Category: Financial Accounting

You are given the following information:

Receivables at 1 January 20X5	$2,500
Receivables at 31 December 20X5	$2,250
Total receipts during 20X5 (including cash sales of $1,250)	$21,250

What is the figure for sales on credit during 20X5?

Answer

Step 1:

Closing Account Receivable = opening AR + total sale – cash received

So, Total sale = closing AR – opening AR + cash received = 2,250 – 2,500 +21,250 =21,000

Step 2:

Total sale = cash sale + credit sale

Credit sale = total sale – cash sale

Credit sales = $21,000 – $1,250= $19,750

At 1 January 20X2 the capital structure of ABC, a limited liability company, was as follows:

	$
Issued share capital 250,000 ordinary shares of 25c each	62,500
Share premium account	75,000

On 1 April 20X2 the company made an issue of 50,000 25c shares at $1.20 each, and on 1 July the company made a bonus (capitalisation) issue of one share for every five in issue at the time, using the share premium account for the purpose.

Calculate the company’s share capital and share premium account at 31 December 20X2.

Answer

	$
Share capital @ 1.1.20X2	62,500
Issue on 1.4.20X2 (50,000 @ 25c)	12,500
Bonus issue (300,000/5 x 1) @ 25c	15,000
Share capital as at 31.12.20X2	90,000
Share premium @ 1.1.20X2	75,000
1.4.20X2 50,000 shares @ (120c – 25c)	47,500
Bonus issue (as above)	(15,000)
	107,500

Public issue

Dr. Cash………………………………60,000

Cr. Share capital……………………………………. 12,500

Cr. Share premium…………………………………47,500

Bonus Issue

Dr. share premium………………15,000

Cr. Share Capital…………………………………..…15,000

At 30 June 20X4 a company had $2m 10% loan notes in issue, interest being paid half-yearly on 30 June and 31 December.

On 30 September 20X4 the company redeemed $500,000 of these loan notes at par, paying interest due to that date.

On 1 April 20X5 the company issued $1,000,000 9% loan notes, interest payable half-yearly on 31 March and 30 September.

What figure should appear in the company’s statement of profit or loss for interest payable in the year ended 30 June 20X5?

Answer

		$
July – September	2,000,000 x 10% x 3/12	50,000
October – June	1,500,000 x 10% x 6/12	112,500
April – June	1,000,000 x 9% x 3/12	22,500
Interest Expense		185,000

Journal Entry

30 September 20X4

Dr. Loan………………………………………………..500,000

Dr. Interest Expense……………………………….50,000

Cr. Cash…………………………………………………………………550,000

1 April 20X5

Dr. Cash………………………………………………1,000,000

Cr. Loan……………………………………………………………..….1,000,000

30 June

Dr. Interest Expense (112,500+22,500)..135,000

Cr. Cash……………………………………………………………………112,000

Cr. Accrued Interest…………………………………………………..22,500

 

At 30 June 20X4 a company’s capital structure was as follows:

	$
Ordinary share capital
1,000,000 shares of 25c each	250,000
Share premium account	200,000

In the year ended 30 June 20X5 the company made a rights issue of 1 share for every 2 held at $1 per share and this was taken up in full. Later in the year the company made a bonus issue of 1 share for every 5 held, using the share premium account for the purpose.

What was the company’s capital structure at 30 June 20X5?

Answer

	$’000
Ordinary shares
Opening balance	250
Rights issue  500,000 * x 25c	125
Bonus issue  300,000** x 25c	75
	450
Share premium Opening balance	200
Rights issue 500,000 x 75c	375
Bonus issue 300,000 x 25c	(75)
	500

*1,000,000 x 1 /2 = 500,000

** (1,000,000 + 500,000) x 1/5 = 300,000

 

At 31 December 20X3 the capital structure of a company was as follows:

	$
Ordinary share capital
25,000 shares of 50c each	12,500
Share premium account	45,000

During 20X3 the company made a bonus issue of 1 share for every 2 held, using the share premium account for the purpose, and later issued for cash another 15,000 shares at 80c per share.

What is the company’s capital structure at 31 December 20X3?

Answer

		$
Ordinary shares at start of year	12,500
Add: bonus issue (25,000 x ½ )12,500 x 50c	6,250
Add: new issue 15,000 x 50c	7,500
		26,250
Share premium at start of year	45,000
Less: bonus issue 12,500 x 50c	(6,250)
Add: new issue 15,000 x 30c	4,500
		43,250

Journal Entry

Bonus Issue

Dr. share premium………………6,250

Cr. Share Capital………………………………..…6,250

Public issue

Dr. Cash………………………………12,000

Cr. Share capital…………………………………….7,500

Cr. Share premium…………………………………4,500

XYZ Co sells goods with a one year warranty and had a provision for warranty claims of $16,000 at 31 December 20X2. During the year ended 31 December 20X3, $6,250 in claims were paid to customers. On 31 December 20X3, XYZ Co estimated that the following claims will be paid in the following year:

Scenario	Probability	Anticipated cost
Worst case	10%	$37,500
Best case	20%	$6,250
Most likely	70%	$15,000

What amount should XYZ Co record in the statement of profit or loss for the year ended 31 December 20X3 in respect of the provision?

