Single Entity Adjustments 1-5 Flashcards
(44 cards)
Shortly after the year end a warehouse assistant discovered that goods costing £2,500 had been received on 28 June 2009 but accidentally omitted from the year-end inventory count.
- Add back £2500 to the inventories balance in the SOFP
- Add this to PBT in the calculation of total comprehensive profit/loss for the year
On 3 April 2009 a claim was made against Adeje Ltd by one of its customers for supplying faulty goods.
Adeje Ltd’s lawyers have considered the claim and believe that there is an 80% chance that the customer will win the case if it is taken to court.
The customer is demanding that a full refund should be given of £10,000 plus damages of £5,000.
The lawyers have advised Adeje Ltd’s directors that they should settle the claim out of court to avoid adverse publicity.
The goods were returned to Adeje Ltd for investigation before being scrapped. The production manager identified that wood that had been purchased from Toscas Ltd, one of its regular suppliers, had been of a poor quality. This was an isolated problem.
Adeje Ltd’s lawyers wrote to Toscas Ltd explaining the situation. At the year end, negotiations were advanced between the two companies, with Toscas Ltd agreeing to pay £10,000 to Adeje Ltd to cover the customer’s refund.
This amount was received by Adeje Ltd on 13 August 2009, however discussions continue with regard to recovering the cost of the damages.
- Add 10,000 to trade and other receivables balance
- Place a 15,000 Provision under Current Liabilities as 80% chance
- Take the provision away from PBT in the total comprehensive profit/loss for the year
- Add the reimbursement to PBT
Research and development expenditure of £120,000 was incurred and capitalised during the current year. £40,000 of this expenditure was spent on research activities and £25,000 was incurred prior to Adeje Ltd gaining the necessary licence to market their new product.
- Take away research and development expenditure (40,000 + 25,000) from PBT in the calculation of total comprehensive profit/loss for the year
- Under intangible assets in the SOFP:
Assets
Intangible assets (120,000 - 40,000 - 25,000) 55,000
On 1 January 2009 Adeje Ltd entered into a one-year lease for new computer equipment. The lease requires four quarterly payments of £2,000, payable at the start of each quarter.
Adeje Ltd has elected to apply the optional recognition exemptions in IFRS 16, Leases. The entries for this lease have not yet been recorded in the trial balance.
- Four instalments of £2000 = £8000
- As Adeje Ltd has elected to apply the optional recognition exemptions in IFRS 16, the lease payments are recognised as an expense on a straight-line basis. Therefore, an expense of £4,000 (£8,000 × 6/12) is debited to profit or loss.
- Taken away from PBT in the total comprehensive profit/loss for the year
- Add to the bank overdraft balance under current liabilities in the SOFP
No adjustment has been made for the depreciation charges for the year ended 30 June 2009. Freehold buildings are depreciated at 3% pa on a straight-line basis and plant and equipment is depreciated on a reducing balance basis at a rate of 15% pa
Freehold land and buildings
Cost (land – £700,000) 2,500,000
Accumulated depreciation at 30 June 2008 486,000
Plant and equipment
Cost 350,000
Accumulated depreciation at 30 June 2008 97,000
Depreciation on buildings (2,500,000 – 700,000) × 3% = 54,000 pa
Depreciation on plant & equipment (350,000 – 97,000) × 15% = 37,950 pa
- Then figure out carrying amounts to go in SOFP:
Cost b/fw + Acc dep’n b/fd + charge for year = CA
- Take the total of both depreciation charges for the year away from PBT in the total comprehensive profit/loss for the year
On 1 January 2009 Adeje Ltd issued 60,000 6% £1 irredeemable preference shares at par. The payment of the dividend is at the discretion of Adeje Ltd.
The appropriate dividend in respect of these shares was paid on 30 June 2009 and was recognised as a finance cost in arriving at the draft profit before tax for the year.
- Under Equity in the SOFP:
6% Irredeemable Preference Shares 60,000 - Goes in its own column in the SOCE
Column heading: Irredeemable Preference Shares
Row: Issue of shares - Irredeemable dividend of:
60,000 x 6% x 6/12
is taken out of the retained earnings column in the SOCE
Add back the finance cost in the SPL - SHOULD NOT BE A FINANCE COST AS IRREDEEMABLE WITHOUT DIVIDEND
During the year ended 30 June 2009 Adeje Ltd decided to buy back some of its ordinary shares.
