As the Assistant Financial Accountant of Teale plc

As the Assistant Financial Accountant of Teale plc, the Finance Director has asked for your help in preparing the draft statements (excluding the statement of cash flows and the supporting notes) that should fully comply with International Financial Repor

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Individual coursework/assignment - 40% of the final module mark


Teale plc is a public listed company based in the United Kingdom with no subsidiaries or associates.  The company is in the process of preparing its draft financial statements for the year ended 30 September 2016.  These will be presented to a meeting of the Board of Directors scheduled for Monday 23 January 2017.




As the Assistant Financial Accountant of Teale plc, the Finance Director has asked for your help in preparing the draft statements (excluding the statement of cash flows and the supporting notes) that should fully comply with International Financial Reporting Standards.  The company`s trial balance at 30 September 2016 is:





Freehold property (factory) (Note (A))



Accumulated at 30 September 2015:



  • Depreciation of freehold property



  • Depreciation of plant and equipment









Corporation tax (Note (B))



Cost of sales



Deferred tax at 30 September 2015 (Note (B))



Dividends received from investment



Equity shares of £0-50 each 



Inventory at 30 September 2016 at cost (Note (D))



Investment at cost (Note (E))



2% loan note (Note (F))



Operating expenses (administrative and distribution) (Notes (E) and (F))




Other component of equity (share premium)



Overdraft interest



Plant and equipment, at cost (Note (G))



Retained earnings at 30 September 2015



Revenue (Note (I))



Trade receivables 



Trade payables and provisions (Note (H))



Suspense account (Note (J))















The Finance Director has brought the following matters to your attention.  Including the advice given, these details should be assumed to be correct.


(A)      On 1 October 2015 the company’s freehold property (the factory) was revalued to £380 million (£350 million for the building and £30 million for the land) by a newly-established firm of chartered surveyors whose principal partner is the Finance Director`s daughter.  The Directors have asked for this revaluation to be incorporated into the 2016 draft financial statements.


At the date of the revaluation, the Directors estimate that they will use the factory for another 20 years and that (in 2035) they will then be able to sell it for £100 million (which includes £30 million for the land).


(B)       The balance on the corporation tax account represents the under/over payment for the year ended 30 September 2015.


The Directors estimate that the corporation tax provision for the current year is £29.5 million.


At 30 September 2016, there are estimated to be £290 million of taxable temporary differences, including £140 million attributable to the revaluation of the factory noted in (A) above.  The current rate of UK corporation tax is 20%, which is the same as the previous year.


(C)       On 1 October 2015, the company introduced a new share option scheme for its employees; all its 100,000 employees were granted 200 share options each. They will become entitled to the options on 30 September 2019, provided they are still employed by the company at that date.


The fair value of a share option was £1.20 on 1 October 2015 and was £1.40 on 30 September 2016. During the year to 30 September 2016, 3,000 employees left the company and a further 15,000 employees are expected to leave before 30 September 2019. Half the employees work in the factory and the rest are employed in the distribution and administration departments. Ignore any deferred tax implications.


(D)      During 2016, one product line had been proving difficult to sell. There were 5,000 of these items in inventory at 30 September 2016 at a cost of £122 each. These goods were finally sold via an agent in December 2016 for £100 each, after the company rebranded these goods at a cost £20 per item. The agent charged a commission of 10%.


(E)       On 1 May 2016, Teale purchased 500,000 equity shares in Abney plc, a listed company, at a cost of £2 each. The broker’s fee of £20,000 to buy the shares was charged to operating expenses. Teale has early adopted IFRS 9 Financial instruments and the Directors wish to classify these investments at ‘fair value through other comprehensive income’.


At 30 September 2016, the quoted price of an Abney plc share is £2.30 each. Teale received a dividend of £60,000 from Abney plc during the year, which is already included in the trial balance. Ignore any deferred tax implications.

(F)       The 2% loan note was issued on 1 October 2015 at a discount of 5%.  It is redeemable on 30 September 2019 at a premium of 18%.  Direct issue costs of £2 million were charged to operating expenses.  The effective rate of interest on the loan note is 8% per annum.  Interest is due on 30 September each year, but had not been paid at 30 September 2016.


(G)      All plant and equipment should be depreciated at 15% per annum using the reducing balance method and charged to cost of sales.


(H)      The government has introduced new legislation which will take effect in 2017, which will require improved safety equipment to be installed at Teale’s premises. The trial balance at 30 September 2016 includes a provision of £10 million for the total estimated cost of buying and installing the equipment, which was charged to cost of sales.


In August 2016, the company appointed an outside consultant to advise them on the best way to implement the new legislation. Her fees to 30 September 2016 are estimated to be £40,000 and these costs have not been provided for as she has not yet submitted an invoice.


