Solution Manual for Frank Woods Business Accounting 14th Edition Volume 1 By Allan Sangster, Lewis G

SOLUTION MANUAL FOR FRANK WOODS BUSINESS ACCOUNTING 14TH EDITION VOLUME 1 BY ALLAN SANGSTER, LEWIS GORDON

SOLUTIONS

SOLUTION MANUAL FOR FRANK WOODS BUSINESS ACCOUNTING 14TH EDITION VOLUME 1 BY ALLAN SANGSTER, LEWIS GORDON Answers Note: To save time and space, the months are omitted in the Ledger accounts which follow. The day of the month is shown in brackets.

Answer to Question 1.2A

BA 1

(a) 49,000 (d) 48,100

(c) 65,800 (f) 85,900

(b) 75,100 (e) 81,300

Answer to Question 1.4A (a) Asset (b) Asset (c) Liability (d) Asset (e) Asset

BA 1

(f) Asset (g) Liability (h) Liability (i) Asset

Answer to Question 1.6A

BA 1

Assets List Wrong: Accounts payable, Capital.

Liabilities List Wrong: Equipment, Computers.

Answer to Question 1.8A

BA 1

Fixtures 3,200 + Van 4,750 + Inventory 2,340 + Bank 520 + Cash 100 = Total Assets 10,910.

Loan 5,000 + Accounts payable 1,910 + Capital (difference) 4,000.

Answer to Question 1.10A

BA 1 G Cook Balance sheet as at 30 June 2019

Non-current assets Equipment Current assets Inventory Accounts receivable Cash at bank

9,720 6,430 9,280 410 16,120

Less Current liabilities Accounts payable

(8,380) 17,460 17,460

Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual

Answer to Question 1.12A Assets (a) +Van (b) −Cash (c) +Inventory −Bank (d) +Cash (e) +Inventory −Accounts receivable (f) +Inventory (g) −Cash (h) −Bank

BA 1

Liabilities +Accounts payable −Loan from F Duff

Capital

+Capital +Accounts payable −Accounts payable

Answer to Question 1.14A

−Capital

BA 1 J Hill Balance Sheet as at 7 December 2019

Non-current assets Equipment Motor Vehicle

6,310 7,300 13,610

Current assets Inventory Accounts receivable Bank Cash

8,480 3,320 9,510 485

Current liabilities Accounts payable

1,760 33,645

Capital

33,645

Answer to Question 2.11A Debited (a) Trailer (c) Loan from W Small (e) Office equipment (g) Bank (i) Cash

21,795 35,405

BA 1

Credited Cash Cash Dexter Ltd L Tait Loan from F Burns

Debited (b) J Tough (d) Cash (f) Cash (h) Bank (j) J Fife

Credited Bank Trailer T Walls Capital Cash

Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual

Answer to Question 2.12A (1) Capital (25) Cash

(5) Old Ltd (15) Cash (30) Bank

Bank 6,400 16,000 (2) Van 400 (12) Cash 180 (19) Carton Cars 7,100 (30) Office fixtures 480

(15) Bank (24) Cash

(5)

Drop

Bank

Vans Bank 6,400 Carton Cars 7,100

16,000

(19) Bank

Office fixtures 900

Carton Cars 7,100 (8) Van

7,100

Loan from Berry (21) Cash

500

1,200 500

BA 1

Bank 18,000 (8) Cash 4,000 (15) Loan Fox (17) Drop Loan: T Fox 1,000 (2) Bank 500

400 1,000 840

(1) (8)

Capital Bank

Cash 1,500 (3) Computer 400 (24) Loan Fox

(3)

Cash

Computer 1,200

(17) Bank

Drop Ltd 840 (5)

(31) P Blake

P Blake (31) Printer Printer 400

4,000

Display stands 840

Display Stands 840 Capital (1) (1)

Answer to Question 3.2A Debited (a) Purchases (c) C Riddle (e) Lorry (g) Bank (i) F Toms

Cash 180 (15) Office fixtures 120 500 (25) Bank 400

Old Ltd (5)

Answer to Question 2.15A Capital Loan Fox

(12) Bank (21) Loan: Berry (2) (8)

Office Fixtures 900 120 480 Capital (1)

(1) (2)

BA 1

Cash Bank

1,500 18,000

BA 1

Credited B Cowan Filing cabs M Davis Ltd M Peters Bank

Debited (b) Returns in (d) Purchases (f) J Hicks (h) Purchases (j) S Mulligan

Credited L Keith Cash Returns Out Bank Sales

400

Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual

Answer to Question 3.12A (1) Capital (19) Sales

Cash 7,400 (2) 54 (7)

(4) (7)

Purchases 410 362

J Watson Cash

BA 1

Bank Purchases

Returns Outwards (12) J Watson (12) Returns (29) Bank

J Watson 42 (4) 368

(10) Sales

L Less 218

7,000 362

(2) Cash (24) F Holmes (Loan)

Bank 7,000 (5) Van 4,920 (29) J Watson 368 1,500 (31) Firelighters Ltd 820

Sales (10) L Less (19) Cash

42

Fixtures Purchases

410

(22) Firelighters Ltd (5)

Bank

820 Van 4,920 F Holmes (Loan) (24) Bank

(31) Bank

Firelighters Ltd 820 (22) Fixtures Capital (1)

Answer to Question 3.6A

Bank 18,000 (21) Printer 250 (29) B Hind

(5) Sales (12) Sales

Cash 210 (18) Bank 305

7,400

620 1,373

(2) (3) (8)

B Hind G Smart G Smart

250

Sales (5) Cash (10) P Syme (12) Cash (22) H Buchan

210 483 305 394

Purchases 1,455 472 370

1,455

Purchases Purchases

472 370

(10) Sales

P Syme 483 (23) Returns In

160

(22) Sales

H Buchan 394 (25) Returns In

18

A Cobb (31) Machinery

419

(31) A Cobb

Machinery 419

18,000

(21) Bank

Printer 620

G Smart 47 (3) (8)

Capital (1)

820

Cash

Purchases

(28) Returns Out

1,500

BA 1

(1) Capital (18) Cash

B Hind (6) Returns Out 82 (2) (29) Bank 1,373

218 54

Bank

(23) P Syme (25) H Buchan

Returns Inwards 160 18 Returns Outwards (6) B Hind (28) G Smart

82 47

Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual

Answer to Question 4.4A July (1) Bank Cash Capital (2) Stationery Bank (3) Purchases T Smart (4) Cash Sales (5) Insurance Cash (7) Computer J Hott (8) Electricity Bank (10) C Biggins Sales (11) T Smart Returns Out (14) Wages Cash (17) Rent Bank (20) Bank C Biggins (21) J Hott Bank (23) Stationery News Ltd (25) F Tank Sales (31) News Ltd Bank

BA 1 Dr 5,000 1,000

Cr 6,000

75 75 2,100 2,100 340 340 290 290 700 700 32 32 630 630 550 550 210 210 225 225 400 400 700 700 125 125 645 645 125 125

Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual

Answer to Question 4.4A

BA 1

Bank (1) Capital 11,000 (5) Stationery 62 (24) K Fletcher 250 (16) Business rates 970 (28) Business rates 45 (19) Rent 75 (28) J Biggs 830 (28) D Martin 415 (28) B Black 6,100 (1)

Capital

Cash 1,600 (3) Purchases (4) Rent (7) Wages (11) Rent (18) Insurance (21) Motor exps (23) Wages Capital (1) (1)

(4) Cash (11) Cash (19) Bank

Rent 75 75 75

(7) Cash (23) Cash

Wages 160 170

(5)

Stationery 62

Bank

(16) Bank

Bank Cash

Business rates 970 (28) Bank

(2) (2) (2) (3)

Sales (6) (6) (6) (15) (15) (15)

370 75 160 75 280 24 170 11,000 1,600

Purchases 830 610 590 370

J Biggs D Martin P Lot Cash

Returns Outwards (10) D Martin (13) B Hogan

Returns Inwards 35

(28) Bank

B Black 6,100 (20) Van

(28) Bank

J Biggs 830 (2)

(10) Returns Out (28) Bank

D Martin 195 (2) 415 P Lot (2)

45

D Twigg B Hogan K Fletcher T Lee F Sharp G Rae

(6)

Sales

D Twigg 370

370 290 410 205 280 426 195

6,100

Purchases

830

Purchases

610

Purchases

590

(18) Cash

Insurance 280

(6)

Sales

B Hogan 290 (13) Returns In

35

(21) Cash

Motor Expenses 24

(6)

Sales

K Fletcher 410 (24) Bank

250

(20) B Black

Van 6,100

(15) Sales

T Lee 205

(15) Sales

F Sharp 280

(15) Sales

G Rae 426

Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual

Answer to Question 4.6A

BA 1

(A) Goods bought on credit £27,000.

(B) Borrowed £35,000 and immediately spent it on land and buildings £35,000.

(C) Sold goods costing £20,000 for £30,000 on credit.

(D) Debtors paid £13,000 which was deposited in the bank.

(E) Debtors paid £2,000: This amount taken by proprietor as drawings.

(F) Took £5,000 drawings by cheque and paid off £3,000 accrued expenses by cheque.

(G) Equipment costing £30,000 sold for £21,000, resulting in a £9,000 loss on disposal.

(H) Goods taken for owner’s personal use £1,000.

(I) Took £6,000 cash as drawings. Alternatively could have been £6,000 cash stolen – thus reducing cash and causing a loss.

Answer to Question 5.6A (1) Sales (21) Sales (1)

Balance b/d

(1) Sales (8) Sales (21) Sales

BA 1

P Black 620 (19) Bank 180 (31) Balance c/ d 800

620 180 800

(15) Returns Out (28) Bank

180 G Smith 84 (31) Balance c/d 322 860 1,266

(1)

Balance b/d 1,266

(1) (8)

Sales Sales

L Sime 1,200 (10) Returns In 448 (19) Bank (31) Balance c/d 1,648

(1)

Balance b/d 1,406

(1)

Sales

J Teel 608 (10) Returns In (12) Cash 608

(31) Balance c/d 1,266

(28) Bank (31) Balance c/d 62 180 1,406 1,648

Purchases

G Lime 180 (2) 30 210

Black, Smith and Sime are debtors. Donovan, Lime and Still are creditors.

T Still 21 (2) 100 (9) 40 363 524 (1)

63 215 278

Balance b/d

278

Purchases

210 210

(31) Balance b/d

(15) Returns Out (28) Bank (31) Returns Out (31) Balance c/d

190 190

I Donovan 278 (2) Purchases (9) Purchases 278 (1)

1,266

164 444 608

P Best 25 (2) 165 190

Purchases Purchases

30

360 164 524

Balance b/d

363

Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual

Answer to Question 5.7A 2020 May 1 May 19 May 21 2020 May 1 May 8 May 21 2020 May 1 May 8 May 10 May 19 2020 May 1 May 10 May 12 2020 May 2 May 15 May 28 2020 May 2 May 9 2020 May 2 May 28 2020 May 2 May 9 May 15 May 28 May 31

Sales Bank Sales

Sales Sales Sales

Sales Sales Returns Bank

Sales Returns Bank

Purchases Returns Bank

BA 1 F Black Dr 620

620 180 G Smith Dr 84 322 860 L Sime Dr 1,200 448

J Teel Dr 608

Cr

Balance 1,200 Dr 1,648 Dr 1,586 Dr 1,406 Dr

Cr

G Lime Dr

Balance 190 Cr 165 Cr 0

Cr 63 215

Balance 63 Cr 278 Cr

Cr 210

Balance 210 Cr 30 Cr

Cr 360 164

Balance 360 Cr 524 Cr 503 Cr 403 Cr 363 Cr

180 T Still Dr 21 100 40

Balance 608 Dr 444 Dr 0

Cr 190

25 165

Purchases Purchases

Purchases Purchases Returns Bank Returns

Balance 84 Dr 406 Dr 1,206 Dr

164 444 P Best Dr

Balance 620 Dr 0 180 Dr

Cr

62 180

I Donovan Dr

Purchases Bank

Cr

Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual

Answer to Question 6.3A (1) Capital (28) T Potts (28) J Field (30) Capital

(1)

Balance b/d

(5)

Sales (26) Loan from B Bennet

(3) (3) (3) (3)

J Small F Brown R Charles T Rae (19) R Charles (19) T Rae (19) F Jack

(1)

Balance b/d

(30) Balance c/d

BA 1

Bank 15,000 (6) Rent 175 71 (7) Business rates 130 42 (23) J Small 272 900 (23) F Brown 1,200 (23) T Rae 500 (25) Van 6,200 (30) Balance c/d 7,536 16,013 16,013 7,536 Cash 610 (17) Wages (30) Balance c/d 750 1,360 Purchases 290 (30) Balance c/d 1,200 530 610 110 320 165 3,225

(1)

Balance b/d

(30) (11) Balance Sales c/d (1) Balance b/d

1,360

(23) Bank (18) Returns Out (30) Balance c/d

3,225 (23) Bank (30) Balance c/d

3,225 (30) Balance c/d

Sales 2,383 (5) Cash (11) T Potts (11) J Field (11) T Gray 2,383 Returns Outwards 45 (18) J Small (18) R Charles 45

(1) Balance b/d (20) J Field (20) T Potts (11) Sales

290 1,070

3,225

(1) Balance b/d (30) Balance c/d

Business rates 130 (30) Balance c/d (1) Balance b/d 130 Wages 290 (30) Balance c/d (17) Cash 290 (1) Balance b/d Loan from B Bennet (30) Balance c/d 750 (26) Cash (1) Balance b/d J Small (18) Returns Out 18 (3) Purchases (23) Bank 272 290

(7) Bank

Returns Inwards 6 (30) Balance c/d 14 48 (20) Returns In 20 (28) Bank 20 48 T Gray Capital 15,900 1) Bank 1,640 ((30) Balance c/d (30) Bank 1,640 15,900

(1)

610 85 48 1,640 2,383 2,383

(30) Balance c/d

18 27 45

Purchases

R Charles 27 (3) Purchases 613 (19) Purchases 640 (1) Balance b/d T Rae 500 (3) Purchases 430 (19) Purchases 930 (1) Balance b/d

290

750 750 290 290 1,200 530 110 640 613 610 320 930 430

F Jack 165 (19) Purchases (1) Balance b/d

165 165

T Potts 85 (20) Returns In (28) Bank 85

14 71 85

J Field Turnkey Motors 4,950 (21) Van (1) Balance b/d Trial Balance

4,950 4,950

45 20

206 42 48

15,000 1,640 900 15,900

Balance b/d 15,900

Van (21) Turnkey Motors 4,950 (30) Balance c/d (25) Bank 6,200 11,150

(11) Sales

F Brown 1,200 (3)

130

11,150 11,150

Bank Cash Purchases Sales Returns Outwards Returns Inwards Capital Van Rent Business rates Wages Loan from B Bennet R Charles T Rae F Jack

7,536 1,070 3,225 20

2,383 45 15,900

11,150 175 130 290 750 613 430 165

Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual

(1)

Balance b/d

(6) (1)

Bank

Rent 175 (30) Balance c/d

Balance b/d

175

11,150 175

Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual

Answer to Question 6.4A

BA 1

Cash 10,500 (2) Bank (1) Capital (21) Sales 145 (3) Purchases (30) Loan: B Barclay 500 (11) Salaries (30) A Tom 614 (30) Balance c/d 11,759 (1) Balance b/d 1,419

9,000 550 790 1,419 11,759

220 6,500 900 118 3,790 11,528

(1)

Bank Cash 9,000 (8) Rent Loan: B Barclay 2,000 (15) Van R Pleat 158 (26) F Hood L Fish 370 (26) M Smith (30) Balance c/d 11,528 Balance b/d 3,790

(3) (4) (4) (4) (4)

Cash T Dry F Hood M Smith G Low

(2) (16) (29) (29)

(1)

Balance b/d

(30) Balance c/d

(30) Balance c/d

(18) R Tong (18) M Singh (1)

Balance b/d

Purchases 550 (30) Balance c/d 800 930 160 510 2,950 2,950

2,950

(1)

Balance b/d

1,783

Returns Outwards 72 (14) F Hood (14) M Smith 72 (1) Balance b/d

30 42 72 72

(30) Balance b/d

(30) Balance c/d

T Dry 800 (4) (1)

(14) Returns Out (26) Bank

M Smith 42 (4) 118 160

Cash Balance b/d

25

160 160

(30) Balance c/d

G Low 510 (4) (1)

Purchases Balance b/d

510 510

(30) Balance c/d

Buttons Ltd 89 (5) Stationery (1) Balance b/d

89 89 89

Buttons Ltd Balance b/d

89

790

(10) Chiefs Ltd (1) Balance b/d

Fixtures 610 (30) Balance c/d 610

610

(15) Bank (1) Balance b/d

Van 6,500 (30) Balance c/d 6,500

6,500

(30)

Balance c/d

Loan from B Barclay 2,500 (16) Bank (30) Cash 2,500

Balance c/d

(6) Sales (24) Sales

(6)

Sales

(1)

Balance b/d

(6) Sales (24) Sales

(24) Sales (6)

Sales

(1)

Balance b/d

Cash Bank Purchases Sales Returns Outwards Returns Inwards Capital Stationery Rent Salaries Fixtures Van Loan from B Barclay Chiefs Ltd M Singh R Tong T Dry G Low Buttons Ltd

2,000 500 2,500

Balance b/d

2,500

Chiefs Ltd 610 (10) Fixtures (1) Balance b/d

610 610

(1)

10,500 10,500

Purchases

(1)

Salaries 790 (30) Balance c/d 790

(14) Returns Out (26) Bank

800 800

(5)

(11) Cash (1) Balance b/d

25

Purchases Balance b/d

Stationery 89 (30) Balance c/d

220

(30)

170 240 326 204 145 130 410 158 1,783

Capital 10,500 (1) (1)

Rent 220 (30) Balance c/d 220

2,950

Sales 1,783 (6) R Tong (6) L Fish (6) M Singh (6) A Tom (21) Cash (24) L Fish (24) A Tom (24) R Pleat 1,783

Returns Inwards 5 (30) Balance c/d 20 25 25

Bank Balance b/d

(8) (1)

L Fish 240 (29) 130 370

Bank

370 370

M Singh 326 (18) Returns In (30) Balance c/d 326 306 A Tom 204 (30) Cash 410 614 R Pleat 158 (29)

614 614

Bank

158

R Tong 170 (18) Returns In (30) Balance c/d 170 165 F Hood 30 (4) 900 930 Trial Balance

20 306 326

Purchases

5 165 170

930 930

1,419 3,790 2,950 25 89 220 790 610 6,500 306 165

16,864

1,783 72 10,500

2,500 610 800 510 89 16,864

Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual

Answer to Question 9.2A

BA 1 Cash 295 310

(1) (2) (3) (4) (9)

Balances b/d Sales Cash F Bell Business rates (11) Bank (13) Sales (16) J Bull (Loan) (20) K Brown

150 430 1,500 2,685

Answer to Question 9.4A

BA 1

Disct

Cash 420

(1) (2) (2) (2) (2) (3) (8)

Balances b/d S Braga L Pine G Hodd M Rae Sales Bank (10) Sales (12) B Age (29) A Line (30) Sales (30) Balance c/d

41 16 22 52 400 1,260 4 980 135

3,060

Cash Book Bank 4,240 (3) Bank (5) Postage 200 (6) Office equipment 194 (7) L Root 115 (11) Cash (12) Wages (14) Motor expenses (28) General expenses 174 (30) Insurance (30) Balances c/d 4,923

