Handel Limited, a company that prepares its financial statements to 31 December each year, is involved in the manufacture and distribution of a variety of natural healthcare products. A number of issues have still to be resolved before the financial statements for the year ended 31 December 2016 can be finalised.

Issue 1: Handel Limited acquired 200,000 of finished goods inventories on consignment from Chopin Limited during December 2016. While the goods remain in Handel Limiteds inventory at 31 December 2016, they are not recorded in the companys financial statements for the year ended 31 December 2016. The contract entered into with Chopin Limited states that Handel Limited has the right to sell the inventories direct to the public or to transfer them at cost to another retailer. Chopin Limited cannot force Handel Limited to return the goods or transfer them to another retailer.

Requirement Explain how this transaction should be recorded in the financial statements of Handel Limited for the year ended 31 December 2016. 4 Marks

Issue 2: Handel Limited occasionally purchases garlic, keeping it in controlled conditions for periods of two years in order to enhance its nutritional properties prior to using it to manufacture a range of health supplements. In January 2016, Handel Limited purchased garlic at a cost of 84,000, immediately contracting to sell it for 84,000 and buy it back exactly two years later for 101,640. Handel Limited has not made any accounting entries in respect of this arrangement in the companys financial statements for the year ended 31 December 2016.

Requirement Explain how this transaction should be accounted for in the financial statements of Handel Limited for the years ended 31 December 2016 and 2017, showing any relevant figures. 8 Marks

Issue 3: Handel Limited operates an internet site. During the year ended 31 December 2016 it commenced selling products manufactured by another healthcare company, Mahler Limited, which does not compete directly with Handel Limited. Customers using Handel Limiteds internet site select which of Mahler Limiteds products they wish to purchase and provide their credit card details and the address to which the goods should be delivered. Once credit card authorisation is received, Handel Limited passes the transaction details to Mahler Limited, who is then responsible for the delivery of the goods to the customer and also for any disputed credit charges, product returns or warranty claims. Handel Limited charges Mahler Limited a fee of 10% of its products sold. During the year ended 31 December 2016 Handel Limited sold goods to the value of 500,000 relating to Mahler Limited.

Requirement Explain how Handel Limited should reflect this arrangement with Mahler Limited in its financial statements for the year ended 31 December 2016. 4 Marks

Issue 4: During the year ended 31 December 2016 Handel Limited commenced selling a water filtration device for 240 which includes an extended warranty that covers all repairs for a period of four years. A competitor sells the same device without a warranty for 225 and a local insurance broker sells a warranty similar to Handel Limiteds for 25. During the year ended 31 December 2016, Handel Limited sold 5,000 water filtration devices with the extended warranty.

Requirement Prepare the relevant extracts for the financial statements of Handel Limited for the year ended 31 December 2016 assuming that claims under the warranty are expected to occur evenly over the four-year period of the warranty and that all sales occurred on 1 January 2016.