Reference no: EM133134086

Question - Ko-Furn Limited is an office furniture manufacturer. The following is a list of balances extracted from its accounting records at 31 December 2021:

	Dr	Cr
	$000	$000
Land, at valuation	540
Building: cost	500
Building: accumulated depreciation at 1.1.21		180
Equipment: cost	392
Equipment: accumulated depreciation at 1.1.21		152
Inventory at 1.1.21	214
Trade receivables	366
Provision for doubtful debts at 1.1.21		16
Prepayment at 1.1.21	12
Accrual at 1.1.21		18
Cash	518
Trade payables		201
8% debentures: 2025		100
Share capital: ordinary 50c shares		50
:10% redeemable $1 preference shares		60
Share premium		350
Retained earnings		606
Sales		2,924
Purchases	976
Wages and salaries	540
Distribution costs	200
Other administrative expenses	360
Debenture interest paid	4
Corporation tax	12
Disposal account		20
Interim dividend paid on preference shares	3
Interim dividend paid on ordinary shares	40
	4,677	4,677

The following information is given:

1. Ko-furn prices its furniture using a normal 30% mark-up policy. An inventory count carried out at 31 December 2021 valued inventory at selling price of $325,000. This included two board tables at normal selling price of $20,800 each, which the directors have decided should be reduced in price to $5,000 each.

2. The land was valued at $900,000 at 31 December 2021. The directors decided to reflect the revalued amount in the statement of financial position.

3. On 1 February 2021, the company sold some of its equipment for $20,000. While the proceeds of sale were credited to the Disposal account, no other entries were made in the books of account in relation to this transaction. The sold equipment had cost $100,000 in August 2019. The company charges a full year's depreciation in the year of acquisition and no depreciation in the year of disposal.

4. The company's depreciation policy is as follows:

Land: nil

Buildings: 4% straight line

Equipment: 40% reducing balance

5. Trade receivable at 31 December 2021 include a debt of $16,000 from a customer recently declared bankrupt. The company has decided to maintain the provision for doubtful debts at 4% of remaining trade receivables.

6. The balance of prepayments at 1.1.21 refers to insurance charges. Prepaid insurance, included in distribution costs at 31 December 2021 amounted to $24,000.

7. The balance of accruals at 1.1.21 refers to electricity charges. After the year end, the company received an electricity invoice for $30,000 covering the period 1 November 2021 to 31 January 2022. Electricity charges are included in other administrative expenses.

8. The second half year's debenture interest which was due on 31 December 2021 was paid on 5 January 2022.

9. The dividend on the cumulative preference shares, due to be paid on 1 January 2022, is to be provided and a final dividend on the ordinary shares of $130,000 to be paid on 28 February 2022 has been proposed by the directors.

10. Corporation tax for the year ended 31 December 2021 is estimated to be $190,000.

11. The company issued 100,000 additional shares of 50c each on 30 December 2021 for $140,000. This transaction has not been recorded in the accounting records.

Required -

1. Make an income statement for the year ended 31 December 2021, a statement of movements in equity for that year and a statement of financial position at that date, in good style, for the directors.

2. Explain what is meant by 'undistributable reserves' and give two examples of such reserves.

3. Calculate the undistributable reserves of the company. Briefly explain why the share capital and these reserves provide safety to the company's creditors.