Case Stimulus
The draft financial statements of Gbola Limited group and its investee companies Tanko Limited and Eze Limited at December 31, 2018 are shown below: Draft statements of profit or loss for the year ended December 31, 2018. Gbola Limited Tanko Limited Eze Limited N’ 000 N’000 N’000 Revenue 17,070 7,320 2,235 Cost of sales (8,640) (3,210) (885) Gross profit 8,430 4,110 1,350 Other operating expenses (2,070) (810) (600) Profit from operations 6,360 3,300 750 Interest expense (570) (660) (210) Profit before tax 5,790 2,640 540 Income tax expense (810) (360) (90) Profit for the year 4,980 2,280 450 Draft statements of financial position as at December 31, 2018 Gbola Limited Tanko Limited Eze Limited N’000 N’000 N’000 N’000 N’000 N’000 Non-current assets: Property, plant and equipment 10,350 12,180 10,680 Investments 29,250 39,600 12,180 10,680 Current assets: Inventories 10,500 8,910 840 Receivables 15,000 4,200 1,950 Cash and cash equivalents 5,625 1,875 225 Total current assets 31,125 14,985 3,015 Total assets 70,725 27,165 13,695 Equity and liabilities: Equity: Share capital (ordinary shares of N1 each) 28,125 12,000 7,500 Reserves 16,875 10,350 2,400 Total equity 45,000 22,350 9,900 Non-current liabilities: 7% Loan notes 4,500 3,000 750 Current liabilities: Trade payables 20,250 1,515 2,820 Current income tax 975 300 225 21,225 1,815 3,045 Total equity and liabilities 70,725 27,165 13,695 Additional information (i) On January 1, 2014, Gbola Limited acquired 9,000,000 ordinary shares in Tanko Limited for N23,250,000 when the reserves of Tanko Limited were N3,000,000. (ii) A new asset with a fair value of N1,500,000 was acquired during the year under a lease agreement by Gbola Limited. A clause in the lease agreement stipulated that N300,000 payments must be paid on December 31, each year for six years, starting from December 31, 2018. The interest rate implicit in the lease is 5.47%. Gbola Limited treated this as an operating expense; because the only accounting entry that the company believes must be made in relation to this asset is the N300,000 payment it has made. (iii) Gbola Limited had an intangible asset of N750,000 for software in its statement of financial position. The directors of Gbola Limited believed that the software will have no recoverable value at the date of acquisition and Tanko Limited wrote it off shortly after its acquisition. (iv) At the date of acquisition of Tanko Limited, the carrying amount of its property, plant and equipment, considered to have a remaining life of 10 years was N5,625,000 lower than its fair value. (v) On January 1, 2017, Gbola Limited acquired 2,250,000 ordinary shares in Eze Limited for N6,000,000 when the reserves of Eze Limited were N1,350,000. The carrying amount of assets of Eze Limited was the same as their fair values at that date. Depreciation should be treated as an operating expense. (vi) A component used by both Tanko Limited and Eze Limited is produced by Gbola Limited and it sells this component at a margin of 25% and goods worth N780,000 were sold to Tanko Limited during the year. None of these goods had been sold by Tanko Limited at December 31, 2018. Gbola Limited also sold goods worth N1,200,000 to Eze Limited and Eze Limited sold all of these goods as at December 31, 2018. (vii) N900,000 in respect of amounts owed by Tanko Limited and N525,000 in respect of amounts owed by Eze Limited were included in the receivables of Gbola Limited. The corresponding balances in Tanko Limited and Eze Limited payables were N600,000 and N525,000 respectively. On December 31, 2018. Tanko Limited sent a cheque of N300,000 to Gbola Limited. (viii) There has been no impairment for Eze Limited. However, the impairment test conducted on Tanko Limited’s goodwill showed that goodwill is being impaired by 10% per annum on a straight-line basis. (ix) Gbola Nigeria Limited cash and cash equivalents included Director’s loan of N1,500,000. The Directors are of the view that the inclusion does not contravene any International Financial Reporting Standard.