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Cost / Accumulated depr. / Carrying value
$’000 $’000 $’000
Assets
Non-current assets
Land and buildings 9,000/ 1,000 /8,000
Plant and equipment 21,000 /9,000 /12,000
Total-30,000 /10,000 /20,000
Current assets
Inventories 3,000
Receivables 2,600
Cash at bank 1,900
Total assets 27,500
Equity and liabilities
Equity Issued share capital (ordinary shares of 50c each) 6,000
Retained earnings 12,400
Non-current liabilities
Loan notes (redeemable 20Y0) 2,000
Current liabilities
Trade payables 2,100
22,500
Suspense account 5,000
27,500
The following further information is available:
1 It has been decided to revalue the land and buildings to $12,000,000 at 31 December 20X4.
2 Trade receivables totalling $200,000 are to be written off.
3 During the year there was a contra 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 50c 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 20X4 with a
carrying amount 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 the 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 the plant sold should be adjusted for in fullI’ve bit confused in calculation of retained earnings.Why do we add adjusted depreciation to it ,also in answer they deduct irrecoverable debts,loss on disposal and inventory write down from retained earnings? I thought that we only can deduct “dividend paid” from retained earnings.Can you explain why this items dealt with retained earnings? Thanks in advance
The retained earnings increases by the profit each year and reduces by the dividend.
The items you mention will all affect the profit for the year, and therefore automatically affect the retained earnings at the end of the year.
(Incidentally, although this question is good practice because it tests several different areas, do appreciate that it is impossible for a question like this to be ever set in the exam. You cannot be asked to produce full financial statements. You must buy a Revision Kit from one of the ACCA approved publishers – they are full of exam standard questions for practice.)
I trust that you are watching our free lectures. They are a complete free course for Paper FA (F3) and cover everything needed to be able to pass the exam well.
Now it is clear) But only 1 moment that I didn’t understand is why we add depreciation expense(350000) to retained earnings.As I know we deduct it from profit,that means that we also have to deduct it from retained earnings.Am I right?
P.S.This question from BPP revision kit.
Great thanks to you for those videos.I’m watching them.I am please that it is clear.
Are you using an old edition of the Revision Kit?
I ask, because this is a question called Shuswap. When it was asked in the real exam many years ago it was asked in the way that you have typed out.
However because of the change in the format of the exam (due to the introduction of CBE) it cannot now be asked in this way. It is still in the current edition of the BPP Revision Kit, but the questions have been amended to make it into the current format and the exact question that you are asking no longer exists – you cannot now be asked to produce full financial statements.
I’m using 2016-2017 version. now they can ask for example to calculate only retained earnings.yes? But i didn’t understand only this part of this question in calculation of retained earnings: Why did they add depreciation to retained earnings? It is clear why they substracted from retained earnings irrecoverable debts or loss on disposal of inventory( because they are expenses,so that they decrease profit).But depreciation charge is expense too.But in answer they add it to retained earnings
It is because they had sold some plant, but had not recorded it as a sale.
So the depreciation would have been calculated on all the plant, whereas it should only have been calculated on the plant the remained.
So….the depreciation should be reduced, which means the profit would be higher, and therefore the retained earnings will be higher 🙂
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