Financial Accounting · May 2025

a. Recognition and de-recognitions

i. Definitions:

• Recognition: Recognition is the process for capturing for inclusion in the statement of financial position or statement of financial performance an item that meets the definition of an element.

• De-recognition: De-recognition is the process of removing an item from financial statements of a reporting entity as an asset, liability or equity when an item no longer meets the criteria for recognition.

ii. Criteria for recognition:

• Only items that meet the definition of an asset, a liability or equity are recognised in the statement of financial position. Only items that meet the definition of income and expenses are recognised in the statement of financial performance;

• An entity recognises an asset or a liability if such recognition provides users of financial statements, with relevant information about the asset or liability and about income and expenses or changes in equity;

• The information must provide a faithful representation of the asset or liability, or any income, expense and changes in equity; and

• The information must also result in the benefits that exceed the costs of providing the information. There must not be a low probability that an inflow or outflow of economic benefits will result from an asset or a liability.

iii. Process of recognition:

• Recognition involves depicting an item that meet the criteria in words and by a monetary amount and including the amount in the relevant component of financial statements;

• Amounts recognised in a statement are included in totals and if applicable subtotals that give structures to the statement;

• Items are recognised by including them in line items and not individually. Notes may be needed to disclose details of the line-items; 18

• Items that meet the definition of an asset, a liability or equity are recognised in the statement of financial position;

• Items that meet the definition of income and expenses are recognised in the statement of financial performance;

• The recognition of assets or a liability arising from transaction or other events may result in simultaneous recognition of both income and expenses. For example, when goods are sold for cash, the entity will recognise revenue for the cash received from customer and expenses (that is, cost of sales) for the goods that were sold. This is the matching of cost with income; and

• If an item meeting the definition of an element is not recognised, disclosures may be needed. The disclosure must be sufficient to compensate for the absence of the item from inclusion in the financial statements.

b. Blockchain

i. The types of records that a company can maintain in a blockchain are:

• Auditing records: It helps in keeping financial transactions, transparent and auditable;

• Inventory records: It makes the transaction records of inventory accessible to authorised users at any time and location;

• Banking records: It enables quick funds transfer, recording of financial transactions accurately, recording smart contracts, protecting and transferring ownership of assets, verifying people's identities and credentials;

• Financial Transactions: it can be used to record and track financial transactions, including payments, invoices and accounts;

• Legal Contracts: It can store and verify legal contracts, providing a secure and immutable record of agreements;

• Digital Assets: Blockchains can be used to store and manage various digital assets, such as images, video files and email backups; and

• Supply Chain Management: Blockchains can help in tracking the movement of goods throughout the supply chain, improving transparency and traceability.

ii. The benefits of making use of blockchain technology are:

• It will benefit businesses by reducing costs, increasing traceability and enhancing security; 19

• It allows for the encryption of data through blocks, which are tracking of time and date of transaction;

• The technology could be used to make audit process more efficient, because it would keep an accurate record of when a transaction occurred and who authorised it;

• It limits the chances of an electronic record being altered;

• By generating a hash string of a file and storing it in the blockchain, an entity can prove the integrity of the file at any point in time by comparing the original hash with a newly generated hash;

• Blockchain technology enables smart contracts, which are self- executing computer programs that automate tasks, such as paying an invoice when predefined conditions are me;

• It has the potential to revolutionise accounting by vastly automating processes and enabling new, unprecedented services that comply with regulatory requirements; and

• The technology reduces manual recording and verification procedures in accounting by enabling companies to write transactions directly into a shared permanent register, thereby creating an interlocking system of accounting records.

Examiner’s report The question tests candidates' knowledge of the recognition and derecognition of elements of financial statements and blockchain technology. The attempt rate was low, and overall performance was poor due to limited grasp of the principles. Candidates’ common pitfalls include, discussing financial statements elements without linking them to recognition and derecognition while others failed to address blockchain technology. Candidates are advised to thoroughly cover this syllabus area, utilise their study texts as guidance and review past examination questions and solutions. 20 a.

