Financial Reporting Assignment: Balance Sheet and Income Statement

This assignment provides a comprehensive solution to a financial reporting problem. It begins with detailed journal entries, followed by a comprehensive income statement and a balance sheet. The solution then addresses the purpose of depreciation in accounting, emphasizing its role in matching costs with revenues. Finally, it contrasts the cost model and the revaluation model for measuring property, plant, and equipment, explaining their impact on financial statements. The assignment includes calculations, explanations, and references to relevant accounting standards and literature. The solution covers topics such as depreciation, amortization, revaluation gains, and the presentation of financial data, providing a solid foundation for understanding key financial reporting concepts.

Running Head: Financial Reporting 1
FINANCIAL REPORTING

Financial Reporting
Contents
Question A: Journal Entries.........................................................................................................................3
Question B: Comprehensive income statement...........................................................................................5
Question B: Balance sheet...........................................................................................................................6
Question C: Purpose of depreciation...........................................................................................................7
Question D: Cost model v/s revaluation model for measurement of property plant and equipment
subsequent to its initial recognition.............................................................................................................7
References...................................................................................................................................................9

Financial Reporting
Question A: Journal Entries
Dat
e Journal entries Debit Credit
1 Closing Stock A/c £ 2,917.00
To profit and loss a/c £ 2,917.00
(for closing stock recorded)
2 Land A/c £ 1,000.00
To revaluation surplus A/c £ 1,000.00
(for land revaluated )
Building A/c £ 1,312.50
To revaluation surplus A/c £ 1,312.50
(for building revaluated)
Revaluation A/c £ 160.00
To Plant A/c £ 160.00
(for plant revalued)
Depreciation £ 312.50
To building £ 312.50
(for depreciation charged)
Profit and loss £ 312.50
To depreciation £ 312.50
(for depreciation recorded)
Depreciation
£
60.00
To Plant
£
60.00
(for depreciation charged)
Profit and loss
£
60.00
To plant
£
60.00
(for depreciation recorded)
Depreciation £ 400.00
To building £ 400.00
(for depreciation charged)

Financial Reporting
Profit and loss £ 400.00
To depreciation £ 400.00
(for depreciation recorded)
Depreciation £ 250.00
To Plant £ 250.00
(for depreciation charged)
Profit and loss £ 250.00
To plant £ 250.00
(for depreciation recorded)
4 Retained earnings £ 7,500.00
To dividend payable £ 7,500.00
(for dividend declared)
Dividend payable £ 7,500.00
To cash A/c £ 7,500.00
(for dividend paid)
5 Unearned revenue £ 250.00
To revenue £ 250.00
(for revenue received in advance)
6 Profit and loss A/c £ 264.08
To provision for bad and doubtful debts £ 264.08
(for provision created)
Bad debts £ 264.08
To trade receivables £ 264.08
(for bad debts incurred)
7A Capital development expenditure £ 10,000.00
To bank a/c £ 10,000.00
(for capital expenditure created as an
asset)
Amortization Expense £ 1,000.00
To Capital development expenditure £ 1,000.00
(for amortization charged for three
months)

Financial Reporting
7B Profit and Loss account £ 1,000.00
To Amortization expenditure £ 1,000.00
(for amortization expense recorded)
Profit and loss account
To cost of sales £ 105.00
(for expenses treated as cost of sales) £ 105.00
Total £ 35,317.65 £ 35,317.65
Question B: Comprehensive income statement
Hydan co.
Income statement
(for the year ending 31ST December 2017)
Particulars Amount Amount
in 000 in 000
Revenue £ 53,065.00
Cost of sales £ 24,924.00
Gross Profit £ 28,141.00
Other operating income
Rent received £ 1,200.00
Investment income £ 80.00 £ 1,280.00
Other non- operating income
Gain on plant revaluation £ 160.00
Gain on building revaluation £ 1,312.50
Gain on land revaluation £ 1,000.00 £ 2,472.50
£ 31,893.50
Less: Expenses
Administrative expenses £ 2,871.00
Depreciation : building £ 712.50
Depreciation : Plant £ 320.00
Amortization on capital expenditure £ 1,000.00
Bad debts £ 264.08
£ 5,167.58
Profits after tax £ 26,725.93

