183 LLAMA
The following trial balance relates to Llama, a listed company, at 30 September 2007:
$000 $000
Land and buildings – at valuation 1 October 2006 (note (i)) 130,000
Plant – at cost (note (i)) 128,000
Accumulated depreciation of plant at 1 October 2006 32,000 Investments – at fair value through profit and loss (note (i)) 26,500
Investment income 2,200
Cost of sales (note (i)) 89,200
Distribution costs 11,000
Administrative expenses 12,500
Loan interest paid 800
Inventory at 30 September 2007 37,900
Income tax (note (ii)) 400
Trade receivables 35,100
Revenue 180,400
Equity shares of 50 cents each fully paid 60,000
Retained earnings at 1 October 2006 25,500
2% loan note 2009 (note (iii)) 80,000
Trade payables 34,700
Revaluation reserve (arising from land and buildings) 14,000
Deferred tax 11,200
Suspense account (note (iv)) 24,000
Bank 6,600
The following notes are relevant:
(i) Llama has a policy of revaluing its land and buildings at each year end. The valuation in the trial balance includes a land element of $30 million. The estimated remaining life of the buildings at that date (1 October 2006) was 20 years. On 30 September 2007, a professional valuer valued the buildings at $92 million with no change in the value of the land. Depreciation of buildings is charged 60% to cost of sales and 20%
each to distribution costs and administrative expenses.
During the year Llama manufactured an item of plant that it is using as part of its own operating capacity. The details of its cost, which is included in cost of sales in the trial balance, are:
$000
Materials cost 6,000
Direct labour cost 4,000
Machine time cost 8,000
Directly attributable overheads 6,000
The manufacture of the plant was completed on 31 March 2007 and the plant was brought into immediate use, but its cost has not yet been capitalised.
All plant is depreciated at 12.5% per annum (time apportioned where relevant) using the reducing balance method and charged to cost of sales.
The fair value of the investments held at fair value through profit and loss at 30 September 2007 was $27.1 million.
(ii) The balance of income tax in the trial balance represents the under/over provision of the previous year’s estimate. The estimated income tax liability for the year ended 30 September 2007 is $18.7 million. At 30 September 2007 there were $40 million of taxable temporary differences. The income tax rate is 25%. Note: You may assume that the movement in deferred tax should be taken to the statement of profit or loss.
(iii) The 2% loan note was issued on 1 April 2007 under terms that provide for a large premium on redemption in 2009. The finance department has calculated that the effect of this is that the loan note has an effective interest rate of 6% per annum.
(iv) The suspense account contains the corresponding credit entry for the proceeds of a rights issue of shares made on 1 July 2007. The terms of the issue were one share for every four held at 80 cents per share. Llama’s share price immediately before the issue was $1. The issue was fully subscribed.
Required:
(a) A statement of profit or loss and other comprehensive income for the year ended
30 September 2007. (12 marks)
(b) A statement of financial position as at 30 September 2007. (13 marks) (c) A calculation of the earnings per share for the year ended 30 September 2007.
Note: A statement of changes in equity is not required. (5 marks) (Total: 30 marks)
184 DEXON
Below is the summarised draft statement of financial position of Dexon at 31 March 2008.
$000 $000 $000
Assets
Non-current assets
Property at valuation (land $20,000; buildings
$165,000 (note (ii)) 185,000
Plant (note (ii)) 180,500
Investments at fair value through profit and loss
at 1 April 2007 (note (iii)) 12,500
–––––––
378,000 Current assets
Inventory 84,000
Trade receivables (note (iv)) 52,200
Bank 3,800 140,000
–––––– –––––––
Total assets 518,000
–––––––
Equity and liabilities Equity
Ordinary shares of $1 each 250,000
Share premium 40,000
Revaluation reserve 18,000
Retained earnings – at 1 April 2007 12,300
– for the year ended 31 March 2008 96,700 109,000 167,000 ––––––– ––––––– –––––––
417,000 Non-current liabilities
Deferred tax – at 1 April 2007 (note (v)) 19,200
Current liabilities 81,800
–––––––
Total equity and liabilities 518,000
–––––––
The following information is relevant:
(i) At 31 March 20X8, a customer placed a large order for $2.6 million. The finance assistant at Dexon recorded the order within revenue, and ensured that the goods were excluded from the year-end inventory count, even though the order was not delivered until April 20X8. Dexon applied a mark up on cost of 30% on all these sales.
