0 Tukumu Limited is a company that manufactures curios. Tukumu Limited operates in the Natal

0

Tukumu Limited is a company that manufactures curios. Tukumu Limited operates in the Natal Midlands and employs the local population to manufacture the curios. As a result of the positive effect that Tukumu Limited has had on an otherwise impoverished area, it was awarded a government grant of C 150 000 on 1 January 20X6. This grant was given to Tukumu Limited to subsidies 20% of future wages.

Tukumu Limited had complied with all the conditions laid out to obtain the grant during the previous financial year (20X5). The only condition that remained on 1 January 20X6 is to incur future wages.

Wages incurred and paid:

C

31December 20X6

200 000

31December 20X7

250 000

31 December 20X8

400 000

Required:

a) Show the journal entries in the company’s general journal, for the years ended 31December 20X6 to 20X8, assuming that the company policy is to present such a grant as grant income.

b) Show the journal entries in the company’s general journal, for the years ended 31December 20X6 to 20X8, assuming that the company policy is to recognize government grants as an adjustment to expenses.

Q301

Dozey Limited manufactures and sells toys for babies. They have been operating a profitable business for many years in the Amanda area.

Due to a recent baby boom, Dozey Limited found it needed to purchase new equipment. At the time, the directors discovered that the government was allocating grants to manufacturing companies operating in the Amakanda area. Dozey Limited’s directors applied for a grant. OnIJanuary 20X5, Dozey Limited was awarded a grant of C 400 000 to purchase the much needed equipment. Dozey Limited had met all the conditions of the grant by 31 December 20X4, apart from the actual acquisition of the equipment. Dozey Limited purchased the equipment immediately on receipt of the grant (1January 20X5).

The cost of acquiring the equipment was C 1 500 000. The useful life is expected to be 4 years. Dozey Limited does not expect to receive any amount for the equipment at the end of its useful life.

Required:

a) Show the general journal entries in the years ended 31 December 20X5, 20X6, 20X7 and 20X8. The company has the policy of recognizing government grants directly in income.

b) Show the general journal entries in the years ended 31 December 20X5, 20X6, 20X7 and 20X8. The company has the policy of recognizing government grants indirectly in income.

Q 302

Potato Limited is a company that farms corn. Potato Limited is a relatively new company in the corn industry, having previously been in the gun manufacturing industry.

Potato Limited was awarded a government grant of C 500 000 on 1 January 20X5, the details of which are as follows:

• C 300 000 is to assist with the purchase of a new harvester;

• C 200 000 is for immediate financial support and is not associated with any future costs;

• AM conditions attaching to the grant have been met. Later that day, the harvester was acquired for C 900 000. The harvester has a useful life of 5 years and, at the end of its useful life, Potato Limited expects to sell it for C 50 000 as scrap metal.

Required:

a) Show the general journal entries for the years ended 31 December 20X5 to 20X9 using the direct method (recognised as grant income).

b) Show the general journal entries for the years ended 31 December 20X5 to 20X9 using the indirect method (recognised as a reduction of the related costs).

Q303

Blot Limited is a newly formed company that is considering entering the ink business. Blot plans to manufacture ink and sell it to printers.

Due to the scarcity of businesses in the sector, Blot Limited was awarded a government grant to purchase the machinery it needed to start operations.

The grant was awarded to Blot Limited on 1 January' 20X6 for an amount of C 250 000 and is conditional upon Blot manufacturing ink for an unbroken period of 3 years. Should Blot stop manufacturing before the end of the 3 year period, the grant will have to be repaid in full.

Blot Limited purchased the requisite machinery on 1 January 20X6 for C 500 000. The machinery is expected to have a useful life of 4 years and a nil residual value.

Due to unforeseen circumstances, Blot Limited had to stop manufacturing ink on 1 January 20X8, but intends to continue on 1 January 20X9.

Required

a) Show the general journal entries for the years ended 31 December 20X6 to 20X9 using the direct method (recognised as grant income).

b) Show' the general journal entries for the years ended 31 December 20X6 to 20X9 using the indirect method (recognised as a reduction of the related costs).

Q304Anthony Limited wanted to start manufacturing guns and weapons. To do this they were required to obtain a license from the government. The company applied for a license and was awarded one on the 30 June 20X8. The fair value of the grant is reliably determined to be worth C 900 000, and has to be renewed for this amount in 5 years’ time. The company had to pay the government C 50 000 to obtain the license.

The company was also given free technical advice by government experts on the manufacturing of weapons as well as on the marketing thereof. This assistance was given because of the company’s excellent BEE rating (a government imposed set of criteria that companies in that country should abide by) in its other operations.