Cash Book Bank (5) Rent 4,940 779 (6) M Peters 304 (6) G Graham 418 (6) F Bell 988 (8) Cash 740 (14) Wages (16) R Todd (16) F Dury 276 (20) Fixtures 324 (24) Lorry (30) Stationery (30) Balance c/d 12,623 21,392

Cash 200 80

Bank 310 94 150

400 81 35 1,970 2,685

Disct

Cash 340

9 24 10

320 3,968 4,923

Bank 351 936 390 400

540 15 12

70

295 400 4,320 14,300 56 2,124 3,060

21,392

Discounts Allowed 135

(30) Total for month

Discounts Received (30) Total for month

Answer to Question 9.6A

70

BA 1 Cash Book

Disct Balance b/d AB CD EF Bank ¢ Balance c/d

8 20 12 40

Balance b/d

Cash 80

100 180 50

Bank 900 192 480 288 125 1,985

Disct Cash ¢ GH IJ Wages

45 70

Bank 100 555 1,330

130

Balance c/d Balance b/d

Cash

115

50 180

1,985 125

Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual

AB Balance b/d

200

Bank Discount received

192 8

200

200 CD

Balance b/d

500

Bank Discount received

480 20

500

500 EF

Balance b/d

300

Bank Discount received

288 12

300

300 GH

Bank Discount allowed

555 45

Balance b/d

600

600

600 IJ

Bank Discount received

1,330 70

Balance b/d

1,400

1,400

Answer to Question 10.3A

1,400

BA 1

Receipts

Petty Cash Book Total Office Exps

Motor Exps

Cleaning

Casual Labour

450 (1)

Balance b/d T Wise Staples and tape dispenser Black Motors Cleaning materials Envelopes Petrol (11) I Dodds (12) J Marsh (12) Paper clips (14) Petrol (16) Adhesive tape (16) Petrol (21) Car tyre (22) T Randall (23) J Marsh (24) I Gray (25) Paper (26) Monday Cars

(1) (2) (2) (3) (6) (8)

36 19 42 3 10 18 12 7 2 16 1 24 63 15 16 21 7 74

36 19 42 3 10 18 12 7 2 16 1 24 63 15 16 21 7 74

Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual

(29) (30) 425

(30) (30)

Petrol T Pointer

19 20 425

Cash Balance c/d

(1) (3) (5) (7)

S Fry J Hall R Dunn P Kay (16) A Dale (23) D Fu (30) A Cook

970 560 120 430 390 240 650 3,360

General Ledger Sales (31) Total for month

(a) Invoice summaries: A Portsmouth 22 metres plastic tubing @ £1 6 sheets foam rubber @ £3 4 boxes vinyl padding @ £5 Less Trade discount 25% B Butler 50 lengths polythene sheeting @ £2 8 boxes vinyl padding @ £5 20 sheets foam rubber @ £3 Less Trade discount 20% A Gate 4 metres plastic tubing @ £1 33 lengths polythene sheeting @ £2 30 sheets foam rubber @ £3 Less Trade discount 25%

256

26

20 104

BA 1

Sales Day Book

Answer to Question 11.4A

39

450 875

875

Answer to Question 11.2A

19

(1)

Sales

Sales Ledger S Fry 970

(3)

Sales

J Hall 560

(5)

Sales

R Dunn 120

(7)

Sales

P Kay 430

(16) Sales

A Dale 390

(23) Sales

D Fu 240

(30) Sales

A Cook 650

3,360

BA 1

22 18 20 60 15 45 100 40 60 200 40 160 4 66 90 160 40 120

(b) Sales Day Book (1) A Portsmouth (5) B Butler (11) A Gate (21) L Mackeson (30) M Alison

(1)

Sales

Sales Ledger A Portsmouth 45

(5)

Sales

B Butler 160

(11) Sales

A Gate 120

(21) Sales

L Mackeson 29

(30) Sales

M Alison 120

45 160 120 29 120 474

Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual

L Mackeson 29 metres plastic tubing @ £1

29

M Alison 32 metres plastic tubing @ £1 24 lengths polythene sheeting @ £2 20 boxes vinyl padding @ £5

32 48 100 180 60 120

Less Trade discount 331/3%

Answer to Question 11.6A

Less Trade discount 25%

2,700 216 2,916 729 2,187

F Clark 6 cricket bats @ £70 8 ice skates @ £40 5 rugby balls @ £34 Less Trade discount 20%

420 320 170 910 182 728

(a) (2) J Ring (11) F Clark (18) A Lane (25) J Jack (30) J Wood

Purchases Day Book

(b)

Purchases Ledger J Ring (2) Purchases

2,187

F Clark (11) Purchases

728

A Lane (18) Purchases

2,140

J Jack (25) Purchases

180

J Wood (30) Purchases

456

(30) Total for month

2,187 728 2,140 180 456 5,691

General Ledger Purchases 5,691

General Ledger Sales (30) Total for month

474

BA 1

Workings: Invoices J Ring 3 sets golf clubs @ £900 6 footballs @ £36

(c)

(c)

A Lane 6 sets golf trophies @ £55 4 sets golf clubs @ £720 Less Trade discount 331/3% J Jack 5 cricket bats @ £48 Less Trade discount 25% J Wood 8 goal posts @ £95 Less Trade discount 40%

330 2,880 3,210 1,070 2,140 240 60 180 760 304 456

Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual

Answer to Question 11.8A

BA 1

(a) Purchases Day Book (9) C Clarke (16) A Charles (31) M Nelson (b)

(c) (31) Total for month

Sales Day Book 240 160 50 450

240

(1)

Sales

A Charles (16) Purchases

160

(7)

Sales

R Richards 200

M Nelson (31) Purchases

50

(23) Sales

T Young 160

(1)

Sales

Sales Ledger B Dock 240 (10) Returns

(1)

Sales

M Ryan 126

(1) (6)

Sales Sales

G Soul 94 99

(1)

Sales

F Trip 107 (10) Returns

(6)

Sales

P Coates 182

(6)

Sales

L Job 203 (24) Returns

General Ledger Purchases Account 450

405

BA 1

Sales Day Book

Returns Inwards Day Book (10) B Dock (10) F Trip (24) L Job General Ledger Sales (30) Total for the month

240 126 94 107 182 203 99 1,790 302 3,143 19 32 16 67

3,143

(20) Sales

B Uphill 1,790

(30) Sales

T Kane 302

(6)

T Mann 99

Returns Inwards (30) Total for the month

45 200 160 405 Sales Ledger M Marshall 45

Answer to Question 11.11A B Dock M Ryan G Soul F Trip P Coates L Job T Mann (20) B Uphill (30) T Kane

M Marshall R Richards (23) T Young

Purchases Ledger C Clarke (9) Purchases

Sales Account (31) Total for month

(1) (1) (1) (1) (6) (6) (6)

(1) (7)

67 Sales

19

32

16

Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual

Answer to Question 11.13A

BA 1

Sales Day Book E Rigby E Phillips F Thompson A Green H George J Ferguson (20) E Phillips (20) F Powell (20) E Lee

(3) (3) (3) (8) (8) (8)

Returns Inwards Day Book (14) E Phillips (14) F Thompson (31) E Phillips (31) E Rigby

510 246 356 307 250 185 188 310 420 2,772 18 22 27 30 97

Sales Ledger E Rigby 510 (31) Returns In

30

Sales (20) Sales

E Phillips 246 (14) Returns In 188 (31) Returns In

18 27

(3)

Sales

F Thompson 356 (14) Returns In

Sales

A Green 307

Sales

H George 250

Sales

J Ferguson 185

(20) Sales

F Powell 310

(20) Sales

E Lee 420

(3) Sales (3)

(8) (8) (8)

Purchases Day Book K Hill M Norman N Senior R Morton J Cook D Edwards C Davies (24) C Ferguson (24) K Ennevor

(1) (1) (1) (5) (5) (5) (5)

Returns Outwards Day Book (12) M Norman (12) N Senior (31) J Cook (31) C Davies

380 500 106 200 180 410 66 550 900 3,292 30 16 13 11 70

Purchases Ledger K Hill (1) Purchases

380

(12) Returns Out

M Norman 30 (1) Purchases

500

(12) Returns Out

N Senior 16 (1)

Purchases

106

R Morton (5) Purchases

200

J Cook 13 (5)

Purchases

180

D Edwards (5) Purchases

410

C Davies 11 (5)

Purchases

66

C Ferguson (24) Purchases

550

K Ennevor (24) Purchases

900

22

(31) Returns Out

(31) Returns Out

General Ledger Sales (31) Sales Day Book Purchases (31) Purchases Day Book

3,292

Returns Inwards 2,772

(31) Returns In Day Book

97 Returns Outwards (31) Returns Out Day Book

70

Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual

Answer to Question 12.2A Office furniture Drawings Purchases Display cabinets Durham Brothers Ltd Bad debts Computers

BA 1 Dr Dr Dr Dr Dr Dr Dr

Answer to Question 13.2A

1,400 270 90 460 36 80 2,300

: : : : : : :

Durham Brothers Ltd Purchases Drawings M Sharp Fixtures T Lyle OTF Ltd

Cr Cr Cr Cr Cr Cr Cr

1,400 270 90 460 36 80 2,300

BA 1

(a)

B Cox Middle Road Paisley INVOICE number 4632 To: T Ross 24 Peter Street Loughborough

VAT Registration No. Date: 1 March 2020 Your Order No. 9841 £ 134.00 208.00 216.00 558.00 111.60 669.60

20,000 Coils Sealing Tape @ £6.70 per 1,000 = 40,000 Sheets Bank A5 @ £5.20 per 1,000 = 24,000 Sheets Bank A4 @ £9.00 per 1,000 = Add VAT at 20%

(b) Books of T Ross: B Cox 2020 Mar 1 Purchases

669.60

Books of B Cox: T Ross

2020 Mar 1 Sales

Answer to Question 13.7A

669.60

BA 1

Output VAT payable to HMRC

£61,548×1/6 =

10,258

Input VAT reclaimable from HMRC

£46,020×2/3×20% =

(6,136)

Amount to be paid by the business to HMRC

Answer to Question 13.9A

BA 1

Let ‘y’ be the total value of net sales in Nov & Dec: 0.6y*1.2 + 0.4y = £280,000 1.12y = £280,000 so y = £250,000.00.

Three-fifths of these are subject to VAT at 20%: £250,000*0.6*20% = £30,000 output VAT Let ‘z’ be the total value of net sales in Jan: 0.6z*1.225 + 0.4z = £110,000 1.135z = £110,000 so z = £96,916.30 Three-fifths of these are subject to VAT at 22.5%: £96,916.30*0.6*22.5% = £13,083.70 output VAT Therefore total output VAT for quarter is £30,000 + £13,083.70 = £43,083.70

4,122

Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual

Answer to Question 13.11A (a) 2020 May 25 27 28 29 30

BA 1 Sales Day Book Invoice No 3045 3046 3047 3048 3049

Laira Brand Brown Bros Penfold’s T Tyrrell Laira Brand

Net 1,060.00 2,200.00 170.00 460.00 1,450.00 5,340.00

VAT 159.00 330.00 25.50 69.00 217.50 801.00

Gross 1,219.00 2,530.00 195.50 529.00 1,667.50 6,141.00

(b) Personal accounts in Sales Ledger: Debit gross amounts Sales account in General Ledger: Credit net total for week Output VAT account in General Ledger: Credit total of VAT column for week (c) 2020 May 1 Balance b/d 15 Sales 25 Sales 30 Sales

Laira Brand 2020 2,100.47 May 21 Bank 680.23 29 Returns In 1,219.00 31 Balance c/d 1,667.50 5,667.20

Answer to Question 14.3A

2,500.00 609.50 2,557.70 5,667.20

BA 1

F Dover Income Statement for the year ending 31 May 2020 Sales Less Cost of goods sold: Purchases Less Closing inventory Gross profit Less Expenses: Salaries Business rates Motor expenses General expenses Insurance Net profit

471,624 242,080 28,972 79,120 4,800 1,820 610 2,480

Answer to Question 14.4A

Sales Less Cost of goods sold: Purchases Less Closing inventory Gross profit Less Expenses: Salaries and wages Equipment rental Insurance Lighting and heating Motor expenses Sundry expenses Net profit

213,108 258,516

88,830 169,686

BA 1

G Graham Income Statement for the year ending 30 June 2019

382,420 245,950 29,304 48,580 940 1,804 1,990 2,350 624

216,646 165,774

56,288 109,486

Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual

Answer to Question 15.3A

BA 1 F Dover Balance Sheet as at 31 May 2020

Non-current assets Premises Car

106,000 8,600

Current assets Inventory Accounts receivable Bank Cash

28,972 42,160 5,430 650

114,600

77,212 191,812

Total assets Less Current liabilities Accounts payable

22,400 169,412

Capital Capital introduced Add Net profit

46,526 169,686 216,212 46,800

169,412

Non-current assets Shop Fixtures Lorry

174,000 4,600 19,400

198,000

Current assets Inventory Accounts receivable Bank

29,304 44,516 11,346

Less Drawings

Answer to Question 15.4A

BA 1 G Graham Balance Sheet as at 30 June 2019

Current liabilities Accounts payable Capital Capital introduced Add Net profit Less Drawings

85,166 283,166 23,408 259,758

194,272 109,486 303,758 44,000

259,758

Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual

Answer to Question 15.6A

BA 1

= 18,000 + 4,800 + 24,000 + 760 + 15,600 − 8,000 − 6,000 = 49,160 Capital at 31 December 2019 = 16,200 + 5,800 + 28,000 + 240 + 4,600 + 16,000 − 11,000 − 2,000 = 57,840 Increase in capital = 8,680 Add Drawings (200  52) 10,400 19,080 Less Capital introduced 4,000 Net profit 15,080

Capital at 1 January 2019

A Trader Balance Sheet as at 31 December 2019 Non-current assets Fixtures Motor vehicle

16,200 16,000 32,200

Current assets Inventory Accounts receivable Bank Cash

28,000 5,800 4,600 240

Current liabilities: Accounts payable

11,000

Non-current liabilities: Loan

2,000

Capital account Opening balance Add Capital introduced Net profit

13,000 57,840 49,160 4,000 15,080 68,240 10,400 57,840

Less Drawings

Answer to Question 16.2A

38,640 70,840

BA 1

A Higgins Trading Account part of the Income Statement for the year ending 31 December 2020 Sales 575,430 Less Returns in 23,010 Less Cost of goods sold: Purchases 353,690 Less Returns out 17,290 336,400 Carriage inwards 5,420 341,820 Less Closing inventory 37,880 Gross profit

552,420

303,940 248,480

Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual

Answer to Question 16.5A

BA 1

T Owen Income Statement for the year ending 31 March 2019 Sales Less Cost of goods sold: Opening inventory Add Purchases Less Returns out Carriage inwards

276,400 52,800 141,300 2,408

Less Closing inventory Gross profit Less Expenses: Wages and salaries Carriage outwards Business rates Communication expenses Commissions paid Insurance Sundry expenses Net profit

138,892 1,350 193,042 58,440 63,400 5,840 3,800 714 1,930 1,830 208

134,602 141,798

77,722 64,076

Balance Sheet as at 31 March 2019 Non-current assets Buildings Fixtures

125,000 1,106 126,106

Current assets Inventory Accounts receivable Bank Cash

58,440 45,900 31,420 276

Current liabilities Accounts payable

136,036 262,142 24,870 237,272

Capital Opening balance Add Net profit

210,516 64,076 274,592 37,320

Less Drawings

237,272

Answer to Question 16.6A

BA 1

F Brown Income Statement for the year ending 30 September 2020 Sales Less Returns in Less Cost of goods sold: Opening inventory Add Purchases Less Returns out Carriage inwards Less Closing inventory Gross profit

391,400 2,110

389,290

72,410 254,810 1,240

253,570 760 326,740 89,404

237,336 151,954

Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual

Less Expenses: Wages and salaries Carriage out Motor expenses Rent Telephone charges Insurance Office expenses Sundry expenses

39,600 2,850 1,490 8,200 680 745 392 216

54,173 97,781

Balance Sheet as at 30 September 2020 Non-current assets Van Office equipment

5,650 7,470

Current assets Inventory Accounts receivable Bank Cash

89,404 38,100 4,420 112

Current liabilities Accounts payable

132,036 145,156 26,300 118,856

Capital Opening balance Add Net profit

49,675 97,781 147,456 28,600

Less Drawings

Answer to Question 16.8A

13,120

118,856

BA 1 Capital July 1

Balance b/d

9,700

July 1

Balance b/d Purchases

Aug 1

Balance b/d

500 3,900 4,400 1,400

Inventory July 1

Balance b/d

5,000 OK Ltd

July July 31

Bank Balance c/d

3,000 1,400 4,400

AB Ltd July 1

Balance b/d Sales

Aug 1

Balance b/d

300 600 900 600

July July 31

Bank Balance c/d

300 600 900

July 31 Balance c/d

3,700

Equipment July 1 Aug 1

Balance b/d Balance b/d

3,700 3,700

Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual

Bank July 1

Aug 1

Balance b/d Sales AB Ltd Balance b/d

1,200 3,200 300 4,700 1,200

July

OK Ltd General expenses Balance c/d

3,000 500 1,200 4,700

July

Bank AB Ltd

Aug 1

Balance b/d

3,200 600 3,800 3,800

Balance c/d

3,900

Balance c/d

500

July 31

Sales July 31

Balance c/d

3,800 3,800

Purchases July Aug 1

OK Ltd Balance b/d

3,900 3,900

July 31

General Expenses July Aug 1

Bank Balance b/d

500 500

July 31

Ms Porter Trial Balance as at 31 July Dr 3,700 5,000 1,200 500 3,900 600

Equipment Inventory at 1 July Bank General expenses Purchases AB Ltd OK Ltd Sales Capital at 1 July

14,900

Cr

1,400 3,800 9,700 14,900

Ms Porter Income Statement for July Sales Less Cost of goods sold: Opening inventory Purchases

3,800 5,000 3,900 8,900 6,200

Less Closing inventory

2,700 1,100 500 600

Gross profit Less General expenses Net profit Balance Sheet as at 31 July Non-current assets Equipment Current assets Inventory Accounts receivable Bank Current liability: Accounts payable Capital at 1 July Add Net profit

3,700 6,200 600 1,200

8,000 11,700 1,400 10,300 9,700 600 10,300

Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual

Answer to Question 17.2A

BA 1

Capital (a) (c) (f ).

Revenue (b) (d) (e) (g).

Answer to Question 17.4A

BA 1

See text for how to distinguish between capital and revenue expenditure. i) Cost of repairs is always revenue; an extension to an asset is always capital. ii) This is capital expenditure in the same way as buying a van to replace a van is capital expenditure. iii) This is capital expenditure because the asset was improved by the expenditure.

Answer to Question 17.6A

BA 1

Capital: 2,600 of (a); 600 of (c); 150 of (d); all of (e).

Revenue: 300 of (a); all of (b); 2,680 of (c); 1,110 of (d).

Answer to Question 17.8A (a) Revenue (b) Revenue (c) Capital (d) Revenue (e) Capital (f) Revenue

BA 1

(g) Capital (h) Revenue (i) Revenue (j) Capital (k) Revenue (l) Capital

Answer to Question 17.10A (a) Capital (b) Revenue (c) Revenue (d) Revenue (e) Capital

BA 1

(f) Capital (g) Revenue (h) Revenue (i) Capital

Answer to Question 17.12A

BA 1

(a) Balance b/d Survey fees Legal charges Cost of site Architect’s fees Subcontractors Transfer from wages Inventory of materials used

Premises 521,100 1,500 3,000 90,000 8,700 69,400 11,600 76,800 Balance c/d 782,100

Balance b/d Vendor of Press A Installation costs (A) Vendor of Press B Installation costs (B) Transport costs (A)

407,500 87,300 2,310 105,800 2,550 2,900 608,360

782,100 782,100

Plant

Balance c/d

608,360 608,360

Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual

(b) Cash discount 2% on Press A. Connected with finance not plant. Loan note interest similarly not applicable. The £4,700 demolition cost and £1,400 plus £1,750 cost of hiring lifting gear are not shown separately as they are included in other figures used above.

