13.3 Preparation of financial statements for limited companies ( 編製有限公司的財務報表 )

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1 Chapter 13 Regulatory Framework of Accounting in Hong Kong and Financial Statements for Limited Companies ( 香港的會計監管架構和有限公司的財務報表 ) 13.3 Preparation of financial statements for limited companies ( 編製有限公司的財務報表 ) Income statements for internal use ( 作內部用途的損益表 ) 有限公司可選擇以任何方式編製作內部用途 ( 通常是給管理層使用 ) 的財務報表 內部財務報表的編製並不受任何監管要求 所限制 絕大部分公司在編製這些報表時, 都會盡量因應公開發表 ( 即提供予外部使用者, 例如股東 債權人和稅務局 ) 的要 求編製 Name : Serial No: Income Statement for the year ended 31 March 2010 Dr Cr Sales 410,890 Less Cost of goods sold: Opening inventories 64,320 Add Purchases 118, ,820 Less Closing Inventories (58,770) (124,050) Gross profit 286,840 Add Other revenues: Bank interest received 2, ,640 Less Expenses: Wages and salaries 76,530 Rent and rates 83,580 Directors remuneration 12,000 Auditors remuneration 5,000 Motor expenses (distribution) 10,780 Sales commissions 7,890 Debenture interest (80,000 x 6%) 4,800 Bad debts 3,780 Depreciation: Office equipment (300,000 x 10%) 30,000 Depreciation: Delivery vans (120,000-40,000) x 30% 24,000 (258,360) Net profit 31,280 Less Profit tax (6,240) Profit after tax 25,040 Add Retained profits brought forward 42,000 67,040 Less Appropriations: Transfer to general reserve 10,000 Ordinary share dividend (200,000 x 0.05) 10,000 (20,000) Retained profits carried forward 47, The directors may be entitled to remuneration. Directors remuneration would be charged as an expense ( 董事酬金會被視作企業的費用 ). 2. The auditor s remuneration would be charged as an expense ( 核數師酬金會被視作企業的費用 ). 3. Debenture interest would be charged as an expense ( 債券利息會被視作企業的費用 ). 4. Part of the profit may be distributed as dividends to the shareholders of the company. The rest would be transferred to reserves or carried forward to the following year as retained profits ( 企業可能會把部分利潤撥作股息向股東分派 ). 5. Firms are required to pay profits tax and only limited companies are required to disclose this information in their published financial statements ( 有限公司必須要在其公開發表的財務報表內披露有關利得稅的資料 ). 1

2 Classwork 1 1. CA Co Ltd made a net profit of 210,000 for the year ended 31 December Retained profits as at 31 December 2009 amounted to 17,000. At a directors meeting, the following appropriations were approved. Transfer to general reserve 30,000 Transfer to foreign exchange reserve 5,000 It was also agreed that a dividend of 10% be proposed on the 500,000 ordinary shares of 2 each. The yearly dividend on the 250,000 10% preference shares of 1 each had been paid. Required: Draw up an income statement extract for the year ended 31 December 2010 (showing appropriations only). CA Co Ltd Income Statement for the year ended 31 December 2010 (extract) Net profit 210,000 Add Retained profits brought forward 17, ,000 Less Transfer to general reserve 30,000 Transfer to foreign exchange reserve 5,000 Preference dividend paid (250, %) 25,000 Proposed ordinary dividend (500, %) 100,000 (160,000) Retained profits carried forward 67, CB Ltd has an authorised share capital of 90,000 ordinary shares of 1 each and 10,000 10% preference shares of 1 each. The company s trial balance extracted after one year of trading as at 31 December 2010 shows the following information: Net profit 11,340 Debentures 30,000 Issued ordinary share capital, fully paid 60,000 Issued preference share capital, fully paid 10,000 Accounts payable 3,550 Accounts receivable 4,120 Cash 2,160 Inventory 8,800 Allowance for doubtful accounts 350 Depreciation: equipment 4,500 Equipment at cost 45,000 Premises at cost 50,000 Bank? The directors decided to transfer 1,500 to the general reserve and propose a dividend of 12.5% on the ordinary shares. The preference dividend was not paid until January Draw up an income statement extract for the year ended 31 December CA Co Ltd Income Statement for the year ended 31 December 2010 (extract) Net profit 11,340 Less Appropriations Transfer to general reserve 1,500 Preference dividend (10,000 10%) 1,000 Ordinary dividend (60, %) 7,500 (10,000) Retained profits carried forward 1,340 2

3 3. The following trial balance was extracted from the books of Chang Ltd as at 31 December 2009: Chang Ltd Trial Balance as at 31 March 2010 Dr Cr 100,000 ordinary shares of 1 each 100,000 Retained profits 34,280 Freehold land at cost 65,000 Plant and machinery at cost 55,000 Accumulated depreciation on plant and machinery 15,800 Purchases 201,698 Sales 316,810 General expenses 32,168 Wages and salaries 54,207 Rent 4,300 Lighting expenses 1,549 Bad debts 748 Allowance for doubtful accounts 861 Accounts receivable 21,784 Accounts payable 17,493 Inventory 25,689 Bank 23, , ,244 You are given the following additional information: (i) Inventory as at 31 December 2009 was valued at 29,142. (ii) Wages and salaries due on 31 December 2009 amounted to 581. (iii) Rent paid in advance as at 31 December 2009 amounted to 300. (iv) A dividend of 10,000 was proposed for the year. (v) The allowance for doubtful accounts was to be increased to 938. (vi) A depreciation charge was to be made on plant and machinery at a rate of 10% per annum on cost. Required: Draw up an income statement extract for the year ended 31 December 2009 (for internal use). Chang Ltd Income Statement for the year ended 31 December 2009 Sales 316,810 Less Cost of goods sold: Opening inventories 25,689 Add Purchases 201, ,387 Less Closing Inventories (29,142) (198,245) Gross profit 118,565 Less Expenses: Wages and salaries (54, ) 54,788 Rent (4, ) 4,000 Lighting expenses 1,549 Bad debts 748 Allowance for doubtful accounts ( ) 77 General expenses 32,168 Depreciation: Plant and machinery (55,000 10%) 5,500 (98,830) Net profit 19,735 Add Retained profits brought forward 34,280 54,015 Less Appropriations Proposed dividend (10,000) Retained profits carried forward 44,015 3

