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The following were included among the assets and liabilities of Tranquility Health Ltd on 01/01/2019: Buildings and grounds at cost €650,000; equipment at cost €70,000; vehicles at cost €60,000; stock in shop €4,700; stock of heating oil €1,900; 5% investments €80,000; contract cleaning prepaid €750; clients’ deposits paid in advance €5,700; creditors for supplies to Tranquility Health Ltd €3,700 - Leaving Cert Accounting - Question 7 - 2020
Question 7
The following were included among the assets and liabilities of Tranquility Health Ltd on 01/01/2019: Buildings and grounds at cost €650,000; equipment at cost €70,... show full transcript
Worked Solution & Example Answer:The following were included among the assets and liabilities of Tranquility Health Ltd on 01/01/2019: Buildings and grounds at cost €650,000; equipment at cost €70,000; vehicles at cost €60,000; stock in shop €4,700; stock of heating oil €1,900; 5% investments €80,000; contract cleaning prepaid €750; clients’ deposits paid in advance €5,700; creditors for supplies to Tranquility Health Ltd €3,700 - Leaving Cert Accounting - Question 7 - 2020
Step 1
Prepare a statement of the reserves (profit and loss balance) for Tranquility Health Ltd on 01/01/2019.
Answer
To prepare the statement of reserves as of 01/01/2019, we consider the assets and liabilities.
Assets
- Buildings and Grounds: €650,000
- Equipment: €70,000
- Vehicles: €60,000
- Stock in Shop: €4,700
- Stock of Heating Oil: €1,900
- 5% Investments: €80,000
- Contract Cleaning Prepaid: €750
- Balance at Bank: €93,900
Liabilities
- Clients Deposits Paid in Advance: €5,700
- Creditors for Supplies: €3,700
- Loan: €70,000
- Loan Interest: €4,200
Capital
- Issued Share Capital: €525,000
Calculation of Reserves
egin{align*}
ext{Total Assets} & = 650,000 + 70,000 + 60,000 + 4,700 + 1,900 + 80,000 + 750 + 93,900 = 865,250
ext{Total Liabilities} & = 5,700 + 3,700 + 70,000 + 4,200 = 83,600
ext{Net Assets} & = ext{Total Assets} - ext{Total Liabilities} = 865,250 - 83,600 = 781,650
ext{Reserves (01/01/2019)} & = ext{Net Assets} - ext{Capital} = 781,650 - 525,000 = 256,650
ext{Reserves on 01/01/2019} = €256,650
Therefore, the reserves statement shows €256,650.
Step 2
Calculate the profit/loss from the shop for the year ended 31/12/2019.
Answer
To determine the profit/loss from the shop for the year, we will use the receipts and payments account:
Shop Receipts
- Total Shop Receipts: €63,600
Less: Shop Expenses
- Purchases: €29,100
- Wages:
- Total Salary: €26,000; allocated to shop (30%): €7,800
- Light and Heat: €5,900
- Insurance: €850
- Telephone and Broadband: €400
Calculation
egin{align*}
ext{Gross Profit} & = ext{Total Shop Receipts} - ext{Total Expenses}
& = 63,600 - (29,100 + 7,800 + 5,900 + 850 + 400)
& = 63,600 - 43,050
& = 20,550
\end{align*}
Net Profit from Shop
Thus, the profit from the shop is €20,550.
Step 3
Prepare the profit and loss account of Tranquility Health Ltd for the year ended 31/12/2019. Show workings.
Answer
Profit and Loss Account for the year ended 31/12/2019
Income
- Profit from Shop: €20,550
- Clients’ Fees: €272,400
- Investment Income: €4,000
Total Income: €296,950
Expenditure
- Wages and Salaries: €75,100
- Light and Heat: €7,130
- Cleaning: €4,875
- Laundry: €3,400
- Telephone and Broadband: €2,200
- Depreciation on Buildings: €15,200
- Depreciation on Equipment: €9,000
- Depreciation on Motor Vehicles: €13,000
- Loss on Sale of Vehicle: €1,000
- Insurance: €7,850
- Loan Interest: €1,200
Total Expenditure: €130,955
Net Profit
egin{align*}
ext{Net Profit} & = ext{Total Income} - ext{Total Expenditure}
& = 296,950 - 130,955
& = 165,995
\end{align*}
Thus, the net profit for the year is €165,995.
Step 4
Prepare the balance sheet of Tranquility Health Ltd on 31/12/2019.
Answer
Balance Sheet as at 31/12/2019
Fixed Assets
- Buildings: €850,000
- Less Depreciation: €15,200
- Net Book Value: €834,800
- Equipment: €85,000
- Less Depreciation: €9,000
- Net Book Value: €76,000
- Motor Vehicles: €60,000
- Less Depreciation: €13,000
- Net Book Value: €47,000
Total Fixed Assets: €957,800
Current Assets
- Bank: €27,200
- Stock in Shop: €3,600
- Stock - Heating Oil: €700
- Clients’ Fees: €272,400
- Cleaning Prepaid: €475
- Investment Income: €4,000
Total Current Assets: €306,375
Total Assets
egin{align*}
ext{Total Assets} & = ext{Fixed Assets} + ext{Current Assets}
& = 957,800 + 306,375
& = 1,264,175
\end{align*}
Liabilities
- Creditors (Supplies): €2,450
- Clients Fees Prepaid: €7,300
- Electricity due: €380
- Loan: €70,000
- Loan Interest: €1,200
Total Liabilities: €81,730
Net Assets
egin{align*}
ext{Net Assets} & = ext{Total Assets} - ext{Total Liabilities}
& = 1,264,175 - 81,730
& = 1,182,445
\end{align*}
Capital
- Issued Share Capital: €525,000
- Revaluation Surplus: (Buildings revaluation) €144,200
Reserves
- Retained Earnings (from P&L): €513,245
Total Capital and Reserves
egin{align*}
ext{Total Capital} & = ext{Issued Capital} + ext{Revaluation Surplus} + ext{Retained Earnings}
& = 525,000 + 144,200 + 513,245
& = 1,182,445
\end{align*}
Thus, the balance sheet balances at €1,182,445.
Step 5
Advise the Board on how to fund the expected cost of €140,000.
Answer
To fund the expected cost of €140,000 for purchasing equipment, the following options are available:
-
Use of Reserves: As the company has reserves of €256,650, it can use a portion of these reserves to fund the purchase directly.
-
Bank Loan: The company has managed its current finances well, with a current account balance of €27,200. Thus, they could seek a bank loan to cover the investment, which would avoid depleting reserves further.
-
Raising Capital: Another option could be to issue new shares or additional ordinary shares. The company can acquire the necessary funds through raising additional capital.
-
Adjustment of Existing Budget: The Board can consider reallocating funds from less critical investments to prioritize necessary equipment purchases, ensuring the company maintains its operational efficiency.
In summary, leveraging existing reserves while exploring external financing through loans or capital raising will provide for the expected costs.