Marking guide Marks Marks a. Recognition and derecognition i. Definitions Recognition 1 De-recognition 1 2

ii. Criteria for recognition Meets definition of element 1½ Relevant information 1½ Faithful representation 1½ Benefits exceed cost 1½ 6

iii. Process of recognition Depicting item in words and amount 1 Including amount in financial statements 1 Items recognised in line items 1 Notes of disclosure 1 4 b. Blockchain

i. Types of records to be maintained Any six valid points at 1 mark each 6

ii. Benefits of Blockchain Explanation of any two benefits at 1 mark each 2 Total 20

Transactions Book of prime entry i. Fixed amount paid weekly to employees to buy credit cards for data. Petty cash book

ii. Opening entries in the ledger accounts Journal

iii. Invoice of a certain amount sent to a customer Sales day book

iv. Office equipment purchased on credit Journal

v. Transport expenses paid to marketing staff for local running Petty cash book

vi. Transfer of balances from one account to another Journal

vii. Goods returned to a supplier Returns outwards or 21

b. ii purchases returns

viii. Carriage inwards on goods meant for resale Purchases day book

ix. Settlement of debt by exchange of motor vehicle. Journal

x. Early settlement discount note received Cash book Statement of changes in equity for the year ended March 31, 2025 Ordinary shares Share premium Retained earnings Total equity ₦’000 ₦’000 ₦’000 ₦’000 Balance April 1,2024 85,000 8,400 1,500 94,900 Profit for the year 32,105 32,105 Dividends paid ______ _____ (3,500) (3,500) Balance March 31,2025 85,000 8,400 30,105 123,505 Morire Limited Statement of profit or loss for the year ended March 31,2025 ₦’000 Profit from operations 14,885 Investment income 27,220 Finance cost (W2) (5,000) Profit before tax 37,105 Income tax expense (5,000) Profit for the year 32,105 22 Statement of financial position as at March 31, 2025 ₦’000 Non-current assets: Property , plant and equipment 114,955 Investment: Bank deposit 25,000 139,955 Current assets: Inventories 27,220 Receivables (19,300 - 3,500) 15,800 Bank balance 8,400 51,420 Total assets 191,375 Equity and liabilities: Equity: Ordinary shares 85,000 Share premium 8,400 Retained earnings 30,105 123,505 Non-current liabilities: . 10% preference shares 20,000 10% loan notes 30,000 50,000 Current liabilities: Income tax payable 5,000 Trade payables 11,370 Accrued loan interest 1,500 17,870 Total equity and liabilities: 191,375

Workings – Property , plant and equipment schedule Building Equipment M/vehicles Total Cost: ₦’000 ₦’000 ₦’000 ₦’000 Balance b/d 120,500 26,500 17,200 164,200 Accumulated depreciation: Balance March 31, 2025 (5,545) (26,500) (17,200) (49,245) Carrying amount March 31,2025 114,955 - - 114,955 23

Examiner’s report This question tests candidates' knowledge of books of original entry and preparation of primary financial statements, involving accruals adjustments. Majority of candidates attempted the question, with an average overall performance. Common pitfalls included:

• Misclassifying preference shares and dividends as equity, despite the instrument being treated as a debt instrument.

• Incorrectly classifying capital items in the statement of profit or loss.

• Failure to identify the appropriate books of prime entry for none routine transactions where they were supposed to use the journal. Candidates are advised to properly classify items in financial statements, practice preparing financial statements with adjustments, and to familiarise themselves with books of prime entry, including the appropriate use of the journal for non-routine transactions.

Marking guide Marks Marks a. Correctly stating books of prime entry at ½ mark each 5

b. Morire Limited financial statements i. Statement of profit or loss Correct calculation of profit 1 Investment income included 1 Finance cost correctly calculated 1 Profit for the year correctly calculated 1 4

ii. Statement of changes in equity Opening balances correctly stated 1 Profit for the year correctly included 1 Dividend paid corrected deducted 1 3

iii. Statement of financial position Stating non-current assets 2 Stating current assets correctly stated 2 Equity correctly stated 2 Liabilities correctly stated 2 8 Total 20 24

a. Supplier statement:

i. Nature:

• Supplier statements are source documents regularly issued to the entity by a supplier of goods or services. The statement contains details of all the invoices, credit notes, discounts and payments made on a supplier account according to the supplier. Entities need to maintain individual supplier’s accounts for the following reasons:

• The practice makes it easy for the entity to spot and reconcile any discrepancies between the supplier statement and the payables ledger accounts; and

• The entity is able to keep track of payment deadlines to the suppliers and pay when liability is due, which may provide favourable credit terms to the entity.

ii. The following might cause differences between the supplier statement and the payable ledger accounts for the supplier:

• Timing difference: This may be as a result of a payment made by a customer which has not been received by the supplier.

