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SOLUTIONS MANUAL

Frank Wood’s

Business Accounting
1&2
ELEVENTH EDITION

Frank Wood BSc(Econ), FCA and Alan Sangster BA, MSc, CertTESOL, CA

ISBN 978-0-273-71824-6

© Pearson Education Limited 2008
Lecturers adopting the main text are permitted to download and photocopy this manual as required.

Pearson Education Limited
Edinburgh Gate
Harlow
Essex CM20 2JE
England
and Associated Companies around the world
Visit us on the World Wide Web at www.pearsoned.co.uk Eleventh edition published in 2008
© Pearson Education Limited 2008
The rights of Frank Wood and Alan Sangster to be identified as authors of this Work have been asserted by them in accordance with the Copyright, Designs and Patents Act 1988.
All rights reserved. Permission is hereby given for the material in this publication to be reproduced for OHP transparencies and student handouts, without express permission of the Publishers, for educational purposes only.
In all other cases, no part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without either the prior written permission of the Publishers or a licence permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd,
Saffron House, 6–10 Kirby Street, London ECIN 8TS.
ISBN 978-0-273-71824-6
10
11

9 8 7 6
10 09 08

5

Printed in Great Britain

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3

2

1

Contents
Preface

iv

Part 1 Business Accounting 1
Students and examination success
Answers

1
3
6

Part 2 Business Accounting 2
Answers

93
95

Preface
This solutions manual contains answers to all the questions not already answered in Business Accounting 1 and Business Accounting 2. It can be seen that there are a considerable number of questions in both textbooks. About one-half of these have the answers at the back of the relevant textbook, while the remainder of the answers are contained in this manual.
The result of this is to give a high degree of flexibility in the use of the textbooks. To illustrate the contents of each chapter, the questions can be used which have answers in the textbook. Any students who are absent can be told what they have missed and can look up the answers themselves. Students who arrive late on the course can also be told what work to do and they can check their own progress against the answers as given. However, quite obviously work must be set, either in class or for homework, for which answers are not available to students. This manual can therefore be used to check such work.
Whilst every endeavour has been made to show workings quite fully, it must be appreciated that there are often different ways of getting to the same answer. This manual would be unduly lengthy and complicated if every version of arriving at the answer were to be shown. The methods chosen are therefore those judged to be the best from a teaching point of view.
Frank Wood and Alan Sangster

By writing on letterheaded paper of the institution where you teach, giving details of the course for which you use Business Accounting 1 or Business Accounting 2 with your classes, you can obtain complimentary copies of this manual. This manual is not available for students, nor is it in any way available for sale to the general public. It is also available on the lecturer’s password-protected section of the Frank Wood website at www.pearsoned.co.uk/wood

PART 1

BUSINESS ACCOUNTING 1

Students and examination success
Experienced teachers and lecturers know just as much as we do about this topic. There will, however, be quite a lot of people reading this who are new to teaching, and who have little experience in understanding how the examiner views things. If we have anything to offer, it is simply that we have, between us, been concerned with accounting education for many years and have been examiners for several external examining bodies.
The Notes for Students at the start of both Business Accounting 1 and Business Accounting 2 deal with examination techniques. Make certain the students read these. Go through these with them. If we all tell students that what these say is true, then they are more likely to believe us.

How students lose marks
1 Lack of knowledge (obviously) but they throw away marks unnecessarily for all of the following reasons:
(a)
(b)
(c)
(d)

Untidy work, including columns of figures not lined up.
Bad handwriting. Do not make it difficult for the examiner to read and mark.
Lack of headings, dates, sub-totals, etc. in accounting statements.
Not submitting proper workings.

You can only get them to rectify everything under this heading by insisting on them correcting (a), (b),
(c) and (d) from early on in the course. Do not wait until a few weeks before the examination to insist upon properly laid out and neatly constructed work.
2 Students very often do not follow the rubric on the examination paper. If it asks for two questions only from Section A, then it means just that. A remarkably high percentage do not follow the instructions per the rubric.
3 Students fail to answer the questions as set. If, for example, an examiner wants a list, students will lose marks by giving explanations instead. Students must tackle the question in the prescribed way and not do it differently. The percentage of students passing examinations would rise dramatically if only we could correct this failing. A good plan is to get them to highlight the instruction that shows how the examiner wants the question to be answered, e.g.
List the ways by which . . .
Describe the ways by which . . .
Write a report to the managing director about the ways by which . . .
Discuss how the ways by which . . .
Explain how the ways by which . . .
Then, get them to underline the key words in the rest of the question.
They need as much practice as possible in doing this, especially for essay-type questions.
Practice is even more essential for students for whom English is not their first language.
At the end of this section are 20 essay questions in which we have already highlighted the instruction and underlined the key words. See if your students can do the same.
4 Poor technique with essay questions. Business Accounting 2, Notes for students, the section headed
‘Answering essay questions’ covers this point. Discuss this with your students who have to tackle essay questions. 5 Not tackling the required number of questions. I have always found it very difficult to convince students to get hold of the idea that they will get more marks for five uncompleted questions than they will for four completed questions, when the examiner has asked for five to be attempted. Time planning is essential.
6 By not tackling the easiest questions first. Years ago, we did quite a lot of research into the results of students who had followed this advice, compared with those who ignored it. Following the advice produced better results.
7 By simply regurgitating the contents of a textbook in essay answers. For instance, when an examiner set a question on, say, materiality. Most of the answers simply gave exactly the same examples, word for word sometimes, that we have given in Business Accounting 1.
Examiners are looking for originality and imagination. Students will get excellent marks if they give their own examples. A good idea is that, for each of the concepts and conventions, they think up their own examples before the examination. There are going to be more and more questions on these things in the years ahead.
Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

3

8 Examiners like to see answers where students realise that all accounting is not found in textbooks, but exists for the use of businesses. Get them to use examples in essay questions based on what they have observed in the businesses around them.
For example, a question on ratios and interpretation will often be answered by students just using figures. They should also say why the figures have changed; what possible causes there might have been.
In their life outside their studies, they should observe how accounting is carried out. They all go at one time or another to refectories, restaurants, shops, department stores, clothes shops, travel on buses and trains, etc. They should observe how the money is calculated and collected, what sort of bills or tickets are given out, how fraud or errors could occur, and so on. They can give this flavour of the real world in their answers. Believe us, they will get better marks.

Essay questions – how not to misunderstand them
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

List the various pieces of information which should be shown on a sales invoice.
Describe what is meant by an imprest system.
Accounting based on historical costs can be misleading. Discuss.
The bookkeeper has said that if an error does not affect trial balance agreement then it cannot affect anything else very much. You are to write a report to the managing director stating whether or not you agree with the bookkeeper.
Give five examples of different compensating errors and explain why they cancel each other out.
Explain the differences between the straight line and reducing balance methods of depreciation.
Briefly describe the benefits to be gained from maintaining control accounts.
List six instances of errors which could cause the trial balance totals to disagree.
Name three methods of inventory valuation, and briefly describe any one of them.
‘Without the use of accounting ratios, much of the accounting work already performed would be wasted.’ Discuss the amount of truth in this statement.
How can retail stores use accounting ratios to help them to plan future inventory levels?
Assess the benefits of double entry as compared with single entry methods of bookkeeping.
Define depreciation and describe how the annual charge is worked out using the straight line method.
For a firm buying goods on credit, how can it calculate the figure of purchases even though a Purchases
Journal has not been kept?
List the differences between the income and expenditure account of a club and the income statement of a trading concern.
‘It is unsatisfactory for the treasurer of a club to prepare and present to the members only the receipts and payments account as a summary of the records of the club’s activities for the year.’ Why is this true?
What is the better thing to do?
You are to give your advice to the managing director of a company on the best manner of constructing departmental income statements.
How do the financial statements of a partnership vary from those of a sole trader, and why?
Consider the view that if profit was not calculated at all until the business was closed down, then such a calculation would be a simple and straightforward affair.
You are to write a letter to a friend explaining in simple terms why profit does not necessarily mean that you have cash in the bank.

Practice on past full examination papers
If students have not tackled past papers, under as near examination conditions as possible, they will often get quite a shock when they first sit an accounting examination.
This very often is due to two main reasons:
(a) There is such a lot to do in such a short time.
(b) Even though there is so much to do, in professional examinations in particular, many of the questions are quite difficult with some complicated calculations or adjustments.
If students can attempt, say, at least two such papers and then have their attempts marked and criticised, they will normally learn a lot from the experience.

Examination questions and marking schemes
We had originally intended to put here some typical examination questions and their marking schemes.
However, after some considerable thought, we decided against doing so. There is no one precise mode of marking and any suggestions that we might make could perhaps create more arguments and consequent misunderstandings. 4

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

In front of a group of people, it would be possible to do this, as we could deal with all the comments from the group and arrive at a consensus of opinion. However, the books sell world-wide and practices can vary.
It can, however, be said that:
(a) By and large, marking is ‘positive’, i.e. marks are awarded for what a student gets right, rather than being deducted for what a student gets wrong.
(b) However, marks are deducted for untidy work, lack of headings, dates, sub-totals, etc.
(c) An incorrect part of an answer, with no workings attached to it, will get nil marks.
(d) Extra, unnecessary answers, resulting from students failing to follow the rubric, will not be marked.
(e) Not following the examiner’s instructions will lose marks. For example, marks will be lost if, when asked for a ‘report’, a student gives a ‘list’; or if asked to ‘discuss’, a student gives only one side of the argument; or if asked to ‘define’, a student gives an ‘explanation’. Some examiners will award zero marks, even though the answers given by the student show good knowledge of the topic. Others
(including ourselves) would be kinder than that.
(f ) An error which repeats itself through an answer should lose only one set of marks. For instance, an error in the trading account will also affect balances in the profit and loss account, appropriation account and balance sheet. In cases of this type, only one set of marks should be lost.
(g) Guessing by students is not normally penalised. The one exception that may arise concerns multiple choice questions where wrong answers may be penalised as an incentive to prevent students guessing.
In this case, the examining body would make this information known well in advance of the examination date.
(h) The easiest marks to get, especially in an essay question, are the first few marks.
(i) Good handwriting and well displayed answers will often (although theoretically they should not) get higher marks than they deserve. This is simply because examiners are human beings with human failings, and work that can be easily marked makes them feel generous.
Frank Wood and Alan Sangster

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

5

Answers
Answer to Question 1.2A BA 1
(a) 38,100
(e) 26,000

(b) 51,600
(f ) 159,000

(c) 7,600

(d) 104,100

Answer to Question 1.4A BA 1
Liabilities:
Assets:

Accounts payable for inventory
Owing to bank
Loan from D Jones
Motor vehicles
Premises
Inventory
Accounts receivable
Cash in hand
Machinery

Answer to Question 1.6A BA 1
Wrong: Accounts payable, Capital, Machinery, Motor vehicles.

Answer to Question 1.8A BA 1
Fixtures 1,200 + Van 6,000 + Inventory 2,800 + Bank 200 + Cash 175 = Total Assets 10,375.
Loan 2,500 + Accounts payable 1,600 + Capital (difference) 6,275.

Answer to Question 1.10A BA 1

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

M Kelly
Balance Sheet as at 30 June 2006
3,400
3,600
4,500
2,800
10,900
4,100

Capital

6

6,800
10,200
10,200

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

Answer to Question 1.12A BA 1
Assets
(a) +Van
(b) −Cash
(c) +Inventory
−Bank
(d) +Cash
(e) +Inventory
−Accounts receivable
(f ) +Inventory
(g) −Cash
(h) −Bank

Liabilities
+Accounts payable
−Loan from P Smith

Capital

+Capital
+Accounts payable
−Accounts payable

−Capital

Answer to Question 1.14A BA 1

Non-current assets
Equipment
Car

J Hill
Balance Sheet as at 7 December 2009
6,310
7,300

Current assets
Inventory
Accounts receivable
Bank
Cash

8,480
3,320
9,510
485

Current liabilities
Accounts payable

13,610

21,795
35,405
1,760
33,645

Capital

33,645

Answer to Question 2.2A BA 1
Debited
(a) Lorry
(c) Loan from P Logan
(e) Office machinery
(g) Bank
(i) Cash

Credited
Cash
Cash
Ultra Ltd
J Cross
Loan from L Lowe

Debited
(b) T Lake
(d) Cash
(f ) Cash
(h) Bank
(j) D Lord

Credited
Bank
Lorry
A Hill
Capital
Cash

To save time and space, the months are omitted in the Ledger accounts which follow. The day of the month is shown in brackets.

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

7

Answer to Question 2.5A BA 1
(1) Capital
(25) Cash

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

Bank
16,000
(2)
400 (12)
(19)
(30)

Van
6,400
Cash
180
Carton Cars 7,100
Office fixtures 480

Office Fixtures
900
120
480
Capital
(1) Bank

(12) Bank
(21) Loan: Berry

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

Vans
(2) Bank
6,400
(8) Carton Cars 7,100
Old Ltd
(5) Office fixtures 900

16,000

(19) Bank

Carton Cars
7,100
(8) Van
Loan from Berry
(21) Cash

7,100
500

Answer to Question 2.6A BA 1
Bank
(1) Capital
9,000
(8) Cash
(2) Loan Blane 2,000 (15) Loan Blane
(17) Clearcount

(15) Bank
(24) Cash

Loan: B Blane
500
(2) Bank
250

200
500
420

2,000

Cash
750
(3) Computer
200 (24) Loan Blane

(3) Cash

Computer
600

(17) Bank

Display Equipment
(5) Clearcount
420
Capital
(1) Cash
(1) Bank

(1) Capital
(8) Bank

750
9,000

(31) F Jones

Clearcount Ltd
420
(5) Display eqt
F Jones
(31) Printer
Printer
200

Answer to Question 3.2A BA 1
(a)
(c)
(e)
(g)
(i)

8

Debited
Purchases
L Jones Ltd
Van
Bank
B Henry

Credited
T Morgan
Machinery
D Davies Ltd
D Picton
Bank

(b)
(d)
(f )
(h)
(j)

Debited
Returns in
Purchases
I Prince
Purchases
J Mullings

Credited
J Thomas
Cash
Returns out
Bank
Sales

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

600
250

420

200

Answer to Question 3.4A BA 1
Cash
7,400
(2) Bank
54
(7) Purchases

(1) Capital
(19) Sales

7,000
362

Purchases
410
362

(4) J Watson
(7) Cash

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

J Watson
42
(4) Purchases
368

(10) Sales

Bank
7,000
(5) Van
4,920
(29) J Watson
368
1,500 (31) Firelighters Ltd820

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

Sales
(10) L Less
(19) Cash

42

L Less
218

410

(22) Firelighters
Ltd
(5) Bank

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

(31) Bank

218
54

Firelighters Ltd
820 (22) Fixtures
Capital
(1) Cash

1,500
820
7,400

Answer to Question 3.6A BA 1
(1) Capital
(18) Cash

Bank
18,000 (21) Printer
250 (29) B Hind
Cash
210 (18) Bank
305

(5) Sales
(12) Sales

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

620
1,373

(2) B Hind
(3) G Smart
(8) G Smart

250

Sales

(5)
(10)
(12)
(22)

1,455

G Smart
47
(3) Purchases
(8) Purchases

472
370

(10) Sales

P Syme
483 (23) Returns In

160

(22) Sales

H Buchan
394 (25) Returns In

419

Cash
P Syme
Cash
H Buchan

210
483
305
394

18

A Cobb
(31) Machinery

Purchases
1,455
472
370

(28) Returns Out

Capital
(1) Bank

18,000

(23) P Syme
(25) H Buchan

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

(31) A Cobb

Machinery
419

(21) Bank

82
47

Printer
620

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

9

Answer to Question 4.3A BA 1
July
1 Bank
Cash
Capital
2 Stationery
Bank
3 Purchases
T Smart
4 Cash
Sales
5 Insurance
Cash
7 Computer
J Hott
8 Expenses
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

10

Dr
5,000
1,000
75
2,100
340
290
700
32
630
55
210
225
400
700
125
645
125

Cr
6,000
75
2,100
340
290
700
32
630
55
210
225
400
700
125
645
125

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

Answer to Question 4.4A BA 1
Bank
(1) Capital
11,000
(5)
(24) K Fletcher
250 (16)
(28) Business rates 45 (19)
(28)
(28)
(28)
(1) Capital

Cash
1,600
(3)
(4)
(7)
(11)
(18)
(21)
(23)

Stationery
62
Business rates 970
Rent
75
J Biggs
830
D Martin
415
B Black
6,100
Purchases
Rent
Wages
Rent
Insurance
Motor exps
Wages

Capital
(1) Bank
(1) Cash
(4) Cash
(11) Cash
(19) Bank

11,000
1,600

(16) Bank

Sales

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

(13) B Hogan

B Black
6,100 (20) Van
J Biggs
830
(2) Purchases

(10) Returns Out
(28) Bank

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

45

(6) Sales

Insurance
280

(6) Sales

B Hogan
290 (13) Returns In

(21) Cash

Motor Expenses
24

(6) Sales

K Fletcher
410 (24) Bank

Van
6,100

195

6,100
830
610

590

D Twigg
370

(18) Cash

(20) B Black

370
290
410
205
280
426

Returns Inwards
35

(28) Bank

Stationery
62
Business rates
970 (28) Bank

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

Returns Outwards
(10) D Martin

(28) Bank

Wages
160
170

(5) Bank

Purchases
830
610
590
370

J Biggs
D Martin
P Lot
Cash

370
75
160
75
280
24
170

Rent
75
75
75

(7) Cash
(23) Cash

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

(15) Sales

F Sharp
280

(15) Sales

250

T Lee
205

(15) Sales

35

G Rae
426

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

11

Answer to Question 4.6A BA 1
(A)
(B)
(C)
(D)
(E)
(F)
(G)
(H)
(I)

Goods bought on credit £27,000.
Borrowed £35,000 and immediately spent it on land and buildings £35,000.
Sold goods costing £20,000 for £30,000 on credit.
Debtors paid £13,000.
Debtors paid £2,000: this amount taken by proprietors.
Took £5,000 drawings by cheque and paid off £3,000 accrued expenses by cheque.
Equipment costing £30,000 sold for £21,000; paid by cheque.
Goods taken for own use £1,000.
Took £6,000 cash as drawings. Could have been £6,000 cash stolen – thus reducing cash and causing a loss.

Answer to Question 5.6A BA 1
(1) Sales
(21) Sales
(1) Balance b/d
(1) Sales
(8) Sales
(21) Sales
(1) Balance b/d
(1) Sales
(8) Sales

(1) Balance b/d
(1) Sales

G Wood
310 (19) Bank
90 (31) Balance c/d
400

310
90
400

(15) Returns
(28) Bank

90
K Hughes
42 (31) Balance c/d
161
430
633

(31) Balance c/d
633

F Dunn
1,100 (10) Returns
31
224 (19) Bank
750
(31) Balance c/d
543
1,324
1,324
543
M Lyons
309 (10) Returns
(12) Cash
309

82
227
309

190

J Leech
278
(2) Purchases
(9) Purchases
278

63
215
278

(1) Balance b/d

633

633

T Sim
15
(2) Purchases
175
190

(28) Bank
(31) Balance c/d

P Tidy
180
(2) Purchases
30
210
(31) Balance b/d

(15)
(28)
(31)
(31)

Returns
Bank
Returns
Balance c/d

F Rock
21
(2) Purchases
100
(9) Purchases
18
215
354
(1) Balance b/d

Wood, Hughes and Dunn are debtors. Leech, Tidy and Rock are creditors.

12

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

190

278
210
210
30
190
164
354
215

Answer to Question 5.7A BA 1
G Wood
Dr
310

2008
May 1
Sales
May 19 Bank
May 21 Sales

90
K Hughes
Dr
42
161
430

2008
May 1
Sales
May 8
Sales
May 21 Sales
2008
May 1
May 8
May 10
May 19

Sales
Sales
Returns
Bank

2008
May 1
Sales
May 10 Returns
May 12 Bank
2008
May 2
Purchases
May 15 Returns
May 28 Bank
2008
May 2
May 9

Purchases
Purchases

2008
May 2
Purchases
May 28 Bank
2008
May 2
May 9
May 15
May 28
May 31

Purchases
Purchases
Returns
Bank
Returns

F Dunn
Dr
1,100
224

M Lyons
Dr
309

T Sim
Dr
15
175
J Leech
Dr

P Tidy
Dr
180
F Rock
Dr
21
100
18

Cr
310

Balance
310 Dr
0
90 Dr

Cr

Balance
42 Dr
203 Dr
633 Dr

Cr

Balance
1,100 Dr
1,324 Dr
1,293 Dr
543 Dr

31
750
Cr
82
227

Balance
309 Dr
227 Dr
0

Cr
190

Balance
190 Cr
175 Cr
0

Cr
63
215

Balance
63 Cr
278 Cr

Cr
210

Balance
210 Cr
30 Cr

Cr
190
164

Balance
190 Cr
354 Cr
333 Cr
233 Cr
215 Cr

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

13

Answer to Question 6.3A BA 1
(1)
(28)
(28)
(30)

Capital
T Potts
J Field
Capital

(1) Balance b/d
(5) Sales
(26) Loan from
B Bennet
(1) Balance b/d
(3)
(3)
(3)
(3)
(19)
(19)
(19)

J Small
F Brown
R Charles
T Rae
R Charles
T Rae
F Jack

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

Bank
15,000 (6)
71 (7)
42 (23)
900 (23)
(23)
(25)
(30)
16,013

Rent
175
Business rates 130
J Small
272
F Brown
1,200
T Rae
500
Van
6,200
Balance c/d 7,536
16,013

7,536
Cash
610 (17) Wages
(30) Balance c/d
750
1,360

Sales
2,383 (5)
(11)
(11)
(11)
2,383

Cash
T Potts
J Field
T Gray

Returns Outwards
45 (18) J Small
(18) R Charles
45
(1) Balance b/d

(20) J Field
(20) T Potts
(1) Balance b/d
(30) Balance c/d

1,360

Returns Inwards
6 (30) Balance c/d
14
20

3,225

610
85
48
1,640
2,383
2,383
18
27
45
45
20

20

15,000
900
15,900

(1) Balance b/d 15,900
Van
(21) Turnkey Motors 4,950 (30) Balance c/d 11,150
(25) Bank
6,200
11,150
11,150
(1) Balance b/d
(6) Bank
(1) Balance b/d

14

11,150
Rent
175 (30) Balance c/d
175

(30)

(18)
(23)

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

(23) Bank
(30) Balance c/d

20
Capital
15,900 (1) Bank
(30) Bank
15,900

(17)
(1)

3,225

3,225

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

290
1,070

1,070
Purchases
290 (30) Balance c/d
1,200
530
610
110
320
165
3,225

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

(7) Bank
(1) Balance b/d

175

(30) Balance c/d

(11) Sales

(11) Sales

F Brown
1,200 (3) Purchases
R Charles
27 (3)
613 (19)
640
(1)
T Rae
500 (3)
430 (19)
930
(1)
F Jack
165 (19)
(1)
T Potts
85 (20)
(28)
85

Purchases
Purchases
Balance b/d
Purchases
Purchases

130

290

750
750
290
290
1,200
530
110
640
613

Balance b/d

610
320
930
430

Purchases
Balance b/d

165
165

Returns In
Bank

14
71
85

J Field
48 (20) Returns In
(28) Bank
48

6
42
48

T Gray
1,640 (30) Balance c/d 1,640
1,640
Turnkey Motors
(30) Balance c/d
4,950 (21) Van
4,950
(1) Balance b/d 4,950
Trial Balance as at 30 November 2007
Bank
7,536
Cash
1,070
Purchases
3,225
Sales
2,383
Returns Outwards
45
Returns Inwards
20
Capital
15,900
Van
11,150
Rent
175
Business rates
130
Wages
290
Loan from B Bennet
750
R Charles
613
T Rae
430
F Jack
165
T Gray
1,640
Turnkey Motors
4,950
25,236
25,236
(11) Sales
(1) Balance b/d

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

(8) Bank
(1) Balance b/d

Answer to Question 6.4A BA 1
Cash
Capitals
10,500
(2)
Sales
145
(3)
Loan: B Barclay 500 (11)
A Tom
614 (30)
11,759
(1) Balance b/d
1,419

(1)
(21)
(30)
(30)

Bank
Cash
9,000
(8)
Loan: B Barclay2,000 (15)
R Pleat
158 (26)
L Fish
370 (26)
(30)
11,528
(1) Balance b/d
3,790

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

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

Cash
T Dry
F Hood
M Smith
G Low

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

(30) Balance c/d

(18) R Tong
(18) M Singh
(1) Balance b/d

Bank
Purchases
Salaries
Balance c/d

Rent
Van
F Hood
M Smith
Balance c/d

Purchases
550 (30) Balance c/d
800
930
160
510
2,950
2,950
Sales
1,783
(6)
(6)
(6)
(6)
(21)
(24)
(24)
(24)
1,783
(1)

R Tong
L Fish
M Singh
A Tom
Cash
L Fish
A Tom
R Pleat

9,000
550
790
1,419
11,759

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

2,950

Balance b/d

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

30
42
72
72

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

Loan from B Barclay
2,500 (16) Bank
(30) Cash
2,500
(1) Balance b/d

2,000
500
2,500
2,500

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

610
610

(6) Sales
(24) Sales

L Fish
240 (29) Bank
130
370

(30) Balance c/d

(6) Sales
(1) Balance b/d
(6) Sales
(24) Sales

(24) Sales
(6) Sales
(1) Balance b/d

25

(14) Returns Out
(26) Bank

10,500
10,500

(30) Balance c/d

T Dry
800
(4) Purchases
(1) Balance b/d

800
800

(14) Returns Out
(26) Bank

M Smith
42
(4) Purchases
118
160

160

(30) Balance c/d

G Low
510
(4) Purchases
(1) Balance b/d

510
510

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

89
89

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

Salaries
790 (30) Balance c/d
790

25

(30) Balance b/d

Stationery
89 (30) Balance c/d
89

(11) Cash
(1) Balance b/d

(30) Balance c/d

Capital
10,500
(1) Cash
(1) Balance b/d

(30) Balance c/d

220

2,950

170
240
326
204
145
130
410
158
1,783
1,783

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

Rent
220 (30) Balance c/d
220

160

89

M Singh
326 (18) Returns In
(30) Balance c/d
326
306
A Tom
204 (30) Cash
410
614
R Pleat
158 (29) Bank
R Tong
170 (18) Returns In
(30) Balance c/d
170
170
F Hood
30
(4) Purchases
900
930

Trial Balance as at 31 January 2008
Cash
1,419
Bank
3,790
Purchases
2,950
Sales
Returns Outwards
Returns Inwards
25
Capital
Stationery
89
Rent
220
Salaries
790
Fixtures
610
Van
6,500
Loan from B Barclay
Chiefs Ltd
M Singh
306
R Tong
165
T Dry
G Low
Buttons Ltd
16,864

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

370
370
20
306
326

614
614
158
5
165
170

930
930

1,783
72
10,500

2,500
610
800
510
89
16,864

15

Answer to Question 7.3A BA 1
B Morse
Income Statement for the year ending 31 December 2008

Sales
Less Cost of goods sold:
Purchases
Less Closing inventory
Gross profit
Less Expenses:
Salaries
Business rates
Motor expenses
General expenses
Insurance
Net profit

235,812
121,040
14,486
39,560
2,400
910
305
1,240

106,554
129,258

44,415
84,843

Answer to Question 7.4A BA 1

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

G Graham
Income Statement for the year ending 30 June 2008

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

216,646
165,774

56,288
109,486

Answer to Question 8.3A BA 1

Non-current assets
Premises
Car
Current assets
Inventory
Accounts receivable
Bank
Cash

B Morse
Balance Sheet as at 31 December 2008
53,000
4,300
14,486
21,080
2,715
325

Total assets
Less Current liabilities
Accounts payable
Capital
Balance at 1.1.2008
Add Net profit
Less Drawings

16

57,300

38,606
95,906

11,200
84,706
23,263
84,843
108,106
23,400

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

84,706

Answer to Question 8.4A BA 1
G Graham
Balance Sheet as at 30 June 2008

Non-current assets
Shop
Fixtures
Lorry

174,000
4,600
19,400

Current assets
Inventory
Accounts receivable
Bank

29,304
44,516
11,346

Current liabilities
Accounts payable

198,000

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

Capital
Balance at 1.7.2007
Add Net profit

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

Less Drawings

259,758

Answer to Question 8.6A BA 1
= 18,000 + 4,800 + 24,000 + 760 + 15,600 − 8,000 − 6,000
= 49,160
Capital at 31 December 2009 = 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 2009

A Trader
Balance Sheet as at 31 December 2009
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
Balance at 1 January 2009
Add Capital introduced
Net profit
Less Drawings

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

38,640
70,840
13,000
57,840
49,160
4,000
15,080
68,240
10,400
57,840

17

Answer to Question 9.2A BA 1
P Frank
Trading Account part of the Income Statement for the year ending 31 March 2008
Sales
469,320
Less Returns in
16,220
Less Cost of goods sold:
Purchases
394,170
Less Returns out
19,480
374,690
Carriage inwards
2,490
377,180
Less Closing inventory
52,400
Gross profit

453,100

324,780
128,320

Answer to Question 9.5A BA 1

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

T Owen
Income Statement for the year ending 31 March 2009

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
Non-current assets
Buildings
Fixtures
Current assets
Inventory
Accounts receivable
Bank
Cash

276,400
52,800
138,892
1,350
193,042
58,440
63,400
5,840
3,800
714
1,930
1,830
208

Less Drawings

18

77,722
64,076

Balance Sheet as at 31 March 2009
125,000
1,106
58,440
45,900
31,420
276

Current liabilities
Accounts payable
Capital
Balance at 1.4.2008
Add Net profit

134,602
141,798

126,106

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

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

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

237,272

Answer to Question 9.6A BA 1
F Brown
Income Statement for the year ending 30 September 2008
Sales
Less Returns in
Less Cost of goods sold:
Opening inventory
Add Purchases
Less Returns out
Carriage inwards

391,400
2,110
254,810
1,240

Less Closing inventory
Gross profit
Less Expenses:
Wages and salaries
Carriage out
Motor expenses
Rent and rates
Telephone charges
Insurance
Office expenses
Sundry expenses

Non-current assets
Van
Office equipment

389,290

72,410
253,570
760
326,740
89,404
39,600
2,850
1,490
8,200
680
745
392
216

237,336
151,954

54,173
97,781

Balance Sheet as at 30 September 2008
5,650
7,470

Current assets
Inventory
Accounts receivable
Bank
Cash

89,404
38,100
4,420
112

Current liabilities
Accounts payable

13,120

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

Capital
Balance as at 1.10.2007
Add Net profit

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

Less Drawings

118,856

Answer to Question 9.8A BA 1
Capital
July 1 Balance b/d

9,700

Inventory
July 1 Balance b/d

5,000
OK Ltd

July
Bank
July 31 Balance c/d

3,000
1,400
4,400

July 1

Balance b/d
Purchases

Aug 1 Balance b/d

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

500
3,900
4,400
1,400

19

AB Ltd
July 1

Balance b/d
Sales

Aug 1

Balance b/d

300
600
900
600

July
Bank
July 31 Balance c/d

300
600
900

Equipment
July 1
Aug 1

Balance b/d
Balance b/d

3,700
3,700

July 31 Balance c/d

3,700

July

OK Ltd
General expenses
July 31 Balance c/d

3,000
500
1,200
4,700

July

3,200
600
3,800
3,800

Bank
July 1

Balance b/d
Sales
AB Ltd

Aug 1

Balance b/d

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

July 31 Balance c/d

3,800
3,800

Bank
AB Ltd

Aug 1 Balance b/d

Purchases
July
Aug 1

OK Ltd
Balance b/d

3,900
3,900

July 31 Balance c/d

3,900

General Expenses
July
Aug 1

Bank
Balance b/d

500
500

July 31 Balance c/d

Ms Porter
Trial Balance as at 31 July
Equipment
Inventory
Bank
General expenses
Purchases
AB Ltd
OK Ltd
Sales
Capital

Sales
Less Cost of goods sold:
Opening inventory
Purchases
Less Closing inventory

500

Dr
3,700
5,000
1,200
500
3,900
600

14,900
Ms Porter
Income Statement for July

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

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

Gross profit
Less General expenses
Net profit

20

Cr

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

2,700
1,100
500
600

Balance Sheet as at 31 July

Non-current assets
Equipment

3,700

Current assets
Inventory
Accounts receivable
Bank

6,200
600
1,200

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

Current liability: Accounts payable
Capital
Add Net profit

Answer to Question 13.2A BA 1

(1)
(2)
(3)
(4)
(9)
(11)
(13)
(16)
(20)

Cash Book
Bank
4,240
(3)
(5)
200
(6)
194
(7)
115
(11)
(12)
(14)
(28)
174
(30)
(30)
4,923

Cash
295
310

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

150
430
1,500
2,685

Cash
200
80

Bank
Postage
Office equipment
L Root
Cash
Wages
Motor expenses
General expenses
Insurance
Balances c/d

400
35
1,970
2,685

Bank
310
94
150
81
320
3,968
4,923

Answer to Question 13.4A BA 1

(1)
(2)
(2)
(2)
(2)
(3)
(8)
(10)
(12)
(29)
(30)
(30)

Balances b/d
S Braga
L Pine
G Hodd
M Rae
Sales
Bank
Sales
B Age
A Line
Sales
Balance c/d

(30) Total for month

Disct
41
16
22
52

4

Cash
420

400
1,260
980

135

3,060

Cash Book
Bank
4,940
(5)
779
(6)
304
(6)
418
(6)
988
(8)
740
(14)
(16)
(16)
276
(20)
324
(24)
(30)
12,623
(30)
21,392

Rent
M Peters
G Graham
F Bell
Cash
Wages
R Todd
F Dury
Fixtures
Lorry
Stationery
Balance c/d

Disct
9
24
10
15
12

70

Cash
340

540

56
2,124
3,060

Bank
351
936
390
400
295
400
4,320
14,300
21,392

Discounts Allowed
135
Discounts Received
(30) Total for month

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

70

21

Answer to Question 13.6A 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

Cash ¢
GH
IJ
Wages

125
1,985

Balance c/d
Balance b/d

Disct
45
70

115

Cash

130
50
180

Bank
100
555
1,330

1,985
125

AB
Balance b/d

200

Bank
Discount received

200

192
8
200

CD
Balance b/d

500

Bank
Discount received

500

480
20
500

EF
Balance b/d

300

Bank
Discount received

300

288
12
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

22

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

1,400
1,400

Answer to Question 14.2A BA 1
(1)
(3)
(5)
(7)
(16)
(23)
(30)

I Hood
S Bell
J Smart
K Byers
T Todd
W Morris
F Lock

Sales Day Book

520
318
64
165
540
360
2,040
4,007

(1) Sales
(3) Sales

Sales Ledger
I Hood
520
S Bell
318

(7) Sales
4,007

J Smart
64
K Byers
165

(16) Sales

T Todd
540

(23) Sales

General Ledger
Sales
(31) Total for month (5) Sales

W Morris
360

(30) Sales

F Lock
2,040

Answer to Question 14.4A BA 1
(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%
L Mackeson
29 metres plastic tubing @ £1
M Alison
32 metres plastic tubing @ £1
24 lengths polythene sheeting @ £2
20 boxes vinyl padding @ £5
Less Trade discount 331/3%

22
18
20
60
15
45
100
40
60
200
40
160
4
66
90
160
40
120
29
32
48
100
180
60
120

(b)
(1)
(5)
(11)
(21)
(30)

Sales Journal
A Portsmouth
B Butler
A Gate
L Mackeson
M Alison

(1) Sales

Sales Ledger
A Portsmouth
45

(5) Sales

B Butler
160

(11) Sales

45
160
120
29
120
474

A Gate
120

(21) Sales

L Mackeson
29

(30) Sales

M Alison
120

(c)

General Ledger
Sales
(30) Total for month Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

474

23

Answer to Question 15.2A BA 1
Workings: Invoices
F Day
2 sets golf clubs @ £800
5 footballs @ £40
Less Trade discount 25%

6 cricket bats @ £60
6 ice skates @ £35
4 rugby balls @ £30

G Smith

Less Trade discount 20%
(a)
(2)
(11)
(18)
(25)
(30)

Purchases Day Book
F Day
G Smith
F Hope
L Todd
M Moore

1,600
200
1,800
450
1,350
360
210
120
690
138
552

M Moore
8 goal posts @ £80
Less Trade discount 40%

552
2,760
195

M Moore
(30) Purchases

24

L Todd
5 cricket bats @ £52
Less Trade discount 25%

1,350

L Todd
(25) Purchases

(30) Total for month Purchases Ledger
F Day
(2) Purchases

F Hope
(18) Purchases

(c)

Less Trade discount 331/3%

1,350
552
2,760
195
384
5,241

G Smith
(11) Purchases

(b)

F Hope
6 sets golf trophies @ £90
4 sets golf clubs @ £900

384

General Ledger
Purchases
5,241

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

540
3,600
4,140
1,380
2,760
260
65
195
640
256
384

Answer to Question 15.4A BA 1
(a)
Purchases Day Book
(9) C Clarke
(16) A Charles
(31) M Nelson

240
160
50
450

Sales Day Book
(1) M Marshall
(7) R Richards
(23) T Young

Purchases Ledger
C Clarke
(9) Purchases

(31) Total for month (1) Sales

160

(7) Sales

R Richards
200

M Nelson
(31) Purchases
(c)

240

Sales Ledger
M Marshall
45

A Charles
(16) Purchases

(b)

50

(23) Sales

45
200
160
405

T Young
160

General Ledger
Purchases Account
450
Sales Account
(31) Total for month 405

Answer to Question 16.2A BA 1
(1)
(1)
(1)
(1)
(6)
(6)
(6)
(20)
(30)

B Dock
M Ryan
G Soul
F Trip
P Coates
L Job
T Man
B Uphill
T Kane

Sales Day Book

Returns Inwards Day Book
(10) B Dock
(10) F Trip
(24) L Job

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

General Ledger
Sales
(30) Total for the month 3,143
(30) Total for the month

Returns Inwards
67

(1) Sales

Sales Ledger
B Dock
240 (10) Returns

(1) Sales

M Ryan
126

(1) Sales
(6) Sales

19

G Soul
94
99

(1) Sales

F Trip
107 (10) Returns

(6) Sales

P Coates
182

(6) Sales

L Job
203 (24) Returns

(20) Sales

16

B Uphill
1,790

(30) Sales

32

T Kane
302

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

25

Answer to Question 16.4A BA 1
(3)
(3)
(3)
(8)
(8)
(8)
(20)
(20)
(20)

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

(14)
(14)
(31)
(31)

Returns Inwards Day Book
E Phillips
F Thompson
E Phillips
E Rigby

510
246
356
307
250
185
188
310
420
2,772

(1)
(1)
(1)
(5)
(5)
(5)
(5)
(24)
(24)

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

18
22
27
30
97

(12)
(12)
(31)
(31)

Returns Outwards Day Book
M Norman
N Senior
J Cook
C Davies

(3) Sales

Sales Ledger
E Rigby
510 (31) Returns In

30

(3) Sales
(20) Sales

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

18
27

(3) Sales

F Thompson
356 (14) Returns In

(8) Sales

(20) Sales
(20) Sales

(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
410

C Davies
11
(5) Purchases

66

C Ferguson
(24) Purchases

550

K Ennevor
(24) Purchases

900

J Ferguson
185
F Powell
310

380

D Edwards
(5) Purchases

22

H George
250

(8) Sales

E Lee
420

Sales
(31) Sales Day
Book
(31) Purchases
Day Book

26

Purchases
3,292

30
16
13
11
70

Purchases Ledger
K Hill
(1) Purchases

A Green
307

(8) Sales

380
500
106
200
180
410
66
550
900
3,292

(31) Returns Out

(31) Returns Out

General Ledger
2,772

(31) Returns In
Day Book

Returns Inwards
97

Returns Outwards
(31) Returns Out
Day Book

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

70

Answer to Question 17.2A BA 1
Fixtures
Drawings
Purchases
Computer equipment
Bell and Co
Bad debts
Office equipment

Dr
Dr
Dr
Dr
Dr
Dr
Dr

1,153
340
68
640
42
124
1,710

:
:
:
:
:
:
:

Bell and Co
Purchases
Drawings
H Cowes
Fixtures
P Lees
Furniture Today Ltd

Cr
Cr
Cr
Cr
Cr
Cr
Cr

1,153
340
68
640
42
124
1,710

Answer to Question 18.3A BA 1
Receipts
600

527
1,127

(1) Balance b/d
(1) F Black
(2) Letterheadings
(2) Abel Motors
(3) Cleaning materials
(6) Envelopes
(8) Petrol
(11) P Lyon
(12) T Upton
(12) Paper clips
(14) Petrol
(16) Adhesive tape
(16) Petrol
(21) Motor tax
(22) F Luck
(23) T Upton
(24) J Lamb
(25) Copy paper
(26) Lively Cars
(29) Petrol
(30) F Tred
(30)
(30)

Cash
Balance c/d

Petty Cash Book
Total
Office
Exps
18
41
67
4
11
22
16
8
3
19
2
25
95
19
14
27
8
83
24
21
527

41
11

3
2

Motor
Exps

Cleaning

18
67

4

22
8

65

16

19
25
95
14

8

Casual
Labour

83
24
335

26

19
27

21
101

600
1,127

Answer to Question 19.2A BA 1
(a)
INVOICE number 1876
To: R Wilson
24 Peter Street
Loughborough

A Duff
Middle Road
Paisley

VAT Registration No. 454 366 812
Date: 1 March 2006
Your Order No. 943

20,000 Coils Sealing Tape @ £6.10 per 1,000 =
40,000 Sheets Bank A5 @ £4.60 per 1,000 =
24,000 Sheets Bank A4 @ £8.20 per 1,000 =
Add VAT 10%

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

£
122.00
184.00
196.80
502.80
50.28
552.88

27

(b) Books of R Wilson:

A Duff
2006
Mar 1 Purchases

Books of A Duff:
2006
Mar 1 Sales

552.88

R Wilson
552.88

Answer to Question 19.5A BA 1
Sales Day Book
(1)
(4)
(14)
(28)

H Impey Ltd
B Volts
L Marion
B Volts

Purchases Day Book
(5)
(8)
(18)
(30)

G Sharpe and Co
R Hood and Associates
F Tuckley Ltd
R Hood and Associates

Net
180
410
190
220
1,000

VAT
18
41
19
22
100

Gross
198
451
209
242
1,100

Net
90
150
130
350
720

VAT
9
15
13
35
72

Gross
99
165
143
385
792

Sales Ledger
H Impey Ltd
198

(1) Sales
(4) Sales
(28) Sales

B Volts
451
242

(14) Sales

L Marion
209
Purchases Ledger
G Sharpe and Co
(5) Purchases

99

R Hood and Associates
(8) Purchases
(30) Purchases

165
385

F Tuckley Ltd
(18) Purchases

143

General Ledger
Sales
(31) Credit sales per month
(31) Credit purchases for month
(31) VAT content purchases
(31) Balance c/d

28

1,000

Purchases
720
Value Added Tax
72
(31) VAT content sales
28
100

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

100
100

Answer to Question 19.7A BA 1
(a)
2007
May 25
27
28
29
30

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 period
VAT account in General Ledger: credit total of VAT column for period
(c)
2007
May 1
15
25
30

Balance b/d
Sales
Sales
Sales

Laira Brand
2007
2,100.47
May 21 Bank
680.23
29 Returns In
1,219.00
31 Balance c/d
1,667.50
5,667.20

2,500.00
609.50
2,557.70
5,667.20

Answer to Question 20.4A BA 1

2008
June

G Graham
Purchases Analysis Book
Total Purchases Light &
Heat
1
4
7
8
9
9
17
19
21
22
23
24
25
25
28
30

J Syme
T Hill
F Love
Topp Garages
BT
Gilly Shop
G Farmer
B&T Ltd
T Player
Overnight Couriers Ltd
J Moore
Topp Garages
PowerNorth Ltd
H Noone
PMP Ltd
Topp Garages

108
210
195
265
65
19
181
13
222
46
12
364
39
193
38
66
2,036

108
210
195
65
181
222

193
1,109

Motor
Exps

Stationery

Carriage
Inwards

265
19

13

39

117

364

66
695

12

46

38
31

84

Answer to Question 20.5A BA 1
General ledger: Purchases Dr 1,109; Lighting and heating Dr 117;
Motor expenses Dr 695; Stationery Dr 31;
Carriage inwards Dr 84.
Purchases ledger: Credits in personal accounts should be obvious.

