Qasi’s plc is a company which maufactures cakes and bakery products for wholesale to supermarkets and independent bakers. Its’ trial balance at 31^st March 2018 is shown below:

	Notes	£’000	£’000
Administrative expenses		80
Cash and cash equivalents		25
Cost of goods sold		420
Distribution costs		65
Equity dividend paid		80
Inventory at 31st March 2018		115
Land market value 31st March 2017	i	700
Long term borrowings	vii		200
Equity shares £1 each, fully paid at 31st March 2018	vi		600
Property plant and equipment at cost 31st March 2017	iii	500
Provision for deferred tax at 31st March 2017	ii		35
Provision for property plant and equipment depreciation at 31st March 2017	iv		140
Research and Development	ix	60
Retained earnings at 31st March 2017			170
Revaluation reserve at 31st March 2017			5
Revenue			798
Share premium at 31st March 2018	vi		300
Suspense	iii		2
Taxation	v	10
Trade payables			40
Trade receivables	viii	235
		2,290	2,290

Additional information provided:

1. Land is carried in the financial statements at market value. The market value of the land at 31^st March 2018 was £725,000. There were no purchases or sales of land during the year.
2. The tax due for the year ended 31^st March 2018 is estimated at £21,000.

Deferred tax is estimated to increase by £15,000.

3. During the year Qasi disposed of old equipment for £2,000. No entry had been made in the accounts for this transaction except to record the cash received in the cash book and in the suspense account. The original cost of the equipment sold was £35,000 and its book value at 31^st March 2017 was £5,000.

4. Property plant and equipment is depreciated at 10% per year straight line. Depreciation of property plant and equipment is deemed to be part of cost of sales. Qasi’s policy is to charge a full year’s depreciation in the year of acquisition and no depreciation in the year of disposal.
5. The tax balance is the balance remaining after settling the liability for the year ended 31^st March 2017
6. On 30^th September 2017 Qasi had issued 200,000 equity shares at a premium of 50%
7. Long term borrowings consist of a loan taken out on 1^st April 2017 at 5% interest per year. No loan interest has been paid at 31^st March 2018
8. On 22^nd April 2017 Qasi discovered that Cuppins its’ largest customer had gone into liquidation. Qasi has been informed that it is very unlikely to receive any of the £15,000 balance outstanding at 31^st March 2018.
9. The balance on research and development was incurred developing a new type of dough which stays fresher for longer. The product is now being produced and sales commenced during the current year. It is expected to be sold profitably for 6 years.

Required:

1. The Finance Director of Donal Ltd is hoping that the business will be successful in its’ bid for a government grant of £100,000 towards the cost of new equipment which will be receivable in 2019. The expected life of the equipment is 10 years. He is proposing that this the full amount of £100,000 is credited to the profit and loss account in 2019.

2. Comment on this proposal in line with IAS 20 Government Grants and any relevant accounting concepts.

3. A non-accountant friend of yours is thinking of investing in Qasi Plc and is looking at the financial statements which you have just prepared. Provide him with a simple explanation of the purpose of the deferred tax provision as included in the financial statements linking your answer to any relevant accounting concepts

Answer rating: 100% (QA)

1The Finance Directors proposal is not in line with IAS 20 IAS 20 states that government grants shou... View the full answer