Exhibit 1: Metalwise plc draft financial statement extracts

Draft summary statement of comprehensive income for the year ended 31 December 2020

		000
Revenue		617,000
Cost of sales		(450,000)
Gross profit		167,000
Operating expenses		(120,761)
Operating profit		46,239
Finance costs		(6,500)
Profit before tax		39,739
Income tax expense (To be completed)		-
Profit for the year		39,739
Other comprehensive income (To be completed)		-
Total comprehensive income		39,739

Draft statement of financial position as at 31 December 2020

			000
ASSETS
Non-current assets
Property, plant and equipment (Exhibit 3 Issue 1)			100,000
Intangible			10,000
Investment (Exhibit 3 Issue 2)			8,000
			118,000
Current assets
Inventories			93,062
Trade receivables			35,035
Financial asset			50
Cash and cash equivalents			8,322
			136,469
Total assets			254,469
EQUITY AND LIABILITIES
Share capital and share premium			100,000
Retained earnings			65,339
Other reserves
			165,339
Long-term liabilities
Long-term bank borrowings			35,010
Deferred tax Balance at 1 January 2020 (Exhibit 3 Issue 3)			16,000
			51,010
Current liabilities
Trade and other payables			38,020
Current tax payable (Exhibit 3 Issue 3)			100
			38,120
Total equity and liabilities			254,469

Required:

1. For Issue 1 Revaluation of land and Issue 2 Investment,

• explain the appropriate financial reporting treatment making reference to relevant accounting standards; and
• set out the accounting adjustments required to correct the financial statements for Metalwise plc for the year ended 31 December 2020.

Maximum words for part a) = 450

(10 marks)

I have not made any adjustments for the following issues: Issue 1 Revaluation of Land Included in the balance for PPE is a plot of land. The land has been revalued at 31 December 2020 to 30 million. The directors have decided to include this revaluation of land in the statement of financial position but I have not put through the journal entries to recognise the revaluation. Issue 2 Investment 8,000,000 On 1 February 2020, Metalwise bought 200,000 shares of the issued ordinary share capital of KKL plc, a listed company. Each share cost 40 and this investment, which represents a 10% shareholding, is a long-term investment in KKL plc. Metalwise incurred legal fees and brokers fees when it made this investment. Issue 3 Deferred tax liability brought forward and PPE timing difference At 1 January 2020, the deferred tax liability is recognised at 16 million in the statement of financial position and no adjustments have been made to this figure in the draft financial statements at 31 December 2020. The deferred tax liability arises solely in relation to the difference between the carrying amount of plant and machinery and its tax base. The carrying amount of this plant and machinery on 1 January 2020 was 95 million, and its tax base was 15 million. Depreciation is disallowed for tax purposes and a claim for tax depreciation is made each year in calculating the current tax liability for the company. There were no additions or disposals of plant and machinery. On 30 September 2020 Metalwise paid the current tax liability it owed for the year ended 31 December 2019. The balance on the current tax liability on the statement of financial position at 31 December 2020 represents an over provision in respect of the year ended 31 December 2019. I have not calculated the current tax or the deferred tax movement for the year ended 31 December 2020. You will be required to calculate the current and deferred tax liabilities for the year ended 31 December 2020 and to recommend the correct financial reporting treatment for the above issues. Additional information about these issues and the tax rules for the jurisdiction in which Metalwise operates will be provided on Thursday 18th March 2021. The relevant tax rate is 20%. Advance information - Issue 1 Revaluation of Land Included in the balance for PPE is a plot of land. The land has been revalued at 31 December 2020 to 30 million. The directors have decided to include this revaluation of land in the statement of financial position but I have not put through the journal entries to recognise the revaluation. Additional information The cost of the land included in the PPE on the statement of financial position at 31 December 2020 is 5 million. In the tax jurisdiction where Metalwise operates, gains on land are not taxable in any future periods. Advance information - Issue 2 Investment 8,000,000 On 1 February 2020, Metalwise bought 200,000 shares of the issued ordinary share capital of KKL plc, a listed company. Each share cost 40 and this investment, which represents a 10% shareholding, is a long-term investment in KKL plc. Metalwise incurred legal fees and brokers fees when it made this investment. Additional information Legal and brokers fees (transaction costs) of 500,000 are included in finance costs in the statement of profit or loss for the year ended 31 December 2020. The directors have not made an irrevocable election to classify the investment as at fair value through OCI. At 31 December 2020, the fair value of one share in KKL plc was 65 per share In the tax jurisdiction where Metalwise operates gains arising on equity instruments are taxed at 20% only when the shares are sold. Transaction costs in relation to the acquisition of shares are allowed as a tax deduction. Advance information Issue 3 Deferred tax liability brought forward and PPE timing difference At 1 January 2020, the deferred tax liability is recognised at 16 million in the statement of financial position and no adjustments have been made to this figure in the draft financial statements at 31 December 2020. The deferred tax liability arises solely in relation to the difference between the carrying amount of plant and machinery and its tax base. Advance information Issue 3 Deferred tax liability brought forward and PPE timing difference At 1 January 2020, the deferred tax liability is recognised at 16 million in the statement of financial position and no adjustments have been made to this figure in the draft financial statements at 31 December 2020. The deferred tax liability arises solely in relation to the difference between the carrying amount of plant and machinery and its tax base. The carrying amount of this plant and machinery on 1 January 2020 was 95 million, and its tax base was 15 million. Depreciation is disallowed for tax purposes and a claim for tax depreciation is made each year in calculating the current tax liability for the company. There were no additions or disposals of plant and machinery. On 30 September 2020 Metalwise paid the current tax liability it owed for the year ended 31 December 2019. The balance on the current tax liability on the statement of financial position at 31 December 2020 represents an over provision in respect of the year ended 31 December 2019. I have not calculated the current tax or the deferred tax movement for the year ended 31 December 2020. Additional information The depreciation charge on PPE for the year ended 31 December 2020 was 15 million. This charge included 2 million depreciation on a building. No tax depreciation is available for buildings but Metalwise can claim 5 million tax depreciation for PPE for the year ended 31 December 2020. On 1 April 2020, Metalwise bought the rights to a metal alloy process, an intangible asset. The carrying amount of this intangible asset is included on the statement of financial position at 31 December 2020 at 10 million. The intangible cost 14 million and amortisation of 4 million has been included in the statement of profit or loss. This is the correct financial reporting treatment for this asset. The tax treatment for intangibles in the tax jurisdiction where Metalwise operates permits a full tax deduction for the full cost of the intangible asset in the year that it is purchased. For all other income and expenses the treatment for accounting profit and taxable profit are the same except for those differences identified above. The tax rate is 20% b) Including your recommended adjustments from part a) and the advance and additional information for Issue 3, calculate the current and deferred tax liabilities for Metalwise plc for the year ended 31 December 2020. Set out the journals to adjust the statement of comprehensive income and the statement of financial position. (20 marks) c) Prepare a revised statement of comprehensive income and statement of financial position for Metalwise plc for the year ended 31 December 2020 which reflects your adjustments for a) and b) above. You must show your workings. You may use the worksheet provided (20 marks)