Question 1

Draft Income Statement for the Year ended 31 December 2012 of

O’Dear Ltd:

Rs’000
Sales 21,500
Cost of sales 2,800
Gross profit 18,700
Operating expenses 5,300
Profit from operations 13,400
Interest cost on debentures 1,200
Profit before tax 12,200
Income tax expense 2,000
Net profit for period 10,200
Draft Statement of Financial Position as at 31 December 2012 of O’Dear
Ltd

Rs’000 Rs’000

ASSETS

Non-current assets
Property, plant and equipment 30,000

Current assets
Inventories 1,300
Trade receivables 7000
Cash at bank 2050
10,350
Total assets 40,350

EQUITY AND LIABILITIES

Capital and reserves

Issued share capital (Rs1) 2,000
Accumulated profit 14,450
16,450
Non-current Liabilities
6% Debentures 20,000

Current liabilities
Trade creditors 1,700
Taxation payable 2,000
Dividend payable 200
3,900
40,350

As a financial analyst recently recruited by an Investment bank, you have been given
the task to review the draft financial statements of one of the bank’s clients. Your review
reveals the following:
 (i) The sales and debtors figure includes Rs2,662,000 representing the invoice
value of goods sold to a long standing customer on 1 January 2012 and
repayable on 31 December 2014. The credit rating of the customer is such that
an appropriate interest rate would be 10% per year.
(ii) A lease rental Rs200,000 was paid on 31 December 2012. It is the first of five
annual payments in respect of a leasing contract for the rental of equipment
that has a cash purchase price of Rs750,000 The lease contract was entered on
1 January 2012. The rate implicit in the lease has been computed to be 12%
and the present value of an annuity of Rs1 for 5 years at a discount rate of
12% is 3.605. At the end of the lease term, the equipment will be returned to
the lessor. The equipment has an economic life of 6 years. The lease rental of
Rs200,000 was included in operating expense of Rs3.3.m.
(iii) The 6% Rs20,000,000 debentures were issued on 1 st January 2012 at a discount
of 10%. Issue costs amounted to Rs1,000,000. The debentures will be
redeemed at a premium of Rs1,015,000 above par value. Interest payments
(equivalent to 6% of Rs20,000,000) are effected every 31 December. The
effective rate of interest is 12% per annum. The discount of Rs2,000,000 on
issue together with the issue costs have been included in administrative
expenses.
(iv) Property. plant and equipment includes the following: a plot of land which
initially cost Rs500,000 on 1 January 2010 is now worth Rs1,000,000 on 31
December 2012. This revised value is to be reflected in the books.
Required:

(a) Prepare in line with relevant international accounting standards the corrected
statement of comprehensive income for the year ended 31 December 2012.
Prepare in line with relevant international accounting standards the corrected
statement of financial position as at 31 December 2012.