Answers to activities, practice exercises and exam practice questions

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1 Answers to activities, practice exercises and exam practice questions This text has not been through the Cambridge endorsement process. 2 [1] The cheque which Noel cashed was for his personal expenses. It is therefore debited to the Drawings account. [2] Following the principle of purchases returns, sales returns are always debited to their own account, never to the sales account. [3] The costs of running motor vehicles (petrol, licence, insurance, repairs, etc.) are not debited to the motor vehicles account. A new account, motor expenses, is opened to record them. All answers that appear in this publication have been written by the author. 1 Double-entry bookkeeping: cash transactions Practice exercises 1 1 Noel pays a cheque into his business bank account as capital 2 Purchases some goods for resale and pays by cheque 3 Sells some goods and banks the takings Debit account Bank Purchases Bank Credit account Noel Capital Bank Sales 4 Pays rent by cheque Rent payable Bank 5 Purchases shop fittings and Shop fittings Bank pays by cheque 6 Cashes cheque for personal Drawings Bank expenses [1] 7 Pays wages by cheque Wages Bank 8 Returns goods to supplier and Bank Purchases returns banks refund 9 Receives rent from tenant and Bank Rent receivable banks cheque 10 Refunds money to customer by Sales returns Bank cheque for goods returned [2] 11 Motor vehicle purchased and Motor vehicles Bank paid for by cheque 12 Pays for petrol for motor vehicle and pays by cheque [3] Motor expenses Bank 2 Bank account May 1 Martine capital 300 May 3 Rent payable 100 May 2 Charline loan May 4 Shop fittings 400 May 5 Purchases 20 May 4 Purchases 300 returns May 6 Sales 40 May 7 Wages 60 May 8 Drawings 100 Martine capital account May 1 Bank 300 Charline Loan account May 2 Bank 1 000

2 Answers to activities, practice exercises and exam practice questions: Chapter 1 Rent payable account May 3 Bank 100 Shop fittings account May 4 Bank 400 Purchases account May 4 Bank 300 Purchases returns account May 5 Bank 20 Sales account May 6 Bank 40 Wages account May 7 Bank 60 May 8 Bank 100 Drawings account 3 3 a Notes: 1 The narrative must always contain the name of the account where the opposite entry can be made. 2 Purchases returns are always posted to their own account, never to the credit of the purchases account. July 1 Debit account Bank Lee started business by paying $ of his savings into a business bank account He also had $500 in cash which he decided to use to pay Cash Capital cash expenses for the business 2 Bought some goods for resale for $1300, paying by cheque Purchases Bank 3 Paid $2500 by cheque to rent some business premises Rent payable Bank 4 Bought some office furniture by cheque for $750 Office furniture Bank Bought office stationery for $120, paying by cash Stationery Cash 6 Sold some goods for $1700 and paid the money into the bank Bank Sales Sold more goods for $180. He received cash for this sale Cash Sales Credit account Capital 8 Retuned some faulty goods valued at $60 to the supplier and received a cheque refund Bank Purchases returns 9 A customer returned some faulty goods. Lee gave the Sales returns Cash customer a cash refund of $25 10 Sold goods for $420. Lee received cash for the goods. Cash Sales He kept $200 as business cash and banked the rest Bank 11 Lee took cash drawings of $160 Drawings Cash

3 Cambridge International AS and A Level Accounting b Bank account July 1 Capital July 2 Purchases July 6 Sales July 3 Rent July 8 Purchases returns 60 July 4 Office furniture 750 July 10 Sales 220 Cash account July 1 Capital 500 July 4 Stationery 120 July 6 Sales 180 July 9 Sales returns 25 July 10 Sales 200 July 11 Drawings 160 Capital account July 1 Bank Cash 500 Purchases account July 2 Bank Sales account July 6 Bank Cash 180 July 10 Bank 220 Cash 200 Purchases returns account July 8 Bank 60 Sales returns account July 9 Cash 25 Rent account July 3 Bank Office furniture account July 4 Bank 750

4 Answers to activities, practice exercises and exam practice questions: Chapter 1 Stationery account July 4 Cash 120 Drawings account July 11 Cash Debit account 1 Local taxes paid by cheque Taxes Bank Credit account 2 Bank pays interest to trader Bank Interest received 3 Other operating expenses paid by cheque Other operating expenses Bank 4 Postage and stationery paid by cheque Postage and stationery Bank 5 Telephone bill paid by cheque Telephone Bank 6 Carriage inwards paid by cheque Carriage inwards Bank 7 Carriage outwards paid by cheque Carriage outwards Bank 8 Interest paid by cheque to brother in Interest payable Bank respect of a loan received from him 9 Interest paid to bank Interest payable / bank interest Bank Bank account June 1 Farook capital June 2 Premises Amna loan June 3 Office furniture June 5 Sales June 4 Purchases June 10 Sales June 6 Insurance 600 June 12 Purchase returns 900 June 7 Motor van June 13 Insurance 100 June 8 Motor expenses 50 June 14 Office furniture 800 June 9 Purchases June 10 Wages 400 June 11 Sales returns June 13 Drawings 200 June 15 Loan Capital account June 1 Bank Loan account June 15 Bank June 1 Bank June 2 Bank Premises account

