Walkthrough question two
This chapter walks through a comprehensive question on preparing the statement of profit or loss and the statement of financial position for a limited liability company.
Learning objective
By the end of this chapter, you should be able to:
- Calculate revenue, cost of sales, gross profit, operating profit, profit before financing and income taxes, profit before income taxes, profit (for the year), and total comprehensive income (for the year) from the given information.
- Record the income tax expense in the statement of profit or loss, including the under-/ over-provision of tax in the prior year
- Prepare a statement of profit or loss and other comprehensive income or extracts as applicable.
- Prepare a statement of financial position or extracts as applicable.
Illustration 2: Sokoto Company Ltd
Sokoto Company Ltd is a retail company that has been operating for several years. The following trial balance was extracted from the books of account as at 31 December 2024:
| Debit ($) | Credit ($) | |
|---|---|---|
| Ordinary share capital (50,000 shares) | 200,000 | |
| Retained earnings (1 January 2024) | 133,400 | |
| 8% Debenture (issued 1 July 2023) | 200,000 | |
| Land and buildings - cost | 450,000 | |
| Land and buildings - accumulated depreciation | 72,000 | |
| Equipment - cost | 180,000 | |
| Equipment - accumulated depreciation | 54,000 | |
| Inventory (1 January 2024) | 80,500 | |
| Account receivables | 124,800 | |
| Allowance for doubtful debts | 3,600 | |
| Cash at bank | 45,200 | |
| Account payables | 83,300 | |
| Sales revenue | 935,200 | |
| Taxation | 3,000 | |
| Purchases | 456,000 | |
| Distribution costs | 142,600 | |
| Administrative expenses | 186,400 | |
| Debenture interest paid | 8,000 | |
| Dividend paid | 5,000 | |
| TOTALS | 1,681,500 | 1,681,500 |
Additional Information:
- Inventory at 31 December 2024 was valued at $94,200.
- Depreciation for the year has not yet been recorded. Depreciation is fully charged to administrative expenses.
- Buildings: 2% per annum on cost (land value is $150,000)
- Equipment: 20% per annum using the reducing balance method
- At the end of the year, the land was revalued to $200,000
- The allowance for doubtful debts should be adjusted to 4% of accounts receivable.
- At year-end, distribution costs of $8,400 are outstanding, while the administrative expenses amount of $5,800 was prepaid.
- Debenture interest for the second half of the year remains unpaid.
- Income tax for the year is estimated at $48,600. The balance of taxation in the trial balance relates to over/under provision of tax in the previous year.
Required: Prepare for Sokoto Company Ltd:
-
The Statement of Profit or Loss and Other Comprehensive Income for the year ended 31 December 2024
-
The Statement of Financial Position as at 31 December 2024.
Suggested solution:
Before you start the solution, make sure you can explain how each item in the additional information affects:
- the statement of profit or loss and other comprehensive income, and/or
- the statement of financial position.
Work through this question carefully and take time to link each adjustment to the relevant trial balance figure. This question brings together the main adjustments you’re commonly tested on when preparing the statement of profit or loss and the statement of financial position. Pay close attention to how each adjustment is treated.
W1: Cost of sales
Calculate the cost of sales.
| Amount ($) | |
|---|---|
| Opening inventory | 80,500.00 |
| Purchases | 456,000.00 |
| Closing inventory | (94,200.00) |
| ------------------: | |
| 442,300.00 |
W2: Selling expenses
Calculate the selling expenses.
| Amount ($) | |
|---|---|
| Per trial balance | 142,600.00 |
| Accrued selling expenses | 8,400.00 |
| ------------------: | |
| 151,000.00 |
W3: Administrative expenses
Calculate the administrative expenses.
| Amount ($) | |
|---|---|
| Per trial balance | 186,400.00 |
| Depreciation* | 31,200.00 |
| Increase in provision for doubtful debt* | 1,392.00 |
| Prepaid administrative expenses | (5,800.00) |
| ------------------: | |
| 213,192.00 |
Note: the prepayment is shown as a current asset in the statement of financial position.
- Depreciation charge for the year:
-
Building = $300,000 x 2% = $6,000
-
Equipment = ($180,000 - $54,000) x 20% = $25,200
- Provision for doubtful debts
| Description | Amount ($) |
|---|---|
| Per trial balance (Opening balance) | 3,600.00 |
| Increase in provision for doubtful debt | 1,392.00 |
| Closing balance (4% of $124,800 (Account receivable)) | 4,992.00 |
W4: Finance expense
Calculate the finance expense.
| Amount ($) | |
|---|---|
| Debenture interest paid | 8,000.00 |
| Accrued (outstanding) interest | 8,000.00 |
| ------------------: | |
| 16,000.00 |
The debenture interest for the year is $16,000 (8% of $200,000). Only $8,000 appears in the trial balance because that is the amount paid during the year. The remaining $8,000 is unpaid at the year-end, so it must be accrued.
