Extract from the trial balance of GoodFellas at 31. December 2019 (EUR) Debit Credit Costs of services
Question:
Extract from the trial balance of GoodFellas at 31. December 2019 (EUR)
Debit | Credit | |
Costs of services provided | 320,000 | |
Contracts in progress | 700,000 | |
Interest expense | 21,000 | |
Sales and administrative expenses | 120,000 | |
Impairment losses | 13,000 | |
Sales revenue | 680,000 | |
Interest income | 6,000 |
Required:
GoodFellas entered a lease contract for a digger machine on the 2nd of January 2019. The machine could have been bought outright for €60,000. Under the lease contract GoodFellas paid €10,000 on the 2nd of January 2019, and then will need to pay €20,000 on the 2nd of January 2020, 2013 and 2014. The effective rate implicit in the lease is 9.7%. The lease was at first treated as an operating lease and the first payment was included in expenses (under cost of services provided), but it became clear later that the lease is in fact a finance lease: Explain how this transaction should be treated in the financial statements for the year ended 31. December 2019 without providing the amounts. Calculate the total amount that should be recognised as a liability on the 2nd of January 2019.
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v. Refer to the transaction described in (iv) above. (A). Calculate the finance charge for the year ended 31. December 2019 (B). Explain the treatment of the transaction (including the amounts) for the following year, that is year ended 31. December 2020.
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vi. On the 1st of Februrary 2019 GoodFellas entered a 3-year construction contract to build an ice cream factory. The budgeted revenue is €1,200,000 with costs budgeted at €800,000. By 31. December 2019 €700,000 of the total contract costs had been incurred and recorded as “contract in progress”. No revenue has so far been recorded in the accounts. Explain the accounting treatment and calculate the amounts related to the contract that need to be included in the statement of financial position for the year ended 31. December 2019. The client has so far transferred progress payments to the total amount of €500,000.
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vii. GoodFellas pays corporate income tax at a flat rate of 21% of income before tax. However, income on construction contracts (questions 1g and 1h) is taxed when cash is received from the client. The client has so far paid €500,000 since the start of the contract in February 2019. Explain the treatment of the tax on construction contract revenue. Calculate current tax, the amount of tax liability and deferred tax. .
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viii. Refer to all the questions above and make appropriate adjustments to the trial balance (excepts i, ii, iii & iv). Prepare the statement of income for the year ended 31. December 2019 on the basis of the trial balance and the questions above. At a minimum write the form of the statement of income with corresponding amounts from the trial balance.
Expert Answer:
Answer i Extract from the trial balance of GoodFellas at 31 December 2019 EUR Debit Costs of services provided320000 Contracts in progress700000 Interest expense21000 Sales and administrative expenses120000 Impairment losses13000 Credit Sales revenue680000 Interest income6000 ii GoodFellas entered a lease contract for a digger machine on the 2nd of January 2019 The machine could have been bought outright for 60000 Under the lease contract GoodFellas paid 10000 on the 2nd of January 2019 and then will need to pay 20000 on the 2nd of January 2020 2013 and 2014 The effective rate implicit in the lease is 97 The lease was at first treated as an operating lease and the first payment was included in expenses under cost of services provided but it became clear later that the lease is in fact a finance lease Explain how this transaction should be treated in the financial statements for the year ended 31 December 2019 without providing the amounts This transaction should be treated as a finance lease in the financial statements for the year ended 31 December 2019 The liability of 60000 should therefore be recognised on the 2nd of January 2019 This liability is calculated by taking the present value of the future lease payments discounted by the effective rate implicit in the lease The first payment of 10000 should be recognised as an interest expense for the year ended 31 December 2019 and the liability of 60000 should be reduced accordingly Calculate the total amount that should be recognised as a liability on the 2nd of January 2019 The total amount that should be recognised as a liability on the 2nd of January 2019 is 60000 This is calculated by taking the present value of the future lease payments discounted by the effective rate implicit in the lease PV 10000 20000 x PVIFA 973 years PV 10000 1765638 PV 2765638 Thus the total liability to be recognised is 60000 which is the difference between the cost of the