[Solutions Student Manual]

Introduction
Contents Preface 01 Entities and financial reporting statements xxx 02 International financial reporting: institutional framework and standards xxx 03 History and purpose of the conceptual framework xxx 04 The nature and objectives of financial reporting xxx 05 Accounting principles, concepts and policies 06 The qualitative characteristics of financial information 07 Auditing, corporate governance and ethics 08 The accounting equation and its components 09 Basic documentation and books of account 10 Double entry and the general ledger 11 The balancing of accounts and the trial balance 12 Day books and the journal 13 The cash book 14 The petty cash book 15 The final financial statements of sole traders (introductory) 16 Depreciation and non-current assets 17 Bad debts and provisions for bad debts 18 Accruals and prepayments 19 The preparation of final financial statements from the trial balance (advanced) 20 The bank reconciliation statement 21 Control accounts 22 Errors and suspense accounts 23 Single entry and incomplete records 24 Inventory valuation 25 Financial statements for manufacturing entities 26 The final financial statements of clubs 27 The final financial statements of partnerships 28 Changes in partnerships 29 Partnership dissolution and conversion to a limited company 30 The nature of limited companies and their capital 31 The final financial statements of limited companies 32 Statement of cash flows 33 The appraisal of company financial statements using ratios xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

Preface
This student manual contains suggested answers to those exercises with an asterisk after the question number. In the main these comprise some of the numerical exercises that were written by the author, and some of those of the examining bodies. All the short written review questions are designed so that they can be answered directly from the relevant section of the chapter, though a brief solution is provided for ease of reference (more detail is typically expected in student answers). This student manual is intended to enable the student to monitor the progress of his or her learning. It will be most effective if you first attempt each question without referring to the answer. When you have finished, or done as much as you are able, then check your answer against the suggested solution. Students are also strongly advised to record the time it takes them to answer each question. Most questions carry around 2025 marks, which means that the time allowed to answer them in a three-hour examination is about 3645 minutes. If you take considerably longer than this, then you should attempt the question again at a later date (for revision) to see whether you can answer it more quickly. When you can answer most of the questions in the recommended time, you should be sufficiently prepared for the examination!

1. Entities and Financial Reporting

McGraw-Hill 2011 Ward An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

Statements
1.4 Knowledge of items in the financial reporting Statements Classification Non-current asset Revenue expense Revenue expense Current liability Current asset Statement a Statement of financial position b Statement of profit and loss c Statement of profit and loss d Statement of financial position e Statement of financial position

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

2. International Financial Reporting: Institutional Framework and Standards

2.1 Objectives of the IASB Under the IFRS Foundation Constitution the objectives of the IASB are: (a) to develop, in the public interest, a single set of high quality, understandable and enforceable global accounting standards that require high quality, transparent and comparable information in financial statements and other financial reporting to help participants in the world's capital markets and other users make economic decisions; to promote the use and rigorous application of those standards; in fulfilling the objectives associated with (a) and (b), to take account of, as appropriate, the special needs of small and medium-sized entities and emerging economies; and to bring about convergence of national accounting standards and International Accounting Standards and International Financial Reporting Standards to high quality solutions.

(b) (c)

(d)

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

3. History and Purpose of the Conceptual Framework of Accounting

3.1 Definitions of the conceptual framework

According to the ASB website an accounting standard-setter's conceptual framework or statement of principles describes the accounting model that it uses as the conceptual underpinning for its work. Such statements therefore typically describe the standard-setter's views on:

the activities that should be reported on in financial statements the aspects of those activities that should be highlighted the attributes that information needs to have if it is to be included in the financial statements how information should be presented in those financial statements

The FASB (1976) (US standard setters) in its Scope and Implications of the Conceptual Framework Project describes a conceptual framework of accounting as a constitution, a coherent system of interrelated objectives and fundamentals that can lead to consistent standards and that prescribe the nature, function and limits of financial accounting and financial statements.

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

4. The Nature and Objectives of Financial Reporting (including CSR, Environmental Accounting and Accountability)
4.2 Explanation of terms

Internal control - A system of internal checks, and control procedures that are designed to ensure that assets are not misappropriated and liabilities are complete. Internal check Procedures, tests and controls in place to ensure that transactions are correct and are being processed correctly. Stewardship - The accountability of an enterprises management for the resources entrusted to them. Accountability - Managements responsibility to provide an account/report on the way in which the resources entrusted to them have been used.

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

5. Accounting Principles, Concepts and Policies

5.1 Concept governing drawings

The relevant concept is the entity concept. This concept assumes that the financial statements represent all the transaction of the business entity only, which is not considered to be separate in law (unincorporated entities), however, in accounting is. Therefore, any expenditure by the owner for his/her own personal needs or wants is not to be included, so must be removed from the financial statements through the drawings account. 5.3 Definition of the elements

a. Assets Resources controlled by an entity as a result of past events and from which future economic benefits are expected to flow to the entity. b. Liabilities Present obligations of an entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits c. Ownership interest The residual interest in the assets of the entity after deducting all its liabilities d. Income Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants (owners). e. Expenditure Decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants (owners). Framework (IASC, 1989)

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

5.15 (solution brief points which should be referred to)

The first point relates to the realisation concept and the prudence concept. Profits should not be anticipated but losses should. Though this used to be one of the fundamental concepts of accounting, it has been downgraded due to the abuse of the prudence concept by preparers, wherein it was used for earnings manipulation (smoothing). In January 2009 IAS 1 Preparation and Presentation of Financial Information (IASB, 2009) introduced the comprehensive income statement, which basically requires that holding gains (such as gains on the value of investments) are shown under other comprehensive income. This can either be shown as part of a single comprehensive income statement which shows the profit or loss for the year (as normal) from realised transactions and impairments and a second part which deals with holding gains made. Alternatively, the holding gains (unrealized profits) can be shown in a separate statement to the income statement called the Comprehensive income statement. Therefore, though not treated as realised, holding gains are not provided for the user as the information is deemed to be relevant for economic decisionmaking. The prudence concept, though downgraded, is still important and impairments in value will always be realised in the income statement. Advertising - IAS 38 intangible assets does not allow advertising to be capitalised as development expenditure. Though it is assumed to generate future revenues it is an example of an internally generated intangible asset which cannot be capitalised. The main reasoning for disallowing the treatment is uncertainty as to whether the expenditure qualifies as the element asset and uncertainty as to the measurement of to value to include in the financial statements. Advertising creates brands which do not have an active readily available market to determine market value, they are bespoke and no two brands are the same. Cost may not provide an appropriate measurement basis. The potential revenue generation may be questionable. Therefore reliability takes precedence over relevance in this instance.

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

6. The Qualitative Characteristics of Financial Information

6.8 Definition of terms Off-Balance sheet finance - Method of getting access to resources (assets) without having the associated commitment to pay for the asset recorded in the statement of financial position. Substance over form - Information that represents faithfully the transactions and other events it either purports to represent or could reasonably be expected to represent. The economic substance of the transaction is considered over its legal form. Threshold quality - Materiality is the threshold quality wherein only material information is relevant and therefore only material information should be included in an entitys financial statements.

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

7. Auditing, Corporate Governance and Ethics

7.9The ethical dilemma suggested by your father The suggestion put forward by your father (assuming no country risk) will more than likely increase the profitability of the company in these hard times. However, the board of directors should consider the ethical consequences. Ethical practices can restrict the extent to which a company can achieve its primary objective. In the global economy in which we operate, there is much to be made by companies who have products that can be made in countries that have no employment laws. Profits and company value will theoretically increase if a company is able to access cheap labour, or even child labour, for next to nothing. In these circumstances, companies justify their actions by arguing that some income to a family is better than none; or by highlighting the fact that, though the salaries paid are low, they are higher than those paid by indigenous companies. Many companies also use some of the profits made for social purposes in the communities that they are located in by, for example, building schools, building churches, building hospitals, or getting running water. These are all deemed to be signs of these companies acting ethically. However, this does not get away from the fact that the local population is being abused for financial gain. Whether the board feels that the financial gain is worth the drop in ethical standards is a matter for discussion. Given that this company is a UK company, I would suggest that this action is not consistent with how he should be running a company. In addition, the consequences of this action becoming public might be great. There is likely to be an adverse reaction from trade unions, the public and from the government. The use of bribery or corruption may be seen as part and parcel of normal trade within certain countries. In a global economy when there is much pressure to perform, unethical approaches (such as bribery) might be considered to be fair game when attempting to achieve the companys primary objectives. However, unethical behaviour cannot be defended on the grounds of it being normal practice in a country, nor can it be defended by the argument if I did not do it, someone else would, or we would lose the business to a competitor, who does it. Taking bribes is not considered to be appropriate in the UK and is not appropriate behaviour for UK companies. Were the use of bribery to become public, the company might be subject to public attention and enquiry. All in all these unethical actions may end up with the company in a worse financial state. However, on a positive note looking globally to obtain cheaper running costs and labour is an option that he should look into, however, child labour and bribery should not form part of any investment package.

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

8. The Accounting Equation and its Components

8.1 Relevance of the Entity concept in Accounting A reporting entity is defined in the Statement of Principles for Financial Reporting (ASB, 1999) as an entity for which there are users who rely on the financial statements as their major source of financial information about the entity. Accounting for a reporting entity focuses on setting up a means of recording all accounting information in relation to that entity, as distinct from information that does not relate to the entity. The use of the word entity emphasizes the properties of being separate and discrete. Boundaries are created to separate out the accounting entity. Realizing that these boundaries are necessary, even though they may be artificial, is the key to the entity concept. It becomes possible, for example, to accept that a business may be separate from its sole proprietor. By defining the boundaries of the organizational unit, the accounting entity concept determines the transactions that will be recorded in the financial statements. For example, when a local plumber buys tools to carry out his work, that action can be regarded as a purchase by the business, while when the same man buys a cinema ticket this would be seen as a personal purchase. In the same way, the salary paid to a company director is treated not as some internal transfer within a company but as a payment to an officer as a separate individual. In general, accounting sets up the business, the company and the club as entities that are artificial constructs, separate from their owners and employees as individuals.

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

8.7 J. Frank Statement of financial position as at 1 January 20X3 ASSETS Non-current assets Land and buildings Fixtures Current assets Bank Total assets EQUITY AND LIABILITIES Equity Owners capital (to balance) Total equity Non-current liabilities Mortgage Total non-current liabilities Total equity and liabilities 4,000 4,000 9,800 5,800 5,800 1,740 9,800 7,500 560 8.060

J. Frank Statement of financial position as at 31 December 20X3 ASSETS Non-current assets Land and buildings Fixtures Delivery van Current assets Inventory Sundry receivables Bank Cash Total assets EQUITY AND LIABILITIES McGraw-Hill 2011 Ward An Introduction to Financial Accounting 7e by Thomas and 940 470 1,050 80 2,540 11,250 7,500 560 650 8.710

[Solutions Student Manual]

Equity Owners capital (to balance) Total equity Non-current liabilities Mortgage Current liabilities Sundry payables Total equity and liabilities 800 800 11,250 5,000 5,000 5,450 5,450

J. Frank Determining income for the year ended 31 December 20X3 Capital at 31 Dec 5,450 Less :Capital at 1 Jan 5,800 Apparent loss (350) Add: Drawings 500 Profit for the year 150

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

9. Basic Documentation and Books of Account

9.10Making a cheque safe The cheque should be crossed and the words Account payee only written between the crossing lines.

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

10. Double Entry and the General Ledger

10.3 20X2 1 Oct 6 Oct 12 Oct 24 Oct H. George Cash 20X2 5,000 1 Oct 3,500 2 Oct 1,810 4 Oct 1,320 9 Oct 15 Oct 18 Oct 19 Oct 21 Oct 22 Oct 25 Oct 27 Oct 28 Oct 30 Oct 31 Oct 31 Oct 1 Nov Balance b/d 11,630 4,435 Capital 1 Oct Loan S. Ring 6 Oct Sales revenue 12 Oct 24 Oct 1 Oct 30 Oct 2 Oct 18 Oct 4 Oct Cash Cash Cash Cash Cash Rent and rates 200 400 Purchases 970 630 Fixtures and fittings 1,250 Motor vehicles McGraw-Hill 2011 Ward An Introduction to Financial Accounting 7e by Thomas and Cash Cash Cash Cash 200 970 1,250 2,650 150 630 350 25 65 45 250 35 400 175 4,435 11,630

Capital S. Ring Sales revenue Sales revenue

Rent Purchases Fixtures and fittings Motor vehicles Wages Purchases Drawings Motor expenses Printing Motor expenses Wages Stationery Rates Drawings Balance c/d

5,000 3,500 1,810 1,320

[Solutions Student Manual]

9 Oct 15 Oct 27 Oct 19 Oct 31 Oct Cash Cash Cash Cash Cash 2,650 Wages 150 250 Drawings 350 175 Motor expenses 25 45 Printing and stationery 65 35

21 Oct 25 Oct 22 Oct 28 Oct

Cash Cash Cash Cash

10.4 20X3 1 Mar 18 Mar 28 Mar

L. Johnson Capital Sales revenue G. Lion Bank 20X3 10,000 1 Mar 540 2 Mar 280 6 Mar 9 Mar 13 Mar 20 Mar 24 Mar 26 Mar 30 Mar 31 Mar 31 Mar 10,820 3,170 Capital 1 Mar Sales revenue 11 Mar 18 Mar Leasehold premises Office equipment Postage Purchases Drawings Telephone Light and heat E. Lamb Light and heat Bank charges Balance c/d 5,000 1,400 35 420 250 120 65 230 85 45 3,170 10,820

1 Apr

Balance b/d

Bank

10,000

G. Lion Bank Sales returns Bank

880 540 310 280

11 Mar

Sales

G. Lion 880 22 Mar 28 Mar

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

Sales returns 310 Leasehold premises 5,000 Office equipment 1,400 Postage and telephone 35 120 Purchases 630 420 E. Lamb 4 Mar 180 230

22 Mar

G. Lion

1 Mar

Bank

2 Mar

Bank

6 Mar 20 Mar 4 Mar 9 Mar

Bank Bank E. Lamb Bank

16 Mar 26 Mar

Purchases returns Bank

Purchases

630

Purchases returns 16 Mar E. Lamb Drawings 250 Light and heat 65 85 Bank charges 45

180

13 Mar

Bank

24 Mar 30 Mar

Bank Bank

31 Mar

Bank

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

11. The Balancing of Accounts and the Trial Balance

11.2 20X3 1 Jan 1 Jan 31 Jan S. Baker Details Capital Loan London Bank Ltd Sales revenue Cash account 20X3 Details 1,000 1 Jan Rent 500 2 Jan Fixtures and fittings 600 8 Jan Purchases 9 Jan Carriage inwards 10 Jan Stationery 15 Jan Wages 20 Jan Drawings 31 Jan Balance c/d 2,100 875 100 300 400 25 50 200 150 875 2,100

1 Feb

Balance b/d

20X3 31 Jan

Capital introduced account Details 20X3 Details Capital account 1,000 1 Jan Cash 1,000 Loan London Bank account Details 20X3 Details Balance c/d 500 1 Jan Cash 500 500 1 Feb Balance b/d Sales revenue account 20X3 Details 600 31 Jan Cash 600

1,000 1,000

20X3 31 Jan

500 500 500

20X3 31 Jan

Details Income statement a/c

600 600

20X3 1 Jan

Details Cash

Rent account 20X3 100 31 Jan 100

Details Income statement a/c

100 100

Fixtures and fittings account McGraw-Hill 2011 Ward An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

20X3 2 Jan 1 Feb 20X3 8 Jan Details Cash Balance c/d Details Cash 20X3 Details 300 31 Jan Balance c/d 300 300 Purchases account 20X3 Details 400 31 Jan Income statement a/c 400 Carriage inwards account 20X3 Details 25 31 Jan Income statement a/c 25 Stationery account 20X3 Details 50 31 Jan Income statement a/c 50 Wages account 20X3 200 31 Jan 200 20X3 Details 20 Jan Cash Drawings account 20X3 Details 150 31 Jan Capital a/c 150 150 150 Details Income statement a/c 200 200 300 300

