Exercise 1:

The accountant of Rabbit Co has prepared the following trial balance as at 31 December
20X7.
$'000
50c ordinary shares (fully paid) 350
7% $1 preference shares (fully paid) 100
10% loan stock (secured) 200
Retained earnings 1.1.X7 242
General reserve 1.1.X7 171
Land and buildings 1.1.X7 (cost) 430
Plant and machinery 1.1.X7 (cost) 830
Accumulated depreciation
Buildings 1.1.X7 20
Plant and machinery 1.1.X7 222
Inventory 1.1.X7 190
Sales 2695
Purchases 2152
Preference dividend 7
Ordinary dividend (interim) 8
Loan interest 10
Wages and salaries 254
Light and heat 31
Sundry expenses 113
Suspense account 135
Trade accounts receivable 179
Trade accounts payable 195
Cash 126

Notes

1. Sundry expenses include $9,000 paid in respect of insurance for the year ending 1
September 20X8. Light and heat does not include an invoice of $3,000 for electricity for
the 3 months ending 2 January 20X8, which was paid in February 20X8. Light and heat
also includes $20,000 relating to salespeople's commission.
2. The suspense account is in respect of the following items.
$'000
Proceeds from the issue of 100,000 ordinary shares 120
Proceeds from the sale of plant 300
420
Less consideration for the acquisition of Mary & Co 285
135
3. The net assets of Mary & Co were purchased on 3 March 20X7. Assets were valued as
follows.
$'000
Investments 231
Inventory 34
265

All the inventory acquired was sold during 20X7. The investments were still held by
Zabit at 31.12.X7.

4. The property was acquired some years ago. The buildings element of the cost was
estimated at $100,000 and the estimated useful life of the assets was 50 years at the time
of purchase. As at 31 December 20X7 the property is to be revalued at $800,000.

5. The plant which was sold had cost $350,000 and had a carrying amount of $274,000
as at 1.1.X7. $36,000 depreciation is to be charged on plant and machinery for 20X7.

6. The loan stock has been in issue for some years. The 50c ordinary shares all rank for
dividends at the end of the year.

7. The management wish to provide for:

(i) Loan stock interest due
(ii) A transfer to general reserve of $16,000
(iii) Audit fees of $4,000

8. Inventory as at 31 December 20X7 was valued at $220,000 (cost).

9. Taxation is to be ignored.

Required
Prepare the financial statements of Zabit Co as at 31 December 20X7, including the
statement of changes in equity. No other notes are required.

ANSWER
(a) Normal adjustments are needed for accruals and prepayments (insurance, light and
heat, loan interest and audit fees). The loan interest accrued is calculated as follows.
$'000
Charge needed in statement of profit or loss (10% × $200,000) 20
Amount paid so far, as shown in list of account balances 10
Accrual: presumably 6 months' interest now payable 10

The accrued expenses shown in the statement of financial position comprise:

 $'000
Loan interest 10
Light and heat 3
Audit fee 4
17

(b) The mis-posting of $20,000 to light and heat is also adjusted, by reducing the light
and heat expense, but charging $20,000 to salespeople's commission.

$ 100,000
(c) Depreciation on the building is calculated as = $2,000
50

The carrying value of the property is then $430,000 – $20,000 – $2,000 = $408,000 at
the end of the year.
When the property is revalued a reserve of $800,000 – $408,000 = $392,000 is then
created.

(d) The profit on disposal of plant is calculated as proceeds $300,000 (per suspense
account) less carrying value $274,000 is $26,000. The cost of the remaining plant is
calculated at $830,000 – $350,000 = $480,000. The depreciation allowance at the year
end is:

$'000
Balance 1.1.X7 222
Charge for 20X7 36
Less depreciation on disposals (350 – 274) (76)
182

(e) Goodwill arising on the purchase of Mary & Co is:

$'000
Consideration (per suspense account) 285
Assets at valuation 265
Goodwill 20

This is shown as an asset on the statement of financial position. The investments, being
owned by Zabit at the year end, are also shown on the statement of financial position,
whereas Mary's inventory, acquired and then sold, is added to the purchases figure for
the year.