asset and the present value of the lease payments iii Refer to the transaction described in ii above A Calculate the finance charge for the year ended 31 December 2019 The finance charge for the yearended 31 December 2019 is 279062 This is calculated as follows Finance charge Interest expense liability x effective rate implicit in the lease Finance charge 21000 60000 x 0097 Finance charge 21000 5820 Finance charge 26820 B Explain the treatment of the transaction including the amounts for the following year that is year ended 31 December 2020 For the year ended 31 December 2020 the treatment of the transaction should include the following The interest expense should be recognised in the statement of profit or loss for the year ended 31 December 2020 This should be calculated by multiplying the balance of the liability at the start of the period 60000 by the effective rate implicit in the lease 97 The liability for the lease should be recognised in the statement of financial position at the end of the period 31 December 2020 The amount recognised should be 60000 plus the interest expense from the year ended 31 December 2020 The cash payment of 20000 should be recognised in the statement of cash flows as a financing activity iv On the 1st of Februrary 2019 GoodFellas entered a 3year construction contract to build an ice cream factory The budgeted revenue is 1200000 with costs budgeted at 800000 By 31 December 2019 700000 of the total contract costs had been incurred and recorded as contracts in progress No revenue has so far been recorded in the accounts Explain the accounting treatment and calculate the amounts related to the contract that need to be included in the statement of financial position for the year ended 31 December 2019 The client has so far transferred progress payments to the total amount of 500000 The accounting treatment of the construction contract should include the following The revenue should be recognised in the statement of profit or loss for the year ended 31 December 2019 This should be calculated as the total costs incurred up to the end of the period 700000 less any progress payments already received 500000 The costs should be recognised in the statement of profit or loss for the year ended 31 December 2019 This should be calculated as the amount of costs incurred up to the end of the period 700000 The contract in progress should be recognised in the statement of financial position at the end of the period 31 December 2019 as an asset This should be calculated as the difference between the total contract costs and costs recognised in the statement of profit or loss 700000 700000 0 Revenues received in advance should be recognised in the statement of financial position at the end of the period 31 December 2019 as a liability This should be calculated as the total progress payments received 500000 v GoodFellas pays corporate income tax at a flat rate of 21 of income before tax However income on construction contracts questions 1g and 1h is taxed when cash is received from the client The client has so far paid 500000 since the start of the contract in February 2019 Explain the treatment of the tax on construction contract revenue Calculate current tax the amount of tax liability and deferred tax The treatment of the tax on construction contract revenue should include the following Current tax should be recognised in the statement of profit or loss for the year ended 31 December 2019 This should be calculated by multiplying the revenue recognised in the statement of profit or loss for the year ended 31 December 2019 700000 500000 200000 by the corporate tax rate 21 The amount of tax liability should be recognised as a liability in the statement of financial position at the end of the period 31 December 2019 This should be calculated as the total current tax due 200000 x 21 less any tax payments already made 0 Deferred tax should also be recognised in the statement of financial position at the end of the period 31 December 2019 This should be calculated as the difference between the tax calculated by applying the corporate rate to the revenue recognised in the statement of profit or loss 200000 x 21 and the actual amount of tax payable 0 Calculations Current tax 200000 x 21 Current tax 42000 Tax liability 42000 0 Tax liability 42000 Deferred tax 42000 0 Deferred tax 42000 viii Refer to all the questions above and make appropriate adjustments to the trial balance excepts i ii iii iv Prepare the statement of income for the year ended 31 December 2019 on the basis of the trial balance and the questions above At a minimum write the form of the statement of income with corresponding amounts from the trial balance Statement of Income for the Year Ended 31 December 2019 Revenue Sales revenue 680000 Construction contract revenue 200000 Interest income 6000 Total Revenue 886000 Expenses Cost of services provided 320000 Contracts in progress 700000 Interest expense 23790 Sales and administrative expenses ... 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