(ii) The non-current assets have not been depreciated for the year ended 31 March 2008.
Dexon has a policy of revaluing its land and buildings at the end of each accounting year. The values in the above statement of financial position are as at 1 April 2007 when the buildings had a remaining life of fifteen years. A qualified surveyor has
(iii) The investments at fair value through profit and loss are held in a fund whose value changes directly in proportion to a specified market index. At 1 April 2007 the relevant index was 1,200 and at 31 March 2008 it was 1,296.
(iv) In late March 2008 the directors of Dexon discovered a material fraud perpetrated by the company’s credit controller that had been continuing for some time.
Investigations revealed that a total of $4 million of the trade receivables as shown in the statement of financial position at 31 March 2008 had in fact been paid and the money had been stolen by the credit controller. An analysis revealed that $1.5 million had been stolen in the year to 31 March 2007 with the rest being stolen in the current year. Dexon is not insured for this loss and it cannot be recovered from the credit controller, nor is it deductible for tax purposes.
(v) During the year the company’s taxable temporary differences increased by
$10 million of which $6 million related to the revaluation of the property. The deferred tax relating to the remainder of the increase in the temporary differences should be taken to the statement of profit or loss. The applicable income tax rate is 20%.
(vi) The above figures do not include the estimated provision for income tax on the profit for the year ended 31 March 2008. After allowing for any adjustments required in items (i) to (iv), the directors have estimated the provision at $11.4 million (this is in addition to the deferred tax effects of item (v)).
(vii) On 1 September 2007 there was a fully subscribed rights issue of one new share for every four held at a price of $1.20 each. The proceeds of the issue have been received and the issue of the shares has been correctly accounted for in the above statement of financial position.
(viii) In May 2007 a dividend of 4 cents per share was paid. In November 2007 (after the rights issue in item (vii) above) a further dividend of 3 cents per share was paid. Both dividends have been correctly accounted for in the above statement of financial position.
Required:
Taking into account any adjustments required by items (i) to (viii) above:
(a) Prepare a statement showing the recalculation of Dexon’s profit for the year ended
31 March 2008. (8 marks)
(b) Prepare the statement of changes in equity of Dexon for the year ended 31 March
2008. (8 marks)
(c) Redraft the statement of financial position of Dexon as at 31 March 2008. (9 marks) (d) Explain the difference between accounting for a prior year error and accounting for an under or overestimate of a provision in the prior year. Your answer should refer
to the issue in note (iv). (5 marks)
Note: Notes to the financial statements are NOT required.
(Total: 30 marks)
185 CAVERN
The following trial balance relates to Cavern as at 30 September 2010:
$000 $000
Equity shares of 20 cents each (note (i)) 50,000
8% loan note (note (ii)) 30,600
Retained earnings – 30 September 2009 15,100
Revaluation reserve 7,000
Share premium 11,000
Land and buildings at valuation – 30 September 2009:
Land ($7 million) and building ($36 million) (note (iii)) 43,000
Plant and equipment at cost (note (iii)) 67,400
Accumulated depreciation plant and equipment – 30 September 2009 13,400
Equity investments (note (iv)) 15,800
Inventory at 30 September 2010 19,800
Trade receivables 29,000
Bank 4,600
Deferred tax (note (v)) 4,000
Trade payables 21,700
Revenue 182,500
Cost of sales 128,500
Administrative expenses (note (i)) 25,000
Distribution costs 8,500
Loan note interest paid 2,400
Bank interest 300
Investment income 700
Current tax (note (v)) 900
––––––– –––––––
340,600 340,600 ––––––– –––––––
The following notes are relevant:
(i) Cavern has accounted for a fully subscribed rights issue of equity shares made on 1 April 2010 of one new share for every four in issue at 42 cents each, when the market value of a Cavern share was 82 cents. The company paid ordinary dividends of 3 cents per share on 30 November 2009 and 5 cents per share on 31 May 2010.