5 Cambridge International AS and A Level Accounting Office furniture account June 3 Bank June 14 Bank 800 Purchases account June 4 Bank June 9 Bank Sales account June 5 Bank June 10 Bank Insurance account June 6 Bank 600 June 13 Bank 100 Motor van account June 7 Bank June 8 Bank 50 Motor expenses account June 10 Bank 400 June 11 Bank June 13 Bank 200 Exam practice questions Multiple-choice questions 1 B 2 B 3 D 4 B Wages account Sales returns account Purchases returns account Drawings account June 12 Bank 900

6 Answers to activities, practice exercises and exam practice questions: Chapter 2 2 Double-entry bookkeeping: credit transactions Practice exercises 1 Khor account June 10 Purchases returns [1] 180 June 1 Purchases June 30 Bank June 30 Discounts received 126 Lim account June 30 Bank June 15 Purchases June 30 Discounts received 126 [1] The goods which Geraud returned to Khor will have had the trade discount deducted from them when they were purchased. This must be adjusted when the goods are returned. Their cost was $200-10% trade discount of $20 = 180. Lai account June 5 Sales 600 June 25 Sales returns 180 June 30 Bank 399 June 30 Discounts allowed 21 Chin account June 20 Sales June 30 Bank June 30 Discounts allowed 65 7 Purchases account June 1 Khor June 15 Lim Purchases returns account June 10 Khor 180 Sales account June 5 Lai 600 June 20 Chin Sales returns account June 25 Lai 180 [2] [2] The same is true for the goods returned by Lai, which had cost $200 but need to have the 10% trade discount deducted.

7 Cambridge International AS and A Level Accounting Bank account June 30 Lai 399 June 30 Khor June 30 Chin June 30 Lim Discounts received account June 30 Khor 126 June 30 Lai 126 Discounts allowed account June 30 Lai 21 June 30 Chin 65 Note: Remember trade discount is never entered in the ledger. 2 In the books of Brian: 8 Ken account April 1 Sales April 2 Purchases 400 April 3 Sales 600 April 6 Purchases 720 April 12 Bank 380 April 10 Bank Discount received 20 Discount allowed 45 Sales account April 1 Ken April 3 Ken 600 Purchases account April 2 Ken 400 April 6 Ken 720 Bank account April 10 Ken April 12 Ken 380 Discounts allowed account April 10 Ken 45 Discounts received account April 12 Ken 20

8 Answers to activities, practice exercises and exam practice questions: Chapter 2 In the books of Ken: Brian account April 2 Sales 400 April 1 Purchases April 6 Sales 720 April 3 Purchases 600 April 10 Bank April 12 Bank 380 Discount received 45 Discount allowed 20 Sales account April 2 Brian 400 April 6 Brian 720 Purchases account April April Bank account April 10 Brian 380 April 12 Brian April 12 Brian 20 Discounts allowed account 9 Discounts received account April 10 Brian 45 3 Adams account July 5 Purchases returns 510 July 1 Purchases July 14 Bank Discount received 150 Bond account July 14 Bank July 4 Purchases Discount received 90 Astle account July 9 Purchases returns 640 July 7 Purchases July 14 Bank Discount received 248

9 Cambridge International AS and A Level Accounting Cairns account July 14 Bank July 10 Purchases Discount received 189 Purchases account July 1 Adams July 4 Bond July 7 Astle July 10 Cairns Purchases returns account July 5 Adams 510 July 9 Astle Bank account July 14 Adams Bond Astle Cairns Discount received account July 14 Adams 150 Bond 90 Astle 248 Cairns Blignaut account March 1 Sales March 15 Bank Discount allowed 90 Ebrahim account March 4 Sales March 6 Sales returns 170 March 15 Bank Discount allowed 161 Friend account March 8 Sales March 15 Bank Discount allowed 128

10 Answers to activities, practice exercises and exam practice questions: Chapter 2 Flower account March 12 Sales March 14 Sales returns 315 March 15 Bank Discount allowed 59 Sales account March 1 Blignaut March 4 Ebrahim March 8 Friend March 12 Flower Sale returns account March 6 Ebrahim Flower 315 Bank account March 15 Blignaut Ebrahim Friend Flower March 15 Blignaut 90 Ebrahim 161 Friend 128 Flower 59 Exam practice questions Multiple-choice questions 1 A 2 B 3 A Discount allowed account

11 Cambridge International AS and A Level Accounting 3 Books of prime entry Activities Activity 1 Purchases journal Sales journal March 1 Tikolo March 4 Snyman March 6 Walters March 10 Karg March 13 Burger March 17 Kotze March 18 Tikolo March 25 Snyman Purchases returns journal Sales returns journal March 12 Tikolo 400 March 11 Snyman 200 March 22 Burger March 20 Karg Cash book Discounts Bank Discounts Bank March 31 Snyman March 31 Tikolo March 31 Karg March 31 Walters March 31 Kotze March 31 Burger March 31 Purchases journal total Purchases account Purchases returns account March 31 Sales account Purchases returns journal total March 31 Sales journal total March 31 Sales returns journal total Sales returns account 500 March 31 Cash book total 313 Discounts allowed account

