Preparation of Single Entity Financial Statements

SECTION C EcoBuild Construction Co is preparing its financial statements for the year ended 31 October 20X8. The draft profit before tax is $4,200,000. The following issues remain unresolved: 1. On 1 November 20X7, EcoBuild entered into a 10-year lease for a new crane. The present value of the lease payments was $1,500,000. The lease agreement transfers ownership of the crane to EcoBuild at the end of the lease term. The crane has an estimated useful life of 15 years. No accounting entries have been made for this lease yet. The implicit interest rate is 6%. 2. EcoBuild's tax team has estimated the current tax liability for the year at $850,000. Additionally, the deferred tax liability needs to increase by $120,000 due to accelerated tax depreciation. Neither of these tax figures has been recorded. Required: (a) Calculate the adjusted Profit After Tax for EcoBuild for the year ended 31 October 20X8. Show all workings for depreciation, finance costs, and tax. (b) Assuming the adjusted Total Assets are $25,000,000 and adjusted Total Equity is $12,000,000, calculate the Return on Equity (ROE) and Return on Assets (ROA). Briefly explain what these two ratios indicate to stakeholders.

**Section C - Constructed Response 2** BioPharma Innovations is preparing its financial statements for the year ended 31 December 20X5. **Draft figures before adjustments ($'000):** Revenue: 45,000 Cost of Sales: (22,000) Gross Profit: 23,000 Operating Expenses: (12,000) Operating Profit: 11,000 Finance Costs: (1,000) Profit Before Tax: 10,000 **Equity and Liabilities at 31 Dec 20X5 (Draft, $'000):** Equity: 30,000 Long-term Loan: 15,000 **Adjustments required:** 1. *R&D:* Operating expenses include $3,000,000 spent on developing a new drug. Technical and commercial feasibility were established on 1 July 20X5. $1,000,000 of the $3,000,000 was incurred evenly between 1 July and 31 December. The drug is not yet complete, so no amortization is required. 2. *Revaluation:* Lab equipment with a carrying amount of $4,000,000 was revalued to $5,500,000 on 31 December 20X5. This has not been recorded. 3. *Taxation:* The current tax bill for the year is estimated at $1,800,000. Additionally, the deferred tax liability needs to increase by $400,000 (of which $300,000 relates to the lab equipment revaluation, and $100,000 relates to temporary differences in profit or loss). **Requirement:** (a) Prepare the revised Statement of Profit or Loss and Other Comprehensive Income for the year ended 31 December 20X5. (10 marks) (b) Calculate the following ratios for 20X5 based on your revised figures: i. Operating Profit Margin ii. Interest Cover iii. Return on Capital Employed (ROCE) (Use closing capital employed). (6 marks) (c) Briefly comment on the impact of capitalizing the development costs on the ROCE compared to if they had been fully expensed. (4 marks)

SECTION A Delta Corp revalued its land during the year, resulting in a revaluation surplus of $500,000. The tax base of the land remains at its original cost. The corporate income tax rate is 25%. How should the deferred tax consequence of this revaluation be recognized in the financial statements under IAS 12 Income Taxes?

SECTION C Nimbus Cloud Services (Nimbus) is a tech infrastructure company. The draft Statement of Profit or Loss for the year ended 31 December 20X9 shows a Profit Before Tax of $4,500,000. However, the following issues have not yet been accounted for: 1. Revenue Recognition (IFRS 15): On 1 October 20X9, Nimbus signed a $1,200,000 contract to provide a client with customized server hardware and 2 years of ongoing maintenance. The hardware was delivered and installed on 1 October 20X9. If sold separately, the hardware would cost $1,000,000 and the 2-year maintenance contract would cost $500,000. Nimbus incorrectly recorded the full $1,200,000 as revenue on 1 October 20X9. 2. Convertible Bond (IFRS 9): On 1 January 20X9, Nimbus issued 20,000 convertible bonds at their par value of $100 each ($2,000,000 total). The bonds pay interest annually in arrears at a nominal rate of 4%. Similar bonds without a conversion option carry an effective interest rate of 8%. (PV factors at 8% for 3 years: Year 1 = 0.926, Year 2 = 0.857, Year 3 = 0.794). Nimbus simply recorded the $80,000 cash interest paid as a finance cost. 3. Property Revaluation (IAS 16 & IAS 12): Nimbus revalued its headquarters on 31 December 20X9. The carrying amount before revaluation was $8,000,000, and the new fair value is $10,000,000. The tax base of the property is $6,000,000. The corporate tax rate is 25%. Nimbus has not recorded the revaluation or any related deferred tax. 4. Current Tax: The estimated current tax bill for the year ended 31 December 20X9 is $850,000. REQUIREMENT: (a) Calculate the revised Profit for the Year and Other Comprehensive Income for Nimbus for the year ended 31 December 20X9. Show all adjustment workings clearly. (14 marks) (b) Nimbus's total Capital Employed (Equity + Non-Current Liabilities) at 31 December 20X9, AFTER all adjustments, is $25,000,000. Calculate Nimbus's Return on Capital Employed (ROCE). Compare and interpret this against the sector average ROCE of 14%, considering the impact of the property revaluation. (6 marks)

