Tutor's Support Pack: HND Accounting Graded Unit 3 DE66 35

HND Accounting
Graded Unit 3
DE66 35
Tutors Support Pack
Olive Gardiner
Adam Smith College
January 2007
COLEG
Accounting Graded Unit 3
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Acknowledgements
First published January 2007
Colleges Open Learning Exchange Group (COLEG) Material developed by Adam
Smith College.
No part of this publication may be reproduced without the prior written consent of
COLEG, except as authorised in the paper entitled Intellectual Property Rights of
COLEG Members.
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Contents
Tutor materials
Introduction to unit
Purpose of this unit
Assessment
Unit specification and assessment exemplars
Introduction to this pack
Student materials

Financial reporting
Basic accounts preparation standard year end adjustments
6
7
7
Incorporating long term work in progress adjustments
15
Incorporating revaluation adjustments
20
Incorporating finance lease adjustments
24
Incorporating issues of shares
27
Disclosure
30
Conceptual matters
36
Taxation
37
Appendices
47
Appendix 1 SSAP 9
47
Appendix 2 SSAP 21
51
Appendix 3 FRS 15
55
Appendix 4 FRS 3
61
Appendix 5 SSAP25
65
Appendix 6 FRS 18 Theoretical matters
67
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Appendix 7 Adjusting the accounting profit
82
Appendix 8 Capital allowances
88
Appendix 9 Calculating the CT due
97
Appendix 10 Relief for trading losses
99
Appendix 11 solutions to revision exercises
104
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Tutor materials
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This Group Award Graded Unit is designed to provide evidence that the candidate has
achieved the following aims of the HND Accounting:
To prepare students for progression to further study in accounting or a related

discipline.
To develop and integrate a range of contemporary vocational skills in addition to

those developed at HNC level (ie evaluating and interpreting financial data;
applying relevant legislation; providing information for decision-making).
To enable students to integrate financial accounting with relevant business taxation.
Assessment
Students will be assessed in this unit by a three-hour written examination and will be
allowed access to a taxation text book during the assessment. To achieve this unit,
students should attain 50% of available marks with achievement being graded
according to marks attained.
Prior to undertaking this Group Award Graded Unit, students should have completed
the following HND mandatory units:
Financial Reporting and Analysis (DE5G 35)
Accounting for Specialised Transactions (DE5E 35)
Business Taxation (DE5L 35)
Unit specification and assessment exemplars

The Unit specification will be an essential document in the delivery of the unit.
Exemplar instruments of assessment with marking guidelines have been produced to
provide examples of the specific evidence required to demonstrate achievement of the
aims of the HND Accounting group award which this Graded Unit is designed to cover,
and to indicate the national standard of achievement required at SCQF 8.
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Introduction to this pack

The purpose of this pack is to provide materials for use in the delivery of this Graded
Unit. The main body of the student material consists of grouped revision exercises as
per the contents list. Solutions are provided at the end. These are all together in one
place this was felt to be the most appropriate presentation, as they are more easily
removed if you so wish.
Some revision notes are included in the appendices to give easy reference for those
students who have trouble remembering their original teaching materials on these
topics. Those delivering the units will know to what extent they wish to make use of
these.
Note:
Users of the pack should note that it is up to date as at the time of writing and reflects
the changes in format required by the change in the Companies Act brought into force
on 1st January 2005 and reflected in the version of the FRSSE at that date, whereby
dividends paid during the year should be debited directly to equity and no longer be
shown in the profit and loss account. The pack follows the format as laid down in the
FRSSE and FRS 25, showing dividends paid in a simplified reconciliation of
shareholders funds.
It is recognised that there may be further changes in the very near future when the new
Companies Act comes into force.
As the Unit entitled Financial Reporting and Analysis is based on FRSSE companies,
the pack also recognises:
There is now no requirement for small companies to disclose staff numbers

(financial years beginning on or after 1st January 2005).
There is now no requirement for small companies to disclose wages and salaries,
social security costs and other pension costs (financial years beginning on or after
1st January 2005).
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Student materials
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This Group Award Graded Unit is designed to provide evidence that you have achieved
the following aims of the HND Accounting:
To prepare students for progression to further study in accounting or a related

discipline.
To develop and integrate a range of contemporary vocational skills in addition to

those developed at HNC level (ie evaluating and interpreting financial data;
applying relevant legislation; providing information for decision-making).
To enable students to integrate financial accounting with relevant business taxation.
Prior to undertaking this Group Award Graded Unit, you should have completed the
following HND mandatory units:
Financial Reporting and Analysis (DE5G 35)
Accounting for Specialised Transactions (DE5E 35)
Business Taxation (DE5L 35)
You will be assessed in this unit by means of a three hour examination during which
you will have access to a taxation text book. In order to achieve the unit you must
obtain 50% or more of the available marks.
Remember that your result in this unit will provide the grade that will appear on
your HND certificate. It is therefore very important that you do yourself justice in
your performance in this unit.
The following material is designed to help you revise the material you have studied in
the mandatory units specified above and to help you practise putting the material
together, as you will have to in the examination and of course in practice.
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Financial reporting
Basic accounts preparation standard year end adjustments
Revision exercise 1
The following trial balance was extracted from the accounts of Castlepark at
31st March 20X9.
000
000
General administrative expenses
Selling and delivery costs
Opening stock
Purchases
Interest on bank overdraft
Prepaid expenses
Bad debts written off
VAT account
Trade creditors
Bank overdraft
12% debenture stock
Ordinary share capital, issued and fully paid
Profit and loss account at 1/4/X8
Share premium account
Dividend paid
Sales (excl. VAT)
Trade debtors
Accruals
Freehold land
Freehold property:
cost
accumulated depreciation @ 1/4/X8
Equipment and vehicles:
cost
accumulated depreciation @ 1/4/X8
29,610
11,205
79,519
503,500
2,496
1,729
1,755
3,229
66,465
29,960
9,975
78,750
7,498
29,400
4,760
608,738
136,620
1,120
30,000
31,145
3,189
10,553
4,568
842,892
842,892
Required:
From the above trial balance and the information overleaf, prepare a profit and loss
account for the year ended 31st March 20X9 and a balance sheet at that date.
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Additional information:
1) Corporation tax has been estimated to be 22,050,000 based on the year's
profit.
2) The 12% debenture stock was issued at the end of the year.
3) The rates to be charged for the year as depreciation are:
Freehold property
2% (of which 25% is to be charged to Administration,

50% to cost of sales and the rest to Distribution)
Equipment and vehicles
15% (of which 50% is to be charged to cost of sales

and 50% to Distribution)
4) Closing stock was valued at 72,500,000.

5) Auditors fees of 85,000 are to be accrued.
6) The company pays its annual insurance premiums in full on the 1st January every
year. This years payment was for 64,000.
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Revision exercise 2
The following trial balance was extracted from the accounts of Andrene at 31st March
20X9.
000
000
Cost of goods sold
Prepaid expenses
VAT account
Investments
Trade creditors
Bank overdraft
Closing stock of finished goods
10% debenture stock
Dividend paid Nov 'X8
Deferred tax
Sales (excl. VAT)
Trade debtors
Accruals
Investment income (rec'd Oct 'X8)
Proceeds of the disposal of equipment
Purchase of equipment and vehicles
Fixed assets, NBV at 1/4/X8
23,000
5,000
21,000
6,600
175,600
670
1,500
1,450
31,400
12,100
9,200
83,940
5,000
3,650
1,200
7,000
352,000
60,200
200
520
50
560
36,500
419,170
419,170
Required:
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1) Corporation tax has been estimated to be 8,600,000 based on the year's profit.
28,000 is to be transferred to the deferred tax account representing the excess of
capital allowances over depreciation charges.
2) The 10% debenture stock was in issue throughout the year.
3) The equipment and vehicles disposed of had a written down value of 40,000 and
originally cost 75,000.
The fixed assets at 1/4/X8 were:
Freehold property
Cost or valuation
50,400,000
10,000,000
Accumulated depreciation
18,200,000
5,700,000
The rates to be charged for the year as depreciation are:

Freehold property
2% (of which 40% is to be charged to administration,

40% to cost of sales and the rest to distribution)

and 50% to distribution)
4) Audit fees of 176,000 are to be accrued.

5) The accountant has decided that the amount included in debtors relating to FPB plc
(200,000) should be written off as the company has gone into liquidation. He also
considers a general doubtful debt allowance of 5% of the remaining debtors will be
required to reflect the expected difficulties being experienced in the sector.
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Revision exercise 3
The following trial balance was extracted from the accounts of Milton at 31st March
20X7.
000
000
Trade creditors
Bank overdraft
12% debenture stock
Cost of goods sold
VAT account
Investments
Dividend paid
Sales (excl. VAT)
Trade debtors
Accruals
Investment income
Deferred tax
42,538
19,134
60,856
6,384
13,518
17,171
291,040
54,400
5,454
2,698
2,066
26,643
14,224
3,046
378,000
98,077
475
177
11,592
21,395
534,444
534,444
Required:
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2) The 12% debenture stock was issued at par at the start of the year.
3) The fixed assets at 1/4/X6 were:
Freehold property
19,933,000
6,426,000
2,041,000
2,923,000
Cost or valuation
The amounts to be charged for the year as depreciation are:

Freehold property
226,000 (of which 81,000 is to be charged to

administration, 56,000 to cost of sales and the rest to
selling and distribution expenses)
605,000 (of which 202,000 is to be charged to

Administration, 134,000 to cost of sales and the rest
to selling and distribution expenses)
4) The following expenses are to be accrued:

23,000
Accountancy services
35,000
12
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Revision exercise 4
The following trial balance was extracted from the accounts of Panico at 31st March
20X9.
000
000
Purchases
Dividend paid
VAT account
Trade creditors
Bank
Opening stock of finished goods
10% debenture stock
Corporation tax
Deferred tax
Sales (excl. VAT)
Trade debtors
14,090
9,980
220,960
34,800
4,500
9,600
6,942
1,650
25,400
15,980
57,025
4,800
35
807
337,450
65,955
28,040
419,007
419,007
Required:
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Cost or valuation
Freehold property
28,000,000
7,800,000
5,040,000
2,720,000

Freehold property
2% of cost (50% administration, 30% to cost of sales

and 20% to selling and distribution)
16% of cost (50% to cost of sales and the rest to

selling and distribution expenses)
2) Closing stock was estimated to be 85m

Tax paid in January 20X9 (based on the profit of 20X8) was 8,900,000 which was
35,000 more than originally estimated.
4) The 12% debenture stock was in issue throughout the year.
5) Auditors fees of 125,000 are to be accrued.
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Incorporating long term work in progress adjustments

The exercises contained in this section relate to organisations with long term work in
progress. If you are unsure of the treatment, revision material is contained in
appendix 1.
Revision exercise 5
The trial balance for Gammon plc, extracted at 31st December 20X6 contains the
following balances relating to a contract with Bilt Ltd:
Dr
Bilt: contract account costs so far
Cr
450,000
Bilt: payments on account
550,000
You discover the following about the contract:

The contract was started on 1st July 20X6, and is expected to finish in November
20X7. The total contract price is 2m.
Expected costs to completion are 750,000 and the surveyor has confirmed that at the
year end the contract was 30% complete.
Required:
Show how this contract will be reflected in the profit and loss account for the year
ended 31st December 20X6 of Gammon plc, and in the balance sheet at that date.
You should show all journal entries necessary.
15
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Revision exercise 6
The following trial balance was extracted from the accounts of Acer at 31st March
20X9.
000
000
Profit and loss account at 1/4/x8
Cost of goods sold
VAT account
Contract account
Investments property
Trade creditors
Bank overdraft
12% debenture stock
Dividend paid
Directors total emoluments
Deferred tax
Sales (excl. VAT)
Trade debtors
Investment income
Purchase of Equipment and vehicles
Fixed assets, NBV at 1/4/x8
37,800
3,600
10,458
15,210
203,280
771
1,500
50
10,212
31,903
14,888
58,956
4,000
9,785
7,280
270
8,694
283,856
73,526
134
48
245
16,050
396,258
396,258
Required:
From the above trial balance and the information on the following page, prepare a profit
and loss account for the year ended 31st March 20X9 and a balance sheet at that date.
16
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2) The 12% debenture stock was issued at the start of the year.
3) The directors' total emoluments of 270,000 are to be charged as 222,000 to
administrative expenses and 48,000 to distribution costs.
4) The equipment and vehicles disposed of had a written down value of 75,600 and
originally cost 132,600.
The fixed assets at 1/4/x8 were:
Cost or valuation
Freehold property
Equipments and vehicles
14,950,000
4,818,000
1,530,000
2,188,000

Freehold property 2% of cost (50% administration, 30% to cost of sales and 20%
to selling and distribution)
Equipment and vehicles 15% of cost (50% to cost of sales and the rest to selling
and distribution expenses)
5) Included in stock are 20 items made as a special order for a customer who went
into liquidation before they were delivered. As they are of a specialist nature, they
can only be sold for scrap. Their net scrap value is expected to be 1,000 each,
although they originally cost 2,500 each to make.
6) The contract account balance of 50,000 represents the balance of 500,000 costs
so far incurred on a long term contract and 550,000 received from the contractee.
No other entries have been made in respect of this contract. The details are as
follows:
Total contract value
885,000
Value of work certified
600,000
Cost of work certified
400,000
Costs to date
500,000
Estimated cost to complete
90,000
The directors wish to recognise attributable profit in accordance with SSAP 9.
17
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Revision exercise 7
The following trial balance was extracted from the accounts of Harebell at 31st March
20X9.
000
000
Investment properties
Purchases
Bank overdraft
Trade creditors
Dividend paid
Opening stock
VAT account
Corporation tax
Deferred tax
Sales (excl. VAT)
Trade debtors
Rental income from investment properties
Contract account
10,396
12,070
8,866
45,000
242,000
16,834
14,566
6,855
37,980
12,700
2,720
46,007
1,845
36
10,350
337,500
98,040
160
550
49,395
476,935
476,935
Required:
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1) Closing stock was estimated to be 48.5m before taking account of the contract
mentioned below.
2) Harebell has one long term contract underway. The managing director wishes you
to calculate how much profit can prudently be recognised and include this in the
accounts. The details are as follows:
Contract value
10m
Start date 3 September 20X8
Costs so far
2.8m
Estimated costs to complete
4.0m
Work certified complete
2.25m
Estimated completion Nov. 20Y0
(This last amount has been invoiced to the customer and he has paid it. It has not
been included in sales however. The only entries in the books have been debits to
the contract account of costs incurred, and a credit to the contract account of
amount paid.)
Profit is earned at a constant rate over the contract.
Tax paid in January 20X9 (based on the profit of 20X8) was 7,936,000 which was
36,000 more than originally estimated.
4) Audit costs of 234,000 are to be accrued.
19
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Incorporating revaluation adjustments

The exercises contained in this section relate to organisations who revalue their fixed
assets in accordance with FRS 15. If you are unsure of the treatment, revision material
is contained in Appendix 3.
Revision exercise 8
The following trial balance was extracted from the accounts of Bensven at 31st March
20X9.
000
000
Cost of goods sold
Salaries and wages
VAT account
Investments
Trade creditors
Bank overdraft
12% debenture stock
Revaluation reserve
Dividend paid
Deferred tax
Sales (excl. VAT)
Trade debtors
Investment income (rec'd Oct 'X8)
30,000
3,737
11,500
4,900
145,823
44,440
667
1,100
10,000
22,160
9,618
53,517
4,000
7,680
2,240
2,542
7,050
252,500
50,216
220
16,700
340,305
340,305
Required:
20
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2) The 12% debenture stock was issued at par at the start of the year. 12% is the
market rate for this type of debt.
3) The directors believe that the debtors balance of 15,000 relating to a customer
now in liquidation should be written off, and a general allowance of 3% of the
remaining debtors figure made.
Cost or valuation
Freehold property
12,416,000
8,000,000
1,916,000
1,800,000
The rates normally charged for the year as depreciation are:

Freehold property


5) Wages and salaries are to be split between cost of sales, administration and selling
and distribution in the ratio 2:2:1.
6) On the first day of the year, the property was revalued by an external surveyor at
30m. The directors wish to incorporate this value into the accounts. The
surveyors have intimated that the buildings have a further 50 years of useful
economic life.
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Revision exercise 9
The following trial balance was extracted from the accounts of Jaqjas at 31st March
20X9.
000
000
Purchases
Salaries and wages
VAT account
Investments
Trade creditors
Bank overdraft
Opening stock
Revaluation reserve
Dividend paid
Deferred tax
Sales (excl. VAT)
Trade debtors
Investment income
42,840
9,963
11,524
6,096
262,384
24,337
1,358
1,756
9,897
36,157
16,314
43,228
12,090
3,903
3,000
9,853
321,300
74,321
155
18,186
454,331
454,331
Required:
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Cost or valuation
Freehold property
16,940,000
5,462,000
1,735,000
2,481,000

Freehold property


4) On the last day of the year, the property was revalued by an external surveyor at
26m. The directors wish to incorporate this value into the accounts.
5) Audit fees of 126,000 are to be accrued.
6) Closing stock was estimated to be 55m.
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Incorporating finance lease adjustments

