FR – May 2016 – L2 – Q1 – Preparation of Financial Statements

Prepare the statement of profit or loss and statement of financial position for Zealow Ltd as at 31st December 2015, incorporating relevant adjustments.

Question

The following trial balance relates to Zealow Ltd as at 31st December 2015:

GH¢000	GH¢000
Turnover	213,800
Cost of sales	143,800
Operating expenses	22,400
Trade receivables	13,500
Bank	900
Closing inventories – 31st December 2015 (note i)	10,500
Interest expenses (note iii)	5,000
Rental income from investment property	1,200
Plant and equipment-cost (note ii)	36,000
Land and building- at valuation (note ii)	63,000
Accumulated depreciation	16,800
Investment property-valuation 1st January 2015 (note ii)	16,000
Trade payables	11,800
Joint arrangement (note v)	8,000
Deferred tax (note iv)	5,200
Ordinary shares of 25p each	20,000
10% Redeemable preference shares of GH¢1 each	10,000
Retained earnings – 1st January 2015	17,500
Revaluation surplus (note ii)	21,000

Total: GH¢318,000 | GH¢318,000

The following additional information is relevant:

An inventory count on 31st December 2015 listed goods with a cost of GH¢10.5 million. This includes some damaged goods that had cost GH¢800,000. These would require remedial work costing GH¢450,000 before they could actually be sold for an estimated GH¢950,000.
Non-current assets:
- Plant: All plant, including that of the joint operation (note v), is depreciated at 12.5% on a reducing balance basis.
- Land and Building: The land and building were revalued at GH¢15 million and GH¢48 million respectively on 1st January 2015, creating a GH¢21 million revaluation surplus. At this date, the building had a remaining life of 15 years. Depreciation is on a straight-line basis. Zealow Ltd does not make a transfer to realized profits in respect of excess depreciation.
- Investment property: On 31st December 2015, a qualified surveyor valued the investment property at GH¢13.5 million. Zealow Ltd uses the fair value model in IAS 40 Investment property to value its investment property.
Interest expenses include overdraft charges, the full year’s preference dividend, and an ordinary dividend of 4p per share that was paid in June 2015.
The directors have estimated the provision for income tax for the year ended 31st December 2015 at GH¢8 million. The deferred tax provision at 31st December 2015 is to be adjusted (through the profit or loss statement) to reflect that the tax base of the company’s net assets is GH¢12 million less than their carrying amounts. The rate of tax is 30%.

On 1st January 2015, Zealow Ltd entered into a joint arrangement with two other entities. Each venturer contributes their own assets and is responsible for their own expenses, including depreciation on assets of the joint arrangement. Zealow Ltd is entitled to 40% of the joint venture’s total turnover. The joint arrangement is not a separate entity and is regarded as a joint operation.
Details of Zealow Ltd joint venture transactions are:

GH¢000
Plant and equipment at cost
Share of joint venture turnover (40% of total turnover)
Related joint venture cost of sales excluding depreciation
Trade receivables
Trade payables
Total

Required:

(a) Prepare the statement of profit or loss for Zealow Ltd for the year ended 31st December 2015. (10 marks)
(b) Prepare the statement of financial position for Zealow Ltd as at 31st December 2015. (10 marks)

Answer

Zealow Ltd – Statement of Profit or Loss for the Year Ended 31 December 2015

GH¢’000	GH¢’000
Revenue (w(i))	221,800
Cost of sales (w(i))	(156,200)
Gross profit	65,600
Operating expenses	(22,400)
Investment income	1,200
Loss on investment property (16,000 – 13,500 w(ii))	(2,500)
Financing cost (5,000 – 3,200 ordinary dividend (w(v)))	(1,800)
Profit before tax	40,100
Income tax expense (w(iii))	(6,400)
Profit for the period	33,700

Zealow Ltd – Statement of Financial Position as at 31 December 2015

GH¢’000	GH¢’000	GH¢’000
Non-current assets
Property, plant and equipment (w(iv))		87,100
Investment property (w(ii))		13,500
	Total non-current assets	100,600
Current assets
Inventories (10,500 – 300 (w(i)))		10,200
Trade receivables (13,500 + 1,500 JV)		15,000
	Total current assets	25,200
	Total assets	125,800
Equity and liabilities
Ordinary shares of 25p each		20,000
Reserves:
Revaluation	21,000
Retained earnings (w(v))	48,000
	Total equity	89,000
Non-current liabilities
Deferred tax (w(iii))		3,600
Redeemable preference shares of GH¢1 each		10,000
	Total non-current liabilities	13,600
Current liabilities
Trade payables (11,800 + 2,500 JV)		14,300
Bank overdraft		900
Current tax payable		8,000
	Total current liabilities	23,200
	Total equity and liabilities	125,800

The damaged inventories will require expenditure of GHC450,000 to repair them then
have an expected selling price of GHC950,000. This gives a net realizable value of
GHC500,000, as their cost was GHC500,000, as their cost was GHC800,000, a write
down of GHC300,000 is required.

(i) The fair value model in IAS 40 investment property requires investment
properties to be included in the balance sheet at their fair value (in this case
taken to be the open market value). Any surplus or deficit is recorded in
income

(ii)

Taxable temporary differences are GHC12 million. At a rate of 30% this would require a
balance sheet provision for deferred tax of GHC3.6 million. The opening provision is
GHC5.2 million, thus a credit of GHC1.6 million, thus a credit of GHC1.6 million will be
made in the statement of profit or loss.
(iii) Non-current assets
Land and building
Depreciation of the building for the year ended
31 December 2015 will be (48,000/15 years)