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Assets
Non current assets
Land and buildings cost 9000 accumulated dep 1000 c value 8000
Plant and equipment cost 21000 accumulated dep 9000 c value 12000
total c value 20000Current assets
Inventories c value 3000
Receivables c value 2600
Cash at bank c value 1900
Total assets c value 27500Equity and liabilities
Equity
Issued share capital (ordinary shares) c value 6000
Retained earnings c value 12400Non current liabilities
Loan notes (redeemable 20Y0) c value 2000Current liabilities
Trade payable c value 2100
Total c value 22500Total 5000
Suspense account 27500Notes
1 It has been decided to revalue the land and buildings to 12,000,000 at 31 Dec 20×4
2 Trade receivables totalling 200,000 are to be written off
3 During the year there was a contract settlement of 106,000 in which an amount due to a supplier was set off against the amount due from the same company for goods sold to it. No entry has yet been made to record the set off.
4 Some inventory items included in the draft statement of financial position at cost 500,000 were sold after the reporting date for 400,000 with selling expenses of 40,000.
5 The suspense account is made up of two items
A The proceeds of issue of 4,000,000 50 c shares at 1.10 per share credited to the suspense account from the cash book
B The balance of the account is the proceeds of sale of some plant on 1 January 20×4 with a carrying value at the date of sale of 700,000 and which had originally cost 1,400,000. No other accounting entries have yet been made for the disposal apart from the cash book entry for the receipt of proceeds. Depreciation on plant has been charged at 25% straight line basis in preparing the draft statement of financial position without allowing for the sale. The depreciation for the year relating to plant sold should be adjusted for in full.Answer:
Retain earnings
Per draft. 12400
Irrecoverable debts. (200)
Inventory write down. (140)
Loss on disposal of plant (100)
Depreciation adjustment (1400 ×25%) = 350
Prepare statment of financial position?Sir can explain me the working of retain earning and why derpreciation for the year of sold is added and not expense out?
Thanks in advance 🙂In future, if you want me to answer then you must ask in the Ask the Tutor Forum – this forum is for students to help each other.
The retained earnings have to be adjusted for the following reasons:
Note 1 says there are receivables to be written off – this reduces the profit and therefore the retained earnings.
Note 4 says that inventory at cost of 500 had a NRV of 360. We must value at the lower, therefore the value needs reducing by 140 which means 140 less profit and therefore less retained earnings.The suspense account is not 27500 – you have typed it wrongly – it is 5,000.
4,400 of this is the money from the issue of shares, so the other 600 is the sale of the plant. The book value was 700, so there is a loss on sale which reduces the profit and therefore reduces the retained earnings.Because the sale had not been recorded in the books, depreciation will have been calculated and charged. It was straight line depreciation and therefore they will have shown an expense of 250. It should not have been charged because it had been sold. Therefore the expense needs removing which means more profit and therefore more retained earnings.
All of the above is explained in detail in my free lectures. The lectures are a complete free course for Paper F3 and cover everything needed to be able to pass the exam well.
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