Answer to Question 17.14A

BA 1

Part (a) Capitalised as cost of the machine in the balance sheet of J Barton: 195,000 – 29,250 trade discount + 8,700 + 3,000 + 4,400 + 5,800 = 187,650.

Maintenance contract and insurance are revenue expenditure (the maintenance expense to be spread over 3 years and insurance over 12 months so prepayment adjustments will be required: see chapter 22 for explanation of prepayments) Cash discount 195,000 × 2.5% = 4,875 will appear as ‘other income’ after gross profit in the income statement.

Part (b) When an amount is not considered to be ‘material’ (i.e. it is not of interest to readers of the financial statements mainly because the amount involved is insignificant) then it may be treated as a revenue expense rather than being capitalised. An example might be a business that buys a stapler or a hole-punch for office use. Such items may be used in the business for several years and not bought for the purpose of resale, so at face value they appear to meet the criteria of ‘non-current assets’. However, the insignificant cost and nature of these items means that they are ‘immaterial’ and would be treated as revenue expenses in the income statement in the period in which they were purchased.

Answer to Question 18.3A i)

BA 1

FIFO: 15 @ £19 = £285

ii) LIFO: Jan Apr

Received 120 @ £16 80 @ £18

June Oct

150 @ £19

Nov

Issued

45 @ £16 80 @ £18 125 60 @ £16 150 @ £19 210

iii) AVCO:

Received

Jan Apr Jun Oct Nov

120 @ £16 80 @ £18

Issued

125 150 @ £19 210

Answer to Question 18.4A

BA 1

FIFO 6,210 285 5,925 2,075 8,000

LIFO 6,210 240 5,970 2,030 8,000

Purchases Less Closing inventory Cost of goods sold Gross profit Sales

Inventory after each transaction 120 @ £16 120 @ £16 1,920 80 @ £18 1,440 75 @ £16 75 @ £16 150 @ £19

Trading Accounts AVCO 6,210 274 5,936 2,064 8,000

3,360 1,200

1,200 2,850

15 @ £16 Average cost per unit of inventory £16 £16.80 £16.80 £18.27 £18.27

1,920

4,050 240

No. of units in inventory 120 200 75 225 15

Total value of inventory £1,920 £3,360 £1,260 £4,110 £274

Sales (All methods) 125 @ £22 2,750 210 @ £25 5,250 8,000

Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual

Answer to Question 18.7A

BA 1

(a)

Mary Smith Income Statement for the 3 months ending 30 November 2019 FIFO Sales 15,840 Less Cost of sales (note 1) 10,408 Gross profit 5,432 1,520 Less Overhead expenses Sales commission (note 2) 136 Depreciation of lawn mower (note 3) 12 1,668 Net profit 3,764 Note 1 1 @ 350 (net realisable value)

1,520 14

LIFO 15,840 11,392 4,448 1,645 2,803

350

Purchases

16,032 5,240

Inventory Cost of sales 1 @ 350 (net realisable value)

5,624 10,408

350 16,032

Purchases Less Taken for business use Inventory

450 4,190

4,640 11,392

Note 2 LIFO 21/2% @ 4,448 = 111.20 Note 3 LIFO 1/8 @ 3 months @ 450 = 14.06 5,240 Less Taken for business use (LIFO) Closing inventory 10 @ 384 Sales commission:

FIFO 21/2% @ 5,432 = 135.80

Depreciation:

FIFO 1/8 @ 3 months @ 384 = 12.00

384 3,840 4,190

(b) Mary Smith’s income, 3 months to 31 August 2019: (a) Inventory at 9 March 2018 Sales at cost [w1] Purchases Sales returns [w2] Purchase returns Office cleaning Inventory with Marketing [w3] Sale or return [w4] Free sample Inventory at 28 February 2018

£ Increase 33,400

£ Decrease

£ 100,600

14,000 3,336 850 1,320 320 35,890

600 111 20 (17,956)

17,934 118,534

Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual

Workings 1) (43,838  100/105)  100/125 2) 4,170  100/125 3) 1,650  100/125 4) 800  100/125 = 640; 1/2 sold = 320. (b) Revised net profit for the year ending 28 February 2018 £ Draft net profit Add: Undervaluation of inventory Goods sold on sale or return [w5] Less:

£ 249,600

17,934 400 18,334 267,934 600 267,334

Office cleaning material

Revised total current assets at 28 February 2018 £ 300,000 17,934 317,934

Draft current assets Add: Undervalued inventory Revised total current assets Workings 5) 320  125/100

Answer to Question 19.1A

BA 1

• Chapter 21 covers depreciation. A spreadsheet can be used to create what is commonly known as a ‘fixed asset register’. This is a list of all the individual non-current assets that the business owns, together with their date of purchase, expected useful life, expected residual value and so on. Some fairly simple formulas can then be employed to automatically calculate the monthly depreciation charge on each asset. (Accounting software will often have a ‘fixed asset register’ module that can alternatively be used for this purpose, but some businesses will still prefer to use a spreadsheet.)

• Chapter 42 covers management accounting, of which budgeting is a central aspect. Spreadsheets are very commonly used to create annual budgets and forecasts. The structure of a spreadsheet is ideal for presenting a budget for the coming year, with a different column for each month and a row for each different item of revenue or cost. Moreover, as long as the formulas are written correctly, small changes in expectations during the budget-setting process can be input and the detailed forecast for each of the next 12 months will be updated automatically, saving hours of manual recalculations.

Similarly, spreadsheets are ideal specifically for answering ‘what-if’ questions: different forecast data can be entered (selling prices, sales volumes, cost prices, interest rates etc.) and the spreadsheet will instantly display the financial impact of those assumptions. The use of spreadsheets in this way to explore the impact of different strategies and scenarios is extremely common.

• Extended trial-balances are referred to in Chapter 22 and spreadsheets are ideal for creating these. Simple formulas can be used to add the initial trial balance and the adjustments to automatically create a final trial balance and financial statements. By avoiding repetitive manual calculations, a significant amount of time is saved by using a spreadsheet for this work. Moreover, once a template is set-up it can be used over and over again to help produce financial statements in future periods, or for other businesses.

• A fourth example would be for ‘books of original entry’, covered in part 2 of the text. For example, a sole trader starting in business could simply start by keeping a cash book in Excel, most likely in a multiple column format. A very small business could function without purchasing specialist accounting software (initially at least) and simply record all business receipts and payments on a spreadsheet.

Using a spreadsheet for this purpose would offer various advantages: for example, the column totals would be added up automatically, it would be easy to insert new columns as the business grew, and the workbook could be emailed to the sole trader’s accountant at the end of the year of the purposes of producing the business’s final accounts.

Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual

Answer to Question 19.2A BA 1 This particular US company misrecorded over $3 billion of expenses as assets in 2001 and 2002. In other words, over $3 billion of ‘revenue expenditure’ was treated as ‘capital expenditure’: the difference between these two is covered in Chapter 17 of the text. In this particular case, the company’s assets were overstated by some $3 billion, its expenses were understated by $3 billion, and profits were therefore overstated by $3 billion. The fraud was discovered by the internal auditors of the company. The discovery ultimately resulted in the company filing for bankruptcy, 500,000 people losing their jobs, and the CEO (along with several accounting staff) going to prison.

Answer to Question 19.3A

BA 1

Some people think that clever tax planning is simply sound business strategy and that there is no ethical problem. Arguments might include: 1) A company has a legal and moral obligation to its shareholders to maximise its value, and therefore has an obligation to make every effort to reduce its tax bill to the lowest possible level within the bounds of the law. Tax advisers are simply helping companies fulfil their obligations.

2) Some argue that companies’ efforts to minimise the tax they pay on their profits actually brings benefits to society: paying less tax means they have more money to invest in expansion and job creation.

Moreover, a company’s continued success means that it will contribute even more in tax by way of PAYE and national insurance (i.e. taxes on their employees’ wages) and business rates (i.e. taxes on their business premises). ‘Tax-friendly’ economies attract more investment and grow faster which ultimately benefits everyone, it is argued.

3) ‘Fairness’ is both a subjective and emotive concept. Many would agree that companies should pay their ‘fair share’ of tax but who decides what is fair and what is unfair? It is unreasonable to expect tax advisers and their clients to make that judgement themselves; all we can expect is for them to remain within the law. Equally, the tax authorities are really only in a position to judge objectively whether an arrangement is legal, not whether it is ‘fair’.

The onus is therefore on the government to tighten up tax legislation to remove loopholes and reduce the scope for clever tax planning schemes. Individuals, businesses and their advisers need certainty and this can only be provided by the law.

Others would say that creation of complex schemes to avoid tax is an unethical activity, regardless of whether the schemes are technically legal. Arguments might include: 1) Tax revenues are needed to provide vital public services, such as healthcare, education, social care and policing. A society without this infrastructure would be completely uncivilised. Tax is therefore a levy that must be paid by everyone for the privilege of living in a civilised country. It is unacceptable for accounting firms to be advising wealthy clients on how to construct their affairs in order to avoid paying this levy. This is especially because (for example) successful companies indirectly gain a huge benefit from being able to trade in a country that has a strong infrastructure of schools, hospitals, roads and other public services.

2) Broadly speaking, companies and individuals should pay tax in proportion to their income.

Suppose, for example, a multinational coffee chain has hundreds of profitable coffee shops in the UK: It is undoubtedly ‘fair’ that it should pay UK tax on those profits at the same rate as any other coffee shop companies in the UK. Using a clever scheme to ‘shift’ the profits to another country to avoid paying tax in the UK may be smart tax planning and completely legal, but it is certainly inequitable.

3) All professional accountants have a duty to act ethically, so it is not appropriate for them to be promoting extreme tax-avoiding schemes to their clients. The international code of ethics for accountants instructs that they should ‘avoid any action that discredits the profession’. Given the public outcry that has surrounded some recent high profile cases in the UK it is clear that many feel that tax advisers who promote the more aggressive tax planning schemes are breaching this instruction.

Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual

Answer to Question 19.4A BA 1 Suggestions could include charities, religious organisations, and trade unions. In other words, in addition to the ‘public sector’ there are various other types of organisation whose primary purpose is something other than to make a profit.

Answer to Question 19.5A BA 1 Three suggestions could be: Internal audit Accountants in practice provide ‘external’ audit services in the sense that they are independent firms that review the financial statements of their client companies. In contrast ‘internal auditors’ are typically employees of the company itself: their task is to monitor and evaluate whether its own systems and procedures are working properly and to advise management on how things might be improved.

All companies (above a certain size) are legally required to have their financial statements reviewed by external auditors but there is no legal requirement for businesses to employ their own internal auditors. It will therefore tend to be larger organisations that can afford to employ them.

Forensic accounting ‘Forensic’ literally means appropriate for use in a court of law, so ‘forensic accountants’ are needed when legal cases that have a significant financial dimension require experts to provide evidence in relation to exactly what has happened. ‘Forensic accountants’ will generally therefore involved with investigating events (a financial fraud would be just one example), supplying their findings to solicitors for use in court, and sometimes appearing in court themselves as expert witnesses.

Carrying out in-depth investigations can be arduous and require high levels of dedication and attention to detail: forensic accountants may need to examine accounting documents and records meticulously, identify discrepancies, quantify losses, trace where funds may have gone and how they might be recovered.

Reports of their findings will also have to be written with a high degree of precision and clarity. And carrying out the role of ‘expert witness’ in court will require (among other things) excellent oral communication skills.

Insolvency ‘Insolvency practitioners’ (IPs) are usually accountants or are insolvency specialists working for firms of accountants. It is a highly specialised field. Their main aim is essentially to sort out the financial situation of people or businesses that are in severe financial difficulty. For example, IPs may act as ‘liquidators’ of a company that is in such serious financial difficulty that it needs to be shut down permanently (also known as ‘winding up’ a company).

‘Liquidation’ is something of a last resort and the IPs will normally first try to rescue the company, so the company will typically first be placed in ‘administration’: the IPs, acting as ‘administrators’, will take over running of the company and decide what the best outcome is (which might include reorganising the company and negotiating with creditors so that it can keep trading, selling the business as a going concern to another company, or closing the company down altogether).

Alternatively, lenders might appoint IPs to act as ‘receivers’ whose role is to take over the running of the company specifically to sell some of its assets so that the lenders can be repaid.

Answer to Question 19.6A

BA 1

(a) Advantages of training with one of the Big Four might include: • They are large, multinational organisations with the infrastructure and resources to provide first class training.

• They are prestigious, world-renowned firms. Working for them will tend to impress future employers later in your career.

• You will earn more: at every level, salaries will be a bit higher than at smaller firms.

• If you manage to reach the top of a Big Four firm (i.e. to become a partner) then you will be extremely well-paid.

• Big Four firms will have some large, prestigious client companies which could lead to job opportunities with those companies in the future (if your plan is to transfer to industry).

Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual

• A bigger firm means a bigger network of potential contacts that could be useful later in your career.

• Multinational firms also potentially offer opportunities for overseas secondments. (b) Possible disadvantages could be: • Competition for trainee positions at the Big Four is extremely fierce so (unless you are an exceptionally strong candidate) restricting your applications to these four may not be wise.

• Some may find the working environment rather too competitive and pressured for their tastes.

• Only a tiny percentage of trainees will succeed in becoming partner in a Big Four firm. (c) Possible advantages to training with a smaller firm might include: • Smaller firms will generally mean smaller clients. This has various implications: • You may be better-placed to see the whole picture of the client’s business, rather than just working on one or two small aspects of a big project • You may work on smaller jobs in smaller teams, which can mean greater responsibility, more face-toface exposure to clients, and earlier involvement in higher-level discussions with clients. In contrast, at the Big Four you could be given rather mundane, low profile tasks in the first couple of years.

• You may be exposed to a wider range of different clients, rather than being stuck working on one big client for weeks on end.

• Generally speaking, you might tend to work slightly fewer hours with slightly less pressure at a smaller firm. The work-life balance may be better.

• There may be more opportunity to have a closer working relationship with partners, and be genuinely ‘mentored’ by one of them.

It is quite understandable that many students would prefer to qualify with a Big Four firm but that doesn’t mean it is wise to rule out smaller firms altogether. Above all, qualifying as a professional accountant is a very worthwhile achievement whatever size of firm you train with, and smaller firms can sometimes have their own advantages.

Answer to Question 19.7A BA 1 If you are reading this book you are probably a student but you might be doing a course in business, management, law, or some other discipline, and have no intention whatsoever of becoming an accountant.

However, your aim will probably be to become a manager of some description, or at least work in some sort of senior role. You will therefore have to make decisions, and for many of these decisions you will need accounting information.

This information will be provided to you by the accountants in your organisation, but you’ll need to understand exactly what it means before you can begin to use it effectively. Similarly, the success or failure of your decisions will often be primarily judged by whether they prove to be profitable for your organisation, so you’ll need an understanding of how business profits are calculated.

If you understand the basics of accounting you will also understand the financial reports that will be discussed in meetings, you will be able to communicate far more effectively with your colleagues in the finance department, and you’ll understand how budgeting works and how your actual performance will be monitored against the plan. You’ll also understand that accounting is as much an art as it is a science, and that many figures in financial statements are imprecise estimates based on questionable assumptions.

In so many ways, understanding accounting will help make you a better, more effective manager, whatever field you end up working in.

Answer to Question 19.8A BA 1 There could be various suggestions. Some students will occasionally be more familiar with new technologies on the horizon than some of their instructors! However, one suggestion would be the potential emergence of a cashless society. Some observers believe that (over the course of the coming decades) notes and coins will disappear altogether and all payments will be made using either cards or (more likely) smartphones.

This could potentially set some small businesses free of almost all bookkeeping tasks. All business receipts and payments could be transacted via the business’s smartphone(s), and the inf ormation regarding every transaction could be automatically recorded on some simple accounting software. All invoices would also be exchanged electronically, so there would be no need for filing or paperwork either. Basic financial statements could then be automatically produced by the accounting software. A cashless society could massively reduce the bookkeeping burden on small businesses.

Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual

However, other observers think that the UK will never become completely cashless. For various reasons, certain sections of society might resist the change and notes and coins will stubbornly refuse to be entirely replaced. It certainly seems true that the prospect of a fully cashless society is a long way off in the UK. Certain other countries have made more progress in this direction than the UK: for example, the use of notes and coins has fallen significantly in Sweden in recent years and a completely cashless society seems a rather more realistic proposition there than it is in the UK.

Answer to Question 20.4A

BA 1

(a) 2017 Dec 31 Various accounts receivable 2018 Dec 31 Various accounts receivable 2019 Dec 31 Various accounts receivable (b) 2017 Dec 31 Balance c/d 2018 Dec 31 Balance c/d

2019 Dec 31 Profit and Loss Dec 31 Balance c/d

Bad Debts 2017 2,480 Dec 31 Profit and Loss 2018 5,216 Dec 31 Profit and Loss 2019 10,620 Dec 31 Profit and Loss

2,480 5,216 10,620

Allowance for Doubtful Debts 2017 4,200 Dec 31 Profit and Loss 2018 6,160 Jan 1 Balance b/d Dec 31 Profit and Loss 6,160 2019 1,000 Jan 1 Balance b/d 5,160

4,200 4,200 1,960 6,160 6,160

6,160 (c) Account receivable Less Allowance for doubtful debts

Answer to Question 20.6A

Balance Sheet (extracts) 2017 84,000 154,000 4,200 79,800 6,160

6,160

2018 147,840

2019 172,000 5,160

166,840

BA 1

(a) Write-off £14,300 + increase in allowance £900 = £15,200 expense (b) Write-off £29,400 – decrease in allowance £1,700 = £27,700 net expense (c) Written-off Debt recovered that had been previously written-off Decrease in allowance Net total charge in Income Statement (d) Original total of accounts receivable i) Amount must be written-off, i.e. removed from accounts receivable ii) There is merely doubt over whether this amount will be received: it therefore remains in accounts receivable, and an allowance for it is set up separately iii) A separate allowance has already been set-up for this, implying the debt is still included in the £97,000. It has now been received, so total accounts receivable are reduced by £1,523 iv) This amount has already been written-off, so the debt is not included in the £97,000.

