Alec Powell runs a small shop selling sports equipment. He has run this business as a...

   

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Alec Powell runs a small shop selling sports equipment. He has run this business as a sole trader for a number of years and has built up a small niche market by offering a specialist service for local sports teams. This has enabled him to continue trading with a high level of sales even though larger 'chains' have undercut his prices. He wants your advice on a number of issues relating to drawing up the financial accounts for the year ended 31 December 2010: (a) A similar business at the other side of the city has been recently sold as a going concern to a larger chain of sports shops. The selling price of the business was £50,000 higher than the book value of the assets. Mr Powell believes that his own sports shop would generate similar amounts of goodwill and would like to include a value for goodwill on the state- ment of financial position. (b) Each of the last four years he has sold football boots to one of the local football teams every February. He has been informed that next year the club would probably continue in this. manner. In anticipation Powell has produced the set ready for sale. He would like to include these in the 2010 sales figures due it being 'almost certain' that these will be sold. (c) One of the machines that are used to print the team shirts has been depreciated using the straight line method for the last five years. However, the machine will need replacing five years before Powell expected. With this in mind, he would like to increase the amount of depreciation that he charges each year to show a more realistic valuation for the machine. (This part of the question may require that you have studied Chapter 10.) (d) On March 30 this year Powell received £4,000 relating to sales made in the previous year. He would like to include this £4,000 as income for this year as this is the period in which it was received. Using your knowledge of accounting and the concepts outlined in this chapter advise Mr Powell in each point on what would be the appropriate action to take. Alec Powell runs a small shop selling sports equipment. He has run this business as a sole trader for a number of years and has built up a small niche market by offering a specialist service for local sports teams. This has enabled him to continue trading with a high level of sales even though larger 'chains' have undercut his prices. He wants your advice on a number of issues relating to drawing up the financial accounts for the year ended 31 December 2010: (a) A similar business at the other side of the city has been recently sold as a going concern to a larger chain of sports shops. The selling price of the business was £50,000 higher than the book value of the assets. Mr Powell believes that his own sports shop would generate similar amounts of goodwill and would like to include a value for goodwill on the state- ment of financial position. (b) Each of the last four years he has sold football boots to one of the local football teams every February. He has been informed that next year the club would probably continue in this. manner. In anticipation Powell has produced the set ready for sale. He would like to include these in the 2010 sales figures due it being 'almost certain' that these will be sold. (c) One of the machines that are used to print the team shirts has been depreciated using the straight line method for the last five years. However, the machine will need replacing five years before Powell expected. With this in mind, he would like to increase the amount of depreciation that he charges each year to show a more realistic valuation for the machine. (This part of the question may require that you have studied Chapter 10.) (d) On March 30 this year Powell received £4,000 relating to sales made in the previous year. He would like to include this £4,000 as income for this year as this is the period in which it was received. Using your knowledge of accounting and the concepts outlined in this chapter advise Mr Powell in each point on what would be the appropriate action to take.

Answer rating: 100% (QA)

Advice to A An organisation or enterprise cannot include the amount of calculated goodwill of its ow... View the full answer