(f) The other item in the suspense account is dealt with as follows.
 $'000
Less nominal value 100,000 x 50c 285
Assets at valuation 265
Excess of consideration over par value (= share premium) 20

(g) The transfer to general reserve increases it to $171,000 + $16,000 = $187,000.

ZABIT CO
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20X7

$'000 $'000

Revenue 2695
Cost of sales
Opening inventory 190
Purchases (2,152 + 34) 2186
2376
Closing inventory 220
2156
Gross profit 539
Profit on disposal of plant 26
565
Expenses
Wages, salaries and commission 274
Sundry expenses (113 – 6) 107
Light and heat (31 – 20 + 3) 14
Depreciation: buildings 2
plant 36
Audit fees 4
Loan interest 20
457
Profit for the year 108
Other comprehensive income
Revaluation of non-current assets 392
Total comprehensive income for the year 500
 ZABIT CO
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER
20X7
Ordinar Preferenc Share Revaluatio Genera Retaine Total
y share e share premiu n surplus l d
captital captital m reserve earnings
$'000 $'000 $'000 $'000 $'000 $'000 $'000
Balance at
350 100 – – 171 242 863
1.1.X7
Total
comprehensiv
e income for
the year
Issue of shares 50 – 70 – – – 120
Dividends
– – – – – (15) (15)
paid
Transfer to
general – – – – 16 (16) –
reserve
Balance at 1,46
400 100 70 392 187 319
1.12.X7 8
ZABIT CO
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X7

$'000 $'000
ASSETS
Non-current assets
Property, plant land and equipment
Property at valuation 800
Plant: cost 480
depreciation 182
298
Goodwill 20
Investments 231

Current assets
Inventory 220
Trade accounts receivable 179
Prepayments 6
Cash 126
531
Total assets 1880

EQUITY AND LIABILITIES

Equity
50c ordinary shares (350 + 50) 400
7% $1 preference shares 100
Share premium 70
Revaluation surplus 392
General reserve 187
Retained earnings 319
1468
Non-current liabilities
10% loan stock (secured) 200
Current liabilities
Trade accounts payable 195
Accrued expenses 17
212
Total equity and liabilities 1880
Excercise 2: Prepare statement of comprehensive income or statement of financial
position

The following trial balance was extracted from the ledger of Stephen Chee, a sole trader,
as at 31 May 20X1 — the end of his financial year.
STEPHEN CHEE
TRIAL BALANCE AT 31 MAY 20X1

DR CR
$ $
Property, at cost 240,000
Equipment, at cost 160,000
Accumulated depreciation (as at 1 June 20X0)
- on property 40,000
- on equipment 76,000
Purchases 500,000
Sales 804,400
Inventory, as at 1 June 20X0 100,000
Discounts received 9,600
Returns out 30,000
Wages and salaries 117,600
Irrecoverable debts 9,200
Loan interest 10,200
Other operating expenses 35,400
Trade payables 72,000
Trade receivables 76,000
Cash in hand 600
Bank 38,600
Drawings 48,000
Allowance for receivables 1,000
17% long-term loan 60,000
Capital, as at 1 June 20X0 242,600
1,335,600 1,335,600
Notes:
The following additional information as at 31 May 20X1 is available:
1. Inventory as at the close of business has been valued at cost at $84,000
2. Wages and salaries need to be accrued by $1,600
3. Other operating expenses are prepaid by $600
4. The allowance for receivables is to be adjusted so that it is 2% of trade receivables
5. Depreciation for the year ended 31 May 20X1 has still to be provided for as
follows.
 Property: 1.5% per annum using the straight-line method
 Equipment: 25% per annum using the reducing balance method
Prepare Stephen Chee's Statement of profit or loss for the year ended 31 May 20X1 and
his statement of financial position as at that date.