400 400

20X3 9 Jan

Details Cash

25 25

20X3 Details 10 Jan Cash

50 50

20X3 Details 15 Jan Cash

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

11.3 S. Baker Trial balance as at 31 January 20X3 Debit 875 Credit 1,000 500 600 100 300 400 25 50 200 150 2,100

Cash Capital Loan London Bank Sales revenue Rent Fixtures and fittings Purchases Carriage inwards Stationery Wages Drawings

2,100

11.4 H. George (Q10.3) 20X2 1 Oct 6 Oct 12 Oct 24 Oct Cash a/c 20X2 5,000 1 Oct 3,500 2 Oct 1,810 4 Oct 1,320 9 Oct 15 Oct 18 Oct 19 Oct 21 Oct 22 Oct 25 Oct 27 Oct 28 Oct 30 Oct 31 Oct 31 Oct 11,630 4,435

Capital S. Ring Sales revenue Sales revenue

Rent Purchases Fixtures & fittings Motor vehicles Wages Purchases Drawings Motor expenses Printing Motor expenses Wages Stationery Rates Drawings Balance c/d

200 970 1,250 2,650 150 630 350 25 65 45 250 35 400 175 4,435 11,630

1 Nov 31 Oct

Balance b/d Capital a/c

Capital introduced a/c 5,000 1 Oct Cash 5,000 LoanS. Ring a/c 3,500 6 Oct Cash

5,000 5,000

31 Oct

Balance c/d

3,500

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

3,500 1 Nov Balance b/d Sales Revenue a/c 12 Oct Cash 3,130 24 Oct Cash 3,130 Rent & rates a/c 200 400 31 Oct P/L a/c 600 Purchases a/c 970 630 31 Oct P/L a/c 1,600 Fixtures & fittings a/c 1,250 31 Oct Balance c/d 1,250 1,250 Motor vehicles a/c 2,650 31 Oct Balance c/d 2,650 2,650 Wages a/c 150 250 31 Oct P/L a/c 400 Drawings a/c 350 175 31 Oct Capital a/c 525 Motor expenses a/c 25 45 31 Oct P/L a/c 70 Printing & stationery a/c 65 An Introduction to Financial Accounting 7e by Thomas and 3,500 3,500 1,810 1,320 3,130

31 Oct

P/L a/c

1 Oct 30 Oct

Cash Cash

600 600

2 Oct 18 Oct

Cash Cash

1,600 1,600

4 Oct 1 Nov 9 Oct 1 Nov 15 Oct 27 Oct

Cash Balance b/d Cash Balance b/d Cash Cash

1,250 1,250

2,650 2,650

400 400 525 525

19 Oct 31 Oct

Cash Cash

21 Oct 25 Oct

Cash Cash

70 70

22 Oct

Cash

McGraw-Hill 2011 Ward

[Solutions Student Manual]

28 Oct Cash 35 31 Oct P/L a/c 100 100 100

H. George Trial balance as at 31 October 20X2 Debit Credit 4,435 5,000 3,500 3,130 600 1,600 1,250 2,650 400 525 70 100 11,630 11,630

Cash Capital Loan S. Ring Sales revenue Rent & rates Purchases Fixtures & fittings Motor vehicles Wages Drawings Motor expenses Printing & stationery

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

11.5 (Q10.4) L. Johnson Trial balance as at 31 March 20X3 Debit 3,170 290 310 5,000 1,400 155 1,050 220 180 250 150 45 11,820 Credit 10,000 1,420

Bank Capital Sales revenue G. Lion Sales returns Leasehold premises Office equipment Postage and telephone Purchases E. Lamb Purchases returns Drawings Light and heat Bank charges

11,820

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

12. Day books and the journal

12.5 Purchases day book Date 20X3 1 Aug 3 Aug 18 Aug Name of supplier Desks Ltd Chairs Ltd Cabinets Ltd Amount 750 350 720 1,820

Purchases returns day book Date 20X3 10 Aug 21 Aug Name of supplier Desks Ltd Chairs Ltd Amount 225 140 365

Sales day book Date 20X3 6 Aug 13 Aug 23 Aug Name of supplier British Cars Ltd London Beds Ltd English Carpets Ltd Amount 630 680 1,170 2,480

Sales returns day book Date 20X3 16 Aug 25 Aug Name of supplier British Cars Ltd London Beds Ltd Amount 270 85 355

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

The ledger Purchases 20X3 31 Aug Per PDB 1,820 Purchases returns 20X3 31 Aug Per PRDB 10 Aug Returns 31 Aug Balance c/d Desks Ltd 225 1 Aug 525 750 1 Sep Chairs Ltd 140 3 Aug 210 350 1 Sep Cabinets Ltd 18 Aug Sales revenue 31 Aug 31 Aug Per SRDB 6 Aug 1 Sep Sales revenue Balance b/d Sales returns 355 British Cars 630 16 Aug 31 Aug 630 360 London Beds 680 25 Aug 31 Aug 680 595 English Carpets 1,170 Returns Balance c/d 270 360 630 Purchases Balance b/d Purchases Balance b/d Purchases Per SDB

365 750 750 525 350 350 210 720 2,480

21 Aug Returns 31 Aug Balance c/d

13 Aug Sales revenue 1 Sep Balance b/d

Returns Balance c/d

85 595 680

23 Aug Sales revenue

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

12.6 The journal Date 20X3 20 Apr Details account Plant and machinery Dr To Black Ltd Cr Being purchase of machine on credit White Ltd Dr To Motor vehicles Cr Being sale of deliver y vehicle on credit Fixtures and fittings Dr To Grey Ltd Cr Being purchase of shop fittings on credit Yellow Ltd Dr To Office equipment Cr Being sale of typewriter on credit Debit 5,300 Credit 5,300 3,600 3,600

23 Apr

26 Apr

480 480 270 270

28 Apr

The ledger 20X3 20 Apr Plant and machinery 5,300 Black Ltd 20X3 20 Apr Plant and machinery White Ltd 3,600

Black Ltd.

5,300

23 Apr

Motor vehicles

Motor vehicles 23 Apr White Ltd Fixtures and fittings 480 Grey Ltd McGraw-Hill 2011 Ward

3,600

26 Apr

Grey Ltd

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

26 Apr Fixtures and fittings Yellow Ltd 270 480

28 Apr Office equipment

Office equipment 28 Apr Yellow Ltd

270

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

12.7 The journal Date 20X2 1 Aug Details account Premises Dr Plant and machinery Dr Inventory Dr Trade receivables Dr To Trade payables Cr To Capital Cr
Being assets and liabilities introduced into business by owner from takeover of L. House

Debit 55,000 23,000 14,600 6,300 98,900

Credit

2,900 96,000 98,900

The ledger 20X2 1 Aug 1 Aug 1 Aug 1 Aug Premises 55,000 Plant and machinery 23,000 Inventory 14,600 Trade receivables 6,300 Trade payables 20X2 1 Aug Capital

Capital Capital Capital Capital

2,900

Capital 1 Aug Assets and 96 ,000 liabilities Note: The trade receivables and trade payables would be entered in their individual personal accounts.

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

13. The Cash Book

13.3 The cash book Date 20X3 May 1 " 3 " 4 " 15 " 31 " " " " Details Memo. discount allowed b/d Debit amount 3,680 2,000 840 490 160 485 575 Date 20X3 May 7 " 10 " 13 " 18 " 20 " 23 " 26 " 31 " " " " " " Details Memo. discount received Credit amount 510 200 360 2,450 180 70 250 850 220 480 2,660 8,230

Balance Capital Sales Sales Oak Ltd Pine Ltd Lime Ltd

30 25

Purchases Wages Rent Fixtures & fittings Light & heat Printing & stationery Drawings Brick Ltd Stone Ltd Slate Ltd Balance c/d

45 20 40 105

55 June 1 Balance b/d

8,230 2,660

McGraw-Hill 2011

An Introduction to Financial Accounting 7e by Thomas and Ward

[Solutions Student Manual]

13.4 The ledger Capital 20X3 May 1 Balance b/d 3,680

May 31

Capital a/c

Capital introduced May 3 2,000 2,000

Bank

2,000 2,000

The capital introduced and drawings account are balanced to the capital account, however, for the purpose of preparing the trial balance, for extracting the financial statements, these are all kept separate. Sales revenue Apl 30 Per SDB 1,910 May 4 Bank 840 May 31 P/L a/c 3,240 " 15 Bank 490 3,240 3,240 Oak Ltd 20X3 May 1 Balance b/d 190 May 31 Bank 160 " " Discount allowed 30 190 190 Pine Ltd 510 May 31 " " 510 Lime Ltd 630 May 31 " " 630 55 Discount allowed May 31 55 55 Purchases McGraw-Hill 2011 Ward An Introduction to Financial Accounting 7e by Thomas and

May 1

Balance b/d

Bank Discount allowed

485 25 510

Apl 15

Sales

Bank Balance c/d

575 55 630

June 1 May 31

Balance b/d Total per Cash Book

P/L a/c

55 55

[Solutions Student Manual]

Apl 30 May 7 Per PDB Bank 1,850 510 May 31 2,360
Brick Ltd 850 May 1 45 895 Stone Ltd 220 May 1 20 240 Slate Ltd 480 Apl 11 40 May 31 40 560 June 1 Discount received May 31 40 65 105 Wages 200 May 31 200 Rent 360 May 31 360 Fixtures & fittings 2,450 May 31 2,450 2,450 Light & heat 180 May 31 180 Printing & stationery 70 May 31 70 Drawings 250 May 31

P/L a/c

2,360 2,360
895 895

May 31 " "

Bank Discount rec'd

Balance b/d

May 31 " "

Bank Discount rec'd

Balance b/d

240 240

May 31 " " " "

Bank Discount rec'd Balance c/d

Purchases Discount disallowed Balance c/d Total per Cash Book

520 40 560 40

May 31 May 31

Slate Ltd disallowed P/L a/c

105 105

May 10

Bank

P/L a/c

200 200

May 13

Bank

P/L a/c

360 360

May 18 June 1 May 20

Bank Balance b/d Bank

Balance c/d

2,450 2,450

P/L a/c

180 180

May 23

Bank

P/L a/c

70 70

May 26

Bank

Capital a/c

250

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

250 250

B. Jones Trial balance as at 31 May 20X3 Bank Capital Capital introduced Sales revenue Sales returns Lime Ltd (trade receivable) Discount allowed Purchases Purchases returns Slate Ltd (trade payable) Discount received Wages Rent Fixtures & fittings Light & heat Printing & stationery Drawings ad Note 1. The discount relating to Slate Ltd has been entered in the cash book and then reversed as discount disallowed because the latter will probably have occurred at a later date, and to illustrate the entry for discount disallowed. This reversal is often shown as a deduction (in red ink) in the discount received column of the cash book. However, if it was known to have been disallowed on 31 May, as implied in the question, the student would be justified in simply not entering the discount in the cash book in the first place. Debit 2,660 Credit 3,680 2,000 3,240 580 55 55 2,360 195 40 65 200 360 2,450 180 70 250 9,220

9,220

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

13.5 The cash book
Date Details Memo Bank Cash Date discoun t received Balance b/d Sales revenue Sales revenue Sales revenue Cash Capital B. Jones loan Purchases returns Bank British Cars 10 London Beds 15 English Carpets 1,950 470 380 350 500 1,000 20X3 8604 Sep 6 Sep 10 Sep 29015 Sep 16 Sep 19 Sep 20 Sep 17021 Sep Details Memo Bank discoun t receive d Purchases Light and heat Wages Travelling expenses Rates Drawings Purchases Postage and telephone Bank Vehicles Motor expenses Cash Desks Ltd Chairs Ltd Cabinets Ltd Balance c/d 510 250 40 410 150 320 30 350 2,500 25 20 45 280 180 500 190 500 1,320 420 6,680 1,500 Cash

20X3 1 Sep 3 Sep 9 Sep 12 Sep 22 Sep 24 Sep 26 Sep 27 Sep 29 Sep 30 Sep 30 Sep 30 Sep

230

25 1 Oct Balance c/d

18022 Sep 25 Sep 28 Sep 29 Sep 30 Sep 30 Sep 30 Sep 30 Sep 6,680 1,500 1,320 420 350 580 1,100

13.6 The ledger Capital 20X3 1 Sep Balance b/d 3,310 24 Sep Bank 3,310 1 Oct Balance b/d Loan B. Jones 1,000 26 Sep Bank 1 Oct Bal b/d Sales revenue 31 Aug Per SDB 3 Sep Bank 9 Sep Bank 3,620 12 Sep Cash 3,620 2,810 500 3,310 3,310 1,000 1,000 2,480 470 380 290 3,620

30 Sep Balance c/d

30 Sep Balance c/d

30 Sep P/L a/c

Sales returns McGraw-Hill 2011 Ward An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

20X3 31 Aug Per SRDB 1 Sep Balance b/d 355 30 Sep P/L a/c British Cars 360 30 Sep Bank 30 Sep Discount allowed 360 London Beds 595 30 Sep Bank 30 Sep Discount allowed 595 Discount allowed 30 Sep P/L a/c 25 English Carpets 1,170 30 Sep Bank 30 Sep Balance c/d 1,170 70 Purchases 1,820 230 320 30 Sep P/L a/c 2,370 Purchases returns 31 Aug Per PRDB 535 27 Sep Cash 535 Desks Ltd 500 1 Sep Balance b/d 25 525 Chairs Ltd 190 1 Sep Balance b/d 20 210 Discount received 45 30 Sep Total per 355 350 10 360 580 15 595 25

1 Sep Balance b/d

30 Sep Total per Cash Book

23 Aug Sales 1 Oct Balance b/d 31 Aug Per PDB 4 Sep Cash 20 Sep Bank

1,100 70 1,170

2,370 2,370 365 170 535 525 525 210 210

30 Sep P/L a/c

30 Sep Bank 30 Sep Discount received

30 Sep Bank 30 Sep Discount received

Profit and loss account McGraw-Hill 2011 Ward

45

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

Cash Book 30 Sep Bank 30 Sep Balance c/d Cabinets Ltd 500 18 Aug Purchases 220 720 1 Oct Balance b/d Light and heat 510 Profit and loss a/c 250 Wages Profit and loss a/c 720 720 220

6 Sep Bank 10 Sep Bank 15 Sep Cash 16 Sep Bank 19 Sep Cash 21 Sep Cash 25 Sep Bank **

510 250 40 410 150 30 2,500

Travelling expenses 40 Profit and loss a/c 410 Rates Profit and loss a/c

Drawings 150 Profit and loss a/c Postage and telephone 30 Profit and loss a/c Motor vehicles 2,500 30 Sep Bal c/d

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

B. Player Trial balance as at 30 September 20X3 Debit Credit Cash 420 Bank 1,320 Capital 3,310 Loan B. Jones 1,000 Sales revenue 3,620 Sales returns 355 Discount allowed 25 English Carpets 70 Purchases 2,370 Purchases returns 535 Discount received 45 Cabinets Ltd 220 Light and heat 510 Wages 250 Travelling expenses 40 Rates 410 Drawings 150 Postage and telephone 30 Motor vehicles 2,500 Motor expenses 280 8,730 8,730
Note: Discount taken by trade receivables such as English Carp etc, which is not allowed, is usually simply not entered in the discount allowed column of the cash books since the business whose books we are preparing has disallowed the discount.

