In: Accounting
QUESTION 1
Ernest and his partner Mary run a second-hand bookshop. The
business is incorporated under...
QUESTION 1
Ernest and his partner Mary run a second-hand bookshop. The
business is incorporated under the name of Ketchum Ltd, and they
are the only shareholders.
As the business is small they do not employ a full-time
accountant, but pay a local firm to prepare their accounts after
the end of the accounting period from information they supply. You
are on a summer work placement with this firm and have been asked
to
prepare
a first draft of the accounts for Ketchum Ltd for the year ending
31st December 2019.
A list of closing balances reported in Ketchum Ltd’s statement
of financial position as at 31st December 2018 is set
out below:
Ketchum Ltd.
Statement of Financial Position
31st December 2018
|
|
£
|
£
|
Shop premises (cost)
|
56,250
|
|
Shop premises (accumulated depreciation)
|
3,375
|
|
Fixtures and fittings (cost)
|
12,500
|
|
Fixtures and fittings (accumulated depreciation)
|
3,750
|
|
Inventories of books at cost
|
42,375
|
|
Trade receivables
|
39,000
|
|
Prepayment
|
500
|
|
Total assets
|
|
143,500
|
Trade payables
|
6,962.50
|
|
Accruals
|
1,250
|
|
Bank overdraft
|
6,250
|
|
Bank loan repayable in 2022
|
33,750
|
|
Total liabilities
|
|
48,212.50
|
Share capital (£1 ordinary shares)
|
62,500
|
|
Retained profits
|
32,787.50
|
|
Total equity
|
|
95,287.50
|
Further information:
- The shop premises were acquired under a 50-year lease on
1st January 2016 and are being depreciated to a zero
residual value.
- The fixtures and fittings were also bought on 1st
January 2016 and are being depreciated over 10 years to a zero
residual value.
- Depreciation is provided on a straight line basis for both the
shop premises and the fixtures and fittings.
- The business pays its insurance premium annually on
1st July to cover the following twelve month period.
This is the only prepayment as at 31st December
2018.
- The accrued expenses relate to the accountant’s fees for
preparing last year’s accountants, paid in March 2019. This is the
only accrual as at 31st December 2018.
- All profits earned are subject to a 20% corporate income tax
paid on 31st December of the year in which they are
earned.
During the year to 31st December 2019, the following
transactions and events took place:
- The business made cash sales of £107,375. It also made credit
sales to internet retailers of £76,787.50.
- Inventory costing £94,725 was bought during the year. All items
were bought on credit. Suppliers were paid £96,437.50 over the
course of the year.
- The inventory of books as at 31st December 2019 cost
£34,375.
- During the year some fixtures that had cost £2,500 when
purchased were sold for £1,375. New fixtures were acquired for cash
at a cost of £3,750 and are also being depreciated over 10 years to
a zero residual value. No depreciation is charged in the year of
disposal but a full year’s depreciation is charged in the year of
acquisition.
- The part-time shop assistant was paid wages of £13,625 over the
year.
- Receipts from credit customers totalled £68,162.50.
- Electricity bills totalling £2,287.50 were paid during the
year. The company has recently changed its electricity supplier and
is now being billed quarterly in arrears. At the end of December
2019 the bill for the quarter ended on 31st January 2020
had not yet been received, but was estimated to be £862.50.
- You have been told that the fees charged for preparing the
accounts will be the same as last year. The bill will be sent out
in March 2020.
- The insurance premium of £1,125 for the year to 30th
June 2020 was paid during July 2019.
- In December 2019 £10,000 was paid off the bank loan, and
interest of £1,000 was paid on 31st December 2019.
Overdraft interest of £118.75 was charged and paid.
- Administrative expenses of £1,581.25 were paid as they
arose.
- Ernest and Mary received directors’ wages of £1,250 per month
each.
Required:
- Using the information provided by Ernest and Mary, and Ketchum
Ltd’s statement of financial position as at 31st
December 2018, prepare the following:
- A table summarising the effects of all transactions and events
listed above on assets, liabilities, equity, revenue, and expenses
of Ketchum Ltd.