Xact Plc (name of the company)

You have been recently appointed as Finance Manager at Xact Plc (XACT PLC). XACT Plc is a company that manufactures printing equipment and provides extensive printing facilities. Your predecessor has left a file of some outstanding transactions and the finance director is concerned about the implications these issues will have on profit for the year. The year end is 31 March 20X8.

Required:

Explain how the transactions outlined in Exhibit 1 should be dealt with in the financial statements of XACT Plc for the year ended 31 March 20X8. Your answer should include journals.

Exhibit 1 Outstanding issues

1. Shared printing facility

In January 20X8, XACT Plc purchased a printing facility that is jointly owned with another entity, Kasur Printing. XACT Plc owns 55% of the printing facility and Kasur Printing owns 45%. They have agreed to share services and costs accordingly, with decisions regarding the printing facility requiring unanimous agreement of the parties. The total cost of the printing facility was Rs. 120 million and XACT Plc paid Rs. 90 million and Kasur Printing paid the remaining amount. The only entry in the financial statements was to record the payment of Rs. 90 million within property, plant and equipment. Kasur Printing has notified XACT Plc that for the first two months they have paid for insurance and other costs totalling Rs. 10 million. XACT Plc has not yet incurred any costs in relation to the facility and no revenue has yet been earned from the facility.

2. Sale of printing machine

On the 1 April 20X7, XACT Plc entered into a contract with a customer to sell an existing printing machine but will not transfer the machine over to them until 1 April 20X9. The customer paid Rs. 240 million on the 1 April 20X7 rather than paying Rs. 300 million when the machine is transferred over to them. The interest rate implicit in the contract is 11.8% in order to adjust for the risk involved in the delay in payment. However, Xact Plc's incremental borrowing rate is 5%. I have recognised the amount received within revenue.

3. Construction of printing machine

On 1 April 20X7, XACT Plc entered in to a contract to construct a printing machine on a customer's premises for a promised consideration of Rs. 1,500 million with a bonus of Rs. 100 million if the machine is completed within 24 months. The estimated expected costs would be Rs. 800 million and the bonus was estimated not to be payable. The contract specifies that control of the machine is transferred to the customer as the asset is constructed.

At 28 February 20X8, on a cost incurred basis the contract is 65% complete and XACT Plc has recognised revenue and costs on that basis. However, on 4 March 20X8, the contract is modified with the result that the fixed consideration and expected costs increase by Rs. 110 million and Rs. 60 million respectively. The time allowable for achieving the bonus is extended by six months. I have also been told that as a result of the time extension the bonus is now expected to be highly probable. No further work was completed between 4 March 20X8 and 31 March 20X8. I wasn't sure on how to adjust for this, so I have not made any adjustments.

4. Overhaul costs

XACT Plc acquired a new printing facility on 1 January 20X8 and the directors estimate that a major overhaul is required every two years. The costs of the overhaul are approximately Rs. 78 million which comprises Rs. 70 million for parts and equipment and Rs. 8 million for labour. As the directors are certain that this overhaul will go ahead and that they want to recognise the costs now so Rs. 78 million has been capitalised and an accrual created.

5. Development costs

From October 20X7, development costs of Rs. 100 million have been incurred and these have been capitalised. The development relates to a new process that will improve the printing process on cotton products. As at 31 March 20X8, the results to date indicated that it was probable that there were sufficient economic benefits to carry on with the development and there were no indicators of impairment. During April 20X8, additional costs of Rs. 20 million were incurred and a significant technical issue arose so the project was abandoned