The dividend payments are included in administrative expenses in the trial balance.
(ii) The 8% loan note was issued on 1 October 2008 at its nominal (face) value of
$30 million. The loan note will be redeemed on 30 September 2012 at a premium which gives the loan note an effective finance cost of 10% per annum.
(iii) Non-current assets:
Cavern revalues its land and building at the end of each accounting year. At 30 September 2010 the relevant value to be incorporated into the financial statements is $41.8 million. The building’s remaining life at the beginning of the current year (1 October 2009) was 18 years. Cavern does not make an annual transfer from the revaluation reserve to retained earnings in respect of the realisation of the revaluation surplus. Ignore deferred tax on the revaluation surplus.
Plant and equipment includes an item of plant bought for $10 million on 1 October 2009 that will have a 10-year life (using straight-line depreciation with no residual value). Production using this plant involves toxic chemicals which will cause decontamination costs to be incurred at the end of its life. The present value of these costs using a discount rate of 10% at 1 October 2009 was $4 million. Cavern has not provided any amount for this future decontamination cost. All other plant and equipment is depreciated at 12.5% per annum using the reducing balance method.
No depreciation has yet been charged on any non-current asset for the year ended 30 September 2010. All depreciation is charged to cost of sales.
(iv) The equity investments had a fair value of $13.5 million on 30 September 2010.
There were no acquisitions or disposals of these investments during the year ended 30 September 2010. The equity investments are recorded as fair value through profit or loss in accordance with IFRS 9 Financial Instruments.
(v) A provision for income tax for the year ended 30 September 2010 of $5.6 million is required. The balance on current tax represents the under/over provision of the tax liability for the year ended 30 September 2009. At 30 September 2010 the tax base of Cavern’s net assets was $15 million less than their carrying amounts. The movement on deferred tax should be taken to the statement of profit or loss. The income tax rate of Cavern is 25%.
Required:
(a) Prepare the statement of profit or loss for Cavern for the year ended 30 September
2010. (11 marks)
(b) Prepare the statement of changes in equity for Cavern for the year ended
30 September 2010. (5 marks)
(c) Prepare the statement of financial position of Cavern as at 30 September 2010.
(9 marks) (d) Using the information in note (i), calculate earnings per share for Cavern for the
year ended 30 September 2010. Also, calculate the re-stated figure for 2009 if the EPS figure in the original 2009 financial statements was 8c per share. (5 marks) Notes to the financial statements are not required.
(Total: 30 marks)
186 CANDEL Walk in the footsteps of a top tutor
The following trial balance relates to Candel at 30 September 2008:
$000 $000
Leasehold property – at valuation 1 October 2007 (note (i)) 50,000
Plant and equipment – at cost (note (i)) 76,600
Plant and equipment – accumulated depreciation at 1 October 2007 24,600 Capitalised development expenditure – at 1 October 2007 (note (ii)) 20,000
Development expenditure – accumulated amortisation at 1 October 2007 6,000
Closing inventory at 30 September 2008 20,000
Trade receivables 43,100
Bank 1,300
Trade payables and provisions (note (iii)) 23,800
Revenue (note (i)) 300,000
Cost of sales 204,000
Distribution costs 14,500
Administrative expenses (note (iii)) 22,200
Preference dividend paid 800
Interest on bank borrowings 200
Equity dividend paid 6,000
Research and development costs (note (ii)) 8,600
Equity shares of 25 cents each 50,000
8% redeemable preference shares of $1 each (note (iv)) 20,000
Retained earnings at 1 October 2007 24,500
Deferred tax (note (v)) 5,800
Leasehold property revaluation reserve 10,000
–––––––– –––––––
466,000 466,000 –––––––– –––––––
The following notes are relevant:
(i) Non-current assets – tangible:
The leasehold property had a remaining life of 20 years at 1 October 2007. The company’s policy is to revalue its property at each year end and at 30 September 2008 it was valued at $43 million. Ignore deferred tax on the revaluation.