12 Answers to activities, practice exercises and exam practice questions: Chapter 3 Discounts received account March 31 Cash book total Tikolo account March 12 Purchases returns 400 March 1 Purchases March 31 Bank March 18 Purchases March 31 Discounts received 620 Walters account March 31 Bank March 6 Purchases Discounts received 360 Burger account March 22 Purchases returns March 13 Purchases March 31 Bank March 31 Discounts received 170 Snyman account March 4 Sales March 11 Sales returns 200 March 25 Sales March 31 Bank March 31 Discounts allowed Karg account March 10 Sales March 20 Sales returns 300 March 31 Bank March 31 Discounts allowed 78 Kotze account March 17 Sales March 31 Bank March 31 Discounts allowed 135 Activity 2 Cash book Disc Cash Bank Disc Cash Bank $ March 1 Sales March 2 Electricity 130 March 3 Sales 900 March 4 Bank March 4 Cash March 5 Other operating expenses 25 March 6 Bank 800 March 6 Cash 800 March 7 Purchases 750

13 Cambridge International AS and A Level Accounting Activity 3 Accounts Dr Cr a A & Co. 120 A. Cotter 120 Correction of credit note no. 964 received from A and Co. Ltd. in the sum of $120 debited to A. Cotter in error. b Purchases 400 Hussain 400 Correction of invoice no. 104 in the sum of $400 received from Hussain omitted from the purchases journal. c Maya 45 Sales 45 Correction of posting error: invoice no in the sum of $150 sent to Maya entered in the sales journal as $105. d Machinery Purchases Correction of purchase of machine posted in error to purchases account. e Sales returns 68 Hanif 68 Correction of omission of credit note no.23 for $68 and sent to Hanif, omitted from the sales returns journal. 14 [1] It is assumed that the value of the goods returned were after adjusting for the trade discount. Whether a returns amount given needs to be adjusted for the trade discount should be clear. Practice exercises 1 a Purchases journal Purchases returns journal April 1 Bilal April 8 Bilal [1] 100 April 3 Asad April 21 Asma [1] 600 April 15 Asma April 26 Bilal Sales journal Sales returns journal April 2 Imran 720 April 13 Imran [1] 60 April 10 Raza 880 April 24 Amna [1] 300 April 16 Amna April 17 Raza Journal Accounts Dr Cr 5 April Motor vehicles/delivery van Syed Purchase of delivery van, from Syed, invoice no. 324.

14 Answers to activities, practice exercises and exam practice questions: Chapter 3 b Bank account Discount allowed Bank Discount received Bank April 30 Imran April 30 Bilal April 30 Raza April 30 Asma April 30 Amna April 30 Asad April 30 Syed Bilal account April 8 Purchase returns 100 April 1 Purchases April 30 Bank ( %) April 26 Purchases Discount received Asad account April 30 Bank ( %) 988 April 3 Purchases Discount received Asma account April 21 Purchase returns 600 April 15 Purchases April 30 Bank ( %) Discount received April 30 Purchases journal total Purchases account Purchases returns account April 30 Purchases returns journal total 700 Imran account April 2 Sales 720 April 13 Sales returns 60 April 30 Bank ( %) 627 Discount allowed

15 Cambridge International AS and A Level Accounting Raza account April 10 Sales 880 April 30 Bank ( %) April 17 Sales Discount allowed Amna account April 16 Sales April 24 Sales returns 300 April 30 Bank ( %) 855 Discount allowed Sales account April 30 Sales journal total April 30 Sales returns journal total 360 Sales returns account 16 April 30 Bank 176 Discount allowed account Discount received account April 30 Bank 447 Syed account April 30 Bank April 5 Del. Van (Inv 324) April 5 Syed Delivery van account

16 Answers to activities, practice exercises and exam practice questions: Chapter 3 2 Date Accounts Dr Cr a March 3 Machinery Mumtaz Purchase of machinery on credit on invoice 506. b March 6 Sales 675 Wayne 675 Correction of invoice 495 entered twice in error. c March 7 Delivery van Younas Purchase of new delivery van from Younas on invoice 998. d March 10 Sales returns 190 Browne 190 Credit note 103 omitted from sales returns journal. e March 15 Geeta Sandra Transfer of invoice no. 854 from Sandra posted to Geeta s account in error. Exam practice questions Multiple-choice questions 1 C 2 B 3 B 4 C 17

17 Cambridge International AS and A Level Accounting 1 4 Balancing accounts Practice exercise Discounts allowed Three-column cash book Cash Bank Discounts received Cash March 1 Capital March 2 Rent March 3 Sales 550 March 7 Joe March 8 Balance b/d March 7 Postages 20 Bank March 7 Balance c/d Capital account March 7 Balance c/d March 1 Bank March 8 Balance b/d Purchases account March 2 Joe March 7 Balance c/d March 8 Balance b/d Joe account March 5 Purchases returns 200 March 2 Purchases March 7 Bank ($4000 $200 95%) March 7 Discount received Purchases returns account March 7 Balance c/d 200 March 5 Joe 200 March 8 Balance b/d 200 Barney account March 3 Sales March 7 Balance c/d March 8 Balances b/d 2 000

18 Answers to activities, practice exercises and exam practice questions: Chapter 4 Sales account March 7 Balance c/d March 3 Barney March 3 Cash March 8 Balance b/d Rent account March 2 Bank March 7 Balance c/d March 8 Balance b/d Postages account March 7 Cash 20 March 7 Balance c/d 20 March 8 Balance b/d 20 19

