On 1 January 1983 a company was formed with an issued capital of £100 fully paid up in cash. On 1 January 1983 it purchased for resale a 'widget'

for £100, the estimated mark-up being 50 per cent. 'Widgets' are notoriously difficult to turn over and the widget was sold in December 1983 for £180 (there had been a price increase in October 1983 of 20 per cent);

another widget was purchased in December 1983 for £120.

(a) On the assumption that all profits are distributed as dividends, show the income statement for 1983 and balance sheet at 31 December 1983 on an historic cost basis (assume all transactions are cash).

(b) Do you think that the income statement is a fair reflection of the operating profit? Does the gross profit percentage reflect the 'terms of trading'?

(c) What will be necessary for the company to carry on the same level of activity?

(d) Is there any alternative system you might consider? If so identify, and draft out the income statement and balance sheet.

(e) Identify the advantages and disadvantages of

(d) over historic cost.

(f) Which method (in your opinion) is relevant to the information for a 'decision-making' approach?
(g) Should the holding gain be distributable?