Enola plc has investment in two companies, Sherlock Ltd and Mycroft Ltd. The draft statement of profit/loss as well as the statement of financial position of the three companies for the year ended 31 December 2022 are shown below: Statement of profit/loss for the year ended 31 December 2022 Enola Sherlock Mycroft £ £ £ Revenue 4,000,000 2,000,000 1,500,000 Cost of sales (2,800,000) (1,400,000) (1,050,000) Gross profit 1,200,000 600,000 450,000 Operating expenses (834,000) (350,000) (150,000) Investment income 284,000 Operating profit before interest and tax 650,000 (350,000) (150,000) Finance charge (50,000) Profit before tax 600,000 250,000 300,000 Income tax expense (180,000) (80,000) (90,000) Profit after tax 420,000 170,000 210,000 Statement of financial position as at 31 December 2022 Enola Sherlock Mycroft £ £ £ Non-current asset – land 3,000,000 1,500,000 1,500,000 Plant and Machinery 1,500,000 1,000,000 Investments 5,000,000 Current Assets 3,095,000 1,600,000 1,200,000 Total assets 12,595,000 4,100,000 2,700,000 Ordinary share capital (£1 nominal value) 8,000,000 3,000,000 2,000,000 Retained earnings 2,595,000 560,000 400,000 Non-current liabilities 500,000 Current liabilities 1,500,000 540,000 300,000 Equity and liabilities 12,595,000 4,100,000 2,700,000 The revenue and current assets include £106,500 referring to Sandcast plc. On 1 October 2022, Enola plc agreed a contract with Sandcast plc to source and install Interactive Displays and Audio systems (IDAS) across Sandcast’s 10 nationwide offices and to provide ongoing technical support for five years following the installation. The contract price was agreed at £150,000. Enola plc normally charges £140,000 for the similar system and £12,000 per year for the technical support. It was also agreed that Enola plc would send an invoice Sandcast plc following the successful installation of the IT system and the payment is due 60 days from the date of complete installation. The installation of the new system was expected to be completed on 1 November 2022 and Sandcast was entitled to access the technical support facility from the same date. Enola plc sent the invoice on 15 November 2022 and recognised the revenue in its book. However, due to the worldwide computer chip crisis, the engineering team could not complete the installation before 15 December 2022. On 15 December 2022, the engineering team issued the job completion report and dispatched it to the accounts department confirming the successful installation of IDAS. Requirements: The accountant who posted Enola plc’s sales in Note 1 is now worried that they treated this incorrectly. They come to you asking for help. Prepare a brief note for them showing the correct treatment and explaining why the correct treatment is consistent with International Financial Reporting Standards.
Enola plc has investment in two companies, Sherlock Ltd and Mycroft Ltd. The draft statement of
Statement of profit/loss for the year ended 31 December 2022
Enola |
Sherlock |
Mycroft |
|
|
£ |
£ |
£ |
Revenue |
4,000,000 |
2,000,000 |
1,500,000 |
Cost of sales |
(2,800,000) |
(1,400,000) |
(1,050,000) |
Gross profit |
1,200,000 |
600,000 |
450,000 |
Operating expenses |
(834,000) |
(350,000) |
(150,000) |
Investment income |
284,000 |
|
|
Operating profit before interest and tax |
650,000 |
(350,000) |
(150,000) |
Finance charge |
(50,000) |
|
|
Profit before tax |
600,000 |
250,000 |
300,000 |
Income tax expense |
(180,000) |
(80,000) |
(90,000) |
Profit after tax |
420,000 |
170,000 |
210,000 |
Statement of financial position as at 31 December 2022
Enola |
Sherlock |
Mycroft |
|
£ |
£ |
£ |
|
Non-current asset – land |
3,000,000 |
1,500,000 |
1,500,000 |
Plant and Machinery |
1,500,000 |
1,000,000 |
|
Investments |
5,000,000 |
||
Current Assets |
3,095,000 |
1,600,000 |
1,200,000 |
Total assets |
12,595,000 |
4,100,000 |
2,700,000 |
Ordinary share capital (£1 nominal value) |
8,000,000 |
3,000,000 |
2,000,000 |
|
2,595,000 |
560,000 |
400,000 |
Non-current liabilities |
500,000 |
||
Current liabilities |
1,500,000 |
540,000 |
300,000 |
Equity and liabilities |
12,595,000 |
4,100,000 |
2,700,000 |
- The revenue and current assets include £106,500 referring to Sandcast plc. On 1 October 2022, Enola plc agreed a contract with Sandcast plc to source and install Interactive Displays and Audio systems (IDAS) across Sandcast’s 10 nationwide offices and to provide ongoing technical support for five years following the installation. The contract price was agreed at £150,000. Enola plc normally charges £140,000 for the similar system and £12,000 per year for the technical support. It was also agreed that Enola plc would send an invoice Sandcast plc following the successful installation of the IT system and the payment is due 60 days from the date of complete installation. The installation of the new system was expected to be completed on 1 November 2022 and Sandcast was entitled to access the technical support facility from the same date. Enola plc sent the invoice on 15 November 2022 and recognised the revenue in its book. However, due to the worldwide computer chip crisis, the engineering team could not complete the installation before 15 December 2022. On 15 December 2022, the engineering team issued the job completion report and dispatched it to the accounts department confirming the successful installation of IDAS.
Requirements:
The accountant who posted Enola plc’s sales in Note 1 is now worried that they treated this incorrectly. They come to you asking for help. Prepare a brief note for them showing the correct treatment and explaining why the correct treatment is consistent with International Financial Reporting Standards.
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