19 Cambridge International AS and A Level Accounting 5 The classification of accounts and division of the ledger Activities Activity 1 Account Personal Non-current asset Current asset Revenue or other income Expense Capital Sales returns Delivery vans Purchases Rent payable Trade receivables 2 Inventory Discount allowed Drawings Bank 1 Rent receivable Trade payables 3 Computer Wages 20 Discount received Notes: 1 The bank account would be a current liability if it was overdrawn. 2 Trade payables is the International Accounting Standards terminology for the aggregate amount owing to suppliers. It is not literally a personal account but is a description given to the total of the credit balances on the supplier personal accounts. Trade payables are presented as a current liability in the statement of financial position (see later chapters) at the end of an accounting period. 3 Trade receivables is the International Accounting Standards terminology for the aggregate amount receivable from customers. It is not literally a personal account but is a description given to the total of the debit balances on the customer personal accounts. Trade receivables are presented as a current asset in the statement of financial position (see later chapters) at the end of an accounting period.

20 Answers to activities, practice exercises and exam practice questions: Chapter 5 Practice exercises 1 Statement The purchase of a motor car is revenue expenditure The payment of wages to employees is revenue expenditure The accounts for customers are kept in the sales ledger Repairs to the office windows is an example of capital expenditure The purchase of office stationery is revenue expenditure The sales account is a nominal account The fixtures and fittings account is a real account Suppliers accounts are kept in the nominal ledger The day-to-day costs of running the business is an example of revenue expenditure True or false False True True False True True True False True 2 a The sales account records the revenue of the business and is an example of a nominal account. b The purchase of a new machine is an example of capital expenditure and the account is an example of a real account c Small items of expenditure are recorded in the petty cash book. d A non- current asset is bought to keep in the business for a long period of time. 21

21 Cambridge International AS and A Level Accounting 6 The trial balance Activities Activity 1 22 The grocer s trial balance at 31 December Account Dr Cr Premises Motor vans Office furniture Computer Sales Sales returns 700 Purchases Purchases returns 500 Motor vehicle running expenses Wages Rent Bank Capital Drawings Activity 2 a Complete reversal of entries b Error of principle c Error of omission d Compensating errors e Error of commission f Error of original entry Practice exercises 1 Hassan s trial balance at 31 December 2015 Account Dr Cr Sales Sales returns Purchases Purchases returns Wages Heating and lighting Rent payable Rent receivable Advertising Postage and telephone Discounts allowed Discounts received Plant and machinery Delivery van 9 000

22 Answers to activities, practice exercises and exam practice questions: Chapter 6 2 Bank Trade receivables Trade payables Drawings Capital Notes: Items in the debit column are mainly assets or expenses. Items in the credit column are mainly income or liabilities. Andrea s corrected trial balance at 31 December 2015 Account Dr Cr Premises Plant and machinery Office equipment Wages Rent payable Heating and lighting Other operating expenses Sales Purchases Discounts allowed Discounts received Bank Trade receivables Trade payables Purchases returns Sales returns Rent receivable Capital Drawings Exam practice questions Multiple-choice questions 1 B 2 B 3 C 4 C

23 Cambridge International AS and A Level Accounting 7 Income statements for sole traders Activities Activity 1 Liz Trading section of the income statement for the year ended 31 March 2016 Debit Credit Purchases Sales Less: purchases returns Less: sales returns Activity Rodney Trading section of the income statement for the year ended 30 September 2015 Debit Credit Purchases Sales Less: purchases returns Less: sales returns Less: closing inventory Cost of sales Gross profit Activity 3 Sofia Income statement for the year ended 31 December 2015 Revenue Less: sales returns Cost of sales Purchases Less: purchases returns Less: inventory at 31 December Gross profit Add: rent received Add: discounts received Less: Wages Rent payable Electricity Insurance 2 290

24 Answers to activities, practice exercises and exam practice questions: Chapter 7 Income statement for the year ended 31 December 2015 Motor van expenses Discounts allowed Other operating expenses Loan interest Profit for the year Activity 4 Khor Extract from the income statement for the year ended 31 December 2015 $ Revenue Less: sales returns Less: cost of sales Opening inventory Purchases Less: purchases returns Less: closing inventory Gross profit Activity 5 25 Lamar Income statement for the year ended 31 March 2016 $ Revenue Less: sales returns Less: cost of sales Opening inventory Purchases Less: purchases returns Less: closing inventory Gross profit Rent receivable Discounts receivable Less: Wages Rent payable Heating and lighting Repairs to machinery (cont.)

