Category: Accounting Principles

ABC Co’s non-current assets had carrying amounts of $92,100 and $121,250 at the beginning and end of the year respectively. Depreciation for the year was $12,150. Assets originally costing $8,750, with a carrying amount of $4,525 were sold in the year for $3,750.

What were the additions to non-current assets in the year?

Answer

Ending carrying amount = beginning carrying amount + purchase – depreciation – carrying amount of fixed asset disposal

Purchase = Ending carrying amount + depreciation + carrying amount of fixed asset disposal- beginning carrying amount = 121,250 + 12,150 + 4,525 –  92,100  = $45,825 

At 1 July 20X2 the share capital and share premium account of a company were as follows:

Share capital – 75,000 ordinary shares of 25c each	18,750
Share premium account	50,000

During the year ended 30 June 20X3 the following events took place:

1.On 1 January 20X3 the company made a rights issue of two shares for every three held, at $1.20 per share.

2.On 1 April 20X3 the company made a bonus (capitalisation) issue of three shares for every five in issue at that time, using the share premium account to do so.

What are the correct balances on the company’s share capital and share premium accounts at 30 June 20X3?

Answer

Rights issue

Number of rights issue = 75,000 x 2/3= 50,000 shares

Dr. Cash ( 50,000 x 1.2)………………………60,000

Cr. Share capital (50,000 x 0.25)………………………….12,500

Cr. Share premium (50,000 x 0.95)………………………47,500

Bonus issue

Number of bonus issue = (75,000 + 50,000) x 3/5 = 75,000

Dr. Share premium ( 75,000 x 0.25)………….18,750

Cr. Share capital…………………………………..…….18,750

Share capital = 18,750 +12,500 + 18,750 = 50,000

Share premium=  50,000 + 47,500– 18,750 = 78,750

On 30 September 20X3 part of the inventory of a company was completely destroyed by fire.

The following information is available:

– Inventory at 1 September 20X3 at cost $12,450

– Purchases for September 20X3 $22,150

– Sales for September 20X3 $32,500

– Inventory at 30 September 20X3 – undamaged items $8,000

– Standard gross profit percentage on sales 25%

Based on this information, what is the cost of the inventory destroyed?

Answer

	$
Theoretical gross profit ($32,500 x 25%)	8,125
Actual gross profit ($32,500 – ($12,450 + $22,150 – $8,000))	5,900
Shortfall-missing inventory	2,225

A business purchased an asset on 1 January 20X0 at a cost of $40,000. The asset had an expected life of eight years and a residual value of $10,000. The straight-line method is used to measure depreciation. The financial year ends on 31 December.

At 1 Jan 20X2, the estimated remaining life of the asset from that date is now expected to be only four more years, but the residual value is unchanged.

What will be the net book value of the asset as at 31 December 20X2, for inclusion in the statement of financial position?

Answer

Original annual depreciation = $(40,000 – 10,000)/8 years = $3,750 per year.

	$
Cost	40,000
Accumulated depreciation to 31 December 20X1 (2 years x $3,750)	(7,500)
Carrying amount at 1 January 20X2	32,500
Residual value	(10,000)
Remaining depreciable amount as at 1 January 20X2	22,500

Remaining life from 1 January 20X2 = 4 years

Annual depreciation = $22,500 /4 years = $5,625.

Net book value (carrying amount at 31 December 20X2) =  $32,500 – $5,625 = $26,875.

A company purchases a machine with an expected useful life of 6 years for $1,500. After two years of use, management revised the expected useful life to 8 years. The machine is to be depreciated at 20% per annum on the reducing balance basis. A full year’s depreciation is charged in the year of purchase, with none in the year of sale. During year 4, it is sold for $750.

What is the profit or loss on disposal?

Answer

Depreciation = beginning net book value x Depreciation rate

Carrying amount (net book value) = cost – accumulated depreciation or

Carrying amount (Year n) = cost x (1-depreciation rate)^n

	$
Carrying amount: 1,500 x 0.8 x 0.8 x 0.8	768
Proceeds of sale	(750)
Loss on disposal	18

XYZ Co uses a computer package to maintain its accounting records. A printout of its cash book for the month of May 20X5 was extracted on 31 May and is summarised below.

