Question

BrownLow Ltd. is a paper producing company in Sheffield. Its draft trial balance at 31 December 2019 is shown below:

	Credit ($000)	Debit ($000)
Administration costs	39
Bank balance	10
Debenture interest	9
Debenture (6% p.a., repayable at par 2025)		300
Discount allowed	12
Discount received		15
Fixtures and fittings – cost	110
Fixtures and fittings - provision for depreciation		24
Inventory (as at 1 January 2019)	78
Land and buildings	1430
Machinery - cost	280
Machinery - provision for depreciation		49
Non-current assets disposal		30
Ordinary dividends (interim paid)	120
Ordinary shares (10p each)		400
Preference dividends (interim paid)	4
Preference shares (redeemable 2030)		200
Provision for doubtful debts		13
Purchases	910
Retained earnings as at 1 January 2019		23
Returns in	31
Returns out		24
Revaluation reserve as at 1 January 2019		240
Sales revenue		1860
Selling distribution costs	135
Trade payables		110
Trade receivables	120
Total	3288	3288

The following additional information should be taken into consideration:

a) Debenture interest and preference dividends are paid every six months – only the payments for the first six months of this accounting period have been booked. The preference shares do not carry voting rights and bear a variable rate of interest, calculated as equivalent to 4% p.a. for the final six months of this accounting period. A final dividend of 3p per ordinary share has been proposed. The directors announced this final dividend on 31 December 2019.

b) On 30 June 2019, some obsolete machinery was sold for £30,000. It had cost £55,000 and £37,000 had been provided as depreciation up to 31 December 2018. In line with the company’s policy, no depreciation charge has been booked for 2019. However, no entries have been made in the accounts relating to the disposal except to debit the bank account and credit a non-current asset disposals account with the proceeds.

c) No provision for depreciation has been made for the year ended 31 December 2019. Company policy is to calculate depreciation on the straight-line method. Machinery is depreciated at 20% p.a. assuming a zero scrap value. Fixtures and fittings are depreciated at 10% p.a. assuming a zero scrap value. Machinery depreciation is charged to cost of sales and fixtures and fittings depreciation is charged to administration costs.

d) Land and buildings are owned freehold and are not depreciated. On 31 December 2019 the buildings were valued by a professional surveyor at £1,500,000. The company would like to incorporate this valuation in its accounts.

e) An internal review revealed that payments totalling £8,000 of insurance costs relating to the month of January 2020 have been charged to administration costs. Furthermore, there has been no recognition of unpaid distribution costs of £10,000 relating to December 2019.

f) On 31 December 2019, the accounts receivable manager learnt that a customer has declared bankruptcy and will not be able to pay the remaining £11,000 balance that it owes Rosa Ltd. The Directors have decided to maintain the provision for doubtful debts at 7% of closing trade receivables. Doubtful debt provisions and bad debts are charged to selling costs.

g) The closing inventories are valued at cost of £83,000.
h) An estimated tax charge for the period of £70,000 has not yet been recorded.

Prepare an income statement for the year ended 31 December 2019 and a Statement of Financial position statement (balance sheet) at that date. Show all your calculations

Answer 1

Income Statement for the year ended 31st December 2019
Particulars		Amount($000)
Sales revenue		1860
Returns in i.e sales return	-31
Discount allowed		-12
profit on sale of machinery	12
Total Income		1829
Administration costs		52
Cost of Goods Sold		911
Selling distribution costs	140.63
Preference dividends Total	8
Debenture interest Total	18
Tax expense		70
Total Expense		1199.63
Net Profit		629.37
Balance Sheet
Particulars		Amount
Assets
Fixtures and fittings – cost	110
provision for depreciation	-35
Machinery - cost		225
provision for depreciation	-57
Land and buildings		1500
Bank balance		10
Trade receivables		109
Provision for doubtful debt	-7.63
Inventory		83
Prepaid expense		8
Total		1945.37
Equity		400
Retained earning		532.37
revaluation reserve		310
preference share		200
debenture		300
preference dividend payable	4
debenture interest payable	9
income tax payable		70
outstanding expense		10
trade payable		110
Total		1945.37

Working
non current assets		30000
machinery cost		55000
provision for depreciation		37000
wdv		18000
profit on sale of machine		12000
machinery	furniture and fixture
280	110
-55	0
225	110
20%	10%
45	11	depreciation for the year
provision for expense balance
	Machinery	Furniture and fixture
opening	49	24
less sold	37	0
current year	45	11	depreciation for the year
closing balance	57	35
plant and machinery balance cost
opening	280
less sold	55
current year	0
closing balance	225
cost of goods sold
opening inventory	78
purchase less return	886
Less discount received	-15
Less closing inventory	-83
depreciation	45
Total	911
preference dividend	=200*4%*6/12	add to preference dividend and shown as payable in liability side
	4
debenture interest	=300*6%*6/12	add to preference dividend and shown as payable in liability side
	9
dividend proposed not to be recorded till approved by shareholder hence no entry passed
land & building value	1430
value as per valuer	1500
revaluation reserve	70	add to revaluation reserve and add to land and building
prepaid expense	8000	reduced from administrative cost and shown in asset side
outstanding expense	10000	charged to administrative cost and shown in liability side
provision for doubtful debt	11	bad debt adjusted against provision
To sundery debtor	11	reduced form sundry debtors
sundry debtor balance	109	i.e 120-11
To provision for doubtful debt	7.63	this is 7 % of 109
	2	provision balance 13-11 = 2
	-5.63	extra provision shown in selling expense