International Accounting Standards and Preparation of Financial Statements - BST Enterprises - Essay Example

BST Enterprises plc – Application of International Accounting Standards and preparation of financial ments Working According to Iasb (2009, p.98), research and development cost are reported according to IAS 9. The research costs include costs on general research, specific research, product development and other incidental costs in the development process. £50,000 on applied research will be loss and written off to the loss and profit account as part of research costs. This is because the applied research cannot be accounted for to specific future benefits as it is not possible to ascertain. £ 80,000 on development of a new product scrapped will be included the research costs. This cost is incidental in any product development process and is a normal research expense. £ 120,000 should be appropriated to the periods accordingly, £80,000 for this period and £40,000 accrued to the next period. This is because the benefits of the new product are expected to accrue evenly over the eighteen months. Journal Entries Dr. consolidated income statement £210,000 Dr. Accrued Research £40,000 Cr. Research Costs £250,000 Working 2 Disposal of property, machine and equipment is recorded and reported according to IAS 16 Property is reported to the balance sheet at the lower of Net Realizable value, or the Replacement value or the Written down cost. There are four main accounts that are considered in the recording of fixed assets, in this case property. This are: property account, provision for depreciation account, disposal account and the depreciation account. The property account is recorded only with the written down values and the fluctuations in value of property will be reflected in the depreciation account. The property disposal account is used to calculate the loss or profit on disposal and will appear as follows; Buildings disposal Account Buildings £500,000 Cash/Bank £950,000 Accumulated Depreciation £27,500 Depreciation £7,500 Profit and loss A/C £415,000 £950,000 £950,000 Working 3 Government grants are treated as per IAS 20 on disclosure and reporting for grants. Where a firm gains support from the government, it should be reflected in the books of account as revenue expenditure and credited to the income statement. This revenue should be appropriated accordingly depending on the periods they accrue. Since only one third relate to this period, the rest should be accrued to the next two periods equally. Journal entries will include; Dr. Government Grants £930,000 Cr. Profit and Loss £310,000 Cr. Accrued Government Grants £620,000 Working 4 IAS 17 provides a guideline on reporting of leases. It clarifies the difference between finance leases and operating leases. With the finance leases the owner has an option to acquire the asset on completion of the lease and in addition bears the costs that arise in due course of the lease. On the contrary, operating leases cover a very short period of the assets life. The effect of this on accounting is that finance leases appear in the balance sheet as both an asset and a liability which in turn decreases the level of working capital. Given that the amount on the lease had been posted to the suspense account, this is reversed through the following journal entries; 1. Dr. Motor vehicle A/C £250,000 Cr. Finance Lease A/C £250,000 2. When payments are due Dr. Finance Lease £55,000 Cr. Cash/Bank £5000 Cr. Suspense A/C £50000 3. Interest on Lease Year 1 5/14*250000 £89,285.71 Year 2 4/14*250000 £71,428.57 Year 3 3/14*250000 £53,571.29 Year 4 2/14*250000 £35,714.29 Year 5 1/14*250000 £17,857.14 Journal entries for the entries; Dr. Profit and loss A/C £89,285.71 Cr. Interest on lease A/C £89285.71 Working 5 1. Purchase of factory falls under IAS 16 on property. The factory will be treated as a fixed asset as it has not been described as an acquisition or subsidiary company. The journal entries will be as follows: Dr. Factory A/C £14million Cr. Cash/Bank A/C £14million 2. Treatment of debtors is regulated by IAS 13 on reporting of current assets and liabilities. Since the debtor has gone into liquidation, he cannot possibly pay off the debt hence it will be written off as a bad debt. Since there is no provision for bad debts, the whole amount is written off as a loss to the profit and loss account. Dr. Profit and Loss A/C £100,000 Cr. Bad Debts W/O A/C £100,000 Working 6 IAS 40 regards the reporting of investment property and their treatment. This IAS governs the value that property on the values of market value, revaluation value or the written down cost. In this case the property will be reported in the books of account as per its fair value of £450,000. Working 7 Inventory is recorded under IAS 3. The stock lost will be treated as an expense and written off the trading account but since after repairs it can be resold, the identifiable value of the stock will include the amount to be realized. Journal entries will include; 1. Dr. Profit and Loss with stock damaged £60,000 Cr. Stock A/C £60, 000 2. Dr. Profit and Loss with repairs £10,000 Cr. Repairs £10,000 3. Dr. Stock A/C £30,000 Cr. Trading A/C £30,000 Working 8: Depreciation Depreciation is calculated under the guidelines of IAS 4. There are four main methods of calculating deprecion and the IAS will apply fully where the company lacks a depreciation policy. The four are Reducing balance method Straight line method Sum of digits method and, Twenty year assumed period. Calculations for depreciation for the various assets will be as follows; 1. Depreciation on freehold Buildings; evenly