25 Cambridge International AS and A Level Accounting Income statement for the year ended 31 March 2016 $ Discounts allowed Loan interest Profit for the year Activity 6 26 Sara Income statement for the year ended 31 March 2016 $ Sales Less: cost of sales Opening inventory Purchases Carriage inwards Less: closing inventory Cost of sales Gross profit Less: Wages Rent Electricity Carriage outwards Other operating expenses Loss for the year (4 750) Practice exercises 1 Hadlee Income statement for the year ended 31 December 2015 $ Sales Less: sales returns Less: cost of sales Opening inventory Purchases Less: purchases returns Less: closing inventory Gross profit Less: expenses Wages Rent Heating and lighting 5 120

26 Answers to activities, practice exercises and exam practice questions: Chapter 7 $ Advertising Other operating expenses Loan interest Profit for the year Tikolo Income statement for the year ended 31 March 2016 $ Sales Less: sales returns Less: cost of sales Opening inventory Purchases $( ) Less: purchases returns Add: carriage inwards Less: closing inventory Gross profit Add: other income Discounts received Less: expenses Wages Rent Heating and lighting Discounts allowed Carriage outwards Other operating expenses Profit for the year Exam practice questions Multiple-choice questions 1 A 2 C 3 C 4 D 5 A

27 Cambridge International AS and A Level Accounting 28 8 Statements of financial position for sole traders Practice exercises 1 Sofia Statement of financial position at 31 December 2015 $ Non-current assets Land and buildings Plant and machinery Motor vans Current assets Inventory Trade receivables Cash and cash equivalents Total assets Capital and liabilities Capital at 1 January Add: profit for the year Less: drawings Non-current liability Loan Current liabilities Trade payables Total capital and liabilities Lamar Statement of financial position at 31 March 2016 $ Non-current assets Premises Plant and machinery Current assets Inventory Trade receivables Cash and cash equivalents Total assets

28 Answers to activities, practice exercises and exam practice questions: Chapter 8 3 $ Capital and liabilities Capital at 1 April Add: profit for the year Less: drawings Non-current liability Loan Current liabilities Trade payables Total capital and liabilities Hadlee Statement of financial position at 31 December 2015 $ Non-current assets Plant and machinery Office furniture Current assets Inventory Trade receivables Cash and cash equivalents Total assets Capital and liabilities Opening capital Add: profit for the year Less: drawings (4 833) Non-current liabilities Loan Current liabilities Trade payables Total capital and liabilities

29 Cambridge International AS and A Level Accounting 30 Tikolo Statement of financial position at 31 March 2016 $ Non-current assets Fixtures and fittings Office furniture Current assets Inventory Trade receivables Cash and cash equivalents Total assets Capital and liabilities Opening capital Add: profit for the year Less: drawings $( ) (22 527) Current liabilities Trade payables Total capital and liabilities Exam practice questions Multiple-choice questions 1 D 2 A 3 B 4 C

30 Answers to activities, practice exercises and exam practice questions: Chapter 9 9 Accounting principles or concepts Exam practice questions Multiple-choice questions 1 B 2 A 3 A 4 B 5 B 6 D 31

31 Cambridge International AS and A Level Accounting 10 Accruals and prepayments (the matching concept) Activities Activity 1 a Telephone account Dec 31 Bank Dec 31 Balance c/d (rental prepaid) 400 Dec 31 Bank Dec 31 Income statement b Alexander s total telephone expense for the year is $3410. This is made up of calls $( ) = $ line rental $( ) = $1600. c Dec 31 Balance c/d (calls owing) Jan 1 Balance b/d 400 Jan 1 Balance b/d 360 The amount of $360 for calls owing will appear under current liabilities. The figure of $400 will appear under current assets. Never net off the two amounts. 32 Activity 2 Rent payable account Dec 31 Bank Dec 31 Income statement 2016 Jan 1 Balance b/d 200 Dec 31 Balance c/d (rent prepaid) Electricity account Dec 31 Bank 630 Dec 31 Income statement Dec 31 Balance c/d (accrued expense) Jan 1 Balance b/d 180

32 Answers to activities, practice exercises and exam practice questions: Chapter 10 Stationery account Dec 31 Bank 420 Dec 31 Income statement Dec Balance c/d (amount owing) 130 Dec Balance c/d (inventory) Jan 1 Balance b/d 140 Jan 1 Balance b/d 130 Dec 31 Rent receivable account Income statement 400 Jan 1 Balance b/d 100 Dec 31 Bank Dec Balance c/d (rent owing) Activity 3 a Devram Income statement for the year ended 31 December 2015 Gross profit Rent $( ) Electricity $( ) Stationery $( ) 389 Motor expenses $( ) 885 Interest on loan $( ) Profit for the year b Note: Unpaid interest on the loan must be accrued although it is not mentioned in the question. Devram Statement of financial position at 31 December 2015 Non-current assets Current assets Inventory Stationery inventory Trade receivables (cont.)

33 Cambridge International AS and A Level Accounting Statement of financial position at 31 December 2015 Other receivables: prepaid rent 300 Cash and cash equivalents Total assets Capital and liabilities Capital at 1 January Profit for the year Less: drawings Non-current liabilities Long-term loan Current liabilities Trade payables Other payables 986 $( ) Total capital and liabilities Practice exercises 1 a Prudence; accruals b Antonia Income statement for the year ended 31 December 2015 $ Sales Less: sales returns Less: cost of sales Opening inventory Purchases Less: purchases returns Less: closing inventory Gross profit Less: expenses Wages $( ) Rent $( ) Heating and lighting $( ) Motor expenses Loan interest $( ) Profit for the year

34 Answers to activities, practice exercises and exam practice questions: Chapter 10 c Antonia Statement of financial position at 31 December 2015 $ Non-current assets Premises Motor vehicles Current assets Inventory Trade receivables Other receivables: prepaid rent 800 Cash and cash equivalents Total assets Capital and liabilities Opening capital Profit for the year Less: drawings Non-current liabilities Loan Current liabilities Trade payables Other payables $( ) Total capital and liabilities d The loan received is shown as a non-current liability as it is not due for repayment within 12 months from the date of the statement of financial position (31 December 2015). Any part of it which becomes due for repayment within 12 months will be shown as a current liability. 2 a Desmond Income statement for the year ended 31 March 2016 $ Sales Less: sales returns Less: cost of sales Opening inventory Purchases Less: purchases returns Add: carriage inwards $( ) Less: closing inventory (cont.)