On 1 October 2007 an item of plant was disposed of for $2.5 million cash. The proceeds have been treated as sales revenue by Candel. The plant is still included in the above trial balance figures at its cost of $8 million and accumulated depreciation of $4 million (to the date of disposal).
All plant is depreciated at 20% per annum using the reducing balance method.
Depreciation and amortisation of all non-current assets is charged to cost of sales.
(ii) Non-current assets – intangible:
In addition to the capitalised development expenditure (of $20 million), further research and development costs were incurred on a new project which commenced on 1 October 2007. The research stage of the new project lasted until 31 December 2007 and incurred $1.4 million of costs. From that date the project incurred development costs of $800,000 per month. On 1 April 2008 the directors became confident that the project would be successful and yield a profit well in excess of its costs. The project is still in development at 30 September 2008.
Capitalised development expenditure is amortised at 20% per annum using the straight-line method. All expensed research and development is charged to cost of sales.
(iii) Candel is being sued by a customer for $2 million for breach of contract over a cancelled order. Candel has obtained legal opinion that there is a 20% chance that Candel will lose the case. Accordingly Candel has provided $400,000 ($2 million × 20%) included in administrative expenses in respect of the claim. The unrecoverable legal costs of defending the action are estimated at $100,000. These have not been provided for as the legal action will not go to court until next year.
(iv) The preference shares were issued on 1 April 2008 at par. They are redeemable at a large premium which gives them an effective finance cost of 12% per annum.
(v) The directors have estimated the provision for income tax for the year ended 30 September 2008 at $11.4 million. The required deferred tax provision at 30 September 2008 is $6 million.
Required:
(a) Prepare the statement of profit or loss and other comprehensive income for the
year ended 30 September 2008. (12 marks)
(b) Prepare the statement of changes in equity for the year ended 30 September 2008.
(3 marks) (c) Prepare the statement of financial position as at 30 September 2008. (10 marks) (d) In December 2008, the leasehold property was severely damaged following a
storm. Explain how this damage should be dealt with in the financial statements for the year ended 30 September 2008. Explain how the treatment may differ depending on whether the building is insured or not. (5 marks) Note: Notes to the financial statements are not required. (Total: 30 marks)
187 PRICEWELL
Timed question with Online tutor debrief
The following trial balance relates to Pricewell at 31 March 2009:
$000 $000
Leasehold property – at valuation 31 March 2008 (note (i)) 25,200 Plant and equipment (owned) – at cost (note (i)) 46,800 Plant and equipment (leased) – at cost (note (i)) 20,000 Accumulated depreciation at 31 March 2008
Owned plant and equipment 12,800
Leased plant and equipment 5,000
Finance lease payment (paid on 31 March 2009) (note (i)) 6,000
Obligations under finance lease at 1 April 2008 (note (i)) 15,600
Construction contract (note (ii)) 14,300
Inventory at 31 March 2009 28,200
Trade receivables 33,100
Bank 5,500
Trade payables 33,400
Revenue (note (iii)) 310,000
Cost of sales (note (iii)) 234,500
Distribution costs 19,500
Administrative expenses 27,500
Preference dividend paid (note (iv)) 2,400
Equity dividend paid 8,000
Equity shares of 50 cents each 40,000
6% redeemable preference shares at 31 March 2008 (note (iv)) 41,600
Retained earnings at 31 March 2008 4,900
Current tax (note (v)) 700
Deferred tax (note (v)) 8,400
––––––– –––––––
471,700 471,700 ––––––– –––––––
The following notes are relevant:
(i) Non-current assets:
The 15 year leasehold property was acquired on 1 April 2007 at cost $30 million. The company policy is to revalue the property at market value at each year end. The valuation in the trial balance of $25.2 million as at 31 March 2008 led to an impairment charge of $2.8 million which was reported in the statement of profit or loss and other comprehensive income of the previous year (i.e. year ended 31 March 2008). At 31 March 2009 the property was valued at $24.9 million.
Owned plant is depreciated at 25% per annum using the reducing balance method.