**Section C - Constructed Response 1** Titanium Heavy Industries (THI) is preparing its financial statements for the year ended 31 December 20X6. The trial balance shows a draft profit before tax of $12,500,000. However, the following issues have not yet been accounted for: **1. Revenue Contract:** On 1 July 20X6, THI entered into a contract to build a specialized heavy crane for a customer for $8,000,000. The contract meets the criteria to recognize revenue over time. By 31 December 20X6, THI had incurred costs of $3,000,000. The total estimated costs to complete the contract are $6,000,000. THI measures progress based on costs incurred relative to total expected costs. No entries have been made for this contract. **2. Convertible Loan Note:** On 1 January 20X6, THI issued $5,000,000 of 4% convertible loan notes at par. Interest is payable annually in arrears. The notes are convertible in 3 years. The market interest rate for similar debt without a conversion option is 8%. The present value of $1 at 8% is: Yr 1: 0.926, Yr 2: 0.857, Yr 3: 0.794. The draft profit includes a deduction of $200,000 for the interest paid, but no other adjustments have been made. **3. Property Revaluation:** THI owns a factory that had a carrying amount of $10,000,000 on 1 January 20X6. On 31 December 20X6, an independent valuer assessed the fair value of the factory at $14,000,000. The factory has a remaining useful life of 20 years from 1 January 20X6. THI's policy is to revalue its properties and make an annual transfer between the revaluation surplus and retained earnings. Depreciation for the year has already been correctly charged based on the $10,000,000 carrying amount, but the revaluation has not been recorded. **4. Taxation:** The estimated current tax bill for the year is $2,200,000. Furthermore, the revaluation of the factory creates a taxable temporary difference. The corporate tax rate is 25%. **Required:** (a) Calculate the revised Profit Before Tax for the year ended 31 December 20X6. Show all workings for the Revenue and Convertible Loan Note adjustments. (10 marks) (b) Calculate the Income Tax Expense for the year and the Revaluation Surplus (net of tax) to be recognized in Other Comprehensive Income. (5 marks) (c) Explain the impact of the Convertible Loan Note adjustment on THI's Gearing ratio (Debt / Equity) compared to if it had been treated entirely as debt. (5 marks)

**Section C** GreenGrid operates renewable energy infrastructure. You are preparing the financial statements for the year ended 31 December 20X5. **Draft Trial Balance Extracts at 31 December 20X5:** Revenue: $45,000,000 (Credit) Cost of Sales: $22,000,000 (Debit) Operating Expenses: $8,000,000 (Debit) Solar Farms (Carrying amount 1 Jan 20X5): $60,000,000 (Debit) Convertible Loan Note (Issued 1 Jan 20X5): $10,000,000 (Credit) Interest paid on Loan Note: $400,000 (Debit) Tax paid during year: $200,000 (Debit) Deferred Tax Liability (1 Jan 20X5): $1,500,000 (Credit) **Additional Information:** 1. **Solar Farms:** GreenGrid uses the revaluation model. On 31 December 20X5, an independent valuer assessed the solar farms at $65,000,000. The farms have a remaining useful life of 20 years from 1 Jan 20X5. Depreciation for the year has not yet been charged to Cost of Sales. 2. **Convertible Loan Note:** Issued on 1 Jan 20X5 at par ($10m). It pays a coupon of 4% annually. The market rate for a similar bond without conversion rights is 8%. The equity component of $1,030,000 has already been correctly recorded in equity, and the liability component was initially recorded at $8,970,000. The $400,000 interest paid has been deducted from the liability balance in the trial balance. 3. **Taxation:** The current tax estimate for the year is $1,200,000. The deferred tax liability at 31 December 20X5 is calculated to be $1,800,000. The tax paid in the trial balance relates to an under-provision from the previous year. **Required:** **(a)** Prepare the Statement of Profit or Loss and Other Comprehensive Income for GreenGrid for the year ended 31 December 20X5. *(12 marks)* **(b)** Calculate the following ratios for 20X5 and provide a brief commentary (max 3 sentences) on GreenGrid's profitability: i. Operating Profit Margin ii. Return on Capital Employed (Assume total Capital Employed is $75,000,000 for this calculation). *(8 marks)*