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You are presented with the accounts of Adam Ltd for the year to 30 October 2022 (see below). Adam Ltd runs a small printing business and the managing director wishes to know the amount of the companies’ Adjusted trading profit for the year ended 30 October 2022.
£ £
Gross profit from trading 160,000
Profit on sale of business premises (1) 8,500
168,500
Advertising 5,600
Irrecoverable Debts 950
Depreciation 12,670
Light and heat 6,200
Miscellaneous expenses (2) 4,350
Motor car expenses (3) 3,775
Rates 6,385
Repairs and renewals (4) 13,260
Staff wages (5) 82,720
Telephone 3,250 139,160
Profit before tax 29,340Notes
(1) The profit on the sale of premises relates to the sale of a small freehold industrial unit in which the company stored paper before building the extension.(2) Miscellaneous expenses included:
£
Subscription to Printers’ Association 520
Contribution to local Enterprise Agency 250
Gifts to customers
• Company calendars costing £7.50 each 250
• Two food hampers 625(3) A director uses the motor car 75% for business purposes and 25% for private purposes.
(4) Repairs and renewals expenditure was allocated as follows:
Refurbishing second hand press before it could be used in the business 30%
Redecorating administration offices 10%
Building extension to enlarge paper store in February 2022 60%
100%(5) Staf wages includes an amount of £1,820 for a staff Christmas lunch.
a. Calculate Adam Ltd’s Adjusted trading profit for year ended 30 October 2022. You should indicate using zero any items in the accounts for which no adjustment is required. (30 Marks)
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Food, alcoholic drink and tobacco are never tax deductible and have to be added back.
Company calendars as gifts to customers are acceptable as they are promoting Company.
Take away profit on sale of business property that stored paper. This is not a trading profit.
I tend to think the contribution to the local enterprise agency is also trade related and so requires no adjustment.
The private use of the motor car by the director requires no adjustment as this is a company. The director will be assessed as receiving a benefit in kind with regard to the car.
The expense related to the Christmas lunch are deductible in principal. The only thing that gives me pause is why this would be allocated to staff wages.
The refurbishment of second hand printing press is deductible. I am assuming it is bring it back to its original condition and not enhancing the asset.
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