The following trial balance is taken from the records of EVANS Plc at 31 December 2021.

	£000	£000
Revenue		150,050
Purchases	101,000
Inventory at 01.01.2021	12,000
Cash and bank	8,260
Operating expenses	5,400
Freehold buildings and land at cost at 01.01.2021 (land 6,600)	39,100
Freehold buildings - Accumulated depreciation at 01.01.2021.		12,250
Equipment at cost at 01.01.2021	25,000
Equipment - Accumulated depreciation at 01.01.2021.		14,760
Trade receivable	10,800
Capitalised development cost	150
Allowance for doubtful debts at 01.01.2021.		372
Trade payable		3,800
Ordinary share capital at £ 0.50 per share		5,350
Share premium		80
Interest expense	280
Vehicles at cost at 01.01.2021	1,812
Vehicles - Accumulated depreciation at 01.01.2021.		300
Retained earnings at 01.01.2021.		9,690
Long-term loans at 01.01.2021		6,000
Revaluation reserve		150

Additional information

1. On the 1st of January 2021, EVANS Plc issued 2,000,000 new
   • rdinary shares at issuing (market) value of £0.60 per share and this was taken up in full. The accountant already recorded the total proceeds of £1,200,000 under share capital and Cash and bank accounts.
2. On the 1st of December 2021, EVANS Plc received a long-term loan of £3,000,000 but this transaction has not been recorded.
3. EVANS Plc collected £300,000 from its credit customers, which is yet to be recorded.
4. The purchases account includes £1,000,000 paid on the first of May to acquire new Vehicles which were used immediately. However, no
   • ther entries in relation to the purchases have been made. Breakdown of this cost is as follow; purchasing price of £900,000, legal fees of £16,000 and annual insurance of £84,000.
5. On the 20th of December 2021, Building, which was bought in 2010 for a cost of £950,000, was sold for £850,000 cash. However, this sale transaction has not been recorded yet. On 1st January 2015, this building was revaluated to £900,000 and depreciation rate is 2%.
6. Operating expenses includes paid rent of £90,000 covered the period from 1 January to 30 September 2021.The rent is paid in equal instalments quarterly in arrears.
7. Annual interest rate on long-term loans is 5%.
8. On 1 August 2021, EVANS plc agreed to provide a special consultancy service (starting immediately for three months) for £100,000 to one of its clients on credit. The customer paid £70,000, which were already recorded when the cash was received. As of at 31st December 2021, this customer went bankrupt.
9. Corporation tax of £600,000 has been estimated in respect of the profit for the year.
10. Revenue and cash account include £200,000 related to a
    • contract to provide a service from 1st November 2021 – 31st March
    • The service has been provided equally over that period.
11. On 31 December 2021, the board of directors declared a
    • dividend of £0.05 per ordinary share and this will be paid in March 2022.
12. On 31 December, EVANS paid salaries of £800,000, which is
    • yet to be recorded. It is the company policy to report salaries under
    • perating expenses.
13. EVANS PLC applies the following depreciation policies:
    1. Vehicles are depreciated at 10% per annum on the straight-line basis.
    2. Buildings are depreciated at 2% per annum on the straight-line basis.
    3. Equipment are depreciated at 5% using the reducing balance method.
    4. The company policy is a full year’s depreciation is provided in the year of purchase of the asset, and none in the year of sale. In addition, depreciation is allocated to operating expenses.
14. The allowance for doubtful debts is estimated to be 5% of the
    • remaining trade receivables.
15. Inventory at 31 December 2021 valued at cost of £445,000.
    • Included in this sum, however, £40,000 of items that have been in warehouse for more than two years and directors agreed that this could be sold in January 2022 for £15,000.

Required:

(A) Prepare the income statement for the year ended 31/12/2021 and a statement of financial position as at that date. (Show all calculations)

(B) Critically discuss different methods to account for bad debts.

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Answer rating: 100% (QA)

a Income statement for the year ended 31 December 2021 Revenue Sales 150050 Less Cost of goods sold Inventory Jan 1st 12000 Purchases 101000 Less Inve... View the full answer