You are the recently-appointed financial controller for Buttercup Bluebell Builders plc (Buttercup), a UK construction company. You are preparing the companys financial statements for the year ended 31 October 2022 in accordance with International Financial Reporting Standards.

You need to complete your work on a contract which is still in progress at the year end. You have already identified that a contract exists for accounting purposes. Relevant information is in Appendix 1.

You also need to analyse the information you have gathered about some provisions that might be required. This information is in Appendix 2.

QUESTIONS:

Analyse, providing explanations and showing all workings, the contract in progress in Appendix 1 and:

select the appropriate accounting treatment in relation to Buttercups financial statements for the year ended 31 October 2022; and

prepare any journal entries necessary.

(11 marks)

Analyse the information in Appendix 2 and:

explain, showing all workings, whether a provision is required in Buttercups financial statements for the year ended 31 October 2022; and

prepare, showing all workings, any journal entries necessary.

(9 marks)

(20 marks)

Note:

1. Ignore taxation.

APPENDIX 2 (SECTION 4)

Information regarding potential provisions

In October 2022, Buttercup was fined 100,000 for causing environmental damage due to the incorrect disposal of noxious materials from one of its construction sites in July 2022. The fine had not been paid by the year end due to a delay in processing the payment.

In addition to the fine, Buttercup is required to rectify the damage done by no later than 31 March 2023 and specialist environmental advisers have estimated that this will cost 375,000. This estimate is deemed to be reliable.

No accounting entries have been made in relation to this issue.

Buttercups financial statements have, for a number of years, included a provision in relation to the costs of decommissioning a quarry it owns. The quarry itself is included in Buttercups property, plant and equipment and has been accounted for correctly. The requirement for decommissioning was included in the purchase agreement when Buttercup acquired the quarry in 2016.

The provision was first established on 31 October 2016 based on a decommissioning date of 31 October 2026, estimated costs of 11,000,000 and a discount rate of 6%. The carrying amount of the provision at 31 October 2021 was 8,220,000.

Due to an acceleration in the use of the quarry, the estimate at 31 October 2022 is that decommissioning will take place on 31 October 2024. The estimated costs have not changed and the discount rate of 6% remains appropriate.

No changes have been made to the opening provision in Buttercups accounting records for the year ended 31 October 2022.

In June 2022, Buttercup leased a warehouse in order to store some of the companys heavy machinery on a short-term basis. The lease runs for 12 months from 30 June 2022. On 31 October 2022, Buttercup vacated the warehouse as the company no longer needed the storage space. The warehouse cannot be sub-let. At 31 October 2022, the remaining payments on the lease amount to

240,000. There is an early cancellation fee of 300,000.

Buttercup elects to take all available exemptions under IFRS 16 Leases.