Question 3 (20 marks) Hermione Ltd. produces magical wands. The budgeted production equals 500 magical wands and the budgeted fixed production overheads equals 282,000. The actual production level was 20% lower than estimated and the actual fixed production overheads equal 300,000. The selling, general and administrative expenses equal 18,250. Hermione Ltd. sells 200 magical wands for a price of 150 per unit. The variable production cost per unit is 56. Required: a) Generate the profit statement using the absorption costing technique. (6 marks) b) Considering your answer in a), which is your advice for Hermione Ltd.? Explain your answer in detail. (10 marks) c) Would your answers in a) and b) change if the amount of magical wands sold equals 400 units? Explain your answer in detail. (4 marks) Question 1 (35 marks) Imagine you are the financial accountant of Happiness Ltd. You have the following final balances for the different accounts on 31st December 2021 (the accounting-year end): Value () Buildings 300,000 Transportation element 148,000 Accumulated depreciation (buildings) at 01/01/2021 52,500 Accumulated depreciation (transportation element) at 01/01/2021 36,800 Salary expense 16,500 Share premium 7,200 Capital 20,000 Retained earnings at 31/12/2020 97,900 Long term debt 190,300 Cash 60,000 Trade receivables 62,500 Inventory at 31/12/2020 40,000 Purchases 10,000 Sales 200,000 Allowance for trade receivables 2,500 Accrued Expenses 19,500 Trade payables 10,300 Required: a) Prepare the Trial Balance corresponding to the above information. (8 marks) b) Considering the following additional information, prepare the Income Statement for Happiness Ltd. on 31/12/2021. Additional Information: 1) Inventory equals 20,500 on 31/12/2021. Purchases 10,000 200,000 Sales Allowance for trade receivables 2,500 19,500 Accrued Expenses Trade payables 10,300 Required: a) Prepare the Trial Balance corresponding to the above information. (8 marks) b) Considering the following additional information, prepare the Income Statement for Happiness Ltd. on 31/12/2021. Additional Information: 1) Inventory equals 20,500 on 31/12/2021. 2) The accrued expenses in the trial balance correspond to the electricity expense for the year that has not been paid in the current accounting period. The amount of salary expense from the trial balance corresponds to the salaries of the year that have not been paid during the current accounting period. 3) Non-current assets are depreciated using the straight-line method. Buildings have a residual value of 0 and a useful life of 20 years. The transportation element has a residual value of 10,000 and a useful life of 10 years. 4) On 31/12/2021 the transportation element is sold for 100,000. 5) Managers of Happiness Ltd. estimate that the provision for doubtful debts needs to equal the 20% of the trade receivables final balance. Page 2 of 4 6) On 30/06/2021, Happiness Ltd. acquires on cash an insurance for 24 months for 32,400 paid on cash. 7) Corporate tax percentage is 19%. (15 marks) c) Draw the journal entries corresponding to the additional information from point b). (12 marks) 5) Managers of Happiness Ltd. estimate that the provision for doubtful debts needs to equal the 20% of the trade receivables final balance. Page 2 of 4 6) On 30/06/2021, Happiness Ltd. acquires on cash an insurance for 24 months for 32,400 paid on cash. 7) Corporate tax percentage is 19%. (15 marks) c) Draw the journal entries corresponding to the additional information from point b). (12 marks) Question 2 (15 marks) Following the information in Question 1 and additionally considering that 3,000 of purchases have not been paid on cash during the current accounting period 2021, prepare the Statement of Financial Position for Happiness Ltd. on 31/12/2021. (15 marks)
