UNIT THIRTEEN: COMPANY ACCOUNTS

After you have studied this unit, you should be able to:
 Define a company.
 Explain sources of finance for companies.
 Explain the classes of shares.
 Explain the process of issuing shares.
 Distinguish between the following types of share capital: authorised and issued, called up
and paid up, calls in arrears and calls in advance.
 Distinguish between a bonus issue and a rights issue.
 Record the issue of shares at par value and at a premium that are fully paid for.
 Explain the differences in the financial statements of a sloe trader and that of a company.
 Prepare the trading, profit and loss account and balance sheet for a company.

Introduction
A company is a business formed by a group of members known as shareholders. A company
is a separate legal entity and is distinct from its owners. The owners of the company may or
may not be involved in the management of the company. Usually, the management of the
company is left in the hands of the directors of the company. The liability of the members for
the debts of the company is limited to the amount of capital they have contributed.

Company finance
The way in which the assets of a company are financed will vary from one company to
another. Generally, part or all of the finance may be provided by the owners of the company
(shareholders) and part may be provided by outside lenders of finance.

1. Share Capital
The ownership of a company is through shares, which have been issued by the company.
Share capital represents part of the capital invested in the company by its shareholders but
may also represent past reserves of the company, which have been capitalised by a bonus
issue of the shares.

A company may issue different classes of shares, by far the most Important of which are:

a) Ordinary shares
These are the normal shares issued by the company. The normal rights of ordinary
shareholders are to vote at company meetings and to receive dividends from the
remainder of profits.

b) Preference shares
These are shares carrying a fixed rate of dividend, the shareholders of which have a
prior claim to any company profits for distribution. Preference shares do not carry a
voting right. Preference shares could either be cumulative or non-cumulative.

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2. Debentures
This is a written acknowledgement of a loan to a company, given under the company's
seal, which carries a fixed rate of interest.

A debenture may relate to a loan from one person. Debenture stock, on the other hand,
rather like shares, may be held by a large number of individuals. The conditions and
regulations are set out in a debenture trust deed.

Debentures are not part of the company's share capital - they are third party liabilities.
Debenture interest is a charge against profit and must be paid whether or not a company
makes a profit.

The accounts
The double entry bookkeeping and the recording in the books of prime entry are exactly the
same for a sole trader or for a limited company. However, as there is a difference in the way
companies are financed, some ledger accounts maintained differ from that of a sole trader.

Issue of Shares
A company raises capital by issue of shares. The process of issuing shares is the same
whether it is a newly formed company issuing shares for the first time or an established
company asking for more capital to extend its operations.

Each share issued has a stated nominal value (also called a par value), e.g. for 1 000 shares
of K100 each, the K100 per share is the nominal value. The nominal value is used as the
base line price below which further shares may no t generally be issued and also as a means
of calculating dividends to share holders. Shares could be issued at par value or at a
premium. The double entry for recording the issue of shares is as follows:

a) Shares issued at nominal value

Dr - Cash book
Cr - Share capital account

E.g. 20 000 ordinary shares of K1 000 each are issued at nominal value. Record this
in the ledger accounts.

Solution
Bank account
___________________________________________________________________
K'000 K'000
Ordinary share capital 20 000

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 Ordinary share capital account
___________________________________________________________________
K'000 K'000
Bank 20 000

b) Shares issued at a premium

Dr - Cash book
Cr - Share capital account, with nominal value
Cr - Share premium account with excess of nominal value

E.g. 20 000 ordinary shares of K1 000 each are issued at a price of K1 200 each.
Record this in the ledger accounts.

Solution
Bank account
___________________________________________________________________
K'000 K'000
Ordinary share capital 24 000

Ordinary share capital account

___________________________________________________________________
K'000 K'000
Bank 20 000

Share premium account

___________________________________________________________________
K'000 K'000
Bank 4 000

Bonus issue
The issue of bonus shares (called a bonus, script or capitalisation issue) represents the issue
of shares to the existing shareholders in proportion to their existing holding. No cash or
other consideration is passed from shareholders to the company. Any reserve may be used
to finance the bonus issue.

The double entry for a bonus issue is:

Dr - Reserves
Cr - Share capital, with the amount of bonus issue

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Rights issue
A rights issue represents the offer of shares to existing shareholders in proportion to their
existing holdings at a stated price. Unlike the bonus issue, the shareholders do not have to
take up their offer and have the alternative of selling their rights on the stock market.

