The following trial balance relates to Clarion as at 31 March 2015: $’000 $’000

Question

The following trial balance relates to Clarion as at 31 March 2015:
              $’000 $’000
Equity shares of $1 each (note (i)) 30,000
Retained earnings – 1 April 2014 8,600
Other component of equity – share premium (note (i)) 5,000
8% loan notes (note (ii)) 20,000
Plant and equipment at cost (note (iii)) 85,000
Accumulated depreciation plant and equipment – 1 April 2014 19,000
Investments through profit or loss – value at 1 April 2014 (note (iv))               6,000
Inventory at 31 March 2015 11,700
Trade receivables 18,500
Bank 1,900
Deferred tax (note (vi)) 2,700
Trade payables 9,400
Environmental provision (note (iii)) 4,000
Finance lease obligation (note (iii)) 4,200
Revenue                          132,000
Cost of sales 88,300
Operating lease payments (note (v)) 2,000
Administrative expenses 8,000
Distribution costs 7,400
Loan note interest paid      800
Suspense account (note (ii)) 5,800
Bank interest      300
Dividends paid 3,900
Investment income (note (iv))           500
Current tax (note (vi))      400
–––––––– ––––––––
               237,700                  237,700
–––––––– ––––––––
The following notes are also relevant:

(i) The equity shares and share premium balances in the trial balance above include a fully subscribed 1 for 5 rights issue at $1·60 per share which was made by Clarion on 1 October 2014. The market value of Clarion’s shares was $2·50 on 1 October 2014.

(ii) On 31 March 2015, one quarter of the 8% loan notes were redeemed at par and six months’ outstanding loan interest was paid. The suspense account represents the double entry corresponding to the cash payment for the capital redemption and the outstanding interest.

(iii) Property, plant and equipment:
Included in property, plant and equipment are two major items of plant acquired on 1 April 2014:
Item 1 had a cash cost $14 million, however, the plant will cause environmental damage which will have to be rectified when it is dismantled at the end of its five year life. The present value (discounting at 8%) on 1 April 2014 of the rectification is $4 million. The environmental provision has been correctly accounted for, however, no finance cost has yet been charged on the provision.
Item 2 was plant acquired with a fair value of $8 million under a five-year finance lease. This required an initial deposit of $2·3 million and annual payments of $1·5 million on 31 March each year. The finance lease obligation in the trial balance above represents the fair value of the plant less both the deposit and the first annual payment. The lease has an implicit interest rate of 10% and the asset has been correctly capitalised in plant and equipment. No depreciation has yet been charged on plant and equipment which should be charged to cost of sales on a straight-line basis over a five-year life (including leased plant). No plant is more than four years old.

(iv) The investments through profit or loss are those held at 31 March 2015 (after the sale below). They are carried at their fair value as at 1 April 2014, however, they had a fair value of $6·5 million on 31 March 2015. During the year an investment which had a carrying amount of $1·4 million was sold for $1·6 million. Investment income in the trial balance above includes the profit on the sale of the investment and dividends received during the year.

(v) Clarion renewed an operating lease on a property on 1 April 2014. The operating lease payments represent an annual payment (in advance) of $1 million and a lease premium of $1 million. The lease is for four years and operating lease expenses should be included in cost of sales.

(vi) A provision for current tax for the year ended 31 March 2015 of $3·5 million is required. The balance on current tax in the trial balance above represents the under/over provision of the tax liability for the year ended 31 March 2014. At 31 March 2015, the tax base of Clarion’s net assets was $12 million less than their carrying amounts. The income tax rate of Clarion is 25%.
Required:
(a) Prepare the statement of profit or loss for Clarion for the year ended 31 March 2015.
(b) Prepare the statement of changes in equity for Clarion for the year ended 31 March 2015.
(c) Prepare the statement of financial position for Clarion as at 31 March 2015.

Explanation / Answer

Depreciation -

Item 1 Value = 14m + 4m (Future Provision) = 18m Divided by 5 years = 3.6m

Item 2 Value = 8 M Divided by 5 years Life = 8/5= 1.6 M

Interest on Finance lease

8m Fair value Less 2.3m Down Payment = 5.7m

5.7m @ 10% for one year = 570000

Environmental Provision Interest

4m @ 8%( being the discount rate used ) = 320000

Current Tax and Deferred Tax

Deffered Tax = 12m*0.25= 4m

Current Provision in trial balance = 3.7m

So therefore Additional Provision Required = 0.3m

Statement Of Profit and Loss Particulars Amount$ Investment Income-500+500(Increase in Fair value) 1000 Revenue 132000 Less Cost of sales (=88300+1250(Operating lease) 89550 GROSS PROFIT 43450 Admin Exp 8000 Distribution Costs 7400 Loan Note Interest 1600 bank Interest 300 Interest on Finance Lease 570 interest on Environmental Provision 320 Depreciation - 3600+1600 5200 23390 Profit before Tax 20060 Tax Provision = 3100+300 3400 Profit After Tax 16660 Less - Dividends 3900 Profit To be Transferrred To retained Earnings 12760

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