Group discussion 2: The financial statements of K22-CFAB Ltd for the year ended 30

September 2017 are being prepared. The following balances have been extracted from
the nominal ledger of K22-CFAB Ltd at 30 September 2017.
Notes £
Sales 2 1,284,300
Purchases 627,200
Administrative expenses 6 347,690
Distribution costs 129,400
Land and buildings 4
Cost (land £200,000) 950,000
Accumulated depreciation at 30 September 2016 142,500
Plant and machinery 4, 5
Cost 265,000
Accumulated depreciation at 30 September 2016 156,455
Retained earnings at 30 September 2016 83,885
5% £10 convertible bonds 8 400,000
Ordinary share capital (£1 shares) 200,000
Cash at bank 1,950
Inventories at 30 September 2016 41,500
Trade and other receivables 32,500
Trade and other payables 152,300
Finance costs 8 20,000
Taxation 9 4,200

Notes
1 Inventories at 30 September 2017 have been correctly valued at 35,200
2 On 4/1/2017 K22-CFAB Ltd entered into an 18 month contract to provide advertising
services to one of its customers for 27000. K22-CFAB Ltd will display the customer's
advertising on the side of its delivery vans over the 18 months period. The full 27000
was received on 4/1/2017 and was debited to cash and credited to sales.
3 On 2 October 2017 K22-CFAB Ltd received an invoice for 150000.00 from its internet
provider. The invoice was for an annual service contract for the 12 months commencing
7/1/2017 The invoice had not been recorded in the nominal ledger, nor had it been
accrued for at 9/30/2017
4. No adjustments have been made for depreciation for the year ended 30 September
2017. Freehold buildings are depreciated at 2.5% pa on a straight-line basis and plant
and equipment is depreciated on a reducing balance basis at a rate of 20% pa unless
indicated otherwise. All costs associated with property, plant and equipment should be
recognised in cost of sales.
5. On 1 October 2016 equipment with a carrying amount of 11,000 was damaged,
although the equipment is still being used. On 1 October 2016, following the damage,
the equipment had an estimated remaining useful life of 2 years, a value in use of 6,500
and a fair value of 7,200 with costs to sell of 500. No accounting entries have been
made for the year ended 30 September 2017 in respect of this equipment.
6. On 1 October 2016 K22-CFAB Ltd entered into a contract for a right to use a machine
for five years, the contract met the definition of a lease under IFRS 16. The terms of the
agreement require 5 annual payments of 7500, in arrear, with the first payment due on
30 September 2017. The first payment was duly paid on that date, being credited to cash
and debited to administrative expenses. No other entries have been made in respect of
this transaction. The present value of the minimum lease payments was equivalent to
fair value. The interest rate implicit in the lease is 8%
7. On 15 July 2017 K22-CFAB Ltd purchased inventories from an overseas supplier
for €140000, correctly recording the transaction at that date, but making no further
adjustments. At 30 September 2017 the invoice was unpaid and the inventories were
still held by K22-CFAB Ltd. The spot exchange rates were as follows:
15 July 2017 €1: £0.90
30 September 2017 €1: £0.95
8. On 1 October 2016 K22-CFAB Ltd issued 40,000 5% £ 10 convertible bonds at par,
debiting cash and crediting convertible bonds. On 30 September 2020 each bond can be
redeemed for cash at par or converted into two ordinary shares. The interest due on the
bonds was paid on 30 September 2017, credited to cash and debited to finance costs.
The equivalent effective interest rate on similar bonds without the conversion rights is
8% pa.
9. The income tax liability for the year ended 30 September 2017 was estimated at
£19,000 and was not recorded in the nominal ledger. The balance shown in the nominal
ledger relates to an additional payment made in July 2017 in respect of the prior year.
Requirements
1 Prepare the statement of profit or loss for K22-CFAB Ltd for the year ended 30
September 2017 and a statement of financial position as at that date, in a form suitable
for publication.
2. The concept of substance over form is implied within faithful representation, one of
the qualitative characteristics of the IASB's Conceptual Framework. Explain the concept
of substance over form and how it should be applied to the transactions described in
Notes 6 and 8.
GROUP DISCUSSION 2 – SOLUTION
Arenas Ltd – Statement of profit or loss for the year ended 30 September 2017

£
Revenue (W3) 1,266,300
Cost of sales (W1) -685,398
Gross profit 580,902
Administrative expenses (W1) -384,690
Distribution costs (W1) -129,400
Operating profit 66,812
Finance costs (W6+W4) -31,216
Profit before tax 35,596
Income tax -23,200
Profit for the year 12,396

Statement of financial position as at 30 September 2017

ASSETS
Non-current assets
Property, plant and equipment (W5) 870,136
ROU 23,956
Current assets
Inventories 35,200
Trade and other receivables 32,500
Cash and cash equivalents 1,950 69,650
Total assets 963,742
EQUITY AND LIABILITIES
Equity
Ordinary share capital 200,000
Other share reserve (equity component of convertible
39,746
bond)
Retained earnings 96,281 336,026