The double entry for recording a right issue is:

Dr - Cash book
Cr - Share capital, with nominal value
Cr - Share premium, with the premium (if any)

Share Capital Structure

i) Authorised share capital: this is the maximum share capital that a company is
allowed to issue. It is also known as the Nominal capital.
ii) Issued share capital: this is the actual share capital issued to shareholders at any
point in time. It is the issued share capital that appears on the company's balance
sheet.
iii) Called up share capital: this is part of the nominal value payable on each share that
has been called for. However most capital is issued on a fully paid up basis.
iv) Paid-up share capital: this is that part of the nominal value that is paid at current
date.
v) Calls in arrears: this is the amount requested for (called for) but not yet received.
vi) Calls in advance: this is the amount received prior to payment being requested.

_________________________________________________________________________
ACTIVITY 1

Elsewhere Ltd was formed with the legal right to be able issue 200 000 shares of K500
each. The company has actually issued 150 000 shares. None of these shares have been
fully paid up. So far the company has made calls of K400 per share. All the calls have
been paid by shareholders except for K4 000 000 owing from one shareholder.

Calculate the following:

a) Authorised share capital
b) Issued share capital
c) Called up share capital
d) Paid up share capital
e) Calls in arrears
_________________________________________________________________________
Feedback to this activity is at end of module

Financial statements for companies

The trading and profit and loss account and the balance sheet for companies are drawn in a
similar manner as to that of a sole trader and the partnership. The main differences between
the financial statements of a sole trader and that of a company are:

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1. The profit and loss account
The profit and loss account has an extra section called a n appropriation account that
shows how the profits are distributed or used by a company. The following items are
found in this section:

a) Corporation tax: this is a tax levied as percentage of the taxable profits.

Accounting
profits are not the same as taxable profits. Accounting profits require certain
adjustments to arrive at the taxable profits. Corporation tax is not an expense but an
appropriation of profits (appropriated by the government rather than the company).
It is shown separately immediately after net profit.

Corporation tax is an estimate of the tax liability and is normally paid some months
after the end of the accounting period. To this effect it is shown as a current liability
in the balance sheet.

b) Dividends: A dividend is a return of part of the profit made by a company to the

shareholders. Dividends can be stated as a percentage of the nominal value of the
share or alternatively as an amount per share. For example: K100 000 dividends on
1 000 shares of K1 000 per share can be expressed as of dividend of 10% per share
or K100 per share.

Dividends are declared by the company in the general meeting upon

recommendation from the directors. The directors of the company on their
responsibility can declare an interim dividend during the accounting period on the
account of the total dividend of the year. The balance after an interim dividend is
paid will be declared at the general meeting as a final dividend. The double entry
bookkeeping for both the interim and final dividend is:

For interim dividend

Dr - Dividend account
Cr - Cash book

For final dividend

Dr - Profit and loss account
Cr - Proposed dividends account

Both the interim and the final dividend appear in the profit and loss account but it is
only the final proposed dividend that will appear in the balance sheet as a current
liability.

c) Transfers to reserves: A reserve is a profit set aside before deducting dividends for
a purpose e.g. a fixed asset replacement reserve used to set aside profits for
replacing fixed assets during a period of rising prices.

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 There are two types of reserves: capital and revenue reserves.

Capital reserves, which are also known as statutory reserves are established by
law. They include share premium, capital redemption reserve and revaluation
reserve. Capital reserves can not be distributed to shareholders as dividends.
The share premium account, which arises on issue of shares, as shown above can be
used for the following purposes:
- financing the issue of fully paid bonus shares
- writing off preliminary expenses on the formation of a company
- writing off expenses, commission or discount on share or debenture issue
- providing the premium on the redemption of debentures and on redeemable
of shares

Revenue reserves arise when a company makes profits and does not pay out all the
profits to the shareholders. There is no statutory requirement for a company to have
any amount in its revenue reserve. Revenue reserves can be used for any purpose by
the company. However, where profits are transferred to a named reserve, the
directors are indicating that these amounts are not available to support a dividend
payment (although there is nothing in law to prevent their distribution). Revenue
reserves include, fixed assets replacement reserve, general reserve, profit and loss
account (reserve) etc.

2. The balance sheet

The major difference in the balance sheet of a company lies in the capital section. As
mentioned earlier on, ownership of a company is through shares. Therefore, the capital
section of a company is made up of shareholders' funds, which comprise, share capital
and reserves.

