Single Entity Adjustments 1-5

Question 1

Shortly after the year end a warehouse assistant discovered that goods costing £2,500 had been received on 28 June 2009 but accidentally omitted from the year-end inventory count.

Answer 1

• Add back £2500 to the inventories balance in the SOFP

- Add this to PBT in the calculation of total comprehensive profit/loss for the year

Question 2

On 3 April 2009 a claim was made against Adeje Ltd by one of its customers for supplying faulty goods.
Adeje Ltd’s lawyers have considered the claim and believe that there is an 80% chance that the customer will win the case if it is taken to court.

The customer is demanding that a full refund should be given of £10,000 plus damages of £5,000.
The lawyers have advised Adeje Ltd’s directors that they should settle the claim out of court to avoid adverse publicity.

The goods were returned to Adeje Ltd for investigation before being scrapped. The production manager identified that wood that had been purchased from Toscas Ltd, one of its regular suppliers, had been of a poor quality. This was an isolated problem.

Adeje Ltd’s lawyers wrote to Toscas Ltd explaining the situation. At the year end, negotiations were advanced between the two companies, with Toscas Ltd agreeing to pay £10,000 to Adeje Ltd to cover the customer’s refund.

This amount was received by Adeje Ltd on 13 August 2009, however discussions continue with regard to recovering the cost of the damages.

Answer 2

• Add 10,000 to trade and other receivables balance
• Place a 15,000 Provision under Current Liabilities as 80% chance
• Take the provision away from PBT in the total comprehensive profit/loss for the year
• Add the reimbursement to PBT

Question 3

Research and development expenditure of £120,000 was incurred and capitalised during the current year. £40,000 of this expenditure was spent on research activities and £25,000 was incurred prior to Adeje Ltd gaining the necessary licence to market their new product.

Answer 3

• Take away research and development expenditure (40,000 + 25,000) from PBT in the calculation of total comprehensive profit/loss for the year
• Under intangible assets in the SOFP:
  Assets
  Intangible assets (120,000 - 40,000 - 25,000) 55,000

Question 4

On 1 January 2009 Adeje Ltd entered into a one-year lease for new computer equipment. The lease requires four quarterly payments of £2,000, payable at the start of each quarter.
Adeje Ltd has elected to apply the optional recognition exemptions in IFRS 16, Leases. The entries for this lease have not yet been recorded in the trial balance.

Answer 4

• Four instalments of £2000 = £8000
• As Adeje Ltd has elected to apply the optional recognition exemptions in IFRS 16, the lease payments are recognised as an expense on a straight-line basis. Therefore, an expense of £4,000 (£8,000 × 6/12) is debited to profit or loss.
• Taken away from PBT in the total comprehensive profit/loss for the year
• Add to the bank overdraft balance under current liabilities in the SOFP

Question 5

No adjustment has been made for the depreciation charges for the year ended 30 June 2009. Freehold buildings are depreciated at 3% pa on a straight-line basis and plant and equipment is depreciated on a reducing balance basis at a rate of 15% pa

Freehold land and buildings
Cost (land – £700,000) 2,500,000
Accumulated depreciation at 30 June 2008 486,000

Plant and equipment
Cost 350,000
Accumulated depreciation at 30 June 2008 97,000

Answer 5

Depreciation on buildings (2,500,000 – 700,000) × 3% = 54,000 pa
Depreciation on plant & equipment (350,000 – 97,000) × 15% = 37,950 pa
- Then figure out carrying amounts to go in SOFP:
Cost b/fw + Acc dep’n b/fd + charge for year = CA
- Take the total of both depreciation charges for the year away from PBT in the total comprehensive profit/loss for the year

Question 6

On 1 January 2009 Adeje Ltd issued 60,000 6% £1 irredeemable preference shares at par. The payment of the dividend is at the discretion of Adeje Ltd.
The appropriate dividend in respect of these shares was paid on 30 June 2009 and was recognised as a finance cost in arriving at the draft profit before tax for the year.

