5.1 Sole traders (3)
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1.
XYZ Company uses the straight-line method for depreciation. A machine cost £50,000 and is expected to have a useful life of 10 years with a residual value of £5,000. Calculate the annual depreciation expense for the first year of use.
Calculation:
- Depreciable Amount: £50,000 (Cost) - £5,000 (Residual Value) = £45,000
- Annual Depreciation: £45,000 / 10 years = £4,500
Therefore, the annual depreciation expense for the first year is £4,500.
2.
Question 3: A company has a stock of £25,000. £3,000 of this stock was taken by the owner for personal use. The owner has not yet made a claim for this. Explain the potential consequences if this adjustment is not made and how it should be recorded in the accounting records.
Answer:
Consequences of not making the adjustment:
- Inaccurate Cost of Goods Sold: The cost of goods sold will be overstated, leading to an inflated gross profit and potentially an overstatement of profit before tax.
- Inaccurate Profitability Analysis: The company's profitability will be misrepresented, making it difficult to assess its true financial performance.
- Misleading Financial Statements: The financial statements will not provide a true and fair view of the company's financial position and performance.
How to record the adjustment:
The adjustment should be recorded as a deduction from the opening stock. This is done by making the following journal entry:
Date | Account Debited | Account Credited |
31/12/2023 | Cost of Goods Sold | Inventory (or Stock) |
Explanation:
- The Cost of Goods Sold account is debited by £3,000.
- The Inventory (or Stock) account is credited by £3,000.
- This adjustment ensures that the cost of goods sold is accurately reflected in the financial statements, providing a true and fair view of the company's financial performance.
3.
A company has the following balances as at 31 December 2023:
- Non-current Assets: Land & Buildings £150,000, Equipment £80,000
- Current Assets: Inventory £30,000, Cash at Bank £10,000, Accounts Receivable £20,000
- Current Liabilities: Accounts Payable £15,000, Short-term Loan £5,000
- Non-current Liabilities: Long-term Loan £50,000
- Capital: £100,000
State the components of the Statement of Financial Position shown in the data above. Explain briefly what each component represents.
The Statement of Financial Position (also known as the Balance Sheet) presents a snapshot of a company's assets, liabilities, and capital at a specific point in time (31 December 2023). The components are:
- Non-current Assets: These are long-term assets used in the business. They represent resources owned by the company that are expected to provide benefit for more than one accounting period. Examples include land, buildings, and equipment.
- Intangible Assets: These are non-physical assets that have value. Examples include patents, trademarks, and goodwill. (Not explicitly shown in the data, but a key component).
- Current Assets: These are assets that are expected to be converted into cash or used up within one year. Examples include inventory, cash, and accounts receivable.
- Current Liabilities: These are obligations that are expected to be settled within one year. Examples include accounts payable and short-term loans.
- Non-current Liabilities: These are obligations that are not expected to be settled within one year. Examples include long-term loans.
- Capital: This represents the owners' stake in the company. It is the difference between the total assets and the total liabilities. It includes share capital and retained earnings.