Example:
You are provided with the following trial balance of Mulyatubotu and co. Ltd at 31st
December 2004:
Dr Cr
K'000 K'000
Ordinary share capital (K500 shares) 120 000
5% preference share capital K100 shares 40 000
Freehold land and buildings at cost 460 000
Provision for depreciation - buildings 200 000
Debtors 20 000
Creditors 4 000
Cash at bank 10 000
Stock at 1st January 2004 20 000
Sales 160 000
Discounts allowed 800
Discounts received 400
Purchases 98 000
Carriage inwards 2 000

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 Carriage outwards 1 600
10% debentures 2005 100 000
Debenture interest paid 10 000
Administrative expenses 8 000
Salaries (excluding directors) 8 000
Preference dividend paid 2 000
Profit and loss account balance 16 000
640 400 640 400

Adjustments are required for:

1. Stock at 31st December 2004, at cost K30 000 000.

2. Directors' salaries not yet paid K10 000 000.
3. Corporation tax for the year K10 000 000.
4. Proposed ordinary dividend K25 per share.
5. Depreciation on buildings for the year K9 200 000.
6. Accrued audit fee K2 000 000.
7. Creation of a plant replacement reserve of K2 000 000.

You are required to prepare the trading and profit and loss account for the year ended 31st
December 2004 and a balance sheet as at that date.

Solution:
Mulyatubotu and co. Ltd
Trading and profit and loss account for the year ended 31st December 2004
K’000 K’000
Sales 160 000
Opening stock 20 000
Purchases 98 000
Carriage inwards 2 000
120 000
Less: closing stock 30 000
Cost of sales 90 000
Gross profit 70 000
Add Gains:
Discount received 400
Total income 70 400
Less expenses:
Discount allowed 800
Carriage outwards 1 600
Administrative expenses 8 000
Staff salaries 8 000
Directors' salaries 10 000
Audit fee 2 000
Depreciation: - buildings 9 200
Debenture interest 10 000

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 Total expenses 49 600
Net profit before tax 20 800
Less: corporation tax 10 000
Net profit after tax 10 800
Transfer to plant replacement reserve 2 000
Dividends: - Preference (paid) 2 000
- Ordinary (proposed) 6 000
10 000
Retained profit for the year 800
Profit and loss account b/d 16 000
Profit and loss account c/d 16 800

Mulyatubotu and co. Ltd

Balance sheet as at 31st December 2004
Cost Dep. Value
Fixed assets: K’000 K’000 K’000
Freehold land and buildings 460 000 209 200 250 800
Current assets:
Stock 30 000
Debtors 20 000
Cash at bank 10 000
60 000
Creditors: Amounts falling due within one year:
Creditors 4 000
Corporation tax 10 000
Proposed dividend 6 000
Accruals: - directors' salaries 10 000
- Audit fee 2 000
32 000
Net current assets 28 000
Total assets less current liabilities 278 800
Creditors: Amounts falling due after more than one year:
10% debentures 2009 100 000
178 800
Capital and reserves:
Ordinary share capital 120 000
5% preference share capital 40 000
Plant replacement reserve 2 000
Profit and loss account 16 800
178 800

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 ________________________________________________________________________
REVIEW QUESTIONS

QUESTION ONE
You are presented with the following summarised trial balance of Mistaken Ltd in respect
of the year ended 31st March 2005:
Dr Cr
K'000 K'000
Ordinary share capital (K500 shares) 100 000
Plant and machinery:
Cost 307 400
Depreciation (1st April 2004) 84 600
Debtors 52 030
Creditors 38 274
Cash at bank 41 118
Cash in hand 126
Stock at 1st April 2004 61 070
Sales 998 600
Cost of sales 800 000
9% debentures 2010 75 000
Share premium account 20 000
Administrative costs 100 000
Provision for doubtful debts 1 860
Interim dividends paid 2 500
Profit and loss account balance 45 910
1 364 244 1 364 244

The following final adjustments are required:

1. The provision for doubtful debts is to be adjusted to 5% of the debtors' figure. The charge
is to be included in administrative costs.
2. Corporation tax on the current year profits is estimated at K31 200 000.
3. The directors propose a final dividend of K60 per share.
4. Depreciation at 10% of cost is to be provided. The charge is to be included in the cost of
sales.
5. Interest for the year ended 31st March 2005 was paid on 1st April 2005. No accrual has
been made.

