for half of Sugar Ltd's 100,000 $1 ordinary shares on Sugar Ltd's incorporation. A
contract between Regina Ltd and Twin Ltd gives them equal profit shares and states that
unanimous consent is required for all key operating decisions.
Sugar Ltd made a profit for the six months ended 30 June 2019 of $15,600. In June 2019
Regina Ltd made sales of $5,000 to Sugar Ltd, at a mark-up of 25%. Sugar Ltd still held
all these goods in inventories at 30 June 2019. Regina Ltd recognised its cost of
investment in Sugar Ltd of $50,000 in current assets, but made no further accounting
entries, other than to record the sale of the goods.
2) On 1 July 2019 Regina Ltd borrowed $200,000 at 6% pa to fund the construction of a
new warehouse, a qualifying asset. The cash received was immediately placed on deposit
earning interest at 2% pa. Construction did not begin until 1 August 2019 due to delays in
agreeing the plans with the architects.
A construction payment of $120,000 was made on 1 August 2019 and the remaining
$80,000 paid on 1 May 2020. The warehouse was ready for use on 1 June 2020 but
Regina Ltd did not start to use it until 1 July 2020. The directors estimate that the
warehouse has a useful life of 10 years.
Regina Ltd recognised the net interest in the statement of profit or loss for the year ended
30 June 2020. The construction costs were included in assets in the course of construction
in the statement of financial position as at 30 June 2020. No depreciation is charged on
assets in the course of construction.
3) On 1 January 2019 Nacho plc had in place $500,000 of 6.0% pa loan finance and
$800,000 of 4.7% pa loan finance. Neither loan was taken out for a specific purpose. On
1 February 2019 the company began to construct a new office building, which was
funded by this existing loan finance. The building was correctly assessed as a qualifying
asset, was completed and available for use on 31 October 2019, and has an estimated
total useful life of 50 years. The company moved its administrative function into this
building on 31 December 2019. The accountant included the interest payable for the
whole year on the total loan finance as part of the cost of the office building of $650,000
within property, plant and equipment. He did not recognise any depreciation on this
building in the year ended 31 December 2019 because the staff did not move to the new
building until the last day of the year.
4) The draft financial statements of Tacos plc include research and development
expenditure of $390,500 within intangible assets. The accountant's working papers show
that this all related to the development of a new waterproof fabric, which was assessed as
being commercially viable on 31 March 2019. The development of the fabric was
completed on 31 August 2019, and the first fabric was delivered to customers on 1
September 2019. The amount capitalised is made up as follows:
Research costs 100,000
Development costs incurred prior to 31 March 2015 55,500
Development costs incurred from 1 April 2015 to 31 August 2015 225,000
Marketing costs 10,000
No amortisation has been charged on this amount. The fabric technology is estimated to
have a three-year life before it is superseded by superior products.
5) During the year ended 31 December 2019 the directors of Nami plc decided to change
the company's accounting policy in respect of consumable stores, such as dyes and
threads used in the manufacturing process. In the year ended 31 December 2018, and all
years prior to that, Nami plc's stated accounting policy was to write off the costs of such
consumable stores as incurred. The directors now wish to recognise consumable stores as
inventory, on the grounds that this better matches purchases made to sales generated. As a
result, the accountant included closing inventory of consumable stores of $22,600 in the
draft financial statements for the year ended 31 December 2019, but made no other
adjustments. It has been established that the equivalent figure at 31 December 2018 was
$31,200, but it has not been possible to arrive at figures prior to that date.
Explain the required IFRS financial reporting treatment of Issues (1) to (5)
above in the financial statements of each company. Compute relevant
calculations and set out the required adjustments in the form of journal entries.
6) The following figures were calculated for Hakuna Ltd's draft single entity financial
statements for the year ended 31 March 2019.
Profit before tax 475,300
Total assets 852,500
Total liabilities 302,400
However, additional information is now available and the draft figures should be
- Inventories were purchased on 1 February 2019 from an overseas supplier for €25,000.
The invoice remained unpaid at 31 March 2019. The cost of the inventories was correctly
translated and recognised at the date of delivery along with the corresponding liability.
No other accounting entries were made. Exchange rates are:
1 February 2019 €1: $0.89
31 March 2019 €1: $0.81
- Research and development costs of $185,000 were incurred in the period on a new
product design and recognised within intangible assets. No other accounting entries were
made in respect of these costs. $45,000 was incurred during the early stages of the project
before the new design was assessed as economically viable. Of the remaining $140,000
costs incurred, $15,000 was incurred on a promotional event, $8,000 on staff training and
$12,000 on a pre-production prototype.
Orders for the new product were taken at the pre-launch event with total deposits of
$18,000. These deposits were recognised as revenue. The design will not be ready for
production until 1 June 2019.
Calculate the following revised figures for inclusion in Hakuna Ltd's single entity
financial statements for the year ended 31 March 2019:
? Profit before tax
? Total assets
? Total liabilities