	$		$
Balance b/d	137	Payments	1,492
Receipts	1,573	Balance c/d	218
	1,710		1,710

The company’s chief accountant provides you with the following information.

a)Bank charges of $315 shown on the bank statement have not been entered in the company’s cash book.

b)Three standing orders entered on the bank statement have not been recorded in the company’s cash book: a subscription for trade journals of $26, an insurance premium of $180 and a business rates payment of $1,086.

c)A cheque drawn by XYZ Co for $347 and presented to the bank on 26 May has been incorrectly entered in the cash book as $468.

After correcting the errors above, what is the revised balance on the cash book?

Answer

CASH BOOK
		$			$
20X5			20X5
31-May	Balance b/d	218	31-May	Bank charges	315
	Error $(468 – 347)	121		Trade journals	26
	Balance c/d	1,268		Insurance	180
		–		Business rates	1,086
		1,607			1,607
				Credit Balance	1,268

You are an employee of ABC Co and have been asked to help prepare the end of year statements for

the period ended 30 November 20X7 by agreeing the figure for the total receivables.

The following figures, relating to the financial year, have been obtained from the books of original entry.

	$
Purchases for the year	90,487
Sales	118,047
Returns inwards	10,307
Returns outwards	4,245
Irrecoverable debts written off	479
Discounts allowed	668
Discounts received	466
Cheques paid to suppliers	85,698
Cheques received from customers	107,453
Customer cheques dishonoured	157

You discover that at the close of business on 30 November 20X6 the total of the receivables amounted

to $12,561. What is the balance on the receivables ledger control account at 30 November 20X7?

Answer

RECEIVABLES LEDGER CONTROL
	$		$
Balance b/d	12,561	Returns inwards	10,307
Sales	118,047	Irrecoverable debts written off	479
Cheques dishonoured	157	Discounts allowed	668
		Cheques received	107,453
	–	Balance c/d	11,858
	130,765		130,765

The increase in net assets is $692, drawings are $308 and capital introduced is $180.

What is the net profit for the year?

Answer

Ending capital = beginning capital + profit +additional capital – drawing

Profit = drawing + ending capital – beginning capital – additional capital

Increase in net asset = ending capital – beginning capital

Profit = Drawings + Increase in net assets – Capital introduced

= $308 + $692 – $180

= $820

Capital introduced is $200. Capital brought forward at the beginning of the year amount to $400 and liabilities are $280. Assets are $360.

What is the retained profit for the year?

Answer

Asset = liabilities + capital

Capital = Assets – Liabilities

Ending capital = beginning capital + additional capital + profit (loss) -drawing

$200 + $400 + profit for the year = $360 – $280

$600 + profit (loss) = $80 , so profit (loss) = 80-600= – 520

Therefore, the profit for the year is in fact a loss of $520.

The following extract is from the statement of profit or loss of ABC Co for the year ended 30 April 20X7.

	$
Profit before tax	17,000
Tax	(8,000)
Profit for the year	9,000

In addition to the profit above:

1. ABC Co paid a dividend of $5,250 during the year.

2. A gain on revaluation of land resulted in a surplus of $4,500.

What total amount will be added to retained earnings at the end of the financial year?

Answer

	$
Profit for year	9,000
Dividend	(5,250)
Added to retained earnings	3,750

Channy has prepared her draft financial statements for the year ended 30 April 20X7, and needs to adjust them for the following items:

1. Rent of $2,625 was paid and recorded on 2 January 20X6 for the period 1 January to 31 December 20X6. The landlord has advised that the annual rent for 20X7 will be $3,000 although it has not been invoiced or paid yet.

2. Property and contents insurance is paid annually on 1 March. Channy paid and recorded $1,500 on 1 March 20X7 for the year from 1 March 20X7 to 28 February 20X8.

What should the net effect on profit be in the draft financial statements for the year ended 30 April 20X7 of adjusting for the above items?

Answer

	$
Rent accrual ($3,000 x 4/12)	(1,000)
Insurance prepayment ($1,500 x 10/12 )	1,250
Net increase in profit	250

Journal Entry on 1 March 20X7

Dr. Insurance Expense…………1,500

Cr. Cash……………………………………1,500

Adjusting Entry on 30 April 20X7

Dr. Prepayment ………………..1,250

Cr. Insurance Expense…………………….1,250

Selena had receivables of $149,650 at 30 November 20X7. Her allowance for receivables at 1 December 20X6 was $3,115. She wished to change it to the equivalent of 2% of receivables at 30 November 20X7. On 29 November 20X7 she received $159 in full settlement of a debt that she had written off in the year ended 30 November 20X6.

