- 20 Marks
FR – Nov 2017 – L2 – Q3 – Financial Statements Correction
Adjust the draft statement of financial position and profit figures for Okushe Ltd considering the necessary corrections and revaluations.
Question
Okushe Ltd is a listed textile manufacturing company that prepared the following draft statement of financial position as at 31 October 2017. On subsequent examination of the books and records, the Finance Director prepared a list of issues that may require amendments to the draft statement presented.
Okushe Ltd Statement of Financial Position as at 31 October 2017
| GH¢000 | |
|---|---|
| Non-current assets | |
| Property, Plant & Equipment | 1,020,000 |
| Intangible assets | 100,000 |
| Equity investments | 360,000 |
| Total non-current assets | 1,480,000 |
| Current assets | |
| Inventory | 65,000 |
| Trade receivables | 130,000 |
| Cash & bank | 30,000 |
| Total current assets | 225,000 |
| Total assets | 1,705,000 |
| Equity | |
| Equity share capital | 580,000 |
| Retained Earnings: | |
| – Balance 1 November 2016 | 375,000 |
| – Profit for year | 95,000 |
| – Dividend declared | (30,000) |
| Total Retained Earnings | 440,000 |
| Other components of equity: | |
| – Balance 1 November 2016 | 128,000 |
| – Other comprehensive income for the year | 35,000 |
| Total other components of equity | 163,000 |
| Total equity | 1,183,000 |
| Non-current liabilities | |
| Finance lease obligations | 175,000 |
| 5% debenture 2021 | 150,000 |
| Total non-current liabilities | 325,000 |
| Current liabilities | |
| Trade payables | 95,000 |
| Finance lease obligations | 35,000 |
| Provision for warranty claim | 12,000 |
| Corporation tax due | 25,000 |
| Final dividend due | 30,000 |
| Total current liabilities | 197,000 |
| Total equity & liabilities | 1,705,000 |
The following notes are relevant:
- Property, Plant and Equipment (PPE):
- The property carried at GH¢130 million was revalued to GH¢110 million on 31 October 2017. This revaluation has not been accounted for. The revaluation reserve (included in other components of equity) had a balance of GH¢12 million due to previous revaluations of this property.
- A sale agreement was entered during October 2017 to sell some plant with a carrying value of GH¢45 million for an agreed price of GH¢39 million. No cash has been received, as a 30-day credit period was agreed with the purchaser. No entry has been made for this transaction.
- Equity Investments:
- The fair value of equity investments as at 31 October 2017 was GH¢380 million, which has not yet been incorporated into the financial statements. Okushe has decided to take all fair value gains and losses on equity investments to “other comprehensive income” as permitted by IFRS 9 – Financial Instruments.
- 5% Debenture:
- The 5% debenture was issued on 1 November 2016 for cash proceeds of GH¢150 million and was correctly recorded. The effective rate of interest to maturity was 6.5%. The only other entry made in respect of the debenture was the payment of GH¢7.5 million interest on 31 October 2017.
- Warranty Provision:
- The company offers a 12-month warranty on all goods sold. A provision is maintained for the expected cost of honoring this warranty, which has not been updated as at 31 October 2017. 40,000 units of its product were sold during the year, all qualifying for warranty. It expects 10% will need minor repairs at an average cost of GH¢500 each, and 3% will need major repairs at a cost of GH¢10,000 each.
Required:
a) Prepare a schedule showing any corrections required to the profit and other comprehensive income for the year. (8 marks)
b) Redraft the Statement of Financial Position at 31 October 2017, considering the above adjustments. (12 marks)
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