The exercises contained in this section relate to organisations that lease some of their
fixed assets and must therefore account for them in accordance with SSAP 21. If you
are unsure of the treatment, revision material is contained in appendix 2.
Revision exercise 10
Grant required a new computer system and decided to lease one from Bussols on the
following terms:
Cash price:
15,600
Lease terms:
Deposit of 3,900 on 1/4/X1 followed by two instalments of 4,680

payable on 1st April in each of the following two years and a final
payment of 4,762 payable on 1/4/X4. The interest rate implicit in the
lease is 10%.
Grant has decided to depreciate the computer using the straight line method over the
life of the lease.
Required:
a) Make the necessary entries in the books of Grant for 20X1/2 and show extracts
from the Profit and loss account for the year to 31st March 20X2 and the balance
sheet at that date. Spread the interest using the actuarial method.
b) Calculate the interest allocation for 20X1/2 under the sum-of-digits method.
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You are the financial accountant of ABC plc, a listed company engaged in the
manufacture of garden equipment. The trial balance at 31st March 20X4 was as
follows:
000
000
Ordinary share capital (1 shares)
15% debentures
Profit and loss account 1st April 20X3
Deferred taxation 1st April 20X3
Sales
Staff costs
Overheads
Raw materials purchases
Investments at cost
Amounts owing to HMRC PAYE and NI
Dividends received
Interest paid (including debenture interest)
Ordinary dividend paid
Corporation tax underprovided
Bank
Trade debtors and creditors
Freehold land at cost
Freehold buildings at cost
Other fixed assets at NBV (31/3/X4)
Plant and m/c
Motor vehicles
Fixtures and fittings
Stocks of raw materials 1/4/X3
Stocks of finished goods 1/4/X3
8,000
3,000
5,670
2,500
66,980
17,780
27,890
12,255
965
275
60
850
530
120
70
29,290
1,400
800
3,520
55
800
950
2,970
100,245
13,760
100,245
Required:
Using the additional information provided overleaf, prepare for publication in the
corporate report of ABC plc, the profit and loss account for the year ended 31st March
20X4 and a balance sheet at that date.
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1) Staff costs are apportioned 7:1:2 between the production, distribution and
administration functions respectively.
2) Overheads are split as follows:
000
Production
19,200
Distribution
6,610
Administration
2,080
27,890
Production overheads include two instalments in respect of plant and machinery

acquired on 1st October 20X3 under a finance lease. The terms of the lease
require sixteen quarterly instalments of 20,000 payable in arrears. The fair value
of the machinery on 1st October 20X3 was 184,000. The company wishes to use
the sum of digits method to account for the lease.
3) In the past, the company has not depreciated its freehold buildings. From 1st April
20X3, depreciation is to be provided retrospectively on these buildings. The
buildings were acquired on 1st April 20X0 and have an estimated useful life of 40
years from that date. The depreciation is to be apportioned 80% production and
20% administration.
4) The estimate of 4,200,000 provided for corporation tax payable on the profits of
the previous year was agreed at 4,320,000 and this was paid on the due date.
Taxation on the profits of the current year is estimated at 3,000,000.
5) Stock at 31st March 20X4 totalled 3,990,000.
6) The balance on the deferred taxation account at 1 April 20X3 relates to timing
differences due to the difference between capital allowances and depreciation.
The required provision based on cumulative timing differences was 1,800,000 at
31st March 20X4.
7) The debentures are redeemable in two equal annual instalments commencing on
30th March 20X5.
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Incorporating issues of shares

The exercises contained in this section relate to the accounting for the issue of share
capital. If you are unsure of this aspect of your studies, revision notes are contained in
Appendix 4.
Biscabee have the following shareholders funds at 1st January 20X7:
Ordinary share capital (1 ordinary shares)
Share premium
Profit and loss account
150,000
75,000
560,000
785,000
On 2nd January, the directors decide to make a bonus issue of 1 share for every 3
held. They wish to do this in a way that maximizes distributable profit.
Following the bonus issue, the directors decide to raise much needed funding for
expansion by means of a rights issue on 5th January. The terms of the issue were as
follows:
Two shares at 3.50 each for every 5 shares held.
The rights issue was taken up by all shareholders.
Required:
Prepare journal entries to record the bonus and rights issues, and show the
shareholders funds as they would appear on a balance sheet at 5th January, assuming
no further profit or loss has arisen.
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The following trial balance was extracted from the accounts of Nordheim at 31st March
20X9.
000
000
Trade debtors
Salaries and wages
Bad debts written off
VAT account
Investment property
Trade creditors
Bank
8% debenture stock
Cost of goods sold
Dividend paid
Sales (excl. VAT)
Investment income
Suspense account
Purchase of equipment and vehicles
106,560
30,161
229,485
1,332
1,920
24,000
74,640
103,200
20,944
23,118
72,600
4,800
3,755
10,968
600,770
2,880
912,025
360
7,950
144
1,584
26,280
1,129,738
1,129,738
Required:
and loss account for the year ended 31st March 20X9 and a balance sheet at that date,
including as far as possible, from the information provided, the necessary notes to the
accounts.
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1) The 8% debenture stock was issued at the end of the year.
2) Corporation tax has been estimated to be 5m based on the year's profit.
3) The equipment disposed of had a written down value of 180,000 and originally
cost 216,000.
The fixed assets at 1/4/X8 were:
Cost or valuation
Freehold property
14,160,000
32,160,000
2,040,000
18,000,000

Freehold property


5) The suspense account represents the cash proceeds of an issue of shares. 4m 1
ordinary shares were issued on 1st January 20X9. No entries have been made in
the accounts other than to debit the bank and credit the suspense account with the
proceeds.
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Disclosure
Belco plc started the year with tangible fixed assets with a net book value of 328,000,
made up as follows:
Freehold land
cost
90,000
Buildings
cost
200,000
accumulated depreciation
20,000
Plant
cost
70,000
28,000
Vehicles
cost
26,000
10,000
During the year, the land was revalued to 120,000 as a result of a survey by ABC
Chartered Surveyors and Co. Other transactions for the year included:
New plant was acquired at a cost of 50,000
A vehicle that had originally cost 10,000 and had been depreciated at 20% per
year on cost for 3 years was sold for 3,000
A new vehicle was acquired for 15,000.
Belcos depreciation policy is to charge a full years depreciation in the year of

acquisition and none in the year of disposal. The rates used as:
Buildings:
2% per annum on cost
Plant:
15% per annum reducing balance method
Vehicles:
Required:
Prepare the fixed asset schedule and associated notes for Belco plc.
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Prepare the fixed asset schedule and associated disclosure notes required for Andrene
in Revision exercise 2 which you worked on earlier.
Prepare the disclosure notes required by SSAP 21 in the case of Grant in revision
exercise 10 which you worked on earlier.
Prando required a new computer system and decided to lease one from Bolshi on the
following terms:
Cash price:
7,800
Lease terms:
Deposit of 1,950 on 1/4/X0 followed by 2 instalments of 2,340

payable on 1st April in each of the following two years and a final
payment of 2,381 payable on 1/4/X3. The interest rate implicit in the
lease is 10%.
Prando has decided to depreciate the computer using the straight line method over the
life of the lease.
Required:
a) Make the necessary entries in the books of Prando for 20X0/X1 and show extracts
from the profit and loss account for the year to 31st March 20X1 and the balance
sheet at that date. Spread the interest using the actuarial method.
b) Calculate the interest allocation for 20X0/X1 under the sum-of-digits method.
c) Prepare the disclosure notes required under SSAP 21 as a result of this
transaction.
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The accounts of Biscabee include the following figures:
Cost of sales
Depreciation of production machinery: owned
Depreciation of production machinery: leased
Raw materials used
Labour costs
Sundry materials
Pension contributions on behalf of employees
Hire of specialist equipment
Utilities
Amortisation of development costs
Research costs
85,000
24,000
125,000
140,000
54,000
12,500
6,785
12,870
4,500
6,000
Administrative expenses
Depreciation of office equipment (all owned)
Labour costs
Pension contributions
Stationery
Telephone
Insurance
Directors fees
Audit fees
35,000
70,000
6,750
10,453
2,560
1,400
15,000
35,000
Distribution costs
Depreciation of fork lift trucks (all owned)
Labour costs
Pension contributions
Sundry expenses
25,000
45,000
3,750
10,000
Required:
State which items must be disclosed individually in the notes to the accounts and
prepare, as far as the information permits, a suitable disclosure note.
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Biscabees stock figure at the end of the year is 450,000. Biscabee is a
manufacturing organisation and this figure includes raw materials, work in progress and
finished goods in the proportion 2:3:4.
Biscabee revalue their head office property every three years in line with the
requirements of FRS 15. All other fixed assets are held at cost and depreciated as
follows:
Plant and machinery:
10% per annum, straight line
Vehicles:
25% per annum, straight line
Required:
a) Prepare a suitable note for inclusion in the published accounts relating to the stock
breakdown.
b) Prepare a suitable note for disclosing Biscabees accounting policy with regard to
stock in line with the requirements of SSAP 9 and FRS 18.
c) Prepare a suitable note for disclosing Biscabees accounting policy with regard to
fixed assets in line with the requirements of FRS 15 and FRS 18.
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Harebells profit and loss account for the year ended 31 December is as follows:
Trading profit and loss account
for year ended 31 December
000
Turnover
Cost of sales
608,738
(511,621)
Gross profit
97,117
Admin expenses
Distribution costs
(31,558)
(12,153)
Operating profit
53,406
Interest payable
(2,496)
Profit before taxation
50,910
Taxation
(22,050)
Profit after taxation
28,860
During the year, Harebell discontinued a major segment of its business. This had
accounted for 5% of turnover, 6% of the cost of sales, 6% of administrative expenses
and 10% of the distribution costs.
Required:
Redraft the profit and loss account incorporating the requirements of FRS 3 with regard
to discontinued activities.
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Discuss the advantages users may gain from the additional disclosure required by
SSAP 25 Segmental Information and briefly state the requirements of that standard.
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Conceptual matters
The historic cost model still dominates the production of financial information in the UK,
despite attempts to find a more satisfactory model (eg by the introduction of SSAP 16,
now withdrawn). FRS 15 and the Draft Statement of Principles both appear to suggest
that a modified form of historic cost accounting will be with us for a long time yet.
Required:
Critically evaluate two alternative models which have been put forward and comment
on the reasons for the continuing domination of historic cost accounting.
Identify the bodies that influence the setting of accounting standards in the UK and
comment specifically on the role of:
The FRC
The ASB
The UITF
The FRRP.
The Statement of Principles emphasises the importance of the concepts of accruals
and going concern in the preparation of financial statements.
Required
Briefly describe these two concepts and comment on whether you believe they
contribute to the relevance of financial information to the users of accounts.
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Taxation
Al Cap Ltd
Al Cap Ltd is a wine importing company. The most recent annual accounts show the
following:
Gross profit
Bank deposit interest
Dividends (net)
Expenses:
Rent and business rates
Light and heat
Office salaries
Repairs to premises (note a)
Motor expenses
Depreciation motor vans
equipment
Amortisation of lease
Loss on sale of equipment
Bad and doubtful debts (note b)
Professional charges (note c)
Interest on bank over draft (note d)
Sundry expenses (note e)
Salaries
2,740
120
19,660
2,620
740
2,800
750
120
40
680
375
240
770
15,450
Net profit
51,929
160
140
52,229
47,105
5,124
Notes:
a) Repairs:
Alterations to flooring in order to install new bottling machine
Decorations
Replastering walls due to damp
b) Bad and doubtful debt
Trade debts w/o
Specific allowance for doubtful debt
1,460
475
685
2,620
500
180
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c) Professional charges:
Accountancy
Cost of court action for failing to observe Customs regulations
Legal cost of obtaining new lease (see below)
Debt collection
200
110
20
45
375
d) The overdraft was obtained in order to finance the purchase of stock

e) Sundry expenses
Fine re breach of Customs bonding regulations
Subscription to wine retail trade association
Donation to police welfare fund
Entertaining customers
Calendars bearing firms name sent to 300 customers
Miscellaneous allowable expenses
f)
250
50
20
300
120
30
770
On 25th March the company took out a lease on a new retail outlet for 99 years.
Required:
Compute Al Caps trading profit before capital allowances.
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You are presented with the accounts of Cornelius Ltd for the year to 31st December
2006. Cornelius runs a small printing business and the managing director wishes to
know the trading profit for the year ended 31st December 2006.
Calculate Cornelius Ltds trading profit for taxation purposes.
Gross profit from trading

Profit on sale of business premises (1)
Advertising
Debtors allowance (2)
Depreciation
Light and heat
Miscellaneous expenses (3)
Motor car expenses (4)
Rates
Repairs and renewals (5)
Staff wages (6)
Telephone
25,620
1,750
27,370
642
75
2,381
372
347
555
1,057
2,598
12,124
351
(20,502)
6,868
Profit before tax
Notes:
1) The profit on the sale of premises relates to the sale of a small freehold industrial
unit in which the company stored paper before building the extension
2) The charge for debtors allowance is made up as follows:
Write-off of specific trade debts
Increase in general allowance for doubtful debtors
less: recovery of bad debt previously written off
Charge to the profit and loss account
42
50
92
(17)
75
3) Miscellaneous expenses include:

Subscription to printers association
Contribution to Local Enterprise Agency
45
50
Gifts to customers
Calendars costing 7.50 each (bearing the companys name)
Two food hampers bearing the companys name
75
95
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4) A director uses the motor car for 75% business and 25% private use
5) Repairs and renewals comprise the following expenditure:
Refurbishing a second hand press

(before it could be used in the business)
Redecorating administration offices
Building extension to enlarge paper store
522
429
1,647
2,598
6) Staff wages include an amount for 182 for a staff Christmas lunch
Required:
Calculate Cornelius Ltds trading profit for the year ended 31st December 2006.
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Your Company Ltd
An examination of the draft accounts of Your Company for the year ended 31st March
2007 reveals the following details in respect of specific items of expenditure and
income. The draft accounts showed a profit of 290,000.
Expenditure
1) Throughout the year, two of the directors were seconded to work elsewhere. One
worked for Oxfam a leading charity and his salary, paid by your company, was
22,000. The other worked for a subsidiary company in the group and his salary,
also paid by your company, was 24,000.
2) Damages of 30,000 were paid to a customer who was injured by a falling crate
while visiting your factory. Only 18,000 was recovered from your public liability
insurers.
3) During the year the company purchased freehold offices for 40,000. Your chief
engineer estimated that it would cost 2,000 to get them ready for use. In the event
it cost 12,000. The amount spent purchasing the offices was capitalised but the
repair expenditure of 12,000 was deducted in the profit and loss account.
4) Bad debts were written off amounting to 6,000.The appropriate ledger account for
the year showed that these all related to specific identified debtors.
5) Because of the overall contraction in trade, a supervisor was made redundant and
given a severance payment of 18,000. His statutory redundancy entitlement was
11,000.
Income
6) Goods were sold to a subsidiary in the Caribbean for 80,000. Had they been sold
to a UK customer the price would have been 120,000
Required:
Compute the adjusted trading profit starting with the profits of 290,000 shown by the
accounts. Give reasons for your adjustments.
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Able Ltd, a small company, prepares accounts to 31st December. The company's pool
of unrelieved expenditure on plant and machinery brought forward on 1st January was
11,000. During the year FYAs of 50% were available to small companies when
purchasing plant.
During the year ended 31st December the following transactions took place:
15th June
31st August
30th November
Purchased plant for 6,500.

Purchased plant for 12,000.
Sold plant for 2,800 (originally purchased for 4,600).
Required:
Compute the capital allowances for the year ended 31st December.
Flash Ltd, a medium-sized company, prepares accounts to 31st December. At 1st
January the tax WDVs are as follows:
Pool
21,200
Expensive motor car
13,600
The following transactions took place during the year ended 31st December:
10.5.05
25.6.05
28.6.05
15.2.06
16.2.06
18.2.06
Purchased plant for

Purchased a motor car for
Purchased an energy saving toilet for
Sold the expensive motor car for
Purchased a motor car for
Purchased an electrically propelled car for
Required:
Calculate the capital allowances for the year to 31st December.
42
6,600
10,600
600
9,400
18,000
16,500
Tutors Support Pack
XY Ltd trades as a tool manufacturer and makes up accounts each year to 30th June.
The company's agreed profits before the deduction of capital allowances for the year to
30th June 2006 were 120,000. At the start of the year, tax written down values were:
General plant and equipment
Expensive car
45,000
20,000
The following purchases and sales of capital items took place during the year:
Purchases:
September
October
November
General plant and equipment

Motor car for employee (no private use)
Motor car (40% private use by director)
60,000
10,000
28,000
Plant sold for

Employee's car
Expensive car sold for
25,000
2,000
12,000
Sales:
August
September
November
Required:
a) Compute the capital allowances for the accounting year.
b) Compute the trading profits for the year.
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Simple Simon Ltd
Simple Simon Ltd had the following income and expenditure for the year ended 31st
March 2007:
Property business income
Trading income
Chargeable gains
Investment income (interest gross)
Charges on income
Dividends plus tax credit
10,000
95,200
25,000
18,000
2,000
15,000
Required:
Calculate Simple Simons CT for the year ended 31st March 2007.
Peter Pieman Ltd
Peter Pieman Ltd had the following income and expenditure for the year ended 31st
March 2007:
Trading income
Chargeable gains
Investment income (interest-gross)
UK dividends received (gross)
70,500
465,700
10,000
13,200
100,000
Required:
Calculate Peter Piemans CT for the year ended 31st March 2007.
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Charles Ltd has the following PCTCT for the year ended 31st March 2007:
360,000
10,000
370,000
(80,000)
290,000
Trading income
less Gift Aid donation
PCTCT
Required:
What is the corporation tax liability if:
a) no dividends are received from UK companies?
b) 9,000 of dividends are received from UK companies?
c) 45,000 of dividends are received from UK companies?
Ross McHugh Ltd has the following results for the two years to 31st March 2007:
Year Ended
31.3.06
31.3.07
(20,000)
18,000
6,000
9,000
(2,000)
7,000
Trading profit/(loss)
Interest income
Capital loss
Chargeable gains
Required:
Calculate the PCTCT for the two periods, assuming that the loss is relieved under
S393(1) ICTA 1988 showing any losses carried forward at 1st April 2007.
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Duck Soup Ltd has the following results for the year ended 31st March 2007:
Trading loss before capital allowances (note 1)
Interest income
Chargeable gain
Net loss
(96,000)
3,500
14,500
(78,000)
Notes:
1) The trading loss is after charging:
Depreciation
Entertaining customers
10,800
1,200
2) All other expenses are allowable for corporation tax.