Receipt will thus be credited to an Income Statement account Revised total of accounts receivable

3,960 (261) (150) 3,549 97,000 (1,375) (1,523) 94,102

Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual

Answer to Question 20.8A

BA 1 Allowance for Doubtful Debts 2018 2,700 Jan 1 Balance b/d Dec 31 Profit and loss 2,700

2,166 534 2,700

Provision for Discount on Accounts receivable 2018 648 Jan 1 Balance b/d Dec 31 Profit and loss 648

526 122 648

2018 Dec 31 Various debtors

Bad Debts 2018 16,349 Dec 31 Profit and loss

16,349

2018 Dec 31 Total for year

Discounts Allowed 2018 3,857 Dec 31 Profit and loss

3,857

2018 Dec 31 Balance c/d

2018 Dec 31 Balance c/d*

Income Statement (extract) Bad debts Increase in allowance for doubtful debts Discounts allowed Increase in provision for discounts on accounts receivable

16,349 534 3,857 122

* 1% of [67,500 − 2,700]

Answer to Question 20.11A

BA 1

Revised receivables are 145,000 – 6,000 = 139,000 Allowance required 139,000*4% = 5,560, that is, a increase in the allowance of 1,060 Therefore impact on net profit: Bad debts written off Increase in allowance for bad debts Bad debts recovered Net charge to income statement (i.e. negative impact on net profit)

Answer to Question 21.4A

BA 1

(a) Straight line Photocopier cost Yr 1 Depreciation

23,000 4,750* 18,250 4,750 13,500 4,750 8,750 4,750 4,000

Yr 2 Depreciation Yr 3 Depreciation Yr 4 Depreciation * Calculation: 23,000 − 4,000 4

=

(29,200) (1,060) 830 (29,430)

19,000 = 4,750 4

(b) Reducing balance Photocopier cost Yr 1 Depn 35% of 23,000 Yr 2 Depn 35% of 14,950 Yr 3 Depn 35% of 9,717 Yr 4 Depn 35% of 6,316

23,000 8,050 14,950 5,233 9,717 3,401 6,316 2,211 4,105

Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual

Answer to Question 21.8A

BA 1

(a) Reducing balance Printer cost Yr 1 Depreciation 60%

800 480 320 192 128 77 51 31 20 12 8

Yr 2 Depn 60% of 320 Yr 3 Depn 60% of 128 Yr 4 Depn 60% of 51 Yr 5 Depn 60% of 20

(b) Straight line Printer cost Yr 1 Depreciation

800 160* 640 160 480 160 320 160 160 160 –

Yr 2 Depreciation Yr 3 Depreciation Yr 4 Depreciation Yr 5 Depreciation * Calculation: 800 = 160 5

Answer to Question 21.6A

BA 1

(a) Reducing balance Bus cost Yr 1 Depreciation 25%

56,000 14,000 42,000 10,500 31,500 7,875 23,625 5,906 17,719

Yr 2 Depn 25% of 42,000 Yr 3 Depn 25% of 31,500 Yr 4 Depn 25% of 23,625

(b) Straight line Bus cost Yr 1 Depreciation

56,000 9,500* 46,500 9,500 37,000 9,500 27,500 9,500 18,000

Yr 2 Depreciation Yr 3 Depreciation Yr 4 Depreciation * Calculation: 56,000 − 18,000 4

Answer to Question 21.10A (a)

= 38,000 = 9,500 4

BA 1

Purchased in Feb 2016, original cost Depreciation expense for year to 31/8/2016 (at 30%) Cost minus accumulated depreciation at 31 August 2016 Depreciation expense for year to 31/8/2017 (at 30% of NBV) Cost minus accumulated depreciation at 31 August 2017 Depreciation expense for year to 31/8/2018 (at 30% of NBV) Cost minus accumulated depreciation at 31 August 2018 Depreciation expense for year to 31/8/2019 (at 30% of NBV) Cost minus accumulated depreciation at 31 August 2019 Depreciation expense for year to 31/8/2020 (at 30% of NBV)

240,000.00 (72,000.00) 168,000.00 (50,400.00) 117,600.00 (35,280.00) 82,320.00 (24,696.00) 57,624.00 (17,287.20)

(b) The reducing balance method will allocate a greater proportion of the asset’s original cost to expenses in the early years of use, and a smaller proportion in its later years. This may be appropriate if the benefits obtained by the business from using the asset decline over time. See text for further explanation.

Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual

Answer to Question 21.11A

BA 1

Part (a) Van: (11,360 – 2, 000)/4 = 2,340 Equipment (7,000 – 1,000)/10 = 600 Total depreciation expense = 2,940 Part (b) Van: (11,360 – 2,000)/4 = 2,340 x 9/12 months = 1,755 Equipment (7,000 – 1,000)/10 = 600 x 3/12 months =150 Total depreciation expense = 1,905

Answer to Question 21.13A

BA 1

(a) Balance 1 April 2020 Add Acquisitions during year

Plant at Cost 372,000 96,000 468,000 44,400 423,600

Less Disposals (36,000 + 4,000 + 4,400) Balance 31 March 2021 (b) Provision for Depreciation of Plant Balance 1 April 2020 Less Depreciation on disposals (W1)

205,400 25,200 180,200 48,680 228,880

Add charge for year 20% × (423,600 − 180,200) Balance 31 March 2021 Plant Sold Cost: year to 31 March 2017 Depreciation: year to 31 March 2017

20%

Depreciation: year to 31 March 2018

20%

Addition Depreciation: year to 31 March 2019

20%

Depreciation: year to 31 March 2020

20%

40,000 8,000 32,000 6,400 25,600 4,400 30,000 6,000 24,000 4,800 19,200

(W1) Depreciation accumulated: 8,000 + 6,400 + 6,000 + 4,800 = 25,200. (c) Sale of plant Less Cost (40,000 + 4,400) Depreciation Book value at date of sale Loss on disposal

13,700 44,400 25,200 19,200 5,500

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Answer to Question 21.16A (a) 2019 Jan 1 2020 Jan 1 Oct 1

(b) 2019 Jan 1 Jul 1

BA 1 Machinery 2019 2,800 Dec 31 Balance c/d 2020 2,800 Dec 31 Balance c/d 3,500 6,300

Bank Balance b/d Bank

6,300 6,300

Fixtures 2019 290 Dec 31 Balance c/d 620 910 2020 910 Dec 31 Balance c/d 130 1,040

Bank Bank

2020 Jan 1 Balance b/d Dec 1 Bank

(c) 2019 Dec 31 Balance c/d 2020 Dec 31 Balance c/d

2,800

910 910 1,040 1,040

Accumulated Provision for Depreciation: Machinery 2019 420 Dec 31 Profit and loss 2020 1,302 Jan 1 Balance b/d Dec 31 Profit and loss 1,302

420 420 882* 1,302

* (2,800 − 420)  15% = 357 3,500  15% = 525 882 2019 Dec 31 Balance c/d 2020 Dec 31 Balance c/d

Accumulated Provision for Depreciation: Fixtures 2019 46 Dec 31 Profit and loss 2020 96 Jan 1 Balance b/d Dec 31 Profit and loss 96

46 46 50* 96

* (910 − 46)  5% = 43.2 130  5% = 6.5 49.7 rounded to 50. (d) 31 December 2019 Machinery at cost Less Depreciation to date Fixtures at cost Less Depreciation to date 31 December 2020 Machinery at cost Less Depreciation to date Fixtures at cost Less Depreciation to date

Balance Sheet (extracts) 2,800 420 910 46 6,300 1,302 1,040 96

2,380 864

4,998 944

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Answer to Question 21.19A

BA 1

Note: Lorry names have been added for clarity.

Lorries 2019 99,600 June 1 32,800 August 21 39,000 2020 March 6 37,600 31 209,000

2019 April 1 Balance b/d June 7 Bank October 30 Bank 2020 March 6 Lorry disposal – F 2020 April 1

2019 June 1 August 21 2020 March 31

2019 June 1 August 21 2020 March 6

Balance b/d

Lorry disposal – B Lorry disposal – A Balance c/d

Lorry disposal – B Lorry disposal – A

19,600 31,200

Lorry disposal – E Balance b/d

39,000 119,200 209,000

119,200 Accumulated depreciation on lorries 2019 7,840 April 1 Balance b/d 42,560 24,960 2020 March 31 Depreciation (119,200 × 20%) 23,840 33,600 66,400 66,400 2020 April 1 Balance b/d 33,600

Lorries – B Lorries – A

Lorry disposal 2019 19,600 June 1 31,200

Accumulated depreciation on lorries – B

7,840

Lorries – E

39,000

Bank

10,500

1

August 21 Accumulated depreciation on lorries – A 24,960 21 Bank 7,000 2020 March 6 Lorries – F 37,600 31 Profit and loss (loss on disposal) 1,900 89,800

89,800 Bank 2019 June 1 August 21

2020 March 31

Accumulated depreciation on lorries

Answer to Question 21.21A Workings: AAT 101

10,500 7,000

Lorry disposal – B Lorry disposal – A

2019 June 7 Lorries – D October 30 Lorries – E

Depreciation on lorries 2020 March 31 23,840

Profit and loss

32,800 39,000

23,840

BA 1

Cost Less Estimated residual value Estimated total depreciation Estimated life 5 years Depreciation charge per year Accumulated depreciation at 1.4.2017 2 years 6 months @ 1,200

8,500 2,500 6,000 1,200 3,000

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Depreciation 1.4.2017 to 30.6.2017 3 months @ 1,200 p.a.

Accumulated depreciation at 30.6.2017 Cost was Written-down value on disposal Trade-in allowance Loss on disposal

300 3,300 8,500 5,200 5,000 200 12,000 2,000 10,000

DJH 202

Cost Less Estimated residual value Estimated total depreciation Estimated life 8 years Depreciation charge per year Accumulated depreciation at 1.4.2017 2 years @ 1,250 Remainder of estimated depreciation Adjust to cover 4 years in future: i.e. 7,500  4 now yearly charge Depreciation for year to 31 March 2018 AAT 101 As above As above DJH 202 Cost 15,000 – residual value 4,000 KGC 303 = 11,000  5 years = 2,200 p.a.

For 9 months 30.6.2017 to 31.3.2018 2,200  9/12

1,250 2,500 7,500 1,875 300 1,875

1,650 3,825

(a) (Dates omitted) Motor vehicles Motor vehicle disposals Pinot Finance Bank Purchase of KGC 303 Motor vehicle disposals Motor vehicles Cost of vehicle AAT 101 Accumulated provision for depreciation: Motors Motor vehicle disposals Depreciation to date of disposal of AAT 101 Profit and loss Motor vehicle disposals Loss on disposal of vehicle AAT 101

Journal

Cr 5,000 6,000 4,000

8,500 8,500 3,300 3,300 200 200

(b) Profit and loss Provision for depreciation: Motor vehicles Depreciation on motor vehicles for year to 31 March 2018 (c) (Dates omitted) Balance b/d Purchase of KGC 303

Dr 15,000

Motor Vehicles 20,500 Motor vehicle disposals 15,000 Balance c/d 35,500

3,825

3,825

8,500 27,000 35,500

Accumulated Provision for Depreciation: Motor Vehicles Motor vehicle disposals Balance c/d

3,300 6,025 9,325

Balance b/d Profit and loss

5,500 3,825 9,325

Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual

Answer to Question 21.23A

BA 1

(a) i)

Depreciation on Machines each year 2019 2020 Machine 1 (95% 40,000 @ 10%) 3,800 (12 months) 3,800 (12 months) Machine 2 (95% 40,000 @ 10%) 3,800 (12 months) 3,800 (12 months) Machine 3 (95% 15,200 @ 10%) 361 (3 months) 1,444 (12 months) Machine 4 (95% 15,200 @ 10%) 361 (3 months) 1,444 (12 months) Machine 5 (95% 20,000 @ 10%) Total per year 8,322 10,488 ii) Sale proceeds Machine 3 cost Accumulated depreciation (361 + 1,444 + 722)

2021 3,800 (12 months) 3,800 (12 months) 722 (6 months) 1,444 (12 months) 950 (6 months) 10,716 12,640

15,200 2,527 12,673 33

Loss on sale of Machine 3

(b) Assuming that the depreciation rate was set to match the estimated useful economic life, it should not matter which depreciation method was used. The overall reported profits during the economic life of the vehicle would be identical. However, the diminishing balance method (or reducing balance method) will result in lower reported profits in the first few years, but higher reported profits in the later years.

Answer to Question 21.25A

BA 1

Annual depreciation charge on Z-15 machine = 19,000 x 10% = 1,900 per year Dixie owned the Z-15 for three years (i.e. 1/4/16 – 31/3/19).

So accumulated depreciation after three years was 1,900  3 = 5,700.

Thus the net book value of the Z-15 at the date it was traded-in was 19,000 – 5,700 = 13,300 Trade-in value given by vendor of the Z-18 =32,000 list price – 20,000 settlement figure = £12,000 trade-in value.

Therefore the profit or loss on disposal: Effective disposal proceeds (i.e. trade-in value received) NBV of Z-15 at date of disposal Loss on disposal

Answer to Question 21.27A 2019 Jan 1

Balance b/d Bank

2019 Machinery

£ 12,000 (13,300) (1,300)

BA 1 Machinery 2019 52,950 Machinery disposal 2,480 Dec 31 Balance c/d 55,430

2,800 52,630 55,430

Machinery disposal 2019 2,800 Accumulated provision for depreciation – machinery Bank Dec 31 Profit and loss (loss on disposal) 2,800

1,120 800 880 2,800

Accumulated provision for depreciation – machinery 2019 Machinery disposal 1,120 Jan 1 Balance b/d Dec 31 Balance c/d 29,813 Dec 31 Depreciation 30,933 2019

25,670 5,263 30,933

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2019 Jan 1

Office furniture 2019 2,860 Dec 31 Balance c/d 320 3,180

Balance b/d Bank

2019 Dec 31 Balance c/d

3,180 3,180

Accumulated provision for depreciation – office furniture 2019 Jan 1 Balance b/d 1,649 Dec 31 Depreciation 1,649

1,490 159 1,649

Balance Sheet extract as at 31 December 2019 Machinery, at cost Less Accumulated depreciation

52,630 29,813

Office furniture, at cost Less Accumulated depreciation

3,180 1,649

22,817 1,531

Answer to Question 21.28A (a)

BA 1

P Mackie Income Statement for the year ending 30 April 2020

Sales Less Returns inwards

26,200 670 25,530

Less Cost of sales Opening inventory Add Purchases Less Returns outwards

2,266 16,450 392 16,058 295 18,619 2,860

Carriage inwards Less Closing inventory

15,759 9,771 Gross profit Less Expenses: Carriage outwards Salaries Motor expenses Rent Sundry expenses Bad debts Depreciation: Fixtures and fittings Motor vehicles

534 2,692 729 843 1,390 365 80 1,900 8,533 1,238

Net profit Balance Sheet at 30 April 2020 Non-current assets Fixtures and fittings (800 – 240 – 80) Motor vehicles (7,600 – 3,800 – 1,900)

480 1,900 2,380

Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual

Current assets Inventory Accounts receivable (4,965 – 365) Bank Cash

2,860 4,600 1,648 150 9,258 3,277

Less Current liabilities – Accounts payable

5,981 8,361 Capital account Opening balance Add Net profit

15,523 1,238 16,671 8,400 8,361

Less Drawings (b) See text Chapters 20 (bad debts) and 21 (depreciation).

Answer to Question 21.30A

BA 1

(a)

Annual Depreciation Charge (ii) Diminishing balance 60%  1,800 = 1,080 60%  720 = 432 60%  288 = 173 60%  115 = 69 1,754

(i) Straight line

Year 1 Year 2 Year 3 Year 4

450 450 450 450 1,800

(b) (Dates omitted) Balance b/d Assets disposals

(i) Laser Printer 1,800 Assets disposals

1,800 1,685 35 1,720

(iii) Assets Disposals 1,800 Provision for depreciation 120 Bank 1,920

1,720 200 1,920

Answer to Question 22.2A

(b) 2020 Jun 30 Cash and bank 30 Owing c/d

350 450 450 550 1,800

(ii) Accumulated Provision for Depreciation: Laser Printer 1,720 Balance b/d Profit and loss (69  6/12) 1,720

Laser printer Profit and loss

(a) 2019 Jul 1 Stock b/d 2020 Jun 30 Cash and bank

(iii) Units of output 35,000/180,000  1,800 = 45,000/180,000  1,800 = 45,000/180,000  1,800 = 55,000/180,000  1,800 =

BA 1 Stationery 2020 60 Jun 30 Profit and loss 30 Inventory c/d 240 300 General Expenses 2019 470 Jul 1 Owing b/d 60 2020 Jun 30 Profit and loss 530

205 95 300

32 498 530

Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual

(c) 2020 Jun 30 Cash and bank 30 Rates owing c/d

Rent and Rates 2019 5,410 Jul 1 393

Owing b/d Rent Rates

2020 Jun 30 Profit and loss 30 Rent prepaid c/d 5,803 (d) 2020 Jun 30 Cash and bank 30 Owing c/d

(e) 2019 Jul 1 Owing b/d 2020 Jun 30 Profit and loss

Answer to Question 22.4A

Motor Expenses 2019 1,410 Jul 1 Owing b/d 67 2020 Jun 30 Profit and loss 1,477 Commission Receivable 2020 50 Jun 30 Cash and bank 30 Owing c/d 1,132 1,182

Lighting and Heating 2019 192 Dec 31 Profit and loss 1,300 31 Inventory c/d 810 162 2,464

Balance b/d Bank (electricity) Bank (oil) 31 Owing c/d

92 1,385 1,477

1,100 82 1,182

2,259 205

Insurance 2019 1,410 Jun 30 Bank 1,164 Dec 31 Profit and loss 1,464 31 Prepaid c/d * 4,038

Balance b/d Bank (fire) Bank (general)

* Prepaid calculated: Fire 5 months 1,164 @ 5/12 = General 7 months 1,464 @ 7/12 =

Answer to Question 22.6A

5,022 370 5,803

BA 1

2019 Jan 1

2019 Jan 1

220 191

485 854 1,339

BA 1

(a) £2,930 paid in 2020 + £910 still owing re 2020 - £840 of payments made during 2020 that related to lighting & heating used in 2019 = £3,000 total expense (b) Expenses would be understated by £650, so net profit would be overstated by £650. (c) Premium is 20% more than the previous year, so the previous premium must have been 7,200/1.2 = 6,000 (i.e. 6,000 + 20% = 7,200). Insurance expense will therefore be: 1/4/18 to 31/8/18 was at the old price (5 months): 6,000  5/12 = 2,500 1/9/18 to 31/3/19 was at the new price (7 months): 7,200  7/12 = 4,200 Total expense in Income Statement 6,700

2,464

82 2,617 1,339 4,038

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(d) Electricity for three months to 31/5/18 = £864; therefore, as at 30/4/18, £864  2/3 = £576 had been used but not billed so represents an accrual. (The rent was paid in advance so a prepayment is required for rent, not an accrual.) (e) Calculations as follows: 1/9/19 to 31/3/20 was at the lower rent (7 months): 45,600  7/12 = 26,600 1/4/20 to 31/8/20 was at the higher rent (5 months): 51,600  5/12 = 21,500 Total expense in Income Statement 48,100 Prepayment in Balance Sheet: 1 month prepaid = 1/12  51,600 4,300 (f) Additional bills of 886 paid in April + 291 outstanding re April + one month of prepaid insurance ‘consumed’ in April (565/5) = 1,290 total expense.

Answer to Question 22.7A BA 1 No set answer.

Note: Avoid very technical language as it is for a non-accountant. Keep it fairly brief. (a) ‘Assets’ means the resources possessed by the business, but there is one important qualification to this statement. That is that the asset must have cost the business something that can easily be measured in monetary terms. Whilst, therefore, your skill and knowledge may be an ‘asset’ in ordinary everyday language, it cannot be classed as an ‘asset’ in an accounting sense as it did not cost anything to the business. (b) The house you live in, we assume, is not used at all for your business. It cannot therefore be included as a business asset. Accordingly the increase in the value is also irrelevant.

If the house is owned by the business it would be included as an asset at £130,000 until a proper revaluation takes place. (c) Assets are called non-current assets when they are of long life, are to be used in the business and were not bought with the main purpose of resale. Examples are buildings, machinery, motor vehicles and fixtures and fittings.