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

29

Answer to Question 21.5A BA 1
Gross pay
Less Income tax
National Insurance
Net pay

28
18

210
46
164

Answer to Question 21.6A BA 1
Basic pay
Danger money
Less Income tax*
National Insurance
Net pay

35
19

200
40
240
54
186

* 240 − 90 = 150. First 50 @ 20% = 10 + (100 @ 25%) 25 = 35

Answer to Question 21.7A BA 1
Basic pay
Maternity pay
Less Income tax*
National Insurance
Net pay

145
79

860
90
950
224
726

* 950 − 320 = 630. First 250 @ 20% = 50 + (380 @ 25%) 95 = 145

Answer to Question 21.8A BA 1
Pay
Sick pay
Less Superannuation
Income tax*
National Insurance
Net pay

90
290
130

1,500
150
1,650
510
1,140

* 1,650 − 90 − 350 = 1,210. First 250 @ 20% = 50 + (960 @ 25%) 240 = 290

Answer to Question 24.2A BA 1
Capital (a) (c) (f ).
Revenue (b) (d) (e) (g).

Answer to Question 24.4A 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 24.6A 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).
30

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

Answer to Question 24.8A BA 1
(a)
(b)
(c)
(d)
(e)
(f )

Revenue
Revenue
Capital
Revenue
Capital
Revenue

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

Capital
Revenue
Revenue
Capital
Revenue
Capital

Answer to Question 24.10A BA 1
(a)
(b)
(c)
(d)
(e)

Capital
Revenue
Revenue
Revenue
Capital

(f )
(g)
(h)
(i)

Capital
Revenue
Revenue
Capital

Answer to Question 24.13A BA 1
(a)
Balance b/d
Survey fees
Legal charges
Cost of premises
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

(b) Cash discount 2% on Press A. Connected with finance not plant. Debenture 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 24.15A BA 1
(a) Computers
Cabling
Installation
Less Cash discount (21/2%)
Printers
Software
Amount capitalised
Amount charged to revenue
Consumables (250 – 50)
Training

7,000
300
500
7,800
195

7,605
375
350
8,330
200
500
700

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

31

(b) When an amount is not considered to be material – i.e. it is not of interest to the users of the financial statements – it may be treated as a revenue expense rather than being capitalised. In this case, it might be considered that the cost of the cabling (300 – 21/2% = 292.50) was not material – the business may, for example, use £300 as the minimum amount that should be capitalised, anything costing less than this being treated as a revenue expense.

Answer to Question 25.4A BA 1
Note: The answer assumes that the figure for accounts receivable in the question is after deduction of bad debts. (a)
Bad Debts
2007
2007
Dec 31 Various accounts receivable
1,240
Dec 31 Profit and Loss
1,240
2008
2008
Dec 31 Various accounts receivable
2,608
Dec 31 Profit and Loss
2,608
2009
2009
Dec 31 Various accounts receivable
5,424
Dec 31 Profit and Loss
5,424
(b)
2007
Dec 31 Balance c/d
2008
Dec 31 Balance c/d

2009
Dec 31 Profit and Loss
Dec 31 Balance c/d

Allowance for Doubtful Debts
2007
1,640
Dec 31 Profit and Loss
2008
4560
Jan 1 Balance b/d
Dec 31 Profit and Loss
4,560
2009
160
Jan 1 Balance b/d
4,400

1,640
1,640
2,920
4,560
4,560

4,560
(c)
Debtors
Less Allowance for doubtful debts

Balance Sheet (extracts)
2007
41,000
76,000
1,640
39,360
4,560

4,560

2008
71,440

88,000
4,400

2009
83,600

Answer to Question 25.6A BA 1
(a) (i) Prudence. Always provide for probable losses.
(ii) To match the expense of bad debts with the sales which occasioned the debts.
(iii) Overall percentage. Percentages using ageing schedule. Flat sum.
(b) (i)
2008
Dec 31 Balance c/d

2009
Dec 31 Profit and loss
Balance c/d
2000
Dec 31 Balance c/d

Allowance for Doubtful Debts
2008
600
Jan 1 Balance b/d
Dec 31 Profit and loss
600
2009
200
Jan 1 Balance b/d
400
600
2000
400
Jan 1 Balance b/d

500
100
600
600
600
400

(ii) (Extracts) Profit and Loss Account section of the income statement for the year ending 31 December
(2008) Allowance for doubtful debts
100
(2009) Reduction in allowance for doubtful debts 200
Note: See textbook Exhibit 25.5 for an alternative layout to adopt on this answer.
(c) A bad debt is a debt which has proved to be irrecoverable and so is written off.
Allowance for doubtful debts: the amount of accounts receivable on a certain date which will probably turn out to be bad debts and have to be written off eventually.
32

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

(d)
2010
Jan 1 Balance b/d

Warren Mair
2010
130
Aug 25 Bank
Aug 25 Bad debts
130

39
91
130

Answer to Question 25.8A BA 1
2008
Dec 31 Balance c/d

2008
Dec 31 Balance c/d*

2008
Dec 31 Various debtors
2008
Dec 31 Total for year

Allowance for Doubtful Debts
2008
1,284
Jan 1 Balance b/d
Dec 31 Profit and loss
1,284

930
354
1,284

Provision for Discount on Debtors
2008
415
Jan 1 Balance b/d
Dec 31 Profit and loss
415

301
114
415

Bad Debts
2008
1,110
Dec 31 Profit and loss

1,110

Discounts Allowed
2008
362
Dec 31 Profit and loss

362

Profit and Loss
Bad debts
1,110
Increase in allowance for doubtful debts
354
Discounts allowed
362
Increase in provision for discounts on debtors 114
* 1% of [42,800 − 1,284] (obviously we do not give discounts on bad debts).

Answer to Question 25.11A BA 1
(a)
2004
Dec 31 Balance c/d

2005
Dec 31 Profit and loss
Balance c/d

2003
Dec 31 Accounts receivable
2004
Dec 31 Accounts receivable
(b)
2006
Jan 1 Balance b/d

Allowance for Doubtful Debts
2004
1,800
Jan 1 Balance b/d
Dec 31 Profit and loss
1,800
2005
1,600
Jan 1 Balance b/d
200
1,800
2006
Jan 1 Balance b/d
Bad Debts
2003
2,100
Dec 31 Profit and loss
2004
750
Dec 31 Profit and loss
B. Roke
2006
70
Dec 31 Bad debts

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

1,500
300
1,800
1,800
1,800
200

2,100
750

70

33

H A Ditt
2006
42
Dec 31 Bad debts

2006
Jun 1 Balance b/d

Bad Debts
2006
70
Dec 31 Profit and loss
42
112

2006
Dec 31 B Roke
HA Ditt

42

112
112

Answer to Question 26.4A BA 1
(a) Straight line
Photocopier cost
Yr 1 Depreciation
Yr 2 Depreciation
Yr 3 Depreciation
Yr 4 Depreciation

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

(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

* Calculation:
23,000 − 4,000 19,000
=
= 4,750
4
4

Answer to Question 26.5A 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
Yr 2 Depreciation
Yr 3 Depreciation
Yr 4 Depreciation
Yr 5 Depreciation
* Calculation:

800
160*
640
160
480
160
320
160
160
160


800
= 160
5

Answer to Question 26.6A BA 1
(a) Reducing balance
Bus cost
Yr 1 Depreciation 25%
Yr 2 Depn 25% of 42,000
Yr 3 Depn 25% of 31,500
Yr 4 Depn 25% of 23,625

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

(b) Straight line
Bus cost
Yr 1 Depreciation
Yr 2 Depreciation
Yr 3 Depreciation
Yr 4 Depreciation
* Calculation:
56,000 − 18,000 38,000
=
= 9,500
4
4

34

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

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

Answer to Question 26.10A BA 1
(a) (i) Straight line: 100,000 − 20,000 = 80,000 ÷ 4 = 20,000 depreciation per year.
31.12.2003
31.12.2004
31.12.2005

Cost/NBV
100,000
80,000
60,000

Depn
20,000
20,000
20,000

(ii) Reducing balance: Percentage = 1 −

4

NBV
80,000
60,000
40,000

20,000
100,000

= 33%
31.12.2003
31.12.2004
31.12.2005

Cost/NBV
100,000
67,000
44,890

(b)

Depn
33,000
22,110
14,814

NBV
67,000
44,890
30,076

Straight line
Sale proceeds
Balance b/d at 1.1.2006
Gain on sale

Reducing balance

45,000
40,000
5,000

45,000
30,076
14,924

(c) See text. Straight line is more appropriate when the economic benefits of using an asset reduce evenly over its useful economic life, such as in the case of office furnishings which will deteriorate gradually through wear and tear. Reducing balance is more appropriate when the economic benefits of using an asset reduce rapidly from the start, such as in the case of a motor vehicle – the cost of maintaining it, for example, is very low at the start and, generally, higher the longer it is in use.
(d) Net book value represents an estimate of the remaining economic value of an asset expressed financially on a basis which is usually directly related to its original cost, original estimate of its residual value, and original estimated useful economic life.

Answer to Question 26.11A BA 1

2003
2004

2005

2006

Bought 1.1.2003
Depreciation 30% for 9 months
Bought 1.5.2004
Depreciation 30% × 1,860
30% for 5 months
Bought 1.10.2004
Depreciation 30% × 1,302
30% × 2,187
30% for 12 months
Bought 1.4.2006
Depreciation 30% × 911
30% × 1,531
30% × 2,560
30% for 6 months

A
2,400
540
1,860
558
1,302
391
911
273

638

B

Forklift trucks
C

D

2,500
313
2,187
656
1,531
459
1,072

3,200
640
2,560

768
1,792

3,600

1,080
2,520

2006 Total Depreciation Provision = 273 + 459 + 768 + 1,080 = 2,580

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

35

Answer to Question 27.3A BA 1
(a)
2005
Jan 1 Bank
2006
Jan 1 Balance b/d
Oct 1 Bank

Machinery
2005
2,800
Dec 31 Balance c/d
2006
2,800
Dec 31 Balance c/d
3,500
6,300

(b)
2005
Jan 1
Jul 1

Fixtures
2005
290
Dec 31 Balance c/d
620
910
2006
910
Dec 31 Balance c/d
130
1,040

Bank
Bank

2006
Jan 1 Balance b/d
Dec 1 Bank

(c)
2005
Dec 31 Balance c/d
2006
Dec 31 Balance c/d

2,800
6,300
6,300

910
910
1,040
1,040

Provision for Depreciation: Machinery
2005
420
Dec 31 Profit and loss
2006
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
2005
Dec 31 Balance c/d
2006
Dec 31 Balance c/d

Provision for Depreciation: Fixtures
2005
46
Dec 31 Profit and loss
2006
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 2005
Machinery at cost
Less Depreciation
Fixtures at cost
Less Depreciation
31 December 2006
Machinery at cost
Less Depreciation to date
Fixtures at cost
Less Depreciation to date

36

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

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

2,380
864

4,998
944

Answer to Question 27.7A BA 1
(a) Per text.
(b) Any three from physical deterioration, economic factors, obsolescence, inadequacy, time, wasting character (e.g. mines).
(c) Straight line and reducing balance.
(d) Keep consistently to one particular method for an asset.
(e) Briefly: otherwise would not be able to calculate figures until asset put out of use, possibly many years hence. Need to calculate profits, allowing for depreciation, even though figures not absolutely accurate.
(f ) Profits would be overstated. Values per balance sheet also overstated.
(g) Prudence concept does not take profits into account until they have been realised. An increase in value, without sale, does not represent realisation.
(h)
(i)
Machinery
2007
2009
Jan 1 Bank
5,000
Jan 4 Machinery disposals
5,000
(ii)
2009
Jan 4

(iii)
2009
Jan 4

2007
Dec 31
2008
Dec 31
2009
Dec 31

Machinery disposals

Provision for Depreciation of Machinery
2007
1,000
Dec 31 Profit and loss
2008
Dec 31 Profit and loss
1,000

Machinery

Machinery Disposals
2009
5,000
Jan 4 Provision for depreciation
Jan 4 Bank
Dec 31 Profit and loss
5,000

500
500
1,000

1,000
3,760
240
5,000

Profit and Loss (extracts)
Provn for depn of machinery

500

Provn for depn of machinery

500

Machinery disposals (loss)

240

(iv) (Extracts)
Income Statement for the year ending 31 December
(2007) Provision for depreciation
(2008) Provision for depreciation
(2009) Loss on sale of machinery

500
500
240

Answer to Question 27.9A BA 1
Workings:
AAT 101 Cost
Less Estimated residual value
Estimated total depreciation
Estimated life 5 years
Depreciation charge per year
Accumulated depreciation at 1.4.2006
2 years 6 months @ 1,200
Depreciation 1.4.2006 to 30.6.2006
3 months @ 1,200 p.a.
Depreciation to 30.6.2006
Cost was
Written-down value on disposal
Trade-in allowance
Loss on disposal
Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
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8,500
2,500
6,000
1,200
3,000
300
3,300
8,500
5,200
5,000
200

37

DJH 202

Cost
Less Estimated residual value
Estimated total depreciation
Estimated life 8 years
Depreciation charge per year
Accumulated depreciation at 1.4.2006
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 2007
AAT 101 As above
DJH 202
As above
KGC 303 Cost 15,000 – residual value 4,000
= 11,000 ÷ 5 years = 2,200 p.a.
For 9 months 30.6.2006 to 31.3.2007
2,200 × 9/12

12,000
2,000
10,000
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
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

8,500
3,300
200

(b) Profit and loss
Provision for depreciation: Motor vehicles
Depreciation on motor vehicles for years to 31 March 2007
(c) (dates omitted)
Balance b/d
Purchase of KGC 303

Motor vehicle disposals
Balance c/d

Dr
15,000

3,825

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

Cr
5,000
6,000
4,000
8,500
3,300
200

3,825

8,500
27,000
35,500

Provision for Depreciation: Motor Vehicles
3,300
Balance b/d
6,025
Profit and loss
9,325

5,500
3,825
9,325

Answer to Question 27.11A BA 1
(a) (i)

Depreciation on Machines each year
2006
2007
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
Depreciation provision (361 + 1,444 + 722)
Loss on sale of Machine 3

38

15,200
2,527

2008
3,800 (12 months)
3,800 (12 months)
722 (6 months)
1,444 (12 months)
950 (6 months)
10,716
12,640
12,673
33

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(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 27.13A BA 1
Accumulated provision for depreciation
2007
2008

Balance c/d
Balance c/d

10,000
17,500

2007
2008

2009

Balance c/d

17,500
20,500

Depreciation
Balance b/d
Depreciation

2009

Balance b/d
Depreciation

20,500

Balance Sheet extract as at 31 December
2007

Machine

2008

Machine

30,000
22,500

2009

Machine

10,000
10,000
7,500
17,500
17,500
3,000
20,500

19,500

Answer to Question 27.15A BA 1
Lorries
2006
April 1
June 7
October 30
2007
March 6

Lorry disposal

37,600
209,000

2007
April 1

Balance b/d

119,200

Balance b/d
Bank
Bank

99,600
32,800
39,000

2006
June 1
August 21
2007
March 6
31

Lorry disposal
Lorry disposal

19,600
31,200

Lorry disposal
Balance b/d

39,000
119,200
209,000

Accumulated depreciation on lorries
2006
June 1
Lorry disposal
August 21 Lorry disposal
2007
March 31 Balance c/d

7,840
24,960
33,600
66,400

2006
April 1
2007
March 31

Balance b/d

42,560

Depreciation

23,840
66,400

2007
April 1

Balance b/d

33,600

Lorry disposal
2006
June 1
Lorries
August 21 Lorries

19,600
31,200

2007
March 6

39,000

Lorries

89,800

2006
June 1
1

Accumulated depreciation on lorries 7,840
Bank
10,500

August 21 Accumulated depreciation on lorries
24,960
21 Bank
7,000
2007
March 6
Lorries
37,600
31 Profit and loss (loss on disposal) 1,900
89,800

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39

Bank
2006
June 1
Lorry disposal
August 21 Lorry disposal

10,500
7,000

2006
June 7
Lorries
October 30 Lorries

32,800
39,000

Depreciation on lorries
2007
March 3

Accumulated depreciation on lorries

23,840

2007
March 31

Profit and loss

23,840

Machinery disposal
Balance c/d

2,800
52,630
55,430

Answer to Question 27.17A BA 1
Machinery
2009
Jan 1

Balance b/d
Bank

52,950
2,480
55,430

2009
Dec 31

Machinery disposal
2009

Machinery

2,800

2,800

2009

Dec 31

Accumulated provision for depreciation – machinery
1,120
Bank
800
Profit and loss (loss on disposal) 880
2,800

Accumulated provision for depreciation – machinery
2009
Dec 31

Machinery disposal
Balance c/d

1,120
29,813
30,933

2009
Jan 1
Dec 31

Balance b/d
Depreciation

25,670
5,263
30,933

Office furniture
2009
Jan 1

Balance b/d
Bank

2,860
320
3,180

2009
Dec 31 Balance c/d

3,180
3,180

Accumulated provision for depreciation – office furniture
2009
Dec 31 Balance c/d

1,649
1,649

2009
Jan 1 Balance b/d
Dec 31 Depreciation

Balance Sheet extract as at 31 December 2009
Machinery, at cost
Less Accumulated depreciation
Office furniture, at cost
Less Accumulated depreciation

40

1,490
159
1,649

52,630
29,813
3,180
1,649

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

22,817
1,531

Answer to Question 27.19A BA 1
(a)
Sales
Less Returns inwards

M Jackson
Income Statement for the year ending 30 April 2007

Less Cost of Sales
Opening inventory
Add Purchases
Less Returns outwards

11,570
355

Carriage inwards
Less Closing inventory
Gross profit
Less Expenses:
Carriage outwards
Salaries
Motor expenses
Rent
Sundry expenses
Bad debts
Depreciation: Fixtures and fittings
Motor vehicles

18,614
440
18,174
3,776
11,215
234
15,225
4,000

326
2,447
664
576
1,202
800
60
850

Net profit

Non-current assets
Fixtures and fittings (600 – 60)
Motor vehicles (3,400 – 850)

11,225
6,949

6,925
24

Balance Sheet as at 30 April 2007

Current assets
Inventory
Accounts receivable (4,577 – 800)
Bank
Cash
Less Current liabilities – Accounts payable

540
2,550
3,090
4,000
3,777
3,876
120
11,773
3,045

Capital account
Opening balance
Add Net profit

8,728
11,818
13,844
24
13,868
2,050
11,818

Less Drawings
(b) See text Chapters 25 (bad debts) and 27 (depreciation).

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41

Answer to Question 27.21A BA 1
(a)
Year 1
Year 2
Year 3
Year 4

(i) Straight line

450
450
450
450
1,800

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

(b) (Dates omitted)
Balance b/d

(iii) Units of output
35,000/180,000 × 1,800 = 350
45,000/180,000 × 1,800 = 450
45,000/180,000 × 1,800 = 450
55,000/180,000 × 1,800 = 550
1,800

(i) Laser Printer
1,800
Assets disposals
(ii) Provision for Depreciation: Laser Printer
1,720
Balance b/d
Profit and loss
1,720

Assets disposals

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

Laser printer
Profit and loss

1,800
1,685
35
1,720
1,720
200
1,920

Answer to Question 28.2A BA 1
(a)
2007
Jul 1 Stock b/d
2008
Jun 30 Cash and bank

Stationery
2008
60
Jun 30 Profit and loss
30 Inventory c/d
240
300

(b)
2008
Jun 30 Cash and bank
30 Owing c/d

General Expenses
2007
470
Jul 1 Owing b/d
60
2008
Jun 30 Profit and loss
530

(c)
2008
Jun 30 Cash and bank
30 Rates owing c/d

Rent and Rates
2007
5,410
Jul 1 Owing b/d
393
Rent
Rates
2008
Jun 30 Profit and loss
30 Rent prepaid c/d
5,803

(d)
2008
Jun 30 Cash and bank
30 Owing c/d

(e)
2007
Jul 1 Owing b/d
2008
Jun 30 Profit and loss

42

Motor Expenses
2007
1,410
Jul 1 Owing b/d
67
2008
Jun 30 Profit and loss
1,477
Commission Receivable
2008
50
Jun 30 Cash and bank
30 Owing c/d
1,132
1,182

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205
95
300

32
498
530

220
191
5,022
370
5,803

92
1,385
1,477

1,100
82
1,182

Answer to Question 28.4A BA 1
2006
Jan 1
Dec 31
31
31

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

Lighting and Heating
2006
192
Dec 31 Profit and loss
1,300
31 Inventory c/d
810
162
2,464

2,464

Insurance
2006
1,410
Jun 30 Bank
1,164
Dec 31 Profit and loss
1,464
31 Prepaid c/d *
4,038

82
2,617
1,339
4,038

2006
Jan 1 Balance b/d
Dec 31 Bank (fire)
31 Bank (general)

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

2,259
205

485
854
1,339

Answer to Question 28.6A BA 1
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)

Expense.
Revenue.
Nominal ledger.
Current assets: Debtors and prepayments.
Current liabilities: Revenue prepaid.
The Journal.
Cheque counterfoil as written up in the bank column of cash book.
Bank paying-in book, as written up in bank column of cash book.
£620 Dr.
£960 Cr.
Understated £90.
Overstated £75.

Answer to Question 28.7A 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 £30,000 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.

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43

(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 cost used up in the year. As equipment may last for several years, only part will be charged against one year.
The remaining value of the equipment is shown in your balance sheet. The total cost will be charged against your profits, but spread over several years. The total costs will only be charged once against the profits.

Answer to Question 28.10A BA 1

Sales
Less Returns in
Less Cost of goods sold:
Opening inventory
Add Purchases
Less Returns out

J Wright
Income Statement for the year ending 31 March 2009

61,420
1,356

Less Closing inventory
Gross profit
Add Discounts received
Less Expenses:
Wages and salaries (39,200 + 3,500)
Rent and insurance (8,870 − 600)
Carriage outwards
General office expenses (319 + 16)
Discounts allowed
Allowance for doubtful debts
Depreciation: Fixtures and fittings
Delivery van
Net profit

Non-current assets
Fixtures and fittings
Less Depreciation
Delivery van
Less Depreciation
Current assets
Inventory
Accounts receivable
Less Provision for doubtful debts
Prepaid expenses
Cash in hand
Less Current liabilities
Accounts payable
Expenses owing (3,500 + 16)
Bank overdraft

190
1,400

127,245
3,486
7,940
60,064
68,004
6,805

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

61,199
62,560
62
62,622

58,695
3,927

Balance Sheet as at 31 March 2009
1,900
190
5,600
1,400
12,418
740

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

Financed by:
Capital
Balance at 1/4/2008
Add Net profit
Less Drawings

44

123,759

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1,710
4,200
5,910

19,223
25,133

17,406
7,727

25,200
3,927
29,127
21,400
7,727

Answer to Question 28.12A BA 1

Sales
Less Cost of goods sold
Inventory 1 June 2005
Purchases
Carriage inwards

Mr Yousef
Income Statement for the year ending 31 May 2006
11,927
82,350
2,211
96,488
13,551

Less Inventory 31 May 2006
Gross profit
Less Carriage outwards
Salaries and wages
Rent, rates and insurance (6,622 + 210 – 880)
Postage and stationery
Advertising
Bad debts
Allowance for doubtful debts
Depreciation
Net profit

Non-current assets
Equipment at cost
Less Depreciation to date
Current assets
Inventory
Accounts receivable
Less Allowance for doubtful debts
Prepayments
Bank
Cash

138,078

2,933
26,420
5,952
3,001
1,330
877
40
8,700

82,937
55,141

49,253
5,888

Balance Sheet as at 31 May 2006
58,000
27,700
12,120
170

Current liabilities
Accounts payable
Expenses accrued

30,300

13,551
11,950
880
1,002
177
6,471
210

Financed by:
Capital: Balance at 1 June 2005
Add Net profit

27,560
57,860

6,681
51,179
53,091
5,888
58,979
7,800
51,179

Less Drawings

Answer to Question 29.3A BA 1
(i) FIFO: 15 @ £19 = £285
(ii) LIFO:
Jan
Apr

Received
120 @ £16
80 @ £18

June
Oct
Nov

150 @ £19

Issued

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

Inventory after each transaction
120 @ £16
120 @ £16
1,920
80 @ £18
1,200
75 @ £16
75 @ £16
150 @ £19

1,920
3,120
1,200

1,200
2,850

15 @ £16

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4,050
240

45

(iii) AVCO: Received
Jan
Apr
Jun
Oct
Nov

Issued

120 @ £16
80 @ £18

125

150 @ £19

210

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

No. of units in inventory
120
200
75
225
15

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

Answer to Question 29.4A BA 1
Trading Accounts for the year ended 31 December 2010
FIFO
LIFO
AVCO
Sales (All methods)
Purchases
6,210
6,210
6,210
125 @ £22
2,750
Less Closing inventory
285
240
274
210 @ £25
5,250
8,000
Cost of goods sold
5,925
5,970
5,936
Gross profit
2,075
2,030
2,064
8,000
8,000
8,000
Sales

Answer to Question 29.7A BA 1
Mary Smith
Income Statement for the 3 months ending 30 November 2009
FIFO
Sales
15,840
Less Cost of sales (note 1)
10,408
Gross profit
5,432
Less Overhead expenses
1,520
Sales commission (note 2)
136
Depreciation of lawn mower (note 3)
12
1,668
Net profit
3,764
Note 1
(FIFO) Closing inventory 10 @ 489
4,890
1 @ 350 (net realisable value)
350
5,240
Purchases
Less Taken for business use
384
Inventory
5,240
Cost of sales
(LIFO) Closing inventory 10 @ 384
3,840
1 @ 350 (net realisable value)
350
4,190
Purchases
Less Taken for business use
Inventory
(a)

Note 2
Sales commission:
Note 3
Depreciation:

46

1,520
111
14

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

16,032
5,624
10,408

450
4,190

FIFO 21/2% @ 5,432 = 135.80
LIFO 21/2% @ 4,448 = 111.20
FIFO 1/8 @ 3 months @ 384 = 12.00
LIFO 1/8 @ 3 months @ 450 = 14.06

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
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16,032
4,640
11,392

(b) Mary Smith’s income, 3 months to 31 August 2009:
Salary 3,750 + Interest (1/4 @ 10% @ 7,000) 175 = 3,925
Business: 3 months to 30 November 2009 =
3,764
(c) FIFO: Advantage: related to actual movements of goods therefore closing inventory nearer to actual current price levels.
Disadvantage: during inflation profits include holding gains.
LIFO: Advantage: cost of sales nearer to current price levels.
Disadvantages: not related to actual movement of goods, therefore inventory valuations will not match up to current price levels.

Answer to Question 29.10A BA 1
(a) Inventory at 9 March 2008
Sales at cost [w1]
Purchases
Sales returns [w2]
Purchase returns
Office cleaning
Inventory with Marketing [w3]
Sale or return [w4]
Free sample
Inventory at 29 February 2008

£
Increase
33,400
850
1,320
320
35,890

£
Decrease

£
100,600

14,000
3,336
600
20
(17,956)

17,934
118,534

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 29 February 2008
Draft net profit
Add: undervaluation of inventory goods sold on sale or return [w5]

£
17,934
400

Less: Office cleaning material
Revised total current assets at 29 February 2008
Draft current assets
Add: undervalued inventory
Revised total current assets

£
249,600
18,334
267,934
600
267,334
£
300,000
17,934
317,934

Workings
[5] 320 × 125/100

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47

Answer to Question 30.2A BA 1
Cash Book
2,740
Bank charges
201
Giffy Ltd
Balance c/d
2,941

Balance b/d
B Barnes

32
98
2,816
2,941

Bank Reconciliation Statement as on 31 March 2009
Bank balance per cash book
Add Unpresented cheque

2,816
131
2,947
410
3,357

Less Bankings not yet on bank statement
Bank balance per bank statement

Answer to Question 30.4A BA 1
(a)
2007
Jun 1
7
16
28
30
30

D Hogan: Cash Book
2007
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

Balance b/d
J May
T Wilson
F Slack
G Baker
Flynn

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

(b)
D Hogan: Bank Reconciliation Statement as on 30 June 2007
Balance in hand per cash book
Add unpresented cheque

1,560
22
1,582
582
1,000

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

Answer to Question 30.6A BA 1
(a)

Thomas P Lee
Computation of Bank Balance for Balance Sheet Purposes as on 31 October 2009

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

15.10
210.10
29.31

894.68
225.20
1,119.88

169.56
109.10
9.00
15.00

Thomas P Lee
Bank Reconciliation Statement as on 31 October 2009
Corrected cash book balance
Add Unpresented cheques

331.97
787.91

(b)

Less Bankings not on bank statements
Overdraft per bank statement
(c) Briefly: helps verify correctness of cash book and bank statement.
48

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

787.91
395.80
1,183.71
1,895.60
711.89

Answer to Question 30.8A BA 1
(a)
2007
Dec 6 P Pan
20 C Hook
31 W Britten
31 F Ray
31 Balance c/d

F King: Cash Book
2007
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

(b)
F King: Bank Reconciliation Statement as on 31 December 2007
Bank overdraft per cash book
Add Bank lodgements not yet entered on bank statement
Less Unpresented cheque
Bank overdraft per bank statement

1,900
304
261
37
94
72
2,668

1,746
325
2,071
37
2,034

Answer to Question 31.2A BA 1
Returns outwards
Bank
Discounts received
Balance c/d

Purchases Ledger Control
246
Balance b/d
8,300
Purchases
749
8,046
17,341

11,241
6,100
17,341

Answer to Question 31.4A BA 1
Balance b/d
Sales journal
Bank: dishonoured cheques

Sales Ledger Control
28,409
Bad debts
26,617
Bank
120
Discounts
Returns in
Set-offs to purchases ledger
Balance c/d
55,146

342
24,293
416
924
319
28,852
55,146

Answer to Question 31.7A BA 1
Sales Ledger Control
20,040
Balance b/d
124,600
Cash book
37
Bad debts
Discount allowed
Returns inwards
Purchase ledger
Balance c/d
144,677

Balance b/d
Sales day book
Balance c/d

Balance b/d
Cash book
Discount received
Returns outwards
Sales ledger
Balance c/d

Purchases Ledger Control
12
Balance b/d
93,685
Purchases day book
2,850
Balance c/d
240
438
13,241
110,466

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

56
119,930
204
3,480
1,063
438
19,506
144,677
14,860
95,580
26

110,466

49

Answer to Question 31.8A BA 1
(a) (i) Purchases invoices; (ii) Debit notes.
(b) Sales journal, Returns inwards journal. Descriptions per text.
(c)
2010
Apr 9 Bank
9 Discount
29 Returns out
30 Balance c/d

1,130

May 1 Balance b/d
(d)
2010
Apr 30 Bank
30 Discounts
30 Returns out
30 Contra to sales ledger
30 Balance c/d

T Sage
2010
690
Apr 1 Balance b/d
30
17 Purchases
80
330
1,130

330

720
410

Purchases Ledger Control
2010
1,596
Apr 1 Balance b/d
84
30 Purchases
130
30 Balance c/d*
180
1,360
3,350

May 1 Balance b/d
* Debit balance on J Morris account.

10

1,530
1,810
10
3,350

May 1 Balance b/d

1,360

(e) 1 Arithmetical check on accuracy of entries in purchases ledger.
2 Quick way to find figure of creditors.

Answer to Question 32.3A BA 1
(a)
(b)
(c)
(d)
(e)

B Roy
Dr
1,410
:
A Ray
Cr
Cash
Dr
94
:
Bank
Cr
D Rolls
Dr
734
:
D Rollo
Cr
Purchases
Dr
72
:
L Hand
Cr
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

Answer to Question 32.6A BA 1
(a)
(b)
(c)
(d)
(e)
(f )
(g)
(h)

50

Commissions received
Dr
Bank charges
Dr
Motor expenses
Dr
Fax machine
Dr
Returns inwards
Dr
Capital
Dr
Loan interest
Dr
Drawings
Dr
(double the original amount)

430
34
37
242
216
2,000
400
168

:
:
:
:
:
:
:
:

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

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

Cr
Cr
Cr
Cr
Cr
Cr
Cr
Cr

430
34
37
242
216
2,000
400
168

Answer to Question 32.7A BA 1
(a)

Thomas Smith
Corrected Trial Balance as at 31 March 2008

Inventory in trade 1.4.2007
Discounts allowed
Discounts received
Allowance for doubtful debts
Purchases
Purchases returns
Sales
Sales returns
Freehold property: at cost provision for depreciation
Motor vehicle: at cost provision for depreciation
Capital
Bank
Trade accounts receivable
Trade accounts payable
Establishment and administrative expenditure
Drawings

10,700
310
94,000
1,100
70,000
15,000
7,100
11,300
16,600
9,000
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.)

450
960
1,400
132,100
3,500
4,500
84,600
7,600
235,110

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

Answer to Question 33.3A BA 1
(a) (Narratives omitted)
(i) Sales
Office equipment
(ii) Suspense
Purchases
(iii) Drawings
Purchases
(iv) Bank charges
Suspense
(v) Suspense
K Lamb

The Journal

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

Dr
125
10
140
22
90

Cr
125
10
140
22
90

51

(b)
Purchases
K Lamb

Suspense
10
Balance
90
Bank charges
100

78
22
100

(c)
Statement of Corrected Net Profit for the year ended 31 December 2007
Net profit per the financial statements
Add Purchases overcast
10
Add Private purchases
140
Less Sales shown in error
Less Bank charges omitted
Corrected net profit

125
22

28,400
150
28,550
147
28,403

Answer to Question 33.7A BA 1
1

Trial Balance as at 31 March 2009

Non-current assets at cost
Provision for depreciation 1 April 2008
Inventory as at 1 April 2008
Trade accounts receivable
Trade accounts payable
Balance at bank (overdrawn)
Capital
Drawings
Sales
Purchases
Running expenses
Allowance for doubtful debts
Suspense

2

Dr
18,300
3,700
1,825

7,740
18,327
6,904
280
57,076
The Journal

Sales
Suspense
Office equipment (Non-current assets)
Purchases
Bank
Account payable
Return inwards
Account receivable
Drawings
Suspense
3
Per trial balance

360
45
37
160
Suspense
280
Sales
Drawings
280

4 Per text.

52

Dr
120

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

Cr
2,800
864
382
26,860
26,080
90
57,076

Cr
120
360
45
37
160
120
160
280

Answer to Question 33.9A BA 1
(a)

Balance b/d
(iv) Sales undercast

Suspense
1,536
(i) Debtor balance omitted
360
(iii) Undercast of cash book
(v) 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) Account receivable increased in balance sheet.
(ii) 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) Cash in the balance sheet increased by 720.
(iv) Sales increased 360; so too are gross profit and net profit.
(v) Accounts payable reduced 358 in balance sheet.
(vi) Electricity increased 152, so net profit reduced 152. Also electricity owing 152 to be included as extra accrual in balance sheet.
(vii) Cash increased 731 in balance sheet. Can now be removed from allowance for doubtful debts, so net profit increased 731 and accounts receivable (net) in balance sheet increased 731.