What total amount should be recognised for receivables in the statement of profit or loss for the year ended 30 November 20X7 ?

Answer

	$
Receivables allowance at 30/11/X7 (149,650 x 2%)	2,993
Opening allowance at 1/12/X6	(3115)
Reduction in allowance (credit to statement of profit or loss)	(122)

Total credit to statement of profit or loss = 122 + 159  = $281

Journal Entry

Dr. Cash………………………………………….159

Cr. Irrecoverable debts…………………………….……159

Dr. allowances for receivables…..122

Cr. Irrecoverable debts ……………………..122

David has extracted a trial balance and created a suspense account with a credit balance of $1,520 to make it balance.

David found the following:

1. A sales invoice for $9,140 has not been entered in the accounting records.
2. A payment of $3,024 has been posted correctly to the payables control account but no other entry has been made.
3. A credit sale of $264 has only been credited to the sales account.

What is the remaining balance on the suspense account after these errors have been corrected?

Answer

SUSPENSE ACCOUNT
	$		$
Cash	3,024	Bal b/f	1,520
		Receivables	264
		Bal c/f	1,240
	3,024		3,024

Adjusting Entry

Dr. Suspense Account…..3,024

Cr. Cash………………………………….3,024

Dr.  Receivable …………..264

Cr. Suspense Account……………….264

A firm has the following transactions with its product R.

1 January 20X3	Opening inventory: nil
1 February 20X3	Buys 15 units at $100 per unit
11 February 20X3	Buys 19 units at $75 per unit
1 April 20X3	Sells 11 units at $150 per unit
1 August 20X3	Buys 7 units at $50 per unit
1 December 20X3	Sells 19 units at $150 per unit

The firm uses Perpetual FIFO to value its inventory. What is the inventory value at the end of the year?

Answer

Closing inventory $650

			Inventory	Unit
Purchases	Sales	Balance value		cost
Units	Units	Units	$	$
15		15	1,500	100
19			1,425	75
		34	2,925
	11		(1,100) 11 x 100
		23	1,825
7			350	50
		30	2,175
	19		(1,525)*
		16	650

* 4 @ $100 + 15 @ $75 = $1,525

The plant and equipment account in the records of a company for the year ended 31 December 20X8 is shown below.

PLANT AND EQUIPMENT – COST
20X8	$	20X8	$
1 Jan Balance	240,000
1 July Cash	12,000	30 Sept Transfer disposal account	21,000
	–	31 Dec Balance	231,000
	252,000		252,000

The company’s policy is to charge depreciation on the straight line basis at 30% per year, with proportionate depreciation in the years of purchase and sale.

What should be the charge for depreciation in the company’s statement of profit or loss for the year ended 31 December 20X8?

Answer

	$
Held all year ((240,000 – 21,000) x 30%)	65,700
Addition (12,000 x 30% x 6/12)	1,800
Disposal (21,000 x 30% x 9/12)	4,725
Depreciation	72,225

At 1 January 20X8 a company had an allowance for receivables of $12,250.

At 31 December 20X8 the company’s trade receivables were $215,750  and it was decided to write off balances totaling $5,750 . The allowance for receivables was to be adjusted to the equivalent of 4% of the remaining receivables.

What total figure should appear in the company’s statement of profit or loss for receivables expense?

Answer

	$	$
Trade receivables	215,750
Irrecoverable debts write off	(5,750)
	210,000
Closing allowance for receivables (4% x 210,000)		8,400
Opening allowance		12,250
Reduction		(3,850)
Charge = 5,750 – 3,850 = 1,900

Journal Entry

Dr. Irrecoverable debts ………….. 5,750

Cr. Receivable………………………………………. 5,750

Dr. allowance for receivables…. 3,850

Cr. Irrecoverable debts …………………………….. 3,850

The carrying amount of a company’s non-current assets was $100,000 at 1 August 20X2. During the year ended 31 July 20X3, the company sold non current assets for $12,500 on which it made a loss of $2,500. The depreciation charge of the year was $10,000.

What was the carrying amount of noncurrent assets at 31 July 20X3?

