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(b) Donald actually decided to operate as a sole trader. The first year’s results of his business were not as he had

hoped, and he made a trading loss of ￡8,000 in the year to 31 March 2007. However, trading is now improving,

and Donald has sufficient orders to ensure that the business will make profits of at least ￡30,000 in the year to

31 March 2008.

In order to raise funds to support his business over the last 15 months, Donald has sold a painting which was

given to him on the death of his grandmother in January 1998. The probate value of the painting was ￡3,200,

and Donald sold it for ￡8,084 (after deduction of 6% commission costs) in November 2006.

He also sold other assets in the year of assessment 2006/07, realising further chargeable gains of ￡8,775 (after

indexation of ￡249 and taper relief of ￡975).

Required:

(i) Calculate the chargeable gain on the disposal of the painting in November 2006. (4 marks)

2 The draft financial statements of Choctaw, a limited liability company, for the year ended 31 December 2004 showed

a profit of $86,400. The trial balance did not balance, and a suspense account with a credit balance of $3,310 was

included in the balance sheet.

In subsequent checking the following errors were found:

(a) Depreciation of motor vehicles at 25 per cent was calculated for the year ended 31 December 2004 on the

reducing balance basis, and should have been calculated on the straight-line basis at 25 per cent.

Relevant figures:

Cost of motor vehicles $120,000, net book value at 1 January 2004, $88,000

(b) Rent received from subletting part of the office accommodation $1,200 had been put into the petty cash box.

No receivable balance had been recognised when the rent fell due and no entries had been made in the petty

cash book or elsewhere for it. The petty cash float in the trial balance is the amount according to the records,

which is $1,200 less than the actual balance in the box.

(c) Bad debts totalling $8,400 are to be written off.

(d) The opening accrual on the motor repairs account of $3,400, representing repair bills due but not paid at

31 December 2003, had not been brought down at 1 January 2004.

(e) The cash discount totals for December 2004 had not been posted to the discount accounts in the nominal ledger.

The figures were:

$

Discount allowed 380

Discount received 290

After the necessary entries, the suspense account balanced.

Required:

Prepare journal entries, with narratives, to correct the errors found, and prepare a statement showing the

necessary adjustments to the profit.

(10 marks)

(ii) authority; (3 marks)

4 Hogg Products Company (HPC), based in a developing country, was recently wholly acquired by American Overseas

Investments (AOI), a North American holding company. The new owners took the opportunity to completely review

HPC’s management, culture and systems. One of the first things that AOI questioned was HPC’s longstanding

corporate code of ethics.

The board of AOI said that it had a general code of ethics that HPC, as an AOI subsidiary, should adopt. Simon Hogg,

the chief executive of HPC, disagreed however, and explained why HPC should retain its existing code. He said that

HPC had adopted its code of ethics in its home country which was often criticised for its unethical business behaviour.

Some other companies in the country were criticised for their ‘sweat shop’ conditions. HPC’s adoption of its code of

ethics, however, meant that it could always obtain orders from European customers on the guarantee that products

were made ethically and in compliance with its own highly regarded code of ethics. Mr Hogg explained that HPC had

an outstanding ethical reputation both locally and internationally and that reputation could be threatened if it was

forced to replace its existing code of ethics with AOI’s more general code.

When Ed Tanner, a senior director from AOI’s head office, visited Mr Hogg after the acquisition, he was shown HPC’s

operation in action. Mr Hogg pointed out that unlike some other employers in the industry, HPC didn’t employ child

labour. Mr Hogg explained that although it was allowed by law in the country, it was forbidden by HPC’s code of

ethics. Mr Hogg also explained that in his view, employing child labour was always ethically wrong. Mr Tanner asked

whether the money that children earned by working in the relatively safe conditions at HPC was an important source

of income for their families. Mr Hogg said that the money was important to them but even so, it was still wrong to

employ children, as it was exploitative and interfered with their education. He also said that it would alienate the

European customers who bought from HPC partly on the basis of the terms of its code of ethics.

Required:

(a) Describe the purposes and typical contents of a corporate code of ethics. (9 marks)