Question

In: Accounting

Vwalika plc was created on 1 January 2010 with a share capital of K150,000, fully paid...

  1. Vwalika plc was created on 1 January 2010 with a share capital of K150,000, fully paid in cash on that date. The price level index at that date was 100. The following transactions were recorded:

Purchased equipment for K90,000, K40,000 paid when the index was 100, and payment of the balance being deferred for 18 months.

Purchased goods for K88,000 when the index was 100.

Purchased goods for K90,000 when the index was 110.

Sold goods for K200,000 when the index was 120, the cost of sales amounting to K120,000. Cash expenses amounted to K32,000, and a depreciation provision of 10 per cent on historic cost of equipment was made at year end.

Additional information as at 31 December 2010 was as follows:

Trade debtors                                                                                       K36,000

Bank balance                                                                                         K81,000

Creditors                                                                                                K67,000

Closing inventory was valued at K58,000 on a FIFO basis.

The index at year end was 120.

Required:

  1. Calculate the purchasing power gain or loss on the monetary items.
  2. Prepare an inflation-adjusted income statement for the year ended 31 December 2010.
  3. Prepare an inflation- adjusted balance sheet as at 31 December 2010 when the price level index was 130.

Solutions

Expert Solution

Calculation of Purchasing Power Gain or Loss

Average Price Index = (Begining Index+ Ending Index)/2 = (100+120)/2= 110

Sales = 200000 * 110/120 =183333

Less: cost of sales =128800

(88000 * 110/100+ 32000 *110/110)

Cash Expense = 35200

(32000 * 110/100)     

= 19333

Add ; Closing Stock (58000 * 110/110) = 58000

Profit before depreciation & tax = 77333

Depreciation on Equipment = 9900

(90000* 110/100*10%)

Profit before Tax (PBT) = 67433

Inflation-adjusted income statement for the year ended 31 December 2010

Sales =.200000 * 120/120 = 200000

Less: Cost of sales = 140509

(88000 * 120/100+ 32000 *120/110)

Gross Profit = 59491

Less: Cash Expense = 38400

(32000 * 120/100)

= 21091

Add : Inventory on End date = 63273

(58000 * 120/110)

Profit before depreciation and tax = 84364

Less; Depreciation = 10800   

(90000* 120/100*10%)

Profit before tax = 73564

inflation- adjusted balance sheet as at 31 December 2010

Liabilities Inflated Value

Share capital 150000 150000 * 130/100 = 195000

Net profit 39000 189000 39000 * 130/115 = 44087 239087

(200000-120000-32000-9000(90000*10%)

Creditors 67000 67000 * 130/115 = 75739

Total 256000 314826

Assets

Bank Balance 81000 81000 * 130/115 = 91565

Debtors 36000 36000 * 130/115 = 40696

Equipment(90000-9000) 81000 81000 * 130/115 = 91565

Closing Stock 58000 58000 * 130/115= 68545

Total 256000 292371

Net Monetary Loss (314826-292371) = (22455)      

ekkarill92 answered 1 year ago
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