FINANCIAL REPORTING – Page 6

Title: FR – L2 – Q48 – Taxation

Calculate Peak Ltd's corporate income tax liability for 20X4 based on profit, depreciation, and tax allowances.

Question

Peak Ltd was incorporated on 1 January 20X4. In the year ended 31 December 20X4 the company made a profit before taxation of GH¢121,000.
During the period Peak Ltd made the following capital additions:

GH¢
Plant	48,000
Motor vehicles	12,000

During the period:

GH¢
Accounting depreciation	11,000
Tax depreciation	15,000

Tax is chargeable at a rate of 30%.

Required:
(a) Calculate the corporate income tax liability for the year ended 31st December 20X4.

(b) Calculate the deferred tax balance that is required in the statement of financial position as at 31st December 20X4.

(c) Prepare a note showing the movement on the deferred tax account and thus calculate the deferred tax charge for the year ended 31st December 20X4.

(d) Prepare the statement of profit or loss note which shows the compilation of the tax expense for the year ended 31st December 20X4.

Answer

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Tags: axation, Current Tax, Deferred Tax, Profit or Loss, Tax Expense
Level: Level 2

Topic: Financial Reporting Standards and Their Applications

FR – L2 – Q47 – Provisions and Contingencies

Advise on accounting for an insurance claim with a debit balance and potential additional payment.

Question

ACCOUNTING TREATMENT
You have been asked to advise on the appropriate accounting treatment for the following situations arising in the books of various companies. The year end in each case can be taken as 31 December 20X4 and you should assume that the amounts involved are material in each case.
(a) At the year-end there was a debit balance in the books of a company for GH¢15,000, representing an estimate of the amount receivable from an insurance company for an accident claim. In February 20X5, before the directors had agreed the final draft of the published accounts, correspondence with lawyers indicated that GH¢18,600 might be payable on certain conditions.
(b) A company has an item of equipment which cost GH¢400,000 in 20W8 and was expected to last for ten years. At the beginning of the 20X4 financial year the book value was GH¢280,000. It is now thought that the company will soon cease to make the product for which the equipment was specifically purchased. Its recoverable amount is only GH¢80,000 at 31 December 20X4.
(c) On 30 November, a company entered into a legal action defending a claim for supplying faulty machinery. The company’s solicitors advise that there is a 20% probability that the claim will succeed. The amount of the claim is GH¢500,000.
(d) An item has been produced at a manufacturing cost of GH¢1,800 against a customer’s order at an agreed price of GH¢2,300. The item was in inventory at the year-end awaiting delivery instructions. In January 20X5 the customer was declared bankrupt and the most reasonable course of action seems to be to make a modification to the unit, costing approximately GH¢300, which is expected to make it marketable with other customers at a price of about GH¢1,900.
(e) At 31 December, a company has a total potential liability of GH¢1,000,400 for warranty work on contracts. Past experience shows that 10% of these costs are likely to be incurred, that 30% may be incurred but that the remaining 60% is highly unlikely to be incurred.

Required
For each of the above situations outline the accounting treatment you would recommend and give the reasoning of principles involved. The accounting treatment should refer to entries in the books and/or the year-end financial statements as appropriate.

Answer

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Tags: Contingent Liabilities, Financial Statements, IAS 16, IAS 2, IAS 37, Impairment, Inventories, Legal Claims, Provisions, Warranty
Level: Level 2

Topic: Financial Reporting Standards and Their Applications

FR – L2 – Q46 – Events After the Reporting Period

Explain accounting treatment for post-year-end events affecting receivables, property, inventory, subsidiaries, and other events for Earley Enterprises.

Question

Earley Enterprises is finalising its accounts for the year ended 31 December 20X3. The following events have arisen since the year end and the financial director has asked you to comment on the final accounts.

(a) At 31 December 20X3 trade receivables included a figure of GH¢250,000 in respect of NedenCorp. On 8 March 20X4, when the current debt was GH¢200,000, NedenCorp went into receivership. Recent correspondence with the receiver indicates that no dividend will be paid to unsecured creditors.