4 4. Here is the trial balance of RF Ltd as at 30 June RF Ltd Trial Balance as at 30 June 2010 Dr Cr 50,000 ordinary shares of 1 each 50,000 Inventory 38,295 Accounts receivable 26,890 Accounts payable 12,310 10% debentures 20,000 Non-current assets replacement reserve 10,000 General reserve 6,000 Retained profits 3,964 Debenture interest 1,000 Equipment at cost 35,000 Motor vehicles at cost 28,500 Accumulated depreciation: Equipment 8,400 Motor vehicles 10,350 Bank 3,643 Cash 180 Sales 99,500 Purchases 66,350 Returns inwards 1,150 Carriage inwards 240 Wages and salaries 10,360 Rent, rates and insurance 5,170 Discount allowed 1,246 Directors remuneration 2, , ,524 Additional information: (i) Inventory as at 30 June 2010 was valued at 49,371. (ii) A dividend of 15% was proposed. (iii) Accrued expenses included: rent 700, directors remuneration 2,500. (iv) Depreciation was to be charged on a reducing-balance basis: equipment at 10%, motor vehicles at 20%. (v) Transfers to reserves included: general reserve 2,000, non-current assets replacement reserve 1,000. Required: Draw up an income statement for the year ended 30 June 2010 (for internal use). RF Ltd Income Statement for the year ended 30 June 2010 Sales 99,500 Less Returns inwards (1,150) 98,350 Less Cost of goods sold: Opening inventories 38,295 Add Purchases 66,350 Carriage inwards ,885 Less Closing Inventories (49,371) (55,514) Gross profit 42,836 Less Expenses: Wages and salaries 10,360 Rent, rates and insurance (5, ) 5,870 Discounts allowed 1,246 Debenture interest (20,000 10%) 2,000 Depreciation: Equipment [(35,000 8,400) 10%] 2,660 Motor vehicles [(28,500 10,350) 20%] 3,630 Directors remuneration (2, ,500) 5,000 (30,766) Net profit 12,070 Add Retained profits brought forward 3,964 16,034 Less Appropriations: Transfer to general reserve 2,000 Transfer to non-current assets replacement reserve 1,000 Proposed dividend (50,000 15%) 7,500 (10,500) Retained profits carried forward 5,534 4

5 Income statements for external use ( 作外部用途的損益表 ) Under HKAS 1 (Revised), the income and expenses for a period can be presented in two ways: 1 A single statement of comprehensive income ( 單一全面收益表 ) This statement has to show: (a) profit or loss for the period ( 期內的利潤或虧損 ), (b) each component of other comprehensive income classified by nature ( 其他全面收益的各個組成項目 ( 按性質分類 )), and (c) total comprehensive income for the period ( 該期間的全面收益總額 ). 2 Two statements ( 兩份報表 ) A separate income statement ( 一份獨立的損益表 ) plus a statement of comprehensive income is used. A separate income statement is used to display the profit or loss components. The second statement (statement of comprehensive income) begins with the profit and loss for the period and displays components of other comprehensive income. The term other comprehensive income (out of NSS) refers to items of income and expense that are not recognized in profit and loss. The published income statement would be prepared as follows (ignoring the section on other comprehensive income ): Statement of Comprehensive income for the year ended 31 March 2010 Sales (revenue or turnover) 410,890 Cost of sales (124,050) Gross profit 286,840 Other revenues (other income) 2,800 Administrative expenses (76, , , , ,000) (207,110) Distribution expenses (10, , ,000) (42,670) Other operating expenses (3,780) Operating profit 36,080 Finance expenses (finance costs) (4,800) Profit before tax 31,280 Taxation (income tax expense) (6,240) Profit after tax (profit for the year) 25, Differences between internal income statements and external income statements ( 內部與外部損益表的分別 ) The published income statement has been simplified ( 簡單 ) from the internal income statement in several aspects: 1 Details of the cost of goods sold are omitted ( 略去銷貨成本的詳情 ). Only the total is shown ( 只展示總額 ). 2 Details of other revenues are omitted ( 略去其他收益的詳情 ). Only the total is shown ( 只展示總額 ). 3 Expenses are classified into various categories by function ( 按功能 ) (Function of expense method ( 費用按功能分類法 )). (i) Administrative expenses ( 行政費用 ) : refer to expenses incurred in the management of affairs of a business. (ii) Distribution expenses ( 分銷費用 ) : refer to expenses incurred in the selling and distribution of goods and/or services. (iii) Finance expenses ( 融資費用 ) : refer to expenses incurred in the borrowing of funds. (iii) Other operating expenses ( 其他營業費用 ) : refer to expenses other than distribution, administrative or finance expenses. This method may require arbitrary allocations and involve considerable judgement. For example, some companies would classify bad debts as selling expenses instead of other expenses. Expenses can also be classified by nature ( 按性質分類 ) in this method (Nature of expenses method ( 費用按性質分類法 )). For example, expenses can be classified into depreciation, purchases of materials, transport costs, employee benefits and advertising costs. A company can use either of the two methods to present expenses in the income statement. The choice depends on whichever method is more relevant to the business. 4 Four profit figures are shown: (i) gross profit ( 毛利 ), (ii) operating profit ( 營業利潤 ), (iii) profit before tax ( 稅前利潤 ) and (iv) profit after tax ( 稅後利潤 ). Operating profit (profit before interest and tax) is the profit after deducting all types of operating expenses ( 所有類型的營業費用 ) except finance charges ( 除了融資費用 ). 5 Retained profits ( 留存利潤 ) and appropriation items ( 分配項目 ) are not shown in the income statement. They are disclosed ( 披露 ) in the statement of changes of equity ( 股東權益變動表 ). 5

