Required The Financial Director of Alcuin would like a report on how the four-year lease should be accounted for and why. Prepare a note containing a full calculation of this, again explaining why the treatment is as you propose.
lcuin, Langwith and Halifax are firms involved in the production and sale of highquality technical equipment for universities; the following are draft financial statements:
| Alcuin £000 | Langwith £000 | Halifax £000 | |
| Assets | |||
| Non-current assets | |||
|
property, plant and equipment(note1) |
10,500 | 5,500 | 2,500 |
| investment in Langwith (note2) | 5,000 | - | - |
| investment in Halifax (note 3) | 3,000 | - | - |
| current assets | 1,500 | 1,000 | 500 |
| Total assets | 20,000 | 6,500 | 3,000 |
| Equity and liabilities | |||
| equity | |||
| ordinary share capital (£1） | 10,000 | 2,000 | 1,000 |
| 7,000 | 3,750 | 750 | |
| non-current liabilities | 2,000 | - | - |
| current liabilities | 1,000 | 750 | 1,250 |
| Total equity and liabilities | 20,000 | 6,500 | 3,000 |
statement of
| Alcuin £000 | Langwith £000 | Halifax £000 | |
|
Revenue |
10,000 | 5,000 | 2,000 |
| Cost of sales | (7,000) | (3,250) | (1,900） |
| Gross profit | 3,000 | 1,750 | 100 |
|
investment income( from Langwith) |
1,000 | - | - |
| Administration costs | (700) | (250) | （750） |
| profit before tax | 3,300 | 1,500 | （650） |
| tax | (2,000) | (300) | - |
| profit after tax | 1,300 | 1,200 | （650） |
| dividends | - | (1,000) | - |
| profit after tax and dividends | 1,300 | 200 | （650） |
Notes to the accounts:
1. On 31st March 2021 Langwith entered into a four-year lease contract for a new machine used in the production with a contract requiring the payment of £14,930 per annum in arrears. This does not appear in the accounts above.The interest rate implicit in the lease is 7.5% and Langwith uses the actuarial method to allocate interest for finance leases. The Langwith’s
policy for these assets applies the straight-line method over four years and
there is not thought to be a residual value of the asset at the end of this
period.
2. Alcuin Ltd acquired two million of the ordinary shares of Langwith Ltd on 29th November 2014 when the retained earnings of Langwith Ltd were £1,000,000.
3. Alcuin Ltd acquired 75% of the ordinary shares of Halifax Ltd on 7
th September 2016 when the retained earnings of Halifax Ltd were £500,000; Alcuin use the proportionate share (‘partial’) method of valuing the noncontrolling interest in Halifax.
4. During the year goods with an original cost of £400,000 were sold by Alcuin to Langwith for £600,000. Half of these goods are in Langwith’s inventory at the year end.
5. On 1st October 2020, Halifax sold units with a total sales price of £500,000 to a single large customer. Included in the contract was a two-year service warranty covering all required repairs during this time. The normal selling price of the same merchandise would be £400,000 without the warranty. As of 31 st March 2021, Halifax recognised £425,000 of revenue, included in the above accounts
Required
The Financial Director of Alcuin would like a report on how the four-year lease should be accounted for and why. Prepare a note containing a full calculation of this, again explaining why the treatment is as you propose.
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