Answer to Question 33.10A BA 1
Sales Ledger Control
110,172
Purchases ledger: set-off (iii)
200
Customer: posting error (vii)
Balance c/d
110,372

Balance b/d
Customer Y (x)

Sales ledger: set-off (iii)
Purchases: wrong posting (vi)
Purchases overcast (viii)
Balance c/d

700
100
109,572
110,372

Purchases Ledger Control
700
Balance b/d
198
1,000
76,368
78,266

78,266

78,266

Suspense
2,315
Trial balance error (ix)
90
Balance c/d
2,405

Balance b/d
Insurances (xi)

2,400
5
2,405

Purchases Ledger Balances
As given
Add M Smith: credit posted in error (iv)
Less Debit balances
Set-off (iii)
Invoice entered in error (vi)
Revised list of balances

1,111
700
198

77,777
600
78,377
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.

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

53

Answer to Question 33.13A 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

100
1,400
700
810
90
76

Cr
124
100
1,800
300
470
340
86
4
67
9

Answer to Question 34.2A BA 1
(a)
Sales
Less Cost of goods sold:
Inventory 1 April 2004
Add Purchases

R Jack
Income Statement for the year ending 31 March 2005
(iv)

Less Inventory 31 March 2005
Gross profit
Less Expenses
Net profit

(i)
(ii)
(iii)
(vi)
(v)

106,400
14,000
82,000
96,000
20,000

76,000
30,400
21,888
8,512

The closing inventory as at 31 March 2005, as shown above, is 20,000.
Order of solving problem:
14,000 + (a)
(i) Average inventory is 17,000. Therefore
= 17,000
2
Therefore (a) = 20,000.
(ii) can now be found by deducting (a) 20,000 from 96,000 = 76,000.
(iii) is 40% of (ii), therefore (iii) is 30,400.
(iv) is therefore needed to balance the account, i.e. 106,400.
(v) if net profit was 8% of sales it would be 8,512.
(vi) therefore expenses are 30,400 − (v) 8,512 = 21,888.
(b) The total amount of profit and loss expenditure Jack must not exceed if he is to maintain a net profit on sales of 8% is, as shown in step (vi): 21,888.

54

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

Answer to Question 34.4A BA 1
(a) Cost of goods sold = Sales less trade discount

Category X
9,000 − 15%
= 7,650

Category Y
24,000 − 18%
= 19,680

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

9,000 − 7,650
= 1,350

24,000 − 19,680
= 4,320

1,260

3,360

1,350 − 1,260
= 90

4,320 −3,360
= 960

7,650
= 10
?

19,680
= 16
?

= 765

= 1,230

(c) Total expenses = 14% of sales
(d) Gross profit − Expenses = Net profit

(e)

Cost of goods sold
= Inventory turnover
Average inventory
So, by arithmetical deduction

Answer to Question 34.6A BA 1
(a) Mark-up

therefore

1
3
(b)

Margin
1
1
= (see text) = 25%
3+1 4

14,500 100
×
= 24.166%
60,000
1

(c) Such as: wastage; pilferage; sales at reduced prices; incorrect inventory valuation; arithmetical errors on selling prices.
(d)
Trading Account for the year ending 31 December 2009
Sales
Less: Cost of goods sold
Inventory 1 January 2009
Add: Purchases (47,000 + 5%)
Less: Inventory 31 December 2009 (4,500 + 5%)
Gross profit
(e)

3,000
49,350
52,350
4,725

60,000

47,625
12,375

45,500
45,500
=
= 12.133 times
(3,000 + 4,500) ÷ 2
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
As a percentage of (f )

2,125 100
×
= 25%
8,500
1

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© Pearson Education Limited 2008

55

Answer to Question 34.8A 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

(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 =

297
192
489 =

Sales (11 × 81) + (8 × 72)
Opening inventory
Purchases

Arthur
Income Statement for the month ending 31 October
306
1,128
1,434
456

Closing inventory
Gross profit
Less Expenses:
Rent
Advertising
Miscellaneous
Net profit
Current assets
Inventory
Bank
Current liabilities
Raleigh
Capital account
Opening balance
Add Net profit
Less Drawings
(e) Profit of £351
Drawings
Increase in Inventory
Increase in Bank
Increase in Accounts payable

56

60
66
12
Balance Sheet as at 31 October

33.33%

351 =

Net profit
489 − (60 + 66 + 12) =
(d)

288
4,242

23.9 %

1,467

978
489

138
351

456
4,242
4,698
1,128

3,369
351
3,720
150

3,570

3,570
150
150
1,179
(1,128)
351

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

Answer to Question 35.3A BA 1
Cash
Bank
Fixtures
Inventory
Accounts receivable
Motor van
Less Creditors

Non-current assets
Motor van
Less Depreciation
Fixtures
Less Depreciation
Current assets
Inventory
Accounts receivable
Prepaid expenses
Cash
Current liabilities
Trade accounts payable
Expenses owing
Bank overdraft

Opening Capital: 31 October 2003

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 2004
6,800
1,360
3,700
370
23,900
29,400
460
190
9,100
320
1,810

Financed by:
Capital
Balance at 31 October 2003
Add Net profit
Add Cash introduced

(C)
(B)

Less Drawings

(A)

5,440
3,330
8,770

53,950
62,720

11,230
51,490

44,610
7,600
32,200

Missing figures deduced: (A) 51,490 (B) 83,690 (C) 31,480.

Answer to Question 35.5A BA 1
Workings:
Balance b/d
Receipts from debtors
Cash sales
Loan from F Tung
Bank

Cash
194
1,540
12,600
14,334

Bank
920
94,200
2,500

97,620

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

Cash
1,310
xxx
180
272
14,334

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

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

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

57

Capital at 31 December 2007
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

Sales
Less Cost of goods sold:
Opening inventory
Add Purchases

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

A Bell
Income Statement for the year ending 31 December 2008
24,200
65,510
89,710
27,100

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

Non-current assets
Motor van
Less depreciation
Current assets
Inventory
Accounts receivable
Prepayments
Bank
Cash

3,560
1,840
1,000
900

97,940

62,610
35,330

7,300
28,030

Balance Sheet as at 31 December 2008

Current liabilities
Trade accounts payable
Rent owing
Non-current liabilities
Loan – F Tung

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

4,600

43,472
48,072

8,460
2,500

Capital
Balance at 1 January 2008
Add Net profit
Less Drawings (12,572 + 11,400)

58

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

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

10,960
37,112

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

Answer to Question 35.7A 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)
Sales
Less Cost of goods sold:
Opening inventory
Add Purchases

Bill Smithson
Income Statement for the year ending 31 March 2009

Less Closing inventory
Gross profit
Less Expenses:
Electricity
Telephone
Rent
Advertising
Insurance (946 − 177)
Motor expenses (2,116 − 432 + 291)
Depreciation: Motor
Fittings
Net profit

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

(b)
Balance Sheet as at 31 March 2009
Non-current assets
Fittings (4,200 + 2,550 − 300 − 250)
Less Depreciation
Motor
Less Depreciation

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 1.4.2008
Add Net profit
Less Drawings (16,743 + shelving 250)

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

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

59

Answer to Question 35.9A BA 1
Jean Smith
Income Statement for the year ending 31 March 2006

Sales
Less Cost of sales: Purchases (26,400 + 120 + 880)
Less Closing inventory
Gross profit 50% × (50,400 − 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
Loan interest
Net profit

Non-current assets
Motor van at cost
Less Provision for depreciation
Current assets
Inventory
Accounts receivable
Prepayments (125 + 700)
Bank (W1)
Cash

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

1,185
10,000

21,885
3,015

Cash

48,100

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)

60

25,500
24,900

Balance Sheet as at 31 March 2006

Less Current liabilities
Accounts payable
Accrued expenses (125 + 180)
Non-current liabilities
Loan from John Peacock
Capital:
Balance as at 1 April 2005
Add Net profit

(W1)
Capital
Loan: J Peacock
Bankings 42,000 + 340
Cash sales 50,400 − 2,300

50,400

Bank
15,000
10,000
42,340

67,340

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

Cash
890

355
42,340
3,875
640
48,100

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

Bank
250
7,600
8,500
14,700
1,200
3,500
760
26,520

4,310
67,340

Answer to Question 35.13A BA 1
(a)
Bank
Cash
Inventory
Machinery
Accounts receivable

P Maclaran
Capital Account on 1 January 2008

Less: Accruals
Accounts payable
Loan

Sales
Less: Sales returns

150
5,700
7,000

P Maclaran
Income Statement for the year ending 31 December 2008

Less: Cost of sales
Opening inventory at 1 January 2008
Add: Purchases
Less: Withdrawn by the owner
Less: Closing inventory at 31 December 2008

1,200
5,400

12,850
13,410

47,700
640
47,060
2,300
30,700
33,000
6,600

Gross profit
Add: Discount received
Less: Expenses
Rent
Bad debts written off
Wages
Insurance
Loan interest
Depreciation
Repairs
Electricity

6,000
60
2,300
9,800
8,100
26,260

850
240
9,200
850
700
2,800
1,400
570

Net profit

26,400
20,660
600
21,260

16,610
4,650

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.

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61

Answer to Question 35.14A BA 1

Non-current Assets
Machinery at 1 January 2008
Add: Additions

P Maclaran
Balance Sheet as at 31 December 2008

Less: Depreciation

9,800
3,400
13,200
2,800

Current assets
Inventory
Accounts recevivable
Prepayments
Cash

5,400
9,200
100
90

Current liabilities
Accounts payable
Bank overdraft
Accrued charges: Loan interest
Non-current liabilities
Bank loan 10%
Capital Account
Balance at 1 January 2008
Add: Net profit
Less: Drawings

4,800
2,930
7,730
200
7,930
7,000
13,410
4,650
18,060
7,800

10,400

14,790
25,190

14,930
10,260

10,260

Answer to Question 36.2A BA 1
The Shire Golf Club
(a)
Bar Trading Account for the year ending 31 December 2003
Sales
Less Cost of supplies sold:
Opening inventory
Add Purchases
Less Closing inventory
Gross profit
Wages of bar staff
Profit to income & expenditure

84,600
9,400
41,300
50,700
6,410

(c)
Income and Expenditure Account for the year ending 31 December 2003
Income
Subscriptions (183,400 − 1,870)
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

62

37,000
21,500
910
2,400

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

44,290
40,310
29,200
11,110

181,530
11,110
6,508
199,148

61,810
137,338

Balance Sheet as at 31 December 2003

Non-current assets
Clubhouse
Equipment
Less Depreciation

18,600
2,400

Current assets
Bar inventory
Bank

6,410
3,924

Current liabilities
Subscriptions received in advance

142,000
16,200
158,200
10,334
168,534
1,870
166,664

(b) Financed by:
Accumulated fund
Balance at 1 January 2003
Add Surplus of income over expenditure

29,326
137,338
166,664

Answer to Question 36.4A BA 1
(a)
Takings
Less Cost of supplies
Opening inventory
Add Purchases

Plumpton Leisure Centre
Trading Account for the year ending 31 December 2004

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 2004
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
Surplus of income over expenditure

26,720
8,700
1,900
5,200
80

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
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4,080
12,210
4,680
7,530

45,920
7,530
4,116
890
58,456

42,600
15,856

63

Balance Sheet as at 31 December 2004
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 1 January 2004*
Add Surplus for the year

44,980

7,856
52,836

36,980
15,856
52,836

* 1 January 2004 Equipment 32,400 + Inventory 680 + Bank 3,900 = 36,980.

Answer to Question 36.6A BA 1
(a)
Cash in hand
Subscriptions in arrears
Savings account

Milham Theatre Club
Accumulated Fund as at 1 February 2007

Less Bank overdraft
Coach hire owing
(b)
Theatre Trips Account
Income: For theatre tickets
For coach travel
Less Expenses for theatre tickets
For coach travel (1,540 − 60)
Deficit to income and expenditure account

180
60

80
150
1,950
2,180
240

2,720
1,240
3,120
1,480

(c)
Income and Expenditure Account for the year ending 31 January 2008
Income:
Subscriptions (1,620 + 75)
Savings account interest
Less Expenditure:
Secretarial and administrative expenses
Subscription arrears written off
Deficit on theatre trips
Surplus of income over expenditure
(d) (Extracts)
Balance Sheet as at 31 January 2008
Accumulated fund:
Balance at 1 February 2007
Add Surplus for the year
Add Gift from member
Current liabilities
Subscriptions received in advance

64

1,940
1,125
1,000

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

3,960
4,600
640

1,695
155
1,850
55
30
640

(e) 1 Increase number of members.
2 Make all subscriptions payable in advance.
3 Charge more for coach travel.
4 Charge more for theatre tickets.

1,940

725
1,125

4,065
165

Answer to Question 37.3A BA 1
J Jones
Manufacturing Account and Income Statement for the year ending 31 December 2006
Inventory of raw materials at 1.1.2006
21,000
Add: Purchases
258,000
279,000
Less: Inventory of raw materials at 31.12.2006
25,000
Cost of raw materials consumed
254,000
Factory wages
59,000
Prime cost
313,000
Indirect manufacturing costs
Fuel and Light
20,000
Rent and business rates
12,000
Repairs to plant and machinery
9,000
Depreciation – plant and machinery
8,000
49,000
362,000
Add: Work in progress at 1.1.2006
14,000
376,000
Less: Work in progress at 31.12.2006
11,000
Production cost of goods completed
365,000
Sales
482,000
Less: Returns inward
7,000
475,000
Less: Cost of goods sold
Inventory of finished goods at 1.1.2006
23,000
Add: Production cost of goods completed
365,000
388,000
Less: Inventory of finished goods at 31.12.2006
26,000
362,000
Gross profit
113,000
Less: Expenses
Administration expenses
Fuel
5,000
Salaries
17,000
Rent and business rates
4,000
Office expenses
9,000
35,000
Selling and distribution expenses
Carriage outwards
4,000
Financial charges
Allowance for doubtful debts
1,000
40,000
Net profit
73,000

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
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65

Non-current assets
Premises
Plant and machinery

Balance Sheet as at 31 December 2006

Current assets
Inventory – raw materials work in progress finished goods

410,000
64,000
474,000
25,000
11,000
26,000

Accounts receivable
Prepayments
Bank

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

Current liabilities
Accounts payable
Accrual

37,000
4,000

Capital account
Opening balance
Add: Net profit

97,000
571,000

41,000
530,000
457,000
73,000
530,000

Answer to Question 37.6A BA 1
Manufacturing Account and Trading Account part of the Income Statement for the 3 months ending
31 March 2002
Inventory of raw materials at 1.1.2002
10,500
Add: Purchases
27,200
Carriage in
700
38,400
Less: Inventory of raw materials at 31.12.2002
10,200
(a) Cost of raw materials used in production
28,200
Add: Direct factory wages
72,600
(b) Prime cost
100,800
Indirect manufacturing costs:
Factory wages
13,900
Rent and business rates
1,200
Power
2,000
Repairs
1,300
Sundry expenses
900
Depreciation – machinery
3,900
23,200
124,000
Add: Work in progress at 1.1.2002
2,400
126,400
Less: Work in progress at 31.3.2002
2,900
(c) Production cost of goods completed
123,500
Sales
160,400
Less: Cost of goods sold
Inventory of finished goods at 1.1.2002
14,300
Production cost of goods completed
123,500
137,800
Less: Inventory of finished goods at 31.3.2002
13,200
(d) Cost of goods sold
124,600
(e) Gross profit
35,800

66

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
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Answer to Question 37.9A BA 1
Jean Marsh
Manufacturing Account for the year ending 31 December 2009
Cost of raw materials consumed:
Inventory of raw materials at 1.1.2009
3,400
Add Purchases
18,000
Carriage inwards
800
22,200
Less Inventory of raw materials 31.12.2009
2,900
Factory wages
Prime cost
Factory overhead expenses:
General expenses
1,200
Lighting 4/5
2,000
Rent 4/5
3,000
Insurance 3/4
600
Depreciation of plant and machinery
1,500
Factory cost of production c/d
(a)

(b)
Trading Account part of the Income Statement for the year ending 31 December 2009
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

19,300
18,500
37,800

8,300
46,100

90,000

44,000
46,000

(c)
Profit and Loss Account part of the Income Statement for the year ending 31 December 2009
Gross profit b/d
46,000
Add Discount received
1,600
47,600
Less Administrative costs:
Office salaries
16,900
General expenses
825
Lighting 1/5
500
Rent 1/5
750
Insurance 1/4
200
19,175
Selling costs:
Jean Marsh: Salary and expenses
10,400
Depreciation of car
500
Advertising
1,400
Bad debts
650
Carriage outwards
375
13,325
32,500
Net profit after proprietor’s salary
15,100

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67

(d)
Non-current assets
Plant and machinery
Less Depreciation for year
Motor vehicle
Less Depreciation

Balance Sheet as at 31 December 2009
9,100
1,500
4,200
500

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

Financed by:
Capital
Balance at 1 January 2009
Add Net profit after salary
Less Drawings

7,600
3,700
11,300

22,875
34,175

6,075
28,100

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

Answer to Question 38.3A BA 1
Jack’s Superstores
Departmental Income Statement for the year ending 31 March 2005
A
B
C
Sales
180,000
138,000
82,000
Less Cost of goods sold:
Opening inventory
27,100
21,410
17,060
Add Purchases
101,300
81,200
62,900
128,400
102,610
79,960
Less Closing inventory
23,590
104,810
15,360
87,250
18,200
61,760
Gross profits
75,190
50,750
20,240
Add Discounts received
1,013
812
629
Less Expenses:
76,203
51,562
20,869
Salaries and wages
45,600
30,400
15,200
Rent and rates
3,100
3,100
3,100
Delivery expenses
1,620
1,242
738
Commission
4,500
3,450
2,050
Insurance
900
600
300
Advertising
769
769
769
Administration expenses
6,600
6,600
6,600
Depreciation
1,400
64,489
1,400
47,561
1,400
30,157
Net profits/(losses)
11,714
4,001
( 9,288)

68

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
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Answer to Question 39.2A BA 1
Gerry Peace
Statement of Cash Flows for the year ending 31 December 2003

Operating activities
Profit from operations
Adjustments for:
Depreciation (fixtures 200 + van 2,020)
Operating cash flows before movements in working capital
Increase in inventory
Increase in accounts receivable
Decrease in accounts payable

21,160

(6,800)
(1,800)
(3,294)

Cash generated by operations
Tax paid
Interest paid
Net cash from operating activities
Investing activities
Payments to acquire tangible non-current assets (5,000 + 400)
Net cash used in investing activities
Financing activities
Loan received
Capital introduced
Drawings
Net cash used in financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of year (900 + 220)




(5,900)
5,000
10,000
(21,600)

Cash and cash equivalents at end of year
Bank balances and cash ((94) + 200)

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
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2,220
23,380

(11,894)
11,486

11,486
(5,900)

(6,600)
(1,014)
1,120
106
106

69

Answer to Question 39.5A BA 1
K Rock
Statement of Cash Flows for the year ending 30 June 2009

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

51,000
11,500
1,600
( 200)

Operating cash flows before movements in working capital
Increase in inventory
Increase in accounts payable
Decrease in accounts receivable
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

(2,900)
3,200
1,600


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

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

12,900
63,900

1,900
65,800

65,800

(2,300)

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

Answer to Question 40.2A 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
(ii)
Mowers purchased
Carriage
Bank: Graham
Profit and loss
Balance c/d
Bank: to Graham

Mowers purchased
Carriage
Bank: Frank
Profit and loss
Balance b/d

70

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

Bank: to Frank

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

123,790
40,000
163,790

70,000
40,000
104,590
214,590
29,807

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

Answer to Question 40.4A BA 1
Memorandum Joint Venture Account for Rock, Hill and Pine
Paintings (8,000 + 17,000 + 1,700)
26,700
Sales (31,410 + 4,220 + 2,300)
Lighting and heating
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

37,930
6,200
1,700

45,830

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

Rent
Paintings
General expenses
Profit and loss
Balance b/d

22,840

1,700
22,840
24,540

Cash: from Pine

22,840

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

Van
Paintings
Profit and loss
Balance b/d

6,307

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

Cash: from Pine

6,307

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

Use of van
Lighting
Paintings
General expenses
Profit and loss
Balance c/d
Cash: to Rock
Cash: to Hill

22,840
6,307
29,147

31,410
2,300

33,710

Balance b/d

29,147
29,147

Answer to Question 41.2A BA 1
Gray, Wilkes and Booth
Appropriation Account for the year ending 31 December 2003

Net profit
Less: Salaries – Wilkes
Booth
Interest on capital
Gray
Wilkes
Booth
Share of profit
Gray 3/8
Wilkes 3/8
Booth 1/4

84,800

32,000
14,000

46,000

2,500
2,000
1,500

6,000
12,300
12,300
8,200

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
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52,000
32,800
32,800

71

Answer to Question 41.5A BA 1
Cole, Knox and Lamb
Appropriation Account for the year ending 31 December 2005

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

22,000
28,000

50,000

3,600
2,700
2,100

8,400

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

70,950
32,250
25,800

Balance Sheet as at 31 December 2005 (extract)
60,000
45,000
35,000

Capital: Cole
Knox
Lamb
Current accounts
Balances at 1.1.2005
Add: Salaries
Interest on capital
Share of profit

Cole
18,000

3,600
70,950
92,550
(27,000)
( 1,200)
64,350

Less: Drawings
Interest on drawings

2,600
187,400

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

58,400
129,000

129,000

140,000

149,800

Answer to Question 41.6A BA 1
Penrose and Wilcox
Profit and Loss Appropriation Account for the year ending 31 December 2009
Net profit brought down
Add Interest on drawings: Penrose
270
Wilcox
180
(a) (i)

Less Salary: Penrose
Interest on capital: Penrose
Wilcox

540
720

Balance of profit shared:
Penrose 3/5
Wilcox 2/5
(ii)
Balance b/d
Interest on drawings
Drawings
Balances c/d

Current Accounts (dates omitted)
Penrose
Wilcox
640
Balance b/d
270
180
Interest on capital
3,000
2,000
Salary
1,030
470
Share of profit
4,940
2,650

2,400
1,600

2,000

450
7,260

1,260

3,260
4,000

4,000

4,000

Penrose

Wilcox
330
720

540
2,000
2,400
4,940

(b) Shows easily whether original investment is growing or declining.
(c) He had taken out more in drawings than he was entitled to as share of profit.
(d) (i) To calculate net profit.
(ii) To show how net profits are divided between the partners.
(e) (i) To compensate one partner for having contributed more as capital than another.
(ii) To provide deterrent if partners take out more in drawings than they need to.
72

6,810

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
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1,600
2,650

Answer to Question 41.7A BA 1
(a)
Net profit
Add: Interest on drawings
A
B

Profit and Loss Appropriation Account

25,800
400
300

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

1,500
500

Less: Share of Profit
A
B

(b)

12,000
8,000

Partners’ Current Accounts

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

A
( 500)
1,500
1,000

12,000
13,000
( 400)
12,600
(12,000)
600

700
26,500
4,500
22,000
2,000
20,000
20,000

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

Answer to Question 41.10A BA 1
Scot and Joplin: Income Statement and Profit and Loss Appropriation Account for the year ending
31 December 2007
Sales
180,400
Less Cost of goods sold:
Opening inventory
38,410
Add Purchases
136,680
175,090
Less Closing inventory
41,312
133,778
Gross profit
46,622
Less Expenses:
Salaries
27,400
Office expenses (2,130 + 240)
2,370
Discounts allowed
312
Depreciation: Motors
5,350
Office equipment
1,840
7,190
37,272
Net profit
9,350
Add Interest on drawings: Scot
300
Joplin
200
500
9,850
Less Interest on capital: Scot
2,500
Joplin
1,000
3,500
6,350
Balance of profit shared: Scot 70%
4,445
Joplin 30%
1,905
6,350


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73

Balance Sheet as at 31 December 2007
Cost
9,200
21,400
30,600

Non-current assets
Office equipment
Motor vehicles
Current assets
Inventory
Accounts receivable
Bank
Cash

Depreciation
5,440
18,150
23,590

3,760
3,250
7,010

41,312
41,940
2,118
317
85,687

Less Current liabilities
Accounts payable
Expenses owing

32,216
240

32,456

Capitals
Scot
Joplin

50,000
20,000

Current accounts
Balance 1.1.2007
Add Interest on capital
Add Share of profits
Less Drawings
Less Interest on drawings

17,500
300

Scot
7,382
2,500
4,445
14,327
17,800
( 3,473)

16,000
200

53,231
60,241
70,000

Joplin
7,009
1,000
1,905
9,914
16,200
( 6,286)

( 9,759)
60,241

Answer to Question 41.12A BA 1
Sales
Less Returns inwards

Bush, Home and Wilson
Income Statement for the year ending 30 April 2004

Less Cost of goods sold:
Opening inventory
Add Purchases
Carriage inwards
Less Closing inventory
Gross profit
Less Expenses:
Salaries and wages
Discounts allowed
Business rates (2,900 − 200)
Postages (845 – 68)
Bad debts
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
Balance of profit shared: Bush 1/2
Home 1/8
Wilson 3/8

74

334,618
10,200
324,418
196,239
3,100

2,800
1,100

68,127
199,339
267,466
74,223
54,117
190
2,700
777
1,620
450
1,017
3,900
300
200
240

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

193,243
131,175

64,771
66,404
740
67,144

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

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

40,000
27,144
27,144


Balance Sheet as at 30 April 2004
Cost
5,700
8,400
14,100

Non-current assets
Office equipment
Computers
Current assets
Inventory
Accounts receivable
Less Allowance for doubtful debts
Prepayments (200 + 68)
Bank

51,320
1,400

Depreciation
4,000
6,400
10,400

1,700
2,000
3,700

74,223
49,920
268
5,214

Current liabilities
Accounts payable

129,625
133,325
36,480
96,845

Financed by:
Capital: Bush
Home
Wilson

60,000
10,000
30,000

Current accounts:
Balances 1.5.2003
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

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

100,000

( 3,155)
96,845

Answer to Question 42.2A BA 1
(a)
Goodwill
Other assets

Balance Sheet as at 1 October 2002

72,000
180,000
252,000

Capitals Mack (30,000 + 7,200)
Burns (70,000 + 28,800)
Flint (35,000 + 14,400)
Tonks (45,000 + 21,600)

(b)
Before
Mack 1/10
Burns 2/5
Flint 1/5
Tonks 3/10

37,200
98,800
49,400
66,600
252,000

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

14,400
21,600
28,800
7,200
72,000

Loss or gain
Gain
7,200
Loss
7,200
Gain
14,400
Loss
14,400

Action needed
Debit Mack
7,200
Credit Burns
7,200
Debit Flint
14,400
Credit Tonks
14,400

Balance Sheet as at 1 October 2002

Net assets
Capitals Mack (30,000 − 7,200)
Burns (70,000 + 7,200)
Flint (35,000 − 14,400)
Tonks (45,000 + 14,400)

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
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180,000
180,000
22,800
77,200
20,600
59,400
180,000

75

Answer to Question 42.4A BA 1
(a)

Share old goodwill 10,000
30,000
20,000

60,000

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

1

/3
/12
1
/6
1
/12
5

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

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

Adjustment for goodwill
Balances c/d

(b)
Other assets
Cash

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

Blunt Dodds Fuller Baxter
14,000 24,400 20,400

5,000 10,000

24,000
14,000 29,400 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 43.2A 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

76

Capitals
Fitch
Wall Home
7,650
4,590
Balances b/d
11,811
9,887 12,000
Cash
19,461 14,477 12,000

12,400

480
7,650
4,590

Fitch
Wall
19,461 14,477

12,240
12,720

Home

12,000
19,461 14,477 12,000

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
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(b)
Non-current assets
Plant and machinery at valuation
Current assets
Inventory
Accounts receivable
Bank

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

Less Current liabilities
Accounts payable

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

Capitals
Fitch
Wall
Home

11,811
9,887
12,000

33,698

Answer to Question 43.4A BA 1
(a)
Buildings
Goodwill
Fittings
Inventory
Accounts receivable
Accrued expenses
A Barnes
C Darwin
(b)
Non-current assets
Goodwill
Buildings
Fittings
Current assets
Inventory
Accounts receivable
Bank
Current liabilities
Accounts payable
Accruals

Dr
4,000
12,000

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

A Barnes, C Darwin and E Fox
Balance Sheet as at 31 March 2008
12,000
55,000
27,000
94,000
15,500
4,800
22,000
8,000
300

Capital accounts
A Barnes
C Darwin
E Fox

(c)
A Barnes
C Darwin
E Fox
Goodwill

Cr

42,300
136,300

8,300
128,000
67,800
35,200
25,000
128,000

Dr
6,000
4,000
2,000

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
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Cr

12,000

77

Answer to Question 44.3A BA 1
Gain and Main
Profit and Loss Appropriation Account for the year ending 31 March 2008

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

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

9,750
1,000
500

9,000
6,000

Gain
1,000
24,000

25,000

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

Balance b/d
Gain: to settle

Realisation

78

1,500

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

26,250
11,250
15,000
15,000

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
1,380
920

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

2,300
43,800

43,800

1,550
2,620
4,170

Bank

Main: to settle

Plain Ltd
40,000
Gain
Main
40,000

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

4,170
4,170

24,000
16,000
40,000

Answer to Question 44.4A 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

12,800
1,200

Realisation (profit)
Capitals

12,990

A 2/5
B 2/5
C 1/5

Capitals

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

4,800
4,800
2,400
14,400
14,400
7,200

Loan
Cash

A

7,000

Capitals

A
B
C

7,996
3,996
2,998

Cash

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

58,000
9,810
190

14,000
5,196
5,196
2,598

12,000

36,000
7,000

14,990

(b) The partners will receive the following shares, the shares being split in profit sharing ratio:
A
B
C

Ordinary
11,520
11,520
5,760
28,800

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

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79

Answer to Question 44.6A BA 1
(a) (All in £000)
Furniture: decrease (12 − 5)
Motors: decrease 20 − (10 + 4)
Inventory written off
Bad debt written off
Doubtful debts provision: increase
(42 − 2) × 5% − 1
Office expenses accrued
Dissolution costs
Capitals: Proudie 3/5
9
Slope 1/5
3
Thorne 1/5
3

(b)

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

Slope
45
28
73

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

40

1
3
1
15
40
Capitals
Thorne
Balances b/d
45
Current a/cs
Revaluation
Loan
6
Goodwill share (W1)
51

40

Proudie
100
24
9
8
90
231

Slope
60
10
3

Thorne
40
8
3

73

51

(W1) Goodwill: Profits 130 + 150 + 181
Less Stock reduction
Bad debt written off
Increase in allowance for doubtful debts
Office expenses accrued

5
2
1
3

461

11
450

Average profit 450 ÷ 3 = 150; Proudie’s share 150 × 3/5 = 90
Split equally between Slope and Proudie.
(c)
Non-current assets
Land and buildings
Furniture
Motor vehicles
Current assets
Inventory
Accounts receivable
Less Allowance for doubtful debts
Prepaid expenses
Cash
Current liabilities
Accounts payable
Accrued expenses (3 + 1 + 3)

Slope and Thorne
Balance Sheet as at 1 June 2009
200
5
10
215
40
2

15
7

Non-current liabilities
Loan – Proudie

Capitals: Slope
Thorne

80

18
38
2
2

60
275

22
219
241
34

28
6
34

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

Answer to Question 44.8A BA 1
(All answers shown in £000)
(a) (i)
Grant and Herd
Profit and Loss Appropriation Account for the year ending 31.12.2008
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

(ii)
Salary paid
Drawings
Interest on drawings
Car
Shares in Valley
Bank

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

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

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

25

65

Grant
300

15
15
87

Herd
100
20
5
10
58
60
253

417

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

5
65

20

15
10

Grant

2
3
20

15
5

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

60

100
141
25
10

Valley Ltd: Consideration
(400,000 × 1.25)

500
776

Valley Ltd
Balance Sheet as at 1 January 2009
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

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
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331
666
166
500
400
100
500

81

Answer to Question 45.5A BA 1
Developing Limited
Statement of Changes in Equity (extract) for 2004 (£000s)
Retained
General
Profits
Reserve
Opening balance
3
7
Retained profits for the year
27

Transferred to General Reserve
(10)
10
Closing balance
20
17

Non-current assets
Current assets

Share
Premium
4

4

Balance Sheet as at 31 December 2004 (£000s)

140
50
190
19
171
20
151

Less: Current liabilities – Accounts payable
Less: Non-current liabilities – Loan notes
Share capital
Ordinary shares of 50p each
10% Preference shares of £1 each

Authorised
100
50
150

Reserves
Share premium
General reserve
Retained profits

Issued
80
30
110

4
17
20

41
151

Answer to Question 45.7A BA 1
(a)
Non-current assets
Cost
Less: Accumulated depreciation

Budgie Ltd
Balance Sheet as at . . . (£000s)
160
50
110

Current assets
Inventory
Accounts receivable

40
47

Current liabilities
Accounts payable
Bank overdraft

45
30

Shareholders’ funds
Share capital
Retained profits

87
197

75
122
100
22
122

(b) Inventory represents almost half the current assets – the acid test ratio is 0.63:1 compared with the current ratio of 1.16:1 – and, in the absence of any information on industry norms, this level of inventory appears to be too high. If the bank demanded payment of the overdraft, the company would face severe liquidity problems. It should probably try to reduce the level of inventory held and reduce the bank overdraft.

82

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Answer to Question 45.9A BA 1

Sales
Less Cost of goods sold
Opening inventory
Purchases

Tully Ltd
Income Statement for the year ending 31 December 2005
81,300
623,800
705,100
102,400

Less Closing inventory
Gross profit
Less Expenses
Wages
Motor expenses
Machinery repairs
Sundry expenses
Depreciation: Premises
Machinery
Motor vehicles
Directors’ remuneration
Net loss

Non-current assets
Premises
Machinery
Motor vehicles

975,600

13,250
21,820
6,940

Balance Sheet as at 31 December 2005

Current assets
Inventory
Accounts receivable
Bank
Current liabilities
Accounts payable
Motor expenses owing

Cost
265,000
109,100
34,700
408,800

241,500
4,580
3,600
2,900
42,010
82,600

Depn
73,250
63,220
25,140
161,610
102,400
169,600
17,900
74,900
280

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

602,700
372,900

67,500
19,410

377,190
4,290

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

289,900
537,090

75,180
461,910
375,000
86,910
461,910

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

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83

Answer to Question 45.11A BA 1
Falta Ltd
Income Statement for the year ending 30 April 2005

Sales
Less Returns inwards
Less Cost of goods sold
Opening inventory
Add Purchases
Add Carriage inwards

Less Closing inventory
Gross profit
Less Expenses
Wages and salaries
Rent, business rates and insurance
Discounts allowed
Debenture interest
Depreciation: Equipment
Motor vehicles
Directors’ remuneration
Net profit

Non-current assets
Equipment
Motors

Balance Sheet as at 30 April 2005
Cost
225,000
57,200
282,200

Current assets
Inventory
Accounts receivable
Bank
Cash
Current liabilities
Expenses owing
Loan notes interest
Accounts payable
Non-current liabilities
8% Loan notes
Capital and reserves
Called-up share capital
Non-current asset replacement reserve
General reserve
Retained profits (12,411 + 155,040 − (5,000 + 10,000))

880,426
18,400
102,994
419,211
1,452
523,657
111,317
123,289
17,042
3,415
3,200
45,000
14,300
88,400

Depreciation
77,600
32,500
98,850
111,317
227,219
4,973
62

412,340
449,686

294,646
155,040

Net
147,400
24,700
172,100

343,571
515,671

6,802
1,600
54,818
63,220
40,000

40,000
20,000
152,451

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

84

862,026

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
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103,220
412,451
200,000
212,451
412,451

Answer to Question 45.13A 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
1,000
4,000
2,000
1,000
1,000
1,140
1,000
2,000
3,000

Cr
10,000
1,000
4,000
2,000
1,000
1,000
1,140
1,000
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.

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85

Fiddles PLC
Income Statement for the year ending . . .

(b)

Operating profit (note 1)
Loan note interest (note 2)
Net profit for the year
Add Retained profits brought forward from last year
Retained profits carried forward to next year

Non-current assets
Land
Buildings
Plant and machinery
Less Depreciation
Current assets
Inventory
Accounts receivable
Less Allowance for doubtful debts
Bank
Current liabilities
Accounts payable
Loan note interest
Non-current liabilities
16% Loan notes

80,140
7,200
72,940
199,000
271,940

Balance Sheet as at . . .

170,000
120,000

186,000
1,860

100,000
120,000
50,000
270,000

192,000
184,140
13,000

389,140
659,140

100,000
7,200
107,200
180,000

Capital and reserves
Called-up share capital
Retained profits

287,200
371,940
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

86

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Answer to Question 46.2A BA 1
(a)
Accounts payable
Bank

Business Purchase
9,000
Premises
50,000
Plant
Inventory
Accounts receivable
Goodwill (difference)
59,000

35,000
6,000
8,000
6,000
4,000
59,000

(b)
Balance Sheet at 1 January 2009
Non-current assets
Goodwill
Premises
Plant and machinery, at cost less depreciation
Fixtures and fittings, at cost less depreciation
Current assets
Inventory
Accounts receivable
Cash (4,500 + 300 − 4,000)
Total assets
Current liabilities
Accounts payable
Bank overdraft
Expenses owing
Non-current liabilities

Capital: Balance
Add Cash introduced
Less Loss on plant

4,000
90,000
30,000
4,000
128,000
25,000
15,500
800

41,300
169,300

17,000
15,800
200
33,000
25,000

87,000
25,000
112,000
700

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

58,000
111,300

111,300

87

Answer to Question 47.2A BA 1
(a)

Spendlight

Easylawn

(i)

Gross profit as % of sales

430
100
×
= 17.2%
2,500
1

430
100
×
= 26.9%
1,600
1

(ii)

Net profit as % of sales

166
100
×
= 6.6%
2,500
1

170
100
×
= 10.6%
1,600
1

(iii)

Expenses as % of sales

264
100
×
= 10.6%
2,500
1

260
100
×
= 16.25%
1,600
1

(iv)

Inventory turnover

2,070
= 10.1 times
(190 + 220) ÷ 2

1170
,
= 8.7 times
(110 + 60) ÷ 2

(v)

ROCE

166 100
×
= 45.1%
368
1

170 100
×
= 76.2%
223
1

(vi)

Current ratio

399
= 2.1
189

199
= 5.2
38

179

39

(vii) Acid test ratio

189

= 0.95

38

= 1.03

(viii) Accounts receivable/sales ratio

104
× 12 = 0.5 months
2,500

29
× 12 = 0.2 months
1,600

(ix)

189
× 12 = 1.08 months
2,100

38
× 12 = 0.37 months
1,220

Accounts payable/purchases ratio

(b) Easylawn is the more efficient company. It has made £170,000 profit as compared with £166,000 profit and has achieved a return on capital employed of 76.2% per cent, almost 70% higher than that of
Spendlight, with 45.1%.
Reasons: These are conjecture – you really have to know more about the businesses before you can be definite.
(i)
(ii)
(iii)
(iv)
(v)

88

Easylawn has managed to achieve a far greater percentage gross profit, whilst maintaining a reasonable level of sales.
Because expenses are lower, but gross profit is the same as for Spendlight, a higher figure of net profit is achieved by Easylawn.
Easylawn has kept inventory down to relatively lower figures than Spendlight, although Spendlight has managed to get higher rate of inventory turnover.
Easylawn has a 69% higher rate of return on capital employed, helped by lower inventory, better debt/sales ratio and relatively lower accounts payable.
Acid test ratio with Easylawn appears healthier than with Spendlight.

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

Answer to Question 47.5A BA 1
(a) (i)

40
100
×
= 25%
160
1

(ii)

Cost of sales
120
=
= 12
Average inventory
10

(iii)

32
100
×
= 20%
160
1

(iv)

32
100
×
= 25%
128
1

(v)

20
= 2 :1
10

(vi)

Accounts receivable and bank 10
=
= 1:1
Accounts payable liabilities
10

(b) Although the gross profit percentage is the same, inventory turnover is down from 12 to 9. This would mean a relatively lower gross profit figure for CD.
Net profit percentage is markedly lower, down from 20% to 10%. This implies that CD has far higher expenses than AB.
For the amount of assets used AB is getting twice the return on them than CD, 25% compared with
121/2%.
CD has kept current assets to a minimum – a figure of 1 : 1 is too low for comfort under normal circumstances. Similarly the quick asset ratio is too low.
AB is by far the more successful business. It is turning over its inventory more frequently and has kept expenses under control. This has meant overall a return of 25% on its capital employed. It is also in a good liquid position and able to meet its debts.
CD on the other hand is in a worse position on each factor. It is not only less profitable; it may well be unable to meet its debts as they fall due.

