cuin, Langwith and Halifax are firms involved in the production and sale of high-quality technical equipment for universities; the following are draft financial statements: Statement of financial position as at 31st March 2021 Alcuin Langwith Halifax £000 £000 £000 Assets Non-current assets Property, Plant and Equipment (note 1) 10,500 5,500 2,500 Investment in Langwith (note 2) 5,000 - - Investment in Halifax (note 3) 3,000 - - Current assets 1,500 1,000 500 Total assets 20,000 6,500 3,000
Alcuin, Langwith and Halifax are firms involved in the production and sale of high-quality technical equipment for universities; the following are draft financial statements:
Alcuin Langwith Halifax
£000 £000 £000
Assets
Non-current assets
Property, Plant and Equipment (note 1) 10,500 5,500 2,500
Investment in Langwith (note 2) 5,000 - -
Investment in Halifax (note 3) 3,000 - -
Current assets 1,500 1,000 500
Total assets 20,000 6,500 3,000
Equity and liabilities
Equity
Ordinary share capital (£1) 10,000 2,000 1,000
Retained earnings 7,000 3,750 750
Non-current liabilities 2,000 - -
Current liabilities 1,000 750 1,250
Total equity and liabilities 20,000 6,500 3,000
Statement of
Alcuin Langwith Halifax
£000 £000 £000
Revenue 10,000 5,000 2,000
Cost of sales (7,000) (3,250) (1,900)
Gross profit 3,000 1,750 100
Investment income (from Langwith) 1,000 - -
Administration costs (700) (250) (750)
Profit before tax 3,300 1,500 (650)
Tax (2,000) (300) -
Profit after tax 1,300 1,200 (650)
Dividends - (1,000) -
Profit after tax and dividends 1,300 200 (650)
Notes to the accounts:
1. On 31st March 2021 Langwith entered into a four-year lease contract for a new machine used in the production with a contract requiring the payment of £14,930 per annum in arrears. This does not appear in the accounts above. The interest rate implicit in the lease is 7.5% and Langwith uses the actuarial method to allocate interest for finance leases. The Langwith’s depreciation policy for these assets applies the straight-line method over four years and there is not thought to be a residual value of the asset at the end of this period.
2. Alcuin Ltd acquired two million of the ordinary shares of Langwith Ltd on 29th November 2014 when the retained earnings of Langwith Ltd were £1,000,000.
3. Alcuin Ltd acquired 75% of the ordinary shares of Halifax Ltd on 7th September 2016 when the retained earnings of Halifax Ltd were £500,000; Alcuin use the proportionate share (‘partial’) method of valuing the non-controlling interest in Halifax.
4. During the year goods with an original cost of £400,000 were sold by Alcuin to Langwith for £600,000. Half of these goods are in Langwith’s inventory at the year end.
5. On 1st October 2020, Halifax sold units with a total sales price of £500,000 to a single large customer. Included in the contract was a two-year service warranty covering all required repairs during this time. The normal selling price of the same merchandise would be £400,000 without the warranty. As of 31st March 2021, Halifax recognised £425,000 of revenue, included in the above accounts.
Required:
b) The Financial Director of Alcuin would like a report on how the four-year lease should be accounted for and why. Prepare a note containing a full calculation The interest rate that is implicit in the lease is 705%.This is naturally used in as discounting rate.
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