IA2: ACCOUNTING FOR SPECIALIZED BUSINESSES 1

In this unit, you will start with the preparation of accounting for a company. When preparing account for a company, it is common to think of companies that generally engage in the sale of goods and services, such that, the common way of presenting financial statements is used.

Estate Agents and Property Companies prepare profit and loss account and a balance sheet as a normal trading company and in addition, prepare appropriation account. The peculiarity in its balance sheet is that freehold land held for re-sale is classified as stock under current assets.

ILLUSTRATION

Iruland Estate Development Nigeria Plc, was registered in year 2005. It purchased freehold land at Ajah for the purpose of creating a highly developed holiday centre and retirement estate. The area of land purchased consists of 4,000 plots from which a block of 20 plots was designed as sports and entertainment arena whilst the remaining land was offered for sale at N15,000 per plot, for development of luxury bungalows. As at 30th April, 2008, the position of the company was as follows:

2001

The following transactions took place in the year ended 30th April 2008:

  • On 1 July 2007, to be effective 1 May 2007, the company sold the entertainment arena to complete leisure ltd for N3 million together with arena stocks and debtors at the balance sheet figure. Cash settlement was made on 20th July 2007.
  • The preference shares were redeemed on 30 June 2007, within the terms of the original issue, at a premium of 105, to be in lieu of any accrued dividend. The premium on redemption is to be written off to capital reserve.
  • On 1 July 2007, the proposed ordinary dividend was paid.
  • On 31 October 2007, the 7% debentures were redeemed at 104 together with 6 months accrued interest. The premium on redemption is to be written off to capital reserve. The debenture redemption fund had been created out of profit.
  • On 1 November 2007, the company made a bonus share issue to the ordinary shareholders of one for every three ordinary shares held on that date. The capital reserve arising from the realization of fixed assets was issued for this purpose.
  • During the course of the year, 400 plots were sold at N15,000 a plot.
  • Also, within the year, the creditors as at 1 May 2007, were paid off at a discount of 5% and administrative expenses of N450,000 incurred, of which N210,000 was unpaid at 30th April, 2008.
  • Income from investments (market value on 31 October 2007 was N7,800,000) amounted to N270,000.

You are required to prepare for Iruland Estate Development Nigeria Plc the following for year ended 30 April 2008:
a. Profit and loss appropriation account.
b. Balance sheet as at 30 April 2008.
c. Bank account.

SUGGESTED SOLUTION
IRULAND ESTATE DEVELOPMENT LIMITED

a. Profit and Loss Appropriation Account for the year ended 30 April 2008

2002

2003

SELF ASSESSMENT EXERCISE
Without looking at the solution of the question in the illustration, solve the question and compare to the solution in the illustration.

FARMER’S ACCOUNT

Farmers prepare trading, profit and loss account, and balance sheet, just as every other business outfit. However, peculiarities in a farmer’s account are mainly in the valuation of stock of arable plantation products and livestock. Statement of Accounting Standard No. 4(SAS) on stock, prescribes treatment of these peculiarities.

ARABLE PRODUCTS

a. First-time land clearing and stumping may involve substantial costs which are sometimes capitalised.
b. Tillage in-ground and harvested crops are three distinct operational stages requiring valuation.
Each operational stage has its own peculiar problems of revaluation. Costs incurred are charged to each category.
c. The value of tillage usually includes the accumulated costs of labour and usage of machinery for preparing the land for planting, ploughing and fertilizer spreading.
d. In-ground crops are usually valued by including the costs associated with tillage, labour, seedlings, weeding, disease control and the attributable cost of machinery used.

e. The valuation of harvested crops involves the correct determination of actual input costs, labour, depreciation and storage costs at the time of harvest, to ensure that the value of harvested crops includes all the costs incurred from tillage to harvesting.
f. Most farm products are perishable or deteriorate quickly: therefore, it is appropriate to make reasonable provision for deterioration or animal spoilage based on norm within the industry or after consultation with experts.
g. Where there is adequate record keeping and an appropriate cost accounting system, cost forms the basis for the valuation of arable products. In other situations, net realisable value is used.
h. Official prices for certain products, such as, maize, sorghum and millet, are published by the appropriate commodity Boards, for example, National Grains Board. Use of such official prices is not, however, recommended except where they are below cost.