Answer 6

• Under Equity in the SOFP:
  6% Irredeemable Preference Shares 60,000
• Goes in its own column in the SOCE
  Column heading: Irredeemable Preference Shares
  Row: Issue of shares
• Irredeemable dividend of:
  60,000 x 6% x 6/12
  is taken out of the retained earnings column in the SOCE

Add back the finance cost in the SPL - SHOULD NOT BE A FINANCE COST AS IRREDEEMABLE WITHOUT DIVIDEND

Question 7

During the year ended 30 June 2009 Adeje Ltd decided to buy back some of its ordinary shares.
On 1 March 2009 it reacquired 200,000 of its ordinary shares for £2 per share.
The shares had originally been issued at a premium of 30p per share. Adeje Ltd recognised the £400,000 cash paid and debited it against share capital and share premium.

Answer 7

• Under Equity in the SOFP:
  Treasury Shares (200,000 x £2) (400,000)
• Incorrect accounting treatment: add back 200,000 to both share capital and share premium balances in the SOFP
• Treasury shares gets its own column in the SOCE:
  Row: Share buy back (400,000)

Question 8

During the year to 30 June 2009 Adeje Ltd changed its method of inventory valuation from weighted average to FIFO.
Inventory at 30 June 2009 was correctly valued on the FIFO basis.
Closing inventory at 30 June 2008 was reported as £37,000 valued at weighted average; however if it had been valued using FIFO it would have been £39,000.

Answer 8

39,000 - 37,000 = 2,000 adjustment - increase

• Take this away from PBT in total comprehensive profit/loss calculation
• Has its own row in the SOCE and is added to the Retained Earnings column as it is an increase in value

Question 9

The income tax liability for the year ended 30 June 2009 has been estimated at £41,000.

Answer 9

Goes under current liabilities in the SOFP

Question 10

On 1 July 2011 Giyani plc entered into a two-year fixed-price contract for the provision of services to a customer.

The total contract value is £95,000 and as at 31 December 2011, £5,000 had been received from the customer and included in revenue.

At 31 December 2011, recoverable costs of £11,000 had been incurred and included in cost of sales but Giyani plc was unable to make a reliable estimate of the costs to complete the contract.

Answer 10

• Take the 5,000 out of revenue

- Add 11,000 to revenue

Question 11

On 1 January 2011 Giyani plc issued 240,000 5% £1 redeemable preference shares at par. The preference shares are redeemable in 2016 at a premium of 10%.

The dividends due for the year on the preference shares had not been accrued at 31 December 2011, although they were paid shortly after the year end.
The effective interest rate of the preference shares is 6.42% pa.

On 1 October 2011 Giyani plc made a 1 for 5 bonus issue of £1 ordinary shares, utilising retained earnings. No accounting entries have been made for this, although the correct number of shares were issued.

Answer 11

• Under current liabilities in the SOFP:
  Preference share interest (240,000 x 5%) 12,000
• Under Non-current liabilities:
  5% redeemable preference shares 243,408
  Year B/f Interest Ex(6.42) Interest P(5%) C/f
  2011 240,000 15,408 (12,000) 243,408
• Interest expense then added to finance costs

Bonus issue:
Goes in the SOCE
Column: Ordinary Share capital , Row: Bonus Issue
27,000
Column: Retained Earnings, Row: Bonus Issue
(27,000)

Question 12

Giyani plc’s policy is to depreciate plant and machinery at 15% pa on cost. On 1 January 2011 a new machine was acquired for £7,000 and correctly included in the cost of plant and machinery.

This machine includes integrated tools that have to be replaced every three years at a cost of £1,200.

Depreciation on plant and machinery should be presented in cost of sales.

Answer 12

• Add to the cost of sales matrix
• Take 1,200 out of the cost of plant and machinery
  Component depreciation: 1,200/3 = 400
• Work out the depreciation of the rest of plant and machinery separately

Question 13

Giyani plc uses the revaluation model for land and buildings. The buildings were acquired on 1 January 2005 and have a total useful life of 50 years. Depreciation on buildings should be presented in other operating costs.

