Question

Cabbage White Ltd. has the following trial balance at 31 December 2018. Debit €’000 Credit €‘000...

Cabbage White Ltd. has the following trial balance at 31 December 2018.

Debit €’000 Credit €‘000
Inventory at 1 January 2018 2,500
Administrative expenses 2,906
Interest expense 65
Distribution costs 585
Non-current assets at cost:
Land 800
Buildings 10,000
Plant and equipment 1,400
Motor vehicles 320
Accumulated depreciation at 1 January 2018
Buildings 4,000
Plant and equipment 480
Motor vehicles 120
Suspense* 1,800
Retained profits at 1 January 2018 480
Trade receivables 886
Purchases 4,100
Carriage inwards 100
Carriage outwards 200
Sales discounts 268
Dividends paid 250
Sales revenue 12,000
5% Bank loan payable (due 2022) 1,300
Salaries payable 120
Trade payables 1,060
Bank overdraft 20
Share premium 500
€1 ordinary shares 2,500
24,380 24,380

* Suspense accounts are opened either to correct errors or when it is not known immediately where to post an amount. A suspense account is temporary and will be closed once it has become clear which account should be correctly posted by the given amount.

The following additional information is relevant:

(a) Inventory as at 31 December 2018 was valued at 1,500,000.

(b) Depreciation has to be provided as follows:

i. Buildings at 5% straight-line, charged to administrative expenses

ii. Plant and equipment at 20% on the reducing balance basis, charged to cost of sales

iii. Motor vehicles at 25% on the reducing balance basis, charged to distribution costs

(c) A customer has gone bankrupt owing €86,000. This debt is not expected to be received and has to be written off. In addition, it has been decided to set up a provision for doubtful debts of 5% of the receivables at the year-end.

(d) 1 million new ordinary shares were issued at €1.80 per share on 1 December 2018. On that date the proceeds were debited to the cash and bank account and credited to the suspense account.

(e) Land was revalued as at 31 December 2018 at €1,400,000.

Required:

1. Prepare the following:

a. Statement of profit or loss and the statement comprehensive income for the year ended 31 December 2018 (you may choose to prepare two separate statements or one statement that combines the two).

b. Statement of changes in equity for the year ended 31 December 2018

c. Statement of financial position as at 31 December 2018 Provide all the financial statements with proper headings. Show all your workings. Ignore taxation.

2. The directors of Cabbage White Ltd have decided to revalue land. They hope that it will make it easier for the company to get another long-term bank loan if needed. Do you agree with this reasoning? Explain why or why not.

3. The directors of Cabbage White Ltd are concerned about their overdraft. Give them some recommendation about what steps they should take to prevent the overdraft from increasing

If there are too many questions in one message then you can answer in several messages. Thank you.

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Homework Answers

Answer #1

ANSWER :- 1 (a ) :- PROFITS & LOSS ACCOUNTS FOR THE PERIOD ENDIND DEC. 31,2018

AMOUNTS        AMOUNTS

,000 $ ,000 $

SALES ( A)    12000

LESS SALES DISCOUNT 268 11732

PURCHASES 4100

ADD OPENING STOCK    2500

LESS CLOSING STOCK    1500

CARRIAGE INWARD 100

DEPRECIATION ON PLANT & EQUIPMENT 184

( 1400-480) x 20%

COST OF GOODS SOLD (B)     5384 5384

GROSS PROFITS C= (A-B ) 6348

ADMIN. EXPENSES 2906

ADD DEPRECIATION ON BUILDING 500 3406

INTEREST EXPENSES 65

DISTRIBUTION COST    585

ADD DEP. ON MOTOR VEHICLE 50 635   

( 320-120) X 25%

CARRIAGE OUTWARDS 200

BAD DEBTS 86

PROVISION FOR DOUBTFUL DEBT

( 5 % of ( 886-86)) 40

NET PROFITS 1916

ANSWER 1 (b) STATEMENT OF CHANGE IN EQUITY AS ON DEC.31,2018

AMOUNT IN ,000 $

OPENING BALANCE AS ON JAN.1/2018 2500 ISSUED DURING THE PERIOD 1000   

CLOSING BALANCE AS ON DEC.31,2018 3500

ANSWER 1 ( c ) :- STATEMENT OF FINANCIAL POSITION AS ON DEC.31,2018

ASSETS AMT. IN ,000$    AMT. IN,000 $

LAND 800

BUILDING 10000

PLANT & EQUIPENTS 1400

MOTOR VEHICLE 320

TRADE RECEIVABLE 886

LESS BAD DEBT 86 800

CLOSING STOCK 1500

TOTAL 14820

LIABILITIES & EQUITY :-

EQUITY 3500

(35 MILLION SHARES @ $1)

SHARE PREMIUM 380

RETAINED EARNING 480

ADD NET PROFITS 1916

LESS DIVIDEND PAID 250 2146

5% BANK LOAN PAYABLES 1300

TRADE PAYABLES 1060

SALARY PAYABLES 120

BANK OVERDRAFT 20

ACCUMULATED DEP. :-

BUILDING 4500

PLANT & EQUIPMENTS 1584

MOTOR VEHICLES 170

PROVISION FOR DOUBTFUL DEBT 40

TOTAL 15020

ANSWER 2

THE LAND AND BUILDING CAN NOT BE REVALUED AS PER THE HISTORICAL COST CONCEPT

ANSWER 3 :-

THEY SHOULD EXTEND PAYABLE CREDIT PERIOD AND REDUCE RECEIVABLE PERIOD TO PREVENT OVERDRAFT FROM INCREASING.

  

      

  

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