Single Entity Adjustments 6-10 Flashcards
Tipperary plc measures its property, plant and equipment under the revaluation model. On 1 January 2013 the company’s land and buildings were valued at £450,000 (land £100,000) and its plant and equipment at £85,000.
This valuation has not been reflected in the trial balance above.
On 1 January 2013 the remaining useful lives of the buildings and plant and equipment were reassessed at 20 years and four years respectively.
Depreciation on buildings should be presented in administrative expenses and depreciation on plant and equipment should be presented in cost of sales.
Other than the equipment referred to in Note 2 below, there were no additions to or disposals of property, plant and equipment in the year ended 31 December 2013.
The revaluation surplus at 31 December 2012 included £200,000 in respect of land and buildings, with the remainder attributable to plant and equipment.
Tipperary plc has a policy of making an annual transfer between the revaluation surplus and retained earnings wherever possible.
Depreciation charges for the year ended 31 December 2013 on a historical cost basis would have been £15,000 for plant and equipment and £10,000 for buildings.
PPE: Land and Buildings: CA at 1 Jan 2013 420,000 Valuation 450,000 ------------ Revaluation upwards 30,000
Plant and Equipment: CA at 1 Jan 2013 105,000 Valuation 85,000 ------------ Revaluation downwards (20,000)
Balance on revaluation surplus b/f: 209,000
Land and buildings 200,000
Remainder attributable to plant and equipment = 9,000
————–
20,000 - 9000 = (11,000)
Charge downwards revaluation to COS in cost matrix
SPL: Revaluation gain = (30,000 - 9,000) = 21,000
SOFP: Total valuation = CA of PPE
450,000 + 85,000
Depreciation: Cost matrix
COS: (85,000/4) = 21,250
Admin Expenses: ((450,000 – 100,000)/20) = 17,500
- Take these away from CA in SOFP
On 1 January 2013 Tipperary plc acquired new equipment for £30,000, which is included in the £175,000 in the trial balance and in the valuation of £85,000 in Note 1 above.
A government grant of £18,000 was received to help finance the purchase of this equipment as part of the government’s drive to encourage investment in new technology, and was credited to revenue.
Tipperary plc has an accounting policy of using the deferred income approach
Grant received 18,000 Less released in year (18,000/4) (4,500) (UL of P&E = 4 years) --------------------------- Deferred income 13,500
SOFP: Current liability 4,500 Non-current liability 9,000 ------------- 13,500
COS cost matrix:
- Deduct 4,500 from COS under row ‘Release of government grant’
During the year Tipperary plc decided to rationalise its business. The plan to shut down operations at this factory was announced in August 2013 to the local workforce.
Those affected were offered jobs in other areas of Tipperary plc’s business.
A relocation package was offered to staff affected by the closure who were required to move to take up other jobs within Tipperary plc.
The total rationalisation cost has been calculated by Tipperary plc as £500,000.
Of this amount, £400,000 relates to staff relocation packages due to be paid on 28 February 2014 and the remainder is in respect of legal costs associated with the rationalisation.
The factory was vacated on 30 September 2013. Rationalisation costs had not been recognised at the year end.
DR Admin Expense 100,000
CR Provision for legal costs 100,000
- Add 100,000 to admin expenses in the cost matrix
- Under current liabilities place a ‘provision for legal costs’ in the SOFP
- 28 Feb 2014 past year end
The redeemable preference shares were issued on 1 January 2013 and the coupon and effective interest rates are both 5%.
On 15 February 2013 Tipperary plc declared an ordinary dividend of 10p per share in respect of the year ended 31 December 2012. This was paid one month later and debited to administrative expenses.
On 30 June 2013 Tipperary plc made a 1 for 4 rights issue of ordinary shares at a price of £1.20 per share.
The rights issue was fully taken up. The nominal value received was credited to ordinary share capital, but the premium was credited to revenue.
No ordinary or preference dividends have been paid or accrued in respect of the current year.
Ordinary Share Capital b/f 230,000
Redeemable preference share capital 100,000
SOFP:
NCL: Redeemable preference share capital 100,000
SPL:
Finance cost = (100,000 x 5%) = (5,000)
Equity:
Ordinary Share Capital 230,000
Share Premium 9,200
Rights issue:
(230,000/5) x 20p
Add 46,000 to Ordinary share capital (230,000/5)
Add 9,200 to Share premium (230,000/5) x 20p
- Both in SOCE column
- Remove 9,200 from revenue
Ordinary dividend:
(184,000 x 10p) = (18,400) take from Retained Earnings in the SOCE
- Deduct from Admin expenses
On 15 November 2013 Tipperary plc purchased some inventories from an overseas supplier for €115,000, correctly recording the transaction at that date, but making no further adjustments.
