1
The directors of the company by which you are employed as an accountant have received
the forecast profit and loss account for 2009 which disclosed a net profit for the year of £36,000.
This is considered to be an unacceptably low figure and a working party has been set up to
investigate ways and means of improving the forecast profit.
The following suggestions have been put forward by various members of the working party:
(a) ‘Every six months we deduct income tax of £10,000 from the debenture interest and pay it over
to Revenue & Customs. If we withhold these payments, the company’s profit will be increased
considerably.’
(b) ‘I see that in the three months August to October 2009 we have forecast a total amount of
£40,000 for repainting the exterior of the company’s premises. If, instead, we charge this
amount as capital expenditure, the company’s profit will be increased by £40,000.’
(c) ‘In November 2009, the replacement of a machine is forecast. The proceeds from the sale of the
old machinery should be credited to profit and loss account.’
(d) ‘There is a credit balance of £86,000 on general reserve account. We can transfer some of this
to profit and loss account to increase the 2009 profit.’
(e) ‘The company’s £1 ordinary shares, which were originally issued at £1 per share, currently have
a market value of £1.60 per share and this price is likely to be maintained. We can credit the
surplus £0.60 per share to the 2009 profit and loss account.’
(f
) ‘The company’s premises were bought many years ago for £68,000, but following the rise in
property values, they are now worth at least £300,000. This enhancement in value can be
utilised to increase the 2009 profit.’
You are required, as the accounting member of the working party, to comment on the feasibility
of each of the above suggestions for increasing the 2009 forecast profit.
(Association of Chartered Certified Accountants)