Solutions Manual Students Ed72011

7/27/2019 Solutions Manual Students Ed72011

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[Solutions Student Manual]

Introduction

Contents

Preface01 Entities and financial reporting statements xxx02 International financial reporting: institutional framework and standards xxx03 History and purpose of the conceptual framework xxx04 The nature and objectives of financial reporting xxx

05 Accounting principles, concepts and policies xxx06 The qualitative characteristics of financial information xxx07 Auditing, corporate governance and ethics xxx

08 The accounting equation and its components xxx09 Basic documentation and books of account xxx10 Double entry and the general ledger xxx11 The balancing of accounts and the trial balance xxx12 Day books and the journal xxx13 The cash book xxx14 The petty cash book xxx15 The final financial statements of sole traders (introductory) xxx16 Depreciation and non-current assets xxx17 Bad debts and provisions for bad debts xxx18 Accruals and prepayments xxx

19 The preparation of final financial statements fromthe trial balance (advanced) xxx20 The bank reconciliation statement xxx21 Control accounts xxx22 Errors and suspense accounts xxx23 Single entry and incomplete records xxx24 Inventory valuation xxx25 Financial statements for manufacturing entities xxx26 The final financial statements of clubs xxx27 The final financial statements of partnerships xxx28 Changes in partnerships xxx

29 Partnership dissolution and conversion to a limited company xxx30 The nature of limited companies and their capital xxx31 The final financial statements of limited companies xxx32 Statement of cash flows xxx33 The appraisal of company financial statements using ratios xxx

McGraw-Hill 2011 An Introduction to Financial Accounting 7e by Thomas andWard


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Preface

This student manual contains suggested answers to those exercises with an

asterisk after the question number. In the main these comprise some of thenumerical exercises that were written by the author, and some of those of theexamining bodies. All the short written review questions are designed so thatthey can be answered directly from the relevant section of the chapter,though a brief solution is provided for ease of reference (more detail istypically expected in student answers).

This student manual is intended to enable the student to monitor theprogress of his or her learning. It will be most effective if you first attempteach question without referring to the answer. When you have finished, ordone as much as you are able, then check your answer against thesuggested solution. Students are also strongly advised to record the time it

takes them to answer each question. Most questions carry around 2025marks, which means that the time allowed to answer them in a three-hourexamination is about 3645 minutes. If you take considerably longer thanthis, then you should attempt the question again at a later date (for revision)to see whether you can answer it more quickly. When you can answer mostof the questions in the recommended time, you should be sufficientlyprepared for the examination!

1. Entities and Financial Reporting McGraw-Hill 2011 An Introduction to Financial Accounting 7e by Thomas andWard


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Statements

1.4 Knowledge of items in the financial reporting Statements

Statement Classification

a Statement of financial position Non-current asset

b Statement of profit and loss Revenue expense

c Statement of profit and loss Revenue expense

d Statement of financial position Current liability

e Statement of financial position Current asset



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2. International Financial Reporting:Institutional Framework and Standards

2.1 Objectives of the IASB

Under the IFRS Foundation Constitution the objectives of the IASB are:

(a) to develop, in the public interest, a single set of high quality,understandable and enforceable global accounting standards thatrequire high quality, transparent and comparable information infinancial statements and other financial reporting to help participants inthe world's capital markets and other users make economic decisions;

(b) to promote the use and rigorous application of those standards;

(c) in fulfilling the objectives associated with (a) and (b), to take accountof, as appropriate, the special needs of small and medium-sizedentities and emerging economies; and

(d) to bring about convergence of national accounting standards andInternational Accounting Standards and International FinancialReporting Standards to high quality solutions.



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3. History and Purpose of the ConceptualFramework of Accounting

3.1 Definitions of the conceptual framework

According to the ASB website an accounting standard-setter's conceptualframework or statement of principles describes the accounting model that ituses as the conceptual underpinning for its work. Such statements thereforetypically describe the standard-setter's views on:

the activities that should be reported on in financial statements

the aspects of those activities that should be highlighted

the attributes that information needs to have if it is to be included inthe financial statements

how information should be presented in those financial statements

The FASB (1976) (US standard setters) in its Scope and Implications of theConceptual Framework Projectdescribes a conceptual framework ofaccounting as a constitution, a coherent system of interrelated objectives andfundamentals that can lead to consistent standards and that prescribe thenature, function and limits of financial accounting and financial statements.



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4. The Nature and Objectives of FinancialReporting (including CSR, Environmental

Accounting and Accountability)

4.2 Explanation of terms

Internal control - A system of internal checks, and control procedures that aredesigned to ensure that assets are not misappropriated and liabilities arecomplete.

Internal check Procedures, tests and controls in place to ensure thattransactions are correct and are being processed correctly.Stewardship - The accountability of an enterprises management for theresources entrusted to them.

Accountability - Managements responsibility to provide an account/report onthe way in which the resources entrusted to them have been used.



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5. Accounting Principles, Concepts andPolicies

5.1 Concept governing drawings

The relevant concept is the entity concept. This concept assumes that thefinancial statements represent all the transaction of the business entity only,which is not considered to be separate in law (unincorporated entities),however, in accounting is. Therefore, any expenditure by the owner forhis/her own personal needs or wants is not to be included, so must beremoved from the financial statements through the drawings account.

5.3 Definition of the elements

a. AssetsResources controlled by an entity as a result of past events and from whichfuture economic benefits are expected to flow to the entity.

b. LiabilitiesPresent obligations of an entity arising from past events, the settlement ofwhich is expected to result in an outflow from the entity of resourcesembodying economic benefits

c. Ownership interestThe residual interest in the assets of the entity after deducting all itsliabilities

d. IncomeIncreases in economic benefits during the accounting period in the form ofinflows or enhancements of assets or decreases of liabilities that result inincreases in equity, other than those relating to contributions from equityparticipants (owners).

e. ExpenditureDecreases in economic benefits during the accounting period in the form ofoutflows or depletions of assets or incurrences of liabilities that result indecreases in equity, other than those relating to distributions to equityparticipants (owners).

Framework (IASC, 1989)



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5.15 (solution brief points which should be referred to)

The first point relates to the realisation concept and the prudence concept.

Profits should not be anticipated but losses should. Though this used to be

one of the fundamental concepts of accounting, it has been downgraded dueto the abuse of the prudence concept by preparers, wherein it was used forearnings manipulation (smoothing). In January 2009 IAS 1 Preparation andPresentation of Financial Information (IASB, 2009) introduced thecomprehensive income statement, which basically requires that holding gains(such as gains on the value of investments) are shown under othercomprehensive income. This can either be shown as part of a singlecomprehensive income statement which shows the profit or loss for the year(as normal) from realised transactions and impairments and a second partwhich deals with holding gains made. Alternatively, the holding gains(unrealized profits) can be shown in a separate statement to the income

statement called the Comprehensive income statement.

Therefore, though not treated as realised, holding gains are not provided forthe user as the information is deemed to be relevant for economic decision-making.

The prudence concept, though downgraded, is still important andimpairments in value will always be realised in the income statement.

Advertising - IAS 38 intangible assets does not allow advertising to becapitalised as development expenditure. Though it is assumed to generate

future revenues it is an example of an internally generated intangible asset which cannot be capitalised.

The main reasoning for disallowing the treatment is uncertainty as to whetherthe expenditure qualifies as the element asset and uncertainty as to themeasurement of to value to include in the financial statements. Advertisingcreates brands which do not have an active readily available market todetermine market value, they are bespoke and no two brands are the same.Cost may not provide an appropriate measurement basis. The potentialrevenue generation may be questionable. Therefore reliability takesprecedence over relevance in this instance.



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6. The Qualitative Characteristics ofFinancial Information

6.8 Definition of terms

Off-Balance sheet finance - Method of getting access to resources (assets)without having the associated commitment to pay for the asset recorded inthe statement of financial position.

Substance over form - Information that represents faithfully the transactionsand other events it either purports to represent or could reasonably beexpected to represent. The economic substance of the transaction isconsidered over its legal form.

Threshold quality - Materiality is the threshold quality wherein only materialinformation is relevant and therefore only material information should beincluded in an entitys financial statements.



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7. Auditing, Corporate Governance andEthics

7.9 The ethical dilemma suggested by your father

The suggestion put forward by your father (assuming no country risk) willmore than likely increase the profitability of the company in these hard times.However, the board of directors should consider the ethical consequences.Ethical practices can restrict the extent to which a company can achieve itsprimary objective. In the global economy in which we operate, there is muchto be made by companies who have products that can be made in countriesthat have no employment laws. Profits and company value will theoreticallyincrease if a company is able to access cheap labour, or even child labour,for next to nothing. In these circumstances, companies justify their actions byarguing that some income to a family is better than none; or by highlightingthe fact that, though the salaries paid are low, they are higher than those paidby indigenous companies. Many companies also use some of the profitsmade for social purposes in the communities that they are located in by, forexample, building schools, building churches, building hospitals, or gettingrunning water. These are all deemed to be signs of these companies actingethically. However, this does not get away from the fact that the localpopulation is being abused for financial gain. Whether the board feels thatthe financial gain is worth the drop in ethical standards is a matter fordiscussion. Given that this company is a UK company, I would suggest thatthis action is not consistent with how he should be running a company. Inaddition, the consequences of this action becoming public might be great.There is likely to be an adverse reaction from trade unions, the public andfrom the government.

