Beach plc. calculated a draft gross profit of £950,000 and draft net profit of £720,000 for the year ended 31 March 20X1. Subsequently, the following issues have been discovered:
1. A subscription notice for £2,000 was received in the year ended 31 March 20X1. The company pays the subscription into 2 cqual instalments. The first instalment was paid on 29 March 20X1 and posted to the cash at bank account and distribution expenses. No other entries have been made. 2. £1,500 transportation fee relating to new machine acquisition was incorrectly recorded in the administration expenses. The company depreciates machinery on a straight-line basis at a rate of 25% per annum. Depreciation should be included in administration expenses.
After correcting the above issue, which amount should Beach plc. reports for gross profit and net profit?
Exercise 3: (2 marks)
At 31 December 20X5, Blue Sky plc.'s allowance for receivables was £25,000. At 31 December 20X6, after considering total outstanding receivables of £520,000, the directors determined that the allowance should be £21,000. The company decided that debt totaling £7,000 were to be written off. On the other hand, during the year ended 31 December 20X6, Blue Sky plc, received £5,000 in full settlement of a debt that had previously been written off. Make journal entry for irrecoverable debts expenses. Which amount should the company reports on net receivables. The End
Beach plc. calculated a draft gross profit of £950,000 and draft net profit of £720,000 for the year ended 31 March 20X1. Subsequently, the following issues have been discovered:
1. A subscription notice for £2,000 was received in the year ended 31 March 20X1. The company pays the subscription into 2 cqual instalments. The first instalment was paid on 29 March 20X1 and posted to the cash at bank account and distribution expenses. No other entries have been made. 2. £1,500 transportation fee relating to new machine acquisition was incorrectly recorded in the administration expenses. The company depreciates machinery on a straight-line basis at a rate of 25% per annum. Depreciation should be included in administration expenses.
After correcting the above issue, which amount should Beach plc. reports for gross profit and net profit?
Exercise 3: (2 marks)
At 31 December 20X5, Blue Sky plc.'s allowance for receivables was £25,000. At 31 December 20X6, after considering total outstanding receivables of £520,000, the directors determined that the allowance should be £21,000. The company decided that debt totaling £7,000 were to be written off. On the other hand, during the year ended 31 December 20X6, Blue Sky plc, received £5,000 in full settlement of a debt that had previously been written off. Make journal entry for irrecoverable debts expenses. Which amount should the company reports on net receivables. The End
Related questions
Part B
You are a senior internal auditor at BHEL Ltd., a machine toolmanufacturer. A draft set of financial statements for the year havebeen prepared by management, and it has fallen to you to examinethe figures for reasonableness and at the same time identifysignificant audit areas which may require further work even thoughyour systems audit during the year has proved satisfactory.
You are aware of the fact that the company is at presentcontemplating an issue of $2,000,000 15% loan stock (redeemable inthe year 20X0) in order to assist the remodeling of its presentproduction facilities. The majority of the directors are in favourof making the issue but a few are reluctant to do so in view of thefact that the machine tools industry is subject to wide-rangingfluctuations in sales and profits. Abbreviated financial statementsfor BHEL Ltd. together with typical ratios for firms in the machinetool industry are as follows.
INCOME STATEMENTS FOR THE YEARS ENDED 31 DECEMBER
20X2 20X1
Particular | $'000 | $'000 | $'000 | $'000 |
Sales | 23,500 | 20,500 | ||
Cost of goods sold | 16,000 | 14,000 | ||
Gross profit | 7,500 | 6,500 | ||
Selling expenses | 2,700 | 1,900 | ||
Administration expenses | 2,300 | 2,600 | ||
5,000 | 4500 | |||
Profit from operations | 2,500 | 2000 | ||
Interest paid | 500 | 300 | ||
Net profit before taxation | 2,000 | 1,700 | ||
Taxation | 1,200 | 1,020 | ||
Net profit after taxation | 800 | 680 | ||
Dividends paid | 525 | 280 | ||
Profit for the year retained | 275 | 400 | ||
Retained profit brought forward | 6,090 | 5,690 | ||
Retained profit carried forward | 6,365 | 6,090 | ||
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER | ||||
Total assets | ||||
Tangible non-current assets (net) | 6,315 | 5,600 | ||
Other non-current assets | 800 | 750 | ||
7,115 | 6,350 | |||
Current assets | ||||
Inventory | 5,100 | 3,200 | ||
Receivables | 2,900 | 1,900 | ||
Prepayments | 100 | 100 | ||
Cash and bank | 600 | 590 | ||
8,700 | 5,790 | |||
15,815 | 12,140 | |||
Equity and liabilities | 350 | |||
Called up share capital Ordinary 50p shares authorised, issuedand fully paid | 350 | 350 | ||
Retained profits | 6,365 | 6,090 | ||
6,715 | 6,440 | |||
8% loan stock (20Y0 â 20Y3) | 5,500 | 3,300 | ||
Current liabilities | 3,600 | 2,400 | ||
15,815 | 12,140 | |||
1. (Inventory valuation at 31 December 20X0 was $2,500,000)
2. (Receivables' balance at 31 December 20X0 totaled$1,700,000)
Typical industrial averages for 20X2 and 20X1 are as follows
Gross profit on sales | 34% | Acid test ratio | 1.2:1 |
Net profit before tax on sales | 11% | Average age of receivables | 30 days |
Net profit before tax on net assets employed | 19.5% | Average age of inventory | 73 days |
Working capital ratio | 2.5:1 | Interest cover | 8 times |
Required
1. Review and communicate parameters forvariances in financial outcomes of the BHEL compared to year 20X1of the financial statement and explains areas which may cause yousome concern, describe the main matters (consider risk) which youwould need to investigate for future decision making and riskminimisation. Write your response in 400-500 words.