Assets are called current assets when they represent cash or are primarily for conversion into cash or have a short life. An example of a short-lived asset is that of the stock of oil held to power the boilers in a factory, as this will be used up in the near future. Other examples of current assets are cash itself, stocks of goods, debtors and bank balances. (d) Some vehicles may have been bought specifically for resale, and are therefore current assets. Other vehicles, such as a breakdown truck, have been bought for use, not resale, and are consequently noncurrent assets. See definitions in (c) above. (e) The profit in the income statement is calculated by matching up sales for the year with those costs that have been incurred in order to achieve the sales. Some of the costs were paid for in a previous year, some items are still owed for. This means that costs do not mean items paid for in the year. Similarly, a lot of sales will still be owed for – see accounts receivable – so that this does not equal cash received in the year.

As many items in the income statement do not equal cash received or paid out, then obviously there is not necessarily any easy comparison between profit and cash and bank balances. (f) No, that is not true. Depreciation represents the part of the original cost used up in the year. As equipment may last for several years, only part will be charged against 1 year.

The portion of the original cost of the asset that has not yet been expensed is shown in your balance sheet.

The total cost will eventually be charged against your profits, but spread over several years. The total costs will only be charged once against the profits.

Answer to Question 22.10A BA 1 J Wright Income Statement for the year ending 31 March 2019 Sales Less Returns in Less Cost of goods sold: Opening inventory Add Purchases Less Returns out Less Closing inventory Gross profit Add Discounts received Less Expenses:

127,245 3,486

123,759

7,940 61,420 1,356

60,064 68,004 6,805

61,199 62,560 62 62,622

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Wages and salaries (39,200 + 3,500) Rent and insurance (8,870 − 600) Carriage outwards General office expenses (319 + 16) Discounts allowed Increase in allowance for doubtful debts Depreciation: Fixtures and fittings Delivery van Net profit Balance Sheet as at 31 March 2019 Non-current assets Fixtures and fittings Less Accumulated depreciation (570 + 190) Delivery van Less Accumulated depreciation (700 + 1400) Current assets Inventory Accounts receivable Less Allowance for doubtful debts Prepaid expenses Cash in hand

190 1,400

42,700 8,270 3,210 335 2,480 110 1,590

1,900 760 5,600 2,100 12,418 740

Less Current liabilities Accounts payable Expenses owing (3,500 + 16) Bank overdraft

1,140 3,500 4,640

6,805 11,678 600 140 11,400 3,516 2,490

Financed by: Capital Opening balance Add Net profit

19,223 23,863

17,406 6,457

23,930 3,927 27,857 (21,400) 6,457

Less Drawings

Answer to Question 22.12A

Sales Less Cost of goods sold Opening inventory Purchases Carriage inwards

58,695 3,927

BA 1

Mr Yousef Income Statement for the year ending 31 May 2019

Less closing inventory Gross profit Less Carriage outwards Salaries and wages Rent, rates and insurance (6,622 + 210 – 880) Postage and stationery Advertising Bad debts Increase in allowance for doubtful debts Depreciation Net profit

138,078 11,927 82,350 2,211 96,488 13,551 2,933 26,420 5,952 3,001 1,330 877 40 8,700

82,937 55,141

49,253 5,888

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Balance Sheet as at 31 May 2019 Non-current assets Equipment at cost Less Accumulated depreciation (19,000 + 8,700) Current assets Inventory Accounts receivable Less Allowance for doubtful debts Prepayments Bank Cash

58,000 27,700 13,551 12,120 170

Current liabilities Accounts payable Expenses accrued

Answer to Question 23.4A

1/1 Bal b/d Credit sales Refunds of credit balances Dishonoured cheques Late payment interest

6,681 51,179

BA 1 Purchases Ledger Control 950 Balance b/d 16,695 Purchases 845 19,410 37,900

23,700 14,200 37,900

BA 1 Sales Ledger Control 36,210 Bad debts 31,470 Bank 260 Discounts Returns in Set-offs to purchases ledger Balance c/d 67,940

Balance b/d Sales day book Bank: Dishonoured cheques

Answer to Question 23.7A

27,560 57,860

53,091 5,888 58,979 7,800 51,179

Less Drawings

Returns Outwards Bank Discounts received Balance c/d

11,950 880 1,002 177 6,471 210

Financed by: Capital: Opening balance Add Net profit

Answer to Question 23.2A

30,300

536 26,306 668 1,878 404 38,148 67,940

BA 1 Sales ledger control account 40,290 Cash from customers 240,740 Bad debt write-offs 2,150 Contras with payables 810 Discounts allowed 1,340 Returns Inwards 31/12 Bal c/d 285,330

213,420 7,220 3,230 4,860 12,280 44,320 285,330

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Discounts received from suppliers Paid to credit suppliers Contras with receivables Returns outwards to suppliers 31/12 Bal c/d

Answer to Question 23.8A a) Balance b/d Credit sales Refunds of credit balances Dishonoured cheques Late payment interest

Purchases ledger control account 4,870 1/1 Bal b/d 223,990 Credit purchases 3,230 Refunds of debit balances 9,780 33,150 275,020

30,490 243,920 610 275,020

BA 1 Sales ledger control account 80,436 Cash from customers 172,139 Bad debt write-offs 797 Set-offs/contras with payables 488 Discounts allowed 1,895 Returns inwards Balance c/d 255,755

147,593 5,164 479 3,441 8,606 90,472 255,755

Purchases ledger control account 1,925 Balance b/d 48,261 95,242 Credit purchases 96,255 479 Refunds of debit balances 242 3,850 43,262 144,758 144,758 b) i) Sales invoice; and ii) credit note c) Benefits include: i) It helps check the accuracy of the entries made in the personal accounts. If at any time the balance on the control account disagrees with the total of all the balances on the purchase ledger control accounts then errors have occurred and can be investigated. ii) It helps prevent fraud: responsibility for the purchase ledger accounts and the control account can be separated, reducing the risk that one person would be able to tamper with both the personal accounts and the control account. iii) It instantly gives a single total for trade payables, avoiding the need (in a manual system) to add up all the balances on the personal accounts in the purchases ledger.

Discounts received Paid to credit suppliers Set-offs/contras with receivables Returns outwards Balance c/d

Answer to Question 24.2A

BA 1 Cash Book 8,340 Bank charges 435 DMC Ltd Balance c/d 8,775

Balance b/d P Fox

25 99 8,651 8,775

Bank Reconciliation Statement as on 31 March 2019 Bank balance per cash book Add Unpresented cheques Less Bankings not yet on bank statement Bank balance per bank statement

8,651 277 8,928 420 8,508

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Answer to Question 24.4A

BA 1

(a) 2019 Jun 1 Balance b/d 7 J May 16 T Wilson 28 F Slack 30 G Baker 30 Flynn

D Hogan: Cash Book 2019 1,410 Jun 5 L Holmes 62 12 J Rebus 75 16 T Silver 224 29 Blister Disco 582 29 SLM 64 30 Bank charges 30 Balance c/d 2,417

180 519 41 22 52 43 1,560 2,417

(b) D Hogan: Bank Reconciliation Statement as on 30 June 2019 Balance in hand per cash book Add unpresented cheque

1,560 22 1,582 582 1,000

Less Bank lodgement not yet on bank statement Balance in hand as per bank statement

Answer to Question 24.6A (a)

BA 1

Thomas P Lee Computation of Bank Balance for Balance Sheet Purposes as on 31 October 2019

Balance per cash book Add Cheque duplicated Traders’ credits not in cash book

15.10 210.10

894.68

Less

29.31

T Andrews: Dishonoured cheque Bank charges not in cash book: Bank commission Bank interest Incorrect entry of cheque (310.84 – 301.84) Standing order not in cash book Corrected bank balance

225.20 1,119.88

169.56 109.10 9.00 15.00

Thomas P Lee Bank Reconciliation Statement as on 31 October 2019 Corrected cash book balance Add Unpresented cheques

331.97 787.91

(b)

Less Bankings not on bank statements Overdraft per bank statement

787.91 395.80 1,183.71 1,895.60 711.89

(c) Briefly: Helps verify correctness of cash book and bank statement.

Answer to Question 24.8A (a) 2020 Dec 6 P Pan 20 C Hook 31 W Britten 31 F Ray 31 Balance c/d

BA 1 F King: Cash Book 2020 230 Dec 1 Balance b/d 265 10 J Lamb 325 19 P Wilson 102 29 K Coull 1,746 30 Tox 31 Bank charges 2,668

1,900 304 261 37 94 72 2,668

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(b) F King: Bank Reconciliation Statement as on 31 December 2020 Bank overdraft per cash book Less Bank lodgements not yet on bank statement

(1,746) (325) (2,071) 37 (2,034)

Add Unpresented cheque Bank overdraft per bank statement

Answer to Question 25.2A

BA 1

Net profit for the year Depreciation Profit on disposal of non-current assets Decrease in inventory Increase in accounts receivable Decrease in accounts payable Net cash flow from operating activities

Answer to Question 25.4A

£’000 347 86 (19) 31 (44) (25) 376

BA 1

Non-current assets at NBV T-account working: £’000 Bal b/d 580 Acquisitions 170

£’000 45 95 610 750

NBV of disposals Depreciation expense Bal c/d

750 Disposal working: Proceeds from disposal of non-current assets (balancing figure) Net book value disposed of (from above) Loss on disposal

Answer to Question 25.5A

£’000 27 (45) (18)

BA 1

Pat Bond Statement of Cash Flows for the year ending 31 December 2020

Operating activities Profit from operations Adjustments for: Depreciation (fixtures 400 + van 4,040) Operating cash flows before movements in working capital Increase in inventory Increase in accounts receivable Decrease in accounts payable Cash generated by operations Tax paid Interest paid

Net cash from operating activities Investing activities Payments to acquire tangible non-current assets (11,000 + 800) Net cash used in investing activities Financing activities Loan received Capital introduced Drawings

42,320 4,440 46,760 (13,600) (3,600) (6,588) (23,788) 22,972 – – – 22,972 (11,800) (11,800) 10,000 20,000 (43,200)

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Net cash used in financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of year (1,800 + 440)

(13,200) (2,028) 2,240 212

Cash and cash equivalents at end of year Bank balances and cash (400 − 188)

Answer to Question 25.8A

212

BA 1

K Rock Statement of Cash Flows for the year ending 30 June 2020 Operating activities Profit from operations Adjustments for: Depreciation (5,200 + 6,300) Loss on sale of tangible non-current assets Reduction in allowance for doubtful debts Operating cash flows before movements in working capital Increase in inventory Decrease in accounts receivable Increase in accounts payable Cash generated by operations Tax paid Interest paid Net cash from operating activities Investing activities Payments to acquire tangible non-current assets Receipts from sale of tangible non-current assets Net cash used in investing activities Financing activities Loan repaid to T Pine Drawings Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year

51,000 11,500 1,600 ( 200) 12,900 63,900 (2,900) 1,600 3,200 – –

– 65,800

(18,100) 15,800 (2,300) (10,000) (38,000)

Cash and cash equivalents at end of year Bank balances and cash

Answer to Question 26.3A

1,900 65,800

(48,000) 15,500 12,600 28,100 28,100

BA 1

(a) B Roy Dr 1,410 : A Ray Cr (b) Cash Dr 94 : Bank Cr (c) D Rolls Dr 734 : D Rollo Cr (d) L Hand Dr 72 : Purchases Cr (e) G Boyd Dr 128 : Cash Cr (Needs double the amount to cancel out the error and replace it with the correct amount.) (f) Sales Dr 320 : Fittings Cr (g) Cash Dr 400 : Bank Cr (Needs double the amount.) (h) Purchases Dr 1,182 : Furnishings Cr

1,410 94 734 72 128 320 400 1,182

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Answer to Question 26.6A (a) Commissions received (b) Bank charges (c) Motor expenses (d) Fax machine (e) Returns Inwards (f) Capital (g) Loan interest (h) Drawings (double the original amount)

Answer to Question 26.7A (a)

BA 1 Dr Dr Dr Dr Dr Dr Dr Dr

430 34 37 242 216 2,000 400 168

: : : : : : : :

Rent received Business rates Bank Purchases Returns Outwards Loan G Bain Van Purchases

Cr Cr Cr Cr Cr Cr Cr Cr

430 34 37 242 216 2,000 400 168

BA 1

Thomas Smith Corrected Trial Balance as at 31 March 2018

Inventory in trade 1 April 2017 Discounts allowed Discounts received Allowance for doubtful debts Purchases Purchases returns Sales Sales returns Freehold property: At cost Accumulated depreciation Motor vehicle: At cost Accumulated depreciation Capital Bank Trade accounts receivable Trade accounts payable Establishment and administrative expenditure Drawings

10,700 310 450 960 94,000 1,400 132,100 1,100 70,000 3,500 15,000 4,500 84,600 7,100 11,300 7,600 16,600 9,000 235,110

235,110

(b) (Dates omitted) The Journal Dr Inventory 1,300 Capital (Being adjustment for items on mislaid inventory lists.)

Trade accounts payable 210 Purchases returns (Being goods returned to J Hardwell Ltd.) Sales 1,000 Trade accounts receivable (Being reversal of trade sample sent to John Grey wrongly treated as a sale.)

Trade samples 1,000 Purchases (Being correction of treatment of trade sample.)

Repairs and renewals 150 Purchases (Being correction of treatment of paint used to paint stockroom wrongly charged to purchases.)

Cr 1,300 210 1,000 1,000 150

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Answer to Question 27.3A

BA 1

(a) (Narratives omitted) i) Sales Office equipment disposals ii) Suspense Purchases iii) Drawings Purchases iv) Bank charges Suspense v) Suspense K Lamb

The Journal

(b) Purchases K Lamb

Suspense 10 Balance 90 Bank charges 100

Dr 125

Cr 125

10 10 140 140 22 22 90 90 78 22 100

(c) Statement of Corrected Net Profit for the year ended 31 December 2017 Net profit per the financial statements Add Purchases overcast Add Private purchases

28,400 10 140

Less Bank charges omitted Corrected net profit

150 28,550 22 28,528

Note: Error (i) does not affect profit because by correcting sales are reduced by £125 but loss on disposal is reduced by £125.

Answer to Question 27.7A

BA 1

Lee Crosby Balance Sheet as at 31 March 2018 Non-current assets Property Shop fittings (cost 38,000 − 3,500)

Cost 108,000 34,500 142,500

Current assets Inventory Trade receivables (3,740 − 1,040) Prepayments Cash at bank and in hand (2,140 + 155 − 75) Total assets Current liabilities Trade payables (4,220 – 55) Accruals Non-current liabilities Loan Total liabilities Net assets Capital: Opening capital Add profit for the year (see working) Less drawings in year (71,201 + 75) Closing capital

Acc dep 5,400 6,500 11,900 31,517 2,700 225 2,220

4,165 160

NBV 102,600 28,000 130,600

36,662 167,262

4,325 52,000 56,325 110,937 136,175 46,038 (71,276) 110,937

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Working: Original profit for the year 1) Purchases understated 2) Shop fittings depreciation (38,000 − 3,500 − 2,000)/5 years 3) Property depreciation (108,000 × 5%) 4) Increase in drawings; no effect on profit 5) Bad debt write-off 6) Wages overstated: correction is Dr Suspense 10,000; Cr Wages 10,000 7) Credit note received; returns outwards understated Corrected profit for the year

Answer to Question 27.9A (a)

52,423 (3,500) (6,500) (5,400) (1,040) 10,000 55 46,038

BA 1 Suspense 1,536 i) 360 iii) v)

Balance b/d iv) Sales undercast

Debtor balance omitted Undercast of cash book Supplier incorrectly credited for returns out (double the amount) vii) Cheque omitted: Mr Smith

1,896

87 720 358 731 1,896

Items ii) and vi) do not pass through suspense account. (b) i) ii)

Accounts receivable increased in balance sheet.

Net profit will be increased by 1,200 but further depreciation needed. Machinery increased by 1,200 (subject to depreciation) in the balance sheet. iii) Bank in the balance sheet increased by 720. iv) Sales increased by 360; so too are gross profit and net profit. v) Accounts payable reduced by 358 in balance sheet. vi) Electricity increased by 152, so net profit reduced by 152. Also electricity owing 152 to be included as extra accrual in balance sheet. vii) Bank increased by 731 in balance sheet. Can now be removed from allowance for doubtful debts, so net profit increased by 731 and accounts receivable (net) in balance sheet increased by 731.

Answer to Question 27.10A Balance b/d Customer Y (x)

Sales Ledger: Set-off (iii) Purchases: Wrong posting (vi) Purchases overcast (viii) Balance c/d

Balance b/d Insurances (xi)

BA 1 Sales Ledger Control 110,172 Purchases ledger: Set-off (iii) 200 Customer: Posting error (vii) Balance c/d 110,372 Purchases Ledger Control 700 Balance b/d 198 1,000 76,368 78,266 Suspense 2,315 Trial balance error (ix) 90 Balance c/d 2,405

700 100 109,572 110,372

78,266

78,266

2,400 5 2,405

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Purchases Ledger Balances As given Add M Smith: Credit posted in error (iv)

77,777 600 78,377

Less Debit balances Set-off (iii) Invoice entered in error (vi) Revised list of balances

1,111 700 198

2,009 76,368

Now, identify what has led to the balance on the suspense account, and make the appropriate correcting entries needed to close the account.

Sales Ledger Balances

Debit balances Credit balances

111,111 (1,234) 109,877 (700) 600 (300) (100) 200 109,577 (5) 109,572

Set-off (iii) Invoice not posted (iv) Allowance (i.e. credit note) (v) Cash receipt (vii) Excessive write-off (x) Suspense Sales Ledger Control Account The £5 in the suspense account remains unexplained and requires further investigation.

Answer to Question 27.13A

BA 1 Dr 62 62

(a) Discount allowed Discount received Suspense (b) Sales Suspense (c) Fittings Bank Motor van Gain on sale of motor van (d) Premises Wages Purchases (e) C Blimp Bank Discounts allowed (f) D Hood D I Hoade Suspense

Answer to Question 28.2A

124 100 1,400 700 810 90

100 1,800 300 470 340 86 4

76 67 9

BA 1

The Grampian Golf Club (a) Bar Trading Account for the year ending 31 December 2019 Sales Less Cost of supplies sold: Opening inventory Add Purchases Less Closing inventory Gross profit Wages of bar staff Profit to income & expenditure

Cr

169,200 18,800 82,600 101,400 12,820

88,580 80,620 58,400 22,220

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(c) Income and Expenditure Account for the year ending 31 December 2019 Income Subscriptions (366,800 − 3,740) Profit on bar Profits from raffles Less Expenditure: Golf professional’s salary Greenkeeper’s wages General expenses Depreciation of equipment Surplus of income over expenditure

363,060 22,220 13,016 398,296 74,000 43,000 1,820 4,800

123,620 274,676

Balance Sheet as at 31 December 2019 Non-current assets Clubhouse Equipment Less Depreciation

37,200 4,800

Current assets Bar inventory Bank

12,820 7,848

Current liabilities Subscriptions received in advance

(a)

32,400 316,400 20,668 337,068 3,740 333,328

(b) Financed by: Accumulated fund Balance at beginning of year Add Surplus of income over expenditure

Answer to Question 28.4A

284,000

58,652 274,676 333,328

BA 1

Plumpton Leisure Centre Trading Account for the year ending 31 December 2020

Takings Less Cost of supplies Opening inventory Add Purchases Less Closing inventory Gross profit Wages Profit to income and expenditure

16,290 680 4,320 5,000 920

(c) Income and Expenditure Account for the year ending 31 December 2020 Income Subscriptions (45,060 + 860) Refreshment bar profit Profits from dances Profit on exhibition Less Expenditure Wages (31,400 − 4,680) Rent of building Travelling expenses of teams Depreciation of equipment Loss on equipment sold (340 − 420) Surplus of income over expenditure

4,080 12,210 4,680 7,530

45,920 7,530 4,116 890 58,456 26,720 8,700 1,900 5,200 80

42,600 15,856

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Balance Sheet as at 31 December 2020 Non-current assets Equipment (32,400 − 420 + 18,200) Less Depreciation Current assets Refreshment bar inventory Accounts receivable for subscriptions Bank

50,180 5,200 920 860 6,076

Financed by: Accumulated fund Balance at beginning of year* Add Surplus for the year

44,980

7,856 52,836

36,980 15,856 52,836

* 1 January 2020 Equipment 32,400 + Inventory 680 + Bank 3,900 = 36,980.