PLANTATION PRODUCTS

a. The major problem with the determination of the value of a plantation product is that, a plantation does not usually start to produce until after a long gestation period. Thus, all costs associated with land preparation, planting, pruning and development are accumulated until the trees come to maturity are amortized over the estimated productive life of the plantation.
b. It is the normal practice to have planting done in lots or batches so as to have a continuous flow of plantation output. Where possible, costs of such lots or batches are accumulated separately in order to match their revenue with associated costs, when harvested and sold.
c. Each year the cost of plantation output consists of the preparation of the cost accumulated for the quantities harvested plus the cost of extracting and transporting them to the point of sale.
d. Some enterprises prefer to use average cost of production in assigning value to the quantities harvested and those not harvested. This method is justifiable because most plantation products are homogenous.
e. Some plantation crops such as sugarcane and banana are annual crops which yield produce within the first year of being planted. Stocks of such produce are valued in the same manner as arable products.
On the other hand, certain fruit trees such as oranges, mangoes are often grown on a much smaller scale than would normally be regarded as plantation. However, stocks of their products are valued in the same manner as those in plantations.

LIVESTOCK

a. Two major problems are associated with the valuation of livestock:
i. Determining the actual number and their existence, especially, grazing animal; and
ii. Identifying the various stages of their development.
b. The following three approaches to valuation of stock are generally in use:
i. Cost approach; the value is based on the actual cost incurred on each category of livestock.
ii. Net realisable value; the value is based on the expected returns allowing for the costs of fattening, preparation for sale and selling.
iii. Appraised value: the value is determined by professional valuers, taking into consideration the current market value, the mortality factor and the relative marketability of the breed or class of stock.
c. Where livestock is raised primarily for its products rather than for consumption. Such as dairy cattle or egg-laying poultry, different considerations arise in the valuation of such stock. It is usual to accumulate the cost of bringing such livestock to the point of maturity at which they begin to yield products and to amortise such costs over their estimated productive lives.
d. The stocks in livestock enterprise usually include feeds- stock, drugs, small implements and other essential materials. They are usually valued at cost after a physical count.
Main Features of Farm Accounts
a. Open departmental accounts for different activities such as dairy, crops, fruits and livestock rearing, and where necessary, sub-divide the activities.
b. Open ledger accounts as in commercial activities, for example, debit purchases account and credit creditor’s account, for purchases of input on credit.
c. Rotation of crops resulting in a number of fields lying “fallow”, occasionally sown with “fallow crops”, that is, a number of fields are not in full production.
d. Large mechanised farms keep financial records but most small farm records are incomplete or at best; single entries recording receipts and payments.
e. Large expenditure incurred on seeds and fertilizers may occasionally be spread over a period.
Farming equipment purchased that are of material value and expected to be in use for a long period should be capitalized.
f. Valuation of stock and manorial rights are carried out by farm experts.
g. Where destruction of animals and crops as a result of disease and pest respectively occur, compensation for loss is computed for possible insurance claim.
h. Large farms take insurance cover for loss of livestock due to infection or loss of cattle as a result of straying.

Illustration

2004

2005

4. The opening stocks for the following product lines: Cassava N1,256,000, Yam N1,240,000, Cow N2,200,000, Ram N1,840,000.
5. Purchases of: Cow N4,720,000 and Ram N1,472,000.
6. Own consumption: Cassava N64,000; Cow N120,000.
7. Subsidies: Cassava N160,000, Yam N224,000, Cow N320,000, Ram N200,000. You are required to prepare trading, profit and loss account of Multinational Farms for the year ended 31 December 2008 and its balance sheet as at that date

2006

2007

MULTINATIONAL FARMS
TRADING, PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2008

