Depreciation Adjustment – NBC Institute

FM – Nov 2016 – L3 – Q3 – Strategic Performance Measurement

Calculation of EVA for Jack Limited using adjusted financial data and WACC to assess value creation.

Question

Jack Limited is a family-owned business which has grown strongly in the last 50 years. The key objective of the company is to maximize the family’s wealth through their shareholdings. Recently, the directors introduced value-based management, using Economic Value Added (EVA) as the index for measuring performance.

You are provided with the following financial information:

Statement of Profit or Loss and Other Comprehensive Income for the Year Ended December 31, 2015

Item	Amount (₦’million)
Operating profit	340.0
Finance charges	(115.0)
Profit before tax	225.0
Tax at 25%	(56.3)
Profit after tax	168.7

Notes

Description	2015 (₦’m)	2014 (₦’m)
(i) Capital employed – from the Statement of Financial Position	6,285	6,185
(ii) Operating costs: Depreciation	295	285
Provision for doubtful debts	10	2.5
Research and development	60	–
Other non-cash expenses	35	30
Marketing expenses	50	45

Economic depreciation is assessed to be ₦415 in 2015. Economic depreciation includes any appropriate amortization adjustments. In previous years, it can be assumed that economic and accounting depreciation were the same.
Tax: The cash paid in the current year is ₦45 million, with an adjustment of ₦2.5 million for deferred tax provisions. There was no deferred tax balance prior to 2015.
The provision for doubtful debts was ₦22.5 million on the 2015 Statement of Financial Position.
Research and development cost is not capitalized in the accounts. It relates to a new project that will be developed over five years and is expected to be of long-term benefit to the company. The first year of this project is 2015.
The company has been spending heavily on marketing each year to build its brand long-term.
Estimated cost of capital for the company:
- Equity: 16%
- Debt (pre-tax): 5%
Gearing (Debt/Equity) Ratio: 1.5:1

Answer

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Tags: Depreciation Adjustment, Economic Value Added, Financial Performance, Value-Based Management
Level: Level 3

Topic: Strategic Performance Measurement

FR – Nov 2017 – L2 – Q1a – Consolidation of Group Statements

This question tests candidates on preparing a consolidated statement of profit or loss and other comprehensive income for a group, accounting for goodwill, non-controlling interest, intra-group transactions, and fair value adjustments.

Question

On April 1, 2017, Higherhigher Limited acquired 60% of the equity share capital of Lowerlower Limited in a share exchange of two shares in Higherhigher for three shares in Lowerlower. The issue of shares has not yet been recorded by Higherhigher Limited. At the date of acquisition, shares in Higherhigher had a market value of N6 each.

Below is the summarised draft financial statements of both companies:

Statement of Profit or Loss and other Comprehensive Income for the year ended September 30, 2017	Higherhigher Limited (N’000)	Lowerlower Limited (N’000)
Revenue	2,720,000	1,344,000
Cost of sales	(2,016,000)	(1,024,000)
Gross profit	704,000	320,000
Distribution costs	(64,000)	(64,000)
Administrative expenses	(192,000)	(102,400)
Finance costs	(9,600)	(12,800)
Profit before tax	438,400	140,800
Income tax expense	(150,400)	(44,800)
Profit for the year	288,000	96,000

Additional information:

The fair value of Lowerlower Limited’s assets was equal to their carrying amounts, except for a plant with a fair value of N64m in excess of the carrying amount, which had a remaining life of five years. Straight-line depreciation was used. Lowerlower has not adjusted the carrying amount of its plant.
Sales from Lowerlower to Higherhigher after the acquisition were N256m, with a 40% mark-up. Higherhigher sold N166.4m of these goods by September 30, 2017.
Lowerlower’s receivables include N19.2m due from Higherhigher, which didn’t agree with Higherhigher’s payables due to cash in transit of N6.4m.
Non-controlling interest is measured at fair value. The fair value of the goodwill attributable to the non-controlling interest is N48m.
Consolidated goodwill was not impaired.

You are required to prepare:

The consolidated statement of profit or loss and other comprehensive income for the year ended September 30, 2017.

Answer

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Tags: consolidated financial statements, Depreciation Adjustment, Goodwill, Intra-Group Sales, Non-Controlling Interest, Profit Adjustment
Level: Level 2

Topic: Consolidated Financial Statements
Series: NOV 2017

FM – Nov 2016 – L3 – Q3 – Strategic Performance Measurement

Calculation of EVA for Jack Limited using adjusted financial data and WACC to assess value creation.

