Financial Reporting and Equity Accounting: Papaw Ltd Case

Question 1 

Papaw Ltd finalised their financial statements for the year ended 31 December 2018 and authorised them for issue on 20 March 2019. The new managing director is unsure about the treatment of the following eight material events and has asked for your professional advice.

(i) 15 January 2019 – The directors declared a final dividend for the year ended 31 December 2018 of 11 cents per share. The total dividend payable was $330 000.   

(ii) 20 January 2019 – Included in the general ledger inventory account at balance date were items of inventory measured at a cost of $120 000. On 20 January 2019 it was discovered, at the time of sale, that these items of inventory had been damaged prior to balance date.  Therefore, they only sold for $100 000 cash. 

(iii) 2 February 2019 – Included in the general ledger inventory account at balance date were items of slow moving inventory measured at a net realisable value of $450 000.

On 2 February 2019, this inventory was sold for $400 000 cash.  

(iv) 15 February 2019 - Papaw Ltd announced its plan to discontinue a poor-performing business segment. The loss on disposal of the business segment is estimated to be $25 000.

(v) 28 February 2019 – Papaw Ltd is found liable for a breach of contract and is required to pay damages of $200 000. The court case was initiated by a supplier against Papaw Ltd in March 2018. On 31 December 2018, the entity’s legal advisers informed the directors of Papaw Ltd that the company is likely to be found liable; a provision of $150 000 was therefore recognised at balance date. 

(vi) 3 March 2019 – Papaw Ltd was found liable by the court for a lawsuit initiated by Yawn Ltd and was required to pay damages of $190 000. Back in October 2018, Yawn Ltd initiated legal proceedings against Papaw Ltd concerning a breach of contract. On 31 December 2018, the entity’s legal advisers informed the directors that it was unlikely that Papaw Ltd would be found liable; a contingent liability, however, was included in the notes at balance date.

(vii) 8 March 2019 – An accounts receivable Warm Ltd went into bankruptcy. At 31 December 2018, Warm Ltd owed Papaw Ltd $600 000 and it was not considered doubtful at balance date. 

 (viii) 26 March 2019 – A fire destroyed one of the production plants. It will cost an estimated $1 000 000 to rebuild the production plant. The production plant had been insured for $800 000. 

Required: 

Prepare a professional report for the managing director of Papaw Ltd to explain the correct treatment of the above eight events. NZ IAS 10 Events after the Reporting Period must be referred to in the introduction to your report.

Question 2

(d) Assume Parent Ltd only acquired 24% of the equity in ‘Subsidiary Ltd’ for $168 000 on

1 April 2011.

The following equity account balances have been extracted from the financial statements of ‘Subsidiary Ltd’ on 31 March 2019:

Prepare the notional journal entry, at 31 March 2019, to account for Parent Ltd’s investment in ‘Subsidiary Ltd’ using the equity method as required by NZ IAS 28 Investments in Associates. The directors do not believe the investment has ever been impaired. The tax rate is 28%.

Note: Your workings must be included on each line of your notional journal entry. Complete a ‘quick estimate’ in the space provided.                                                

(e) Refer back to your answer for (d) and determine the amount at which the investment asset will be measured at, after being equity accounted for, in the financial statements as at 31 March 2019. Show your workings.