Published Financial Statements

I’m not surprised that you’re having a problem with point (V)!

You’re missing some VITAL piece of information!

“Part (V): The Inventory of Highwood was not counted until 4 April 20X6 due to operational reason. At this date its value was $ 36 million and this figure has been used in the cost of sales calculation above> Between the year end 31 March 20X6 and 4 April 20X6, Highwood received a delivery of goods at a cost of $ 2.7 million at mark-up on cost of 30%. Neither the goods delivered nor the sales made in the period were included in Highwood Purchases (as part of cost of sales) or revenue in the above trial balance.”

Can you check that you have correctly typed the sentence that begins “Between the year end …”

Point (IV) (possibly point (vi) unless you’ve copied point number 5 before point number 4!)

Highwood has not “sold” these Receivables because the risks and rewards have not been transferred “Any of the factored receivables outstanding after six months will be refunded to Easyfinance” tells us that the risk of non-collection from the Receivables is a cost that Highwood has to bear

So we need to undo the entries that were put through to record this “sale” and then make the correct entries to reflect the reality of the situation

Well, if it’s not a sale, what is it? It’s a loan from Easyfinance to Highwood

Undo the “sale” entries

Dr Receivables $10m
Cr Cash $8.7m
Cr Administrative expenses $1.3m

That gets us back to the position BEFORE the “sale” transaction was (incorrectly) accounted for

Now record the receipt of the cash as a secured loan from Easyfinance

Dr Cash $8.7m
Cr Loan creditor $8.7m

Of course, you can see that in these two double entries I have first of all credited cash and then debited it. We can short cut this and combine the two separate entries into just one as follows …

Dr Receivables $10m
Cr Loan creditor $8.7m
Cr Administrative expenses $1.3m

Further, we now need to make a provision for doubtful debts (an allowance for receivables)

Dr Finance costs (or administrative expenses) $.6m
Cr Receivables $.6m

OK?

Part (V): The Inventory of Highwood was not counted until 4 April 20X6 due to operational reason. At this date its value was $ 36 million and this figure has been used in the cost of sales calculation above> Between the year end 31 March 20X6 and 4 April 20X6, Highwood received a delivery of goods at a cost of $ 2.7 million and made sales of 7.8 million at mark-up on cost of 30%. Neither the goods delivered nor the sales made in the period were included in Highwood Purchases (as part of cost of sales) or revenue in the above trial balance.

So, the inventory per the count was $36,000,000

But included in that figure is the value of inventory received since the year end of $2,700,000 so that needs to be deducted to find the year end figure – now adjusted to $33,300,000

But there have been sales since the year end of $7,800,000 at a mark up of 30% so we need to add those back in at cost

100/130 * $7,800,000 is $6,000,000 and that figure is the cost value of the sold inventory

So the correct year end inventory is $33,300,000 + $6,000,000 = $39,300,000

OK?

Hi,

The treatment for the convertible loan notes is the standard treatment where we are following the concept of substance over form. Work through the class noted and videos on this area of the syllabus.

The tax is slightly more complicated than usual as the movement in the deferred tax is being adjusted for the revaluation of the PPE.

Thanks.