The following information has been extracted from the bookkeeping records of DZL at 30 November 2010.

You have also been provided with the following information:

1. The balance of prepayments at 1 December 2009 refers to prepaid insurance. Insurance for the six months from 1 September 2010 of £70,000 was paid in September 2010.
2. The loan bears interest at 6% per annum. Four months interest was due on 30 November 2010. The same amount of interest was due at 30 November 2009.
3. All non-current assets are being depreciated using the straight line method. The furniture is being depreciated to a nil residual amount over 10 years. The partners bought all vehicles on 1 December 2007 and expect to sell them on 30 November 2012 for £10,000. The premises are being depreciated to a nil residual amount over 100 years. On 20 November 2010 the partners sold part of their premises that they had acquired in January 2005 for £100,000. The sale proceeds of £115,000 were still at the Estate Agent’s bank account at 30 November 2010, and no entries have yet been made in the partnership’s records with regard to this transaction. The partners provide full depreciation in the year of acquisition and none in the year of disposal.
4. A customer company owing £20,000 has gone bankrupt. The partners do not expect to recover this debt and have decided to maintain the provision for doubtful debts at 4% of the remaining trade receivables balance.
5. The remaining balance of accrued expenses at 1 December 2009 refers to accrued electricity expense. The partners expect the next electricity bill, covering the period 1 October to 31 December 2010, in January 2011. Their estimated monthly electricity charge has been revised to £35,000.
6. The accountant’s fee for the year is estimated at £20,000.

Drini, Zana and Luljeta have a partnership which was established three years ago. Three partners have the following agreement to share their profit:

Ian Daniel James

Interest on capital 5% 5% 5%

Salaries £70,000 £85,000 £90,000

Share of residual profits 5 3 2

Required:

1. Prepare an income statement for DZL for the year ended 30 November 2010 and a statement of financial position as at that date. Show clearly the appropriation of profits and capital between the partners.

2. Discuss how the choice of depreciation method can be used as a tool to increase reported profits. Give examples.

3. Discuss how the provision for doubtful debt can be used as a tool to increase reported profits, or avoid taxes. Illustrate your thoughts.  

Transcribed Image Text:

Trial Balance at 30 November 2010 Dr Cr £'000 £'000 Accrued expenses at 1 December 2009 Sundry expenses 62 44 Trade receivables 170 Vehicles – cost 150 Vehicles – accumulated depreciation Wages (of administration staff) 56 130 Bank 542 Business rates Capital account 1 December 2009: lan 90 700 Daniel 500 James 300 Drawings lan 220 Daniel 190 James 180 Electricity 450 Furniture – cost 80 Furniture – accumulated depreciation 24 Insurance 120 Interest 100 Loan (6% repayable 2018) Premises - cost 900 Premises - accumulated depreciation Prepayments at 1 December 2009 45 25 Provision for doubtful debts at 1 December 2009 10 Revenue (i.e. fees etc. charged) 1,500 Trial Balance at 30 November 2010 Dr Cr £'000 £'000 Accrued expenses at 1 December 2009 Sundry expenses 62 44 Trade receivables 170 Vehicles – cost 150 Vehicles – accumulated depreciation Wages (of administration staff) 56 130 Bank 542 Business rates Capital account 1 December 2009: lan 90 700 Daniel 500 James 300 Drawings lan 220 Daniel 190 James 180 Electricity 450 Furniture – cost 80 Furniture – accumulated depreciation 24 Insurance 120 Interest 100 Loan (6% repayable 2018) Premises - cost 900 Premises - accumulated depreciation Prepayments at 1 December 2009 45 25 Provision for doubtful debts at 1 December 2009 10 Revenue (i.e. fees etc. charged) 1,500

Answer rating: 100% (QA)

Answer Income Statement for DZL for the Year Ended 30 November 2010 Revenue Sales 2400000 Gain on Sale of Premises 15000 Total Revenue 2415000 Expense... View the full answer