You are required to attempt the following question, which is adapted from a past

exam question.

Question 1 - Smith and Jones Ltd

Mr Smith and Mr Jones run a wholesale business selling coffee and biscuits to coffee

shops. The business is incorporated under the name of Smith and Jones Ltd, and they

are the only shareholders.

As the business is small, they do not employ a full-time accountant, but pay a local

firm to prepare their accounts after the end of the accounting period from information

they supply. You are on a summer work placement with this firm and have been asked

to prepare a first draft of the financial statements for Smith and Jones Ltd for the year

ending 31 December 2010.

A list of opening balances at 1 January 2010 is set out below:

Shop premises: cost 45,000

Shop premises: accumulated depreciation 2,700

Fixtures and fittings: cost 10,000

Fixtures and fittings: accumulated depreciation 3,000

Inventories of coffee and biscuits at cost 34,680

Trade receivables 31,200

Allowance for trade receivables 780

Prepayments 400

Trade payable 5,570

Accruals (miscellaneous) 1,000

Bank overdraft 5,000

Bank loan repayable in 2014 27,000

Share capital: 1 ordinary shares 50,000

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Retained profits 26,230

Further information:

a. The shop premises were acquired under a 50 year lease on 1 January 2007 and are

being depreciated to a zero residual value.

b. The fixtures and fittings were also bought on 1 January 2007 and are being

depreciated over 10 years to a zero residual value.

c. Depreciation is provided on a straight line basis for both the shop premises and the

fixtures and fittings.

d. The business pays its insurance premium annually on 1 July to cover the

following twelve-month period. This is the only prepayment at 1 January 2010.

e. An allowance of 2.5% for trade receivables is maintained.

During the year to 31 December 2010, the following transactions/events took place

(in no particular order):

1. The business made cash sales of 85,900. It also made credit sales of

61,430.

2. Inventory costing 75,780 was bought during the year. All items were

bought on credit. Suppliers were paid 77,150 over the course of the year.

The inventory at 31 December 2010 cost 27,500.

3. During the year some fixtures that had cost 2,000 when purchased were

sold for 1,700. New fixtures were acquired at a cost of 3,000 and were

paid for in cash. No depreciation is provided in the year of disposal but a

full year's depreciation is provided in the year of acquisition.

4. Mr Smith and Mr Jones received directors' salaries of 1,000 per month

each.

5. The accruals at 1 January 2010 were paid in February 2010.

6. Receipts from credit customers totaled 54,530. No bad debts had been

written off during the year. However, of the amounts due from credit

customers at the end of the year, 1,500 had been outstanding for more

than six months and was considered unlikely to be collected as the

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customers concerned were not replying to correspondence. The directors

have decided to continue to maintain an allowance of 2.5% for trade

receivables, after writing off the uncollectable amounts.

7. Electricity invoices (bills) totaling 1,830 relating to the current period

were paid during the year. The company has recently changed its energy

supplier and is now being billed quarterly in arrears. At the end of

December 2010 the bill for the quarter ended on 31 January 2011 had not

yet been received, but was estimated to be 690.

8. The insurance premium for the year to 30 June 2011 was paid on 1 July

2010. The amount paid represented a 5% increase from the prior year

premium.

Required:

Prepared an income statement for the company for the year ended 31 December 2010,

and a statement of financial position as at that date. Show your workings.