Question

PEG AFRICA

Financial Manager Case Study.

This case study uses the fictional information on page 1. Questions based on the information are found on page 2. Where you feel information is missing, please use reasonable assumptions and not why you believe the assumption is reasonable.

PEG Ghana Solar Limited sells Solar Home Systems (SHS) to individuals on a hire purchase basis. The selling price per unit is GHS 1,043 and it is paid over 12 months by the customer.

Based on customer demand, the company introduced a Solar Tv to be sold on a hire purchase basis. Customers are expected to pay over a period of 24 months. The unit selling price of the TV set is GHS 2,500.

For each product, customers pay an initial deposit before the product is activated for use. In the event that the customer is unhappy and returns the product in a good condition the initial deposit is refunded to the customer but in this scenario the customer forgoes the loan amount (the above deposit) that they have paid.

The company is currently in the month of March, 2017 and purchased 500 SHS at the unit cost of $88 per unit, shipment cost was $1500. Customs duties was $10,000 and carriage inwards and offloading cost were $1,000 and $250 respectively.

The goods were received on 3^rd March, 2017 and were made available for sale. Total Inventory balance for the SHS prior to the receipt of new consignment was 1000units with a value of $124,000.00. The company uses the average costing method to value its inventory.

The company’s borrowing rate in USD terms is 7% and the exchange rate of USD Dollars to the Ghana Cedi as at 31^st March, 2017 is $1: GHS4.3

The company’s stated capital is $500k and the amount due to parent company as at 31^st March, 2017 is $4.3m and has been recognized as intercompany loan at zero coupon rate.

The company wishes to comply with the thin capitalization rule and therefore seek to strategically present its amount due to parent company to comply with thin capitalization rule.

Below is a summary of operational data

Details	SHS	SOLAR TV
Unit Price (GHS)	1,043	2,500
Initial Deposit (GHS)	99	300
Units Sold (March)	1,175	20
Total Receivables as at 28 February, 2017 (GHS) Gross	250,000	10,000
Provision for doubtful debt as at 28 February, 2017(GHS)	5,000	500
Provision for doubtful debt as at 31 March, 2017 (GHS)	10,000	1,000

Questions to case study.

How should revenue be recognized? Please explain.

Compute the cost of products sold and gross profit for the month of March, 2017.

Explain how the trade receivables should be recognized as at 31^st March for the two types of products (SHS and Solar TV)

Discuss the strategy to adopt to enhance compliance with the thin capitalization rule.

Assume 20 customers returned their SHS. Before returning their SHS, the customers had paid off GHS 14,000 from their loans. Indicate the effect of this assumption in your books of accounts.

Indicate the appropriate accounting standards used for the completion of the requirement above where applicable.

NB: Make an assumption when you think you need extra information.

Answer 1

-)1-FOR SHS REVENUE SHOULD BE DIVIDED INTO TWO PARTS.A)-SEGREGATE INTEREST ELEMENT FROM CASH PRICE ELEMENT AND RECOGNISE CASH PRICE AS REVENUE.B)-RECOGNISE INTEREST IN PROPORTION TO UNPAID DUES TO SELLER.

2)-FOR SOLAR TV RECOGNISE REVENUE ONLY A)-WHEN BUYER ACCEPTS GOODS OR B)-TIME PERIOD IF ANY FOR REJECTION HAS ELAPSED OR A RESONABLE TIME HAS BEEN ELAPSED.ONLY THAT AMOUNT WHICH IS NOT SUPPOSED TO BE RETURNED TO THE CUSTOMER CAN BE RECOGNISED WITH CERTAINITY.

-COST OF PRODUCT SOLD

SHS-UNIT COST+SHIPMENT COST+CUSTOM DUTY+CARRIAGE INWARD+OFFLOADING COST

=88+1500+10000+1000+250

=12838(TOTAL COST)

*SAME CRITERIA TO BE FOLLOWED FOR SOLAR TV SINCE NO DATA IS GIVEN FOR IT.

-GROSS PROFIT FOR BOTH=SELLING PRICE - COST(AS SHOWN ABOVE)

-ALL THE TRADE RECEIVABLE WILL BE RECORDED AS DEBTORS IN BALANCE SHEET AND THE PROVISIONS FOR BOTH THE PRODUCTS WILL BE RECORDED IN THE LIABILILY SIDE OF BALANCE SHEET SO THAT THE NET RESULT WILL BE NET TRADE RECEIVABLES.

-FOR COMPLIANCE WITH THIN CAPITALIZATION RULE IT IS ADVISABLE TO EITHER RAISE THE EQUITY LEVEL TO A CERTAIN EXTENT WITH RESPECT TO CORRESPONDING DEBT OR REDUCE DEBT TO A CERTAIN LEVEL WITH RESPECT TO IT'S CORRESPONDING EQUITY BY PAYOFF.

-IF ANY REVENUE HAS BEEN RECOGNISED EARLIER AND LATER ON IT IS REQUIRED TO BE REFUNDED THEN IT IS ALWAYS APPROPRIATE TO MAKE APPROPRIATE PROVISIONS TO SET OFF THE EXCESS REVENUE AMOUNT.THEREFORE APPROPRIATE PROVISIONS SHOULD BVE MADE IN THE PROFIT AND LOSS ACCOUNT FOR THE RETURNED SHS.

-ACCOUNTING STANDARD- REVENUE RECOGNITION.