Dealing with Accounting Adjustments - Tiffany Ltd. Case Study - Accounting and Finance Assignment Help

Assignment Task:

ASSIGNMENT

Tiffany Case Ltd is currently finalising their financial statements for the year ended 31 December 2018. Tiffany Case Ltd is a manufacturing retailer of high-end leather accessories. 

During the year Tiffany Case Ltd has experienced several accounting issues including; machinery revaluation and impairment, research and development expenditure and the purchase of a sculpture which was subsequently damaged.

The Financial Director of Tiffany Case Ltd has asked for your advice on the appropriate accounting treatment of these issues.

At present, the Trial Balance is incomplete due to missing figures and the first task of this assignment is to complete the Trial Balance and ensure it balances before examining the issues detailed in the Notes section.

Presented below, is the draft trial balance for the year ended 31 December 2018:

The trial balance requires completion by processing the following information into the trial balance:

1. Plant and machinery figure is the last six digits of your student ID number. If the last six digits begin with a zero, replace this with a one. (e.g. 057462 becomes 157462).

2. Retained earnings figure is the last four digits of your student ID number. If the last four digits begin with a zero, replace this with a one. (e.g. 0683 becomes 1683).

3. The bank account is the balancing item. This figure can be a debit or a credit. Ensure that the Trial Balance balances before completing the notes section.

4. Closing inventory at 31 December 2018 of £4,764 has not been included in the Trial Balance above, this will require adjustment.

Note 1: Revaluation and Impairment 

a. In the plant and machinery figures, a leather tanning machine was purchased on 1 July 2015 at a cost of £75,000 to enable goods to be produced for a specific customer. At that time, it was assessed that the machine had a useful life of 10 years. On 30 June 2018, the machine was reassessed and at that date, it was concluded that the machine would last 20 years, and the fair value was £95,000.

Tiffany Case Ltd adopts a policy of revaluing its non-current assets to their fair value but does not make an annual transfer from the revaluation surplus to retained earnings to represent the additional depreciation charged due to the revaluation.

b. On 31 December 2018, the company was informed by the major customer that it would no longer be placing orders with the company. This caused severe issues within the company and a full review was undertaken. The Board of Directors discussed the option of selling the machine and advertised the machine in a high-profile magazine at a cost of £1,000 which has still to be paid and is not recorded in the Trial Balance.

A buyer was found who was willing to pay £45,000, however, the company would have to cover the transport costs amounting to £3,000.

Tiffany Case Ltd decided to revise the investment returns earned from the machine for the next three years. The results are as follows:

Year Ended 31 December:
2019              20,000
2020              18,000
2021              19,000

Tiffany Case Ltd cost of capital is approximately 8% which results in the following discount factors:

Year Ended 31 December:
2019              0.93
2020              0.84
2021              0.76

None of the above information has been recorded in the Trial Balance as the Financial Director is unclear what to do.

All plant and machinery have been correctly depreciated for the year EXCEPT for the leather tanning machine discussed above which has not yet been depreciated.

The revaluation reserve in the trial balance does not relate to the leather tanning machine. 

Any transactions, if required, relating to the above are to be processed through the Cost of the Sale expense account.

Note 2: Research and Development

Tiffany Case Ltd has accumulated £6,412 in the Research and Development account. The Financial Director is uncertain whether all these items can be capitalised. The Research and Development account is made up of the following 3 items:

a. The Good Speed project commenced in 2017 looking at ways to increase the speed of the leather manufacturing process. Initial research costs totalling £5,000 were expensed in the 2017 financial statements.

During early 2018, the Good Speed project had costings of £3,412 which related to a staff member designing computer software, which automatically creates designs directly onto the leather. 

This software was identified as able to reduce production costs by 10% on 1 January 2018, however, the benefits did not reflect in the financial statements until 1 April 2018. The total costs included £412 in respect of training staff on how to use the software.
 
The Financial Director is not certain if this project can be treated as an Intangible Asset. The Production manager thinks the software has a four-year useful life, however, the IT manager believes it should last for twenty years. 

b. The Leatherhead project has costings of £1,500 during the year 2018. The work of this project has been cancelled due to damage to the leather and further discussions will take place at a later date to decide the future of the project.

c. The company registered the patent, Stainmore, at a cost of £1,500 on 1 October 2018 relating to the design of processing soft leather materials. The life span is 5 years.

Transactions, if any, relating to Research and Development are to be processed through the Selling and Distribution Expense account.

Note 3: Sculpture 

A leather sculpture was purchased on 1 January 2018 for £50,000. The sculpture was placed in the lobby to enable customers to view it. The Directors hoped this would generate interest and hopefully increase sales. 

The artist has become increasingly popular and the Directors believe the value of the sculpture has significantly increased since purchase, however, no formal valuation has been performed to support this opinion.  

On 1 October 2018, another company occupying the building, Block Ltd,  damaged the sculpture. The sculpture has since been repaired at a cost of £5,000. This has been recorded as an expense in the Trial Balance.

Tiffany Case Ltd is currently pursuing two claims with regard to this damage, nothing has been recorded within the Trial Balance in respect of these claims.

a. A claim for £5,000 has been made to the insurance company and they have confirmed in writing that they will settle the claim in full. The insurance company have not confirmed the actual settlement date but believe it will be early January 2019. 

b. The company are suing Block Ltd for £50,000, for inconvenience and loss of revenue, due to customers being unable to access the building while repairs were being completed. The lawyers are undecided on whether the company can win, and the court case will not be arranged until the following year. The solicitors have advised that there is an 80% chance that the company will receive a settlement of £10,000 and a 50% chance that the settlement payment will be £50,000. 

Legal fees of approximately £4,000 have accumulated up to the year-end. These have not been accounted for.

The Financial Director is very puzzled about how to account for the purchase of the sculpture and which accounting standard to apply as there is no accounting standard that specifically deals with the artwork. In advising the Financial Director you will need to consider and justify which accounting standard may be the most appropriate. In addition, you may want to consider underlying accounting principles and the International Accounting Standard Board’s asset definition.   

The Financial Director would also like advice on how to deal with the two claims the company is pursuing.

Any adjustments, if required, relating to the above are to be processed through administration expenses.

REQUIRED:

As the External Financial Advisor to Tiffany Case Ltd prepares a report to the Financial Director, Mr Wong, on the correct accounting treatment of all the 3 issues noted above. 

a. In your discussion, where relevant, make specific reference to;

• International Financial Reporting Standards, International Accounting Standards (Including Specific Paragraphs of the Standard) and
• underlying accounting principles 

b. Present clearly the correct accounting treatment and provide the accounting journals. Show all your workings (the workings are not included in the word count).      

c. Restate the Trial Balance at 31 December 2018 to reflect the correct accounting treatment determined in part (b) using the extended trial balance proforma available on MyBeckett.

                                                                                                                                                                             
d. Using the restated trial balance in (c) prepare a Statement of Profit or Loss and Statement of Financial Position using the format as prescribed in IAS 1. 

Harvard referencing 

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