Hazzizzi Ltd Trial balance as at March 31, 2023

Trade receivables 22,800,000

Trade payables 6,100,000

Provision for bad debt 7,600,000

Bank 2,100,000

Cash in hand 928,000

Petty cash 203,000

Interest income 4,700,000

Dividend income 2,600,000

Royalties 1,900,000

Contingent liability 17,300,000

Revenues 3,277,000,000

Land 177,800,000

Building 812,000,000

Motor vehicles 129,300,000

Fixtures and fittings 46,100,000

Machinery 166,200,000

Equipment 53,400,000

Accumulated depreciation: Building 81,900,000

Accumulated depreciation: Motor vehicles 21,400,000

Accumulated depreciation: Fixtures and fittings 7,900,000

Accumulated depreciation: Machinery 43,300,000

Accumulated depreciation: Equipment 15,900,000

6% Redeemable preference share capital 41,300,000

9% Irredeemable preference share capital 15,500,000

Ordinary share capital 222,000,000

Share premium 17,100,000

Revaluation reserves 39,800,000

General reserves 6,400,000

Retained earnings 5,900,000

Cost of sales 1,868,000,000

Administrative expenses 327,900,000

Distribution costs 116,600,000

Other operating expenses 216,400,000

Miscellaneous expenses 47,667,500

12% Mortgage 604,000,000

8% Bank loan 109,300,000

15% Debenture 72,500,000

Mortgage interest payment 36,200,000

Closing inventory 21,600,000

Deferred tax asset 7,700,000

Overprovision of tax 3,400,000

Goodwill 48,300,000

Patent 131,000,000

Trademark 20,700,000

Copyright 9,800,000

Accumulated amortisation: Patent 26,700,000

Accumulated amortisation: Trademark 10,767,500

Accumulated amortisation: Copyright 731,000

Research and development costs 404,500,000

The following details are deemed relevant to the preparation of the draft financial statements which are to be presented to the entity’s auditors:

Property, plant and equipment

Subsequent to a revaluation exercise which took place on March 31, 2023, the land had a fair value of $226 million, while the building had a fair value of $971 million. The building is depreciated evenly over thirty years to a nil residual value, with the charges allocated in a 3:1 ratio between administrative expenses and cost of sales. There have been no adjustments made for the revaluations in the current period, and their effects have not been included in the accumulated temporary differences noted below. The capital allowances granted on the building to date are equivalent to the accumulated depreciation charged against it.

Four months into the financial year, the entity bought a motor vehicle for $13.2 million, but inadvertently recorded the debit to miscellaneous expenses. Motor vehicles are depreciated on a straight line basis over eight years to a nil residual value. All depreciation charges on motor vehicles are to be allocated to distribution costs.

Additionally, management bought a conveyor system costing $18.1 million halfway through the financial year, which it is yet to record in the books. The system is comprised of two components: one of which has a useful life of 24 years, while the other component has to be replaced every six years. The latter component accounts for 8% of the total cost of the system. Associated depreciation charges are allocated in full to distribution costs.

Fixtures and fittings and machinery are to be depreciated 9% on the reducing balance and 12% on cost respectively, while equipment is to be depreciated over eight years on a straight line basis down to a residual value of 10% of cost. The depreciation on fixtures and fittings is charged to other operating expenses, while for machinery as well as equipment, depreciation charges are allocated equally between cost of sales and administrative expenses.

During the year, management commenced processes to sell all of its existing machinery to facilitate a major upgrade project. The sale was deemed highly probable effective July 1, 2022 when a buyer was identified. The items have a combined fair value of $107 million, with disposal costs amounting to $4.4 million. Any impairment or gain on the transaction should be recognised in other operating expenses.

Included in miscellaneous expenses is a lease payment which relates to the rental of manufacturing equipment with a remaining useful life of three years. The agreement commenced on April 1, 2022, and requires that a total of five annual payments of $8.1 million are made – an eighth of which relates to maintenance expenses, and another 5% of which is attributable to insurance expenses. Maintenance and insurance expenses are ordinarily classified as other operating expenses. The lease agreement also speaks to a guaranteed residual value of $0.96 million, and permits the extension of the lease by an additional two years. Management is confident that the company should receive the intended benefits from the leased asset within the agreed period, which would negate the need to extend the contract. The incremental borrowing rate is 7%, while the interest rate implicit in the lease is 400 basis points higher.

The $8.1 million payment debited to miscellaneous expenses is the only record of the lease transaction that has been made to date. Also debited to miscellaneous expenses is $1.1 million for legal fees incurred to draft the lease agreement on April 1, 2022, while a lease incentive of $490,000 which was received by cheque has yet to be recorded.

Depreciation on the right of use asset is to be shared equally between cost of sales, administrative expenses, and other operating expenses. The entity prefers to show the leased asset separately within its property, plant and equipment for presentation purposes.

Intangible assets

Goodwill is to be impaired by 14%, with the impairment charged to other operating expenses. The patent is to be amortised over 16 years to a nil residual value, with the amortisation charged to other operating expenses, while the trademark and copyright are both amortised over a 18-year period, with charges going to cost of sales.