3) The tax written down value of plant and machinery on 1st April 2005 was 16,000.
There were no purchases or sales during the year ended 31st March 2006.
4) Duck Soup Ltd has the following results for the previous year ending 31st March
2006:
Trading profit
40,000
Interest income
2,000
Chargeable gains
-------42,000
Required:
Compute the allowable trading loss for the year ended 31st March 2007 and show how
it can be relieved.
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Appendices
Appendix 1 SSAP 9
SSAP 9 Stocks and long term work in progress
This SSAP is based on the accruals/matching concept costs must be allocated
between the cost of goods sold (matched against current revenue) and costs of closing
stock (carried in the balance sheet to be matched against future revenue).
Main points:
Stock should be valued at the lower of cost and net realisable value (NRV).
Costs should include those incurred in the normal course of business in bringing a
product or service to its present position and location.
Costs include direct costs (labour, materials), production overheads and other
attributable overheads.
NRV is the actual or estimated selling price less further costs to be incurred in
marketing selling and distribution.
The principle instances where NRV will be less than cost will be where:
there have been increases in cost or falls in selling price
physical deterioration of stock has occurred
products are obsolescent
the company has decided to make and sell a product at a loss.
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Long term work in progress

The most controversial aspect of SSAP 9 is its regulation concerning work in progress
for incomplete long term contracts.
Usually long term contracts will exceed one year. According to prudence, it would
seem correct to treat all costs incurred on these contracts simply as WIP (unless it was
foreseen that the costs would not be recovered), not recognising any profit until the
contract is complete. SSAP 9, however, allows a proportion of profit to be recognised
in stages over the life of the contract, provided that:
it is expected to be profitable in the final analysis
the contract is far enough advanced to enable the end result to be foreseen with
reasonable assurance
prudent estimates are used.
Thus the matching concept, while apparently over-ruling prudence on this occasion,
must still be applied prudently!
The rules are as follows:
a) Turnover and profit must reflect the proportion of work carried out at the accounting
date.
b) Where the outcome cannot be foreseen with reasonable certainty, no profit must be
recognised.
c) If there is any expected loss on a contract, provision must be made for the loss as
soon as it is foreseen.
For the profit and loss account:
First ascertain the total estimated profit or loss on a contract.
Ascertain attributable profit on the basis that it is prudent to recognise such profit.
Calculate turnover:
The standard does not prescribe a method of calculating turnover. Recognise as
turnover the same proportion of the total contract value as applied to the total
estimated profit for ascertaining attributable profit to date. This is often given as the
amount of work certified.
Associated costs of achieving the turnover recognised should be deducted from

total costs to date in the contract account and charged in the profit and loss account
as cost of sales to give, as gross profit, the attributable profit or foreseeable loss on
a contract as calculated.
You will be given information to calculate attributable profit or foreseeable loss. You
will also be given a basis for recognising either turnover or cost of sales (or both).
Given the basis for turnover, take cost of sales as the balancing item. Given the basis
for cost of sales, take turnover as the balancing item.
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Foreseeable loss
If a loss is foreseen on the contract as a whole, this loss must be taken into account
immediately. It is never appropriate to recognise an attributable profit at one stage of
the contract if an overall loss is expected on the contract as a whole.
Further provisions for foreseeable loss should be included with cost of sales.
Remember:
When, in the early stages of a contract, it is not possible to foresee its
outcome with reasonable certainty, turnover will equal the costs that are
charged to cost of sales. Therefore no profit from the contract will be
recognised in the profit and loss account. However, when in the later
stages of the contract the outcome can be assessed with reasonable
certainty, turnover should include profit prudently recognised as earned at
that stage of completion.
For the balance sheet:
Long-term contracts in the balance sheet will comprise:

Total costs to date
Less: Amounts transferred to cost of sales in respect of
work carried out to date
Net costs
Less: any foreseeable losses (if costs remaining need to
be further written down)
Less: any applicable payments on account
x
(x)
x
(x)
(x)
X
Debtors: amounts recoverable on contracts will arise when turnover recognised is

greater than payments on account received and receivable.
Where payments on account received and receivable are greater than turnover
recognised, the excess should first be applied against any net costs remaining in
the contract account (as above). Any further excess should be classified as
payments on account and separately disclosed in creditors.
When foreseeable losses exceed net costs, the excess should be included in the
balance sheet in either accruals or provisions.
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Disclosure
The Companies Act requires that, either on the face of the balance sheet, or in a note
to the accounts, the stock figure must be broken down into its components as follows
(for all companies except those qualifying as small):
1) Raw materials and consumables
2) Work in progress
3) Finished goods and goods for resale
Where amounts recoverable on contracts are included in debtors, these too must be
split out in a note to the accounts.
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Appendix 2 SSAP 21
SSAP21 Hire purchase and leasing
This SSAP covers the appropriate accounting treatment for assets which are used by a
business but payment for the asset is spread over time.
Principle:
the accounting treatment should reflect the commercial substance of the
transaction, not its legal form.
There are basically four types of transaction possible:
credit sale
hire purchase
finance lease
operating lease.
Only in the case of an operating lease does the user of the asset not record the asset
as a fixed asset in his books at the start of the agreement.
The decision as to whether a lease is an operating lease or a finance lease is an
important one, as this will affect the accounting treatment and therefore the reported
profit figure and balance sheet ratios such as ROCE, gearing etc.
Definition:
a finance lease is a lease that transfers substantially all the risks and
rewards of ownership of an asset to the lessee.
Step 1:
calculate minimum lease payments (including initial payment)
Step 2:
discount the answer to step 1 using the rate of interest implicit in the lease
Step 3:
calculate the fair value of the asset at the start of the lease
If the answer to step 2 amounts to 90% or more of the answer to step 3, it is a finance
lease.
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Principles of accounting treatment books of the lessee

Operating leases:
payments are debited to the profit and loss account as incurred
no asset is recorded in the books.
All others:
asset is recorded at fair value and a corresponding liability set up
payments are split between repayment of capital amount and payment of finance
charges
finance charges are debited to the profit and loss account
repayment of the capital amount reduces the balance sheet liability
depreciation is calculated and charged over the shorter of the lease period and the
useful life of the asset.
Acceptable methods of splitting payment between capital repayment and finance

charges include:
straight line:
only acceptable for short term credit agreements
sum of the digits:
also known as the rule of 78
actuarial method:
the most accurate and hence the favoured treatment
Principles of accounting treatment books of the lessor

Operating leases:
asset included in fixed assets under "assets held for operating leases" and
depreciated in normal way
rental income credited as operating income to the profit and loss account
All others:
asset treated as sold for fair value and corresponding debtor set up as "net
investment in finance leases"
payments split as for lessee between payment of principle and finance charge
credit finance charge to profit and loss account; payment of principle reduces the
debtor
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Disclosure requirements of SSAP 21

The treatment used in the accounts, including the method chosen to allocate the
finance charges, should be disclosed in the accounting policies note to the accounts.
Also, in the books of the lessee:
Finance leases and HP:
Assets
These either show by each major class of assets the gross amounts of assets
held and the related accumulated depreciation or integrate these with owned
fixed assets and disclose by way of an additional note the NBV of assets held
under finance leases and HP agreements.
Liabilities
The amounts of obligations due under finance leases/HP agreements should be
disclosed separately from other liabilities either on the face of the balance sheet
or in the notes to the accounts.
These amounts should be shown analysed between due in next year, due in the
second to fifth years inclusive, and due thereafter (this analysis can be shown
separately or as part of an equivalent analysis of the total liabilities of which
they form part).

The total depreciation charge and aggregate finance charges for the period in
respect of finance leases and HP contracts should be disclosed by way of note.
Operating leases:
Disclose by way of a note to the profit and loss account the total operating lease
rentals, split between hire of plant and machinery and other.
In the books of the lessor:

The standard requires disclosure of the net investment in a) finance leases and b) HP
agreements at each balance sheet date. These should be disclosed separately in a
note to the accounts analysed between receivable within one year and receivable after
one year.
For assets held for use in operating leases, the cost/valuation and accumulated
depreciation should be shown, either as part of the fixed asset schedule or in a
separate table.
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Dealing with finance leases in published accounts

Balance sheet:
Step 1:
The leased asset should be capitalised in the fixed asset account at fair
value (ie list price or PV of minimum lease payments).
Step 2:
Calculate and charge depreciation over the lease period.
Step 3:
Calculate NBV for balance sheet.
Step 4:
Set up a lease creditor for the same amount as the leased asset in step 1.
Step 5:
Calculate total finance charge (the difference between the total of the
minimum lease payments and the fair value of the asset.
Allocate the finance charge to accounting periods over the term of the lease
using either:
Step 6:
actuarial method
sum of the digits method; or
straight line method.
Reduce the lease creditor by the difference between the lease payment and
the finance charge.
Profit and loss account:

Step 1:
Annual depreciation charged as normal to cost of sales, administration or

distribution.
Step 2:
Finance charge allocated to current period included in Interest paid and

payable but disclosed separately in the notes.
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Appendix 3 FRS 15
FRS 15 Tangible fixed assets
FRS 15 came into force in April 2000 and replaced SSAP 12. It is intended to give
guidance on the initial valuation of tangible fixed assets for balance sheet purposes
and the treatment appropriate for arriving at subsequent carrying value.
Definition:
Tangible fixed assets are assets that have physical substance and are held
for use in the production or supply of goods and services, for rental to
others, or for administrative purposes on a continuing basis in the reporting
entitys activities.
Initial value
FRS 15 states that a tangible fixed asset should initially be measured at its cost. In
practice, an assets cost is:
purchase price less trade discounts or rebates plus any further costs
directly attributable to bringing it into working condition for its intended use.
Costs which might be included in the initial valuation include:
stamp duty and other duties
legal fees
delivery and handling costs
installation costs.
If the entity has constructed the fixed asset rather than buying it, it might incur other
costs:
materials
labour
architects/designers fees
direct overheads.
Only those costs that are directly attributable to bringing the asset into working
condition for its intended use should be included, never an apportioned amount of
general overhead.
FRS 15 also states that abnormal costs should not be included. These might include
additional costs caused by faulty workmanship, industrial disputes, design errors, etc.
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One of the more controversial aspects of initial valuation concerns the capitalisation of
interest costs. FRS 15 leaves this as optional, but lays down rules which must be
followed if interest costs are capitalised.
Arguments for:
finance costs are just as much a cost of constructing a tangible fixed asset as other
directly attributable costs
the accounts are more likely to reflect the true success or failure of projects
involving the construction of fixed assets
failure to capitalise borrowing cost means that profits may be reduced in periods
when fixed assets are acquired. This is misleading as capital investment should
increase profit in the long run.
Arguments against:
borrowing costs are incurred in support of the whole of the activities of an

enterprise. Any attempt to associate such costs with a particular asset is
necessarily arbitrary.
capitalisation of borrowing costs may lead to the same type of asset having a
different carrying value, depending on the method of finance adopted by the
enterprise.
treating borrowing costs as a charge against income results in financial statements

giving more comparable results from period to period, thus providing a better
indication of the future cash flows of an enterprise.
capitalisation leads to higher tangible fixed asset values, which could exceed the
recoverable amount of the asset.
The rules:
Only finance costs that are directly attributable to the construction of a tangible
fixed asset should be capitalised as part of the cost of that asset.
The total amount of finance cost capitalised during a period should not exceed the
total amount of finance cost incurred during the period.
Capitalisation should begin when:

i)
finance costs are being incurred
ii) expenditures for the asset are being incurred

iii) activities that are necessary to get the asset ready for use are in progress.
Capitalisation should be suspended during extended periods in which active

development is interrupted.
Capitalisation should cease when substantially all the activities that are necessary
to get the tangible fixed asset ready for use are complete.
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Disclosures
When finance costs are capitalised, the following disclosures must be made:
i)
the accounting policy adopted
ii) the aggregate amount of finance costs included in the cost of the tangible fixed
assets
iii) the amount capitalised during the period
iv) the amount recognised in the profit and loss account during the period
v) the interest rate used to determine the amount capitalised.
Subsequent expenditure can only be capitalised if it enhances an asset, by, for
example, extending its useful economic life, increasing its capacity or achieving a
significant improvement in quality of output.
Revaluation of fixed assets
The Companies Act, 1985 allows tangible fixed assets to be carried either at historic
cost or at a valuation. Many entities take advantage of this rule and revalue some of
their fixed assets (normally property). Other entities continue to carry all assets at
historic cost.
There are strong arguments for carrying assets at current value and the ASB wishes to
encourage this as it believes this provides more relevant information to users of
financial information. However, until the issue of FRS 15 there was no accounting
standard that gave guidance on revaluation. This has led to the following problems:
valuations are not kept up to date
entities cherry pick ie revalue certain assets and not others
some entities do not depreciate revalued fixed assets.
Basic rules:
revaluation is optional
if one asset is revalued, so must all assets in that class be revalued
the carrying value of a revalued fixed asset should be its current value at the
balance sheet date (current value = lower of replacement cost and recoverable
amount).
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FRS 15 does not insist on annual revaluations but requires the following:
a full valuation every five years with an interim valuation in year 3 or in other years
when there has been a material change in value
Five-yearly valuations should be carried out by a qualified external or internal valuer. If

an internal valuer is used, the valuation should be reviewed by a qualified external
valuer.
Bases of valuation
Non-specialised properties should be valued on the basis of existing use value plus
directly attributable acquisition costs, if material. Open market value should be
disclosed if materially different.
Specialised properties should be valued on the basis of depreciated replacement cost.
Properties surplus to requirement should be valued at open market value less expected
direct selling costs (NRV).
All other revalued assets should be valued on the basis of open market value where
available, or depreciated replacement cost.
Gains and losses on revaluation
The Companies Act states that only realised gains can be recognised in the profit and
loss account. Revaluation gains are not realised until and unless the asset is sold.
They are therefore recognised in the Statement of Recognised Gains and Losses (we
shall meet this third primary statement later when we consider FRS 3 requirements)
and accounted for using a revaluation reserve.
Losses are treated according to the cause:
revaluation losses which are caused by a clear consumption of economic benefits

should be recognised in the profit and loss account (they are akin to depreciation)
other losses (perhaps caused by a market slump) should normally be recognised in

the Statement of Total Recognised Gains and Losses and accounted for in the
revaluation reserve until the carrying amount reaches its depreciated historic cost.
Any further loss should be shown in the profit and loss account.
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Depreciation
Depreciation is redefined by FRS 15 as:
the measure of cost or revalued amount of the economic benefits of the
tangible fixed asset that have been consumed during the period.
The depreciable amount should be allocated on a systematic basis over the life of the
asset, reflecting as fairly as possible the pattern in which the assets economic benefits
are consumed by the entity.
This is no change from the requirements of SSAP 12. However, there is an attempt to
address the problem of companies which did not depreciate certain revalued assets.
In the past, many entities did not charge depreciation on revalued properties on the
grounds that the assets were being maintained or refurbished regularly so that the
economic life of the property was limitless (this treatment was common in the hotel,
brewing, public house and retail sectors).
It had been expected that FRS 15 would insist on depreciation in all circumstances.
The ASB has recognised, however, that there may be rare cases where tangible fixed
assets do have very long useful economic lives. FRS 15 says that in these rare cases
the entity need not charge depreciation but will have to hold annual impairment reviews
instead (FRS 11). These reviews are time consuming, costly and complex and may
result in reduced profit (due to showing an impairment loss). This will discourage nondepreciation more effectively than a ban!
Disclosure
In the note to the accounts, a company must disclose (for each class of assets):
a) the depreciation method used
b) the useful economic lives or rates used
c) the total depreciation charge for the period
d) the effect of any change in estimate of useful economic lives or residual value, if
material.
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Fixed asset schedule

The Companies Act gives the following schedule as a disclosure note to be used for all
major classes of fixed assets. It can also be an excellent working note to help you
ensure that you have dealt with all aspects of the accounting.
Land and
property
Plant and
equipment
Total
000
000
000
At cost/revaluation
Opening balances
Additions
Disposals
Transfers
Revaluations
Closing balances
Depreciation
Opening balances
Disposals
Revaluations
Charge for year
Closing balances
NBV at end
NBV at start
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Appendix 4 FRS 3
FRS 3 Reporting financial performance
The objective of FRS 3 is stated as:
to require reporting entities falling within its scope to highlight a range of
important components of financial performance to aid users in
understanding the performance achieved by a reporting entity in a period
and to assist them in forming a basis for their assessment of future results
and cash flows.
Why was FRS 3 necessary?
The profit and loss account is arguably the most significant single indicator of a
company's success or failure. It is very important to ensure that it is not presented in
such a way as to be misleading. This could happen either through an inadvertent lack
of consistency within a company or between different companies; or it could arise as a
result of deliberate manipulation of accounting figures by unscrupulous directors.
FRS 3 applies to all financial statements intended to give a true and fair view, unless
the entity is obliged to prepare accounts under a statutory framework which does not
permit such treatment.
FRS 3 Profit and loss account
A layered format is to be used for the profit and loss account to highlight a number of
important components of financial performance:
a) results of continuing operations
b) results of discontinued operations
c) profits or losses on the sale or termination of an operation, costs of a fundamental
reorganisation or restructuring and profit or losses on the disposal of fixed assets
d) extraordinary items.
The following points must be noted:
a) The analysis of results between continued and discontinued operations should be
disclosed to the level of operating profit.
b) All exceptional items (except those in c) below) should be included under the
statutory format heading to which they relate and disclosed by way of a note.
c) The following items must be shown separately on the face of the profit and loss
account after operating profit and before interest:
i)
profits or losses on the sale or termination of an operation
ii) costs of a fundamental reorganisation or restructuring

iii) profits or losses on the disposal of fixed assets.
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Statement of total recognised gains and losses

This is a new primary financial statement of equal status with the profit and loss and
balance sheet. It shows the profit or loss for the period along with all other movements
on reserves which reflect recognised gains and losses attributable to shareholders. It
does not deal with the realisation of gains in previous periods, nor with transfers
between reserves. This means that the excess of the revalued amount over historical
cost will never be recognised in the profit and loss account. Profit or loss on disposal
will be calculated as the difference between the net proceeds and the net carrying
amount.
Earnings per share
EPS is now calculated on the profit attributable to equity shareholders after minority
interest, extraordinary items, preference dividends and other appropriations in respect
of preference shares. If an EPS figure is given based on any other level of earnings,
then it cannot be given greater prominence than the proper EPS figure and a
reconciliation between the two figures must be disclosed.
Required notes:
Note of historical cost profits and losses

This is a memorandum item which helps comparison between the results of
companies which have revalued their assets with the results of those which have
not. It shows the results for the period as if no revaluation had been made. The
note should be shown immediately after the profit and loss or after the statement of
recognised gains and losses.
Reconciliation of movements in shareholders' funds

This brings together the results of the period, shown in the statement of total
recognised gains and losses with all other changes in shareholders' funds in the
period, including capital contributed by or repaid to shareholders.
Prior period adjustments

Prior period adjustments should be accounted for by restating the comparative
figures for the preceding period in the primary statement and notes and adjusting
the opening balance of reserves for the cumulative effect. The cumulative effect of
the adjustments should also be noted at the foot of the statement of total
recognised gains and losses of the current period. The effect of prior period
adjustments on the results for the preceding period should be disclosed where
practicable.
These are rare and limited to occasions where:
a) there has been a change in accounting policy;
b) there has been a fundamental error in the past which must now be corrected.
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Effect of FRS 3
a) Extraordinary items will be much rarer (non-existent? Sir David Tweedie famously
said that after the introduction of FRS 3 little green men from Mars are
extraordinary all else is exceptional).
b) A new format has been introduced for the profit and loss splitting continuing
operations and discontinued operations. Disclosure will be much fuller.
c) A new statement has been introduced the statement of recognised gains and
losses. The ASB's aim has been to turn attention away from particular numbers or
indicators and to encourage users to make their own judgments about a company's
performance. This statement cannot be lost in the notes as the reserve note was
under SSAP 6.
Note that one of the main reasons for the FRS was the collapse of Polly Peck.
The size of the exchange movements going through reserves was considerable
and although they had been disclosed, they had not been highlighted.
FRS 3 Additional information
FRS 3 introduced a new statement and a variety of new notes to expand the
information required in published accounts and to help the user of the published
information get a clear picture of the companys performance.
Statement of Total Recognised Gains and Losses
It is important to understand that the profit and loss account can only deal with realised
profits. A company may also make substantial unrealised gains or losses. These may
be recognised in the accounts, even although they have not been realised. For
example, gains on the revaluation of fixed assets are recognised by increasing the
carrying value of the assets in the balance sheet, with the double entry being to a
revaluation reserve.
The new primary statement, the statement of recognised gains and losses, brings
together realised gains/losses from the profit and loss account and recognised but
unrealised gains/losses from the balance sheet.
Statement of Total Recognised Gains and Losses (STRGL)
Profit for the financial year (profit after tax)
Unrealised surplus on revaluation of properties
Unrealised loss on revaluation of trade investment
Foreign currency translation differences
Total gains and losses recognised since last annual report
Prior year adjustment
63
m
29
4
(3)
30
(2)
28
10
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In addition to this statement, FRS 3 brought in the requirement for the following two
notes:
a) Reconciliation of movement in shareholders funds
This simple reconciliation is designed to clarify exactly what has caused
shareholders funds to change during the period. Shareholders funds include all
reserves and, of course, share capital itself.
Typically:
Profit for the financial year (profit after tax)
Dividends
Other recognised gains and losses (per STRGL)
Prior year adjustment
New share capital
Addition to shareholders funds
Opening shareholders funds
Closing shareholders funds
m
29
(8)
21
(1)
10
20
50
365
405
b) Note of historic cost profits and losses

