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Instructor’s Manual

Financial Accounting &

Reporting

Tenth edition

Barry Elliott
and

Jamie Elliott

For further instructor material

www.pearsoned.co.uk/elliott

ISBN 0 273 70365 X

 Pearson Education Limited 2006

www.pearsoned.co.uk/elliott

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Barry Elliott and Jamie Elliott: Financial Accounting and Reporting (tenth edition) – Instructor’s Manual

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Chapter 17: Question 4 – X Ltd

(a) Workings to provide figures for income statement and balance sheet
entries

Period Liability Rental Liability Finance Liability

at start payment during charge at end

of period period (4.3535%) of period

1.1.X4 100,000 12,000 88,000 3,831 91,831

1.7.X4 91,831 12,000 79,831 3,475 83,306

1.1.X5 83,306 12,000 71,306 3,104 74,410

1.7.X5 74,410 12,000 62,410 2,717 65,127

1.1.X6 65,127 12,000 53,127 2,313 55,440

1.7.X6 55,440 12,000 43,440 1,891 45,331

1.1.X7 45,331 12,000 33,331 1,451 34,782

1.7.X7 34,782 12,000 22,782 992 23,774

1.1.X8 23,774 12,000 11,774 513 12,287

1.7.X8 12,287 12,000 287 12 299

120,000

Depreciation is over useful economic life, using the historical cost of the leased asset

100,000

8
= £12,500 per year

Income statement

Finance Depreciation Total

Charge

20X4 (3,831 + 3,475) 7,306 12,500 19,806

20X5 5,821 12,500 18,321

20X6 4,204 12,500 16,704

20X7 (1,451 + 992) 2,443 12,500 14,943

The balance sheet is as follows:
Assets

20X4 20X5 20X6 20X7
Equipment

under finance

lease 100,000 100,000 100,000 100,000
Depreciation 12,500 25,000 32,500 50,000
87,500 75,000 62,500 50,000

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Chapter 32: Question 4 – Gettry Doffit

1 Quantities of chemicals received by the company for disposal on site represent a liability for
costs of disposal at the year-end. The work would be undertaken by Gettry Doffit plc on a con-
tractual basis and, clearly, income from contracts (short-term as defined in the original SSAP 9)
should not be credited to profit and loss account until the work has been completed i.e. on the
completion of the contract. Therefore, it would appear that such quantities should be carried in
the balance sheet as a liability at the higher of:

(i) invoice cost to the customer or

(ii) estimated cost of disposal.

Applying these principles to (A) axylotl peroxide and (B) pterodactyl chlorate:

Re (A)
This contract will give rise to certain revenue of £87,179 i.e. 170 million won @ 1,950 to the £.
This is because the invoice value in won has been ‘sold forward’ at the stated rate of the forward
contract. It is therefore appropriate, and permissible per SSAP 20, to use the forward rate as the
transaction value in the books at all dates, and given such treatment, no exchange differences
will arise.

There should be a debtor and creditor for this amount in the balance sheet i.e. the debtor for the
certain amount receivable should not be dealt with as income until the contract is completed.
Any profit arising would be dealt with in the year to 31 March 20X6.

Dr Debtors £87,179

Cr Creditors – accruals and deferred income £87,179

It is possible that the company could choose as a matter of accounting policy to use rates on the
date of the transaction and then retranslate on settlement/balance sheet date giving rise to ex-
change differences. The alternative numbers arising are dealt with below. The costs incurred
up to the year-end will be dealt with as follows

Dr Creditors £60,000

Cr Bank £60,000

The creditor balance would be debited with the estimated further costs to completion of £15,000
in 20X5/X6 leaving the company with profit of £12,179 in 20X5/X6.

Also in 20X5/X6 – 1.5.X5 – the company would receive 170 million won and realise, per the
terms of the forward contract, £87,179, thus eliminating the debtor. Had actual rates been used:

Dr Debtors 170 million won @ 1,900 = £89,473

Cr Creditors £89,473

The balance on creditors in 20X5/X6 will then be a profit of £14,473. However, the debtor
would have to be retranslated at the 20X5 year-end – 170 million won @ 2,000 to the £ =
£85,000 giving rise to a loss in that year of £4,473. On settlement the debtor will realise
£87,179 giving rise to a gain of £2,179.

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In total, £14,473 plus £2,179 less £4,473 = £12,179 (as when the forward rate was used to start
with) would be credited to profit and loss account, though in this case partly in 20X4/X5 and
partly in 20X5/X6.

Re (B)
As this is disposed of per the terms of this contract, neither a debtor nor a liability arises. The
point where revenue should be recognised is the date of processing, and it is clear per the terms
of the contract that no loss can arise. The costs of the break-down should therefore be carried
forward as work-in-progress, perhaps reduced for the worth of the by-products.

2 The won forward contract has been exhaustively dealt with above. As the contract to buy
dollars is to be used to finance trade purchases overseas, the transaction poses no problems pro-
vided the dollars will be used to purchase stocks whose realisable amount is greater than
(70,000 @ 1.60) = £43,750. Indeed, it would make sense not to reflect such a contract in the
accounts, it being more appropriate to disclose the detail under commitments. There are, how-
ever, other pertinent points to be made.

If the dollars are not to be applied towards a trade purchase, the company would have surplus
dollars which may only be converted back to sterling at a loss. Such a loss should be recognised
in accordance with the prudence concept, although there may be mitigating factors such as an
alternative use for dollars.

3 Given the raising of the irrevocable letter of credit, all that the Nigerian supplier has to do is to
ship the goods specified in the letter, present the bill of lading as proof of shipment, and await
payment. Thus, the company must pay for goods supplied in accordance with the contract terms,
and cannot cancel. Therefore, a liability of (130 – 90)/130 × £65,000 = £20,000 should be recog-
nised immediately, unless a variation can be negotiated with the supplier or an alternative use
found for the chemical.

4 The spillage is a post balance sheet event. No liability should be recognised in the accounts
unless the going concern concept is threatened.

However, the potential liability is so material as to require disclosure under SSAP 17.

• In a normal joint venture the companies trade as partners, with joint and several liability.

• The precise apportionment of the liability may require a contribution from Dumpet Andrunn
plc.

• If they cannot pay, it is likely that Gettry Doffit plc will have to.

• The likelihood of a liability crystallising, the likely amount, and any recovery from Dumpet
Andrunn plc, must be assessed, and full details given in the notes to the accounts and re-
ferred to in the directors’ report.

• As it is likely that the company will resist the claim, the maximum payable should
probably be disclosed as a contingent liability.

• The possibility of an insurance recovery should also be examined.