W5: Income tax expenses
| Amount ($) | |
|---|---|
| Current year income tax | 48,600 |
| Under tax provision | 3,000 |
| ------------------: | |
| 51,600 |
The taxation figure in the trial balance has a debit balance, so it represents an under-provision from the prior year. The current year income tax ($48,600) is shown as a current liability (income tax payable) in the statement of financial position.
The following workings are used in the statement of financial position.
W6: Property, plant and equipment
Prepare the PPE schedule to determine the amount for the SOFP.
| Buildings | Land | Equipment | Totals | |
|---|---|---|---|---|
| Cost | 300,000.00 | 150,000.00 | 180,000.00 | 630,000.00 |
| Accumulated depreciation (1/1/2024) | (72,000.00) | - | (54,000.00) | (126,000.00) |
| Carrying amount (1/1/2024) | 228,000.00 | 150,000.00 | 126,000.00 | 504,000.00 |
| Depreciation for the year | (6,000.00) | - | (25,200.00) | (31,200.00) |
| Revaluation surplus* | - | 50,000.00 | - | 50,000.00 |
| Carrying amount (31/12/2024) | 222,000.00 | 200,000.00 | 100,800.00 | 522,800.00 |
Revaluation surplus (Land) = CA - Fair Value = $150,000 - $200,000 = $50,000
This revaluation surplus of $50,000 is presented in Other Comprehensive Income and creates a revaluation reserve under Equity in the statement of financial position.
W7: Account receivables
Adjust the accounts receivable for the SOFP.
| Amount ($) | |
|---|---|
| Per trial balance | 124,800 |
| Allowance for doubtful debt | (4,992) |
| ------------------: | |
| 119,808 |
W8: Accrued expenses
Determine the accrued expenses for the SOFP.
Hint: Add all the accrued expenses (to be shown as current liabilities) in the statement of financial position.
| $ | |
|---|---|
| Debenture interest accrued (w4) | 8,000 |
| Selling expenses accrued (w2) | 8,400 |
| -----------------: | |
| 16,400 |
W9: Prepayments
Determine the prepaid expense balance for the SOFP.
Hint: Add all the prepaid expenses (to be shown as a current asset) in the statement of financial position.
| $ | |
|---|---|
| Administrative expenses prepaid (w3) | 5,800 |
W10: Retained earnings
Hint: You can only complete this after calculating profit for the period. Profit for the year is obtained from the statement of profit or loss.
| Amount ($) | |
|---|---|
| Opening balance (per trial balance) | 133,400 |
| Profit for the year | 61,108 |
| Dividend paid | (5,000) |
| ------------------: | |
| 189,508 |
Statement of profit or loss and other comprehensive income
Prepare the statement on your own before you check the answer.
Sokoto Company Limited Statement of Profit or Loss and Other Comprehensive Income for the year ended 31 December 2024
| Note | $ | |
|---|---|---|
| Sales revenue | 935,200.00 | |
| Cost of sales | 1 | (442,300.00) |
| Gross profit | 492,900.00 | |
| Distribution cost | 2 | (151,000.00) |
| Administrative expenses | 3 | (213,192.00) |
| Profit before interest and tax | 128,708.00 | |
| Finance expense | 4 | (16,000.00) |
| Profit before tax | 112,708.00 | |
| Income tax for the year | 5 | (51,600.00) |
| Profit after tax | 61,108.00 | |
| Other comprehensive income | ||
| Revaluation surplus | 6 | 50,000.00 |
| Total comprehensive income | 111,108.00 |
Statement of financial position
Prepare the statement on your own before you check the answer.
Sokoto Company Ltd Statement of Financial Position as at 31 December 2024
| Note | $ | $ | |
|---|---|---|---|
| Non-current asset: | |||
| Property, plant and equipment | 6 | 522,800.00 | |
| Current asset: | |||
| Inventories | 94,200.00 | ||
| Accounts receivables | 7 | 119,808.00 | |
| Prepaid expenses | 9 | 5,800.00 | |
| Cash at bank | 45,200.00 | ||
| Total asset | 787,808.00 | ||
| Equity and liabilities | |||
| Equity: | |||
| Ordinary share capital (50,000 shares) | 200,000.00 | ||
| Retained earnings | 10 | 189,508.00 | |
| Revaluation surplus | 50,000.00 | 439,508.00 | |
| Non-current liabilities: | |||
| 8% Debenture | 200,000.00 | ||
| Current liabilities: | |||
| Account payables | 83,300.00 | ||
| Accrued expenses | 8 | 16,400.00 | |
| Income tax payable | 5 | 48,600.00 | 148,300.00 |
| Total equity and liabilities | 787,808.00 |
WARNING: To strengthen your understanding of preparing these statements, work through this question independently (without checking the solution) at least 2-3 times. This question draws on concepts covered in earlier topics. If any treatment is unclear, go back to the relevant topic and review it. Consistent practice is essential for accurate financial statements preparation.