Answer

statement of profit or loss

	$
Provision required at 31.12.X3 =
(0.10​ x 37,500)+(0.20 x 6,250)+(0.70 x 15,000)	15,500
Provision b/f at 31.12.X2	(16,000)
Utilised during year	6,250
Increase required – charge to SPL	5,750
Statement of Financial Position
Provision c/f at 31.12.X3	15,500

XYZ Co sells goods with a one year warranty under which customers are covered for any defect that becomes apparent within a year of purchase. In calendar year 20X6, XYZ Co sold 25,000 units.

The company expects warranty claims for 4% of units sold. Half of these claims will be for a major defect, with an average claim value of $25. The other half of these claims will be for a minor defect, with an average claim value of $5.

What amount should XYZ Co include as a provision in the statement of financial position for the year ended 31 December 20X6?

Answer

XYZ Co should provide on the basis of the expected cost. The expected cost would be calculated as (2% x 25,000 x $25) + (2% x 25,000 x $5) = $12,500 + $2,500 = $15,000

Dr. warranty Expense…………..15,000

Cr. Provision for warranty…………………..15,000

At the beginning of the year, the allowance for receivables was $1,000. At the year-end, the allowance required was $2,000. During the year $700 of debts were written off, which includes $200 previously included in the allowance for receivables.

What is the charge to statement of profit or loss for receivables expense for the year?

Answer

		charge
	$	$
Receivables allowance at year end	2,000
Receivables allowance at beginning of year	1,000
Increase in allowance		1,000
Irrecoverable debts written off		700
Total charge to statement of profit or loss		1,700

At 1 January 20X4, there was an allowance for receivables of $3,000. During the year, $1,000 of debts were written off as irrecoverable, and $800 of debts previously written off were recovered. At 31 December 20X4, it was decided to adjust the allowance for receivables to 10% of receivables which are $20,000.

What is the total receivables expense for the year?

Answer

	$	$
Receivables allowance at 31.12.X4 (10% of $20,000)	2,000
Receivables allowance at 1.1.X4	3,000
Decrease in allowance		1,000
Irrecoverable debts written off		(1,000)
Debt recovered		800
Total credit to statement of profit or loss		800

At 31 December 20X6 a company’s trade receivables totaled $216,000 and the allowance for receivables was $12,000.

It was decided that debts totaling $3,250 were to be written off. The allowance for receivables was to be adjusted to the equivalent of five per cent of the receivables.

What figures should appear in the statement of financial position for trade receivables (after deducting the allowance) and in the statement of profit or loss for receivables expense?

Answer

	$
Allowance required 5% x (216,000 – 3,250)	10,638
Existing allowance	(12,000)
Reduction in allowance	(1,362)
Irrecoverable debts written off	3,250
receivables expense	1,888

Net trade receivables = $216,000 – $3,250  – $10,638  = $202,112

At 1 July 20X5 a limited liability company had an allowance for receivables of $20,750. During the year ended 30 June 20X6 debts totaling $36,500 were written off. At 30 June 20X6 a receivables allowance of $54,500 was required.

What figure should appear in the company’s statement of profit or loss for the year ended 30 June 20X6 for receivables expense?

Answer

Receivables expense = $36,500 + ($54,500 – $20,750) = $70,250

At 30 September 20X4 a company’s allowance for receivables amounted to $9,500, which was equivalent to five per cent of the receivables at that date.

At 30 September 20X5 receivables totaled $217,000. It was decided to write off $7,000 of debts as irrecoverable. The allowance for receivables required was to be the equivalent of five per cent of receivables.

What should be the charge in the statement of profit or loss for the year ended 30 September 20X5 for receivables expense ?

Answer

	$
Irrecoverable debt written off	7,000
Increase in allowance (217,000 – 7,000 ) x 5% – 9,500)	1,000
	8,000

At 1 July 20X4 the receivables allowance of ABC Co was $4,500.

During the year ended 30 June 20X5 debts totaling $3,650 were written off. The receivables allowance required was to be $4,000 as at 30 June 20X5.

What amount should appear in ABC Co ‘s statement of profit or loss for receivables expense for the year ended 30 June 20X5?

Answer

	$
Irrecoverable debts written off	3,650
Reduction in allowance (4,500-4,000)	(500)
Receivables expense	3,150

At 31 December 20X5 a company’s receivables totalled $100,000 and an allowance for receivables of $12,500 had been brought forward from the year ended 31 December 20X4.