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

14. The Petty Cash Book

14.3 Petty cash book
Debit amount Date Details Credit Purchases Wages
amount

Motor Travelling expenses expenses

Postage Misc. Printing and and stationery telephone

400

20X4 1 Feb 1 Feb 3 Feb 6 Feb 8 Feb 11 Feb 12 Feb 14 Feb 16 Feb 19 Feb 20 Feb 21 Feb 22 Feb 23 Feb 24 Feb 25 Feb 26 Feb 27 Feb 28 Feb 28 Feb 28 Feb 1 Mar

304 704 400

Balance b/d Purchases Wages Petrol Bus fares Pens and pencils Casual labour Repairs Paper Purchases Train fares Repairs to premises Postage Drawings Taxi fares Envelopes Purchases Wages Petrol Bank Balance c/d Balance b/d

31 28 9 3 8 25 17 15 22 12 35 6 20 7 4 18 30 14 304 400 704

31

28

9 3 8 25 17 15 22 12 35 6 20 7 4 18 30 71 83 14 40 22 27 6 55

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

The ledger 20X4 28 Feb Per PCB Purchases 71 Wages 83 Motor expenses 40 Travelling expenses 22 Printing and stationery 27 Postage and telephone 6 Repairs to premises 35 Drawings 20 Bank 20X4 28 Feb Cash 304

28 Feb Per PCB

28 Feb Per PCB

28 Feb Per PCB

28 Feb Per PCB

28 Feb Per PCB

21 Feb Cash

23 Feb Cash

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

15. The Final Financial Statements of Sole Traders (Introductory)

15.7 R. Woods Statement of profit and loss for the year ended 30 September 20X3 Sales revenue 18,922 Less : Cost of sales Inventory at 1 Oct 20X2 2,368 Add : purchases 12,389 14,757 Less : inventory at 30 Sep 20X3 2,946 11,811 Gross profit 7,111 Less : Expenditure Salaries and wages Rent and rates Insurance Motor expenses Printing and stationery Light and heat General expenses Profit for year 3,862 504 78 664 216 166 314

5,804 1,307

R. Woods Statement of financial position as at 30 September 20X3 ASSETS Non-current assets Premises 5,000 Motor vehicles 1,800 Fixtures and fittings 350 7,150 Current assets Inventory Trade receivables Bank Total assets EQUITY AND LIABILITIES McGraw-Hill 2011 Ward An Introduction to Financial Accounting 7e by Thomas and

2,946 3,896 482 7,324 14,474

[Solutions Student Manual]

Equity capital Balance at 1 Oct 20X2 Add : profit for the year Less : drawings Balance at 30 Sep 20X3 Current liabilities Trade payables Total liabilities Total equity and reserves 12,636 1,307 13,943 1,200 12,743 1,731 1,731 14,474

15.9

A. Evans

Statement of profit and loss for the year ended 30 June 20X3 Sales revenue 81,640 Less : returns inwards 840 Net sales 80,800 Less : Cost of sales Inventory at 1 July 20X2 5,610 Add : purchases 49,870 Less : returns outwards 960 48,91 0 54,52 0 Less : inventory at 30 June 20X3 4,92 0 49,600 Gross profit 31,200 Add : interest received 620 31,820 Less : Expenditure Carriage outwards 390 Rent and rates 1,420 Light and heat 710 Telephone and postage 540 Printing and stationery 230 Bank interest 140 3,430 Profit for the year 28,390

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

A. Evans Statement of financial position as at 30 June 20X3 ASSETS Non-current assets Leasehold premises 52,500 Motor vehicles 13,650 66,150 Current assets Inventory 4,920 Trade receivables 2,630 Investments 4,980 Cash Total assets EQUITY AND LIABILITIES Equity capital Balance at 1 July 20X2 Add : profit for the year Less : drawings Balance at 30 June 20X3 Non-current liabilities Loan - Solihull Bank Total non-current liabilities Current liabilities Trade payables Bank overdraft Total current liabilities Total liabilities Total equity and liabilities 460 12,990 79,140

39,980 28,390 68,370 14,760 53,610 20,000 20,000 1,910 3,620 5,530 25,530 79,140

Note: The student should state that she or he is assuming that the investments are intended to be held for less than one year from the date of the statement of financial position and are thus a current asset. Alternatively, it may be assumed that the investments are to be held for more than one accounting year and are therefore a non-current asset.

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

16. Depreciation and Non-Current Assets

16.7 Is depreciation the loss in value of a non-current asset? A common misconception is that depreciation reflects the loss in value of a non-current asset. However, this is not its purpose. Depreciation is a systematic means of allocating the cost of a non-current asset to the revenue to which the asset helps to generate. It is a prime example of the application of the matching concept. The allocation should reflect the reduction in the useful economic life of the asset (the reduction in the revenue generating powers of the asset). Though it may equate, or be close, to the reduction in the market value of the asset this is not its purpose and may not happen in some cases. For example, when a non-current asset is bespoke (like a mineshaft). In this instance the asset can only be used by that particular company and its market value would be scrap value. The market value would be very different to the net book value (the unallocated portion of the original cost). 16.17 Workings Cost of machines purchased on 1 October 20X2 should include all transportation and installation expenditure: 3,100 + 130 + 590 + 180 = 4,000 Cost per machine = 4,000 2 = 2,000 Disposal Aggregate depreciation from the date brought into use (1 April 20X3) until the date of disposal (31 March 20Y1) = 10% 2,000 8 years = 1,600. Book value at 31 March 20Y1 = 2,000 1,600 = 400. Proceeds of sale = 800 100 = 700. Profit on sale = 700 400 = 300. a 20Y1 31 Mar The journal Machinery disposals Machinery account Being the transfer of the cost of the machine sold to the disposals account Dr Cr Debit 2,000 Credit 2,000

31 Mar

Depreciation expense Dr Provision for depreciation Cr Being depreciation for the current year on the machine sold Provision for depreciation Dr

100 100

31 Mar

1,600

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

Machinery disposals Cr Being the aggregate depreciation on the disposal 31 Mar H. Johnson bank Machinery disposals Being proceeds of sale of machinery sold Machinery disposals Wages Being the labour cost of dismantling the machine sold Machinery disposals Profit and loss account Being profit on sale of machine Machinery account R. Adams bank Being purchase of new machine Dr Cr 800 800 1,600

31 Mar

Dr Cr

100 100

31 Mar

Dr Cr

300 300

1 May

Dr Cr

2,800 2,800

Notes 1 It is likely that in practice the entries relating to depreciation and the profit on sale would be done at the end of the accounting year. However, examination questions like this often expect students to do them on the date of disposal. 2 Although not required by the question, students may find it useful to start by constructing the machinery disposals account in rough form as follows: Machinery disposals Machinery cost 2,000 Provision for depreciation Wages dismantling costs 100 aggregate depreciation 1,600 I/S profit on sale 300 H. Johnson proceeds of sale 800 2,400 2,400

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

b Provision for depreciation for year ended 30 September 20Y1: Machine owned all year: 10% 2,000 = 200 Machine sold: 10% 2,000 6 months = 100 Machine acquired: depreciation from the date brought in to use (1 July 20Y1) to the end of the accounting year: 10% 2,800 3 months = 70 Total depreciation expense for year: 200 + 100 + 70 = 370 16.19 Workings

Plant Cost at 31 December 20X2 = 96,920 + 33,080 40,000 = 90,000 Depreciation for 20X2 = 10% 90,000 = 9,000 Disposal: Aggregate depreciation = 10% 40,000 6 years = 24,000 Book value at disposal = 40,000 24,000 = 16,000 Loss on sale = 16,000 15,000 = 1,000 Vehicles Disposal 1: Aggregate depreciation 20W9 = 25% 3,200 = 800 20X0 = 25% (3,200 800) = 600 20X1 = 25% (3,200 [800 + 600]) = 450 Total = 800 + 600 + 450 = 1,850 Book value at disposal = 3,200 1,850 = 1,350 Loss on sale = 1,350 1,300 = 50 Disposal 2: Aggregate depreciation 20X0 = 25% 4,800 = 1,200 20X1 = 25% (4,800 1,200) = 900 Total = 1,200 + 900 = 2,100 Book value at disposal = 4,800 2,100 = 2,700 Profit on sale = 2,960 2,700 = 260 Remainder Cost at 31 December 20X2 = 25,060 + 4,750 3,200 4,800 = 21,810 Aggregate depreciation at 31 December 20X2 = 14,560 1,850 2,100 = 10,610 Depreciation for 20X2 = 25% (21,810 10,610) = 2,800

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

a The ledger Plant 20X2 96,920 31 Dec Bank 33,080 31 Dec Provision for depn 31 Dec P/L loss 31 Dec Balance c/d 130,000 90,000 50,120 9,000 59,120 35,120 1,300 1,850 50 2,960 2,100 21,810 30,070 15,000 24,000 1,000 90,000 130,000

20X2 1 Jan Balance b/d 31 Dec Bank

20X3 1 Jan Balance b/d

Provision for depreciation on plant 20X2 20X2 31 Dec Plant 24,000 1 Jan Balance b/d 31 Dec Balance c/d 35,120 31 Dec P/L 59,120 20X3 1 Jan Balance b/d 20X2 1 Jan Balance b/d 31 Dec Bank Vehicles 20X2 25,060 31 Dec Bank vehicle 4,750 31 Dec Provision for depn 31 Dec I/S loss 31 Dec Bank vehicle 260 31 Dec Provision for depn _____ 31 Dec Balance c/d 30,070 21,810

31 Dec P/L Profit

20X3 1 Jan Balance b/d

Provision for depreciation on vehicles 20X2 20X2 31 Dec Vehicles 1,850 1 Jan Balance b/d 31 Dec Vehicles 2,100 31 Dec P/L 31 Dec Balance c/d 13,410 17,360 20X3 1 Jan Balance b/d Depn on plant Depn on vehicles Loss on sale plant Loss on sale vehicle The journal McGraw-Hill 2011 Ward Statement of P/L 9,000 Profit on sale vehicle 2,800 1,000 50

14,560 2,800 17,360 13,410 260

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

b 20X2 31 Dec Profit and loss account Dr Provision for depn plant Cr Being depreciation on plant for 20X2 31 Dec Profit and loss account Dr Provision for depn Cr vehicles Being depreciation on vehicles for 20X2 Debit 9,000 Credit 9,000 2,800 2,800

Alternative method disposals account Plant 20X2 20X2 1 Jan Balance b/d 96,920 31 Dec Disposals 31 Dec Bank 33,080 31 Dec Balance c/d 130,000 20X3 1 Jan Balance b/d 90,000 Plant disposals 20X2 20X2 31 Dec Plant 40,000 31 Dec Bank 31 Dec Provision for depn 31 Dec I/S loss 40,000 Vehicles 20X2 20X2 1 Jan Balance b/d 25,060 31 Dec Disposal 1 31 Dec Bank 4,750 31 Dec Disposal 2 31 Dec Balance c/d 29,810 20X3 1 Jan Balance b/d 21,810 20X2 31 Dec Vehicles 1 31 Dec Vehicles 2 Vehicle disposals 20X2 3,200 31 Dec Bank vehicle 4,800 31 Dec Provision for depn 31 Dec I/S loss 31 Dec Bank vehicle 260 31 Dec Provision for depn 8,260

40,000 90,000 130,000

15,000 24,000 1,000 40,000 3,200 4,800 21,810 29,810

1,300 1,850 50 2,960 2,100 8,260

31 Dec I/S profit

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

17. Bad Debts and Provisions for Bad Debts

17.7 Workings Trade receivables at 31 July 20X3 15,680 Less : bad debts (410 + 270) 680 Revised trade receivables at 31 July 20X3 15,000 Provision for bad debts = 4% 15,000 = 600 The ledger 20X3 31 July 31 July 31 July 31 July A. Wall 20X3 410 31 July B. Wood 270 31 July Bad debts 410 31 July 270 680 410 270 680 ___ 680 600

Balance b/d Balance b/d A. Wall B. Wood

Bad debts Bad debts P/L a/c

Provision for bad debts 31 July P/L a/c Statement of P/L a/c Bad debts 680 Provision for bad debts 600 17.8 Workings Trade receivables at 30 Apr 20X3 Less : bad debts (620 + 880) Revised trade receivables at 30 Apr 20X3 Provision for bad debts at 30 Apr 20X3 (3% x 18,000) Less : provision for bad debts at 30 Apr 20X2 Reduction in provision for bad debts The ledger A. Winters McGraw-Hill 2011 Ward

19,500 1,500 18,000 540 750 210

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

20X3 30 Apr 30 Apr Balance b/d Balance b/d 20X3 620 30 Apr D. Spring 880 30 Apr Bad debts 620 30 Apr 880 1,500 Bad debts Bad debts 620 880

30 Apr 30 Apr

A. Winters D. Spring

P/L a/c

1,500 _____ 1,500 750 _ ___ 750 540 210

20X3 30 Apr 30 Apr

Provisions for bad debts 20X2 P/L a/c 210 30 Apr Balance b/d Balance c/d 540 750 20X3 1 May Balance b/d

Bad debts

Statement of Profit and loss account 1,500 Provision for bad debts

17.14 Workings Provision for bad debts Specific provision (320 70) General provision Trade receivables at 31 Dec 20X3 Less :bad debts (210 + [260 110]) specific provision Revised trade receivables at 31 Dec 20X3 Provision at 31 Dec 20X3 (5% x 12,000) Total provision for bad debts at 31 Dec 20X3 Less : provision for bad debts at 31 Dec 20X2 Reduction in provision for bad debts 12,610 360 250 610 12,000 600 850 1,260 410 250

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

Provision for depreciation Date of purchase Details or sale Depreciation on disposal 1 July 20X1 31 Mar 20X3 For year ending 31.12.X1 25% 8,000
6 12

Depreciation Depreciation on disposal of year ended 31 Dec 20X3 1,000 1,750 328 3,078 328

For year ending 31.12.X2 25% (8,000 1,000) For year ending 31.12.X3 25% (8,000 [1,000 + 1,750])
3 12

Book value at 31.3.X3: 8,000 3,078 = 4,922 Loss on sale: 4,922 4,000 = 922 Depreciation on acquisition 31 Mar 20X1
9 25% (4,000 + 1,000) 12 Depreciation on remainder Cost = 30,000 - 8,000 = 22,000 Aggregate depreciation: 12,500 (1,000 + 1,750) = 9,750 WDV = 22,000 9,750 = 12,250 Depreciation = 25% 12,250

938

3,063 4,329

a 20X3 1 Jan 1 May

The ledger A. Bee 20X3 320 30 Apr ___ 30 Apr 320 250 70 250 320

Balance b/d Balance b/d

Bank Balance c/d

1 Jan

Balance b/d

J. Kay 210 15 June Bad debts C. Dee 180 3 Aug F. Gee 260 7 Oct ___ 7 Oct 260 Bad debts 210 31 Dec 150 360 Provision for bad debts

210

1 Jan

Balance b/d

Bank

180

1 Jan

Balance b/d

Bank Bad debts

110 150 260 360 ___ 360

15 June 7 Oct

J. Kay F. Gee

P/L a/c

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

31 Dec 31 Dec P/L a/c Balance c/d 410 1 Jan 850 1,260 20X4 1 Jan Balance b/d 1,260 150 1,260 850 4,000 3,078 922 27,000 35,000

Balance b/d Part exchange Provision for depreciation P/L a/c loss on sale Balance c/d

1 Jan 31 Mar 31 Mar

Plant and machinery Balance b/d 30,000 31 Mar Bank Part exchange 1,000 31 Dec 4,000 31 Dec ______ 31 Dec 35,000

20X4 1 Jan

Balance b/d

27,000

31 Dec 31 Dec

Provision for depreciation Plant and 1 Jan Balance b/d machinery 3,078 Balance c/d 13,751 31 Dec P/L a/c 16,829 20X4 1 Jan Balance b/d

12,500 4,329 16,829 13,751 410

Statement of Profit and loss account Bad debts 360 Provision for bad debts Provision for depreciation 4,329 Loss on sale of plant 922

b Like the provision for bad debts, depreciation is also a provision. A provision is the setting aside of income to meet a known or highly probable future liability or loss, the amount and/or timing of which cannot be ascertained exactly, and thus an estimate has to be made. Provisions for bad debts and depreciation are both intended to provide for a future loss. A provision for bad debts provides for the loss that occurs when credit customers fail to pay their debts. Depreciation is the reduction in the useful economic life of a non-current asset, and a provision for depreciation is intended to provide for the loss in its economic life.