If a company has adopted the policy of revaluing fixed assets, permitted under the
rules of FRS 15, the reported profit figure will be different from that which would
have been reported under the historic cost convention. If this difference is material,
then the financial statements must include a reconciliation statement after the
STRGL or the profit and loss.
The profit figure to be reconciled is the profit before taxation; however, the retained
profit for the year must also be restated.
Typically:
Reported profit before taxation
Realisation of property revaluation gains of previous years
Difference between historic cost depreciation and the
actual charge for the period calculated on revalued amounts
Retained profit under historic cost convention
64
m
45
9
5
59
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Appendix 5 SSAP25
SSAP25 Segmental reporting
Now enshrined in SSAP 25, segmental reports were a recommendation of The
Corporate Report.
Definition:
The analysis of general corporate information between separate divisions
or classes of business which are individually of economic significance.
Purpose:
To provide information to assist the user of financial statements:
a) to appreciate more thoroughly the results and financial position of the entity by
permitting a better understanding of the entitys past performance and thus a better
assessment of its future prospects; and
b) to be aware of the impact that changes in significant components of a business
may have on the business as a whole.
A segment is significant if:
a) its third party turnover is over 10% of the entitys turnover
b) its segment profit or loss is over 10% of the entitys profit or loss
c) its net assets are more than 10% of the total assets of the entity.
These should be reviewed annually and re-defined as appropriate. Segments can be
class of business or geographical.
Classes of business:
A distinguishable component of an entity that provides a separate product
or service or separate group of products or services.
Geographical segments:
A geographical area comprising a country or group of countries in which an
entity operates, or to which it supplies goods or services.
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Disclosure
Group information should be disclosed about each class of business and each
geographical segment as follows:
1) Turnover by origin and destination
2) Profit/loss before taxation
3) Common costs
4) Segment net assets
Advantages of disclosure:
rates of profitability, opportunities for growth, risk etc may vary between segments
provides data which gives users a better basis for making important decisions.
However:
Such information may be of great use to competitors and there is a get out clause,
allowing directors to withhold such a breakdown if it would do commercial harm to the
business.
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Appendix 6 FRS 18 Theoretical matters

FRS 18 The Statement of Principles
Alternative accounting models
The search for a conceptual framework
What is a conceptual framework?
A statement of generally accepted theoretical principles which form the
frame of reference for a particular field of inquiry.
More specifically:
A constitution: a coherent system of interrelated objectives and
fundamentals that can lead to consistent standards and that prescribes the
nature, function and limits of financial accounting and financial statements.
USA
A framework to provide a consistent approach for making decisions about
choices of accounting practice and for setting standards.
UK
Why was the search begun?
There was a growing perception towards the end of the 1980s that standards had been
developed in a haphazard manner, leading to conflicts between standards and lack of
consensus in various aspects of financial reporting. International pressure grew for a
conceptual framework which would concentrate on meeting the needs of the users of
accounts.
The Solomons report of 1989 formalised the feelings that the form and content of
financial reports had been determined without resolving the following fundamental
issues:
What are the objectives of financial reports?
Who are the users of financial reports?
What are the true information needs of these user groups?
What types of reports will satisfy these needs?
How can business profit be measured and reported accurately and consistently?
How should assets and liabilities be valued?
In 1991, the newly formed ASB addressed the need for a conceptual framework,
working closely with the international standards committee.
The result is the Statement of Principles.
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The stated purposes of the Statement of Principles:

a) To assist the ASB in the development of future accounting standards and in its
review of existing accounting standards.
b) To assist the ASB by providing a basis for reducing the number of alternative
accounting treatments permitted by law and accounting standards.
c) To assist preparers of financial statements in applying accounting standards and in
dealing with topics that do not form the subject of an accounting standard.
d) To assist auditors in forming an opinion on whether financial statements conform
with accounting standards.
e) To assist users of financial statements in interpreting the information contained in
financial statements prepared in conformity with accounting standards.
f)
To provide those who are interested in the work of the ASB with information about
its approach to the formulation of accounting standards.
The Statement of Principles does not have the status of an accounting standard
and, therefore, does not override any specific accounting standard. If there were
to be a conflict (unlikely hopefully) the requirements of the accounting standard
prevail over those of the Statement of Principles.
The Statement of Principles
The Statement of Principles contains eight chapters:
1) The objective of financial statements
2) The reporting entity
3) The qualitative characteristics of financial information
4) The elements of financial statements
5) Recognition in financial statements
6) Measurement in financial statements
7) Presentation of financial information
8) Accounting for interests in other entities.
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Main points
Chapter 1
The objective of financial statements is to provide information about the financial
position, performance and financial adaptability of an enterprise that is useful to a wide
range of users for assessing the stewardship of management and for making economic
decisions.
The chapter emphasises the ways financial statements provide information about the
financial position of an enterprise. The main elements which affect the position of the
company are:
i)
the economic resources it controls
ii) its financial structure

iii) its liquidity and solvency
iv) its capacity to adapt to changes in the environment in which it operates.
The chapter discusses the importance of each of these elements and how they are
disclosed in the financial statements.
Chapter 2
This chapter addresses which entities ought to prepare and publish financial
statements and what determines the boundary when circumscribing the relevant
activities and resources on which the entity reports.
Chapter 3
This chapter discusses characteristics of information in relation to content and
presentation:
Relevance and reliability are key in relation to content.
Comparability and understandability are key in relation to presentation.
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Chapter 4
Definitions of key terms are given. These definitions are already appearing in new
FRSs and their presence has been widely welcomed. Their inclusion makes this a vital
chapter.
Definitions of key terms:
Assets
are rights or other access to future economic benefits controlled by an

entity as a result of past transactions or events.
Liabilities
are obligations of an entity to transfer economic benefits as a result of

past transactions or events.
Ownership
interest
is the residual amount found by deducting all of the entitys liabilities

from all of the entitys assets.
Gains
are increases in ownership interest other than those relating to

contributions from owners.
Losses
are decreases in ownership interest other than those relating to

distributions to owners.
Chapter 5
This chapter explains what is meant by recognition. It discusses the three stages of
recognition of assets and liabilities and then goes on to describe the criteria which
determine each of these stages.
These stages are:
a) Initial recognition
An element should be recognised if there is sufficient evidence that the change in
assets or liabilities inherent in the element has occurred and evidence that a future
inflow or outflow of benefit will occur.
b) Subsequent remeasurement
A change in the amount at which an asset or liability is recorded should be
recognised if there is sufficient evidence that the amount of an asset or liability has
changed and the new amount can be measured with reasonable certainty.
c) Derecognition
A asset or liability should cease to be recognised if there is no longer sufficient
evidence that the entity has access to future economic benefits or an obligation to
transfer economic benefit.
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Chapter 6
This chapter deals with the measurement of assets for valuation on the balance sheet.
It also deals with the influence of capital maintenance on the measurement of gains
and losses.
Initially the asset should be recorded at historical cost (ie transaction cost). This is as
at present. However, the chapter then goes on to suggest that assets and liabilities
should regularly be remeasured in order to include them at a current value value to
the business. This is not a popular idea due to its unfamiliarity and, some say, lack of
verifiability. This chapter forms the basis of FRS 15.
Chapter 7
This chapter looks at the set of financial statements and supplementary data provided
at present and looks at the factors which affect the arrangement of data within this set.
In particular it looks at:
Aggregation:
Classification: whether analysis is facilitated by the groupings in the statements
Structure:
how transactions are condensed and simplified
proper structuring will ensure prominence is given to the correct

items
It sets out the primary statements:
the profit and loss account
the statement of total recognised gains and losses
the balance sheet
the cash flow statements
and describes the role of the supporting notes to these statements.

Chapter 8
This chapter deals with the measurement and presentation issues of the effect on a
reporting entitys financial performance and position of its interest in other entities. It
considers both single entity and consolidated financial statements.
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Advantages of a statement of principles:

1) Principles are powerful. A single principle, consistently applied, can suggest
solutions to many issues. A principled approach to different issues not only
ensures solutions are consistent with each other; if the principle is soundly framed,
the solutions will be the right ones.
(Technical director, ASB)
2) The statement helps reduce scope for individual judgment and the potential
subjectivity that this implies.
3) Financial statements should be more comparable.
4) The statement should provide guidelines for procedures not the subject of a
standard.
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FRS 18 Accounting policies

Issued December 2000
Effective 22 June 2001
FRS 18 sets out the principles to be followed in selecting accounting policies and the
disclosures needed to help users to understand the accounting policies adopted and
how they have been applied.
Objective
The objective of FRS 18 is to ensure that for all material items:
a) an entity adopts the accounting policies most appropriate to its particular
circumstances for the purpose of giving a true and fair view;
b) the accounting policies adopted are reviewed regularly to ensure that they remain
appropriate, and are changed when a new policy becomes more appropriate to the
entitys particular circumstances; and
c) sufficient information is disclosed in the financial statement to enable users to
understand the accounting policies adopted and how they have been implemented.
Definitions
Accounting policies
Those principles, bases, conventions, rules and practices applied by an entity that
specify how the effect of transactions and other events are to be reflected in its
financial statements through:
i)
recognising,
ii) selecting measurement bases for, and

iii) presenting
assets, liabilities, gains, losses and changes to shareholders funds.
Accounting policies do not include estimation techniques.
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Estimation techniques
The methods adopted by an entity to arrive at estimated monetary amounts,
corresponding to the measurement bases selected, for assets, liabilities, gains, losses
and changes to shareholders funds.
Estimation techniques implement the measurement aspects of accounting policies.
They include, for example:
a) methods of depreciation, such as straight line and reducing balance, applied in the
context of a particular measurement basis, used to estimate the proportion of the
economic benefits of a tangible fixed asset consumed in a period.
b) different methods used to estimate the proportion of trade debtors that will not be
recovered, particularly where such methods consider a population as a whole
rather than individual balances.
Measurement bases
Those monetary attributes of the elements of financial statements that are reflected in
financial statements. This might for instance be historic cost or current value.
Applying the definitions in practice
Often legislation or accounting standards will prescribe the measurement bases to be
used in respect of particular assets and liabilities. Some standards allow a degree of
choice concerning what is to be recognised in the financial statements.
Whether prescribed or chosen, measurement bases are a matter of accounting policy,
and the basis used must be disclosed.
The choice of method used to arrive at a monetary amount corresponding to a
measurement basis is not a matter of accounting policy, but a matter of estimation
technique.
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Choice of accounting policies

An entity should adopt accounting policies that enable its financial statement to give a
true and fair view of the entitys financial performance and position. If in exceptional
circumstances compliance with the requirements of an accounting standard is
inconsistent with the requirement to give a true and fair view, the requirements of the
standard should be departed from to the extent necessary to give a true and fair view.
In such circumstances, the disclosures mentioned later must be made this has
become known as the true and fair view override.
Concepts
According to FRS 18, two concepts the going concern assumption and accruals
play a pervasive role in financial statements and hence in the selection of accounting
policies.
Going concern
An entity should prepare its financial statements on a going concern basis unless:
a) the entity is being liquidated or has ceased trading; or
b) the directors have no realistic alternative but to liquidate the entity or cease trading.
The going concern assumption mainly affects the valuation of assets.
Accruals
An entity should prepare its financial statements, except for cash flow information, on
the accrual basis of accounting. This requires the non-cash effects of transactions and
other events to be reflected as far as possible in the accounting period to which they
relate, and not in the period in which any cash involved is received or paid.
Judging the appropriateness of selected accounting policies
The standard sets the test for acceptability of a policy as adopted by discussing the
four main required qualities of information:
relevance
reliability
comparability
understandability.
The standard discusses these in some detail and points out that the four may be
incompatible at times. At such times, sense must be used. The two most common
conflicts envisaged are:
Relevance versus reliability (if the most relevant policy is not the most reliable, the
appropriate one to use is the most relevant of those that are reliable).
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Neutrality versus prudence within the context of reliability (prudence can cause bias,
and policy selection must not cause deliberate understatement of assets and gains or
overstatement of liabilities and losses).
Reviewing and changing accounting policies
The standard recommends frequent review of accounting policies and change to more
appropriate treatments if they are consistent with the requirements of statute and
standards. Where appropriate, previous year's figures will be adjusted to aid
comparability and although frequent change in policy may be seen as inconsistent, this
should not deter the entity from making changes if they are desirable from the point of
view of appropriateness.
Disclosures
FRS 18 is principally a disclosure standard and this is in some respects the most
important part of the standard.
The following information must be disclosed:
a) a description of each of the accounting policies that is material in the context of the
entitys financial statements.
b) a description of those estimation techniques that are significant.
c) details of any changes to the accounting policies that were followed in preparing the
financial statements for the preceding years, including:
i)
a brief explanation of why each new accounting policy is thought more

appropriate
ii) where practicable, the effect of a prior period adjustment on the results for the
previous period, in accordance with FRS 3
iii) where practicable, an indication of the effect of a change in accounting policy
on the results for the current period.
d) where the effect of a change in an estimation technique is material, a description of
the change and, where practicable, the effects on the results for the current period.
The objective of the disclosure requirements is to enable the accounting policies
adopted by an entity to be understood by users having a reasonable knowledge of
business and economic activities and accounting and a willingness to study with
reasonable diligence the information provided.
There must also be disclosure of any circumstances which might throw doubt on the
appropriateness of the going concern assumption and details of the use of any true and
fair view override described previously.
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Alternative accounting models

At various times (usually when we are undergoing a period of high inflation) users of
accounts will call into question the usefulness of a set of accounts based on historic
cost especially because most, if not all, users are interested more in the future than
the past.
Accountants have at various times sought to introduce alternatives to the historic cost
model, but these have not proved successful and with inflation very low now, the
search has all but ceased. The Canadian accountancy profession is considering
research that suggested a version of current cost accounting might be a better way
forward but so far they have not found many supporters.
We do now have a standard (as a result of the international harmonisation process)
that gives instruction on accounting during hyperinflationary times FRS 24 but this
does not apply to the UK at the present time and would only affect UK companies with
overseas subsidiaries in such economies. The basic rule remains that we account on a
modified historic cost basis.
The problems of historic cost accounting:
It ignores current value of assets and therefore understates the value of resources
used in the business.
As no account is taken of the changing value of money over time, it is difficult to

interpret trends.
Profit may be overstated as current revenue is matched with out of date costs. This
could lead to an imprudent distribution, eg if a business buys an item of stock for
10 and sells it for 20, historic cost accounting would show a distributable profit of
10. However, if the replacement cost of the item has risen to 13, that would
leave insufficient funds to remain in business.
Ratios based on historic cost accounts (which tend to overstate profit and
understate asset values) can be misleading.
No attempt is made to recognise the loss that arises through holding assets of fixed
monetary value and the gain that arises through holding liabilities of fixed monetary
value.
Modified historic cost accounts still prevail, partly because of the difficulty of finding an
acceptable alternative.
The benefits of historic cost accounting:
They are generally understood and accepted by the business community.
They are relatively objective.
They are verifiable.
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The concept of profit/income

The basic question How much better off are you after the period in question?
In a set of accounts:
OR
Opening capital + profit
Closing capital
Opening net assets + profit
Closing net assets
Thus the increase in net assets can be described as profit/income and, conversely,
profit/income is reflected by an increase in net assets (or in wealth?).
The measurement of income and the valuation of assets are therefore interlinked.
The concept of capital maintenance
The above calculation of income can only be regarded as true if it reflects a real
increase, ie it measures how much better off the owner is after the period in question in
some real way.
There are two ways of regarding this maintenance of wealth:
Financial capital maintenance

Capital = the purchasing power of owners' equity
Income = the amount that can be consumed while maintaining capital so defined
This concept underlies current purchase power (CPP) accounting
Physical capital maintenance

Capital = net operating assets = the operating capability of the entity
Income = the amount that can be consumed while maintaining the operating
capability of the entity
This concept underlies current cost (CCA) accounting
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HCA, CPP and CCA compared

Alan sets up business on 1st January with 1,000, which he immediately uses to buy
goods for resale. On 31st January he sells these goods for 1,500. At this date, the
replacement price of the goods to Alan is 1,200. During January the retail price index
(RPI) rose by 30%.
In historic cost terms:
1,500
1,000
500
Sales
Cost of sales
Profit/Income
In real terms, how much better off is Alan? He began with 1,000. To maintain his
purchasing power, he would have had to increase this by 30% to 1,300 by 31
January. In fact he has 1,500.
Thus, in current purchasing power terms:
Capital at 31st January
Capital required to maintain purchasing power
Profit/income
1,500
1,300
200
If Alan wishes to remain in business at the same level he must replace the goods he
has sold with new stock, costing 1,200. If the profit and loss account is to show the
amount which can reasonably be distributed while maintaining the operating capability
of the business, the profit would more sensibly be based on a current cost basis:
1,500
1,200
300
Sales
Cost of sales
Profit/income
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Current Cost Accounting

Intention
To show the effect of changing price levels on the results and net asset position
disclosed by HC accounts, in particular on:
operating profit
distributable profit
operating asset valuation.
The profit and loss account