It was decided to write off debts totaling $9,500. The allowance for receivables was to be adjusted to the equivalent of 5% of the receivables.

What charge for receivables expense should appear in the company’s statement of profit or loss for the year ended 31 December 20X5?

Answer

	$
Closing allowance (100,000 – 9,500) x 5%	4,525
Opening allowance	12,500
Decrease in allowance	(7,975)
Irrecoverable debts written off	9,500
Charge	1,525

David’s draft financial statements for the year to 31 October 20X6 report a loss of $2,972. When he prepared the financial statements, David did not include an accrual of $3,252 and a prepayment of $1,668.

What is David’s profit or loss for the year to 31 October 20X6 following the inclusion of the accrual and prepayment?

Answer

	$
Original loss	(2,972)
Accrual	(3,252)
Prepayment	1,668
Revised loss	(4,556)

During 20X6, ABC, a limited liability company, paid a total of $15,000 for rent, covering the period from 1 October 20X5 to 31 March 20X7.

What figures should appear in the company’s financial statements for the year ended 31 December 20X6 ?

Answer

Statement of profit or loss and other comprehensive income

Rental Expense = $15,000 x 12/18 = $10,000

Statement of financial position

Prepayment = $15,000 x 3/18 = $2,500

XYZ , a limited liability company, receives rent for subletting part of its office premises to a number of tenants.

In the year ended 31 December 20X7 XYZ received cash of $79,650  from its tenants.

Details of rent in advance and in arrears at the beginning and end of 20X7 are as follows:

31 December
	20X7	20X6
	$	$
Rent received in advance	7,100	6,150
Rent owing by tenants	4,575	4,225

All rent owing was subsequently received

What figure for rental income should be included in the statement of profit or loss of XYZ for 20X7?

Answer

RENTAL INCOME ACCOUNT
	$		$
Opening rent owing	4,225	Opening rent in advance	6,150
Rent income (balancing figure)	79,050	Cash received	79,650
Closing rent in advance	7,100	Closing rent owing	4,575
	90,375		90,375

A business compiling its financial statements for the year to 31 January each year pays rent quarterly in advance on 1 January, 1 April, 1 July and

1 October each year. After remaining unchanged for some years, the rent was increased from $6,000 per year to $7,500 per year as from 1 July 20X3.

Which of the following figures is the rent expense which should appear in the statement of profit or loss for year ended 31 January 20X4?

Answer

5 months/12 months x $6,000 = $2,500

7 months/12 months x $7,500 = $4,375

Total rent: $2,500 + $4,375 = $6,875

The year end of ABC Co is 30 November 20X0. The company pays for its gas by a standing order of $2,400 per month. On 1 December 20W9, the statement from the gas supplier showed that ABC Co had overpaid by $800. ABC Co received gas bills for the four quarters commencing on 1 December 20W9 and ending on 30 November 20X0 for $5,200, $5,600, $8,400 and $8,000 respectively.

What is the correct charge for gas in ABC’s statement of profit or loss for the year ended 30 November 20X0?

Answer

GAS SUPPLIER ACCOUNT
	$			$
Balance b/fwd	800
Bank $2,400 x 12	28,800	28-Feb	invoice	5,200
		31-May	invoice	5,600
		31-Aug	invoice	8,400
		30-Nov	invoice	8,000
		30-Nov	bal. c/d	2,400
	29,600			29,600

GAS ACCOUNT
		$			$
28-Feb	invoice	5,200
31-May	invoice	5,600
31-Aug	invoice	8,400
30-Nov	invoice	8,000	30-Nov	SPL	27,200
		27,200			27,200

 

Diesel fuel in inventory at 1 November 20X5 was $3,125 , and there were invoices awaited for $425. During the year to 31 October 20X6, diesel fuel bills of $21,350 were paid, and a delivery worth $325 had yet to be invoiced. At 31 October 20X6, the inventory of diesel fuel was valued at $2,450.

What is the value of diesel fuel to be charged to the statement of profit or loss and other comprehensive income for the year to 31 October 20X6?

Answer

Diesel fuel purchased

Balance c/fwd = Balance b/fwd + purchase – payments

	$
Balance b/fwd	(425)
Payments	21,350
Balance c/fwd	325
Purchases	21,250
Cost of fuel used
	$
Opening inventory	3,125
Purchases	21,250
Closing inventory	(2,450)
Transfer to SPL	21,925

A business compiling its financial statements for the year to 31 July each year pays rent quarterly in advance on 1 January, 1 April, 1 July and 1 October each year. The annual rent was increased from $15,000 per year to $18,000 per year as from 1 October 20X5.

What figure should appear for rent expense in the business’s statement of profit or loss and other comprehensive income for the year ended 31 July 20X6?