The balance of £872,000 (land £300,000, buildings £572,000) represents the latest valuation on 1 January 2011, the previous valuation being £842,000.

The only entry made to reflect the latest valuation was to increase the nominal ledger account for valuation of land and buildings by £30,000 and to credit this amount to the revaluation surplus.

Giyani plc does not make annual transfers between the revaluation surplus and retained earnings

Answer 13

Buildings:
B/fw   572,000
Acc Depn    (37,500)
Adj    37,500
----
572,000

572,000/(50-6 yrs) (13,000)
(UL-time since acquisition of buildings)
——
559,000

• Take the 30,000 out of the b/f balance in the revaluation surplus column in the SOCE

Question 14

Early in 2011, the financial controller discovered invoices for £50,000 in relation to electricity used in 2010.
These invoices had not been recorded in the nominal ledger, nor had they been accrued for at 31 December 2010.
As the 2010 financial statements had already been published the financial controller decided to include the amount in administrative expenses for 2011.
The amount was paid in April 2011

Answer 14

• Removed from Retained Earnings column in the SOCE - row: correction of error
• Take away from Admin expenses in cost matrix (prior period error)

Question 15

Inventories included in the trial balance is the figure from the 31 December 2010 financial statements as the inventory count had not been completed in time.

The inventory count at 31 December 2011 showed that there were 1,500 finished units held in Giyani plc’s warehouse.
10,000 units were completed during the year, although planned production was 12,000.

Production had been halted for two weeks due to a fault on the production line.

Production costs incurred during the year are shown in the ‘Production costs’ table below and included in the list of balances above (no adjustment is required to these figures).

Direct costs 176,000
Fixed production overheads 153,600

Answer 15

Direct costs = £176,000
Per unit (10,000) 17.60
Fixed production overheads = £153,600
Per unit (12,000) 12.80
------------
30.40

Closing inventory
Finished goods (1,500 × £30.40) 45,600
- Take this away from COS in the cost matrix
- Place under Assets in the SOFP - under Inventories

Question 16

A grant of £50,000 was received on 1 April 2011 in respect of a job creation scheme in an underprivileged area.

This is the full amount of the grant and it has been credited to revenue.

The only criterion attached to the grant is that the jobs are still in existence 18 months after the grant was awarded.

The project has been an overriding success and Giyani plc’s directors believe that the jobs will continue to exist for the foreseeable future.

Answer 16

• Take 50,000 out of revenue in the statement of profit or loss
• Under Non-current liabilities in the SOFP:
  Deferred income (50,000 x 9/18) 25,000
  (9 because that’s the months from receival to y/e)
• Other income in the SPL = (50,000 - 25,000)
  Grant - Deferred income

Question 17

A dividend of 15p per ordinary share was paid on 1 September 2011 and the amount was recognised in finance costs.

Answer 17

• SPL: Take this away from finance costs:
  135,000 x 15p = (20,250)
• SOCE: Taken away from the retained earnings column under the row ‘Dividend on ordinary shares’

Question 18

Adjustment needs to be made at 31 December 2011 for prepaid administrative expenses of £10,500 and accrued operating costs of £12,600.

Answer 18

• Add 12,600 to ‘Other operating costs’ in the cost matrix
• SOFP: Add 12,600 to trade and other payables balance
• Take prepayment of 10,500 away from Admin Expenses in the cost matrix
• Add 10,500 to trade receivables in SOFP

Question 19

The research and development expenditure of £115,000 includes £28,000 incurred up to 30 June 2012 when a project review was undertaken and Temera Ltd assessed that the development of the new product was economically viable.

The remaining costs were incurred between 1 July and 1 December 2012, when the new product was launched, and include £8,000 on staff training, £12,000 on product testing and £10,000 on promotional advertising.