Answer to Question 47.6A BA 1
1 (i)

Loan note interest has to be paid whether profits are made or not. Dividends on shares can only be paid if there are sufficient available profits.
(ii) Shareholders are part owners of the company and can exercise their powers with the votes at their disposal. Loan note holders normally have no voice in the running of the company.
(iii) If the company ceases to trade, then loan note holders are entitled to a full return of their money before the shareholders get anything.

2 (i)

Galloway Ltd
Profit and Loss Appropriation Account for the year ending 30 April 2008
Net profit for the year brought down
Add Retained profits brought forward from last year
Less Transfer to general reserve
Retained profits carried forward to next year

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

36,600
3,950
40,550
5,000
35,550

89

(ii)
Balance Sheet as at 30 April 2008
Non-current assets
Freehold premises at cost
Furniture and equipment at cost
Less Depreciation to date
Motor vehicles at cost
Less Depreciation to date

44,000
7,460
38,400
16,300

Current assets
Inventory
Accounts receivable
Prepayments
Rent receivable

32,124
4,782
280
175

Current liabilities
Accounts payable
Bank overdraft
Expenses owing

190,000
36,540
22,100
248,640

37,361
286,001

3,847
1,830
774
6,451

Non-current liabilities
8% Loan notes

15,000

Share capital: Ordinary shares
Reserves:
General reserve
Retained profits

21,451
264,550
200,000

29,000
35,550

64,550
264,550

3 (i) Net profit as % of sales.
(ii) Lower gross profit % ratio.
Higher expenses.
(iii) Acid test ratio.
(iv) More capital introduced in cash; loans received in cash; non-current assets sold; profits.

Answer to Question 47.8A BA 1
(a)

Schedule of Accounting Ratios and Resource Utilisation
Year ended 30 September 2007
2008
2009

(i)

Net profit as % of sales

13,000
90,000

= 14.4%

20,000
100,000

= 20%

22,000
120,000

= 18.3%

(ii) Gross profit as % of sales

16,000
90,000

= 17.8%

25,000
100,000

= 25%

28,000
120,000

= 23.3%

(iii) Inventory turnover

74,000
3,500

= 21.1

75,000
5,500

= 13.6

92,000
18,500

= 5.0

(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.

90

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(b)

Your answer should be in report fashion. The main points you should cover include:

(i)

The increase of sales by £20,000 from 2008 to 2009 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.
The year to 2008 showed a considerable increase in profitability. Can this be maintained?
Why has inventory increased to £30,000 at end of 2009? Does this show difficulties in achieving sales? Investigate.
If the above indicate problems in the future, what is the value of assets if sold at break-up prices?
A government investment involves no risk, except for inflation.
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.
There is a case for the investment in the loan stock being better than carrying on the business.

(ii)
(iii)
(iv)
(v)
(vi)
(vii)

Answer to Question 47.10A BA 1
(a)

Table of Accounting Ratios

1 Current ratios

180
160

2 Acid test

A

B
= 1.1

200
120

= 1.7

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

90
× 12 = 0.36
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%

(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.
(ii) Higher gearing of A leads to higher return on owners’ equity. The extra debt of A could lead to problems when profits fall.
(iii) A’s high accounts payable/cost of sales ratio is very worrying, as is the low current ratio.
(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 47.20A BA 1
See text.

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91

PART 2

BUSINESS ACCOUNTING 2

Answers
Answer to Question 1.4A BA 2
(a) All in £000
Balance b/d
Goods to branch
Branch accounts receivable: returns

Balance b/d

Branch Inventory (Selling price)
75
Returns
600
Cash sales
8
Branch accounts receivable
Inventory deficiency to branch adjustment
Balance c/d
683

30
120
437
6
90
683

90

Returns from branch
Head office trading a/c

Goods Sent to Branch (Cost price)
20
Branch inventory
380
400

Returns from branch
Branch inventory deficiency
Branch profit and loss
Unrealised profit c/d

Branch Adjustment (Profit loading)
10
Unrealised profit b/d
6
Goods to branch
179
30
225

225

Unrealised profit b/d

30

Balance b/d
Branch inventory

Balance b/d

400

25
200

8
390
9
15
81
503

81

Balance b/d
Cash sales
Branch accounts receivable
Balance b/d

Branch Accounts receivable
66
Branch inventory: Returns
437
Bank
Discounts
Bad debts
Balance c/d
503

400

Branch Bank
3
General expenses
120
To HO bank
390
Balance c/d
513

42
459
12
513

12

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95

Paper Products
Income Statement for the year ending 31 March 2006
Head Office
Branch
Revenue: Cash
1,500
120
Credit
1,960
429
3,460
549
Less
Cost of goods sold:
Opening inventory
180
50
Add Purchases
2,400
380
2,580
430
Less Closing inventory
220
2,360
60
370
Gross profit
1,100
179
Less
Expenses:
General expenses
410
42
Discounts allowed
29
9
Bad debts
24
463
15
66
Net profit
637
113
(b)

Total
1,620
2,389
4,009
230
2,780
3,010
280
452
38
39

2,730
1,279

529
750

(c) See text, but merits mainly concern tight control as HO can see what profits the branch ought to be making; also saves branch staff having to keep full accounting records.
Demerits depend on whether branch staff are given room for initiative within the above system, or else the HO stupidly lets the system strangle all initiative.

Answer to Question 1.6A BA 2
LR
Income Statement for the year ending 31 December 2009
Head Office
Revenue
83,550
Less Cost of goods sold:
Purchases
123,380
Goods to branch
44,264
79,116
Less Closing inventory
12,276
66,840
Gross profit
16,710
Less General expenses
8,470
Net profit
8,240

Non-current assets
Current assets
Inventory
Accounts receivable
Cash in transit
Bank

Branch
51,700
44,264
2,664

Balance Sheet as at 31 December 2009

39,000
14,940
15,020
1,000
5,260

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

96

41,600
10,100
6,070
4,030

Drawings

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

36,220
75,220
12,690
62,530
52,000
12,270
64,270
1,740
62,530

Workings:
Inventory: Head office
Purchases
Less Cost of sales: 100/125 × £83,550
Cost of goods to branch: 100/125 × £56,250
Add

123,380

66,840
45,000

111,840
11,540
736
12,276

Cost of goods in transit: 100/125 × £920

Inventory: Branch
Cost of goods sent
Less Cost of sales: 100/125 × £51,700
Cost of goods in transit:
Inventory shortage at cost: 100/125 × £300

41,360
736
240

45,000
42,336
2,664

Answer to Question 1.8A BA 2
Star Stores
Income Statements for the year ending 31 December 2009
Head Office
Revenue
1,200
Goods transferred to branch
360
1,560
Less Cost of goods sold:
Opening inventory
80
Add Purchases
880
Transfer of goods from head office
960
Less Closing inventory
100
860
Gross profit
700
Less Administrative expenses
380
Distribution costs
157
Increase in provision for profit included in branch inventory*
13
550
Net profit
150
(a) (All in £000)

Branch

570
570

30
300
330
48
30
172

282
288

202
86

* (48 × 1/6) − 5 + (60 × 1/6)

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97

(b)
Non-current assets
Plant and equipment
Motor vehicles

Balance Sheet as at 31 December 2009

Cost
330
700
1,030

Depn
150
400
550

Current assets
Inventory (100 + 48 + 60 − 18)
Accounts receivable and prepayments
Bank and cash (25 + 2 + 15)

190
206
42

Less Current liabilities
Accounts payable and accruals

550
236
786
64
722

Less Drawings

Branch Current Account
255
Inventory in transit c/d
86
Cash in transit c/d
Balance c/d
341

Balance b/d
Net profit

Answer to Question 1.11A

180
86
266

BA 2

Conversion of currency to sterling:
Dr Balances:
Non-current assets at cost
Accounts receivable and cash
Operating costs
Cr

60
15
266
341

Head Office Current Account
266
Balance b/d
Net profit
266

Balance c/d

Balances:
Sales
Accounts payable
HO current account
Accumulated depreciation

Mics
900,000
36,000
225,000
1,161,000

Rate
8 to £
4 to £
5 to £

£
112,500
9,000
45,000
166,500

480,000
25,000
420,000
236,000
1,161,000

5 to £
4 to £ actual 8 to £

96,000
6,250
42,600
29,500
174,350

Difference represents exchange loss: to be written off

Home Ltd
Income Statement for the year ending 31 December 2004
Revenue (96,000 + 186,300)
Less Operating costs (103,700 + 45,000)
Exchange losses
Net profit for the year
Add Retained profit 31 December 2003
Retained profit at 31 December 2004

98

438
918
196
722

Capital: Balance at 1.1.2009
Add Net profit

Workings

Net
180
300
480

7,850
166,500

148,700
7,850

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

282,300
156,550
125,750
110,800
236,550

Balance Sheet as at 31 December 2004
Non-current assets (W1)
Current assets
Accounts receivable and cash (17,600 + 9,000)
Creditors: amounts falling due within one year
Trade accounts payable (9,700 + 6,250)

425,900
26,600
15,950

Capital and reserves
Called-up share capital
Retained profits

10,650
436,550
200,000
236,550
436,550

(W1) Cost 450,000 + 112,500 = 562,500 – accumulated depreciation 107,100 + 29,500 = (net) 425,900.

Answer to Question 2.2A BA 2
(a)
2005
Jan 1 Dowe Ltd
2005
Dec 31 Balance c/d
2006
Dec 31 Balance c/d

2007
Dec 31 Balance c/d

Computer
1,046
Accumulated Provision for Depreciation
2005
418
Dec 31 Profit and loss
2006
669
Jan 1 Balance b/d
Dec 31 Profit and loss
669
2007
820
Jan 1 Balance b/d
Dec 31 Profit and loss
820
Dowe Ltd
2005
300
Jan 1
300
Dec 31
521
1,121
2006
300
Jan 1
273
Dec 31
573
2007
300
Jan 1
Dec 31
300

2005
Jan 1 Bank
Dec 31 Bank
31 Balance c/d
2006
Dec 31 Bank
31 Balance c/d
2007
Dec 31 Bank

(b)
Non-current assets
Computer at cost
Less Depreciation
Current liabilities
Owing on HP

Computer
HP interest (10% of 746)

418
418
251
669
669
151
820

1,046
75
1,121

Balance b/d
HP interest

521
52
573

Balance b/d
HP interest

273
27
300

Balance Sheet as at 31 December 2005 (extract)
1,046
418

628
521

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99

Answer to Question 2.4A BA 2
(a)
2002 July 31
Nov 30

2003 Jan

1

Motor Vehicles

HP Company:
Cash price DL1
HP Company:
Cash price DL2

27,000

2003 Sept 1
Dec 31

Balance b/d

63,000

2002 July 31
Nov 30
Dec 31

Disposals re: DL1
Balance c/d

2003 Jan–Aug 31 Cash: 8 × £1,050 8,400
Sept
20 Cash to settle 10,700
Jan–Dec 31 Cash 12 × £1,350
Balance c/d
19,100

100

2003 Sept 1 Disposal DL1
Dec 31 Balance c/d

7,313
9,750

27,000
36,000
63,000

Motor vehicles DL1

2,813
750
3,563

2003 Jan 1 Balance b/d
Sept 1 Profit and loss:
DL1 25% × 8/12
× £27,000
DL2 25% × £36,000

Hire Purchase Company
DL1
DL2
Cash: deposit
4,680
2002 Motors
Cash: deposit
7,200
July 31
Cash: instalments
Nov 30
5 × £1,050
5,250
Dec 31
1 × £1,350
1,350
Balance c/d
17,670 27,600
27,600

(d)
2003 Sept 1

63,000

Depreciation
3,563 2002 Dec 31 Profit and loss:
DL1 25% × 5/12
× £27,000
DL2 25% × 1/12
× £36,000
3,563

Balance c/d

17,063
(c)

63,000

36,000
63,000

63,000
(b)
2002 Dec 31

2002 Dec 31 Balance c/d

DL1

36,150

Cash price
27,000
Cash price
Profit and loss:
HP interest
5 × £120
600
1 × £150
27,600

16,200
13,200
29,400

2003 Jan 1 Balance b/d
17,670
Sept 20 Profit and loss:
HP interest
1,430
Dec 31 12 × £150
19,100

Assets Disposal
27,000 2003 Sept 1 Depreciation
Sept 20 Cash
Dec 31 Profit and loss:
Loss on disposal
27,000

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
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3,563
4,500
9,000
17,063

DL2
36,000

150
36,150
27,600
1,800
29,400

7,313
18,750
937
27,000

Answer to Question 2.8A BA 2

Hire purchase sales
Cash sales

Object Ltd
Income Statement for the year ending 31 August 2006

Less Cost of goods sold
Opening inventory
Purchases
Inventory repossessed

540,000
71,000
611,000
15,000
342,000
2,500
359,500
12,000

Less Closing inventory (see W1)
Add Profit on repossessed goods (see W2)
Less Provision for unrealised profit (see W3)
Gross profit
Less Administration and shop expenses
Depreciation
Net profit for the year

130,000
15,000

Balance Sheet as at 31 August 2006
Non-current assets
Intangible assets
Premises and equipment at cost
Less Depreciation to date
Current assets
Inventory
Accounts receivable (see W4)
223,560
Less Provision for unrealised profit (W3)
99,360
Bank and cash

100,000
60,000

145,000
19,408

40,000

12,000
124,200
6,208

Current liabilities
Trade accounts payable
Net current assets

142,408
182,408
80,000
102,408

Equity
Called-up share capital
Retained profits
Workings:
(W1) Opening inventory
Purchases
Cash sales
Less Repossessed
Accordingly:
Cost of sales 67,500 × 100/150
HP sales: Cost £540,000 × 100/180
Closing inventory

347,500
263,500
700
264,200
99,792
164,408

75,500
27,408
102,408

71,000
3,500

15,000
342,000

357,000

67,500
45,000
300,000

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
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345,000
12,000

101

(W2)
HP Accounts receivable
Profit to trading a/c

Repossessions
3,240
Provision for unrealised profit
700
Purchases
3,940

(W3)
Repossessions £3,240 × 80/180
Balance c/d £223,560 × 80/180

1,440
2,500
3,940

Provision for Unrealised Profit
1,440
Balance b/d
99,360
Trading account
100,800
HP Accounts receivable
2,268
Cash
540,000
Repossessions
Balance c/d
542,268

(W4)
Balance b/d
HP sales

1,008
99,792
100,800

315,468
3,240
223,560
542,268

Answer to Question 2.9A BA 2
(a) First assumption
Hire purchase sales
Cost of sales
Provision for unrealised profit
Loss on repossessed goods
Gross profit

F Ltd
Hire Purchase Income Statement (extract)
1,210
229
53

Hire purchase accounts receivable
Less Provision for unrealised profit
Workings:

Cost

Jan 10
Mar 8
May 12
July 6
Sept 20
Oct 15
Nov 21

150
350
90
200
70
190
160
1,210

(b) Second assumption
Hire purchase sales
Cost of sales
Provision for unrealised profit
Loss on repossessed goods
Gross profit

102

1,492
323

Balance Sheet (extract)
687
229
458
HP sales price 225
525
135
300
105
285
240
1,815

Cash collected 180
420
81
247
42
57
48
1,075

Balance
45
105
54

63
228
192
687

Balance of profit
Earned
Unearned
60
15
140
35
27
18
47

14
21
19
76
16
64
323
229

F Ltd
Hire Purchase Income Statement (extract)

Hire purchase accounts receivable
Less Provision for unrealised profit

1,815

1,210
405
53

Balance Sheet (extract)
687
405
282

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

Cost
30
70
36

42
152
128
458

1,815
1,668
147

Workings:

Cost

Jan 10
Mar 8
May 12
July 6
Sept 20
Oct 15
Nov 21

150
350
90
200
70
190
160
1,210

HP sales price 225
525
135
300
105
285
240
1,815

Cash collected 180
420
81
247
42
57
48
1,075

Balance

Balance of profit
Earned
Unearned
30
45
70
105

45
47


35

95

80
147
405

45
105
54

63
228
192
687

Cost


9

28
133
112
282

Answer to Question 2.10A BA 2
(a) (i)
1.1.07

HP Loan

(ii)
31.12.08

Balance c/d

31.12.09

Balance c/d

(iii)
1.1.07
31.12.07

31.12.08

Bank
Bank
Balance c/d
Bank
Balance c/d

Machinery
20,000
Provision for Depreciation: Machinery
31.12.07 Profit and loss
8,000
31.12.08 Profit and loss
8,000
12,000
12,000

1.1.09
31.12.09

Hire Purchase Loan
6,000
1.1.07
5,828
31.12.07
9,852
21,680
5,828
5,206

Bank

5,831
5,831

(b)

Balance b/d
Profit and loss

8,000
4,000
12,000

Machinery
Profit and loss
(12% × 14,000)

20,000

1.1.08
31.12.08

1.1.09
31.12.09

Balance b/d
Profit and loss
(12% × 5,206)

(Extracts) Balance Sheet as at 31 December

Non-current assets
Machinery at cost
Less Depreciation to date
Non-current liabilities
Owing under hire purchase
Current liabilities
Owing under hire purchase

1,680
21,680

Balance b/d
Profit and loss
(12% × 9,852)

11,034
31.12.09

4,000
4,000
8,000

9,852
1,182
11,034
5,206
625
5,831

2007

2008

2009

20,000
4,000
16,000

20,000
8,000
12,000

20,000
12,000
8,000

5,206
4,646

5,206

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103

Answer to Question 3.3A BA 2
Materials issued
Materials bought
Direct expenses
Administration charge
Wages
Plant bought
Accrued wages c/d
Accrued expenses c/d
Profit and loss (6,750 × 2/3)
Reserve (part of apparent profit not recognised as being earned yet)

Cantilever Ltd – Contract Account
9,411
Architect’s certificates (64,170 × 10/9 )
28,070
Inventory of materials
6,149
Plant
2,146
18,493
12,180
366
49
76,864
4,500
2,250
83,614

71,300
2,164
10,150

83,614

Answer to Question 3.4A BA 2
Plant
Materials
Wages
Sundry expenses
Head office charges

Contract Account – Year ended 31 December 2010
30,000
Sale of materials (at cost)
124,000
Unused materials c/d
95,000
Plant c/d
5,000
Cost of contract to date c/d
9,000
263,000

Cost of contract b/d
Unused materials b/d
Plant b/d
Profit and loss account
Profit taken to date

263,000

225,000
10,000
20,000
43,000

Workings:
Cash received to date
Value of work certificated (100/75 thereof)
Work completed but not yet certified
Total value of work executed to date
Further costs to be incurred:
Wages
Materials 74,400 + 10,000
Sundry expenses
Plant 25,000 + 20,000
Plant residual value
Head office charges
(6/9 × 9,000) + 10%
Contingency provision

8,000
10,000
20,000
225,000

Value
195,000
260,000
30,000
290,000

Cost

Profit

225,000

65,000

520,000

209,000
434,000

86,000

64,000
84,400
9,000
45,000
(15,000)
6,600
15,000
209,000

Work certified to date 260,000: Profit to be taken now 260/520 × 86,000 =

104

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
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43,000

Answer to Question 3.5A BA 2
(All in £000)
(a) Workings:
(i) Profits/(losses)
Contract price
Less Costs to date
664
estd further costs to completion
106
estd post-completion costs 30
Estd total profits/(losses)
Profit/loss recognised
Profit: Cost of sales to date
Total cost:
Contract 1 580/800 × 300
Contract 2 470/620 × 330
Overall losses

1
1,100

75
800
300

10

218

(ii) Payments on account
Turnover to 31.10.2010
Progress payments: received awaited retained
Yet to recover
Excess paid
Transferred to long-term
Payments on account (net)

535

2
950

615
60
75

810

Contracts
3
1,400

680
620
330

750
48

640

45

1,535
( 135)

20

165
1,460
( 160)

(135)
2
720

680
40
80 800

(80)
65
(15)

5
1,200

1,070

800

250

1
798

4
1,300

5

(

1,240
40)

(160)

Contracts
3
646
615
25
60
700

385
200
65

(54)
29
(25)

(40)
4
525
650

5
900

722
34
84

840
60

(125)
(125)

(iii)

Data for Income Statement for the year ending 31 October 2010
Contracts
1
2
3
4
5
Turnover to 31.10.2010
580
470
646
525
900
Profit to 31.10.2010
218
250
798
720
Turnover to 31.10.2009
560
340
517
400
610
To profit and loss
238
380
129
125
290
Cost of sales to 31.10.2010
Loss to 31.10.2009

580

470

646
135
781

525
160
685

460
120

245
225

517
264

470
215

610
330

218
100
188

250
95
155

(135)

(160)
( 70)
( 90)

664
580
84

535
470
65

84

65


1,162

900
40
940

Cost of sales to 31.10.2009
To profit and loss

Profit or Loss

Profit/loss (proof) to 31.10.2010 to 31.10.2009
Costs to 31.10.2010
To cost of sales
Less Losses foreseeable
Transfers from payments on a/c
Long-term contract balances
Provision for losses

(135)
810
646
164
135
29
29


640
525
115
160
( 45)


(

40)

(

40)

1,154

8

1,070
900
170
40
130
130

( 45)

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

105

(b)
Balance Sheet extracts at 31 October 2010
Current assets
Inventory
Long-term contracts (84 + 130)
Accounts receivable
Recoverable on long-term contracts (48 + 60)
Creditors
Payments on account (15 + 125 + 25)
Provisions for liabilities and charges
Foreseeable losses provision
Note attached to balance sheet:
Long-term contract balances (84 + 65 + 29 + 130)
Less Payments on account (29 + 65)

214
108
165
45
308
94
214

Answer to Question 5.4A BA 2
(Dates omitted)
(a)
Forfeited shares (5,000 × £1)
Balance c/d

Balance c/d

Ordinary Share Capital
5,000
Balance b/d
Application and allotment
595,000
First and final call
600,000
600,000
600,000

(b)

Balance b/d
Amber

Share Premium
Application and allotment
52,500
Forfeited shares
52,500

Balance c/d

(c)
Bank refunds (75,000 × 65p)
Bank refunds re 3 for 4 allotment (25,000 × 65p)
Ordinary share capital
Share premium

(d)
Ordinary share capital
(100,000 × 30p)

Application and Allotment
48,750
Bank (200,000 × 65p)
Bank (100,000 × 55p)
16,250
70,000
50,000
185,000
First and Final Call
Bank (95,000 × 30p)
30,000
Forfeited shares (5,000 × 30p)
30,000

(e)
First and final call
Amber Ltd
Share premium

Forfeited Shares
1,500
Ordinary share capital
1,000
2,500
5,000

(f )
Ordinary share capital

Amber Ltd
5,000
Bank (5,000 × 80p)
Forfeited shares*
5,000

* discount on reissue

106

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

500,000
70,000
30,000
600,000
595,000
5,000
600,000

50,000
2,500
52,500

130,000
55,000

185,000

28,500
1,500
30,000

5,000
5,000

4,000
1,000
5,000

Answer to Question 5.6A BA 2

Cash: return of unsuccessful application monies 8,000 × 0.75
Share capital: Due on application and allotment 150,000 × 0.80
Share premium 150,000 × 0.15

Grobigg Ltd
Application and Allotment
Cash: 180,000 × 0.75
6,000
Cash: Balance due on allotment
120,000
22,500
148,500

Share capital 150,000 × 0.20

30,000
30,000

Call

135,000
13,500
148,500

Cash: 149,600 × 0.20
Forfeited shares

29,920
80
30,000

Forfeited Shares
80
Share capital
400
Cash: 400 × 0.90
280
760

Call
Share capital
Share premium

400
360
760

Share Premium
Application and allotment
Forfeited shares
Share Capital
400
Application and allotment
150,000
Forfeited shares
Call
150,400

Forfeited shares
Balance c/d

22,500
280
120,000
400
30,000
150,400

Answer to Question 6.2A BA 2
(a)
(A1)

Dr
7,000

(B1)

Preference share applicants
(B2) Preference share capital
Preference shares allotted

7,000

(C1)

3,000

Bank
(A2) Preference share applicants
Cash received from applicants

Retained profits
(C2) Capital redemption reserve
Part of purchase price of shares not covered by new issue, to comply with Companies Acts
(D1) Ordinary share capital
(D2) Ordinary share purchase
Shares being purchased

10,000

(E1)

10,000

Ordinary share purchase
(E2) Bank
Payment made for share purchase

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

Cr
7,000

7,000

3,000

10,000

10,000

107

Net assets (except bank)
Bank
Preference share capital
Preference share applicants
Ordinary share capital
Ordinary share purchase
Capital redemption reserve
Share premium
Retained profits

Balances before 31,000
16,000
47,000
8,000
20,000
4,000
32,000
15,000
47,000

Dr

Effect

(A1)

7,000

(B1)
(D1)
(E1)

7,000
10,000
10,000

(C1)

Cr

(E2)

10,000

(B2)
(A2)

7,000
7,000

(D2)
(C2)

10,000
3,000

3,000

(b)
(A1)

Dr
12,000

(B1)

2,400

(C1)

Retained profits
(C2) Capital redemption reserve
Transfer because shares purchased out of distributable profits

12,000

(D1) Ordinary share capital
(D2) Bank
Payment of redemption

14,400

Ordinary share capital
(A2) Ordinary share purchase
Shares being purchased
Retained profits
(B2) Ordinary share purchase
Premium on purchase of shares not previously issued at premium

Net assets (except bank)
Bank
Preference share capital
Ordinary share capital
Ordinary share purchase
Capital redemption reserve
Share premium
Retained profits

108

Balances before 31,000
16,000
47,000
8,000
20,000

4,000
32,000
15,000
47,000

Dr

Effect
(D2)

(A1)
(D1)

(C1)
(B1)

12,000
14,400

(A2)
(B2)
(C2)

Cr
14,400

12,000
2,400
12,000

12,000
2,400

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

Balances after 31,000
13,000
44,000
15,000

10,000

3,000
4,000
32,000
12,000
44,000
Cr
12,000

2,400

12,000

14,400
Balances
after
31,000
1,600
32,600
8,000
8,000
12,000
4,000
32,000
600
32,600

(c)
(A1)

Dr
8,000

(B1)

Preference share purchase
(B2) Bank
Cash paid on purchase

8,000

(C1)

8,000

Preference share capital
(A2) Preference share purchase
Shares to be purchased

Retained profits
(C2) Capital redemption reserve
Transfer per Companies Acts

Net assets (except bank)
Bank
Preference share capital
Preference share purchase
Ordinary share capital
Capital redemption reserve
Share premium
Retained profits

Balances before 31,000
16,000
47,000
8,000
20,000
4,000
32,000
15,000
47,000

Dr

Effect

Cr

(B2)
8,000
8,000

(C1)

(A2)

8,000

(C2)

(A1)
(B1)

8,000

8,000

8,000

(d)
(A1)

Dr
12,000

(B1)

Preference share applicants
(B2) Preference share applicants
Preference shares allotted

12,000

(C1)

Ordinary share capital
(C2) Ordinary share purchase
Shares to be purchased

12,000

(D1) Ordinary share purchase
(D2) Bank
Payment made to purchase shares

12,000

Bank
(A2) Preference share applicants
Cash received from applicants

Net assets (except bank)
Bank
Preference share capital
Preference share applicants
Ordinary share capital
Ordinary share purchase
Share premium
Retained profits

Balances before 31,000
16,000
47,000
8,000

20,000

4,000
32,000
15,000
47,000

Dr

Effect

(A1)

12,000

(B1)
(C1)
(D1)

12,000
12,000
12,000

Cr

(D2)

12,000

(B2)
(A2)

12,000
12,000

(C2)

12,000

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

Cr
8,000

8,000

8,000
Balances
after
31,000
8,000
39,000


20,000
8,000
4,000
32,000
7,000
39,000
Cr
12,000

12,000

12,000

12,000
Balances
after
31,000
16,000
47,000
20,000

8,000

4,000
32,000
15,000
47,000

109

(e)
(A1)

Dr
10,000

(B1)

10,000

(C1)

Ordinary share capital
(C2) Ordinary share purchase
Shares being purchased

6,000

(D1) Share premium account
(D2) Ordinary share purchase
Amount of share premium account used for redemption

1,200

(E1)

Retained profits
(E2) Ordinary share purchase
Excess of premium payable over amount of share premium account usable for the purpose

1,800

(F1)

9,000

Bank
(A2) Preference share applicants
Cash received from applicants
Preference share applicants
(B2) Preference share capital
Preference shares allotted

Ordinary share purchase
(F2) Bank
Amount payable on purchase
Balances
before
31,000
16,000
47,000

Net assets (except bank)
Bank
Preference share capital
Preference share applicants
Ordinary share capital
Ordinary share purchase

8,000

20,000


Share premium account

4,000
32,000
15,000
47,000

Retained profits

Dr

Effect

(A1)

10,000

(B1)
(C1)
(F1)

10,000
6,000
9,000

(D1)

1,200

(E1)

Cr

(F2)

9,000

(B2)
(A2)

10,000
10,000

(C2)
(D2)
(E2)

6,000
1,200
1,800

1,800

Cr
10,000

10,000

6,000

1,200

1,800

9,000
Balances
after
31,000
17,000
48,000
18,000

14,000

2,800
34,800
13,200
48,000

Answer to Question 6.4A BA 2
(a)

2004
Dec 31 Balance c/d

2005
Dec 31

2006
Dec 31

Balance c/d

Loan Note Redemption Reserve
2003
Dec 31 Retained profits*
2004
Dec 31 Bank: Interest
14,268.74
Dec 31 Retained profits
14,268.74

21,942.52
21,942.52

Retained profits: Loan notes now redeemed
30,000.00
30,000.00

348.02
6,960.36
14,268.74

2005
Jan 1
Dec 31
Dec 31

Balance b/d
Bank: Interest
Retained profits

14,268.74
713.42
6,960.36
21,942.52

2006
Jan 1
Dec 31
Dec 31

Balance b/d
Bank: Interest
Retained profits

21,942.52
1,097.12
6,960.36
30,000.00

* 0.232012 × 30,000 = 6,960.36

110

6,960.36

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

(b)
2003
Dec 31
2004
Dec 31
2005
Dec 31
2006
Dec 31
(c)
2006
Dec 31
(d)
2003
2004
2005
2006

Loan Note Sinking Fund Investment
Bank

6,960.36

Bank

7,308.38

Bank

7,673.78

Bank

8,057.48
30,000.00

Bank (redemption)

2006
Dec 31

Loan Notes
2003
30,000.00
Jan 1

Bank

30,000.00
30,000.00

Bank

30,000.00

Retained Profits (extracts) for the years ended 31 December
Loan note
Redemption Reserve
Loan note
Redemption Reserve
Loan note
Redemption Reserve
Loan note
Redemption Reserve

6,960.36
6,960.36
6,960.36
6,960.36

Answer to Question 6.6A BA 2
(Dates omitted)
(a) Bank
Application and allotment
Application monies received
(b) Application and allotment
Bank
Oversubscriptions refunded
(c) Application and allotment
Ordinary share capital
Share premium
Amount due on allotment ordinary shares
(d) Bank (see workings W1)
Application and allotment
(e) Call
Ordinary share capital
First and final call made
(f ) Bank
Call
Amount paid on call
(g) Ordinary share capital
Forfeited shares
Shares forfeited
(h) Forfeited shares
Application and allotment
Call
Amounts not received cancelled
(i) Forfeited shares
Ordinary share capital
Forfeited shares now reissued
(j) Bank
Forfeited shares
Cash received on reissue
(k) Forfeited shares
Share premium
Profit on reissue transferred
(l) Bank
Application and allotment – redeemable shares
Monies received on issue

Dr
1,320,000
1,032,000
340,000

51,975
60,000
59,910
300
115

300
500
385
800,000

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

Cr
1,320,000
1,032,000
140,000
200,000
51,975
60,000
59,910
300
25
90
300
500
385
800,000

111

(m) Application and allotment – redeemable shares
Share premium
Redeemable shares
Redeemable shares allotted
(n) (Old) redeemable preference shares
Share premium
Redemption of shares
Shares to be redeemed at premium 40p
(o) Redemption of shares
Bank
Monies paid on redemption
(p) Investments
Ordinary share capital
400,000 March Hares shares of 25p purchased, payment being 200,000 50p ordinary shares
(q) 8 per cent loan notes
Share premium
Loan note redemption
Amount due on loan notes to be redeemed
(r) Loan note redemption
Bank
Redeemed loan notes paid for
(s) Bank
Share premium
7% Loan notes
Issue of 7% loan notes at 5% discount
Workings (W1):
Due on application and allotment
Received on application
Less Returned

800,000

500,000
200,000
700,000
100,000

400,000
40,000
440,000
475,000
25,000

1,320,000
1,032,000

Less Unpaid 100 × 25p

300,000
500,000

700,000
700,000
100,000

440,000
440,000

500,000

340,000
288,000
52,000
25
51,975

Answer to Question 6.8A BA 2
(All in £000)
(a)

Ordinary Share Capital
Balance b/d
Ordinary share application
Ordinary share allotment
Ordinary share first call
1,000
Ordinary share final call
1,000

Balance c/d

(b) and (c)
Bank (10,000 × 3)
Ordinary share capital
Share premium

(d)

Share Premium
Ordinary share allotment
305
Investments (own shares)
305

Balance c/d

(e)
Ordinary share capital

112

Ordinary Share Application and Allotment
30
Bank (85,000 × 3)
300
Bank (50,000 × 8) − 75,000
250
580

Ordinary Share: First Call
100
Bank

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

500
150
150
100
100
1,000

255
325
580

250
55
305

100

(f )
Ordinary share capital

Ordinary Share: Final Call
100
Bank
Investments (own shares)
100

(g)
Ordinary share capital: final call
Share premium

Investments: Own Shares
10
Bank
55
65

90
10
100

65
65

Answer to Question 7.4A BA 2
(a)
Cash
Freehold premises
Gain on sale of non-current asset
Sale of freehold premises

Hubble Ltd: Journal

Freehold premises
Revaluation reserve
Surplus on revaluation of premises
(400,000 − (375,000 − 55,000))

Dr
75,000

80,000

Freehold premises
Plant and machinery
Inventory
Vendor: A Bubble
Assets taken over as per purchase agreement

100,000
10,000
55,000

Vendor: A Bubble
Ordinary share capital
Share premium
Cash
Discharge of purchase consideration by issue of 120,000 ordinary shares £1 each and a cash payment of £25,000

165,000

(b)
Hubble Ltd: Balance Sheet as at 31 May 2010
Non-current assets
Freehold premises at cost or valuation
Plant and machinery at cost
Less Depreciation
Motor vehicles at cost
Less Depreciation
Current assets
Inventory
Accounts receivable
Bank
Cash
Current liabilities
Trade accounts payable
Financed by:
Share capital
Authorised: 650,000 ordinary shares
Issued: 520,000 ordinary shares
Reserves
Share premium
Revaluations reserve
Retained profits

160,000
48,765
8,470
1,695
157,550
96,340
11,825
105

Cr
55,000
20,000

80,000

165,000

120,000
20,000
25,000

500,000
111,235
6,775
618,010

265,820
883,830
63,200
820,630
650,000
520,000

20,000
80,000
200,630

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

300,630
820,630

113

Workings
Freehold premises
Plant and machinery
Bank
Retained profits

375,000 + 100,000 + 80,000 − 55,000 = 500,000
101,235 + 10,000
= 111,235
75,000 − 38,175 − 25,000
= 11,825
180,630 + 20,000
= 200,630

Answer to Question 7.5A BA 2
VU Limited
Pre-incorporation
1.4.2009 to
30.6.2009
Revenue
Less Cost of sales

(A)

Less Depreciation
Directors’ fees
Administration expenses
Sales commission
Interest on purchase consideration
Distribution costs:
Variable
Fixed
Loan note interest
Net profit for the periods
Less Goodwill impaired written-off
Preliminary expenses written-off
Dividend paid

(B)

555

(B)
(C)
(B)

2,210
1,050
1,400

(C)
(B)

30,000
20,779
9,221

900
625

(D)
(D)

1,000
1,481

Retained profit carried forward

6,740
2,481

2,481

Postincorporation
1.7.2009 to
31.3.2010
95,000
59,221
35,779
1,665
500
6,630
3,325
467
2,850
1,875
1,600

169
7,560

18,912
16,867

7,729
9,138

Notes:
(A) See workings below. (B) Time basis. (C) Pro rata to sales. (D) The goodwill impaired is written-off against the pre-incorporation profit of £2,481, as are preliminary expenses (so far as possible).
The split of cost of sales is rather tricky. The answer will be demonstrated in an arithmetical, rather than algebraic, fashion:
Sales are: Pre-incorporation
Post-incorporation

30,000 = 24%
95,000 = 76%

As post-incorporation cost of sales fell by 10% then the relationship between pre- and post-incorporation cost of sales is:
Pre-incorporation
24
Post-incorporation 76% − (1/10 76%)
68.4
92.4
∴ Pre-incorporation costs are 80,000 × 100/924 × 24/100 = 20,779
Note: The proposed dividend is not relevant as it is an appropriation of profit and is not part of the calculation of profit.

Answer to Question 7.6A BA 2

Revenue
Cost of goods sold:
Opening inventory
Add Purchases
Less Closing inventory
Gross profit
114

Rowlock Ltd
Income Statement for the year ending 31 May 2009

52,185
5,261
38,829
44,090
4,946

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

39,144
13,041

Gross profit (allocated on basis of sales 5 : 16)
Variable expenses:
Wrapping
Postage
Packing
(5 : 16)
Fixed expenses
Office
Warehouse rent, etc.
(4 : 8)
Expenses attributable to company:
Director’s salary
Loan note interest

Pre-incorporation

Postincorporation
9,936

3,105

840
441
1,890
3,171

755

2,416

627
921
1,548

516

1,032
1,000
525

1,271
1,834
218
1,616

Formation expenses
Net profit

4,973
4,963

4,963

Balance Sheet as at 31 May 2009

Non-current assets
Goodwill
Sundry

4,434
25,000
29,434

Current assets
Inventory
Sundry
Total assets

4,946
9,745

Current liabilities
Non-current liabilities
7% loan notes
Net assets
Equity
Ordinary share capital

14,691
44,125

4,162
15,000

19,162
24,963
20,000
4,963
24,963

Workings:
Gross profit allocated per volume sales in each period:
Oct
2

Nov
2

Dec
2

Jan
2

Feb
2

Mar
2

Apr
2

May
2

Jun
1

16
Drawings
Purchase consideration:
Ordinary shares
Debentures

July
1

Aug
1

Sept
2

5
Purchase of Business Account
500
Balance Rowlock’s capital account at 1.6.2008 = net assets
20,000
Pre-incorporation profits
15,000
Goodwill (difference)
35,500

29,450
1,616
4,434
35,500

Answer to Question 8.2A BA 2
(a)
2007
Jan 31 Bank
Jul 10 Bank

Ordinary Dividends
2007
48,000
Dec 31 Profit and loss
40,000
88,000
Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

88,000
88,000

115

Corporation Tax
2007
145,000
Jan 1 Balance b/d
160,000
Dec 31 Profit and loss
305,000

2007
Oct 1 Bank
Dec 31 Accrued c/d

145,000
160,000
305,000

Deferred Taxation
2007
28,000
Jan 1 Balance b/d
Dec 31 Profit and loss
28,000
(30,000 × 40%)

2007
Dec 31 Balance c/d

2007
Jan 30 Bank
Dec 31 Loan note Int. receivable
Dec 31 Balance c/d

16,000
12,000
28,000

Income Tax
2007
3,500
Jan 1 Balance b/d
2,100
Dec 31 Loan note Interest payable
1,400
7,000
Loan note Interest Payable
2007
14,000
Dec 31 Profit and loss
3,500
17,500

2007
Dec 31 Bank
Dec 31 Income tax

17,500
17,500

8,400
2,100
10,500

Investment Income
2007
4,200
Sep 30 Bank

2007
Dec 31 Profit and loss

4,200

(b)
Income Statement (extract) for the year ending 31 December 2007
Net trading profit
Add Loan note interest received
14,000
Investment income
4,200
Less Loan note interest payable
Profit before taxation
Taxation: Corporation tax
Deferred tax
Profit for the year

116

7,000

Loan note Interest Receivable
2007
10,500
Dec 31 Bank
Dec 31 Income tax
10,500

2007
Dec 31 Profit and loss

Current liabilities
Corporation tax
Non-current liabilities
Deferred taxation

3,500
3,500

160,000
12,000

Balance Sheet (extract) as at 31 December 2007
160,000
28,000

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
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540,000
18,200
558,200
17,500
540,700
172,000
368,700

Answer to Question 8.4A BA 2
Joytan Ltd
Income Statement for the year ending 31 December 2009

Trading profit
Income from other non-current asset investments
Other interest receivable and similar income

13,500
8,000

Interest payable and similar charges
Profit before taxation
Tax on profit on ordinary activities
Profit for the year

500,000
21,500
521,500
30,000
491,500
210,000
281,500

Answer to Question 8.7A BA 2
(a) Tax on profit on ordinary activities (£000):
Corporation tax at 35% (740 + 104) (W1)
Deferred taxation
Corporation tax overprovided in previous years (W2)
Workings
(W1) £740,000 plus tax relief £104,000
(W2) Balance due at 31 March 2002
Less: CT paid to Revenue and Customs

844
20
864
( 80)
784

(b) Corporation tax liability:
Estimated CT charged on profits for year ended 31 March 2003
Less Tax credit on investment income (12 × 20/80)
Total tax liability
(c) Deferred taxation:
Balance at 31 March 2002
Transfer from profit and loss

600,000
(520,000)
80,000

740,000
3,000
737,000

300
20
320

No provision has been made in respect of timing differences totalling £400,000.