The leased plant was acquired on 1 April 2007. The rentals are $6 million per annum for four years payable in arrears on 31 March each year. The interest rate implicit in the lease is 8% per annum. Leased plant is depreciated at 25% per annum using the straight-line method.
No depreciation has yet been charged on any non-current assets for the year ended 31 March 2009. All depreciation is charged to cost of sales.
(ii) On 1 October 2008 Pricewell entered into a contract to construct a bridge over a river. The performance obligation will be satisfied over time. The agreed price of the bridge is $50 million and construction was expected to be completed on 30 September 2010. The $14.3 million in the trial balance is:
$000
Materials, labour and overheads 12,000
Specialist plant acquired 1 October 2008 8,000
Payment from customer (5,700)
––––––
14,300 ––––––
The sales value of the work done at 31 March 2009 has been agreed at $22 million and the estimated cost to complete (excluding plant depreciation) is $10 million. The specialist plant will have no residual value at the end of the contract and should be depreciated on a monthly basis. Pricewell recognises progress towards satisfaction of the performance obligation on the percentage of completion basis as determined by the agreed work to date compared to the total contract price.
(iii) Pricewell’s revenue includes $8 million for goods it sold acting as an agent for Trilby.
Pricewell earned a commission of 20% on these sales and remitted the difference of
$6.4 million (included in cost of sales) to Trilby.
(iv) The 6% preference shares were issued on 1 April 2007 at par for $40 million. They have an effective finance cost of 10% per annum due to a premium payable on their redemption.
(v) The directors have estimated the provision for income tax for the year ended 31 March 2009 at $4.5 million. The required deferred tax provision at 31 March 2009 is $5.6 million; all adjustments to deferred tax should be taken to the statement of profit or loss. The balance of current tax in the trial balance represents the under/over provision of the income tax liability for the year ended 31 March 2008.
Required:
(a) Prepare the statement of profit or loss and other comprehensive income for the
year ended 31 March 2009. (12 marks)
(b) Prepare the statement of financial position as at 31 March 2009. (13 marks) (c) Explain how revenue should be recognised in relation to goods and services, and
explain how the items in notes (ii) and (iii) follow these principles. (5 marks) Note: A statement of changes in equity and notes to the financial statements are
not required.
(Total: 30 marks)
Calculate your allowed time, allocate the time to the separate parts
188 SANDOWN
The following trial balance relates to Sandown at 30 September 2009:
$000 $000
Revenue (note (i)) 380,000
Cost of sales 246,800
Distribution costs 17,400
Administrative expenses (note (ii)) 50,500
Loan interest paid (note (iii)) 1,000
Investment income 1,300
Current tax (note (v)) 2,100
Property– at cost 1 October 2000 (note (vi)) 63,000
Plant and equipment – at cost (note (vi)) 42,200
Brand – at cost 1 October 2005 (note (vi)) 30,000
Accumulated depreciation – 1 October 2008 – building 8,000
– plant and equipment 19,700
Accumulated amortisation – 1 October 2008 – brand 9,000
Investment property (note (iv)) 26,500
Inventory at 30 September 2009 38,000
Trade receivables 44,500
Bank 8,000
Trade payables 42,900
Equity shares of 20 cents each 50,000
Equity option 2,000
5% convertible loan note 2012 (note (iii)) 18,440
Retained earnings at 1 October 2008 33,260
Deferred tax (note (v)) 5,400
––––––– –––––––
570,000 570,000 ––––––– –––––––
The following notes are relevant:
(i) Sandown’s revenue includes $16 million for goods sold to Pending on 1 October 2008. The terms of the sale are that Sandown will incur ongoing service and support costs of $1.2 million per annum for three years after the sale. The service performance obligation will be satisfied over time. Sandown normally makes a gross profit of 40% on such servicing and support work. Ignore the time value of money.
(ii) Administrative expenses include an equity dividend of 4.8 cents per share paid during the year.
(iii) The 5% convertible loan note was issued for proceeds of $20 million on 1 October 2007. It has an effective interest rate of 8% due to the value of its conversion option, and can be converted into 50 shares for every $100 owed.