The new product has an estimated useful life of four years. Equipment used in the project development costing £18,000 was purchased and brought into use on 1 April 2012 and has an estimated useful life of three years.

Depreciation has not yet been accounted for. All expenses relating to research and development should be presented in other operating costs.

Answer 19

- Trial Balance: 115,000
Less: Amounts charged to profit or loss
Prior to 1 July 2012   28,000
Staff training   8,000
Promotional spend   10,000
---
(46,000) - this 46,000 added to other operating cost in cost matrix

Depreciation development equipment:
(Development charge for year 18000/3)
(6,000 x 5/12) (1/07/12 - 30/10/12) 2,500
Intangible asset at 30 Nov 2012 71,500
Amortisation (71,500/4 x 4/12) (5,958) - add to other operating costs in cost matrix
——-
115,000
(46,000)
2,500
—–
71,500
(5,958)
—
65,542 - Goes in intangible assets under Assets in SOFP

Question 20

The patents all have an estimated useful life of five years and amortisation is presented in other operating costs.

On 1 October 2012 Temera Ltd sold one of its patents, which had originally been acquired on 1 April 2010 at a cost of £2,400.

The profit on disposal was correctly calculated as £6,500 but the only accounting entries made were to debit cash at bank with the sale proceeds and credit a suspense account.

Answer 20

Patents:
Cost - b/f   15,000
Disposed in year    (2,400)
----
12,600

Acc amortisation b/f (4,500)
Amortisation charge for year:
On patents held all year (12,600 /5) 2,520
On patent disposed of (2,400/5 x 6/12) 240
———
(2,760)

Accum amortisation on patent disposed of (2,400/5 x 30/12) 1,200
(months held/12)
——–
CA at 31 March 2013: 6,540

Suspense Account:
TB    (7,700)
Disposed of patent (6,500 + (2,400 - 1,200))   7,700
---
-

Patent amortisation: Added to other operating expenses in cost matrix
Profit on sale of patent DEDUCTED from other operating expenses in cost matrix
CA goes to intangible assets under assets in SOFP

Question 21

Temera Ltd measures its land and buildings under the revaluation model. The amount shown in (the trial balance above is for the valuation prior to 31 March 2012 and the balance shown in the revaluation surplus is split equally between land and buildings.

On 1 April 2012, the date of the most recent valuation, a surveyor valued the buildings at £400,000 and estimated that the remaining useful life of the buildings at that date was 25 years.

This valuation has not yet been reflected in the above figures. There was no change to the value of the land. Temera Ltd does not make an annual transfer between the revaluation surplus and retained earnings.

Depreciation on buildings should be presented in administrative expenses.

Answer 21

Land and buildings b/f    630,000
Accumulated dep'n b/f    (122,500)
---------------
507,500
Valuation at 1 April 2012:    400,000
------
Revaluation loss  (107,500)
Balance on revaluation surplus re buildings
(100,000/2 - balance b/f /2)     50,000
--------------------
Excess to profit or loss 57,500 - this is deducted on its own line in the statement of profit or loss

Valuation/cost at 1 April 2012   400,000
Depreciation: 
(400,000/25) = (16,000)
-------------
384,000

Development equipment:
Valuation at 1 April 2012:  18,000
Dep (18,000/3)    (6,000)
--------
12,000

• Revaluation surplus goes under equity in SOFP
  = 50,000
  (100,000 - 50,000)

Question 22

Temera Ltd moved part of its head office function to a new building on 1 April 2012. The company has a contract to lease the building for 10 years at a cost of £10,000 pa; the useful life of the building is 40 years.

Lease payments are made in arrears on 31 March each year. On 31 March 2013 the first payment was made and this has been accounted for by crediting the cash balance and debiting administrative expenses with the payment of £10,000, both of which are reflected in the draft trial balance above.

The interest rate implicit in the lease is 3% and the
present value of future lease payments at 1 April 2012 is £85,300.

