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Diagnostics Ltd Financial Reporting Analysis

Diagnostics Ltd, a medical equipment supplier, reported financial data for the period ending 31 March 2015, including sales of R12,500,000 and expenses totaling R8,859,000. Key transactions not recorded include depreciation, impairment, write-offs of trade receivables, and inventory adjustments. Additionally, the document outlines share capital changes and income tax expenses for the year.

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38 views3 pages

Diagnostics Ltd Financial Reporting Analysis

Diagnostics Ltd, a medical equipment supplier, reported financial data for the period ending 31 March 2015, including sales of R12,500,000 and expenses totaling R8,859,000. Key transactions not recorded include depreciation, impairment, write-offs of trade receivables, and inventory adjustments. Additionally, the document outlines share capital changes and income tax expenses for the year.

Uploaded by

katauboy9
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

TUTORIAL 14

PART A (40 MARKS)


Diagnostics Ltd is a key supplier of medical equipment to hospitals and other health facilities.
Diagnostics Ltd was incorporated under the Companies Act of 2004 in 2012, and is a
registered VAT vendor. All its suppliers are also registered VAT vendors and VAT is
calculated at a rate of 14%.
The following information was extracted from the records of Diagnostics Ltd for the reporting
period ended 31 March 2015.

Note Dr Cr

Sales 12 500 000

Cost of sales 5 850 000

Employee benefit expense 1 720 000

Dividend income from subsidiary 540 000

Management fee from subsidiary 135 000

Interest income 278 000

Finance costs 224 000

Auditors remuneration 785 000

Other expenses 235 000

Property, plant and equipment 1. 9 351 000

Accumulated depreciation (01 April 2014) 1. 5 480 000

Investment in subsidiary 4 230 000

Trade receivables 2. 5 670 000

Inventories 3. 2 578 000

Cash and cash equivalents 4. 8 244 000

Trade and other payables 2 535 000

South African Revenue Service (SARS) 195 000

Long term borrowings 5. 1 900 000

Share capital 6. 12 500 000

Retained earnings (01 April 2014) 3 214 000

39 082 000 39 082 000


The following transactions have not been recorded:
1. Property, plant and equipment
The total depreciation for the current reporting period was correctly calculated as
R1 207 000 (plant R902 000 and vehicles R305 000).
An impairment test (subsequent to the calculation of depreciation) revealed that plant with a
carrying value of R2 758 000 has a recoverable amount of R 2 000 000.
A vehicle with a cost of R450 000 and accumulated depreciation of R145 000 (up to the date
of the theft) was stolen during the year. The insurer paid R330 600 on the claim.
Another vehicle with a carrying value of R325 000 was sold to a second hand dealer for
R399 000 (including VAT).
2. Trade receivables
A debt of R79 800 owed by Vanish Ltd was deemed as irrecoverable. The finance director
authorized the write off. Furthermore, after reviewing the rest of the receivables, it was
decided that the allowance for doubtful debts should be increased by R185 000.
3. Inventories
A physical stock count on 31 March 2015 revealed that inventory with a cost of R450 000,
had a net realisable value of R375 000. In addition, it was also discovered that inventory with
a cost of R83 000 was missing.
4. Cash and cash equivalents

The bank statement for March 2015 was received on 1 April which reflected bank charges of
R1 710 and interest income of R1 200 that still had to be recorded.

5. Long term borrowings

The accountant of Diagnostics Ltd prepared the following amortization table for a loan that
was obtained from High Street Bank during the year.

Date Instalment Interest Amortised cost


R
R R

01 April 2014 1 900 000

31 March 2015 475 867 152 000 1 576 133

31 March 2016 475 867 126 091 1 226 356

31 March 2017 475 867 98 108 848 597

31 March 2018 475 867 67 888 440 618

31 March 2019 475 867 35 249 0

The loan attracts interest at 8% per annum and is secured by a building with a carrying value
of R2 100 000. The instalment due on 31 March 2015 has been paid on time.
6. Share capital

The issued share capital comprises 100 000 ordinary shares issued at R100 each and
250 000 5% preference shares issued at R10 per share.