Answer

	$
August to September 15,000 x 2/12	2,500
October to July 18,000 x 10/12	15,000
Rental Expense	17,500

A company has sublet part of its offices and in the year ended 30 November 20X5 the rent receivable was:

Until 30 June 20X5	$2,100 per year
From 1 July 20X5	$3,000 per year

Rent was paid quarterly in advance on 1 January, April, July, and October each year.

What amounts should appear in the company’s financial statements for the year ended 30 November 20X5?

Answer

	$
Statement of profit or loss
December to June 2,100 x 7/12	1,225
July to November 3,000 x 5/12	1,250
Rent receivable	2,475

Statement of financial position

Sundry payables 3,000 x 1/12 =$250 (December rent received in advance)

At 31 March 20X4 a company had oil in hand to be used for heating costing $2,050 and an unpaid heating oil bill for $900.

At 31 March 20X5 the heating oil in hand was $2,325 and there was an outstanding heating oil bill of $800 .

Payments made for heating oil during the year ended 31 March 20X5 totaled $8,650

Based on these figures, what amount should appear in the company’s statement of profit or loss and other comprehensive income for heating oil for the year?

Answer

Used Oil = opening oil + purchase – ending oil

Closing accrual for oil = opening accrual + purchase – payment

Purchase = Closing accrual for oil + payment – opening accrual

= 800 + 8,650 – 900= 8,550

So used oil = $2,050 +8,550 – 2,325= 8,275

A company pays rent quarterly in arrears on 1 January, 1 April, 1 July and 1 October each year. The rent was increased from $22,500 per year to $30,000 per year as from 1 October 20X4.

What rent expense and accrual should be included in the company’s financial statements for the year ended 31 January 20X5?

Answer

	$
February to March 20X4 (5,625 x 2/3)	3,750
April to June	5,625
July to September	5,625
October to December	7,500
January 20X5 (7,500 x 1/3)	2,500
Rent Expense for the year	25,000

Accrual for Rental= 7,500 x 1/3 = 2,500

ABC company receives rent for subletting part of its office block.

Rent, receivable quarterly in advance, is received as follows:

Date of receipt	Period covered	$
1 October 20X3	3 months to 31 December 20X3	15,000
30 December 20X3	3 months to 31 March 20X4	15,000
4 April 20X4	3 months to 30 June 20X4	18,000
1 July 20X4	3 months to 30 September 20X4	18,000
1 October 20X4	3 months to 31 December 20X4	18,000

What figures, based on these receipts, should appear in the company’s financial statements for the year ended 30 November 20X4 ?

Answer

Receipt	$
1 October 20X3 (15,000 x 1/3)	5,000
30 December 20X3	15,000
4 April 20X4	18,000
1 July 20X4	18,000
1 October 20X4 (18,000 x 2/3)	12,000	(6,000 Credit rent in advance)
Credit to statement of profit or loss	68,000

Statement of profit or loss

$68,000 Credit

Statement of financial position

Rent received in advance (Cr) $6,000

ABC Co purchased a patent on 31 December 20X5 for $375,000.

ABC  Co expects to use the patent for eight years, after which it will be valueless. According to IAS 38 Intangible assets, what amount will be amortised in ABC Co’s statement of profit or loss and other comprehensive income for the year ended 31 December 20X6?

Answer

The patent should be amortised over its useful life of 8 years.

(375,000-0) /8 = $46,875

A company purchased an asset on 1 January 20X4 at a cost of $250,000. It is depreciated over 50 years by the straight line method (nil residual value), with a proportionate charge for depreciation in the year of acquisition and the year of disposal. At 31 December 20X5 the asset was re-valued to $300,000. There was no change in the expected useful life of the asset.

The asset was sold on 30 June 20X6 for $298,750.

What profit or loss on disposal of the asset will be reported in the statement of profit or loss of the company for the year ended 31 December 20X6?

Answer

Annual depreciation was initially $250,000/50 years = $5,000.

After revaluation, annual depreciation is $300,000/48 years = $6,250.

	$
Valuation, 1 January 20X6	300,000
Accumulated depreciation to 30 June 20X6 (6/12 x $6,250 )	3,125
Carrying amount at 30 June 20X6	296,875
Sale/disposal price	298,750
Profit on disposal in statement of profit or loss	1,875

Note: The balance on the revaluation surplus at 30 June will be transferred to realised profits (retained profits reserve), but this will not be reported as profit in the statement of profit or loss.

AAA Co purchased a machine with an estimated useful life of 5 years for $34,000 on 30 September 20X3. AAA Co planned to scrap the machine at the end of its useful life and estimated that the scrap value at the purchase date was $4,000. On 1 October 20X6, AAA Co revised the scrap value to $2,000 due to the decreased value of scrap metal.

What is the depreciation charge for the year ended 30 September 20X7?