No other accounting entries in respect of the lease have been made. The contract meets the definition of a lease under IFRS 16, Leases

Answer 22

Year Ended B/f Interest @ 3% Payment C/f
2013 85,000 2,559 (10,000) 77,859
2014 77,859 2,336 (10,000) 70,195

The lease liability of £77,859 at 31 March 2013 should be apportioned between current and non-current liabilities:

SOFP:
Non-current liability (c/f balance at 31 March 2014) = £70,195
Therefore, current liability = (77,859 – 70,195) = £7,664

The lease payment charged against expenses should be reversed by deducting it from admin expenses
The 2,559 goes to the statement of profit or loss as a finance cost

Right of use asset:
Need to recognise a right of use asset:
PV of lease payments - depreciation = 
85,300 - 8,530 = 76,770 
= SOFP - Assets - Right of Use Asset  76,700
- Add depreciation to Admin expenses

Question 23

On 1 May 2012 Temera Ltd issued 10,000 £1 ordinary shares for cash of £1.30 each. The full amount received was debited to cash and credited to ordinary share capital.

Subsequently, a 1 for 4 bonus issue of ordinary shares was made on 1 August 2012.

No accounting entries have been made for the bonus issue although the correct number of shares were issued. The intention was to utilise the share premium account as far as possible.

Answer 23

Share Capital:
TB:: 323,000
Share issue adjustment (10,000 x 30p)  (3,000)
---------
320,000

At y/e 400,000

Share premium:
TB: 67,500
Share issue adjustment (10,000 x 30p)   3,000
Bonus Issue (320,000/4)   (70,500)
---------
At y/e   0 

Therefore do not include share premium balance in SOFP

Question 24

Temera Ltd has an agreement with a number of its third party retailers whereby when a new range of products is launched a number of items are provided on a sale or return basis.

Retailers pay for items sold on 60 days credit terms and return any unsold items at that date.

Temera Ltd makes a standard 20% mark-up on all goods sold. Temera Ltd launched a new product range in February 2013.

Sales of £27,000 on the sale or return basis were made and were recognised as part of revenue during February 2013.

Temera Ltd expects 10% of the products to be returned.

Answer 24

• Deducted to COS in the cost matrix:

Row: Items expected to be returned:
(10% x 27,000/1.2) (2,250)

• Then under Assets in the SOFP:
  Asset (right to recover products) 2,250

Question 25

At 31 March 2013 inventories were valued at £36,200. However, Temera Ltd had purchased some of its inventories from an overseas supplier on 1 January 2013 for €5,000.

These inventories were not included in the inventory count as they had been stored in a different area.

The invoice was unpaid at 31 March 2013 and was included in trade payables at the exchange rate on the date of purchase.

The spot exchange rates are as follows:
1 January 2013 – €1: £0.84
31 March 2013 – €1: £0.80

Answer 25

Translation at 1 January 2013 (5,000 × 0.84) 4,200
Translation at 31 March 2013 (5,000 × 0.80) (4,000)
——————-
Exchange gain 200

Exchange gain then deducted from other operating expenses and from the trade payables balance in the SOFP

Question 26

How do you calculate RE?

Answer 26

Trial balance 223,300
Bonus issue (80,000 – 70,500) (W2) (9,500)
(excess from share premium)
Profit for the year 120,093 (SPL final balance)
———-
333,893

Question 27

The income tax liability for the year ended 31 March 2013 has been estimated at £56,000.

However, on 5 June 2013 Temera Ltd received a letter from HMRC stating that the tax previously brought forward and paid for the year ended 31 March 2012 had been understated and an additional £11,500 including interest was now due.

Answer 27

• Add this to taxation in the SOFP
• And to the total balance deducted in the SPL
  67,500

Question 28

On 1 July 2012 Dedlock Ltd received a government grant of £10,000 to help finance the acquisition of a machine, purchased on the same date for £25,000.

The machine has been depreciated on a reducing balance basis using a rate of 20% pa.