Step 1: Adjustment to initial trial balance

a, Accruals
Debit Expenses (SOCI) 1,600
(Wages + Salaries) [Note (2)]
Credit Accrual (Liability — SOFP) 1,600
(Wages + Salaries) [Note (2)]

b, Prepayment
Debit Prepayment (Current asset — SOFP) 600
(Other operating expenses) (Note (3)]
Credit Expenses (SOCI) 600
(Other operating expenses) (Note (3)]

c, Allowance for receivables

Previous allowance 1,000

New allowance (2% x 76,000) (Note (4)] 1,520
Increase 520
Per trial balance 9,200
Statement of profit or loss (Irrecoverable debt expense) 9,720

Adjustment:
Debit Irrecoverable debt expense (SOCI) 520
Credit Allowance for receivables (SOFP) 520
d, Depreciation
Property
Opening accumulated depreciation 40,000
Charge for the year (1.5% x 240,000) [Note (5)] 3,600
Closing accumulated depreciation 43,600
Equipment
Opening accumulated depreciation 76,000
Charge for the year (25% x 84,000) [Note (5)] 21,000
Closing accumulated depreciation 97,000
Total charge in statement of comprehensive income
(3,600 + 21,000) (Depreciation expense) 24,600

Adjustment
Debit Depreciation expense (SOCI) 24,600
Credit Accumulated depreciation (SOFP) 24,600
STEPHEN CHEE
STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 MAY
20X1

$' $'
Revenue 804,000
Cost of sales
Opening inventory 100,000
Purchases 500,000
Purchases returns (30,000)
Closing inventory (84,000)
(486,000)

Gross profit 318,400

Other income — discounts received 9,600

328,000
Expenses
Operating expenses
Wages and salaries 119,200
Irrecoverable debts 9,720
Loan interest 10,200
Depreciation 24,600
Other operating expenses 34,800
198,520

Profit for the year 129,480

STEPHEN CHEE
STATEMENT OF FINANCIAL POSITION AS AT 31 MAY 20X1

$' $'
NON-CURRENT ASSETS
Property 196,400
Equipment 63,000
259,400

CURRENT ASSETS
Inventory 84,000
Trade receivables net of allowance for receivables 74,480
Prepayments 600
Bank 38,600
Cash in hand 600
198,280
457,680
CAPITAL AND LIABILITIES
Capital
Balance as at 1 June 20X0 242,600
Profit for the year 129,480
Drawings (48,000)
324,080
Non-current liabilities
17% long-term loan 60,000

Current liabilities
Trade payables 72,000
Accruals 1,600
73,600
457,680
Exercise 3:
Donald Brown, a sole trader, extracted the following trial balance on 31 December 20X0.

TRIAL BALANCE AS AT 31 DECEMBER 20X0

$' $'
Capital as at 1 January 20X0 52,188
Receivables 85,474
Cash in hand 2,822
Payables 70,808
Fixtures and fittings at cost 84,400
Discounts received 2,350
Inventory as at 1 January 20X0 36,920
Sales 983,240
Purchases 775,872
Motor vehicles at cost 91,460
Lighting and heating 12,368
Motor Expenses 5,724
Rent 17,682
General expenses 14,826
Bank overdraft 37,114
Accumulated depreciation
Fixtures and fittings 4,400
Motor vehicles 30,584
Drawings 53,136
1,180,684 1,180,684

The following information as at 31 December is also available.

1. $436 is owing for motor expenses
2. $1,360 has been prepaid for rent
3. Depreciation is to be charged for the year as follows:
- Motor vehicles: 20% on cost
- Fixtures and fittings: 10% reducing balance method
4. Inventory at the close of business was valued at $39,852

Required: Prepare Donald Brown's statement of comprehensive income for the year
ended 31 December 20X0

1. Depreciation charge

Total depreciation charge = Depreciation charge for motor vehicles + Depreciation

charge for fixtures and fittings
Depreciation charge for motor vehicles: $91,460 x 20% = $18,292
Depreciation charge for fixtures and fittings: 10% • $(84,400 — 4,400) = $8,000
Total: $8,000 + $18,292 = $26,292

DONALD BROWN'S STATEMENT OF COMPREHENSIVE INCOME FOR THE

YEAR ENDED 31 DECEMBER 20X0

$' $'
Revenue 983,240
Cost of sales
Opening inventory 36,920
Purchases 775,872
812,792
Closing inventory 39,852
772,940
Gross profit 210,300
Other income — discounts received 2,350
212,650
Expenses
Lighting and heating 12,368
Motor expenses (5,724 + 436) 6,106
Rent (17,682 — 1,360) 16,322
General expenses 14,826
Depreciation 26,292
Profit for the year 75,968
136,682