Answer

Gain(loss) = proceeds – carrying amount

Carrying amount = proceeds – gain(loss)

	$
Carrying amount at 1st August 20X2	50,000
Less depreciation	(5,000)
	45,000
Proceeds	6,250
Loss	1,250
Carrying amount of asset sold	(7,500)
Therefore carrying amount	37,500

The following receivables ledger control account has been prepared by a trainee accountant:

	$			$
		20X5
Balance	71,170	31-Dec	Cash received from credit customers	44,948
Credit sales	47,280		Contras against amounts owing by company in payables ledger	200
Discounts allowed	915		Balance	75,897
Irrecoverable debts written off	450
Sales returns	1,230			–
	121,045			121,045

What should the closing balance on the account be when the errors in it are corrected?

Answer

RECEIVABLES LEDGER CONTROL ACCOUNT
	$		$
Opening balance	71,170	Cash received	44,948
Credit sales	47,280	Discounts allowed	915
		Irrecoverable debts written off	450
		Sales returns	1,230
		Contras	200
	–	Closing balance	70,707
	118,450		118,450

At 1 July 20X7 a company’s allowance for receivables was $12,000.

At 30 June 20X8, trade receivables amounted to $209,500. It was decided to write off $18,000 of these debts and adjust the allowance for receivables to $15,000.

What are the final amounts for inclusion in the company’s statement of financial position at 30 June 20X8?

Answer

Trade receivables = 209,500 – 18,000 = 191,500

Allowance for receivables = 15,000

Net balance = 191,500 – 15,000 = 176,500

On 1 September 20X8, a business had inventory of $95,000. During the month, sales totaled $162,500 and purchases $120,000. On 30 September 20X8 a fire destroyed some of the inventory. The undamaged goods in inventory were valued at $55,000. The business operates with a standard gross profit margin of 20%.

Based on this information, what is the cost of the inventory destroyed in the fire?

Answer

	$
Sales (100%)	162,500
Cost of sales (80%)	130,000
Gross profit (20%)	32,500
Opening inventory	95,000
Purchases	120,000
	215,000
Closing inventory (bal. fig.)	(85,000)
Cost of sales	130,000
Calculated inventory	85,000
Actual inventory	55,000
Lost in fire	30,000

The following information is available about the transactions of David, a sole trader who does not keep proper accounting records:

Opening inventory   $19,250

Closing inventory   $21,000

Purchases   $190,750

Gross profit as a percentage of sales   20%

Based on this information, what is David’s sales revenue for the year?

Answer

Margin = (sale –cost)/sale = 20%

	$	$
Sales (balancing figure) 100%		236,250
Opening inventory	19,250
Purchases	190,750
	210,000
Closing inventory	(21,000)
Cost of sales (80%)		189,000
Gross profit ( 20/80 x 189,000)		47,250

At 1 January 20X7 a company had an allowance for receivables of $4,500

At 31 December 20X7 the company’s trade receivables were $114,500.

It was decided:

a) To write off debts totaling $7,000 as irrecoverable

b) To adjust the allowance for receivables to the equivalent of 10% of the remaining receivables

What figure should appear in the company’s statement of profit or loss for the total of debts written off as irrecoverable and the movement in the allowance for receivables for the year ended 31 December 20X7?

Answer

	$
Closing receivables	114,500
Irrecoverable debts write off	(7,000)
	107,500
Allowance required (10% x 107,500)	10,750
Existing allowance	(4,500)
Increase required	6,250
Charge to statement of profit or loss (7,000 + 6,250)	13,250

ABC received a statement from one of its suppliers, XYZ, showing a balance due of $7,960. The amount due according to the payables ledger account of XYZ in ABC’s records was only $460.

Comparison of the statement and the ledger account revealed the following differences:

1. A cheque sent by ABC for $540 has not been allowed for in XYZ’s statement.
2. XYZ has not allowed for goods returned by ABC $360.
3. ABC made a contra entry, reducing the amount due to XYZ by $6,400, for a balance due from XYZ in ABC’s receivables ledger. No such entry has been made in XYZ’s records.

What difference remains between the two companies’ records after adjusting for these items?

