ACCOUNTANCY 6 – COMPANY ACCOUNT 1.4

DR REDEEMABLE DEBENTURES ACCOUNT CR

DR DISCOUNT ON ISSUE DEBENTURE ACCOUNT CR

DR DEBENTURE REDEMPTION ACCOUNT CR

Discount on debentures written off = 5/15 × 750 = 250.

COMPANY FINAL ACCOUNTS

Company final accounts consist of the Trading Account and the Profit and Loss Account. These accounts are similar to those of a sole proprietorship, but in the profit and loss account of a company, certain items are specifically debited. These include debenture interest, directors’ salaries or fees or emoluments, and audit fees or charges. On the credit side, apart from the gross profit made, other gains such as dividends received can also be shown.

The appropriation of profit is shown in this account. It lists items such as corporation tax payable, proposed dividend, interim dividend, reserve transfers, and other appropriations.

Corporation tax:

Corporation tax is a tax levied on a company’s profit. It is an important consideration in the distribution of profits and affects the net profit available for dividends and reserves.

Dividend:

The term dividend originates from the Latin word “Dividend,” meaning to divide. It refers to the portion of a company’s profit that is distributed among its shareholders as a return on their investment.

TYPES OF DIVIDEND:

• Interim Dividend
• Proposed Dividend

INTERIM DIVIDEND

The word “Interim” originates from Latin meaning “in the meantime.” An interim dividend is declared and paid before the close of the company’s financial period. It is usually based on the company’s performance during the year to date.

PROPOSED DIVIDEND:

A proposed dividend is declared but not paid before the accounts are closed. It is shown among items on the Balance Sheet as “proposed dividend” or “unpaid dividend.” This dividend is subject to approval at the company’s annual general meeting.

The credit side of the appropriation account includes items such as the net profit made during the year and the balance of profit brought forward from the previous year.

DR APPROPRIATION ACCOUNT FOR THE YEAR ENDED 31ST DEC 1999 CR

BALANCE SHEET AS AT 31/12/1999

EXERCISE:

Here is a trial balance of RF Ltd as at 31^st June 2008.

Given the following information as at 30^th June 2008, draw up a set of financial statements for the year to that date.

1. Stock 30^th June 2008 Tshs. 4,937.
2. The share capital consisted of 25,000 ordinary shares of sh. Each and 25,000 10 per cent preference shares was proposed to be paid as well as a dividend of 20 per cent on the ordinary shares.
3. Accrued rent Tshs. 700. Directors remuneration Tshs. 2,500.
4. Debentures interest ½ year’s interest owing.
5. Depreciation cost equipment 10 percent reserve, motors 20%.
6. Transfers to Reserve; General reserve Tshs. 2,000. Fixed assets replacement reserve Tshs. 1,000.
7. Provide 50% as corporation tax payable.

PROFIT & TRADING & LOSS APPROPRIATION ACCOUNT & BALANCE SHEET

BALANCE SHEET AS AT 30TH JUNE 2008

HIRE PURCHASE ACCOUNTING

HIRE PURCHASE TRANSACTIONS

Hire purchase is a system of trading governed by the Hire Purchase Act. Under this system, the buyer agrees to pay for goods by installments over a stipulated period. The property in the goods remains with the seller until the buyer pays the final installment, including an option to purchase fee, which then transfers ownership to the buyer.

The buyer obtains possession and uses the goods, but ownership only passes after full payment. If the buyer fails to pay any installment, the seller is entitled to repossess the goods, and the buyer has no claim over the installments already paid.

ACCOUNTING PART

1. Buyer’s books.
2. Seller’s books.

Hire-purchase transactions in the buyer’s books

Goods involved are usually fixed assets such as motorcars, refrigerators, and similar items.

The hire purchase price consists of two elements:

1. Cash “cost” price
2. Hire purchase interest

The interest compensates the seller for the delay in receiving full payment and covers associated risks.

N.B

It is standard accounting policy to treat hire purchase transactions as actual sales or purchases because the buyer intends to pay the full amount through installments.

Methods of writing off the hire purchase interest

1. Straight line / fixed installment method.
2. Sum of the digits method (or rule of 78 method).
3. Actuarial method.

The interest should be written off to the Profit & Loss Account over the period of the hire purchase contract.

Straight line method

Under this method, the hire purchase interest is written off evenly over the installments. The interest per installment = (Total hire purchase interest) / (Total number of installments).

Sum of the years’ digits method

This method apportions the hire purchase interest approximately in proportion to the outstanding amount at any time.

Procedure

1. Number the installments, e.g., 3 installments: 1, 2, 3.
2. Assign the highest digit to the first installment and the lowest digit to the last installment.

Installment digits:

1 – 3

2 – 2

3 – 1

Sum of digits: 6

Apportion the hire purchase interest, e.g., if hire purchase interest = Tshs 36,000:

1. 1st year hire purchase interest = 3/6 × 36,000 = 18,000
2. 2nd year hire purchase interest = 2/6 × 36,000 = 12,000
3. 3rd year hire purchase interest = 1/6 × 36,000 = 6,000

Buyer’s books continue

Actuarial method

This method writes off hire purchase interest based on the reducing balance principle.

It requires the following information:

• Cash price
• Deposit (optional)
• Rate of interest
• Number of installments and their amounts

Working:

METHOD OF RECORDING

There are two alternative methods of recording hire purchase transactions in the buyer’s books.

Method A

Accounting entries:

With the cash “cost price”

With the proportion of the H.P interest when installment is due

With the deposit + installment paid

N.B

The balance on the vendor account represents the unpaid portion of the cash price, which should be included under current liabilities in the balance sheet.

METHOD B

1. Dr. Fixed assets A/C with the cash price
Dr. H.P interest suspense A/C with the total H.P interest
Cr. Vendors A/C with total H.P price.

With the proportion of the H.P interest when installment is due

With the deposit + installment paid

N.B

The balance on the vendor account less the balance of hire purchase interest suspense account shall be included in current liabilities in the balance sheet.

Example

On 1^st Jan 1991, Contractor’s Ltd bought a hydraulic crane from Hi-Lift Ltd on hire purchase. The terms of the H.P contract were an initial deposit of Tshs 40,000 payable followed by 3 installments of Tshs 37,978 on 1^st Dec in each of the next three years from 1991 onwards. The cost of the crane for cash purchase would have been Tshs 120,000. Interest is charged on the balance outstanding on 31^st Dec at the rate of 20% p.a. The final year of both companies ends 31^st Dec.

Required

1. Calculate the amount of H.P. Interest included in the H.P price.
2. Determine the amount of interest allocated in each of the three years using the sum of digits method.
3. Prepare the relevant ledger account for Contractor’s Ltd for each of the three years ended 31^st Dec 1991, 1992, and 1993, assuming depreciation on fixed assets is charged using the straight line method in addition to 20% p.a interest rate.

Solution

DR HI-LIFT COMPANY ACCOUNT CR