Project #92815 - Question 2


2.    The following trial balance relates to Cavern as at 30th September 2010:

$’000            $’000

Equity shares of 20 cents each (note (i))                                                  50,000

8% loan note (note (ii))                                                             30,600

Retained earnings - 30 September 2009                                                  12,100

Other equity reserve                                                                3,000

Revaluation reserve                                                                7,000

Share premium                                                                  11,000

Land and buildings at valuation - 30 September 2009:

Land ($7 million) and building ($36 million) (note (iii))                       43,000

Plant and equipment at cost (note (iii))                                  67,400

Accumulated depreciation plant and equipment - 30 September 2009                              13,400

Available-for-sale investments (note (iv))                                15,800

Inventory at 30 September 2010                                      19,800

Trade receivables                                                29,000

Bank                                                                          4,600

Deferred tax (note (v))                                                              4,000

Trade payables                                                                  21,700

Revenue                                                                     182,500

Cost of sales                                                  128,500

Administrative expenses (note (i))                                     25,000

Distribution costs                                                 8,500

Loan note interest paid                                              2,400

Bank interest                                                      300

Investment income                                                                   700

Current tax (note (v))                                                 900

340,600           340,600


The following notes are relevant:

(i)   Cavern has accounted for a fully subscribed rights issue of equity shares made on 1 April 2010 of one new
    share for every four in issue at 42 cents each. The company paid ordinary dividends of 3 cents per share on
    30 November 2009 and 5 cents per share on 31 May 2010. The dividend payments are included in administrative
    expenses in the trial balance.

(ii)  The 8% loan note was issued on 1 October 2008 at its nominal (face) value of $30 million. The loan note will be
    redeemed on 30 September 2012 at a premium which gives the loan note an effective finance cost of 10% per

(iii)  Non-current assets:

Cavern revalues its land and building at the end of each accounting year. At 30 September 2010 the relevant value
to be incorporated into the financial statements is $41·8 million. The building’s remaining life at the beginning of
the current year (1 October 2009) was 18 years. Cavern does not make an annual transfer from the revaluation
reserve to retained earnings in respect of the realisation of the revaluation surplus. Ignore deferred tax on the
revaluation surplus.

Plant and equipment includes an item of plant bought for $10 million on 1 October 2009 that will have a 10-year
life (using straight-line depreciation with no residual value). Production using this plant involves toxic chemicals
which will cause decontamination costs to be incurred at the end of its life. The present value of these costs using
a discount rate of 10% at 1 October 2009 was $4 million. Cavern has not provided any amount for this future
decontamination cost. All other plant and equipment is depreciated at 12·5% per annum using the reducing
balance method.

No depreciation has yet been charged on any non-current asset for the year ended 30 September 2010. All depreciation is charged to cost of sales.

(iv)  The available-for-sale investments held at 30 September 2010 had a fair value of $13·5 million. There were no
    acquisitions or disposals of these investments during the year ended 30 September 2010.


(v)  A provision for income tax for the year ended 30 September 2010 of $5·6 million is required. The balance on
    current tax represents the under/over provision of the tax liability for the year ended 30 September 2009. At
    30 September 2010 the tax base of Cavern’s net assets was $15 million less than their carrying amounts. The
    movement on deferred tax should be taken to the income statement. The income tax rate of Cavern is 25%.



(a)  Prepare the statement of comprehensive income for Cavern for the year ended 30 September 2010.


(b)  Prepare the statement of changes in equity for Cavern for the year ended 30 September 2010.

(c)  Prepare the statement of financial position of Cavern as at 30 September 2010. Notes to the financial statements are not required.

The following mark allocation is provided as guidance for this question:

(a)  11 marks

(b)  5 marks

(c)  9 marks



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Due By (Pacific Time) 11/11/2015 12:00 am
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