Answer

Carrying amount at 1.10.X6: 34,000 – ((34,000 – 4,000) × 3/5) = $16,000 Revised depreciation charge:

(Carrying amount – revised residual value)/remaining useful life

= (16,000 – 2,000 )/2 = $7,000

XYZ Co purchased an asset for $25,000 on 1.1.X3. It had an estimated useful life of 5 years and it was depreciated using the straight line method. On 1.1.X5 XYZ Co revised the remaining estimated useful life to 4 years.

What is the carrying amount of the asset at 31.12.X5?

Answer

Carrying amount at 1.1.X5 = 25,000 – (25,000 x 2/5) = $15,000

New depreciation charge = Carrying amount/Revised useful life

= $15,000 /4 years = $3,750

Carrying amount at 31.12.X5 = $15,000 – $3,750  = $11,250

A non-current asset (cost $35,000, depreciation $22,000 ) is given in part exchange for a new asset costing $43,000. The agreed trade-in value was $15,000. Which of the following will be included in the statement of profit or loss?

Answer

	$
Carrying amount at disposal (35,000 – 22,000 )	13,000
Trade-in allowance	15,000
Profit on disposal	2,000

ABC Co purchases a motor vehicle on 30 September 20X4 for $3,750 on credit. ABC Co has a policy of depreciating motor vehicles using the reducing balance method at 20% per annum, pro rata in the years of purchase and sale.

What are the correct ledger entries to record the purchase of the vehicle at 30 September 20X4 and what is the depreciation charge for the year ended 31 December 20X4?

Answer

To record the purchase of the asset:

Dr. Non-current assets – cost	$3,750
Cr. Payables	$3,750

Depreciation charge is 3,750 x 20% x 3/12 = $187.5

Jon is entering an invoice for a new item of equipment in the accounts. The invoice shows the following costs:

Water treatment equipment	$20,000
Delivery	$650
Maintenance charge	$2,090
Sales tax	$4,027
Invoice total	$26,767

Jon is registered for sales tax. What is the total value of capital expenditure on the invoice?

Answer

Water treatment equipment	$20,000
Delivery	$650
	$20,650

At 31 December 20X5 ABC, a limited liability company, owned a building that had cost $200,000 on 1 January 20W6.

It was being depreciated at 5% per year.

On 31 December 20X5 a revaluation to $250,000 was recognized. At this date the building had a remaining useful life of 10 years.

What is the balance on the revaluation surplus at 31 December 20X5 and the depreciation charge in the statement of profit or loss for the year ended 31 December 20X6 ?

Answer

Revaluation surplus = fair value – carrying amount

Revaluation surplus = (250,000 – (200,000 – (200,000 x 5% x 10)) = $150,000.

Depreciation charge = (250,000/10) = $25,000

XYZ Co acquired a lorry on 1 April 20X3 at a cost of $7,500. The lorry has an estimated useful life of four years, and an estimated resale value at the end of that time of $1,500. XYZ Co charges depreciation on the straight line basis, with a proportionate charge in the period of acquisition.

What will the depreciation charge for the lorry be in XYZ Co ‘s accounting period to 31 August 20X3?

Answer

Depreciation charge =

[($7,500 – $1,500)/4 years] x (5 months /12 months) = $625

Y purchased some plant on 1 January 20X2 for $9,500. The payment for the plant was correctly entered in the cash book but was entered on the debit side of the plant repairs account.

Y charges depreciation on the straight line basis at 20% per year, with a proportionate charge in the years of acquisition and disposal, and assuming no scrap value at the end of the life of the asset.

How will Y’s profit for the year ended 30 April 20X2 be affected by the error?

Answer

		$
DEBIT	Property, plant and equipment	$9,500
CREDIT	Plant repairs	$9,500
DEBIT	Depreciation expense	$633*
CREDIT	Accumulated depreciation	$633

Profit is understated by $9,500 – $633 = $8,867

*9,500 x 20% x 4/12= $633

The carrying amount of a company’s non-current assets was $50,000 at 1 August 20X4. During the year ended 31 July 20X5, the company sold non-current assets for $6,250 on which it made a loss of $1,250. The depreciation charge for the year was $5,000. What was the carrying amount of non-current assets at 31 July 20X5?

Answer

Gain(loss) on disposal = proceeds – carrying amount of disposal

Carrying amount of disposal = proceeds – gain(loss)

	$	$
Carrying amount at 1st August 20X4		50,000
Less depreciation		(5,000)
Proceeds	6,250
Loss	1,250
carrying amount of disposal		(7,500)
Therefore carrying amount		37,500

A car was purchased by a newsagent business in June 20X3 for:

	$
Cost	40,000
Road tax	600
Total	40,600

The business adopts a date of 31 December as its year end.

The car was traded in for a replacement vehicle in April 20X6 at an agreed value of $20,000.