Answer to Question 29.3A

BA 1

J Jones Manufacturing Account and Income Statement for the year ending 31 December 2019 Opening inventory of raw materials Add: Purchases Less: Closing inventory of raw materials Cost of raw materials consumed Factory wages Prime cost Indirect manufacturing costs Fuel and light (21,000 + 4,000)  80% Rent and business rates (21,000 − 5,000)  75% Repairs to plant and machinery Depreciation – plant and machinery (80,000  10%)

20,000 12,000 9,000 8,000 49,000 362,000 14,000 376,000 11,000 365,000 482,000 7,000 475,000

Add: Opening work in progress Less: Closing work in progress Production cost of goods completed Sales Less: Returns inward Less: Cost of goods sold Opening inventory of finished goods Add: Production cost of goods completed

23,000 365,000 388,000 26,000

Less: Closing inventory of finished goods Gross profit Less: Expenses Administration expenses Fuel (21,000 + 4,000)  20% Salaries Rent and business rates (21,000 − 5,000)  25% Office expenses

362,000 113,000 5,000 17,000 4,000 9,000 35,000

Selling and distribution expenses Carriage outwards Financial charges Increase in allowance for doubtful debts

21,000 258,000 279,000 25,000 254,000 59,000 313,000

4,000 1,000

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40,000 73,000

Net profit Balance Sheet as at 31 December 2019 Non-current assets Premises Plant and machinery (80,000 − 8,000 − 8,000) Current assets Inventory – raw materials work in progress finished goods

410,000 64,000 474,000

25,000 11,000 26,000

Accounts receivable (20,000  95%) Prepayments Bank

62,000 19,000 5,000 11,000

Current liabilities Accounts payable Accrual

37,000 4,000

97,000 571,000

41,000 530,000 Capital account Opening balance Add: Net profit

Answer to Question 29.6A

457,000 73,000 530,000

BA 1

Manufacturing Account and Trading Account part of the Income Statement for the 3 months ending 31 March 2020 Opening inventory of raw materials Add: Purchases Carriage in Less: Closing inventory of raw materials (a) Cost of raw materials used in production Add: Direct factory wages (b) Prime cost Indirect manufacturing costs: Factory wages Rent and business rates Power Repairs Sundry expenses Depreciation – machinery

13,900 1,200 2,000 1,300 900 3,900 23,200 124,000 2,400 126,400 2,900 123,500 160,400

Add: Opening work in progress Less: Closing work in progress (c) Production cost of goods completed Sales Less: Cost of goods sold Opening inventory of finished goods Production cost of goods completed Less: Closing inventory of finished goods (d) Cost of goods sold (e) Gross profit

10,500 27,200 700 38,400 10,200 28,200 72,600 100,800

14,300 123,500 137,800 13,200 124,600 35,800

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Answer to Question 29.9A

BA 1

(a)

Jean Marsh Manufacturing Account for the year ending 31 December 2020 Cost of raw materials consumed: Opening inventory of raw materials Add Purchases Carriage inwards Less Closing inventory of raw materials Factory wages Prime cost Factory overhead expenses: General expenses Lighting 4/5 Rent 4/5 Insurance 3/4 (of 950 − 150) Depreciation of plant and machinery Factory cost of production c/d

3,400 18,000 800 22,200 2,900

1,200 2,000 3,000 600 1,500

(b) Trading Account part of the Income Statement for the year ending 31 December 2020 Sales Less Cost of sales of finished goods: Opening inventory 6,100 Add Factory cost of production b/d 46,100 52,200 Less Closing inventory 8,200 Gross profit c/d (c) Profit and Loss Account part of the Income Statement for the year ending 31 December 2020 Gross profit b/d Add Discount received Less Administrative costs: Office salaries General expenses (750 + 75) Lighting 1/5 Rent 1/5 Insurance 1/4 (950 − 150) Selling costs: Jean Marsh: Salary and expenses Depreciation of car Advertising Bad debts Carriage outwards Net profit after proprietor’s salary

16,900 825 500 750 200

19,175

10,400 500 1,400 650 375

13,325

19,300 18,500 37,800

8,300 46,100

90,000

44,000 46,000

46,000 1,600 47,600

32,500 15,100

Note: as a sole proprietor Jean’s ‘salary’ is really her drawings. Her salary should NOT therefore appear in the income statement. However, the question does not separate salary from expenses so, for convenience, her ‘salary’ is included as an expense above. (d) Non-current assets Plant and machinery Less Depreciation Motor vehicle Less Depreciation

Balance Sheet as at 31 December 2020 9,100 1,500 4,200 500

7,600 3,700 11,300

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Current assets Inventory: Raw materials Finished goods Accounts receivable Prepayments Bank Cash

2,900 8,200 7,700 150 3,600 325

Current liabilities Accounts payable Expenses owing

6,000 75

22,875 34,175

6,075 28,100

Financed by: Capital Balance at beginning of year Add Net profit after salary

15,000 15,100 30,100 2,000 28,100

Less Drawings

Answer to Question 30.3A

BA 1

Jack’s Superstores Departmental Income Statement for the year ending 31 March 2018 A B Sales 180,000 138,000 Less Cost of goods sold: Opening inventory 27,100 21,410 Add Purchases 101,300 81,200 128,400 102,610 Less Closing inventory 23,590 104,810 15,360 87,250 Gross profits 75,190 50,750 Add Discounts received 1,013 812 Less Expenses: 76,203 51,562 Salaries and wages 45,600 30,400 Rent and rates 3,100 3,100 Delivery expenses 1,620 1,242 Commission 4,500 3,450 Insurance 900 600 Advertising 769 769 Administration expenses 6,600 6,600 Depreciation 1,400 64,489 1,400 47,561 Net profits/(losses) 11,714 4,001

Answer to Question 31.2A

C 82,000 17,060 62,900 79,960 18,200

15,200 3,100 738 2,050 300 769 6,600 1,400

61,760 20,240 629 20,869

30,157 ( 9,288)

BA 1

i) Memorandum Joint Venture Account for Frank and Graham Mowers purchased 135,260 Sales Carriage 404 Frank: Mowers taken over Net Profit: Frank 1/2 14,063 Graham 1/2 14,063 28,126 163,790

123,790 40,000 163,790

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ii) Mowers purchased Carriage Bank: Graham Profit and loss Balance c/d

(Frank’s books) Joint Venture with Graham 120,400 Bank 320 Mowers taken over 50,000 Sales 14,063 29,807 214,590

Bank: to Graham

Mowers purchased Carriage Bank: Frank Profit and loss

29,807

Balance b/d

(Graham’s books) Joint Venture with Frank 14,860 Bank 84 Sales 70,000 Balance c/d 14,063 99,007

Balance b/d

29,807

Answer to Question 31.4A

Bank: from Frank

Balance b/d

Van Paintings Profit and loss Balance b/d

Use of van Lighting Paintings General expenses Profit and loss Balance c/d

214,590 29,807

50,000 19,200 29,807 99,007 29,807

BA 1

Memorandum Joint Venture Account for Rock, Hill and Pine 26,700 Paintings (8,000 + 17,000 + 1,700) Sales (31,410 + 4,220 + 2,300) Lighting 86 Goods taken over Rent 2,100 Sale of van Van 2,200 Use of Pine’s van 600 General expenses 1,090 Net profit: Rock 3/8 4,895 Hill 1/2 6,527 Pine 1/8 1,632 13,054 45,830 Rent Paintings General expenses Profit and loss

70,000 40,000 104,590

(Rock’s Books) Joint Venture with Hill and Pine 2,100 Sale of van 17,000 Balance c/d 545 4,895 24,540 22,840

Cash: from Pine

(Hill’s Books) Joint Venture with Rock and Pine 2,200 Sales 8,000 Good taken over 6,527 Balance c/d 16,727 6,307

Cash: from Pine

(Pine’s Books) Joint Venture with Rock and Hill 600 Sales 86 Sales 1,700 545 1,632 29,147 33,710

37,930 6,200 1,700

45,830 1,700 22,840 24,540 22,840

4,220 6,200 6,307 16,727 6,307

31,410 2,300

33,710

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Cash: to Rock Cash: to Hill

22,840 6,307 29,147

Answer to Question 32.2A

Balance b/d

29,147 29,147

BA 1

George, Henry and Lee Appropriation Account for the year ending 31 December 2019 Net profit Less: Salaries – Henry Lee Interest on capital George Henry Lee

215,400

50,000 30,000

80,000

4,800 3,200 2,400

10,400

Share of profit George 5/10 Henry 3/10 Lee 2/10

62,500 37,500 25,000

Answer to Question 32.5A

90,400 125,000

125,000

BA 1

Cole, Knox and Lamb Appropriation Account for the year ending 31 December 2020

Net Profit Add: Interest on drawings Cole Knox Lamb

184,800 1,200 900 500

Less: Salaries Knox Lamb Interest on capital Cole Knox Lamb

2,600 187,400

22,000 28,000

50,000

3,600 2,700 2,100

8,400

Balance of profit shared: Cole 55% Knox 25% Lamb 20%

58,400 129,000

70,950 32,250 25,800 129,000

Capital: Cole Knox Lamb Current accounts Opening balance Add: Salaries Interest on capital Share of profit Less: Drawings Interest on drawings

Balance Sheet as at 31 December 2020 (extract) 60,000 45,000 35,000 Cole 18,000 – 3,600 70,950 92,550 (27,000) (1,200) 64,350

Knox 8,000 22,000 2,700 32,250 64,950 (23,000) (900) 41,050

Lamb 6,000 28,000 2,100 25,800 61,900 (17,000) (500) 44,400

140,000

149,800

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Answer to Question 32.6A (a)

BA 1

Smith & Tolhurst Appropriation account for the year ended 31 October 2019

Net profit Add Interest on drawings Smith Tolhurst

79,600 1,360 1,520

Less Salary: Tolhurst Less Interest on capital accounts Smith (4% × £160,000) Tolhurst (4% × £90,000)

6,400 3,600

2,880 82,480 (20,000) (10,000) 52,480

Residual profits shared: Smith (⅝) Tolhurst (⅜)

32,800 19,680 52,480

b) Balance b/d Drawings Interest on drawings Balance c/d

Partners’ current accounts Tolhurst 9,200 Balance b/d 49,800 Salary 1,520 Interest on capital Residual profit share Balance c/d 60,520

Smith 37,300 1,360 12,940 51,600

Smith 12,400 6,400 32,800 51,600

Tolhurst 20,000 3,600 19,680 17,240 60,520

(c) That, up to 1 November, Tolhurst had taken out more (cumulatively) in drawings than he was entitled to (in terms of his cumulative share of net profits). (d) ‘Interest on capital’ compensates partners for their original investment in the business. Those who contribute more will be credited with more. Meanwhile partners are often charged interest on their drawings because this should deter them from taking unnecessary or excessive amounts out of the business.

Answer to Question 32.7A (a) Net profit Add: Interest on drawings A B

BA 1 Profit and Loss Appropriation Account 25,800 400 300 700 26,500 4,500 22,000

Less: Salary – B Less: Interest on capital A B

1,500 500 2,000 20,000

Less: Share of profit A (3/5) B (2/5)

12,000 8,000 20,000 –

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(b)

Partners’ Current Accounts

A (500) 1,500 1,000 – 12,000 13,000 (400) 12,600 (12,000) 600

Opening balance Add: Interest on capital Add: Salary Share of profit Less: Interest on drawings Less: Drawings Closing balance

Answer to Question 32.10A

BA 1

Scot and Joplin: Income Statement and Profit and Loss Appropriation Account for the year ending 31 December 2020

Sales Less Cost of goods sold: Opening inventory Add Purchases

38,410 136,680 175,090 41,312

Less Closing inventory Gross profit Less Expenses: Salaries Office expenses (2,130 + 240) Discounts allowed Depreciation: Motors Office equipment Net profit Add Interest on drawings: Scot Joplin Less Interest on capital: Balance of profit shared:

B 1,280 500 1,780 4,500 8,000 14,280 (300) 13,980 (15,000) (1,020)

180,400

133,778 46,622

27,400 2,370 312 5,350 1,840

7,190 300 200

Scot Joplin

2,500 1,000

Scot 70% Joplin 30%

4,445 1,905

37,272 9,350 500 9,850 3,500 6,350 6,350 –

Non-current assets Office equipment Motor vehicles Current assets Inventory Accounts receivable Bank Cash Less Current liabilities Accounts payable Expenses owing Capitals Scot Joplin

Balance Sheet as at 31 December 2020 Cost 9,200 21,400 30,600

Depreciation 5,440 18,150 23,590

3,760 3,250 7,010

41,312 41,940 2,118 317 85,687 32,216 240

32,456 50,000 20,000

53,231 60,241 70,000

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Current accounts Opening balance Add Interest on capital Add Share of profits

Scot 7,382 2,500 4,445 14,327

Less Drawings Less Interest on drawings

17,500 300

Answer to Question 32.12A Sales Less Returns inwards

17,800 (3,473)

Joplin 7,009 1,000 1,905 9,914 16,000 200

16,200 (6,286)

BA 1

Bush, Home and Wilson Income Statement for the year ending 30 April 2020

Less Cost of goods sold: Opening inventory Add Purchases Carriage inwards

196,239 3,100

Less Closing inventory Gross profit Less Expenses: Salaries and wages Discounts allowed Business rates (2,900 − 200) Postages (845 – 68) Bad debts Increase in allowance for doubtful debts General expenses Depreciation: Computers Office equipment Net profit Add Interest on drawings: Bush Home Wilson Less Salaries: Home Wilson Interest on capital: Bush Home Wilson

2,800 1,100

Current assets Inventory Accounts receivable Less Allowance for doubtful debts Prepayments (200 + 68) Bank

334,618 10,200 324,418 68,127 199,339 267,466 74,223

18,000 14,000 4,800 800 2,400

3,900

51,320 1,400

64,771 66,404 740 67,144

32,000 8,000 13,572 3,393 10,179

Balance Sheet as at 30 April 2020 Cost 5,700 8,400 14,100

193,243 131,175

54,117 190 2,700 777 1,620 450 1,017

300 200 240

Balance of profit shared: Bush 1/2 Home 1/8 Wilson 3/8

Non-current assets Office equipment Computers

(9,759) 60,241

Depreciation 4,000 6,400 10,400

40,000 27,144 27,144 –

1,700 2,000 3,700

74,223 49,920 268 5,214

129,625 133,325

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Current liabilities Accounts payable

36,480 96,845

Financed by: Capital: Bush Home Wilson

60,000 10,000 30,000

Current accounts: Opening balance Add Salaries Interest on capital Share of profit

Bush 5,940 – 4,800 13,572 24,312 (39,000) (300) (14,988)

Less Drawings Interest on drawings

Home (2,117) 18,000 800 3,393 20,076 (16,000) (200) 3,876

Answer to Question 33.2A

BA 1

(a) Goodwill Other assets

Balance Sheet as at 1 October 2019

Wilson 9,618 14,000 2,400 10,179 36,197 (28,000) (240) 7,957

(3,155) 96,845

150,000 330,000 480,000

Capitals Abel (55,000 + 15,000) Burt (120,000 + 60,000) Cole (65,000 + 30,000) Dodds (90,000 + 45,000)

(b) Before Abel 1/10 Burt 2/5 Cole 1/5 Dodds 3/10

100,000

15,000 60,000 30,000 45,000 150,000

70,000 180,000 95,000 135,000 480,000

After 1 /5 3 /10 2 /5 1 /10

30,000 45,000 60,000 15,000 150,000

Loss or gain Gain 15,000 Loss 15,000 Gain 30,000 Loss 30,000

Action needed Debit Abel 15,000 Credit Burt 15,000 Debit Cole 30,000 Credit Dodds 30,000

Balance Sheet as at 1 October 2019 Net assets

330,000 330,000

Capitals Abel (55,000 − 15,000) Burt (120,000 + 15,000) Cole (65,000 − 30,000) Dodds (90,000 + 30,000)

40,000 135,000 35,000 120,000 330,000

Answer to Question 33.4A

Blunt 1/6 Dodds 1/2 Fuller 1/3 Baxter

goodwill 10,000 30,000 20,000 − 60,000

BA 1 (a) 1

/3 /12 1 /6 1 /12 5

Share old goodwill 20,000 25,000 10,000 5,000 60,000

Share new

Action: Capital accounts Dr Capital 10,000 Cr Capital 5,000 Cr Capital 10,000 Dr Capital 5,000

Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual

Capital Accounts Fuller Baxter Balances b/d Adjustment 10,000 5,000 for goodwill 4,000 29,400 30,400 19,000 Cash 14,000 29,400 30,400 24,000 Blunt

Adjustment for goodwill Balances c/d

Dodds

(b) Other assets Cash (1,200 + 24,000)

Blunt Dodds Fuller Baxter 14,000 24,400 20,400 − 5,000 10,000 14,000 29,400

24,000 30,400 24,000

Balance Sheet

66,000 25,200 91,200 (8,400) 82,800

Accounts payable Capitals Blunt Dodds Fuller Baxter

4,000 29,400 30,400 19,000 82,800

Answer to Question 34.2A

BA 1

(a) i) Balance b/d

Goodwill 12,400 Revaluation

ii) Goodwill Inventory

Revaluation 12,400 Plant and machinery 320 Loss on revaluation Fitch 5/8 Wall 3/8 12,720

iii) Loss on revaluation Balances c/d

Fitch 7,650 11,811 19,461

(b) Non-current assets Plant and machinery at valuation Current assets Inventory Accounts receivable Bank

Wall 4,590 9,887 14,477

Capitals Home Balances b/d 12,000 Cash 12,000

12,400

480 7,650 4,590

Fitch 19,461

Wall 14,477

19,461

14,477

Home 12,000 12,000

Balance Sheet 16,800 6,100 4,100 12,626

Less Current liabilities Accounts payable Capitals Fitch Wall Home

12,240 12,720

22,826 38,626 5,928 33,698

11,811 9,887 12,000

33,698

Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual

Answer to Question 34.4A

BA 1

(a) Buildings Goodwill Fittings Inventory Accounts receivable Accrued expenses A Barnes (13,000  3/5) C Darwin (13,000  2/5) (b)

Dr 4,000 12,000

Cr 2,000 500 200 300 7,800 5,200

A Barnes, C Darwin and E Fox Balance Sheet as at 31 March 2018

Non-current assets Goodwill Buildings Fittings

12,000 55,000 27,000 94,000

Current assets Inventory Accounts receivable Bank

15,500 4,800 22,000

Current liabilities Accounts payable Accruals

8,000 300

42,300 136,300

8,300 128,000 Capital accounts A Barnes C Darwin E Fox

67,800 35,200 25,000 128,000

(c) A Barnes C Darwin E Fox Goodwill

Dr 6,000 4,000 2,000

Cr

12,000

Answer to Question 35.3A

BA 1

Gain and Main Profit and Loss Appropriation Account for the year ending 31 March 2018

