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FAT Summer Class 2022 Week 3 Monday

Calculative Question

Q1: The following trial balance has been extracted from the books of Walrus plc as at 31 March 2018:

	£'000	£'000
Land, at cost	370
Right-of-use asset, at cost (note (i))	250
Accumulated depreciation at 1 April 2017:
Right-of-use Asset		90
Inventory at 31 March 2018	212
Trade receivables and payables	170	130
Bank	150
Leased liability (note (ii))		200
Deferred tax liability at 1 April 2017 (note (iii))		10
Current tax liability at 1 April 2017 (note (iii))	8
Ordinary shares of £1 each		150
Share Premium		250
Retained earnings at 1 April 2017		108
Sales		1,162
Cost of sales	940
	2,100	2,100

Additional Information:

(i) Right-of-us asset has been revaluated to £200,000 with a remaining useful life of 20 years on 1 April 2017. Depreciation on right-of-use assets has not been charged to 31 March 2018 which will be taken account to cost of goods sold.

(ii) Walrus plc pays interest on lease liability in in arrears which has not been charged to the year 31 March 2018. Walrus uses 8% to imply the rate of lease liability.

(iii) An estimate of income tax (tax provision) is £12,000 for the year ended 31 March 2018. The balance on current tax in the trail balance is the under/over provision of tax for the previous year (When income tax is calculated based on taxable profits, company will estimate its liability for current tax by recognising a “provision”. The actual tax charge later might be different from this provision, resulting in a under/over provision of the tax liability. A debit balance of current tax represents an under provision of tax liability, which will add to the tax charge in the following year). As at 31 March 2018, Walrus has further taxable temporary differences of £80,000. The income tax rate of Walrus is 20%.

Required:

(a) Calculate total cost of sales for the year 31 March 2018.

(b) Calculate finance cost for the year 31 March 2018.

(d) Calculate the net profit for the year 31 March 2018.

(e) Calculate basic EPS for the year 31 March 2018.

(a) Depreciation on right-of-use assets should be charged to total cost of sales

Carrying amount as at 31.03.2017 = 250,000-90,000 = £160,000

Gain on revaluation = 200,000 - 160,000 = £40,000

Depreciation expense= 200,000/20 years = £10,000

Total cost of sales = 940,000 + 10,000 = £950,000

(b) Finance cost from leased liability

Interest expense = £200,000 x 8% = £16,000

Total income expense = Current tax expense = (Net income before tax + current year’s permanent differences + current year’s temporary differences) x tax rate + adjustment from prior years (under/over provision).

Income tax expense
Provision for year ended 31.03.2018		12,000
Add: Under-provision		8,000
Deferred tax (from increased deferred tax)	80,000 x 20% - 10,000	6,000
		£26,000

(d) Net income

	£’000
Revenue	1,162
Cost of sales	-950
Gross profit	212
Finance cost	-16
Profit before tax	196
Income tax expense	-26
Net profit for the year	170

(e) Basic EPS £170,000/150,000 = £1.133/share

Q2: The following trial balance has been extracted from the books of Walrus plc as at 31 December 2021:

	$’m	$’m
Revenue (note (i))		580
Cost of sales	200
Distribution cost	40
Administrative expense	20
Loan note interest (note (iii))	4.2
Bank overdraft interest	13
Land at cost (note (ii))	250
Plant and equipment at cost (note (ii))	300
Accumulated depreciation at 31 December 2020:
Plant and equipment		98
Inventory at 31 December 2021	65
Trade receivables	95.8
Trade payables		57
Bank overdraft		30
Equity shares of $1 each (note (iii))		70
Share premium		66
Retained earnings at 31 December 2020		20
6% Convertible loan note (note (iii))		70
Current tax (note (iv))	12
Deferred tax (note (iv))		9
	1,000	1,000

Additional information:

(i) Revenue in Walrus plc’s financial statement includes $50 million cash sales on behalf of Alex Co of which in the sale transaction Walrus plc is acting as an agent. The commission fee is 20% of the sales. By 31 December 2021, Walrus plc had remitted $20m of the total $50m sales to Alex Co which had been recorded as cost of sales in the statement.

(ii) Plant and equipment is depreciated at 10% per annum on the reducing balance basis which should be taken into cost of good sold.

(iii) On 1 January 2021, Walrus plc issued a 6% $70 million convertible loan note at par which will be redeemed at par or convert into equity shares after 3 years. Interest is payable annually in arrears. The effective interest rate on equivalent bond is 7%.

(iv) The balance on current tax represents the under/over provision of the tax liability for the year ended 31 December 2020. A provision of $50 million is required for current tax for the year ended 31 December 2021 and at this date the deferred tax liability was assessed at $12 million.

(v) The equity shares and share premium balances in the trial balance above has included a fully subscribed 1 for 5 bonus issue which was made by Walrus plc on 1 October 2021.

Please use the discount factor shown as below:

Period	6%	7%	8%
1	0.943	0.935	0.926
2	0.890	0.873	0.857
3	0.840	0.816	0.794

Required:

(a) Calculate the revenue and cost of sales for the year ended 31 December 2021.

(b) Calculate the finance cost for the year ended 31 December 2021.

(d) Calculate the basic earnings per share for the year ended 31 December 2021.

(a) Revenue and cost of sales

	$'m
Revenue from the question	580
Remove agency sales	-50
Add commission fee = 50*20% =	10
Revenue	540

Cost of sales from question	200
Remove agency costs	-20
Add depreciation = (300-98)x10% =	20.2
Cost of sales	200.2

Note: The agency sales $50m should be removed from revenue and their ‘$20m cost’ from cost of sales. Walrus plc’s should report the commission earned of $10 million as other operating income (or as revenue would be acceptable).

(b) Finance Cost