IAS 1 Question 7

QUESTION 7 – Financial Statements (CAF1 S18)

Following is the trial balance of Tulip Enterprises (TE) for the year ended 31 December 2017:

Debit Rs. in '000 Credit Rs. in '000

Cash and bank balances 2,320 Trade payables 3,250
Trade receivables 4,400 Accruals and other payables 1,320
Stock-in-trade 31-12-2017 3,900 Provision for doubtful rec. 220
Prepayments and advances 1,740 Accumulated depreciation 4,630
Property, plant & equipment – cost 12,500 12% Long-term loan 5,150
Drawings 490 Capital 6,000
Cost of sales 23,580 Sales 35,230
Salaries and wages 2,610 Miscellaneous income 940
Fuel and power 450
Bad debt expense 230
Rent and insurance 2,900
Repair and maintenance 920
Financial charges 700
56,740 56,740

Additional information:
(i) While carrying out the physical inventory count at year-end, following matters were identified:
 Goods costing Rs. 1,000,000 were slightly defective. These can be sold for Rs. 1,130,000 after
incurring a cost of Rs. 200,000.
 Goods costing Rs. 670,000 purchased on credit were returned to a supplier on 28 December
2017 but the return was not recorded in the books.

(ii) A machine costing Rs. 450,000 was received on 1 October 2017 against 100% advance payment.
The advance has not yet been adjusted due to non-receipt of the invoice.

(iii) On 1 October 2017, 50% advance received for an annual maintenance contract of Rs. 80,000 was
credited to miscellaneous income. Remaining amount would be received at the end of the contract.
Services are rendered evenly throughout the contract period.

(iv) Maintenance services for Rs. 150,000 were rendered in December 2017 but income has been
recorded in January 2018 on receipt of the amount.

(v) Interest on the loan is paid in arrears on 1 April and 1 October each year. Interest accrued for the
quarter ended 31 December 2017 has been credited to loan account.

(vi) Rent and insurance include:

 annual insurance premium of Rs. 800,000 for the health policy arranged by TE for the
department heads and the owner’s family members. Premium pertaining to the owner’s family
members is Rs. 200,000. The policy is valid up to 30 June 2018.

 Rs. 1,200,000 paid against the annual rent agreement expiring on 31 August 2018. According to
the rent agreement, the rent paid would not be refunded in case the building is vacated earlier.

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IAS 1 Question 7

(vii) TE maintains provision for doubtful receivables according to the age analysis of the outstanding
balances. Relevant details are as under:

Trade receivables as on 31 December 2017

Less than 3 4-6 7-12 More than Total
months months months 1 year
Outstanding balances
(Rs. in '000) 1,970 1,000 900 530 4,400
Required provision – 5% 10% 20%

(viii) TE depreciates property, plant & equipment at 15% per annum on reducing balance method.

Required:
Prepare the following:
(a) Statement of profit or loss for the year ended 31 December 2017 (11)
(b) Statement of financial position as at 31 December 2017 (10)

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IAS 1 Question 7

ANSWER 7 – Financial Statements (CAF1 S18)

Tulip Enterprises
Statement of Profit or Loss
For the year ended 31 December 2017
Rs. 000
Sales 35,230
Cost of sales 23,580 + 70 J1 (23,650)
Gross Profit 11,580
Expenses:
Salaries and wages 2,610
Fuel and power 450
Bad debts expense 230 + 26 J10 256
Rent and insurance 2,900 – 500 J8 – 800 J9 1,600
Repair and maintenance 920
Financial charges 700
Depreciation 17 J4 + 1,180 J11 1,197
(7,733)
Misc. income 940 – 120 J5 + 150 J6 970
Profit for the year 4,817
Tulip Enterprises
Statement of Financial Position
As at 31 December 2017
Rs. 000
Non – current assets
Property, plant and equipment 12,500 + 450 J3 12,950
Accumulated depreciation [4,630 + 17 J4 + 1,180 J11] (5,827)
7,123
Current assets
Inventory 3,900 – 70 J1 – 670 J2 3,160
Receivable [4,400] – [220 + 26 J10] 4,154
Prepayment and other receivables 1,740 – 450 J3 +150 J6 + 300 J8 + 800 J9 2,540
Cash and bank 2,320
12,174
19,297
Capital and Liabilities
Capital 6,000
Profit 4,817
Drawings 490 + 200 J8 (690)
10,127
Non-current liabilities
12% long term loan 5,150 – 150 J7 5,000
5,000
Current liabilities
Trade payables 3,250 – 670 J2 2,580
Accruals and other payables 1,320 + 120 J5 + 150 J7 1,590
4,170
19,297

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IAS 1 Question 7

Journal Entries
Rs. 000
Cost of sales 70
(i) 1
Inventory 70
Cost Rs. 1,000 and NRV Rs. 930 (i.e. Rs. 1,130 – 200)
Trade payables 670
(i) 2
Inventory 670
Recording of purchase return under perpetual method
PPE 450
(ii) 3
Prepayment and other receivable 450
Recording of acquisition of PPE against advance
Depreciation 17
(ii) 4
Accumulated depreciation 17
450 x 15% x 3/12 = Rs. 17 (rounded off)
Misc. Income 120
(iii) 5
Unearned income (accrual) 120
Unearned income 480 x 50% x 3/6 months = Rs. 120
Prepayment and other receivable 150
(iv) 6
Misc. Income 150
Accrual of income
Loan 150
(v) 7
Interest payable (accrual) 150
Accrual classified appropriately 5,000 x 12% x 3/12 = 150 (or 5,150 x 3/103)

Prepaid insurance 800 – 200 = 600 x 6/12 300

(vi) 8 Drawings 200
Rent and insurance 500
Insurance prepaid and drawings

Prepaid rent 800

(vi) 9
Rent and insurance 800
Rs. 1,200 x 8/12 = Rs. 800
Bad debts expense 26
(vii) 10
Allowance for doubtful debts 26
Rs. 1,000 x 5% + 900 x 10% + 530 x 20% = Rs. 246 – opening 220 = Increase 26

Depreciation 1,180
(viii) 11
Accumulated depreciation 1,180
12,500 – 4,630 = 7,870 x 15% = Rs. 1180

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