Financial Reporting
Question B: Balance sheet
Hydan Co.
Balance Sheet
(as at 31st December 2017)
Particulars Amount Amount
in 000 in 000
Assets
Cash in hand
£
41.00
Trade receivables £ 3,492.00
Less: Provision for doubtful debts
-£
264.08 £ 3,227.93
Inventory £ 2,917.00
Investment £ 3,000.00
Research and development recognized as
intangible assets £ 10,000.00
Less: Amortized -£ 1,000.00 £ 9,000.00
Property plant and Equipment
Building £ 16,000.00
Less: Accumulated depreciation
-£
712.50 £ 15,287.50
Plant £ 2,500.00
Less: Accumulated depreciation
-£
320.00 £ 2,180.00
Land £ 21,000.00 £ 21,000.00
Total Assets £ 56,653.43
Liabilities
Ordinary share £ 15,000.00
Less: Dividend paid -£ 7,500.00 £ 7,500.00
Retained earnings £ 16,003.00
Revaluation A/c £ 2,472.50
Add: Net profit £ 26,725.93 £ 45,201.43
Closing share capital £ 52,701.43
Bank overdraft
£
482.00
Trade payables £ 3,470.00
Total Liabilities £ 56,653.43

Financial Reporting

Financial Reporting
Question C: Purpose of depreciation
The purpose of depreciation is majorly to achieve the matching principle of the accounting.
When the historical cost of the productive asset is matched to the sales earned while using the
asset. According to IAS 16 “Property plant and equipment”, the cost of the asset is allocated over
the years as it becomes very cumbersome to match the same with the existing principle. The
steady rate of depreciation is taken into consideration, over the useful life of an asset, so that the
proper linkage can be made between the revenue and the expenses. The depreciation is shown in
the profit and loss account to present the right state of the profitability. The depreciation is a non-
cash expense but it is also accounted for the tax purposes hence, it is necessary to calculate the
depreciation. When the correct profit and loss is arrived at the right information is distributed to
the users of the reports, so that they can make the strategic business decisions (Mgbame, 2016).
Question D: Cost model v/s revaluation model for measurement of property plant and
equipment subsequent to its initial recognition.
Under the cost model, the valuation of the asset is done on the basis of net book value which is
calculated as cost less accumulated depreciation. On the other hand, the revaluation model which
is also termed as fair value. However, the valuation of the non-current assets is carried at a
revalued amount less depreciation. Under the cost model, the revaluations is not carried on the
regular basis, whereas under the revaluation model, revaluation should be carried out on a
constant basis, so that carrying amount of an asset does not have a major gap from its originally
cost and the fair value. Under the revaluation model, the reliability can be figured out using the
fair value of the property plant and equipment (Mgbame, 2016).

Financial Reporting
Impact on the financial statements
In order to reflect the pattern precisely, the cost model is implemented and this describes the
more appropriateness while preparing the financial statements. When the cost model is applied,
the carrying amount is also included by calculating as the cost less depreciation less accumulated
impairment losses.
The increase with respect to the revaluation is shown in the income statement whereas in case of
the decrease of the value, the same is treated as an expense. Under the revaluation model the
calculation of the carrying amount is figured out by revalued amount less accumulate
depreciation, less accumulated impairment losses (Drews, et al 2017).

Financial Reporting
References
Drews, P., Williams, G., Goldfain, B., Theodorou, E.A. and Rehg, J.M., (2017) Aggressive deep
driving: Model predictive control with a cnn cost model. arXiv preprint arXiv:1707.05303.
Mgbame, C.O., (2016) Accounting for Depreciation, Depletion and Amortization in the Oil and
Gas: Concepts, Issues and Challenges. Journal of Accounting and Financial Management, 2(1),
pp.1-8.