Income Statement (Cambridge (CIE) IGCSE Accounting)

Worked Example

The trial balance of Abrakadabra Limited at 31 March 2024 was as follows:

Additional information:            

1.  Inventory at 31 March 2024 was valued at $7 080

2.  Depreciation on fittings is to be charged at 20% method per annum using the reducing balance

3. Rent includes a payment of $2 700 for the 3 months from 1 March 2024 to 31 May 2024

4.  Accrued wages at 31 March 2024 were $4 550

5.  No debenture interest has been paid for the year ended 31 March 2024

6.  No dividends were outstanding at 31 March 2024

7. $2 200 of the retained earnings is to be transferred to a general reserve on 31 March 2024

Prepare the income statement for Abrakadabra Limited for the year ended 31 March 2024.

Answer

Identify which balances affect the income statement.

Deal with the additional notes and identify how they affect the income statement.

1. The closing inventory will be subtracted as part of the cost of sales

2. Find the year's depreciation charge

   1. Find the current net book value

      1. $250 000 - $75 000 = $175 000

   2. Multiply the net book value by 20%

      1. 20% × $175 000 = $35 000

3. Subtract the prepaid rent from the balance

   1. Find the cost per month

      1. $2 700 ÷ 3 = $900

   2. Multiply this by two for the prepaid months (April & May)

      1. $900 × 2 = $1 800

   3. Subtract this from the amount on the trial balance

      1. $10 280 - $1 800 = $8 480

4. Add the accrued wages to the balance

   1. $25 850 + $4 550 = $30 400

5. Calculate the debenture interest

   1. 4% × $46 000 = $1 840

6. Dividends for ordinary shares do not affect the income statement

7. Transferring money to the general reserve does not affect the income statement

Prepare the income statement using the usual layout. Remember to put the debenture interest after the profit from operations as it is a finance cost.