6 Classwork 2 1. The following trial balance was extracted from the books of Speed Ltd as at 30 April 2010: Dr Cr Sales 2,860,000 Purchases 2,054,000 Electricity 13,650 Rent and rates 28,600 Salaries 334,100 Sundry expenses 9,230 Interest on debentures 11,700 Inventory 260,000 Machinery: Cost 520,000 Accumulated depreciation 130,000 Motor vehicles at cost 208, ,000 ordinary shares of 1 each 260,000 General reserve 29,900 Retained profits 213,980 15% debenture (repayable in 2016) 156,000 Accounts receivable 208,000 Accounts payable 62,400 Bank 65,000 3,712,280 3,712,280 The following information is also given: (i) Inventory as at 30 April 2010 was valued at 347,750. (ii) Depreciation was to be charged on the following assets using the reducing-balance method: Machinery 10% per annum Motor vehicles 12.5% per annum Though the motor vehicles were purchased in early 2010, it is the company policy to charge a full year s depreciation in the year of acquisition. (iii) Rates prepaid on 30 April 2010 amounted to 2,600. (iv) Electricity accrued as at 30 April 2010 amounted to 1,950. (v) Salaries included directors remuneration 70,200. (vi) Profits tax for the year was estimated to be 67,000. (vii) The directors proposed to transfer 52,000 of the profits to the general reserve and to declare a final dividend of 0.5 per share. Required: Draw up an income statement for the year ended 30 April 2010 for external use. Speed Ltd Statement of Comprehensive Income for the year ended 30 April 2010 Sales 2,860,000 Cost of sales (W1) (1,966,250) Gross profit 893,750 Administrative expenses (W2) (440,700) Other operating expenses (9,230) Operating profit 443,820 Finance expenses (156,000 15%) (23,400) Profit before tax 420,420 Taxation (67,000) Profit after tax 353,420 W1: Cost of sale W2: Administrative expenses Opening inventory 260,000 Add Purchases 2,054,000 2,314,000 Less Closing inventory (347,750) 1,966,250 Electricity (13, ,950) 15,600 Rent and rates (28,600 2,600) 26,000 Salaries 334,100 Depreciation: Machinery [(520, ,000) 10%] 39,000 Motor vehicles (208, %) 26, ,700 6

7 2. The following trial balance was extracted from the books of Silver Queen Co Ltd as at 31 December 2009: Dr Cr 1,080,000 ordinary shares of 0.5 each 540, ,000 5% preference shares of 0.5 each 260,000 Revaluation reserve 208,000 Inventory 137,800 10% debentures (repayable in 2011) 650,000 Debentures interest 32,500 Freehold land, at cost 1,131,000 Office equipment, at cost 468,000 Office equipment: Accumulated depreciation 117,000 Short-term investments (listed shares), at cost 780,000 Purchases 682,500 Sales 1,486,000 Salaries 101,400 Administrative expenses 109,200 Preference dividend 13,000 Retained profits 142,300 Discounts allowed and received 5,915 2,665 Carriage inwards 16,900 Carriage outwards 10,400 Accounts receivable and payable 136,500 31,200 Bank overdraft 5,950 Suspense account 182,000 3,625,115 3,625,115 Additional information: (i) Inventory as at 31 December 2009 was valued at 195,000. (ii) A total of 260,000 ordinary shares of 0.5 each were issued at 0.7 per share on 5 December However, only one entry in the bank account had been made. (iii) A final ordinary dividend of 0.1 per share was proposed on all issued shares as at 31 December (iv) Depreciation charge for office equipment for the year was 93,600. (v) Half-year debenture interest was owing at the end of (vi) Estimated profits tax payable on current year s profits was 64,580. Required: Prepare an income statement for the year ended 31 December 2009 for external use. Silver Queen Co Ltd Statement of Comprehensive Income for the year ended 31 December 2009 Sales 1,486,000 Cost of sales (W1) (642,200) Gross profit 843,800 Other revenues 2,665 Administrative expenses (W2) (304,200) Selling and distribution expenses (5, ,400) (16,315) Operating profit 525,950 Finance expenses (650,000 10%) (65,000) Profit before tax 460,950 Taxation (64,580) Profit after tax 396,370 W1 : Cost of sales Opening inventory 137,800 Add Purchases 682,500 Carriage inwards 16, ,200 Less Closing inventory (195,000) 642,200 W2: Administrative expenses Salaries 101,400 Administrative expenses 109,200 Depreciation: Office equipment 93, ,200 7

8 Application of new titles under HKAS 1 (Revised) ( 根據 香港會計準則 第 1 號 ( 經修訂 ) 採用新的報表名稱 ) Under HKAS 1 (Revised), the new titles of financial statement only apply ( 適用於 ) to limited companies ( 有限公司 ) for external reporting ( 外部用途的報表 ). It is optional ( 可選擇是否採用 ) for sole proprietorship ( 獨資企業 ) and partnerships ( 合夥 ). You may encounter the use of either the old titles or the new titles ( 使用舊名稱或新名稱 ) in exam questions ( 考試題目 ) on sole proprietorships or partnerships ( 獨資企業和合夥 ) Balance sheet for internal use ( 作內部用途的資產負債表 ) There are no regulatory requirements ( 監管要求 ) for the preparation ( 編制 ) of internal balance sheet ( 內部資產負債表 ). However, for the sake of convenience ( 為了方便 ), it would prepare an internal balance sheet that is consistent with ( 一致 ) the requirements for publication ( 發布 ). Balance Sheet as at 31 March 2010 Accumulated Net book Non Current assets Cost depreciation value Office equipment 300, , ,000 Delivery vans 120,000 64,000 56, , , ,000 Long-term investments 100, ,000 Current assets Inventories 58,770 Accounts receivable 38,470 Bank 16, ,990 Less Current Liabilities Accounts payable 42,310 (24,000) Accrued expenses (80,000 x 6% 2,400 ) 2,400 Tax payable 6,240 (50,950) Net Current assets 63, ,040 Financed by: Capital and reserves Ordinary share capital 200,000 Share premium 12,000 General reserve (50, ,000) 60,000 Retained profits (after appropriation) 47,040 Proposed dividend 10, ,040 Non-current liabilities 6% debentures 80, ,040 Investments held for long-term purposes are shown at cost as a non-current asset. If they are held for resale in the foreseeable future, it should be shown at fair market value as a current asset. 1. The tax payable should be shown as a current liability ( 應付稅項應列作流動負債 ). 2. There are usually two types of long-term financing ( 長期融資 ): (i) capital and reserves ( 資本及儲備 ); (ii) non-current liabilities ( 非流動負債 ). 3. Capital ( 資本 ) means the issued share capital ( 已發行股本 ). The amount of authorized share capital ( 法定股本的金額 ) should be disclosed ( 披露 ) as a note to the financial statements ( 在財務報表附註內 ). 4. The share premium ( 股本溢價 ), general reserve ( 普通儲備 ) and retained profits (retained earnings) ( 留存利潤 ) are some of the common types of reserves ( 常見的儲備類別 ). 5. The figure of retained profit ( 留存利潤 ) is taken from the balance carried forward ( 餘額移後 ) after appropriation ( 扣減分配 後 ) in the income statement ( 損益表 ). 6. Debentures issued ( 已發行債券 ) should be shown as a non-current liability ( 非流動負債 ). If the debentures are going to be redeemed ( 贖回 ) in the following year ( 在下年度 ), they should be shown as a current liability ( 流動負債 ) 8