Four adjustments are made to the profit and loss account:
i)
The depreciation adjustment the extra depreciation charge required to reflect

the replacement cost of fixed assets
ii) The cost of sales adjustment the adjustment required to match revenue with
current cost of sales at the time the sale was made
iii) The monetary working capital adjustment the additional/reduced amount of
finance required to maintain the monetary working capital as a result of changes in
input prices of goods and services used and financed by the business.
The operating profit is adjusted by the net effect of these three adjustments
iv) The gearing adjustment limiting the effect of the above three adjustments on
equity to take account of the fact that if the company has long term debt, and
interest is paid out of pre-tax profit, the effect will be lessened by the tax shield.
This further adjustment will then give the profit available to ordinary shareholders.
The balance sheet
Fixed assets adjust value to reflect value to the firm, ie the lower of net replacement
cost or recoverable amount. The recoverable amount is the higher of realisable value
or deprival value.
Stock adjust value to reflect value to the firm, ie the lower of net replacement cost or
net realisable value.
The net effect of the adjustments is transferred to a CC reserve from the profit and loss
account, thus reducing the amount of distributable profit to that amount which will not
reduce the operating capability of the company.
The main problem with this approach is the complexity and the difficulty of
arriving at objective values for the assets.
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Current Purchasing Power Accounting

CPP takes the historic cost accounts and adjusts them to show the effects of inflation,
especially on the capital value of the enterprise from the owners' point of view. Historic
cost accounts are adjusted to current monetary value by application of the RPI to all
non-monetary items.
Underlying principles
Owners' capital = purchasing power of owners' capital
Profit
= the amount that can be consumed while maintaining capital as

defined above
Advantages:
Simple to apply and understand
The RPI is easily obtainable and regularly updated. It is therefore objective.
It shows the direct effect of inflation on the enterprise's profit and valuations.
It does not attempt to examine whether or not assets will be replaced; it simply
updates their apparent economic value, taking inflation into account.
Disadvantages:
The RPI is not necessarily relevant to the specific assets of the company.
Subjectivity in the preparation of the historic cost accounts is aggravated by CPP.
The effects of technological change etc on asset values are ignored.
Because of this, CPP does not give a realistic measure for distributable profit.
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Appendix 7 Adjusting the accounting profit

The taxable trading profit of a company is rarely the same as the accounting profit
shown in the companys profit and loss account unfortunately! This is partly because
we have the room within accounting standards to exercise judgement about how
certain items are treated and this may (would?) result in manipulation if choices were
available that reduced the tax charge.
Nevertheless, the before tax accounting profit is the starting point for the series of
adjustments that are normally necessary.
Adjustments
There are four types of adjustment that need to be made to move from accounting
profit to the taxable trading profit (or taxable profit):
1) Expenditure which tax law prevents from being an allowable deduction may have
been charged in the profit and loss account.
2) Income taxable as trading profit may not be charged in the profit and loss account.
3) Expenditure that is deductible for tax purposes may not be charged in the profit and
loss account.
4) Income may be included in the profit and loss account that is not taxable as trading
profit.
The first two types of adjustments increase the profit figure and the second two reduce
it. The format often used is:
Net profit as per accounts (profit before tax)

Add:
Expenditure charged in the accounts which
is not deductible from trading profits
Income taxable as trading profits but which has
not been included in the accounts
X
X
X
X
Less:
Expenditure which is deductible from trading
profits but not charged in the accounts
Profits included in the accounts but are not
taxable trading profits
Capital allowances
(X)
(X)
(X)
(X)
(X)
Taxable trading profit
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Before you start to make adjustments, two important points need to be emphasised:
It is only the companys taxable trading profit that is being calculated. The fact that
an item of income (such as rental income) is excluded does not mean that it is not
taxable, only that it is not taxable as trading profits.
The starting point in deciding whether or not an adjustment is necessary is the

principle of normal commercial accountancy. These apply unless overridden by
tax law.
Non-deductible expenditure
Non-deductible expenditure (also known as disallowable expenditure) is by far the most
common form of adjustment that has to be made to the profit and loss account and
includes the following:
Expenditure not incurred wholly and exclusively for trading purposes

Such expenditure may be disallowed because it is too remote from the purposes of
the trade (the remoteness test) or because it has more than one purpose and one
of them is not trading (the duality principle).
Capital expenditure
Expenditure on capital assets is not allowed in computing trading profits, so any
amount charged to the profit and loss account for capital expenditure or
depreciation, loss on the sale of fixed assets, or amortisation of a lease, must be
added back to the accounting profit figure for the computation of trading profits.
The distinction between revenue expenditure, which is allowable, and capital
expenditure, which is disallowed, is not always clear-cut, especially when deciding
if expenditure is repairs (revenue therefore allowable) or enhancement (capital
therefore disallowed).
The cost of initial repairs is deductible if the asset can be put into use before the
repairs are carried out. For example, a taxpayer obtained a deduction for the cost
of renovating newly acquired cinemas. The work was done to make good normal
wear and tear and the purchase price was not reduced to take into account the
necessary repair work.
However, the costs of initial repairs to an asset are not deductible where they are
necessary to make the asset usable for trade. For example, a taxpayer failed to
obtain a deduction for repair work on a newly bought ship in order to make it
seaworthy prior to using it.
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Deductible expenditure
Expenditure on certain categories of fixed assets (plant and machinery and industrial
buildings) attracts capital allowances which are tax allowances for the cost of
purchasing such assets and replaces depreciation as a deduction in the trading profits
calculation.
Subscriptions and donations
Trade or professional association subscriptions are normally deductible since they will
be made wholly and exclusively for the purposes of trade.
Charitable donations are allowed if they meet the following tests:
it must be wholly and exclusively for trading purposes (eg promoting the company)
it must be local and reasonable in size in relation to the company making the
donation
it must be made to an educational, religious, cultural, recreational or benevolent

organisation.
If the donation is disallowed by reason of failing one or both of the first two tests (but is
still made to a charity) a company can instead claim relief under the gift aid scheme
and will be treated as a charge on income.
Subscriptions or donations to political parties are not deductible.
Non-charitable gifts are not allowed, except in the following circumstances:
Gifts and entertainment
Entertainment expenditure is disallowed. The only exception is for expenditure relating
to employees, provided it is not merely incidental to the entertainment of others.
Expenditure on gifts and entertainment needs to be looked at in terms of the recipient.
Gifts to employees
They would normally be allowed as regards the company making the gift, however the
gift may result in an income tax charge for the employee under the benefits rules.
Gifts to customers
Gifts to customers are only allowed if:
they cost less than 50 per recipient per year
the gift is not of food, alcohol, tobacco or vouchers which can be exchanged for
goods
the gift carries conspicuous advertising for the company making the gift.
If a gift fails any or all of the above criteria it is disallowed.

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Legal and professional charges

Legal and professional charges are allowable provided that they are incurred in
connection with the trade and are not related to capital items. So, for example, the
following types of professional charges are allowed:
Legal fees to collect trade debts
Charges incurred in defending the title to fixed assets
The following are not allowed:
Fees incurred when purchasing new fixed assets
Fees arising as a result of using new share capital
The cost of registering patents is allowable. Also, the expense of renewing a short
lease is allowable, although the expense of initial granting of the lease is not.
Charges on income and gift aid
Charges on income are deducted in arriving at PCTCT. Consequently, in computing
trading profits, they must be disallowed.
Interest payable
Interest paid on borrowings for trading purposes is allowable on an accruals basis.
Provided the accounts have been correctly prepared, no adjustment is therefore
required. A company may pay interest on debenture loans, bank overdrafts or hire
purchase contracts.
For companies, interest on overdue corporation tax is allowable under the loan
relationship rules and is, therefore, added back to the trading profits.
Car leasing
Lease rentals in respect of cars costing more than 12,000 are restricted for trading
purposes, lease payments for cars costing less than 12,000 are allowed in full.
The allowable portion of the lease payment is calculated as follows:
Annual rental charge in
profit and loss account
12,000 + (cost of car (when new ) 12,000 )

cost of car (when new )
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Other items
The items dealt with so far are the important ones you should know, however the
following items may also require adjustment.
Item of expenditure
Treatment in
computation
Notes
Compensation for the loss of

office
Allow
Only if for the benefit of

trade
Cost of registering patents and

trademarks
Allow
Cost of seconding employees to

charities
Allow
Counselling services provided in

the UK for redundant employees
Allow
Damages paid
Allow
Only if paid in connection

with trade matter
Defalcations (eg theft/fraud)
Allow*
Only if by employee, not

director
Educational courses
Allow
Only if for trade purposes
Fines
Disallow*
Unless on parking fines

incurred on business by
employee (not director)
Payment that constitutes a

criminal offence
Disallow
Pension contributions to an
approved pension scheme
Allow
Premiums for insurance against

an employees death or illness
Allow
Redundancy pay in excess of

statutory amount
Allow
On the cessation of
trading the limit is 3 x the
statutory amount
Removal expenses
Allow
Provided not an
expansionary move
Salaries accrued at the year end
Allow
Provided paid not more

that nine months after the
year end
Provided paid (not

accrued) by the year end
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Income taxable as trading profit but not included in profit and loss account
The only situation where an adjustment will be necessary in a companys accounts is

where there has been an error due to faulty accounting.
Deductible expenditure not charged in the profit and loss account
The most important item of deductible expenditure not charged in the profit and loss
account is capital allowances. These are deductible as if they were a trading expense.
Income included in the profit and loss account but not taxable as trading profits
These fall into three categories as follows:

1. Capital receipts (which may be chargeable gains). In addition any profit on the
sale of fixed assets should be deducted in calculating taxable trading profit, as this
is purely an accounting profit and not a real profit.
2. Income taxed as another source of income other than trading profits (such as rents
or interest on bank accounts).
3. Income that is exempt from tax (such as dividends from UK companies).
Such receipts must be deducted in arriving at the trading profit. However, they may
form part of the PCTCT under another source of income.
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Appendix 8 Capital allowances

Capital allowances are given on qualifying expenditure on certain fixed assets.
Allowances are given on original cost, plus any subsequent qualifying expenditure of a
capital nature and are available on the following:
Plant and machinery
Industrial buildings
Qualifying hotels.
Note:
Capital allowances are given as a trading expense in calculating the taxable trading
profits.
Capital allowances are given for a period of account instead of a tax year.
Where there is a short or long period of account the writing down allowance is
contracted or expanded on a pro rata basis.
If the period of account exceeds 12 months it must be divided for capital allowance
purposes into a 12 month period of account and a second period for the remainder.
Meaning of plant and machinery
There is no statutory definition of plant. The most informative definition was given in
the case of Yarmouth v France (1887). Plant was said to include:
Whatever apparatus is used by a businessman for carrying out his
business not his stock-in-trade that he makes for sale but all goods and
chattels, fixed or moveable, live or dead, which he keeps for permanent
employment in his business.
This is obviously a very far reaching definition. It includes not only the obvious items
of plant and machinery, but also items such as moveable partitions, office furniture and
carpets, heating systems, motor vehicles, computers, lifts and any expenditure incurred
to enable the proper functioning of the item such as reinforced floors or air conditioning
systems for computers.
If it is part of the setting, or premises, then it is not plant, and thus no capital
allowances area available, but if it fulfils a function it is plant.
There are various types of expenditure that would not be thought of as plant using the
approach set out above but are treated as plant by specific legislation. These include:
the cost of complying with fire legislation;
the costs of altering buildings required for the installation of plant;
expenditure on acquiring computer software outright.

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Statutory exclusions
Although there is no statutory definition of plant, provisions have been introduced with
the intention of making the issue clearer by providing that land, buildings and structures
cannot be plant.
In particular the provisions give detailed lists of items associated with buildings that are
part of the building and not plant. The term buildings include:
walls, floors ceilings, doors, windows and stairs
mains services, and systems of water, electricity and gas
waste disposal, sewerage and drainage systems
shafts or other structures for lifts etc.
Structures
Expenditure on structures and on works in the alteration of land does not qualify as
expenditure on plant apart from the follow exceptions.
A structure is a fixed structure of any kind other than a building.
Exceptions
The following may fall within the definition of expenditure on a building but will
nevertheless normally qualify as plant:
electrical, cold water and gas systems provided mainly to meet the particular
requirements of the trade, or to serve particular machinery used for the purposes of
the trade
space or water heating systems, systems of ventilation and air cooling, and any
ceiling or floor comprised in such systems
manufacturing or processing equipment, storage equipment, display equipment,

counters, check outs and similar equipment
cookers, washing machines, dishwashers, refrigerators and similar equipment
wash basins, sinks, baths, showers, sanitary ware and similar equipment
furniture and furnishings
lifts and escalators
sprinkler equipment and fire alarm systems;
movable partition walls
decorative assets provided for the enjoyment of the public in a hotel, restaurant or
similar trade
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advertising hoardings, signs and similar displays
sound insulation provided to meet the particular requirements of the trade
computer, telecommunication and surveillance systems
strong rooms in bank or building society premises, safes
glasshouses which have, as an integral part of their structure, devices which control
the plant growing environment automatically
swimming pools (including diving boards) and structures for rides at amusement
parks
caravans provided mainly for holiday lettings
moveable buildings intended to be moved in the course of the trade
expenditure on altering land for the purposes only of installing plant or machinery
dry docks and jetties
pipelines and also underground ducts or tunnels with a primary purpose of carrying
utility conducts
silos provided for temporary storage and storage tanks, slurry pits and silage
clamps
fish tanks, ponds and zoo cages
a railway or tramway.
Statutory inclusions
The following expenditure is deemed to be expenditure on plant and machinery:
expenditure incurred by a trader in complying with fire regulations
expenditure by a trader on thermal insulation of an industrial building
expenditure by a trader in meeting statutory safety requirements for sports grounds
expenditure (by an individual or partnership but not a company) on security assets

provided to meet a special threat to an individual security that arises wholly or
mainly due to the particular trade concerned. Cars, ships, aircraft and dwellings
are specifically excluded from the definition of a security asset.
Capital expenditure on computer software (programs and data) qualifies as

expenditure on plant and machinery regardless of whether:
the software is supplied in a tangible form such as a disc or electronically, or
the purchaser buys the software or a licence to use it.
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Calculating the allowances

The pool of expenditure
Generally, the cost of all plant and machinery purchased by a company becomes part
of a pool of expenditure on which capital allowances may be claimed. When an
addition is made, the pool increases; on a disposal the pool is reduced by the sale
proceeds (limited to the original cost of the asset).
Exceptionally, certain items are not included in the pool. For companies, these are:
motor cars costing more than 12,000
expenditure incurred on short-life plant where an election to de-pool is made
expenditure incurred on long-life assets.
Writing down allowances (WDA)
An annual WDA of 25% is given on a reducing balance basis by reference to the

unrelieved expenditure in the pool brought forward at the beginning of the accounting
period. This is known as the written down value (WDV).
The unrelieved expenditure is the cost of all pooled assets (less allowances already
given against the pool). This is then adjusted for additions and disposals during the
period.
Looking at a pro-forma layout will help to understand how the WDA is calculated.
Suppose that Boat Ltd prepares accounts to 31st March each year, and has a balance
of unrelieved expenditure brought forward at 1st April 2006.
Year ended 31 March 2007: Pool
41,000
9,000
50,000
(14,000)
36,000
(9,000)
27,000
WDV b/f (say) at 1.1.06

Additions
Less: Disposals
WDA @ 25%
WDV c/f at 31.3.07
The important point to note is the order in which additions and disposals are dealt with.
The WDA is calculated on the balance remaining after excluding disposals.
If the accounting period is less than 12 months long, then the WDA is scaled down
proportionately. You should remember that companies cannot have an accounting
period of longer than 12 months. Where the period of account is longer than 12
months, then it will be split into two accounting periods. There will therefore be two
separate capital allowance computations (one for each accounting period).
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Length of ownership in the accounting period
The WDA is never restricted by reference to the length of ownership of an asset in the
accounting period. For example, if a company's accounting period is the year ended
31st March 2007, the same WDA is given whether an asset is purchased on 1st April
2006 or on 31st March 2007. This is because it is ownership of an asset on the last
day of the accounting period that qualifies it for allowance.
Sale of plant and machinery
As you have already seen, where plant and machinery is sold during the accounting
period, the disposal value (sale proceeds) is deducted from the balance of unrelieved
expenditure in the pool. The WDA for the year is then calculated on the resultant
figure.
The sale proceeds deducted from the pool must never exceed the original cost of the
asset that has been sold. An excess of sale proceeds over original cost may be
charged as a capital gain. Thus on a disposal always deduct from the pool the lower of
the sale proceeds and the original cost.
Balancing charges
If, on disposal of an asset in the pool, disposal proceeds exceed the pool balance
brought forward, the excess allowances previously given will be recovered and charged
to tax by means of a balancing charge.
A balancing charge is assessed as an addition to the trading profits.
Balancing allowances
The basic idea underlying capital allowances is that over the life of a business a
company will obtain relief for the fall in value of an asset between the original cost and
subsequent sale proceeds (if any).
When the business is permanently discontinued and there is still a balance of
unrelieved expenditure in the pool (after deducting final sale proceeds), a company is
entitled to claim relief for that unrelieved balance by means of a balancing allowance.
It is effectively a last year allowance.
The only time a balancing allowance will arise in the pool is when the trade is
permanently discontinued.
A balancing allowance is computed by reference to the excess of the pool balance at
the end of the final accounting period over the sale proceeds received on the ultimate
disposal of plant and machinery.
No WDAs are available in the final accounting period. This is logical, since relief for
unrelieved expenditure will instead be given by means of a balancing allowance.
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First year allowances
First year allowances (FYAs) can be claimed in respect of expenditure on certain types
of plant and machinery. However, FYAs are only available to small and medium-sized
companies (see definition below).
In the year of acquisition, a FYA at the rate of 40% is given instead of the WDA. For
small companies only this is on occasion increased to 50%. You must check the date
of acquisition with the tax tables in your book to establish the correct rate.
The balance of expenditure remaining after claiming the FYA is then added into the
pool, and will qualify for WDA in subsequent periods.
FYAs cannot normally be claimed in respect of motor cars or long-life assets.
Unlike the WDA, the FYA is still available in full even if the accounting period is less
than 12 months.
Small and medium-sized companies
FYAs are only available to small and medium-sized companies.