The use of bribery or corruption may be seen as part and parcel of normaltrade within certain countries. In a global economy when there is muchpressure to perform, unethical approaches (such as bribery) might beconsidered to be fair game when attempting to achieve the companysprimary objectives. However, unethical behaviour cannot be defended on thegrounds of it being normal practice in a country, nor can it be defended by theargument if I did not do it, someone else would, or we would lose thebusiness to a competitor, who does it. Taking bribes is not considered to beappropriate in the UK and is not appropriate behaviour for UK companies.Were the use of bribery to become public, the company might be subject topublic attention and enquiry.

All in all these unethical actions may end up with the company in a worsefinancial state. However, on a positive note looking globally to obtain cheaperrunning costs and labour is an option that he should look into, however, childlabour and bribery should not form part of any investment package.



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8. The Accounting Equation and itsComponents

8.1 Relevance of the Entity concept in Accounting

A reporting entity is defined in the Statement of Principles for FinancialReporting(ASB, 1999) as an entity for which there are users who rely on thefinancial statements as their major source of financial information about theentity. Accounting for a reporting entity focuses on setting up a means ofrecording all accounting information in relation to that entity, as distinct frominformation that does not relate to the entity. The use of the word entityemphasizes the properties of being separate and discrete. Boundaries arecreated to separate out the accounting entity. Realizing that theseboundaries are necessary, even though they may be artificial, is the key tothe entity concept. It becomes possible, for example, to accept that abusiness may be separate from its sole proprietor.

By defining the boundaries of the organizational unit, the accounting entityconcept determines the transactions that will be recorded in the financialstatements. For example, when a local plumber buys tools to carry out hiswork, that action can be regarded as a purchase by the business, while whenthe same man buys a cinema ticket this would be seen as a personalpurchase. In the same way, the salary paid to a company director is treatednot as some internal transfer within a company but as a payment to an officeras a separate individual. In general, accounting sets up the business, thecompany and the club as entities that are artificial constructs, separate fromtheir owners and employees as individuals.



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8.7J. Frank

Statement of financial position as at 1 January 20X3

ASSETS

Non-current assets

Land and buildings 7,500

Fixtures 560

8.060

Current assets

Bank 1,740

Total assets 9,800

EQUITY AND LIABILITIES

Equity

Owners capital (to balance) 5,800

Total equity 5,800

Non-current liabilities

Mortgage 4,000

Total non-current liabilities 4,000

Total equity and liabilities 9,800

J. FrankStatement of financial position as at 31 December 20X3

ASSETS

Non-current assets

Land and buildings 7,500

Fixtures 560

Delivery van 650

8.710

Current assetsInventory 940

Sundry receivables 470

Bank 1,050

Cash 80

2,540

Total assets 11,250




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Equity

Owners capital (to balance) 5,450

Total equity 5,450

Non-current liabilities

Mortgage 5,000

5,000

Current liabilities

Sundry payables 800

800

Total equity and liabilities 11,250

J. FrankDetermining income for the year ended 31 December20X3

Capital at 31 Dec 5,450Less :Capital at 1 Jan 5,800Apparent loss (350)Add: Drawings 500Profit for the year 150



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9. Basic Documentation and Books ofAccount

9.10 Making a cheque safe

The cheque should be crossed and the words Account payee only writtenbetween the crossing lines.



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10. Double Entry and the General Ledger

10.3 H. George

Cash20X2 20X2 1 Oct Capital 5,000 1 Oct Rent 200 6 Oct S. Ring 3,500 2 Oct Purchases 97012 Oct Sales

revenue1,810 4 Oct Fixtures and fittings 1,250

24 Oct Salesrevenue

1,320 9 Oct Motor vehicles 2,650

15 Oct Wages 15018 Oct Purchases 630

19 Oct Drawings 35021 Oct Motor expenses 2522 Oct Printing 6525 Oct Motor expenses 4527 Oct Wages 25028 Oct Stationery 3530 Oct Rates 40031 Oct Drawings 17531 Oct Balance c/d 4,435

11,630 11,6301 Nov Balance b/d 4,435

Capital1 Oct Cash 5,000

Loan S. Ring6 Oct Cash 3,500

Sales revenue12 Oct Cash 1,81024 Oct Cash 1,320

Rent and rates1 Oct Cash 20030 Oct Cash 400

Purchases2 Oct Cash 97018 Oct Cash 630

Fixtures and fittings4 Oct Cash 1,250

Motor vehicles



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9 Oct Cash 2,650

Wages15 Oct Cash 15027 Oct Cash 250

Drawings19 Oct Cash 35031 Oct Cash 175

Motor expenses21 Oct Cash 2525 Oct Cash 45

Printing and stationery22 Oct Cash 65

28 Oct Cash 35

10.4 L. JohnsonBank

20X3 20X3 1 Mar Capital 10,000 1 Mar Leasehold premises 5,00018 Mar Sales

revenue540 2 Mar Office equipment 1,400

28 Mar G. Lion 280 6 Mar Postage 35

9 Mar Purchases 42013 Mar Drawings 25020 Mar Telephone 12024 Mar Light and heat 6526 Mar E. Lamb 23030 Mar Light and heat 8531 Mar Bank charges 4531 Mar Balance c/d 3,170

10,820 10,8201 Apr Balance b/d 3,170

Capital1 Mar Bank 10,000

Sales revenue11 Mar G. Lion 88018 Mar Bank 540

G. Lion11 Mar Sales 880 22 Mar Sales returns 310

28 Mar Bank 280



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Sales returns22 Mar G. Lion 310

Leasehold premises 1 Mar Bank 5,000

Office equipment 2 Mar Bank 1,400

Postage and telephone 6 Mar Bank 3520 Mar Bank 120

Purchases 4 Mar E. Lamb 630 9 Mar Bank 420

E. Lamb16 Mar Purchases 4 Mar Purchases 630

returns 18026 Mar Bank 230

Purchases returns16 Mar E. Lamb 180

Drawings13 Mar Bank 250

Light and heat24 Mar Bank 6530 Mar Bank 85

Bank charges31 Mar Bank 45



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11. The Balancing of Accounts and theTrial Balance

11.2 S. BakerCash account

20X3 Details 20X3 Details 1 Jan Capital 1,000 1 Jan Rent 100 1 Jan Loan London 500 2 Jan Fixtures and 300

Bank Ltd fittings31 Jan Sales revenue 600 8 Jan Purchases 400

9 Jan Carriage inwards 2510 Jan Stationery 50

15 Jan Wages 20020 Jan Drawings 15031 Jan Balance c/d 875

2,100 2,100 1 Feb Balance b/d 875

Capital introduced account20X3 Details 20X3 Details 31 Jan Capital account 1,000 1 Jan Cash 1,000

1,000 1,000

Loan London Bank account20X3 Details 20X3 Details 31 Jan Balance c/d 500 1 Jan Cash 500

500 500500 1 Feb Balance b/d 500

Sales revenue account20X3 Details 20X3 Details

31 Jan Income 600 31 Jan Cash 600statement a/c600 600

Rent account20X3 Details 20X3 Details 1 Jan Cash 100 31 Jan Income 100

statement a/c100 100

Fixtures and fittings account



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20X3 Details 20X3 Details 2 Jan Cash 300 31 Jan Balance c/d 300

300 300 1 Feb Balance c/d 300

Purchases account20X3 Details 20X3 Details 8 Jan Cash 400 31 Jan Income 400

statement a/c400 400

Carriage inwards account20X3 Details 20X3 Details 9 Jan Cash 25 31 Jan Income 25

statement a/c

25 25

Stationery account20X3 Details 20X3 Details 10 Jan Cash 50 31 Jan Income 50

statement a/c50 50

Wages account20X3 Details 20X3 Details

15 Jan Cash 200 31 Jan Income 200statement a/c

200 200

Drawings account20X3 Details 20X3 Details 20 Jan Cash 150 31 Jan Capital a/c 150

150 150



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11.3 S. Baker Trial balance as at 31 January 20X3

Debit Credit

Cash 875Capital 1,000Loan London Bank 500Sales revenue 600Rent 100Fixtures and fittings 300Purchases 400Carriage inwards 25Stationery 50Wages 200

Drawings 1502,100 2,100

11.4 H. George (Q10.3)

Cash a/c20X2 20X21 Oct Capital 5,000 1 Oct Rent 2006 Oct S. Ring 3,500 2 Oct Purchases 970

12 Oct Sales revenue 1,810 4 Oct Fixtures & fittings 1,25024 Oct Sales revenue 1,320 9 Oct Motor vehicles 2,650

15 Oct Wages 15018 Oct Purchases 63019 Oct Drawings 35021 Oct Motor expenses 2522 Oct Printing 6525 Oct Motor expenses 4527 Oct Wages 25028 Oct Stationery 3530 Oct Rates 400