On 1 December 2014, an additional 100 000 ordinary shares were issued at R105 each and
were paid for on the same date. On the same date, an additional 100 000 5% preference
shares were issued at R10 per share. Payment was received on the same day.

A dividend of 30 cents per ordinary share was declared on 31 March 2015.


7. Income tax
The income tax expense for the year was correctly calculated as R664 557.
Required
a) Present only the statement of profit or loss for the reporting period ended 31 March 2015
in compliance with IFRS. (30)
PART B (5 MARKS)
Below is a summary of statement of financial position at 31 December 2014 of Omega Ltd, a
company registered in terms of the Companies Act of 2008.

Non-current assets 125 000

Current assets* 35 000

Total assets 160 000

Equity 95 000

Non-current liabilities 55 000

Current liabilities 10 000

Total equity and liabilities 160 000

*Included in current assets is a bank balance of R25 000.


The financial director has indicated that these balances are indicative of the fair values of the
respective assets and liabilities.
Required
Based on the above information only, comment on whether Omega Ltd is in a position to
declare an ordinary dividend of R5 000 in compliance with the Companies Act of 2008.
Substantiate your answer. (5)

Common questions

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An interest expense of R152,000 on the loan is recorded in the statement of profit or loss, reducing net income. The payable amount decreases the outstanding loan balance, reflecting the amortization of R475,867, which affects both the liability and interest expense accounts in the balance sheet and income statement .

Omega Ltd can declare a dividend of R5,000 as its equity of R95,000 covers the non-current liabilities of R55,000, leaving R40,000 for dividend and operational liquidity. Additionally, the current assets (including R25,000 in bank balance) adequately cover current liabilities of R10,000, indicating sufficient reserves for the dividend .

The write-down of inventory from R450,000 to its net realisable value of R375,000 results in a reduction of R75,000 in inventory value, recorded as a loss in the statement of profit or loss. This adjustment ensures inventory is valued lower of cost and NRV, complying with the prudence concept .

Diagnostics Ltd should recognize the impairment loss for the plant by comparing its carrying amount of R2 758 000 to the recoverable amount of R2 000 000. The impairment loss of R758 000 should be recorded in the statement of profit or loss for the period ended 31 March 2015 .

Bank charges of R1,710 should be recorded as an expense, reducing cash and profit for the period. Interest income of R1,200 from the bank statement should be recognized as income, increasing cash and profit. These adjustments ensure accurate representation of closing cash and bank reconciliations .

The declaration of a dividend of 30 cents per ordinary share decreases retained earnings by R30,000 for 100,000 shares. The cash flow statement will reflect this as a cash outflow under financing activities, assuming dividends are paid within the reporting period .

The sale of a vehicle for R399 000, including VAT, results in cash inflow under investing activities. The VAT should be excluded to determine the actual cash inflow from the sale of assets, which is R350 526 (R399 000 / 1.14). This inflow reduces the carrying amount of vehicles and impacts the cash position positively .

The stolen vehicle, which had a cost of R450 000 and accumulated depreciation of R145 000, results in a loss. The net book value of the vehicle (R305 000) minus the insurance compensation received (R330 600) leads to a net gain recorded in the statement of profit or loss. Additionally, the insurance proceeds should be recorded as other income .

Issuing an additional 100,000 preference shares at R10 each increases Diagnostics Ltd's preference share capital by R1,000,000, strengthening the company's equity but potentially increasing fixed charge obligations for preference dividends in the future .

Increasing the allowance for doubtful debts by R185 000 results in an expense for the period, reducing net income. It adjusts the trade receivables to reflect a more realistic value by anticipating potential losses from uncollectible accounts .

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