SOLUTION TO JEKYLL AND HYDE - Tutorial 1
Comprehensive Income Statement for the Year
Jekyll
£000
Sales
Hyde
£000
%
£000
240
£000
%
240
Cost of Sales:
Materials purchased
110
110
Closing inventory
(30)
(15)
80
95
Production wages
52
52
Depreciation of plant
20
42
152
Gross Profit
88
(189)
37%
51
21%
Other expenses:
Marketing
10
40
Bad debts
0
10
(10)
Profit for the year
78
50
33%
1
-%
Sheila Ellwood October 2013
ECONM2028 International Accounting
JEKYLL AND HYDE
Statement of Financial Position at year end date
£000
Cost
Non current assets
Tangible assets PPE
Intangible assets -Brands
Current assets
Inventory
Trade receivables
Less: Provision for doubtful debts
Cash at bank
210
30
240
Jekyll
£000
Depreciation
20
20
100
(-)
190
30
220
210
42
168
210
42
168
£000
NBV
15
100
(10)
100
10
Issued share capital £1 shares
Reserves
TOTAL EQUITY & LIABILITIES
£000
Cost
30
TOTAL ASSETS
Current liabilities
Trade payables
Accruals
£000
NBV
Hyde
£000
Depreciation
90
10
140
360
115
283
250
78
328
250
1
251
30
2
30
2
32
360
32
283
Sheila Ellwood October 2013
ECONM2028 International Accounting
ACCOUNTING POLICIES
JEKYLL LTD
HYDE LTD
1.
Inventories are stated at the lower of cost and Net Realisable
Value using the FIFO basis.
Inventories are stated at the lower of cost and Net
Realisable Value using the LIFO basis.
2.
Tangible non-current assets are stated at cost less accumulated depreciation. The cost less residual value of plant is written off by equal instalments over 10 years.
Tangible non-current assets are stated at cost less accumulated depreciation. The cost of plant is written off at
20% per annum on a reducing balance basis.
3.
Marketing expenditure which is deemed to enhance the value of brands is capitalised and is not amortised if the brand is to be continually supported by future advertising expenditure and hence has not fallen in value.
Marketing expenditure is written off in the year in which it is incurred. Sheila Ellwood October 2013
ECONM2028 International Accounting
WORKINGS
1.
Purchases
£
30,000
30,000
50,000
110,000
=
60,000 x 50p
=
40,000 x 75p
=
50,000 x 100p
=
TOTAL
Year end inventories of raw material
2.
30,000 units
Jekyll values on FIFO basis at 100p/unit
=
£30,000
Hyde values on LIFO basis at 50p/unit
=
£15,000
Jekyll does not consider it necessary to provide for doubtful debts.
Hyde provides for doubtful debts at 10% of year end debtors (i.e. sales - receipts)
= 10% x (240,000 - 140,000) = £10,000.
3.
Jekyll depreciates over 10 years and assumes a scrap value of £10,000.
Annual Depreciation
=
210,000 - 10,000
10
=
£20,000
=
£42,000
Hyde depreciates at 20% reducing balance.
First year’s depreciation
=
210,000 x 20%
4.
Jekyll “capitalises” the expenditure on branding [accruals concept] and hence puts
£30,000 on the balance sheet and there is only a £10,000 charge to the
Comprehensive Income Statement (compared to Hyde’s £40,000 charge because all marketing is written off [prudence concept]). NOTE that this could not be done outside Utopia (see later session on intangible assets) but as Utopia has no accounting standards, accounting policies have been developed from basic concepts. 5.
The accruals concept is an underlying accounting concept so both companies must accrue for the £2,000 wages owed. Hence, wages expense = £50,000 (paid) + £2,000 accrual = £52,000, and the £2,000 accrual is shown as a current liability in the balance sheet.
6.
Treatment of dividends varies from country to country. In the answer above Jekyll’s proposed dividend is not accrued. Under international accounting the dividends when approved and/ or paid would be deducted in the Statement of Changes in
Equity (not at the end of the Comprehensive income statement/ Profit and loss account); proposed dividends are not a liability until they are approved.
Sheila Ellwood October 2013