31 Oct Drawings 17531 Oct Balance c/d 4,435

11,630 11,630

1 Nov Balance b/d 4,435

Capital introduced a/c31 Oct Capital a/c 5,000 1 Oct Cash 5,000

5,000 5,000

LoanS. Ring a/c31 Oct Balance c/d 3,500 6 Oct Cash 3,500



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3,500 3,500


Sales Revenue a/c12 Oct Cash 1,810

31 Oct P/L a/c 3,130 24 Oct Cash 1,3203,130 3,130

Rent & rates a/c1 Oct Cash 20030 Oct Cash 400 31 Oct P/L a/c 600

600 600

Purchases a/c2 Oct Cash 97018 Oct Cash 630 31 Oct P/L a/c 1,600

1,600 1,600

Fixtures & fittings a/c4 Oct Cash 1,250 31 Oct Balance c/d 1,250

1,250 1,250


Motor vehicles a/c9 Oct Cash 2,650 31 Oct Balance c/d 2,650

2,650 2,650


Wages a/c15 Oct Cash 15027 Oct Cash 250 31 Oct P/L a/c 400

400 400

Drawings a/c19 Oct Cash 35031 Oct Cash 175 31 Oct Capital a/c 525

525 525

Motor expenses a/c21 Oct Cash 2525 Oct Cash 45 31 Oct P/L a/c 70

70 70

Printing & stationery a/c

22 Oct Cash 65



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28 Oct Cash 35 31 Oct P/L a/c 100 100 100

H. GeorgeTrial balance as at 31 October 20X2

Debit Credit

Cash 4,435Capital 5,000Loan S. Ring 3,500Sales revenue 3,130Rent & rates 600Purchases 1,600

Fixtures & fittings 1,250Motor vehicles 2,650Wages 400Drawings 525Motor expenses 70Printing & stationery 100

11,630 11,630



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11.5 (Q10.4)L. Johnson

Trial balance as at 31 March 20X3

Debit Credit

Bank 3,170Capital 10,000Sales revenue 1,420G. Lion 290Sales returns 310Leasehold premises 5,000Office equipment 1,400Postage and telephone 155

Purchases 1,050E. Lamb 220Purchases returns 180Drawings 250Light and heat 150Bank charges 45

11,820 11,820



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12. Day books and the journal

12.5 Purchases day book

Date Name of supplier Amount 20X3 1 Aug Desks Ltd 750 3 Aug Chairs Ltd 35018 Aug Cabinets Ltd 720

1,820

Purchases returns day book

Date Name of supplier Amount 20X3 10 Aug Desks Ltd 22521 Aug Chairs Ltd 140

365

Sales day book

Date Name of supplier Amount

20X3 6 Aug British Cars Ltd 63013 Aug London Beds Ltd 68023 Aug English Carpets Ltd 1,170

2,480

Sales returns day book

Date Name of supplier Amount

20X3 16 Aug British Cars Ltd 27025 Aug London Beds Ltd 85

355



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The ledger

Purchases20X331 Aug Per PDB 1,820

Purchases returns20X331 Aug Per PRDB 365

Desks Ltd10 Aug Returns 225 1 Aug Purchases 75031 Aug Balance c/d 525

750 7501 Sep Balance b/d 525

Chairs Ltd21 Aug Returns 140 3 Aug Purchases 35031 Aug Balance c/d 210


Cabinets Ltd18 Aug Purchases 720

Sales revenue31 Aug Per SDB 2,480

Sales returns31 Aug Per SRDB 355

British Cars 6 Aug Sales revenue 630 16 Aug Returns 270

31 Aug Balance c/d 360630 630

1 Sep Balance b/d 360

London Beds

13 Aug Sales revenue 680 25 Aug Returns 8531 Aug Balance c/d 595


English Carpets23 Aug Sales revenue 1,170



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12.6 The journal

Date Details account Debit Credit 20X3 20 Apr Plant and machinery Dr 5,300

To Black Ltd Cr 5,300Being purchase ofmachine on credit

23 Apr White Ltd Dr 3,600To Motor vehicles Cr 3,600Being sale of deliveryvehicle on credit

26 Apr Fixtures and fittings Dr 480To Grey Ltd Cr 480Being purchase of shop

fittings on credit28 Apr Yellow Ltd Dr 270

To Office equipment Cr 270Being sale oftypewriter on credit

The ledger

Plant and machinery20X3

20 Apr Black Ltd. 5,300

Black Ltd20X320 Apr Plant and 5,300

machinery

White Ltd23 Apr Motor

vehicles

3,600

Motor vehicles23 Apr White Ltd 3,600

Fixtures and fittings26 Apr Grey Ltd 480

Grey Ltd



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26 Apr Fixtures 480and fittings

Yellow Ltd

28 Apr Officeequipment

270

Office equipment28 Apr Yellow Ltd 270



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12.7 The journal

Date Details account Debit Credit

20X2

1 Aug Premises Dr 55,000Plant and machinery Dr 23,000Inventory Dr 14,600Trade receivables Dr 6,300To Trade payables Cr 2,900To Capital Cr 96,000

98,900 98,900

Being assets andliabilities introducedinto business by

owner from takeoverof L. House

The ledger

Premises20X2 1 Aug Capital 55,000

Plant and machinery

1 Aug Capital 23,000

Inventory1 Aug Capital 14,600

Trade receivables1 Aug Capital 6,300

Trade payables20X21 Aug Capital 2,900

Capital1 Aug Assets and 96 ,000

liabilitiesNote: The trade receivables and trade payables would beentered in their individual personal accounts.



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13. The Cash Book13.3

The cash book

Date Details Memo.discountallowed

Debitamount

Date Details Memo.discountreceived

Creditamount

20X3 20X3 May 1 Balance b/d 3,680 May 7 Purchases 510" 3 Capital 2,000 " 10 Wages 200" 4 Sales 840 " 13 Rent 360" 15 Sales 490 " 18 Fixtures & fittings 2,450" 31 Oak Ltd 30 160 " 20 Light & heat 180" " Pine Ltd 25 485 " 23 Printing & stationery 70" " Lime Ltd 575 " 26 Drawings 250

" 31 Brick Ltd 45 850" " Stone Ltd 20 220" " Slate Ltd 40 480" " Balance c/d 2,660

55 8,230 105 8,230June 1 Balance b/d 2,660

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13.4The ledger

Capital

20X3May 1 Balance b/d 3,680

Capital introducedMay 3 Bank 2,000

May 31 Capital a/c 2,0002,000 2,000

The capital introduced and drawings account are balanced to the capitalaccount, however, for the purpose of preparing the trial balance, forextracting the financial statements, these are all kept separate.

Sales revenueApl 30 Per SDB 1,910May 4 Bank 840

May 31 P/L a/c 3,240 " 15 Bank 490

3,240 3,240

Oak Ltd

20X3May 1 Balance b/d 190 May 31 Bank 160

" " Discountallowed 30

190 190

Pine LtdMay 1 Balance b/d 510 May 31 Bank 485

" " Discountallowed 25

510 510

Lime LtdApl 15 Sales 630 May 31 Bank 575

" " Balance c/d 55630 630

June 1 Balance b/d 55

Discount allowedMay 31 Total per Cash

Book 55May 31 P/L a/c 55

55 55

Purchases



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Apl 30 Per PDB 1,850May 7 Bank 510 May 31 P/L a/c 2,360

2,360 2,360

Brick Ltd

May 31 Bank 850 May 1 Balance b/d 895" " Discount rec'd 45

895 895

Stone Ltd

May 31 Bank 220 May 1 Balance b/d 240" " Discount rec'd 20

240 240

Slate Ltd

May 31 Bank 480 Apl 11 Purchases 520

" "" "

Discount rec'dBalance c/d

4040

May 31 Discountdisallowed 40

560 560

June 1 Balance c/d 40

Discount received

May 31 Slate Ltd -disallowed 40

May 31 Total per Cash Book 105

May 31 P/L a/c 65

105 105

WagesMay 10 Bank 200 May 31 P/L a/c 200

200 200

Rent

May 13 Bank 360 May 31 P/L a/c 360

360 360

Fixtures & fittings

May 18 Bank 2,450 May 31 Balance c/d 2,450

2,450 2,450

June 1 Balance b/d 2,450

Light & heat


180 180

Printing & stationery


70 70

Drawings

May 26 Bank 250 May 31 Capital a/c 250



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250 250

B. JonesTrial balance as at 31 May 20X3

Debit Credit

Bank 2,660Capital 3,680Capital introduced 2,000Sales revenue 3,240Sales returns 580Lime Ltd (trade receivable) 55Discount allowed 55Purchases 2,360Purchases returns 195

Slate Ltd (trade payable) 40Discount received 65Wages 200Rent 360Fixtures & fittings 2,450Light & heat 180Printing & stationery 70Drawings 250

9,220 9,220

ad

Note1. The discount relating to Slate Ltd has been entered in the cash book

and then reversed as discount disallowed because the latter willprobably have occurred at a later date, and to illustrate the entry fordiscount disallowed. This reversal is often shown as a deduction (inred ink) in the discount received column of the cash book. However, ifit was known to have been disallowed on 31 May, as implied in thequestion, the student would be justified in simply not entering thediscount in the cash book in the first place.



