Chapter 9 Adjustments to the Profit and Loss Account and Balance Sheet: 2

Transcription

1 Chapter 9 Adjustments to the Profit and Loss Account and Balance Sheet: Questions 1. Oriana is a chiropodist who works from a small converted house which she bought freehold on 1 January X1 for 15. She lets out the upstairs offices to a firms of financial advisers. Downstairs, Oriana and her assistant, Jackie, provide a range of chiropody and aromatherapy footbath services. Of the 15 paid for the house, 35 is estimated to relate to the value of the land on which the house stands, and the remainder is the value of the building itself. Oriana depreciates the freehold building over 1 years (i.e. at 1% per year) on the assumption that it will have no value at the end of the 1 year period. Oriana s chiropody equipment, which originally cost 36 96, is depreciated on the reducing balance basis at % per year. It was included in her balance sheet at 31 December X at a net book value of 3 6. During the accounting year to 31 December X5 Oriana has not bought or disposed of any fixed assets. gowthorpe/ch9s.doc 7

2 a) Show the amounts for depreciation to be shown in Oriana s profit and loss account for the year ending 31 December X5 b) Show the tangible fixed assets section of Oriana s balance sheet at 31 December X5.. Odile is the sole UK distributor of a French quick-drying cement product. She paid 1 on 1 January X for a licence which grants her the sole distribution rights for a five year period. Odile s amortisation policy is to calculate amortisation for inclusion in the profit and loss account for each complete month of ownership of an intangible asset. What amount of amortisation in respect of this licence will be included in Odile s profit and loss account for the year ending 31 May X? 3. Padma runs a specialist textile and soft furnishings business in shop premises rented from the local authority. At the back of the shop is a small workshop where Padma s two part-time employees produce made-to-measure curtains and covers, and carry out repairs and alterations. gowthorpe/ch9s.doc 73

3 At Padma s 31 August X7 year end, her balance sheet showed the following fixed asset details: Fixed assets Shop fittings at cost Less: depreciation gowthorpe/ch9s.doc 7

4 Workshop equipment at cost Less: depreciation Delivery vehicle at cost gowthorpe/ch9s.doc 75

5 Less: depreciation Fixed assets at net book value In the year ending 31 August X, the following events take place: gowthorpe/ch9s.doc 76

6 1. Padma s made-to-measure service is doing very well. She takes on another part-time employee and buys a new sewing machine and a new cutting table for a total cost of.. Padma sells the delivery vehicle for 5 and buys a new one for Padma s depreciation policy is as follows: 1. Shop fittings are depreciated at 1% of cost each year. (NB: of the of shop fittings at cost, is fully depreciated).. Workshop equipment is depreciated at 5% per year on the reducing balance basis. 3. The delivery vehicle is depreciated at 3% per year on the reducing balance basis.. A full year s depreciation is included in the accounts in the year of purchase of an asset. There is no depreciation in the year of disposal. a) Show the amounts for depreciation and the profit or loss on sale to be included in Padma s profit and loss account for the year ending 31 August X. b) Show the fixed assets section of Padma s balance sheet at 31 August X. gowthorpe/ch9s.doc 77

7 Work to the nearest..quincey is a marketing consultant working from rented offices in a city centre. The principal fixed assets of his business are his luxurious car (for impressing clients), the business computer system and some high quality office furniture. The accounting records show the following totals at Quincey s year end date of 3 June X6: Car at cost 6 Depreciation on car at 1 July X Business computer system at cost 7 gowthorpe/ch9s.doc 7

8 Depreciation on business computer system at 1 July X5 6 Office furniture at cost Depreciation on office furniture at 1 July X5 3 7 Entertaining expenses 6 6 Electricity 1 6 gowthorpe/ch9s.doc 79

9 Consultancy fee income 1 Secretary s salary 1 Sundry expenses 3 Debtors 1 Capital at 1 July X5 5 Business Accounting and Finance nd Edition gowthorpe/ch9s.doc

10 Travelling expenses Office rental 1 Telephone 1 Interest received 9 Drawings 5 Business Accounting and Finance nd Edition gowthorpe/ch9s.doc 1

11 Creditors 1 Insurance Assistant s salary Cash at bank 1 Business Accounting and Finance nd Edition Notes: 1. It is necessary to take account of the depreciation expense for the year ending 3 June X6. The following rates apply: gowthorpe/ch9s.doc

12 Car Business computer system 5% on the reducing balance basis % on the straight line basis Office furniture 1% on the straight line basis None of the fixed assets are fully depreciated, and there have been no additions or disposals of fixed assets during the accounting year.. An accrual of 3 is necessary in respect of telephone charges at 3 June X6. Prepare a profit and loss account for Quincey s business for the year ending 3 June X6 and a balance sheet at that date. 5. Qasim is a wholesaler of specialist cable products for telecommunications businesses. He runs the business from a rented warehouse with office attached. The business owns a range of specialised warehouse fittings, two fork lift trucks and various delivery vehicles. Also, there is a computer system to deal with online orders and despatch and invoicing documentation. a) At 31 December X, Qasim s balance sheet contained the following information relating to fixed assets: gowthorpe/ch9s.doc 3

