Chapter 6

Company accounts

F6.1 Muir Limiteds trial balance for the year to 30 November 2008 is shown below:

Administrative expenses Called up share capital (1 ordinary shares) Cash at bank and in hand Distribution costs Dividends received Fixed asset investments (at cost) Land and property: At cost (land 100,000) Accumulated depreciation (at 1 December 2007) Profit and loss account (at 1 December 2007) Purchases Sales Stock (at 1 December 2007) Trade creditors Trade debtors Vans: At cost Accumulated depreciation ( at 1 December 2007)

Dr 000 210 40 580

Cr 000 720 4

20 200 16 160 1,360 2,480 260 120 430 700 _____ 3,800 300 3,800

Additional information: 1) Stock at 30 November 2008: 250,000. 2) Depreciation if is charged on property at a rate of 4% on cost and on vans at a rate of 25% on cost. 3) At 30 November 2008 10,000 was owing for office salaries and 5,000 had been paid in advance for van licences. 4) Corporation tax owing at the end of the year for 2008 amounted to 55,000. 5) The directors propose to pay an ordinary dividend of 10p per share. Required: Prepare Muirs profit and loss account for the year to 30 November 2008 and a balance sheet as at that date.

F6.2 The following trial balance has been extracted from the books of account of McAdam Limited as at 31 December 2009: Dr 000 2,370 Cr 000 130 800 200 600 570 120 900 700 100 40 80 7,000 4,000 10 3,000 8,000 13,200 380 2,000 2,220 23,950 1,480 ______ 23,950

Administrative expenses Bank overdraft Called up share capital: Ordinary shares of 1 each 10% cumulative preference shares Creditors Debtors Dividends received (from fixed asset investments) Distribution costs Fixed asset investments at cost Furniture and fittings: At cost Accumulated depreciation (at 1 January 2009) Interim dividend paid (10p per ordinary share) Plant and equipment: At cost Accumulated depreciation (at 1 January 2009) Preference dividend paid Profit and loss account Purchases Sales Share premium account Stock (at 1 January 2009) Trade creditors Trade debtors

Additional information: 1) Stock at 31 December 2009: 2,400,000. 2) Depreciation is charged on furniture and fittings at a rate of 10% on cost. The plant and equipment relates entirely to distribution activities and depreciation is charged on it at a rate of 50% on the reduced balance. 3) The amount due for corporation tax at the year end and based on the profits for 2002 was estimated to be 530,000. 4) The directors propose to pay a final ordinary dividend of 20p per ordinary share. Required: Prepare McAdams profit and loss account for the year to 31 December 2009 and a balance sheet as at that date.

F6.3 The Chief Accountant of Minimaj Limited has prepared the following summarised draft trading and profit and loss account for the year to 31 December 2008: 000 Sales revenue Less: cost of goods sold: Opening stock Purchases Less: closing stock Gross profit Administrative expenses Bad debt written off Depreciation: land and building : furniture and fittings : plant and equipment Increase in provision for doubtful debts Research and development expenditure Selling and distribution expenses Net loss for the year ,000 200 900 1,100 100 370 30 5 10 60 75 15 150 185 000 1,800

1,000 800

825 (25)

As Chairman of the company, you are extremely alarmed to find that the company has made a loss for the year. You have, therefore, gone through the Chief Accountants working papers in some detail with him, following which you have instructed him to make the changes listed below to the draft trading and profit and loss account. 1) Increase the sales revenue by 50,000. This amount represents 10% of a major contract price which was signed on 15 November 2008. The contract involved undertaking a great deal of preliminary work during 2008, and you believe that it is only fair to match some of the expected future revenue against the cost which has already been incurred in bringing the deal to a successful conclusion. There is very little information about the costs involved in undertaking the preliminary work. 2) Increase the closing stock value by 200,000. The amended amount for closing stock would be then be closer to current economic values. The company has hitherto used a FIFO (first-in first-out) method of valuing closing stock, but the Chairman thinks that this method is now out of date, and that current economic values should be used. 3) Exclude 40,000 of advertising expenditure which has been charged to administrative expenses. In his view, advertising expenditure should be matched against future sales revenue (and not current sales revenue) which it is likely to generate for very many years ahead. 4) Exclude the bad debt of 30,000. The debt has been outstanding for three years, but it is owed by a company whose chairman is a personal friend of the Chairman. He is confident, therefore, that the debt will eventually be repaid.

5) Reduce the depreciation charge on furniture and fittings and on plant and equipment by 5,000 and 20,000 respectively as the future lives of such assets are now expected to be much longer that was originally estimated. 6) Reduce the increase in the provision for doubtful debts by one-third. The company has maintained a provision for doubtful debts at 6% of outstanding trade debtors for many years, but the overall provision has proved to be somewhat on the high side. 7) Capitalise the 150,000 for research and development expenditure as none of this expenditure relates to current activities. Required: a) Assuming that you were the Chief Accountant, prepare an amended trading and profit and loss account for the year to 31 December 2008 in accordance with your Chairmans instructions; and b) Comment on each of the seven amendments required by the Chairman.