On 1 March 2009 it reacquired 200,000 of its ordinary shares for £2 per share.
The shares had originally been issued at a premium of 30p per share. Adeje Ltd recognised the £400,000 cash paid and debited it against share capital and share premium.
- Under Equity in the SOFP:
Treasury Shares (200,000 x £2) (400,000) - Incorrect accounting treatment: add back 200,000 to both share capital and share premium balances in the SOFP
- Treasury shares gets its own column in the SOCE:
Row: Share buy back (400,000)
During the year to 30 June 2009 Adeje Ltd changed its method of inventory valuation from weighted average to FIFO.
Inventory at 30 June 2009 was correctly valued on the FIFO basis.
Closing inventory at 30 June 2008 was reported as £37,000 valued at weighted average; however if it had been valued using FIFO it would have been £39,000.
39,000 - 37,000 = 2,000 adjustment - increase
- Take this away from PBT in total comprehensive profit/loss calculation
- Has its own row in the SOCE and is added to the Retained Earnings column as it is an increase in value
The income tax liability for the year ended 30 June 2009 has been estimated at £41,000.
Goes under current liabilities in the SOFP
On 1 July 2011 Giyani plc entered into a two-year fixed-price contract for the provision of services to a customer.
The total contract value is £95,000 and as at 31 December 2011, £5,000 had been received from the customer and included in revenue.
At 31 December 2011, recoverable costs of £11,000 had been incurred and included in cost of sales but Giyani plc was unable to make a reliable estimate of the costs to complete the contract.
- Take the 5,000 out of revenue
- Add 11,000 to revenue
On 1 January 2011 Giyani plc issued 240,000 5% £1 redeemable preference shares at par. The preference shares are redeemable in 2016 at a premium of 10%.
The dividends due for the year on the preference shares had not been accrued at 31 December 2011, although they were paid shortly after the year end.
The effective interest rate of the preference shares is 6.42% pa.
On 1 October 2011 Giyani plc made a 1 for 5 bonus issue of £1 ordinary shares, utilising retained earnings. No accounting entries have been made for this, although the correct number of shares were issued.
- Under current liabilities in the SOFP:
Preference share interest (240,000 x 5%) 12,000 - Under Non-current liabilities:
5% redeemable preference shares 243,408
Year B/f Interest Ex(6.42) Interest P(5%) C/f
2011 240,000 15,408 (12,000) 243,408 - Interest expense then added to finance costs
Bonus issue:
Goes in the SOCE
Column: Ordinary Share capital , Row: Bonus Issue
27,000
Column: Retained Earnings, Row: Bonus Issue
(27,000)
Giyani plc’s policy is to depreciate plant and machinery at 15% pa on cost. On 1 January 2011 a new machine was acquired for £7,000 and correctly included in the cost of plant and machinery.
This machine includes integrated tools that have to be replaced every three years at a cost of £1,200.
Depreciation on plant and machinery should be presented in cost of sales.
- Add to the cost of sales matrix
- Take 1,200 out of the cost of plant and machinery
Component depreciation: 1,200/3 = 400 - Work out the depreciation of the rest of plant and machinery separately
Giyani plc uses the revaluation model for land and buildings. The buildings were acquired on 1 January 2005 and have a total useful life of 50 years. Depreciation on buildings should be presented in other operating costs.
The balance of £872,000 (land £300,000, buildings £572,000) represents the latest valuation on 1 January 2011, the previous valuation being £842,000.
The only entry made to reflect the latest valuation was to increase the nominal ledger account for valuation of land and buildings by £30,000 and to credit this amount to the revaluation surplus.
Giyani plc does not make annual transfers between the revaluation surplus and retained earnings
Buildings: B/fw 572,000 Acc Depn (37,500) Adj 37,500 ---- 572,000
572,000/(50-6 yrs) (13,000)
(UL-time since acquisition of buildings)
——
559,000
- Take the 30,000 out of the b/f balance in the revaluation surplus column in the SOCE
Early in 2011, the financial controller discovered invoices for £50,000 in relation to electricity used in 2010.
These invoices had not been recorded in the nominal ledger, nor had they been accrued for at 31 December 2010.
As the 2010 financial statements had already been published the financial controller decided to include the amount in administrative expenses for 2011.
