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.

FINANCIAL ACCOUNTING
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ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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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

 

Statement of profit and loss for the accounting period ending 31st March 2021

 

      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:

  1. On 31st March 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.
  1. Alcuin Ltd 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.
  2. Alcuin Ltd 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. 
  3. 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.
  4. On 1st October 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:

  1. 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.               
  2. The Financial Director of Alcuin would like a report on how the four-year lease should be accounted for and why. Prepare a note containing a full calculation of this, again explaining why the treatment is as you propose.                                       
  3. Adjusting for the above (where necessary) prepare a consolidated statement of financial position and consolidated statement of profit and loss.                    
  4. The Managing Director of Alcuin is confused about the why the investments in Langwith and Halifax do not appear on the financial statements at the group level. Write a note explaining the treatment here and advising on the treatment of goodwill, relating back to the full question above, including those relevant points for the group. 
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