Income statement exercise

Discussion in 'Exams and Studying' started by student123, Nov 29, 2011.

  1. student123


    Nov 29, 2011
    I am preparing for an exam next week and have trouble with this questions:

    Three friends are great fans of wool clothing: jumpers, cardigans, hats, socks – in fact any clothing made of wool. They recently decided to create a new limited liability company called WoolyWorth Limited. The details of activities and transactions for the first year are shown below.
    1. On 30 November 2010 the company was created with authorised ordinary share capital of £500,000 made up of 250,000 ordinary shares, and authorised 5% preference share capital of £100,000 made up of 200,000 reference shares.
    2. On 1st December 2010 the company issued 100,000 ordinary shares at a premium of £1 above the nominal value, and 100,000 preference shares at nominal value.
    3. During the financial year credit sales totalled £500,000. The credit customers paid £450,000 during the year. Two credit customers went bankrupt during the year, each owing £5,000 and their debts were written off. On the last day of the financial year the company decided to create a provision for bad debts equivalent to 10% of the year end trade receivables.
    4. On 1st December 2010 £72,000 was paid for rent for the period 1st December 2008 to 31st May 2012.
    5. On 1st December 2010 equipment costing £25,000 was purchased for cash, with an anticipated useful life of 5 years, using straight line depreciation.
    6. On 1st December 2010 a vehicle costing £20,000 was purchased for cash, with an anticipated useful life of 4 years, using reducing balance depreciation (at twice the straight line rate).
    7. During the financial year wool clothing costing £100,000 was purchased on credit. At the end of the financial year, trade payables were still owed £20,000, and the unsold clothing remaining had a cost value of £20,000.
    8. Salaries expense for the financial year totalled £200,000 and this amount was paid.
    9. Various operating expenses for the financial year totalled £60,000 of which £50,000 had been paid in cash by the end of the financial year.
    10. In November 2011 the company received a letter from a lawyer on behalf of one of the company’s customers. The letter claimed that the customer had suffered skin irritation because of an allergy to wool. The directors are worried that any court case could result in damages of £10,000 being awarded against the company. Any court case would be heard in January 2012.
    11. During the financial year an interim dividend of 1p per ordinary share had been paid in cash.
    12. On the last day of the financial year, the vehicle was sold for £11,000 cash. Depreciation is charged in the year of disposal even if it is the same year as acquisition.
    13. The corporation tax bill for the financial year was estimated as being £20,000, half which had already been paid in cash.
    14. The preference dividend for the year was paid in cash on the last day of the financial year. 15. No agreement could be reached with the ordinary shareholders regarding final dividends.

    anybody you can show me how to do the incomestatement from this information?

    Thanks in advance
    student123, Nov 29, 2011
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  2. mackwaa


    Sep 23, 2011
    i guess we could, but it would be better if you made an attempt and posted it and we can comment on where/how you get on...
    mackwaa, Nov 30, 2011
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  3. student123


    Nov 29, 2011
    here is my start and i also need to do a balance sheet but this is all i know....

    WoolyWorth Limited
    Income Statement for the year ended 30 November 2011
    £ £
    Revenue: 500000
    Less cost of goods sold:
    Purchases 100000
    Less Closing inventory (20000)
    Gross Profit: 420000
    Less Expenses:
    Salaries 200000
    Bad debts written off
    (2 x 5000 £) 10000
    Depreciation on equipment
    (25000£/5) 5000
    Depreciation on vehicle
    (20000£/4 x 2) 10000
    (72000/18 x 12) 48000
    Operating expenses 60000

    Operating Profit: 87000
    Profit of disposal on car: 1000 88000
    Less taxation: (20000)
    Profit for the year after tax: 68000
    Less Dividends:
    Interim dividends (100000x1p) 1000
    Preference dividend (100000x5%x0.5) 2500
    Retained profit for the year: 64500

    WoolyWorth Limited
    Balance Sheet as at 30 November 2011
    £ £ £
    Non-Current assets:
    (25000-5000) 20000
    Current assets:
    Inventory 20000
    Trade receivable 40000
    Less provision for doubtful debts
    (0.1 x40000) (4000)
    (72000-48000) 24000
    Cash and cash equivalents 11000
    Less current liabilities:
    Trade payable 20000
    Accruals 10000
    Taxation 20000
    Net current-assets: 61000
    Total net assets: 61000
    Share capital
    Share premium account
    Retained earnings
    Total equity:

    any ideas?
    student123, Nov 30, 2011
  4. mackwaa


    Sep 23, 2011
    erm well I think you have done a better job than I could!

    I guessed there was probably a B/S (and probably a cashflow) question too.

    Only thing I'm not sure on is the rent. The £72k spans 3.5 financial years (1/12/08 - 31/5/12) so £21,571.28 per year...then you would make an assumption that an accrual was raised up until rent was physically paid and released when the payment occured (although I guess there maybe an error with the question and your answer relfects the correct question).

    And interim dividend is 1p on 250,000 shares...

    Otherwise you're pretty much done, +/- the bank transactions and the equity balances
    mackwaa, Nov 30, 2011
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