Answer to Question 10.4A BA 2
(a)
Goodwill
Non-current assets
Inventory
Work in progress
Accounts receivable
Bank
Formation expenses

Retained profits
Loss on realisation
Rays Ltd: Shares

Realisation
50,000
Rays Ltd
190,000
Loss on realisation
21,000
3,000
25,000
18,000
3,000
310,000
Sundry Shareholders
80,000
Ordinary share capital
70,400
Preference share capital
149,600
300,000

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
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239,600
70,400

310,000

200,000
100,000
300,000

117

(b)
(i) To Loan note holders:
Cash
+ 6% Loan notes
To Creditors:
Cash
Shares
To Preference shareholders:
Dividend arrears
Shares: 9 for every 10
To Ordinary shareholders:
50,000 shares (1 for 4)
Total purchase consideration

30,000
30,000

60,000

18,000
12,000

30,000

9,600
90,000

99,600
50,000
239,600

(ii) Agreed value of assets
Inventory
Work in progress
Accounts receivable
Bank
Non-current assets (balance)
(c)
Non-current assets
Current assets
Inventory
Work in progress
Accounts receivable
Bank
Total assets
Non-current liability
Loan notes

15,000
3,000
25,000
18,000
178,600
239,600
Rays Ltd
Balance Sheet as at 1 January 2009

178,600
15,000
3,000
25,000
58,400

30,000
250,000
250,000

Equity
Issued share capital
Balance b/d
Shares issued
(250,000 − 161,600)

101,400
280,000

18,000
88,400
106,400

Bank

Loan note holders
Accounts payable
Balance c/d

30,000
18,000
58,400
106,400

Answer to Question 10.5A BA 2
Workings
Development expenditure
Debit balance of the retained profits
Plant (balance)

Capital reduction
Development expenditure
Retained profits

TickTick Ltd
Capital Reduction
110,000
Preference share capital
121,000
Ordinary shares
219,000
450,000
Journal

50,000
400,000
450,000
Dr
231,000

Preference share capital
Ordinary shares
Capital reduction

50,000
400,000

Capital reduction
Plant

219,000

118

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Cr
110,000
121,000

450,000
219,000

Non-current assets
Freehold premises
Plant

Balance Sheet as at 31 March 2010

Current assets
Inventory
Accounts receivable
Cash at bank
Total assets

90,000
81,000
171,000
82,000
96,000
11,000

Current liabilities
Accounts payable
Net assets
Equity
Issued capital:
Ordinary shares 500,000 of 20p each
Preference shares 250,000 8 per cent of 80p each

189,000
360,000
60,000
300,000

100,000
200,000
300,000

Answer to Question 11.3A BA 2
(a) (i)

(b)
(c)

(d)
(e)
(f )
(g)
(h)

Turnover should not include VAT on taxable outputs. It would be permissible to show gross turnover only where VAT is deducted to clearly describe turnover net of VAT.
(ii) Where there is irrecoverable VAT in respect of non-current assets, or other items needing disclosure, these should all be shown inclusive of VAT.
(i) IAS 33 requires that earnings per share should be shown with the income statement for the current and preceding year.
(ii) Where the basic EPS differs materially from the diluted EPS, this should also be shown.
IAS 16 and IAS 36 require that the following are disclosed:
1 Methods of depreciation used.
2 Useful lives or the depreciation rates in use.
3 Total depreciation charged for the period.
4 Where material, the financial effect of a change in either useful lives or estimates of residual values.
5 The cost or revalued amount at both the start and end of the accounting period.
6 The cumulative amount of provisions for depreciation or impairment at the beginning and end of the financial period.
7 A reconciliation of the movements, separately disclosing additions, disposals, revaluations, transfers, depreciation, impairment losses, and reversals of past impairment losses written back in the period. 8 The net carrying amount at the beginning and end of the financial period.
(i) depreciation methods in use;
(ii) useful lives, or alternatively the depreciation rates;
(iii) total depreciation for the period;
(iv) gross amounts of these assets and accumulated depreciation.
IAS 38 – expenditure for research and development concerned with research to be written off immediately. IAS 20 – such grants are to be: credited to profit and loss over expected useful life of the asset, by treating it as a deferred credit, where a proportion of it is transferred annually to profit and loss;
Grants are not to be shown as part of shareholders’ funds.
IFRS 3 (Chapter 25) states that goodwill should be capitalised and shown on the face of the balance sheet. It should be reviewed annually for impairment. It should not be amortised.
IAS 8 and the Framework for the preparation and presentation of financial statements deal with this.
Financial statements should be drawn up on the accrual basis and on the assumption that the entity is a going concern. See Chapter 13 Section 13.9 for a fuller answer.
The parent company should prepare consolidated accounts covering both of them. Uniform accounting policies should be used and, if possible, the same accounting date.

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119

Answer to Question 11.4A BA 2
(a) (i)

(ii)

(iii)

(iv)

(v)

Leasehold land and buildings (IAS 16 and IAS 17)
The total cost of £375,000 can be amortised over a period longer than the lease where there are sufficient reasons for believing that the lease will be renewed for a further period. A more permanent state would appear to be indicated by the fact that £300,000 was spent on buildings; such a period would be permissible, given sufficient reasons regarding lease extensions.
Freehold land and buildings (IAS 16)
Cost of building should be separated from that of land. Land (normally) is not to be depreciated.
Buildings are to be depreciated over normal expected useful life. Increase in value due to inflation could result in a revaluation which in turn would mean increased charge for depreciation.
Costs of maintenance do not mean that depreciation should not be charged.
Plant and machinery (IAS 16)
Depreciation rate to be fixed by reference to expected useful life. The degree of obsolescence and the full physical life will have to be taken into consideration.
Straight line 25 per cent would take only four years to write cost down to nil. On the other hand,
15 per cent reducing balance would take over three times that period. Some compromise between these figures must be the obvious choice. If repairs and maintenance are likely to be light in early years and heavy in later years, it may make sense to use a fairly high rate using the reducing balance method. Research and development (IAS 38)
The £250,000 spent on grass-cutting characteristics is purely research and should be completely written off.
It will depend on whether the £100,000 spent has resulted in an asset with a future which is economically viable. If it has, then this sum can be written off over an appropriate period.
The £75,000 for market research has not produced an identifiable product and consequently should be written off.
Inventory (IAS 2)
Included in the balance sheet valuation should be all costs attributable to bringing the inventory to its existing location and condition.
Sales prices are only used in certain cases, e.g. in retailing where the usual gross profit percentage is used to find cost price which will then be used for the valuation.

(b) (Figures in £000)
Profit per draft accounts
Add Amortisation of leaseholds added back (125 − 7.5)
Less:
Depreciation of freeholds (assuming land is 200 and buildings 150) over 50 years
Plant and machinery (assume 25% reducing balance)
Research and development – write off
Drive system treated as viable – to be written off over 4 years
Market research
Already charged
Revised figure of profit

120

370.0
117.5
487.5

250
25
75
350
50

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3
131

300

434.0
53.5

Answer to Question 12.4A BA 2
(i) (Internal use)
Sales
Less Returns inwards
Less Cost of sales:
Inventory 1.4.2003
Add Purchases
Less Returns outwards

Breaker plc
Income Statement for the year ending 31 March 2004

700,000
22,000

Less Inventory 31.3.2004
Gross profit
Distribution costs:
Wages and salaries
Motor expenses
Hire of motors
General distribution expenses
Depreciation: Plant and machinery
Administrative expenses:
Wages and salaries
Motor expenses
Hire of motors
General administrative expenses
Discounts allowed
Directors’ remuneration
Auditor’s remuneration
Depreciation: Plant and machinery
Less Discounts received
Balance c/d
Balance b/d
Licence fees receivable
Operating profit
Bank interest receivable
Profit before taxation
Taxation
Profit for the year
Retained profit brought forward from last year

678,000
886,000
230,000

98,000
2,200
5,000
19,000
7,000
41,000
8,000
8,750
188,950
6,000

182,950

Distribution costs
Administrative expenses

656,000
765,000

243,300

25,000
80,000

Breaker plc
Income Statement for the year ending 31 March 2004

Revenue
Cost of sales

1,421,000

208,000

177,000
8,800
14,000
26,000
17,500

Transfer to general reserve
Ordinary dividend paid
Retained profit carried forward to next year
(ii) (Published)

1,450,000
29,000

243,300
182,950

Licence fees receivable
Operating profit
Bank interest receivable
Profit before taxation
Taxation
Profit for the year

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
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426,250
338,750
338,750
13,000
351,750
3,000
354,750
143,000
211,750
88,000
299,750
105,000
194,750

1,421,000
656,000
765,000
426,250
338,750
13,000
351,750
3,000
354,750
143,000
211,750

121

Answer to Question 12.5A BA 2
(i) (Internal use)
Sales
Less Returns inwards
Less Cost of sales:
Inventory 1.8.2001
Add Purchases
Less Returns outwards
Carriage inwards

Mitchell plc
Income Statement for the year ending 31 July 2002

Less Inventory 31.7.2002
Cost of goods sold
Wages
Hire of plant and machinery
Gross profit
Distribution costs:
Salaries and wages
Motor expenses
Rent and business rates
General distribution expenses
Advertising
Depreciation: Motors
Plant and machinery
Administrative expenses:
Salaries and wages
Motor expenses
Rent and business rates
General administrative expenses
Bad debts
Discounts allowed
Auditor’s remuneration
Directors’ remuneration
Hire of plant and machinery
Depreciation: Motors
Less Discounts received
Operating profit
Income from shares in group entities
Income from shares in associates and joint ventures
Loan note interest
Profit before taxation
Taxation
Profit after taxation
Profit on disposal of investments
Tax on profit from disposal of investments
Profit for the year
Retained profit brought forward from last year
Transfer to general reserve
Preference dividend paid
Ordinary dividend paid
Retained profits

122

1,310,000
57,000

1,790,000
29,000

1,761,000

317,000
1,253,000
10,000
1,580,000
303,000
1,277,000
109,000
12,000

41,000
26,000
12,750
7,000
19,000
15,000
1,300

122,050

62,000
8,000
4,250
6,000
3,000
11,000
15,000
35,000
2,000
6,000
152,250
15,000

137,250

1,408,000
353,000

8,000
5,000

14,000
3,000

50,000
20,000
110,000

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
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259,300
93,700
13,000
106,700
7,000
99,700
29,000
70,700
11,000
81,700
141,000
222,700
180,000
42,700

(ii) (Published)
Revenue
Cost of sales

Mitchell plc
Income Statement for the year ending 31 July 2002

Distribution costs
Administrative expenses
Operating profit
Profit on disposal of investments
Income from shares in group entities
Income from shares in associates and joint ventures

122,050
137,250
14,000

1,761,000
1,408,000
353,000
259,300
93,700

8,000
5,000

Interest payable and similar charges
Profit before taxation
Taxation
Profit for the year

27,000
120,700
7,000
113,700
32,000
81,700

Answer to Question 12.6A BA 2
(All in £000)

Bunker plc
Income Statement for the year ending 31 March 2010

Revenue (note 1)
Cost of sales (5,000 + 24,000 − 6,000 + 500 + 1,000 + 400)
Distribution costs (1,200 + 40 + 700)
Administrative expenses (30 + 3 + 800 + 100 + 300)
Operating profit (note 2)
Income from non-current asset investment (note 3)
Loss on disposal of discontinued operations (note 4)
Profit before taxation
Taxation (note 5)
Profit for the year
Earnings per share (1,057/1,000) (note 6)
Notes
1 Revenue is net of value added tax.
2 Operating profit is found after charging:
Depreciation (500 + 40 + 3)
Auditors’ remuneration
Directors’ emoluments
Staff costs (700 + 400 + 100)
3 Income from listed companies
4 Closure of overseas operations
5 Taxation
UK corporation tax at 35%
Previous year’s overprovision
Deferred taxation – transfer
Tax relief on overseas operations closure costs

1,940
1,233

35,000
24,900
10,100
3,173
6,927
1,600
8,527
350
8,177
7,120
1,057
105.7p

543
30
300
1,200
1,600
350
7,200
( 200)
150
( 30)

7,120
6 Earnings per share: Based on 1 million ordinary shares of £1 each and ordinary profit after taxation of
£1,057,000.
7 Dividends: Ordinary interim
100
Ordinary final
200
300

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123

Answer to Question 13.4A BA 2
(a) (For internal use)
Sales
Less Returns inwards
Less Cost of sales:
Inventory 1 April 2001
Add Purchases
Add Carriage inwards

Jeremina plc
Income Statement for the year ending 31 March 2002

184,000
620,000
6,000
810,000
163,000
647,000
104,000
25,200

Less Inventory 31 March 2002
Wages
Depreciation: Plant and machinery
Gross profit
Distribution costs:
Warehouse wages
Wages and salaries: Sales staff
Motor expenses
General distribution expenses
Depreciation: Plant and machinery
Motor vehicles
Administrative expenses:
Wages and salaries
Motor expenses
General administrative expenses
Directors’ remuneration
Bad debts
Discounts allowed
Depreciation: Plant and machinery
Motor vehicles
Less Discounts received

1,320,000
34,000

40,000
67,000
23,200
17,000
7,200
19,200

182,200

Other operating income: Royalties receivable
Loan note interest
Profit before taxation
Taxation
Profit on ordinary activities after taxation
Retained profits from last year
Preference dividend
Ordinary dividend
Retained profits carried forward to next year

124

776,200
509,800

173,600

59,000
5,800
12,000
84,000
10,000
14,000
3,600
4,800
193,200
11,000

1,286,000

12,000
40,000

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355,800
154,000
5,000
159,000
2,000
157,000
38,000
119,000
21,000
140,000
52,000
88,000

(b) (For publication)
Revenue
Cost of sales
Gross profit
Distribution costs
Administrative expenses

Jeremina plc
Income Statement for the year ending 31 March 2002

173,600
182,200

Other operating income
Operating profit
Interest payable and similar charges
Profit before taxation
Taxation
Profit for the year
Balance Sheet as at 31 March 2002
Non-current assets
Intangible assets
Development costs
24,000
Goodwill
200,000
Tangible assets
Plant and machinery
132,000
Motor vehicles
48,000
Current assets
Inventory:
Finished goods and goods for resale
Trade accounts receivable
Total assets
Current liabilities
Bank loans and overdrafts
7,000
Trade accounts payable
45,000
Bills of exchange payable
7,000
Corporation tax payable
38,000
Non-current liabilities
Loan notes
Equity
Called-up share capital
Reserves:
General reserve
Exchange reserve
Retained profits (21,000 + 119,000 − 12,000 − 40,000)

1,286,000
776,200
509,800
355,800
154,000
5,000
159,000
2,000
157,000
38,000
119,000

224,000
180,000
163,000
188,000

404,000

351,000
755,000

97,000
30,000

127,000
628,000
500,000

25,000
15,000
88,000

128,000
628,000

Note: It is assumed that both the ordinary dividend and the preference dividend were paid during the year.
Notes
1 The called-up capital consists of:
400,000 Preference shares of 50p each
300,000 Ordinary shares of £1 each

200,000
300,000
500,000

2 Plant and machinery:
Cost
Depreciation to 31 March 2001
Depreciation for the year to 31 March 2002

72,000
36,000

3 Motor vehicles at cost:
Less Depreciation to 31 March 2001
Less Depreciation for the year ended 31 March 2002

48,000
24,000

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240,000
108,000
132,000
120,000
72,000
48,000

125

Answer to Question 13.5A BA 2
(All in £000)
Non-current assets
Tangible assets
Investments

Plott plc
Balance Sheet as at 31 March 2011

Current assets
Inventory
Trade and other accounts receivable
Total assets
Current liabilities
Trade and other accounts payable
Bank overdraft
Current tax

2,400
100
2,500
400
5,500

5,900
8,400

2,300
500
900
3,700

Non-current liabilities
Deferred tax
Net assets
Equity
Called-up share capital
Reserves

80

Notes to the balance sheet
(1) Tangible assets:
Cost at 1.4.2010
Additions
Disposals
At 31.3.2011
Depreciation at 1.4.2010
Additions
Disposals
At 31.3.2011
Net book value: at 31.3.2011 at 31.3.2010

3,780
4,620

(6)

2,100
2,520
4,620

(7)
(8)

3,400
600
( 200)
3,800
1,200
500
( 300)
1,400
2,400
2,200
100

(3) Inventory: Finished goods
No significant difference between replacement cost and value shown on balance sheet.

400

(4) Accounts receivable: Trade 5,300 + Other 200
(5) Trade and other accounts payable
Trade accounts payable
Other accounts payable
(6) Provisions for liabilities and charges:
Deferred taxation

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(3)
(4)

(5)

(2) Investments: Cost at 1.4.2010 and 31.3.2011
No purchase or sales of non-current asset investments took place during the year.
Market value of investments at 31.3.2011 was £110,000.

126

Notes
(1)
(2)

5,500
2,000
300
2,300
80

(7) Called-up share capital
Ordinary shares £1 each
(8) Reserves
At 1 April 2010
Profit for the year (585 + 420)
At 31 March 2010
(9) The proposed dividend will be shown as a note

Authorised
2,500
Share
Retained
premium profits 315
1,200
1,005
315
2,205

Issued
2,100
Total
1,515
1,005
2,520

Answer to Question 13.6A BA 2
(All in £000)

Quire plc
Income Statement for the year ending 30 September 2011

Revenue
Cost of sales (500 + 12,000 + 720 − 400)
Gross profit
Distribution costs (2,800 + 360 − 50)
Administrative expenses (3,000 + 130 + 120)
Operating loss
Income from non-current asset investments 40 + (1/4 × 40)

3,110
3,250

Interest payable
Loss before taxation
Taxation (80 + 10 − 60)
Loss for the period
⎛ 560 ⎞
Loss per share ⎜

⎝ 4,000 ⎠
Note: The proposed dividend should not be accrued.
Balance Sheet as at 30 September 2011
Non-current assets
Tangible assets (3,500 − 1,100 − 1,200)
Investments
Current assets
Inventory
Trade and other account receivables (5,320 + 160 + 50)
Total assets
Current liabilities
Trade and other accounts payable (100 + 180 + 130)
Bank overdraft
Current tax

19,000
12,820
6,180
6,360
(180)
50
(130)
(400)
(530)
( 30)
(560)
(14.0p)

1,200
100
400
5,530

1,300
5,930
7,230

410
2,400
80
2,890

Non-current liabilities
Deferred tax (200 − 60)
Total liabilities
Net assets
Equity
Called-up share capital
Retained profits (820 − 560 − 60)

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140

3,030
4,200
4,000
200
4,200

127

Workings:
1 Depreciation:
Fixed assets at cost
Less Depreciation to 1 October 2010

3,500
1,100
2,400

× 50%
Apportioned: Cost of sales (60%)
Distribution (30%)
Administration (10%)

1,200
720
360
120
1,200

Answer to Question 13.7A BA 2
(All in £000)

Patt plc
Income Statement for the year ending 31 March 2010

Revenue
Cost of sales (130 + 3,700 − 170 + 42 + 2,230)
Gross profit
Distribution costs (100 − 15 + 12)
Administrative expenses (200 + 6 + 290 + 20) + [5% × (2,290 − 290)]
Profit before taxation
Taxation
Profit for the year
Earnings per share (195 ÷ 1,440)
Note: Dividends proposed of 10p per ordinary share = £144,000
Balance Sheet as at 31 March 2010
Non-current assets
Tangible assets
Current assets
Inventory
Trade and other accounts receivable
Total assets
Current liabilities
Trade and other accounts payable
Bank overdraft
Current tax
Net assets

97
616

713
355
160
195
13.54p

(2)
(3)
(4)

Notes
120 (5)
170
1,965

235
25
160

Equity
Called-up share capital
Retained profits

128

Notes
7,000 (1)
5,932
1,068

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2,135
2,255

(6)

(7)
420
1,835
1,440
395
1,835

(8)
(9)

Notes
(1) Revenue is in respect of invoices sent to customers, exclusive of value added tax.
(2) Profit on operating activities before taxation:
After charging: Depreciation
Bad debt
Allowance for doubtful debts
(3) Tax on profit on ordinary activities: UK corporation tax at 35%
(4) Earnings per share. Based on the profit on ordinary activities, after taxation, on 1,440,000 ordinary shares £1 each in issue.
(5) Tangible fixed assets
Total cost at 1 April 2009 and 31 March 2010
300
Depreciation at 1 April 2009
120
Charge for year
60
180
(6) Trade and other accounts receivable: Trade (2,290 − 100 − 290)
1,900
Other accounts receivable
50
Prepayments
15
(7) Trade and other accounts payable
Trade
Other accounts payable
Accruals
(8) Share capital
Ordinary shares £1 each
(9) Retained profit
At 1 April 2009
Profit for year
(10) Dividend proposed of 10p per share = 144,000

160
55
20

60
290
100
160

120

1,965

235
1,440

200
195

395

Answer to Question 14.3A BA 2
Cosnett Ltd
Income Statement for the year ending 30 September 2005

Revenue
Cost of sales
Gross profit
Distribution costs
Administrative expenses (W1)

82,190
484,480

Loss on disposal of discontinued operations
Dividends received from investments
Interest payable
Profit before taxation
Taxation: Current tax
Deferred tax
Profit for the year

120,000
26,500

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3,058,000
2,083,500
974,500
566,670
407,830
86,100
321,730
2,800
324,530
19,360
305,170
146,500
158,670

129

Balance Sheet as at 30 September 2005
Non-current assets
Tangible assets
Plant and machinery
Current assets
Inventory
Trade accounts receivable (W2)
Investments (W3)
Cash at bank
Total assets
Current liabilities
Trade and other accounts payable
Taxation (W4)
Accruals
Bank loan
Non-current liabilities
Loan notes
Bank loan
Deferred taxation
Account payable for plant

1,184,300
421,440
332,100
20,000
17,950

212,560
120,000
3,260
5,000
340,820
150,000
20,000
71,600
30,000

271,600

Net assets
Equity
Ordinary share capital
Retained profits
Workings:
(W1) Administrative expenses:
Salaries: office staff
Directors’ emoluments
Travel and entertainment
Political and charitable donations
Rent and rates: offices
General expenses
Allowance for doubtful debts
Hire of plant
(W2) 396,100 − (80% × 80,000) = 332,100
(W3) Obviously a current asset was bought with temporary surplus cash
(W4) Mainstream corporation tax

130

791,490
1,975,790

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612,420
1,363,370
600,000
763,370
1,363,370

42,100
63,000
4,350
750
82,180
221,400
64,000
6,700
484,480

120,000

Notes to Published Accounts
1 Accounting policies. These were . . . [should be given]
2 Directors’ emoluments were £63,000. [Details should be shown of highest paid and bands of payments.]
3 Depreciation. [Details of methods etc. to be given.]
4 Plant and machinery account showed cost £1,475,800 and aggregate depreciation £291,500. [Details of year’s movements should be stated.]
5 Auditors’ remuneration was £ . . .
6 Hire of plant and machinery cost £6,700.
7 The closure of the factory at . . . incurred a loss of £86,100.
8 Tax charged for the year is calculated:
Corporation tax on profit
120,000
Deferred tax
26,500
146,500
9 Deferred taxation consists of:
Balance 1 October 2004
45,100
Add Change to profit or loss
26,500
71,600
10 Retained profits
Balance at 1 October 2004
625,700
Profits for the year
158,670
Balance at 30 September 2005
784,370
Interim dividend paid
21,000
763,370

Answer to Question 14.4A BA 2
(All in £000)

Arran plc
Income Statement for the year ending 31 March 2007

Revenue
Cost of sales (140 + 1,210 − 150)
Gross profit
Distribution costs
Administrative expenses (95 + 5 + 40)
Operating profit

Income from non-current asset investment
Profit before taxation
Taxation: Current tax (180 − 5)
Deferred tax
Profit for the year
Earnings per share (W2)

500
140

175
4

2,265
1,200
1,065
640
425
12
437
179
258
129p

Note: Dividends proposed at 20p per ordinary share = £60,000.

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131

Non-current assets
Tangible assets
Land and buildings (W3)
Plant and machinery (W3)
Investments

Balance Sheet as at 31 March 2007
165
190

Current assets
Inventory
Accounts receivable
Cash and bank
Total assets

150
230
25

Current liabilities
Trade accounts payable
Taxation (W4)

64

374
666
200
466
666

Workings:
(W1) Corporation tax for the year
Less Overprovision in previous year

180
5
175
4
179

Deferred tax
Profit after tax
Number of ordinary shares issued
258
=
= 129p
200

EPS =

(W3)
Cost 1 April 2006
Depreciation b/d
Depreciation for year
Written-down value 31 March 2007
(W4) Corporation tax for the year

132

405
1,040

130
180
310

Non-current liabilities
Deferred tax (60 + 4)
Net assets
Equity
Called-up share capital
Retained profits (229 + 258 − 21)

(W2)

355
280
635

30
5

Land and buildings 200
35
165

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Plant, etc.
170
40

400
210
190
180

Answer to Question 14.5A BA 2
(All in £000)

Greet plc
Income Statement for the year ending 31 March 2008
Notes

Revenue
Cost of sales (140 + 960 − 150)
Gross profit
Distribution costs
Administrative expenses
Operating profit
Gain on disposal of discontinued operations

(1)
(1)
(1)

420
210

(2)

Income from other non-current asset investment
Profit before taxation
Taxation: Current tax
Deferred tax
Profit for the year

(4)

Earnings per share

(5)

Non-current assets
Tangible assets
Investments

(3)

(7)
(8)

43
459
76.5p

530
560
1,090
150
470
40

Current liabilities
Trade accounts payable
Taxation

Equity
Called-up share capital
Retained profits (182 + 459)

630
370
60
430
72
502

Balance Sheet as at 31 March 2008

Current assets
Inventory
Accounts receivable
Cash and bank
Total assets

Non-current liabilities
Deferred tax
Total liabilities
Net assets

27
16

1,950
950
1,000

660
1,750

261
52
313
(9)

(10)

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196

509
1,241

600
641
1,241

133

Notes attached to the accounts for year ended 31 March 2008
1 In calculating distribution and administrative costs, the following items have already been charged:
Hire of plant
35
Depreciation
32
Directors’ emoluments
45
Auditors’ remuneration
30
2 Sale of factory
60
3 Non-current asset income is on listed non-current asset investments
4 Tax on profit on ordinary activities:
UK corporation tax (estimated)
52
Previous year’s overprovision
(25)
Deferred tax: increase in provision
16
43
5 EPS based on 600,000 shares in issue and the profit after tax
76.5p
6 Proposed final dividend 50p a share
300
7 Plant and machinery: Cost 31 March 2007
750
Depreciation to 31 March 2007
188
Depreciation for the year
32
220
530
8 Investments: These comprise of non-current asset investments at cost, with market value £580,000
No movements during year
560
9 Deferred taxation: at 31 March 2007
180
Add Provided during year
16
196
10 Called-up share capital:
Ordinary shares £1 each
Authorised
1,000
Issued
600

Answer to Question 14.7A BA 2
Per text.

Answer to Question 15.2A BA 2
See text.

134

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Answer to Question 15.4A BA 2
Pennylane Ltd
(IAS 7) Statement of Cash Flows (using the indirect method) for the year ending
31 December 2003 (£000)
Cash flows from operating activities
Profit from operations
Adjustments for:
Depreciation
90
Loss on sale of tangible non-current assets
13
Profit on sale of financial investment
( 5)
Operating cash flows before movements in working capital
Increase in inventories
( 16)
Increase in accounts receivable
(105)
Increase in accounts payable
14
Cash generated by operations
Tax paid
Interest paid

(110)
( 75)

Net cash from operating activities
Cash flows from investing activities
Interest received
Payments to acquire intangible non-current assets
Payments to acquire tangible non-current assets
Receipts from sale of tangible non-current assets
Receipts from sale of financial investments

330

98
428

(107)
321

25
( 50)
(205)
37
30

Net cash used in investing activities
Cash flows from financing activities
Issue of ordinary share capital
Dividends paid
Long-term loan
Net cash from financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period

(185)
136

(163)
60
( 80)
100

80
53
(181)
(128)

Answer to Question 15.8A BA 2
(All in £000)
(a)
Income Statement for the year ending 30th April 2006
Trading profit
520
Less Depreciation on property
36
Depreciation on plant and vehicles
84
Loss on sale of plant and vehicles
20
140
Net profit before tax
380
Less Taxation:
Provision for corporation tax
172
Transfer to deferred tax
176
(348)
Net profit for the year
32
Note: The transfer of profit for the year to a general reserve would be shown in the statement of changes in Equity.

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135

(b)
Statement of Cash Flows for the year ending 30 April 2006
Cash flows from operating activities
Profit before taxation
Adjustments for:
Depreciation
Loss on sale of tangible non-current assets
Increase in inventories
Increase in accounts receivable
Decrease in accounts payable
Cash generated from operations
Taxation paid
Net cash used in operating activities
Cash flows from investing activities
Payments to acquire tangible non-current assets
Payments to acquire intangible non-current assets
Receipts from sales of tangible non-current assets
Net cash used in investing activities
Cash flows from financing activities
Proceeds from issue of share capital
Payment to redeem share capital
Net cash from financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period

380
120
20
( 24)
( 76)
24

(420)
( 40)
40
440
(125)

64
444
(450)
( 6)

(420)

315
(111)
50
( 61)

Workings:
Loss on sale of tangible non-current assets = 40 − 60 = (20)
Cash and cash equivalent at end of period = 64 (per movement of assets table) less 125 (unrecorded redemption of shares)
( 61)

Answer to Question 15.10A BA 2
(All in £000)
(a)
Statement of Cash Flows for V Ltd for the year ending 31 December 2003 (indirect method)
Cash flows from operating activities
Profit before taxation
331
Adjustments for:
Depreciation
74
Loss on sale of tangible non-current assets
4
Increase in inventories
( 3)
Increase in accounts receivable
( 9)
Increase in accounts payable
( 5)
61
Cash generated from operations
392
Interest paid
( 23)
Taxation paid
( 68)
Net cash from operating activities
301
Cash flows from investing activities
Payments to acquire tangible non-current assets
( 98)
Receipts from sales of tangible non-current assets
2
Net cash used in investing activities
( 96)
Cash flows from financing activities
Proceeds from issue of share capital
91
Payment of long-term loan
(250)
Dividend paid
( 52)
Net cash used in financing activities
(211)
Net decrease in cash and cash equivalents
( 6)
Cash and cash equivalents at beginning of period
37
Cash and cash equivalents at end of period
31

136

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Working
Loss on sale of tangible non-current assets = 2 − (18 − 12) = (4)
Taxation paid = charge in income statement 87 new provision
(100)
( 13) old provision
81
paid
68
(b) In the long term, if a business is not profitable, it will not produce sufficient revenues to cover its expenses. Despite the importance of short-term cash flow to meet payments as they fall due, it is in the long-term interests of the business to invest in non-current assets, research and development, and advertising in order to generate future revenues in a profitable manner. Sometimes, management is accused of short-termism, for example delaying necessary capital expenditure in order to keep costs low. While this will indeed improve short-term cash flow, the long-term viability of the business can be at risk.

Answer to Question 17.4A BA 2
Goodwill
Non-current assets
Inventory
Accounts receivable
Bank

Consolidated Balance Sheet

Share capital

20,000
158,000
41,000
28,000
3,000
250,000
250,000
250,000

Answer to Question 17.5A BA 2
Non-current assets
Inventory
Accounts receivable
Bank

Consolidated Balance Sheet

Share capital
Retained profits

170,000
42,000
78,000
5,000
295,000
235,000
60,000
295,000

Elimination of negative goodwill of 60,000 by Parental Ltd recognising the gain in profit or loss.

Answer to Question 17.8A BA 2
Non-current assets
Inventory
Accounts receivable
Bank

Consolidated Balance Sheet

Share capital
Minority interest

64,200
15,200
19,900
6,100
105,400
100,000
5,400
105,400

Elimination of negative goodwill of 1,200 uplifted for minority interest element to 1,200 plus
1,200 × 1/2 = 1,800. Non-current assets in Son and Daughter reduced by 1,800. Minority interest = 1/3 of
16,200 = 5,400.
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137

Answer to Question 17.9A BA 2
Consolidated Balance Sheet

Goodwill
Non-current assets
Inventory
Accounts receivable
Bank
Share capital
Minority interest

3,000
57,000
11,000
17,000
7,000
95,000
90,000
5,000
95,000

Answer to Question 17.12A BA 2
Consolidated Balance Sheet

Goodwill
Non-current assets
Current assets
Share capital
Retained profits
General reserve
Minority interest

2,000
129,000
51,000
182,000
100,000
56,000
20,000
6,000
182,000

Elimination of negative goodwill of 18,000 by reducing non-current assets in Sub 1.

Answer to Question 17.13A BA 2
Consolidated Balance Sheet

Goodwill*
Non-current assets
Current assets
Share capital
Retained profits
General reserve
Minority interest

19,500
189,000
55,000
263,500
160,000
58,000
20,000
25,500
263,500

* Goodwill 10,500 + 9,000 = 19,500

Answer to Question 18.3A BA 2
Goodwill*
Non-current assets
Current assets

Consolidated Balance Sheet as at 31 October 2008

Share capital
Retained profits: 45,000 + (51% of 8,000)
Minority interest 39,200 + [49% of (15,000 + 15,000)]
* Goodwill: Cost 60,000 − [51% of (80,000 + 7,000 + 15,000)] = 7,980

138

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7,980
165,000
55,000
227,980
125,000
49,080
53,900
227,980

Answer to Question 18.5A BA 2
Goodwill
Non-current assets
Current assets

P, S1 and S2 Consolidated Balance Sheet as at 31 December 2003

1,800
157,667
114,300
273,767

Share capital
Retained profits: 27,000 − (80% of 1,600) + (75% of 3,400)
General reserve
Minority interest: [20% of (50,000 + 1,400 + 6,000) + 25% of (36,000 + 8,067)]

200,000
28,270
23,000
22,497
273,767

Goodwill S1 Cost 49,000 − [80% of (50,000 + 3,000 + 6,000)] = 1,800
Negative goodwill S2 Cost 30,500 − [75% of (36,000 + 4,800 + 1,800)] = 1,450
Elimination of negative goodwill of 1,450 uplifted for minority interest element in S2 to 1,450 plus
1,450 × 25/75 = 1,933 (to nearest £). Non-current assets in S2 reduced by 1,933. Minority interest in S2 =
25 per cent of 44,067 = 11,017.
S2 Balance Sheet (restated)
Non-current assets
Current assets
Share capital
Retained profits as at 31.12.02
Add profit for 2003

4,667
3,400

£
29,467
14,600
44,067
36,000
8,067
44,067

Answer to Question 18.6A BA 2
(All in £000)
(a) Cost of acquisition
Nominal value shares bought
Retained profits (50 × 80%)
Goodwill
(b) Heather
Thistle (120 − 50) × 80%
Group retained profit
(c) Minority interest:
Nominal value of shares
Retained profits

80
40

150
120
30
700
56
756

100
120
220

Minority interest 220 × 20% = 44

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139

Answer to Question 19.4A BA 2
(All in £000)
Non-current assets
Goodwill (W4)
Other non-current assets
Total non-current assets

Seneley Group
Consolidated Balance Sheet as at 30 September 2006
58
745
803

Current assets
Inventory (225 + 45 + 150 − 4)
Accounts receivable (W1)
Cash and bank
Total assets

416
420
65

430
1,274

Current liabilities: Accounts payable (W1)
Equity
Called-up share capital
Retained profits (W2)

800
289
1,089
185
1,274

Minority interest (W3)

(W1)

Accounts
Receivable
240
180
50
470

Seneley
Lowe
Wright
Less Intercompany debts:
Wright owed Lowe
Lowe owed Seneley
Seneley owed Wright

25
20
5

50
420

Accounts
Payable
320
90
70
480
25
20
5

(W2) Retained profits:
Seneley
Wright (50 − 60) × 70%
Lowe (150 − 90) × 80%

(W3) Minority interest: Lowe 550 × 20%
Wright 250 × 30%

140

50
430
252
( 7)
48
293
( 4)
289

Less Profit in inventory

(W4) Cost of control:
Cost of investment
Share capital
Retained profits
Goodwill/(Negative goodwill)

901
1,704

110
75
185

80%
80%

Lowe
450
(320)
( 72)
58

(70%)
(70%)

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Wright
130
(140)
( 42)
( 52)

Answer to Question 19.5A BA 2
Consolidated Balance Sheet as at 31 December 2005
Non-current assets
Goodwill (125,000 − 113,000) + (85,000 − 77,840)
Other non-current assets
Current assets
Inventory (101,000 − 350)
Accounts Receivable (85,000 − 5,700)
Bank
Total assets

19,160
322,000
341,160
100,650
79,300
48,000

Current liabilities
Accounts Payable (30,000 − 5,700)
Net assets

227,950
569,110
24,300
544,810

Share capital
Retained profits (37,000 − 350 + 26,000 − (56% × 4,000))
General reserve

325,000
60,410
100,000
485,410
59,400
544,810

Minority interest 44% × (135,000)

Answer to Question 19.7A BA 2
(All in £000)

Block Group of Companies
Consolidated Balance Sheet as at 30 September 2008

Non-current assets
Goodwill (W1)
Other non-current assets (8,900 + 2,280 + 3,240)
Total non-current assets

100
14,420
14,520

Current assets
Inventory (300 + 80 + 160 − 50)
Accounts receivable (1,600 + 50 + 130 − 30 − 20)
Cash (400 + 120 + 110)
Total assets
Accounts payable (300 + 140 + 130 − 20 − 30)

490
1,730
630

Capital and reserves
Called-up share capital
Retained profits (W2)

10,000
5,190
15,190
1,660
16,850

Minority interest (W3)

Workings:
(W1) Goodwill:
Cost
Shares
Retained profits

2,850
17,370
520
17,850

Chip
3,000
200
3,200

× 80%

2,500

(

2,560
60)

Knot
2,000
500
2,500

× 60%

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1,600
1,500
100

141

(W2) Retained profits
Block
Chip (500 − 200) × 80%
Knot (400 − 500) × 60%
Inventory profit unrealised 100 × 50%

5,060
240
( 60)
( 50)
5,190

(W3) Minority interest
Chip 20% × 3,500
Knot 40% × 2,400

700
960
1,660

Answer to Question 20.2A BA 2
75% Share capital and reserves 31 October 2008
Shares bought 31 October 2004
Shares bought 31 October 2008
Goodwill on acquisition

Holding

Cost

150,000
300,000
450,000

260,000
650,000

765,000
910,000
145,000

Note
Comprising: 31 October 2004: £260,000 − ((25% of £600,000 + 340,000) = £235,000) = 25,000
31 October 2008: £650,000 − ((50% of £600,000 + 420,000) = £510,000) = 140,000
165,000
Post first purchase profits 31 October 2004 to 31 October 2008 (25% of £80,000) ( 20,000)*
145,000
* This is the goodwill ‘lost’ by delaying acquisition until 31 October 2008.

