Freedom Plc Trial Balance at 30 September 2023	Note	Dr	Cr
		000	000
Sales and Purchases		11,000	21,000
Manufacturing expenses		1,000
Selling and Distribution expenses		3,000
Administration expenses		4,500
Taxation expense		500
Land and Buildings cost		3,000
Land and Buildings accumulated depreciation at 30/9/2023			500
Plant and equipment - cost	2	2,500
Plant and equipment accumulated depreciation at 30/9/2023	2		1,200
Research and development asset	3	4,500
Bank overdraft			300
Bank loan due 1/1/2027			800
Receivables and Payables		3,500	1,850
Inventory at 30/9/2023		2,000
Share Capital			3,000
Share Premium			2,000
Retained Earnings at 1/10/2022			4,850
Totals		35,500	35,500

REQUIRED: YOU JUST NEED TO DO THE JOURNALS AND WORKINGS

You are Freedoms External Financial Advisor and the Financial Director has asked you to consider the three issues below and comment on the accounting treatment adopted.

1. Factory accident (20 marks)

On 1 October 2022 there was an accident at the main factory which caused oil and manufacturing waste to be discharged into the local river causing pollution and damage to nearby fields.

Due to the close proximity of other factories it would be difficult to prove that damage had been caused by Freedom and no action has been taken by the Environmental Agency.

However, in Freedoms published financial statements they have stated they will always rectify any damage caused by their manufacturing operations.

The Directors estimate clean-up costs will be in the region of 900,000. The work would take 4 years and would be payable in three equal instalments. Instalments would be payable on 30 September 2024, 30 September 2025 and 30 September 2026. Freedoms cost of capital is 10%.

The present value of 1 payable at the end of a period discounted at 10% is as follows:

End of Year 1 0.909

End of Year 2 0.826

End of Year 3 0.751

End of Year 4 0.683

The Financial Director of Freedom has not accounted for this transaction within the trial balance above as any clean-up work will not commence until after the year end and there is no legal requirement to carry out the work.

Any resultant entries to the Statement of Profit or Loss should be classified as administration expenses.

1. Damaged plant (20 marks)

Freedom owns and operates an item of manufacturing plant that cost 650,000 and had accumulated depreciation of 250,000 on 1 October 2022. It is depreciated straight line at 15% per annum on cost.

On 1 April 2023 the plant started malfunctioning due to a damaged part. Due to the unavailability of replacement parts, it is not possible to repair the plant, but it still operates, albeit at a reduced capacity.

It is expected as a result of the damaged part the remaining life of the plant from 1 April 2023 will be just two years. Because of its reduced capacity, the estimated value in use of the plant is 150,000.

A similar company has offered to purchase the plant for 152,000. However Freedom would have to incur costs of 3,000 to dismantle and deliver the plant.

For the year ended 30 September 2023 the Financial Director has charged a full years depreciation at the rate of 15% per annum based on the cost at 1 October 2022 of 650,000, this was charged to manufacturing expenses.

Any resultant entries to the Statement of Profit or Loss should be classified to manufacturing expenses.

1. Intangible asset; Development of new cabling equipment (20 marks)

The company is developing new cabling equipment which has superior high speed processing capabilities. At 1 October 2022 2 million had been incurred on the project which has been charged as a research expense in the Statement of Profit or Loss in the year ended 30 September 2022.

It was not until 1 January 2023 that the company was able to demonstrate that the new cabling equipment was operating satisfactorily and felt to be commercially viable. Profit projections for the manufacture and sale of the new cabling equipment showed profits of 20 million over the next three years from 1 September 2023 when commercial production started.

The costs incurred in the first three months of the financial year (1 October 2022 to 31 December 2022) were 1.5 million and the costs incurred in the next eight months to 31 August 2023 were 1 million.

Due to the predicted success of the new cabling equipment the Financial Director has treated all costs incurred on the project as an intangible asset at 30 September 2023. Consequently, the 4.5 million intangible asset includes the 2 million costs previously charged as a research expense in the year ended 30 September 2022.

Any resultant entries to the Statement of Profit or Loss should be classified to Selling and Distribution expenses. (Round any calculations to the nearest pound)

REQUIRED: YOU JUST NEED TO DO THE JOURNALS AND WORKINGS