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13.5 The cash book

Date Details Memo Bank Cash Date Details Memo Bank Cashdiscoun

t

discoun

treceived received

20X3 20X3 1 Sep Balance b/d 1,950 860 4 Sep Purchases 230 3 Sep Sales revenue 470 6 Sep Light and heat 510 9 Sep Sales revenue 380 10 Sep Wages 25012 Sep Sales revenue 29015 Sep Travelling expenses 4022 Sep Cash 350 16 Sep Rates 41024 Sep Capital 500 19 Sep Drawings 15026 Sep B. Jones loan 1,000 20 Sep Purchases 32027 Sep Purchases

returns

17021 Sep Postage and

telephone

30

29 Sep Bank 18022 Sep Bank 35030 Sep British Cars 10 350 25 Sep Vehicles 2,50030 Sep London Beds 15 580 28 Sep Motor expenses 28030 Sep English Carpets 1,100 29 Sep Cash 180

30 Sep Desks Ltd 25 50030 Sep Chairs Ltd 20 19030 Sep Cabinets Ltd 50030 Sep Balance c/d 1,320 420

25 6,680 1,500 45 6,680 1,500

1 Oct Balance c/d 1,320 420

13.6 The ledger

Capital20X3 1 Sep Balance b/d 2,810

30 Sep Balance c/d 3,310 24 Sep Bank 5003,310 3,310

1 Oct Balance b/d 3,310

Loan B. Jones30 Sep Balance c/d 1,000 26 Sep Bank 1,000

1 Oct Bal b/d 1,000

Sales revenue31 Aug Per SDB 2,4803 Sep Bank 4709 Sep Bank 380

30 Sep P/L a/c 3,620 12 Sep Cash 2903,620 3,620

Sales returns



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20X331 Aug Per SRDB 355 30 Sep P/L a/c 355

British Cars1 Sep Balance b/d 360 30 Sep Bank 350

30 Sep Discount 10allowed

360 360

London Beds1 Sep Balance b/d 595 30 Sep Bank 580

30 Sep Discount 15allowed

595 595

Discount allowed

30 Sep Total per Cash 30 Sep P/L a/c 25Book 25

English Carpets23 Aug Sales 1,170 30 Sep Bank 1,100

30 Sep Balance c/d 701,170 1,170

1 Oct Balance b/d 70

Purchases

31 Aug Per PDB 1,8204 Sep Cash 230

20 Sep Bank 320 30 Sep P/L a/c 2,3702,370 2,370

Purchases returns31 Aug Per PRDB 365

30 Sep P/L a/c 535 27 Sep Cash 170535 535

Desks Ltd30 Sep Bank 500 1 Sep Balance b/d 52530 Sep Discount received 25

525 525

Chairs Ltd30 Sep Bank 190 1 Sep Balance b/d 21030 Sep Discount received 20

210 210

Discount receivedProfit and loss account 45 30 Sep Total per 45



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Cash Book

Cabinets Ltd30 Sep Bank 500 18 Aug Purchases 72030 Sep Balance c/d 220

720 7201 Oct Balance b/d 220

Light and heat6 Sep Bank 510 Profit and loss a/c 510

Wages10 Sep Bank 250 Profit and loss a/c 250

Travelling expenses

15 Sep Cash 40 Profit and loss a/c 40

Rates16 Sep Bank 410 Profit and loss a/c 410

Drawings19 Sep Cash 150 Profit and loss a/c 150

Postage and telephone21 Sep Cash 30 Profit and loss a/c 30

Motor vehicles25 Sep Bank 2,500 30 Sep Bal c/d 2,500**



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B. PlayerTrial balance as at 30 September 20X3

Debit Credit

Cash 420Bank 1,320Capital 3,310Loan B. Jones 1,000Sales revenue 3,620Sales returns 355Discount allowed 25English Carpets 70Purchases 2,370Purchases returns 535Discount received 45

Cabinets Ltd 220Light and heat 510Wages 250Travelling expenses 40Rates 410Drawings 150Postage and telephone 30Motor vehicles 2,500Motor expenses 280

8,730 8,730

Note: Discount taken by trade receivables such as English Carp etc, which is notallowed, is usually simply not entered in the discount allowed column of the cashbooks since the business whose books we are preparing has disallowed thediscount.



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14. The Petty Cash Book

14.3 Petty cash book

Debit Date Details Credit Purchases Wages Motor Travelling Printing Postage Misc.amount amount expenses expenses and and

stationery telephone

20X4 400 1 Feb Balance b/d

1 Feb Purchases 31 313 Feb Wages 28 286 Feb Petrol 9 98 Feb Bus fares 3 311 Feb Pens and pencils 8 812 Feb Casual labour 25 2514 Feb Repairs 17 1716 Feb Paper 15 1519 Feb Purchases 22 2220 Feb Train fares 12 1221 Feb Repairs to

premises35 35

22 Feb Postage 6 623 Feb Drawings 20 2024 Feb Taxi fares 7 725 Feb Envelopes 4 426 Feb Purchases 18 18

27 Feb Wages 30 3028 Feb Petrol 14 14

304 28 Feb Bank 304 71 83 40 22 27 6 5528 Feb Balance c/d 400

704 704400 1 Mar Balance b/d



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The ledger

Purchases20X4 28 Feb Per PCB 71

Wages28 Feb Per PCB 83

Motor expenses28 Feb Per PCB 40

Travelling expenses

28 Feb Per PCB 22

Printing and stationery28 Feb Per PCB 27

Postage and telephone28 Feb Per PCB 6

Repairs to premises21 Feb Cash 35

Drawings23 Feb Cash 20

Bank20X4 28 Feb Cash 304



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15. The Final Financial Statements of SoleTraders (Introductory)

15.7 R. Woods

Statement of profit and loss for the year ended 30September 20X3

Sales revenue 18,922Less : Cost of salesInventory at 1 Oct 20X2 2,368Add: purchases 12,389

14,757

Less : inventory at 30 Sep 20X3 2,946 11,811Gross profit 7,111

Less : ExpenditureSalaries and wages 3,862Rent and rates 504Insurance 78Motor expenses 664Printing and stationery 216Light and heat 166General expenses 314 5,804

Profit for year 1,307

R. WoodsStatement of financial position as at 30 September 20X3ASSETS Non-current assetsPremises 5,000Motor vehicles 1,800Fixtures and fittings 350

7,150

Current assetsInventory 2,946Trade receivables 3,896Bank 482

7,324Total assets 14,474




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Equity capitalBalance at 1 Oct 20X2 12,636Add: profit for the year 1,307

13,943Less : drawings 1,200

Balance at 30 Sep 20X3 12,743

Current liabilitiesTrade payables 1,731Total liabilities 1,731Total equity and reserves 14,474

15.9 A. Evans

Statement of profit and loss for the year ended 30 June20X3

Sales revenue 81,640Less : returns inwards 840Net sales 80,800Less : Cost of salesInventory at 1 July 20X2 5,610Add: purchases 49,870Less : returns outwards 960 48,91

0

54,520

Less : inventory at30 June 20X3 4,92

049,600

Gross profit 31,200Add: interest received 620

31,820Less : ExpenditureCarriage outwards 390

Rent and rates 1,420Light and heat 710Telephone and postage 540Printing and stationery 230Bank interest 140 3,430Profit for the year 28,390



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A. EvansStatement of financial position as at 30 June 20X3ASSETS Non-current assets

Leasehold premises 52,500Motor vehicles 13,650

66,150Current assetsInventory 4,920Trade receivables 2,630Investments 4,980

Cash 46012,990

Total assets 79,140

EQUITY AND LIABILITIESEquity capitalBalance at 1 July 20X2 39,980Add: profit for the year 28,390

68,370Less : drawings 14,760Balance at 30 June 20X3 53,610Non-current liabilitiesLoan - Solihull Bank 20,000

Total non-current liabilities 20,000Current liabilitiesTrade payables 1,910Bank overdraft 3,620Total current liabilities 5,530Total liabilities 25,530Total equity and liabilities 79,140

Note: The student should state that she or he is assuming that theinvestments are intended to be held for less than one year from the date ofthe statement of financial position and are thus a current asset. Alternatively,

it may be assumed that the investments are to be held for more than oneaccounting year and are therefore a non-current asset.



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16. Depreciation and Non-Current Assets

16.7 Is depreciation the loss in value of a non-current asset?

A common misconception is that depreciation reflects the loss in value of anon-current asset. However, this is not its purpose. Depreciation is asystematic means of allocating the cost of a non-current asset to the revenueto which the asset helps to generate. It is a prime example of the applicationof the matching concept. The allocation should reflect the reduction in theuseful economic life of the asset (the reduction in the revenue generatingpowers of the asset). Though it may equate, or be close, to the reduction inthe market value of the asset this is not its purpose and may not happen insome cases. For example, when a non-current asset is bespoke (like a mine-shaft). In this instance the asset can only be used by that particular companyand its market value would be scrap value. The market value would be very

different to the net book value (the unallocated portion of the original cost).

