Warrburt (Dec 08)

Hello tutor,

I am having some problems with this question : Warrburt (Dec 2008, Kaplan kit – Q15)

Question 1:
In this entity’s SOPL, they included their share of associate Profit before tax when it should have been Profit after tax. Thus we needed to adjust for this error when determining the tax paid.

The answer gave:
Opening tax balances (26+42) = 68
Tax on associate profit (2)
Cash paid = (3)
Closing tax balances (28 + 35) = 63

My question is..why are we not adjusting the ‘Closing tax balances’ too since recognising the ‘associate tax’ as the group’s current tax liability was wrong in the first place?

If we had done that, then taxes paid would have been:
Opening tax balances (26+42) = 68
Tax on associate profit (2)
Cash paid = (5)
Closing tax balances (28 + 35 – 2) = 61

Also, since this was an error, shouldn’t we have adjusted the ‘Loss for the year’ to account for this at the start of the SOCF? The ‘loss for the year’ the group made was $21m, and if we were to account for the error, it would have been $19m.

Question 2:
When preparing a SOCF, should we always account for ‘Other income’?

The entity in the same question also had an ‘other income’ figure of $31m. The question said the gains on sale of Financial Assets ($7m) and on PPE ($2m) were included within other income, but did not mention anything about investment income.

The answer adjusted this $31m by removing the above mentioned gains, then deducted $22m from the loss for the year and added $22m to ‘Cash flows generated from Investing activities’.

I have noticed that other SOCF questions do not account for Other income at all. How do you think we should approach this?

I hope this is not too long. Hoping to hear from you, thanks again!