- 20 Marks
FR – L2 – Q71 – Presentation of Financial Statements
Question
The following trial balance relates to Zestful Ltd as at 31st December 20X9.
| Description | GH₵’000 | GH₵’000 |
|---|---|---|
| Revenue | 213,800 | |
| Cost of sales | 143,800 | |
| Operating expenses | 22,400 | |
| Trade receivables | 13,500 | |
| Bank | 900 | |
| Closing inventories – 31st December 20X9 (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 20X9 (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 20X9 | 17,500 | |
| Revaluation surplus (note (ii)) | 21,000 | |
| Total | 318,000 | 318,000 |
The following additional information is relevant:
(i) An inventory count on 31st December 20X9 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.
(ii) Non-current assets:
- Plant: All plant, including that of the joint operation (note v), is depreciated at 12.5% on reducing balance basis.
- Land and building: The land and building were revalued at GH₵15 million and GH₵48 million respectively on 1st January 20X9 creating a GH₵21 million revaluation surplus. At this date the building had a remaining life of 15 years. Depreciation policy is on a straight-line basis. Zestful Ltd does not make a transfer to realized profits in respect of excess depreciation. Depreciation on both the building and the plant should be charged to the cost of sales.
- Investment property: On 31st December 20X9 a qualified surveyor valued the investment property at GH₵13.5 million. Zestful Ltd uses the fair value model in IAS 40 Investment Property to measure its investment property.
(iii) Interest expenses include interest on loan notes and an ordinary dividend of 4p per share that was paid in June 20X9.
(iv) The directors have estimated the provision for income tax for the year ended 31st December 20X9 at GH₵8 million. The deferred tax provision ended 31st December 20X9 is to be adjusted (through the profit or loss) to reflect the tax base of the company’s net assets is GH₵12 million less than their carrying amounts. The rate of tax is 30%.
(v) On 1 January 20X9 Zestful Ltd entered into a joint arrangement with other entities. Each venturer contributes their own assets and is responsible for their own expenses including depreciation assets of the joint arrangement. Zestful 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 Zestful Ltd joint venture transactions are:
| Description | GH₵’000 |
|---|---|
| Plant and equipment at cost | 12,000 |
| Share of joint venture turnover (40% of total turnover) | 8,000 |
| Related joint venture cost of sales excluding depreciation | (5,000) |
| Trade receivables | 1,500 |
| Trade payables | (2,500) |
Required:
Prepare a statement of profit or loss for the year ended 31 December 20X9 and a statement of financial position as at that date.
Answer
(a) Zestful Ltd statement of profit or loss for the year ended 31 December, 20X9
| Description | GH₵’000 |
|---|---|
| Revenue (W1) | 221,800 |
| Cost of sales (W1) | (156,200) |
| Gross profit | 65,600 |
| Operating expenses | (22,400) |
| Investment income | 1,200 |
| Loss on investment property (16,000 – 13,500) (W2) | (2,500) |
| Financing cost (5,000 – 3,200 ordinary dividend) (W5) | (1,800) |
| Profit before tax | 40,100 |
| Income tax expense (W3) | (6,400) |
| Profit for the period | 33,700 |
(b) Zestful Ltd Statement of financial position as at 31 December 20X9
| Description | GH₵’000 | GH₵’000 |
|---|---|---|
| Non-current assets | ||
| Property, plant and equipment (W4) | 87,100 | |
| Investment property (W2) | 13,500 | |
| 100,600 | ||
| Current assets | ||
| Inventories (10,500 – 300) (W1) | 10,200 | |
| Trade receivables (13,500 + 1,500 JV) | 15,000 | |
| 25,200 | ||
| Total assets | 125,800 | |
| Equity and liabilities | ||
| Ordinary shares of 25p each | 20,000 | |
| Reserves: | ||
| Revaluation | 21,000 | |
| Retained earnings (W5) | 48,000 | |
| 69,000 | ||
| 89,000 | ||
| Non-current liabilities | ||
| Deferred tax (W3) | 3,600 | |
| Redeemable preference shares of GH₵1 each | 10,000 | |
| 13,600 | ||
| Current liabilities | ||
| Trade payables (11,800 + 2,500 JV) | 14,300 | |
| Bank overdraft | 900 | |
| Current tax payable | 8,000 | |
| 23,200 | ||
| Total equity and liabilities | 125,800 |
WORKINGS
- Revenue
| Description | GH₵’000 |
|---|---|
| Per question | 213,800 |
| Joint operation revenue | 8,000 |
| 221,800 |
Cost of sales
| Description | GH₵’000 |
|---|---|
| Per question | 143,800 |
| Closing inventories adjustment (see below) | 300 |
| Joint operation costs | 5,000 |
| Depreciation (W4) – building | 3,200 |
| – plant | 3,900 |
| 156,200 |
The damaged inventories will require expenditure of GH₵450,000 to repair them then have an expected selling price of GH₵950,000. This gives a net realizable value of GH₵500,000, as their cost was GH₵800,000, a write down of GH₵300,000 is required.
- Investment property
The fair value model in IAS 40 Investment Property requires investment properties to be included in the statement of financial position at their fair value (in this case taken to be the open market value). Any surplus or deficit is recorded in income. - Taxation
| Description | GH₵’000 |
|---|---|
| Provision for year | 8,000 |
| Deferred tax (see below) | (1,600) |
| 6,400 |
Taxable temporary differences are GH₵12 million. At a rate of 30% this would require a statement of financial position provision for deferred tax of GH₵3.6 million. The opening provision is GH₵5.2 million, thus a credit of GH₵1.6 million will be made in the statement of profit or loss.
- Non-current assets
Land and building
Depreciation of the building for the year ended 31 December 20X9 will be (48,000 / 15 years) = 3,200
Plant and equipment
| Description | GH₵’000 |
|---|---|
| Per trial balance | 36,000 |
| Joint operation plant | 12,000 |
| 48,000 | |
| Accumulated depreciation 1 January 20X9 | (16,800) |
| Carrying amount prior to charge for year | 31,200 |
| Depreciation year ended 31 December 20X9 at 12.5% | (3,900) |
| Carrying amount at 31 December 20X9 | 27,300 |
Summarising
| Description | Cost/valuation | Accumulated Dep | Carrying amount |
|---|---|---|---|
| Land and building | 63,000 | 3,200 | 59,800 |
| Plant and equipment | 48,000 | 20,700 | 27,300 |
| Property, plant and equipment | 111,000 | 23,900 | 87,100 |
- Retained earnings
| Description | GH₵’000 |
|---|---|
| Balance b/f | 17,500 |
| Profit for period | 33,700 |
| Ordinary dividends paid (20,000 × 4 × 4p) | (3,200) |
| 48,000 |
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