The amount was paid in April 2011
- Removed from Retained Earnings column in the SOCE - row: correction of error
- Take away from Admin expenses in cost matrix (prior period error)
Inventories included in the trial balance is the figure from the 31 December 2010 financial statements as the inventory count had not been completed in time.
The inventory count at 31 December 2011 showed that there were 1,500 finished units held in Giyani plc’s warehouse.
10,000 units were completed during the year, although planned production was 12,000.
Production had been halted for two weeks due to a fault on the production line.
Production costs incurred during the year are shown in the ‘Production costs’ table below and included in the list of balances above (no adjustment is required to these figures).
Direct costs 176,000
Fixed production overheads 153,600
Direct costs = £176,000 Per unit (10,000) 17.60 Fixed production overheads = £153,600 Per unit (12,000) 12.80 ------------ 30.40
Closing inventory
Finished goods (1,500 × £30.40) 45,600
- Take this away from COS in the cost matrix
- Place under Assets in the SOFP - under Inventories
A grant of £50,000 was received on 1 April 2011 in respect of a job creation scheme in an underprivileged area.
This is the full amount of the grant and it has been credited to revenue.
The only criterion attached to the grant is that the jobs are still in existence 18 months after the grant was awarded.
The project has been an overriding success and Giyani plc’s directors believe that the jobs will continue to exist for the foreseeable future.
- Take 50,000 out of revenue in the statement of profit or loss
- Under Non-current liabilities in the SOFP:
Deferred income (50,000 x 9/18) 25,000
(9 because that’s the months from receival to y/e) - Other income in the SPL = (50,000 - 25,000)
Grant - Deferred income
A dividend of 15p per ordinary share was paid on 1 September 2011 and the amount was recognised in finance costs.
- SPL: Take this away from finance costs:
135,000 x 15p = (20,250) - SOCE: Taken away from the retained earnings column under the row ‘Dividend on ordinary shares’
Adjustment needs to be made at 31 December 2011 for prepaid administrative expenses of £10,500 and accrued operating costs of £12,600.
- Add 12,600 to ‘Other operating costs’ in the cost matrix
- SOFP: Add 12,600 to trade and other payables balance
- Take prepayment of 10,500 away from Admin Expenses in the cost matrix
- Add 10,500 to trade receivables in SOFP
The research and development expenditure of £115,000 includes £28,000 incurred up to 30 June 2012 when a project review was undertaken and Temera Ltd assessed that the development of the new product was economically viable.
The remaining costs were incurred between 1 July and 1 December 2012, when the new product was launched, and include £8,000 on staff training, £12,000 on product testing and £10,000 on promotional advertising.
The new product has an estimated useful life of four years. Equipment used in the project development costing £18,000 was purchased and brought into use on 1 April 2012 and has an estimated useful life of three years.
Depreciation has not yet been accounted for. All expenses relating to research and development should be presented in other operating costs.
- Trial Balance: 115,000 Less: Amounts charged to profit or loss Prior to 1 July 2012 28,000 Staff training 8,000 Promotional spend 10,000 --- (46,000) - this 46,000 added to other operating cost in cost matrix
Depreciation development equipment:
(Development charge for year 18000/3)
(6,000 x 5/12) (1/07/12 - 30/10/12) 2,500
Intangible asset at 30 Nov 2012 71,500
Amortisation (71,500/4 x 4/12) (5,958) - add to other operating costs in cost matrix
——-
115,000
(46,000)
2,500
—–
71,500
(5,958)
—
65,542 - Goes in intangible assets under Assets in SOFP
The patents all have an estimated useful life of five years and amortisation is presented in other operating costs.
On 1 October 2012 Temera Ltd sold one of its patents, which had originally been acquired on 1 April 2010 at a cost of £2,400.
The profit on disposal was correctly calculated as £6,500 but the only accounting entries made were to debit cash at bank with the sale proceeds and credit a suspense account.
