Single Entity Adjustments 11-14 Flashcards
On 1 September 2015 Kwano Ltd started to build a specialised machine, which is a qualifying 1
asset, per IAS 23, Borrowing Costs.
On the same date Kwano Ltd borrowed £150,000 to partially fund the machine construction costs and immediately spent these funds.
This loan is repayable on 1 September 2017 and has an interest rate of 6% pa, being the market rate.
Interest is paid every six months in arrears. The interest paid on 28 February 2016 was included in finance costs for the year ended 30 June 2016 but no additional amounts were accrued.
The machine was ready for use on 1 July 2016, by which date construction costs of £215,000 had been debited to property, plant and equipment.
On 30 April 2016 Kwano Ltd received a government grant for £50,000 in respect of this machine.
The grant was debited to cash and credited to purchases, although Kwano Ltd’s accounting
policy is to use the netting off method for capital grants.
Year End 30 June 2016
- Create a row for ‘Borrowings’ under Non-current liabilities in the SFP - 150,000
- Deduct incorrectly charged borrowing costs from finance costs = (150,000 x 6% x 6/12) = (4,500)
- Add (150,000 x 6% x 10/12) = 7,500 to plant and equipment. This is because there’s 2 months left till payment in September
- Add (150,000 x 6% x 4/12) to trade payables as this is 7,500-4,500
- Add 50,000 back to COS as incorrectly treated
The income tax charge for the year is estimated at £115,000. This is the appropriate estimate the amount payable for the year ended 30 June 2016.
In March 2016 the income tax liability for the year ended 30 June 2015 was settled for £186,400. The financial statements for the year ended 30 June 2015 had included an income tax liability of £195,000. The difference of £8,600 is included in the trial balance as at 30 June 2016.
- £115,000 to the SFP
- SPL: 115,000 - 8,600
Land and buildings are measured under the revaluation model, and plant and machinery under 3
the cost model. When the revaluation model was first adopted on 1 July 2014 the carrying amount of buildings was £975,000 and the remaining useful life of the buildings was estimated at 40 years.
On 1 July 2014 land was valued at £1,000,000 and buildings at £1,500,000. Property prices have remained static over the two years since the initial revaluation and Kwano Ltd has neither acquired nor sold any property in that period. Kwano Ltd makes an annual transfer between the revaluation surplus and retained earnings but has not yet made this transfer for the year ended 30 June 2016.
The carrying amount for property, plant and equipment in the draft statement of financial position is made up as shown in the ‘Property, plant and equipment’ table below.
Land and buildings (land £1,000,000) 2,462,500
Plant and machinery 1,428,300
3,890,800
Depreciation on property, plant and equipment for the year ended 30 June 2016 has not yet been charged.
Depreciation on buildings is calculated on a straight-line basis and is recognised in administrative expenses. Depreciation on plant and machinery is calculated on a reducing balance basis at 20% pa and is recognised in cost of sales.
On 30 June 2016 the directors decided to sell a piece of land which was surplus to requirements following a recently rejected planning application. The nominal ledger balances were not adjusted to reflect this decision.
The land remains in property, plant and equipment at its 1 July 2014 valuation, despite meeting the held for sale criteria of IFRS 5, Non-current Assets Held for
Sale and Discontinued Operations. Kwano Ltd has been advised that the land is only expected to sell for £55,400, with selling costs of £7,500.
The land had cost £170,000 on 1 July 2000 and had
been revalued to £301,500 on 1 July 2014
Land and buildings: TB: 2,462,500 Held for sale asset (301,500) ------ 2,161,00
Depreciation charge: 1,500,000/40 = (37,500)
Plant and equipment: TB: 1,428,300 Borrowing (150,000 x 6% x 10/12) 7,500 Government grant (50,000)
Depreciation:
((1,428,300 - 215,000) x 20%)
Revaluation Surplus:
Per list of balances 1,925,000
Held for sale asset (W2) (131,500)
Depreciation charge on revalued amount (W3) 37,500 Depreciation charge on historical cost (975,000/40) (24,375)
Transfer to retained earnings (13,125)
(add this to retained earnings)
At 30 June 2016 1,780,375
On 1 July 2015 Kwano Ltd issued 300,000 5% redeemable £1 preference shares at par. These 4
shares are redeemable in 2020 at a premium. The preference dividend is paid annually in arrears on 30 June. The appropriate dividend was paid on 30 June 2016 and was debited to retained earnings. The effective interest rate on the preference shares is 5.6% pa.
Opening balance (5.6%) Interest paid (5%) C/f 300,000 16,800 (15,000) 301,800
- 16,800 the finance cost for the year
- 301,800 goes to ‘Redeemable Preference Share Capital’ in the SFP
- Interest paid incorrectly debited to retained earnings so we add it back
(Where there is a debit RE balance in the TB it is a negative)
The provision of £200,000 shown in the trial balance above relates to outstanding lawsuits for the supply, prior to the year end, of a faulty product by Kwano Ltd to a number of customers.
This amount has been recognised as a provision based on advice from Kwano Ltd’s lawyers that the
claims are very likely to succeed within the next six months, which has led to some adverse
publicity.
The product was withdrawn in May 2016. The provision of £200,000 was charged to administrative expenses but should be recognised under cost of sales when the financial statements are prepared.
Since the year-end, 50 more customers have begun legal proceedings against Kwano Ltd in relation to the same faulty product. Kwano Ltd’s lawyers estimated that for each product £350 will need to be paid to settle the claim. Kwano Ltd expect to settle all claims relating to these faulty products by 30 June 2017.
During the year Kwano Ltd started offering a one-year standard warranty with its luxury products.
Under the warranty, Kwano Ltd will repair any product that is not functioning as intended for up to one year after purchase. If minor repairs were required for all the relevant goods sold the cost would be £65,000, compared to £157,000 if major repairs were required. Kwano Ltd estimates that 20% of the goods sold will require minor repairs and 5% will require major repairs.
No provision was recognised in respect of the warranties for the year ended 30 June 2016 as no
goods had been returned by this date.
Brought forward 200,000
Lawsuits (50 × 350) 17,500
Warranties ((65,000 × 20%) + (157,000 × 5%)) 20,850
At 30 June 2016 238,350
- Goes under ‘Provision’ in the SFP
- Corrections need to be made to the cost matrix and charges as appropriate