Richard has credited the £10,000 grant received to revenue.

Clara has discussed this matter with the managing director and they have agreed that Dedlock Ltd’s accounting policy for government grants will be to use
the deferred income method.

Depreciation on plant and machinery is presented in cost of sales

Answer 28

Grant as received  10,000
Taken to cost of sales y/e 30 June 2013 × 20% =  (2,000)
----------------------
At 30 June 2013  8,000
Within one year × 20% =  (1,600)
-----------------------
After one year (β)   6,400

• Deduct from COS
• Deduct 10,000 from revenue in SPL

SOFP:
1,600 goes as deferred income in current liabilities

Question 29

On 30 June 2013, the directors decided to sell a machine which had cost Dedlock Ltd £20,000.

Richard did not make any adjustment to reflect this decision on the grounds that the machine had not been sold during the year.

Accumulated depreciation on this machine at 30 June 2013 is £8,500.

The machine is expected to sell for £8,000 with selling costs of £450 and the directors are confident that a buyer will be found by the end of December 2013.

Answer 29

Cost: 20,000
Less AD: (8,500)
———-
CA: 11,500

Loss on held for sale asset:
(11,500 - (8,000-450)) 3,950
Add to COS in the cost matrix

SOFP:
- Current Assets - Non-current asset held for sale =
(8,000-450) 7,550
(Expected selling price less costs to sell)
- Deduct the CA from the PPE balance in NCA

Question 30

In August 2013, when the trial balance was extracted, Richard became aware that one of Dedlock Ltd’s customers, Fastolfe Ltd, had gone into liquidation.

Dedlock Ltd’s trade receivables at 30 June 2013 include £55,700 due from Fastolfe Ltd.

Correspondence from the liquidator indicates that this debt will not be paid. Richard has not made any loss allowance for this expected credit losses on receivables as Fastolfe Ltd’s financial difficulties had not been known at the year end.

Dedlock Ltd’s managing director also believes that an allowance of 2% should be made against all other trade receivables.

Dedlock Ltd presents any expenses in relation to irrecoverable debts or movements on allowances in other operating costs.

Answer 30

• Add 55,700 to other operating costs in the cost matrix, under the row: Irrecoverable debt written off
• Add 990 ((105,200-55,700) x 2%) to other operating costs in the cost matrix, under the row: Receivables allowance
  (Receivables balance b/f)
• Deduct both 55,700 and 990 from the trade receivables balance in the SOFP

Question 31

On 1 January 2013 Dedlock Ltd issued 200,000 irredeemable preference shares at par. These shares have a nominal value of 50p each and carry a coupon rate of 5% pa.
The payment of the dividend is mandatory and if it is unpaid at the end of a period it becomes cumulative the following period.
The dividend due was paid on 30 June 2013 and was debited to retained earnings on that date.

Answer 31

SOFP:
NCL - Preference share capital (irredeemable) 100,000
(200,000 x 50p)

SPL:
Finance costs (2,500)
200,000 x 50p x 5% x 6/12 (when issued in year)

• Add back finance costs to Retained Earnings

Question 32

Richard has correctly calculated the income tax liability for the year ended 30 June 2013 at £26,000.

However, included in the revenue is an amount of £3,175, which was the amount of the income tax liability at 30 June 2012 which did not ultimately need to be paid.

Answer 32

SOFP: Leave taxation at 26,000

SPL:

• Deduct 3,175 from revenue
• Deduct 3,175 from the 26,000 as income tax expense

Question 33

A provision needs to be made for dismantling one of Dedlock Ltd’s retail units and returning the site to its original condition.

The requirement to do this was a condition put in place by the local government authority when the unit was constructed.

The unit was completed on 30 June 2013 and will need to be removed in 10 years’ time.

