Since Laburnum plc’s profits having been growing steadily for several years, and its
products are much in demand, the managing director has obtained an unbiased valuation of the company’s goodwill from his friend who is a lecturer in advertising and marketing. His friend suggests that Laburnum plc’s goodwill is worth £400,000. This has been included in the trial balance at 31 December 2015. The other side of this entry has been posted to the revaluation reserve. The managing director wants goodwill to be amortized over 10 years.
Inventory held at 31 December 2015 was valued at £167,400. This includes consignment goods of £30,000 which have been supplied to Laburnum plc by Norris Ltd. Laburnum plc is free to return these goods to Norris Ltd at any time without incurring any penalty.
Inventory included in the closing valuation at cost of £20,000 was sold four days after the year end for £2,000.
Fixtures and fittings with a fair value of £160,000 were acquired in 2015 through a finance lease. The lease period is five years with annual payments of £44,000. The payment of £44,000 for 2015 has been credited to bank and temporarily debited to a suspense account. No other accounting entries have been made in respect of the lease. Laburnum plc uses the sum of digits method to apportion interest. The fixtures and fittings have an estimated useful life of 5 years.
Two government grants have been received during the year:
A grant of £50,000 has been received to contribute towards a project which is to take place in 2015 and 2016. Revenue expenditure which is eligible for grant funding of £25,000 has been incurred in 2015 and is already included in the figure for administrative expenses in the Trial Balance.
A second grant also for £50,000 has been received towards the purchase of some plant and machinery which Laburnum plc purchased during the year. The plant and machinery asset account has already been increased to reflect the new asset. The asset will be depreciated by 20% reducing balance (as is the rest of plant and machinery).
The grant income received has been debited to Bank and credited to a Government grant account (see trial balance above).
At 31 December 2015, Laburnum plc was involved in a legal dispute with a former employee. The outcome of the dispute is unknown but legal advice suggests that the company will have to pay compensation of approximately £150,000.
In 2013 Laburnum plc set up a provision of £200,000 for another legal claim being made against the company. This claim has now been settled and Laburnum plc has paid £150,000 to an unnamed individual. This amount has been credited to bank and debited to a suspense account pending the correct accounting treatment.
The investment properties were purchased three years ago and have a remaining useful life of 22 years. At 31 December 2015 the investment properties had a fair market value of £350,000.
On 3 January 2016, £85,000 of inventory was destroyed in a warehouse fire. The company is not sure how this matter should be dealt with and no adjustment has yet been made to the inventory valuation provided in note 4 above.
Land is valued at £200,000 and is considered to have an infinite useful life. Buildings are re-valued regularly in accordance with the requirements of IAS 16 and in 2015 were valued at £350,000.
Buildings are depreciated on a straight line basis (using their year-end value) over their estimated useful economic life. At 31 December 2015 their remaining useful economic life was estimated to be 14 years.
Plant and machinery which originally cost £40,000 in 2012 was disposed of during 2015. The asset was sold for £18,000. The disposal has not yet been recorded in the accounting records of Laburnum plc. The company charges a full year of depreciation in the year of acquisition and none in the year of disposal.
Plant and machinery is depreciated using the reducing balance method at 20% per annum.
The corporation tax balance in the trial balance relates to an under provision in 2014. Corporation tax for the year ended 31 December 2015 has been estimated as £100,000.
The company made a 1 for 4 bonus issue of ordinary shares on 31 December 2015. This has not been reflected in the trial balance.
At the board meeting on 15 January 2016, it was proposed that the final dividend for ordinary shareholders would be 5 pence per share.
You also need to account for the final preference dividend and debenture interest.
Explain how the items above (additional information 1-17) should be treated with reference to relevant International Financial Reporting Standards and accounting concepts, and by calculating the appropriate amounts. Where necessary clearly show any journal entries that will be needed to correct the financial statements.
Using the trial balance above and your solutions to part a) prepare the following financial statements for BST Enterprises plc:
Income statement for the year ended 31 December 2015 (10 marks) (10 marks)
Statement of changes in equity for the year ended 31 December 2015 (10 marks)
Statement of financial position at 31 December 2015 (15 marks)