9 Classwork 3 1. The following trial balance was extracted from the books of Chang Ltd as at 31 December 2009: Chang Ltd Trial Balance as at 31 March 2010 Dr Cr 100,000 ordinary shares of 1 each 100,000 Retained profits 34,280 Freehold land at cost 65,000 Plant and machinery at cost 55,000 Accumulated depreciation on plant and machinery 15,800 Purchases 201,698 Sales 316,810 General expenses 32,168 Wages and salaries 54,207 Rent 4,300 Lighting expenses 1,549 Bad debts 748 Allowance for doubtful accounts 861 Accounts receivable 21,784 Accounts payable 17,493 Inventory 25,689 Bank 23, , ,244 You are given the following additional information: (i) Inventory as at 31 December 2009 was valued at 29,142. (ii) Wages and salaries due on 31 December 2009 amounted to 581. (iii) Rent paid in advance as at 31 December 2009 amounted to 300. (iv) A dividend of 10,000 was proposed for the year. (v) The allowance for doubtful accounts was to be increased to 938. (vi) A depreciation charge was to be made on plant and machinery at a rate of 10% per annum on cost. (vii) It is given that the retained profits for the year is 44,015 Required: Draw up a balance sheet as at 31 December 2009 (for internal use). Chang Ltd Balance Sheet as at 31 December 2009 Non Current assets Freehold land at cost 65,000 Plant and machinery 55,000 Less Accumulated depreciation (15, ,000 x 10%) (21,300) 33,700 98,700 Current assets Inventory 29,142 Accounts receivable 21,784 Less Allowance for doubtful accounts (938) 20,846 Prepayments 300 Bank 23,101 73,389 Less Current Liabilities Accounts payable 17,493 Accrued expenses 581 (18,074) Net Current assets 55, ,015 Financed by: Ordinary share capital 100,000 Reserves Retained profits 44,015 Proposed dividend 10,000 54, ,015 9

10 2. Here is the trial balance of RF Ltd as at 30 June RF Ltd Trial Balance as at 30 June 2010 Dr Cr 50,000 ordinary shares of 1 each 50,000 Inventory 38,295 Accounts receivable 26,890 Accounts payable 12,310 10% debentures 20,000 Non-current assets replacement reserve 10,000 General reserve 6,000 Retained profits 3,964 Debenture interest 1,000 Equipment at cost 35,000 Motor vehicles at cost 28,500 Accumulated depreciation: Equipment 8,400 Motor vehicles 10,350 Bank 3,643 Cash 180 Sales 99,500 Purchases 66,350 Returns inwards 1,150 Carriage inwards 240 Wages and salaries 10,360 Rent, rates and insurance 5,170 Discount allowed 1,246 Directors remuneration 2, , ,524 Additional information: (i) Inventory as at 30 June 2010 was valued at 49,371. (ii) A dividend of 15% was proposed. (iii) Accrued expenses included: rent 700, directors remuneration 2,500. (iv) Depreciation was to be charged on a reducing-balance basis: equipment at 10%, motor vehicles at 20%. (v) Transfers to reserves included: general reserve 2,000, non-current assets replacement reserve 1,000. (vii) It is given that the retained profits for the year is 5,534. Draw up a balance sheet as at 30 June 2010 (for internal use). RF Ltd Balance Sheet as at 30 June 2010 Accumulated Net book Non Current assets Cost depreciation value Equipment 35,000 11,060 23,940 Motor vehicles 28,500 13,980 14,520 63,500 25,040 38,460 Current assets Inventories 49,371 Accounts receivable 26,890 Bank 3,643 Cash ,084 Less Current Liabilities Accounts payable 12,310 Accrued expenses (1, ,500) 4,200 (16,510) Net Current assets 63, ,034 Financed by: Capital and reserves Ordinary share capital 50,000 Non-current assets replacement reserve (10, ,000) 11,000 General reserve (6, ,000) 8,000 Retained profits 5,534 Proposed dividend (50,000 x 15%) 7,500 82,034 Non-current liabilities 10% debentures 20, ,034 10

11 3. The following trial balance was extracted from the books of T Ho Ltd as at 31 March T Ho Ltd Trial Balance as at 31 March 2010 Dr Cr Bank 6,723 Accounts receivable 18,910 Accounts payable 12,304 Inventory 40,360 Buildings at cost 100,000 Equipment at cost 45,000 Retained profits 15,286 General reserve 8,000 Foreign exchange reserve 4, ,000 ordinary shares of 1 each 100,000 Purchases 72,360 Sales 135,486 Carriage inwards 1,570 Carriage outwards 1,390 Salaries 18,310 Rates and occupancy expenses 4,235 Office expenses 3,022 Sundry expenses 1,896 Accumulated depreciation: Buildings 32,000 Equipment 16,000 Directors remuneration 9, , ,276 Additional information: (i) Inventory as at 31 March 2010 was valued at 52,360. (ii) Rates owing 280; office expenses owing 190. (iii) A dividend of 10% was proposed. (iv) Transfers to reserves: general 1,000, foreign exchange 800. (v) Depreciation was to be charged: buildings at 5% and equipment at 20%, using the straight-line method. Required: Draw up an income statement for the year ended 31 March 2010, and a balance sheet as at that date (for internal use). T Ho Ltd Income Statement for the year ended 31 March 2010 Sales 135,486 Less Cost of goods sold: Opening inventories 40,360 Add Purchases 72,360 Carriage inwards 1, ,290 Less Closing Inventories (52,360) (61,930) Gross profit 73,556 Less Expenses: Salaries 18,310 Rates and occupancy expenses (4, ) 4,515 Carriage outwards 1,390 Office expenses (3, ) 3,212 Sundry expenses 1,896 Depreciation: Buildings (100,000 5%) 5,000 Equipment (45,000 20%) 9,000 Directors remuneration 9,500 (52,823) Net profit 20,733 Add Retained profits brought forward 15,286 36,019 Less Appropriations: Proposed dividend (100,000 10%) 10,000 General reserve 1,000 Foreign exchange reserve 800 (11,800) Retained profits carried forward 24,219 11

