Question 3

Seurat plc operates a pottery which manufactures plates and mugs and is in the process of finalising its financial statements for the year ended 30^th June 2020. It has approached you for advice on the following issues:

1. Seurat plc acquired a furnace that was brought into use on 1^st July 2019. The furnace cost 3m. Site preparation costs amounted to 50,000 and the company spent a further 75,000 on pre-production testing. As the furnace was of a new type to the one it replaced, it was necessary to spend 30,000 during May 2019 on staff training. The furnace will require decommissioning at the end of its useful life of 25 years at a cost of 250,000. Assume interest rates are 5%. (3 marks)

The furnace is expected to have a useful life of 25 years, but the lining of the furnace is expected to require replacement every 3 years. The cost of the lining has been estimated as 450,000. (3 marks)

Requirement

Calculate the amount at which the furnace would be shown on the Statement of financial position at the 1^st July 2019, and the impact of the acquisition on the profit and loss account for the year ended 30^th June 2020. (Calculation marks shown by each part).

Explain your treatment of the training costs and decommissioning costs. (4 marks)

Total marks for a) (10 marks)

2. During the year, Seurat plc purchased some vans from Gogh Ltd. Gogh Ltd is a van dealer controlled by the son of the finance director of Seurat. Despite this, the vans were purchased with a level of discount normally applied to any order of this size.

Requirement

EXPLAIN whether there are any disclosure implications arising from the purchase of the vans for the financial statements for the year ended 30^th June 2020 (ignore the impact on non-current assets). (4 marks)

3. Seurat plc has raised a legal provision of 30,000 at the end of the year. Also at the end of the year, Seurat plc revalued a piece of freehold land. The land had originally cost 100,000 but was revalued to 150,000. Tax law provides tax relief on legal provisions in the period the cash is spent, and taxes gains on property when the property is sold. Seurat pays tax at 25%. Both these transactions are recorded in the financial statements but no account has yet been taken of deferred tax.

Requirement

Show the journal entries required to account for the deferred tax on the above transactions. (4 marks)