Practice Activity 8.10 Preparation of the statement of profit or loss from the incomplete records

Practice Activity 8.10 Preparation of the statement of profit or loss from the incomplete records of a business entity

Mr. Help is the owner of Mr. Help Enterprises. The business had been operating from the personal residence of Mr. Help from January 2013 until December 2016. Mr. Help prepares his financial statements to 31 March yearly. The following facts were obtained from the accounting records of the business as at 31 March 2018:

₦

Inventory (cost) 12,480

Inventory (net realizable value) 16,570

Accounts receivable 14,278

Accounts payable 7,633

Building (carrying amount) 25,000

Office furniture (carrying amount) 8,000

Equipment (carrying amount) 5,000

Mr. Help Enterprises had 40 percent of his inventory destroyed by fire in his warehouse on the night of 20 August 2018. Also, the fire destroyed the finance section of his office building and affected many of his accounting records, including his cash book, ledgers, sales and purchases day books. Based on the carbon copies of some accounting records kept in his private residence, the following facts are known to have occurred from 1 April to 20 August 2018:

₦

1. Cash receipts from customers 3,600

2. Receipts through the bank from credit customers 28,145

3. Accounts receivable 12,333

4. Cash payments to suppliers 3,900

5. Payments to suppliers through the bank 13,370

6. Accounts payable 6,289

7. Expenses incurred by Mr. Help include:

   1. Advertisement expenses ₦685 which Mr. Help paid to an advertising agency to promote the products he sells.

   2. Fuel expenses for the motor vehicle of Mr. Help amounted to ₦335.

Additional information:

i. Electricity expenses amounting to ₦367 was paid to IKH Electric Distribution Company for the period starting from 1 April to 30 September 2018.

ii. Mr. Help hired the services of Amaco Construction Ltd for the renovation of the office building. The renovation commenced from 21 August, 2018 and was carried out to replace certain parts of the building (including the warehouse) that was destroyed by the fire. The renovation of office building cost ₦8,075. The renovation was concluded on 30 August, 2018.

iii. The gross profit margin on all revenue from contracts with customers has been constant at 25%.

iv. Depreciation is on a reducing balance basis. The Depreciation rates are as follows:

Building 20%

Office furniture 15%

Equipment 15%

Required: Prepare the statement of profit or loss for the sole proprietor from 1 April to 31 August 2018.

See the suggested answers to practice activity 8.10 here.

Suggested answers to practice activity 8.10

Step 1: Prepare total accounts receivable control account to ascertain the amount of revenue.

Step 2: Prepare total accounts payable control account to ascertain the amount of purchases.

Step 3: Calculate gross profit as a margin on revenue

Gross Profit is the margin on revenue = 25%

Therefore, 25% of 29,800 = ₦7,450

Step 4: Calculate cost of sales

Cost of sales + Gross Profit = Revenue

Cost of sales + ₦7,450 = ₦29,800

Cost of sales = ₦29,800 - ₦7,450

Cost of sales = ₦22,350

Step 5: Calculate closing inventory

Opening inventory + Purchases – Closing inventory = Cost of sales

Opening inventory + Purchases – Cost of sales = Closing inventory

Closing inventory = ₦12,480 + ₦15,926 - ₦22,350

Closing inventory should have been ₦6,056. However, 40% of the inventory was destroyed by fire.

40% of ₦6,056 is ₦2,422.

Therefore, Closing inventory = ₦6,056 - ₦2,422 = ₦3,634

Return to Step 4: Re-calculate cost of sales to reflect the 40 percent of the inventory that was destroyed by fire.

Therefore, the cost of sales will now be:

Step 6: Pro-rate the electricity expenses of ₦367 paid to IKH Electric Company from 1 April - 30 September 2018 to 1 April - 31 August 2018.

1 April to 30 September 2018 = 6 months or 183 days

April, June and September have 30 days each = 30 x 3 = 90 days

May, July and August have 31 days each = 31 x 3 = 93 days

The total number of days from 1 April to 30 September 2018 is 183 days.

The total number of days from 1 April to 31 August 2018 is 153 days.

Pro-rating electricity expenses =

Step 7: Pro-rate the depreciation expenses for the period ended 31 August 2018

The depreciation expense for the period is calculated as follows:

Step 8: Prepare the statement of profit or loss for the period ended 31 August 2018

Note:

Renovation expenses will not be expensed in the accounting period ended 31 August 2018. Based on IAS 16 Property, Plant and Equipment, Mr. Help should recognise the cost of renovation and replacement in the carrying amount of office building. It is probable that future economic benefits associated with the replacement will flow to Mr. Help Enterprises. Also, the cost of the replacement is known and estimated to cost ₦8,075.