The definition of small and medium-sized companies is that used for Companies Act
purposes. To qualify, two out of the following conditions must be met in the current or
previous year:
Turnover not
exceeding
Balance sheet
total not
exceeding
Number of
employees not
exceeding
Small company
5.6m
2.8m
50
Medium sized company
22.8m
11.4m
250
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100% First Year Allowances
A 100% FYA is available to all businesses for expenditure incurred on designing

energy saving technologies and on plant and equipment meeting strict water-saving or
efficiency criteria (eg water meters, flow controllers, efficient toilets). The equipment
must be used in the persons business.
A first year allowance of 100% is also available for certain motor cars. This is available
to all businesses. To qualify a motor car must be registered between 17th April 2002
and 31st March 2008 and meet one of the following criteria:
emit less than 120 grams per kilometre of carbon dioxide CO2
it is electrically propelled.
A 100% FYA is available to all businesses in respect of expenditure incurred on plant

to refuel vehicles with compressed natural gas or hydrogen (expenditure between 17th
April 2002 and 31st March 2008).
Equipment acquired for leasing does not normally qualify for the 100% FYA but
equipment meeting the above criteria will qualify.
A 100% FYA was available for small companies on information and communication
technology equipment during the period from 1st April 2000 to 31st March 2004 and
included:
computers and peripherals such as printers and modems
computer software
internet-enabled mobile telephones.
First year allowances are given in place of the WDA and are not scaled down if
the accounting period is less than 12 months.
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Motor cars
Motor cars costing less than 12,000 are added to the general pool. Motor cars do not
qualify for FYA.
The cost of a motor car, where it exceeds 12,000, must not be brought into the pool.
The capital allowances on each such car must be separately computed.
The WDA is restricted to a maximum (for a 12-month accounting period) of 3,000.
Once the motor car has been written down to below 12,000 the WDA will be
computed in the normal way (25% of WDV) but the motor car remains in its separate
column of the computation. It must not be brought into the pool.
Each 'expensive' motor car costing over 12,000 is deemed to be used in a separate
trade so that when the motor car is sold a balancing allowance or charge must be
computed on the difference between the WDV and the sale proceeds.
Short-life assets
An election (written application to the Inland Revenue) can be made to leave short-life
assets out of the pool. This is known as de-pooling.
The election is designed to enable companies to accelerate capital allowances on
short-life plant and machinery, where it is the intention to sell or scrap the item within
four years of the end of the accounting period in which the asset is acquired.
An election must be made within two years of the end of the accounting period in which
the expenditure was incurred.
The treatment of short-life assets corresponds in most respects to that applied to motor
cars costing over 12,000. Thus:
each short life asset is the subject of a separate computation
on disposal within four years of the end of the accounting period in which the asset
was acquired a separate balancing allowance is given or balancing charge arises.
However, unlike the treatment of expensive cars, if no disposal has taken place within
four years of the end of the accounting period in which the acquisition took place, the
unrelieved balance is transferred back to the pool. The transfer takes place in the first
accounting period following the four-year anniversary.
The making of a short-life asset election has no bearing on whether or not FYA can be
claimed.
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Long-life assets
The WDA for plant and machinery with a working life of 25 years or more is 6% rather
than 25%, although the allowance is still given on a reducing balance basis.
FYA is not given in respect of expenditure on long-life assets.
The 25-year working life is from the time that the asset is first brought into use to the
time that it ceases to be capable of being used. It is not sufficient to just look at the
expected life in the hands of the current owner.
The reduced rate of WDA does not apply to companies that spend less than 100,000
per annum on long-life assets. This limit is reduced for accounting periods of less than
twelve months and for companies with associated companies.
The following can never be classed as long-life assets:
motor cars
plant and machinery situated in a building that is used as a retail shop, showroom,
hotel or office
ships and railway assets bought before 1 January 2011
second-hand machinery in respect of the vendor obtaining allowances at 25%.
Long-life assets are kept in a separate pool, which operates in exactly the same way as
the plant and machinery pool.
Examples of long-life assets might include aircraft used by an airline and agricultural
equipment used by a farm.
Hire purchase and leasing
There are special rules for capital allowances on hired or leased assets.
Any asset bought on hire purchase is treated as if purchased outright for the cash
price, therefore:
the buyer normally obtains capital allowances on the cash price when the
agreement begins
they may write off the finance charge as a trade expense over the term of the HP
contract.
Leased assets do not normally become the property of the lessee as the asset is only
hired over a period. The hire charge can be deducted in computing trade profits.
An expensive car costing more that 12,000 will attract WDAs limited to 3,000 per
year if bought and, likewise, if it is leased the lease rental is restricted in computing the
taxable trading profits.
Rental charge x
(12,000 + price of car )

(2 price of car )
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Appendix 9 Calculating the CT due

This is divided into two steps:
Determining PCTCT and Profits (P), a term which is used to determine the tax
rates that will apply
Apply relevant rates to calculate the liability
Step 1
PCTCT
Add:
Profits for determining tax rate
X
X
Dividends plus tax credit is the term used to describe UK dividends received in the
100
current period, grossed up by the tax credit of
.
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P is used to determine the rate of tax
Step 2
The tax calculation is based on two main factors:
Profits P
the financial year (FY) which matches the CAP.
For each FY the following information is provided:

FY05
300,000
1,500,000
11
400
19%
30%
Lower limit
Upper limit
Fraction
Small company rate
Ordinary rate
There are three situations that can apply:
where profits (P) do not exceed the lower limit the SCR applies to PCTCT
where profits (P) are at or above the upper limit, the ordinary rate applies to
PCTCT
where profits (P) are between the limits than the following calculation is needed.
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PCTCT at ordinary rate

Less marginal relief
X
(X)
X
Marginal relief is found by using the formula:

Fraction x (M P) x
I
P
where:
I = PCTCT,
M = upper limit
Note:
For accounting periods of less than 12 months the lower and upper limits have to
be time-apportioned to fit the length of the accounting period.
If a companys accounting year straddles the 31st March in a year when the tax
rates change, profits must be split between the two FY to which they relate.
Associated companies
If a company has any associates, the starting rate limits and the small
companies limits are divided by the number of companies associated with each
other.
Long accounting periods
If the financial accounts cover more than 12 months two chargeable accounting
periods are required. One for the first 12 months and one for the balance.
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Appendix 10 Relief for trading losses

Companies can claim relief for losses, in a variety of ways:
Carry forward of trading losses (S393(1))
Loss relief against total profits (S393A)
Terminal loss relief
Carry forward of trading losses (S393(1) ICTA 1988)
Where a company incurs a trading loss, it may carry the loss forward and set it off
against profits from the same trade in future accounting periods. The loss can be
carried forward indefinitely and there is no time limit for obtaining relief but it must be
set-off against the first available trading profits.
A claim to establish the amount of the loss available to carry forward should be made
within six years of the end of the loss-making accounting period.
Computation of the loss
A company's trading loss is computed in the same way as a company's trading profit, ie
after adjusting for non-allowable expenditure and deducting capital allowances.
Loss relief against total profits (S393A ICTA 1988)
Where a company incurs a trading loss it may claim to set the loss against total profits
(before charges) of the accounting period producing the loss.
Any trading loss remaining unrelieved may then be carried back and set against total
profits (before charges) of accounting periods of the 12 months preceding the lossmaking period.
If a company has prepared accounts for a period other than 12 months during the 12
months preceding the loss-making accounting period, then the results of the
accounting period that fall partially outside the 12 month period are apportioned. Loss
relief is limited to the proportion of profits which falls within the 12-month period.
Companies can claim to relieve a loss against current year profits and not to claim to
carry the loss back against earlier profits. However, if the loss is carried back, it must
be relieved as far as possible within the carry-back period.
If a claim is made to carry back the loss, the set off is against later period before earlier
periods. This is relevant where there is an accounting period of less than 12 months
immediately before the loss-making period.
Any loss remaining unrelieved after a S393A ICTA claim is carried forward under
S393(1) ICTA 1988 and relieved against future trading profits of the same trade.
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Unrelieved charges cannot be carried forward and relieved against future trading
profits.
A claim for loss relief under S393A ICTA 1988 (either against current year profits, or
carried back to the previous 12 months) must be made within two years of the end of
the loss-making accounting period.
A claim under S393A ICTA 1988 must be for the whole loss, including capital
allowances. The amount of the loss may be reduced by not claiming the full amount of
capital allowances available. A company may claim any amount of capital allowances,
up to the full amount; a reduced claim would leave a higher tax written down value on
which to claim allowances next year.
Loss-making period of less than 12 months
Where the loss-making period is less than 12 months, then no apportionment is

necessary. The loss can be carried back in full against profits falling within the
preceding 12-month period.
Losses carried back and carried forward
Care needs to be taken over the order of set-off when there are losses for more than
one year.
Losses carried forward under S393(1) ICTA 1988 are set-off before loss claims against
current year profits or losses carried back under S393A ICTA 1988.
If the correct layout is used, then the order of set-off is dealt with automatically.
100
Tutors Support Pack
Terminal loss relief
When a company incurs a trading loss during the final 12 months of trading, then it is
possible to make a claim under S393A ICTA 1988. However, such a loss can be
carried back and set against total profits of the three years preceding the loss making
period, rather than the preceding 12 months.
Relief available
Terminal loss relief applies to trading losses incurred during the final 12 months of
trading.
The company must first claim to set the trading loss against total profits (before
charges) of the accounting period of the loss.
The terminal loss can then be carried back and set against total profits (before
charges) of the three years preceding the loss-making period.
Unrelieved charges are wasted.
The set-off is against later periods before earlier periods.
Apportionment will be necessary in two circumstances:
Where the loss-making accounting period falls partly outside the final 12 months of
trading, only that proportion of the loss falling within the final 12 months can be
carried back for three years. The proportion falling outside the 12 months can only
be carried back under S393A ICTA 1988 for 12 months.
Where the company has prepared accounts for a period other than 12 months
during the three years preceding the loss-making period, apportionment will be
necessary in the same way as for a normal S393A ICTA 1988 loss claim, so that
losses are only carried back against the proportion of profits falling within the threeyear period.
101
Tutors Support Pack
Layout of PCTCT calculation incorporation loss relief
Dealing with losses may seem daunting at first but if you use a systematic, calculated
and clear approach the answers will be easily calculated.
Use a step by step process:
1) Prepare a PCTCT format for the relevant accounting periods. In the proforma
leave spaces to enter relief under S393(1) ICTA 1988 and S393A ICTA in the
appropriate places as follows:
Trading profit
Less: S393(1) ICTA 1988 relief
Property business income, interest income etc
Chargeable gains
Less: S393A ICTA 1988 relief (carry back)
Charges
PCTCT
X
(X)
X
X
X
X
(X)
X
(X)
X
2) The various amounts of income are then entered into the proforma.
3) Identify the losses. Remember that normally losses may only be carried back for
12 months.
4) Relieve the losses and complete a loss memorandum, detailing how the loss has
been relieved and how much loss, if any, is left to be carried forward at the end.
102
Tutors Support Pack
Factors influencing choice of loss relief
There may be several alternative loss reliefs available for a loss and various factors will
influence the loss relief chosen. These include:
Rate of relief
The rate of tax at which relief will be given depends on the level of profits before the
claim is made.
It will normally be beneficial to claim relief against profits subject to corporation tax
at the marginal rate of 32.75% or at the full rate of 30%, in preference to profits
subject to corporation tax at the rates 19%.
Cash flow
Relief under S393A ICTA 1988 will probably result in a repayment of corporation
tax, whereas relief under S393(1) ICTA 1988 will only result in a reduction of a
future tax liability.
Charges
Unrelieved charges cannot be carried forward and relieved against future trading
profits. Therefore, certain claims for loss relief may lead to relief for charges being
lost.
103
Tutors Support Pack
Appendix 11 solutions to revision exercises

Revision exercise 1
Working notes (000) Castlepark
Cost of
sales
Per trial balance
Administration
expenses
29,610
Opening stock
503,500
Bad debts
1,755
Closing stock
(72,500)
Audit fees accrued
85
Insurance prepaid
(48)
Depreciation buildings
311
Depreciation equipment and vehicles
791
511,621
Creditors amounts falling due within one year:
Trade creditors
Accruals (1,120 + 85)
Taxation
Overdraft
VAT account
66,465
1,205
22,050
29,960
3,229
122,909
Fixed assets
Buildings depreciation for year:

31145 x 2% = 623
31145 - (623+3189) = 27,333
Equipment and vehicles depreciation for year:

10553 x 15% = 1,583
NBV
11,205
79,519
Purchases
NBV
Distribution
costs
10553 - (4568 + 1583) = 4,402
104
156
156
792
31,558
12,153
Tutors Support Pack
Journals:
Dr
Cr
Tax in P/L
Creditors
Dr
Admin expenses
Cost of sales
Distribution costs
Provision for depreciation (buildings)
156
311
156
Cost of sales
Distribution costs
791
Cr
Dr
Dr
Dr
Cr
22,050
22,050
623
792
Admin expenses (auditor)

Accruals
85
Prepayments
Admin expenses (insurance)
48
85
48
Trading profit and loss account Castlepark

for year ended 31st March 20X9
000
Turnover
Cost of sales
608,738
(511,621)
Gross profit
97,117
Admin expenses
Distribution costs
(31,558)
(12,153)
Operating profit
53,406
Interest payable
(2,496)
50,910
Taxation
(22,050)
28,860
Profit and loss reserve
Retained profit b/f

Profit for year
Dividends: Paid
7,498
28,860
(4,760)
Retained profit c/f
31,598
105
Tutors Support Pack
Balance sheet Castlepark

at 31st March 20X9
000
Fixed assets
Land
Property
000
30,000
27,333
4,402
61,735
Current assets
Stock
Debtors
Prepayments (1729+48)
72,500
136,620
1,777
210,897
Creditors: amounts falling due

within one year
(122,909)
87,988
Net current assets
149,723
Total assets less current liabilities

Creditors: amounts falling due after
more than one year
Debentures
(9,975)
139,748
Share capital and reserves

Ord share capital
Share premium
78,750
29,400
31,598
139,748
106
Tutors Support Pack
Revision exercise 2
Working notes (000) Andrene
Cost of
sales
Audit fees
Per trial balance
175,600
6,600
3,000
Depreciation of property
403
Depreciation of equipment
629
176,632
12,100
200
176
500
8,600
9,200
1,450
32,226
Tax charge in P/L:
8,600
28
8,628
Deferred taxation:
Opening balance
Transfer
Closing balance
21,000
200
Allowance for doubtful debt
Tax on profit for year

Transfer to/from deferred tax
Distribution
costs
176
Bad debt written off
Trade creditors
Accruals
Accrued audit fees
Acrued interest
Taxation
Overdraft
VAT account
Administration
expenses
7,000
28
7,028
107
403
202
629
24,779
7,431
Tutors Support Pack
Fixed assets:
Disposal:
Proceeds
50
NBV
(40)
Profit on sale 10
Equipment and
vehicles
Premises
10,000
50,400
Total
Cost
At start
60,400
Additions
560
560
Disposals
(75)
(75)
At end
10,485
50,400
60,885
5,700
18,200
23,900
Depreciation
At start
Disposals
(35)
(35)
Charge for year
1,258
1,008
2,266
At end
6,923
19,208
26,131
NBV at start
4,300
32,200
36,500
NBV at end
3,562
31,192
34,754
108
Tutors Support Pack
Trading profit and loss Andrene

for year ended 31st March X9
Turnover
Cost of sales
000
352,000
(176,632)
Gross profit
175,368
Admin expenses
Distribution costs
Profit on sale of equipment
(24,779)
(7,431)
10
Operating profit
143,168
Interest paid and payable (670 + 500)

Interest receivable
(1,170)
520
142,518
Taxation
(8,628)
133,890

Retained profit b/f
Profit for year
Dividend paid
Retained profit c/f
5,000
133,890
(1,200)
137,690
109
Tutors Support Pack
Balance sheet Andrene

At 31st March X9
000
Fixed assets
Tangible
Investments
000
34,754
31,400
66,154
Current assets
Stock
Debtors (60,200-200-3000)
Prepayments
83,940
57,000
1,500
142,440

within one year
(32,226)
Net current assets
110,214
176,368

more than one year
Debentures
Provisions for liabilities and charges
Deferred taxation
(5,000)
(7,028)
164,340

Ord share capital
Share premium
23,000
3,650
137,690
164,340
110
Tutors Support Pack
Revision exercise 3
Working notes (000) Milton
Cost of
sales
Administration
expenses
Accrued expenses
Distribution
costs
58
Per trial balance
291,040
13,518
17,171
Depreciation
81
56
89
Depreciation
202
134
269
291,323
13,766
17,529
Creditors: amounts falling due within one year:
Trade creditors
Accruals
Accrued interest
Accrued expenses
Taxation
Overdraft
VAT account
42,538
475
766
58
14,100
19,134
2,066
79,137
Tax charge in P/L:

14,100
120
14,220
Deferred taxation:
Opening balance
From P/L
11,592
120
11,712
Provide for debenture interest:

Dr Interest payable
Cr Accrued interest
766
766
Fixed assets
Dr
Admin expenses
Dr
Cost of sales
Dr
Distribution costs
Cr
81
56
89
226
111
Tutors Support Pack
Balance sheet
6426 - (2923+226)
Freehold property
Dr
Admin expenses
Dr
Cost of sales
Dr
Distribution costs
Cr
3,277
202
134
269
605
Balance sheet
19933 - (2041+605)
17,287
Trading profit and loss account - Milton

for year ended 31/3/X7
Turnover
Cost of sales
000
378,000
(291,323)
Gross profit
86,677
Admin expenses
Distribution costs
(13,766)
(17,529)
Operating profit
55,382
Interest paid and payable (766+2698)

Interest receivable
(3,464)
177
52,095
Taxation
(14,220)
37,875
Retained profit b/f

Profit for the year
Dividends
Retained profit c/f
5,454
37,875
(3,046)
40,283
112
Tutors Support Pack
Balance sheet Milton

At 31/3/X7
000
Fixed assets
Tangible
Investments
000
20,564
26,643
47,207
Current assets
Stock
Debtors
60,856
98,077
158,933

within one year
(79,137)
79,796
Net current assets
127,003

more than one year
Debentures
Deferred taxation
(6,384)
(11,712)
108,907

Ord share capital
Share premium
54,400
14,224
40,283
108,907
113
Tutors Support Pack
Revision exercise 4
Working notes (000) Panico
Cost of
sales
Per trial balance
Administration
expenses
14,090
Purchases
57,025
Closing stock
(85,000)
Audit fees accrued
125
Insurance prepaid
(48)
Depreciation property
168
Depreciation equipment
624
193,777
Trade creditors
Accrual: Interest
Accrual: auditor
Taxation
VAT account
25,400
480
125
11,500
1,650
39,155
Tax charge in P/L:

Under/over provision
35
11,500
50
11,585
Deferred taxation:
Opening balance
Transfer
Closing balance
807
50
857
Fixed assets
Balance sheet:
28,000 (5040 + 560)
9,980
220,960
Opening stock
Freehold property
Dr
Admin
Dr
Cost of sales
Dr
Distribution
Cr
Distribution
costs
280
168
112
560
22,400
114
280
156
624
14,495
10,716

Dr
Cost of sales
Dr
Distribution
Cr
Balance sheet:
7,800 (2720 + 1248)
Tutors Support Pack
624
624
1248
3,832
Trading profit and loss account Panico

for year ended 31st March X9
Turnover
Cost of sales
Gross profit
000
337,450
(193,777)
143,673
Admin expenses
Distribution costs
Operating profit
(14,495)
(10,716)
118,462
Interest payable
(480)
117,982
Taxation
(11,585)
106,397