Net profit b/d Less Salary: Main Interest on capital: Gain Main Balance of profit Shared: Gain Main

9,750 1,000 500

26,250 1,500

9,000 6,000

11,250 15,000 15,000

Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual

Balance b/d Realisation: Car taken over Plain Ltd: Shares Bank: to settle

Gain 1,000 24,000

25,000

Fixtures Land and buildings Motors Inventory Accounts receivable Profit on realisation: Gain Main

1,380 920

Current Accounts Main 2,000 Balance b/d Capitals transferred P&L appropriation: 16,000 Salary 4,170 Interest Share of profit Realisation profit shared Bank: to settle 22,170

Gain 1,000 10,000 1,000 9,000 1,380 2,620 25,000

Main 5,000 9,750 500 6,000 920 22,170

Realisation 2,000 Accounts payable 30,000 Depreciation: Fixtures 4,500 Motors 3,000 Gain: Car taken over 2,000 Plain Ltd: Purchase price

500 1,000 1,300 1,000 40,000

2,300 43,800

43,800 Bank

Balance b/d Gain: to settle

1,550 2,620 4,170

4,170 4,170

Plain Ltd 40,000 Gain Main 40,000

Realisation

Answer to Question 35.4A

Main: to settle

24,000 16,000 40,000

BA 1

(a) (Narratives omitted) Realisation Freehold premises Equipment and machinery Cars Inventory

Dr 44,000

CNO Ltd Realisation

58,000

Cash Preference shares in CNO Ltd Ordinary shares in CNO Ltd CNO Ltd

10,000 12,000 36,000

Accounts payable Bank Realisation (discount)

10,000

Cash Realisation (bad debts 800, discounts 400) Accounts receivable Realisation (profit) (58,000 − 44,000 + 190 − 1200) Capitals A 2/5 B 2/5 C 1/5

12,800 1,200

Cr 18,000 12,000 3,000 11,000 58,000

58,000 9,810 190

14,000 12,990

5,196 5,196 2,598

Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual

Capitals

A B C Preference shares in CNO Ltd Capitals A B C Ordinary shares in CNO Ltd

4,800 4,800 2,400 12,000

14,400 14,400 7,200

36,000

Loan Cash

A

Capitals

A (22,000 + 5,196 − 4,800 − 14,400) B (18,000 + 5,196 − 4,800 − 14,400) C (10,000 + 2,598 − 2,400 − 7,200)

7,000 7,000

Cash

7,996 3,996 2,998

14,990

(b) The partners will receive the following numbers of shares, the shares being split in profit sharing ratio: Ordinary 11,520 11,520 5,760 28,800

A B C

Answer to Question 35.6A

BA 1

(a) (All in £’000) Furniture: Decrease (12 − 5) Motors: Decrease 20 − (10 + 4) Inventory written down Bad debt written off Doubtful debts allowance: Increase (42 − 2)  5% − 1 Office expenses accrued Dissolution costs Capitals: Proudie 3/5 Slope 1/5 Thorne 1/5

(b)

Proudie Motor 4 Goodwill written off (W1) Cash 8 Loan a/c: Transfer 219 Balances c/d 231

Preference 4,800 4,800 2,400 12,000

Revaluation 7 Land and buildings: 6 increase (200 − 160) 5 2

40

1 3 1

9 3 3

15 40

Slope 45 28 73

Capitals Thorne Balances b/d 45 Current a/cs Revaluation Loan 6 Goodwill share (W1) 51

(W1) Goodwill: Profits 130 + 150 + 181 Less Stock reduction Bad debt written off Increase in allowance for doubtful debts Office expenses accrued Average profit 450  3 = 150; Proudie’s share 150  3/5 = 90 Split equally between Slope and Thorne.

40

Proudie 100 24 9 8 90 231

Slope 60 10 3

Thorne 40 8 3

73

51 461

5 2 1 3

11 450

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(c)

Slope and Thorne Balance Sheet as at 1 June 2019

Non-current assets Land and buildings Furniture Motor vehicles

200 5 10 215

Current assets Inventory Accounts receivable Less Allowance for doubtful debts Prepaid expenses Cash (10 − 8)

18 40 2

Current liabilities Accounts payable Accrued expenses (3 + 1 + 3)

15 7

Non-current liabilities Loan – Proudie

38 2 2

22 219

Capitals: Slope Thorne

BA 1

(All answers shown in £000) (a) i) Grant and Herd Profit and Loss Appropriation Account for the year ending 31.12.2018 Net profit for the year Add Interest on drawings: Grant (40  10%  1/2) Herd (40  10%  3/4) Less Salary: Herd Interest on capital: Grant Herd

60 2 3

5 65

20

Balance of profit: Grant 3/5 Herd 2/5

Salary paid Drawings Interest on drawings Car Shares in Valley Ltd Bank

241 34

28 6 34

Answer to Question 35.8A

ii)

60 275

Grant 40 2 10 300 65 417

Capitals Herd 10 Balances b/d 40 Salary 3 Interest on capital Share of profit 200 Realisation Bank 253

15 5

20

15 10

25

65

Grant 300 − 15 15 87

Herd 100 20 5 10 58 60 253

417

Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual

iii) Non-current assets Inventory Accounts receivable and prepayments Trade accounts receivable Profit on realisation to capitals: Grant 3/5 Herd 2/5

(b)

Realisation 300 Depreciation 90 Trade accounts payable 18 Accounts payable and accruals 223 Grant: Car 87 58 776

100 141 25 10

Valley Ltd: Consideration (400,000  1.25)

500 776

Valley Ltd Balance Sheet as at 1 January 2019

Non-current assets at cost Intangible asset: Goodwill Tangible assets (300 − 100 − 10)

145 190 335

Current assets Inventory Trade accounts receivable Other accounts receivable and prepayments

90 223 18

Current liabilities Trade accounts payable Other accounts payable and accruals

141 25

Capital and reserves Called-up share capital Share premium

331 666 166 500 400 100 500

Answer to Question 36.5A

BA 1

Futurescope Ltd Statement of Changes in Equity (extract) for 2020 (£000s) Preference Ordinary Share Shares Shares Premium Opening balance 130 20 78 Retained profits for the year – – – Transferred to General Reserve – – – Closing balance 130 20 78

Retained Profits 282 43 (12) 313

General Reserve 30 – 12 42

Balance Sheet as at 31 December 2020 (£000s) Non-current assets Current assets Less: Current liabilities – Accounts payable Less: Non-current liabilities – Loan notes Equity: Ordinary shares of 50p each 3% Preference shares of £1 each Share premium General reserve Retained profits

612 191 803 (104) (116) 583 130 20 150 78 42 313 583

Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual

Answer to Question 36.7A

BA 1

Annual interest rate 1 Jun 19 – 31 Mar 20 £3.6m 4.5% I Oct 19 – 31 May 20 £1.1m 3.0% 1 Apr 20 – 31 May 20 £2.1m 4.5% Total interest expense in Income Statement for the year

Prorate by number of months in issue × 10/12 × 8/12 × 2/12

Loan notes in issue

Answer to Question 36.9A

Interest expense £ 135,000 22,000 15,750 172,750

BA 1

Tully Ltd Income Statement for the year ending 31 December 2020 Sales Less Cost of goods sold Opening inventory Purchases

975,600 81,300 623,800 705,100 102,400

Less Closing inventory Gross profit Less Expenses Wages Motor expenses (4,300 + 280) Machinery repairs Sundry expenses Depreciation: Premises Machinery Motor vehicles Directors’ remuneration Net loss Non-current assets Premises Machinery Motor vehicles Current assets Inventory Accounts receivable Bank

602,700 372,900

241.500 4,580 3,600 2,900 13,250 21,820 6,940

42,010 82,600

Balance sheet as at 31 December 2020 Cost Depn 265,000 73,250 109,100 63,220 34,700 25,140 408,800 161,610

Current liabilities Accounts payable Motor expenses owing

102,400 169,600 17,900

Note: The proposed dividend will be shown as a note.

Net 191,750 45,880 9,560 247,190

289,900 537,090

74,900 280 75,180 461,910

Total assets less current liabilities Equity Called-up share capital General reserve (60,000 + 7,500) Retained profits (−4,290 + 31,200 − 7,500)

377,190 4,290

375,000 67,500 19,410

86,910 461,910

Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual

Answer to Question 36.11A

BA 1

Hurmey plc Income Statement for the year ended 31 July 2020 Sales Less Cost of goods sold: Opening inventory Add Purchases Less Returns outwards Less Closing inventory

1,138,555 53,010 523,735 (2,928) (53,661) (520,156) 618,399

Gross profit Add Other income: Commissions received Less Expenses Utilities (20479 per TB + 6757 accrued) Rent (19757 per TB − 2700 prepaid **) Wages & salaries Directors’ remuneration Audit fee Bad debt expense Increase in allowance for doubtful debts Depreciation expense: Premises (658600 × 0.02) Machinery (Cost 465840 × 0.2 straight-line) Vans ((278580 − 63900) × 0.3 reducing-balance)

7,958 626,357 27,236 17,057 113,856 91,080 18,000 25,174 1,043 13,172 93,168 64,404 (464,190) 162,167 (12,250) 149,917 (33,000) 116,917

Operating profit Less Interest expense Profit before tax Less Corporation tax expense Profit for the year Balance sheet as at 31 July 2020 Assets Non-current assets Premises Machinery Vans

(* Acc dep = 171236 TB + 13172 above) (* Acc dep = 105120 TB + 93168 above) (* Acc dep = 63900 TB + 64404 above)

Cost 658,600 465,840 278,580 1,403,020

Current assets Inventory Accounts receivable 105,600 Less allowance for doubtful debts (5,280) Prepayments (** 8100 payment × 4/12 months paid in advance) Cash at bank Total assets Current liabilities Accounts payable Accruals (6125 interest + 6757 + 18000) Corporation tax payable Non-current liabilities Loan notes Total liabilities Net assets

Acc Dep* 184,408 198,288 128,304 511,000

NBV 474,192 267,552 150,276 892,020

53,661 100,320 2,700 2,435 159,116 1,051,136

85,810 30,882 33,000

149,692 175,000 (324,692) 726,444

Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual

Equity Ordinary shares Preference shares Share premium General reserve Retained profits Total equity

67,000 54,000 77,000 42,100 486,344 726,444

(34100 + 8000) (428867 + 116917 − 51440 − 8000)

Answer to Question 36.13A

BA 1

(a) (Narratives omitted) (i) Accounts payable Accounts receivable Operating profit Accounts receivable Operating profit Suspense (ii) Bank Accounts receivable Operating profit Bank (iii) Operating profit Accounts receivable Allowance for doubtful debts (note 1) Operating profit (iv) Retained profit brought forward Operating profit Inventory Operating profit (v) Suspense (note 2) Operating profit

The Journal

Dr 10,000

Cr 10,000

1,000 1,000 4,000 4,000 2,000 2,000 1,000 1,000 1,000 1,000 1,140 1,140 1,000 1,000 2,000 3,000

2,000 3,000

Notes: 1) Accounts receivable 200 − 10 (i) − 1 (i) − 2 (ii) − 1 (iii) = 186 (£000) New allowance 1%  186,000 = 1,860 Reduction in allowance 3,000 − 1,860 = 1,140 2) See note (v) in question. Credit balance on suspense account treated as sales.

Original balance on suspense must be £1,000 debit for trial balance to balance. £1,000 Dr + £4,000 Cr (i) = £3,000 Cr. (b)

Fiddles PLC Income Statement for the year ending . . .

Operating profit (note 1) Loan note interest (note 2) Net profit for the year

80,140 7,200 72,940 Balance Sheet as at . . .

Non-current assets Land Buildings Plant and machinery Less accumulated depreciation

100,000 120,000 170,000 120,000

50,000 270,000

Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual

Current assets Inventory Accounts receivable Less Allowance for doubtful debts Bank (12,000 + 2,000 − 1,000)

192,000 186,000 1,860

Current liabilities Accounts payable (110,000 − 10,000) Loan note interest

184,140 13,000

389,140 659,140

100,000 7,200 107,200

Non-current liabilities 16% Loan notes

180,000 287,200 371,940

Equity: Called-up share capital Retained profits (200,000 − 1,000 + 72,940)

100,000 271,940 371,940

Notes: 1) 80,000 + (iii) 1,140 + (iv) 1,000 + (iv) 2,000 + (v) 3,000 − (i) 1,000 − (i) 4,000 − (ii) 1,000 − (iii) 1,000 = 80,140 2) 180,000  16%  3 months = 7,200 3) The proposed dividend will be shown as a note.

Answer to Question 36.18A

BA 1

Unsworthy plc Income Statement for the year ended 31 December 2020 £’000 Revenue (9,606 – 308 returns inwards) Less Cost of goods sold Opening inventory 468 Add Purchases 5,241 Add Carriage inwards 74 Less Returns out (157 – 16) 141 Less Closing inventory 517 Gross profit Add Other income Less Operating expenses Staff wages & salaries 1,253 Advertising 460 Directors’ remuneration 786 Depreciation expense − Buildings (1,640  2.5%) 41 Depreciation expense − Machinery ((1,728 − 948)  15%) 117 Audit fee 95 Rent (853 − 65 prepaid) 788 Other operating expenses 665 Bad debts 159 Operating profit Less Interest expense (37 on loan notes (W1) + 19 on overdraft) Profit before tax Less Corporation tax expense Profit for the year W1 Loan note interest 1/1/20 – 31/3/20: 500  8%  3/12 1/4/20 – 31/12/20: 600  6%  9/12 Total loan note interest expense for the year 28 has been paid so 9 needs to be accrued.

£’000 10 27 37

£’000 9,298

5,125 4,173 378

4,364 187 56 131 41 90

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Non-current assets Land Buildings (W2) Machinery (W2)

Unsworthy plc Balance Sheet as at 31 December 2020 £’000 Cost 692 1,640 1,728 4,060

Current assets Inventory Trade receivables (922 – 7) Prepayments (195  1/3 months paid in advance) Total assets

517 915 65

Current liabilities Bank overdraft Trade payables (856 + 16 – 7) Accruals (95 audit+ 9 interest (see W1)) Corporation tax payable

232 865 104 41

Non-current liabilities Loan notes Total liabilities

1,497 3,691

1,242

1,842 1,849

W2: Accumulated depreciation At 1 January 2020 Depreciation expense for year At 31 December 2020

375 568 906 1,849 Buildings 760 41 801

Machinery 948 117 1,065

W3: Share capital & premium: Balance at 1 Jan 2020 (3m ordinary shares of NV 10p each) 1-for-4 bonus issue: 3m  1/4 = 750,000 new shares  10p Balance at 31 December 2020

a) Trade payables Purchase price paid

£’000 NBV 692 839 663 2,194

600

Equity: Ordinary shares (W3) Share premium (W3) Retained profits (924 + 90 – 108 dividends)

Answer to Question 37.2A

£’000 Acc Dep 801 1,065 1,866

Share capital 300 75 375

Share premium 643 (75) 568

Business Purchase Account 19,000 Buildings 200,000 Machinery Inventory Trade receivables Goodwill (difference) 219,000

125,000 15,000 10,000 27,000 42,000 219,000

BA 1

b) Amy Adams Balance Sheet as at 1 April 2019 Non-current assets Goodwill Buildings (155,000 + 125,000) Machinery (86,000 + 15,000 – 2,000) Motor vehicles Computer equipment (12,000 + 4,750)

42,000 280,000 99,000 37,000 16,750 474,750

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Current assets Inventory (20,600 + 10,000) Trade receivables (30,100 – 1,350 + 27,000) Prepayments Cash in hand Total assets Current liabilities Bank overdraft (2,700 + 500 – 4,750) Trade payables (23,800 + 19,000) Accruals

30,600 55,750 4,100 150

90,600 565,350

1,550 42,800 1,800 46,150

Non-current liabilities Bank loan Total liabilities Net assets

150,000 196,150 369,200

Capital: Previous capital Add cash introduced by owner Less loss on disposal of equipment (500 proceeds – 2,000 book value) Less irrecoverable debt written-off Amy’s capital

322,050 50,000 (1,500) (1,350) 369,200

Answer to question 38.2A See section 38.6

Answer to question 38.4A See section 38.9

Answer to Question 39.2A

Sales Less Cost of goods sold: Opening inventory Add Purchases

BA 1

T Chan Income Statement for the year ending 31 March 2021 iv)

Less Closing inventory Gross profit Less Expenses Net profit The closing inventory as at 31 March 2021, as shown above, is 22,000.

Order of solving problem: 16,000 + (a) i) Average inventory is 19,000. Therefore = 19,000 2 Therefore (a) = 22,000. ii) Can now be found by deducting (a) 22,000 from 106,000 = 84,000. iii) Is 50% of (ii), therefore (iii) is 42,000. iv) Is therefore needed to balance the account, that is, 126,000. v) If net profit was 12% of sales it would be 15,120. vi) Therefore expenses are 42,000 − (v) 15,120 = 26,880.

i) ii) iii) vi) v)

126,000 16,000 90,000 106,000 22,000 84,000 42,000 26,880 15,120

Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual

Answer to Question 39.4A

BA 1

(a) Cost of goods sold = Sales less gross profit margin

Category X 15,000 − 25% = 11,250

Category Y 28,000 − 30% = 19,600

(b) Sales – Cost of goods sold = Gross profit

15,000 − 11,250 = 3,750

28,000 − 19,600 = 8,400

2,700

5,040

(d) Gross profit − Expenses = Net profit

3,750 − 2,700 = 1,050

8,400 − 5,040 = 3,360

(e) Cost of goods sold = Inventory turnover Average inventory

11,250 =

19,600 = 14 ?

(c) Total expenses = 18% of sales

Answer to Question 39.6A

3

9

= 1,250

So, by arithmetical deduction

(a) Mark-up therefore Margin 1

?

= 1,400

BA 1 1

3+1

=

1

(see text) = 25%

4

(b) 14,500  100 = 24.166% 60,000 1 (c) Such as: Wastage; pilferage; sales at reduced prices; incorrect inventory valuation and arithmetical errors on selling prices. (d) Trading Account for the year ending 31 December 2019 Sales Less: Cost of goods sold Opening inventory Add: Purchases (47,000 + 5%) Less: Closing inventory (4,500 + 5%) Gross profit (e)

(3,0 45,500 00 + 4,500)/2

= 45,500 = 12.133 times 3,750

(f) Gross profit 14,500 − Expenses (10% of 60,000) 6,000 = Net profit 8,500. (g) Amended net profit: Gross profit 12,375 − Expenses 6,000 = 6,375 Reduction compared with (f ) 8,500 − 6,375 = 2,125 2,125 100 As a percentage of (f )  = 25% 1 8,500

60,000 3,000 49,350 4,725

47,625 12,375

Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual

Answer to Question 39.8A

BA 1

(a) Bank transactions Opening balance Add Receipts

3,063 1,467 4,530

Less Payments: Rent Adverts Miscellaneous Drawings

60 66 12 150 288 4,242

(b) Closing inventory A: (3 + 12 − 11)  4  54 = B: (3 + 10 − 8)  5  48 =

216 240 456

Arthur is correct (c) Gross profit A: (81 − 54)  11 = B: (72 − 48)  8 = Net profit 489 − (60 + 66 + 12) = (d)

297 192 489 =

33.33%

351 =

23.9 %

Arthur Income Statement for the month ending 31 October

Sales (11  81) + (8  72) Opening inventory Purchases (12  54) + (10  48)

1,467 306 1,128 1,434 456

Closing inventory

978 489

Gross profit Less Expenses: Rent Advertising Miscellaneous

60 66 12 138 351

Net profit Balance Sheet as at 31 October Current assets Inventory Bank Current liabilities Raleigh

456 4,242 4,698 1,128 3,570

Capital account Opening balance Add Net profit Less Drawings

3,369 351 3,720 150 3,570

Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual

Answer to Question 40.3A

BA 1 Opening Capital: 31 October 2019

Cash Bank Fixtures Inventory Accounts receivable Motor van Less Accounts payable

210 4,700 2,800 18,200 26,600 6,800

59,310 12,700 46,610

B Barnes Statement of Affairs as at 31 October 2020 Non-current assets Motor van Less Depreciation Fixtures (2,800 + 900) Less Depreciation Current assets Inventory Accounts receivable Prepaid expenses Cash

6,800 1,360 3,700 370 23,900 29,400 460 190

Current liabilities Trade accounts payable Expenses owing Bank overdraft

5,440 3,330 8,770

53,950 62,720

9,100 320 1,810 11,230 51,490

Financed by: Capital Opening balance Add Net profit Add Cash introduced

46,610 (C) 7,600 (B)

Less Drawings

32,200 (A)

Missing figures deduced: (A) 51,490 (B) 83,690 (C) 29,480.