You are required to prepare the trading and profit and loss account for the year ended 31st
March 2005 and a balance sheet as at that date, insofar as information permits.

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QUESTION TWO
The following balances have been extracted from the books of Natasha co. Ltd as at 30th
September 2005:
K'000
Sales 240 000
Land at cost 103 200
Buildings at cost 114 000
Furniture and fittings at cost 66 000
Depreciation: Buildings 18 000
Furniture and fittings 30 000
Bank (credit balance) 18 000
Discount received 5 292
st
Unappropriated profit at 1 October 2004 6 000
Provision for doubtful debts 2 448
Cash in hand 696
Stock at 1st October 2004 42 744
Interim dividend on preference shares 1 800
Rates 6 372
Salaries and wages 24 000
Insurance 5 668
Returns inwards 1 116
General expenses 1 308
Debtors 37 920
Creditors 18 900
Purchases 131 568
Debenture interest 1 200
Bad debts 2 028
5% debentures 48 000
6% K1 000 preference shares 60 000
K1 000 ordinary shares 60 000
General reserve 30 000
Share premium 3 000

Additional information:

1. Stock on hand at 30th September 2005 was K46 638 000.

2. Insurance paid in advance K300 000.
3. Wages owing K840 000.
4. Depreciation is to be provided at 10% on cost of buildings, and at 20% on the written
down value of furniture and fittings.
5. Provision for doubtful debts is to be reduced to 5% of debtors.
6. Debenture interest outstanding is K1 200 000.
7. The directors propose to pay a 5% ordinary dividend and the final preference dividend,
and to transfer K24 000 000 to general reserve.
8. The corporation tax charge for the year is K20 000 000.

217
You are required to prepare the trading and profit and loss account for the year ended 30th
September 2005 and a balance sheet as at that date.
___________________________________________________________________________

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UNIT FOURTEEN: MANUFACTURING ACCOUNTS

After you have studied this unit, you should be able to:
 Define a manufacturing organisation
 Explain the purpose of a manufacturing account
 Explain the meaning of prime cost
 Explain the treatment of opening and closing work in progress in manufacturing accounts
 Calculate the profit or loss on manufacturing
 Account for provision for unrealised profits in finished goods.
 Prepare manufacturing, trading and profit and loss accounts and balance sheet for sole
traders, partnerships and companies.

Introduction
A manufacturing organisation is one that manufactures (produces) goods for sale. This could
either be a sole trader, a partnership or a company.

Manufacturing account
For organisations that produce goods, a manufacturing account is prepared in addition to the
trading and profit and loss account.

A manufacturing account is an account that collects together all the costs involved in
production to determine the production cost of goods completed. In ascertaining the
production cost of the goods completed, all the elements of production cost (i.e. direct
materials, direct labour, direct expenses and production overheads) should be charged to the
manufacturing account.
 Direct materials, labour, and expenses are all those costs involved in production that
are traceable to units of goods produced. The total of all direct costs incurred in a year
is called the prime cost.
 Production overheads are all those costs incurred in a factory, but cannot be easily
traced to the units of goods produced.

At the end of the year, the cost of goods manufactured is then transferred, as the figure
equivalent to purchases, to the trading and profit and loss account.

Opening and closing work in progress

The goods partly completed at the start and end of the accounting period are respectively
known as opening work in progress and closing work in progress. The value of the
opening work in progress is added to the total production cost for the period while the value of
the closing work in progress is deducted in arriving at the production cost of goods completed.

219
Example:
W. Brown is a manufacturer. His trial balance as at 31st December 2004, is as follows:
Dr Cr
K’000 K’000
Capital 137 456
Drawings 8 560
Premises 40 000
Machinery 32 500
Office equipment 11 000
Delivery van expenses 2 500
Lighting and heating: Factory 2 859
Office 1 110
Manufacturing wages 45 470
General expenses: Office 3 816
Factory 5 640
Purchases of raw materials 39 054
Salesmen commission 7 860
Rent: Factory 4 800
Office 2 200
Office salaries 6 285
Debtors 28 370
Creditors 19 450
Bank 13 337
Sales 136 500
Stocks at 1st January 2004:
Raw materials 8 565
Finished goods 24 250
Work in progress 5 230 ______
293 406 293 406

Additional information:

1. Stocks at 31st December 2004, were:

Raw materials K9 050 000
Finished goods K24 780 000
Work in progress K6 420 000

2. Ignore depreciation of fixed assets.

Required:
Prepare the manufacturing, trading and profit and loss account for the year ended
31st December 2004 and a balance sheet as at that date.