The invoice was unpaid at 31 December 2013. The spot exchange rates are as follows:
15 November 2013 €1: £0.90
31 December 2013 €1: £0.85
Translation on 15 November 2013 (€115,000 × 0.90) 103,500
Translation on 31 December 2013 (€115,000 × 0.85) 97,750
—————-
Exchange gain 5,750
- Exchange gain DEDUCTED from COS in cost matrix
On 15 November 2013 Tipperary plc purchased some inventories from an overseas supplier for €115,000, correctly recording the transaction at that date, but making no further adjustments.
The invoice was unpaid at 31 December 2013. The spot exchange rates are as follows:
15 November 2013 €1: £0.90
31 December 2013 €1: £0.85
Translation on 15 November 2013 (€115,000 × 0.90) 103,500
Translation on 31 December 2013 (€115,000 × 0.85) 97,750
—————-
Exchange gain 5,750
- Exchange gain DEDUCTED from COS in cost matrix
On 1 July 2014 Gamow Ltd introduced a discount loyalty card scheme for select customers, issuing 200 cards on that date for £1,250 each in return for a 25% discount on all purchases over the next two years.
The financial controller included the total cash received of £250,000 as part of revenue for the year ended 31 March 2015.
An analysis of purchases over the last five years for these customers shows that the monetary value of purchases is evenly spread throughout each year.
Loyalty cards 200 × £1,250 = £250,000
Revenue £250,000 × 9/24 months = £93,750 revenue
(time since introduction)
Contract liability (deferred income) £250,000 – 93,750 = 156,250
SPL:
- Take 156,250 of the 250,000 balance out of revenue as it is deferred income
SOFP:
NCL: Contract Liability (250,000 x 3/24) 31,250
CL: Contract Liability (156,250 - 31,250) 225,000
(add 100,000 from other note)
- Deduct the initial revenue capitalisation
- Add back the portion earnt in the year
- Split the remaining balance between current and non-current liabilities under ‘contract liability’
During the year ended 31 March 2015 Gamow Ltd incurred £275,000 of research and development expenditure on a new product, the Mendel.
All of this expenditure was capitalised as an intangible asset.
The costs incurred are shown in the ‘R & D Costs’ table below:
- Background investigation work (1 April – 31 May 2014) 25,000
- Initial development work (1 June – 15 July 2014) 42,800
- Second phase development work (16 July – 30 November 2014) 160,000
- Product launch costs (December 2014) 31,600
- Staff training (February 2015) 15,600
————-
275,000
The Mendel was assessed as being commercially viable on 16 July 2014 and product development was completed by the end of November 2014. The product was launched in December 2014, although the first products were not delivered until April 2015.
2,000 advance orders were taken during the product launch events, with customers paying deposits of £50 per Mendel. The only accounting entries made in respect of the advance orders were to recognise the cash deposits and credit revenue.
R&D:
Expense:
- Background investigation work (1 April – 31 May 2014) 25,000
- Initial development work (1 June – 15 July 2014) 42,800
- Product launch costs (December 2014) 31,600
- Staff training (February 2015) 15,600
———
115,000
- Add this to COS in the cost matrix
Intangible asset:
- Second phase development work (16 July – 30 November 2014) 160,000
- From when commercially viable to launch
SOFP:
NCA: Intangibles 160,000
Mendel pre-orders:
SPL: Deduct the 100,000 from revenue
SOFP:
(Contract liability (deferred income)) (2,000 × £50) = £100,000
Liabilities, Current Liabilities: Add 100,000
On 1 January 2015 Gamow Ltd made a one-off sale to a customer in mainland Europe.
The sale was for €22,000 and a 120-day credit period was given to the customer. The sale was recognised
in revenue and receivables using the 1 January 2015 spot exchange rate. No other accounting entries have been made.
The cash from the customer was received on 1 May 2015.
The spot exchange rates are as follows:
1 January 2015 €1: £0.83
31 March 2015 €1: £0.79
1 May 2015 €1: £0.80
Translation at 1 January 2015 (22,000 × 0.83) 18,260
Translation at 31 March 2015 (22,000 × 0.79) (17,380)
——————-
Exchange loss 880
- Add this to COS in the cost matrix
- Deduct from trade and other receivables balance in the SOFP
On 1 April 2014 Gamow Ltd issued 30,000 6% £10 convertible bonds at par. On 31 March 2017 each bond can be redeemed for cash at par or converted into three ordinary shares.
The interest due on the bonds was paid on 1 April 2015.
The equivalent effective interest rate on similar
bonds without the conversion rights is 9% pa.
The only accounting entries made at 31 March 2015 were to recognise the £300,000 cash received as a non-current liability.
