Question

Q1.     The trial balance of Norr Ltd at 31 December 20X7 appeared as follows:

	£	£
Ordinary shares of £1 - fully paid		50,000
Purchases	220,000
Retained profit		30,000
Freehold property - cost	80,000
Fixtures - cost	15,000
Fixtures - accumulated depreciation		9,000
Rates	3,000
Motor vehicles - cost	28,000
Motor vehicles - accumulated depreciation		14,000
Insurance	2,000
Inventory	40,000
Trade receivables	30,000
Trade payables		24,000
Sales		310,000
Bank	12,100
12% debentures		40,000
Debenture interest	2,400
Wages and salaries	34,000
Heat and light	4,100
Professional fees	3,900
General expenses	1,200
Motor expenses	2,000
Provision for doubtful debts		1,000
Bad debts	300
	478,000	478,000

Additional information:

1. During the year a motor vehicle, purchased on 31 March 20X4 for £8,000, was sold for £3,000. The sale proceeds were debited to the bank account and credited to the sales account but no other entries have been made in the accounts relating to this transaction.

2. Depreciation has not yet been provided for the year. The following rates are applied on a straight line basis, with the assumption of no residual value:

Fixtures and fittings           10 per cent

Motor vehicles                   20 per cent

The company's policy is to provide a full year's depreciation in the year of acquisition and no depreciation in the year of disposal.

3. Inventory at 31 December 20X7 amounted to £45,000.

4. Rates paid in advance amount to £400. Insurance includes £200 paid in advance. An electricity bill covering the quarter to 31 December 20X7 and amounting to £320 was not received until February 20X8. It is estimated that the audit fee for 20X7 will be £1,500.

5. A general provision for doubtful debts of 4 per cent of trade receivables is to be carried forward.

REQUIRED:

Prepare an Income Statement and Balance Sheet for the year to 31 December 20X7.

Q2. Identify and discuss the key characteristics that accounting information should possess in order to satisfy the needs of the users of that information. What conflicts can arise between those characteristics and how can they be resolved?

Q3. Explain why a business depreciates assets and what the resulting net book value in the balance sheet represents.

Q4.Identify 3 different types of business entities and summarise the key characteristics of each.

Answer 1

Norr Ltd
Income Statement
For the year ending Dec 20X7
Particulars	Calculation	Amount
Sales	310000-3000	307,000.00
Purchases		220,000.00
Gross Profit		87,000.00
Expenses:
Insurance	2000-200	1,800.00
Debenture Interest	12%*40000	4,800.00
Wages and Salaries		34,000.00
Heat and Light	4100+320	4,420.00
Professional Fees	3900+1500	5,400.00
General Expenses		1,200.00
Motor Expenses		2,000.00
Bad Debts	300+(4%*30000)-1000	500.00
Loss on sale of motor vehicle	8000-1600-1600-1600-3000	200.00
Depreciation expense	10%*15000+20%*(28000-8000)	5,500.00
Rates	3000-400	2,600.00
Total Operating Expenses		62,420.00
Net Income		24,580.00

Balance Sheet	Amount/Calculations	Total Amount
Current Assets:
Bank		12,100.00
Trade Receivables		30,000.00
Provision for doubtful debts	4%*30000	(1,200.00)
Inventory		40,000.00
Prepaid Insurance		200.00
Prepaid Rates		400.00
Total Current Assets		81,500.00
Fixed Assets
Freehold Property		80,000.00
Fixtures Cost		15,000.00
Fixtures - accumulated depreciation	`-9000-1500	(10,500.00)
Motor vehicles - cost	28000-8000	20,000.00
Motor vehicles - accumulated depreciation	`-14000+1600+1600+1600-4000	(13,200.00)
Total Fixed Assets		91,300.00
Total Assets		172,800.00
Liabilities
Debentures Interest Payable		2,400.00
12% Debentures		40,000.00
Trade Payables		24,000.00
Heat and Light Payable		320.00
Professional Fees Payable		1,500.00
Total Liabilities		68,220.00
Shareholders Equity
Ordinary shares of £1 - fully paid		50,000.00
Retained Profit	30000+24580	54,580.00
Total Shareholders Equity		104,580.00
Total Liabilities & Shareholders Equity		172,800.00