The equipment was purchased in November 2016 and the installation work will be completed in December 2016.


(I)        Teale’s terms of sale give its customers the right to return any goods purchased within 30 days for a full refund. Teale’s revenue for September 2016 was £58 million. From past experience, the Directors believe that 10% will be returned within the 30-day period but that they will be able to resell these goods subsequently for more than their cost.  The gross profit margin on these goods is 30%. The company applies IFRS 15 Revenue from contracts with customers


(J)        The balance on the suspense account can be reconciled from the two transactions below (the cash entries were correctly recorded): 


(i)    the proceeds of a fully subscribed rights issue of shares on 1 January 2016, of one new equity share for every four held, at a price of £1.60 per share.


(ii)   an interim dividend on 1 August 2016 (for all the shares in issue on that date), of £0.12 per share.






The requirements for part 1 are on the next page.





Requirements for part 1:


Prepare, in accordance with International Financial Reporting Standards, the following draft financial statements for Teale plc for consideration at the forthcoming Board meeting:


(a)        Statement of profit or loss and other comprehensive income for the year ended      30 September 2016                                                                               (14 marks)


(b)        Statement of changes in equity for the year ended 30 September 2016

                                                                                                            (5 marks)


(c)        Statement of financial position as at 30 September 2016.

(9 marks)


Marks allocated to the format and presentation of the draft financial statements.                                                                                                                                            (2 marks)


Detailed disclosure Notes are not required, but there should be clear explanations of the figures used in preparing the draft financial statements. 




All calculations should be rounded to the nearest £1,000.


Total marks for part 1 (as indicated above) = 30 marks

Part 2


The newly-appointed Chairman of Teale plc would like to know more about some of the issues raised by the company`s financial performance and position for the year ended 30 September 2016.  This is due to pressure from a number of institutional shareholders and as the Board must decide whether to recommend a final dividend, at their next meeting scheduled for late February 2017.  The Finance Director has provided the Chairman with the financial statements drafted from Part 1 above. 


The Chairman is well known for his attention to detail and is rather curious about all the information included in the notes following the trial balance in Part 1.  He feels that the subjectivity, estimates and need for judgement associated with this sort of information may be evidence of ‘creative accounting’ and manipulation (by the Finance Director) of the company`s reported results for the year ended 30 September 2016.  The Chairman has limited knowledge of accounting and is not aware of recent accounting developments.

With this in mind, the following e-mail from the Chairman has been passed to you:


I`ve seen the draft financial statements and the notes to the trial balance. I really thought this year`s results would be better. 


Note (A) – I am not sure why our freehold property/factory has been revalued as we have not done this before? How relevant and reliable is the revaluation? This just looks like another accounting device to make the balance sheet (not that I see one has been produced) look healthier and increase profit and cash flow.

(4 marks)


Note (B) - I really don`t understand taxable temporary differences or why the balance on deferred tax (a liability?) seems to be continually rising.  Is this yet another device to reduce profits and future cash flow? Do we owe this amount to the UK government - I don`t think we can afford to pay it!!

(5 marks)


Note (C) – I don’t understand why profit has been reduced because of the new share scheme. Surely issuing new shares to our employees won’t cost the company anything?

(3 marks)


Note (E) – Why are we restating the shares in our new investment (Abney plc) at the year end? As share prices often fluctuate surely it would be better to include them at cost? Is this an attempt to manipulate our profits?

(3 marks)


Note (F) - Surely this loan note costs us more than 2% - even with the UK base rate at 0.25%.  However, I don`t believe the Board would have agreed to this loan if, as the notes claim, it really is costing us 8% (32 times the current base rate).  This looks like an accounting ploy to reduce profit and dividends.

(4 marks)



Note (H) – Please can you explain the accounting treatment of the safety equipment? Surely we have an obligation to comply with new legislation? Is this another way to increase profit?

(4 marks)


Note (I) - I don`t understand why revenue has been reduced in the statement of profit or loss? Is this yet another attempt to manipulate profit? Please can you explain what has happened? If we have received the money for the sale of a product, shouldn`t we recognise it in this year?

(3 marks)


Note (J) - I believe the share issue earlier in the year was a success and I`d like to see shareholders further rewarded possibly with a dividend - from the reported equity balances it looks as if we can afford it.  Can we distribute this year`s profit of over £75 million and/or any other components of equity?  On top of the 12 pence/share interim dividend, I`d like to suggest a 5 pence/share final dividend to the forthcoming Board meeting.  Your thoughts please!!

(4 marks) 

Requirement for part 2:


Prepare a response for the Chairman of Teale plc to respond to each of the above points.


Total marks for part 2 (as indicated above) = 30 marks

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