12 T Ho Ltd Balance Sheet as at 31 March 2010 Accumulated Net book Non Current assets Cost depreciation value Buildings 100,000 37,000 63,000 Equipment 45,000 25,000 20, ,500 62,000 83,000 Current assets Inventories 52,360 Accounts receivable 18,910 Bank 6,723 77,993 Less Current Liabilities Accounts payable 12,304 Accrued expenses ( ) 470 (12,774) Net Current assets 65, ,219 Financed by: Ordinary share capital 100,000 Reserves Foreign exchange reserve (4, ) 5,000 General reserve (8, ,000) 9,000 Retained profits 24,219 Proposed dividend 10,000 48, , Zylon Co Ltd s financial year ends on 31 March each year. The following balances were extracted on 31 March 2011: Issued capital, ordinary shares 480,000 Preference shares 120,000 Retained profits, 1 April ,520 Cr Net profit for the year to 31 March ,680 Interim dividend: Ordinary shares 36,000 Interim dividend: Preference shares 3,600 Plant and equipment, at cost 138,000 Vans, at cost 96,000 Freehold land, at cost 366,240 Accumulated depreciation: Plant and equipment 72,000 Accumulated depreciation: Vans 42,000 Inventory 32,400 Bank overdraft 11,640 Share premium 60,000 General reserve 78,000 Accounts receivable 543,600 Accounts payable 252,000 The authorized and issued ordinary share capital was 500,000 shares and 400,000 shares, respectively, of 1.2 each. There were 200,000 issued 6% preference share of 0.6 each. A final dividend on the preference shares was proposed, and a final dividend of 0.06 per share was proposed to be paid on each ordinary share. Required: Prepare for Zylon Co Ltd the following financial statements (for internal use): (a) Income statement extract for the year ended 31 March 2011 (showing appropriations only). (b) Balance sheet as at 31 March

13 (a) Zylon Co Ltd Income Statement for the year ended 31 March 2011 (extract) Net profit for the year 73,680 Add Retained profits brought forward 26, ,200 Less Appropriations: Interim dividends paid: Preference shares 3,600 Ordinary shares 36,000 39,600 Final dividends proposed: Preference shares [(200, %) 3,600] 3,600 Ordinary shares (400, ) 24,000 (67,200) Retained profits carried forward 33,000 (b) Zylon Co Ltd Balance Sheet as at 31 March 2011 Accumulated Net book Non Current assets Cost depreciation value Freehold land 366, ,240 Vans 96,000 42,000 54,000 Plant and equipment 138,000 72,000 66, , , ,240 Current assets Inventories 32,400 Accounts receivable 543, ,000 Less Current Liabilities Accounts payable 252,000 Bank overdraft 11,640 (263,640) Net Current assets 312, ,600 Financed by: Capital and reserves Preference share capital 120,000 Ordinary share capital 480,000 Share premium 60,000 General reserve 78,000 Retained profits 33,000 Proposed dividend (3, ,000) 27, , ,600 13

14 Balance sheet (Statement of financial position) for external use ( 作外部用途的資產負債表 ) According to HKAS 1 (Revised), the published balance sheet can be prepared in either of the following two formats. W1 : Reserves : Retained profits after appropriations + Share premium + General reserve + Proposed dividend Differences between internal and external balance sheets 1 The balance sheet is divided into three main sections: (i) assets ( 資產 ), (ii) equity ( 權益 ), and (iii) liabilities ( 負債 ). 2 Equity refers to the share capital ( 股本 ) and reserves ( 儲備 ). 3 The following totals are shown: (i) total assets, (ii) total equity, (iii) total liabilities and (iv) total equity and liabilities. 4 All tangible non-current assets ( 有形非流動資產 ) are grouped under the item property, plant and equipment ( 物業 廠房及設備 ) and shown at net book value ( 帳面淨值 ) only. Details ( 詳情 ) of non-current assets should be disclosed ( 披露 ) in the notes to the financial statements ( 財務報表附註內 ). 5 The amount of net current assets is omitted ( 略去流動資產淨值 ). 6 Only the share capital total ( 股本的總額 ) is shown. The amount of ordinary shares and preference shares ( 普通股和優先股的金額 ) should be disclosed ( 披露 ) in the notes to the financial statements ( 財務報表附註內 ). 7 Only a total figure is shown for the reserves ( 儲備的總額 ). Reserves = Share premium + General reserve + Retained profits after appropriations + Proposed dividend. Details of reserves would be disclosed in the notes to the financial statements. 8 Proposed dividend ( 擬派股息 ) needs to be approved ( 通過 ) at the annual general meeting ( 股東周年大會 ). According to HKAS (Revised), dividends proposed after the reporting period ( 報告期後建議派發的股息 ) should not be recognized in the amount ( 不應在帳目中確認 ) but should be disclosed in the notes to the financial statements. 14

15 The Differences between internal and external balance sheets 1 The statement of financial position is presented in the following sequence: (i) assets, (ii) liabilities, and (iii) equity. 2 There is no distinction between current and non-current assets, or between current and non-current liabilities. 3 Assets are listed in order of liquidity ( 變現能力 ), from the most liquid to the least liquid ( 由最高至最低 ). Liabilities are listed in order of when they become due ( 到期償還的時間 ), from the first to be paid to the last to be paid ( 由最早至最遲 ). In practice, Format 1 is more commonly used except for financial institutions, which usually adopt Format Comparative statement of financial position ( 比較財務狀況表 ) According to HKAS 1 (Revised), comparative information ( 比較資料 ) should be disclosed in respect of the previous period ( 前一期 ) for all amounts reported in the financial statements. Balance Sheet as at 31 March ASSETS Non-current assets Property, plant and equipment 346, ,000 Current assets Inventories 58,770 64,320 Accounts receivable 55,220 51, , ,720 Total assets 459, ,720 EQUITY AND LIABILITIES Capital and reserves Share capital 200, ,000 Reserves 129, ,000 Total equity 329, ,000 Non-current liabilities 6% debentures 80,000 80,000 Current liabilities Accrued expenses 44,710 57,410 Tax payable 6,240 4,310 50,950 61,720 Total liabilities 130, ,720 Total equity and liabilities 459, ,720 15

