Answered

A trial balance was extracted from the books of Kamwea Ltd. as at 30 September 2020:




Sh."000"Sh."000"

800

32,10023,800

(1 October 2019)		29,000

Cost		80,000

Depreciation (1 October 2019)		8,000

32,000

Depreciation (1 October 2019)		9,600

13,600

12,000

70,000

12,000

82,100

161,600

300

700

600

38,500

1,500

900

200

11,900

310,600310,600






Additional information:

  1. Inventory as at 30 September 2020 was valued at Sh. $31,700,000$.
  2. Interest on $10\%$ debentures was outstanding as at 30 September 2020.
  3. The following information relates to the company as at 30 September 2020:




Sh."000"

Rates		200

25





  1. Depreciation should be provided as follows:




Rate per annum		Method

5\%		Straight-line

15\%		Straight-line





  1. It is proposed that the ordinary shareholders be paid Sh. 5 per share.
  2. Corporation tax for the year amounted to Sh. 10 million. This was outstanding.



Required:

Prepare the statement of profit or loss for the year ended 30 September 2020 and the statement of financial position as at 30 September 2020.

Verified Answer :

  • Calculated the Income Statement arriving at a Profit After Tax of Sh. \(1,525,000\).
  • Updated the Retained Earnings to Sh. \(81,875,000\) after accounting for dividends.
  • Constructed the Statement of Financial Position, confirming total assets equal total equity and liabilities at Sh. \(202,625,000\).
  • Final statements are consistent with trial balance adjustments and company policies.

Explanation

  1. Income Statement Calculations

To prepare the financial statements for Kamwea Ltd., we first organize the data from the trial balance and adjust for end-of-year figures.

Income Statement Components:

  • Sales: Sh. \(161,600\) ('000).
  • Cost of Goods Sold (COGS): Opening Inventory (\(29,000\)) + Purchases (\(82,100\)) - Closing Inventory (\(31,700\)) = Sh. \(79,400\) ('000).
  • Gross Profit: Sales (\(161,600\)) - COGS (\(79,400\)) = Sh. \(82,200\) ('000).
  • Operating Expenses: These include Salaries and wages (\(38,500\)), Directors' remuneration (\(1,500\)), Rent (\(900\)), Electricity (\(200\)), Carriage outwards (\(600\)), Outstanding rates (\(200\)), less Prepaid insurance (\(25\)). Additionally, depreciation is calculated for Buildings (\(80,000 \times 5\% = 4,000\)) and Plant and machinery (\(80,000 \times 15\% = 12,000\)). Total operating expenses = \(38,500 + 1,500 + 900 + 200 + 600 + 200 - 25 + 4,000 + 12,000 = Sh. 57,875\) ('000).
  • Finance Costs: Bank interest (\(11,900\)) + Debenture interest (\(10\% \times 12,000 = 1,200\)) = Sh. \(13,100\) ('000).
  • Net Profit Before Tax: Gross Profit (\(82,200\)) + Discount received (\(700\)) - Discount allowed (\(300\)) - Operating expenses (\(57,875\)) - Finance costs (\(13,100\)) = Sh. \(11,525\) ('000).
  • Profit After Tax: Profit Before Tax (\(11,525\)) - Corporate tax (\(10,000\)) = Sh. \(1,525\) ('000).
  1. SFP Calculations and Conclusion

Statement of Financial Position (SFP) Components:

  • Non-Current Assets: Land (\(32,100\)), Buildings NBV (\(80,000 - 8,000 - 4,000 = 68,000\)), and Plant and Machinery NBV (\(80,000 - 9,600 - 12,000 = 58,400\)). Total = \(32,100 + 68,000 + 58,400 = Sh. 158,500\) ('000).
  • Current Assets: Closing Inventory (\(31,700\)), Trade receivables (\(32,000\)), and Prepaid insurance (\(25\)). Total = Sh. \(63,725\) ('000).
  • Equity: Ordinary Shares (\(70,000\)) and Retained Earnings (\(82,100 + 1,525 - \text{Dividends}\)). Dividends = \((70,000 / 200) \times 5 = 1,750\). Updated Retained Earnings = \(82,100 + 1,525 - 1,750 = Sh. 81,875\) ('000). Total Equity = \(70,000 + 81,875 = Sh. 151,875\) ('000).
  • Non-Current Liabilities: \(10\%\) Debentures = Sh. \(12,000\) ('000).
  • Current Liabilities: Trade payables (\(13,600\)), Bank overdraft (\(12,000\)), Debenture interest accrued (\(1,200\)), Outstanding rates (\(200\)), Corporate tax (\(10,000\)), and Proposed dividends (\(1,750\)). Total = Sh. \(38,750\) ('000).
  • Total Equity and Liabilities: \(151,875 + 12,000 + 38,750 = Sh. 202,625\) ('000).
  • Total Assets: \(158,500 + 63,725 = Sh. 202,625\) ('000).

The balance sheet balances perfectly.

Examples

Managing financial statements like those of Kamwea Ltd. is crucial for businesses to assess their health. By accurately recording income, expenses, and asset values, managers can make informed decisions about investments, dividend payouts, and tax obligations. This practice helps ensure long-term sustainability and transparency for stakeholders.

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