Patents: Cost - b/f 15,000 Disposed in year (2,400) ---- 12,600
Acc amortisation b/f (4,500)
Amortisation charge for year:
On patents held all year (12,600 /5) 2,520
On patent disposed of (2,400/5 x 6/12) 240
———
(2,760)
Accum amortisation on patent disposed of (2,400/5 x 30/12) 1,200
(months held/12)
——–
CA at 31 March 2013: 6,540
Suspense Account: TB (7,700) Disposed of patent (6,500 + (2,400 - 1,200)) 7,700 --- -
Patent amortisation: Added to other operating expenses in cost matrix
Profit on sale of patent DEDUCTED from other operating expenses in cost matrix
CA goes to intangible assets under assets in SOFP
Temera Ltd measures its land and buildings under the revaluation model. The amount shown in (the trial balance above is for the valuation prior to 31 March 2012 and the balance shown in the revaluation surplus is split equally between land and buildings.
On 1 April 2012, the date of the most recent valuation, a surveyor valued the buildings at £400,000 and estimated that the remaining useful life of the buildings at that date was 25 years.
This valuation has not yet been reflected in the above figures. There was no change to the value of the land. Temera Ltd does not make an annual transfer between the revaluation surplus and retained earnings.
Depreciation on buildings should be presented in administrative expenses.
Land and buildings b/f 630,000 Accumulated dep'n b/f (122,500) --------------- 507,500 Valuation at 1 April 2012: 400,000 ------ Revaluation loss (107,500) Balance on revaluation surplus re buildings (100,000/2 - balance b/f /2) 50,000 -------------------- Excess to profit or loss 57,500 - this is deducted on its own line in the statement of profit or loss
Valuation/cost at 1 April 2012 400,000 Depreciation: (400,000/25) = (16,000) ------------- 384,000
Development equipment: Valuation at 1 April 2012: 18,000 Dep (18,000/3) (6,000) -------- 12,000
- Revaluation surplus goes under equity in SOFP
= 50,000
(100,000 - 50,000)
Temera Ltd moved part of its head office function to a new building on 1 April 2012. The company has a contract to lease the building for 10 years at a cost of £10,000 pa; the useful life of the building is 40 years.
Lease payments are made in arrears on 31 March each year. On 31 March 2013 the first payment was made and this has been accounted for by crediting the cash balance and debiting administrative expenses with the payment of £10,000, both of which are reflected in the draft trial balance above.
The interest rate implicit in the lease is 3% and the
present value of future lease payments at 1 April 2012 is £85,300.
No other accounting entries in respect of the lease have been made. The contract meets the definition of a lease under IFRS 16, Leases
Year Ended B/f Interest @ 3% Payment C/f
2013 85,000 2,559 (10,000) 77,859
2014 77,859 2,336 (10,000) 70,195
The lease liability of £77,859 at 31 March 2013 should be apportioned between current and non-current liabilities:
SOFP:
Non-current liability (c/f balance at 31 March 2014) = £70,195
Therefore, current liability = (77,859 – 70,195) = £7,664
The lease payment charged against expenses should be reversed by deducting it from admin expenses
The 2,559 goes to the statement of profit or loss as a finance cost
Right of use asset: Need to recognise a right of use asset: PV of lease payments - depreciation = 85,300 - 8,530 = 76,770 = SOFP - Assets - Right of Use Asset 76,700 - Add depreciation to Admin expenses
On 1 May 2012 Temera Ltd issued 10,000 £1 ordinary shares for cash of £1.30 each. The full amount received was debited to cash and credited to ordinary share capital.
Subsequently, a 1 for 4 bonus issue of ordinary shares was made on 1 August 2012.
No accounting entries have been made for the bonus issue although the correct number of shares were issued. The intention was to utilise the share premium account as far as possible.
Share Capital: TB:: 323,000 Share issue adjustment (10,000 x 30p) (3,000) --------- 320,000
At y/e 400,000
Share premium: TB: 67,500 Share issue adjustment (10,000 x 30p) 3,000 Bonus Issue (320,000/4) (70,500) --------- At y/e 0
Therefore do not include share premium balance in SOFP
Temera Ltd has an agreement with a number of its third party retailers whereby when a new range of products is launched a number of items are provided on a sale or return basis.
Retailers pay for items sold on 60 days credit terms and return any unsold items at that date.
Temera Ltd makes a standard 20% mark-up on all goods sold. Temera Ltd launched a new product range in February 2013.
Sales of £27,000 on the sale or return basis were made and were recognised as part of revenue during February 2013.
Temera Ltd expects 10% of the products to be returned.
- Deducted to COS in the cost matrix:
Row: Items expected to be returned:
(10% x 27,000/1.2) (2,250)
- Then under Assets in the SOFP:
Asset (right to recover products) 2,250
