- 20 Marks
Question
The following trial balance was extracted from the ledger of Kolikoli Enterprise as at 31/12/21.
| Dr GH¢000 | Cr GH¢000 | |
|---|---|---|
| Buildings at cost | 750,000 | |
| Plant at cost | 350,000 | |
| Provision for depreciation as at 1/1/2021 On buildings | 100,000 | |
| Provision for depreciation as at 1/1/2021 On plant | 190,000 | |
| Purchases | 2,250,000 | |
| Sales | 3,022,000 | |
| Stocks 01-01-2021 | 250,000 | |
| Discounts | 40,000 | 24,000 |
| Returns | 11,000 | 75,000 |
| Wages and salaries | 294,000 | |
| Bad debts written off | 23,000 | |
| Other expenses | 114,000 | |
| Debtors | 190,000 | |
| Creditors | 180,000 | |
| Bank and Cash | 8,000 | |
| Drawings | 20,000 | |
| Provision for doubtful debts | 2,500 | |
| Capital | 706,500 | |
| Total | 4,300,000 | 4,300,000 |
The following additional information is also made available:
a) Stocks at 31/12/2021 were valued at GH¢210,000
b) Wages and salaries accrued amounted to GH¢4,000
c) Other expenses prepaid amounted to GH¢1,500
d) Provision for doubtful debts is to be made at 2% of debtors at 31/12/2021
e) Depreciation for the year is to be provided as follows:
• Buildings 2% on cost
• Plant 25% reducing balance method
You are required to prepare the following:
i. Income Statement for the year ended 31/12/2021; and
ii. Statement of Financial Position as at 31/12/2021
[20 marks]
Answer
To prepare the Income Statement and Statement of Financial Position, start by incorporating the adjustments into the trial balance figures. All figures are in GH¢000.
Step 1: Adjustments Calculation
- Closing stock: GH¢210,000 (used in COGS and balance sheet).
- Accrued wages: Add GH¢4,000 to wages expense and current liabilities.
- Prepaid other expenses: Subtract GH¢1,500 from other expenses and add to current assets.
- Provision for doubtful debts: 2% of debtors (GH¢190,000) = GH¢3,800. Existing provision GH¢2,500, so increase by GH¢1,300 (expense).
- Depreciation on buildings: 2% of cost (GH¢750,000) = GH¢15,000.
- Depreciation on plant: Reducing balance on net book value (GH¢350,000 – GH¢190,000 = GH¢160,000) at 25% = GH¢40,000.
Step 2: Calculate Cost of Goods Sold (COGS)
Net sales = Sales – Sales returns = 3,022,000 – 11,000 = 3,011,000.
Net purchases = Purchases – Purchase returns = 2,250,000 – 75,000 = 2,175,000.
COGS = Opening stock + Net purchases – Closing stock = 250,000 + 2,175,000 – 210,000 = 2,215,000.
Step 3: Income Statement for the year ended 31/12/2021
| Description | GH¢000 | GH¢000 |
|---|---|---|
| Sales | 3,022,000 | |
| Less: Sales returns | 11,000 | |
| Net sales | 3,011,000 | |
| Cost of goods sold: | ||
| Opening stock | 250,000 | |
| Purchases | 2,250,000 | |
| Less: Purchase returns | 75,000 | |
| Net purchases | 2,175,000 | |
| Goods available for sale | 2,425,000 | |
| Less: Closing stock | 210,000 | |
| Cost of goods sold | 2,215,000 | |
| Gross profit | 796,000 | |
| Add: Discounts received | 24,000 | |
| 820,000 | ||
| Less: Expenses | ||
| Wages and salaries (294,000 + 4,000) | 298,000 | |
| Bad debts written off | 23,000 | |
| Increase in provision for doubtful debts | 1,300 | |
| Other expenses (114,000 – 1,500) | 112,500 | |
| Discounts allowed | 40,000 | |
| Depreciation – buildings | 15,000 | |
| Depreciation – plant | 40,000 | |
| Total expenses | 529,800 | |
| Net profit | 290,200 |
Step 4: Statement of Financial Position as at 31/12/2021
| Description | GH¢000 | GH¢000 | GH¢000 |
|---|---|---|---|
| Non-current assets | Cost | Dep | NBV |
| Buildings | 750,000 | 115,000 | 635,000 |
| Plant | 350,000 | 230,000 | 120,000 |
| 755,000 | |||
| Current assets | |||
| Closing stock | 210,000 | ||
| Debtors | 190,000 | ||
| Less: Provision for doubtful debts | 3,800 | 186,200 | |
| Prepayments | 1,500 | ||
| Bank and cash | 8,000 | ||
| 405,700 | |||
| Total assets | 1,160,700 | ||
| Current liabilities | |||
| Creditors | 180,000 | ||
| Accrued wages | 4,000 | ||
| 184,000 | |||
| Net current assets | 221,700 | ||
| Total net assets | 976,700 | ||
| Capital and reserves | |||
| Capital | 706,500 | ||
| Add: Net profit | 290,200 | ||
| Less: Drawings | 20,000 | ||
| 976,700 |
The statements balance, with net assets equaling owner’s equity. The adjustments ensure compliance with accrual and prudence concepts, providing a true and fair view.
- Topic: Sole Trader
- Series: OCT 2022
- Uploader: Samuel Duah