BACC304: Company Accounting Assignment 2 Questions
Question 1
Explain the effect (if any) of each of the following transactions on an entity’s profit or
loss and on its cash flows:
(a) the purchase of new equipment which is then depreciated over its useful life
(b) the payment of a supplier’s invoice
(c) accounting for an accrued expense at the end of an accounting period
(d) the payment of a dividend
(e) the purchase of inventory for cash
(f) investing spare cash in a high-interest bank account, repayable at 7 days’ notice.
(25 marks)
Question 2
Jatman Ltd, a manufacturer, values inventory at the lower of cost and net realisable value according to the weighted average (WA) method of inventory valuation.
The value of closing inventory at 31 December 2018, 2019 and 2020 was originally computed as follows:
| $ | |
| 2018 | 315 000 |
| 2019 | 175 000 |
| 2020 | 330 000 |
During the year ended 31 December 2020, management decided that inventory should rather be valued on the first-in-first-out (FIFO) basis in order to improve the matching of revenue and expenses.
Closing inventory at 31 December 2018, 2019 and 2020 was calculated on the FIFO basis as follows:
| $ | |
| 2018 | 430 000 |
| 2019 | 195 000 |
| 2020 | 450 000 |
Profit before tax, before adjusting for the change in policy, for the years ended 31 December 2018 to 31 December 2020 was as follows:
| $ | |
| 2018 | 700 000 (fully taxable) |
| 2019 | 850 000 (fully taxable) |
| 2020 | 1 010 000 (fully taxable) |
Assume a tax rate of 30%. ZIMRA indicated that the new inventory valuation method will be taken into account only from the 2020 year-end onwards (i.e. prior year assessments will not be reopened).
Retained earnings at 1 January 2019 amounted to $1 455 000 and on 31 December 2019 to $1 950 000. The issued share capital consists of 1 000 000 ordinary shares of $1 each. Assume that a dividend of $100 000 is paid annually. Ignore Tax.
Required
Disclose the above information in the statement of financial position, statement of changes in equity and statement of comprehensive income of Jatman Ltd for the year ended 31 December 2020. Also provide the income tax expense note and the note on the change in accounting policy. (25 marks )
Question 3
The following is a Trial Balance of H Ltd at 31 March 2015
| $000 | $000 | |
| Equity shares 50c each | 56 000 | |
| Retained earnings (note 1) | 1 400 | |
| 8% convertible loan note (note2) | 30 000 | |
| Freehold property – at cost 1 April 2009 (land element $25million (note 3) | 75 000 | |
| Plant and equipment -at cost | 74 500 | |
| Accumulated depreciation 1 April 2014 – Buildings | 10 000 | |
| – Plant and equipment | 24 000 | |
| Current tax (note 4) | 800 | |
| Deferred tax (note 5) | 2 600 | |
| Inventory | 36 000 | |
| Trade receivables | 47 100 | |
| Bank | 11 500 | |
| Trade payables | 24 500 | |
| Revenue | 339 650 | |
| Cost of sales | 207 750 | |
| Distribution costs | 27 500 | |
| Administrative expenses (note6) | 30 700 | |
| Loan interest paid (note 2) | 2 400 | |
| 500 950 | 500 950 |
The following notes are relevant.
- An equity dividend of 5c per share was paid in November 2014 and charged to retained earnings
- The 8% $30 million convertible loan notes was issued on 1 April 2014 at par. Interest is payable annually in arrears on 31 March each year. The loan note is redeemable at par on 31 March 2017 or convertible into equity shares at the option of the loan note holders on the basis of 30 equity shares for each $100 of loan note. H Ltd’ finance director has calculated that to issue an equivalent loan note without the conversion rights it would have to pay an interest rate of 10% per annum. The present value of $1 at the end of each year, based on discount rates of 8% and 10% are found in the discount tables.
- On 1 April 2014 H Ltd decided for the first time to value its freehold property at its current value. A qualified property valuer reported that the market value of the freehold property at this date was $80 million, of which $30 million related to land. At this date the remaining estimated life of the property was 20 years. H Ltd does not make transfer to retained earnings in respect of excess depreciation on the revaluation of its assets. Plant is depreciated at 20% per annum on the reducing balance method. All depreciation of non-current assets is charged to cost of sales.
- The balance on current tax represents the under/over provision of the tax liability for the year ended 31 March 2014. The required provision for income tax for the year ended 31 March 2015 is $19.4 million. The difference between the carrying amounts of the assets of H Ltd (including the revaluation of the property in note3 above) and their (lower) tax base at 31 March 2015 is $27 million. H Ltd’s rate of tax is 25%
- The inventory of H Ltd was not counted until 4 April 2015 due to operational reasons. At this date its value at cost was $36 million and this figure has been used in the cost of sales calculation above. Between the end of 31 March and 4 April 2015, H Ltd received a delivery of goods at a cost of $2.7 million and made sales of $7.8 million at a mark-up of 30%. Neither the goods delivered nor the sales made in this period were included in H Ltd.’s purchases (as part of cost of sales) or revenue in the above trial balance.
- On 31 March H Ltd factored (sold) trade receivables with a book value of $10 million to Quick cash. H Ltd received an immediate payment of $8.7 million and will pay Quick cash 2% per month on any uncollected balances. Any of the factored receivables outstanding after six months will be refunded to Quick cash. If H Ltd had not factored these receivable it would have made an allowance of $600 000 against them.
Required:
Prepare the statement of comprehensive income for H Ltd for the year ended 31 March 2015 [11 marks]
Prepare the statement of changes in equity for H Ltd for the year ended 31 March 2015 [4 marks]
Prepare the statement of financial position of H Ltd at 31 March 2015. [10 marks]
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