Question

Landco reported the following additional data. Amounts for Kennedy Realty for the current year are provided for comparison. Kennedy Realty is a U.S. company that follows IFRS.

Landco                                                           Global Kennedy

(pounds sterling, in thousands)                       (dollars, in millions)

Total revenues                        ￡ 741                                                             $ 517

Average total assets    5,577                                                   4,696

Net income           125                                                      297

Required:  

There are several ways to compare these companies, but one way is using ratio analysis. You also know that Landco reports a revaluation surplus of ￡1,952.

1. If you assume that ￡1,550 of the revaluation surplus amount arose from an increase in the net replacement value of investment properties during the year, prepare the journal entry to record this increase.
2. Next, compute the following ratios for Landco Global and Kennedy Realty.

1. Return on assets.

2. Profit margin on sales.

3. Asset turnover.

How do these companies compare on these performance measures?

3. Based on your analysis using IFRS standards, are Landco’s assets and equity overstated as compared to Kennedy’s? If so, why or why not?
4. What types of adjustments did you make in order to have a more valid comparison of ratios between the two entities?

Answer 1

1. If you assume that ￡1,550 of the revaluation surplus amount arose from an increase in the net replacement value of investment properties during the year, prepare the journal entry to record this increase.

DATE	PARTICULARS	NO	DEBIT	CREDIT
	Investment A/c		1550
	To Revaluation Surplus A/c			1550

Ratios for Landco Global and Kennedy Realty.

	Formula	Landco Global	Kennedy Realty
Return on Asset	Net income/Total Asset	125/5577=0.022	297/4696=0.063
Profit margin on sales	Net income/Total revenue*100	125/741*100=16.87	297/517*100=57.45
Asset turnover	Total revenue/Average total asset	741/5577=0.132	517/4696=0.11

How do these companies compare on these performance measures?

These companies can measure the performance on the basis of ratio such as;

Return on Asset

Profit margin on sales

Asset turnover

Income statement