Answer to Question 20.4A BA 2
Shares bought
Reserves at 31 December 2007 20,000 + 16,000 =
Add proportion of 2008 profits before acquisition (1/4 × 24,000)
Proportion of pre-acquisition profits

36,000
6,000
42,000

175,000
× 42,000 =
200,000

175,000

36,750
211,750

Paid for shares 240,000
Therefore goodwill is 240,000 − 211,750 = 28,250

Answer to Question 21.2A BA 2
Goodwill
Other non-current assets
Current assets

Consolidated Balance Sheet as at 31 December 2007

Share capital
Retained profits (74,000 + 46,000 − 25,000 + 30,000)
Workings: Goodwill: Cost 160,000 − 80,000 − 16,000 − Dividend 25,000 = 39,000

142

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39,000
279,000
107,000
425,000
300,000
125,000
425,000

Answer to Question 21.4A BA 2
Consolidated Balance Sheet as at 31 December 2008
Goodwill (380,000 − 195,000 − 65% of 62,000)
Other non-current assets

144,700
510,000
654,700
212,000
866,700
50,000
816,700

Current assets
Current liabilities
Share capital
Retained profits (112,000 − 65% of 22,000)
Minority interest (105,000 + 35% of 40,000)

600,000
97,700
119,000
816,700

Answer to Question 21.7A BA 2
(a) (All in £000)
Non-current assets
Goodwill

P plc & S plc
Consolidated Balance Sheet as at 30 April 2008

Other non-current assets
Freehold property
Plant

Current assets
Inventory (W1)
Accounts receivable (W2)
Cash (W3)
Total assets
Current liabilities
Trade Accounts payable (W4)
Taxation

22
Cost
141
440
581

Depreciation to date
55
148
203

172
35
25

51
80

Equity
Called-up share capital
Reserves
Share premium
General reserve (W6)
Retained profits (W7)
Minority interest (W5)

86
292
378
400

232
632

131
501
300
20
64
73
457
44
501

Workings:
Cost of Control Account
Cost of investment in ordinary share capital 150
Ordinary share capital (80% × 100)
Share premium (80% × 10)
General reserve (80% × 20)
Profit and loss (80% × 30)
Goodwill
150

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80
8
16
24
22
150

143

(W1) Inventory

P
S
Less Profit in unsold inventory 20% margin × 20

111
65

176
4

172

45
10

35

19
2
4

25

57
6

51

(W5) Minority interest: Ordinary share capital 20% × 100
Preference share capital 50% × 20
Share premium 20% × 10
General reserve 20% × 15
Retained profits 20% × 45

20
10
2
3
9

44

(W6) General reserve: P
Less 80% reduction S reserve × 5

68
4

64

(W2) Accounts receivable

P
S
Less Intercompany account

(W3) Cash
Cheque in transit

30
15

P
S

(W4) Trade accounts payable P
S
Less Intercompany account

(W7) Retained profits P
S 80% × 15

35
22

65
12

77
( 4)

Less Profit on intercompany inventory (see W1)

73

(b) ‘Cost of control’ is the excess of the purchase price over the value of the assets acquired when one company takes a controlling interest in another company. It is usually called, ‘goodwill’, although the term ‘cost of control’ is more explicit. The treatment adopted complies with International GAAP.

Answer to Question 22.2A BA 2
Consolidated Balance Sheet as at 31 March 2004
Non-current assets
Goodwill (74,000 − 30,000 − 18,000 − 16,000)
Other non-current assets
Less Depreciation
Current assets

263,000
64,900

Share capital
Retained profits (65,000 − 1,000 + 10,000 + 100)

10,000
198,100
76,000
284,100
210,000
74,100
284,100

Answer to Question 22.4A BA 2
Consolidated Balance Sheet as at 31 December 2008
Non-current assets
Goodwill (68,000 − 65,000)
Other non-current assets
Less Depreciation
Current assets

155,000
15,500

Share capital
Retained profits (42,000 + 12,000 − 1,500)

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3,000
139,500
20,000
162,500
110,000
52,500
162,500

Answer to Question 23.2A BA 2
Non-current assets
Goodwill
Other non-currents assets
Current assets

Consolidated Balance Sheet as at 31 March 2003
50,100
566,250
123,750
740,100

Share capital
Retained profits (197,500 + 80% of 10,000 + 56% of 12,500)
Minority interest

500,000
212,500
27,600
740,100

Goodwill: Cost of shares to group in Sub A Ltd
Cost of shares to group in Sub B Ltd 80% of 32,500
Less Shares: in Sub A in Sub B 56% of 25,000
Retained profits: in Sub A 80% of 15,000 in Sub B 56% of 2,500
General reserve: in Sub A 80% of 7,500

40,000
14,000
12,000
1,400

Minority interest:
Shares in Sub A
10,000
Shares in Sub B 44% of 25,000
11,000
Retained profits: in Sub A 20% of 25,000
5,000
in Sub B 44% of 15,000
6,600
General reserve: in Sub A 20% of 7,500
Less Cost of shares in Sub B to minority interest of Sub A 20% of 32,500

97,500
26,000

123,500

54,000
13,400
6,000

73,400
50,100

21,000
11,600
1,500

34,100
6,500
27,600

Answer to Question 23.4A BA 2
The dividend on the preference share should be treated like interest and accrued (see W7).
Bryon Ltd & its subsidiaries
Balance Sheet as at 30 September 2006

Non-current assets
Goodwill
Tangible assets
Freehold land and buildings at cost (W1)
Plant and equipment at cost (W2)
Less Depreciation

550,625
11,468,400
8,419,600

Current assets
Inventory (W4)
Accounts receivable (W5)
Cash at bank (W6)
Total assets

2,870,500
4,600,000
142,000

Current liabilities
Accounts payable
Preference dividends accrued (W7)
Bank overdraft

4,073,050
80,000
1,450,850
2,000,000
2,000,000

4,000,000

3,048,800

7,612,500
14,036,925

5,603,900

Non-current liabilities
8% Redeemable preference shares
10% Loan note

2,825,000

Capital and reserves
Called-up share capital
Reserves (W9)
Minority interests (W8)

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9,603,900
4,433,025
2,000,000
949,675
1,483,350
4,433,025

145

Workings: Bryon owns 75% of Carlyle
Bryon owns 75% × 662/3% = 50% of Doyle
(W1)

Land and buildings per balance sheets
Extra value: Doyle

2,625,000
200,000
2,825,000

(W2)

Plant per balance sheets
Extra value: Doyle

(W3)

Depreciation per balance sheets
Extra depreciation: Doyle

8,280,000
139,600
8,419,600

(W4)

Inventory per balance sheets
Less Intercompany profit: Doyle

2,950,500
80,000
2,870,500

(W5)

Accounts receivable per balance sheets
Less Cheque in transit

4,700,000
100,000
4,600,000

(W6)

Bank per balance sheets
Cheque in transit

(W7)

Preference dividend 1/2 year accrued:
8% × 2,000,000 × 6 months

(W8)

Minority interests
Shares: Ordinary:

11,250,000
218,400
11,468,400

42,000
100,000
142,000
80,000

Carlyle (25%)
Doyle (50%)

Reserves: Carlyle
Per question
Less Preference dividend 1.10.2006
25%
Reserves: Doyle
Per balance sheet
Fair value adjustments

250,000
600,000
850,000
1,013,400
80,000
933,400
233,350
521,200
278,800
800,000

50% share
(W9)
(i)

400,000
1,483,350

Reserves
Profit in Doyle
Per question
Less Additional depreciation
Amended profit for 12 months
Post-acquisition =

310,000
40,000
270,000

No of shares bought
× Profit × Months owned
Issued shares

= (Bought 31 March 2006)
= (Bought 30 June 2006)

400,000
6
× 270,000 ×
=
1,200,000
12

400,000
3
× 270,000 ×
=
1,200,000
12

75% goes to group reserves*

45,000
22,500
67,500
= 50,625

* Not 662/3 as the shares shown in the above calculation do not include minority interest.
As Bryon Ltd owns 75% of Carlyle Ltd, that is the proportion to use.

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(ii)

Reserves in Doyle per balance sheet
Add Fair value adjustment

521,200
278,800
800,000

Minority owns 50%
400,000
Bryon’s share 50%
Less 75% share of post-acquisition profits (see (i))
Value of reserves at date of purchases
Reserves for balance sheet therefore per unconsolidated balance sheets:
Bryon
879,000
Carlyle
1,013,400
Doyle
521,200
Add Fair value adjustment (Doyle)
Less Unrealised profits on inventory (W4)
Pre-acquisition profits Carlyle (75%)
Doyle reserves: pre-acquisition (see above)
Minority interest (Doyle)
Minority interest (Carlyle):
1,013,400 − preference dividend due 80,000 =
933,400 × 25%
Accrued dividend preference shares (Carlyle)

80,000
600,000
349,375
400,000
233,350
80,000

400,000
50,625
349,375

2,413,600
278,800
2,692,400

1,742,725
949,675

Answer to Question 24.3A BA 2
Old plc & subsidiaries
Consolidated Income Statement for the year ending 30 April 2006
Revenue (1,250,000 + (875,000 − 150,000 − (3/4 × 120,000)) + (3/4 × 650,000)
Cost of sales (W4)
Gross profit
Distribution expenses
255,000
Administration expenses
122,000
Profit before taxation
Taxation
Profits for the year after taxation
Minority interest (8,400 L (W1) + 4,000 Preference Dividend F)
12,400
Pre-acquisition dividend
1,000
Profit for the year (W2)
Workings:
(W1) Lodge:

Year
Revenue
650,000
Cost of goods sold (Purch. 475,000 + Op. Inv. 80,000 − Cl. Inv.85,000) (470,000)
180,000
Distribution expenses
( 60,000)
Administration
( 72,000)
48,000
Taxation
( 20,000)
28,000
Minority interest 40%

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2,372,500
1,450,500
922,000
377,000
545,000
215,000
330,000
13,400
316,600

9 months
487,500
(352,500)
135,000
( 45,000)
( 54,000)
36,000
( 15,000)
21,000
8,400

147

(W2)

Turnover
Purchases
Adjust stock
Distribution
Administration
Corporation tax
Profit unrealised (see W3)
Minority interest (see W1)
Preference dividend: minority
Pre-acquisition preference dividend

Old
1,250,000
( 780,000)
20,000
490,000
125,000
28,000
337,000
125,000
212,000
(
8,000)

204,000
(W3) Unrealised profit
Opening intra-group inventory
Closing intra-group inventory
Profit @ 25%
(W4) Cost of sales
Per W2
Intra-group purchases
Cost of purchases
Inventory adjustment
Profit unrealised in net inventory (W3)
Profit in closing inventory
Cost of sales

Field
875,000
(555,000)
( 15,000)
305,000
85,000
40,000
180,000
75,000
105,000
( 4,000)
( 1,000)
100,000

Old
36,000
40,000
4,000
1,000

Field

Old
780,000
(150,000)
630,000
( 20,000)
1,000

611,000

Field
555,000
555,000
15,000


570,000

Lodge
487,500
(356,250)
3,750
135,000
( 45,000)
( 54,000)
36,000
15,000
21,000
(

8,400)
12,600

316,600

Lodge

28,000
28,000
7,000

Total

Lodge
356,250
( 90,000)*
266,250
(3,750)

7,000
269,500

Total

8,000

1,450,500

Answer to Question 24.4A BA 2
ATH Ltd
Consolidated Income Statement for year ending 31 December 2008
Revenue (194,000 + 116,000 + 84,000 − 1,000)
Cost of sales (153,000 + 87,000 + 63,000 − 1,000)
Gross profit
General expenses (32,600 + 22,900 + 18,750)
Profit for the year
Minority interest (W1)
Group profit for the year

Goodwill (W3)
Non-current assets

Balance Sheet as at 31 December 2008

Current assets
Total assets
Current liabilities
Net assets
Share capital
Retained profits (W2 + 15,530)
Minority interest (W4)

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393,000
302,000
91,000
74,250
16,750
1,220
15,530

5,450
99,000
104,450
91,000
195,450
55,000
140,450
100,000
32,330
8,120
140,450

Workings:
(W1) Minority interest:
20% × £6,100 for GLE

1,220

(W2) Profit brought forward:
ATH Ltd
FRN (1,900 − 700)

15,600
1,200

(W3) Goodwill:
Cost of shares
Par value
Pre-acquisition profit
Goodwill

GLE
33,700
(24,000)
( 4,800)
4,900

16,800

FRN
21,250
(20,000)
( 700)
550

5,450

(W4) Minority interest:
Share capital
Retained profits 20% × (6,000 − 1,500 + 6,100)

Revenue
Cost of sales
Gross profit
General expenses
Net profit
Dividend received
Dividend paid

GLE
6,000
2,120
8,120

Summarised Income Statements
ATH
194,000
153,000
41,000
32,600
8,400
1,200
9,600

GLE
116,000
87,000
29,000
22,900
6,100

FRN
84,000
63,000
21,000
18,750
2,250

Total
394,000
303,000
91,000
74,250
16,750

1,500
4,600

Answer to Question 26.3A BA 2
(a)

Jasmin (Holdings) Group plc
Consolidated Balance Sheet as at 31 March 2004 (£000)

Intangible fixed assets
Tangible fixed assets
Investment in associated company (note 1)

Current assets: Inventory (285,600 + 151,400 = 437,000 − 300 unrealised profit)
Cash

436,700
319,500

Total assets
Current liabilities: Accounts payable
Share capital and reserves
Ordinary £1 shares
Revaluation reserve [W1 (iv)]
Retained profits [W1 (v)]

37,964
553,320

Minority interest
Notes to financial statements (extract):
1 Investment in associated company, Fortran plc: (8,000 + post-combination share 624)
Share of net assets (pre-combination 7,202 plus post-combination of 52% × 1,200)
Premium on acquisition (not yet written off)

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38,300
379,400
8,624
426,324
756,200
1,182,524
528,100
654,424
60,000
591,284
3,140
654,424
7,696
928
8,624

149

Workings:
(W1) Kasbah:
(i)
Goodwill on acquisition = 97,600 − [18,000 + 800 (goodwill on preference shares) + 40,500]
38,300
(ii)
Minority interest = ordinary share capital 2,000 + preference share capital 3,200 = 5,200
(retained profits 1,880 + revaluation reserve reduction 180) = 3,140
(iii)
Group share of Kasbah retained profits = balance 18,800 + capitalised at acquisition 40,500
59,300 − minority interest 1,880 = 57,420 (post-combination loss)
(iv)
Revaluation reserve = Jasmin 40,000 − group share of Kasbah revaluation reduction 1,620
38,380 minus post-combination reduction Fortran 416 = 37,964
(v)
Group retained profits = Jasmin 610,000 − (unrealised inventory profit 300 + Kasbah 57,420)
552,280 + [Fortran post-combination of 52% (3.6 − 1.6 =) 1.04] = 553,320

=

=
=
=

(W2) Fortran:
(i)
As Jasmin only controls 40% of the voting equity of Fortran, Fortran is an associate company, rather than a subsidiary. Nevertheless, it is 52% of the profits and losses that should be included under equity accounting, being the proportion of ownership.
Jasmin
‘A’ ordinary shares
‘B’ ordinary shares
(ii)
(iii)

4,800
800
5,600

(80%)
(10%)
(40%)

Voting rights
Others
1,200
7,200
8,400

(20%)
(90%)
(60%)

Total
6,000
8,000
14,000

(100%)
(100%)
(100%)

Premium on acquisition = cost 8,000 − [52% of (share capital 10,000 + revaluation reserve 2,000
+ retained profits 1,600)] = 928
Investment in Fortran = cost of shares 8,000 + share of post-acquisition reserves [52% revaluation reserves of (800) = (416) + 52% retained profits of 2,000 = 1,040] = 8,624

(c) The 63.8 million losses of Kasbah plc (the balance on reserves at 1 April 2003 was 45 million; at
3 March 2004 it was 18.8 million), could indicate a possible going concern problem that should be investigated. Answer to Question 26.4A BA 2
(a) Huge has 75% of Large’s share capital. Large is therefore quite clearly a subsidiary undertaking and will be treated as such in the consolidated accounts.
Huge has 25% of the ordinary share capital of Medium. This means that Medium is an associated or related undertaking. The equity method of accounting therefore applies under IAS 27, where the test of it is based on the ability to exert significant influence.
Huge owns only 10% in Small and there is nothing stated in the question to suggest it should be treated as an associated undertaking. It will simply be shown as an investment.

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Huge plc and subsidiary Large plc
Consolidated Balance Sheet as at 30 September 2007

(b) (All in £000)

Fixed assets
Goodwill (W2)
Property, plant and machinery (2,004 + 780)
Investment in related company (Medium)
Add Share of post-acquisition profits (W1)
Other investments (Small)

180
15

Current assets
Inventory (489 + 303)
Accounts receivable (488 + 235 + 10)
Accounts receivable – related company
Bank and cash (45 + 62)
Total assets

792
733
40
107

Current liabilities
Trade accounts payable (318 + 170)

1,672
4,723

2,400
1,530
3,930
305
4,235

Minority interest (see W4)

210,000
150,000

(W2) Purchase of Large shares
600,000 shares at par
600,000/800,000 × Revenue reserves of 320,000

60,000
15,000
600,000
240,000
840,000
900,000
60,000

Cost of purchase
Goodwill
(W3) Revenue reserves:
Huge
Large 75% × post-acquisition profits of 100,000
(420,000 − 320,000) =
Medium (W1)

195
12
3,051

488
4,235

Capital and reserves
Called-up share capital
Revenue reserves (see W3)

Workings:
(W1) Medium: Post-acquisition profits
Reserves 30.9.2007
Less Reserves 1.10.2006
25% of 60,000 =

60
2,784

1,440,000
75,000
15,000

1,530,000

200,000
105,000

305,000

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151

(W4) 25% share capital (Large) × 800,000 =
25% reserves (Large) × 420,000 =

Answer to Question 27.2A BA 2
See text, Section 27.1.

Answer to Question 27.4A BA 2
See text, Section:
(a) 27.3
(b) 27.2
(c) 27.4
(d) 27.6
(e) 27.5

Answer to Question 27.6A BA 2
(a)
(b)
(c)
(d)

1 : 8.33 or 12%
2.5%
48p
5

Answer to Question 27.8A BA 2
Any ten ratios could be selected, but it would be expected that the selection would include ratios from each of the groups given in the chapter. In this case, the company appears as if it may have liquidity problems, possibly due to excessively high inventory. The gross profit percentage is not very high at 30%, and much of it is eroded by the time all the other expenses have been charged to profit or loss. The EPS and dividend cover ratios would need to be compared to those of other companies in the same sector, as would all the other ratios calculated, before any further conclusions could be drawn. It would also be interesting to compare these ratios (and others) with the equivalent figures for the previous year.
Ratio category

Formula

Solvency
Current assets
Current liabilities

Current ratio

Current assets − Inventory

Acid test ratio

Current liabilities

= 1.06 : 1
= 0.18 : 1

Profitability
Gross profit : Revenue

Gross profit
Sales

= 30%

Return on capital employed

Profit before interest and tax
Total assets – current liabilities

= 10.2%

Inventory turnover

Cost of goods sold
Average inventory

= 5.09 times

Accounts receivable days

Accounts receivable
× 365
Sales

= 10.95 days

Accounts payable days

Accounts payable
× 365
Purchases

= 40.28 days

Prior charge capital
Total capital

= 23.8%

Efficiency

Capital structure
Capital gearing ratio
Shareholder ratios
Earnings per share

Net profit after tax and preference dividends
= 7.6p
Number of ordinary shares in issue

Dividend cover

Net profit after tax and preference dividends
= 3.17 times
Net dividend on ordinary shares

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Answer to Question 27.10A BA 2
(a)

R

T

500
100
×
= 25%
2,000
1

500
100
×
= 35.7%
1,400
1

(i)

Gross profit as % of revenue

(ii)

Net profit as % of revenue

60
100
×
= 3%
2,000
1

100
100
×
= 7%
1,400
1

(iii)

Expenses as % of revenue

440
100
×
= 22%
2,000
1

400
100
×
= 28.6%
1,400
1

(iv)

Inventory turnover

1,500
= 3.2 times
(440 + 490) ÷ 2

900
= 4.7 times
(144 + 240) ÷ 2

(v)

ROCE

60
100
×
= 5.4%
1,120
1

100 100
×
= 14.7%
678
1

(vi)

Current ratio

1,250
= 3.86
324

687
= 7.63
90

760
= 2.35
324

447
= 4.97
90

(vii) Acid test ratio
680

(viii) Accounts receivable : revenue ratio
(ix)

2,000

× 12 = 4.08 months

320
1,400

324
× 12 = 2.51 months
1,550

Accounts payable : purchases ratio

× 12 = 2.74 months

90
× 12 = 1.08 months
996

(b) T is obviously the more efficient company. It has made £100,000 profit compared with the £60,000 profit of R and also has achieved a return on capital employed of 14.7%, almost three times that of R
(5.4%).
Reasons: These are conjecture – you really have to know more about the businesses before you can be definite.
(i) Somehow T has managed to achieve a far greater percentage gross profit while maintaining a reasonable level of sales.
(ii) Because expenses are lower, but gross profit is the same as for R, T has made the higher net profit.
(iii) T has kept inventory down to relatively lower figures than R, something made possible by T’s higher level of inventory turnover.
(iv) T has almost three times R’s rate of return on capital employed, helped by lower inventory, better accounts receivable : revenue ratio and relatively lower accounts payable.
(v) T appears to have far better control over its accounts receivables and its accounts payables than R.

Answer to Question 28.3A BA 2
Calculations

Income Statements for the year ending 31 May 2006
6 months to 30 Nov

Revenue
Cost of sales
Gross profit
Expenses
Net profit
Opening inventory
Closing inventory
Average inventory

140,000
42,000
98,000
56,000
42,000
12,000
16,000
14,000

%
100
30
70
40
30

6 months to 31 May
196,000
70,000
126,000
112,000
14,000
16,000
25,000
20,500

Year to 31 May

%
100
36
64
57
7

336,000
112,000
224,000
168,000
56,000
12,000
25,000
18,500

%
100
33
67
50
17

Average inventory could be calculated for the year as [(opening inventory 12,000 + closing inventory
25,000) ÷ 2] £18,500 or [(12,000 + 16,000 + 25,000) ÷ 3] £17,666 or [(14,000 + 20,500) ÷ 2] £17,250.
Inventory turnover

Cost of sales
=
Average inventory

3

3.4

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6.0
153

Influence of New Premises

Revenue
Cost of sales
Gross profit
Expenses
Net profit/(loss)
Opening inventory
Closing inventory
Average inventory
Inventory turnover

New premises
%
70,000
100
28,000
40
42,000
60
21,000
30
21,000
30

10,000
5,000
5.6

Existing business
%
126,000
100
42,000
33
84,000
67
91,000
72
( 7,000)
( 5)
16,000
15,000
15,500
2.7

6 months to 31 May
%
196,000
100
70,000
36
126,000
64
112,000
57
14,000
7
16,000
25,000
20,500
3.4

Note: The New Premises average inventory is probably understated since it is assumed that inventory builds up gradually over the period from zero to £10,000. In reality it may have held £10,000 throughout the period of trading.
Report to Martha
The analysis of the results which are shown above indicates a major query associated with the expenses of the existing business in the second half of the year. Gross profit has declined by 3 per cent compared with the first half year but the expenses have increased from 40 per cent to 72 per cent of sales. Even if it is assumed that expenses are largely fixed for rent, business rates, etc. the absolute level has increased from
£56,000 to £91,000, i.e. by £35,000 or 62.5 per cent in the six-month period. This is in a period when, for the existing business, revenue reduced from £140,000 to £126,000, i.e. by 10 per cent.
The inventory turnover figure indicates some improvement in the second half which is mainly attributable to the new business. This may not be an entirely acceptable measure until a further full halfyear’s funding had been completed.
The return on capital employed is as follows (using the capital employed balances at the end of the period):
Capital employed
Net profit
Return

6 months to 30 Nov
£90,000
£42,000
47%

6 months to 31 May
104,000
14,000
13%

12 months to 31 May
104,000
56,000
54%

Despite the decline in profits during the second half of the year, the return on capital employed is high at
54 per cent. Future trends in gross profit margins and the level of expenses need to be examined.

Answer to Question 28.5A BA 2
(a) (i) Current ratio

Current assets
Current liabilities
Ratio
(ii) Acid test ratio Current assets – inventory
Current liabilities
Ratio

2004
35,000
25,000
1.4 : 1
15,000
25,000
0.6 : 1

(b) (i) The change in net working capital is as follows:
Items increasing working capital
Increase in inventory
Trade accounts receivable increase
Items reducing working capital
Increase in trade accounts payable
Reduction in net liquid assets: reduced cash balance increase in overdraft
Net reduction in working capital

2005
45,000
50,000
0.9 : 1
20,000
50,000
0.4 : 1

5,000
7,000

12,000

4,000
2,000
27,000

29,000

33,000
21,000

The information explains the detailed changes in working capital that have taken place. The reasons behind these changes cannot be given since information is not given.

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(ii) The main issue is the trend of declining liquidity over the year to 31 March 2005. If this trend continues, the business will be unable to meet its liability to creditors. It could, of course, be that major new funding is imminent for the issue of new long-term capital or rising volume/projects. If this is not managed, the owner needs to be advised of the necessity of urgent action.
(c) The balance sheet can be used to prepare a cash flow statement which indicates changes in source and application of cash balances. It will give some indication if comparisons are made over a period of time as to whether the business is investing and expanding or declining, and whether a proper capital structure is in place. The capital structure will depend on the nature of the business and the risks it is involved with, whether it is high or low geared for example. The balance sheet, being a position statement at one point in time, does not give a dynamic picture of future prospects which are essential in planning liquidity.

Answer to Question 28.7A BA 2
Note how the question has the years in the ‘wrong’ columns – normally the previous year is on the far right. Examiners have been known to switch them, so always check which is which.
(a) Witton Way Ltd
The following six ratios could be calculated in answering this part of the question, but other relevant ratios would be acceptable:
2005
2006
(i) Gross profit ratio
Gross profit
× 100
Revenue

1,850
× 100
7,650

2,070
× 100
11,500

= 24.2%

= 18.0%

1,650 + 50
× 100
5,900 + 5,000 + 350

1,500 + 350
× 100
5,900 + 5,700 + 3,350

= 15.1%

= 12.7%

(ii) Return on capital employed
Profit before tax + long-term interest
Share capital + reserves + loans and other borrowings

(iii) Acid test or quick assets or liquidity ratio
Current assets − Inventory
Current liabilities

3,600 − 1,500
2,400

6,300 − 2,450
2,700

= 0.9

= 1.4

(iv) Trade accounts receivable collection period
Trade accounts receivable
× 365
Credit sales

1,200
× 365
7,650

3,800
× 365
11,500

= 57 days

= 121 days

1,500
× 365
5,800

2,450
× 365
9,430

= 94 days

= 95 days

350
× 100
10,900 + 350

3,350
× 100
11,600 + 3,350

= 3.1%

= 22.4%

(v) Inventory turnover ratio
Inventory
× 365
Cost of sales
(vi) Gearing
Long-term borrowings
× 100
Shareholders’ interest + long-term borrowings

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(b) In making a comparison between the two years to 30 April 2005 and 30 April 2006 respectively (as required by part (a) of the question), the following points could be made:
1 Profitability
(a) In absolute terms, revenue has increased by £3,850,000 (50.3%), the cost of sales by £3,630,000
(62.6%), and gross profit by £220,000 (11.9%). The company’s gross profit on revenue has fallen from 24.2% to 18.0%, presumably because it reduced its selling price.
(b) Other expenses have increased by £20,000 (13.3%), probably as a result of the increased sales activity.
(c) To fund the extra expansion, it would appear that the company has borrowed another £3 million as a long-term loan. Hence, the interest charges have increased by £300,000.
(d) Overall, the profit before tax has decreased by £100,000 although the tax based on profits is down by
£50,000.
(e) Not surprisingly, the company’s return on its long-term funds employed was down from 15.1% to
12.7%. This is a most disappointing result after experiencing such a marked increase in its sales activity.
A decrease in the selling price of goods apparently led to an increase in sales volume, but at the expense of overall profitability.
(f ) In brief, it appears that the increase in the company’s sales did not lead to a corresponding increase in profits. Indeed, the company was less profitable in 2006 than it was in 2005. It should also be noted that these results do not take into account the effects of inflation on the company’s performance.
Allowing for inflation would make the 2006 results even more disappointing.
2 Liquidity
(a) At the end of 2005 the company has a healthy cash balance of £900,000. By the end of 2006, it was down to £50,000 notwithstanding that the company had raised £3 million in long-term loans during the year.
(b) However, its liquidity position appears to have improved in 2006 even though its cash position has declined so dramatically during the year. The company’s current assets (excluding its inventory) more than cover its current liabilities in 2006, while in 2005 its current liabilities exceeded the current assets
(excluding inventory) by some £300,000.
3 Efficiency
(a) Bearing in mind the company’s increased sales activity, its inventory at the end of 2006 compared with
2005 was proportionate to the increase in trading activity. At each year end the company held the equivalent of 95 days’ sales in hand.
(b) Its efficiency in dealing with its trade accounts receivable has, however, worsened. At the end of 2006, they represented 121 days’ sales, whereas at the end of 2005 they represented just 57 days’ sales (itself not a particularly low level). Of course this is not a surprising result since more generous credit terms were offered in 2006 in order to stimulate sales. The company has been able to finance this policy by running down its cash reserves and by increasing its long-term loans. In subsequent years it may not be possible to carry on with this policy unless it is able to raise even more long-term funds.
4 Shareholders’ interests
(a) Although the volume of its business increased dramatically, its profitability was down. Hence the company has maintained its dividend at the same level as in 2005.
(b) By borrowing an extra £3 million, the company’s interest charges have increased substantially, although interest charges on loans outstanding at the year end fell from 14.2% to 10.5%. Thus at a time when profits were falling, the ordinary shareholders’ dividend may have to be reduced in order to help pay the interest on the long-term debt, especially if even more funds have to be raised in 2007 and onwards. (c) In 2005 the gearing ratio was only 3.1% but by the end of 2006 it had risen to 22.4%. Nonetheless,
Witton Way is still a low-geared company, and provided no more long-term loans are raised, the ordinary shareholders have little to fear – unless profitability continues to decline.
5 Conclusion
In the short term the company’s new policy appears to have failed. While its revenue has increased substantially, its overall profit is down, its liquidity is threatened and it has had to finance its increased sales activity by a considerable amount of extra borrowing. It would appear that the extra borrowing enabled it to finance its extended credit terms, as well as help to purchase new non-current assets – presumably to cope with the extra activity.

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(c) The following points could be made in answering part (c) of the question:
1 What was the effect of inflation upon the company’s sales?
2 How many new customers were attracted to the company as a result of the extended credit terms and what extra volume of business did they bring?
3 What increase in sales was achieved by individual products?
4 Were the extended credit terms applied to all products?
5 Were all customers offered the extended credit terms?
6 Were more profitable products displaced by less profitable products?
7 Has the proportion of bad debts increased?
8 What effect has the increase in sales activity had on other costs?
9 To what extent has the expected depreciation rate on non-current assets been affected by the increased sales activity?
10 What facilities has the company arranged in order to finance the more generous credit terms in later years?

Answer to Question 28.9A BA 2
(a) To:
From:
Subject:
1

The Chairman
The Accountant
State and progress of the business

The last three years’ trading may be summarised thus:
2004
£000
%
Sales
260
100.0
Cost of sales
207
79.6
Trading profit
53
20.4
Depreciation
15
5.8
Loan interest


Net profit before tax
38
14.6

£000
265
215
50
15

35

2005

%
100.0
81.1
18.9
5.7

13.2

£000
510
373
137
45
30
62

2006
%
100.0
73.1
26.9
8.8
5.9
12.2

Gross profit fell in 2005 but rose sharply in 2006 – was this caused by an increase in sales prices or a decrease in cost of sales? The additional investment in plant has brought a higher charge for depreciation and created a loan interest cost, but the amount of net profit is sharply up, almost in line with sales.
2

Inventory
Closing inventory represent the following days’ cost of sales:
20
× 365 = 35 days
207

45
× 365 = 76 days
215

85
× 365 = 83 days
373

Inventory now seem very high. Is this level necessary?
3

Accounts receivable
33
× 365 = 46 days
260

101
× 365 = 139 days
265

124
× 365 = 89 days
510

89 days seems high, even though a big improvement on 2005 figure. What terms are customers given?
4

Accounts payable
Turnover of accounts payable should be calculated on purchases, not cost of goods sold. Purchases cannot be calculated for 2004 but for the later years is:
Cost of goods sold
Add Closing inventory
Less Opening inventory
Purchases

2005
215
45
260
20
240

2006
373
85
458
45
413

Purchases for 2004 are taken as cost of goods sold.
20
× 365 = 35 days
207

80
× 365 = 122 days
240

35
× 365 = 31 days
413

The figures of 35 days and 31 days indicate a normal monthly credit period, but the figure of 122 days in 2005 seems strange, unless some large purchases were made just before the balance sheet date.
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157

5

Working capital or current ratio
63
= 263%
24

6

161
= 166%
97

209
= 317%
66

116
= 120%
97

124
= 188%
66

Quick ratio or acid test
43
= 179%
24

Both the above series of figures show a satisfactory position but the difference between the two 2006 figures underlines the large investment in inventory at that date.
7

Gearing
317 : 0

325 : 0

445 : 200

Gearing is comfortably low after loan taken up in 2006.
8

Return on shareholders’ funds
38
= 12.0%
317

35
= 10.8%
325

62
= 18.0%
345

2006 shows a welcome rise but all percentages are probably overstated as freehold land and buildings in the balance sheet are probably at original cost; if they have increased in value, shareholders’ funds will be understated.
9

Conclusion
Business appears sound and profitable. The investment in the new plant, part financed by a loan, has caused liquidity problems but these are probably only of a temporary nature.

(b) Answers to specific questions
(i) A statement of cash flows best shows how a company can make a profit but still be short of cash.
Cash flows from operating activities
Operating profit before taxation (62 + 30)
Adjustment for
Depreciation
Operating cash flows before movements in working capital
Increase in inventories
Increase in accounts receivable
Decrease in accounts payable

( 40)
( 23)
( 45)

Cash generated by operations
Tax paid (17 + 1 − 6)
Interest paid

( 12)
( 30)

Net cash used in operating activities
Cash flows from investing activities
Payments to acquire tangible non-current assets
Net cash used in investing activities
Cash flows from financing activities
Dividends paid
Issue of share capital
Loan
Net cash from financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year

92

(300)
( 12)
100
200

45
137

(108)
29
( 42)
(13)
(300)

288
( 25)
15
( 10)

(ii) A balance sheet is not a valuation of a business but more like a historic record where non-current assets are concerned. Revaluations of non-current assets do take place in many companies, but these are usually based on the views of professional valuers (e.g. chartered surveyors) and it is not good practice to introduce guesses of current values. Any revaluation surplus would go to a revaluation reserve and would not affect the declaration of annual profits (unless there were consequential changes to the depreciation charge for the year).

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Answer to Question 28.11A BA 2
(a) An Investor
Sometown, UK
Dear Sir
Report on AA plc and BB plc
1 In accordance with your instructions, I give below my report on these companies which I hope may help you in deciding whether to proceed with a purchase of shares in either.
Balance sheets
2 AA has substantial freehold property. Such freehold property gives a large measure of solidarity to an investment, and also provides a useful security on which to borrow money if required. BB appears to own no freehold or leasehold property – at least, no entry for either appears in its balance sheet.
3 If one assumes that plant is depreciated on a straight line basis with no residual value, AA’s plant is 67% time-expired while BB’s is much newer at only 22%. AA may therefore have to face the cost of replacement before long.
4 AA has more than twice as much as BB tied up in inventory. Expressed in relation to usage (and taking sales less operating profit as the measure of cost of sales), AA’s finished goods are 10 weeks’ sales, while BB’s are only 5 weeks’. The work in progress of AA is equal to 7 weeks’ sales, while that of BB is 3 weeks’. As both companies carry on a similar trade, it is surprising that AA appears to need a much larger investment in inventory – or is it just inefficiency?
5 Debtors of AA approximate to 17 weeks’ sales, but those of BB are only 10 weeks’. Again, is this inefficiency on the part of AA?
6 AA needs a bank overdraft, while BB is comfortably liquid. The current or working capital ratio of AA is 188% against 133% of BB. The quick ratio in both companies is 100%. The working capital situation in both companies is satisfactory but the need for the overdraft in AA underlines the high stock and slow-paying debtors in that company.
7 Creditors in AA appear as 15 weeks’ supplies and expenses, while in BB they are 25 weeks’. Both these figures are astonishingly high when one considers that monthly account is the normal basis of trade. How does BB get nearly half a year’s credit?
8 Expressing gearing as Loans/Loans + Shareholders’ funds, the gearing in AA is 1,400/3,700 or 38%, while that in BB is 1,000/2,500 or 40%. Neither of these figures is regarded as high gearing.
Profit and loss accounts
9 Turning to the income statements, we find the following:
Operating profit as a percentage of revenue
Net profit before tax
Effective rate of tax
Dividend yield on market price
Dividend cover

AA
16%
£70,000
29%
2.7%
1.25 times

BB
24%
£360,000
25%
9.6%
2.1 times

10 BB appears both more efficient and more attractive to its shareholders, and of the two is clearly to be preferred as an investment.
Yours faithfully
I C Essay
(b) The P/E ratio of 30 for AA is surprisingly high, since even blue chip companies usually reach only 26 to 28, and there the expected profit growth is seen to be realised every year. What is AA’s attraction to investors? It is not to be seen in the 2007 financial statements. The market price of £1.50 still compares badly with its net asset value of £2.30, and one is left to guess that perhaps the trading results for 2007 were unexpectedly bad, and that it is the asset backing rather than the profits which has kept the market price up.
By contrast, the P/E ratio of 5 for BB is exceptionally low and such a figure is normally a warning to prospective investors that the profits may be in danger of drying up shortly. The asset backing is £3.00 per share. At 9.6% yield, does the market know something bad about the company which we do not?
A dividend yield of only 4% or 5% is the normal expectation (and as low as 2% for many blue chip companies). Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
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159

Answer to Question 28.13A BA 2
(a) Profitability ratio
Gross profit as % revenue
Net profit as % revenue
Return on capital employed
(using operating profit)
Operating profit/revenue
Distribution costs/revenue
Administration expenses/revenue
Return on shareholders’ funds
(b) Liquidity ratios
Current ratio
Acid test ratio
Inventory turnover*
Accounts receivable/credit sales
Accounts payable/purchases*

2004
528/2,400 = 22%
138/2,400 = 5.7%

2005
588/2,800 = 21%
142/2,800 = 5.1%

138/900 = 15.3%
138/2,400 = 5.7%
278/2,400 = 11.6%
112/2,400 = 4.7%
138/900 = 15.3%

174/1,362 = 12.8%
174/2,800 = 6.2%
300/2,800 = 10.7%
114/2,800 = 4.1%
142/1,042 = 13.6%

936/256 = 3.7:1
392/256 = 1.5:1
1,872/554 = 3.4
384/2,200 × 52 = 9.1 weeks
256/1,872 × 52 = 7.1 weeks

1414/338 = 4.2:1
754/338 = 2.2:1
2,212/660 = 3.4
644/2,640 × 52 = 12.7 weeks
333/2,328 × 52 = 7.5 weeks

* Opening inventory not known for 2004. Therefore the 2004 ratios must be calculated on closing inventory figures if comparison is to be drawn between the two years. The 2005 ratio if average inventory is used is 2,216/602 = 3.7.
Calculation of Purchases for 2005 is Opening inventory 544 + Purchases ? – Closing inventory 660 =
2,212. By arithmetical deduction, Purchases is therefore 2,328. Purchases for 2004 is taken (opening inventory not being known) as same as Cost of sales.
Comments
(a) Profitability
Loan notes of £320,000 have been issued during the year. The income statement has thus had to bear an extra charge of £32,000 interest. If the rate of interest was 10%, this would mean the loan notes were issued on 1 January 2005, thus financing a full year’s expansion.
The extra sales generated of 16.7% have been at the cost of cutting the gross profit percentage from
22% to 21%.
The operating profit percentage has improved from 5.7% to 6.2%, possibly due partly to the fixed element in distribution and administration costs and also improved efficiency by the use of the extra loan capital being invested in better equipment.
The return on capital employed, based on operating profit, has fallen from 15.3% to 12.8%. This is because the profit generated from an increase in sales at a lower rate of profitability has not been sufficient to compensate for the extra capital employed.
Possibly the programme of expansion was only partly completed during 2005 with benefits not capable of being shown up until 2006 and later. Similar remarks also would apply to the return on shareholders’ funds.
(b) Liquidity
Both the current ratio and the acid test (or quick) ratio have improved. This will be largely due to cash received from the issue of loan notes.
The debtors are taking much longer to pay: 12.7 weeks instead of 9.1 weeks as previously. This raises the question as to the creditworthiness of the businesses to whom the extra sales have been made. Every sensible effort should be made to reverse the trend in the accounts receivable ratio.
There is a large cash balance which does not seem to be making a return on its funds. This should be utilised more fully. It may of course be planned already to use it profitably.

