Qasi’s plc is a company which maufactures cakes and bakery products for wholesale to supermarkets and independent bakers. Its’ trial balance at 31st March 2018 is shown below:   Notes £’000 £’000 Administrative expenses   80   Cash and cash equivalents   25   Cost of goods sold   420   Distribution costs   65   Equity dividend paid   80   Inventory at 31st March 2018   115   Land market value 31st March 2017 i 700   Long term borrowings vii   200 Equity shares £1 each, fully paid at 31st March 2018 vi   600 Property plant and equipment at cost 31st March 2017 iii 500   Provision for deferred tax at 31st March 2017 ii   35 Provision for property plant and equipment depreciation at 31st March 2017 iv   140 Research and Development ix 60   Retained earnings at 31st March 2017     170 Revaluation reserve at 31st March 2017     5 Revenue     798 Share premium at 31st March 2018 vi   300 Suspense iii   2 Taxation v 10   Trade payables     40 Trade receivables viii 235               2,290 2,290 Additional information provided: Land is carried in the financial statements at market value. The market value of the land at 31st March 2018 was £725,000. There were no purchases or sales of land during the year. The tax due for the year ended 31st March 2018 is estimated at £21,000. Deferred tax is estimated to increase by £15,000. During the year Qasi disposed of old equipment for £2,000. No entry had been made in the accounts for this transaction except to record the cash received in the cash book and in the suspense account. The original cost of the equipment sold was £35,000 and its book value at 31st March 2017 was £5,000. Property plant and equipment is depreciated at 10% per year straight line. Depreciation of property plant and equipment is deemed to be part of cost of sales. Qasi’s policy is to charge a full year’s depreciation in the year of acquisition and no depreciation in the year of disposal. The tax balance is the balance remaining after settling the liability for the year ended 31st March 2017 On 30th September 2017 Qasi had issued 200,000 equity shares at a premium of 50% Long term borrowings consist of a loan taken out on 1st April 2017 at 5% interest per year. No loan interest has been paid at 31st March 2018 On 22nd April 2017 Qasi discovered that Cuppins its’ largest customer had gone into liquidation. Qasi has been informed that it is very unlikely to receive any of the £15,000 balance outstanding at 31st March 2018. The balance on research and development was incurred developing a new type of dough which stays fresher for longer. The product is now being produced and sales commenced during the current year. It is expected to be sold profitably for 6 years.   Required: 1. The Finance Director of Donal Ltd is hoping that the business will be successful in its’ bid for a government grant of £100,000 towards the cost of new equipment which will be receivable in 2019. The expected life of the equipment is 10 years. He is proposing that this the full amount of £100,000 is credited to the profit and loss account in 2019. 2. Comment on this proposal in line with IAS 20 Government Grants and any relevant accounting concepts. 3. A non-accountant friend of yours is thinking of investing in Qasi Plc and is looking at the financial statements which you have just prepared. Provide him with a simple explanation of the purpose of the deferred tax provision as included in the financial statements linking your answer to any relevant accounting concepts

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Qasi’s plc is a company which maufactures cakes and bakery products for wholesale to supermarkets and independent bakers. Its’ trial balance at 31st March 2018 is shown below:

  Notes £’000 £’000
Administrative expenses   80  
Cash and cash equivalents   25  
Cost of goods sold   420  
Distribution costs   65  
Equity dividend paid   80  
Inventory at 31st March 2018   115  
Land market value 31st March 2017 i 700  
Long term borrowings vii   200
Equity shares £1 each, fully paid at 31st
March 2018
vi   600
Property plant and equipment at cost 31st March 2017 iii 500  
Provision for deferred tax at 31st March 2017 ii   35
Provision for property plant and equipment depreciation at 31st March 2017 iv   140
Research and Development ix 60  
Retained earnings at 31st March 2017     170
Revaluation reserve at 31st March 2017     5
Revenue     798
Share premium at 31st March 2018 vi   300
Suspense iii   2
Taxation v 10  
Trade payables     40
Trade receivables viii 235  
       
    2,290 2,290

Additional information provided:

  1. Land is carried in the financial statements at market value. The market value of the land at 31st March 2018 was £725,000. There were no purchases or sales of land during the year.
  2. The tax due for the year ended 31st March 2018 is estimated at £21,000.

Deferred tax is estimated to increase by £15,000.

  1. During the year Qasi disposed of old equipment for £2,000. No entry had been made in the accounts for this transaction except to record the cash received in the cash book and in the suspense account. The original cost of the equipment sold was £35,000 and its book value at 31st March 2017 was £5,000.
  1. Property plant and equipment is depreciated at 10% per year straight line. Depreciation of property plant and equipment is deemed to be part of cost of sales. Qasi’s policy is to charge a full year’s depreciation in the year of acquisition and no depreciation in the year of disposal.
  2. The tax balance is the balance remaining after settling the liability for the year ended 31st March 2017
  3. On 30th September 2017 Qasi had issued 200,000 equity shares at a premium of 50%
  4. Long term borrowings consist of a loan taken out on 1st April 2017 at 5% interest per year. No loan interest has been paid at 31st March 2018
  5. On 22nd April 2017 Qasi discovered that Cuppins its’ largest customer had gone into liquidation. Qasi has been informed that it is very unlikely to receive any of the £15,000 balance outstanding at 31st March 2018.
  6. The balance on research and development was incurred developing a new type of dough which stays fresher for longer. The product is now being produced and sales commenced during the current year. It is expected to be sold profitably for 6 years.

 

Required:

1. The Finance Director of Donal Ltd is hoping that the business will be successful in its’ bid for a government grant of £100,000 towards the cost of new equipment which will be receivable in 2019. The expected life of the equipment is 10 years. He is proposing that this the full amount of £100,000 is credited to the profit and loss account in 2019.

2. Comment on this proposal in line with IAS 20 Government Grants and any relevant accounting concepts.

3. A non-accountant friend of yours is thinking of investing in Qasi Plc and is looking at the financial statements which you have just prepared. Provide him with a simple explanation of the purpose of the deferred tax provision as included in the financial statements linking your answer to any relevant accounting concepts

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