Non-current liabilities
Lease liabilities 19,328
Convertible bond (W6) 369,075 388,403

Current liabilities
Trade and other payables 196,800
Deferred income (W3) 18,000
Lease liability 5,513
Taxation 19,000 239,313
Total equity and liabilities 963,742

WORKINGS
1. Allocation of cost
Cost of sales Admin expenses Distribution cost
£ £ £
Draft 627,200 347,690 129,400
Opening inventories 41,500
Closing inventories -35,200
Depreciation charges (W5) 47,598
Impairment (W5) 4,300
Exchange loss (W2) 7,000
Internet invoice 37500
Lease payment -7,500
685,398 384,690 129,400

2. Foreign exchange
Translation at 15 July 2017 126000

Translation at 30 September 2017 133,000

Exchange gain/(loss) -7,000

3. Revenue adjustment
Deferred income 18,000

4. Lease and ROU

1 Oct b/f Interest Payment 30 Sept c/f
£ £ £ £
29,945 2,396 -7,500 24,841
24,841 1,987 -7,500 19,328

ROU
Initial recognition 29,945
Depreciation -5989
Carrying amount 23,956

5. PPE
Land &
Plant & equipment
buildings
£ £
Opening balances – cost 950,000 265,000
Accumulated depreciation -142,500 -156,455
807,500 108,545
Depreciation - Land and building -18,750
Depreciation - Plant and equipment 19509
Depreciation on impaired asset 3350 -22859
Impairment -4,300
788,750 81,386

6. Convertible bonds
Cash flow
£
30-Sep-17 20,000
30-Sep-18 20,000
30-Sep-19 20,000
30 September 2020 ( Redemption) 420,000
PV of interest 66,243
PV of principal 294,012
Liability component 360,254
Equity component (bal fig) 39,746
Total 400,000
CASE 2 – SOLUTION
Arenas Ltd – Statement of profit or loss for the year ended 30 September 2017

£
Revenue (W3) 1,248,300
Cost of sales (W1) -680,710
Gross profit 567,590
Administrative expenses (W1) -383,090
Distribution costs (W1) -129,400
Operating profit 55,100
Finance costs (W6+W4) -31,337
Profit before tax 23,763
Income tax -22,200
Profit for the year 1,563

Statement of financial position as at 30 September 2017

ASSETS
Non-current assets
Property, plant and equipment (W5) 875,136
ROU 25,205
Current assets
Inventories 35,200
Trade and other receivables 32,500
Cash and cash equivalents 1,950 69,650
Total assets 969,991
EQUITY AND LIABILITIES
Equity
Ordinary share capital 200,000
Other share reserve (equity component of convertible bond) 38,877
Retained earnings 85,448 324,325

Non-current liabilities
Lease liabilities 20,503
Convertible bond (W6) 369,624 390,128

Current liabilities
Trade and other payables 195,800
Deferred income (W3) 36,000
Lease liability 5,738
Taxation 18,000 255,538
Total equity and liabilities 969,991
WORKINGS
1. Allocation of cost
Cost of Admin
Distribution cost
sales expenses
£ £ £
Draft 627,200 347,690 129,400
Opening inventories 41,500
Closing inventories -35,200
Depreciation charges (W5) 43,110
Impairment (W5) 4,100
Exchange loss (W2) 6,000
Internet invoice 37500
Lease payment -8,100
680,710 383,090 129,400
2. Foreign exchange
Translation at 15 July 2017 142500
Translation at 30 September 2017 148,500
Exchange gain/(loss) -6,000

3. Revenue adjustment
Deferred income 36,000

4. Lease and ROU

1 Oct b/f Interest Payment 30 Sept c/f
£ £ £ £
31,506 2,836 -8,100 26,242
26,242 2,362 -8,100 20,503
ROU
Initial recognition 31,506
Depreciation -6301
Carrying amount 25,205

5. PPE
Land &
Plant & equipment
buildings
£ £
Opening balances – cost 950,000 265,000
Accumulated depreciation -142,500 -156,455
807,500 108,545
Depreciation - Land and building -15,000
Depreciation - Plant and equipment 19509
Depreciation on impaired asset 2300 -21809
Impairment -4,100
792,500 82,636
6. Convertible bonds
Cash flow
£
30-Sep-17 24,000
 30-Sep-18 24,000
30-Sep-19 24,000
30 September 2020 ( Redemption) 424,000
PV of interest 77,753
PV of principal 283,370
Liability component 361,123
Equity component (bal fig) 38,877
Total 400,000
30-
1-Oct-16 Interest Payment
Sep-17
£ £ £ £
361,123 32,501 -24,000 369,624