Enola plc has investment in two companies, Sherlock Ltd and Mycroft Ltd. The draft statement of profit/loss as well as the statement of financial position of the three companies for the year ended 31 December 2022 are shown below:
Statement of profit/loss for the year ended 31 December 2022
Enola Sherlock Mycroft
£ £ £
Revenue 4,000,000 2,000,000 1,500,000
Cost of sales (2,800,000) (1,400,000) (1,050,000)
Gross profit 1,200,000 600,000 450,000
Operating expenses (834,000) (350,000) (150,000)
Investment income 284,000
Operating profit before interest and tax 650,000 (350,000) (150,000)
Finance charge (50,000)
Profit before tax 600,000 250,000 300,000
Income tax expense (180,000) (80,000) (90,000)
Profit after tax 420,000 170,000 210,000
Statement of financial position as at 31 December 2022
Enola Sherlock Mycroft
£ £ £
Non-current asset – land 3,000,000 1,500,000 1,500,000
Plant and Machinery 1,500,000 1,000,000
Investments 5,000,000
Current Assets 3,095,000 1,600,000 1,200,000
Total assets 12,595,000 4,100,000 2,700,000
Ordinary share capital (£1 nominal value) 8,000,000 3,000,000 2,000,000
Retained earnings 2,595,000 560,000 400,000
Non-current liabilities 500,000
Current liabilities 1,500,000 540,000 300,000
Equity and liabilities 12,595,000 4,100,000 2,700,000
Additional information:
- The revenue and current assets include £106,500 referring to Sandcast plc. On 1 October 2022, Enola plc agreed a contract with Sandcast plc to source and install Interactive Displays and Audio systems (IDAS) across Sandcast’s 10 nationwide offices and to provide ongoing technical support for five years following the installation. The contract price was agreed at £150,000. Enola plc normally charges £140,000 for the similar system and £12,000 per year for the technical support. It was also agreed that Enola plc would send an invoice Sandcast plc following the successful installation of the IT system and the payment is due 60 days from the date of complete installation. The installation of the new system was expected to be completed on 1 November 2022 and Sandcast was entitled to access the technical support facility from the same date. Enola plc sent the invoice on 15 November 2022 and recognised the revenue in its book. However, due to the worldwide computer chip crisis, the engineering team could not complete the installation before 15 December 2022. On 15 December 2022, the engineering team issued the job completion report and dispatched it to the accounts department confirming the successful installation of IDAS.
- On 1 January 2022, Enola plc entered a six-year lease contract with Maverick plc for a brand-new electric delivery vehicle. The contract requires a payment of £8,000 every year in advance. The interest rate implicit in the lease is 7% and Enola plc uses actuarial method to allocate interest for finance leases. The economic life of the vehicle is estimated to be 90 months and the residual value of the vehicle at the end of six years will be £1,000. The newly appointed accountant did not take any account related to this leasing (including the payment made at the beginning of the year).
- On 1 January 2017, Enola plc purchased 2,400,000 ordinary shares in Sherlock Ltd for £4 million. At the date of acquisition, the retained earnings of Sherlock Ltd was £300,000. At 1 January 2017, the date of acquisition by Enola plc, the fair values of Sherlock Ltd's assets and liabilities were the same as their carrying amounts. The non-controlling interest and goodwill arising on the acquisition of Sherlock Ltd were both calculated using the proportionate (partial) method.
- On 1st January 2020, Enola plc acquired 25% of the equity shares of Mycroft Ltd for £150,000, giving Enola plc significant influence over Mycroft Ltd. At the acquisition date, retained earnings of Mycroft Ltd was £100,000.
- It is the policy of the group to capitalise goodwill. Impairment tests were carried out on 31 December 2022 which concluded that consolidated goodwill was impaired by 25%. Due to disappointing earnings, the value of investment in Mycroft Ltd's was also impaired by £40,000. At 31 December 2018 an impairment loss of £10,000 in respect of goodwill arising on the acquisition of Sherlock Ltd was recognised.
- On 1 January 2022 Sherlock Ltd sold a machine to Enola plc for £750,000. The asset originally cost £1 million in the year ended 31 December 2018 and are being depreciated over 10 years on straight-line basis. Enola plc is depreciating the machine over their remaining useful economic life. Depreciation on the plant and machinery is presented in cost of sale. Profit or loss on sale is presented in revenue figure.
- Since 1 January 2022, Enola plc has invoiced Sherlock Ltd £30,000 of sales which had a cost of £25,000. All of these goods were still in Sherlock Ltd's inventories at the year end. Mycroft Ltd has invoiced £65,000 of sales to Enola plc, all at a mark-up of 25%. Half of these goods were still in Enola plc's inventories at the year end.
- The dividends payable and retained earnings b/fwd, as shown in the retained earnings section of the statement in changes of equity, are given below: Enola Sherlock Mycroft
£ £ £
Dividends payable 240,000 120,000
Retained earnings b/fwd 2,415,000 510,000 190,000
Requirements:
a) The accountant who posted Enola plc’s sales in Note 1 is now worried that they treated this incorrectly. They come to you asking for help. Prepare a brief note for them showing the correct treatment and explaining why the correct treatment is consistent with International Financial Reporting Standards.
[15 marks, approximately 250 words]
b) The Financial Director of Enola plc would like a report on how the six-year lease should be accounted for. Prepare a note containing the full calculation and explanation of your proposed treatment with reference to International Financial Reporting Standards.
[15 marks, approximately 250 words]
c) Adjusting for the above (where necessary) and prepare a consolidated statement of financial position and consolidated statement of profit and loss of Enola plc for the year end 31 December 2022.
[40 marks]