35 Cambridge International AS and A Level Accounting Income statement for the year ended 31 March 2016 $ Gross profit Add: other income Rent receivable $( ) Interest receivable $( ) Discounts received Less: expenses Wages Rent payable $( ) Discounts allowed Carriage outwards $( ) Stationery and other operating expenses $( ) Profit for the year b Desmond Statement of financial position at 31 March 2016 $ Non-current assets Plant and machinery Motor vehicles Current assets Inventory Trade receivables Other receivables (other operating expenses, 480 stationery inventory and interest accrued) Cash and cash equivalents Total assets Capital and liabilities Opening capital Add: profit for the year Less: drawings Current liabilities Trade payables Other payables $( ) Total capital and liabilities

36 Answers to activities, practice exercises and exam practice questions: Chapter 10 c Carriage inwards is the cost of bringing the goods from the supplier. It is regarded as part of the cost of the item bought and appears in the calculation of the cost of sales. Carriage outwards is the cost of delivering goods to the customer. It is regarded as a business expense and appears with other expenses in the income statement. 3 a The annual financial statements of a business are prepared using the accruals basis. Expenses of the period are matched with the income of the same period. It doesn t matter whether or not the expenses have been paid. Therefore, any amounts owing but unpaid for in a particular year are brought into the financial statements for that year (accruals). Any amounts paid during the year, but relating to a future period (prepayments) are excluded from the financial statements for that year. b b Rent account Jan 1 Balance b/d Dec 31 Income statement $( [ ]) Dec 31 Bank $(2500 4) Dec 31 Balance c/d Jan 1 Balance b/d Electricity account Dec 31 Bank Jan 1 Balance b/d 150 Balance c/d ($ ) 320 Dec 31 Income statement Jan 1 Balance b/d Exam practice questions Multiple-choice questions 1 D 2 B 3 B 4 A

37 Cambridge International AS and A Level Accounting Provisions for the depreciation of non-current assets Activities Activity 1 a Provision for depreciation of motor vehicles account Year 1 Balance c/d Year 1 Income statement Year 2 Balance c/d Year 2 Balance b/d Income statement Year 3 Balance c/d Year 3 Balance b/d Income statement Year 4 Balance c/d Year 4 Balance b/d Income statement Year 5 Balance c/d Year 5 Balance b/d Income statement Year 6 Balance c/d Year 6 Balance b/d Income statement Year 7 Balance c/d Year 7 Balance b/d Income statement Year 8 Year 8 Balance b/d b Statement of financial position extracts Cost Depreciation Net book value $ Year 1: Motor vehicles Year 2: Motor vehicles Year 3: Motor vehicles Year 4: Motor vehicles Year 5: Motor vehicles Year 6: Motor vehicles Year 7: Motor vehicles Activity 2 a Provision for depreciation of machinery account Year 1 Balance c/d Year 1 Income statement Year 2 Balance c/d Year 2 Balance b/d Income statement Year 3 Balance c/d Year 3 Balance b/d Income statement

38 Answers to activities, practice exercises and exam practice questions: Chapter 11 Year 4 Balance c/d Year 4 Balance b/d Income statement Year 5 Balance c/d Year 5 Balance b/d Income statement Year 6 Year 6 Balance b/d b Statement of financial position extracts Cost Depreciation Net book value $ Year 1: Machinery Year 2: Machinery Year 3: Machinery Year 4: Machinery Year 5: Machinery Activity 3 a Machinery at cost account Jan 1 Balance b/d May 7 Disposal of machinery Jun 3 Bank Jun 3 Disposal of machinery Disposal of Dec 31 Balance c/d machinery Jan 1 Balance b/d b Provision for depreciation of machinery account May 7 Disposal of Jan 1 Balance b/d machinery ( ) Jun 3 Disposal of Dec 31 Income statement machinery Dec 31 Balance c/d Jan 1 Balance b/d 1 000

39 Cambridge International AS and A Level Accounting c Disposal of machinery account May 7 June 3 Machinery at cost Machinery at cost May 7 Provision for depreciation of machinery Bank Income statement (loss) June 3 Provision for depreciation of machinery Machinery at cost part exchange Income statement (loss) Practice exercises 1 a The straight-line method of depreciation is calculated by charging the rate of depreciation on the cost of the non-current asset. The reducing balance method of depreciation is calculated by charging the rate of depreciation on the cost of the non-current asset minus the accumulated depreciation to date before making the charge. b Piccolo 40 Income statement for the year ended 31 May 2016 Sales Less: cost of sales Opening inventory Purchases $( ) Less: closing inventory Gross profit Less: expenses Wages Heating and lighting $( ) Repairs to machinery Advertising $( ) Depreciation of freehold buildings ($ %) Depreciation of plant and machinery ($ $ %) Profit for the year

40 Answers to activities, practice exercises and exam practice questions: Chapter 11 Piccolo Statement of financial position at 31 May 2016 Cost Accumulated depreciation Net book value $ Non-current assets Freehold land and buildings Plant and machinery Current assets Inventory Trade receivables Other receivables (prepaid advertising) Bank Total assets Capital and liabilities Opening capital Add: net profit Less: drawings $( ) Trade payables Other payables (heat and light) Total capital and liabilities c Piccolo should not change his method of charging depreciation. To do so will go against the concept of consistency. There is no valid reason why a change should be made. 2 a Wilhelmina Income statement for the year ended 31 March 2016 Sales Less: sales returns Less: cost of sales Opening inventory Purchases Less: purchases returns (cont.)

