Pellegrini plc commenced trading on 1 January 2014 as a carpet manufacturer. The company's accountant has...

 

Transcribed Image Text:

Pellegrini plc commenced trading on 1 January 2014 as a carpet manufacturer. The company's accountant has prepared a draft set of financial statements using historical cost accounting. The directors, however, are considering preparing the financial statements using a method that takes account of the effect of changing prices, but they are unsure of which method to use. The historical cost accounts of the company are shown below. Statement of Financial Position as at 31 December 2014 Non-current assets Land and buildings Cost Accumulated depreciation Plant and machinery Cost Accumulated depreciation Current assets Inventory Bank Ordinary share capital of £1 each Retained earnings Revenue Cost of sales Opening inventory Add: Purchases Less: Closing inventory Gross profit Depreciation Other expenses Profit for the year 3,900,000 (39,000) £ 2,250,000 (112,500) 145,500 4,635,300 Statement of Comprehensive Income for the year ended 31 December 2014 £ £ 3,120,750 3,120,750 (145,500) 3,861,000 2,137,500 5,998,500 4,780,800 10,779,300 9,000,000 1,779,300 10,779,300 £ 5,210,550 (2,975,250) 2,235,300 (151,500) (304,500) 1,779,300 The following additional information is available. (1) All of the non-current assets were acquired when the company commenced trading. (2) The land and buildings are made up of land that had originally cost £2,400,000 and buildings that had originally cost £1,500,000. The land and buildings have been valued professionally on 31 December 2014 at: £ Land Buildings 2,550,000 1,650,000 (3) The sales, purchases and expenses occurred evenly during the year to 31 December 2014, and, other than depreciation, were all for cash. (4) On average, inventory was purchased one month before the year end. (5) The relevant price index numbers for plant and machinery and inventory during the year were: Plant and Machinery 145 152 155 150 31 December 2013 30 November 2014 31 December 2014 Average for the year ended 31 December 2014 (6) The relevant general price index numbers during the year were: General price index 112 1 January 2014 30 November 2014 31 December 2014 Average for the year to 31 December 2014 REQUIRED Inventory 120 125 128 124 118 120 114 (a) Prepare the statement of comprehensive income for the year ending 31 December 2014 and the statement of financial position at 31 December 2014 for Pellegrini plc using constant (or current) purchasing power accounting. (18 marks) (b) Prepare the statement of comprehensive income for the year ending 31 December 2014 and the statement of financial position at 31 December 2014 for Pellegrini plc using current cost accounting after making the depreciation adjustment and cost of sales adjustment. (27 marks) (c) Explain why companies that take account of the effects of changing prices when preparing their financial statements tend to use modified historical cost accounting rather than current (or constant) purchasing power accounting or current cost accounting. (5 marks) Pellegrini plc commenced trading on 1 January 2014 as a carpet manufacturer. The company's accountant has prepared a draft set of financial statements using historical cost accounting. The directors, however, are considering preparing the financial statements using a method that takes account of the effect of changing prices, but they are unsure of which method to use. The historical cost accounts of the company are shown below. Statement of Financial Position as at 31 December 2014 Non-current assets Land and buildings Cost Accumulated depreciation Plant and machinery Cost Accumulated depreciation Current assets Inventory Bank Ordinary share capital of £1 each Retained earnings Revenue Cost of sales Opening inventory Add: Purchases Less: Closing inventory Gross profit Depreciation Other expenses Profit for the year 3,900,000 (39,000) £ 2,250,000 (112,500) 145,500 4,635,300 Statement of Comprehensive Income for the year ended 31 December 2014 £ £ 3,120,750 3,120,750 (145,500) 3,861,000 2,137,500 5,998,500 4,780,800 10,779,300 9,000,000 1,779,300 10,779,300 £ 5,210,550 (2,975,250) 2,235,300 (151,500) (304,500) 1,779,300 The following additional information is available. (1) All of the non-current assets were acquired when the company commenced trading. (2) The land and buildings are made up of land that had originally cost £2,400,000 and buildings that had originally cost £1,500,000. The land and buildings have been valued professionally on 31 December 2014 at: £ Land Buildings 2,550,000 1,650,000 (3) The sales, purchases and expenses occurred evenly during the year to 31 December 2014, and, other than depreciation, were all for cash. (4) On average, inventory was purchased one month before the year end. (5) The relevant price index numbers for plant and machinery and inventory during the year were: Plant and Machinery 145 152 155 150 31 December 2013 30 November 2014 31 December 2014 Average for the year ended 31 December 2014 (6) The relevant general price index numbers during the year were: General price index 112 1 January 2014 30 November 2014 31 December 2014 Average for the year to 31 December 2014 REQUIRED Inventory 120 125 128 124 118 120 114 (a) Prepare the statement of comprehensive income for the year ending 31 December 2014 and the statement of financial position at 31 December 2014 for Pellegrini plc using constant (or current) purchasing power accounting. (18 marks) (b) Prepare the statement of comprehensive income for the year ending 31 December 2014 and the statement of financial position at 31 December 2014 for Pellegrini plc using current cost accounting after making the depreciation adjustment and cost of sales adjustment. (27 marks) (c) Explain why companies that take account of the effects of changing prices when preparing their financial statements tend to use modified historical cost accounting rather than current (or constant) purchasing power accounting or current cost accounting. (5 marks)

Answer rating: 100% (QA)

a Statement of Comprehensive Income for the year ending 31 December 2014 using constant purchasing power accounting Revenue 5210550 Cost of sales Opening inventory 1779300 13158 Add Purchases 4201250 ... View the full answer