16 A more complicated example A trial balance was extracted from the books of Tiger Garment Ltd as at 31 December 2010: Tiger Garment Ltd Trial Balance as at 31 December 2010 Dr Cr 200,000 10% preference shares of 1 each 200, ,000 ordinary shares of 1 each 500,000 Office equipment at cost 830,000 Delivery vans at cost 172,000 Accumulated depreciation: Office equipment 224,000 Accumulated depreciation: Delivery vans 51,600 Investments (long-term) 735,000 Inventories 226,900 Sales 1,292,000 Purchases 539,100 Returns outwards 12,300 Returns inwards 43,100 Carriage inwards 16,200 Carriage outwards 5,200 Wages and salaries 92,400 Directors remuneration 63,000 Rental income 98,900 Motor expenses 81,200 Rent, rates and insurance 229,300 Office expenses 26,600 Debenture interest 15,000 Accounts receivable 186,100 Allowance for doubtful accounts 17,100 Accounts payable 113,700 Bank 62,900 General reserve 50,000 Share premium 40,000 Interim preference dividend 10,000 Interim ordinary dividend 35,000 Retained profits 169,400 Share and debenture issue 600,000 3,369,000 3,369,000 Additional information: (i) Inventory as at 31 December 2010 cost 272,200, including damaged items costing 30,000 that could not be sold. (ii) Depreciation was to be charged for the year as follows: Office equipment: 10% on cost Delivery vans: 20% on net book value (iii) Accruals as at the end of year included: Insurance 6,300 Auditor s fee 20,000 (iv) Some of the office premises had been subleased to others. Rent of 24,000 was received in advance. (v) A delivery van costing 50,000 was sold for 8,600 cash during the year. Accumulated depreciation on this van as at 31 December 2009 amounted to 46,000. No depreciation was to be charged in the year of disposal. Also, no entries had been made to record this transaction. (vi) Allowance for doubtful account was to be maintained at 10% of accounts receivable. (vii) The board of directors proposed a transfer of 20,000 to the general reserve and a final dividend of 0.1 per ordinary share. (viii) Profits tax for the year amounted to 21,830. (ix) 300,000 10% debentures were issued at par on 1 April The debentures were to be redeemed 10 years later. Excess application monies had been refunded to applicants while the remaining amount had been credited to the share and debenture issue account. Interest was to be paid half-yearly on 1 October and 1 April of each year. (x) In January 2010, 200,000 ordinary shares were offered to the public at 1.5 per share. Excess application monies had been refunded to applicants while the remaining amount had been credited to the share and debenture issue account. The financial statements of Tiger Garment Ltd for the year ended 31 December 2010, for both internal and external uses, are presented in the following (assume there was no other comprehensive income and ignore the presented of comparative information). 16

17 Income statement for internal use Tiger Garment Ltd Income Statement for the year ended 31 December 2010 Sales 1,292,000 Less Returns inwards (43,100) 1,248,900 Less Cost of goods sold: Opening inventories 226,900 Add Purchases 539,100 Carriage inwards 16, ,300 Less Returns outwards (12,300) 543, ,900 Less Closing Inventories (272,200 30,000) (242,200) (527,700) Gross profit 721,200 Add Other revenues: Rental income (98,900 24,000) 74,900 Profit on disposal of motor vehicle [(8,600 (50,000 46,000)] 4,600 79, ,700 Less Expenses: Carriage outwards 5,200 Wages and salaries 92,400 Motor expenses 81,200 Rent, rates and insurance (229, ,300) 235,600 Office expenses 26,600 Directors remuneration 63,000 Debenture interest (300,000 x 10% x 9/12) 22,500 Increase in allowance for doubtful accounts (186,100 x 10% 17,100) 1,510 Depreciation: Office equipment (830,000 10%) 83,000 Depreciation: Delivery vans [(172,000 50,000) (51,600 46,000)] x 20% 23,280 Auditor s fee 20,000 (654,290) Net profit Cost of remaining vans Accumulated depreciation of remaining vans 146,410 Less Profit tax (21,830) Profit after tax Depreciation of remaining vans 124,580 Add Retained profits brought forward 169, ,980 Less Appropriations: Transfer to general reserve 20,000 Preference share dividend (200,000 10%) 20,000 Ordinary share dividend 35,000 + [(500, ,000) x 0.1] 105,000 (145,000) Retained profits carried forward 148,980 17

18 Income statement for external use (using the function of expense method) Tiger Garment Ltd Statement of Comprehensive income for the year ended 31 December 2010 Turnover 1,248,900 Cost of sales (521,700) Gross profit 721,200 Other revenues 79,500 Administrative expenses (92, , , , , ,000) (520,600) Selling and distribution expenses (5, , ,280) (109,680) Other operating expenses (1,510) Operating profit 168,910 Finance expenses (22,500) Profit before tax 146,410 Taxation (21,830) Profit for the year 124,580 Balance sheet for internal use Tiger Garment Ltd Balance Sheet as at 31 December 2010 Accumulated Net book Non Current assets Cost depreciation value Office equipment 830, , ,000 Delivery vans 122,000 28,880 93, , , ,120 Investments 735,000 1,351,120 Current assets Inventories 242,200 Accounts receivable 186,100 Less Allowance for doubtful accounts (18,610) 167,490 Bank (62, ,600) 71, ,190 Less Current Liabilities Accounts payable 113,700 Unearned incomes 24,000 Accrued expenses [6, ,000 + (300,000 x 10% x 3/12)] 33,800 Tax payable 21,830 (193,330) Net Current assets 287,860 1,638,980 Financed by: Capital and reserves Preference share capital 200,000 Ordinary share capital (500, ,000) 700,000 Share premium [40,000 + (200,000 x 0.5)] 140,000 General reserve (50, ,000) 70,000 Retained profits 148,980 Proposed dividend [(200,000 x 10% 10,000) + (700,000 x 0.1)] 80,000 1,338,980 Non-current liabilities 10% Debentures 300,000 1,638,980 Accumulated depreciation for Office equipment = 224, ,000 = 307,000 Accumulated depreciation of Delivery vans = 51,600 46, ,280 = 28,880 18

19 Balance sheet for external use (using Format 1) Tiger Garment Ltd Statement of Financial Position as at 31 December 2010 ASSETS Non-current assets Property, plant and equipment 616,120 Investments 735,000 1,351,120 Current assets Inventory 242,200 Accounts receivable 167,490 Bank 71, ,190 Total assets 1,832,310 EQUITY AND LIABILITIES Capital and reserves Share capital 900,000 Reserves (140, , , ,000) 438,980 Total equity 1,338,980 W5: Reserves Non-current liabilities Retained profits: Balance b/f 169,400 10% debentures 300,000 Add Profit after tax 124, ,980 Current liabilities Less Transfer to general reserve 20,000 Accounts payable 113,700 Preference share dividend (200,000 10%) 20,000 Unearned incomes 24,000 Ordinary share dividend (35, ,000 x 0.1) 105, ,000 Accrued expenses 33,800 Retained profits after appropriations 148,980 Tax payable 21, ,330 Add General reserve (20, ,000) 70,000 Share premium [40,000 + (200,000 x 0.5)] 140,000 Total liabilities 493,330 Proposed dividend [(20,000 10,000) + 700,000 x 0.1] 80, ,000 Reserves Total equity and liabilities 438,980 1,832, Differences between reserves and provisions ( 儲備與準備的分別 ) Reserves ( 儲備 ) Reserves are the amounts set aside out ( 撥出 ) of profits which are not used to meet ( 支付 ) any liability ( 負債 ). They are the undistributed profits ( 未派發的利潤 ) of the business and belong to ( 屬於 ) shareholders ( 股東 ). There are two categories ( 兩類 ) of reserves ( 儲備 ) : capital reserves ( 資本儲備 ) and revenue reserves ( 收益儲備 ). Provisions ( 準備 ) A provision is a liability of uncertain ( 無法確定的負債 ) timing ( 時間 ) or amount ( 金額 ). This means an entity ( 企業個體 ) has a present obligation ( 現時須承擔某些責任 ) arising from a past event ( 已發生的事件 ), but the timing or amount required in settlement ( 付款金額或時間 ) has to be estimated ( 估計 ). Examples of provisions include a provision for product warranty ( 產品保修準備 ) and a provision for long-service payments ( 長期服務金準備 ). Provisions are different ( 不同 ) from other liabilities ( 其他負債 ) such as trade payables ( 貿易應付款項 ) and accruals ( 應計費用 ). The amount or timing of the settlement of a provision ( 準備項目的付款金額和時間 ) is uncertain ( 無法確定 ). On the contrary, the amount and timing of the settlement of other liabilities ( 其他負債的付款金額和時間 ) are certain ( 確定 ) or can be estimated with reasonable certainty ( 能合理地準確預計 ). Therefore, provisions should be shown separately from trade payable and accruals in the balance sheet. 19