• Error, for instance, purchases invoice may be assigned to a wrong supplier.

• Credit notes that are not yet processed.

• Debit notes that are not yet processed.

• Discounts that are not properly accounted for.

• Omission of invoices, credit notes, discount allowed or any other relevant document. b. Gbajo Limited Reconciliation of payables balances with supplier statement as at October 31, 2024 ₦ Supplier’s statement balance 185,000 Payment in transit (20,519) Invoice not recorded in the payable account (35,975) Credit note not recorded in payable account 12,300 Payable ledger account balance 140,806 25

c. i. ii. Alternative Solution Adjusted payables ledger account as at October 31,2024 ₦ ₦ Credit note omitted 12,300 Balance b/f 140,806 Balance c/f 164,481 Omitted purchases invoice 35,975 176,781 176,781 Bal b/f 164,481 Supplier statement’s reconciliation as at October 31, 2024 N Balance as per supplier statement of account 185,000 Deduct recent payment omitted by the supplier (20,000) 164,481 Akwete Enterprises Purchases ledger control accounts ₦ ₦ Set off with receivables 53,997 Balance b/f 1,610,780 Purchases returns 151,200 Discount error 57,600 Bank 129,600 Invoice error 28,860 Receivable balance 642 31/10/2023 Balance c/f 1,304,081 ________ 1,668,380 1,668,380 01/11/2023 Balance b/f 1,304,081 Reconciliation of adjusted purchases ledger control balance as at November 1, 2023 ₦ Balance as per individual payable ledger accounts 1,455,725 Payment to supplier omitted (129,600) Amount due to supplier overstated (23,184 -21,384) (1,800) Entry on wrong side of account (53,352 x 2) (106,704) Discount error 57,600 Sales invoice recorded in purchases day book 28,860 Balance as per adjusted purchases ledger control account 1,304,081 26

Examiner’s report The question tests candidates' knowledge of the nature and significance of supplier statements and the reconciliation of payables ledger accounts with supplier statement balances. Over 50% of the candidates attempted the question, with an average overall performance. Candidates’ common pitfalls include:

• Assuming the same reasons for reconciling bank statements and cash book balances apply to supplier statements and payables ledger accounts.

• Incorrectly applying double-entry principles by posting entries to the wrong sides of payables ledger accounts.

• Failing to identify adjusting items in payables ledger accounts and the reconciliation statement. Candidates are advised to thoroughly understand the unique aspects of supplier statement reconciliations and practice applying double-entry principles correctly to improve their performance. Additionally, they should focus on identifying adjusting items in payables ledger accounts and reconciliation statements.

Marking guide Marks Marks a. Supplier’s statement

i. Nature and importance Explaining the nature of supplier statement 2 Explaining the importance of supplier statement 2 4

ii. Causes of differences Stating any two valid causes of differences 2

b. Reconciliation of Gbajo Limited account Supplier statement reconciliation Correct calculation of payable ledger account balance 2 Correct reconciliation of suppler statement balance 2 4

c. Akwete Enterprises account

i. Purchases ledger control account Correct preparation of control account 3 Correct balances of control account 1 4

ii. Reconciliation of the account Correct calculation of adjusted balance 3 Correct identification of reconciliation items 3 6 Total 20 27

a. Property, plant and equipment (PPE)

i. Definition: The term property, plant and equipment includes tangible items that are:

• held for use in the production or supply of goods or services;

• for rental to others or for administrative purposes; and

• expected to be used during more than one period.

ii. Recognition for items of PPE An item of property, plant or equipment should be recognised in the books if: • It is probable that the economic benefits derived from the item will flow to the business; and

• The cost or value can be measured reliably. Determination of cost of building ₦’000 Purchase of old building for site 196,000 Demolition of the old building 15,600 Stamp duties and legal cost on the land purchased 17,640 Cost of materials used at the site 254,000 Costs paid to contractors and other experts on the building 284,640 Costs of construction staff 84,000 Costs of planning permit paid to the relevant government agencies 48,020 Tendering and procurement cost 4,900 Total cost of the factory 904,800

ii. The following costs are expensed and the reasons for expensing them are as follows:

• Costs of management time apportioned to the project: They are indirect costs, which are not directly attributable to the construction.

