Income Statement Exercises

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An extract from the solution is provided in the Appendix at the end of the text for exercises marked with an asterisk (*).

* Question 1

Springtime Ltd is a UK trading company buying and selling as wholesalers fashionable summer clothes. The following balances have been extracted from the books as at 31 March 20X4:


Auditor's remuneration


Income tax based on the accounting profit:

For the year to 31 March 20X4


Overprovision for the year to 31 March 20X3


Delivery expenses (including £300,000 overseas)


Dividends: final (proposed - to be paid 1 August 20X4)


interim (paid on 1 October 20X3)


Non-current assets at cost:

Delivery vans


Office cars


Stores equipment


Dividend income (amount received from listed companies)


Office expenses


Overseas operations: closure costs of entire operations




Sales (net of sales tax)


Inventory at cost:

At 1 April 20X3


At 31 March 20X4


Storeroom costs


Wages and salaries:

Delivery staff


Directors' emoluments


Office staff


Storeroom staff

1 Depreciation is provided at the following annual rates on a straight-line basis: delivery vans 20%; office cars 25%; stores 1%.

2 The following taxation rates may be assumed: corporate income tax 35%; personal income tax 25%.

3 The dividend income arises from investments held in non-current investments.

4 It has been decided to transfer an amount of £150,000 to the deferred taxation account.

5 The overseas operations consisted of exports. In 20X3/X4 these amounted to £5,000,000 (sales) with purchases of £4,000,000. Related costs included £100,000 in storeroom staff and £15,000 for office staff.

6 Directors' emoluments include:

Chairperson 100,000

Managing director 125,000

Finance director 75,000

Sales director 75,000

Export director 25,000 (resigned 31 December 20X3)


(a) Produce an income statement suitable for publication and complying as far as possible with generally accepted accounting practice.

(b) Comment on how IFRS 5 has improved the quality of information available to users of accounts.

(c) Give two reasons why information contained in the accounting policies notes is of importance to users of accounts.

* Question 2

Olive A/S, incorporated with an authorised capital consisting of one million ordinary shares of € 1 each, employs 646 persons, of whom 428 work at the factory and the rest at the head office. The trial balance extracted from its books as at 30 September 20X4 is as follows:



Land and buildings (cost €600,000)


Plant and machinery (cost €840,000)


Proceeds on disposal of plant and machinery


Fixtures and equipment (cost €120,000)




Carriage inwards


Share premium account




Inventory on 1 Oct 20X3


Heating and lighting






Trade investments at cost


Dividend received (net) on 9 Sept 20X4


Directors' emoluments


Pension cost


Audit fees and expense


Retained earnings b/f


Sales commission




Development cost


Formation expenses


Receivables and payables



Interim dividend paid on 4 Mar 20X4


12% debentures issued on 1 Apr 20X4


Debenture interest paid on 1 Jul 20X4




Income tax on year to 30 Sept 20X3


Other administration expenses


Bad debts


Cash and bank balance


Ordinary shares of €1 fully called






You are informed as follows:

(a) As at 1 October 20X3 land and buildings were revalued at €900,000. A third of the cost as well as all the valuation is regarded as attributable to the land. Directors have decided to report this asset at valuation.

(b) New fixtures were acquired on 1 January 20X4 for €40,000; a machine acquired on 1 October 20X1 for €240,000 was disposed of on 1 July 20X4 for €180,000, being replaced on the same date by another acquired for €320,000.

(c) Depreciation for the year is to be calculated on the straight-line basis as follows: Buildings: 2% p.a.

Plant and machinery: 10% p.a. Fixtures and equipment: 10% p.a.

(d) Inventory in trade, including raw materials and work-in-progress on 30 September 20X4, has been valued at cost at €364,000.

(e) Prepayments are made up as follows:

Amount paid in advance for a machine 60

Amount paid in advance for purchasing raw materials 40 Prepaid rent 15

(f) In March 20X3 a customer had filed legal action claiming damages at €240,000. When accounts for the year ended 30 September 20X3 were finalised, a provision of €90,000 was made in respect of this claim.This claim was settled out of court in April 20X4 at €150,000 and the amount of the underprovision adjusted against the profit balance brought forward from previous years.

