Reference no: EM133126612

Question 1 - Below is the trial balance of Martina's Mechanical Services at 5 April 2021.

The following information is relevant.

1. The closing inventory at 5 April 2021 is valued at £132,690.

2. On 5 February 2021 Martina sold a motor vehicle for £8,200. The customer was due to pay Martina's Mechanical Services on 5 April 2021 but only paid half of the amount due by cheque on this last day of the accounting year. Nothing regarding the disposal transaction, including any cash received, has been recorded in the accounts. This motor vehicle had been bought on 6 October 2018 for £15,400.

3. On 5 December 2020, Martina bought a new motor vehicle for £18,000 on purely credit terms. Martina mistakenly debited Fixtures and Fittings at cost.

4. Depreciation on motor vehicles is provided at 25% per annum using the reducing balance basis on a monthly pro-rata basis. Depreciation on fixtures, fittings and equipment is provided at 10% per annum on the straight line basis, assuming no residual value. There were no purchases or disposals of fixtures, fittings, and equipment during the year.

5. Martina estimates that £2,760 due from customers will be irrecoverable and must be written off.

6. The allowance for receivables is to be set at 3% of net receivables at 5 April 2021.

7. Rent includes a prepayment of £620.

8. The heating bill will arrive on 5 June 2021 and £390 is expected to relate to the period ended 5 April 2021.

9. An invoice for £870 for insurance needs to be recorded and accrued for the same period.

10. The long-term loan is repayable in 10 years' time. Interest payable on the loan is 8% and will be paid once per year.

Required -

a. Prepare the income statement for Martina's Mechanical Services for the period ended 5 April 2021. Your answer should only be in round pounds. Show your workings, including a full non-current assets note.

b. Prepare the balance sheet for Martina's Mechanical Services as at 5 April 2021. Show your workings.

c. Explain why any adjustment for the allowance for irrecoverable receivables at the year-end will lead to either a decrease or an increase in the allowance for irrecoverable receivables. How is either possibility shown in the income statement? Your answer should be 100 words or fewer.

d. While Question 1 (a) and (b) is similar to what you can expect in Question 1 in the exam, there are some differences. Outline these differences. Briefly discuss how you would prepare for Question 1 in the exam. Use 150 words or fewer for your whole answer to this question.

Question 2 - Chan, a sole trader, owns and manages a business which manufactures and sells one special type of small tool for home improvement shops.

Set out below is the sales revenue and profit for 2020.

In 2020 the business manufactured and sold 126,000 units and had fixed costs of £153,800. All other costs were variable.

a. Calculate the selling price and variable cost per unit for 2020.

b. Calculate the sales revenue level, both in units and money terms, at which the business broke even in 2020.

c. Complete a contribution analysis table that indicates fixed, variable and total costs, as well as revenue, for 2020 at production levels of 0, 100,000, 200,000 and 300,000 units.

d. Illustrate your answers to (a), (b) and (c) above on a breakeven chart that shows revenue, total cost and fixed cost lines with an appropriate legend for each. Your chart should be labelled with an arrow that points to the breakeven point as well as to the margin of safety area.

e. Chan had considered spending an additional £14,400 on marketing in 2020. He predicted that such an additional investment would have increased the sales and production volume in the year to 138,000 units at a better selling price of £3.68. He also predicted there would have been no other changes to his fixed costs for the year nor any changes to the variable cost per unit.

i. If his predictions had proved correct, what would have been his new profit for the year?

ii. If his predictions had proved correct, what would have been his new breakeven point, in units, for the year?

Question 3 - a. In your own words, briefly explain four limitations of contribution analysis as a management tool.

b. Explain the difference between prime costs and conversion costs.

c. Using an appropriate example, explain how the concept of results controls relates to the management approach of management by objectives.

d. Discuss the effective use of financial rewards as a positive consequence for good performance. Your answer should include a brief discussion of the consequences of using financial rewards ineffectively.