It has been depreciated at 25% per annum on the reducing balance method, charging a full year’s depreciation in the year of purchase and none in the year of sale.

What was the profit or loss on disposal of the vehicle during the year ended December 20X6?

Answer

	$
Cost	40,000
20X3 Depreciation	(10,000)
	30,000
20X4 Depreciation	(7,500)
	22,500
20X5 Depreciation	(5,625)
	16,875
20X6 Part exchange	20,000
Profit	3,125

W bought a new printing machine. The cost of the machine was $120,000 . The installation costs were $7,500  and the employees received training on how to use the machine, at a cost of $1,000. Before using the machine to print customers’ orders, a test was undertaken and the paper and ink cost $1,500.

What should be the cost of the machine in the company’s statement of financial position?

Answer

	$
Cost of machine	120,000
Installation	7,500
Testing	1,500
	129,000

A manufacturing company receives an invoice on 30 April 20X5 for work done on one of its machines. $6,375 of the cost is actually for a machine upgrade, which will improve efficiency. The accounts department do not notice and charge the whole amount to maintenance costs. Machinery is depreciated at 20% per annum on a straight-line basis, with a proportional charge in the years of acquisition and disposal. By what amount will the profit for the year to 31 December 20X5 be understated?

Answer

The profit will be understated

= cost less 8 months depreciation = 6,375 –  6,375 x 20% x 8/12

= 6,375 -850= $5,525

A business purchased a motor car on 1 July 20X6 for $5,000. It is to be depreciated at 10 per cent per year on the straight line basis, assuming a residual value at the end of ten years of $1,000, with a proportionate depreciation charge in the years of purchase and disposal.

The $5,000 cost was correctly entered in the cash book but posted to the debit of the motor vehicles repairs account.

How will the business profit for the year ended 31 December 20X6 be affected by the error?

Answer

	$
Repairs cost overstated	5,000
Depreciation understated ((5,000 – 1,000) x 10% x 6/12)	(200)
Profit understated	4,800

A company bought a property four years ago on 1 January for $42,500. Since then property prices have risen substantially and the property has been revalued at $52,500.

The property was estimated as having a useful life of 20 years when it was purchased.

What is the balance on the revaluation surplus reported in the statement of financial position?

Answer

	$
Valuation	52,500
Carrying amount (42,500 x 16/20)	(34,000)
Revaluation surplus	18,500

An asset register showed a carrying amount of $16,865. A non-current asset costing $3,750 had been sold for $1,000, making a loss on disposal of $313. No entries had been made in the asset register for this disposal.

What is the correct balance on the asset register?

Answer

Gain (loss) on disposal = proceeds – carrying amount of disposal

Carrying amount of disposal = proceeds – gain(loss)

	$
Balance b/d	16,865
Less: Carrying amount of non-current asset sold (1,000 + 313)	1,313
	15,552

A firm has the following transactions with its product R.

1 January 20X3	Opening inventory: nil
10 February 20X3	Buys 15 units at $145 per unit
12 February 20X3	Buys 17 units at $120 per unit
9 April 20X3	Sells 13 units at $195 per unit
13 August 20X3	Buys 11 units at $95 per unit
15 December 20X3	Sells 17 units at $195 per unit

The firm uses periodic weighted average cost (AVCO) to value its inventory. What is the inventory value at the end of the year?

Answer

Price per unit under periodic weighted average cost

= Total cost /(opening quantity + total quantity received)

= ($0+$145 x 15 + $120 x 17 + $95 x 11)/(0+15+17+11)

= $122.33 per unit.

Valuation of closing inventory of 13 units

= (0+15+17+11–13–17) x $122.33 = 13 x $122.33

= $1,590.29

 

The inventory value for the financial statements of ABC Co for the year ended 31 December 20X7 was based on an inventory count on 9 January 20X8, which gave a total inventory value of $209,050.

Between 31 December and 9 January 20X8, the following transactions took place:

	$
Purchases of goods	2,150
Sales of goods (profit margin 25% on sales)	3,500
Goods returned by ABC Co to supplier	175

What adjusted figure should be included in the financial statements for inventories at 31 December 20X7?

Answer

	$
Inventory count value	209,050
Less: purchases	(2,150)
Add: sales (3,500 x 75/100)	2,625
Add: goods returned	175
Inventory figure	9,700

 

The closing inventory of A amounted to $29,100 excluding the following two inventory lines:

1. 450 items which had cost $3 each. All were sold after the reporting period for $2 each, with selling expenses of $110 for the batch.
2. 250 different items which had cost $25 each. These items were found to be defective at the end of the reporting period. Rectification work after the statement of financial position amounted to $500, after which they were sold for $30 each, with selling expenses totaling $120.

Which of the following total figures should appear in the statement of financial position of A for inventory?