• Cost of transferring staff files and other office equipment to the new factory: It is an operating cost.

• Publicity cost of opening the factory: This is also an operating cost. Moreover, the factory was already available for use before it was incurred. 28 Computation iii. of depreciable amount for the year ended October 31, 2023 ₦’000 ₦’000 Total cost of the factory 904,800 Less cost of land: Purchase of old building for site 196,000 Demolition of the old building 15,600 Stamp duties and legal cost on the land purchased 17,640 (229,246) 675,554 Expected residual value (18,500) Depreciable amount 657,054

Examiner’s report The question tests candidates' knowledge of the definition and elements of costs of property, plant and equipment, as well as the application of this knowledge to determine capitalised costs and depreciable amounts for a self-constructed property. Majority of the candidates attempted the question, with an above-average performance. Candidates’ common pitfalls include:

• Failing to identify and deduct the cost of land from the total cost, since land is not a depreciable asset.

• Failing to relate the reasons for expensing items to specific cost items that do not qualify for capitalisation. Candidates are advised to focus on accurately identifying and separating non- depreciable assets, such as land, and ensure they understand which costs qualify for capitalisation. Additionally, they should practice applying the relevant accounting standards to determine capitalised costs and depreciable amounts for properties, plant and equipment. 29

Marking guide Marks Marks a. Property, plant and equipment Definition of PPE 4 Recognition criteria for PPE 2 6

b. Determination of cost of building Correct identification of capitalised cost items 8 Any two costs expensed with valid reasons 2 Computation of depreciable amount 4 14 Total 20

a. Inventories

i. Inventories are defined as assets :

• Held for sale in the ordinary course of business; or

• In the process of production for sale; or

• In the form of materials or supplies to be consumed in the production process or in the rendering of services. Typically, inventories include the following:

• Finished goods acquired for resale;

• Finished goods produced;

• Work-in-progress; and

• Materials and supplies awaiting use in the production process

ii. The following should be included in the costs of inventories:

• Cost of purchase, including taxes, transport and handling, net of trade discounts;

• Cost of conversion, including fixed and variable overheads; and

• Other costs of bringing the inventories to their present location and condition. 30

i. Valuation of inventories at lower of costs and net realisable value (NRV) Product P ₦’m ₦’m Cost 128,400 Selling price 180,000 Delivery cost (13,320) Commission (5% x 180,000) (9,000) NRV 157,680 Value of inventory at cost 128,400 Product Q Cost 79,200 Selling price 82,500 Repair cost 12,600 NRV 69,900 Valuation of Product Q at NRV 69,900 Product R Cost 112,000 NRV 58,600 Valuation of R at NRV 58,600 Total valuation 256,900 Write-down of inventory ₦’m ₦’m Product P Cost 128,400 NRV 157,600 Amount written down (Since NRV ˃ Cost) ii. Nil Product Q Cost 79,200 NRV 69,000 Amount written down 9,300 Product R Cost 112,500 NRV 58,600 Amount written down 53,900 Total amount written down 63,200 31

Note: No amount is written down on Product P because its NRV is greater than the cost. iii. IAS 2 requires that any write-down of inventory to their net realisable value should be recognised as an expense in the period in which the write-down occurs. Therefore, the total cost of products P, Q and R of ₦63,200,000 written off should be adjusted as follows: Debit cost of sales ₦63,200,000 Credit inventory: ₦63,200,000 To adjust end of year inventory to net realisable value

Examiner’s report The question tests candidates' knowledge of the elements of inventory costs and the application of the lower of cost and net realisable value (NRV) policy to determine inventory value. The majority of candidates attempted the question, with an above-average overall performance. Candidates’ common pitfalls include:

• Adding expected repair costs for damaged inventory to their cost instead of deducting them from the expected selling price to arrive at the NRV. Candidates are advised to learn how to accurately calculate NRV by deducting costs to complete and sell, including repair costs, from the expected selling price. Additionally, they should consistently apply the lower of cost and NRV principle to determine inventory value.

