1. On 1st July 2021, Gandalf sold units with a total sales price of 250,000 units...

 

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1. On 1st July 2021, Gandalf sold units with a total sales price of 250,000 units for £200 each 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 £170 per unit without the warranty. As of 31st December 2021, Gandalf recognised £44,375,000 of revenue, included in the above accounts. 2. On 1st January 2021, Tauriel Ltd entered into a four-year lease contract for a new machine with a contract requiring the payment of £12,000,000 per annum in arrears. The interest rate implicit in the lease is 5% and Tauriel uses the actuarial method to allocate interest for finance leases. Tauriel's depreciation policy for these assets requires the straight-line method over three years and there is not thought to be a residual value of the asset at the end of this period. Tauriel didn't account for this transaction. 3. Tauriel Ltd acquired 600,000,000 of the ordinary shares of Gandalf Ltd on 1st January 2015 when the retained earnings of Gandalf Ltd were £176,000,000. 4. Tauriel Ltd acquired 80% of the ordinary shares of Bilbo Ltd on 1st January 2017 when the retained earnings of Bilbo Ltd were £460,000,000. Tauriel use the proportionate share ('partial') method of valuing the non-controlling interest in Bilbo. 5. During the year goods with an original cost of £187,500,000 were sold by Tauriel to Gandalf for £437,500,000. A quarter of these goods are in Gandalf's inventory at the year end. 6. During the year, goodwill in both subsidiaries has suffered from an impairment of 20% of their values. 7. Dividend payments by Gandalf are £144,000,000 and by Bilbo are £40,000,000. These are included in investment income in the statement of profit and loss for the accounting period ending 31st December 2021. The rest of investment income is dividends received from nongroup companies. Requirements: a) The accountant who posted Gandalf's sales in Note 1 is now worried that they treated this incorrectly. They come to you asking for help. Prepare a brief note for them showing the correct treatment and explaining why the correct treatment is consistent with International Financial Reporting Standards. [20 marks, approximately 250 words] b) The Financial Director of Tauriel would like a report on how the four-year lease should be accounted for. Prepare a note containing the full calculation and explanation of your proposed treatment with reference to International Financial Reporting Standards. [20 marks, approximately 250 words] c) Adjusting for the above (where necessary) prepare a consolidated statement of financial position and consolidated statement of profit and loss. [30 marks] 1. On 1st July 2021, Gandalf sold units with a total sales price of 250,000 units for £200 each 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 £170 per unit without the warranty. As of 31st December 2021, Gandalf recognised £44,375,000 of revenue, included in the above accounts. 2. On 1st January 2021, Tauriel Ltd entered into a four-year lease contract for a new machine with a contract requiring the payment of £12,000,000 per annum in arrears. The interest rate implicit in the lease is 5% and Tauriel uses the actuarial method to allocate interest for finance leases. Tauriel's depreciation policy for these assets requires the straight-line method over three years and there is not thought to be a residual value of the asset at the end of this period. Tauriel didn't account for this transaction. 3. Tauriel Ltd acquired 600,000,000 of the ordinary shares of Gandalf Ltd on 1st January 2015 when the retained earnings of Gandalf Ltd were £176,000,000. 4. Tauriel Ltd acquired 80% of the ordinary shares of Bilbo Ltd on 1st January 2017 when the retained earnings of Bilbo Ltd were £460,000,000. Tauriel use the proportionate share ('partial') method of valuing the non-controlling interest in Bilbo. 5. During the year goods with an original cost of £187,500,000 were sold by Tauriel to Gandalf for £437,500,000. A quarter of these goods are in Gandalf's inventory at the year end. 6. During the year, goodwill in both subsidiaries has suffered from an impairment of 20% of their values. 7. Dividend payments by Gandalf are £144,000,000 and by Bilbo are £40,000,000. These are included in investment income in the statement of profit and loss for the accounting period ending 31st December 2021. The rest of investment income is dividends received from nongroup companies. Requirements: a) The accountant who posted Gandalf's sales in Note 1 is now worried that they treated this incorrectly. They come to you asking for help. Prepare a brief note for them showing the correct treatment and explaining why the correct treatment is consistent with International Financial Reporting Standards. [20 marks, approximately 250 words] b) The Financial Director of Tauriel would like a report on how the four-year lease should be accounted for. Prepare a note containing the full calculation and explanation of your proposed treatment with reference to International Financial Reporting Standards. [20 marks, approximately 250 words] c) Adjusting for the above (where necessary) prepare a consolidated statement of financial position and consolidated statement of profit and loss. [30 marks]

Answer rating: 100% (QA)

a The correct treatment for the sales in Note 1 is to recognise the revenue when the units are delivered to the customer not when the contract is sign... View the full answer