Gooch Ltd manufactures and sells clothing and their inexperienced bookkeeper has produced the following trial balance for the 15 months ended 31 st March 2019. The company has decided to move the financial year end away from December as that is a very busy time for them. Gooch Ltd – Trial Balance as at 31 March 2019 £’000 £’000 Accumulated depreciation of land and buildings at 1.1.18 250 Accumulated depreciation of shop fittings at 1.1.18 150 Accumulated depreciation of production machinery at 1.1.18 750 Allowance for receivables 20 Bank loan at 5% p.a. 2000 Carriage Inwards 58 Carriage outwards 66 Cash at bank 18 Directors remuneration 120 Discounts allowed 12 Discounts received 24 Dividends paid 500 Heat and light 480 Insurance 400 Inventory of raw materials as at 1.1.18 320 Inventory of work in progress at 1.1.18 180 Inventory of finished goods at 1.1.18 640 Land and buildings 6000 Loan interest paid 100 Office Expenses 40 Payables 330 Production Machinery 1000 Purchases 3960 Receivables 620 Retained Earnings 5518 Returns Inwards 68 Returns Outwards 40 Sales 5456 Share Capital (Shares of 10p each) 1000 Share Premium Account 600 Shop fittings 750 Wages 890 TOTALS 16228 16143 Additional information: The land and buildings are shown at cost including £3,000,000 for the land. Buildings are depreciated on a straight-line basis over 60 years Shop fittings are depreciated at 20% per year on a reducing balance basis Machinery is depreciated on a reducing balance basis at 25% per year There have been no additions of property, plant or equipment in the period. A dividend of 5p per share was proposed on 28 th February 2019 but has not yet been paid and a further dividend of 10p per share is expected to be proposed in April. Insurance includes £18,000 for the year to December 2019 An accrual for heat and light for March 2019 is needed. One third of heat and light is for administration and the rest is for production. An invoice from a supplier for £24,000 has been debited to purchases and debited to receivables A bill for insurance for £12,000 has been credited to the bank account and debited to office expenses The 25 year bank loan was taken out 5 years ago and the capital is being repaid in equal annual installments. Inventory at 31 March 2019 is valued at a cost of £640,000 for raw materials and £360,000 for work in progress. There was a serious fire in the finished goods warehouse on 31 March 2019 that destroyed the finished goods inventory and all records relating to it. Gooch Ltd claim to operate to a strict policy of making a 40% gross profit mark-up. The destroyed goods are covered by an insurance policy that covers the cost of the goods. A debt of £36,000 is irrecoverable and further debts of £180,000 are 60 days or more overdue. Gooch Ltd sold some shop fittings on 31 March 2109 for £20,000 in cash. The bookkeeper has not recorded the transaction. The fittings cost £80,000 5 years ago. 60% of the wages relate to production labour. Corporation tax for the period is estimated at £12,000 Relevant data from the financial statements to 31 December 2017: Revenue £2,980,000 Gross profit £688,000 Profit for the year £75,000 Trade Receivables £300,000 Trade Payables £250,000 You are required to: Prepare journal entries to deal with all necessary adjustments, clearly showing that the errors have been corrected and the suspense account cleared. Prepare a statement of profit or loss, a statement of changes in equity and a statement of financial position for the period to 31 st March 2019 in a format that would be fit for publication. Using the financial statements that you have prepared in (b) above and the data given below relating to the year ended on 31 December 2017 you are required to identify the important issues that would need to be given attention by the company’s auditors and suggest some relevant audit tests that would need to be carried out.
The Effect Of Prepaid Taxes On Assets And Liabilities
Many businesses estimate tax liability and make payments throughout the year (often quarterly). When a company overestimates its tax liability, this results in the business paying a prepaid tax. Prepaid taxes will be reversed within one year but can result in prepaid assets and liabilities.
Final Accounts
Financial accounting is one of the branches of accounting in which the transactions arising in the business over a particular period are recorded.
Ledger Posting
A ledger is an account that provides information on all the transactions that have taken place during a particular period. It is also known as General Ledger. For example, your bank account statement is a general ledger that gives information about the amount paid/debited or received/ credited from your bank account over some time.
Trial Balance and Final Accounts
In accounting we start with recording transaction with journal entries then we make separate ledger account for each type of transaction. It is very necessary to check and verify that the transaction transferred to ledgers from the journal are accurately recorded or not. Trial balance helps in this. Trial balance helps to check the accuracy of posting the ledger accounts. It helps the accountant to assist in preparing final accounts. It also helps the accountant to check whether all the debits and credits of items are recorded and posted accurately. Like in a balance sheet debit and credit side should be equal, similarly in trial balance debit balance and credit balance should tally.