Retained profit b/f
Profit for year
Dividends: Paid
Retained profit c/f
4,500
106,397
(6,942)
103,955
115
Tutors Support Pack
Balance sheet Panico

at 31st March X9
000
Fixed assets
Tangible
000
26,232
Current assets
Stock
Debtors
Bank
85,000
65,955
15,980
166,935

within one year
(39,155)
Net current assets
127,780
154,012

more than one year
Debentures
Deferred taxation
(4,800)
(857)
148,355

Ord share capital
Share premium
34,800
9,600
103,955
148,355
116
Tutors Support Pack
Revision exercise 5
000
2,000
(450)
(750)
800

Costs to date
Expected profit
Attributable profit = 30% x 800 = 240
This will be achieved by:
Turnover 30% x 2,000
Cost of sales (balancing figure)
Profit
600
360
240
The journal entries are therefore:

Dr
Cr
Bilt Ltd (contractee)

Turnover
600
Dr
Cr
Cost of sales
Contract account
360
600
360
This leaves the following balances to be reflected in the balance sheet:

Bilt Ltd
600 550 paid = 50
This amount will be included in debtors as Amounts Recoverable on Contracts

Contract account
450 360 transferred to cost of sales = 90
This amount will be included in stock as long-term WIP
117
Tutors Support Pack
Revision exercise 6
Working notes (000) Acer
Cost of
sales
Contract
Administration
expenses
400
203,280
Per trial balance

Directors remuneration
Stock write-down
10,458
15,210
222
48
30
370
370
89
150
60
204,169
10,830
15,688
Trade creditors
Accrued interest
Taxation
Overdraft
VAT account
31,903
480
10,580
14,888
1,500
59,351
Tax charge in P/L:

10,580
90
10,670
Deferred taxation:
Opening balance
Transfer
Closing balance
8,694
90
8,784
Stock write-down
Shown at
NRV
Writedown
Dr
Cr
Cost of sales
Stock
Distribution
costs
50 (2,500 x 20)
20
30
30
30
118
Tutors Support Pack
Contract
Costs so far
Estimated cost to complete
Total profit
885
(500)
(90)
295
Value of work certified

Cost of work certified
600
(400)
200
This appears reasonable as contract is 67.80% finished and 67.8% x 295 = 200
Dr
Cr
Contractee
Turnover
600
Dr
Cr
Cost of sales
Contract account
400
600
400
This leaves the following balances:
Contractee:
Turnover
Bank
Debtor
600
550
50
Contract:
Costs to date
Transfer to cost of sales
Work in progress
500
400
100
119
Tutors Support Pack

Equipment and
vehicles
Premises
Total
Cost
At start
4,818
14,950
19,768
Additions
245
560
Disposals
(133)
(133)
At end
4,930
14,950
19,880
2,188
1,530
3,718
Depreciation
At start
Disposals
(57)
Charge for year
740
299
1,039
At end
2,871
1,829
4,700
NBV at start
2,630
13,420
16,050
NBV at end
2,060
13,121
15,181
120
(57)
Tutors Support Pack
Trading profit and loss account Acer

Turnover (283,856 + 600)

Cost of sales
Gross profit
000
284,456
(204,169)
80,287
Admin expenses
Distribution costs
Operating profit
(10,830)
(15,688)
(28)
53,742
Interest payable (771 + 480)

Investment income
(1,251)
134
52,625
Taxation
(10,670)
41,955
Retained profit b/f

Profit for year
Dividends: Paid
Retained profit c/f
3,600
41,955
(7,280)
38,275
121
Tutors Support Pack
Balance sheet Acer

at 31st March 20X9
000
Fixed assets
Tangible
Investments
000
15,181
10,212
25,393
Current assets
Stock (58,956 + 100 - 30)
Debtors (73,526 + 50)
59,026
73,576
132,602

within one year
(59,351)
Net current assets
73,251
98,644

more than one year
Debentures
Deferred taxation
(4,000)
(8,784)
85,860

Ordinary share capital
Share premium
37,800
9,785
38,275
85,860
122
Tutors Support Pack
Revision exercise 7
Working notes (000) Harebell
Cost of
sales
Audit costs
242,000
Contract
12,070
8,866
12,304
8,866
1,530
Opening stock
46,007
Closing stock
(48,500)
241,037
Trade creditors
Accruals
Taxation
Overdraft
VAT account
37,980
234
12,600
16,834
1,845
69,493
Tax charge in P/L:

Underprovision
36
12,600
112
12,748
Deferred taxation:
Opening balance
Transfer
10,350
112
10,462
Contract
Costs to date
Total profit
Dr
Cr
Dr
Cr
Distribution
costs
234
Per trial balance
Attributable
Administration
expenses
3.2m X
Contractee
Sales
Cost of sales
Contract
10,000
(2,800)
(4,000)
3,200
2.25
= 0.72m
10
2,250
2,250
1,530
1,530
123
Tutors Support Pack
The debtor has already paid and this has been credited to contract
Dr
Cr
Contract
Contractee
2,250
2,250
The only balance left will be on the contract account:

Costs so far
Less transferred to cost of
WIP
2,800
(1,530)
1,270
Trading profit and loss - Harebell

for year ended 31 March 20X9
000
Turnover (337,500 + 2,250)

Cost of sales
Gross profit
000
339,750
(241,037)
98,713
Admin expenses
Distribution costs
Operation profit
(12,304)
(8,866)
77,543
Interest paid and payable

Investment income
(6,855)
160
70,848
Taxation
(12,748)
58,100
Retained profit b/f

Profit for year
Dividends
14,566
58,100
(2,720)
69,946
124
Tutors Support Pack
Balance sheet Harebell

At 31st March X9
000
Fixed assets
Tangible
Investments
000
49,395
10,396
59,791
Current assets
Stock (48,500 + 1,270)
Debtors
49,770
98,040
147,810

within one year
(69,493)
78,317
Net current assets
138,108

Deferred taxation
(10,462)
127,646

Share premium
45,000
12,700
69,946
127,646
125
Tutors Support Pack
Revision exercise 8
Working notes (000) Bensven
Cost of
sales
Administration
expenses
Distribution
costs
Costs
Per trial balance

Wages and salaries
145,823
11,500
4,900
17,776
17,776
8,888
Bad debts
15
Allowance
1,506
640
240
240
120
164,479
31,037
14,548
Trade creditors
Accruals
Taxation
Overdraft
VAT account
Tax charge in P/L:
Deferred taxation:
Opening balance
Transfer
Closing balance
Debtors
Opening balance
Less bad debt
Allowance
22,160
480
7,640
9,618
1,100
40,998
7,640
52
7,692
7,050
52
7,102
50,216
(15)
50,201
(1,506)
48,695
Debenture interest
Accrue 4,000 x 12% = 480
126
640
Tutors Support Pack
Fixed asset schedule Bensven

Equipment and
vehicles
Premises
Total
Cost
At start
8,000
12,416
20,416
17,584
17,584
8,000
30,000
38,000
1,800
1,916
3,716
(1,916)
(1,916)
Revaluation
At end
Depreciation
At start
Revaluations
Charge for year
1,280
600
1,880
At end
3,080
600
3,680
NBV at start
6,200
10,500
16,700
NBV at end
4,920
29,400
34,320
Revaluation reserve:
Opening balance
From premises at cost
From Accumulated depreciation
2,240
17,584
1,916
21,740
127
Tutors Support Pack
Trading profit and loss account Bensven

000
Turnover
Cost of sales
Gross profit
252,500
(164,479)
88,021
Admin expenses
Distribution costs
Operating profit
(31,037)
(14,548)
42,436
Interest payable (667 + 480)

Interest receivable
(1,147)
220
41,509
Taxation
(7,692)
33,817
Retained profit b/f

Profit for year
Dividends: Paid
3,737
33,817
(2,542)
Retained profit c/f
35,012
128
Tutors Support Pack
Balance sheet Bensven

At 31 March 20X9
000
Fixed assets
Tangible
Investments
000
34,320
10,000
44,320
Current assets
Stock
Debtors
53,517
48,695
102,212

within one year
(40,998)
61,214
Net current assets
105,534

more than one year
Debentures
Deferred taxation
(4,000)
(7,102)
94,432

Revaluation reserve
Share premium
30,000
21,740
7,680
35,012
94,432
129
Tutors Support Pack
Revision exercise 9
Working notes (000) Jaqjas
Cost of
sales
Per trial balance

Wages and salaries
Administration
expenses
Distribution
costs
262,384
11,524
6,096
3,477
13,907
6,953
Opening stock
43,228
Closing stock
(55,000)
Audit
126
410
118
153
68
254,617
25,710
13,526
Trade creditors
Accruals
Taxation
Overdraft
VAT account
Tax charge in P/L:
Deferred taxation:
Opening balance
Transfer
Closing balance
36,157
126
12,000
16,314
1,756
66,353
12,000
103
12,103
9,853
103
9,956
130
409
Tutors Support Pack

Equipment and
vehicles
Premises
Total
Cost
At start
5,462
16,940
22,402
9,060
9,060
5,462
26,000
31,462
2,481
1,735
4,216
(2,074)
(2,074)
Revaluation
At end
Depreciation
At start
Revaluations
819
339
1,158
At end
3,300
3,300
NBV at start
2,981
15,205
18,186
NBV at end
2,162
26,000
28,162
Charge for year
Revaluation reserve:
Opening balance
Cost
Depreciation
3,903
9,060
2,074
15,037
Note:
Because the revaluation took place on the last day of the year, depreciation is
calculated on the original cost.
131
Tutors Support Pack
Trading profit and loss account Jacjas

000
Turnover
Cost of sales
Gross profit
321,300
(254,617)
66,683
Admin expenses
Distribution costs
Operating profit
(25,710)
(13,526)
27,447
Interest payable
Interest receivable
(1,358)
155
26,244
Taxation
(12,103)
14,141
Retained profit B/F

Profit for year
Dividends: Paid
Retained profit C/F
9,963
14,141
(3,000)
21,104
132
Tutors Support Pack
Balance sheet Jacjas

at 31st March 20X9
000
Fixed assets
Tangible
Investments
000
28,162
9,897
38,059
Current assets
Stock
Debtors
55,000
74,321
129,321

within one year
(66,353)
62,968
Net current assets
101,027

Deferred taxation
(9,956)
91,071

Ord share capital
Revaluation reserve
Share premium
42,840
15,037
12,090
21,104
91,071
133
Tutors Support Pack
Grant
Allocation of interest
Year
Opening
balance
Payment
1
2
3
4
15,600
12,870
9,009
4,762
(3,900)
(4,680)
(4,680)
(4,762)
Creditor
Bal b/d
15,600
15,600
Creditor
Bal b/d
3,900
3,900
Interest
Closing
balance
1,170
819
433
(0)
12,870
9,009
4,762
(0)
Computer
Bal c/d
Depreciation
15,600
3,900
Depreciation
Accumulated
Depreciation
3,900
Cash
Bal c/d
Creditor
Bal b/d
P/L
Lease creditor
3,900 Fixed asset
14,122 Interest suspense
18,022
Interest suspense
2,422 P/L (Interest)
Bal c/d
2,422
1,252
Profit and loss extracts
Depreciation
Interest paid
3,900
1,170
134
3,900
15,600
2,422
18,022
1,170
1,252
2,422
Tutors Support Pack
Balance sheet extracts
Fixed assets (15,600 3,900)
11,700
Creditors due within one year

(Next years instalment interest element = 4,680 819)
3,861
Creditors due after more than one year

(Total creditor balance on interest suspense 3861)
(Or: Read from table closing balance year 2!)
9,009
Sum of digits allocation
After initial deposit, there are 3 payments, thus:

Sum of digits = 3+2+1 = 6
Total interest = Total payments cash price
= 18,022 - 15,600
= 2,422
Allocation:
Yr 1 (3/6) x 2422 = 1,211
Yr 2 (2/6) x 2422 = 807
Yr 3 (1/6) x 2422 = 404
2,422
135
Tutors Support Pack
ABC plc
Working notes (000)
Cost of
sales
Administration
expenses
Distribution
costs
Staff costs
12,446
3,556
1,778
Overhead per TB
19,200
2,080
6,610
Purchases
12,255
Opening stock
3,920
Closing stock
(3,990)
Lease payments
(40)
Depreciation leased machinery
23
16
43,830
5,640
8,388
Trade creditors
Lease creditor (see below)
Taxation
Debentures (1/2 due within year)
PAYE etc
Tax charge in P/L:
Underprovided
Deferred taxation:
Opening balance
Transfer
Closing balance
13,760
30
3,000
1,500
275
18,565
120
3,000
(700)
2,420
2,500
(700)
1,800
136
409
Fixed assets
Annual depreciation on building:
Tutors Support Pack
800
= 20
40
Prior period adjustment:

3 x 20 = 60
This year: 20: 16 to cost of sales; 4 to admin
Total for balance sheet:
Land
Buildings (800 - 80)
Leased machine (184-23)
Plant
Motor vehicles
Fixtures and fittings
1,400
720
161
3,520
55
800
6,656
Dealing with the lease (000)

Opening entry:
Dr Fixed asset
Cr Creditor
184
Dr Interest suspense
136
184
Cr Creditor
(16 x 20,000 184,000)
136
When payments made:

These must be removed from the overhead account
Payment 1
Dr Creditor
Cr Production overhead
20
20
20
Payment 2
Dr Creditor
Cr Production overhead
20
137
Tutors Support Pack
Spreading the interest:

Total interest
= 136
Total number of payments = 16
Sum of the digits
= 16+15+14+13+12+11+10+9+8+7+6+5+4+3+2+1
= 136
16
x 136 = 16
Allocated to first payment:
136
15
x 136 = 15
Allocated to second payment:
136
31
Dr P/L interest
Cr Interest suspense
31
31
Depreciation
Dr depreciation (P/L)
23
Cr accumulated depreciation
Creditor
Bal b/d
184
184
Payments
Bal c/d
Creditor
Bal b/d
184
2
16
23
Fixed asset
P/L
-
184
Lease creditor
40 Fixed asset
280 Interest suspense
320
Bal b/d
Interest suspense
136 P/L
Bal c/d
136
105
184
136
320
280
31
105
136
Splitting the creditor:
Net creditor: (280 - 105) =

Payments within year
Less: interest element
175
80
50
Creditor due within one year

Creditor due after more than one year
(4 x 20,000)
136
[14 + 13 + 12 + 11]
136
30
145
138
Tutors Support Pack
Trading profit and loss account ABC plc

000
Turnover
Cost of sales
Gross profit
66,980
(43,830)
23,150
Admin expenses
Distribution costs
Operating profit
(5,640)
(8,388)
9,122
Interest paid and payable (850 + 31)

Investment income
(881)
60
8,301
Taxation
(2,420)
5,881
5,670
(60)
5,881
(530)
10,961
Retained profit b/f

Prior period adjustment
Profit for year
Dividends: Paid
Retained profit c/f
139
Tutors Support Pack
Balance sheet ABC plc

At 31st March 20X4
000
Fixed assets
Tangible
Investments
000
6,656
965
7,621
Current assets
Stock
Debtors
Bank
3,990
29,290
70
33,350

within one year
(18,565)
Net current assets
14,785
22,404

within one year
Debentures
Finance lease creditor
(1,500)
(145)

Deferred taxation
(1,800)
18,961

Ord share capital
8,000
10,961
19,961
140
Tutors Support Pack
January 2
50,000
Dr
Share premium
Cr
Being the issue of 50,000 bonus shares
50,000
January 5
Dr
Cr
Cr
Cash
Share capital
Share premium
280,000
80,000
200,000
Balance sheet
Share capital (1 ordinary shares)

Share premium
280,000
225,000
560,000
1,065,000
Working
150,000
= 50,000 shares
3
Share premium account used as this leaves maximum distributable profit
Bonus issue:
Rights issue: Share capital now at 200,000

200,000
Issue:
x 2 shares = 80,000 shares
5
Cash received = 80,000 x 3.50
= 280,000
141
Tutors Support Pack
Working notes (000) Nordheim
Cost of
sales
Administration
expenses
Distribution
costs
Per trial balance
600,770
30,161
10,968
Salaries and wages
114,743
68,846
45,897
Bad debts
Depreciation Equipment and vehicles
1,332
3,353
Depreciation Property
3,353
113
85
85
718,979
100,423
60,303
Trade creditors
Taxation
VAT account
74,640
5,000
1,920
81,560
Share issue
Dr
Cr
Cr
Suspense account
Share capital
Share premium
7,950
4,000
3,950
142
Tutors Support Pack

Equipment and
vehicles
Premises
Total
Cost
At start
Additions
32,160
1,584
Disposals
At end
14,160
46,320
1,584
(216)
(216)
33,528
14,160
47,688
18,000
2,040
20,040
Depreciation
At start
Disposals
Charge for year
(36)
(36)
6,706
283
6,989
At end
24,670
2,323
26,993
NBV at start
14,160
12,120
26,280
NBV at end
8,858
11,837
20,695
Disposal:
NBV of equipment disposed of
Proceeds
Loss
180
(144)
36
143
Tutors Support Pack
Trading profit and loss account Nordheim

000
Turnover
Cost of sales
Gross profit
912,025
(718,979)
193,046
Admin expenses
Distribution costs
Operating profit
(100,423)
(60,303)
(36)
32,284
Interest receivable
360
32,644
Taxation
(5,000)
27,644
Retained profit B/F

Profit for year
Dividends: Paid
Retained profit C/F
20,944
27,644
(2,880)
45,708
144
Tutors Support Pack
Balance sheet Nordheim

At 31st March 20X9
000
Fixed assets
Tangible
Investments
000
20,695
24,000
44,695
Current assets
Stock
Debtors
Bank
72,600
106,560
23,118
202,278

within one year
(81,560)
Net current assets
120,718
165,413

within one year
Debentures
(4,800)

Share premium
107,200
7,705
45,708
160,613
145
Tutors Support Pack
COST/VALUATION
Opening balance
Additions
Disposals
Revaluation
Closing balance
Land
Buildings
Plant
Vehicles
Total
90,000
200,000
70,000
50,000
26,000
15,000
(10,000)
30,000
120,000
200,000
120,000
31,000
386,000
65,000
(10,000)
30,000
471,000
20,000
28,000
4,000
24,000
13,800
41,800
10,000
(6,000)
6,200
10,200
58,000
(6,000)
24,000
76,000
DEPRECIATION
Opening balance
Disposals
Charge for year
Closing balance
NBV at start
90,000
180,000
42,000
16,000
328,000
NBV at end
120,000
176,000
78,200
20,800
395,000
The freehold land was revalued during the year by ABC Chartered Surveyors and Co.
Accounting policy note:
Tangible fixed assets are stated at cost less depreciation, except in the case of
freehold land which is periodically revalued by external surveyors. Freehold land is not
depreciated.
Depreciation is calculated on other tangible fixed assets in such a way as to write off
the cost to residual value over the expected useful lives of the assets as follows:
Buildings:
Plant:
Vehicles:

