- 20 Marks
FR – L2 – Q64 – Revenue from Contracts with Customers
Question
AX LTD
Below is the summarised draft statement of financial position of AX Ltd, a company listed on the West Africa Stock Exchange, as at 31 March, 20X9:
| Non-current assets | |
|---|---|
| Property at valuation (land GH₵20,000; buildings GH₵165,000) (note ii) | 185,000 |
| Plant (note ii) | 180,500 |
| Financial assets at fair value through profit or loss at 1 April 20X8 (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 | |
| Stated capital | 290,000 |
| Capital surplus | 12,300 |
| Income surplus | |
| – At 1 April 20X8 | 96,700 |
| – For the year ended 31 March 20X9 | 12,300 |
| 109,000 | |
| 411,300 | |
| Non-current liabilities | |
| Deferred tax – at 1 April 20X8 (note v) | 19,200 |
| Current liabilities | 81,800 |
| 101,000 | |
| Total equity and liabilities | 518,000 |
The following information is relevant:
(i) AX Ltd’s statement of profit or loss includes GH₵8million of revenue for credit sales made on a “sale or return” basis. At 31 March 20X9, customers who had not paid for the goods, had the right to return GH₵2.6million of them. AX Ltd applied a mark-up on cost of 30% on all these sales. In the past, AX Ltd’s customers have sometimes returned goods under this type of agreement.
(ii) The non-current assets have not been depreciated for the year ended 31 March 20X9. AX Ltd 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 as at 1 April 20X8 when the building had a remaining life of 15 years. A qualified surveyor has valued the land and buildings at 31 March 20X9 at GH₵180million. Plant is depreciated at 20% on the reducing balance basis.
(iii) The financial assets at fair value through profit or loss are held in a fund whose value changes directly in proportion to a specified market index. At 1 April 20X8 the relevant index was 1,200 and at 31 March 20X9 it was 1,296.
(iv) In late March 20X9 the directors of AX Ltd discovered a material fraud perpetrated by the company’s credit controller that had been continuing for some time. Investigations revealed that a total of GH₵4 million of the trade receivables as shown in the statement of financial position at 31 March 20X9 had in fact been paid and the money had been stolen by the credit controller. An analysis revealed that GH₵1.5 million had been stolen in the year to 31 March 20X8 with the rest being stolen in the current year. AX Ltd is not insured for this loss and it cannot be recovered from the credit controller, nor is it deductible for tax purpose.
(v) During the year, the company’s taxable temporary differences increased by GH₵10 million of which GH₵6 million related to the revaluation of the property. The deferred tax relating to the remainder of the increase in the 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 20X9. After allowing for any adjustments required in terms (i) to (iv), the directors have estimated the provision of GH₵11.4 million (this is in addition to the deferred tax effects of item (v).
(vii) During the year, dividends of GH₵15.5 million were paid. These have been correctly accounted for in the above statement of financial position.
Required:
Taking into account any adjustments required by items (i) to (vii) above:
(a) Prepare a statement showing the recalculation of AX Ltd’s profit for the year ended 31 March 20X9; and
(b) Redraft the statement of financial position of AX Ltd as at 31 March 20X9.
Answer
(a). Recalculation of profit for the year ended 31 March 20X9
| GH₵’000 | GH₵’000 | |
|---|---|---|
| Draft retained profit per income surplus | 12,300 | |
| Dividends paid | 15,500 | |
| Draft profit for the year | 27,800 | |
| Profit on goods on sale or return (2,600 × 30/130) | (600) | |
| Depreciation | ||
| Buildings (165,000/15) | (11,000) | |
| Plant (180,500 × 20%) | (36,100) | (47,100) |
| Gain in investment (W3) | 1,000 | |
| Current year fraud loss | (2,500) | |
| Increase in deferred tax provision (W5) | (800) | |
| Current year tax | (11,400) | |
| Profit for the year | (33,600) |
WORKINGS
W3 Financial assets at FV through profit or loss
FV at year end (12,500 × 1,296 / 1,200) = 13,500
Per draft SOFP = 12,500
Gain – to profit or loss = 1,000
W5 Deferred tax
DR Capital surplus (6,000 × 20%) = 1,200
DR Profit or loss (tax charge) (4,000 × 20%) = 800
CR Deferred tax liability (10,000 × 20%) = 2,000
(b). Statement of financial position as at 31 March 20X9
| Non-current assets | GH₵’000 |
|---|---|
| Property (W1) | 180,000 |
| Plant (W1) | 144,400 |
| Investments (W3) | 13,500 |
| 337,900 |
| Current assets | GH₵’000 |
|---|---|
| Inventory (84,000 + 2,000 (W2)) | 86,000 |
| Trade receivables (W7) | 45,600 |
| Bank | 3,800 |
| 135,400 |
| Total assets | 473,300 |
| Equity and liabilities | GH₵’000 |
|---|---|
| Equity | |
| Stated capital | 290,000 |
| Capital surplus (12,300 + 4,800 (W6)) | 17,100 |
| Income surplus (W8) | 46,100 |
| Total equity | 353,200 |
| Non-current liabilities | GH₵’000 |
|---|---|
| Deferred tax (19,200 + 2,000 (W5)) | 21,200 |
| Current liabilities | GH₵’000 |
|---|---|
| As per draft SFP | 81,800 |
| Tax payable | 11,400 |
| 93,200 |
| Total equity and liabilities | 473,300 |
WORKINGS
W1 Property, plant and equipment
| Land | Buildings | Plant | Total | |
|---|---|---|---|---|
| GH₵’000 | GH₵’000 | GH₵’000 | GH₵’000 | |
| Property | 20,000 | 165,000 | 180,500 | 365,500 |
| Depreciation | – | (11,000) | (36,100) | (47,100) |
| 20,000 | 154,000 | 144,400 | 318,400 | |
| Revaluation | – | 6,000 | – | 6,000 |
| Balance c/d | 20,000 | 160,000 | 144,400 | 324,400 |
W2 Sale or return
Cancel sale:
DR Sales 2,600
Record inventories:
DR Inventories (SFP) 2,600 × 100/130 = 2,000
CR Cost of sales (closing inventories) 2,000
W3 Financial assets at FV through profit or loss
FV at year end (12,500 × 1,296 / 1,200) = 13,500
Per draft SOFP = 12,500
Gain – to profit or loss = 1,000
W4 Fraud
DR Income surplus – prior year 1,500
DR Current year profit 2,500
CR Receivables 4,000
W5 Deferred tax
DR Capital surplus (6,000 × 20%) = 1,200
DR Profit or loss (tax charge) (4,000 × 20%) = 800
CR Deferred tax liability (10,000 × 20%) = 2,000
W6 Capital surplus
Land and buildings at 31 March 20X8 = 185,000
Depreciation (165,000/15) = (11,000)
| | 174,000 | Valuation at 31 March 20X9 = 180,000
Surplus = 6,000
Deferred tax provision (6,000 × 20%) = (1,200)
Net surplus = 4,800
W7 Trade receivables
Per draft SFP = 52,200
Sale or return = (2,600)
Adjustment – fraud = (4,000)
| 45,600 |
W8 Income surplus
B/f = 96,700
Prior year adjustment = (1,500)
Total comprehensive income = (33,600)
Dividends paid = (15,500)
| 46,100 |
- Tags: Deferred Tax, Depreciation, Financial Position, Fraud, Inventory, Revaluation, Trade Receivables
- Level: Level 2
- Topic: Inventory Accounting
- Uploader: Samuel Duah