Answer

Inventories are measured at the lower of cost and net realisable value (NRV).

Net realisable value = estimated selling price in the ordinary course of business – the estimated costs of completion – the estimated costs necessary to make the sale

	29,100
	$
Line 1:	790
Line 2:	6,250
	36,140

Note

Line 1

Cost = 450 x 3= 1,350

NRV =450 x $2– $110 = 790 (lower)

Line 2

Cost = 250 x 25= 6,250 (lower)

NRV =250 x $30– $120 – $500 = 6,880

An inventory record card shows the following details.

April    1.  40 units in stock at a cost of $20 per unit

6.   90 units purchased at a cost of $35 per unit

15.   50 units sold

22.   80 units purchased at a cost of $30 per unit

27.   75 units sold

What is the value of inventory at 30 April using the FIFO method?

Answer

Total purchase and beginning inventory in unit

= 40 +90+80 =210 units

Total sale in unit =50 + 75 = 125 units

Closing inventory in unit = 210-125= 85 units

Closing inventory in US$ = 2,575 (5 units @$35 and 80 units @$30)

XYZ Co sells three products – A, B and C. The following information was available at the year end.

	A	B	C
	$ per unit	$ per unit	$ per unit
Original cost	10	13	9
Estimated selling price	13	15	19
Selling and distribution costs	5	8	9
	units	units	units
Units of inventory	200	150	300
What is the value of inventory at the year end?

Answer

Inventories are measured at the lower of cost and net realisable value (NRV).

Net realisable value = estimated selling price in the ordinary course of business – the estimated costs of completion – the estimated costs necessary to make the sale

	Cost	Net realizable value	Lower of cost & NRV	Units	Value
	$	$	$		$
A	10	8	8	200	1,600
B	13	7	7	150	1,050
C	9	10	9	300	2,700
value of inventory at the year end					5,350

You are preparing the financial statements for a business. The cost of the items in closing inventory is $10,469. This includes some items which cost $490 and which were damaged in transit. You have estimated that it will cost $90 to repair the items, and they can then be sold for $300.

What is the correct inventory valuation for inclusion in the financial statements?

Answer

Inventories are measured at the lower of cost and net realisable value (NRV).

Net realisable value = estimated selling price in the ordinary course of business – the estimated costs of completion – the estimated costs necessary to make the sale

  $

Original inventory valuation  ……..10,469 

Cost of damaged items   …………..(490)

NRV of damaged items (300 – 90)   210  

Correct inventory valuation     10,189 

The financial year of XYZ Co ended on 31 December 20X2. An inventory count on January 10 20X3 gave a total inventory value of $131,825.

The following transactions occurred between January 1 and January 10.

    $

Purchases of goods    1,975 

Sales of goods (gross profit margin 30% on sales)    3,750

Goods returned to a supplier    200

What inventory value should be included in XYZ Co’s financial statements at 31 December 20X2?

Answer

    $

Inventory count, 10 January 20X3 …………………….131,825 

Purchases since end of year …………………………….(1,975)

Cost of sales since end of year (3,750 x 70%) …….. 2,625

Purchase returns since end of year …………………….  200     

Inventory at 31 December 20X2…………………… 132,675

A company with an accounting date of 31 October carried out a physical check of inventory on 4 November 20X2, leading to an inventory value at cost at this date of $241,850.

Between 1 November 20X2 and 4 November 20X2 the following transactions took place:

1Goods costing $19,200 were received from suppliers.

2Goods that had cost $7,400 were sold for $10,000.

3A customer returned, in good condition, some goods which had been sold to him in October for $300 and which had cost $200.

4The company returned goods that had cost $900 in October to the supplier, and received a credit note for them.

What figure should appear in the company’s financial statements at 31 October 20X2 for closing inventory, based on this information?

Answer

  $

Inventory check balance ……………. 241,850

Less: goods from suppliers ………..(19,200)

Add: goods sold …………………………7,400

Less: goods returned ………………….(200)

Add: goods returned to supplier ….900

Closing Inventory  ……………………230,750 

A company values its inventory using the first in, first out (FIFO) method. At 1 May 20X5 the company had 1,200 engines in inventory, valued at $280 each.

During the year ended 30 April 20X6 the following transactions took place:

20X5

10 July   : Purchased 180 engines at $230 each

12 November :  Sold 500 engines for $320,000

20X6

13 February :  Purchased 220 engines at $300 each

14 April :   Sold 650 engines for $250,000

What is the value of the company’s closing inventory of engines at 30 April 20X6?

Answer

Total purchase and beginning inventory in unit

= 1,200 +180+ 220 =1,600 units

Total sale in unit =500 + 650 = 1,150 units

Closing inventory in unit = 1,600-1,150= 450 units

Closing inventory in US$ = ?

