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statements for the year ended 30 June 20X4 in relation to the
transaction with Customer B?
$
_______
(d)
How much revenue can AMS Co recognise in its financial
statements for the year ended 30 June 20X4 in relation to the
transaction with Customer C?
$
_______
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Chapter summary
Chapter 17
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Test your understanding answers
Test your understanding 1
Penguin Co
Statement of profit or loss and other comprehensive income for the
year ended 31 December 20X5
$
Sales revenue
50,000
Cost of sales (8,000 + 20,000 – 12,000)
(16,000)
––––––
Gross profit
34,000
Distribution costs
(8,000)
Administrative expenses
(15,550)
––––––
Operating profit
10,450
Fundamental reorganisation costs
(2,400)
––––––
8,050
Finance charges
(800)
––––––
Profit before taxation
7,250
Taxation (3,000 – 500)
(2,500)
––––––
Profit for the year
4,750
Other Comprehensive Income
Items that will not be reclassified to profit or loss in future
periods:
Revaluation surplus in the year
6,000
––––––
Total Comprehensive Income
10,750
––––––
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KAPLAN PUBLISHING
Statement of financial position at 31 December 20X5
$
$
Non-current assets
Tangible assets (35,000 + 6,000)
41,000
Current assets
Inventory
12,000
Trade receivables
10,000
Cash at bank and in hand
7,250
––––––
29,250
––––––
Total assets
70,250
––––––
Equity
Ordinary share capital (8,000 + 2,000)
10,000
10% irredeemable preference share capital
9,000
Share premium account (3,000 + 6,000)
9,000
Revaluation surplus
6,000
Retained earnings
5,250
––––––
39,250
Non-current liabilities
10% loan notes
8,000
Current liabilities
Trade payables
20,000
Taxation
3,000
––––––
23,000
––––––
70,250
––––––
Chapter 17
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319
Statement of changes in equity for the year ended 31 December
20X5
Ordinary
Share
capital
Irredeemable
pref capital
Share
premium
Revaluation
surplus
Retained
earnings
Total
$
$
$
$
$
$
Balance at
1 Jan 20X5
8,000 9,000 3,000
– 3,000
23,000
Revaluation
of building
6,000
6,000
Profit for the
year
4,750
4,750
Dividends
(900 + 1,600)
(2,500)
(2,500)
Issue of
share capital
*
2,000
6,000
8,000
–––––
–––––
–––––
–––––
–––––
–––––
Balance at
31 Dec 20X5
10,000 9,000 9,000 6,000 5,250
39,250
–––––
–––––
–––––
–––––
–––––
–––––
* The issue of 4,000 shares for $8,000 means that they were issued at
$2 each. If the nominal value is $0.50 then the premium per share was
$1.50. Therefore the increase in share capital was 4,000 shares × $0.50
= $2,000 and the increase in share premium was 4,000 shares × $1.50 =
$6,000.
Note that the irredeemable preference share capital has been recognised
and classified as equity in both the SOFP and SOCIE. There is no
obligation to redeem or repay this share capital – therefore, it is classified
as equity.
Preparing basic financial statements
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KAPLAN PUBLISHING
Test your understanding 2
Phillipa Page
Statement of profit or loss for the year ended 30 June 20X7
$
Sales revenue
120,000
Cost of sales (W1)
(72,500)
––––––
Gross profit
47,500
Discount received
2,500
Distribution costs
(13,200)
Administrative and selling expenses (W2)
(15,650)
––––––
Operating profit
21,150
Finance costs (W3)
(600)
––––––
Profit for the year
20,550
––––––
Statement of financial position at 30 June 20X7
$
$
Non-current assets
87,500
Tangible assets (102,500 – 10,000 – 5,000)
Current assets
Inventory
12,000
Trade receivables (12,200 – 1,000)
11,200
23,200
––––––
Total assets
110,700
––––––
Capital account
Balance brought forward at 1 July 20X6
73,100
Capital introduced in the year
5,000
Profit for the year
20,550
Drawings
(8,000)
––––––
90,650
Chapter 17
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Non-current liabilities
6% bank loan
10,000
Current liabilities
Trade payables
5,600
Bank overdraft
4,150
Interest accrual
300
––––––
10,050
––––––
110,700
––––––
Workings
(W1) Cost of sales
$
Opening
inventory
10,000
Purchases
60,000
Closing
inventory
(12,000)
Wages (50% × 15,000)
7,500
Loss on disposal of non-current asset (10,000 –
8,000 proceeds)
2,000
Depreciation
charge
5,000
––––––
72,500
––––––
(W2) Administrative and selling expenses
$
Per trial balance
5,600
Wages (50% × $15,000)
7,500
Irrecoverable debts written off ($1,550 + $1,000)
2,550
––––––
15,650
––––––
(W3) Loan
interest
$
Charge for the year: $10,000 × 6%
600
Amount paid per trial balance
(300)
––––––
Accrual
required
300
––––––
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Test your understanding 3
The correct answer is A
1
Sales of year-end
inventory at less
than cost
Adjusting
Closing inventory must be
valued at the lower of cost
and net realisable value. The
post-yearend sale provides
evidence of the net realisable
value.
Therefore closing inventory
must be adjusted to reflect
the reduction in value.
2 Share
issue
Non-adjusting
3
Fire in warehouse Non-adjusting If only a small quantity of
inventory has been
destroyed, this will not affect
the presumption that the
entity is operating as a going
concern. However, if the loss
of inventory was so pervasive
that it affected that ability of
the entity to operate as a
going concern, this would
necessitate a change in the
basis of accounting o prepare
financial statements on a
break-up basis.
4 Bankruptcy
of
Major customer
Adjusting
The bankruptcy of the
customer provides evidence
of their inability to pay their
debt at the year-end. The
amount outstanding from the
customer at 30 June 20X6
should therefore be written
off in the year-end accounts.
5 Acquisition
of
Teeny Co
Non-adjusting
6 Receipt
of
Insurance monies
Adjusting
The receipt of insurance
monies provides evidence of
a year-end asset. The
amount subsequently
received should be reflected
as such in the year-end
accounts.
Chapter 17
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Test your understanding 4
(a)
$1,000
Revenue of $1,000 recognised at a point in time when control was
transferred on 20 June 20X4. Remember that revenue excludes
sales tax.
(b)
$1,200
Remember that trade receivables should include sales tax charged
as that is the total amount due from the customer. This is
outstanding as at 30 June 20X4.
(c)
$1,100
Revenue of $900 on the supply of goods can be recognised at a
point in time when control of the goods has been transferred i.e. on
1 May 20X4.
Revenue on the supply of services should be recognised over a
period of time from the date supply commenced i.e. from 1 May
20X4. By 30 June 20X4, 2/6 × $600 = $200 can be recognised.
Therefore, total revenue recognised by 30 June 20X4 re Customer
B is $1,100.
(d)
$50
The net sales value of the transaction, excluding sales tax, is
100/120 × $600 = $500. As the goods were delivered on 25 June
20X4, AMS Co is entitled to commission of 10% × $500 = $50.
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