Question

You are provided with the following financial information:

Statement of Profit or Loss and Other Comprehensive Income for the Year Ended December 31, 2015

Item	Amount (₦’million)
Operating profit	340.0
Finance charges	(115.0)
Profit before tax	225.0
Tax at 25%	(56.3)
Profit after tax	168.7

Notes

Description	2015 (₦’m)	2014 (₦’m)
(i) Capital employed – from the Statement of Financial Position	6,285	6,185
(ii) Operating costs: Depreciation	295	285
Provision for doubtful debts	10	2.5
Research and development	60	–
Other non-cash expenses	35	30
Marketing expenses	50	45

Economic depreciation is assessed to be ₦415 in 2015. Economic depreciation includes any appropriate amortization adjustments. In previous years, it can be assumed that economic and accounting depreciation were the same.
Tax: The cash paid in the current year is ₦45 million, with an adjustment of ₦2.5 million for deferred tax provisions. There was no deferred tax balance prior to 2015.
The provision for doubtful debts was ₦22.5 million on the 2015 Statement of Financial Position.
Research and development cost is not capitalized in the accounts. It relates to a new project that will be developed over five years and is expected to be of long-term benefit to the company. The first year of this project is 2015.
The company has been spending heavily on marketing each year to build its brand long-term.
Estimated cost of capital for the company:
- Equity: 16%
- Debt (pre-tax): 5%
Gearing (Debt/Equity) Ratio: 1.5:1

Answer

Find Related Questions by Tags, levels, etc.

Tags: Depreciation Adjustment, Economic Value Added, Financial Performance, Value-Based Management
Level: Level 3

Topic: Strategic Performance Measurement

FR – Nov 2017 – L2 – Q1a – Consolidation of Group Statements

This question tests candidates on preparing a consolidated statement of profit or loss and other comprehensive income for a group, accounting for goodwill, non-controlling interest, intra-group transactions, and fair value adjustments.

Question

Below is the summarised draft financial statements of both companies:

Statement of Profit or Loss and other Comprehensive Income for the year ended September 30, 2017	Higherhigher Limited (N’000)	Lowerlower Limited (N’000)
Revenue	2,720,000	1,344,000
Cost of sales	(2,016,000)	(1,024,000)
Gross profit	704,000	320,000
Distribution costs	(64,000)	(64,000)
Administrative expenses	(192,000)	(102,400)
Finance costs	(9,600)	(12,800)
Profit before tax	438,400	140,800
Income tax expense	(150,400)	(44,800)
Profit for the year	288,000	96,000

Additional information:

The fair value of Lowerlower Limited’s assets was equal to their carrying amounts, except for a plant with a fair value of N64m in excess of the carrying amount, which had a remaining life of five years. Straight-line depreciation was used. Lowerlower has not adjusted the carrying amount of its plant.
Sales from Lowerlower to Higherhigher after the acquisition were N256m, with a 40% mark-up. Higherhigher sold N166.4m of these goods by September 30, 2017.
Lowerlower’s receivables include N19.2m due from Higherhigher, which didn’t agree with Higherhigher’s payables due to cash in transit of N6.4m.
Non-controlling interest is measured at fair value. The fair value of the goodwill attributable to the non-controlling interest is N48m.
Consolidated goodwill was not impaired.

You are required to prepare:

The consolidated statement of profit or loss and other comprehensive income for the year ended September 30, 2017.

Answer

Find Related Questions by Tags, levels, etc.

Tags: consolidated financial statements, Depreciation Adjustment, Goodwill, Intra-Group Sales, Non-Controlling Interest, Profit Adjustment
Level: Level 2

Topic: Consolidated Financial Statements
Series: NOV 2017

Question Tag: Depreciation Adjustment

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FM – Nov 2016 – L3 – Q3 – Strategic Performance Measurement

Calculation of EVA for Jack Limited using adjusted financial data and WACC to assess value creation.

FR – Nov 2017 – L2 – Q1a – Consolidation of Group Statements

This question tests candidates on preparing a consolidated statement of profit or loss and other comprehensive income for a group, accounting for goodwill, non-controlling interest, intra-group transactions, and fair value adjustments.

FM – Nov 2016 – L3 – Q3 – Strategic Performance Measurement

Calculation of EVA for Jack Limited using adjusted financial data and WACC to assess value creation.

FR – Nov 2017 – L2 – Q1a – Consolidation of Group Statements

This question tests candidates on preparing a consolidated statement of profit or loss and other comprehensive income for a group, accounting for goodwill, non-controlling interest, intra-group transactions, and fair value adjustments.

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FM – Nov 2016 – L3 – Q3 – Strategic Performance Measurement

Calculation of EVA for Jack Limited using adjusted financial data and WACC to assess value creation.

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FR – Nov 2017 – L2 – Q1a – Consolidation of Group Statements

This question tests candidates on preparing a consolidated statement of profit or loss and other comprehensive income for a group, accounting for goodwill, non-controlling interest, intra-group transactions, and fair value adjustments.

You're reporting an error for "FR – Nov 2017 – L2 – Q1a – Consolidation of Group Statements"

FM – Nov 2016 – L3 – Q3 – Strategic Performance Measurement

Calculation of EVA for Jack Limited using adjusted financial data and WACC to assess value creation.

You're reporting an error for "FM – Nov 2016 – L3 – Q3 – Strategic Performance Measurement"

FR – Nov 2017 – L2 – Q1a – Consolidation of Group Statements

This question tests candidates on preparing a consolidated statement of profit or loss and other comprehensive income for a group, accounting for goodwill, non-controlling interest, intra-group transactions, and fair value adjustments.

You're reporting an error for "FR – Nov 2017 – L2 – Q1a – Consolidation of Group Statements"

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