41 Cambridge International AS and A Level Accounting Income statement for the year ended 31 March 2016 Cost Depreciation Net book value $ Less: closing inventory Gross profit Less: expenses Wages Electricity $( ) Repairs to machinery 643 Other operating expenses $( ) Interest on loan and HP $( ) Depreciation of leasehold property ($ ) Depreciation of plant and machinery ($ $[ ] - $ %) Depreciation of office equipment ($ %) Profit for the year b Wilhelmina Statement of financial position at 31 March 2016 Cost Accumulated depreciation Net book value $ Non-current assets Leasehold property Plant and machinery Office equipment Current assets Inventory Trade receivables Other receivables (other operating 180 expenses) Bank Total assets Capital and liabilities Opening capital Add: net profit Less: drawings

42 Answers to activities, practice exercises and exam practice questions: Chapter 11 $ Non-current liabilities Loan (repayable 2020) Trade payables 973 Other payables (electricity and loan) Loan for machinery (including accrued interest $200) Total capital and liabilities Notes: Hire purchase is not on the syllabus. However, the amount due to the company from whom the machinery was bought is $ $( ). This is added on to the cost of the machinery $( ). Interest to be paid over the course of HP agreement is $800 (4 $200) and as the agreement was for one year and began on 1 January 2016, three month s interest, ( 3 12 or 1 4 $800 = $200 ) must be accrued at 31 March The entire loan for the machinery is repayable within 12 months from the date of the statement of financial position. This means that the whole of the amount is treated as a current liability. Exam practice questions Multiple-choice questions 1 D 2 C 3 A 4 A 43 Structured question 1 a Businesses will use different methods of depreciation because non-current assets lose value at different rates during their working life. For example, a motor vehicle will depreciate more in the early years of its life. Thus, the reducing balance method of depreciation is best for this asset. On the other hand, something like office furniture will lose its value evenly over its life and is depreciated using the straight-line method. b Asset disposal account May 31 Motor vehicles at cost May 31 Motor vehicles accumulated depreciation Bank Income statement

43 Cambridge International AS and A Level Accounting c i Motor vehicles at cost $( ) = $ ii Motor vehicles accumulated depreciation Beginning of year less vehicle sold $( ) = $8 000 Depreciation charge for the year $( ) 25% = $6 000 (Add to get) Accumulated depreciation at end of year = $ iii Office equipment at cost $( ) = $ iv Office equipment accumulated depreciation Beginning of the year $8 000 Assets charged a full year of depreciation $ % = $2 000 Assets bought in year and held for only 3 months $ % 1 = $50 4 (Add to get) Accumulated depreciation at end of year $

44 Answers to activities, practice exercises and exam practice questions: Chapter Irrecoverable and doubtful debts Activities Activity 1 a 2012: $( ) = $ : $( ) = $ : $( ) = $ : $( ) = $ : $( ) = $9 720 b Provision for doubtful debts account Mar 31 Balance c/d Mar 31 Income statement Apr 1 Balance b/d Mar 31 Balance c/d Mar 31 Income statement Apr 1 Balance b/d Mar Mar 31 Income statement Apr 1 Balance b/d Mar 31 Income statement Balance c/d Apr 1 Balance b/d Mar 31 Balance c/d Mar 31 Income statement Apr 1 Balance b/d Practice exercises 1 a David Income statement for the year ended 31 March 2016 $ Revenue $( ) Less: sales returns Less: cost of sales Opening inventory Purchases Less: purchases returns Add: carriage inwards (cont.)

45 Cambridge International AS and A Level Accounting 46 Income statement for the year ended 31 March 2016 $ Less: closing inventory $( ) Gross profit Add: other income Reduction in provision for doubtful debts $( ) 250 Discounts received Less: expenses Wages $( ) Rent $( ) Telephone $( ) Electricity $( ) Postage and stationery 359 Carriage outwards Discounts allowed Irrecoverable debts $( ) Depreciation of leasehold premises ($ %) Depreciation of delivery vans ($ $ %) Depreciation of office furniture ($ %) Profit for the year Notes: 1 The calculation for the adjustment is as follows: Trade receivables account Opening balance Goods on sale or return Specific irrecoverable debt Specific provision Balance Provision required = % = $550 Existing provision $800 Reduction in provision $250 2 It would have been possible to combine the specific provision for the irrecoverable debt into the provision for doubtful debts account. This would be shown as: Provision for doubtful debts account Specific irrecoverable debt Opening balance 800 Balance c/d 550 Income statement