20 Classwork 4 1. The following trial balance was extracted from the books of Speed Ltd as at 30 April 2010: Dr Cr Sales 2,860,000 Purchases 2,054,000 Electricity 13,650 Rent and rates 28,600 Salaries 334,100 Sundry expenses 9,230 Interest on debentures 11,700 Inventory 260,000 Machinery: Cost 520,000 Accumulated depreciation 130,000 Motor vehicles at cost 208, ,000 ordinary shares of 1 each 260,000 General reserve 29,900 Retained profits 213,980 15% debenture (repayable in 2016) 156,000 Accounts receivable 208,000 Accounts payable 62,400 Bank 65,000 3,712,280 3,712,280 The following information is also given: (i) Inventory as at 30 April 2010 was valued at 347,750. (ii) Depreciation was to be charged on the following assets using the reducing-balance method: Machinery 10% per annum Motor vehicles 12.5% per annum Though the motor vehicles were purchased in early 2010, it is the company policy to charge a full year s depreciation in the year of acquisition. (iii) Rates prepaid on 30 April 2010 amounted to 2,600. (iv) Electricity accrued as at 30 April 2010 amounted to 1,950. (v) Salaries included directors remuneration 70,200. (vi) Profits tax for the year was estimated to be 67,000. (vii) The directors proposed to transfer 52,000 of the profits to the general reserve and to declare a final dividend of 0.5 per share. Required: Prepare an income statement for the year ended 30 April 2010 and a balance sheet (using Format 1) as at that date for external use. Speed Ltd Statement of Comprehensive Income for the year ended 30 April 2010 Sales 2,860,000 Cost of sales (W1) (1,966,250) Gross profit 893,750 Administrative expenses (W2) (440,700) Other operating expenses (9,230) Operating profit 443,820 Finance expenses (156,000 15%) (23,400) Profit before tax 420,420 Taxation (67,000) Profit after tax 353,420 W1: Cost of sales W2: Administrative expenses Opening inventory 260,000 Add Purchases 2,054,000 2,314,000 Less Closing inventory (347,750) 1,966,250 Electricity (13, ,950) 15,600 Rent and rates (28,600 2,600) 26,000 Salaries 334,100 Depreciation: Machinery [(520, ,000) 10%] 39,000 Motor vehicles (208, %) 26, ,700 20

21 Speed Ltd Statement of Financial Position as at 30 April 2010 ASSETS Non-current assets Property, plant and equipment (W3) 533,000 Current assets Inventory 347,750 Accounts receivable 208,000 Prepayments 2,600 Bank 65, ,350 Total assets 1,156,350 EQUITY AND LIABILITIES Capital and reserves Share capital 260,000 Reserves (W4) 597,300 Total equity 857,300 Non-current liabilities 15% debentures 156,000 Current liabilities Accounts payable 62,400 Accrued expenses [1,950 + (23,400 11,700)] 13,650 Tax payable 67, ,050 Total liabilities 299,050 Total equity and liabilities 1,156,350 W3: Property, plant and equipment Machinery at cost 520,000 Less Accumulated depreciation (130, ,000) (169,000) 351,000 Motor vehicles at cost 208,000 Less Accumulated depreciation (26,000) 182, ,000 W4: Reserves Retained profits: Balance b/f 213,980 Add Profit after tax 353, ,400 Less Transfer to general reserve 52,000 Ordinary share dividend (260,000) x 0.5) 130, ,000 Retained profits after appropriation 385,400 Add General reserve (29, ,000) 81,900 Proposed dividend (260,000 x 0.5) 130, ,900 Reserves 597,300 21

22 2. The following trial balance was extracted from the books of Silver Queen Co Ltd as at 31 December 2009: Dr Cr 1,080,000 ordinary shares of 0.5 each 540, ,000 5% preference shares of 0.5 each 260,000 Revaluation reserve 208,000 Inventory 137,800 10% debentures (repayable in 2011) 650,000 Debentures interest 32,500 Freehold land, at cost 1,131,000 Office equipment, at cost 468,000 Office equipment: Accumulated depreciation 117,000 Short-term investments (listed shares), at cost 780,000 Purchases 682,500 Sales 1,486,000 Salaries 101,400 Administrative expenses 109,200 Preference dividend 13,000 Retained profits 142,300 Discounts allowed and received 5,915 2,665 Carriage inwards 16,900 Carriage outwards 10,400 Accounts receivable and payable 136,500 31,200 Bank overdraft 5,950 Suspense account 182,000 3,625,115 3,625,115 Additional information: (i) Inventory as at 31 December 2009 was valued at 195,000. (ii) A total of 260,000 ordinary shares of 0.5 each were issued at 0.7 per share on 5 December However, only one entry in the bank account had been made. (iii) A final ordinary dividend of 0.1 per share was proposed on all issued shares as at 31 December (iv) Depreciation charge for office equipment for the year was 93,600. (v) Half-year debenture interest was owing at the end of (vi) Estimated profits tax payable on current year s profits was 64,580. Required: (a) Prepare an income statement for the year ended 31 December 2009 and a balance sheet (using Format 1) as at the same date for external use. (b) Explain why a company that has earned substantial profits during a period can run out of cash and requires the use of a bank overdraft. Silver Queen Co Ltd Statement of Comprehensive Income for the year ended 31 December 2009 Sales 1,486,000 Cost of sales (W1) (642,200) Gross profit 843,800 Other revenues 2,665 Administrative expenses (W2) (304,200) Selling and distribution expenses (5, ,400) (16,315) Operating profit 525,950 Finance expenses (650,000 10%) (65,000) Profit before tax 460,950 Taxation (64,580) Profit after tax 396,370 W1 : Cost of sales Opening inventory 137,800 Add Purchases 682,500 Carriage inwards 16, ,200 Less Closing inventory (195,000) 642, W2: Administrative expenses Salaries 101,400 Administrative expenses 109,200 Depreciation: Office equipment 93, ,200

