Question

YOJ is a sole importer of garden tractors, which are purchased from a foreign producer and resold to local gardeners and hobby markets. The opening balance sheet of YOJ as at 1 January 2X20 is as follows.

YOJ Balance sheet 01/01/2X20 in €
Inventory	470,000	Share capital	750,000
Receivables	225,000	Retained earnings	250,000
Cash	305,000
Total assets	1,000,000	Total equity & liabilities	1,000,000

Detail information concerning the opening Balance sheet 01/01/2X20:

• Inventory consists of 1,000 pieces of merchandise, purchased in 2X19 for price of €470/piece
• Receivables consists of gross amount €250,000 owed by customers, reduced by the estimated uncollectible amounts (10% of the outstanding receivables, i.e. €25,000)

Detail information about all transactions occurring during 2X20

1. Bank loan

On 2 January 2X20, a 5-year bank loan is originated at total amount of €50,000. At the end of each year (i.e. on 31 December 2X20, 2X21, 2X22, 2X23 and 2X24), the company must repay one fifth of the loan (i.e. €10,000) plus accrued interest on the loan, equivalent to 8% of the outstanding balance as at the beginning of the year.

2. Tangible assets

The loan is used to purchase two cars. The first car costs €35,000 and is to be used by the company’s chief operating manager. Its expected useful life is 3 years and then it will be sold on a secondhand market for an estimated price of €5,000. The second car, purchased for €15,000, is to be used by the sales manager. Expected useful life is 6 years and the secondhand market price at the time of disposal is estimated to be €3,000. Both cars are purchased on 5 January 2X20 and run since then.

3. Inventory and sales

Information on purchases¹ and sales of merchandise:

• January: purchase of 750 pieces for €400/piece
• February to September: sales of 1,200 piece for €840,000 in total
• October: purchase of 450 pieces for €460/piece
• November to December: sales of 500 pieces for €400,000 in total

Information on payments from customers:

• All customers with due payments at the beginning of the year have paid except for one, owing €30,000, who went bankrupt → YOJ received €220,000 and remaining €30,000 hadto be written-off.
• At the year-end, there are outstanding receivables of €300,000 related to sales in 2X20. Based on its past experience, YOJ estimates that 10% of the closing balance of trade receivables will never be collected.

Information on payments to suppliers:

1. • January purchase of inventory has been paid to the supplier; purchase made in October is due in February 2X21 and the payment has not been done yet.
2. Rental

In January 2X20, YOJ paid rental for the store and administrative offices. The contract is effective from January 2X20 to December 2X21 and the total amount paid for the store is €24,000 and for the offices €12,000.

2. Employees

The total salaries in 2X20 are €54,000 in the case of selling staff and €66,000 in the case of

management and other administrative staff. Unpaid balance as of 31 December 2X20 is €14,000 (to

be paid in January 2X21)

3. Income tax

Company’s tax advisor has prepared the tax‐filling (tax-return), according to which income tax expense for 2X20 is, after adjusting accounting profit for all non-deductible expenses and non- taxable income, €26,000. Liability is payable on 1 April 2X21; YOJ has made advance payments of

€15,000 during 2X20.

Tasks required

Financial statements

1. Account for all transactions described above. When necessary, select an appropriate accounting policy and describe it explicitly in your solution. In case of shortage of cash, YOJ has an agreement with its bank allowing YOJ to overdraw its bank account.
2. Prepare Balance sheet statement and Income statement of YOJ as of 31 December 2X20 following generally accepted accounting principles.

Answer 1

YOJ
Income Statement
Period ended 31st December 2020
Particulars	$	Particulars	$
To opening Balance	470000	By Sales	1240000
To Purchase	507000	By Closing Stock	227000
To Gross Profit	490000
	1467000		1467000
To Interet on loan(50000*8%)	4000	By Gross Profit	490000
To Bad Debts	35,000
To Depreciation	12000
To Salaries	120000
To Rent	18000
To Tax Expenses	26000
To Net Profit Transferred to Retained Earnings	275000
	490000		490000
YOJ
Balance Sheet as at 31st December 2020
Liabilities	$	Assets	$
Bank Loan	40000	Receivables                                    300000
Payables	207000	Less: Provison for bad debts        30000	270000
Outstanding Salary	14000	Car(50000-12000)	38000
		Inventory	227000
Share Capital	750000	Prepaid Rent	18000
Retained Earnings                                  250000		Cash	983000
Add:Current Year Profit                        275000	525000
	1536000		1536000
Explanations
Valuation of Closing stock following FIFO method
	{Units,Price/unit}	Balance{Units,Price/unit}
Opening Stock		{1000,470}
Purchase	{750,400}	{1000,470},{750,400}
Sales	{1200,_}	{550,400}
Purchase	{450,460}	{550,400},{450,460}
Sales	{500,_}	{50,400},{450,450}
Value of closing stock	50*400+450*460	227000
Computation of Bad Debts
Bad debts accrued during the year	30,000
Provision Kept	25000
Bad debts additionally to be booked	5,000
Add:Bad debts to estimated during next year	30000
Bad Debts to be booked	35,000
Cash A/c
To opening balance	305000	By Car	50000
To Loan	50000	By Salary	106000
To Receivables	190000	By Purchases	300000
To Sales	940000	By Rent	18000
		By Prepaid Rent	18000
		By Loan	10000
		By Closing Balance	983000
	1485000		1485000
Computation of Depreciation Charged to Cars
Car 1
Value	35000
Salvage Value	5000
Useful Life	3
Depreciation	10000
Car 2
Value	15000
Salvage Value	3000
Useful Life	6
Depreciation	2000