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

18. Accruals and Prepayments

18.2 The ledger 20X2 1 Jan 29 Jan 2 May 30 July 5 Nov Rent 20X2 300 31 Dec P/L a/c 930 31 Dec Prepayment c/d 930 930 960 4,050 320 Light and heat 20X2 420 1 Jan Accrual b/d 360 31 Dec P/L a/c 270 390 150 1,590 20X3 1 Jan Accrual b/d 140 1,450 3,730 320

Prepayment b/d Bank Bank Bank Bank

4,050

20X3 1 Jan Prepayment b/d 20X2 6 Mar 4 June 3 Sep 7 Dec 31 Dec

Bank Bank Bank Bank Accrual c/d

1,590 150

Workings Rent prepaid at 1 Jan 20X2 = 1 3 900 = 300

Rent prepaid at 31 Dec 20X2 = 1 3 960 = 320

Light and heat accrued at 1 Jan 20X2 = 1 3 420 = 140

Light and heat accrued at 31 Dec 20X2 = 1 3 450 = 150

18.8 The entries in a rent receivable account are on the opposite side to those in a rent payable account. The credit to the profit and loss account is the difference between the two sides of the ledger account after entering all the prepayments (or accruals). The derivation of the purchases on credit will be unfamiliar to students at this point in their studies. It is discussed in depth in Chapter 21. However, the principle is very similar to expense accounts containing accruals. A total purchase ledger (control) account is used in place of the individual personal accounts of the credit suppliers. The trade payables (total credit suppliers) at McGraw-Hill 2011 Ward An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

the start and end of the year are entered on the same sides as accruals in an expense account, as are the payments. The credit purchases for the year are then the difference between the two sides of the purchase ledger control account. The ledger Rents receivable 20X3 20X2 31 May P/L a/c 4,004 1 June Prepayment b/d 20X3 31 May Prepayment c/d 517 31 May Bank 4,521 1 June Prepayment b/d Rent and rates payable 20X2 20X2 1 June Prepayment b/d 1 June Accrual b/d 1,246 20X3 20X3 31 May Bank rent 7,491 31 May P/L a/c 31 May Bank rates 2,805 31 May Prepayment c/d 1,509 31 May Accrual c/d 382 11,924 1 June Prepayment b/d 1,509 1 June Accrual b/d Total trade payables 20X2 75,181 1 June Balance b/d 1,043 20X3 4,720 31 May P/L purchases 80,944 1 June Balance b/d 463 4,058 4,521 517 315 10,100

11,924 382

20X3 31 May Bank 31 May Discount recd 31 May Balance c/d

5,258 75,686 80,944 4,720

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

19. The Final Financial Statement of Sole Traders (Advanced)

19.5 Workings
3 6 6,400 = 1,600 Rent prepaid = 6 12 3 Rates prepaid = 12 1,488 = 372 Rent and rates prepaid = 1,600 + 372 = 1,972 Provision for doubtful debts: At 31 December 20X3 = 5% (72,300 - 1,420) = 3,544 Reduction in provision = 3,702 - 3,544 = 158 Depreciation on car = 20% 7,200 = 1,440

C. Jones Extended trial balance as at 31 December 20X3

Trial balance Dr Cr 45,214 Adjustments Dr 9,502 Cr Statement of profit and loss Dr Cr Statement of financial position Dr Cr 35,712

Capital Drawings 9,502 9,502 Purchases 389,072 389,072 Sales revenue 527,350 Wages and salaries 33,440 3,012 3,012 36,452 Rent and rates 9,860 1,972 1,972 7,888 Light and heat 4,142 4,142 Bad debts 1,884 1,420 3,304 Provision doubtful debts 3,702 158 Trade receivables 72,300 1,420 Trade payables 34,308 Bank 2,816 Cash 334 Inventory 82,124 99,356 82,124 82,124 Motor car cost 7,200 Motor car depreciation 2,100 1,440 1,440 Profit for the year 102,442 612,674 612,674 626,864

527,350 3,012 1,972 158 70,880 34,308 99,356 2,816 334 99,356 7,200 3,540 102,44 2 182,55 8 3,544

626,864 182,558

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

C. Jones Statement of profit and loss for the year ended 31 December 20X3 Sales revenue Less : cost of sales Inventory at 1 Jan 20X3 Add : purchases Less : inventory at 31 Dec 20X3 Gross profit Add : reduction in provision for doubtful debts Less : Expenditure Wages and salaries Rent and rates Light and heat Bad debts Provision for depreciation Profit for the year 82,124 389,072 471,196 99,356 527,350

371,840 155,510 158 155,668

36,452 7,888 4,142 3,304 1,440

53,226 102,442

C. Jones Statement of financial position as at 31 December 20X3 ASSETS Non-current assets Motor car at cost Less: provision for depreciation Current assets Inventory Trade receivables Less: provision for doubtful debts Prepayments Bank Cash Total assets 7,200 3,540 3,660 99,356 70,880 3,544 67,336 1,972 2,816 334 171,814 175,474

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

EQUITY AND LIABILITIES Equity capital Balance at 1 Jan 20X3 Add: profit for the year Less: drawings Balance at 31 Dec 20X3 Current liabilities Trade payables Accruals Total liabilities Total equity and liabilities

45,214 102,442 147,656 9,502 138,154 34,308 3,012 37,320 175,474

19.6 J. Clark Statement of profit and loss for the year ended 31 March 20X3 Sales revenue (58,640 400) 58,240 Less : Returns inwards 3,260 Net sales 54,980 Less : Cost of sales Opening inventory 4,670 Add : Purchases (34,260 350) 33,910 Less : Returns outwards 2,140 31,770 Add : Carriage inwards 730 32,500 37,170 Less : Closing inventor y (3,690 + 300) 3,990 33,180 Gross profit 21,800 Add : Discount received 1,970 Investment income 460 24,230 Less : Expenditure Wages 7,180 Carriage outward 420 Discount allowed 1,480 Depreciation on plant (25% x [11,350 4,150]) 1,800 Depreciation on vehicles 1,986 Loss on sale of vehicle 264 Interest payable 1,000 Rent and rates (4,300 210) 4,090 Provision for bad debts ([10% x (8,070 370 400)] 530) 200 Bad debts 370 Light and heat (2,640 + 130) 2,770 Stationery (450 230) 220 21,780 Profit for the year 2,450

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

J. Clark Statement of financial position as at 31 March 20X3 ASSETS Non-current assets Freehold premises Plant and machinery (4,150 + 1,800) Motor vehicles (13,290 1,000) Goodwill Cost 32,000 11,350 12,290 55,640 5,950 4,498 10,448 Prov depn WDV 32,000 5,400 7,792 45,192 5,000 50,192

Current assets Stationer y inventory Inventory (3,690 + 300) Trade receivables(8,070 370 400) Less : Provision for bad debts Sundry receivables Prepayments Quoted investments Bank and cash Total assets EQUITY AND LIABILITIES Equity capital Balance at 1 April 20X2 Add : profit for year Less : Drawings (5,600 + 350) Balance at 31 March 20X3 Non-current liabilities Mortgage on premises Total non-current liabilities Current liabilities Trade payables Accruals Total current liabilities Total liabilities Total equity and liabilities

230 3,990 7,300 730 6,570 458 210 6,470 2,850 20,778 70,970 60,000 2,450 62,450 5,950 56,500 10,000 10,000 4,340 130 4,470 14,470 70,970

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

Workings: Depreciation on vehicles Previous years Disposal 3 20X0/X1: 20% 1,000 12 20X1/X2: 20% (1,000 50) 20X2/X3: 3 20% [1,000 (50 + 190)] 12 Book value at sale = 1,000 278 = 722 Loss on sale = 722 458 = 264 Depreciation on remaining 20% [(13,290 1,000) (2,790 240)] Aggregate depreciation at 31 March 20X3 2,790 + 1,986 278 = 4,498 Note: 1 It is assumed that the quoted investments are to be held for less than one accounting year. 50 190 240 38 278 38 This year

1,948 1,986

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

20. The Bank Reconciliation Statement

20.5 The ledger Balance b/d Dividends Cash book 2,880 Bank charges 189 Refer to drawer Error (141 2) Balance c/d 3,069 105 54 282 2,628 3,069

Grow Ltd Bank reconciliation statement at 31 March 20X3 Balance per cash book Add : Cheques not yet presented (642 + 1,200) Less : Amounts not yet credited Cheque debited in error by bank Balance per bank statement 1,904 216 2,628 1,842 4,470 2,120 2,350

20.6 a

Mrs Lake Bank reconciliation statement as at 30 April 20X3 1,310.40

Balance per bank account Add : Error cheque no. 236130 (87.77 77.87) Receipts not entered in bank account Cheques not yet presented (30 + 52.27) Less : Payments not entered in bank account (12.80 + 32.52) Amounts not yet credited Less : Undetected error Balance per bank statement

9.90 21.47 82.27 45.32 192.80 113.64 1,424.04 238.12 1,185.92 19.47 1,166.45

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

b The undetected error would require further investigation. The amount is the same as cheque number 427519 on 10 April. This cheque number is different from the sequence of the others, which suggests that it may have been debited to Mrs Lakes account in error. Note 1 Students should have realized that cheques numbered 236126 and 236127 shown on the bank statement are in the cash book for March and were unpresented at 31 March (Reconciliation at 31 March 20X3: 1,053.29 15.21 210.70 = 827.38). No entries are required in the bank reconciliation at 30 April 20X3 since these are on the bank statement for April.

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

21. Control Accounts

21.7 The ledger 20X3 1 Jan 31 Jan 31 Jan 31 Jan 31 Jan Sales ledger control account 20X3 Balance b/d 4,200 1 Jan Balance b/d Sales revenue 23,000 31 Jan Returns inward Dishonoured 31 Jan Bank cheques 1,850 31 Jan Discount Bad debts recovered 230 allowance Interest on 31 Jan Bad debts overdue accts 120 31 Jan Bills receivable 31 Jan Purchase ledger contra 31 Jan Allowances Balance c/d 240 31 Jan Balance c/d 29,640 Balance b/d 4,575 1 Feb Balance b/d 300 750 16,250 525 670 5,300 930 340 4,575 29,640 240 6,150 21,500

31 Jan 1 Feb

Purchase ledger control account 20X3 20X3 1 Jan Balance b/d 250 1 Jan Balance b/d 31 Jan Returns outward 450 31 Jan Purchases 31 Jan Bank 19,800 31 Jan Discount recd 325 31 Jan Bills payable 4,500 31 Jan Sales ledger contra 930 31 Jan Allowances recd 280 31 Jan Balance c/d 1,535 31 Jan Balance c/d 28,070 1 Feb Balance b/d 420 1 Feb Balance b/d
Notes

420 28,070 1,535

1 The following items do not appear in control accounts: carriage inwards, carriage outwards; provision for bad debts; cash received from bills receivable; cash paid on bills payable. 2 The debit balance on the sales ledger control account is calculated by subtracting the total of the credit side from the debit side. The credit balance on the purchases ledger control account is calculated in a similar way. 3 The credit balances on the sales ledger control account are probably the result of credit customers overpaying, possibly in instances where they have been sent a credit note for goods and also paid for them. Similarly, the debit balances on the purchases ledger control account may be due to this business overpaying some of its credit suppliers. 4 Although credit balances on the sales ledger control account and debit balances

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

on the purchase ledger control account are frequently encountered in examinations, in practice each control account can only throw up one balance which would naturally be the difference between the two sides of the control account. This balance should then agree with the difference between the total of the debit and credit balances of the personal accounts in the personal ledger. 5 Sometimes goods are bought from a business to which goods were also sold. In these circumstances the amounts owed may be set off against each other and a cheque paid/received for the difference. The amount set off is referred to as a personal ledger contra and in the above example is 930. 6 It is assumed that the actual money received that relates to debts that were previously written off as bad (230) is included in cheques received from credit customers. Thus, the item bad debts recovered is treated as an instruction to reverse the entry by which they were originally written off.

21.8 a The ledger Balance b/d Sales revenue Bad debts recovered Cash Interest on overdue accounts Sales ledger control account 14,364 Bank 138,208 Discount allowed 84 Returns inwards 132 Bills receivable 20 Bad debts Purchase ledger contra Balance c/d Balance b/d b 152,808 20,614 118,258 3,692 1,966 6,486 1,186 606 20,614 152,808

Sales ledger control account Original balance Add : Sales day book undercast Less : Discount allowed omitted Amended balance Sales ledger Original balances Add :Amount of cheque transposed (4,300 3,400) Less : Returns posted incorrectly (125 2) Amended balance

20,614 1,000 21,614 50 21,564 20,914 900 21,814 250 21,564

21.9 a The ledger Sales ledger control account McGraw-Hill 2011 Ward An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

Balance b/d Sales revenue 17,220 Bank 98,730 Returns inwards Bills receivable Discount allowed Bad debts Transfer to purchase eldger Balance c/d 115,950 8,280 45,280 18,520 29,160 6,940 4,920 2,850 8,280 115,950

Balance b/d

Purchase ledger control account Bank 38,020 Balance b/d Returns outwards 16,010 Purchases Bills payable 21,390 Cash Discount received 7,680 Transfer to sales ledger 2,850 Balance c/d 22,830 108,780 Balance b/d b Purchase ledger Original balances Add : cheque posted wrongly (3,400 340) Less : returns outward error (180 2) Amended balance Purchase ledger control account Original balance Add : discount received (210 120) Less : purchases day book overcast Amended balance Undetected error = 23,400 22,420 = 980

20,490 85,860 2,430

108,780 22,830 20,700 3,060 23,760 360 23,400 22,830 90 22,920 500 22,420

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

22. Errors and suspense accounts

22.6 a Debit wages account with 250. b Credit sales account with 100. c Credit suppliers personal account with 9 (i.e. 198 189). d Change the amount shown in the trial balance in respect of drawings to 300. e Debit the bank account with 172 (i.e. 86 2). 22.10 The Journal Debit 32 Credit 32 28 28 720 720 3,000 3,000 80 80 100 100 17 17 41 41 9

Light and heat Suspense Being correction of posting error Suspense Wages Being correction of arithmetic error Rent Suspense Being correction of transposed figures Motor vehicles Purchases Being correction of error of principle A. Watson A. Watt Being correction of an error of commission Sales revenue Loose tools Being correction of error of principle Postage and telephone Carriage outwards Being correction of error of commission Bank charges Cash book Being correction of error of omission Stationery

Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr Dr

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

Sales revenue Being correction of a compensating error 10 J. Bloggs Sales control Sales revenue Being correction of error of prime entry Suspense Trial balance Being correction of extraction error Cr Dr Cr Dr Cr 108 108 124 124 9

11

The ledger Difference per trial balance Wages Extraction error Suspense 600 Light and heat 28 Rent 124 752 32 720 752

22.14 a The journal 20X3 31 March Cash book Suspense account Being correction of undercast on debit side of cash book Freehold premises: Suspense account Being correction of purchase of building in cash book not posted to ledger Suspense account Purchases Being correction of purchases of 100 entered in PDB summary as 1,000 Debit 10,000 Credit 10,000

Dr Cr

Dr Cr

5,000 5,000

Dr Cr

900 900

Carriage Dr Suspense account Cr Being correction of transport charge of 450 entered in PDB summary as 45 Rent receivable Suspense account Being correction of rent received of 45 posted twice to the ledger McGraw-Hill 2011 Ward Dr Cr

405 405

45 45

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

Sales ledger control account Suspense account Being correction of undercast on debit side of sales ledger control account Notes 1 Item 3 relates to errors in a PDB summary that is used to post the nominal ledger. It is assumed that the credit suppliers personal ledger is posted from the PDB and not the summary, and thus the individual suppliers personal account and control account are correct. 2 Item 5 assumes that the sales ledger control account is part of the double entry in the ledger and thus the balance is included in the statement of financial position. 3 Items 6 to 9 do not necessitate entries in the suspense account but will require journal entries for their correction. 4 Check that the balance on the suspense account has been eliminated as follows: Suspense 14,650 Cash book 900 Freehold premises Carriage Rent receivable Sales ledger control account 15,550 Dr Cr 100 100

Per trial balance Purchases

10,000 5,000 405 45 100 15,550

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

b Workings Bank account 10,000 Balance b/d Bank charges Balance c/d 10,000 5,520 Freehold premises 60,000 5,000 65,000 1,230 3,250 5,520 10,000

Correction of undercast

Balance b/d Balance b/d Correction of posting error

Balance b/d Correction of undercast

Sales ledger control account 37,140 100 37,240 Provision for depreciation on vehicles Balance b/d I/S a/c Inventory 75,410 1,250 76,660 Purchase ledger control account Balance b/d Purchases 41,360 2,110 43,470 33,500 900 1,250 11,935 500 12,435