Answer to Question 40.5A Workings: Balance b/d Receipts from debtors Cash sales Loan from F Tung Bank

BA 1 Cash 194

Bank 920 94,200

1,540 2,500 12,600 14,334

Cash Cash Trade accounts payable Rent Insurance Drawings* Sundry expenses Balance c/d

97,620

* Figure for drawings is that needed to make cash columns balance, that is, 12,572.

1,310 xxx 180 272 14,334

Bank 12,600 63,400 3,200 1,900 11,400 820 4,300 97,620

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Capital at 31 December 2017 Bank 920 Cash 194 Inventory 24,200 Accounts receivable 9,200 Insurance prepaid 340 Motor van 5,500 40,354 Less Accounts payable 7,300 33,054

Purchases Bank Cash − Opening Crs + Closing Crs

63,400 1,310 64,710 7,300 57,410 8,100 65,510

Sales Bank Cash − Opening Drs + Closing Drs

94,200 1,540 95,740 9,200 86,540 11,400 97,940

A Bell Income Statement for the year ending 31 December 2018 Sales Less Cost of goods sold: Opening inventory Add Purchases

97,940

Less Closing inventory Gross profit Less Expenses: Rent (3,200 + 360) Insurance (1,900 + 340 − 400) Sundry expenses (820 + 180) Depreciation: Motor van (5,500 – 4,600) Net profit

24,200 65,510 89,710 27,100 3,560 1,840 1,000 900

62,610 35,330

7,300 28,030

Balance Sheet as at 31 December 2018 Non-current assets Motor van Less depreciation Current assets Inventory Accounts receivable Prepayments Bank Cash Current liabilities Trade accounts payable Rent owing Non-current liabilities Loan – F Tung

Capital Opening balance Add Net profit Less Drawings (12,572 + 11,400)

5,500 900 27,100 11,400 400 4,300 272 8,100 360

4,600

43,472 48,072

8,460 2,500

10,960 37,112

33,054 28,030 61,084 23,972 37,112

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Answer to Question 40.7A

BA 1

(a) i) Balance b/d Credit sales (difference)

Accounts Receivable Control 2,643 Bank 46,215 Balance c/d 48,858

44,846 4,012 48,858

Total sales = credit 46,215 + cash 3,921 = 50,136 Accounts Payable Control 22,177 Balance b/d 2,445 Purchases (difference) 24,622

Bank Balance c/d

1,598 23,024 24,622

Total purchases = 23,024 + table 300 = 23,324 ii)

Bill Smithson Income Statement for the year ending 31 March 2019

Sales Less Cost of goods sold: Opening inventory Add Purchases Less Closing inventory Gross profit Less Expenses: Electricity Telephone Rent Advertising Insurance (946 − 177) Motor expenses (2,116 − 432 + 291) Depreciation: Motor Fittings (4,200 + 2,550 −300 − 250)  10% Net profit (b) Balance Sheet as at 31 March 2019 Non-current assets Fittings (4,200 + 2,550 − 300 − 250) Less Depreciation Motor Less Depreciation

50,136 3,210 23,324 26,534 4,063 1,090 360 2,000 1,430 769 1,975 1,020 620

6,200 620 5,100 1,020

Current assets Inventory Accounts receivable Prepayment Bank

4,063 4,012 177 1,775

Current liabilities Accounts payable Expenses owing

2,445 291

Capital Balance at start of year Add Net profit Less Drawings (16,743 + shelving 250) * 3,210 + 2,643 − 1,598 + 5,100 + 4,200 − 432 + 2,420 = 15,543

22,471 27,665

9,264 18,401

5,580 4,080 9,660

10,027 19,687 2,736 16,951 15,543 18,401 33,944 16,993 16,951

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Answer to Question 40.9A

BA 1

Jean Smith Income Statement for the year ending 31 March 2019

Sales [(24,900  2) + 600] Less Cost of sales: Purchases (26,400 + 120 + 880) Less Closing inventory Gross profit (25,500 − 600) Less Expenses: Wages Rent (3,500 − 700) Rates Electricity (760 + 180) Postages, stationery and sundries Van running expenses Van licence and insurance (250 − 125) Van depreciation (7,500/5)  6/12 months Loan interest (10,000  5%)  3/12 months Net profit Balance Sheet as at 31 March 2019 Non-current assets Motor van at cost Less Accumulated depreciation Current assets Inventory Accounts receivable Prepayments (125 + 700) Bank (W1) Cash Less Current liabilities Accounts payable Accrued expenses (125 + 180) Non-current liabilities Loan from John Peacock

50,400 27,400 1,900 14,700 2,800 1,200 940 355 890 125 750 125

7,600 750 1,900 2,300 825 4,310 640 880 305

10,000

48,100

6,850

9,975 16,825

11,185 5,640 15,000 3,015 18,015 12,375 5,640

Less Drawings (3,875 (W1) + 8,500)

Cash

21,885 3,015

1,185

Capital: Opening balance at start of year Add Net profit

(W1) Capital Loan: J Peacock Bankings 42,000 + 340 Cash sales 50,400 − 2,300

25,500 24,900

Bank 15,000 10,000 42,340

Van running expenses Van licence and insurance Van Caravan Wages Rates Rent Electricity Purchases (26,400 + 120) Postages, etc.

Bankings Drawings (difference) Balances c/d

48,100 67,340 *Bank statement 4090 + 340 uncredited deposits − 120 unpresented cheques = 4,310

Cash 890

355 42,340 3,875 640 48,100

Bank 250 7,600 8,500 14,700 1,200 3,500 760 26,520

4,310* 67,340

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Answer to Question 40.13A (a)

BA 1 P Maclaran Capital on 1 January 2018

Bank Cash Inventory Machinery Accounts receivable

6,000 60 2,300 9,800 8,100 26,260

Less: Accruals Accounts payable Loan

150 5,700 7,000

12,850 13,410

P Maclaran Income Statement for the year ending 31 December 2018 Sales Less: Sales returns

47,700 640 47,060

Less: Cost of sales Opening inventory Add: Purchases Less: Withdrawn by the owner Less: Closing inventory

1,200 5,400

2,300 30,700 33,000 6,600

Gross profit Add: Discount received Less: Expenses Rent (1,100 − 100 − 150) Bad debts written off Wages Insurance Loan interest (500 + 200) Depreciation Repairs Electricity Net profit Workings: Sales: 35,000 − 80 + 9,700 + 240 − 8,100 + 9,200 + 640 + 1,100 = 47,700.

Purchases: 31,000 − 5,700 + 4,800 + 600 = 30,700.

Depreciation: 9,800 + 3,400 − 10,400 = 2,800.

850 240 9,200 850 700 2,800 1,400 570

26,400 20,660 600 21,260

16,610 4,650

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Answer to Question 40.14A

BA 1 P Maclaran Balance Sheet as at 31 December 2018

Non-current assets Machinery opening balance Add: Additions Less: Depreciation

9,800 3,400 13,200 2,800

Current assets Inventory Accounts receivable Prepayments Cash

5,400 9,200 100 90

Current liabilities Accounts payable Bank overdraft

10,400

14,790 25,190

4,800 2,930 7,730 200 7,930

Accrued charges: Loan interest Non-current liabilities Bank loan 10%

7,000

Capital Account Balance at start of year Add: Net profit

14,930 10,260

13,410 4,650 18,060 7,800

Less: Drawings (6,600 + 1,200)

10,260

Answer to Question 41.11A (a)

BA 1 Abraxas

Buscema

i)

Gross profit as % of sales

1,010 100 = 30.6%  1 3,300

1,020



100 =  1

ii)

Net profit as % of sales

100 66  = 2% 3,300 1

108  2,700

10 =  1

iii)

Expenses as % of sales

iv)

Inventory turnover

v)

ROCE

vi) vii)

2,700

944 100  = 28.6% 3,300 1 2,290 = 5.3 times (410 + 460)  2 66 100  =  638 1

912 100  1 =  2,700 1,680 = 7.5 times (216 + 233) ÷ 2 108 100  =  401 1

Current ratio

992 = 1.3:1 744

360 = 2.0:1 179

Acid test ratio

532 = 0.72:1 744

127 = 0.71:1 179

viii) Accounts receivable days

524   = 58 days 3,300

106   = 14 days 2,700

ix)

744   = 116 days 2,340

179   = 39 days 1,697

Accounts payable days

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(b) Buscema appears to be performing better in relation to virtually all of the ratios. The only one in which it is inferior is (iii) expenses as a percentage of sales, which seems to be purely because of the higher level of directors’ remuneration. The senior management at Buscema certainly appear to be doing a better job of their stewardship of the company than their counterparts at Abraxas. Possible reasons for some of the key observations in connection with the ratios might include: • Buscema focuses on higher margin products and therefore earns a higher rate of gross profit.

Alternatively perhaps Abraxas simply charges lower prices in an attempt to boost its sales.

• Buscema uses its resources more efficiently: the company generates a greater net profit with lower capital employed (and a lower wage bill). Its operating processes may be more streamlined and efficient than those at Abraxas.

• Buscema collects its debts much faster than Abraxas. Perhaps its credit control department is more efficient, or it has better relationships with its customers. Alternatively Abraxas may have offered generous credit terms to its customers in a deliberate attempt to boost sales.

• Abraxas appears to be taking over 3 months to pay its suppliers. This could be a risky policy because some suppliers may refuse to trade with Abraxas in the future. It could also be a sign that Abraxas is experiencing some cash flow difficulties.

• Buscema has a higher rate of inventory turnover. Maybe its buyers are more effective at identifying household products that are in high demand. The slower inventory turnover of Abraxas, and the fact that its inventory levels have actually increased this year, are further worrying signs in terms of their potential impact on the company’s cash flow.

Answer to Question 41.14A BA 1 Author’s note: By necessity, the scenario presented in this question is highly simplified and one would never dispense investment advice on the basis of such limited information. However, the question is an excellent introduction to the ‘shareholder ratios’ presented in this chapter.

Laura (L) wishes to maximise her income, which means she would seek to maximise the value of dividends she receives each year. At first sight, Gogro (G) would therefore appear to be preferable. The dividend yield, which compares the latest annual dividend paid with the current market share price, is nearly double for G compared to Stabilo (S). This means that, for the same total investment, L’s annual dividend income (assuming dividends continue to be paid at similar levels) will be almost double if she buys shares in G rather than S. This is the same as pointing out that the dividend paid per share of G is slightly higher, but the share price is much cheaper: thus the same total investment would buy a greater number of shares in G and hence would produce a higher annual income.

The price-earnings ratio is also significantly higher for G than S, which means that the market price of G’s shares is higher compared to the current level of G’s profits than it is for S. This could indicate that the market is optimistic about G’s prospects to generate profits in the future.

The current price of G is near the top of the range of its price over the last 52 weeks, which also may suggest current levels of optimism about G’s situation. It may also point to the fact that G’s share price is on an upwards trend, and the price could rise even higher in the coming months. We are told that L wishes to maximise her income, but it is highly likely she would appreciate some growth in the value of her investment too.

The ROCE (return on capital employed) of G is higher than S which at face value suggests that G is managing to generate higher profits than S relative to the book value of its assets. However, it is difficult to deduce a great deal from this alone: it is possible that G and S are very different businesses in very different industries, so the fact that ROCE differs may not reveal much about how efficiently they are using their capital employed.

Moreover, some of the other information might make one very cautious about advising L to invest in G. First, the market price of G’s shares has been much more volatile in the last 52 weeks. This could suggest that a degree of uncertainty surrounds G’s business, or that it has been going through difficult or fluctuating circumstances. The share price of S appears far more stable, which suggests that the value of L’s £50,000 might be safer if invested in S. Of potentially even greater concern is the dividend cover. According to the data given, S only paid a quarter of its annual profit for the year in the form of a dividend. This has various implications, including: • S is retaining a significant portion of profits within the company, which can be used for reinvestment, expansion and growth. This could boost its future profits.

• S’s current level of dividend is more likely to be sustainable, because it is making annual profits well in excess of the amounts it is paying out.

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On the other hand, G paid a dividend greater than its annual profit, which means that none of this year’s profit was retained for reinvestment and that it could be difficult for G to sustain this level of dividends going forward.

Another concern is that G’s gearing is much higher than S’s. This means that, relative to its equity, G has borrowed a lot more than S. Since interest on loans must (unlike dividends) be paid each year, this increases the risk that if profits fall it may not be possible for G to pay a dividend. Furthermore it may mean that G is unable to borrow any further (without paying very high rates of interest) which means it could struggle to get the funds needed expand and grow in the future. S’s gearing is much lower, so it is less likely to face either of these problems.

We are also given details of the property, plant & equipment (PPE) of the two companies. S appears to have a much greater investment in PPE than G. The ‘depreciation to date’ figures possibly also indicate that S’s assets are newer, given that a much higher proportion of the cost of G’s assets has been depreci ated. However, it is very difficult to draw any firm conclusions because S and G may be very different businesses in very different industries, and accordingly hold very different types of PPE. In summary, on the basis of last year only, investment in G may potentially offer greater dividend income. But S appears to be a safer, more stable investment, offering greater assurance that current levels of dividend can be maintained or improved. Much more information about the two companies (their line of business, industry averages, future prospects, historical financial data and so forth) would be necessary before making any decision, as would information about L’s own financial circumstances and risk preferences. It would also appear unwise, of course, to invest all £50,000 in the shares of one company: a more diversified portfolio of investments is likely to be advisable.

Answer to Question 41.15A

BA 1

(a) 50% (b) 33⅓% (c) 5% (d) Receivable days have steadily improved over the last four years. Alistair has managed to reduce the average time waiting for his customers to pay from 60 to 40 days, which will benefit his cash flow and liquidity. It is possible he may have employed a new credit controller; or he has simply tightened up his collection procedures; or perhaps is offering cash discounts to incentivise some customers to pay more promptly.

There is still room for further improvement as his ideal target would be to collect his money in accordance with his 30-day credit policy.

Meanwhile payable days have increased steadily, which will also boost his business’s liquidity because he is holding on to his cash for longer. His average payment period is now roughly in line with the 30-day credit terms offered by his suppliers. It appears that he was paying his suppliers much quicker than this four years ago: perhaps he was taking advantage of prompt payment discounts offered by some of his suppliers in the past?

The receivable days remain greater than the payable days which is still not ideal: he is essentially paying his suppliers faster than he is collecting money from his customers. But the ‘gap’ has closed significantly (from 40 days to 7 days) which is certainly a positive trend.

However, his inventory turnover has slowed dramatically. Perhaps he has decided to hold much higher levels of inventory for some reason, or his sales have declined significantly so that his stock is moving much slower. Either way, money is tied up in inventory for much longer, which will have a negative effect on his business’s liquidity. It is definitely this trend in inventory turnover that is most worrying for Alistair and this is the aspect of his business that he should investigate further as a priority.

Answer to Question 41.17A (a)

BA 1

Schedule of Accounting Ratios and Resource Utilisation Year ended 30 September 2018 2019

2020

Net profit as % of sales

13,000 90,000

= 14.4%

20,000 = 20% 100,000

22,000 = 18.3% 120,000

ii) Gross profit as % of sales

16,000 90,000

= 17.8%

25,000 = 25% 100,000

28,000 = 23.3% 120,000

iii) Inventory turnover

74,000 3,500

= 21.1

75,000 5,500

92,000 18,500

i)

= 13.6

= 5.0

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iv) Current ratio

24,000 4,000

= 6:1

25,000 6,000

= 4.2:1

40,000 11,000

= 3.6:1

v) Acid test ratio

20,000 4,000

= 5:1

18,000 6,000

= 3:1

10,000 11,000

= 0.9:1

vi) Accounts receivable/ sales (months)

19,000  12 = 2.5 90,000

15,000  12 = 1.8 100,000

10,000  12 = 1.0 120,000

These are not the only six ratios or measures available. (b)

Your answer should be in report fashion. The main points you should cover include: i)

The increase of sales by £20,000 from 2019 to 2020 has been accompanied by a fall in net profit ratio of 1.7%, and worse liquidity ratios. The acid test ratio shows that there may be difficulties in paying your debts soon. ii) The year to 2019 showed a considerable increase in profitability. Can this be maintained? iii) Why has inventory increased to £30,000 at end of 2020? Does this show difficulties in achieving sales? Investigate. iv) If the above indicate problems in the future, what is the value of assets if sold at break-up prices? v) A government investment involves no risk, except for inflation. vi) Your return from Space Age should have a figure deducted for the value of your services. Only then can we sensibly compare the return from the business with the return from the investment. vii) There is a case for the investment in the loan stock being better than carrying on the business.

Answer to Question 41.19A (a)

BA 1 Table of Accounting Ratios A

B

1) Current ratios

180 160

= 1.1

200 120

= 1.7

2) Acid test

100 160

= 0.6

100 120

= 0.8

3) Net profit as % of sales

30 1,000

= 3%

100 3,000

= 3.3%

4) Gross profit as % of sales

600 1,000

= 60%

1,000 3,000

= 33%

5) Accounts receivable/sales (months)

100  12 = 1.2 1,000

3,000

6) Accounts payable/cost of sales (months)

110  12 = 3.3 400

120  12 = 0.7 2,000

7) Return on owners’ equity

30 100

= 30%

100 520

= 19.2%

8) Gearing

100 200

= 50%

130 650

= 20%

90

 12 = 0.36

(b) Should be in report fashion. Main points, briefly: i)

Both have similar net profit percentage: A 3%; B 3.3%. However, result obtained very differently as A has high GP% and very high expenses, whereas B has lower GP% and relatively lower expenses.

This could simply reflect differing judgements regarding whether to allocate certain expenses to ‘cost of sales’.

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ii) Higher gearing of A leads to higher return on owners’ equity. The extra debt of A could lead to problems if profits fall. iii) A’s high accounts payable/cost of sales ratio is very worrying, as is the low current ratio. Some of A’s suppliers might refuse to trade with A if A takes this long to pay its bills. iv) Figures considerably distorted by B’s land revaluation. This leads to B’s ROOE being understated, whilst that of A – by comparison – is overstated.

Answer to Question 41.29A

BA 1

For the benefits, see sections 41.1–41.3 of the text.

The limitations include: • Ratios only provide clues in relation to identifying what the significant trends or weaknesses might be.

Further investigation is usually required to truly understand what is going on.

• Ratios are calculated on the basis of published financial statements: the weaknesses of this information are discussed in section 41.8 of the text.

• Comparisons between businesses may be distorted by different accounting policies being used: see section 41.10 of the text.