(g) The following allocations have been agreed upon:

Factory Administration

Depreciation of buildings 60% 40%

Salaries other than to directors 55% 45%

Heating and lighting 80% 20%

(h) Pension cost of the company is calculated at 10% of the emoluments and salaries.

(i) Income tax on 20X3 profit has been agreed at €140,000 and that for 20X4 estimated at €185,000. Corporate income tax rate is 35% and the basic rate of personal income tax 25%.

(j) Directors wish to write off the formation expenses as far as possible without reducing the amount of profits available for distribution.


Prepare for publication:

(a) The income statement of the company for the year ended 30 September 20X4, and

(b) the balance sheet as at that date along with as many notes (other than the one on accounting policy) as can be provided on the basis of the information made available.

Question 3

Cryptic pic extracted its trial balance on 30 June 20X5 as follows:



Land and buildings at cost


Plant and machinery at cost


Accumulated depreciation on plant and machinery at 30 Jun 20X5


Depreciation on machinery


Furniture, tools and equipment at cost


Accumulated depreciation on furniture, etc. at 30 Jun 20X4


Receivables and payables



Inventory of raw materials at 30 Jun 20X4


Work-in-progress at factory cost at 30 Jun 20X4


Finished goods at cost at 30 Jun 20X4


Sales including selling taxes


Purchases of raw materials including selling taxes


Share premium account




Deferred taxation






Retained earnings at 30 Jun 20X4


Factory power


Trade investments at cost


Overprovision for tax for the year ended 30 Jun 20X4






Dividend received (net)


Dividend paid on 15 April 20X5


Other administration expenses


Disposal of furniture


Selling tax control account


Ordinary shares of 50p each


12% Preference shares of £1 each (IAS 32 liability)


Cash and bank balance






The following information is relevant:

(i) The company discontinued a major activity during the year and replaced it with another All non-current assets involved in the discontinued activity were redeployed for the new one. The following expenses incurred in this respect, however are included in 'Other administration expenses':

Cancellation of contracts re terminated activity 165 Fundamental reorganisation arising as a result 145

Cryptic has decided to present its results from discontinued operations as a single line on the face of the income statement with analysis in the notes to the accounts as allowed by IFRS 5.

On 1 January 20X5 the company acquired new land and buildings for £150,000. The remainder of land and buildings, acquired nine years earlier; have NOT been depreciated until this year The company has decided to depreciate the buildings, on the straight-line method, assuming that one-third of the cost relates to land and that the buildings have an estimated economic life of 50 years. The company policy is to charge a full year of depreciation in the year of purchase and none in the year of sale.

Plant and machinery was all acquired on 1 July 20X0 and has been depreciated at 10% per annum on the straight-line method.The estimate of useful economic life had to be revised this year when it was realised that if the market share is to be maintained at current levels, the company has to replace all its machinery by 1 July 20X6.The balance in the 'Accumulated provision for depreciation' account on 1 July 20X4 was amended to reflect the revised estimate of useful economic life and the impact of the revision adjusted against the retained earnings brought forward from prior years.

Furniture acquired for £80,000 on 1 January 20X3 was disposed of for £64,000 on 1 April 20X5. Furniture, tools and equipment are depreciated at 5% p.a. on cost. Depreciation for the current year has not been provided.

Results of the stocktaking at year-end are as follows: Stock of raw materials at cost including selling tax £197,800 Work-in-progress at factory cost £54,000

Finished goods at cost £364,000

The company allocates its expenditure as follows:









Salaries and wages













Depreciation of building




(vii) The directors wish to make an accrual for audit fees of £18,000 and estimate the income tax for the year at £65,000. £11,000 should be transferred from the deferred tax account.The directors have to pay the preference dividend.

(viii) The following analysis has been made:

New activity

Sales excluding selling taxes £165,000

Cost of sales £98,000

Distribution cost £16,500

Administrative expenses £22,500

(ix) Assume that selling taxes applicable to all purchases and sales is 15%, the basic rate of personal income tax is 25% and the corporate income tax rate is 35%.