The company has a 31 December financial year end.

Required

a) Show the journal entries for the year ended 31 December 20X8 assuming that Anthony Limited measures the license at its fair value.

b) Show the journal entries for the year ended 31 December 20X8 assuming that Anthony Limited measures the license at its nominal amount.

c) Prepare the disclosure necessary for the government assistance not recognized in Anthony Limited’s accounting records.

Q305

Trailblazer Limited recently commenced business as a shoe manufacturer. As an incentive for locating their factory in The middle of nowhere, the government agreed to subsidies half of the cost of the construction of the factory to the maximum of C 1 000 000.

Required:

Discuss how Trailblazer limited should account for the subsidy if the factory cost C 1600 000 to construct.

Q306

Brightspark Limited a manufacturer of light bulbs recently received a government grant of C 300 000 to assist with the company cash flows pursuant to the purchase of a glass blower for C 500 000 on 1/1/20X8. A condition placed on this grant required Brightspark to produce 10,000 light bulbs for the new parliament buildings by 31/12/20X9. Failure to comply with part or this entire requirement would cause a proportionate amount of the grant to be repayable.

• For the 20X8 financial year Brightspark produced and installed 6,000 light bulbs in the new parliament building. However due to frequent power cuts during 20X9 only 2,000 of the government light bulbs were produced and installed in 20X9.

• The useful life of the glass blower was 5 years

Required:

a) Prepare journal entries for the years ended 31 December 20X8 and 20X9, accounting for the grant and the glass blower assuming Bright spark has a policy of accounting for the grant as deferred income.

b) Prepare journal entries for the years ended 31 December 20X8 and 20X9, accounting for the grant and the glass blower assuming Bright spark has a policy of writing off the grant against the asset.

Q307

A company called SA Furniture Company Limited was listed on the Karachi Stock Exchange (KSE) from 20W8 to 20X2, inclusive. In 20X3 it was eventually delisted.

The company’s cash flow data for the 20W8 – 20X2 periods was as follows:

SA FURNITURE COMPANY LIMITED STATEMENT OF CASHFLOW FOR THE YEARS ENDED

 

20W8C000

20W9C000

20X0C000

20X1C000

20X2cooo

Cash flows from operating

 

 

 

 

 

activities

 

 

 

 

 

Operating cash flow before

63 850

89 929

150 282

132 792

(130 189)

working capital changes

 

 

 

 

 

Working capital movements

(83 952)

(84 604)

(241 945)

(183 071)

197 770

Cash generated from

(20 102)

5 325

(91 663)

(50 279)

67 581

operations

 

 

 

 

 

Finance costs and taxation

(14 342)

(20 862)

(40 985)

(77 993)

(86 987)

Dividends paid

(4 145)

(17 916)

(43 723)

(30 806)

(3 738)

 

(38 589)

(33 453)

(176 371)

(159 078)

(23 144)

Cash flows from investing activities

5 169

(8 763)

(58 719)

(600)

(26 559)

Cash flows from financing

 

 

 

 

 

activities

 

 

 

 

 

Ordinary shares

26 915

 -

Preference shares

 -

58 500

104 270

(3 890)

( 5 101)

Long-term loans

577

(11029)

129 355

163 568

246 349

Short-term loans

5 928

(5 255)

1465

 

(191 545)

 

33 420

42 216

235 090

 

49 703

0

0

0

0

0

The following additional non-cash flow data for the same period was also available:

 

20W8

20W9

20X0

20X1

20X2

 

COOO

COOO

COOO

COOO

COOO

Sales

729 571

934 052

1 287 052

1 409 189

1 422 727

Sales growth

28.03%

37.79%

9.49%

0.96%

 

 

 

 

 

 

Profit after tax

43 143

60 129

92 878

(79 224)

(77 120)

Share price at year-end

C7.20

C8.00

Cl2.50

Cl1.00

C0.40

EPS

C2.60

C3.63

C5.60

(C4.56)

(C0.43)

Required:

Comment on why you think this company experienced financial difficulties.

Q308

Handyman Limited is a hardware wholesaler supplying goods to ‘do-it-yourself retailers around the country. The company commenced operations at the beginning of the 20X3 year. The company has been operating successfully for a number of years. Although turnover has increased consistently, the company has recently been experiencing cash flow problems. The managing director has approached you for advice on how to improve this situation. The following amounts were extracted from the records of the company:

 

20X3

20X4

20X5

 

C000s

C000s

C000s

Turnover

100 000

120 000

135 000

Cost of sales

75 000

90 000

101 250

Profit before interest and tax

6 000

5 500

5 600

Accounts receivable

16 500

25 000

29 600

Accounts payable

13 000

14 700

17 000

Inventory

18 750

26 000

30 400

Bank / (overdraft)

5 000

(500)

(2 000)

Required:

Identify and calculate the ratios that would be needed to analyse the working capital of the company. Comment on the company’s working capital management in the light of these ratios.