16.17 Workings

Cost of machines purchased on 1 October 20X2 should include alltransportation and installation expenditure:

3,100 + 130 + 590 + 180 = 4,000Cost per machine = 4,000 2 = 2,000

Disposal

Aggregate depreciation from the date brought into use (1 April 20X3) until the

date of disposal (31 March 20Y1) = 10% 2,000 8 years = 1,600. Book

value at 31 March 20Y1 = 2,000 1,600 = 400. Proceeds of sale = 800 100 = 700. Profit on sale = 700 400 = 300.

a The journalDebit Credit

20Y1 31 Mar Machinery disposals Dr 2,000

Machinery account Cr 2,000Being the transfer of thecost of the machine sold tothe disposals account

31 Mar Depreciation expense Dr 100Provision for depreciation Cr 100Being depreciation for thecurrent year on the machinesold

31 Mar Provision for depreciation Dr 1,600



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Machinery disposals Cr 1,600Being the aggregatedepreciation on the disposal

31 Mar H. Johnson bank Dr 800

Machinery disposals Cr 800Being proceeds of sale ofmachinery sold

31 Mar Machinery disposals Dr 100Wages Cr 100Being the labour cost ofdismantling the machinesold

31 Mar Machinery disposals Dr 300

Profit and loss account Cr 300Being profit on sale ofmachine

1 May Machinery account Dr 2,800R. Adams bank Cr 2,800Being purchase of newmachine

Notes

1 It is likely that in practice the entries relating to depreciation and the profiton sale would be done at the end of the accounting year. However,examination questions like this often expect students to do them on the dateof disposal.

2 Although not required by the question, students may find it useful to start byconstructing the machinery disposals account in rough form as follows:

Machinery disposalsMachinery cost 2,000 Provision for

depreciation

Wages dismantling costs 100 aggregatedepreciation 1,600

I/S profit on sale 300 H. Johnson proceedsof sale 800

2,400 2,400



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b Provision for depreciation for year ended 30 September 20Y1:

Machine owned all year: 10% 2,000 = 200

Machine sold: 10% 2,000 6 months = 100

Machine acquired: depreciation from the date broughtin to use (1 July 20Y1) to the end of the accounting year:

10% 2,800 3 months = 70

Total depreciation expense for year:200 + 100 + 70 = 370

16.19 Workings

Plant

Cost at 31 December 20X2 = 96,920 + 33,080 40,000 = 90,000Depreciation for 20X2 = 10% 90,000 = 9,000

Disposal:

Aggregate depreciation = 10% 40,000 6 years = 24,000

Book value at disposal = 40,000 24,000 = 16,000Loss on sale = 16,000 15,000 = 1,000

VehiclesDisposal 1:Aggregate depreciation

20W9 = 25% 3,200 = 800

20X0 = 25% (3,200 800) = 600

20X1 = 25% (3,200 [800 + 600]) = 450Total = 800 + 600 + 450 = 1,850Book value at disposal = 3,200 1,850 = 1,350Loss on sale = 1,350 1,300 = 50

Disposal 2:Aggregate depreciation

20X0 = 25% 4,800 = 1,200

20X1 = 25% (4,800 1,200) = 900

Total = 1,200 + 900 = 2,100Book value at disposal = 4,800 2,100 = 2,700Profit on sale = 2,960 2,700 = 260

RemainderCost at 31 December 20X2 = 25,060 + 4,750 3,200 4,800 = 21,810Aggregate depreciation at 31 December 20X2 = 14,560 1,850 2,100 =10,610

Depreciation for 20X2 = 25% (21,810 10,610) = 2,800



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a The ledger

Plant20X2 20X2 1 Jan Balance b/d 96,920 31 Dec Bank 15,000

31 Dec Bank 33,080 31 Dec Provision 24,000for depn

31 Dec P/L loss 1,00031 Dec Balance c/d 90,000

130,000 130,00020X31 Jan Balance b/d 90,000

Provision for depreciation on plant20X2 20X2 31 Dec Plant 24,000 1 Jan Balance b/d 50,120

31 Dec Balance c/d 35,120 31 Dec P/L 9,00059,120 59,120

20X31 Jan Balance b/d 35,120

Vehicles20X2 20X2 1 Jan Balance b/d 25,060 31 Dec Bank vehicle 1,30031 Dec Bank 4,750 31 Dec Provision 1,850

for depn31 Dec I/S loss 50

31 Dec Bank vehicle 2,96031 Dec P/L Profit 260 31 Dec Provision 2,100

for depn_____ 31 Dec Balance c/d 21,81030,070 30,070


Provision for depreciation on vehicles20X2 20X2 31 Dec Vehicles 1,850 1 Jan Balance b/d 14,560

31 Dec Vehicles 2,100 31 Dec P/L 2,80031 Dec Balance c/d 13,410

17,360 17,36020X31 Jan Balance b/d 13,410

Statement of P/LDepn on plant 9,000 Profit on sale vehicle 260Depn on vehicles 2,800Loss on sale plant 1,000Loss on sale vehicle 50

The journal



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bDebit Credit

20X2 31 Dec Profit and loss account Dr 9,000

Provision for depn plant Cr 9,000

Being depreciation onplant for 20X2

31 Dec Profit and loss account Dr 2,800Provision for depnvehicles

Cr 2,800

Being depreciation onvehicles for 20X2

Alternative method disposals accountPlant

20X2 20X2

1 Jan Balance b/d 96,920 31 Dec Disposals 40,00031 Dec Bank 33,080 31 Dec Balance c/d 90,000

130,000 130,00020X31 Jan Balance b/d 90,000

Plant disposals20X2 20X2 31 Dec Plant 40,000 31 Dec Bank 15,000

31 Dec Provision 24,000for depn31 Dec I/S loss 1,000

40,000 40,000Vehicles

20X2 20X2 1 Jan Balance b/d 25,060 31 Dec Disposal 1 3,20031 Dec Bank 4,750 31 Dec Disposal 2 4,800

31 Dec Balance c/d 21,81029,810 29,810


Vehicle disposals

20X2 20X2 31 Dec Vehicles 1 3,200 31 Dec Bank vehicle 1,30031 Dec Vehicles 2 4,800 31 Dec Provision 1,850

for depn31 Dec I/S loss 5031 Dec Bank vehicle 2,960

31 Dec I/S profit 260 31 Dec Provision 2,100for depn

8,260 8,260



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17. Bad Debts and Provisions for BadDebts

17.7 Workings

Trade receivables at 31 July 20X3 15,680Less : bad debts (410 + 270) 680Revised trade receivables at 31 July 20X3 15,000Provision for bad debts = 4% 15,000 = 600

The ledger

A. Wall20X3 20X3 31 July Balance b/d 410 31 July Bad debts 410

B. Wood31 July Balance b/d 270 31 July Bad debts 270

Bad debts31 July A. Wall 410 31 July P/L a/c 68031 July B. Wood 270 ___

680 680

Provision for bad debts31 July P/L a/c 600

Statement of P/L a/cBad debts 680Provision for bad debts 600

17.8 Workings

Trade receivables at 30 Apr 20X3 19,500Less : bad debts (620 + 880) 1,500Revised trade receivables at 30 Apr 20X3 18,000Provision for bad debts at 30 Apr 20X3(3% x 18,000) 540Less : provision for bad debts at 30 Apr 20X2 750Reduction in provision for bad debts 210

The ledger

A. Winters



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20X3 20X3 30 Apr Balance b/d 620 30 Apr Bad debts 620

D. Spring30 Apr Balance b/d 880 30 Apr Bad debts 880

Bad debts30 Apr A. Winters 620 30 Apr P/L a/c 1,50030 Apr D. Spring 880 _____

1,500 1,500

Provisions for bad debts20X3 20X2 30 Apr P/L a/c 210 30 Apr Balance b/d 75030 Apr Balance c/d 540 _

___750 750

20X31 May Balance b/d 540

Statement of Profit and loss accountBad debts 1,500 Provision for bad

debts210

17.14 Workings

Provision for bad debts Specific provision (320 70) 250General provisionTrade receivables at 31 Dec 20X3 12,610Less :bad debts (210 + [260 110]) 360specific provision 250 610Revised trade receivables at 12,00031 Dec 20X3Provision at 31 Dec 20X3(5% x 12,000) 600

Total provision for bad debts at 31 Dec 20X3 850Less : provision for bad debts at 31 Dec 20X2 1,260Reduction in provision for bad debts 410



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Provision for depreciationDate of purchase Details Depreciation Depreciationor sale on disposal of year ended

31 Dec 20X3

Depreciation on disposal1 July 20X1 For year ending 31.12.X1 25% 8,000 612

1,000

For year ending 31.12.X2 25% (8,000 1,000) 1,750

31 Mar 20X3 For year ending 31.12.X3 25% (8,000 [1,000 + 1,750])

312

328 328

3,078Book value at 31.3.X3: 8,000 3,078 = 4,922Loss on sale: 4,922 4,000 = 922Depreciation on acquisition

31 Mar 20X1 25% (4,000 + 1,000) 912

938

Depreciation on remainderCost = 30,000 - 8,000 = 22,000Aggregate depreciation: 12,500 (1,000 + 1,750) = 9,750

