Question 3

b. Lagos has produced its draft financial statements for the year ended 30 September 2013 and two issues arisen:

I. On 1st September 2013, Lagos factored (sold) $2 million of trade receivables to Kano. Lagos received an immediate payment of $1.8 million and credited this amount to receivables and charged $200,000 to administrative expenses. Lagos will receive further amounts from Kano depending on how quickly Kano collects the receivables.

Kano will charge a monthly administrative fee of $10,000 and 2% per month on its outstanding balance with Lagos. Any receivables not collected after four months would be sold back to Lagos; however, Lagos expects all customers to settle in full within this period. None of the receivables were due or had been collected by 30 September 2013.

II. On 1 October 2012, Lagos sold a property which had a carrying amount of $3.5 million to a property company for $5 million and recorded a profit of $1.5 million on the disposal. Part of the terms of the sale is that Lagos will rent the property for a period of 5 years at an annual rental of $400,000. At the end of the period, the property company will sell the property through a real estate company/property agent at its fair value which is expected to be approximately $6.5 million. Lagos will be given the opportunity to repurchase the property (at its fair value) before it is put on the open market.

All of the above amounts are deemed to be at commercial values.

Required

Discuss, and quantify where appropriate, how Lagos should account for the above two issues in its financial statements for the year ended 30 September 2013.