Below is the Trial Balance for Voortex Ltd. (Voortex) at the financial year end 30 September 2019.

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Question:

Below is the Trial Balance for Voortex Ltd. (“Voortex”) at the financial year end 30 September 2019. Voortex operates as a wholesaler of goods, selling mostly on credit.

VOORTEX LTD.

Trial Balance as at 30 September 2019

DR CR

£000 £000

Ordinary share capital (Nominal value £5) 4,600 Share premium 2,645 Retained earnings at 30 September 2018 2,791 Land 4,525

Buildings (B) 1,400 Plant & machinery (P&M) 7,500 Intangibles - Website development (WD) 336 Provision for depreciation - B at 30 September 2018 225

Provision for depreciation – P&M at 30 September 2018 4,800 Provision for amortisation - WD at 30 September 2018 112 Provision for environmental clean-up at 30 September 2018 57 Provision for bad debts at 30 September 2018 82 Inventory at 30 September 2018 3,283

Trade receivables 2,600 Trade payables 1,375 Bank overdraft 256 Sales 37,371 Purchases 23,715 Rent expense 2,235 Other operating expenses 8,479 Interest expense 11 Dividend paid 230 54,314 54,314

Additional Information:

The following additional information provides further details about some items appearing on the trial balance, as well as information required to record period-end adjustments:

1. The inventory at 30 September 2019 has been counted and valued at £3,752,000 2. The following information relates to the non-current assets:

a) The company uses the revaluation model to value Land. All the land has recently been independently valued and in total the land valuation has increased by £1,275,000.

b) Buildings are expected to have a useful life of 20 years and a residual value of £500,000 c) Plant & machinery is depreciated using the declining balance method at 40%.

d) The initial costs relating to the development of the company’s website have been capitalised and are being spread over a period of 3 years.

3. The rent expense includes an amount of £510,000 which was paid on 1 September 2019 for the period September – November 2019.

4. Some operating expenses, totalling £275,000, have been incurred during September 2019 but as no invoices have as yet been received from the suppliers, these have not been recorded in the accounting records.

5. A review of the existing provision for costs relating to the environmental clean-up (which will be carried out in 2023) was carried out and the provision amount is considered to be understated and should be increased by £17,000

6. An analysis of the trade receivables balance has been carried out and it is estimated that 4% of this balance will not ultimately be received.

7. The company does not have any bank loans but has used up all its cash balances during the year. The bank agreed to allow Voortex an overdraft facility and interest charges relating to the overdraft have all been paid. The company intends to sell a number of plots of land early in 2020 and this will generate a significant cash inflow.

8. The taxation charge for the year is estimated at £950,000

9. A dividend of 25p per share was paid during the year (and has been correctly recorded)

REQUIRED:

a) From the additional information provided, prepare the necessary journal entries to record any period-end adjustments required.

b) Prepare an Income Statement for the year ended 30 September 2019 AND a Statement of Financial Position (in total assets format) at that date.

c) The Financial Control team have been reviewing these draft financial statements and there is some concern that the profit figure seems higher than was expected. There is some concern that the sales figure includes items of deferred revenue. In the context of this

business, what does this term mean AND if this were the case, how would it affect the financial statements you have prepared if this is corrected?

d) A major shareholder (David, a close family member of the managing director but with no involvement in the business and no finance/accounting expertise) has commented that the figure showing for Total Equity in the financial statements represents only about 25% of what he believes the company is “worth”. In the context of this business, explain how the financial statements’ equity figure and the perceived “worth” of the business may differ.