(b) On 15 March 20X4 Earley Enterprises sold its former head office building, Whiteley Grove, for GH¢2.7 million. At the year end the building was unoccupied and carried at a value of GH¢3.1 million.

(c) Inventories at the year-end included GH¢650,000 of a new electric tricycle the Oparis. In January 20X4 the European Union declared the tricycle to be unsafe and prohibited it from sale. An alternative market, in Bongaria, is being investigated, although the current price is expected to be cost less 30%.

(d) Stingray Ltd, a subsidiary in Outer Sarnia, was nationalised in February 20X4. The Outer Sarnia authorities have refused to pay any compensation. The net assets of Stingray Ltd have been valued at GH¢200,000 at the year end.

(e) Freak floods caused GH¢150,000 damage to the Southridge branch of Earley Enterprises in January 20X4. The branch was fully insured.

(f) On 1 April 20X4 Earley Enterprises announced a 1 for 1 rights issue aiming to raise GH¢15 million.

Required

Explain how you would respond to the matters listed above.

Answer

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Tags: Adjustments, Disclosures, Events After Reporting Period, Financial Statements, IAS 10, Impairment, Inventories, Subsidiaries
Level: Level 2

Topic: Events After the Reporting Period

FR – L2 – Q45 – Provisions

Explain the accounting treatment for litigation, unfair dismissal, returns, and division closure in Kumasi Ltd's financial statements for 20X4.

Question

Kumasi Ltd is preparing its financial statements for the year ended 30 September 20X4. The following matters are all outstanding at the year end.
(1) Kumasi Ltd is facing litigation for damages from a customer for the supply of faulty goods on 1 September 20X4. The claim, which is for GH¢500,000, was received on 15 October 20X4. Kumasi Ltd’s legal advisors consider that Kumasi Ltd is liable and that it is likely that this claim will succeed. On 25 October 20X4 Kumasi Ltd sent a counter-claim to its suppliers for GH¢400,000. Kumasi Ltd’s legal advisors are unsure whether or not this claim will succeed.
(2) Kumasi Ltd’s sales director, who was dismissed on 15 September, has lodged a claim for GH¢100,000 for unfair dismissal. Kumasi Ltd’s legal advisors believe that there is no case to answer and therefore think it is unlikely that this claim will succeed.
(3) Although Kumasi Ltd has no legal obligation to do so, it has habitually operated a policy of allowing customers to return goods within 28 days, even where those goods are not faulty. Kumasi Ltd estimates that such returns usually amount to 1% of sales. Sales in September 20X4 were GH¢400,000. By the end of October 20X4, prior to the drafting of the financial statements, goods sold in September for GH¢3,500 had been returned.
(4) On 15 September 20X4 Kumasi Ltd announced in the press that it is to close one of its divisions in January 20X5. A detailed closure plan is in place and the costs of closure are reliably estimated at GH¢300,000, including GH¢50,000 for staff relocation.

Required
State, with reasons, how the above should be treated in Kumasi Ltd’s financial statements for the year ended 30 September 20X4

Answer

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Tags: Contingent Liabilities, Financial Statements, IAS 37, Litigation, Provisions, Restructuring, Returns
Level: Level 2

Topic: Financial Reporting Standards and Their Applications

FR – L2 – Q44 – Provisions

Explain accounting treatment for decommissioning costs of a mining site under IAS 37, including calculations.

Question

The following information relates to the financial statements of Kumasi Ltd for the year to 31 March 20X4.

The mining division of Kumasi Ltd has a 3 year operating licence from an overseas government. This allows it to mine and extract copper from a particular site. When the licence began on 1 April 20X3, Kumasi Ltd started to build on the site. The cost of the construction was GH¢500,000.

The overseas country has no particular environmental decommissioning laws. In response to the global sustainability agenda, Kumasi Ltd has developed its own policy for sustainable operations. It has made information about this policy public and has provided examples to demonstrate that it is a responsible company that believes in restoring mining sites at the end of the extraction period. The cost of removing the construction at the end of the three years is estimated to be GH¢100,000.

