Kenphone Limited (KL) was established on 1 October 1997 to trade in the newly liberated telephone market in Kenya. Because of the delay in obtaining the necessary licenses, the company moved into Internet Service Provider market and in addition bought 80% ordinary share capital of Tanzania Cellphones Limited (TCL) on 1 January 1999 when the balance on the profit and loss account of TCL was Tsh.1,350 million. TCL has not issued any additional share capital since 1 January 1999. The draft financial statement of KL and TCL for the year ended 30 September 2000 are as follows.Income statements for the year ended 30 September 2000KIKSh. millionTCLTsh. millionSalesCost of salesGross profitDistribution costsAdministrative expensesLoss on exchangeOpening profitFinance costs: Interest on loanDividend receivedNet profit before taxTaxationProfit and taxDividends: Interim paid Final proposed3,112(1,867)1,245(423)(369) (21)(813)432(9) 8431(126)305(60)(100)(160)14529343816,224(11,024) 5,20011,87211,248 -3,1202,080(120)-1,960(585)1,375(130)(240)(370)1,0051,8202,825Balance sheet as at 30 September 2000KLKsh. millionTCLTsh. millionProperty, plant and equipment (NBV)Investment in subsidiaryCurrent assets:InventoriesTrade and other receivablesCashCurrent liabilities:Trade and other payablesCurrent tax liabilitiesProposed dividend (gross)Net current assetsShare capital: AuthorisedIssued and fully paid20m/90m ordinary shares of Sh. 10Share premium accountExchange reserveRetained earningsShareholders fundNon-current liabilities:Deferred taxLong-term loan418220638153239 78470(143)(11)(100)(254) 21685420050(9)438679 -251501758544,241 ___-4,2418521,248 1922,292(828)(48)(240)(1,116)1,1765,417900300-2,8254,025___-1921,2001,3925,417Additional information:1. The fair value of the identifiable net assets of TCL was Tsh.3,000 million at 1 January 1999. Goodwill on consolidation is to be amortised on the straight line basis over 6 with a full year’s charge in the year acquisition. TCL is a foreign entity. The increase in the fair value of TCL over book value is attributable to property, plant and equipment which is depreciated over 6 years on the straight line basis (again bargain with a full year’s charge in the year of acquisition). The fair value adjustment was not incorporated into the books of TCL.Goodwill arising on the acquisition and any fair value adjustments to the carrying amount of assets and liabilities arising on the acquisition are treated as assets and liabilities of the reporting entity which are already expressed in the reporting currency. Depreciation of property, plant and equipment is classified as an administrative expense. Amortisation of goodwill should be shown as a separate line item.2. TCL paid the interim dividend on 31 March 2000 and interest on its long term loan on 30 September 2000. The board of directors of both companies proposed the final dividends indicated at Board meeting which were both held on 29 September 2000.3. In order to hedge its investment on TCL, KL borrowed Tsh.1,800 million in Tanzania on 1 January 1999. The rate of interest on loan is 6% per annum and is payable in a single amount on 30 September each year. The exchange loss on this loan for the period ended 30 September 1999 had been classified as equity. The exchange loss for the year ended 30 September 2000 has been charged against KL’s profit for the year. The overall loss should be accounted for in accordance with IAS 21 and IAS 39. The loan has been determined as an affective hedge.4. The following charge rates are relevant.1 January 19991 October 19991 April 200030 September 2000weighed average for year to30 September 2000Ksh.1 =Ksh.1 =Ksh.1 =Ksh.1 =Ksh.1 =Tsh. 15Tsh. 14Tsh. 13Tsh. 12Tsh. 135. It can be assumed that transactions in the subsidiary took place evenly over the year, except where indicated above.Required:(a). The consolidated income statement for the year ended 30 September 2000 (14 marks)(b). The consolidated balance sheet as at 30 September 2000 (11 marks) (Total: 25 marks)

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