  $

50 @ $280  :  14,000 

180 @ $230:    41,400

220 @ $300 :    66,000

 Total…………121,400

The inventory value for the financial statements of ABC Co for the year ended 31 May 20X6 was based on a inventory count on 6 June 20X6, which gave a total inventory value of $190,000.

Between 31 May and 6 June 20X6, the following transactions took place.

  $

Purchase of goods   2,350

Sale of goods (mark up on cost at 15%)   2,990 

Goods returned by ABC Co to supplier    300 

What figure should be included in the financial statements for inventories at 31 May 20X6 ?

Answer Ending Inventory = 190,000 – 2,350 + 300 + (2,990 x 100/115) = $190,550

Sales (including sales tax) amounted to $6,903, and purchases (excluding sales tax) amounted to $ 4,500. What is the balance on the sales tax account, assuming all items are subject to sales tax at 14.5%?

Answer

Output sales tax 6,903 x 14.5 /114.5 = $874.18

Input sales tax 4,500 x 14.5% = $652.50

Balance on sales tax a/c (credit) = 874.18 – 652.50 = 221.68

A business commenced with capital in cash of $ 3,000. Inventory costing $2,400  plus sales tax is purchased on credit, and half is sold for $3,000 plus sales tax, the customer paying in cash at once. The sales tax rate is 10%.

What would the accounting equation after these transactions show?

Answer

  $

Assets

Opening cash ………………………………3,000

Cash received $(3,000 + 300 sales tax)…3,300

Closing cash………………………………6,300

Inventory $(2,400 – 1,200) …………….1,200

Total Assets…………………………….7,500  

Liabilities

Opening liabilities   –

Sales tax payable $(300 – 240)……………60

Trade payable $(2,400 + 240 sales tax)…2,640

Closing liabilities ……………………….2,700

Capital

Opening capital……………………………….3,000

Profit on sale of inventory $(3,000 – 1,200)..1,800

Closing capital………………………………4,800

At 31 December 20X5 XYZ’s trial balance included the following balances:

     $

Machinery at cost   …………………6,450 

Accumulated depreciation ………….4,480 

Inventory ……………………………2,882 

Trade receivables …………………..5,878 

Trade payables ……………………….3,920 

Bank overdraft …………………………843 

Cash at bank ………………… ………….80 

What is the value of XYZ’s current assets at 31 December 20X5?

Answer

Inventory………………………2,882

Trade receivables………………5,878

Cash at bank…………………….. 80 

 Total Current Asset……………8,840 

ABC Company has extracted the following list of balances from general ledger

at 31 July 20X9:

       $

Sales   64,636

Opening inventory   2,413

Purchases   35,740

Expenses   8,710

Non-current assets (carrying amount)   15,991

Receivables   7,937

Payables   3,467

Cash at bank   447

Capital   3,132

What is the total of the debit balances in ABC’s trial balance at 31 July 20X9?

Answer

The debits are as follows:

     $

Opening inventory      ………………2,413 

Purchases   ……………………………35,740  

Expenses   …………………… …….. 8,710 

Non-current assets  …………… 15,991

Receivables ………………………..7,937 

Cash at bank    ……………………   447 

Total Debit Balances ………… 71,238

The following totals appear in the day books for June 20X6.

  $

Sales day book   10,000

Purchases day book   5,000

Returns inwards day book   500

Returns outward day book   1,000

Opening and closing inventories are both $ 750.

What is the gross profit for June 20X6?

Answer

$   $

Sales   ………………………………………10,000

Returns inwards   ………………………(500)

Net sale…………………………………………………..9,500

Opening inventory  …………………. 750

Purchases ………………………………  5,000

Returns outwards  ……………….. (1,000)

Closing inventory  ………………… (750)

 Cost of sale……………………………………… (4,000)

Gross profit………………………………………   5,500

You are given the following information:

Receivables at 1 January 20X7   $ 30,000 

Receivables at 31 December 20X7      $ 15,000 

Total receipts during 20X7 (including cash sales of $ 10,000 )   $ 90,000 

What are sales on credit during 20X7?

Answer

Step 1:

Closing Account Receivable = opening AR + total sale – cash received

So, Total sale = closing AR – opening AR + cash received = 15,000-30,000+90,000=75,000

Step 2:

Total sale = cash sale + credit sale

So, Credit sale = total sale – cash sale = 75,000-10,000=65,000

Credit sales =$65,000

The net assets of David, a trader, at 1 January 20X4 amounted to $16,000. During the year to 31 December 20X4 David introduced a further $6,250 of capital and made drawings of $6,000. At 31 December 20X4 David’s net assets totaled $23,000.

What is David’s total profit or loss for the year ended 31 December 20X4?

Answer

Closing Capital  = opening capital + profit(loss) + Additional Capital – drawing

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

Profit(loss)= 23,000-16,000-6,250+6,000 = $6,750