The cost in 10 years’ time of dismantling the unit is estimated at £25,000

Deadlock uses a discount rate of 7% pa where necessary

Answer 33

Dismantling provision:
(25,000/1.07^10) = 12,709

This goes to the SOFP under non-current liabilities under the heading ‘Provision’

• Add this 12,709 to PPE balance in SOFP under Assets

Question 34

On 30 June 2013 a full physical inventory count was carried out. Richard’s notes show the following:

Inventories at 30 June 2013
Raw materials:
Components A & B = 3,000 components in total: cost £5 per component.
Component C = 1,000 components: cost £1 per component, but no longer used by us – resale
value 50p per component.

Finished goods:
30 June 2013 = 200 units.
1,900 units were made during the year (normal capacity is 2,000).
Cost to produce: materials £129,380, direct labour £121,000, variable overheads £73,000, fixed overheads £52,500.
No adjustment is required to these figures.

Answer 34

Raw materials
– Components A & B (3,000 × £5) 15,000 – Component C (1,000 × £.5) 500

54,790

Finished goods  
Variable costs ((129,380 + 121,000 + 73,000)/1,900)  170.20
Fixed costs (52,500/2,000)    26.25 
----------
196.45

• Adjustment in COS:
  278,500 - 54,790 = 223,710, add this to COS in cost matrix
• 54,790 now recognised as inventories under assets in the SOFP

Question 35

On 15 June 2013 Dedlock Ltd took delivery of a large order of stationery supplies.
The purchase invoice amounted to £5,300, but was not received until July 2013.

Richard has not made any
adjustment for this invoice.

Answer 35

Results in = Accrual

Y/E - 30 June

• 5,300 added to admin expenses

Question 36

Alloa Ltd sold goods on 1 October 2012 for £200,000 with a one-year interest-free credit period and the full amount was included in sales and trade receivables. Alloa Ltd normally offers credit terms to customers at a rate of 5% pa

Answer 36

• Deduct the interest free credit from revenue
  (200,000 - (200,000/1.05)) = (9,524)
• Added to investment income in the SPL

Question 37

In November 2012 Alloa Ltd began selling a new product on its website. The product is sold on behalf of Billo Ltd. Alloa Ltd’s contract with Billo Ltd requires it to remit immediately to Billo Ltd all amounts received from customers who buy the product.

Billo Ltd then fulfils all orders from its own warehouse. Alloa Ltd receives a commission of 15% on all of the sales made each month.

Monthly reports showing total sales of the product are provided to Alloa Ltd by Billo Ltd 20 days after the end of each month.

Billo Ltd’s report showed total sales of £48,000 for the month of September 2013, although no amounts have yet been recorded by Alloa Ltd in respect of these sales.

Sales commission relating to sales in August 2013 had been recognised and received by Alloa Ltd by 30
September 2013.

Answer 37

- Add commission to revenue:
(48,000 x 15%) = 7,200
SOFP:
- Add commission to trade and other receivables 
(48,000 x 15%)

Question 38

A review of machinery on 31 March 2013 identified that one machine was not operating efficiently.

The machine was purchased on 1 October 2010 for £38,400.

The review on 31 March 2013 showed that if the machine were to be retained it would generate future cash flows with a present value of £10,000.

If the machine were to be sold it would realise
£11,000, with selling costs of £1,500.

An equivalent new machine could be purchased for
£56,000.

No adjustments in respect of this review have yet been recognised.

Property, plant and equipment is measured under the cost model and is depreciated using the reducing balance method at a rate of 30% pa.

Depreciation should be presented in cost of sales.

The balance in the trial balance is the carrying amount at 1 October 2012

Answer 38

CA at 30 September 2012 (38,400 × 0.70^2) 18,816
Dep’n to 31 March 2013 (18,816 × 30% × 6/12) (2,822)
———————-
Carrying amount 31 March 2013 15,994
———————–
Less: recoverable amount (value in use) (10,000)
Impairment loss 5,994

• Deduct this from the CA of PPE in the SOFP
• Charge to cost of sales in the cost matrix
• Deduct the depreciation on impaired machine from PPE amount in SOFP
  (2,822 + (10,000 x 30% x 6/12) = (4,322)
• Deduct depreciation on other machines:
  ((90,800 - 18,816) x 30%) = (21,595)

Question 39

During the year £228,000 was spent on research and development of two new software products, Uig and Brora.