220
Solution:
W Brown
Manufacturing, trading and profit and loss account
for the year ended 31st December 2004
K’000 K’000
Raw materials:
Opening stock 8 565
Purchases 39 054
Total stock available 47 619
Less: closing stock 9 050
Cost of raw materials consumed 38 569
Direct labour:
Wages 45 470
Prime cost 84 039
Add: production overheads:
Lighting and heating 2 859
General expenses 5 640
Rent 4 800
13 299
97 338
Add: opening work in progress 5 230
102 568
Less: closing work in progress 6 420
Production cost 96 148

Sales 136 500

Opening stock 24 250
Production cost 96 148
120 398
Less: closing stock 24 780
Cost of sales 95 618
Gross profit 40 882
Less expenses:
Administrative expenses 2 500
Lighting and heating 1 110
General expenses 3 816
Rent 2 200
Office salaries 6 285
Salesmen's commission 7 860
Total expenses 23 771
Net profit 17 111

221
 W. Brown
Balance sheet as at 31st December 2004
Cost Dep. Value
Fixed assets: K’000 K’000 K’000
Premises 40 000 - 40 000
Machinery 32 500 - 32 500
Office equipment 11 000 - 11 000
83 500 - 83 500
Current assets:
Stock: - raw materials 9 050
- work in progress 6 420
- finished goods 24 780
Debtors 28 370
Cash at bank 13 337
81 957
Less: Current liabilities:
Creditors 19 450

Working capital 62 507

Net assets 146 007

Financed by:
Capital 137 456
Add: net profit 17 111
154 567
Less: drawings 8 560
146 007

Goods transferred at market value

It is usual to allocate the gross profit earned by the business between the factory and the
selling department to reveal the actual profit earned from mere selling. This may also allow
the production manager to earn a commission. This is achieved by transferring the finished
goods from the factory to the selling department with a profit element (i.e. profit loading).
This is also called transferring goods at market value.

When this happens, there will be a balance in the manufacturing account representing a profit
or a loss arising from manufacturing goods instead of purchasing them as finished products.
This profit or loss should then be transferred to the profit and loss account.

222
Example:
The following information has been extracted from the books of Major manufacturing
company for the year to 30th September 2004:
K'000
Advertising 2 000
Deprecation for the year to 30th September 2004:
Factory equipment 7 000
Office equipment 4 000
Direct wages 40 000
Factory: insurance 1 000
Heat 15 000
Indirect materials 5 000
Power 20 000
Salaries 25 000
st
Finished goods at 1 October 2003 24 000
Office: electricity 15 000
General expenses 9 000
Postage and telephones 2 900
Salaries 70 000
Raw material purchases 200 000
Carriage inwards on raw materials 2 000
st
Raw material stock at 1 October 2003 8 000
Sales 512 400
Work in progress at 1st October 2003 12 000

Notes:

1. At 30th September 2004, the following were on hand:

K'000
Raw materials 10 000
Work in progress 9 000
Finished goods 30 000

2. At 30th September 2004, there was an accrual for advertising of K1 000 000, and it was
estimated that K1 500 000 had been paid in advance for electricity. These items had not
been included in the books of account for the year to 30th September 2004.

3. Goods produced during the year are to be transferred to the trading account at a market
value of K326 000 000.

4. For the purpose of stock valuation, finished goods have been valued at cost.

You are requested to prepare in the vertical columnar form, the company's manufacturing,
trading and profit and loss account for the year to 30th September 2004.

223
Solution:
Major Manufacturing Company
Manufacturing, trading and profit and loss account
for the year ended 30th September 2004
K’000 K’000 K’000
Raw materials:
Opening stock 8 000
Purchases 200 000
Add: carriage inwards 2 000
202 000
Total stock available 210 000
Less: closing stock 10 000
Cost of raw materials consumed 200 000
Direct labour:
Wages 40 000
Prime cost 240 000
Add: production overheads:
Depreciation - factory equipment 7 000
Insurance 1 000
Heat 15 000
Indirect materials 5 000
Power 20 000
Salaries 25 000
73 000
313 000
Add: opening work in progress 12 000
325 000
Less: closing work in progress 9 000
Production cost 316 000