Adjustment Entries
At the end of every accounting period Adjustment Entries are made in order to adjust the accounts precisely replicate the expenses and revenue of the current period. It is also known as end of period adjustment. It can also be referred as financial reporting that corrects the errors made previously in the accounting period. The basic characteristics of every adjustment entry is that it affects at least one real account and one nominal account.
Gooch Ltd manufactures and sells clothing and their inexperienced bookkeeper has produced the following
Gooch Ltd – Trial Balance as at 31 March 2019
| |
£’000 |
£’000 |
|
|
|
250 |
|
Accumulated depreciation of shop fittings at 1.1.18 |
|
150 |
|
Accumulated depreciation of production machinery at 1.1.18 |
|
750 |
|
Allowance for receivables |
|
20 |
|
Bank loan at 5% p.a. |
|
2000 |
|
Carriage Inwards |
58 |
|
|
Carriage outwards |
66 |
|
|
Cash at bank |
|
18 |
|
Directors remuneration |
120 |
|
|
Discounts allowed |
12 |
|
|
Discounts received |
24 |
|
|
Dividends paid |
500 |
|
|
Heat and light |
480 |
|
|
Insurance |
400 |
|
|
Inventory of raw materials as at 1.1.18 |
320 |
|
|
Inventory of work in progress at 1.1.18 |
180 |
|
|
Inventory of finished goods at 1.1.18 |
640 |
|
|
Land and buildings |
6000 |
|
|
Loan interest paid |
100 |
|
|
Office Expenses |
40 |
|
|
Payables |
|
330 |
|
Production Machinery |
1000 |
|
|
Purchases |
3960 |
|
|
Receivables |
620 |
|
|
|
|
5518 |
|
Returns Inwards |
68 |
|
|
Returns Outwards |
|
40 |
|
Sales |
|
5456 |
|
Share Capital (Shares of 10p each) |
|
1000 |
|
Share Premium Account |
|
600 |
|
Shop fittings |
750 |
|
|
Wages |
890 |
|
| |
|
|
|
TOTALS |
16228 |
16143 |
Additional information:
The land and buildings are shown at cost including £3,000,000 for the land. Buildings are depreciated on a straight-line basis over 60 years
Shop fittings are depreciated at 20% per year on a reducing balance basis
Machinery is depreciated on a reducing balance basis at 25% per year
There have been no additions of property, plant or equipment in the period.
A dividend of 5p per share was proposed on 28 th February 2019 but has not yet been paid and a further dividend of 10p per share is expected to be proposed in April.
Insurance includes £18,000 for the year to December 2019
An accrual for heat and light for March 2019 is needed. One third of heat and light is for administration and the rest is for production.
An invoice from a supplier for £24,000 has been debited to purchases and debited to receivables
A bill for insurance for £12,000 has been credited to the bank account and debited to office expenses
The 25 year bank loan was taken out 5 years ago and the capital is being repaid in equal annual installments.
Inventory at 31 March 2019 is valued at a cost of £640,000 for raw materials and £360,000 for work in progress. There was a serious fire in the finished goods warehouse on 31 March 2019 that destroyed the finished goods inventory and all records relating to it. Gooch Ltd claim to operate to a strict policy of making a 40% gross profit mark-up. The destroyed goods are covered by an insurance policy that covers the cost of the goods.
A debt of £36,000 is irrecoverable and further debts of £180,000 are 60 days or more overdue.
Gooch Ltd sold some shop fittings on 31 March 2109 for £20,000 in cash. The bookkeeper has not recorded the transaction. The fittings cost £80,000 5 years ago.
60% of the wages relate to production labour.
Corporation tax for the period is estimated at £12,000
Relevant data from the financial statements to 31 December 2017:
Revenue £2,980,000
Gross profit £688,000
Profit for the year £75,000
Trade Receivables £300,000
Trade Payables £250,000
You are required to:
Prepare
Prepare a statement of profit or loss, a statement of changes in equity and a statement of financial position for the period to 31 st March 2019 in a format that would be fit for publication.
Using the financial statements that you have prepared in (b) above and the data given below relating to the year ended on 31 December 2017 you are required to identify the important issues that would need to be given attention by the company’s auditors and suggest some relevant audit tests that would need to be carried out.
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