Discontinued activity £215,000 £155,000 £48,500 £38,500


(a) Advise the company on the accounting treatment in respect of information stated in (ii) above.

(b) In respect of the information stated in (iii) above, state whether a company is permitted to revise its estimate of the useful economic life of a non-current asset and comment on the appropriateness of the accounting treatment adopted.

(c) Set out a statement of movement of property, plant and equipment in the year to 30 June 20X5.

(d) Set out for publication the income statement for the year ended 30 June 20X5, the balance sheet as at that date and any notes other than that on accounting policy, in accordance with relevant standards.

Question 4

The IASC/IASB has issued accounting standards that concentrate on the issue of reporting financial performance.The main standards that report this are:

IAS 1 Presentation of Financial Statements IAS 14 Segment Reporting

IFRS 5 Non-current Assets held for Sale and Discontinued Operations

All of these accounting standards require companies to give disclosures or further presentation on the face of the financial statements to help users understand the performance of the enterprise. These further disclosures improve the quality of the information in the financial statements and therefore should improve the decisions taken by users in response to the financial statements.


(a) Describe how the statement of changes in equity (from IAS 1), segmental disclosures and discontinued operations disclosures will help investors and lenders make decisions based on the financial statements.

(b) Bedok Ltd has three divisions: a paper manufacturing division, a printing division and a clothing manufacturing division. On 1 April 20X9 the directors of Bedok Ltd decided to sell the clothing division as it was not in line with the core activities of the company. This decision was announced to the employees and the public on 1 June 20X9. The net assets of the clothing division as at 31 December 20X9 were £16 million (£20 million assets less £4 million liabilities).

On 10 May 20Y0 the board signed an agreement with Woodlands Ltd to sell the clothing division for £20 million.The net assets of the clothing division at this date were £18 million (£23 million assets and £5 million liabilities). Bedok Ltd incurred redundancy costs of £1 million which had been expected from the date the decision to sell the division was made.The redundancy costs are not reflected in the income statement information given below.The sale was completed on 1 July 20Y0 and the clothing division did not trade between 10 May 20Y0 and 1 July 20Y0.

The results of the clothing manufacturing division for 20X9 and 20Y0 are as follows:



(to 1 July)









Operating profit



Tax charge



Prepare extracts from the financial statements (including notes) of Bedok Ltd for 31 December 20X9 and 20Y0 in accordance with IFRS 5, including all relevant information on the face of the income statement.

254 • Regulatory framework - an attempt to achieve uniformity Question 5

The following is the draft trading and income statement of Parnell Ltd for the year ending 31 December 2003:

563 310 253

45 78

Profit on ordinary activities before tax 130

Tax on profit on ordinary activities 45

Profit on ordinary activities after taxation - all retained 85

Profit brought forward at 1 January 2003 101

Profit carried forward at 31 December 2003 186

Revenue Cost of sales

Distribution costs Administrative expenses

You are given the following additional information, which is reflected in the above income statement only to the extent stated:

1. Distribution costs include a bad debt of $15 million which arose on the insolvency of a major customer There is no prospect of recovering any of this debt. Bad debts have never been material in the past.

2. The company has traditionally consisted of a manufacturing division and a distribution division. On 31 December 2003, the entire distribution division was sold for $50 million; its book value at the time of sale was $40 million. The surplus on disposal was credited to administrative expenses. (Ignore any related income tax.)

3. During 2003, the distribution division made sales of $100 million and had a cost of sales of $30 million. There will be no reduction in stated distribution costs or administration expenses as a result of this disposal.

4. The company owns offices which it purchased on 1 January 2001 for $500 million, comprising $200 million for land and $300 million for buildings. No depreciation was charged in 2001 or 2002, but the company now considers that such a charge should be introduced. The buildings were expected to have a life of 50 years at the date of purchase, and the company uses the straight-line basis for calculating depreciation, assuming a zero residual value. No taxation consequences result from this change.

5. During 2003, part of the manufacturing division was restructured at a cost of $20 million to take advantage of modern production techniques.The restructuring was not fundamental and will not have a material effect on the nature and focus of the company's operations.This cost is included under administration expenses in the income statement.


