On 1 April 2020 Arc Ltd began trading in specialist equipment made with components that are...
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On 1 April 2020 Arc Ltd began trading in specialist equipment made with components that are in short supply. Capital of £4,000 was introduced and used immediately to purchase 10 units of inventory at a cost of £400 each. On 1 October 2020, 6 units of the inventory was sold for £700 cash, when the replacement cost of each unit had risen to £450. No further transactions took place, and by the year-end of 31 March 2021, the replacement cost per unit had risen to £500. Summarised financial statements for the year ended 31 March 2021, based on the Historic cost convention (and ignoring tax), are shown below: Income Statement for the year ended 31 March 2021: Sales [6 units at £700 each] Purchases [10 units at £400 each] Closing stock [4 units at £400 each] Cost of sales: Profit Statement of Financial Position at 31 March 2021 Stock Cash Capital Employed Share Capital Profit Date: 1 April 2020 1 October 2020 31 March 2021 Replacement cost 4,000 (1,600) £400 £450 £500 £ 1,600 4,200 5,800 The owners of Arc are keen to receive all distributable profits, however the directors are concerned that doing so may erode the company's capital, given increases in replacement cost throughout the year as summarised below: 4,200 (2,400) 1,800 4,000 1,800 5,800 Using the above information, prepare a summary income statement and statement of financial position in line with current cost accounting (Replacement Cost) basis (CCA). Explain to the directors why a distribution of £1,800 would not ensure capital is maintained in "physical" terms and suggest an appropriate dividend to pay to maintain capital under the current cost accounting. (16 marks) On 1 April 2020 Arc Ltd began trading in specialist equipment made with components that are in short supply. Capital of £4,000 was introduced and used immediately to purchase 10 units of inventory at a cost of £400 each. On 1 October 2020, 6 units of the inventory was sold for £700 cash, when the replacement cost of each unit had risen to £450. No further transactions took place, and by the year-end of 31 March 2021, the replacement cost per unit had risen to £500. Summarised financial statements for the year ended 31 March 2021, based on the Historic cost convention (and ignoring tax), are shown below: Income Statement for the year ended 31 March 2021: Sales [6 units at £700 each] Purchases [10 units at £400 each] Closing stock [4 units at £400 each] Cost of sales: Profit Statement of Financial Position at 31 March 2021 Stock Cash Capital Employed Share Capital Profit Date: 1 April 2020 1 October 2020 31 March 2021 Replacement cost 4,000 (1,600) £400 £450 £500 £ 1,600 4,200 5,800 The owners of Arc are keen to receive all distributable profits, however the directors are concerned that doing so may erode the company's capital, given increases in replacement cost throughout the year as summarised below: 4,200 (2,400) 1,800 4,000 1,800 5,800 Using the above information, prepare a summary income statement and statement of financial position in line with current cost accounting (Replacement Cost) basis (CCA). Explain to the directors why a distribution of £1,800 would not ensure capital is maintained in "physical" terms and suggest an appropriate dividend to pay to maintain capital under the current cost accounting. (16 marks)
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Related Book For
International Marketing And Export Management
ISBN: 9781292016924
8th Edition
Authors: Gerald Albaum , Alexander Josiassen , Edwin Duerr
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