Market value 326 000

Less: production cost 316 000
Manufacturing profit 10 000

Sales 512 400

Opening stock 24 000
Market value 326 000
350 000
Less: closing stock 30 000
Cost of sales 320 000
Gross profit on trading 192 400
Add: profit on manufacturing 10 000
202 400

224
 Less expenses:
Advertising 2 000
Add: accrual 1 000
3 000
Depreciation - office equipment 4 000
Electricity 15 000
Less: prepayment 1 500
13 500
General expenses 9 000
Postage and telephones 2 900
Salaries 70 000
Total expenses 102 400
Net profit 100 000

Provision for unrealised profit

In cases where goods are transferred at market price to the selling department, there may be
some of these goods that remain unsold at the end of the year. If the stock of such goods is
valued at the transfer price or market price, then in order to arrive at the true profit, it is
necessary to provide in the accounts for unrealised profits included in the valuation of stocks.

A provision for unrealised profit account is opened to account for such profits. This account is
prepared in the same manner as the provision for doubtful debts account, i.e. an increase in the
account balance is treated as an expense, while a decrease is treated as a gain in the profit and
loss account. The balance on the provision for unrealised profit account is at the end of the
year deducted from the closing stock of finished goods in the balance sheet.

Example:
The following balances as at 31st December 2004 have been extracted from the books of
William Speed, a manufacturer:
K'000
Stock at 1st January 2004:
Raw materials 7 000
Work in progress 5 000
Finished goods 6 900
Purchase of raw materials 38 000
Direct labour 28 000
Factory overheads:
Variable 16 000
Fixed 9 000
Administrative expenses:
Rent and rates 19 000
Heat and light 6 000
Stationery and postage 2 000

225
 Staff salaries 19 380
Sales 192 000
Plant and machinery:
At cost 30 000
Provisions for depreciation 12 000
Motor vehicles (for sales deliveries):
At cost 16 000
Provisions for depreciation 4 000
Creditors 5 500
Debtors 28 000
Drawings 11 500
Balance at bank (Dr) 16 600
Capital at 1st January 2004 48 000
Provision for unrealised profit at 1st January 2004 1 380
Motor vehicles running costs 4 500

Additional information:

1. Stocks at 31st December 2004, were as follows:

K'000
Raw materials 9 000
Work in progress 8 000
Finished goods 10 350

2. The factory output is transferred to the trading account at factory cost plus 25% for factory
profit. The finished goods stock is valued on the basis of amounts transferred to the debit
of the trading account.

3. Depreciation is provided annually at the following percentages of the original costs of

fixed assets held at the end of each financial year:
Plant and machinery 10%
Motor vehicles 25%

4. Amounts accrued due on 31st December 2004 for direct labour amounted to K3 000 000
and rent and rates prepaid at 31st December 2004 amounted to K2 000 000.

Required:
Prepare the manufacturing, trading and profit and loss account for the year ended 31st
December 2004, and a balance sheet as at that date.
Note: the prime cost and factory cost should be clearly shown.

226
Solution:
William Speed
Manufacturing, trading and profit and loss account
for the year ended 31st December 2004
K’000 K’000 K’000
Raw materials:
Opening stock 7 000
Purchases 38 000
Total stock available 45 000
Less: closing stock 9 000
Cost of raw materials consumed 36 000
Direct labour:
Wages 28 000
Add: wages accrued 3 000
31 000
Prime cost 67 000
Add: factory overheads:
Variable 16 000
Fixed 9 000
Depreciation - plant and machinery 3 000
28 000
95 000
Add: opening work in progress 5 000
100 000
Less: closing work in progress 8 000
Factory cost 92 000

Market value 115 000

Less: factory cost 92 000
Manufacturing profit 23 000

Sales 192 000

Opening stock 6 900
Market value 115 000
121 900
Less: closing stock 10 350
Cost of sales 111 550
Gross profit on trading 80 450
Add: profit on manufacturing 23 000
103 450
Less expenses:
Rent and rates 19 000
Less: prepayment 2 000
17 000
Provision for unrealised profit (w1) 690

227
 Heat and light 6 000
Stationery and postage 2 000
Staff salaries 19 380
Depreciation - motor vehicles 4 000
Motor vehicle running costs 4 500
Total expenses 53 570
Net profit 49 880