Balance b/d Undervaluation

Profit and loss account Carriage 405 Balance b/d Rent receivable 45 Purchases Bank charges 3,250 Inventory Depreciation on vehicles 500 Purchases 2,110 Revised profit 29,340 35,650

35,650

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

Miscup Statement of financial position as at 31 March 20X3 ASSETS Non-current assets Freehold premises Motor vehicles Fixtures and fittings Current assets Inventory Trade receivables Bank Cash Total assets TOTAL ASSETS AND LIABILITIES Equity capital (start of year) Add : profit for the year Total equity Current liabilities Trade payables and accrued charges Total current liabilities Total equity and liabilities Cost Agg/depn 65,000 25,000 12,435 1,500 750 91,500 13,185 WDV 65,000 12,565 750 78,315 76,660 37,240 5,520 75 119,495 197,810 125,000 29,340 154,340 43,470 43,470 197,810

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

23. Single Entry and Incomplete Records

23.5 Workings for plant Cost at 30 June 20X2 Add : additions Less : disposals Cost at 30 June 20X3 Aggregate depreciation Depreciation at 30 June 20X2 (50,000 31,000) Add : depreciation for the year on addition (10% 20,000 3 mths) on disposal (10% 10,000 3 mths) on rest (10% [50,000 10,000]) Less : aggregate depreciation on disposal 10% 10,000 2 years 9 mths Depreciation at 30 June 20X3 50,000 20,000 70,000 10,000 60,000

19,000 500 250 4,000

4,750 23,750 2,750 21,000

Round Music Statement of financial position as at 30 June 20X3 ASSETS Non-current assets Plant at cost Less : aggregate depreciation Current assets Inventory (8,630 1,120) Trade receivables Less : provision for doubtful debts Prepayments Total assets 60,000 21,000 39,000 7,510 6,120 310 5,810 80 13,400 52,400

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

EQUITY AND LIABILITIES Equity Capital at 30 June 20X3 Total equity Non-cur rent liabilities Long-term loan Total non-current liabilities Current liabilities Trade payables Accruals Bank overdraft Total current liabilities Total liabilities Total equity and liabilities Round Music Statement of profit for the year ended 30 June 20X3 Capital at 30 June 20X3 Less : capital at 30 June 20X2 Add : drawings (18,500 + 750) Less : capital introduced Profit for the year 40,360 42,770 (2,410) 19,250 16,840 5,000 11,840

40,360 40,360 7,000 7,000 3,480 130 1,430 5,040 12,040 52,400

23.7 Workings 1 Credit purchases = 5,720 + 33,360 - 5,220 = 33,860 2 Total purchases = 33,860 + 1,120 + 4,500 = 39,480 3 Credit sales = 5,840 + 31,860 6,540 = 31,160 4 Cash sales = 18,920 + 4,000 + 1,120 + 980 + 170 = 25,190 5 Total sales = 25,190 + 31,160 = 56,350 6 Telephone = 120 + 280 140 = 260 7 Light and heat = 370 + 290 60 = 600 8 Motor expenses = 1,810 + 980 = 2,790 9 Depreciation on fixtures and fittings = 20% 5,800 = 1,160 10 Accumulated depreciation on fixtures and fittings = 10,000 5,800 + 1,160 = 5,360

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

A. Fox Statement of profit and loss for the year ended 31 July 20X3 Sales revenue 56,350 Less : cost of sales Inventory at 1 Aug 20X2 3,300 Add : purchases (39,480 530) 38,950 42,250 Less : inventory at 31 July 20X3 3,920 38,330 Gross profit 18,020 Less : expenditure Wages 5,640 Telephone (120 + 280 140) 260 Light and heat (370 + 290 60) 600 Motor expenses (1,810 + 980) 2,790 Printing 560 Cleaning 170 1,160 11,180 Depreciation (20% 5,800) Profit for the year 6,840 A. Fox Statement of financial position as at 31 July 20X3 ASSETS Non-current assets Cost Agg/depn Freehold land and buildings 35,000 Fixtures and fittings 10,000 5,360 45,000 5,360 Current assets Inventory Trade receivables Prepayments Bank Total assets EQUITY AND LIABILITIES Equity capital Balance at 1 Aug 20X2 Add : capital introduced Profit for year Less : drawings (4,000 + 530) Balance at 31 July 20X3 Current liabilities Trade payables Accruals Total current liabilities Total equity and liabilities

WDV 35,000 4,640 39,640 3,920 5,840 140 8,260 18,160 57,800 48,480 1,000 6,840 56,320 4,530 51,790 5,720 290 6,010 57,800

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

24. Inventory Valuation

24.6 Discussion on the relationship between inventory valuation method and actual costs. When a firm elects not to separately identify each individual item of inventory either because this is impossible as the items cannot be separately identified (coal, oil, etc) or because the cost of this type of system would exceed the benefit then three common methods are typically used for valuing the inventory that is sold (or released to production). These are the LIFO, FIFO and AVCO methods of inventory valuation. Each of the three methods of calculating the cost of inventory results in different values for inventory and hence profit. In times of constantly rising prices, FIFO will give the highest figure for profits of the three methods (as the cheaper values relating to items that are purchased earlier/first will be released as an expense first) and the highest value of inventory at the period end (as the remaining inventory will be valued at the latest higher priced). In summary under FIFO older, lower costs are matched against revenues than is the current reality, however, the value of inventory in the statement of financial position will be current. The opposite impact on profit and inventory valuation will occur in times of falling prices (uncommon). When prices are rising, the lowest profit figure will be reported under the LIFO method as the more expensive values relating to the more recently purchased items will be released to the statement of profit and loss first. Under this method inventory will have the lowest valuation of the three methods as the remaining items will be assigned the earliest price values (which are the lowest in times of rising prices). In summary under LIFO the statement of profit and loss reflects the most recent costs; however, the statement of financial position will be out of date as inventory will be valued at old values. The opposite impact on profit and inventory valuation will occur in times of falling prices (uncommon). Under AVCO average prices are used and the value of the inventory released to the statement of profit and loss will lie between the LIFO and FIFO methods as will the value of year-end inventory. A business should choose whichever method is appropriate to its particular circumstances and apply this consistently in order that meaningful comparisons can be made. FIFO is by far the most common method used in practice in the UK because it is favoured by the UK accounting standard SSAP 9 Stocks and Long Term Contracts (ASC, 1988), by IAS 2 and by HM Revenue and Customs. The valuation of inventories is a controversial issue in accounting, and is one of the areas most open to deliberate manipulation.

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

24.9 Universal shoes (a) Inventories schedule as at 31 December 20X2
Cost Net realisable value Lower of cost and NRV

Casual shoes 10,000 x 6 2,000 x 6

60,000 10,000 x 30 12,000 2,000 x 30 72,000 51,000 3,000 x 55 24,000 2,000 x 55 75,000 94,000 2,000 x 30

300,000 60,000 360,000 165,000 110,000 275,000 60,000

72,000

Work shoes 3,000 x 17 2,000 x 12

75,000 60,000 207,000

Dress shoes 2,000 x 47

b) Memorandum to chief accountant TO: Chief accountant FROM: An Accountant Subject: Inventory valuation Date: 15 January 20X3 (the contents of the answer should refer to the following points) I refer to your recent request regarding the valuation of inventories as at 31 December 20X2. IAS 2 Inventories sets out the methods allowed for valuing inventories. Points that might be included -Under IAS 2 inventories includes assets that are held for sale in the ordinary course of the business. -It states that inventory value includes the cost of purchase (purchase price), import duties and transport and handling costs (but excludes trade discounts) FIFO and the weighted average method are allowable but LIFO is not. So the FIFO policy adopted by Universal shoes is fine. -In terms of valuation inventory should be held at the lower of cost and the Net realizable value (NRV). When the sale price expected is below inventory cost then inventory should be written down to this value (less any costs to sell the assets). This value is called the NRV. When calculating the closing costs for the shoes the following matters arose 1. Casual shoes there were goods in transit at the year end. In accordance with cut-off principles, the goods need to be included in McGraw-Hill 2011 Ward An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

inventories as they have been included in purchases and in trade payables. 2. Work shoes the cost of these shoes increased on 1 November 20X2. In order to apply the FIFO method for inventory valuation, account is taken of the jackets in inventory from 1 November 20X2, which will be valued at the new cost. Any remaining inventory will be valued at the old cost. 3. Dress shoes the market for these shoes changed from 1 January 20X3. Although this is after the year end, it still has to be taken account of when arriving at the inventory valuation. The effect of the market changing has resulted in a reduction in the NRV of the shoes from 75 to 40, with associated costs of 10 reducing the NRV further to 30 per pair. As the NRV is lower than cost this is the value that is used for the year-end inventory figure. I hope this explains the valuation of inventory at the year- end. Any issues ask, etc.

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

24.14 a Cost of sales FIFO
Quantity Purchase Value Quantity price 1,200 1,000 1.00 1,200 1.05 1,050 800 600 1.10 660 1.00 800 COS price Value Quantity Inventory price 1,200 1,000 2,200 400 1,000 1,400 400 1,000 600 2,000 800 600 800 600 900 2,300 800 300 1,100 800 1.25 1,000 1.05 1.10 840 330 1,170 300 900 1,200 300 900 800 2,000 700 700 700 700 1,400 300 700 1,000 1.00 1.05 1.00 1.05 1.00 1.05 1.10 1.05 1.10 1,500 1.05 1.10 1.20 1.10 1.20 1.10 1.20 1.25 Value 1,200 1,050 2,250 400 1,050 1,450 400 1,050 660 2,110 840 660 840 660 1,080 2,580 330 1,080 1,410 330 1,080 1,000 2,410 875 875 875 910 1,785 375 910 1,285

400 200 600 900 1.20 1,080

1.00 1.05

400 210 610 1,400

300 900 100 1,300 700 1.30 910 400 5,200 5,900 4,200

1.10 330 1.20 1,080 1.25 125 1,535

1.25 1.25 1.30 1.25 1.30

1.25

500 4,615

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

LIFO
Quantity Purchase Value Quantity price 1,200 1,000 1.00 1,200 1.05 1,050 800 600 1.10 660 1.05 840 COS price Value Quantity Inventory Value price 1,200 1,000 2,200 1,200 200 1,400 1,200 200 600 2,000 1,200 200 1,400 1,200 200 900 2,300 1,200 1,200 1,200 800 2,000 700 700 700 700 1,400 300 700 1,000 1.00 1.05 1.00 1.05 1.00 1.05 1.10 1.00 1.05 1.00 1.05 1.20 1.00 1.00 1.25 1.00 1.00 1.30 1.30 1.00 1,200 1,050 2,250 1,200 210 1,410 1,200 210 660 2,070 1,200 210 1,410 1,200 210 1,080 2,490 1,200 1,200 1,200 1,000 2,200 700 700 700 910 1,610 390 700 1,090

600 900 1.20 1,080

1.10

660

900 200 1,100 800 1.25 1,000 800 500 1,300 700 1.30 910 400 5,200 5,900 4,200

1.20 1,080 1.05 210 1,290

1.25 1,000 1.00 500 1,500

1.30

520 4,810

Weighted average (AVCO) Purchases Less : inventory 1,000 @ (5,900 5,200) Cost of sales 5,900 1,135 4,765

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

b Workings Sales revenue

Quantity Units 800 600 1,100 1,300 400 4,200

Price 1.70 1.90 2.00 2.00 2.05

Value 1,360 1,140 2,200 2,600 820 8,120

Capital Sales revenue

Balance b/d Statements of profit and loss Sales revenue Less : cost of sales Gross profit Less : expenses Profit for the year

Bank 6,000 Purchases 8,120 Expenses (1,740 570) Balance c/d 14,120 7,050 FIFO 8,120 4,615 3,505 1,740 1,765 LIFO 8,120 4,810 3,310 1,740 1,570

5,900 1,170 7,050 14,120 AVCO 8,120 4,765 3,355 1,740 1,615

Statements of financial position ASSETS Inventory Bank Total assets EQUITY AND LIABILITIES Equity Capital at start of period Profit for year Capital at end of period Current liabilities Accrued expenses Total equity and liabilities 1,285 7,050 8,335 1,090 7,050 8,140 1,135 7,050 8,185

6,000 1,765 7,765 570 8,335

6,000 1,570 7,570 570 8,140

6,000 1,615 7,615 570 8,185

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

25. Financial Statements for Manufacturing

25.6 Upton Upholstery Manufacturing Account for the year ended 30 April 20X3 Raw materials: Inventory at 1 May 20X2 Add : purchases carriage inwards Less :inventor y at 30 Apr 20X3 Cost of raw materials consumed Direct wages (19,900 + 600) Prime cost Factory overheads: Depreciation: machinery (28,000 7) Light and heat (3,000 4 5) Rent and rates 3 (6,600 [ 1 3 600]) 4 Factory costs Manufacturing costs Add : WIP at 1 May 20X2 Less :WIP at 30 Apr 20X3 Factory cost of completed production 84,000 1,200 4,000 85,200 89,200 (5,400) 83,800 20,500 104,300

4,000 2,400 4,800 11,200 115,500 16,400 131,900 (17,000) 114,900

Statement of profit and loss for the year ended 30 April 20X3 Note Sales revenue 140,000 Cost of sales 1 (115,900) Gross profit 24,100 Selling and distribution 2 (3,100) Administration 3 (7,800) Profit for the year 13,200

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

Workings for the statement of profit and loss 1. Cost of sales Inventory at 1 May 20X2 Add : factory cost of production Less :inventory at 30 Apr 20X3 Cost of sales 2. Selling and distribution overheads Carriage outwards Sales commission Provision for doubtful debts 3. Administrative overheads Depreciation: equipment25% (2,000 800) Light and heat (3,000 1 5)
1 Rent and rates (6,600 [ 1 3 600]) 4 Office wages (5,200 + 100)

9,000 114,900 123,900 8,000 115,900 700 1,400 1,000 3,100 300 600 1,600 5,300 7,800

Upton Upholstery Statement of financial position as at 30 April 20X3 ASSETS Cost Aggr. Non-current assets depn Factory machinery (5,000 + 4,000) 28,000 9,000 Office equipment (800 + 300) 2,000 1,100 30,000 10,100 Current assets Inventories (5,400 + 17,000 + 8,000) Trade receivables 15,000 Less : provision for bad debts 1,000 Prepaid rent Cash and bank Total assets EQUITY AND LIABILITIES Equity capital Capital Non-current liabilities Bank loan Current liabilities Trade payables Accrued costs (600 + 100) Total current liabilities Total liabilities Total equity and liabilities Workings for the statement of financial position McGraw-Hill 2011 Ward

WDV 19,000 900 19,900 30,400 14,000 200 2,300 46,900 66,800 39,100 11,000 16,000 700 16,700 27,700 66,800

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

1. Equity capital Balance at 1 May 20X2 Add : profit for the year Less : drawings Balance at 30 April 20X3 35,000 13,200 48,200 9,100 39,100

25.7

Manufacturing account for the year ended 31 December 20X2

Raw materials: Inventory at 1 Jan 20X2 Add : purchases (47,693 2,093) Add: carriage inwards Less : returns outward Less : inventory at 31 Dec 20X2 Cost of raw materials consumed Direct wages (23,649 549) Direct expenses: Royalties Prime cost Factory overheads: Supervisors wages Electricity factory Depreciation on plant Rent and rates factory Insurance on plant Repairs to plant Manufacturing costs Add : WIP at 1 Jan 20X2 Less : WIP at 31 Dec 20X2 Less : proceeds from the sale of scrap Factory cost of completed production

2,453 45,600 683 46,283 4,921

41,362 43,815 3,987 39,828 23,100 7,500 70,428

5,617 2,334 13,400 3,600 1,750 917

27,618 98,046 1,617 99,663 2,700 96,963 199 6,764

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

Statement of profit and loss for the year ended 31 December 20X2 Note Sales revenue Cost of sales Gross profit Discount received Selling and distribution Administrative Financial charges Profit for the year 2 145,433 95,433 50,000 2,310 52,310 (16,246) (16,064) (3,100) 16,900

3 4 5

Notes 1 The proceeds from the sale of scrap metal could have been deducted from the cost of raw materials.