The cost of the site currently shown in the trial balance is GH¢500,000. The company has a cost of borrowing of 10%.

Required

Explain the correct accounting treatment for the above (with calculations if appropriate).

Answer

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Tags: Decommissioning Costs, Financial Reporting, IAS 37, Non-current Assets, Provisions, Sustainability
Level: Level 2

Topic: Provisions

FR – L2 – Q43 – Leases

Show extracts from Zest Pharma Plc's accounts for a 5-year lease with a 2-year extension option, including calculations for 20X4.

Question

Zest Pharma Plc leases an asset on 1 January 20X4.
The lease is for five years at a rental of GH₵600,000 per half year in advance, with an option of two more years at nominal rental. It is reasonably certain that the option will be exercised. The present value of future lease payments is GH₵4,400,000.
The directors of Zest Pharma Plc consider that the asset has a useful life of seven years.
The rate of interest implicit in the lease is 7.68% per half year.

Required
Prepare relevant extracts from the accounts of Zest Pharma Plc at 31 December 20X4.

Answer

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Tags: Depreciation, Finance Costs, Financial Statements, IFRS 16, Lease Liability, Leases, Right-of-Use Asset
Level: Level 2

Topic: Financial Reporting Standards and Their Applications

Title: FR – L2 – Q42 – Leases

Show how a 4-year machine lease is presented in Fablon Ltd’s 20X4 financial statements, including profit or loss and financial position.

Question

Fablon Limited leased a machine on 1 January 20X4 for four years. Lease payments of GH¢40,000 are payable in arrears annually. The interest rate implicit in the lease is 10% and the present value of the minimum lease payments is GH¢126,760.

Required
Show how the lease agreement would be presented in the statement of profit or loss for 20X4 and the statement of financial position at 31 December 20X4. Notes to the financial statements are not required.

Answer

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Tags: Depreciation, Finance Costs, Financial Statements, IFRS 16, Lease Liability, Leases, Right-of-Use Asset
Level: Level 2

Topic: Financial Reporting Standards and Their Applications

FR – L2 – Q41 – Financial Reporting Standards and Their Applications

Show extracts from Cypress Limited's 20X4 financial statements for leases of a threshing and baling machine.

Question

On 1 January 20X4, Cypress Limited entered into the following lease agreements.

(a) Threshing machine
A lease of a threshing machine for 3 years from Alpha Ltd.
A deposit of GH¢2,000,000 was payable on 1 January 20X4 followed by 3 instalments of GH¢6,500,000 payable in arrears, commencing on 31 December 20X4. The present value of future lease payments is GH¢16,752,000 and the interest rate implicit in the lease is 8%.

(b) Baling machine
A lease of a baling machine for 5 years from Beta Ltd.
Cypress Limited has agreed to make 5 annual instalments of GH¢35,000 payable in advance, commencing on 1 January 20X4. The present value of future lease payments is GH¢150,000.
The interest rate implicit in the lease is 8.36%.

Required

Show the relevant extracts from the accounts of Cypress Limited for year ended 31 December 20X4.

Answer

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Tags: Depreciation, Finance Costs, Financial Statements, IFRS 16, Lease Liabilities, Leases, Right-of-Use Assets
Level: Level 2

Topic: Financial Reporting Standards and Their Applications

FR – L2 – Q40 – Financial Reporting Standards and Their Applications

Show lease presentation for a boat lease in Finley Ltd's financial statements for 20X4, including profit or loss and financial position extracts.

Question

On 1 January 20X4, Finley Ltd entered into an agreement to lease a boat. The initial measurement of the lease liability was GH¢36,000 and the term of the lease was four years. Annual lease payments of GH¢10,000 are payable in advance. The interest rate implicit in the lease is 7.5%.

Required
Show how this lease would be presented in the statement of profit or loss of Finley Ltd for the year ended 31 December 20X4 and the statement of financial position as at that date. Detailed disclosure notes are not required.