Year Cash DF PV 31 March 2015 18,000 1/1.09 16,514 31 March 2016 18,000 1/1.092 15,150 31 March 2017 318,000 1/1.093 245,554 ----------------------------- Liability component 277,218 Equity component (bal fig) 22,782 ------------------- Total 300,000
1 April 2014 Interest (9%) Payment (6%) 31 Mar 2015
277,218 24,950 (18,000) 284,168
SOFP: Equity Other Share reserve (convertible bond) 22,782 Non-current Liabilities: Bond 284,168
SPL:
Finance cost - Add Interest (9%) 24,950
On 1 April 2014 a legal claim was made against Gamow Ltd in relation to a delivery of goods which were of a poor quality.
This was an isolated incident with a fault with one of the production machines and the goods should not have been delivered to the customer. Gamow Ltd’s legal department believe that the claim is likely to succeed and an out of court settlement is estimated at £120,000.
A provision was recognised at 31 March 2015 for £120,000 and the costs were debited to other operating costs.
Due to a number of complications with the claim it is estimated that it is not likely to be settled until April 2016. The appropriate discount rate is 7%.
120,000/1.072 = 104,813
Unwinding of discount: 104,813 × 7% = 7,337
Cost matrix:
Provision adjustment:
(120,000 - 104,813) = (15,187)
Deducted from other operating costs
Provisions note: At 1 April 2014 – Profit or loss charge 104,813 Unwinding of discount 7,337 ------------------------- At 31 March 2015 112,150
This provision is in relation to a legal claim which arose on 1 April 2014 due to the delivery of faulty goods to a customer. The incident was one-off in nature due to a fault with one of the machines. The provision has been discounted to a present value of 7%. The legal claim is likely to be settled in April 2016.
SOFP:
Non-Current Liabilities: Provision: 112,150
SPL: 7,337 added to finance cost
Depreciation on property, plant and equipment for the year ended 31 March 2015 has not yet been charged. All depreciation is charged on a straight-line basis.
Buildings were assessed as having a 40-year useful life, and plant and machinery a 15-year useful life.
The cost of property, plant and equipment at 1 April 2014 is shown in the ‘Property, plant and equipment’ table below. Cost at 1 April 2014: Land 350,000 Buildings 1,080,000 Plant and machinery 384,900
No new items of property, plant and equipment were acquired in the year, although a machine was sold on 1 April 2014 for £9,300.
This machine had originally been purchased on 1 April
2008 for £19,500.
The only accounting entries made in respect of this disposal were to debit cash and credit the cash proceeds to non-current assets.
All expenses in respect of property, plant and equipment should be recognised in administrative expenses
Buildings:
Cost 1,080,000
Charge for year: (1,080,000/40) (27,000)
Plant and Machinery:
Cost 384,900
Less disposal (cost) (19,500)
Charge for year: (365,400/15) (24,360)
Disposal - CA:
(19,500 - (19,500/15) x 6) = 11,700
Cost - (Cost/UL x time held)
PPE - SOFP CA
At 1 April 2014 - per trial balance 1,260,780
Add surplus on land (diff note) 150,000
Less depreciation (51,360)
(27,000 + 24,360)
Less disposal adj (2,400)
(11,700 - 9,300)
———-
1,357,020 - goes to NCA on SOFP
Depreciation charge for the year added to Admin expenses in the cost matrix
During the year the finance director reviewed Gamow Ltd’s accounting policies. As a result of this review he decided to change the accounting policy for freehold land from historical cost to revaluation as he felt that by showing the land at valuation it would provide more relevant information to users. At 31 March 2015 the land was valued at £500,000.
- Surplus on land added to CA of NCA PPE in SOFP
SPL: Own line for revaluation surplus on land under other comprehensive income: add 150,000 - This sits after profit for the year and generates total comprehensive income for the year
Inventories at 31 March 2015 were valued at their cost of £47,300. This included £9,000 in respect of one product which had a total list price of £12,000 at 31 March 2015.
However, on 15 April 2015 the directors discovered that since March 2015 a number of competitors had been selling an equivalent product for 30% less than Gamow Ltd’s list price.
At cost 47,300
Less write-down to NRV (9,000 – (12,000 × 70%)) (600)
——–
46,700
- Deducted from COS in cost matrix
- Deduct the 600 from Inventories in the SOFP
On 1 December 2014 Laderas plc received a government grant of £75,000 to assist with the purchase of a specialised machine which has an estimated useful life of five years. As there were
no conditions attached to the grant it was credited in full to sales, although Laderas plc’s policy is to use the ‘netting-off’ method. The machine cost £125,000 and was ready for use on 1 January 2015. The total cost of the machine has been included in the plant and machinery balance above
- Deduct the 75,000 from revenue
- Deduct the cost of the government grant asset from plant and machinery (the full 125,000)
- Depreciation charged to plant and machinery:
((125,000-75,000/5) x 9/12) = (7,500) - Deduct the 75,000 government grant from the PPE CA in the SOFP