WDV = 22,000 9,750 = 12,250

Depreciation = 25% 12,250 3,063

4,329

a The ledger

A. Bee20X3 20X3 1 Jan Balance b/d 320 30 Apr Bank 70

___ 30 Apr Balance c/d 250

320 3201 May Balance b/d 250

J. Kay1 Jan Balance b/d 210 15 June Bad debts 210

C. Dee1 Jan Balance b/d 180 3 Aug Bank 180

F. Gee1 Jan Balance b/d 260 7 Oct Bank 110

___ 7 Oct Bad debts 150260 260

Bad debts15 June J. Kay 210 31 Dec P/L a/c 3607 Oct F. Gee 150 ___

360 360

Provision for bad debts



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31 Dec P/L a/c 410 1 Jan Balance b/d 1,26031 Dec Balance c/d 850 150

1,260 1,26020X41 Jan Balance b/d 850

Plant and machinery1 Jan Balance b/d 30,000 31 Mar Part

exchange4,000

31 Mar Bank 1,000 31 Dec Provision for 31 Mar Part exchange 4,000 depreciation 3,078

31 Dec P/L a/c losson sale 922

______ 31 Dec Balance c/d 27,00035,000 35,000

20X4

1 Jan Balance b/d 27,000

Provision for depreciation31 Dec Plant and 1 Jan Balance b/d 12,500

machinery 3,07831 Dec Balance c/d 13,751 31 Dec P/L a/c 4,329

16,829 16,82920X41 Jan Balance b/d 13,751

Statement of Profit and loss accountBad debts 360 Provision for bad debts 410Provision for depreciation 4,329Loss on sale of plant 922

b Like the provision for bad debts, depreciation is also a provision. Aprovision is the setting aside of income to meet a known or highly probablefuture liability or loss, the amount and/or timing of which cannot beascertained exactly, and thus an estimate has to be made. Provisions for baddebts and depreciation are both intended to provide for a future loss. A

provision for bad debts provides for the loss that occurs when creditcustomers fail to pay their debts. Depreciation is the reduction in the usefuleconomic life of a non-current asset, and a provision for depreciation isintended to provide for the loss in its economic life.



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18. Accruals and Prepayments

18.2 The ledger

Rent20X2 20X2 1 Jan Prepayment b/d 300 31 Dec P/L a/c 3,73029 Jan Bank 930 31 Dec Prepayment c/d 320 2 May Bank 93030 July Bank 930 5 Nov Bank 960

4,050 4,05020X3

1 Jan Prepayment b/d 320

Light and heat20X2 20X2 6 Mar Bank 420 1 Jan Accrual b/d 140 4 June Bank 360 31 Dec P/L a/c 1,450 3 Sep Bank 270 7 Dec Bank 39031 Dec Accrual c/d 150

1,590 1,59020X3

1 Jan Accrual b/d 150

Workings

Rent prepaid at 1 Jan 20X2 = 13 900 = 300

Rent prepaid at 31 Dec 20X2 = 13 960 = 320

Light and heat accrued at 1 Jan 20X2 = 13 420 = 140

Light and heat accrued at 31 Dec 20X2 = 13 450 = 150

18.8 The entries in a rent receivable account are on the opposite side tothose in a rent payable account. The credit to the profit and loss account isthe difference between the two sides of the ledger account after entering allthe prepayments (or accruals).

The derivation of the purchases on credit will be unfamiliar to students at thispoint in their studies. It is discussed in depth in Chapter 21. However, theprinciple is very similar to expense accounts containing accruals. A total

purchase ledger (control) account is used in place of the individual personalaccounts of the credit suppliers. The trade payables (total credit suppliers) at



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the start and end of the year are entered on the same sides as accruals in anexpense account, as are the payments. The credit purchases for the year arethen the difference between the two sides of the purchase ledger controlaccount.

The ledger

Rents receivable20X3 20X2 31 May P/L a/c 4,004 1 June Prepayment b/d 463

20X331 May Prepayment c/d 517 31 May Bank 4,058

4,521 4,5211 June Prepayment b/d 517

Rent and rates payable20X2 20X2 1 June Prepayment b/d1,246

1 June Accrual b/d 315

20X3 20X331 May Bank rent 7,491 31 May P/L a/c 10,10031 May Bank rates 2,805 31 May Prepayment c/d

1,50931 May Accrual c/d 382

11,924 11,9241 June Prepayment b/d 1,509 1 June Accrual b/d 382

Total trade payables20X3 20X2 31 May Bank 75,181 1 June Balance b/d 5,25831 May Discount recd 1,043 20X331 May Balance c/d 4,720 31 May P/L purchases 75,686

80,944 80,9441 June Balance b/d 4,720



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19. The Final Financial Statement of SoleTraders (Advanced)

19.5 Workings

Rent prepaid = 36 612

6,400 = 1,600

Rates prepaid = 312 1,488 = 372

Rent and rates prepaid = 1,600 + 372 = 1,972Provision for doubtful debts:

At 31 December 20X3 = 5% (72,300 - 1,420) = 3,544

Reduction in provision = 3,702 - 3,544 = 158

Depreciation on car = 20% 7,200 = 1,440

C. JonesExtended trial balance as at 31 December 20X3

Trial balance Adjustments Statement of profit Statement offinancial

and loss positionDr Cr Dr Cr Dr Cr Dr Cr

Capital 45,214 9,502 35,712Drawings 9,502 9,502

Purchases 389,072 389,072Sales revenue 527,350 527,350Wages and salaries 33,440 3,012 3,012 36,452 3,012Rent and rates 9,860 1,972 1,972 7,888 1,972Light and heat 4,142 4,142Bad debts 1,884 1,420 3,304Provision doubtful debts 3,702 158 158 3,544Trade receivables 72,300 1,420 70,880Trade payables 34,308 34,308Bank 2,816 2,816Cash 334 334Inventory 82,124 99,356 82,124 82,124 99,356 99,356Motor car cost 7,200 7,200Motor car depreciation 2,100 1,440 1,440 3,540Profit for the year 102,442 102,44

2612,674 612,674 626,864 626,864 182,558 182,55

8



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C. JonesStatement of profit and loss for the year ended 31 December 20X3

Sales revenue 527,350Less : cost of salesInventory at 1 Jan 20X3 82,124Add: purchases 389,072

471,196Less : inventory at 31 Dec 20X3 99,356 371,840Gross profit 155,510Add: reduction in provision for

doubtful debts 158155,668

Less : ExpenditureWages and salaries 36,452Rent and rates 7,888Light and heat 4,142Bad debts 3,304Provision for depreciation 1,440 53,226Profit for the year 102,442

C. JonesStatement of financial position as at 31 December 20X3

ASSETS Non-current assetsMotor car at cost 7,200Less: provision for depreciation 3,540

3,660Current assetsInventory 99,356

Trade receivables 70,880Less: provision for doubtful debts 3,544 67,336Prepayments 1,972Bank 2,816Cash 334




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EQUITY AND LIABILITIESEquity capitalBalance at 1 Jan 20X3 45,214Add: profit for the year 102,442

147,656Less: drawings 9,502Balance at 31 Dec 20X3 138,154Current liabilitiesTrade payables 34,308Accruals 3,012Total liabilities 37,320Total equity and liabilities 175,474

19.6 J. ClarkStatement of profit and loss for the year ended 31 March 20X3

Sales revenue (58,640 400) 58,240Less : Returns inwards 3,260Net sales 54,980Less : Cost of salesOpening inventory 4,670Add: Purchases (34,260 350) 33,910Less : Returns outwards 2,140

31,770Add: Carriage inwards 730 32,500

37,170

Less : Closing inventor y(3,690 + 300) 3,990 33,180Gross profit 21,800Add: Discount received 1,970Investment income 460

24,230Less : ExpenditureWages 7,180Carriage outward 420Discount allowed 1,480Depreciation on plant

(25% x [11,350 4,150]) 1,800Depreciation on vehicles 1,986Loss on sale of vehicle 264Interest payable 1,000Rent and rates (4,300 210) 4,090Provision for bad debts([10% x (8,070 370 400)] 530) 200Bad debts 370Light and heat (2,640 + 130) 2,770Stationery (450 230) 220 21,780Profit for the year 2,450



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J. ClarkStatement of financial position as at 31 March 20X3

ASSETS Cost Prov WDV Non-current assets depnFreehold premises 32,000 32,000Plant and machinery(4,150 + 1,800) 11,350 5,950 5,400Motor vehicles(13,290 1,000) 12,290 4,498 7,792

55,640 10,448 45,192Goodwill 5,000

50,192

Current assetsStationer y inventory 230Inventory (3,690 + 300) 3,990Trade receivables(8,070 370 400) 7,300Less : Provision for bad debts 730 6,570Sundry receivables 458Prepayments 210Quoted investments 6,470Bank and cash 2,850

20,778

Total assets 70,970EQUITY AND LIABILITIESEquity capitalBalance at 1 April 20X2 60,000Add: profit for year 2,450

62,450Less : Drawings (5,600 + 350) 5,950Balance at 31 March 20X3 56,500Non-current liabilitiesMortgage on premises 10,000Total non-current liabilities 10,000

Current liabilitiesTrade payables 4,340Accruals 130Total current liabilities 4,470Total liabilities 14,470Total equity and liabilities 70,970



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Workings: Depreciation on vehicles

Previous Thisyears year

Disposal20X0/X1: 20% 1,000 312

50

20X1/X2: 20% (1,000 50) 190

24020X2/X3:

20% [1,000 (50 + 190)] 31238 38

278Book value at sale = 1,000 278 = 722Loss on sale = 722 458 = 264Depreciation on remaining

20% [(13,290 1,000) (2,790 240)] 1,948

1,986Aggregate depreciation at 31 March 20X32,790 + 1,986 278 = 4,498

Note:1 It is assumed that the quoted investments are to be held for less than oneaccounting year.



