Page treated as sold in the records and

Page 1 of 4FACULTY OF COMMERCE AND LAWDEPARTMENT OF ACCOUNTING, BANKING AND FINANCEBACC304: COMPANY ACCOUNTINGJANUARY 2018 ASSIGNMENT 2: INTAKE 27Question 1The following items appeared on the list of balances of P Ltd at 31 December 2017:Dr Cr$ $Opening inventory 3 850 000Accounts receivable ledger balances 2 980 000 1 970Accounts payable ledger balances 14 300 1 210 400Prepayments 770 000Cash at bank A 940 000Overdraft at bank B 360 000The closing inventory amounted to $4 190 000, before allowing for the adjustments required byitems listed below.In the course of preparing the financial statements at 31 December 2017, the need for a numberof adjustments emerged as detailed below:a) The opening inventory was found to have been overstated by $418 000 as a result of calculationerrors on inventory sheets.b) Some items included in closing inventory at cost of $16 000 were found to be defective andwere sold after the end of the reporting period for $10 400. Selling costs amounted to $600.Page 2 of 4c) Goods with a sales value of $88 000 were in the hands of customers at 31 December 2017 ona sale or return basis. The goods had been treated as sold in the records and the full sales valueof $88 000 had been included in trade receivables. After the reporting period the goods werereturned in good condition. The cost of the goods was $66 000.d) Accounts receivable amounting to $92 000 are to be written off.e) The allowance for doubtful debts is to be set up for 5% of the accounts receivable total.f) The sales manager is entitled, from 1 January 2017, to a commission of 2% of the company’sprofit after charging that commission. The profit amounted to $1 101 600 before including thecommission, and after adjustments for items (a) to (e) above. The manager has already received$25 000 on account of commission due during the year ended 31 December 2017.Required1. Explain how adjustment should be made for the error in the opening inventory, inaccordance with IAS 8 Accounting Policies, Changes in Accounting Estimate and Errors.Assume the error is material. (3 marks)2. State two disclosures required by IAS 8 Accounting Policies, Changes in AccountingEstimate and Errors in the financial statements at 31 December 2017 (2 marks)3. Show how the final figures for current assets should be presented in the statement offinancial position. (Show all your workings) (20 marks)Question 2 (a)On 31 March 2017 B Ltd sold a piece of undeveloped land to S Ltd and made the followingentries:Dr Bank $6 000 000Cr Land (cost) $4 200 000Cr Gain on sale $1 800 000The sale agreement specifies that B Ltd has the option to repurchase this land within the next twoyears for between $6 500 000 and $6 800 000 depending on the date of the transaction. B Ltd isrequired to repurchase the land on 31 March 2019 for $6 800 000 if the option is not exercisedbefore this date. S Ltd must gain B Ltd’s approval before it can use the land for any purpose. Theland had a market value of $8 000 000 on 31 March 2017RequiredDiscuss how B Ltd should have accounted for this transaction in its financial statements for theyear to 31 March 2017 in accordance with IAS 1 Presentation of financial statements.(5marks)Page 3 of 4Question 2 (b)ABC Ltd is finalising financial statements for the year ended 30 April 2017. It has a number ofproperties and it is company policy to depreciate these over 40 years. Details of the propertiesare set out below.FactoryDuring the financial year the company constructed a factory in four months. The factory cameinto use on 1 September 2016. The costs involved were as follows:$Purchase of the land site 200 000Clearance of the site planning fees 80 000Planning fees 13 000Construction costs materials etc. 400 000Legal fees 35 000Cost of opening facility 60 000Training of staff in building’s health and safety requirements 15 000Head office allocations 40 000Total 843 000RequiredShow which items will be recognized as constituting the cost of the factory as well as thecarrying amount of the factory on 30 April 2017. (5marks)Basil ComplexThis consists of land and buildings which were acquired on 1 May 2007, for $1 700 000 (beingLand $700 000 and buildings $1 000 000). On 30 April 2012 the land was revalued to $1 200000 and buildings were revalued to $1 470 000.Page 4 of 4On 30 April 2017 another review was undertaken and the land was revalued to $700 000 and thebuilding were revalued to $460 000.RequiredShow the accounting entries necessary to record these transactions and events. (5 marks)Question 2 (c)You are given the following information about a company:2017 2016Share prices at 31 December $9.05 $5.12Earnings per share for the year ended 31 December $0.65 $0.38Dividend per share for the year ended 31 December $0.17 $0.30Required(ii) Calculate the P/E ratio and the dividend yield for the company at 31 December 2017 and thecomparative figures for 2016 (2 marks)(iii)Analyse the financial information from the viewpoint of an investor (2 marks)(iv) Explain the limitations that would exist if you were to compare these ratios and marketinformation for the company with that of an entity whose shares were listed on a stockexchange in a different country. (6 marks)

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