QUESTION 1
Preparing Financial Statements
The second column in the spreadsheet (cf. infra) represents balances that
are extracted from the accounting records of ABC SA as at December 31,
20X7. ABC’s accounting period starts on January 1 and ends on December
31.
Required:
You are required to complete the spreadsheet after taking into
account the required adjustments based on the following information:
(a) The evolution of inventory during the accounting period looks as
follows (all transactions are ordered sequentially):
Opening inventory: 500 items @ 39.20 EUR
Purchase: 2,000 items @ 40.80 EUR
Sale: 1,200 items @ 86.81 EUR
Sale: 1,000 items @ 86.81 EUR
Purchase: 1,000 items @ 40.00 EUR
Purchase: 2,000 items @ 40.95 EUR
Sale: 2,500 items @ 86.81 EUR
ABC employs the weighted average method for the valuation of
its inventory.
(b) ABC’s management assumes that 4% of the total amount of
trade receivables will be irrecoverable.
(c) ABC’s internet provider bills on a yearly basis. This annual
invoice is expected to be received during the month of June
20X8 and relates to the period June 20X7 up to May 20X8. The
annual charge for internet services amounts to 800.00 EUR.
(d) Depreciation expenses have not been recorded yet. As for the
building, ABC employs the straight-line method and assumes a
residual value of 100,000.00 EUR and a useful life of 25 years.
As for the vehicle, ABC employs the diminishing balance method
using a 25% rate. As for the furniture, ABC employs the
diminishing balance method using a 20% rate.
(e) During the accounting year, the furniture has been damaged.
Accordingly, ABC decides to perform an impairment test on the
furniture. The following estimates were obtained:
Value in use: 35,000.00 EUR
Fair value: 31,000.00 EUR
(f) An annual interest rate of 5% is applicable to the long-term loan.
This annual interest expense has to be paid in advance (i.e. at
the beginning of the period to which it relates) on the 1st of April
of each year. In addition, 20,000.00 EUR of the loan falls due in 20X8 (i.e.,
20,000.00 EUR of the long-term loan needs to be repaid in 20X8).
Answer:
(use the enclosed spreadsheet to ‘record’ the required adjustments – each
adjustment needs to be recorded in the designated column)
Trial
Building
Cost of acquisition
Accum. depreciation
Furniture
Cost of acquisition
Accum. depreciation
Vehicle
Cost of acquisition
Accum. depreciation
Inventories (January 1,
20X7)
Trade receivables
Deferred expenses
ASSETS
Share capital
Reserves
Sales
Purchases/Cost of sales
Salaries
Depreciation
Impairment losses
Other expenses
Interest expenses
Provision
Long-term loan
Current part long-term
loan
Trade creditors
Other amounts payable
Accrued expenses
EQUITY & LIABILITIES
500,000
-176,000
60,000
-12,000
80,000
-35,000
19,600
34,000
470,600
125,000
27,500
408,000
-203,500
-135,000
-17,600
-15,800
25,000
200,000
44,000
13,000
470,600
(a)
(b)
(c)
(d)
(e)
(f)