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20. The Bank Reconciliation Statement

20.5 The ledger

Cash bookBalance b/d 2,880 Bank charges 105Dividends 189 Refer to drawer 54

Error (141 2) 282

Balance c/d 2,6283,069 3,069

Grow LtdBank reconciliation statement at 31 March 20X3

Balance per cash book 2,628Add: Cheques not yet presented(642 + 1,200) 1,842

4,470Less : Amounts not yet credited 1,904Cheque debited in error by bank 216 2,120Balance per bank statement 2,350

20.6 Mrs Lakea Bank reconciliation statement as at 30 April 20X3

Balance per bank account 1,310.40Add: Error cheque no. 236130(87.77 77.87) 9.90Receipts not entered in bank account 21.47Cheques not yet presented(30 + 52.27) 82.27 113.64

1,424.04Less : Payments not entered in bankaccount (12.80 + 32.52) 45.32Amounts not yet credited 192.80 238.12

1,185.92Less : Undetected error 19.47Balance per bank statement 1,166.45



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b The undetected error would require further investigation. The amountis the same as cheque number 427519 on 10 April. This cheque number isdifferent from the sequence of the others, which suggests that it may havebeen debited to Mrs Lakes account in error.

Note1 Students should have realized that cheques numbered 236126 and 236127shown on the bank statement are in the cash book for March and wereunpresented at 31 March (Reconciliation at 31 March 20X3: 1,053.29 15.21 210.70 = 827.38). No entries are required in the bankreconciliation at 30 April 20X3 since these are on the bank statement forApril.



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21. Control Accounts

21.7 The ledger

Sales ledger control account20X3 20X3 1 Jan Balance b/d 4,200 1 Jan Balance b/d 30031 Jan Sales revenue 23,000 31 Jan Returns inward 75031 Jan Dishonoured 31 Jan Bank 16,250

cheques 1,850 31 Jan Discount31 Jan Bad debts recovered 230 allowance 52531 Jan Interest on 31 Jan Bad debts 670

overdue accts 120 31 Jan Bills receivable 5,30031 Jan Purchase

ledger contra 93031 Jan Allowances 340

31 Jan Balance c/d 240 31 Jan Balance c/d 4,57529,640 29,640

1 Feb Balance b/d 4,575 1 Feb Balance b/d 240

Purchase ledger control account20X3 20X3 1 Jan Balance b/d 250 1 Jan Balance b/d 6,15031 Jan Returns outward 450 31 Jan Purchases 21,50031 Jan Bank 19,800

31 Jan Discount recd 32531 Jan Bills payable 4,50031 Jan Sales ledger contra 93031 Jan Allowances recd 28031 Jan Balance c/d 1,535 31 Jan Balance c/d 420

28,070 28,070 1 Feb Balance b/d 420 1 Feb Balance b/d 1,535

Notes

1 The following items do not appear in control accounts: carriage inwards, carriage

outwards; provision for bad debts; cash received from bills receivable; cash paid onbills payable.

2 The debit balance on the sales ledger control account is calculated by subtractingthe total of the credit side from the debit side. The credit balance on the purchasesledger control account is calculated in a similar way.

3 The credit balances on the sales ledger control account are probably the result ofcredit customers overpaying, possibly in instances where they have been sent acredit note for goods and also paid for them. Similarly, the debit balances on thepurchases ledger control account may be due to this business overpaying some ofits credit suppliers.

4 Although credit balances on the sales ledger control account and debit balances



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on the purchase ledger control account are frequently encountered in examinations,in practice each control account can only throw up one balance which wouldnaturally be the difference between the two sides of the control account. Thisbalance should then agree with the difference between the total of the debit andcredit balances of the personal accounts in the personal ledger.

5 Sometimes goods are bought from a business to which goods were also sold. Inthese circumstances the amounts owed may be set off against each other and acheque paid/received for the difference. The amount set off is referred to as apersonal ledger contra and in the above example is 930.

6 It is assumed that the actual money received that relates to debts that werepreviously written off as bad (230) is included in cheques received from creditcustomers. Thus, the item bad debts recovered is treated as an instruction toreverse the entry by which they were originally written off.

21.8 a The ledger

Sales ledger control accountBalance b/d 14,364 Bank 118,258Sales revenue 138,208 Discount allowed 3,692Bad debts recovered 84 Returns inwards 1,966Cash 132 Bills receivable 6,486Interest on overdue 20 Bad debts 1,186accounts

Purchase ledger contra 606Balance c/d 20,614

152,808 152,808Balance b/d 20,614

b Sales ledger control account Original balance 20,614Add: Sales day book undercast 1,000

21,614Less : Discount allowed omitted 50Amended balance 21,564

Sales ledgerOriginal balances 20,914Add:Amount of cheque transposed(4,300 3,400) 900

21,814

Less : Returns posted incorrectly (125 2) 250

Amended balance 21,564

21.9 a The ledger

Sales ledger control account



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Balance b/d 17,220 Bank 45,280Sales revenue 98,730 Returns inwards 18,520

Bills receivable 29,160Discount allowed 6,940

Bad debts 4,920Transfer to purchaseeldger 2,850Balance c/d 8,280

115,950 115,950Balance b/d 8,280

Purchase ledger control accountBank 38,020 Balance b/d 20,490Returns outwards 16,010 Purchases 85,860Bills payable 21,390 Cash 2,430

Discount received 7,680Transfer to sales ledger 2,850Balance c/d 22,830

108,780 108,780Balance b/d 22,830

b Purchase ledger Original balances 20,700Add: cheque posted wrongly (3,400 340) 3,060

23,760

Less : returns outward error (180 2) 360Amended balance 23,400

Purchase ledger control accountOriginal balance 22,830Add: discount received (210 120) 90

22,920Less : purchases day book overcast 500Amended balance 22,420

Undetected error = 23,400 22,420 = 980



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22. Errors and suspense accounts

22.6

a Debit wages account with 250.b Credit sales account with 100.c Credit suppliers personal account with 9 (i.e. 198 189).d Change the amount shown in the trial balance in respectof drawings to 300.e Debit the bank account with 172 (i.e. 86 2).

22.10 The Journal

Debit Credit

1 Light and heat Dr 32

Suspense Cr 32Being correction of posting error

2 Suspense Dr 28Wages Cr 28Being correction of arithmetic error

3 Rent Dr 720Suspense Cr 720

Being correction of transposed figures

4 Motor vehicles Dr 3,000Purchases Cr 3,000Being correction of error of principle

5 A. Watson Dr 80A. Watt Cr 80Being correction of an error of commission

6 Sales revenue Dr 100

Loose tools Cr 100Being correction of error of principle

7 Postage and telephone Dr 17Carriage outwards Cr 17Being correction of error of commission

8 Bank charges Dr 41Cash book Cr 41Being correction of error of omission

9 Stationery Dr 9



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Sales revenue Cr 9Being correction of a compensating error

10 J. Bloggs Sales control Dr 108Sales revenue Cr 108

Being correction of error of prime entry

11 Suspense Dr 124Trial balance Cr 124Being correction of extraction error

The ledger

SuspenseDifference per trial balance 600 Light and heat 32

Wages 28 Rent 720Extraction error 124

752 752

22.14 a The journal

Debit Credit 20X3 31 March Cash book Dr 10,000

Suspense account Cr 10,000

Being correction of undercast on debitside of cash book

Freehold premises: Dr 5,000Suspense account Cr 5,000Being correction of purchase of buildingin cash book not posted to ledger

Suspense account Dr 900Purchases Cr 900Being correction of purchases of 100

entered in PDB summary as 1,000

Carriage Dr 405Suspense account Cr 405Being correction of transport charge of 450entered in PDB summary as 45

Rent receivable Dr 45Suspense account Cr 45Being correction of rent received of 45posted twice to the ledger



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Sales ledger control account Dr 100Suspense account Cr 100Being correction of undercast on debit sideof sales ledger control account

Notes

1 Item 3 relates to errors in a PDB summary that is used to post the nominalledger. It is assumed that the credit suppliers personal ledger is posted fromthe PDB and not the summary, and thus the individual suppliers personalaccount and control account are correct.

2 Item 5 assumes that the sales ledger control account is part of the doubleentry in the ledger and thus the balance is included in the statement offinancial position.

