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Question 2
The directors of Elsie plc are considering the following report prepared by their budget committee.
(1) During Year 10, we expect the company’s sales will amount to $13,200,000, showing a mark-up of 10% on costs of goods sold. Administration expenses (including depreciation on furniture and bank overdraft interest payable) will be $350,000 and distribution expenses will amount on 1/16th of the cost of the goods sold.
(2) And the end of Year 10, we will declare the annual Dividend of $0.05 per share on the company’s Ordinary shares of $0.50 each; this will absorb 25% of the net profit for Year 10. After the Dividend there will be retained profits of $60,000 on Profit and Loss Account , which is the company’s only reserve.
(3) At the end of Year 10, we expect the company’s liabilities, which will all be payable before 31 March Year 11, will consists of bank overdraft of $1,000,000 creditors for goods purchased $900,000 and other creditors (including Dividends declared) $60,000.
(4) At the end of Year 10, the stock of goods held for resale will amount 1/12th of the cost of goods sold during the year. The total of stock and debtors (the only current assets) will also result in a current ratio of 1.1:1.
(5) At the end of Year 10, the total book value of the all company’s assets will amount to $2,270,000. The only fixed assets will be the company’s buildings at costs and the furniture bought for $104,000 on 1 January Year 6, from which depreciation has been deducted at 20% per annum on the reducing balance basis.
REQUIRED:
(i ) Prepare for Elsie plc:
(a) A budget Trading and Profit and Loss Account for Year 10, showing as much detail as possible.
(b) A budget Balance Sheet at 31 December Year 10.
Note: Make all calculations to the nearest $1,000.
As the company pays bank overdraft interest at 20% per annum, the finance director proposes that, on 1 January Year 10, the company should:
(1) Sell all the company’s land and buildings for $200,000 cash, then immediately rent them back at a rent of $15,000 per annum, payable annually in advance on 1 January.
(2) Issue $500,000, 8% Debentures at 98 for cash; interest would be payable annually in arrears on 31 December. The Debentures would be payable at par in 10 equal annual instalments, the first instalment falling due on 1 July Year 11.
REQUIRED:
(ii) Assuming that the finance director’s proposals are carried out exactly as planned and there
are no further changes from Elsie plc’s budgeted accounts:
(a) Prepare Journal entries (including bank but excluding narrations) to record the sale of the company’s land and buildings and the issue of the Debentures.
(b) Calculate the revised amount of budgeted profit or loss for Year 10.
(c) Revise the company’s Balance Sheet at 31 December Year 10.
The directors of Elsie plc are considering the following report prepared by their budget committee.
(1) During Year 10, we expect the company’s sales will amount to $13,200,000, showing a mark-up of 10% on costs of goods sold. Administration expenses (including depreciation on furniture and bank overdraft interest payable) will be $350,000 and distribution expenses will amount on 1/16th of the cost of the goods sold.
(2) And the end of Year 10, we will declare the annual Dividend of $0.05 per share on the company’s Ordinary shares of $0.50 each; this will absorb 25% of the net profit for Year 10. After the Dividend there will be retained profits of $60,000 on Profit and Loss Account , which is the company’s only reserve.
(3) At the end of Year 10, we expect the company’s liabilities, which will all be payable before 31 March Year 11, will consists of bank overdraft of $1,000,000 creditors for goods purchased $900,000 and other creditors (including Dividends declared) $60,000.
(4) At the end of Year 10, the stock of goods held for resale will amount 1/12th of the cost of goods sold during the year. The total of stock and debtors (the only current assets) will also result in a current ratio of 1.1:1.
(5) At the end of Year 10, the total book value of the all company’s assets will amount to $2,270,000. The only fixed assets will be the company’s buildings at costs and the furniture bought for $104,000 on 1 January Year 6, from which depreciation has been deducted at 20% per annum on the reducing balance basis.
REQUIRED:
(i ) Prepare for Elsie plc:
(a) A budget Trading and Profit and Loss Account for Year 10, showing as much detail as possible.
(b) A budget Balance Sheet at 31 December Year 10.
Note: Make all calculations to the nearest $1,000.
As the company pays bank overdraft interest at 20% per annum, the finance director proposes that, on 1 January Year 10, the company should:
(1) Sell all the company’s land and buildings for $200,000 cash, then immediately rent them back at a rent of $15,000 per annum, payable annually in advance on 1 January.
(2) Issue $500,000, 8% Debentures at 98 for cash; interest would be payable annually in arrears on 31 December. The Debentures would be payable at par in 10 equal annual instalments, the first instalment falling due on 1 July Year 11.
REQUIRED:
(ii) Assuming that the finance director’s proposals are carried out exactly as planned and there
are no further changes from Elsie plc’s budgeted accounts:
(a) Prepare Journal entries (including bank but excluding narrations) to record the sale of the company’s land and buildings and the issue of the Debentures.
(b) Calculate the revised amount of budgeted profit or loss for Year 10.
(c) Revise the company’s Balance Sheet at 31 December Year 10.
