You are the financial controller of Dzakaka Plc. The Financial Accountant at your company was recently employed

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Question:

You are the financial controller of Dzakaka Plc. The Financial Accountant at your company was recently employed and has reasonable knowledge of accounting. As a way of putting her to a test, you have presented her with the following transactions for which you require briefing notes to yourself on the required accounting treatment. All directors of Dzakaka Plc. receive a profit related bonus at the end of the year.

On 1 October 2016, Dzakaka Plc bought a machine for K900 million which was estimated to have an original useful economic life of ten years with no residual value. On 1 October 2019, Dzakaka Plc looked at these estimates again and thought the original estimates were over-optimistic. As a result, the directors approved the revision of the estimated useful life of the machine to eight years from 1 October 2016, and that the machine would now have a scrap value at the end of its life amounting to K10 million.

The financial accountant has charged the initial depreciation calculated from year of acquisition to all the years upto 30 September 2020. (10 marks)

On 1 April 2020, Dzakaka Plc acquired 350,000 shares in Mwiinde Plc for K7.50 per share. Transaction costs incurred amounted to K70,000 on purchase of shares. The directors made an irrevocable election at inception that the investment would be classified as a fair value through profit or loss instrument as it was held for trading. On 30 September 2020, the shares were trading at K6 per share. Prior to the year-end, Dzakaka Plc received dividends amounting to K6,000 from Mwiinde Plc. for their investment in the entity. In addition, Mwiinde Plc has informed Dzakaka of a further dividend proposed amounting to K750 at 30 September 2020 in favour of Dzakaka Plc.

The financial accountant has recognised a fair value loss in other comprehensive income and has recognized as investment income both dividend received and dividends proposed by Mwiinde Plc for the year to 30 September 2020. Upon being questioned by the company’s internal audit team, the financial accountant stated she implemented the accounting treatments under strict instruction from her superiors. She further stated that her obedience was crucial for her job security. (10 marks)

Required:

Evaluate the appropriateness of Financial Accountant’s accounting treatment of the above transactions and the ethical implications of the above situations on the reporting accountant.

Note: Your evaluation must include correct accounting treatment for all transactions for the year ending 30 September 2020.