2 Cost of sales Inventory of finished goods at 1 Jan 20X2 Add : factory cost of production Purchases of finished goods

Less : inventory of finished goods at 31 Dec 20X2 Cost of sales 3. Selling and distribution overheads Salaries and commission Carriage outwards Bad debts Discount allowed Depreciation vehicles Delivery expenses Advertising 4. Administrative overheads Salaries Light and heat Depreciation fixtures and furniture Rent and rates Postage and telephone Printing and stationery 5. Financial charges Loan interest Bank charges

3,968 96,764 36 7 101,09 9 5,666 95,433 8,600 487 726 1,515 3,700 593 625 16,246 10,889 998 1,900 1,200 714 363 16,064 3,000 100 3,100

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

26. The Final Financial Statements of Clubs

26.1 The income and expenditure account is prepared using the same principles as the statement of profit and loss, namely the matching and accrual of revenue income and expenditure. However, the contents differ in that income will take the form of subscriptions, entrance fees from sports activities, surpluses on a bar, dances, raffles, gaming machines, annual dinners, and so on. In some instances, the final financial statements of clubs include a receipts and payments account instead of an income and expenditure account. This is simply a summary of the cash book showing the opening and closing cash and bank balances and the total amounts received and spent on each type of income and expenditure, assets, and so on. It is not prepared using the accruals or matching concept just cash received and paid.

26.8a

Elite Bowling & Social Club Statement of affairs as at 31 October 20X1 Cost 440 120 560 Agg depn 44 100 144 WDV 396 20 416 30 209 585 263 10 1,097 1,513 1,306 186 12 9 207 1,513

ASSETS Non-current assets Furniture, fixtures and fittings Mower Current assets Subscriptions in arrear Bar inventory Bank deposit account current account Cash Total assets

TOTAL MEMBER FUNDS AND LIABILITIES General fund at 31 Oct 20X1 Current liabilities Bar trade payables Accrued rent and rates Accrued light and heat Total liabilities Total member funds and liabilities

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

Workings 1 Net bar purchases Purchase ledger control account 20X2 20X1 31 Oct I&E 1,885 31 Oct Balance b/d 186 31 Oct Balance c/d 248 20X2 ____ 31 Oct Net purchases 1,947 _ 2,133 2,133 2 Subscriptions Subscriptions 20X2 30 31 Oct R&P (30 + 574 + 44) 31 Oct Subs in arrear c/d 624 44 698 3 Non-current assets 648 50 ___ 698

20X1 31 Oct Subs in arrear b/d 20X2 31 Oct Subs for year 31 Oct Subs in advance c/d

Cost of furniture, fixtures and fittings = 440 + 460 = 900 Depreciation on furniture, fixtures and fittings = 10% 900 = 90 Accumulated depreciation on furniture, fixtures and fittings = (440 396) + 90 = 134 Profit on disposal of mower = 40 20 = 20 Cost of new mower = 120 + 40 = 160 Elite Bowling & Social Club Bar statement of profit and loss for the year ended 31 October 20X2 Bar revenue Less: cost of sales Bar inventory at 1 Nov 20X1 Add: purchases Less: bar inventor y at 31 Oct 20X2 Gross profit b 209 1,947 2,156 178 1,978 307 2,285

Elite Bowling & Social Club Income and expenditure account for the year ended An Introduction to Financial Accounting 7e by Thomas and

McGraw-Hill 2011 Ward

[Solutions Student Manual]

31 October 20X2 Income Subscriptions Profit on bar Spectators entrance fees Deposit account interest Catering receipts Less: catering purchases Stewards bonus (40% x 40) Profit on catering Profit on disposal of mower Total income Less: expenditure Wages Rent and rates (184 - 12 + 26) Light and heat (143 - 9 + 11) General expenses Depreciation on furniture Excess of income over expenditure 624 307 54 26 120 80 40 16 24 20 1,055 306 198 145 132 90

871 184

c Elite Bowling & Social Club Statement of financial position as at 31 October 20X2 ASSETS Non-current assets Furniture, fixtures and fittings Mower Current assets Subs in arrear Bar inventor y Bank deposit account current account Cash Total assets Cost 900 160 1,060 Agg depn 134 134 WDV 766 160 926 50 178 497 176 8 909 1,835

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

MEMBER FUNDS AND LIABILITIES Members accumulated funds Balance at 31 Oct 20X1 Excess of income over expenditure Balance at 31 Oct 20X2 Current liabilities Subs in advance Bar trade payables Accrued rent and rates Accrued light and heat Stewards bonus Total current liabilities Total members funds and liabilities
Notes 1 If it had been known that the wages were paid to bar staff, these would have been put in the bar statement of profit and loss. 2 All the items relating to the catering could also have been put in the bar statement of profit and loss.

1,306 184 1,490 44 248 26 11 16 345 1,835

26.9 Assumption: In order to answer this question it is necessary to make an assumption about the cost of the defence bonds. The 1,500 given in the question is their face value. They could have been purchased at any price. However, the most reasonable assumption is that they were purchased at their face value of 1,500. Workings 1 Accumulated/General fund Statement of affairs at 30 June 20X3 Cost 6,000 1,200 7,200 Agg depn 500 500 WDV 6,000 700 6,700 1,500 8,200 20 150 390 560 8,760

ASSETS Non-current assets Freehold building Billiard tables (see workings 3) Prize fund investments Current assets Subs in arrear Bar inventory Bank Total assets MEMBER FUNDS AND LIABILITIES Member funds McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

Accumulated fund (balancing figure) Life members fund (see workings 2) Prize fund (see workings 4) Total member funds Non-current liabilities 5% mortgage Total non-current liabilities Current liabilities Accrued interest on mortgage (5% 4,000) Total current liabilities Total liabilities Total member funds and liabilities 2,585 400 1,575 4,560 4,000 4,000 200 200 4,200 8,760

Note: The ACCA suggested answer has another treatment for the prize fund. The prize fund and prize fund investment accounts are ignored, and the interest is removed from the bank balance. This is essentially a short-cut method for the purpose of calculating the accumulated fund.

Subscriptions Subscriptions 20X3 20 30 June Bank 30 June Subs in arrear c/d 330 350 340 10 350 400 80 480

20X2 30 June Subs in arrear b/d 20X3 30 June Subs for year

20X3 30 June Accum. fund (3 @ 16) 30 June Balance c/d (25 + 5 3) @ 16

Life members fund 20X2 30 June Balance b/d 48 (25 @ 16) 20X3 432 30 June Bank 480

3 Non-current assets: billiard tables Aggregate depreciation at 30 June 20X2 = 5 years (1,200 12) = 500 Depreciation for year = (1,200 + 300) 12 = 125 Aggregate depreciation at 30 June 20X3 = 500 + 125 = 625

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

4 Prize fund Prize fund 20X2 75 30 June Balance b/d 1,575 (1,500 + 75) 20X3 30 June Bank income 1,650 1,575 75 1,650

20X3 30 June Bank prizes 30 June Balance c/d

There are no entries in the prize fund investment account. Bar statement of profit and loss for the year ended 30 June 20X3 Bar receipts 4,590 Less : cost of sales Inventory at 1 July 20X2 150 Add : purchases 3,680 3,830 Less : inventory at 30 June 20X3 180 3,650 Stewards wages and expenses 400 4,050 Gross profit on bar 540 Income and expenditure account For the year ended 30 June 20X3 Income Annual subscriptions Profit on bar Sundry lettings Receipts for billiards Less : repairs to tables depreciation of tables Surplus from billiards Total income Less: expenditure Rates Light and heat Cleaning and laundry Sundry expenses Mortgage interest (5% 4,000) Excess of income over expenditure 330 540 180 275 50 125 175 100 1,150 140 72 138 80 200

630 520

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

Statement of financial position as at 30 June 20X3 ASSETS Non-current assets Cost Agg WDV depn Freehold building 6,000 6,000 Billiard tables 1,500 625 875 7,500 625 6,875 Prize fund investments 1,500 8,375 Current assets Subs in arrear Bar inventory Bank Total assets MEMBER FUNDS AND LIABILITIES Accumulated fund Balance at 1 July 20X2 Add : excess of income over expenditure Transfer from life members fund Gifts from members Balance at 30 June 20X3 Life members fund Balance at 1 July 20X2 Add : subscriptions received Less : transfer to accumulated fund Balance at 30 June 20X3 Prize fund Balance at 1 July 20X2 Less : prizes awarded for previous year Add : income Balance at 30 June 20X3 Total members funds

10 180 95 285 8,660

2,585 520 48 3,500 6,653 400 80 480 48 432 1,575 75 1,500 75 1,575 8,660

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

Notes 1 The ACCA suggested answer has another treatment for the prize fund investment account. The 75 included in the bank balance at 30 June 20X3 relating to the income from the defence bonds is added to the prize fund investment account and removed from the bank balance as shown on the statement of financial position. This highlights that it is an asset of the prize fund even though it is held in a general bank account, and is probably a better method for the purpose of presenting an informative statement of financial position. The method adopted by the author above reflects the balances on the relevant ledger accounts. 2 Notice that the gifts from members are not included in the income and expenditure account because the amount is so large and presumably nonrecurring. 3 The mortgage is computed as follows:

(5% 2 years) m = 4,400 m

10m = 4,400 m 100 110m = 4,400 m 100 m = 4,400

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

27. The Final Financial Statements of Partnerships

27.2 Main Characteristics of a Partnership A partnership is the relationship which exists between individuals carrying on business in common with a view of profit. A partnership must have two or more partners to exist. Partnerships are typically not able to limit their liability to creditors and other members of the public (unless the partnership is an LLP). Therefore, partners are largely free to make whatever agreements between themselves that they wish to cover their mutual relationships. The powers and rights of the partners between themselves are governed by any partnership agreement they may make. Itema typically agreed in this agreement include: the capital to be introduced by each partner; the interest to be paid on capital, if any; the sharing of profits and losses; partners drawings; interest on drawings, if any; the preparation and audit of financial statements; the dissolution of the partnership and how to deal with disputes. 27.7 Workings Interest on loan: Hammond 5% 20,000
3 12

= 250

Interest on capital: 8 ) = 7,733 Clayton (8% 90,000) + (8% 10,000 12 Hammond 8% 60,000 = 4,800 Interest on drawings: Clayton 9 = 4% 3,000 12 4 = 4% 5,000 12 Hammond 9 = 60 4% 2,000 12 3 = 13 4% 1,000 12 73

90 67 157

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

Clayton and Hammond Appropriation account 30 June 20X3 Net profit b/d 250 Interest on drawings: Clayton 17,000 Hammond 13,000 30,000 7,733 4,800 12,474 12,473

Interest on loan: Hammond Salaries: Clayton Hammond Interest on capital: Clayton Hammond Shares of residual profit: Clayton Hammond

67,500

157 73

230

12,533

24,947 67,730

67,730 Clayton Hammond 16,850 9,470 17,000 7,733 12,474 54,057 45,900 Clayton 90,000 10,000 100,000 100,000 250 13,000 4,800 12,473 39,993 36,920 Hammond 60,000 60,000 60,000 20,000

Drawings Interest on drawings

Balance c/d

Current account Clayton Hammond 8,000 3,000 Balance b/d Interest on 157 73 loan Salaries Interest on capital 45,900 36,920 Shares of residual profit 54,057 39,993 Balance b/d Clayton Capital Hammond Balance b/d 100,000 60,000 Bank 100,000 60,000 Balance b/d Loan Hammond Bank

Balance c/d

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

27.12 Workings Interest on loan: 3 Peace 5% 2,000 12 Interest on capital: Peace 10% (10,000 1,000 2,000) 9 10% 1,000 12 Quiet 10% 5,000 = 500 Interest on drawings: 8 = 117 Peace 8% 2,200 12
4 = 48 Quiet 8% 1,800 12

= 700 = 75 775

Peace and Quiet Statement of profit and loss for the year ended 31 December 20X2 Sales revenue 69,830 Less : cost of sales Inventory at 1 Jan 20X2 6,630 Add : purchases 45,620 52,250 Less : inventory at 31 Dec 20X2 5,970 46,280 Gross profit 23,550 Less : expenditure Shop assistants salaries 5,320 Light and heat (1,850 + 60) 1,910 Stationer y (320 50) 270 Bank interest and charges 45 Depreciation on equipment 730 8,275 10% (8,500 1,200) Profit for the year 15,275

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

Profit and loss appropriation account 31 December 20X2 Profit for the year 15,275 Add : Interest on drawings Peace 117 Quiet 48 165 15,440 Less : Interest on loan 25 Peace Interest on capital Peace 775 Quiet Salaries Peace Quiet Shares of residual profit Peace Quiet 500 6,200 4,800 1,275 11,000 12,300 3,140 1,570 1,570 3,140

Drawings Interest on drawings

Peace 2,200 117

Balance c/d

7,533 9,850

Current accounts Quiet 1,800 Balance Interest on 48 loan Interest on capital Salaries 8,662 Shares of residual profit 10,510 Balance b/d Capital accounts Quiet Balance b/d 5,000 5,000 Balance b/d

Peace 1,280 25 775 6,200 1,570 9,850 7,533 Peace 10,000 10,000 8,000

Quiet 3,640 500 4,800 1,570 10,510 8,662 Quiet 5,000 5,000 5,000

Loan account Balance c/d

Peace 2,000 8,000 10,000

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

Peace and Quiet Statement of financial position as at 31 December 20X2 ASSETS Non-current assets Cost Agg depn WDV Leasehold shop 18,000 18,000 Equipment (1,200 + 730) 8,500 1,930 6,570 26,500 1,930 24,570 Current assets Inventory 5,970 Stationer y 50 Trade receivables 1,210 Bank 3,815 11,045 Total assets 35,615 EQUITY AND LIABILITIES Equity capital Peace Quiet Capital accounts 8,000 5,000 13,000 Current accounts 7,533 8,662 16,195 Total equity 15,533 13,662 29,195 Non-current liabilities Loan Peace 2,000 Total non-current liabilities 2,000 Current liabilities Trade payables 4,360 Accrued expenses 60 Total current liabilities 4,420 Total liabilities 6,420 Total equity and liabilities 35,615 27.14 Workings vehicles Depreciation on sale Depreciation on disposal: 9 20X0 10% 2,400 12 20X1 10% 2,400 20X2 10% 2,400 10 12 Aggregate depreciation Book value = 2,400 620 = 1,780 Profit on sale = 1,900 1,780 = 120 Depreciation on remainder: 10% (30,000 2,400) 180 240 200 620 200 Depreciation this y ear

2,760 2,960 Aggregate depreciation at 31 December 20X2: 18,000 + 2,960 620 = 20,340 Simon, Wilson and Dillon McGraw-Hill 2011 Ward An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

Statement of profit and loss for the year ended 31 December 20X2 Sales revenue 130,000 Less : returns 400 129,600 Less : cost of sales Inventory at 1 Jan 20X2 34,900 Add : purchases 64,000 Less : returns 600 63,400 98,300 Less : inventory at 31 Dec 20X2 31,000 67,300 Gross profit 62,300 Add : investment income (800 + 320) 1,120 profit on sale of vehicle 120 63,540 Less : expenditure Salesmens salaries 19,480 Rates (12,100 160) 11,940 Motor expenses (2,800 + 240) 3,040 3,200 Mortgage interest (8% 40,000) Printing and stationery (1,100 170) 930 Bad debts 2,000 120 Provision for bad debts ([2% (28,000 2,000)] 400) Provision for depreciation on Vehicles 2,960 Tools (1,200 960) 240 Bank charges 130 44,040 Profit for the year 19,500 Appropriation account 31 December 20X2 Profit for the year Less : salaries Simon Dillon Interest on capital Simon (10% 35,000) Wilson (10% 25,000) Dillon (10% 10,000) Shares of residual loss Simon Wilson Dillon 15,000 10,000 25,000 3,500 2,500 1,000 19,500

7,000

32,000 (12,500) (5,000) (5,000) (2,500) (12,500)

The ledger
Current account

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

S W D Balance b/d 1,800 Balance b/d Shares of residual 5,000 5,000 2,500 Salaries loss Balance c/d 19,100 2,300 6,700 Interest 24,100 7,300 11,000 Balance b/d S 5,600 15,000 3,500 24,100 19,100 W D 4,800 10,000 2,500 1,000 7,300 11,000 2,300 6,700

Simon, Wilson & Dillon Statement of financial position as at 31 December 20X2 ASSETS Non-current assets Cost Agg depn WDV Freehold land and buildings (65,000 + 5,000) 70,000 70,000 Delivery vehicles (30,000 2,400) 27,600 20,340 7,260 Loose tools 1,200 240 960 98,800 20,580 78,220 Goodwill 11,000 Unquoted investments 6,720 95,940 Current assets Inventories (31,000 + 170) Prepayments Trade receivables (28,000 2,000) Less :provision for bad debts Sundry receivable Income accrued Bank (10,100 130) Total assets 31,170 160 26,000 520 25,480 1,900 320 9,970 69,000 164,940

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

EQUITY AND LIABILITIES Equity Capital accounts Simon Wilson Dillon Current accounts Simon Wilson Dillon Total equity Non-current liabilities 8% mortgage on premises Total non-current liabilities Current liabilities Trade payables Accruals (240 + 1,600) Total current liabilities Total liabilities Total equity and liabilities Notes 1 2 It is assumed that the unquoted investments are intended to be kept for more than one accounting year. The capital and current accounts could have been presented in the statement of financial position in columnar form.