3 Items 6 to 9 do not necessitate entries in the suspense account but willrequire journal entries for their correction.

4 Check that the balance on the suspense account has been eliminated asfollows:

SuspensePer trial balance 14,650 Cash book 10,000Purchases 900 Freehold premises 5,000

Carriage 405

Rent receivable 45Sales ledger controlaccount 100

15,550 15,550



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b Workings

Bank accountCorrection of undercast 10,000 Balance b/d 1,230

Bank charges 3,250

Balance c/d 5,52010,000 10,000

Balance b/d 5,520

Freehold premisesBalance b/d 60,000Correction of postingerror 5,000

65,000

Sales ledger control account

Balance b/d 37,140Correction ofundercast 100

37,240

Provision for depreciation on vehiclesBalance b/d 11,935I/S a/c 500

12,435

Inventory

Balance b/d 75,410Undervaluation 1,250

76,660

Purchase ledger control accountBalance b/d 41,360Purchases 2,110

43,470

Profit and loss accountCarriage 405 Balance b/d 33,500

Rent receivable 45 Purchases 900Bank charges 3,250 Inventory 1,250Depreciation on vehicles 500Purchases 2,110Revised profit 29,340

35,650 35,650



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MiscupStatement of financial position as at 31 March 20X3

ASSETS Non-current assets Cost Agg/depn WDV

Freehold premises 65,000 65,000Motor vehicles 25,000 12,435 12,565Fixtures and fittings 1,500 750 750

91,500 13,185 78,315Current assetsInventory 76,660Trade receivables 37,240Bank 5,520Cash 75


TOTAL ASSETS AND LIABILITIES

Equity capital (start of year) 125,000Add: profit for the year 29,340Total equity 154,340Current liabilitiesTrade payables and accrued charges 43,470Total current liabilities 43,470Total equity and liabilities 197,810



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23. Single Entry and Incomplete Records

23.5 Workings for plant

Costat 30 June 20X2 50,000Add: additions 20,000

70,000Less : disposals 10,000Cost at 30 June 20X3 60,000

Aggregate depreciationDepreciation at 30 June 20X2(50,000 31,000) 19,000

Add: depreciation for the yearon addition (10% 20,000 3 mths) 500

on disposal (10% 10,000 3 mths) 250

on rest (10% [50,000 10,000]) 4,000 4,750

23,750Less : aggregate depreciation on disposal

10% 10,000 2 years 9 mths 2,750

Depreciation at 30 June 20X3 21,000

Round MusicStatement of financial position as at 30 June 20X3

ASSETS Non-current assetsPlant at cost 60,000Less : aggregate depreciation 21,000

39,000Current assetsInventory (8,630 1,120) 7,510

Trade receivables 6,120Less : provision for doubtful debts 310 5,810Prepayments 80




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EQUITY AND LIABILITIESEquityCapital at 30 June 20X3 40,360Total equity 40,360

Non-cur rent liabilitiesLong-term loan 7,000Total non-current liabilities 7,000Current liabilitiesTrade payables 3,480Accruals 130Bank overdraft 1,430Total current liabilities 5,040Total liabilities 12,040Total equity and liabilities 52,400

Round MusicStatement of profit for the year ended 30 June 20X3

Capital at 30 June 20X3 40,360Less : capital at 30 June 20X2 42,770

(2,410)Add: drawings (18,500 + 750) 19,250

16,840Less : capital introduced 5,000

Profit for the year 11,840

23.7 Workings1 Credit purchases = 5,720 + 33,360 - 5,220 = 33,8602 Total purchases = 33,860 + 1,120 + 4,500 = 39,4803 Credit sales = 5,840 + 31,860 6,540 = 31,1604 Cash sales = 18,920 + 4,000 + 1,120 + 980 + 170 = 25,1905 Total sales = 25,190 + 31,160 = 56,350

6 Telephone = 120 + 280 140 = 2607 Light and heat = 370 + 290 60 = 600

8 Motor expenses = 1,810 + 980 = 2,790

9 Depreciation on fixtures and fittings = 20% 5,800 = 1,160

10 Accumulated depreciation on fixtures and fittings = 10,000 5,800+ 1,160 = 5,360



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A. FoxStatement of profit and loss for the year ended 31 July 20X3

Sales revenue 56,350Less : cost of sales

Inventory at 1 Aug 20X2 3,300Add: purchases (39,480 530) 38,950

42,250Less : inventory at 31 July 20X3 3,920 38,330Gross profit 18,020Less : expenditureWages 5,640Telephone (120 + 280 140) 260Light and heat (370 + 290 60) 600Motor expenses (1,810 + 980) 2,790Printing 560

Cleaning 170Depreciation (20% 5,800) 1,160 11,180

Profit for the year 6,840

A. FoxStatement of financial position as at 31 July 20X3ASSETS Non-current assets Cost Agg/depn WDV Freehold land and buildings 35,000 35,000Fixtures and fittings 10,000 5,360 4,640

45,000 5,360 39,640

Current assetsInventory 3,920Trade receivables 5,840Prepayments 140Bank 8,260

18,160Total assets 57,800EQUITY AND LIABILITIESEquity capitalBalance at 1 Aug 20X2 48,480Add: capital introduced 1,000

Profit for year 6,84056,320

Less : drawings (4,000 + 530) 4,530Balance at 31 July 20X3 51,790Current liabilitiesTrade payables 5,720Accruals 290Total current liabilities 6,010Total equity and liabilities 57,800



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24. Inventory Valuation

24.6 Discussion on the relationship between inventory valuation methodand actual costs.

When a firm elects not to separately identify each individual item of inventoryeither because this is impossible as the items cannot be separately identified(coal, oil, etc) or because the cost of this type of system would exceed thebenefit then three common methods are typically used for valuing theinventory that is sold (or released to production). These are the LIFO, FIFOand AVCO methods of inventory valuation. Each of the three methods ofcalculating the cost of inventory results in different values for inventory andhence profit. In times of constantly rising prices, FIFO will give the highestfigure for profits of the three methods (as the cheaper values relating to itemsthat are purchased earlier/first will be released as an expense first) and the

highest value of inventory at the period end (as the remaining inventory willbe valued at the latest higher priced). In summary under FIFO older, lowercosts are matched against revenues than is the current reality, however, thevalue of inventory in the statement of financial position will be current. Theopposite impact on profit and inventory valuation will occur in times of fallingprices (uncommon).

When prices are rising, the lowest profit figure will be reported under theLIFO method as the more expensive values relating to the more recentlypurchased items will be released to the statement of profit and loss first.Under this method inventory will have the lowest valuation of the three

methods as the remaining items will be assigned the earliest price values(which are the lowest in times of rising prices). In summary under LIFO thestatement of profit and loss reflects the most recent costs; however, thestatement of financial position will be out of date as inventory will be valuedat old values. The opposite impact on profit and inventory valuation will occurin times of falling prices (uncommon).

Under AVCO average prices are used and the value of the inventoryreleased to the statement of profit and loss will lie between the LIFO andFIFO methods as will the value of year-end inventory.

A business should choose whichever method is appropriate to its particularcircumstances and apply this consistently in order that meaningfulcomparisons can be made. FIFO is by far the most common method used inpractice in the UK because it is favoured by the UK accounting standardSSAP 9 Stocks and Long Term Contracts (ASC, 1988), by IAS 2 and by HMRevenue and Customs. The valuation of inventories is a controversial issuein accounting, and is one of the areas most open to deliberate manipulation.



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24.9 Universal shoes

(a) Inventories schedule as at 31 December 20X2Cost Net realisable

value

Lower of cost

and NRVCasual shoes 10,000 x 6 60,000 10,000 x 30 300,0002,000 x 6 12,000 2,000 x 30 60,000

72,000 360,000 72,000

Work shoes3,000 x 17 51,000 3,000 x 55 165,0002,000 x 12 24,000 2,000 x 55 110,000

75,000 275,000 75,000

Dress shoes2,000 x 47 94,000 2,000 x 30 60,000 60,000

207,000

b) Memorandum to chief accountantTO: Chief accountantFROM: An AccountantSubject: Inventory valuationDate: 15 January 20X3

(the contents of the answer should refer to the following points)I refer to your recent request regarding the valuation of inventories as at 31December 20X2. IAS 2 Inventories sets out the methods allowed for valuinginventories.

Points that might be included-Under IAS 2 inventories includes assets that are held for sale in the ordinarycourse of the business.-It states that inventory value includes the cost of purchase (purchase price),import duties and transport and handling costs (but excludes trade discounts)

FIFO and the weighted average method are allowable but LIFO is not. Sothe FIFO policy adopted by Universal shoes is fine.

-In terms of valuation inventory should be held at the lower of cost and theNet realizable value (NRV). When the sale price expected is below inventorycost then inventory should be written down to this value (less any costs to sellthe assets). This value is called the NRV.

When calculating the closing costs for the shoes the following matters arose

1. Casual shoes there were goods in transit at the year end. Inaccordance with cut-off principles, the goods need to be included in



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inventories as they have been included in purchases and in tradepayables.

2. Work shoes the cost of these shoes increased on 1 November 20X2.In order to apply the FIFO method for inventory valuation, account istaken of the jackets in inventory from 1 November 20X2, which will be

valued at the new cost. Any remaining inventory will be valued at theold cost.

3. Dress shoes the market for these shoes changed from 1 January20X3. Although this is after the year end, it still has to be takenaccount of when arriving at the inventory valuation. The effect of themarket changing has resulted in a reduction in the NRV of the shoesfrom 75 to 40, with associated costs of 10 reducing the NRV furtherto 30 per pair. As the NRV is lower than cost this is the value that isused for the year-end inventory figure.

I hope this explains the valuation of inventory at the year- end.

Any issues ask, etc.


7/27/2019 Sol

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