15% per annum on reducing balance basis
146
Tutors Support Pack
Equipment and
vehicles
Premises
Total
Cost
At start
10,000
50,400
60,400
Additions
560
560
Disposals
(75)
(75)
At end
10,485
50,400
60,885
5,700
18,200
23,900
Depreciation
At start
Disposals
(35)
(35)
Charge for year
1,258
1,008
2,266
At end
6,923
19,208
26,131
NBV at start
4,300
32,200
36,500
NBV at end
3,562
31,192
34,754
Accounting policy note:
Tangible fixed assets are stated at cost less depreciation. Depreciation is calculated on
tangible fixed assets in such a way as to write off the cost to residual value over the
expected useful lives of the assets as follows:
Premises:

147
Tutors Support Pack
Notes to the profit and loss:
Operating profit is after charging:

Depreciation on leased assets
3,900
Interest paid includes:

Interest paid on finance leases
1,170
Notes to the balance sheet:
Plant and equipment include assets held under finance leases with a net book value of
11,700.
Finance lease creditors
Gross creditor
Less interest element
Net creditor
Due within one year

4,680
(819)
3,861
148
Due within 2-5 years

9,442
(433)
9,009
Tutors Support Pack
Prando
a)
Allocation of interest
Year
1
2
3
4
Opening
balance
7,800
6,435
4,505
2,381
Payment
Interest
(1,950)
(2,340)
(2,340)
(2,381)
Creditor
Bal b/d
7,800
7,800
Bal c/d
1,950
Provision
1,950
Cash
Bal c/d
Computer
Bal b/d
585
410
216
(0)
Computer
Bal c/d
7,800
Provision for depreciation

Depreciation
Bal b/d
1,950
1,950
Depreciation
P/L
Lease creditor
1,950 Computer
7,061
9,011
Bal b/d
Interest suspense
1,211 P/L (Interest)
Bal c/d
1,211
626
Cash extract
Creditor
Profit and loss extracts
Depreciation
Interest paid
Closing
balance
6,435
4,505
2,381
(0)
1,950
585
149
1,950
9,011
9,011
7,061
585
626
1,211
1,950
Tutors Support Pack
Balance sheet extracts
Fixed assets
Creditors due within one year
Creditors due after more than one year
5,850
1,930
4,505
b)
Sum of digits = 6
Allocation:
Yr 1 (3/6) =
Yr 2 (2/6) =
Yr 3 (1/6) =
606
404
202
1,211
c)
Notes to the profit and loss:

Depreciation on leased assets
Interest paid includes:
Interest paid on finance leases
1,950
585
Notes to the balance sheet:
Plant and equipment include assets held under finance leases with a net book value of
5,850.
Finance lease creditors
Gross creditor
Less interest element
Net creditor
Due within one year

2,340
(410)
1,930
150
Due within 2-5 years

4,721
(216)
4,505
Tutors Support Pack
The items which must be disclosed separately for Biscabee are:
Depreciation of owned assets
Depreciation of leased assets
Amortisation of development expenditure
Research costs
Equipment hire costs
Directors fees these will be further expanded on in the Directors Remuneration

report.
Audit fees
Amounts paid to and on behalf of employees (non-FRSSE companies only)

Depreciation of owned assets
Depreciation of leased assets
Amortisation of development expenditure
Research costs
Hire of equipment
Directors fees
Audit fees
Employment costs
(including 23,000 in pension contributions).
151
145,000
24,000
4,500
6,000
6,785
15,000
35,000
278,000
Tutors Support Pack
a)
Stock comprises:
Raw materials
Work in progress
Finished goods
100,000
150,000
200,000
450,000
b)
Stock is valued at the lower of cost and net realisable value. cost includes all direct
expenditure and production overheads incurred in bringing the stock to its current
condition and location under normal working conditions. Net realisable value is
calculated as estimated selling price less any costs of selling such goods.
c)
Tangible fixed assets are stated at cost less depreciation, except in the case of
Freehold property which is revalued every three years by external surveyors. Freehold
land is not depreciated. Depreciation is calculated on other tangible fixed assets in
such a way as to write off the cost to residual value over the expected useful lives of
the assets as follows:
Plant:
Vehicles:

152
Tutors Support Pack
Trading profit and loss account Harebell
for year ended 31st December 20X9
Turnover
Cost of sales
Gross profit
Admin expenses
Distribution costs
Operating profit
000
Continuing
activities
578,301
(480,924)
97,377
(29,665)
(10,938)
56,775
000
Discontinued
activities
30,437
(30,697)
(260)
(1,893)
(1,215)
(3,369)
000
608,738
(511,621)
97,117
(31,558)
(12,153)
53,406
Interest payable
(2,496)
50,910
Taxation
(22,050)
28,860
153
Tutors Support Pack
Segmental reports tell users:

i)
The relative sizes of the sectors in which the organisation operates.
ii) The profitability of each sector

iii) Which sectors depend most heavily on inter-segment sales
iv) The extent to which the group depends on export sales; the extent to which the
group trades in politically difficult areas. This indicates the groups exposure to
exchange risks and economic risks.
The information is designed to help users assess the impact of risk on the
organisations results. It does, however, leave the user to determine which areas are
the most risky!
As with ratio analysis, segmental reporting does not give us the whole story - but it
points us in the direction of questions that may need to be asked if we want to make
informed investment decisions.
Purpose of SSAP 25
To provide information to assist the user of financial statements:

a) to appreciate more thoroughly the results and financial position of the entity by
permitting a better understanding of the entitys past performance and thus a better
assessment of its future prospects; and
b) to be aware of the impact that changes in significant components of a business
may have on the business as a whole.
A segment is significant if:
a) its third party turnover is over 10% of the entitys turnover
b) its segment profit or loss is over 10% of the entitys profit or loss
c) its net assets are more than 10% of the total assets of the entity
These should be reviewed annually and re-defined as appropriate. Segments can be
class of business or geographical.
Classes of business:
A distinguishable component of an entity that provides a separate product or service or

separate group of products or services.
Geographical segments:
A geographical area comprising a country or group of countries in which an entity

operates, or to which it supplies goods or services.
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Tutors Support Pack
Group information should be disclosed about each class of business and each
geographical segment as follows:
1. Turnover by origin and destination
2. Profit/loss before taxation
3. Common costs
4. Segment net assets
Advantages of disclosure:
rates of profitability, opportunities for growth, risk etc may vary between segments
provides data which gives users a better basis for making important decisions.
However, such information may be of great use to competitors and there is a get out
clause, allowing directors to withhold such a breakdown if it would do commercial harm
to the business.
155
Tutors Support Pack
Current Cost Accounting
Intention:
To show the effect of changing price levels on the results and net asset position
disclosed by HC accounts, in particular on:
operating profit
distributable profit
operating asset valuation.
The profit and loss account
Four adjustments are made to the profit and loss account:

i)
The depreciation adjustment the extra depreciation charge required to reflect the
replacement cost of fixed assets.
ii) The cost of sales adjustment the adjustment required to match revenue with
current cost of sales at the time the sale was made.
iii) The monetary working capital adjustment the additional/reduced amount of
finance required to maintain the monetary working capital as a result of changes in
input prices of goods and services used and financed by the business.
The operating profit is adjusted by the net effect of these three adjustments.
iv) The gearing adjustment limiting the effect of the above three adjustments on
equity to take account of the fact that if the company has long term debt, and
interest is paid out of pre-tax profit, the effect will be lessened by the tax shield.
This further adjustment will then give the profit available to ordinary shareholders.
The balance sheet
Fixed assets adjust value to reflect value to the firm, ie the lower of net replacement
cost or recoverable amount. The recoverable amount is the higher of
realisable value or deprival value.
Stock
adjust value to reflect value to the firm, ie the lower of net replacement
cost or net realisable value.
The net effect of the adjustments is transferred to a CC reserve from the profit and loss
account, thus reducing the amount of distributable profit to that amount which will not
reduce the operating capability of the company.
156
Tutors Support Pack
The main problem with this approach is the complexity and the difficulty of arriving at
objective values for the assets. This introduces subjectivity rather than objectivity and
could detract from the credibility of a set of financial statements.
Current Purchasing Power Accounting
CPP takes the historic cost accounts and adjusts them to show the effects of inflation,
especially on the capital value of the enterprise from the owners' point of view. Historic
cost accounts are adjusted to current monetary value by application of the RPI to all
non-monetary items.
Underlying principles
Owners' capital = purchasing power of owners' capital.
Profit = the amount that can be consumed while maintaining capital as defined
above.
Advantages:
Simple to apply and understand.
The RPI is easily obtainable and regularly updated. It is therefore objective.
It shows the direct effect of inflation on the enterprise's profit and valuations.
It does not attempt to examine whether or not assets will be replaced; it simply
updates their apparent economic value, taking inflation into account.
Disadvantages:
The RPI is not necessarily relevant to the specific assets of the company.
Subjectivity in the preparation of the historic cost accounts is aggravated by CPP.
The effects of technological change etc on asset values are ignored.
Because of this, CPP does not give a realistic measure for distributable profit.
Modified historic cost accounts still prevail, partly because of the difficulty of finding an
acceptable alternative:
They are generally understood and accepted by the business community.
They are relatively objective.
They are verifiable, and therefore auditable.
Inflation has ceased to be the problem it was in the 1970s.
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Financial Reporting
Council
The
Accounting
Standards
Board
The Urgent
Issues Task
Force
The
Auditing
Practices
Board
The
Financial
Reporting
Review
Panel
The Public
Sector and
Not-for-profit
Committee
The
Investigation
and
Discipline
Board
The
Financial &
Other
Special
Industries
Committee
The
Professional
Oversight
Board
The
Committee
on
Accounting
for Smaller
Entities
The Financial Reporting Council
Responsible for promoting and enforcing financial reporting standards, auditing

standards and standards of professional behaviour within the accountancy and
actuarial professions. This body has overall responsibility for ensuring that appropriate
standards are set and enforced.
The Accounting Standards Board
Responsible for setting accounting standards primarily in the private sector, although
it has sub-committees to advise on the adaptability of standards for other bodies.
The Urgent Issues Task Force
Assists the ASB where unsatisfactory or conflicting interpretations have developed (or
seem likely to develop) about a requirement of an accounting standard or the
Companies Act. Provides a quicker way of getting guidance issued when the
development of a new standard may take time.
The Financial Reporting Review Panel
Responsible for examining alleged departure from the accounting requirements of the
standards and Company Law. Originally it investigated only when a complaint was
raised, but now pro-actively examines cases of concern with guidance from the
Financial Services Authority.
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Going concern
Accountants assume that, unless there is evidence to the contrary,

a company is going to continue in business at a level similar to that
of its current operations. This has important implications for the
valuation of assets and liabilities.
Matching
(or Accruals)
Income should be properly matched with the expenses of earning

it. Thus, sales should be matched with the cost of goods sold, and
expenses should be those incurred during the period in question,
whether paid for or not.
Relevance
This implies that, to be useful, accounting information must assist

a user to form, confirm or maybe revise a view usually in the
context of making a decision (eg should I invest, should I lend
money to this business? Should I work for this business?).
Going concern is important in giving a true picture of the assets and liabilities of the
company in this context for an investor it is not usually the break-up value they are
concerned with, but the value in terms of a continuing operation.
The accruals concept ensures that as accurate a picture as possible is given of the
performance of the operation over the period in question.
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Tutors Support Pack
Net profit per accounts
Less: Income not included in trading profit
Bank deposit interest
Dividends received
Add: Expenses not allowed for tax purposes
Alteration to flooring
Depreciation
Amortisation
Court action
New lease legal fees
Fine
Entertainment
Trading profit
5,124
(160)
(140)
4,824
1,460
3,550
120
40
110
20
250
300
10,674
Less: Income not included in trading profit
Profit on sale of premises
Increase in general allowance
Depreciation
Food hampers
Refurbishment
Extension
Trading profit
160
6,868
(1,750)
5,118
50
2,381
95
522
1,647
9,813
Tutors Support Pack
290,000

Salary
(Secondment to charity allowable; secondment to subsidiary
not wholly and exclusively for trade of company)
Damages (net)
(Held to be too remote from trade)
Repairs
(Capital)
Goods sold abroad
(Must transfer at market price)
Trading profit
24,000
12,000
12,000
40,000
378,000
Able Ltd
Year ended 31 December

WDV b/f
Sale proceeds plant
11,000
(2,800)
8,200
(2,050)
WDA 25%
Additions qualifying for FYA
15 June
31 August
FYA 50%
Pool
6,500
12,000
18,500
(9,250)
161
2,050
50,910
9,250
15,400
WDV c/f
Allowances
11,300
Tutors Support Pack
Flash
Pool
Expensive
car 1
Expensive
car 2
Allowances
Year ended 31st December
WDV b/f
Additions (no FYA)
21,200
10,600
31,800
Disposal of expensive car

Balancing allowance
13,600
18,000
(9,400)
(4,200)
WDA 25%
WDA restricted
4,200
(7,950)
(3,000)
7,950
3,000
23,850
Additions qualifying for
FYA @ 40%
10.5.05 plant
FYA 40%
6,600
(2,640)
2,640
3,960
27,810

FYA @ 100%
28.6.05 toilet
18.2.06 car
FYA 100%
600
16,500
17,100
(17,100)
17,100
-
27,810
162
15,000
34,890
Tutors Support Pack
XY Ltd
Pool
Expensive
car 1
Expensive
car 2
Allowances
Year ended 31 June 2006
WDV b/f
Additions (no FYA)
45,000
10,000
31,800
(25,000)
(2,000)
Disposals: Plant
Cars
Balancing allowance
20,000
28,000
(12,000)
(8,000)
8,000
4,800
(1,200)
WDA 25%
WDA restricted
(3,000)
1,200
3,000
3,600
FYA @ 40%
Plant
FYA 40%
60,000
(24,000)
24,000
36,000
39,600
Trading profit
(120,000 36,200) =
163
25,000
83,800
36,200
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Simple Simon Ltd
95,200
18,000
10,000
25,000
148,200
(2,000)
146,200
15,000
161,200
Trading income
Investment income
Chargeable gains
less: Charges on income
PCTCT
This final figure is under 300,000 and so the CT payable is simply:

146,200 x 19% = 27,778
Peter Pieman Ltd
465,700
13,200
70,500
10,000
559,400
100,000
659,400
Trading income
Investment income
Chargeable gains
PCTCT
Dividends plus tax credits
659,400 falls between 300,000 and 1,500,000.
CT at 30%
559,400 @ 30% =
167,820
Less marginal relief:
11
559,400
(1,500,00 659,400 )
400
659,400
(19,611)
148,209
164
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Charles Ltd
Step 1
PCTCT
P
(a)
290,000
NIL
------------290,000
------------
(b)
290,000
10,000
-----------300,000
-----------
(c)
290,000
50,000
-----------340,000
------------
Step 2
Identify the FY(s) which applies and determine the tax rate
CT at 30%
CT at 19%
MR
CT liability
55,100
55,100
55,100
55,100
87,000
(27,209)
59,791
Ross McHugh Ltd
Year ended
31/3/06
31/3/07
18,000
(18,000)
Nil
6,000
9,000
5,000
6,000
14,000
Trading profit
Less S393(1) loss relief
Interest income
Chargeable gains (7,000 2,000)
PCTCT
Loss carried forward under S393(1) (20,000-18,000)
165
2,000
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Duck Soup Ltd.
Year ended 31 March
2006
2007
40,000
2,000
3,500
14,500
42,000
18,000
(18,000)
(42,000)
Nil
Nil
Trading profit
Interest income
Chargeable gain
Less S393A relief
Loss memorandum
Loss for year to 31/3/07
Less S393A relief to 31/3/07
Less S393A relief to 31/3/06
Loss c/f under S393(1)
88,000
(18,000)
(42,000)
28,000
Trading loss:
Per accounts
Add back depreciation
Add back entertaining
Less capital allowances
(96,000)
10,800
1,200
(4,000)
(88,000)
166

Tutor's Support Pack: HND Accounting Graded Unit 3 DE66 35

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Tutor's Support Pack: HND Accounting Graded Unit 3 DE66 35

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HND Accounting

Tutors Support Pack

Accounting Graded Unit 3

Tutors Support Pack

Accounting Graded Unit 3

Tutors Support Pack

Accounting Graded Unit 3

Tutors Support Pack

Purpose of this unit

Unit specification and assessment exemplars

Introduction to this pack

Purpose of this unit

Incorporating long term work in progress adjustments

Incorporating revaluation adjustments

Incorporating finance lease adjustments

Incorporating issues of shares

Appendix 6 FRS 18 Theoretical matters

Accounting Graded Unit 3

Tutors Support Pack

Appendix 7 Adjusting the accounting profit

Appendix 8 Capital allowances

Appendix 9 Calculating the CT due

Appendix 10 Relief for trading losses

Appendix 11 solutions to revision exercises

Accounting Graded Unit 3

Tutors Support Pack

Accounting Graded Unit 3

Tutors Support Pack

To prepare students for progression to further study in accounting or a related

To develop and integrate a range of contemporary vocational skills in addition to

To enable students to integrate financial accounting with relevant business taxation.

Financial Reporting and Analysis (DE5G 35)

Accounting for Specialised Transactions (DE5E 35)

Business Taxation (DE5L 35)

Unit specification and assessment exemplars

Accounting Graded Unit 3

Tutors Support Pack

Introduction to this pack

There is now no requirement for small companies to disclose staff numbers

Accounting Graded Unit 3

Tutors Support Pack

Accounting Graded Unit 3

Tutors Support Pack

Accounting Graded Unit 3

Tutors Support Pack

To prepare students for progression to further study in accounting or a related

To develop and integrate a range of contemporary vocational skills in addition to

To enable students to integrate financial accounting with relevant business taxation.

Financial Reporting and Analysis (DE5G 35)

Accounting for Specialised Transactions (DE5E 35)

Business Taxation (DE5L 35)

Accounting Graded Unit 3

Tutors Support Pack

Accounting Graded Unit 3

Tutors Support Pack

2% (of which 25% is to be charged to Administration,

Equipment and vehicles

15% (of which 50% is to be charged to cost of sales

4) Closing stock was valued at 72,500,000.

Accounting Graded Unit 3

Tutors Support Pack

Accounting Graded Unit 3

Tutors Support Pack