35,000 25,000 10,000 19,100 2,300 6,700

70,000

28,100 98,100 40,000 40,000 25,000 1,840 26,840 66,840 164,940

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

28. Changes in Partnerships

28.1 Goodwill a. The precise nature of goodwill is difficult to define in a theoretically sound manner. However, it is generally recognized that goodwill exists, since a value is normally attached to it when a business is purchased. Goodwill usually arises in the financial statements where another business has been purchased at some time in the past. Its value frequently takes the form of the excess of the purchase price of the other business over the market value of its net assets. The existence of this excess shows that the purchaser of a business is prepared to pay for something in addition to the net assets. Goodwill is the label given to that something. b. Goodwill arises from a number of attributes that an ongoing business possesses, such as the following: 1 The prestige and reputation attaching to the name of a business or its products and thus the likelihood that present customers will continue to buy from the business in future (e.g. Rolls-Royce, Microsoft). 2 Existing contracts for the supply of goods in the future (e.g. construction, aerospace, defence equipment). 3 The location of the business premises (e.g. a newsagent next to a railway station) and other forms of captive customers (e.g. a milk distributors clientele). 4 The possession of patents, trademarks, brand names and special technical knowledge arising from previous expenditure on advertising and research and development. However, some of these may be accounted for as separate assets. 5 The existence of known sources of supply of goods and services, including the availability of trade credit. 6 The existing staff, including particular management skills. The costs of recruiting and training present employees give rise to an asset that is not recorded in the statement of financial position but nevertheless represents a valuable resource to the business. Furthermore, these costs would have to be incurred if a business were started from scratch. 7 Other set-up factors. An existing business has the advantage of having collected together the various items of equipment and other assets necessary for its operations. Obtaining and bringing together these assets usually involves delay and expense, and avoiding this is an advantage of an ongoing business.

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

28.7 Workings Shares of goodwill Brown 1 2 90,000 Jones 1 2 90,000 Jones Smith
3 5 2 5

45,000 45,000 90,000 54,000 36,000 90,000

90,000 90,000

The ledger Inventory Provision for bad debts Profit Brown Jones Revaluation account 4,000 Premises 3,000 Fixtures 18,000 18,000 35,000 8,000

36,000 43,000

43,000

Goodwill Cash Balance c/d

Brown 173,000 173,000

Capital Jones Smith 54,000 36,000 Balance b/d Cash

Brown 110,000

Jones 87,000

96,000 64,000 Profit on revaluation 18,000 18,000 Goodwill 45,000 45,000 150,000 100,000 173,000 150,000 Balance b/d 96,000

Smith 100,00 0 100,00 0 64,000

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

28.8 Workings Valuation of goodwill: Net asset value before revaluation (30,100 2,500) Less :loss on revaluation (see below) Net asset value after revaluation Estimated profit for 20X2 Less :partners salaries (3 @ 15,000) Earnings/super profit
P/E ratio = price earnings

27,600 600 27,000 48,750 45,000 3,750

Price = earnings P/E ratio Capitalized value of estimated super profits = 3,750 8 = 30,000 Goodwill = 30,000 27,000 = 3,000 The ledger Balance b/d Revaluation Balance b/d Vehicles 7,000 Prov for depn 1,500 Balance c/d 8,500 6,700 Inventory 9,200 Revaluation Balance c/d 9,200 8,000 Provision for bad debts Revaluation Revaluation account 1,200 Vehicles 1,900 Loss on revaluation Capital B Capital P Capital N 2,100 200 200 200 1,800 6,700 8,500

Balance b/d Balance b/d

1,200 8,000 9,200

900

Inventory Provision for bad debts

1,500

600 2,100

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

Capital L Balance b/d

Revaluation Loan account Balance c/d

B 200

P 200

N 200

5,800 Bank 10,800 8,800 6,000 Goodwill 11,000 9,000 6,000 6,000 Balance b/d

B 10,00 0 1,000 11,00 0 10,80 0

P 8,000 1,000 9,000 8,800

N L 5,000 6,000 1,000 6,000 6,000 6,000

Capital Blackburn Capital Percy Capital Nelson Bal b/d

Goodwill 1,000 1,000 1,000 Bal c/d 3,000 3,000

3,000 3,000

Current account Nelson Loan account 1,400 Balance b/d Loan Nelson Capital account 7,200 Current account 7,200 Bal b/d

1,400

Bal c/d

5,800 1,400 7,200 7,200

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

29. Partnership dissolution and conversion to a limited company

29.1 Reasons for dissolving a partnership However, the phrase dissolution of partnerships refers to the circumstances where all the partners wish to leave, and thus the activities of the partnership are wound up without a new partnership being created. Partnerships are usually dissolved because either it is unprofitable to carry on trading or the partners no longer wish to be associated with each other for personal reasons. 29.3 Non-current assets Inventories Trade receivables Realisation costs Profit on realization Martin Stephen Realization account 3,600 Bank Trade receivables 4,150 Bank Non-current assets 3,850 Bank - Inventories 50 Discount on trade payables 40 20 11,710 Cash account 250 Trade payables 3,500 Realisation expenses 2,950 Loan account: Martin 4,980 Capital - Martin Capital - Stephen 11,680
1,000 Cash Discount Realisation Trade payables 2,52 Bal b/d 0 280 2,80 0

3,500 2,950 4,980 280

11,710

Balance b/d Real. Trade receivables Real. Non-current assets Real. - Inventories

2,520 50 1,000 5,190 2,920 11,680

2,80 0

Cash

Loan a/c Martin 1,000 Bal b/d 1,000

1,000

2,80 0

Martin
Bal b/d Capital account 150 150

Current Account Stephen

100 100 Bal b/d Capital account

Martin
150 150

Stephen
100 100

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

Capital Account Martin Stephen
Current account Bank account 5,190 5,190 100 2,920 3,020 Bal b/d Current account Realisation a/c

Martin
5,000 150 40 5,190

Stephen
3,000 20 3,020

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

30. The Nature of Limited Companies and their Capital

30.1 Characteristics of companies limited by shares The characteristics are as follows: 1 A company is a legal entity that is separate from its shareholders (owners). This means that companies enter into contracts as legal entities in their own right. Thus, creditors and others cannot sue the shareholders of the company but must take legal proceedings against the company. 2 A company has perpetual existence in that the death of one of its shareholders does not result in its dissolution. 3 The liability of a companys shareholders is limited to the nominal value of their shares. Limited liability means that if a companys assets are insufficient to pay its debts, the shareholders cannot be called upon to contribute more than the nominal value of their shares towards paying those debts. 4 The shareholders of a company do not have the right to take part in its management as such. They appoint directors to manage the company. However, a shareholder may also be a director (or other employee). 5 Each voting share carries one vote at general meetings of the companys shareholders (e.g. in the appointment of directors). There may be different classes of shares, each class having different rights and, possibly, some being non-voting. 6 A limited company must have at least two shareholders but there is no maximum number.

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

30.12 Equity shares Preference shares 1 Owners of the company 1 No voting rights who are normally entitled to vote at general meetings of the companys shareholders (e.g. to elect directors) 2 Receive a dividend the 2 Receive a fixed rate of rate of which is decided dividend each year that annually by the companys constitutes an directors. It varies each year appropriation of profit. depending on the profit and Have priority over equity is an appropriation of profit dividends Loan stock debentures 1 No voting rights

2 Receive a fixed rate interest h t at constitutes a charge against income in computing h t e profit. Have priority over preference dividends 3 Last to be repaid the value 3 Repaid before the equity 3 Repaid before the of their shares in the event shareholders in the event equity and preference of the company going into of liquidation shareholders in the liquidation event of liquidation 4 Non-repayable except on the liquidation of the company 5 Rights in Articles of Association 4 All but one particular type are non-repayable except on liquidation 5 Rights in Articles of Association 4 Normally repayable after a fixed period of time 5 Rights specified in the terms of issue

6 Dividends non-deductible 6 Dividends non6 Interest deductible for for tax purposes deductible for tax purposes tax purposes

30.14 Categorizing preference shares as debt or equity instruments Debt Cumulative Redeemable Non-participating Non-convertible Equity Non-cumulative Irredeemable Participating Convertible

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

31. The Final Financial Statements of Limited Companies

31.19 D. Cooper Ltd

Statement of profit and loss for the year ended 30 September 20X2 Sales revenue 135,250 Cost of sales (65,520) Gross profit 69,730 Other income (investment income) 650 Distribution costs (910) Administration expenses (31,080) Other costs (1,270) Finance costs (4,150) Profit before taxation 32,970 Income tax (6,370) Profit for the year 26,600 D. Cooper Ltd Statement of financial position as at 30 September 20X2 ASSETS Note Non-current assets Property, plant and equipment 1 202,700 Goodwill 20,000 222,700 Current assets Inventories 13,480 Trade receivables 11,200 Less : provision for bad debts 1,120 10,080 Prepayments 1,150 Listed investments 8,000 32,710 Total assets 255,410 EQUITY AND LIABILITIES Equity Share capital Share premium account Revaluation reserve Revenue reserve Retained earnings Total equity Non-current liabilities McGraw-Hill 2011 Ward An Introduction to Financial Accounting 7e by Thomas and

100,000 35,000 9,860 12,700 23,43 0 180,99 0

[Solutions Student Manual]

10% debentures 50,000 7% preference shares of 50p each Total non-current liabilities Current liabilities Bank overdraft Trade payables Current tax payable Debenture interest (2,400 1,200) Preference dividends Total current liabilities Total liabilities Total equity and liabilities 24,000 25,000 49,000 7,800 8,300 6,370 1,200 1,750 25,420 74,420 255,410

Statement of changes in equity for the year ended 31 September 20X2 Share Share Revaluatio Revenue Retained Total n capital premium reserve reserve earnings Balance at 1 October 20X1 100,000 35,000 9,860 10,200 2,580 157,640 Changes in equity for 20X2 Equity dividends paid (3,250) (3,250) Total comprehensive income for the 26,600 26,600 period Transfer to general reserve 2,500 (2,500) Balance at 30 September 20X2 100,000 35,000 9,860 12,700 23,430 180,990

Notes to the financial statements 1 Property, plant and equipment Leasehold premises Plant and machinery Loose tools Cost 140,000 80,000 13,000 233,000 Deprec NBV 140,000 25,100 54,900 5,200 7,800 30,300 202,700

2 Share capital Authorised, allotted and called-up share capital 100,000 equity shares of 1 each 50,000 7% preference shares of 50p each 100,000 25,000 125,000

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

3 Dividends During the year a dividend of 3,250 was paid. At the year end the directors proposed a dividend of 13p per share (13,000). Workings Finance costs Interest on debentures (10% 24,000) Preference share dividend Cost of sales Inventory at 1 Oct 20X1 Add : purchases Less : inventory at 30 Sep 20X2 Plant hire Depreciation on plant (15% 80,000) Depreciation on tools (9,100 7,800) Total Administration Directors salaries 3 2,300]) Rates (4,650 [ 6 Light and heat Audit fees Selling and distribution Provision for bad debts [(10% 11,200) 910] Bad debts Other expenses Preliminary expenses 9,400 49,700 59,100 13,480 2,400 1,750 4,150

45,620 6,600 12,000 1,300 65,520 22,000 3,500 3,830 1,750 31,080 210 700 910 1,270

Notes 1 Preliminary expenses could have been written off against the balance on the share premium account instead of being charged to the statement of profit and loss. 2 3 4 It is assumed that listed investments will be held for less than one accounting year. Aggregate depreciation on plant and machinery = 80,000 66,900 + 12,000 = 25,100. Aggregate depreciation on loose tools = 13,000 7,800 = 5,200.

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

31.20 L. Johnson Ltd Statement of profit and loss for the year ended 31 December 20X1 Sales revenue 129,217 Cost of sales (80,889) Gross profit 48,328 Other income (dividends received) 310 Distribution (14,726) Administration (15,112) Finance costs (5,500) Profit before taxation 13,860 Income tax (2,544) Profit after taxation 11,316 L. Johnson Ltd Statement of financial position as at 31 December 20X1 ASSETS Note Non-current assets Property, plant and equipment 1 185,410 Intangible assets 2 5,940 Goodwill 10,000 201,350 Current assets Inventory 12,456 Trade receivables 11,600 Less : provision for bad debts 580 11,020 Prepayments 100 Listed investments 4,873 28,449 Total assets 229,799 TOTAL EQUITY AND LIABILITIES Equity Share capital Share premium account Revaluation reserve Capital redemption reserve Revenue reserve Retained earnings Total equity Non-current liabilities 10% debentures 5% preference shares Total non-current liabilities

80,000 5,350 13,500 9,000 12,400 10,442 130,692 30,000 50,000 80,000

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

Current liabilities Bank overdraft Trade payables Accruals Debenture interest Current tax payable Preference dividend (2,500 1,250) Total current liabilities Total liabilities Total equity and reserves
Statement of changes in equity for the year ended Revaluation Revenu Retained Total e capital premium redemption reserve reserve earnings 80,000 5,600 9,000 13,500 8,400 3,126 119,62 6 (250) (250) 11,316 11,316 80,000 5,350 9,000 13,500 4,000 12,400 (4,000) 10,442 130,69 2 31 December 20X1 Share Share Capital

3,643 8,450 220 3,000 2,544 1,250 19,107 99,107 229,799

Balance at 1 January 20X1 Changes in equity for 20X1 Equity dividends paid Formation expenses Total comprehensive income for the period Transfer to general reserve Balance at 31 December 20X1

Notes 1 Property, plant and equipment Freehold buildings Motor vehicles Plant and machinery Cost 137,000 35,000 40,000 212,000 Deprec 12,950 13,640 26,590 NBV 137,000 22,050 26,360 185,410

Intangible assets Development costs

10,000 10,000

4,060 4,060

5,940 5,940

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

3 Share capital Authorized capital 200,000 equity shares of 1 each 90,000 5% preference shares of 1 each Allotted and called-up share capital 80,000 equity shares of 1 each 50,000 5% preference shares of 1 each 4. 200,000 90,000 290,000 80,000 50,000 130,000

Dividends The directors have proposed a final dividend of 5,000.

