Chapter 8: Question Web 1 – Pinot Ltd
(a) Profit and loss account for the year ended 31 December 20X6
Sales
Cost of sales
Working 1
Gross profit
Administration expenses Working 2
Distribution expenses
Operating profit
Income from fixed asset investments
Interest payable and similar charges
(18,000 Deb + 3000)
Exceptional costs
Profit before tax on ordinary activities
Tax on ordinary activities
Profit after tax on ordinary activities
Dividends
Retained profit for year
[2]
[5]
[6]
[7]
[8]
[9]
Working 1: Cost of sales
Per question
Less realisable on obsolescent stock
Add depreciation
Less capital item incorrectly posted
£
1,100,000
(5,600)
14,000
(10,000)
1,098,400
Working 2: Administration expenses
Per question
Less restructuring expense
Less provision written back
Audit fee
Goodwill amortisation
Depreciation
206,300
(150,000)
(1,500)
7,000
2,500
6,750
71,050
1
£
1,628,000
1,098,400
529,600
(71,050)
(32,800)
425,750
6,000
(21,000)
(150,000)
260,750
115,750
145,000
(54,000)
91,000
Balance sheet as at 31 December 20X6
Fixed assets
Intangible
Tangible
Investments
[1]
[2]
[3]
Current assets
Stock [156,360 + stock obsolescence realisable 5,600]
Debtors [179,830 + 1,500 provision written back]
Creditors – amounts falling due within 1 year [4]
Net current assets
Total assets less current liabilities
Creditors – amounts falling due after 1 year
[5]
Share capital
Revaluation reserve
Profit and loss account [b/f 98,000 + 91,000]
(b)
Notes to the profit and loss account
[1]
Accounting policies
General
Depreciation
Exceptional items
[2]
Operating profit is stated after charging audit fee £7,000
[3]
Staff costs
Purchasing
Distribution
Administration
6
3
1
10
40,000
341,250
130,000
511,250
161,950
181,330
343,280
(210,530)
132,750
644,000
(180,000)
464,000
250,000
25,000
189,000
464,000
£
45,000
22,500
7,500
75,000
[4]
Directors’ emoluments
Chairman
nil
Highest paid director
£19,800
Other directors earn salaries in the range £15,000 – £20,000
[5]
Income from fixed assets investments
£6,000
[6]
Interest payable and similar charges
Bank interest
Debenture interest paid and payable
£
3,000
18,000
21,000
2
[7]
[8]
[9]
Exceptional costs
Restructuring
Less tax relief
150,000
(45,000)
105,000
Taxation on ordinary activities
Tax on profits (165,000 – 45,000 from Note 7)
Overprovision
120,000
(4,250)
115,750
Dividends
Interim at 3.6p
Proposed at 7.2p
£
18,000
36,000
54,000
Notes to balance sheet
Fixed assets:
[1] Intangible assets – Goodwill
Cost at 1 January 20X6
Amortisation
At 1 January 20X6
Charge for year included in Administration expenses
At 31 December 20X6
Net book value at 31 December 20X6
Net book value at 1 January 20X6
[2]
7,500
2,500
10,000
40,000
42,500
Tangible fixed assets
Cost
At 1.1.20X6
Additions
Disposals
Revaluation
At 31.12.20X6
Depreciation
At 1.1.20X6
Charge
Disposals
At 31.12.20X6
NBV 31.12.20X6
NBV 1.1. 20X6
[3]
50,000
Land/
Blgs
Plant/
Machinery
Fixtures
225,000
20,000
90,000
78,000
Total
25,000
250,000
110,000
54,000
323,000
90,000
(24,000)
25,000
414,000
9,000
3,000
16,000
11,000
12,000
238,000
220,000
27,000
83,000
4,000
37,500
6,750
(10,500)
33,750
20,250
40,500
62,500
20,750
(10,500)
72,750
341,250
260,500
(24,000)
Investments
Listed on recognised stock exchange
£130,000
3
Notes relating to creditors, post balance sheet events and capital
[4]
Creditors – due within one year
Bank overdraft
12,700
Trade creditors
32,830
Taxation
120,000
Dividends
36,000
Accrual – interest
9,000
210,530
[5]
Creditors – due after more than one year
10% debentures redeemable 2003
£180,000
Provisions for liabilities – Lawsuit details
Post balance sheet events – Details re investment in Diat d’or
Share capital
Details of authorised capital
Reserves
Revaluation
At 1 January 20X6
Movement during year
At 31 December 20X6
25,000
25,000
Profit &
loss
98,000
91,000
189,000
Comments
Provision
 is an amount retained from profit
 it provides for a loss or liability likely to be incurred but amount is uncertain
 shown in balance sheet after creditors or deducted from asset e.g. bad debt
provision.
Reserve
 a realised or unrealised gain which has not either legally or at the company’s
discretion been distributed as dividends
 i.e. it is retained in the business e.g. retained profits, share premium, revaluation
reserve
 it is shown in the balance sheet after share capital.
Liability
 is an obligation in the future requiring the transfer of assets e.g. cash payment or
provision of services to other entities
 it entails a probable future sacrifice
 it may also include the amount owed to the owners of the business
 it is reported under creditors within or after one year.
Contingent liability
 is a condition that exists at the balance sheet date
 where the outcome will be determined by a future uncertain event
4
it appears as a note to the balance sheet.
5
Chapter 8: Question Web 2 – SEAS Ltd
1.
The closure of the Garratt factory is a discontinuance of a business segment, as
it was clearly a material and separately identifiable component of the company’s
business operations. Under FRS 3, disclosure would be under discontinued
heading.
2.
The fraud is an adjusting event under SSAP 17, and as it has been discovered
the financial statements will not show a true and fair view unless they are
adjusted for it. The £30,000 should therefore be written off in the profit and
loss account.
3.
This is an exceptional item because it is material but arises from the ordinary
activities of the business. It should be charged in arriving at the profit on
ordinary activities, and should be separately disclosed.
4.
The agreement to purchase this business relates to the period after the year-end
and is therefore a non-adjusting event under SSAP 17, as knowledge of it does
not affect the company’s position at 31 March 20X8. However, disclose the
information by way of note.
5.
This is also an exceptional item and should be treated as in 3 above. It is not a
prior year adjustment because it arises from a change in trading conditions and
not from a change in accounting policy or a fundamental error.
6.
Under SSAP 17 this is an adjusting event as it provides evidence of conditions
existing at the balance sheet date. The potential loss of £30,000 should be
written off in the profit and loss account and deducted from the debtors in the
balance sheet.
7. The rights issue relates entirely to the period after the year end, therefore it is a
non-adjusting event under SSAP 17. This should be disclosed by way of note.
One of the three marks should be given for noting share premium.
6