MINI CASE

MOUNTAIN SPRING DISTRIBUTORS LIMITED $($MSDL$)$

The following case details the activities of 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:

Mountain Spring Distributors Limited $($MSDL$)$ is a distributor of plastic household products, located in Grange Hill, Westmoreland. The company was incorporated on the $1$st of January $2019$ with a share capital of $6,000,000$ ordinary shares of $$2.$ On the date of the incorporation the company acquired two $(2)$ delivery trucks at a cost of $$8,000,000$ 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 $200,000$ miles each. The residual value of each truck is estimated to be $$1,000,000$ each after $200,000$ miles. On January $1,2020$ MSDL issued $7\%$ convertible bonds at their nominal value of $$48,000,000.$ The bonds are convertible at any time up to maturity into $50$ ordinary shares for each $$600$ of bond. Alternatively, the bonds will be redeemed at par after $4$ years. Similar non$-$convertible bonds carry an interest rate of $10\%.$ On January $12021,$ the company issued $2,000,000$ ordinary shares at a price of $$3\mathrm{.}50$ which was fully subscribed. This was followed by a bonus issue of $1$ share for $5$ held on that date, funding from the share premium account which at that date had a balance of $$700,000$ and retained earnings a balance of $$520,000.$ The company bought a machine on January $1,2021$ for $$15,000,000,$ which also incurred freight charges of $$500,000,$ installation fees of $$200,000,$ and custom duties of $$2,000,000.$ At the date of purchase the asset had an estimated useful life of $10$ years. The asset is to be depreciated using a straight$-$line basis to a nil residual value. However, on July $1,2022$ the entity$$s operations have changed and management has committed to a plan of sale. The asset has been marketed at its fair value of $$9,000,000$ million and an active buyer was located. On further assessment indicates that cost to dispose of the asset will be $$900,000.$ On June $30,2022$ one of the delivery trucks is involved in an accident and is sold for $$700,000.$ MSDL replaces this truck with a new truck at a cost of $$9,000,000.$ The residual value of this truck is $$1,200,000$ after using it for $300,000$ miles. On January $1,2023$ the directors of the company decided to lease a specialised computer system under a four$-$year lease commencing on that date. The computer systems remaining expected useful life is four years. Four payments are due to the lessor in the amount of $$1,500,000$ per year beginning December $31,2023.$ The lessee$$s incremental borrowing rate is $20\%$ and the rate lessor$$s implicit rate is $18\%.$

CASE QUESTIONS

$1.$ 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:

Annual Mileage of Trucks

Trucks Mileage

$2019202020212022$

Truck $160,00050,00080,00040,000$

Truck $2-$Truck sold $55,00060,00030,00045,000$

Truck $3-$New truck $30,000$

$(8$ marks$)$

$2.($a$)$ Calculate the deferred taxation on truck $1$ for the year ended $31$ December $2019$ if the inland revenue department for capital allowance purposes 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 current taxation and deferred taxation. $(4$ marks$).$

$3.$ For the year ended $31$ December $2019$ 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 $2020$ and explain two $(2)$ advantages of issuing bonus shares. $(8$ marks$).$

$5.$ Discuss whether the treatment of the asset by the company is correct, in accordance with IFRS$5$ Prepare the relevant financial statements extracts for the year ending December $31,2021$ with regards to this machine. $(10$ 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$).$