The following trial balance relates to Zealow Ltd as at 31st December 2015.
The following additional information is relevant:
i) An inventory count on 31st December 2015 listed goods with a cost of GH¢10.5 million. This includes some damaged goods that had cost GH¢800,000. These would require remedial work costing GH¢450,000 before they could actually be sold for an estimated GH¢950,000.
ii) Non-current assets:
Plant:
All plant, including that of the joint operation (note v), is depreciated at 12.5% on reducing balance basis.
Land and building:
The land and building were revalued at GH¢15 million and GH¢48 million respectively on 1st January 2015 creating a GH¢21 million revaluation surplus. At this date the building had a remaining life of 15 years. Depreciation policy is on a straight-line basis. Zealow Ltd does not make a transfer to realized profits in respect of excess depreciation.
Depreciation on both the building and the plant should be charged to the cost of sales.
Investment property:
On 31st December 2015 a qualified surveyor valued the investment property at GH¢13.5 million. Zealow Ltd uses the fair value model in IAS 40 Investment property to value its investment property.
iii) Interest expenses include overdraft charges, the full year’s preference dividend and an ordinary dividend of 4p per share that was paid in June 2015.
iv) The directors have estimated the provision for income tax for the year ended 31st December 2015 at GH¢8 million. The deferred tax provision at 31st December 2015 is to be adjusted (through the profit or loss statement) to reflect that the tax base of the company’s net assets is GH¢12 million less than their carrying amounts. The rate of tax is 30%.
v) On 1st January 2015 Zealow Ltd entered into a joint arrangement with two other entities. Each venturer contributes their own assets and is responsible for their own expenses including depreciation on assets of the joint arrangement. Zealow Ltd is entitled to 40% of the joint venture’s total turnover. The joint arrangement is not a separate entity and is regarded as a joint operation.
Details of Zealow Ltd joint venture transactions are:
Required:
a) Prepare the statement of profit or loss for Zealow Ltd for the year ended 31st December 2015. (10 marks)
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Zealow Ltd statement of profit or loss for the year ended 31 December, 2015.
The damaged inventories will require expenditure of GHC450,000 to repair them then have an expected selling price of GHC950,000. This gives a net realizable value of GHC500,000, as their cost was GHC500,000, as their cost was GHC800,000, a write down of GHC300,000 is required.
(ii) The fair value model in IAS 40 investment property requires investment properties to be included in the balance sheet at their fair value (in this case taken to be the open market value). Any surplus or deficit is recorded in income.
(iii) Taxable temporary differences are GHC12 million. At a rate of 30% this would require a balance sheet provision for deferred tax of GHC3.6 million. The opening provision is GHC5.2 million, thus a credit of GHC1.6 million, thus a credit of GHC1.6 million will be made in the statement of profit or loss.
b) Prepare the statement of financial position for Zealow Ltd as at 31st December 2015. (10 marks)
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The damaged inventories will require expenditure of GHC450,000 to repair them then have an expected selling price of GHC950,000. This gives a net realizable value of GHC500,000, as their cost was GHC500,000, as their cost was GHC800,000, a write down of GHC300,000 is required.
(ii) The fair value model in IAS 40 investment property requires investment properties to be included in the balance sheet at their fair value (in this case taken to be the open market value). Any surplus or deficit is recorded in income.
(iii) Taxable temporary differences are GHC12 million. At a rate of 30% this would require a balance sheet provision for deferred tax of GHC3.6 million. The opening provision is GHC5.2 million, thus a credit of GHC1.6 million, thus a credit of GHC1.6 million will be made in the statement of profit or loss.
