a) Ebony, a Public Limited company with operations in 12 African countries, is preparing
financial statements for the year ended 31 March, 2020. Directors of Ebony receive their
bonus if profit before tax exceeds a pre-determined target for the year.
You are the Country Finance Director of Ebony and the Country Managing Director, who is
a Chartered Accountant by part qualification, makes the following proposal for the required
accounting treatment which he says would enhance the country operation’s performance.
Proposal 1
Ebony issued a K20 million loan at 1 April 2019 for specific financing of the construction of
a Hydro Electric Power station at an effective interest rate of 15% per annum. The
construction of the Hydro Electric Power station commenced on 1 April 2019. However, the
construction works were suspended effective 1 May 2019, due to shortage of one type of
component. The suspension was for an extended period as it lasted till 31 December 2019.
The Country Managing Director proposes to you that the whole year’s interest to 31 March
2020 needs to be capitalized in accordance with IAS 23 Borrowing Costs.
Proposal 2
Ebony has low value items of equipment (small personal computers) that it has acquired
under a lease arrangement for annual lease rentals of K500,000 for three (3) years. The
Country Managing Director has advised you that this lease should be accounted for as a long
term lease using Ebony’s borrowing rate of 8% as he believes the company does not have
any immediate plans to borrow money from the bank and no requirement for overdraft
renewal. The Country Managing Director has done his calculations and informs you that
Ebony’s expense for the current year would only be K103,084 to be charged in the statement
of profit or loss as finance cost. He further states that the items of equipment will not be
depreciated as they are of low value, but will be capitalized.
7
For both his proposals, the Country managing Director reminds you that your promotion to
Regional Finance Director depends on your obedience to his proposed accounting treatment
of above transactions.
Required:
Evaluate the appropriateness of the Country Managing Director’s two proposals, making
reference to accounting and ethical implications of his proposed accounting treatment.
(14 marks)

Answer rating: 100% (QA)

Proposal 1 The Country Managing Directors proposal to capitalise the whole years interest to 31 Marc... View the full answer