Gabby, the finance director of Tara Ltd, prepared the draft financial statements for the year ended 30 September 2020 before being taken ill. The managing director has given Gabby's file to Eldora, the financial controller, to enable her to complete the financial statements. Both Gabby and Eldora are Chartered Accountants.
The managing director told Eldora that the directors need a large profit for the year ended 30 September 2020 as they wish to expand their operations further and will need additional funding. An earnings per share figure in excess of $2.00 is needed to secure additional funding. The directors hold all of the shares in Tara Ltd and have a bonus scheme based on the earnings per share target of $2.00 being exceeded.
The draft profit for the year was $1,096,500 and based on this, Gabby calculated an earnings per share of $2.15.
As of 1 October 2019, Tara Ltd had 400,000 ordinary shares in issue. On 1 January 2020, Tara Ltd made a 1 for 5 bonus issue. On 1 July 2020, Tara Ltd issued 120,000 ordinary shares at market price.
Gabby's file contains the following outstanding items:
(1) On 1 January 2020, Tara Ltd borrowed $300,000 at a rate of 5% per annum to part finance the construction of a new head office building. Due to bad weather causing delays in the first quarter of the year, work on the building only started on 1 April 2020. The building is expected to take 12 months to complete.
Interest of $3,800 was earned on surplus funds invested and credited to finance income in the statement of profit or loss, of which $1,500 was earned up to 31 March 2020. Gabby debited property, plant, and equipment with interest payable for the nine months to 30 September 2020.
(2) A new manufacturing plant housing the latest robotics technology was set up during the year. The following costs were incurred during the year and capitalized as part of property, plant, and equipment:
- Construction costs: $180,000
- Assembly and installation of equipment: $45,000
- Allocated general overheads: $20,000
- Testing of equipment: $3,000
- Employee training: $1,300
- Advertising of new products being manufactured: $1,000
- Safety inspection: $1,500
- Sales launch event for new product: $259,800
The manufacturing plant was ready for use on 1 March 2020. However, the appropriately trained staff were not immediately available to run the plant, and therefore it did not open until later. The manufacturing plant is depreciated on a straight-line basis over 20 years.
