You’re acting as a financial reporting consultant for a client called Parkway who operates a chain of cinemas. Parkway’s year end is 31 December 2021 and they have sent you the following email asking for advice. Hello, I need your help with some issues which have arisen I need your advice on.

EPS

Our profit after tax the year was £2,600,000, we have had a number of various share issues in the year, so calculating Earnings Per Share (EPS) is a little complicated. We started the year with 1,000,000 ordinary shares. On 1st March 2021 we made a normal share issue of 500,000 shares at £2.00 each. On 1 October 2021 we made a 1 for 5 rights issue at £1.50 per share, when the prevailing market rate was £1.80 per share. Our unadjusted EPS last year was 145.6pence. Can you calculate our EPS and adjusted prior year EPS?

Lease of a new cinema

On 1st January 2021 we entered into an 8 year lease for a new cinema. We paid a deposit of £150,000. There will be subsequent annual rental of £80,000 payable in arrears on the 31 st December each year. We expect to use the cinema for the full 8 years. Legal fees of £15,000 were incurred in securing this lease and marketing campaign to launch this new cinema has cost £10,000 On 1st January 2021 the present value of the future lease payments (excluding deposits or initial payments) is £426,794 based on an effective rate of interest of 10%. We’re unsure of the initial and subsequent accounting treatment.

Closure of Scottish Operations

In addition we have decided to close down our Scottish operations in September 2021 which previously would contribute a significant profit after tax of £100,000 per year. How should this be accounted for and how would this treatment differ under UKGAAP?

Requirement:

Reply to the email from the client, providing an explanation of the accounting and reporting treatment and where relevant any calculations required.

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Answer rating: 100% (QA)

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