William Speed
Balance sheet as at 31st December 2004
Cost Dep. Value
Fixed assets: K’000 K’000 K’000
Plant and machinery 30 000 15 000 15 000
Motor vehicles 16 000 8 000 8 000
46 000 23 000 23 000
Current assets:
Stock: - raw materials 9 000
- work in progress 8 000
- finished goods 10 350
less: provision for unrealised profit 2 070
8 280
Debtors 28 000
Cash at bank 16 600
Rent and rates prepaid 2 000
71 880
Less: Current liabilities:
Creditors 5 500
Direct labour accrued 3 000
8 500
Working capital 63 380
Net assets 86 380

Financed by:
Capital 48 000
Add: net profit 49 880
97 880
Less: drawings 11 500
86 380

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Workings
1.
Provision for unrealised profit account
___________________________________________________________________
K'000 K'000
Balance c/d 2 070 Balance b/d 1 380
Profit and loss account 690
2 070 2 070

Note: Closing balance amount = K10 350 000 x 25/125 = K2 070 000

___________________________________________________________________________
REVIEW QUESTIONS

QUESTION ONE
The following is a trial balance for J Banda as at 31st December 2004:
Dr Cr
K’000 K’000
Capital 29 680
Drawings 2 000
Productive machinery (cost K28m) 23 000
Accounting machinery (cost K2m) 1 200
Royalties 700
Carriage inwards on raw materials 350
Purchases of raw materials 37 000
Stocks at 1st January 2004:
Raw materials 2 100
Finished goods 3 890
Work in progress 1 350
Wages (direct K18m, factory K14.5m) 32 500
General factory expenses 3 100
Lighting 750
Factory power 1 370
Administrative salaries 4 400
Salesmen's salaries 3 000
Commission on sales 1 150
Rent 1 200
Insurance 420
General administrative expenses 1 340
Bank charges 230
Discount allowed 480
Carriage outwards 590
Debtors 14 230

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Creditors 12 500
Bank 5 680
Cash 150
Sales 100 000
142 180 142 180

Notes at 31st December 2004:

1. Stock of raw materials K2 400 000, stock of finished goods K4 000 000, work in progress
K1 500 000.
2. Lighting, rent and insurance are to be apportioned: factory 5/6ths, administration 1/6th.
3. Depreciation on productive machinery and accounting machinery at 10% per annum on
cost.

Required:
Prepare the manufacturing, trading and profit and loss account for the year ended 31st
December 2004 and a balance sheet as at that date.
NOTE: expenses in the profit and loss account should be shown under the following headings:
 Administrative expenses
 Selling and distribution expenses
 Financial charges

QUESTION TWO
The following list of balances as at 31st July 2005 has been extracted from the books of
Collins Chalibulacha who commenced business on 1st august 2004 as a designer and
manufacturer of office furniture:
K'000
Plant and machinery, at cost on 1st August 2004 60 000
Motor vehicles, at cost on 1st August 2004 30 000
Sales 170 000
Raw materials purchased 43 000
Direct factory wages 39 000
Light and power 5 000
Indirect factory wages 8 000
Machinery repairs 5 600
Motor vehicle running expenses 12 000
Rent and insurance 11 600
Administrative staff salaries 31 000
Administrative salaries 9 000
Sales and distribution staff salaries 13 000
Capital at 1st August 2004 122 000
Sundry debtors 16 500
Sundry creditors 11 200
Balance at bank (debit) 8 500
Drawings 6 000

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Additional information for the year ended 31st July 2005:

1. It is estimated that the plant and machinery will be used in the business for 10 years and
the motor vehicles used for 4 years: in both cases it is estimated that the residual value will
be nil. The straight-line method of providing for depreciation is to be used.

2. Light and power charges accrued due at 31st July 2005 amounted to K1 000 000 and
insurance prepaid at 31st July 2005 totalled K800 000.

3. Stocks were valued at cost at 31st July 2005 as follows:

K'000
Raw materials 7 000
Finished goods 10 000

4. The valuation of work in progress at 31st July 2005 included variable and fixed factory
overheads and amounted to K12 300 000.

5. Two thirds of the light and power, and rent and insurance costs are to be allocated to the
factory costs and one third to general administration costs.

6. Motor vehicle costs are to be allocated equally to factory costs and general administration
costs.

7. Goods manufactured during the year are to be transferred to the trading account at
K95 000 000.

Required:
Prepare a manufacturing, trading and profit and loss account of the year ended 31st July 2005
of Collins Chalibulacha, and a balance sheet as at that date.
___________________________________________________________________________

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