Answer to Question 28.15A BA 2
From the ratios provided, you can obtain various indicators of whether the Eastown branch is being properly managed:
Return on capital employed: The better return of the Eastown branch suggests it is being well managed – it is earning £6 more (i.e. 37.5% more) per £100 invested than the overall average. However, some caution is needed in that analysis – while a consistent basis for the figures in the ratio is probable (as all the branches are in the same company), there is no guarantee that all have similar assets, either in nature or in age. Unless all the branches have similar asset profiles, the ratio result will be distorted. Further information will be needed.
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Gross profit: Over 15% lower than the overall average (at 38% compared with 45%), which suggests
Eastown is not being managed as well as other branches. However, this could have arisen because the
Eastown branch has been competing locally and has had to cut prices and offer incentives to retain and/or expand its customer base. Further information will be needed.
Selling and promotion costs/sales: The Eastown branch is spending 50% more per £100 of sales on promotion. While this could be an indicator of poor management, it is consistent with the suggestion, made above under gross profit, that the branch may have been competing locally (but, of course, promotion costs do not directly impact gross profit). Further information will be needed.
Wages/sales: Eastown is spending 35.7% more on wages per £100 of sales than the average (19% vs. 14%)
– another possible indicator of poor management. However, it is also consistent with an attempt to retain and/or expand its customer base through an increased level of service (as a result of employing more staff).
Further information will be needed.
Accounts receivable turnover: Eastown allows its customers 21% more time to settle their accounts than the average (63 days vs. 52 days) – another possible indicator of poor management. However, it is also consistent with an attempt to retain and/or expand its customer base through an increased level of service
(as a result of employing more staff). Further information will be needed.
Inventory turnover: Turning over inventory virtually 25% quicker than the average (37 days vs. 49 days) suggests good management of this aspect of working capital. However, it may be caused by inefficient buying policies that are causing inventory shortages and loss of customers. Further information will be needed. Overall: The ratios indicate a higher cost and lower profit profile exists at Eastown compared with the average. This may indicate poorer management, or may be due to the environment in which the branch is operating – it may, for example, be in competition with a price-cutting competitor.
Control over debtors appears weak, but may be due to a need to compete. The only positive ratio result is the lower inventory turnover period. However, it could actually be an indication that mismanagement is occurring. The ratios in themselves are insufficient to draw any firm conclusions regarding the quality of management of the branch. However, they do indicate questions that should be asked and points that should be raised if an objective view on the quality of the branch’s management is to be reached.

Answer to Question 28.16A BA 2
Ratios are used to assess managerial performance, and managers may be tempted to focus on producing
‘good’ ratio results, rather than on producing the ‘best’ performance for the company and its shareholders.
Thus, short-termism may be adopted in order that profits are maximised in the short term.
For example, a policy may be adopted to purchase expensive assets that remain 90% unused, rather than renting them when required, as renting would reduce the profit of the company more than the depreciation charge on the assets. Another example would be whether or not to invest in a new production facility.
If the company does, it will appear less profitable in the period up to when the new facility becomes productive and, thereafter, it will start becoming more profitable. A further example would be a form of
‘window dressing’ whereby debtors are encouraged by discounts, or even coerced to settle their balances immediately before the end of the financial period – this could have the effect of customers moving their business elsewhere.
By their nature, accounting ratios take a short-term view. Shareholders are interested in the longer term.
An aware reader of the financial statements will be able to apply the ratios to the longer-term horizon, and it is the aware reader that managers should be concerned about. By adopting a short-term focus, managers may actually be subject to harsher and more informed criticism than would have been the case had they focused upon the longer-term interests of the company.

Answer to Question 30.2A BA 2
(a) F (b) F (c) T (d) F (e) T

Answer to Question 30.3A BA 2
Ascertaining an index for highly specialised assets can be difficult, and applying a general index may not give an accurate valuation. In addition, calculation of current costs takes time, particularly if the enterprise has a large number of different classes of assets.
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161

Answer to Question 30.5A BA 2
Historical cost depreciation is £30,000 × 10% = £3,000
Current cost depreciation is £3,000 ×

160
= £5,333
90

Answer to Question 30.7A BA 2
Balance Sheet as at:
Equipment at current cost
Less Accumulated depreciation

31.12.2004
60,000
15,000
45,000

Adjustments to current cost reserve:
Asset revaluation
Equipment at cost
Credit to current cost reserve at 31.12.2004

31.12.2005
80,000
40,000
40,000
40,000
20,000
60,000
20,000
80,000

Credit to current cost reserve at 31.12.2005
Depreciation
Historical cost depreciation for year ended 31.12.2004
Adjustment to current cost income statement
150
Current cost depreciation (10,000 ×
)
100

10,000
5,000
15,000

Historical cost depreciation for year ended 31.12.2005
Adjustment to current cost income statement
200
Current cost depreciation (10,000 ×
)
100

10,000
10,000
20,000
35,000

Adjustment debit to current cost reserve at 31.12.2005 for backlog depreciation

5,000

Current cost depreciation as per balance sheet at 31.12.2005

40,000

Answer to Question 30.9A BA 2
Opening working capital = 7,000
Closing working capital = 10,000
Change in the year
= 3,000
At average values:
150
120
150
= 10,000 ×
180

Opening working capital = 7,000 ×

= 8,750

Closing working capital

= 8,333

Change in the year

=

417

The monetary working capital adjustment is 3,000 − 417 = 2,583

Answer to Question 30.11A BA 2
Revenue

Current Cost Income Statement for the year ending 30 June 2004

Historical cost operating profit
Current cost adjustments:
Additional depreciation
Cost of sales
Monetary working capital

1,400,000
500,000
750,000
25,000

Current cost operating profit

162

2,500,000

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1,275,000
125,000

Answer to Question 30.13A BA 2
Current Cost Income Statement for the year ending 30 June 2003

Revenue

Historical cost trading profit

9,000,000
4,000,000

Current cost adjustments:
Additional depreciation
Cost of sales
Monetary working capital
Current cost operating profit
Gearing adjustment (20% × 1,370,000)

200,000
800,000
370,000

Interest payable
Profit before tax
Taxation
Profit for the year
Note: Dividends proposed are £600,000.

1,370,000
2,630,000
274,000
2,904,000
500,000
2,404,000
1,500,000
904,000

Answer to Question 30.15A BA 2
(a) Historical cost ratios:
(i) Gross profit:
Gross profit
× 100
Revenue

2004

2005

650
× 100 = 50%
1,300

630
× 100 = 45%
1,400

115
× 100 = 8.8%
1,300

130
× 100 = 9.3%
1,400

105
× 365 = 59 days
650

130
× 365 = 64 days
770

142
× 365 = 40 days
1,300

190
× 365 = 50 days
1,400

1,300
= 3.8 times
340

1,400
= 5.5 times
255

2004
1,300 × 111/85
= 1,698

2005
1,400 × 111/111
= 1,400

114
85
29

120
85
35

(ii) Net profit:
Profit before tax
× 100
Revenue
(iii) Inventory turnover:
Inventory
× 365
Cost of sales
(iv) Accounts receivable collection period:
Accounts receivable
× 365
Turnover
(v) Non-current assets revenue:
Revenue
Non-current assets at net book value
(b) (i)

Revenue (millions)
Historical cost

(ii) Additional adjustment for depreciation
Replacement cost (10%)
Less Historical cost depreciation
Additional depreciation

(iii) It does not make sense to compare historical cost turnover in 2004 with that for 2005. In real terms it has fallen from 1,698 to 1,400.
When deciding dividends to be paid, directors should look at the amount needed to replace non-current assets, based on replacement costs rather than historical costs.

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163

Answer to Question 31.6A BA 2
There is no set answer to this question. Students should bear in mind the types of information which the various user groups may find useful, distinguishing between quantitative (numerical) and qualitative (narrative) information. In addition, consideration should be given to how useful the information is in helping a user to make a decision about the company.

Answer to Question 35.2A BA 2
(i) t, v.
(iii) b, d, h, o, y.
(v) e, f, j, l, m, r, s, w, x.

(ii) n.
(iv) c, g, i, p, q, u, z.
(vi) a, k.

Answer to Question 35.4A BA 2
Raw materials consumed
(11,400 + 209,000 − 15,600)
Carriage on raw materials
Direct labour (150,000 × 60%)
Royalties (this is a direct expense)
(a) Prime cost
Factory overhead
Factory indirect labour (150,000 × 40%)
Rent and rates (factory block)
Travelling expenses of factory workers
Depreciation of factory machinery
Other factory indirect expenses
(b) Production cost
Administrative expenses
Wages and salaries
Rent and rates: admin. block
Travelling expenses
Depreciation: Cars of administrative staff
Office machinery
Other administrative expenses
Selling and distribution expenses
Salaries: sales force
Carriage costs on deliveries
Rent and rates: Sales department
Travelling expenses: Sales staff
Depreciation: Sales staff cars
Delivery vehicles
Other selling expenses
Finance costs
Interest costs
(c) Total cost

204,800
1,800
90,000
400
297,000
60,000
4,900
200
1,800
6,000

72,900
369,900

26,000
1,100
300
400
200
4,000

32,000

15,000
1,100
1,000
3,400
500
300
1,000

22,300
800
425,000

Answer to Question 35.5A BA 2
(a) Cost behaviour refers to the manner in which costs arise, e.g. are they fixed for a period; do they change in proportion to the level of activity, etc. Analysis of total cost refers to the elements of specific total costs.
(b) • Factory power and lighting: would have a fixed element (light) and a variable element (power), and therefore semi-variable; however, would normally be classified as indirect factory expenses unless it was clear how much was incurred in producing each unit of the products, in which case, it could be split partly between direct costs and partly as indirect overheads.
• Production line workers’ wages: a variable cost; would be analysed as a direct cost.
• Sales manager’s salary: a fixed cost; would be analysed as a selling and distribution expense.
• Office rent: a fixed cost; would be analysed as an indirect administrative expense.

164

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Answer to Question 36.2A BA 2
Answers to be drafted by students in proper memo form.
Introduction:
Marginal cost is 3.2 + 4.8 + 1.6 = 9.6
Selling price − Marginal cost = Contribution to overheads and profit.
Projects which give negative contributions should be rejected.
A change in volume can only be favourable where total contributions with new project are greater than total contributions without new project.
(a) Total contributions with new project £14.80 − £9.60 = £5.20 × 240,000 = £1,248,000
Total contributions without new project £15 − £9.60 = £5.40 × 200,000 = £1,080,000
Therefore accept reduction in selling price to £14.80
Proof
Direct materials
Direct labour
Indirect manufacturing costs
Variable
Fixed
Selling and distribution
Administrative expenses
Finance

At £14.80
768,000
1,152,000

At £15
640,000
960,000

384,000
160,000
80,000
120,000
40,000
2,704,000

320,000
160,000
80,000
120,000
40,000
2,320,000

Sales revenue

3,552,000

3,000,000

Net profit

848,000

680,000

(b) Total contributions with new project £15.4 − £9.6 = £5.8 × 160,000
Add saving in finance costs
Total contributions without new project £15 − £9.6 = £5.4 × 200,000
Therefore reject new project.

928,000
4,000

Proof
(i) At £15 net profit is
(ii) At £15.4
Revenue (160,000 × £15.4)
Direct materials (160,000 × £3.2)
Direct labour (160,000 × £4.8)
Indirect manufacturing costs: Variable (1,600 × £1.6)
Fixed
Selling and distribution
Administrative expenses
Finance (£40,000 − £4,000)

932,000
1,080,000

680,000
512,000
768,000
256,000
160,000
80,000
120,000
36,000

Net profit

2,464,000

1,932,000
532,000

(c) Marginal cost is £9.6: the extra order at £9.80 would therefore be worthwhile.
(d) Marginal cost is £9.6: the extra order at £9.20 should be rejected.

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165

Answer to Question 36.4A BA 2
Year 1
Revenue 36,000 × £64
Less: Variable costs
Direct labour £16 × 40,000
Direct materials £12 × 40,000
Variable overheads £20 × 40,000
Total variable costs
Less: Closing inventory valuation (A)
4,000
× £1,920,000
40,000
Fixed factory indirect expenses

(a) Marginal cost (£000)
2,304
640
480
800
1,920

Year 2
Revenue 40,000 × £64
Less: Variable costs
Direct labour £16 × 48,000
Direct materials £12 × 48,000
Variable overheads £20 × 48,000
Total variable costs
Less: Closing inventory valuation (A)
9,000
× £2,304,000
40,000
Fixed factory indirect expenses
Less: Closing inventory valuation (B)
9,000
× £2,368,000
40,000
Add: Opening inventory b/d
Total costs
Gross profit
Year 3
Revenue 60,000 × £64
Less: Variable costs
Direct labour £16 × 51,000
Direct materials £12 × 51,000
Variable overheads £20 × 51,000
Total variable costs
Less: Closing inventory valuation (A)
Fixed factory indirect expenses

640
480
800
1,920

192
1,728
64

Less: Closing inventory valuation (B)
4,000
× £1,984,000
40,000
Total costs
Gross profit

64
1,984
198.4
1,792
512

1,785.6
518.4

(a) Marginal cost (£000)
2,560

(b) Absorption cost (£000)
2,560

768
576
960
2,304

768
576
960
2,304

518.4
1,785.6
64

192

64
2,368

2,041.6
518.4

(a) Marginal cost (£000)
3,840
816
612
1,020
2,448

2,448
64

518.4

532.8
1,835.2
198.4

2,033.6
526.4

(b) Absorption cost (£000)
3,840
816
612
1,020
2,448

Less: Closing inventory valuation (B)
Add: Opening inventory b/d
Total costs
Gross profit

(b) Absorption cost (£000)
2,304

3,030.4
809.6

64
2,512

2,512
532.8

3,044.8
795.2

Note how, as there is no closing inventory at the end of Year 3, the same total gross profit is made over the three years by both methods.

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Answer to Question 36.6A BA 2
(a) See text.
(b)
Direct labour
Direct materials
Variable overheads
Labour: overtime
Special treatment
Total variable cost
Contribution
Selling price
(i)

(i)
Normal
8
17
11

(ii)
+A
8
17
11
2

36
29
65

38

Normal production
Contribution 2,000 × £29
Fixed costs
Profit

(ii) Order A accepted
Normal production contribution
Order A contribution: sales
Less: Direct costs 600 × £38
Total contribution
Fixed costs
Profit
(iii) Order B accepted
Normal production contribution
Order B contribution: sales
Less: Direct costs 750 × £44
Total contribution
Fixed costs
Profit

(iii)
+B
8
17
11
2
6
44

58,000
29,400
28,600

20,000
22,800

34,000
33,000

58,000
( 2,800)
55,200
29,400
25,800
58,000
1,000
59,000
29,400
29,600

(c) See text, but (iii) above demonstrates that.

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167

Answer to Question 36.8A BA 2
(a) Contribution per product
Variable costs:
Labour
Materials
Variable overhead

A

C

6
20
4
30
45
15

Selling price
Contribution per unit

B
9
24
3
36
44
8

6
16
2
24
37
13

However, September sees a shortage of materials, so work out contribution per kilo of materials. This shows:
A £15 ÷ 5 kilos = £3
B £ 8 ÷ 6 kilos = £1.33
C £13 ÷ 4 kilos = £3.25
Total kilos used per month:
A 6,000 × 5 = 30,000
B 8,000 × 6 = 48,000
C 5,000 × 4 = 20,000
98,000
September delivery of material = 98,000 − 15% = 83,300 kilos; i.e. shortfall of 14,700.
B has the lowest contribution, therefore restrict production by 14,700 ÷ 6 kilos = 2,450 units = 5,550.
Contributions:
A
6,000 × £15
B
8,000 × £8
C
5,000 × £13
Fixed overhead:
A
6,000 × £5
B
8,000 × £5
C
5,000 × £6

July
90,000
64,000
65,000
219,000
30,000
40,000
30,000

August
90,000
64,000
65,000
219,000

100,000
119,000

100,000
119,000

Maximum net profit possible:

(5,550)

September
90,000
44,400
65,000
199,400

100,000
99,400

£337,400

NB: It is assumed that direct labour cut down for B in September does not have to be paid for.
(b) See text.

C

Answer to Question 36.10A BA 2
Firelighters Ltd
Workings
Opening inventory (units)
Manufactured
Closing inventory
Units sold

2010
15,000*
105,000
120,000
20,000
100,000

* Balancing figures

168

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2011
20,000
130,000
150,000
20,000
130,000*

Firelighters Ltd
Revenue Statement for the years ended:
2010
£000

Revenue
100,000 @ £10 per unit
130,000 @ £10 per unit
Cost of sales
Opening inventory:
15,000 @ £4
20,000 @ £4
Manufactured:
105,000 @ £4
130,000 @ £4
Closing inventory:

2011
£000
1,000

1,300

60

80

420

520
600
80
520

480
80
400

20,000 @ £4

Variable selling costs
100,000 @ 1.25
130,000 @ 1.50
Contribution
Fixed manufacturing costs
Other fixed costs
Operating profit before interest
Interest charges
Net profit for the year

125

525

195*

475

105
155

715
585

117
176*

260
215
70
145

293
292
82*
210

* Balancing figures

Answer to Question 36.11A BA 2
(a) (i) Contribution per unit is the difference between the variable costs of producing a unit of a product and the selling price of that unit.
(ii) Key factor is anything that limits the activity of a business (also called the ‘limiting factor’).
(b)
Direct raw material
Direct labour:
Grade 1
Grade 2
Variable overheads

64
24
15
250
400
150
12
138

Selling price
Contribution
Fixed overheads
Profit
(c)
(i) Total production labour available
Grade 1 Full-time
Part-time
Grade 2 Full-time
Part-time

28 × 40 × 4
12 × 40 × 4

1,920
1,104

Grade 1 labour cost per unit
Divide by hourly rate

£
64
8

Grade 2 labour cost per unit
Divide by hourly rate

24
6

A

Hrs
8
4
12

£
56
8
27
6

B

C
185

56
27
10
180
350
170
12
158

4,480
2,240

(ii) Hours required to produce each unit

Total hours per unit

Products
B
87

A
147

60
21
15
281
450
169
12
157

6,720
3,024
9,744
Hrs
7
4.5
11.5

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

£
60
8
21
6

C

Hrs
7.5
3.5
11.0
169

(iii) Maximum possible production
There is a maximum number of hours available for each grade and therefore production will be limited to the smaller of the calculated figures as follows:
Product

Total hours 6,720
3,024

Hours per unit
8
4

Possible units 840
756

Grade 1
Grade 2

6,720
3,024

7
4.5

960
672

672

C Grade 1
Grade 2

6,720
3,024

7.5
3.5

896
864

864

A Grade 1
Grade 2
B

Maximum possible 756

(iv) The product which will give the greatest contribution in Period 7 is C:
A
756

Direct costs (A − £250, B − £180, C − £281)
Selling price (A − £400, B − £350, C − £450)
Contribution

B
672

C
864

189,000
302,400
113,400

Units

120,960
235,200
114,240

242,784
388,800
146,016

(d) This part of the question would include material from a number of different parts of the book. It can be answered at a straightforward level from the material in Chapters 35 and 36. However, a more complete answer would need to include material from Chapters 3, 37, 41 and 44. The answer requires that you indicate that relevant costs and revenues would be identified; costs would be classified as fixed or variable, possibly across a range of different activity levels; contribution per unit would be identified; break-even analysis would be undertaken; product mix may also be considered when a multi-product company is involved; etc.

Answer to Question 36.12A BA 2
(a)
Year 1
Revenue
Less: Variable costs
Direct materials
Direct labour
Variable overheads
Total variable costs
Less: Closing inventory
2,000
× 132,000
16,000
Fixed costs
Total production costs
Less: Closing inventory
2,000
× 172,000
16,000
Gross profit

170

Marginal costing
280,000
60,000
48,000
24,000
132,000
16,500
115,500
40,000

Absorption costing
280,000
60,000
48,000
24,000

155,500

40,000
172,000
21,500

124,500

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
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150,500
129,500

Year 2
Revenue
Less: Variable costs
Direct materials
Direct labour
Variable overheads
Total variable costs
Add: Opening inventory
Less: Closing inventory
2,000
× 123,900
14,000
Fixed costs

Marginal costing
280,000
49,900
44,000
30,000
123,900
16,500
140,400
17,700
122,700
40,600

Total production costs
Add: Opening inventory

Absorption costing
280,000
49,900
44,000
30,000

163,300

Less: Closing inventory
2,000
× 164,500
14,000

40,600
164,500
21,500
186,000
23,500

116,700

162,500
117,500

Marginal costing
300,000

Absorption costing
300,000

Gross profit
Year 3
Sales
Less: Variable costs
Direct materials
Direct labour
Variable overheads
Total variable costs
Add: Opening inventory
Less: Closing inventory
1,000
× 137,200
14,000
Fixed costs
Total production costs
Add: Opening inventory

52,200
45,000
40,000
137,200
17,700
154,900
9,800
145,100
41,300

52,200
45,000
40,000

186,400

Less: Closing inventory
1,000
× 178,500
14,000
Gross profit

41,300
178,500
23,500
202,000
12,750

113,600

189,250
110,750

(b) See text, Section 36.6.

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171

Answer to Question 36.14A BA 2
(a)
Direct labour and materials
Variable cost
Fixed cost
Add: Profit 10%
Selling price

P
45
18
63
12
75
7.5
82.5

Q
51
33
84
21
105
10.5
115.5

R
114
30
144
21
165
16.5
181.5

S
147
63
210
30
240
24
264

T
186
66
252
48
300
30
330

U
342
69
411
39
450
45
495

(b) Discontinue Q and T. All other items are above marginal cost.
(c)
Sales revenue
P 600 × £78
Q 600 × £78
R 600 × £198
S 600 × £225
T 600 × £240
U 600 × £660
Less: Costs
Direct labour and materials
(i) 600 × (45 + 114 + 147 + 342)
(ii) 600 × (45 + 51 + 114 + 147 + 186 + 342)
Variable overheads
(i) 600 × (18 + 30 + 63 + 69)
(ii) 600 × (18 + 33 + 30 + 63 + 66 + 69)
Fixed overheads

(i)
Followed
advice
46,800

118,800
135,000

396,000
696,600
388,800
108,000

(ii)
Produced
all items
46,800
46,800
118,800
135,000
144,000
396,000
887,400

531,000
167,400
34,200
732,600
154,800

(i)
Followed
advice

Net profit

34,200
531,000
165,600

(ii)
Produced
all items

54,000
59,400
135,000

261,000

509,400

54,000
59,400
135,000
118,800
261,000
234,000
862,200

(d) Discontinue S and U. All other items are above marginal cost.
(e)
Sales revenue
P 600 × £ 90
Q 600 × £ 99
R 600 × £225
S 600 × £198
T 600 × £435
U 600 × £390
Less: Costs
Direct labour and materials
(i) 600 × (45 + 51 + 114 + 186)
(ii) 600 × (45 + 51 + 114 + 147 + 186 + 342)
Variable overheads
(i) 600 × (18 + 33 + 30 + 66)
(ii) 600 × (18 + 33 + 30 + 63 + 66 + 69)
Fixed overheads
Net profit

172

237,600
88,200
34,200
360,000
149,400

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531,000
167,400
34,200
732,600
129,600

Answer to Question 36.15A BA 2
(a) and (b) see text.
(c) (i)

Ceres
£

Unit price
Direct labour
Direct material
Variable overhead
Total variable cost
Fixed cost
Total cost
Profit 20%
Selling price

A S Teriod Ltd
Eros
Hermes
£

14
8
11
33
17
50
10
60

8
10
9
27
13
40
8
48

Icarus
£

Vesta
£

Total
£

18
12
15
45
15
60
12
72

26
17
19
62
18
80
16
96

88
60
70
218
82
300
60
360

22
13
16
51
19
70
14
84

(ii) Produce only those where marginal cost is lower than selling price, i.e. produce Ceres, Hermes and Vesta.
(iii) All produced at new prices (100 of each):
Ceres
3,300
1,700
5,000
900
5,900

Total variable cost
Fixed cost
Total cost
Profit/(loss)
Selling price

Eros
2,700
1,300
4,000
(1,500)
2,500

If only Ceres, Hermes and Vesta produced:
Revenue (5,900 + 8,000 + 9,200)
Less Variable cost (3,300 + 5,100 + 6,200)
Contribution
Total fixed costs
Profit

Hermes
5,100
1,900
7,000
1,000
8,000

Icarus
4,500
1,500
6,000
(1,600)
4,400

Vesta
6,200
1,800
8,000
1,200
9,200

Total
21,800
8,200
30,000

30,000

23,100
(14,600)
8,500
( 8,200)
300

Answer to Question 37.3A BA 2

P
15,000
2,000
17,000

Q
21,000
3,000
24,000

Production departments R
S
9,000
18,000
4,000
4,500
13,000
22,500

4,200

2,800

11,200

5,600

6,440
27,640

4,830
31,630

8,050
41,750

3,220
22,320

22,660
8,000

=

£2.83

22,320
5,000

=

£4.46

27,640
7,000

=

£3.95

Dept Q

31,630
9,000

=

£3.51

Dept S

41,750
14,000

=

£2.98

Indirect labour
Other expenses
Apportionment
of costs
Dept F
Dept G

(a) Overhead rates per direct labour hour
Dept R
Dept T
(b) Overhead rates per machine hour
Dept P

9,660
22,660

Service departments F
G
20,000
18,000
8,000
10,000
28,000
28,000

T
12,000
1,500
13,500

(28,000)

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4,200
32,200
(32,200)


173

Answer to Question 37.4A BA 2
Job Cost Sheet, Job 701, Dept R
Direct materials
Direct labour
105 × 8.0
Factory overhead
105 × 2.83

345
840
297.15
1,482.15

Job Cost Sheet, Job 702, Dept T
Direct materials
Direct labour
540 × 10
Factory overhead
540 × 4.46

3,240
5,400
2,408.4
11,048.4

Job Cost Sheet, Job 703, Dept P
Direct materials
Direct labour
400 × 6
Factory overhead
280 × 3.95

1,560
2,400
1,106
5,066

Job Cost Sheet, Job 704, Dept S
Direct materials
Direct labour
620 × 11
Factory overhead
90 × 2.98

196
6,820
268.2
7,284.2

Job Cost Sheet, Job 705, Dept Q
Direct materials
Direct labour
860 × 9
Factory overhead
610 × 3.51

11,330
7,740
2,141.1
21,211.1

Job Cost Sheet, Job 706, Depts P and T
Dept P Direct materials
1,480
Direct labour
600 × 6
3,600
Factory overhead
540 × 3.95
2,133
Dept T Direct materials
32
Direct labour
36 × 10
360
Factory overhead
36 × 4.46
160.56
7,765.56

Answer to Question 37.6A BA 2
(a) See text, Section 37.5.
(b)
(i) Equivalent production during April:
Units
Equivalent production:
Material
Labour
Overhead
(ii) Cost per complete unit:
Material
Labour
Overhead
Cost per complete unit
(iii) Value of work-in-progress:
Materials
Labour
Overhead
Total value of WIP
174

Earith Industries
Units
completed
6,000

75% completed 800
6,600

65% completed 800
6,520

Total cost 12,540
8,476
7,084

Equiv. prodn 6,600
6,520
6,440

55% completed 800

6,440
Cost per unit 1.90
1.30
1.10
4.30

600 × 1.90 = 1,140
520 × 1.30 = 676
440 × 1.10 = 484
2,300

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Answer to Question 37.8A BA 2
(a) Current factory overhead rate
Total factory overheads 100
180 + 225 + 75
100
=
×
=
×
Total direct labour costs
1
450 + 500 + 250
1
480
=
= 40% factory overhead rate.
1,200
Job 131190
Direct labour costs (2,500 + 2,200 + 4,800)
Add: Materials (100 + 400 + 500)

9,500
1,000
10,500
3,800
14,300
2,860
17,160
4,290
21,450

Add: Factory overheads (40% × 9,500)
Total factory costs
Add: General administration (20% × 14,300)
Total cost
Add: Profit (25% total cost)
Selling price
(b) (i) Direct labour hour rate per department:
Assembly £180,000 ÷ 150,000 hours = £1.20 per hour
Painting
£225,000 ÷ 140,625 hours = £1.60 per hour
Packing
£75,000 ÷ 100,000 hours = £0.75 per hour
(ii) Overhead per department as percentage of direct labour costs:
Assembly £180,000 ÷ £450,000 = 40%
Painting
£225,000 ÷ £500,000 = 45%
Packing
£75,000 ÷ £250,000 = 30%
(i) Job 131190 (using direct labour hour rate)
Assembly: Labour
+ 1,000 hours × £1.20

2,500
1,200

3,700

Painting: Labour
+ 900 hours × £1.60

2,200
1,440

3,640

Packing: Labour
+ 960 hours × £0.75
+ Materials (100 + 400 + 500)

4,800
720

Add: General administration (20% × 13,860)
Total cost
Add: Profit 25% × 16,632
Selling price

5,520
1,000
13,860
2,772
16,632
4,158
20,790

(ii) Job 131190 (using percentage direct labour costs)
Assembly: Labour
+ 40%

2,500
1,000

3,500

Painting: Labour
+ 45%

2,200
990

3,190

Packing: Labour
+ 30%

4,800
1,440

Add: General administration (20% × 12,930)
Total cost
Add: Profit 25% × 15,516
Selling price

6,240
12,930
2,586
15,516
3,879
19,395

(c) It depends on where there are direct relationships to overheads. Number of hours worked is more appropriate in (b) (i) and (ii). However, machine hours method for its two departments has not yet been investigated.
(d) There is no set answer. Basically, the absorption rate may be too high, making for an uncompetitive selling price; or too low, making the product too cheap and uneconomic.
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175

Answer to Question 37.10A BA 2
(a)
Power 55:30:15
Rent, etc. 30:20:10
Insurance 22:16:2
Depreciation 22:16:2
Indirect materials
Indirect wages

A
66,000
45,000
11,000
44,000
23,000
21,000
210,000

B
36,000
30,000
8,000
32,000
35,000
34,000
175,000

C
18,000
15,000
1,000
4,000
57,000
55,000
150,000

Direct wages

140,000

200,000

125,000

150%

87.5%

120%

Percentage absorption rate
(b) Selling price of Job No. 347
Dept A
Materials
Direct wages
Overhead 150% of £88
Dept B

Materials
Direct wages
Overhead 87.5% of £192

Dept C

Materials
Direct wages
Overhead 120% of £105
Total production cost
Add: 30%
Selling price

Total
120,000
90,000
20,000
80,000
115,000
110,000
535,000

£
152
88
132
372
85
192
168
817
52
105
126
1,100
330
1,430

(c) (i) Absorption rate based direct labour hours
Dept A £210,000 divided by 25,000 hours = £8.4 per hour
Dept B £175,000 divided by 50,000 hours = £3.5 per hour
Dept C £150,000 divided by 60,000 hours = £2.5 per hour
(ii) Absorption rate based on machine hours
Dept A £210,000 divided by 100,000 hours = £2.1 per hour
Dept B £175,000 divided by 40,000 hours = £4.375 per hour
Dept C £150,000 divided by 10,000 hours = £15 per hour
(d) (i) Allotment: this term is not generally used in relation to overheads. Presumably, the examiner wanted students to demonstrate that they realised it was not another term for either ‘allocation’ or ‘apportionment’.
(ii) Allocation: attribution of costs to a cost centre or product based on some base that clearly identifies the expenditure that was incurred on that cost centre or product. This is used for the attribution of costs that can be specifically identified with a cost centre or product.
(iii) Apportionment: attribution of costs between a number of cost centres or products on the basis of some common base. For example, rates could be allocated to cost centres on the basis of the dimensions of their floor space. This is used for the attribution of costs that cannot be specifically identified as arising from the activities of one cost centre or product.

Answer to Question 37.11A BA 2
(a) (i)
(ii)
(iii)
(iv)
(v)

176

See text, Section 37.6.
See text, Section 37.6.
See text, Section 37.5.
See text, Section 37.9.
Split-off point: the point at which joint products are separately identifiable.

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(b) (i) True: scrap has value, waste has none.
(ii) True: a joint product is one that is produced by the same process and at the same time as another; a by-product is one that is produced incidentally as a result of manufacturing the main product.
They are further distinguished by their value. By-products have relatively little value compared with the main products whose manufacturing process created them. Joint products are each of significant value compared with their own joint product(s).

Answer to Question 38.3A BA 2
(a) (i) Always able to satisfy customers’ demands; strike in firm’s production could stop production of new inventory; strike at suppliers of part could stop production of new inventory.
(ii) So as not to have to lay-off workers; lower costs of production; administratively easier and cheaper.
(b)
Opening inventory
Produced

J
270
300
570
280
290

Less Sales
Closing inventory

A
290
300
590
200
390

S
390
300
690
260
430

O
430
300
730
360
370

N
370
300
670
400
270

D
270
300
570
420
150

Inventory (by deduction) 1 July: 270 units.
(c) Where higher sales could be made but there is a shortage of: skilled labour, or materials, or finance.

Answer to Question 39.4A BA 2
Mtoto Ltd
Cash Budget for the four months ending 31 December 2011 (£)
Sept
Oct
Nov
Dec

(a)

Receipts
Cash sales: Main store
Depot 1
Depot 2
Credit sales: Main store*
Plant surplus
Shop-soiled inventory

18,000
19,700
26,300
21,000
26,500
111,500

26,300
18,000
19,700
32,500

19,200
17,600
21,000
26,000

24,700
17,900
19,100
25,400

17,000
113,500

83,800

87,100

88,200
73,200
86,100
104,900
26,500
17,000
395,900

64,300
9,500
13,000
6,100
92,900

41,000
9,500
12,000
12,000
7,400
81,900

222,300
38,000
61,000
12,000
25,900
359,200

(9,100)
(199,400)
(208,500)

5,200
(208,500)
(203,300)

36,700
(240,000)
(203,300)

* Per balance sheet, debtors pay 1 month after sale.
Payments
Purchases
55,800
61,200
Fixed overheads
9,500
9,500
Wages and salaries
17,000
19,000
Redundancy
Variable costs
5,600
6,800
87,900
96,500
Surplus/(deficit)
Balance b/d
Balance c/d

23,600
(240,000)
(216,400)

Total

17,000
(216,400)
(199,400)

(b) Briefly: full answer to be in report form.
(i) Current ratio 31.8.2011 is 420,900 : 350,500 = 1.2 : 1.
However, acid test ratio shows 21,000 : 350,500 = 0.06 : 1.
This latter ratio reveals considerable liquidity problems.
Forecast shows a fall in bank overdraft of £36,700 over the period. The overdraft is still far too high.
(ii) Find out contributions made by each depot.
Reduce inventory.
Sell off some non-current assets?
Reduce overhead costs.
See if gross profit margins can be increased, either by increasing prices or by better buying policies at cheaper prices.
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177

Answer to Question 39.7A BA 2
Belinda Raglan
Cash Budget (£000)

(a)

May
5
85.2
80.2

Closing overdraft

July
54.6
82.4
27.8

Aug
22.2
56
33.8

116.4

3

119.4

40

10

50

43
12
14

69

8

Payments
Purchases
Rent
Other
Compensation

June
8
72.8
64.8

58.2
12
8
10
88.2

Opening overdraft
Receipts

54.6

22.2

35.2

(b) See text.
(c) Items in the letter should include reference to the 3% discount on purchases in May and June. It is probably unwise to attempt to take advantage of the discount. The increase in the overdraft facility required is entirely due to it and the increased overdraft costs would make the actual saving much less than at first appeared. If June purchases were kept to around £76,000 it appears that the overdraft limit would not need to be raised. It may be worthwhile for Belinda to consider negotiating purchasing on credit from her suppliers. She may also consider offering less credit to her customers, etc.

Answer to Question 39.8A BA 2
(a)

Periods

Receipts:
Capital
Hire charges paid in cash (W1)
Hire charges (chauffeured cars) (W2)
Payments:
Cars bought 6 × 5,340
Cars bought 3 × 5,850
Petrol
Servicing
Fixed costs
Drawings
Initial staff
Chauffeurs
Balance at period end
Deficit at period end
Workings:
(W1) Per week: Weekdays 5 × £10 × 4 cars
Weekends 2 × £18 × 6 cars

1

2

3

4

1,248

34,000
1,664
1,664

1,664
2,400
4,064

1,664
2,400
4,064

35,248

300
200
400
960
720
2,580
732

360
300
200
800
960
720
3,340
1,456

32,040

200
400
960
33,600
1,648

17,550
360
300
200
800
960
720
20,890
15,370

= 200
= 216
416

3 weeks in period 1; 4 weeks other periods.
(W2) Assumed additional to cars in (W1):
Per period: £60 × 5 × 4 × 2 cars = 2,400
(b) Per text.
(c) Internal: Profits, factoring debts, revising payment and receipt schedules where possible, extra own capital. External: Loans from individuals, bank loans and overdrafts, buying cars on hire purchase.