The breakdown of expenditure is shown in the ‘R & D Expenditure’ table below.

Research into product development 26,000

Development activities

• Uig 118,000
• Brora 68,500

Pre-launch testing of Uig 9,600
Staff training 5,900
——————
228,000

On 1 October 2012 Uig was considered to be commercially viable. Uig was launched on 1 April
2013 and has been selling well. It is estimated that Uig will have a useful life of two years at which point technological advances are likely to have been made which will make the product obsolete.

Uig’s development costs were incurred between 1 October 2012 and 31 March 2013.

Brora has yet to be launched and requires additional development before it can be reasonably expected to generate probable future economic benefits

All expenses relating to intangible assets should be presented in cost of sales.

Answer 39

Per list of balances: 228,000

Less amounts charged to profit or loss 
    Staff training 5,900     
    Research costs 26,000    
    Development of the Brora  68,500
    ------------- 
   (100,400)

Intangible asset at 30 September 2013 127,600
Amortisation (127,600/2yrs × 6/12) (31,900)
——————-
95,700

• Charge R&D expenditure to COS in cost matrix
• Charge R&D amortisation to COS in cost matrix
• The 97,500 goes in intangible assets in the SOFP

Question 40

Alloa Ltd acquired the patents early in 2012, all of which are for two years.

No new patents were acquired during the year ended 30 September 2013.

A patent which had cost £3,000 on 1 May 2012 was sold on 30 April 2013 at its carrying amount.
The cash proceeds were debited to cash and credited to cost of sales.

The balance included in the trial balance is the carrying amount at 1 October 2012, which consists of cost of £59,000 and accumulated amortisation of £11,600

Answer 40

Amort charge for year (59,000 – 3,000)/2yrs 28,000
Disposal of patent (3,000/2yrs × 7/12) 875
——————
28,875

COS Matrix:
- Disposed of patent (3,000 - (3,000/2)) 1,500

Question 41

Inventories were valued at £25,500 on 30 September 2013.

The balance shown in the trial balance is opening inventories at 1 October 2012 as the year-end inventory valuation had not been finalised when the trial balance was extracted.

No adjustments for opening or closing inventories have been included in cost of sales.

Answer 41

Closing inventory therefore £25,500
- Work out COS as normal

COS = Opening + Purchases - Closing

Question 42

On 1 October 2012 Alloa Ltd issued 50,000 4% £1 preference shares at par.
These shares are redeemable on 30 September 2018 at a premium.
The preference dividend for the year was paid on 30 September 2013 and has been debited to retained earnings.
The effective interest rate is 4.8% pa.

Answer 42

B/f Interest exp (4.8%) Interest paid(4%) C/f
50,000 2,400 (2,000) 50,400

• NCL in SOFP:
  Redeemable preference shares: 50,400
• Add back preference dividend to retained earnings
  (50,000 x 4%) = 2,000 - it should not have been debited there

Question 43

Alloa Ltd entered into a share buyback scheme in June 2013. It reacquired 15,000 £1 ordinary shares for £1.75 cash per share.

The total cash paid was debited to share capital and share premium based on this nominal value and premium per share

Answer 43

SOFP:

Equity:
Ordinary Share Capital (185,000 + 15,000)
Share premium (88,750 + (15,000 x 0.75))
Treasury Shares (15,000 x £1.75) (26,250)
Retained Earnings (W6)

Question 44

The income tax liability for the year ended 30 September 2013 has now been estimated at £17,000.

The amount shown in the trial balance is the balance remaining on the nominal ledger after paying the liability at 30 September 2012, which was settled at less than originally estimated. (3,000)

Answer 44

SOFP: Taxation remains £17,000

SPL:
3,000 - 17,000 = (14,000)