Answer

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Tags: Depreciation, Finance Costs, Financial Statements, IFRS 16, Interest rate, Lease Accounting, Statement of Financial Position, Statement of profit or loss
Level: Level 2

Topic: Financial Reporting Standards and Their Applications

FR – L2 – Q39 – Leases

Explain accounting for a 5-year machine lease with advance payments under IFRS 16 for Bela Ltd.

Question

The following information relates to the financial statements of Bela Limited for the year to 31 March 20X4.

On 1 October 20X3, Bela Limited entered into a 5 year lease for a machine from Narbona, agreeing to make payments every 6 months of GH¢29,500 beginning on the 1 October 20X3.

The present value of future lease payments at the commencement of the lease and before any payments are made is GH¢250,000 and the machine is believed to have a useful life of 5 years. The six-month interest rate implicit in the lease is 3.9%.

Required

Explain the correct accounting treatment for the above (with calculations where appropriate).

Answer

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Tags: Depreciation, Finance Costs, IFRS 16, Lease Liability, Leases, Right-of-Use Asset
Level: Level 2

Topic: Financial Reporting Standards and Their Applications

Subject (SQ): FINANCIAL REPORTING

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Title: FR – L2 – Q48 – Taxation

Calculate Peak Ltd's corporate income tax liability for 20X4 based on profit, depreciation, and tax allowances.

FR – L2 – Q47 – Provisions and Contingencies

Advise on accounting for an insurance claim with a debit balance and potential additional payment.

FR – L2 – Q46 – Events After the Reporting Period

Explain accounting treatment for post-year-end events affecting receivables, property, inventory, subsidiaries, and other events for Earley Enterprises.

FR – L2 – Q45 – Provisions

Explain the accounting treatment for litigation, unfair dismissal, returns, and division closure in Kumasi Ltd's financial statements for 20X4.

FR – L2 – Q44 – Provisions

Explain accounting treatment for decommissioning costs of a mining site under IAS 37, including calculations.

FR – L2 – Q43 – Leases

Show extracts from Zest Pharma Plc's accounts for a 5-year lease with a 2-year extension option, including calculations for 20X4.

Title: FR – L2 – Q42 – Leases

Show how a 4-year machine lease is presented in Fablon Ltd’s 20X4 financial statements, including profit or loss and financial position.

FR – L2 – Q41 – Financial Reporting Standards and Their Applications

Show extracts from Cypress Limited's 20X4 financial statements for leases of a threshing and baling machine.

FR – L2 – Q40 – Financial Reporting Standards and Their Applications

Show lease presentation for a boat lease in Finley Ltd's financial statements for 20X4, including profit or loss and financial position extracts.

FR – L2 – Q39 – Leases

Explain accounting for a 5-year machine lease with advance payments under IFRS 16 for Bela Ltd.

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Calculate Peak Ltd's corporate income tax liability for 20X4 based on profit, depreciation, and tax allowances.

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Advise on accounting for an insurance claim with a debit balance and potential additional payment.

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Explain accounting treatment for post-year-end events affecting receivables, property, inventory, subsidiaries, and other events for Earley Enterprises.

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Explain the accounting treatment for litigation, unfair dismissal, returns, and division closure in Kumasi Ltd's financial statements for 20X4.

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Explain accounting treatment for decommissioning costs of a mining site under IAS 37, including calculations.

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Show extracts from Zest Pharma Plc's accounts for a 5-year lease with a 2-year extension option, including calculations for 20X4.

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Show how a 4-year machine lease is presented in Fablon Ltd’s 20X4 financial statements, including profit or loss and financial position.

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Show extracts from Cypress Limited's 20X4 financial statements for leases of a threshing and baling machine.

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Show lease presentation for a boat lease in Finley Ltd's financial statements for 20X4, including profit or loss and financial position extracts.

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Explain accounting for a 5-year machine lease with advance payments under IFRS 16 for Bela Ltd.

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