Workings Sales revenue Sales revenue Less :returns inwards Net sales Finance costs Debenture interest (10% 30,000) Preference shares (50,000 5%) Cost of sales Less :cost of sales Inventory at 1 Jan 20X1 Add : purchases Less :returns outwards Less :inventor y at 31 Dec 20X1 Depreciation on: Plant (20% 32,950) Development costs (10% 6,600) Administration Discount received Directors emoluments Rates (596 100) Light and heat (1,028 + 220) Audit fee Selling and distribution Reduction in prov for bad debts McGraw-Hill 2011 Ward 130,846 1,629 129,217

3,000 2,500 5,500 9,436 78,493 ( ,834) 86,095 12,456

73,639 6,590 660 80,889 (396) 13,000 496 1,248 764 15,112

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

(860 [5% 11,600]) Wages and salaries Bad debts Discount allowed Depreciation on: Vehicles (25% 29,400) (280) 5,948 656 492 7,350 14,166

Notes 1 It is assumed that the listed investments are to be held for less than one accounting year. 2 Aggregate depreciation on: Motor vehicles = 35,000 29,400 + 7,350 = 12,950; Plant and machinery = 40,000 32,950 + 6,590 = 13,640; Development costs = 10,000 6,600 + 660 = 4,060

31.21

Oakwood Ltd Statement of profit and loss for the year ended 30 June 20X2 119,410 (85,450) 33,960 410 (2,640) (22,950) (5,000) 3,780 1,080 2,700

Sales revenue Cost of sales Gross profit Other income (interest received) Distribution Administration costs Finance costs Profit before taxation Income tax Profit for the year

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

Oakwood Ltd Statement of financial position as at 30 June 20X2 ASSETS Notes Non-current assets Property, plant and equipment 1 207,110 Intangible assets 2 4,050 Goodwill 8,000 219,160 Current assets Inventory (11,680 + 500) 12,180 Trade receivables (10,400 1,000) 9,400 Less : provision for bad debts 470 8,930 Prepayments 150 Available for sale investments (listed investments) 3,250 24,510 Total assets 243,670 EQUITY AND LIABILITIES Equity Share capital 125,000 Share premium account 8,800 Revenue reserve 9,100 Retained earnings 5,400 Total equity 148,300 Non-current liabilities 5% preference shares 60,000 10% debentures 20,000 Total non-current liabilities 80,000 Current liabilities Bank overdraft 2,630 Trade payables 7,890 Accruals 270 Current tax payable 1,080 Debenture interest 2,000 Preference dividends (3,000 1,500) 1,500 Total current liabilities 15,370 Total liabilities 95,370 Total equity and liabilities 243,670

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

Statement of changes in equity for the year ended 30 June Share Share Revenue capital premium reserve Balance at 1 July 20X1 125,000 9,000 6,100 Changes in equity for 20X2 Equity dividends paid Formation expenses (200) Total comprehensive income for the period Transfer to general reserve 3,000 Balance at 30 June 20X2 125,000 8,800 9,100 20X2 Retained Total earnings 7,700 147,800 (2,000) 2,700 (3,000) 5,400 (2,000) (200) 2,700 148,300

1.

Property, plant and equipment Freehold buildings Delivery vehicles Plant and machinery (34,000 300) Cost 165,000 28,000 33,700 226,700 Deprec 11,170 8,420 19,590 NBV 165,000 16,830 25,280 207,110

2.

Intangible assets Development costs 12,000 12,000 7,950 7,950 Authorized 150,000 70,000 220,000 4,050 4,050 Called-up 125,000 60,000 185,000

3.

Share capital Share capital Equity shares of 1 each 5% preference shares of 1 each

4.

Dividends The company paid a dividend of 2,000 in the year. The directors have proposed a final dividend of 4,000. 119,640 230 119,410 2,000 3,000 5,000 An Introduction to Financial Accounting 7e by Thomas and

Workings Sales revenue Sales revenue (120,640 1,000) Less : returns inwards Net sales Finance costs Debenture interest (10% 20,000) Preference dividend (5% 60,000) Cost of sales McGraw-Hill 2011 Ward

[Solutions Student Manual]

Inventory at 1 July 20X1 Add : purchases Less : returns outwards Add : carriage inwards Less : inventory at 30 June 20X2 (11,680 + 500) Consumable tools Depreciation on Development costs (25% 5,400) Plant (20% [31,900 300]) Administration Administrative salaries Discount received Audit fee Directors remuneration Rates (600 150) Light and heat (940 + 270) Postage and telephone 8,760 81,230 (640) 310 89,660 12,180 77,480 300 1,350 6,320 85,450 6,370 (440) 390 14,100 450 1,210 870 22,950

Selling and distribution Provision for bad debts ([5% (10,400 1,000)] 730) Bad debts Discount allowed Depreciation on Vehicles (10% 18,700)

(260) 740 290 1,870 2,640

Notes 1 2 It is assumed that the investments are to be held for less than one accounting year. Aggregate depreciation on: Development costs = 12,000 5,400 + 1,350 = 7,950 Delivery vehicles = 28,000 18,700 + 1,870 = 11,170 Plant and machinery = 34,000 31,900 + 6,320 = 8,420

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

32. Statement of Cash Flows

32.15 A Brooks Statement of cash flows (indirect method) for the year ended 30 June 20X3 Cash flows from operating activities Loss before taxation (1,800) (1,800 900 1,250) Adjustments for: Depreciation 1,500 Investment income (900) Finance charges 1,250 50 Decrease in trade and other receivables 1,300 (5,400 4,100) (600) Increase in inventories (7,300 6,700) Increase in trade and other payables 1,400 (6,200 4,800) Cash generated from operations Cash flows from investing activities Interest received Purchase of property, plant and equipment (72,000 65,000) Net cash used in investing activities 900 (7,000) (6,100)

2,150

Cash flows from financing activities Capital introduced 20,000 Drawings (7,600) Interest paid (1,250) Repayment of bank-loan (5,000) Net cash from financial activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of period (note 1) Cash and cash equivalents at end of period (note 1) 1 Cash and cash equivalents At 1 July 20X2 (1,300) (1,300) Cash flows 900 1,300 2,200

6,150 2,200 (1,300) 900 At 30 June 20X3 900 900

Cash in hand, at bank Overdrafts

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

32.17 Workings Provision for depreciation plant 20X2 Plant depn on disposal (10,000 6,000) 4,000 1 Jan Balance b/d Balance c/d 9,500 31 Dec P/L a/c 13,500

20X2 31 Dec 31 Dec

7,000 6,500 13,500

The charge to the statement of profit and loss in respect of depreciation on plant for the year of 6,500 is the difference between the two sides of the above account. Plant 20X2 41,000 31 Dec Bank disposal 6,400 31 Dec Depn on disposal 400 (10,000 6,000) 4,000 17,000 31 Dec Balance c/d 48,000 58,400 58,400

20X2 1 Jan Balance b/d 31 Dec P/L a/c profit on sale 31 Dec Bank acquisitions

The cost of plant acquired of 17,000 is the difference between the two sides of the above account.

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

J. Kitchens Ltd Statement of cash flows for the year ended 31 December 20X2 Cash flows from operating activities Profit before taxation 24,000 Adjustments for: 9,500 Depreciation (6,500 + (9,000 6,000)) 200 Provision for bad debts (600 400) Profit on sale of non-current assets (400) Finance charges 750 34,050 Decrease in trade and other payables (2,100) (19,700 17,600) (7,600) Increase in inventories (22,500 14,900) Increase in trade and other receivables ((16,400 + 600) (11,300 + 400)) (5,300) Cash generated from operations 19,050 Cash flows from investing activities Purchase of property, plant and equipment (17,000) Proceeds from sale of property, plant and equipment 6,400 Net cash used in investing activities (10,600) Cash flows from financing activities Interest paid (750) Dividends paid (17,000 ) Net cash from financial activities (17,750) Net increase in cash and cash equivalents (9,300) Cash and cash equivalents at beginning of period (note 1) (500) Cash and cash equivalents at end of period (note 1) (9,800) 1 Cash and cash equivalents At 1 Jan 20X2 Overdrafts (500)

Cash flow (9,300)

At 31 Dec 20X2 (9,800)

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

32.18 Workings Provision for depreciation 20X3 20X2 31 May Non-current 31 May Balance b/d assets depn on 20X3 disposal ( 12,000 31 May P/L a/c -7,500) 4,500 31 May Balance c/d 37,000 41,500 28,000 13,500 41,500

The charge to the profit and loss account in respect of depreciation for the year of 13,500 is the difference between the two sides of the above account. Computation of profit before taxation and dividends Increase in balance on retained earnings account (5,200 3,400) Transfer to reserve (6,900 4,200) Equity dividends paid Proposed final 20X2 21,800 Interim 20X3 6,400 Income tax

1,800 2,700

28,200 7,200 39,900

L. Tyler Ltd Statement of cash flows for the year ended 31 May 20X3 Cash flows from operating activities Profit before taxation 39,900 Adjustments for : Depreciation 13,500 Increase in provision for bad debts (700 500) 200 Profit on sale of non-current assets (8,100 7,500) (600) I n vestment income (1,800) Finance charges 1,600 52,800 Increase in trade and other receivables (14,200 11,800) (2,400) Decrease in inventories ( 21,600 19,400) 2,200 Decrease in trade and other payables ( 8,400 6,700) (1,700) Cash generated from operations 50,900 Income tax paid (5,800) Net cash from operating activities 45,100 Cash flows from investing McGraw-Hill 2011 Ward An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

activities Purchase of investments ( 17,100 3,900) Proceeds from sale of property, plant and equipment Interest received Net cash used in investing activities Cash flows from financing activities Proceeds from the issue of share capital (70,000 60,000) + (34,000 25,000) Repayment of loan stock (30,000 5,000) Interest paid (long-term) Dividends paid (19,600 + 6,400) Net cash from financial activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of period (note 1) Cash and cash equivalents at end of period (note 1) 1 Cash and cash equivalents At 1 June 20X2 Cash in hand, at bank 4,600 Total 4,600

(13,200) 8,100 1,800 (3,300)

19,000 (25,000) (1,600) (26,000) (33,600) 8,200 4,600 12,800

Cash flow 8,200 8,200

At 31 May 20X3 12,800 12,800

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

33. The Appraisal of Company Financial Statements using Ratios

33.9When answering questions such as this with apparently open-ended requirements that do not specify which ratios to calculate, it is very important to consider the data carefully in order to decide what ratios should be computed. First, note that these are sole traders not companies. Second, a related point, as in the case of companies where no share price is given, it is not possible to compute the return on investment ratios. Third, there are no non-current liabilities and thus no gearing ratio. Fourth, search the requirements carefully for key words and phrases such as in this question, performance and financial position. The latter is often taken to include solvency, liquidity and the appraisal of working capital. Fifth, the number of ratios you are expected to compute may be influenced by the marks/time allocated to the question. The ACCA suggested answer contains references to the following accounting ratios (all money values are in 000s): White Return on capital employed Gross profit to sales revenue
48 100 = 25% 192 150 100 = 25% 600 600

Black
48 100 = 30% 160 176 100 = 22% 800 48 100 = 6% 800 800 = 5 tim es 160 624 = 12 tim es 52 67 52 = 4.4 weeks 800 78 52 = 6.5 weeks 624 67 = 0.82 78 + 4

Profit for the year to sales revenue 48 100 = 8% Turnover of capital employed Inventory turnover Trade receivables collection period Trade payables period of credit Liquidity ratio
600 = 3.125 times 192 450 = 8 times 56 75 52 = 6.5 weeks 600 38 52 = 4.4 weeks 450 75 + 8 = 2.2 38

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

Comparison of ratios 1 2 3 Black has a higher ROCE than White, which shows that it is more profitable. Black has a lower GP and profit for the year to sales revenue (profit margin) than White, which suggests either higher unit costs and or lower selling prices. Black has a higher turnover of capital employed (asset turnover) than White. The lower profit margin and higher asset turnover ratio may be the result of selling large quantities at a lower price. This strategy appears to be resulting in a higher ROCE. Black has a higher inventory turnover ratio and longer period of credit from credit suppliers than White, and a lower trade receivables collection period. This suggests that Black is more effective and efficient at controlling its working capital. Black has a considerably lower liquidity ratio than White, which shows that it is stretching itself financially and may encounter liquidity problems.

Overall impressions Blacks performance is superior to Whites. It is more profitable, and has a higher level of activity and better control of working capital. However, Black appears to have a weak liquidity position. This may be the result of overtrading. Additional information needed 1 2 Do either of Black or White work in their businesses? If one does and the other does not the profit is not strictly comparable without a notional salary for the one who does work in the business. There is a difference in accounting policy for the depreciation of buildings. Black has a charge of 5,000 whereas White has no depreciation. This distorts comparisons. Are there any other differences in accounting policies?

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

33.12
Return on capital em ployed = 580,000 +240,000 100 = 15.74% 5,210,000

Profit margin =

580,000 +240,000 = 19.39% 4,230,000 4,230,000 = 0.81 5,210,000 1, 070, 000 = 1.4 7 730, 000

Asset turnover =

Wor king capital ratio =

Liquidity ratio =

1,070,000 480,000 = 0.81 730,000 2, 560, 000 = 5.33 480, 000 270,000 3365 = 23days 4,230,000

Inventory turnover ratio =

Trade receivables' collection period =

Trade payables' period =

260,000 365= 37days 2,560,000

Dividend yield =

200,000 3100= 8% 500,00035 310,000 = 1.55 200,000 310,000 = 0.62 500,000 5 = 8.07 0.62

Dividend cover =

Earnings per share =

Price earningsr atio = Return on equity =

310,000 100 = 14.03% 2,210,000

Gearing ratio =

3,000,000 = 0.58 3,000,000 +2,210,000 30,000 110 = 0.57 (30,000 110)+ (500,000 5)

Gearing ratio (market values) =

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

Comments on ratios 1 2 3 4 5 6 7 The return on capital employed and return on equity are reasonable, indicating satisfactory profitability. The asset turnover ratio appears low (but may be because the company is capital intensive). The working capital ratio is a little low and the liquidity ratio is weak indicating a poor liquidity position and possible insolvency. The trade receivables and trade payables ratios are very low. See limitations below. The dividend yield is high, which means an above average return on investment. The dividend cover is somewhat low and the gearing ratio is rather high. These make the equity shares a risky investment. The P/E ratio, profit margin and inventory turnover ratio are probably about normal.

Limitations include: 1 2 3 4 The lack of comparative figures for previous years and other companies means generalizations about the results can only be tentative. It is not possible to make judgements about the acceptability of these ratios without knowing the type of industry and the current economic climate. The ratios may be distorted since they are calculated using historical cost data. The calculation of some ratios necessitates the use of surrogate data that may give misleading results. For example, the trade receivables (and trade payables) collection period appears to be extremely low, which may be because revenue (cost of sales) includes cash sales (purchases).

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

33.13 The following are points that should be included in a report. Comparison of ratios 1 2 3 4 5 6 7 8 9 The dividend yield of Chips plc is relatively high. The dividend cover of Fish plc is relatively high. The EPS are not really comparable. The P/E ratio of Fish plc is higher; earnings growth may be expected. The P/E ratio of Chips plc is lower; little growth in earnings may be expected. The ROCE suggests that Fish plc has made more profitable use of its assets. The profit margin indicates that Chips plc has higher selling prices and or lower unit costs. The asset turnover suggests that both companies are capital intensive but Fish plc has a higher level of activity. The gearing of Chips plc is high, suggesting greater financial risk. The high gearing ratio of Chips plc has probably resulted in a larger return on equity.

Overall impressions Fish plc may be a better investment because it has a lower financial risk (i.e. low gearing and high dividend cover), is more profitable (i.e. greater ROCE), and has a higher level of activity (i.e. asset turnover). Also, although Fish plc has a lower dividend yield, it probably offers growth in earnings (and thus dividends) resulting from retained profits (as shown by the high dividend cover and P/E ratio). It appears to be pursuing a policy of low selling prices, high turnover and expansion by internal financing from retained profits. In contrast, Chips plc provides a higher dividend yield but with greater risk.

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and

[Solutions Student Manual]

33.14 The following are points that should be included in a report: Comparison of ratios 1 2 3 4 The working capital ratio has improved but the liquidity ratio has worsened. This suggests a possible build-up of inventories. The inventory turnover has slowed, which also points to either an increase in inventories and or a decrease in sales. The trade receivables ratio shows that credit customers are being allowed to take a considerably longer period of credit. The trade payables ratio shows that this company is taking longer to pay its debts.

Overall impressions There is deterioration in liquidity and control of working capital. It appears that there is overstocking, poor inventory control and a relaxation of credit control procedures.

McGraw-Hill 2011 Ward

An Introduction to Financial Accounting 7e by Thomas and