Alcuin, Langwith and Halifax are firms involved in the production and sale of high-quality technical equipment for universities; the following are draft financial statements: Statement of financial position as at 31st March 2021 Alcuin Langwith Halifax £000 £000 £000 Assets Non-current assets Property, Plant and Equipment (note 1) 10,500 5,500 2,500 Investment in Langwith (note 2) 5,000 - - Investment in Halifax (note 3) 3,000 - - Current assets 1,500 1,000 500 Total assets 20,000 6,500 3,000 Equity and liabilities Equity Ordinary share capital (£1) 10,000 2,000 1,000 Retained earnings 7,000 3,750 750 Non-current liabilities 2,000 - - Current liabilities 1,000 750 1,250 Total equity and liabilities 20,000 6,500 3,000
Alcuin, Langwith and Halifax are firms involved in the production and sale of high-quality technical equipment for universities; the following are draft financial statements:
|
|
Alcuin |
Langwith |
Halifax |
|
|
£000 |
£000 |
£000 |
|
Assets |
|
|
|
|
Non-current assets |
|
|
|
|
Property, Plant and Equipment (note 1) |
10,500 |
5,500 |
2,500 |
|
Investment in Langwith (note 2) |
5,000 |
- |
- |
|
Investment in Halifax (note 3) |
3,000 |
- |
- |
|
Current assets |
1,500 |
1,000 |
500 |
|
Total assets |
20,000 |
6,500 |
3,000 |
|
|
|
|
|
|
Equity and liabilities |
|
|
|
|
Equity |
|
|
|
|
Ordinary share capital (£1) |
10,000 |
2,000 |
1,000 |
|
|
7,000 |
3,750 |
750 |
|
Non-current liabilities |
2,000 |
- |
- |
|
Current liabilities |
1,000 |
750 |
1,250 |
|
Total equity and liabilities |
20,000 |
6,500 |
3,000 |
Statement of
|
|
Alcuin |
Langwith |
Halifax |
|
|
£000 |
£000 |
£000 |
|
Revenue |
10,000 |
5,000 |
2,000 |
|
Cost of sales |
(7,000) |
(3,250) |
(1,900) |
|
Gross profit |
3,000 |
1,750 |
100 |
|
Investment income (from Langwith) |
1,000 |
- |
- |
|
Administration costs |
(700) |
(250) |
(750) |
|
Profit before tax |
3,300 |
1,500 |
(650) |
|
Tax |
(2,000) |
(300) |
- |
|
Profit after tax |
1,300 |
1,200 |
(650) |
|
Dividends |
- |
(1,000) |
- |
|
Profit after tax and dividends |
1,300 |
200 |
(650) |
Notes to the accounts:
- On 31stMarch 2021 Langwith entered into a four-year lease contract for a new machine used in the production with a contract requiring the payment of £14,930 per annum in arrears. This does not appear in the accounts above. The interest rate implicit in the lease is 7.5% and Langwith uses the actuarial method to allocate interest for finance leases. The Langwith’s
depreciation policy for these assets applies the straight-line method over four years and there is not thought to be a residual value of the asset at the end of this period. - AlcuinLtd acquired two million of the ordinary shares of Langwith Ltd on 29th November 2014 when the retained earnings of Langwith Ltd were £1,000,000.
- AlcuinLtd acquired 75% of the ordinary shares of Halifax Ltd on 7th September 2016 when the retained earnings of Halifax Ltd were £500,000; Alcuin use the proportionate share (‘partial’) method of valuing the non-controlling interest in Halifax.
- During the year goods with an original cost of £400,000 were sold by Alcuin to Langwith for £600,000. Half of these goods are in Alcuin’s inventory at the year end.
- On 1stOctober 2020, Halifax sold units with a total sales price of £500,000 to a single large customer. Included in the contract was a two-year service warranty covering all required repairs during this time. The normal selling price of the same merchandise would be £400,000 without the warranty. As of 31st March 2021, Halifax recognised £425,000 of revenue, included in the above accounts.
Required:
The accountant who posted the sale in note 5 is now worried that they treated this incorrectly. They come to you asking for help. Prepare a brief note for them both showing the correct treatment, explaining why the correct treatment is consistent with International Financial Reporting Standards.
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