2008

2009

MULTINATIONAL FARMS

BALANCE SHEET AS AT 31 DECEMBER 2008

2010

OIL AND GAS ACCOUNTING- UPSTREAM ACTIVITIES

Companies involved in prospecting and production of crude oil are guided by the Statement of Accounting Standard (SAS) No. 14. The basic principles and illustration of peculiar accounting treatment and methods of calculating depletion, depreciation and amortization of prospecting and production costs of oil and gas will be made. Readers are advised to have another look at SAS No. 14 for the definition of terms and other details.
Costs in oil and gas operations may be classified broadly as:
a. Mineral rights acquisition costs;
b. Exploration and drilling costs;
c. Development costs;
d. Production costs;
e. Support Equipment and facilities costs; and
f. General costs
Oil and Gas accounting methods, full costs, successful effort
Methods and procedures followed by oil companies in accounting for explorations and development costs diverge significantly. Two basic accounting methods that are in common use are the full cost and the successful efforts methods. Both methods are widely followed and each of them has a valid conceptual justification.

Full cost method

  1. All costs incurred on mineral rights acquisition, exploration and development activities (including future development costs) should be capitalized irrespective of whether or not the activities resulted in the discovering of reserves.
  2. The companies using full cost method are referred to as “full cost companies” while those using successful efforts method is referred to as “successful efforts companies:
  3. A third method known as reserve recognition accounting (RRA) allows an enterprise to recognize the “value” of proved oil and gas reserves as assets and changes in such reserve values as earnings in the financial statements. This method is not common, therefore, it is not recommended.
  4. A ceiling test should be conducted at least annually, in order to determine whether the costs capitalized can be recovered from the proved reserve.
  5. Proved reserves represent estimated quantity of oil and gas that can be expected to be recovered from known reservoirs using existing technology. Proved reserve may be developed or undeveloped.

Successful efforts method

  1. Costs incurred prior to acquisition of mineral rights and other exploration activities not specifically directed to an identifiable structure, should be written off in the period they are incurred.
  2. All costs incurred on mineral rights acquisition, exploration, appraisal and development activities should be capitalised, initially on the basis of wells, field or exploration cost centres, pending determination.
  3. Such costs should be written off when it is determined that the well is dry.
  4. Mineral rights acquisition costs that have not been allocated should be amortized over the remaining life of the licence.

ILLUSTRATION

Liboi Producing ltd was incorporated in year 2008 and has two oil mining leases (OML). Reserves in commercial quantities were discovered in 2008, in one of the OMLs. Expenditure were:

201

202

SUGGESTED SOLUTION

LIBOI PRODUCING LTD

203

204

Note:
Proved property of N32 million as shown in the trial balance is the expenditure to date on OML 200 for 100 years of 40 million, less estimated future development cost of N8 million.

ILLUSTRATION

From the following information, you are required to compute the value of the impairment (if any) and comment briefly on your comparative:

205

 

206

Note:

Impairment is assessable individually, well by well, in aggregate or on group of property basis. If impairment were done on individual basis, a provision of N12 million would be made. However, no provision would be made for group or aggregate bases of assessment since group assessed value is higher than cost. Prudence concept is applied here.

Joint Production of Oil and Gas

DD & A is computed based on the equivalent units of production in barrels, where oil and gas are jointly produced. The barrels are the cost unit for oil and are equivalent to 42 US gallons, while gas is measured in metric cubic feet (MCF). For the purpose of calculating equivalent units, it is a standard assumption that one barrel of oil contains six times as much energy as gas, hence the volume of gas is divided by 6 to arrive at equivalent barrels.

Revenue Method of Amortization

DD & A could also be computed based on the current prices (year-end) of the reserves and production. The revenue methods should eliminate distortion caused by the 6:1 conversion ratio by determining amortization on the relative value of hydrocarbons.

ILLUSTRATION

Using the following data, compute full costs for 2004 DD&A using:

(i)Equivalent physical units of production; and

(ii)Revenue values of oil and gas

207

208

SUGGESTED SOLUTION

EQUIVALENT PRODUCTION METHOD/EQUIVALENT QUANTITY PER BARREL

209

CONCLUSION

The peculiarity in agency/property companies’ balance sheet is that freehold land held for re-sale is classified as stock under current assets. The Peculiarities in a farmer’s account are mainly in the valuation of stock of arable plantation products and livestock.

 

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