Ican 2025 Corporate Reporting Question 3

You are the accountant of Oretente Plc, that prepares consolidated financial statements. Your Managing Director, who is not versatile in accounting, has recently attended a seminar at which key financial reporting issues were discussed. He remembers being told the following: Financial statements of an entity should reflect the substance of its transactions; Revenue from the contracts with customers should only be recognised when certain conditions have been satisfied. Transfer of legal ownership to the goods is not necessarily sufficient for an organisation to recognise revenue from their 'sale'. The reporting date of Oretente Plc is July 31. In the year to July 31, 2020, the company entered into the following transactions: Transaction 1: On August 1, 2019, Oretente Plc sold one of its branches to Danto Plc for N24 million. The net assets of the branch in the financial statements of Oretente Plc immediately before the sale was N21 million. Danto Plc is a subsidiary of a bank and was specifically incorporated to carry out the purchase – it has no other business operations. Danto Plc received the N24 million to finance this project from its parent in the form of a loan. Oretente Plc continues to control the operations of the branch and receives an annual operating fee from Danto Plc. The annual fee equates the operating profit of the branch for the 12 months less the interest payable on the loan taken out by Danto for the 12 months to the previous July 31. If this amount is negative, then Oretente Plc must pay the negative amount to Danto Plc. Any payments to or by Oretente Plc must be made by August 31 following the end of the relevant period. In the year to July 31, 2020, the branch made an operating profit of N6,000,000. Interest payable by Danto Plc on the loan for this period was N2,400,000. Transaction 2: On February 1, 2020, Oretente Plc sold a property to a bank for N15 million. The market value of the property at the date of the sale was N30 million. Oretente Plc continues to occupy the property rent-free. Oretente Plc has the option to buy the property back from the bank at the end of every month from February 29th, 2020 until January 31, 2025. Oretente Plc has not yet exercised this option. The repurchase price will be N15 million plus N150,000 for every complete month that has elapsed from the date of sale to the date of repurchase. The bank cannot require Oretente Plc to repurchase the property until the agreement lapses after January 31, 2025.