MINI CASE

COLBECK CASTLE LIMITED $($CCL$)$

The following case details the activities of Colbeck Castle a mid$-$sized Jamaican company over the five$-$year period $2019$ to $2024.$ The financial year end of the company is the $31$st of December. Read the case carefully and answer the questions that follow:

Colbeck Castle Limited $($CCL$)$ is a distributor of household products, located in Colbeck Hills, Portland. The company has three divisions, Kitchen, Bathroom and the Luxury division. The company was incorporated on the $1$st of January $2019$ with a share capital of $12,000,000$ ordinary shares of $$4.$ On the date of the incorporation the company acquired two $(2)$ delivery trucks at a cost of $$12,000,000$ each and decided to depreciate the trucks using the units of output method. The company planned to keep the trucks for a useful life of $300,000$ miles each. The residual value of each truck is estimated to be $$1,000,000.$

On January $1,2020$ CCL issued $8\%$ convertible bonds at their nominal value of $$27,000,000.$ The bonds are convertible at any time up to maturity into $50$ ordinary shares for each $$600$ of bond. Alternatively, the bonds will be redeemed at par after $4$ years. Similar non$-$convertible bonds carry an interest rate of $10\%.$ On January $12021,$ the company issued $2,000,000$ ordinary shares at a price of $$5\mathrm{.}50$ which was fully subscribed. This was followed by a bonus issue of $1$ share for $5$ held on that date, funding came from the share premium account which at that date had a balance of $$1,700,000$ and retained earnings a balance of $$2,520,000.$

Management of the company decided on the $30$ November $2022$ to close down the Luxury division because it was deemed to be under performing. Management held a meeting with the employees of this division in March $2023$ and informed of its impending actions. The employees were informed that a buyer has been located and the sale would be completed by May $2023.$ The division was sold on $15$ May $2023$ for $$150,000,000.$

On June $30,2022$ one of the delivery trucks is involved in an accident and is sold for $$700,000.$ CCL replaces this truck with a new truck at a cost of $$11,000,000.$ The residual value of this truck will $$1,200,000$ after it is used for $300,000$ miles.

On January $1,2023$ the directors of the company decided to acquire a specialised computer system under a five $(5)-$year lease commencing on that date. The computer systems remaining expected useful life is six $(6)$ years. Five $(5)$ payments are due to the lessor in the amount of $$2,700,000$ per year beginning December $31,2023.$ The lessee's incremental borrowing rate is $15\%$ and the rate lessor's implicit rate is $12\%.$

CASE QUESTIONS

Calculate the total depreciation to be charged on delivery trucks for the year ended $31$ December $2022.$ The annual mileage of the trucks is given below:

$\backslash$table$[[$Annual Mileage of Trucks$],[$Trucks$,\backslash$table$[[$Mileage$],[2019]],\backslash$table$[[$Mileage$],[2020]],\backslash$table$[[$Mileage$],[2021]],\backslash$table$[[$Mileage$],[2022]]],[$Truck $1,60,000,70,000,90,000,50,000],[$Truck $2-$Truck sold,$55,000,70,000,56,000,44,000],[$Truck $3-$New truck,,,,$25,000]]$

$(8$ marks$)$

$2.($a$)$ Calculate the deferred taxation on truck $1$ for the year ended $31$ December $2019$ if the inland revenue department for the purpose of capital allowance allowed for the truck to be written off over four years on the straight$-$line basis with nil residual value. The rate of taxation is $30\%.$

$(5$ marks$)$

$($b$)$ Explain for the CFO of the company the difference between a deferred tax asset and deferred tax liability.

$(4$ marks$)$

$3.$ For the year ended $31$ December $2020$ determine the debt and equity components for the compound financial instrument issued by the company. Show the extracts of the Statement of Profit or Loss for the years $2020$ & $2021$ and the Statement of Financial Position as at $31$ December $2020$ & $2021$ in regards to the compound financial instrument.

$(10$ marks$)$

$4.$ Show the journal entries to record the cash and bonus issue of shares on $1$ January $2021$ and explain two $(2)$ advantages of issuing bonus shares.

$(8$ marks$)$

$5.$ Discuss how the treatment of the sale of the Luxury Division should be accounted for at the $31$ Dember $2022$ and $31$ December $2023.$

$(10$ marks$)$

$6.($a$)$ Prepare the relevant journal entries for the first two $(2)$ years on the lease acquired by the company on $1$ January, $2023.$

$(9$marks$)$

$($b$).$ Prepare the relevant financial statement extracts in the third year of the lease $(6$ marks$)$

NB: Narrations are required for all journal entries.

TOTAL

$60$ MARKS

END