On February 28, 2023, the entity acquired a brand for $64 million, but the transaction has not yet been recorded or otherwise accounted for in the books. The brand should be fully amortised over a 26-year period, with charges going to cost of sales and time-apportioned as necessary.

Of the total R&D cost on record, 45% relates to research cost, while the balance relates to development. Five-eighths of the amount recognised as development cost was incurred between September 1, 2022 to November 30, 2022. The product achieved commercial feasibility on December 1, 2022. Any capitalised development cost is to be amortised over fifteen years and charged to cost of sales, with time apportionment where necessary. Any non-capitalised research and development cost should be charged to other operating expenses.

Other liabilities

The contingent liability reflected in the trial balance relates to a customer lawsuit for which the chance of payout has been deemed as possible by the entity’s attorneys. The amount was recorded in other operating expenses. The entity’s attorneys have also advised that another lawsuit with which the company is currently faced has a probable chance of payout of $2.9 million. This amount has not been accounted for. Similar transactions are usually recorded in other operating expenses. Neither of these transactions will have an effect on the accumulated temporary differences noted below.

Debt instruments

On April 1, 2022, the company issued an 8% convertible debenture, a 0% loan note, and a 5.65% debenture with effective interest rates of 12%, 4%, and 7.78% respectively.

The convertible debenture has a nominal value of $313 million and is redeemable at the end of the fourth year, while the loan note has a nominal value of $375 million, was issued at a 7.2% discount with issue costs of $2.791 million, and is redeemable after five years at a 12% premium. The regular debenture has a nominal value of $120 million and is redeemable after 3 years at an 6.9% premium.

Only the coupon payment relating to the convertible debt instrument – which was incorrectly debited to miscellaneous expenses – has been recorded so far; all other relevant journal entries across the three debt issues remain unrecorded. Additionally, there are interest sums for the existing debt obligations reflected in the trial balance that remain unaccounted for at the year end.

Equity and reserves

The par value of each ordinary share is $0.60. On the first day of the financial year, the entity decided to make a bonus issue of three new shares for every ten existing shares held. Subsequently, there was a two for thirteen rights issue on October 31, 2022 at $1.24 per share. The market price per share at that date was $2.38. The bonus and rights issues have not yet been recorded. In the case of the bonus issue, management’s preference is to preserve the retained earnings balance insofar as is possible. Additionally, the revaluation reserve may be used only to the extent that other reserves have been exhausted.

Dividends on the preference shares are currently unpaid and remain unaccounted for at the year end. An interim ordinary dividend amounting to $3.3 million was paid on January 1, 2023, but this is yet to be recorded. A further final ordinary dividend was declared on March 31, 2023 for $0.02 per share held as at that date; this too is yet to be accounted for. The declared dividends were paid on August 1, 2023.

A sum of $4.8 million is to be transferred from accumulated profits to the general reserves.

Trade receivables

Of the trade receivables figure currently reported, $1.7 million relates to a receivables balance that was already paid by the customer during the prior period, but the payment was never accounted for as the monies were stolen by an accounting clerk who has gone into hiding since. The tax effect on any adjustment to be made is to be ignored.

The provision for bad debt is to be revised to 9% of the adjusted trade receivables balance. Adjustments relating to receivables are ordinarily recorded in administrative expenses.

Discontinued operations

Included in administrative expenses is the net result of a discontinued operation. An entire division with assets costing $519 million and accumulated depreciation of $322 million was sold for $108 million. In addition to the sale, the entity also incurred redundancy costs of $20.3 million. The now discontinued operation made profits of $111 million before accounting for the cost of redundancies and the sale of its assets as outlined above. The appropriate taxes on the profits for this segment were already accounted for. Inventory A final inventory count on March 31, 2023 revealed that $4.1 million worth of inventory at cost had not yet been recorded. Of that amount, 3% was found to be obsolete and should be written off. Inventory purchases are ordinarily recorded in cost of sales, but any write-offs are charged to other operating expenses.

Other income

For interest income, the amount shown in the trial balance represents only a half of the amount earned for the year, while royalties earned but not yet received amount to $5.4 million.

Taxation Taxable profits reported for the current year of assessment amounted to $419 million. The overprovision on the trial balance above relates to prior year taxes which have since been paid. The entity has accumulated taxable temporary differences of $105 million, which does not include the effect of the revaluations on property, plant and equipment. The deferred tax asset currently reflected in the trial balance arose solely from transactions charged to the statement of profit or loss

. The current corporation tax rate is 30%. 

REQUIRED:

a) Prepare the statement of profit or loss and other comprehensive income for the year ended March 31, 2023 

b) Prepare the statement of changes in equity for the year ended March 31, 2023

c) Prepare the statement of financial position as at March 31, 2023

d) Calculate the basic earnings per share for the year ended March 31, 2023 NB. The EPS calculations should take into account the impact of any additional shares issued during the year.

e) Prepare all relevant workings and explanations, including, but not limited to:

 ▪ comprehensive listing of ALL journal entries 

▪ a fixed assets schedule 

▪ an intangible assets schedule 

▪ an expense schedule 

▪ all other appropriate supporting calculations NB. The journal entries listing is to be shown separately from the remaining workings and schedules.

Answer rating: 100% (QA)

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