The chief accountant of Uncertain Ltd is not sure of the appropriate accounting treatment for a number of events occurring during the year 19X5/6.

(i) A significant number of employees have been made redundant, giving rise to redundancy payments of \(£ 100,000\) which have been included in manufacturing cost of sales.

(ii) One of Uncertain Ltd's three factories has been closed down. Closure costs amounted to \(£ 575,000\). This amount has been deducted from reserves in the balance sheet.

(iii) The directors have changed the basis of charging depreciation on delivery vehicles. The difference between the old and new methods amounts to \(£ 258,800\). This has been charged as a prior period adjustment.

(iv) During October 19X6 a fire occurred in one of the remaining factories belonging to Uncertain Ltd and caused an estimated \(£ 350,000\) of additional expenses. This amount has been included in manufacturing cost of sales.

(v) It was discovered on 31 October 19X6 that a customer was unable to pay his debt to the company of \(£ 125,000\). The \(£ 125,000\) was made up of sales in the period July to September 19X6. No adjustment has been made in the draft accounts for this item.

Required

(a) Write a report to the chief accountant of Uncertain Ltd with suggestions for appropriate treatment for each of the items (i) to (iv), with explanations for your proposals.

(b) Amend the draft profit and loss account to take account of your proposals.

Transcribed Image Text:

Uncertain Ltd Draft Profit and Loss Account for the year ended 30 September 19X6 Sales 5,450,490 Manufacturing cost of sales 3,284,500 Gross profit 2,165,990 Administration expenses 785,420 Selling expenses 629,800 1,415,220 750,770 Corporation tax (50%) 375,385 375,385 Proposed dividend on ordinary shares 125,000 250,385 Prior period adjustment 2.58,800 Corporation tax 129,400 129,400 120,985