The directors of Kem Ltd. are reviewing the draft financial statements of the company for the year
Question:
The directors of Kem Ltd. are reviewing the draft financial statements of the company for the year ended 30 June 2021. Various matters relating to the financial statements required to be concluded before the financial statements are approved by the directors.
Required:
Explain how the following matters relating to the financial statements of Kem Ltd. should be dealt with, starting in each case the relevant accounting standard:
After the balance sheet date, one of the factories was damaged by fire. The insurance company has agreed to cover only parts of the loss. The company’s going concern is not affected.
Kem Ltd. guaranteed another company in 2019. No disclosure has been made in previous financial statements, but events in the latter part of 2021 suggest that the liability will fall on Kem Ltd. in the year ending 30 June 2022.
On 1 April 2021, Fino increased the operating capacity of its plant. Due to a lack of liquid funds it was unable to buy the required plant which had a cost of $350,000. On the recommendation of the finance director, Fino entered into an agreement to lease the plant from the manufacturer. The lease required four annual payments in advance of $100,000 each commencing on 1 April 2021. The plant would have a useful life of four years and would be scrapped at the end of this period. The finance director, believing the lease to be an operating lease, commented that the agreement would improve the company’s return on capital employed (compared to outright purchase of the plant).
Required:
Prepare extracts of Fino’s income statement and balance sheet for the year ended 30 September 2021 in respect of the rental agreement assuming:
It is an operating lease.