Q309

Med Tech Limited is interested in acquiring a majority shareholding in Computronic Limited. As a financial analyst you are asked to undertake an evaluation of the company and suggest whether Med Tech Limited should go ahead with the purchase of Computronic Limited or not. The following information is available:

Financial Statements from the company

COMPUTRONIC LIMITEDSTATEMENT OF COMPREHENSIVEINCOMESFOR THE YEARSENDED 30 SEPTEMBER

 

20X1

3 432 000

Sales

3 850 000

(2 864 000)

Cost of sales

(3 250 000)

20X0

Gross profit

600 000

568 000

Other expenses

(430 300)

(340 000)

Depreciation

(20 000)

(18 900)

Profit before finance charges

149 700

209 100

Finance charges

(76 000)

(62 500)

Profit before tax

73 700

146 600

Income tax expense

(22 110)

(43 980)

Profit for the period

51 590

102 620

Other comprehensive income

Total comprehensive income

51 590

102 620

COMPUTRONIC LIMITEDSTATEMENT OFFINANCIALPOSITIONS AT 30 SEPTEMBER

20X1

 

20X0

 

ASSETS

 

 

 

 

Non-current assets

 

 

 

 

Property, plant and equipment

 

360 000

 

344 000

Current assets

 

 

 

 

Inventories

836 000

 

715 200

 

Accounts receivable

402 000

 

351 200

 

Cash

52 000

1 290 000

57 600

1 124 000

 

 

1 650 000

 

1 468 000

EQUITYANDLIABILITIES

 

 

 

 

Capital and reserves

 

 

 

 

Share capital

460 000

 

460 000

 

Retained earnings

220 000

680 000

203 000

663 000

Non-current liabilities

 

 

 

 

8% Redeemable preference shares

 

 

 

 

(Redeemable on 30/09/20X3)

225 000

 

200 000

 

Long term loan

430 000

655 000

324 000

524 000

Current liabilities

 

 

 

 

Accounts payable

175 000

 

145 000

 

Accrued expenses

140 000

315 000

136 000

281000

 

 

1 650 000

 

1 468 000

A download from an Information Service relating to Computronic Ltd at 30 September:

 

20X1

20X0

Share price at year end (30 Sept)

C12.00

C30.00

Number of shares in issue

100 000

100 000

Dividend per share

C0.22

CO.22

Industry average data for 20X1

Current ratio

2.7 : 1

Quick ratio

1.0: 1

Inventory collection period

52 days

Accounts receivable collection period

32 days

Non-current assets turnover

10.7 times

Total assets turnover

2.6 times

Debt : Equity ratio

100%

Interest cover ratio

2.5 times

Profit margin

3.50%

Return on assets

9.10%

Return on equity

18.20%

PE ratio

14.2

Extract of the press release issued by the company on 12 October 20X1:

Computronic Limited is a biotechnological company that undertakes research and development of medical innovations. The company has completed trial runs of the long awaited anti-aging electronic treatment device. This device stimulates the production of high growth hormone (HGH) in your body. HGH is associated with human growth and cell health. As a mood elevator, most people find a youthful sense of wellness and a zest for life restored when their levels of human growth hormone are increased. The company’s clinical evidence proves that by elevating our growth hormone levels we can significantly stop and even reverse the symptoms of aging! The electronic device has been successfully patented in Pakistan and the United States but is awaiting approval from the Food and Drug Administration (FDA), for use in the United States of America…

Required:

a) Discuss the purpose of financial statement analysis.

b) Calculate the current and quick ratios for both years and briefly analyse your results.

c) Calculate the return on equity (ROE) ratio for 20X1. Explain why this ratio will be important to Med Tech Limited or any potential investor.

d) Calculate the debt to equity ratio for both years and discuss its usefulness.

e) Calculate the PE ratio for both years and discuss briefly its interpretation with particular reference to companies with high or low ratios.

1) Although financial statement analysis can provide useful information about a company’s operations and its financial condition, this type of analysis has some potential problems and limitations, and it must be used with care and judgment. Discuss some problems and limitations of financial statement analysis?

g) What would your recommendation to Med Tech Limited be, about their intention of buying a majority shareholding in Computronic Limited? Justify your recommendation.

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