Cash flows from capitalising development costs

Hello Sir, Please clarify the following items of cash flows: - Capitalising development costs -Do we have to add it or substract it in investing activities and why - Gain from revaluation of property -in which cash flow it has to go .Do we have to deal with it like the gain of sale of assets like the case in the following question Thanks, ------------------------- Q MOSTON Walk in the footsteps of a top tutor The following trial balance extracts (i.e. it is not a complete trial balance) relate to Moston as at 30 June 20X5: $000 $000 Revenue 113,500 Cost of sales 88,500 Research and development costs (note (i)) 7,800 Distribution costs 2,800 Administrative expenses (note (iii)) 6,800 Loan note interest and dividends paid (notes (iii) and (v)) 5,000 Investment income 300 Equity shares of $1 each (note (v)) 30,000 5% loan note (note (iii)) 20,000 Retained earnings as at 1 July 20X4 6,200 Revaluation surplus as at 1 July 20X4 3,000 Other components of equity 9,300 Property at valuation 1 July 20X4 (note (ii)) 28,500 Plant and equipment at cost (note (ii)) 27,100 Accumulated depreciation plant and equipment 1 July 20X4 9,100 The following notes are relevant: (i) Moston commenced a research and development project on 1 January 20X5. It spent $1 million per month on research until 31 March 20X5, at which date the project passed into the development stage. From this date it spent $1.6 million per month until the year end (30 June 20X5), at which date development was completed. However, it was not until 1 May 20X5 that the directors of Moston were confident that the new product would be a commercial success. Expensed research and development costs should be charged to cost of sales. (ii) Non?current assets: Moston’s property is carried at fair value which at 30 June 20X5 was $29 million. The remaining life of the property at the beginning of the year (1 July 20X4) was 15 years. Moston does not make an annual transfer to retained earnings in respect of the revaluation surplus. Ignore deferred tax on the revaluation. Plant and equipment is depreciated at 15% per annum using the reducing balance method. No depreciation has yet been charged on any non?current asset for the year ended 30 June 20X5. All depreciation is charged to cost of sales. (iii) The 5% loan note wasissued on 1 July 20X4 at its nominal value of $20 million incurring direct issue costs of $500,000 which have been charged to administrative expenses. The loan note will be redeemed after three years at a premium which gives the loan note an effective finance cost of 8% per annum. Annual interest was paid on 30 June 20X5. (iv) A provision for current tax for the year ended 30 June 20X5 of $1.2 million is required, together with an increase to the deferred tax provision to be charged to profit or loss of $800,000. (v) Moston paid a dividend of 20 cents per share on 30 March 20X5, which was followed the day after by an issue of 10 million equity shares at their full market value of $1.70. The share premium on the issue was recorded in other components of equity. Required: (a) Prepare the statement of profit or loss and other comprehensive income for Moston for the year ended 30 June 20X5. (10 marks) (b) Prepare the statement of changes in equity for Moston for the year ended 30 June 20X5. (5 marks) (c) Prepare extracts from the statement of cash flows for Moston for the year ended 30 June 20X5 in respect of cash flows from investing and financing activities. (5 marks) Note: The statement of financial position and notes to the financial statements are NOT required. (Total: 20 marks) ----------------------------------- Anwer (a) Moston – Statement of profit or loss and other comprehensive income for the year ended 30 June 20X5 $000 Revenue 113,500 Cost of sales (W1) (97,700) ––––––– Gross profit 15,800 Distribution costs (2,800) Administrative expenses (6,800 – 500 loan note issue costs) (6,300) Investment income 300 Finance costs (W2) (1,560) ––––––– Profit before tax 5,440 Income tax expense (1,200 + 800) (2,000) ––––––– Profit for the year 3,440 Other comprehensive income Items that will not be reclassified to profit or loss Gain on revaluation of property (29,000 – (28,500 – 1,900) (W1)) 2,400 ––––––– Total comprehensive income for the year 5,840 ––––––– (b) Moston – Statement of changes in equity for the year ended 30 June 20X5 Share capital Other components of equity Revaluation surplus Retained earnings Total equity $000 $000 $000 $000 $000 Balance at 1 July 20X4 20,000 2,300 3,000 6,200 31,500 Share issue (W3) 10,000 7,000 17,000 Total comprehensive income for the year 2,400 3,440 5,840 Dividends paid (W3) (4,000) (4,000) –––––– –––––– –––––– –––––– –––––– Balance at 30 June 20X5 30,000 9,300 5,400 5,640 50,340 –––––– –––––– –––––– –––––– –––––– (c) Moston – Statement of cash flows for the year ended 30 June 20X5 Cash flows from investing activities $000 Capitalised development costs (3,200) Investment income 300 Cash flows from financing activities Shares issued 17,000 Dividends paid (4,000) Loan notes issued 19,500 Workings (monetary figures in brackets in $000) (W1) Cost of sales $000 Per trial balance 88,500 Depreciation of property (28,500/15 years) 1,900 Depreciation of plant and equipment ((27,100 – 9,100) × 15%) 2,700 Research and development expenses (see below) 4,600 –––––– 97,700 –––––– Tutorial note Development costs can only be capitalised from the date the directors became confident that the new product would be commercially successful, which is 1 May. Research of $3 million (3 months at $1 million per month) from January to March and April’s costs of $1.6 million should be expensed, a total of $4.6m. This leaves $3.2 million (2 months at $1.6 million per month) to be capitalised at the year end. (W2) Loan interest $000 5% loan note ((20,000 – 500) × 8% see below) 1,560 –––––– The 5% loan note issue costs should not be charged to administrative expenses, but deducted from the proceeds of the loan, leaving an initial value of $19.5m. (W3) Dividend paid and share issue Note that the dividend was paid prior to the share issue and is therefore calculated based on 20 million shares (30 million – 10 million). $000 Dividend paid 20 million × 20¢ 4,000 –––––– Share issue: 10 million × $1.70 = $17m, split $10m capital, $7m premium.