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 Mileage Mileage Mileage

$2019202020212022$

Truck $170,00050,00080,00030,000$

Truck $2-$Truck sold $55,00060,00030,00025,000$

Truck $3-$New truck $20,000$

$(8$ 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. $(5$ 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 $2021$ 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 that year and the Statement of Financial Position at year end as at $31$ December $2021$ 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$)$