10.7 The following balances existed in the accounting records of Koppa Ltd at 31 December 19X7.

£000 Development costs capitalized, 1 January 19X7 180 Freehold land as revalued 31 December 19X7 2,200 Buildings – cost 900

– aggregate depreciation at 1 January 19X7 100 Office equipment – cost 260

– aggregate depreciation at 1 January 19X7 60 Motor vehicles – cost 200

– aggregate depreciation at 1 January 19X7 90 Trade debtors 1,360 Cash at bank 90 Trade creditors 820 12% debentures (issued 19X0 and redeemable 20Y7) 1,000 Called up share capital – shares of 50p each 1,000 Share premium account 500 Revaluation reserve 200 Profit and loss account 1 January 19X7 1,272 Sales 8,650 Purchases 5,010 Research and development expenditure for the year 162 Stock 1 January 19X7 990 Distribution costs 460 Administrative expenses 1,560 Debenture interest 120 Interim dividend paid 200 In preparing the company’s profit and loss account and balance sheet at 31 December 19X7 the following further information is relevant.

(a) Stock at 31 December 19X7 was £880,000

(b) Depreciation is to be provided for as follows:
Land Nil Buildings 2% per annum on cost Office equipment 20% per annum, reducing balance basis Motor vehicles 25% per annum on cost Depreciation on buildings and office equipment is all charged to administrative expenses. Depreciation on motor vehicles is to be split equally between distribution costs and administrative expenses.

(c) The £180,000 total for development costs as at 1 January 19X7 relates to two projects:
£000 Project 836: completed project 82 (balance being amortized over the period expected to benefit from it;
amount to be amortized in 1997: £20,000)
Project 910: in progress 98 180

(d) The research and development expenditure for the year is made up of:
£000 Research expenditure 103 Development costs on Project 910 which continues to satisfy the requirements in SSAP 13 for capitalization 59 162

(e) The freehold land had originally cost £2,000,000 and was revalued on 31 December 19X7.

(f) Prepayments and accruals at 31 December 19X7 were:
Prepayments Accruals £000 £000 Administrative expenses 40 11 Sundry distribution costs – 4 (g) The share premium account balance arose as a result of the issue during 19X7 of 1,000,000 50p ordinary shares at £1.00 each. All shares qualify for the proposed final dividend to be provided for (see note below).
(h) A final dividend of 20p per share is proposed.
Prepare the company’s profit and loss account for the year ended 31 December 19X7 and balance sheet as at that date, in a form suitable for publication as far as the information provided permits.
(24 marks)
(ACCA Paper 1, The Accounting Framework, June 1998 (modified))
10.8

(a) FRS 32, Reporting Financial Performance, includes requirements governing the treatment of certain items in the published profit and loss account.
Explain how FRS 3 requires discontinued operations and acquisitions to be dealt with in the profit and loss account. What are the advantages of these requirements to users of financial statements? (7 marks)

(b) The trial balance of Leonardo Ltd at 30 September 19X8 included the following items.
Dr Cr £000 £000 Sales 6,840 Opening stock 1,200 Purchases 3,670 Distribution costs 880 Administrative expenses 590 Interest payable 300 Costs of a fundamental reorganization of the company’s operations 560 Profit on sale of head office building (the company plans to move its central administration into a rented building) 1,200 Provision for doubtful debts 1 October 19X7 150 In preparing the company’s profit and loss account the following further information is to be taken into account:

(i) Stock was taken on 27 September 19X8 (all valued at cost) and amounted to £950,000. Between that date and the close of business on 30 September 19X8, goods costing £68,000 were sold and there were no further receipts of goods. These sales are included in the sales total of £6,840,000.
(ii) During the year a debt of £400,000 proved to be irrecoverable and is to be written off. The provision for doubtful debts is to be increased to £200,000.
(iii) The tax charge on the profit from ordinary activities was £300,000.
Prepare the company’s profit and loss account for the year ended 30 September 19X8 for publication.
(10 marks)
(ACCA Paper 1, The Accounting Framework, December 1998 (modified))