Home Solutions (#SB) Critically discuss the presentation of the above statement on the basis of the Conceptual Framework and IAS1.
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QUESTION 2 (20 marks)
ABC is a public company listed on the Namibian Stock Exchange (NSE). The company applies International Financial Reporting Standards (IFRS) to prepare its financial statements and has elected to present its statement of profit or loss and other comprehensive income according to the function of expenses method.
The company’s financial accounting prepared the following statement of profit or loss and other comprehensive income for the year ended 31 December 2012.
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR 2012.
Revenue 12 000 000
Cost of Sales (5 000 000)
Gross Profit 7 000 000
Depreciation (1 500 000)
Salaries and wages (6 500 000)
Dividends declared (125 000)
Surplus on revaluation of property, plant and equipment 225 000
Other expenses (8 000 000)
Purchase of property, plant and equipment (4 250 000)
Profit for the year (13 150 000)
1. The following is included in “ Other expenses”:
Income tax expense (150 000)
Interest expense (505 000)
Rental income 50 000
(a) Briefly explain to the financial accountant why dividend declared of N$ 125 000 should not be presented in the statement of profit or loss and other comprehensive income as an expense. Your answer should refer to relevant definition in the conceptual framework. (3 marks)
(b) Provide a critical analysis of the above-mention statement of profit and loss and other comprehensive income in term of IAS 1 and Conceptual Framework. (7 marks)
(c) Prepare the statement of profit or loss and other comprehensive income for the year ended 31 December 2012 to comply with Companies Act 71 of 2008 and the requirements of International Financial Reporting Standards (IFRS). (10 marks)
QUESTION 3 (40 marks)
Ms Muteka the management accountant of Dempsey Ltd, appointed a person on 1 June 20.8, who pretended to be an expert in preparation of company financial statements.
The following statement of financial position was prepared on 10 July 20.8 by the new accountant:
Statement of financial statement position as at 30 June 20.8
ASSETS Note N$
Land and buildings at carrying amount 2 376 000
Furniture at carrying amount 3 60 000
Vehicle at carrying amount 3 192 000
Investments 4 34 000
Inventories 5 18 000
Receivables 20 000
Consumables on hand 1 000
Capital 6 555 000
Reserves 7 20 000
Loan 8 100 000
Payables 9 14 000
Bank overdraft 12 000
Ms Muteka is not satisfied with the format of the above statement of financial position and requests you to assist her. You acquire the following additional information:
1. The reporting period of -Dempsey Ltd ends on 30 June.
2. The buildings are occupied for the purpose of the activities of the entity and are accounted for in terms of the cost model. At the date of acquisition, 1 July 20.6 the land was valued at N$ 100 000 and the buildings at N$ 300 000. Depreciation is written off on buildings at 4% per year on Straight- line method.
3. Furniture and vehicle were purchased on 1 July 20.6 at N$ 80 000 and N$ 300 000 respectively. Depreciation is written off on furniture at 12.5% per year on cost and on vehicle at 20% per year on diminishing balance method. The necessary write-offs for the current year have been made.
4. Investments consist of the following:
10 000 ordinary shares in a listed company, Springbok Ltd N$ 24 000
6 000 ordinary shares in XY (Pty) Ltd N$ 10 000
On 30 June 20.8, the values of the shares in Springbok Ltd and XY (Pty) Ltd were N$ 28 000 and N$ 14 000 respectively.
5. Inventories consist of the following: Merchandise (trading goods) N$ 18 000
6. Dempsey Ltd may issue 400 000 ordinary shares and 200 000 8% preference shares.
On the 30 June 20.8, the company had already issued 250 000 ordinary shares at
N$ 275 000 and 160 000 preference shares at N$ 280 000.
No share were issued during the current year.
Preference shares form part of equity.
7. The reserves consists of the following:
Retained earnings (balance 30 June 20.7, N$ 7 000) N$ 14 000
Replacement reserve N$ 6 000
The ordinary dividends declared are still owing to shareholders, while the preference dividends have been paid.
8. The loan was entered into on 1 July 20.6 at interest rate of 10% per year. The loan is secured by a mortgage bond on land and buildings and is repayable in yearly instalments of N$ 20 000 from 31 December 20.8.
9. Payables consist of the following:
Trade payables N$ 6 000
Current tax payable N$ 3 000
Shareholders for dividends N$ 5 000
Prepare the statement of financial position, with the necessary notes, as at 30 June 20.8 and the Statement of changes in equity for the year ended 30 June 20.8 for Dempsey Ltd to comply with the minimum requirements of the Companies Act 71 of 2008 and International Financial Reporting Standards (IFRS).