over twenty years: Initial cost £18460 + £4180 = £22, 640 Annual depreciation £22,640/20 = £1,132 2. Depreciation of Plant and Machinery on a straight line basis: Net Book Value = Cost-accumulated depreciation NBV £2960 - £964 = £1996 Depreciation expense = 30/100*1996 = £598.8 3. Depreciation on Fixtures and fittings on 20% straight line: Initial cost £47 + £17 = £64 Depreciation expense 20% of 64 = £12.8 Working 9 According to Plumlee (2009, p.345), accounting for pending legal cases fall under IAS 37 on accounting for contingent liabilities. Contingent liabilities mainly arise over cases that are pending and the firm lacks control over the outcome. This are mostly experienced for pending legal cases and in this case they will be treated as follows; 1. The provision for contingent liability over Hermione case is correct as the accounting concept of prudence requires that expenses must be recorded and provided for once they are deemed to accrue. Provisions must always be set for such contingent liabilities and the accountant for BST enterprises correctly recorded the expense. 2. On the second instance, a provision should not be made for the contingent Asset in the second case as revenues should only be recognized once realized. The act follows the principle of prudence. A note; however, will be provided on this. Dr. Sales Revenue £50,000 Cr. Contingent Asset £50,000 Working 10 Goodwill is treated as per IAS 36 on impairment of Assets. Goodwill is an intangible asset and as such should be written off in the books and attributed to the providers of capital. As per the IAS 36, Goodwill amortization is no longer recorded as an expense in the income statement, but only the loss on the carrying amount is recorded. As such on the full amount of goodwill will be reflected to the statement of financial position. Working 11 Inventory is treated as per the requirements of IAS2. The loss on inventory will be written off to the profit and loss account as follows: Dr. Profit and loss A/C with loss of inventory £200,000 Cr. Inventory A/C £200,000 Working 12 1. Corporation tax is recorded under IAS 12. Where tax is due it is added to the current tax expense and calculated as per the specific countries corporation tax rate. Dr. profit and loss A/C £1.6million Cr. Tax Expense A/C £1.6million 2. A final dividend is provided under IAS18. For BST, the dividend will be calculated as: 12p*15000000/100 = £1,800,000 Dr. Income statement £1.8million Cr. Dividend A/C £1.8million The final dividend for preference shares will be 20,000 as 10,000 had been paid as interim Working 13 Debenture interest: 11% of 800000 = 880 Working 14 Administration costs 2919 + 12.8 (depreciation on fixtures) = 2930.8 BST Enterprises plc Statement of comprehensive income For the year ended 31 December 20X6 £’000 £’000 Sales revenue 19,612 Cost of Sales Opening stock 486 Purchases 3,475 Less: Closing stock (w7) (520) 3441 Other expenses: Depreciation on property 1132 Depreciation on Plant 599 Loss of Stock 30 Repairs on stock 10 5212 (5212) Gross Profit 14,400 Other incomes: Interest tax shield 775 Profit on disposal of Property (w2) 415 Government Grants (w3) 310 1500 Expenses: Debenture Interest (w13) 880 Administration Costs (w14) 2931 Distribution costs 1968 Research and Development costs (w1) 210 Provision for unfair Dismissal 40 Loss of inventory (w11) 200 Bad debts W/O (w5) 100 (6339) Earnings before Taxation 9561 Cooperate tax (w12) (1800) Earnings available to shareholders 7,761 Interim dividends paid Ordinary shares 1500 Preference shares 10 (1510) Proposed final dividend Ordinary Shares (w12) 1800 Preference shares 20 (1820) Retained Earnings 4431 Retained earnings B/F 1361 Retained earnings C/F 5792 BST Enterprises plc Statement of Changes in Equity For the year ended 31 December 20x6 £’000 Issued capital Share Premium Revaluation Reserve Retained Earnings Total Equity Attributable to BST shareholders Balance at January 1, 20x6 15500 800 2675 1361 19836 Dividend (3330) (3330) Consolidated net Profit 7,761 7761 Balance at December 31, 20x6 15000 800 2675 5792 24,267 QN 3 BST Enterprises plc Statement of Financial Position As at 31 December 20X6 £’000 £’000 Non-Current assets Land 10000 Buildings 18460 (5312) 13148 Investment Properties 450 Plant and Machinery 2960 (1563) 1397 Goodwill 2000 Motor vehicle Lease 681 27676 Current Assets: Trade receivables 1930 Cash 950 Bank 8764 Closing inventory 520 Accrued Research Costs 40 12,204 Current Liabilities Trade payables 775 Accrued Interest on Debenture 440 Proposed final dividends Ordinary Shares 1800 Preference shares 20 Prepaid Government Grants 620 3655 (3655) 8549 36,225 Financed By: Ordinary Shares (£1 shares) 15,000 Preference Share Capital (£1 shares, 6%) 500 11% Debentures (repayable 20x9) 8000 Revaluation Reserve 2675 Retained Earnings 5792 Suspense 11958 36,225 Bibliography Albrecht, W. S., Stice, E. K., Stice, J. D.,et al. 2010. Accounting: Concepts and Applications. Stamford: Cengage Learning. Fridson, M. S., & Alvarez, F. 2011. Financial Statement Analysis: A Practitioners Guide. Hoboken: John Wiley & Sons. Greuning, H. V., Scott, D., & Terblanche, S. 2011. International Financial Reporting Standards: A Practical Guide. Washington, DC: World Bank Publications. Iasb, International Accounting Standards Board. 2009. International Financial Reporting Standards. Alphen Aan Den Rijn: Kluwer. Plumlee, M. 2009. International Financial Reporting Standards. New Jersey: Prentice Hall. Stickney, C. P., Weil, R. L., Schipper, K., et all. 2009. Financial Accounting: An Introduction to Concepts, Methods, and Uses. Stamford: Cengage Learning. Read More