23 Speed Ltd Statement of Financial Position as at 31 April 2009 ASSETS Non-current assets Property, plant and equipment (W4) 1,388,400 Current assets Short-term investments 780,000 Inventory 195,000 Accounts receivable 136,500 1,111,500 Total assets 2,499,900 EQUITY AND LIABILITIES Capital and reserves Share capital [(540, ,000) + 260,000] 930,000 Reserves (W5) 785,670 Total equity 1,715,670 Non-current liabilities 10% debentures 650,000 Current liabilities Accounts payable 31,200 Accrued expenses [(650,000 10% x 0.5] 32,500 Tax payable 64,580 Bank overdraft 5, ,230 Total liabilities 784,230 Total equity and liabilities 2,499,900 W4 : Property, plant and equipment Freehold land, at cost 1,131,000 Office equipment Cost 468,000 Less Accumulated depreciation (117, ,600) (210,600) 257,400 1,131,000 W5: Reserves Retained profits: Balance b/f 142,300 Add Profit after tax 396, ,670 Less Preference share dividend (260,000 5%) 13,000 Ordinary share dividend [(1,080, ,000) x 0.1] 134, ,000 Retained profits after appropriation 391,670 Add Revaluation reserve 208,000 Share premium (260, ) 52,000 Proposed dividend [(1,080, ,000) x 0.1] 134, ,670 (b) This is because the net profit for a period is computed under accrual accounting instead of cash accounting. Under accrual accounting, the net profit for a period is the excess of revenues earned over the expenses incurred in earning those revenues in the same period. Revenues are recognised when earned, not when cash is received. Likewise, expenses are recognised when incurred, not when cash is paid. It is not uncommon to have revenues earned during a period but not yet received (e.g., credit sales outstanding) and expenses paid but not yet incurred (e.g., prepaid expenses). Therefore, a company can run out of cash despite earning substantial profits, requiring the use of a bank overdraft. 23

24 HKCEE (2008, 5) The following trial balance was extracted from the books of Lulu Limited as at 31 December 2007: Debit Credit Furniture and equipment, at cost 4,900,000 Stock, 1 January ,400 Accumulated depreciation furniture and equipment, 1 January ,000 Purchases 1,068,000 Bad debts 49,800 Sales returns 45,520 Selling and distribution expenses 597,060 Administrative expenses 106,000 Carriage inwards 11,500 Wages and salaries 545,000 Rent and rates 230,000 Dividend paid 85,500 Cash at bank 303,720 Trade debtors and trade creditors 1,225, ,000 Sales 3,837,000 Share issue 1,000,000 2,000,000 ordinary shares of 1 each, fully paid 2,000,000 5% debentures 600,000 Share premium 166,700 General reserve 140,000 Retained profits 246, ,800 9,319,500 9,319,500 Additional information: (i) (ii) (iii) (iv) (v) Stock as at 31 December 2007 had a cost of 157,500. Minor defects were found in some goods that cost 8,000. These goods had an estimated saleable value of 7,900. Trade debtors included an amount of 100,000 paid to a trade creditor as the deposit for future purchases of 500,000 of goods. At 31 December 2007, prepaid rent and accrued salaries amounted to 2,900 and 10,000 respectively. No entry had yet been made in respect of an interest charge of 5,000 receivable from a trade debtor for his overdue balance. Depreciation was to be provided for furniture and equipment at 20% of net book value. (vi) On 28 December 2007, 400,000 ordinary shares were issued at 2 per share. Subscription had been received for 500,000 (vii) shares. All subscription money had been credited to the share issue account. Excess subscriptions were refunded to unsuccessful applicants on 3 January The board of directors proposed a transfer of 150,000 to the general reserve. (viii) On 1 October 2007, 600,000 5% debentures were issued, interest being payable half-yearly on 31 March and 30 September. REQUIRED: Prepare the following in vertical form for Lulu Limited: (a) the trading, profit and loss and appropriation account for the year ended 31 December 2007; and (b) the balance sheet as at 31 December

25 (a) Lulu Limited Trading and profit and loss and appropriation account for the year ended 31 December 2007 Sales 3,837,000 Less: Sales returns 45,520 3,791,480 Less: Cost of goods sold: Opening stock 152,400 Add Purchases 1,068,000 Carriage inwards 11,500 1,079,500 1,231,900 Less Closing stock [157, ] 157,400 1,074,500 Gross profit 2,716,980 Interest income 5,000 2,721,980 Less Expenses Bad debts 49,800 Selling and distribution expenses 597,060 Administrative expenses 106,000 Wages and salaries (545, ,000) 555,000 Rent and rates (230,000 2,900) 227,100 Debenture interest (600,000 x 5% x 3/12) 7,500 Depreciation furniture and equipment [(4, ,000)x20%] 851,400 2,393,860 Net profit 328,120 Less Appropriations Transfer to general reserve 150,000 Dividend paid 85, ,500 Retained profit for the year 92,620 (b) Lulu Limited Balance sheet as at 31 December 2007 Fixed Assets 4,900,000 Furniture and equipment 1,494,400 Less: Accumulated depreciation (643, ,400) 3,405,600 Current Assets Stock 157,400 Trade debtors (1,225, , ,000) 1,130,000 Deposit on furniture purchases 100,000 Prepaid expenses 2,900 Cash at bank 303,720 1,694,020 Less: Current Liabilities Trade creditors 708,000 Accrued expenses 10,000 Interest payable 7,500 Share subscription refundable (1,000, ,000) 200, ,500 Working capital 768,520 4,174,120 Financed by: Share Capital 2,400,000 ordinary shares of 1 each, fully paid 2,400,000 Reserves Share premium (166, ,000 x 1) 566,700 General reserve (140, ,000) 290,000 Retained profits (92, ,800) 317,420 1,174,120 Shareholders fund 3,574,120 Long-term liabilities 5% Debentures 600,000 4,174,120 25