Wick plc has produced the following trial balance as at 31 August 2002 as a basis for the preparation of its published accounts:

Additional information (1) As a new venture, the company started work on a long-term contract in October 2001 and the above trial balance includes transactions relating to this contract which was in progress as at 31 August 2002. The agreed total contract price is £600 000 and there was work certified of £250 000, included in Sales, as at 31 August 2002. Costs to 31 August 2002 amounted to £400 000, included in Purchases, with estimated costs to completion of £300000. Progress payments received by 31 August 2002 amounted to £340000; these have been debited to Cash at bank and credited to Debtors.
(2) Stock at 31 August 2002 was valued at £300 000 and comprised finished goods of £50 000 and goods awaiting completion of £250 000. These amounts exclude the longterm contract.
(3) Depreciation has yet to be provided for as follows:
● Freehold property – 2.5% p.a. on valuation. The land element is £1.5 million.
● Plant and machinery – 10% p.a. on cost.
● Plant held for rental is for short-term hire and was acquired in the year ended 31 August 2002 – 20% p.a. on cost.
● Fixtures and fittings – 20% p.a. on cost.
It is company policy to provide a full year’s depreciation charge in the year of acquisition.

(4) The bank loan was taken out on 1 September 2000 and is repayable in five equal annual instalments starting from 1 September 2001. Interest is charged at 7% p.a. on the balance owing on 1 September each year and has not yet been paid for the current year.
(5) The company is proposing a final dividend of 10p per share.
(6) Corporation tax of 30% of pre-tax profit is to be provided for, including an increase in the deferred taxation provision of £100000.
Requirements

(a) Prepare the profit and loss account for the year ended 31 August 2002 and a balance sheet as at that date for Wick plc in a form suitable for publication, providing the disclosure note for Stock. (20 marks)
NOTE: You are not required to prepare any other disclosure notes.

(b) Identify and explain two areas in accounting for long-term contracts where judgement has to be exercised. (5 marks)
ICAEW, Financial Reporting, September 2002 (25 marks)

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Debit Credit '000 '000 Freehold property-at valuation 3500 Freehold property-accumulated depreciation 100 Plant and machinery - at cost 1000 Plant and machinery - accumulated depreciation 400 Plant held for rental income 400 Fixtures and fittings - at cost 500 Fixtures and fittings - accumulated depreciation 300 Stock as at 1 September 2001 200 Debtors 650 Provision for doubtful debts 50 Cash at bank 130 Trade creditors Bank loan Deferred taxation VAT payable 700 800 310 120 Ordinary share capital - shares of 1 each Share premium Revaluation reserve Profit and loss account as at 1 September 2001 2000 500 150 300 Sales Purchases and direct labour costs Distribution costs Administration costs 3250 1600 400 500 Interim dividend paid Total 100 8980 8980