Marking guide Marks Marks a. Inventories Definition of inventories 3 Examples of inventories 2 Costs included in inventories 3 8

b. Valuation of inventories Correct identification of cost 1½ Correct calculation of NRV 5 Correct determination of lower of cost and NRV 1½ 8 Calculation of write-down of inventory 2 Accounting treatment for write-down of inventory 2 Total 20 32

a The following are the key issues that should be covered in a partnership agreement when setting up a partnership:

i. Capital: The agreement would indicate whether each partner should contribute a fixed amount of capital or not and how much each partner should contribute; ii. Profit sharing: How profits and losses should be shared among the partners will be spelt out; whether they are capital or revenue profits or losses;

iii. Interest on capital and drawings: Whether interest on capital or drawings should be allowed or charged before arriving at divisible profits, and if so, at what rate?;

iv. Interest on loan by partners: The rate of interest payable on any loan advanced by any of the partners;

v. Whether current accounts are to bear interest, and if so, at what rate?;

vi. Whether partners’ drawings are to be limited in amount so, that the current account does not turn into debit balance;

vii. Whether partners are entitled to remuneration for their services before arriving at divisible profits and if so, what amounts and which of the partners?;

viii. How the books of account would be kept and where they should be kept;

ix. The method for the valuation of assets, that is, goodwill in case of an incoming or outgoing partner; and

x. The method and procedures for settlement of disputes. 33 In the books of the partnership of Muri, Ray and Akugbe as at April 30,2023 Revaluation account ₦’000 ₦’000 Plant and machinery 3,438 Freehold property 17,000 Motor vehicle taken over 500 Goodwill 25,200 Other motor vehicles 2,224 Furniture 1,531 inventories 1,200 Trade receivables 975 Other receivables 2,975 Gain on revaluation to Capital accounts: -Muri 11,743 -Ray 8,807 -Akugbe 8,807 42,200 42,200 ii. Capital accounts Muri Ray Akugbe Muri Ray Akugbe ₦’000 ₦’000 ₦’000 ₦’000 ₦’000 ₦’000 Goodwill w/off 14,400 10,800 Balance b/d 36,200 30,442 22,958 Car taken over 1,500 Current acct. 19,400 Cash 2,257 5% loan 47,408 Revaluation gain 11,743 8,807 8,807 Balance c/d 33,543 28,449 47,943 39,249 51,157 47,943 39,249 51,157 34 iii. Muri and Ray Partnership Statement of financial position as at April 30, 2023 ₦’000 ₦’000 Non-current assets: Freehold property 84,000 Plant and machinery 28,000 Motor vehicles 14,120 Furniture 13,706 139,826 Current assets: Inventories 10,600 Trade receivables 12,900 Other receivables 8,000 Cash (6,517 -2,257) 4,260 35,760 Total assets 175,586 Equity and liabilities: Capital accounts: -Muri 33,543 -Ray 28,449 61,992 Current accounts: -Muri 21,000 -Ray 19,000 40,000 Non-current liabilities: 5% loan notes-Akugbe 47,408 Current liabilities: Trade payables 15,186 Other payables 11,000 26,186 Total equity and liabilities 175,586

Examiner’s report This question tests candidates' knowledge of partnership agreements and the preparation of partnership accounts related to the retirement of a partner. The majority of candidates attempted the question, with an above-average overall performance. Candidates’ common pitfalls include:

• Debiting items that should be credited in the revaluation account and vice versa.

• Adding fair value and carrying amount together as the recognised value on the statement of financial position, instead of using only the fair value.

• Incorrect treatment of goodwill in the partners' capital accounts. 35 Candidates are advised to thoroughly study the accounting treatment for partnership revaluations and retirements, including the correct application of fair value and goodwill. Additionally, they should practice preparing partnership accounts, paying close attention to the accurate treatment of revaluation accounts and goodwill.

Marking guide Marks Marks a. Partnership agreement Any 6 valid points stated 6

b. Partnership account-retirement Correct preparation of revaluation account 6 Correct preparation of capital accounts 3 Correct preparation of statements of financial position 5 14 Total 20