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Answer to Question 40.2A BA 2
(a)
Cash Budget 2007 (£000)
Receipts
Jan
Accounts receivable: Previous month’s sales 1/3
134.2
Sales two months ago 2/3
265.6

Feb
136.8
268.4

Mar
141.2
273.6

399.8

405.2

414.8

Apr
153.6
282.4
9.6
445.6

20.4
58.8

23.4
61.2

22.8
63.6

5.3
10.8
50.0
215.2
360.5

21.2
56.1
19.0
5.4
11.2
50.0
223.6
367.5

5.6
12.2
50.0
232.4
403.8

6.1
12.4
50.0
256.7
411.6

+28.7

+66.4

+77.4

+111.4

Accounts receivable April
2
/3 March × 460.8
Liabilities: Items owing
3
Materials
/4 × 93.6
3
/4 × 91.2
Equipment
Wages
Overheads

456.3
307.2

763.5

Payments:
Materials:
New equipment
Wages:
Overheads:

Current production 1/4
Previous production 3/4
Last month 1/3
Current month 2/3
Payable same month
Last month’s portion

Closing bank balance
(b)

Assets:

70.2
68.4

138.6
19.0
6.2
254.5

Answer to Question 40.4A BA 2
(a)
Opening balance
Opening overdraft
Received (see schedule)
Payments (see schedule)
Closing balance
Closing overdraft

Receipts from debtors
Legacy

Payments of accounts payable
Wages and salaries
General expenses
Insurance
Business rates
Drawings
Machinery
Motor vehicles
Premises

April
+60,000

May
+6,700


60,000
53,300
+6,700


6,700
14,460

April

May




April
2,100

1,800
8,000
6,400
35,000
53,300

−7,760




May
10,000
2,100
200

Cash Budget
June
July

Aug
+27,540

Sept
+35,440

28,000
55,540
20,100
+35,440

28,000
63,440
20,660
+42,780

Cash Receipts Schedule
June
July
26,000
28,000

17,500
45,500

Aug
28,000

28,000

Sept
28,000

28,000

Cash Payments Schedule
June
July
12,000
16,000
2,100
2,100
200
200

Aug
16,000
2,100
200

Sept
16,000
2,100
200
560

−7,760
26,000
18,240
16,100
+2,140

+2,140
45,500
47,640
20,100
+27,540

360
1,800

1,800

1,800

1,800

1,800

14,460

16,100

20,100

20,100

20,660

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179

M Lamb
Forecast Income Statement for the 6 months ending 30 September 2005

(b)

Revenue
Less Cost of goods sold
Purchases
Less: Closing inventory
Gross profit
Less Expenses:
Wages and salaries
General expenses
Insurance
Business rates
Depreciation: Motors
Premises
Machinery
Net profit
Non-current assets
Premises
Machinery
Motors

Current assets
Inventory
Debtors Accounts receivable
Prepayments (insurance)
Cash and bank

102,000
8,000

800
875
800
Balance Sheet as at 30 September 2005
Cost
35,000
8,000
6,400
49,400

Current liabilities
Accounts payable for goods
General expenses
Business rates

94,000
72,000

12,600
1,200
280
720
2,475

Depn
875
800
800
2,475
8,000
56,000
280
42,780

32,000
200
360

Capital
Add Net profit
Less

166,000

17,275
54,725

34,125
7,200
5,600
46,925

107,060
153,985

( 32,560)
121,425
77,500
54,725
132,225
( 10,800)
121,425

Drawings

Answer to Question 40.5A BA 2
(a) See text.
(b)

Madingley Ltd
Forecast Operating Statement for the six months ending 30 November 2010 (£000)

Revenue
Cost of sales:
Opening inventory (91.7 + 142.4)
Materials

Less Closing inventory (91.7 + 136.2)
Wages
Variable overheads
Depreciation: Plant
Gross profit
Fixed overheads
Depreciation: Fixtures
Profit for the year
180

234.1
205.6
439.7
227.9
211.8
36.7
340.2
0.47
226.8
0.27

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
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1,185.20

589.17
596.03
227.07
368.96

Non-current assets
Land and buildings
Plant and machinery
Fixtures and fittings

Forecast Balance Sheet as at 30 November 2010 (£000)
Cost
Aggregate depreciation 134.00
9.40
2.30
145.70

Current assets
Inventory: Raw materials
Finished goods
Accounts receivable
Bank

91.70
136.20
574.50
282.20

Current liabilities
Accounts payable: Raw materials
Overheads

41.00
42.60

Equity
Share capital
Retained profits
Profit for year
Workings
Opening balance
Sales
Cash
Balance c/d

Opening balance
Materials
Cash
Balance c/d

Opening balance
Incurred
Cash
Balance c/d

Opening balance
Receipts
Payments:
Suppliers
Wages
Overheads
Balance c/d


4.23
1.32
5.55

272.19
368.96

Accounts Receivable Control
594.4
1,185.2
1,779.6
Purchases Ledger Control
246.8
41.0
287.8
Overheads
651.8
42.6
694.4
Cash Book

134.00
5.17
0.98
140.15

1,084.60
1,224.75
83.60
1,141.15
500.00
641.15
1,141.15

1,205.1
574.5
1,779.6
82.2
205.6
287.8
127.4
567.0
694.4

12.4
1,205.1

1,217.5

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246.8
36.7
651.8
282.2
1,217.5

181

Answer to Question 40.10A BA 2
(a) (i) Sales: June, July, August, November, 121/2% of total × 4 = 50%
September and October, 25% of total × 2
= 50%
Sales budgets:
June
100,000
July
100,000
August
100,000
September
200,000
October
200,000
November
100,000
800,000
(ii) Cost of sales 800,000 − 25% = 600,000
Opening inventory 210,000 + Purchases ? − Closing inventory 252,000 = Cost of sales 600,000.
Therefore by deduction purchases = 642,000.
June
75,000
July
75,000
Aug
75,000
Sept
150,000
Oct
150,000
Nov 75,000 + 42,000
117,000
Total purchases
642,000
Newland Traders
Budgeted Income Statement for the 6 months ending 30 November 2007
£000

Revenue
Less Cost of goods sold:
Inventory 30.5.2007
Purchases

210
642
852
252

Less Inventory 30.11.2007
Gross profit
Less Expenses:
Wages and expenses
Depreciation (6 × 5,000 + (10% × 80,000 × 3/12))
Net profit
(b)*

Budgeted Balance Sheet as at 30 November 2007

Non-current assets at cost
Less Depreciation

120
32

£000
690
296

Current assets
Inventory
Accounts receivable
Cash at bank and in hand
Total assets
Current liabilities
Accounts payable
Equity
Issued capital
General reserve
Retained profits (48 + 41)
* Best to tackle (c) cash budget before (b) balance sheet.

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252
300
10

£000
800

600
200
152
48
£000
394

562
956
(117)
839
600
150
89
839

(c)

Cash Flow Budget (£000)
Aug
Sept
Oct
+120
+125
+130
100
100
100
220
225
230

June
+48
150
198
128
20

Closing bank balance

75
20

75
20

95

95

+50

Payments
Accounts payable
Wages and expenses
Non-current assets

75
20

148

Opening bank balance
Accounts receivable paid

July
+50
165
215

+120

+125

Nov
−20
200
180

95

150
20
80
250

150
20
170

+130

−20

+10

Extra finance needed October. Assumed that capital expenditure paid one month after incurred. As it appears short term, a bank overdraft or extra capital would be the best options.

Answer to Question 40.11A BA 2
Len Auck and Brian Land, trading as Auckland Manufacturing Co.
Forecast Income Statement for the 4 months ending 30 April 2006

(a)

Revenue
Less Cost of raw materials:
Inventory 31.12.2005
Purchases (43,000 + 1,500)
Less

10,500
44,500
55,000
12,000
43,000
17,200
15,050
18,500
18,500

Inventory 30.4.2006
Direct wages
Overhead expenses
Inventory of finished goods 31.12.2005
Inventory of finished goods 30.4.2006
Net profit
Len Auck
Brian Land

Non-current assets
Plant and machinery at cost
Less Depreciation

5,375
5,375

90,000
30,800
12,000
18,500
46,000

Current liabilities
Accounts payable
Bank overdraft (see part (b))

25,500
23,650

Less Drawings

75,250

10,750
10,750

Forecast Balance Sheet as at 30 April 2006

Current assets
Inventory: Raw materials
Finished goods
Accounts receivable

Capital accounts:
Balance 1.1.2006
Add Share of profit

86,000

Len Auck Brian Land
40,000
39,000
5,375
5,375
45,375
44,375
1,600
1,600
43,775
42,775

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59,200

76,500
135,700
( 49,150)
86,550

86,550

183

(b)
2006
Receipts: accounts receivable
Payments:
Raw materials
Direct wages
Overheads:
Wages and salaries
Other overheads
Drawings
Plant

Cash Budget

Opening balance
Closing balance

Jan
18,000

Feb
18,000

Mar
18,000

Apr
22,000

13,000
3,600

13,000
4,400

10,500
4,400

11,000
4,800

900
1,550
800
25,000
44,850
+4,550
−22,300

1,000
1,550
800

1,000
2,150
800

1,000
2,150
800

20,750
−22,300
−25,050

18,850
−25,050
−25,900

19,750
−25,900
−23,650

Maximum amount of finance needed £25,900 in March.
(c) Repayment of overdraft:
Cash flows:
Accounts receivable
Less Materials
Wages
Overheads
Wages overheads
Drawings
Net cash inflows
Overdraft 30.4.2006
– Net cash inflow May
Overdraft 31.5.2006

11,000
4,800
2,500
1,000
800

May
22,000

20,100
1,900

12,000
4,800
2,500
1,000
800

June
24,000

21,100
2,900

23,650
1,900
21,750

As following months are at the rate of £2,900 net cash inflows then it will take 71/2 months to clear overdraft:
21,750
= 71/2 months, i.e. cleared by middle of January 2007.
2,900

Answer to Question 41.2A BA 2
(i)

Standard costing: a technique that compares standard costs and revenues with actual costs and revenues to obtain variances.
(ii) Standard cost: the cost that should have been incurred.
(iii) Standard hours: the amount of work achievable at standard efficiency levels in an hour.
(iv) Variance: the difference between a standard cost or revenue and the actual cost or revenue incurred.

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Answer to Question 42.2A BA 2
(i)

Actual cost per unit
Standard cost per unit
Materials usage variance (favourable)

171 × £11
176 × £11

£
1,881
1,936
55

(ii) Actual cost per unit
Standard cost per unit
Materials price variance (adverse)

50 × £45
50 × £42

2,250
2,100
150

(iii) Actual cost per unit
Standard cost per unit
Materials usage variance (adverse)

83 × £22
79 × £22

1,826
1,738
88

(iv) Actual cost per unit
Standard cost per unit
Materials price variance (adverse)

41 × £10
41 × £8

410
328
82

(v) Actual cost per unit
Standard cost per unit
Materials price variance (adverse)

60 × £30
60 × £29

1,800
1,740
60

(vi) Actual cost per unit
Standard cost per unit
Materials usage variance (favourable)

78 × £27.5
84 × £27.5

2,145
2,310
165

Answer to Question 42.4A BA 2
(i)

Favourable labour efficiency variance
Adverse wage rate variance
Net adverse labour variance

24 × £5.20
426 × 40p

£
124.80
170.40
45.60

(ii) Favourable wage rate variance
Adverse labour efficiency variance
Net favourable labour variance

660 × 20p
20 × £4.70

132.00
94.00
38.00

(iii) Favourable wage rate variance
Favourable labour efficiency variance

140 × 40p
10 × £5.30

56.00
53.00
109.00

150 × £5.30
140 × £4.90

795.00
686.00
109.00

(iv) Adverse wage rate variance
Adverse labour efficiency variance
Total adverse labour variance

520 × 30p
10 × £5.10

156.00
51.00
207.00

(v) Favourable wage rate variance
Adverse labour efficiency variance
Net favourable labour variance

420 × 40p
30 × £4.80

168.00
144.00
24.00

(vi) Favourable labour variance
Adverse wage rate variance
Net adverse labour variance

30 × £4.60
780 × 40p

138.00
312.00
174.00

This compares with: Standard cost
Actual cost

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185

Answer to Question 42.6A BA 2
Central Grid plc
It can be assumed that there has been a planning change concerning the volume of production, reducing it from 16,000 units to 12,000. Flexible budgeting can be adopted (see Section 39.5 in the text) and a revised original budget of 12,000 units used. Assume that all the various standard costs and usage level relationships would be unchanged at the lower level of output and calculate the variances requested on the basis that the budgeted volume was 12,000. This produces the following:
(a)

(b)

£60,000 − £60,390
(i)
(12,000 − 12,830) × £5
(ii)
(£5 − £4.70694) × 12,830

Total Direct Material Variance for April 2008
=
£390
Material Usage Variance
=
£4,150
Material Price Variance
=
£3,760

£144,000 − £153,000
(i)
(36,000 − 34,000) × £4
(ii)
(£4.00 − £4.50) × 34,000

Total Direct Labour Variance for April 2008
=
£9,000
Labour Efficiency Variance
=
£8,000
Labour Rate Variance
=
£17,000

Workings:
Material usage
Material unit price
Standard labour cost for output

Adverse
Adverse
Favourable
Adverse
Favourable
Adverse

£64,150 ÷ £5
= 12,830
£60,390 ÷ 12,830 = £4.70694
£12 × 12,000
= £144,000

(c) Material: Shows an overall adverse variance of £390.
Usage: Adverse £4,150. Used more material than expected for this level of output. Could have been because the material was of poorer quality (it was cheaper than expected).
Price: Favourable variance £3,760. Purchasing obtained material at a lower price than expected.
Labour: Shows an overall adverse variance of £9,000.
Efficiency: Favourable £8,000. Perhaps using a different machine from usual? Or, perhaps working harder in order to receive the higher than expected wage rate.
Rate: Adverse £17,000. Higher labour hourly cost, possibly because the amount of work was lower than expected.
Polishing labour efficiency variance: The £3,000 adverse variance may have been due to the possibly poorer quality material used in machining having caused polishing to take longer than expected.
(d) Briefly:
Material: Possibly poorer quality material was used (it was cheaper than expected), resulting in waste.
If so, it appears it cost more (in waste) than it saved (in reduced purchasing costs). It also appears that it may have led to the adverse polishing labour efficiency variance.
Labour: Higher wage rates than were expected led to a significant increase in cost. These increased wage rates may have resulted from the change in the planned level of activity from 16,000 units to
12,000.

186

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Answer to Question 42.8A BA 2
(a) See text.
(b) (i) Total materials variance:
(Standard price × standard quantity) − (actual price × actual quantity)
= (£8.42 × 1,940) − (£8.24 × 2,270) = £16,334.8 − £18,704.8 = £2,370 adverse.
(ii) Materials price variance:
(Standard price − actual price per unit) × quantity purchased
= (£8.42 − £8.24) × 2,270 = £408.60 favourable.
(iii) Material usage variance:
(Standard quantity required − actual quantity) × standard price
= (1,940 − 2,270) 330 × £8.42 = £2,778.60 adverse.
(iv) Total labour variance:
(Standard rate × standard hours) − (actual rate × actual hours)
= (£6.53 × 800) − (£6.14 × 860) = £5,224 − £5,280.4 = £56.4 adverse.
(v) Wage rate variance:
(Standard rate − actual rate) × actual hours worked
= (£6.53 − £6.14) × 860 = £335.40 favourable.
(vi) Labour efficiency variance:
(Standard hours − actual hours) × standard rate
= (800 − 860) × £6.53 = £391.80 adverse.

Answer to Question 42.9A BA 2
Direct material variances
Boards
Price variances:
Gamesmaster
Actual
5,050
Budget
5,050 × 5
Adverse

26,000
25,250

Gotchya
Actual
Budget
Adverse

28,390
20,100

2,010
2,010 × 10

(750)

(8,290)

Usage variances:
Gamesmaster
Actual
5,050 × 5
Budget
5,000 × 5
Adverse

25,250
25,000

Gotchya
Actual
Budget
Adverse

20,100
20,000

2,010 × 10
2,000 × 10

(250)

(100)

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187

Components
Price variances:
Gamesmaster
Actual
5,060
Budget
5,060 × 20
Favourable
Gotchya
Actual
Budget
Favourable

2,025
2,025 × 30

75,000
101,200

26,200

56,409
60,750

4,341

Usage variances:
Gamesmaster
Actual
5,060 × 20
Budget
5,000 × 20
Adverse

101,200
100,000

Gotchya
Actual
2,025 × 30
60,750
Budget
2,000 × 30
60,000
Adverse
Total direct material variance: Favourable
Direct labour variances
Assembly
Wage rates
Actual
Budget
10,000 × 5
Favourable
Efficiency
Actual
10,000 × 5
Budget
7,000 × 5
Adverse

( 1,200)

( 750)
19,201

49,000
50,000
50,000
35,000

Testing
Wage rates
Actual
35,700
Budget
7,000 × 5
35,000
Adverse
Efficiency
Actual
7,000 × 5
35,000
Budget
9,000 × 5
45,000
Favourable
Total direct labour variance: Adverse

1,000

(15,000)

(

700)

10,000
( 4,700)

Answer to Question 42.10A BA 2
(i)
(ii)
(iii)
(iv)
(v)

188

Standard cost – BCDE – standard hours at standard rates.
Actual cost – ACJG – actual hours at actual rates.
Total labour cost variance – ABGH and EDJH – difference between (i) and (ii) above.
Efficiency variance – EDJH – additional hours required.
Wage rate variance – ABGH – additional hours at wage rate differential.

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

Answer to Question 43.2A BA 2
(a) Actual fixed overhead
Budgeted fixed overhead
Favourable fixed overhead expenditure variance

£
18,109
19,000
891

(b) Actual hours × standard rate (280 × £12)
Budgeted hours × standard rate (300 × £12)
Favourable variable overhead efficiency variance

3,360
3,600
240

(c) Actual overhead
Overhead applied to production (13,800 × £2)
Adverse variable overhead expenditure variance

28,000
27,600
400

(d) Actual overhead
Overhead applied to production (6,000 × £2)
Favourable variable overhead expenditure variance

11,400
12,000
600

(e) Actual fixed overhead
Budgeted fixed overhead
Adverse fixed overhead expenditure variance

88,700
84,100
3,600

(f ) Actual hours × standard rate (20,000 × £10)
Budgeted hours (14,600 × 1.33) × standard rate £10
Adverse variable overhead efficiency variance

200,000
194,667
5,333

Answer to Question 43.4A BA 2
The variable overhead rate is:
£80,000
= £1.33 per direct labour hour or £0.33 per unit
60,000
The fixed overhead rate is:
£120,000
= £2 direct labour hour or 50p per unit
60,000
The variances are:
Variable overhead
(i) Expenditure variance
Actual overhead
Overhead applied to production 64,000 × £1.33
Favourable expenditure variance
(ii) Efficiency variance
Actual hours × standard rate 64,000 × £1.33
Budgeted hours × standard rate (236,000 units which should be produced in 236,000 ÷ 4 = 59,000 hours × £1.33)
Adverse efficiency variance

£
78,000
85,333
7,333
85,333
78,667
6,666
667

Fixed overhead
(i) Budget (or spending) variance
Actual overhead
Budgeted overhead
Favourable expenditure variance

104,000
120,000
16,000

(ii) Efficiency variance
Actual units produced × standard rate 236,000 × 50p
Actual labour hours × standard rate per hour 64,000 × £2
Adverse efficiency variance

118,000
128,000
10,000

(iii) Capacity variance
Actual volume × standard rate 64,000 × £2
Budgeted volume × standard rate 60,000 × £2
Favourable capacity variance
Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
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128,000
120,000
8,000
6,000
189

The variances can be explained further:
Variable overhead
Actual overhead
Budgeted overhead for actual production 236,000 units × £0.33 per unit
Net favourable variance (made up of favourable expenditure variance £7,333 less adverse efficiency variance £6,666)
Fixed overhead
Actual overhead
Overhead based on units of production 236,000 × £0.50
Net adverse variance (made up of adverse efficiency £10,000 − favourable expenditure £16,000 less favourable capacity variance £8,000)

78,000
78,667
667
104,000
118,000
14,000

Answer to Question 43.6A BA 2
Actual units sold

75,000 × Budget price
75,000 × Actual price
Favourable price variance

£6.00 =
£6.40 =
£0.40

Actual units sold 75,000 × Budget gross profit
Budget units sold 80,000 × Budget gross profit
Adverse volume variance

£3.30 =
£3.30 =

£
450,000
480,000
30,000
247,500
264,000
16,500

Answer to Question 43.8A BA 2
Actual units sold Product
A
B
C

1,000
800
3,000
4,800

Budget price £
60
50
80

Actual
Unit price price variance
£
58
−2
54
+4
78
−2
Adverse price variance

Actual units sold

Budget sales units

Variance in units

1,000
800
3,000
4,800

686
1,027
3,087
4,800

800
1,200
3,600
5,600

−114
−173
−513
−800

Actual units in budget (%)

A
B
C

Actual units in budget (%)

Actual units sold

Variance in units

686
1,027
3,087
4,800

1,000
800
3,000
4,800

+314
−227
−87


A
B
C

Adverse price variance
Adverse volume variance
Adverse mix variance
Net adverse variance

Total price variance −2,000
+3,200
−6,000
−4,800

Budget gross profit per unit
£
10
8
20
Adverse volume variance Total variance £
−1,140
−1,384
−10,260
−12,784

Budget gross profit per unit
£
10
8
20
Adverse mix variance Total variance £
+3,140
−1,816
−1,740
−416

Summary of sales variance

4,800
12,784
416
18,000

* Note: either this figure must be rounded to 3,087 or if recorded as 3,086 the Product A figure shown of
686 needs to be rounded to 687. Either would be correct. It would not be correct to leave both at their possible lower amounts of 3,086 and 686 as the total of ‘actual units in budget %’ must add up to 4,800.

190

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Answer to Question 43.10A BA 2
(i)

Flint Palatignium Ltd
Trading Account part of the Income Statement for the month of April 2008
Actual (£)
Sales units
31,000
Revenue (534,750 + 8,691)
543,441
Materials (155,000 − 4,662 + 1,743)
152,081
Labour (77,500 − 600 + 292)
77,192
Overhead (232,500 − 147 + 9)
232,362
461,635
Operating profit
81,806
Valuation of inventory
1.4.2008
1,000 at £5
=
£5,000
30.4.1008
1,750 at £5
=
£8,750

Budget (£)
534,750
155,000
77,500
232,500
465,000
69,750

Workings:
Units sold = £sales ÷ selling price = £534,750 ÷ £17.25 = 31,000.
(ii) Standard costing uses standards of performance and of prices derived from studying operations and of estimating future prices. Each unit produced attracts a standard materials, labour and overhead cost.
Flint Palatignium negotiates fixed-price contracts utilising standard costing which enables it to set standards that will remain unchanged for long periods. For example, the average cost method of pricing material issues needs a price recalculation each time there are additional receipts. The standard cost of materials will remain unchanged for a long period.
Using the standard costing system would enable the company to check on the efficiency of the service provided. It would also enable faster reporting to be carried out.

Answer to Question 43.11A BA 2
HGW Limited
Income Statement for March 2004

(a)
Revenue
Less: Materials
Labour
Overheads

£
9,734
18,720
12,500

Profit for the month
(b)
(i) Sales variance
Price
Actual
550 × 85
Budget
550 × 86
Adverse
Volume
Actual
550 × 86
Budget
520 × 86
Favourable
Total sales variance: Favourable
(ii) Direct materials variance
Price
Actual
785 × 12.40
Budget
785 × 12
Adverse
Usage
Actual
785 × 12
Budget
825 × 12
Favourable
Total direct material variance: Favourable

46,750
47,300
47,300
44,720

9,734
9,420
9,420
9,900

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
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£
46,750

40,954
5,796

( 550)

2,580
2,030

( 314)

480
166

191

(iii) Direct labour variance
Rate
Actual
2,400 × 7.80
Budget
2,400 × 7.50
Adverse
Efficiency
Actual
2,400 × 7.50
Budget
2,420 × 7.50
Favourable
Total direct labour variance: adverse

18,720
18,000
18,000
18,150

(c) Reconciliation
Budgeted profit on actual sales [550 × 13(86 − 73)]
Variances
Sales (price variance only)
Direct material
Direct labour
Overheads

( 720)

150
570
7,150

(550)
166
(570)
(400)

Profit as per (a) above

(1,354)
5,796

(d) See text, Section 41.2.

Answer to Question 44.3A BA 2
(a) (i) £24,000
(b) (i) £18,000

(ii) £36,000
(ii) £48,000

(iii) £44,000
(iii) £33,000

(iv) £30,000

Answer to Question 44.5A BA 2
(i)
(ii)
(iii)
(iv)
(v)

Loss £2,000
Profit £12,000
Neither profit nor loss
Profit £6,000
Profit £9,000

Answer to Question 44.7A BA 2
(a) Workings:
Sales volume – units
Selling price (£)
Sales (£)
Variable cost (£)
Fixed cost (£)
Profit (£)

192

Current
1,000
2
2,000
1,000
500
500

(i)
1,100
2
2,200
1,100
500
600

Changes
(ii)
1,000
2.20
2,200
1,000
500
700

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

(iii)
1,000
2
2,000
900
500
600

(iv)
1,000
2
2,000
1,000
450
550

Break-even charts:
(i)

10% increase in volume
2,500
Sales
2,000

Cost (£)

Increase in profit: £100
Costs

1,500

1,000

500

0

200

400

600 800
Sales (units)

1,000 1,200

(ii) 10% increase in unit selling price
2,500
Sales
2,000

Cost (£)

Increase in profit: £200
Costs

1,500

1,000

500

0

200

400

600 800
Sales (units)

1,000 1,200

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193

(iii) 10% decrease in unit variable cost
2,500

Sales

2,000

Cost (£)

Increase in profit: £100
1,500

Costs

1,000

500

0

200

400

600 800
Sales (units)

1,000 1,200

(iv) 10% reduction in fixed costs
2,500

Sales

2,000

Cost (£)

Increase in profit: £50
1,500

Costs

1,000

450

0

194

200

400

600 800
Sales (units)

1,000 1,200

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
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Answer to Question 44.9A BA 2
Monarch Ltd
Profit Statement
Original
statement
60,000
£30

(a)
Sales units (W1)
Unit selling price
Revenue
Direct material
Direct labour
Variable overhead

1,800
480
240
240
960
840
260
90
100
450
390

Contribution
Production cost
Administration
Selling, marketing and distribution
Profit
Contribution per unit (£)

2,106
585
312
312
1,209
897
290
95
110
495
402

14

Options
(ii)
62,000
£30

(i)
78,000
£27
£000

(iii)
75,000
£30

1,860
496
248
248
992
868
260
90
127
477
391

2,250
577.5
300
300
1,177.5
1,072.5
285
94
147
526
546.5

14

14.3

11.50

(W1) Contribution = £840,000 for 60,000 units = £14 each.
Contribution + total variable cost = selling price, therefore £14 + £16 = £30.
Monarch Ltd
Profit Statement
Original
statement
Sales units
Unit selling price

Managing director’s option (iv)
78,000
£29

60,000
£30

Revenue
Direct material
Direct labour
Variable overhead
Contribution
Production costs
Administration
Selling, marketing and distribution
Profit
Contribution per unit (£)

£000
1,800
480
240
240
960
840
260
90
100
450
390
14

(F)
(+ 30% × 93.75%)
(E)
(C)

(B)
(A)
(D)

£000
2,262
585
312
312
1,209
1,053
417

150
567
486
13.5

(b) Break-even point − £567,000 = 42,000 units.
First insert (A) and (B). This means that (A) + (B) = (C). Given sales increase in units of 30% = 78,000 sales. Means that (C) ÷ 78,000 = contribution per unit of £13.50. (E) calculated so that (C) + (E) = (F).

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195

Contribution/sales graph
2,400

Sales

= t at its rofi 00 un
P 0
,
60 Costs

2,000

Cost (£)

1,600

00

3,0

4
£2

1,200
800
400

0

10

20

Break-even point = 42,000
30
40
50
60
70
80
Output (000s units)

(c) The report should include the following:
1 Marginal costing takes account of the variable costs of products.
2 It states that fixed factory overhead is a function of time and should not be carried forward into the next period by including it in inventory valuations.
3 To apply marginal costing means splitting up fixed and variable costs. This is not always straightforward.
4 Not all variable costs are a hundred per cent variable.
5 Intelligent cost planning and control is dependent on the knowledge of how costs behave in a particular firm. 6 Raw materials are examples of variable costs. Labour costs usually move in steps.

Answer to Question 44.11A BA 2
(a) See text, Section 44.1. (It should be remembered that a break-even point is relevant only to a specific range of activity and within a specific timescale. If the volume of activity shifts onto a new level, some fixed costs may alter – for example, a second warehouse may need to be rented. This will result in a different break-even point. Also, the break-even point will alter over time as the nature of all costs change.)
(b) (i)

Cost of 2,000 additional units
Direct materials
Direct labour
Overheads

(36,000 − 30,000)
(33,000 − 28,000)
(24,100 − 20,500)

6,000
5,000
3,600
£14,600

(ii) Based on the cost for 2,000 units calculated in (i), the variable costs of 10,000 units would be
£73,000.
(iii) There appears to be a fixed element in both direct labour and overheads. In the case of direct labour, this would appear to be £3,000 [£28,000 − (5 × £5,000)]. In the case of overheads, it appears to be £2,500 [£20,500 − (5 × 3,600)].
(iv) On the basis of (ii) the variable cost of one unit is £7.30 and the contribution per unit is £5
[£12.30 − £7.30]. Break-even point is 1,100 units [(£3,000 + £2,500)/£5].

Answer to Question 45.2A BA 2
The amount borrowed is £3,842.20 and the interest charged is £157.80.
Therefore, the real rate of interest: r= 157.80
= 0.2342 or 23.42%.
3,842.20 × (64 /365)

196

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Answer to Question 45.5A BA 2
£5,000 will accumulate to £5,000 × (1 + 0.035)8 = £6,584.04
Interest is £6,584.04 − £5,000 = £1,584.04

Answer to Question 45.6A BA 2
5

r = (4,400/ 2,500) − 1
= 11.2%

Answer to Question 45.8A BA 2
£50,000
= 10
5,000
Therefore, from Table 4 in Appendix 1, and using the 12 year line, it lies between 2% and 3%:
2%
= 10.575
3%
= 9.954
Difference = 0.621
Interpolating, 10 − 9.954 = 0.046 and =

46
621

× 1 = 0.07

Therefore the offer represents a rate of interest of 3% − 0.07% = 2.93%. This is well below the 6% compound interest you could obtain by investing the £50,000 and confirms that you should accept the offer.

Answer to Question 45.10A BA 2
Paid in per year =
=

Value × (r)
(1 + r)n − 1
£40,000 × 0.07
(1.07)8 − 1

= £3,898.71 per year

Answer to Question 46.4A BA 2
Year:
Cash outflows
Machine
Working capital
Tax on profit @ 30%
Cash inflows
Profit before tax and depn
WDA
Working capital
Net cash flow

0

Cash flow budget for the project
1 (start)
2
3

(60,000)
(30,000)

4

5

(48,000)

(48,000)

(48,000)

160,000
(90,000)

(48,000)
160,000
4,500

160,000
3,375

160,000

116,500

115,375

160,000
2,531
30,000
144,531

7,594
(40,406)

Notes
1 Net outflows are shown in brackets.
2 WDA is 25% reducing balance on the machine multiplied by the tax rate of 30%.
3 At the end, as it has no residual value, the machine has an unexpired WDA that can be claimed of
£60,000 − £34,688 = £25,312.

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197

Answer to Question 46.5A BA 2
Year
0
1
2
3
4
5

Net cash flow
( 90,000)
160,000
116,500
115,375
144,531
( 40,406)

Discount factor (7%)
1.000
0.935
0.873
0.816
0.763
0.713

Present value
( 90,000)
149,600
101,705
94,146
110,277
( 28,809)

Net present value of the net cash flows

336,919

Answer to Question 46.6A BA 2
Year:
Cash outflows
Machine
Tax on savings @ 30%
Tax on sale of old machine
Cash inflows
Savings on material
Sale of old machine
WDA on new machine
Net cash flow

0

1 (start)

(90,000)

Cash flow statement
3
4

5

6
(9,000)

(9,000)
(1,800)
30,000
18,000

(90,000)

2

48,000

(9,000)

(9,000)

(9,000)

30,000

30,000

30,000

30,000

5,400
24,600

4,320
25,320

3,456
24,456

2,765
23,765

11,059
2,059

Notes
1 Net outflows are shown in brackets.
2 WDA is 20% reducing balance on the machine multiplied by the tax rate of 30%.
3 At the end, as it has no residual value, the machine has an unexpired WDA that can be claimed of
£11,059.
4 The old machine is sold at a gain of £6,000 over its book value of £12,000 (4 × £3,000).
The impact on annual reported profits would be:
(i) operating profit would increase by £30,000;
(ii) depreciation would increase by £15,000 (assuming the straight line method was used);
(iii) tax payable would change by the difference between the tax and WDA rows in the statement.

Answer to Question 46.11A BA 2
Year
0
1
2
3

Amount
(40,000)
26,000
16,000
10,000

Balance
(40,000)
(14,000)



Payback at 1 plus 14,000/16,000 years = 1.875 years.

Answer to Question 46.12A BA 2
Year
0
1
2
3

Cash flow
(40,000)
26,000
16,000
10,000

Discount factor (6%)
1.000
0.943
0.890
0.840

Net present value of the project

198

Present value
(40,000)
24,518
14,240
8,400
7,158

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

Answer to Question 46.13A BA 2
Year

Amount

0
1
2
3

(40,000)
26,000
16,000
10,000

Discount factor (16%)
1.000
0.862
0.743
0.641

16% discount rate gives NPV of
18% discount rate gives negative NPV of
The IRR is

Present value
(40,000)
22,412
11,888
6,410
710

Discount factor (18%)
1.000
0.847
0.718
0.609

Present value (40,000)
22,022
11,488
6,090
( 400)

710
400
1,110

710
× 2% = 1.28 + 16% = 17.28%.
1110
,

Answer to Question 46.14A BA 2
From Table 4 in Appendix 1, the present value of an annuity of £1 for three years at 6% is 2.673. The
NPV accounting to the answer to Question 46.12A is £7,158. Therefore the annualised amount is:
£7,158
= £2,677.89.
2.673

Answer to Question 46.15A BA 2
Average return
Average investment

= 90,000
= (128,000 + 8,000) ÷ 2 = 68,000

Accounting rate of return =

90,000
68,000

= 132.35%

Answer to Question 46.16A BA 2
Period
0
1
2
3
4
5

Amount
(128,000)
114,000
114,000
114,000
114,000
122,000

Discount factor (80%)
1.000
0.556
0.309
0.171
0.095
0.053

80% discount rate gives NPV of
90% discount rate gives negative NPV of
The IRR is

Present value
(128,000)
63,384
35,226
19,494
10,830
6,466
7,400

Discount factor (90%)
1.000
0.526
0.277
0.146
0.077
0.040

Present value (128,000)
59,964
31,578
16,644
8,778
4,880
( 6,156)

7,400
6,156
13,556

7,400
× 10% = 5.46% + 80% = 85.46%
13,556

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

199

Answer to Question 46.19A BA 2
Discount
factor
(7%)
1.000
0.935
0.873
0.816

Period
0
1
2
3

Project A net cash flows (68,000)
30,000

48,000

Present value (68,000)
28,050

39,168
( 782)

Project B net cash flows (58,000)
42,000

21,000

Present value (58,000)
39,270

17,136
( 1,594)

Neither should be selected on the basis of this criterion – both projects have a negative net present value.

Answer to Question 46.20A BA 2
Project X = 6.4%
Project Y = 5.2%
Project X would be preferred.

Answer to Question 46.22A BA 2
Discount
factor
(6%)
1.000
0.943
0.890
0.840
0.792
0.747

Period
0
1
2
3
4
5

Project X net cash flows (50,000)
( 8,000)
(12,000)
( 8,000)
( 8,000)
( 8,000)

Present value (50,000)
( 7,544)
(10,680)
( 6,720)
( 6,336)
( 5,976)
(87,256)

Project Y net cash flows (110,000)
( 12,000)
( 12,000)
( 2,000)
( 2,000)
( 2,000)

The present value of an annuity of £1 for 5 years at 6% = £4.212
∴ the annualised cost of Project X

=

and the annualised cost of Project Y =

£87,256
= £20,716
4.212
£136,754
= £32,468
4.212

As the cost of project X is cheaper than that of project Y, project X should be selected.

200

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

Present value (110,000)
( 11,316)
( 10,680)
( 1,680)
( 1,584)
( 1,494)
(136,754)

Answer to Question 46.25A BA 2
(a) Exco
Tonnes
Price:
80% @
20% @
Revenue (£000)
Labour (£000)
Other payments
Net cash flow

2005
120,000

Ohio
Tonnes
Price
Revenue (£000)
Labour (£000)
Other payments
Net cash flow

2005
240,000
£130
31,200
( 2,500)
(28,800)
( 100)

£150
£150

(b) Exco (£000)
Period
0
Capital outlay
2005
Net cash flow
2006
Net cash flow
2007
Net cash flow
2008
Net cash flow
Net present value
Ohio (£000)
0
Capital outlay
2005
Net cash flow
2006
Net cash flow
2007
Net cash flow
2008
Net cash flow
Net present value

18,000
( 1,200)
(15,600)
1,200

Hirwaun Pig Iron Co.
2006
2007
120,000
120,000
£150
£140

17,760
( 1,200)
(15,600)
960

2006
240,000
£130
31,200
( 2,500)
(28,800)
( 100)

£150
£140

2008
120,000
£150
£160

17,760
( 1,200)
(16,200)
360

2007
240,000
£140
33,600
( 2,500)
(30,000)
1,100

18,240
( 1,200)
(16,200)
840

2008
240,000
£170
40,800
( 2,500)
(30,000)
8,300

(2,000)
1,200
960
360
840

PV factor for 12%
1.00
0.893
0.797
0.712
0.636

NPV
(2,000)
1,072
765
256
534
627

(3,500)
( 100)
( 100)
1,100
8,300

1.00
0.893
0.797
0.712
0.636

(3,500)
( 89)
( 80)
783
5,279
2,393

(c) The calculations of net present values indicate that the Ohio investment produces a higher NPV over the four-year period. In order to determine whether this represents a reasonable decision, the management would need to consider the reliability of estimates used – on volumes, sales forces and costs. Exco involves a lower capital outlay, which is expected to produce a payback just before the end of 2006.
Ohio does not achieve payback until over 6 months through the fourth year. Ohio only really comes into profit in the fourth year. If these fourth year estimates are reliable, and may extend into the future period after 2008, then Ohio is clearly preferable. The method using net present value is entirely appropriate, assuming that the cost of capital figure has been reliably estimated. However, the NPV can only be valued if the information on which it is based is accurate. Great care must be taken to assess the sensitivity of the data to changes in the inputs in order to be aware of the underlying risks involved. Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008

201

Answer to Question 46.27A BA 2
Exhibit A
Jimmy Jam
Year
Incremental receipts
Salary
Transfer fee
Exhibit B
Johnny Star
Year
Incremental receipts
Salary
Transfer fee
Exhibit C
Year
0
1
2
3
4
5

Rovers Football Club
0
(200,000)
(200,000)
0
(100,000)
(100,000)
Cash flow
(200,000)
150,000
150,000
150,000
150,000
150,000

1
200,000
( 50,000)

2
200,000
( 50,000)

3
200,000
( 50,000)

4
200,000
( 50,000)

5
200,000
( 50,000)

150,000

150,000

150,000

150,000

150,000

1
400,000
(200,000)

2
400,000
(200,000)

(200,000)

(200,000)

Jimmy Jam
PV factor
NPV
1.00
(200,000)
0.893
133,950
0.797
119,550
0.712
106,800
0.636
95,400
0.567
85,050
340,750

Cash flow
(100,000)
200,000
200,000

Johnny Star
PV factor
NPV
1.00
(100,000)
0.893
178,600
0.797
159,400
238,000

Report to Rovers Football Club
The proposed transactions have been evaluated in Exhibits A, B and C to calculate the likely returns from the two players. On the figures quoted, both transactions produce a positive net present value using 12% interest, with the Jimmy Jam proposal providing the higher of the two. However, the club should consider the fact that the J Star proposal provides a payback in the first year whereas the J Jam transfer would not achieve payback until after six months through year 2.
If J Jam is successful, his five-year contract will provide benefits for three years more than J Star. In both cases the whole proposal hinges on the validity of the assumed increase in revenue and the probability that the players will be fit to play and be popular with the crowds.

202

Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition
© Pearson Education Limited 2008…...

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