The following trial balance has been extracted from the records of Flora Plc (Flora) as at 31 May 2020:

	£'000		£'000
Revenue			103,500
Inventories	16,150
Trade and other receivables	17,800
Trade and other payables			14,900
Bank overdraft			2,900
Cost of sales	72,840
Administrative expenses	14,750
Distribution costs	7,970
Finance costs	1,890
Property, plant and equipment (note (i))	44,600
Ordinary share capital (£1)			5,000
Share premium			12,000
8% Loan notes			18,000
6% Bank loan			10,000
Dividend	900
Retained earnings			10,600
	176,900		176,900

The following information is also relevant:

1. Flora received a £10 million 6% loan from a bank on 1 December 2019. The funds which were used towards the construction of a new property have been correctly capitalised as part of the property, plant & equipment above. Six months interest has been paid and is included within finance costs in the trial balance. Construction of the property was incomplete at the financial year end and is expected to be completed in September 2020.

Flora decided to revalue an item of property on 1 June 2019 for the first time. The carrying amount of the asset at this date was £4.3 million (included in property, plant and equipment above). The directors accepted the report of an independent surveyor who valued the property at £5.1 million on that date. The remaining life of this property is 20 years at the date of the revaluation. It is Flora’s policy to make an annual transfer to retained profits in respect of the excess depreciation arising from the revaluation surplus. No adjustments have been made relating to this property during the year.

Apart from the notes above, all other assets have been correctly accounted for and included in property, plant & equipment in the trial balance. No further adjustments are required in respect of these.

2. Development costs of £9 million were incurred evenly between 1 June 2019 and 28 February 2020 (on a pro-rata basis) and have been included in cost of sales. IAS 38 development criteria were met on 1 September 2019. The project was completed and the product was launched on 28 February 2020. The product is expected to generate revenue over the next five years.

3. Flora sold and delivered goods to a major customer on 1 December 2019. Under the terms of the agreement, Flora will receive payment of £3 million on 30 November 2020. Flora has recorded £3 million in revenue and trade receivables at 31 May 2020. The costs of this sale have been accounted for correctly in the financial statements for the year ended 31 May 2020. Market rates of interest available to this particular customer are 7%.

4. An inventory count was performed at the year-end and has been included in the trial balance at cost. Included in this count is some inventory that was damaged. This inventory originally cost £800,000. Following the damage it is expected that the inventory will be sold for £900,000 but will need to be repaired before it can be sold at a cost of £230,000.

5. On 16 March 2020 a legal claim was made against Flora by an ex-employee. Flora’s lawyers believe that there is a 75% chance that Flora will lose the case and pay damages of £95,000. They also believe that there is a 15% chance that the payout will be £120,000 and a 10% chance that the case will be dismissed. The case is due to go to court in September 2020.

6. A tax estimate of £1.8 million for the year ended 31 May 2020 is required.

REQUIRED:

1. Justify and explain the appropriate accounting treatment with respect to the matters in notes (i) to (v) in accordance with relevant International Financial Reporting Standards (IFRS) and the IFRS Conceptual Framework for Financial Reporting.

2. Using the above trial balance and your accounting treatment outlined in part (a) prepare a statement of profit or loss and other comprehensive income, a statement of financial position and a statement of changes in equity for Flora for the year ended 31 May 2020.

Answer rating: 100% (QA)

Answer Part 1 income statement Income statement for the year ended on 29th feb 2019 Net Sales Reve... View the full answer