Question

The directors of the company by which you are employed as an accountant have received the
forecast income statement for 2018 which disclosed a net profit for the year of K36,000
This is considered to be an unacceptably low figure and a working party has been set up to
investigate ways and means of improving the forecast profit.
The following suggestions have been put forward by various members of the working party:
(a) ‘Every six months we deduct income tax of K10,000 from the loan note interest and pay
it over to the HM Revenue and customs. If we withhold these payments, the company’s
profits will be increased considerately
(b) ‘I see that in the three months August to October 2018 we have forecast a total amunt of
K40,000 for repainting the exterior of the company’s premises. If, instead , we charge
this amount as capital expenditure, the company’s profit will be increase by K40,000.’
(c) ‘In November 2018, the replacement of a machine is forecast. The proceeds from the
sales of the old machinery should be credited to profit and loss account.’
(d) ‘There is a credit balance of K80,000 on general reserve account. We can transfer some
of this to the income statement to increase the 2018 profit.’
(e) ‘The company’s K1 ordinary shares which were originally issued at K1 per share,
currently have a market value of 1.60 per share and this price is likely to be maintained.
We can credit the surplus K0.60 per share to the 2018 profit and loss account.
(f) ‘The company’s premises were bought many years ago for K68,000, but following the
rise in property values, they are now worth at least K300,000. This enhancement in value
can be utilized to increase the 2018 profit.’
You are required, as the accounting member of the working party, to comment on the feasibility
of each of the above suggestions for increasing the 2018 forecast profit.

Answer 1

(a) If we hold the tax amount then there will be future obligations to pay penalty. So it will not add our income. We have to plan to reduce expenses which are not required to do.

(b) Yes, we can capitalise this amount. because it will be for future long period.

(c) Sale of machinery is not in operation of company, so we can't consider it as revenue. This is capital income.

(d) By transferring from reserve to income statement will not increase actual profit in hands. It is generated from past accumlation.

(e) By selling shares more than its original value, can't be considered as income, it is to be shown under equity head as securities premium account.

(f) only raise in market value doesn't enhance profit of the year.