13 Fixed assets Warehouse fittings at cost Less: depreciation Fork lift trucks gowthorpe/ch9s.doc

14 Less: depreciation Delivery vehicles gowthorpe/ch9s.doc 5

15 Less: depreciation Fixed assets at net book value During the year ending 31 December X9 the following events take place: gowthorpe/ch9s.doc 6

16 One of the fork lift trucks, which cost 13 1, was sold for 5. Half of the depreciation at 31 December X of related to this truck. A new fork lift, with computerised controls, was bought during the year for 1 5. There were no other additions or disposals of fixed assets. Qasim s depreciation policy includes the following: 1. Warehouse fittings are depreciated at 1% per year on the straight line basis. None of the fittings was fully depreciated at 31 December X.. Fork lift trucks are depreciated at 5% per year on the reducing balance basis. 3. Delivery vehicles are depreciated at 3% on the reducing balance basis.. A full year s depreciation is charged in the year of acquisition of an asset, but none in the year of disposal. i) Show the amounts for depreciation and the profit or loss on sale to be included in Qasim s profit and loss account for the year ending 31 December X9. ii) Show the fixed assets section of Qasim s balance sheet at 31 December X9. gowthorpe/ch9s.doc 7

17 b) The remainder of Qasim s accounting totals at 31 December X9 are as follows: Interest charges 1 Purchases returns 1 5 Drawings 1 Stock at 31 December X Administrative expenses gowthorpe/ch9s.doc

18 Long-term loan Business Accounting and Finance nd Edition 5 Capital at 1 January X Overdraft Debtors gowthorpe/ch9s.doc 9

19 Sales 5 Stock at 1 January X9 Purchases 3 Secretarial salaries 1 Business Accounting and Finance nd Edition gowthorpe/ch9s.doc 9

20 Warehouse operatives salaries Warehouse heating, lighting etc. 1 Warehouse rental 5 Trade creditors Building on the information calculated in part a) of the question, complete Qasim s profit and loss account for the year ending 31 December X9 and his balance sheet at that date. gowthorpe/ch9s.doc 91

21 gowthorpe/ch9s.doc 9

22 Chapter 9 Students questions ANSWERS 1. Oriana Working 1 Value of building = = 11 Annual depreciation charge on building = 11 x 1% = 11 Working Depreciation of machinery = % of net book value Net book value at start of year = 3 6; there are no additions or disposals of fixed assets. So, charge for depreciation of equipment = % x 3 6 = 7 Working 3 Depreciation of the building from X1 to X5 (for inclusion in the balance sheet): 11 (annual depreciation charge) x 5 years = 55. gowthorpe/ch9s.doc 93

23 Working Depreciation of equipment: At 31 December X cost of equipment = and net book value = 3 6. Depreciation in the balance sheet at that date was: = Depreciation in the balance sheet at 31 December X5 = amount accumulated up to the end of X ( 13 6) + the charge for the year ( 7) = 1 1. a) Depreciation to be included in Oriana s profit and loss account for the year ending 31 December X5: Depreciation of building 11 (working 1) Depreciation of equipment 7 (working ) b) Extract from Oriana s balance sheet at 31 December X5 Fixed assets gowthorpe/ch9s.doc 9

24 Land at cost Building at cost Less: depreciation (working 3) gowthorpe/ch9s.doc 95

25 Equipment at cost Less: depreciation (working ) gowthorpe/ch9s.doc 96

26 Fixed assets at net book value. Odile The number of full months of ownership in the accounting year = (February, March, April and May). Annual amortisation charge: 1 = per year 5 years months amortisation, therefore, is: x = (to the nearest ) 1 3. Padma Working 1: depreciation of shop fittings gowthorpe/ch9s.doc 97

27 of the cost of shop fittings is fully depreciated; this means that only 6 ( ) is subject to depreciation at 1% on cost: 6 x 1% = 6 Working : depreciation of workshop equipment Net book value at 1 September X Additions in the year Total 9517 Depreciation for the year = 9517 x 5% = 379 (to the nearest ) Working 3: disposal of delivery vehicle There is no depreciation in the year of disposal so the profit or loss is calculated by comparing sale proceeds with the net book value at the start of the year, as follows: gowthorpe/ch9s.doc 9

28 Proceeds of sale 5 Net book value 337 Profit on sale 193 Working : depreciation of new delivery vehicle There is a full year s depreciation in the year of acquisition, so depreciation is calculated as follows: x 3% = 57 a) Depreciation and profit on sale to be included in Padma s profit and loss account for the year ending 31 August X: Depreciation of shop fittings 6 (working 1) Depreciation of workshop equipment 379 (working ) Depreciation of delivery vehicle 57 (working ) Profit on disposal of delivery vehicle 193 (working 3) b) Extract from Padma s balance sheet at 31 August X gowthorpe/ch9s.doc 99