46 Answers to activities, practice exercises and exam practice questions: Chapter 12 b 3 The net effect on the income statement is the same. In the statement above there is a credit of $250, being the reduction in the provision, and expenses of $3100 included in the figure for irrecoverable debts. You can use either approach. In practice it is usual to keep irrecoverable debts and the provision for doubtful debts as two separate accounts. David Statement of financial position at 31 March 2016 Cost Accumulated depreciation Net book value $ Non-current assets Leasehold premises Delivery vans Office furniture Current assets Inventory Trade receivables $( ) Less: provision for doubtful receivables Other receivables (rent prepaid) Cash and cash equivalents Total assets Capital and liabilities Opening capital Add: profit for the year Less: drawings Current liabilities Trade payables Other Payables $( ) Total capital and liabilities Note: The total assets equal the total capital and liabilities, thus the statement of financial position balances. If you don t get the two figures the same then look for the difference, but don t waste time.

47 Cambridge International AS and A Level Accounting 48 2 a Saul Income statement for the year ended 31 May 2016 $ Sales Less: sales returns Less: cost of sales Opening inventory Purchases ( ) Less: purchases returns Add: carriage inwards Less: closing inventory Gross profit Add: other income Rent receivable $( ) Discounts received Less: expenses Wages Rent payable $( ) Heating and lighting $( ) Telephone and postage Stationery $( ) Repairs to machinery Discounts allowed Carriage outwards Increase in provision for doubtful debts [($ $1 800) 5%] Irrecoverable debt written off Depreciation Freehold property ($ %) Depreciation Plant and machinery ($ %) Depreciation Motor vehicles ($ %) Profit for the year

48 Answers to activities, practice exercises and exam practice questions: Chapter 12 b Saul Statement of financial position at 31 May 2016 Cost Accumulated depreciation Net book value $ Non-current assets Freehold property Plant and machinery Motor vehicles Current assets Inventory Other operating inventory 450 (stationery) Trade receivables $( ) Less: provision for doubtful debts $( ) Other receivables $( ) Cash and cash equivalents Total assets Capital and liabilities Opening capital Add: profit for the year Less: drawings $( ) Current liabilities Trade payables Other Payables $( ) Total capital and liabilities Exam practice questions Multiple-choice questions 1 C 2 B 3 D 4 B

49 Cambridge International AS and A Level Accounting 13 Bank reconciliation statements Activities Activity 1 $475 Debit Activity 2 $540 Debit (overdrawn) Activity 3 a Revised cash book balance: $80 $210 = $130 overdrawn b Bank reconciliation statement at 31 March 2016 Balance per bank statements $( ) 870 Less: cheque not sent (1 000) Balance per cash book (130) Note: Notice that the final figure is in brackets. This identifies that the balance in the cash book is overdrawn. Activity 4 Adjusted trial balance items: $ 50 Debit Credit Trade receivables $( ) 958 Trade payables $( ) 616 Rent $( ) Bank $( ) 782 Practice exercise 1 Changes Starting totals Calculation Revised totals Debit Credit Debit Credit $ Trade receivables Trade payables Rent receivable Interest receivable Bank charges Bank 990 ( ) 800 Exam practice questions Multiple-choice questions 1 C 2 C 3 B 4 A 5 B

50 Answers to activities, practice exercises and exam practice questions: Chapter Control accounts Activities Activity 1 Byit Limited Purchase ledger control account 2016 $ 2016 $ Mar 1 Balance b/d 16 Mar 1 Balance b/d Mar 31 Purchases returns 824 Mar 31 Purchases journal Bank Balance c/d 156 Discounts received Balance c/d Apr 1 Balance b/d 156 Apr 1 Balance b/d Activity 2 Soldit Limited Sales ledger control account 2016 $ 2016 $ May 1 Balance b/d Balance b/d 545 May 31 Sales journal Sales returns Irrecoverable debt recovered 490 Bank Balance c/d 800 Discounts allowed Bank irrecoverable debt recovered Purchase ledger contra Balance c/d Jun 1 Balance b/d Jun 1 Balance b/d Activity 3 a Purchase ledger balances Sales ledger balances Debit Credit Debit Credit Before amendment Before amendment Deduct invoice entered twice Debit balance incorrectly listed as credit balance 50 (50) Corrected balances (100) Correction of invoice $326 entered as $362 (36) Corrected balances

51 Cambridge International AS and A Level Accounting b Corrected purchase ledger control 2015 $ 2015 $ Dec 31 Cancellation of invoice 100 Dec 31 Balance b/d Discounts received 84 Balance c/d 114 Sales ledger contra 710 Trazom Balance c/d Jan 1 Balance b/d 114 Jan 1 Balance b/d Corrected sales ledger control 2015 $ 2015 $ Dec 31 Balance b/d Dec 31 Sales journal 800 Purchase ledger 710 understatement contra Trazom Balance c/d 390 Balance c/d Jan 1 Balance b/d Jan 1 Balance b/d c Amended profit for the year ended 31 December 2015 $ Profit per draft income statement Add: Reduction in purchases 100 Discounts received omitted 84 Increase in sales 800 Amended profit for the year d Statement of financial position extract at 31 December 2015 Trade receivables Sales ledger Purchase ledger Trade payables Purchase ledger Sales ledger