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accounts

Discussion in 'International A And AS Level' started by osama1122, Jun 2, 2011.

  1. osama1122

    osama1122

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    A company calculates factory profit at a mark-up of 20 % on the cost of production. The following
    information is available.
    $
    inventory (stock) of finished goods at cost at 31 December 2007 40 000
    cost of goods produced for the year to 31 December 2008 240 000
    closing inventory (stock) of finished goods at cost plus factory profit at
    31 December 2008
    54 000
    How much will be shown as factory profit in the accounts for the year ended 31 December 2008?
    A $39 000 B $40 000 C $47 000 D $48 000

    please help
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  3. ruzache

    ruzache

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    You have to first calculate the factory profit which should be added to the cost of goods. That is 240000x20%=48000.

    then you have to draw a T account called provision for unrealised profit. I'll try to draw it here. First to get the opening balance of that account you have to find the overstatement of the opening stock of finished goods. It is however at cost price since it is in the balance sheet (in balance sheet you subtract provision for unrealised profit and show the cost price). Therefore to get the unrealised profit part of the opening stock: (40000/100)x20=8000.

    Then to get the closing balance of the provision for unrealised profit account take the closing stock which is given at transfer price and do this calculation: (54000/120)x20=9000. When you enter these two opening and closing balances (opening balance will be on credit side and closing balance on debit side) the balancing or missing figure is 1000 on the credit side

    provision for unrealised profit account
    ------------------------------------------------------------------------------------------------------
    ...........................................|balance b/d.....................................8000
    ...........................................|
    ...........................................|P/L account (missing figure).................1000
    ...........................................|
    balance c/d.....................9000|

    To get the net amount that has to be charged we have to debit the P/L account with 1000 (that's the double entry as relating to the above account) and we have to add back the factory profit (48000). And hence the answer is 48000-1000=47000 (C)
    student008 likes this.
  4. naavo.1234

    naavo.1234

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    good!!!

    what i used is the simple format

    opening stock of finished goods (cost price) + production cost of goods produced (which is transferred from manufacturing account) - closing stock of finished goods (cost price).

    it staright away came 47000.

    what do you think??
  5. ruzache

    ruzache

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    wait wait wait.. how does that work? :S
  6. whatsmyname

    whatsmyname

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    ok this question is best solved by constructing a PL account...becoz it tests ur ability to understand factory profit + UNREALIZED PROFITS.

    unrealized profits on stocks are deducted from factory profits at the end of the income statement because if we add factory profits we inflate the value of stocks by the amount of the profit. prudence concept says we cant anticipate profits, so these must be removed from the value of profits to make sure profits are not overstated.

    ie. if CLOSING stock is overvalued, profits increase by that amount. deduct that amount [unrealised?] and u get the real profit figure

    so getting to the question.

    Factory Profit for the year = 20% of 240000 = $48000

    now, OLD provision for unrealized profit:

    40000 + [20% x 40000] = 48000 [ie. last years closing stock with profit less last year's provision = balance sheet value of closing stock]
    so provision = 48-40 = $8000 [credit value]

    NEW provision for unrealized profit [this year]

    X + (20% * X) = 54000 [ie. true cost plus factory profit = trading a/c value]
    or X = [5/6]*54000 = $45000 and PROVISION = 54-45 = $9000 [easy method to calculate provision directly= 54000 x 20/120]

    therefore change in provision = 9000-8000 = 1000 [debit, as this means a increase in provision]

    in the PL ac:
    F. Profit on transfer $48000 (cr)
    New P 9000
    Old P (8000) -> $(1000) (dr)
    Factory Profits ----------->$47000

    read more at http://www.thestudentroom.co.uk/wiki/Re ... g_Accounts

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