29 Fixed assets Shop fittings at cost Less: depreciation ( 1 + 6) Workshop equipment at cost ( ) gowthorpe/ch9s.doc 1

30 Less: depreciation ( ) Delivery vehicle at cost Less: depreciation gowthorpe/ch9s.doc 11

31 Fixed assets at net book value. Quincey Working 1: depreciation of car Net book value at 1 July X5 = = 3 76 Depreciation for the year = 3 76 x 5% = 5969 gowthorpe/ch9s.doc 1

32 Working : depreciation of business computer system Depreciation = % of cost (i.e. the straight line basis) = 7 x % = 156 Working 3: depreciation of office furniture Depreciation = 1% of cost = 1 69 x 1% = 169 Quincey: profit and loss account for the year ending 3 June X6 Consultancy fees Interest received 9 6 gowthorpe/ch9s.doc 13

33 Expenses Depreciation of car (working 1) Depreciation of business computer system (working ) Depreciation of office furniture (working 3) gowthorpe/ch9s.doc 1

34 Secretary s salary Assistant s salary Office rental Telephone ( 1 + accrual of 3) gowthorpe/ch9s.doc 15

35 Insurance Electricity Travelling expenses Entertaining expenses Sundry expenses gowthorpe/ch9s.doc 16

36 6 9 Net profit Quincey: balance sheet at 3 June X6 Fixed assets Car at cost gowthorpe/ch9s.doc 17

37 Less: depreciation ( ) Business computer system Less: depreciation ( ) gowthorpe/ch9s.doc 1

38 1 5 6 Office furniture at cost Less: depreciation ( ) 7 gowthorpe/ch9s.doc 19

39 Current assets Debtors Cash at bank gowthorpe/ch9s.doc 11

40 Current liabilities Creditors Accrual Net current assets 1 gowthorpe/ch9s.doc 111

41 Capital at 1 July X5 5 3 Profit for the year Drawings ( gowthorpe/ch9s.doc 11

42 5 5 ) Qasim Working 1 Depreciation of warehouse fittings: 1% x cost = 1 x 1% = 1 Working gowthorpe/ch9s.doc 113

43 Disposal of fork lift truck: compare disposal proceeds with net book value at the date of sale. Net book value is calculated as follows: Cost 13 1 Less: depreciation (1/ x 17 91) ( 955) Net book value 15 Proceeds of sale 5 Profit on sale 1 55 Working 3 Depreciation of fork lift trucks: Net book value at 1 January X9 9 Less: disposed of (see working ) ( 15) 15 Addition of new fork lift truck during the year Depreciation at 5% per year (reducing balance) = 5% x 395 = 5599 Working gowthorpe/ch9s.doc 11

44 Depreciation of delivery vehicles = 3% x net book value = 3% x 3 = a) i) The amounts to be shown for depreciation and profit or loss on sale in Qasim s profit and loss account for the year ending 31 December X9 are: Depreciation of warehouse fittings 1 (working 1) Depreciation of fork lift trucks (working 3) Depreciation of delivery vehicles (working ) Profit on disposal of fork lift truck 1 55 (working ) ii) Fixed assets section of Qasim s balance sheet at 31 December X9 Fixed assets Warehouse fittings at cost gowthorpe/ch9s.doc 115

45 Less: depreciation ( ) 3 Fork lift trucks at cost ( ) Less: depreciation ( ) gowthorpe/ch9s.doc 116

46 Delivery vehicles at cost Less: depreciation ( ) gowthorpe/ch9s.doc 117

47 b) Qasim: profit and loss account for the year ending 31 December X9 Sales gowthorpe/ch9s.doc 11

48 Cost of sales Opening stock Purchases Less: purchases returns gowthorpe/ch9s.doc 119

49 Closing stock gowthorpe/ch9s.doc 1

50 Gross profit Expenses Administrative expenses gowthorpe/ch9s.doc 11

51 Secretarial salaries Warehouse operatives salaries Interest charges Warehouse lighting, heating etc gowthorpe/ch9s.doc 1

52 Warehouse rental Depreciation of warehouse fittings Depreciation of fork lift trucks Depreciation of delivery vehicles Profit on sale of fork lift truck gowthorpe/ch9s.doc 13

53 Net profit Qasim: balance sheet at 31 December X9 Fixed assets gowthorpe/ch9s.doc 1

54 Warehouse fittings at cost Less: depreciation ( ) 3 Fork lift trucks at cost ( ) gowthorpe/ch9s.doc 15

55 Less: depreciation ( ) Delivery vehicles at cost Less: depreciation ( ) gowthorpe/ch9s.doc 16

56 Current assets Stock gowthorpe/ch9s.doc 17

57 Debtors Current liabilities Creditors Bank overdraft gowthorpe/ch9s.doc 1

58 Net current assets gowthorpe/ch9s.doc 19

59 Long-term liabilities: longterm loan ( 5 ) 5 3 Capital at 1 January X Profit for the year 1 3 gowthorpe/ch9s.doc 13

60 9 Drawings ( 1 ) 5 3 gowthorpe/ch9s.doc 131