(a) State how each of the items 1-5 above must be accounted for in order to comply with the requirements of international accounting standards.

(b) Redraft the income statement of Parnell Ltd for 2003, taking into account the additional information so as to comply, as far as possible, with relevant standard accounting practice. Show clearly any adjustments you make. Notes to the accounts are not required. Where an IAS recommends information to be on the face of the income statement it could be recorded on the face of the statement. (The Chartered Institute of Bankers)

Question 6 Related party scenarios

(a) In 20X3 Arthur is a large loan creditor of X Ltd and receives interest at 20% p.a. on this loan. He also has a 24% shareholding in X Ltd. Until 20X1 he was a director of the company and left after a disagreement.The remaining 76% of the shares are held by the remaining directors. Is Arthur a related party to X Ltd?

(b) Brenda joined Y Ltd, an insurance broking company on 1 January 20X0 on a low salary but high commission basis. She brought clients with her that generated 30% of the company's 20X0 turnover. Is Brenda a related party to Y Ltd?

(c) Carrie is a director and major shareholder of Z Ltd. Her husband, Donald, is employed in the company on administrative duties for which he is paid a salary of £25,000 p.a. Her daughter Emma, is a business consultant running her own business. In 20X0 Emma carried out various consultancy exercises for the company for which she was paid £85,000. Are Donald or Emma related parties to Z Ltd?

(d) Fred is a director ofV Ltd.V Ltd is a major customer of W Ltd. In 20X0 Fred also became a director of W Ltd. Are related party disclosures required in either V Ltd or W Ltd?


Discuss whether parties are related in the above situations. Question 7

Maxpool plc, a listed company, owned 60% of the shares in Ching Ltd. Bay plc, a listed company owned the remaining 40% of the £1 ordinary shares in Ching Ltd.The holdings of shares were acquired on 1 January 20X0.

On 30 November 20X0 Ching Ltd sold a factory outlet site to Bay plc at a price determined by an independent surveyor.

On 1 March 20X1 Maxpool plc purchased a further 30% of the £1 ordinary shares of Ching Ltd from Bay plc and purchased 25% of the ordinary shares of Bay plc.

On 30 June 20X1 Ching Ltd sold the whole of its fleet of vehicles to Bay plc at a price determined by a vehicle auctioneer.

Explain the implications of the above transactions for the determination of related party relationships and disclosure of such transactions in the financial statements of (a) Maxpool Group plc, (b) Ching Ltd and (c) Bay plc for the years ending 31 December 20X0 and 31 December 20X1.


Question 8

The following is an extract from the trial balance of Imecet at 31 October 2005:

Property valuation Factory at cost

Administration building at cost Delivery vehicles at cost Sales

Inventory at 1 November 2004 Purchases

8,000 2,700 1,200 500




Factory wages Administration expenses Distribution costs

Interest paid (6 months to 30 April 2005) Accumulated profit at 1 November 2004 10% Loan stock

$1 Ordinary shares (incl. issue on 1 May 2005) Share premium (after issue on 1 May 2005) Dividends (paid 1 June 2005)

575 140 370 100

Revaluation reserve Deferred tax

2,500 650

Other relevant information:

(i) One million $1 Ordinary shares were issued 1 May 2005 at the market price of $1.75 per ordinary share.

(ii) The inventory at 31 October 2005 has been valued at $1,150,000.

(iii) A current tax provision for $350,000 is required for the period ended 31 October 2005 and the deferred tax liability at that date has been calculated to be $725,000.

(iv) The property has been further revalued at 31 October 2005 at the market price of $9,200,000. (iii) No depreciation charges have yet been recognised for the year ended 31 October 2005.

The depreciation rates are:

Factory - 5% straight-line. Administration building - 3% straight-line.

Delivery vehicles - 25% reducing balance.The accumulated depreciation at 31 October 2004 was $l0,000.There were no new vehicles acquired in the year to 31 October 2005.


(a) Prepare the Income Statement for Imecet for the year ended 31 October 2005.

(b) Prepare the Statement of Changes in Equity for Imecet for the year ended 31 October 2005.

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  • jessamine
    Is "inventory in trade" a noncurrent asset?
    8 years ago

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