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You have just joined Betterway Company (B Co.), a public limited company involved in manufacturing Cement and related products and supplying all over the country

You have just joined Betterway Company (B Co.), a public limited company involved in manufacturing Cement and related products and supplying all over the country and across borders. Mark Selby (your senior at work) has asked you to prepare a report that outlines the accounting concepts and accounting standards and assess their relevance in preparing the financial statements of a public limited company like B Co.

 

The reporting period has just ended and Mark has prepared the trial balance of B Co. for the year ended 31st December, 2020.

 

Description

Dr ($’000)

Cr ($’000)

Land and buildings (land $20m) (note 1)

80,000

 

Accumulated Depreciation (Building) till 1st January 2020

 

16,800

Plant and Equipment- Cost (note 1)

81,250

 

Accumulated Depreciation (plant and equipment) till 1st January 2020

 

29,250

Inventory at 31st December 2020 (note 2)

22,740

 

Trade receivables (note 6)

47,077

 

Cash at bank

8,678

 

Revenue

 

289,000

Cost of sales

203,500

 

Distribution cost

9,100

 

Administrative expenses (note 1, 6 and 7)

24,700

 

Finance cost (note 3)

1,500

 

Allowance for doubtful debts

 

500

Income tax (note 4)

 

700

Trade Payables

 

22,650

8% Loan notes

 

25,000

Share capital (par value 50 cents)

 

60,000

Share premium

 

15,000

Retained earnings at 1st January 2020 (note 5)

 

19,645

 

478,545

478,545

 

 

On 15th January 2021 you had a meeting with Mark Selby and he provided you with the following additional information in relation to preparing financial statements of B Co. for the year ended 31st December 2020.

  1. Land and buildings were purchased on 1st January 2013, with buildings being depreciated on straight line basis. On 1st January 2020, the directors decided to revalue the land and buildings to $79,000,000 ($25million for the land). The buildings were originally depreciated over a useful life of 25 years which has not changed.

No depreciated has yet been charged on any of the non-current assets, plant and equipment is depreciated at 20% reducing balance method. 60% of the depreciation relating to Building is charged to cost of sales with the rest being charged to administrative expenses. All of the depreciation relating to plant and equipment is charged to cost of sales.

  1. The inventory includes goods with a cost of $1,280,000 but shortly after the year end, it was discovered that their net realisable value will only be $930,000.
  2. Finance cost relates to the interest paid on 8% loan notes with interest being paid quarterly in arrears. the interest payment for the last quarter was still outstanding at the reporting date.
  3. The directors estimated the current year tax liability to be $11,230,000. the income tax balance in the trial balance represent the overprovision for tax liability relating to the year ended 31st December 2019.
  4. A dividend of 7 cents per shares was declared on 30th December 2020.
  5. The directors have decided to write off irrecoverable debts amounting to $827,000 and make and allowance for doubtful debts of 2% of remaining receivables. Irrecoverable debts expense in movement in allowance for doubtful debts is reported as part of administrative expenses.
  6. Included in the administrative expenses figure is the rent of $7,000,000. this amount was paid on 1st January 2020 for the 14 months period ending 28th February 2021.
  7. the market price of B Co.’s shares stood at $1.75/share at reporting date.

 

Mark told you to look up the qualitative characteristics of financial statements and their importance to make financial statement more useful to stakeholders. “Currently there are no intangible assets in the financial statements but if we do have some, how will they be accounted for under IAS38 intangible assets”, mark inquired.

 

 

Information about one of the competitors of B Co. for the year 2020 is as follows.

gross profit margin                                 30.00%

operating profit margin                        15.00%

net profit margin                                      10.00%

asset turnover                                            1.70 times

return on capital employed                  25.50%

current ratio                                               1.5:1

quick ratio                                                     0.9:1

inventory holding period                       31.2 days

receivables collection period              29.2 days

payables payment period                         38.6 days

interest cover                                               6.00 times

dividends cover                                            4.00 times

earnings per share                                      33.3 cents/share

dividends yield                                               8.33%

price earnings ratio                                   10.00 times

average market price per share            $3.33


Questions

Calculate adjustments relating to the additional information provided in scenario.

Prepare statement of profit or loss and other comprehensive income for the year ended 31st December

Calculate the shareholder ratios for Betterway company (similar ratios of a competitor are provided in scenario).


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Answer Adjustments relating to the Additional Information Provided in the Scenario 1 Revaluation of Land and Buildings Dr Land and Buildings20000000 Cr Revaluation Reserve20000000 2 Inventory Adjustme... blur-text-image

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