Answer

	$
Balance per XYZ	7,960
Cheque not yet received	(540)
Goods returned	(360)
Contra entry	(6,400)
Revised balance per XYZ	660
Balance per ABC	(460)
Remaining difference	200

ABC Co’s bank statement shows an overdrawn balance of $9,650  at 30 June 20X7. A check against the company’s cash book revealed the following differences:

1. Bank charges of $50 have not been entered in the cash book.
2. Lodgements recorded on 30 June 20X7 but credited by the bank on 2 July $3,675.
3. Cheque repayments entered in cash book but not presented for payment at 30 June 20X7 $6,950.
4. A cheque payment to a supplier of $1,050 charged to the account in June 20X7 recorded in the cash book as a receipt.

Based on this information, what was the cash book balance before any adjustments?

Answer

	$
Balance per bank statement	(9,650)
Bank charges	50
Lodgements	3,675
Cheque payments	(6,950)
Cheque payment misposted	2,100
Balance per cash book before adjustments	(10,775)

At 30 June 20X6 a company’s allowance for receivables was $9,750. At 30 June 20X7 trade receivables totaled $129,250. It was decided to write off debts totaling $9,250. The allowance for receivables was to be adjusted to the equivalent of 7 per cent of the trade receivables.

What figure should appear in the statement of profit or loss for these items?

Answer

	$
Allowance for receivables ((129,250 – 9,250) x 7%)	8,400
Previous allowance	(9,750)
Reduction	(1,350)
Debts written off	9,250
Charge to statement of profit or loss	7,900

At 1 July 20X6 a company had prepaid insurance of $ 2,050. On 1 January 20X7 the company paid $9,500 for insurance for the year to 30 September 20X7.

What figures should appear for insurance in the company’s financial statements for the year ended 30 June 20X7?

Answer

	SPLOCI	SOFP
	$	$
Prepaid insurance	2,050
Payment January 20X7	9,500
Prepayment July-Sept 20X7(9,500/12 x 3)	(2,375)	2,375
Insurance expense and prepaid insurance	9,175	2,375

The following information is available for Sok, a sole trader who does not keep full accounting records:

	$
Inventory 1 July 20X6	34,650
30 June 20X7	37,275
Purchases made for year ended 30 June 20X7	179,025

Sok makes a standard gross profit of 25 percent on sales.

Based on these figures, what is Sok’s sales figure for the year ended 30 June 20X7?

Answer

	$
Opening inventory	34,650
Purchases	179,025
Closing inventory	(37,275)
Cost of sales	176,400

Margin = (sale –cost)/sale = 25%

Sales = 176,400  x 100/75 = $235,200

ABC , a limited liability company, issued 500,000 ordinary shares of 20 cents each at a price of $1.3 per share, all received in cash.

What should be the accounting entries to record this issue?

Answer

$

Debit: cash ( 500,000 x 1.3)  ………………650,000

Credit: share capital (500,000 x 0.2)   ……………….100,000

Credit : share premium ( 500,000 x 1.1)  ……………550,000

The following information is available for a sole trader who keeps no accounting records:

	$
Net business assets at 1 July 20X6	46,500
Net business assets at 30 June 20X7	68,500
During the year ended 30 June 20X7:
Cash drawings by proprietor	17,000
Additional capital introduced by proprietor	12,500
Business cash used to buy a car for the proprietor’s
wife, who takes no part in the business	5,000

Using this information, what is the trader’s profit for the year ended 30 June 20X7?

Answer

Assets = Liabilities + Closing Capital (or Assets = Liabilities + Equity)
Closing Capital  = opening capital + profit (loss) + Additional Capital – drawing

Profit (loss) = closing Capital- opening capital-Additional Capital +drawing

	$
Increase in net assets (68,500- 46,500)	22,000
Capital introduced	(12,500)
Drawings (17,000 +5,000)	22,000
Profit for the year	31,500

At 31 December 20X4 the following matters require inclusion in a company’s financial statements:

1.On 1 January 20X4 the company made a loan of $3,000  to an employee, repayable on 31 March 20X5, charging interest at 5 per cent per year. On the due date she repaid the loan and paid the whole of the interest due on the loan to that date.

2.The company has paid insurance $2,250  in 20X4, covering the year ending 31 August 20X5.

3.In January 20X5 the company received rent from a tenant $1,000 covering the six months to 31 December 20X4.

For these items, what total figures should be included in the company’s statement of financial position at 31 December 20X4?

Answer

	$
Receivables and prepayments
Insurance 2,250 x 8/12 prepayment	1,500
Loan (receivable)	3,000
Interest due 3,000 x 5% (receivable)	150
Rent due (receivable)	1,000
	5,650