The draft accounts of a company for the year ended 31 December 19_4, showed a gross profit of £140 000 and a net profit before taxation amounting to £90 000. These figures are higher than in previous years.

Attached to the accounts is a note stating that errors had been made in the preparation of the figures.

An investigation revealed the following:

(1) In previous years the stocks had been valued on a FIFO (First in, First out) basis, but the stock at 31 December 19_4 had been valued incorrectly on a LIFO (Last in, First out) basis. Prices had been rising SS steadily throughout the year, and the difference between the two stock values at the year-end was £6 000.

(2) Cash totalling £4 000 had been stolen from the company’s premises during the year. No record had been made of this theft; there was no possibility of recovery; and the loss had not been insured.

(3) No provision had been made for the audit fee, estimated at £1 000.

(4) In order to allow for the effect of inflation on the value of the premises,

£20 000 had been added to the net profit (premises account debited and the profit and loss account credited).

(5) A sales contract worth £8 000 had been negotiated prior to the year-end, but not signed until 3 January 19_5. The amount had been included in the sales total for the year to 31 December 19_4. The goods relating to this contract were not to be sent to the customer until February 19_5.

(6) An invoice for £2,000 goods received from a supplier had been totalled incorrectly at £200. The £200 had been posted to both the personal and nominal ledgers.

You are required to make:

(a) Journal entries, including appropriate narratives, to correct items (1), (2)
and (3) above.

(b) A calculation of the effect of items (1)-(6) above on the original gross profit calculation and the original net profit calculation.