(Accrual and Prepayment)

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1 Accrual and Prepayment Longman Question 13 The following balances were extracted from the ledgers of Mr Ko at 31 March 2014: $ Telephone 12,355 Dr Rent and rates 55,000 Dr Loan to Bob 450,000 Dr Rental income 36,000 Cr Additional information for 31 March 2014 onwards: (i) Two months telephone bill was unpaid, totalled $550. (ii) The following items were included in rent and rates: 1. Annual rental paid for an office premises for the year ended 31 July 2014, totalled $22, months rates paid (1 January June 2014) totalled $2,400. (iii) Mr Ko lent money to Bob since 1 July Interest rate was agreed at 12% per annum. Bob paid interest for half year during the year. (iv) Rent of $8,400 for the three months ended 30 April 2014 from a tenant was received on 10 April (a) Write up the telephone account, rent and rates account, loan interest income account and rental income account for Mr Ko for the year ended 31 March Show the balance transferred to the profit and loss account for the year. Show also the prepaid or accrued balances. (b) Prepare an extract of statement of financial position for Mr Ko as at 31 March 2014, showing the above accruals and prepayments. (a) Telephone Mar 31 Balance b/d 12,355 Mar 31 Profit and loss 12, Accrued c/d ,905 12,905 Apr 1 Accrued b/d 550 Rent and rates Mar 31 Balance b/d 55,000 Mar 31 Profit and loss 46, Prepaid c/d($22,200 4/12 + $2,400 3/6) 8,600 55,000 55,000 Apr 1 Prepaid b/d 8,600 Loan Interest Income Mar 31 Profit and loss($450,000 12% 9/12) 40,500 Mar 31 Balance b/d ($450,000 12% 1/2) 27, Accrued c/d 13,500 40,500 40,500 Apr 1 Accrued b/d 13,500 9

2 Rental Income Mar 31 Profit and loss 41,600 Mar 31 Balance b/d 36, Accrued c/d ($8,400 2/3) 5,600 41,600 41,600 Apr 1 Accrued b/d 5,600 (b) Mr Ko Statement of Financial Position as at 31 March 2014 (extract) Current assets Current liabilities Prepaid expenses 8,600 Accrued expenses 550 Accrued revenue (13, ,600) 19,100 10

3 Longman (2014, 1) 1 Thorn Ltd s financial year ended on 31 March The following information was extracted from the company s business records: Insurance $ 4 months prepaid fire insurance as at 31 March ,000 2 months accrued property insurance as at 31 March ,000 Property insurance for 14 months ending 31 March 2014 paid on 1 May ,000 Fire insurance for 12 months ending 31 July 2014 paid on 1 August ,500 Rent $ Rent prepaid in advance to Landlord A as at 31 March ,000 Rent paid half-yearly to Landlord A on 1 September 2013 (for 6 months ending 28 February 2014 and 1 March 2014 (for 6 months ending 31 August 2014) 9,000 each time One year s rent paid in advance to Landlord B on 1 April ,000 (a) Show the insurance and rent expense accounts as they would appear in Thorn Ltd s ledgers for the year ended 31 March Thorn Ltd sublet part of its premises during the year. A 12-month rental agreement with a tenant was signed on 1 April 2013 for a monthly rent of $8,000. The company received rents totalling $88,000 during the year. The accounting clerk recorded $88,000 as revenue for the year ended 31 March (b) State with a brief explanation the accounting principle or concept that has been applied or violated in the above situation. (a) Insurance 2013 $ 2013 $ Apr 1 Prepaid b/f 5,000 Apr 1 Accrued b/f 6,000 May 1 Bank 42, Aug 1 Bank 16,500 Mar 31 Profit and Loss 52,000 " 31 Prepaid c/f ($16,500 x 4/12) 5,500 63,500 63,500 Rent Expense 2013 $ 2014 $ Apr 1 Prepaid b/f 4,000 Mar 31 Profit and Loss 38,500 " 1 Bank 24,000 " 31 Prepaid c/f (9,000 x 5/6) 7,500 Sept 1 Bank 9, Mar 1 Bank 9,000 46,000 46,000 (b) The accrual concept has been violated. Under the accrual concept, revenues should be recognised when earned and expenses should be recognised when incurred, and not when money is received or paid. Rental revenue for the year ended 31 March 2014 should be $96,000 (= $8,000 12) instead of the $88,000 amount received. 11

4 Longman (2012, Dec, 2) 2. The first year of trading at Linda Tam s business ended on 31 December 2011 and the following information is available. (i) Motor vehicle expenses: The business paid $28,000 on 31 November 2011 and owed $3,950 as at 31 December Included in the total of $28,000 was an annual vehicle licence fee of $5,000 paid up to 31 March (ii) Commission revenue: The business received commissions totalling $47,980 on 1 December 2011 but commissions of $7,890 for December 2011 were not yet received at the year end. (iii) Insurance: The business paid $39,500 on 15 December 2011, including a sum of $8,400 on 1 October 2011 for annual fire insurance ending 30 September As at 31 December 2011, it owed $3,600 for six months of medical insurance ending 30 April (iv) Sundry expenses: The business paid $7,900 on 20 December 2011 and owed $1,200 at the year end. REQUIRED: Prepare the above ledger accounts for Linda Tam s business for the year ended 31 December 2011 and show the amounts transferred to the profit and loss account at the year end. Motor vehicle expenses Nov 31 Bank 28,000 Dec 31 Profit and loss 30,700 " 31 Accrued c/f 3,950 " 31 Prepaid c/f ($5,000 3/12) 1,250 31,950 31,950 Commission Revenue Dec 31 Profit and loss 55,870 Dec 1 Bank 47,980 " 31 Accrued c/f 7,890 55,870 55,870 Insurance Dec 15 Bank 39,500 Dec 31 Profit and loss 34,400 " 31 Accrued c/f ($3,600 2/6) 1,200 " 31 Prepaid c/f ($8,400 9/12) 6,300 40,700 40,700 Sundry Expenses Dec 20 Bank 7,900 Dec 31 Profit and loss 9,100 " 31 Accrued c/f 1,200 9,100 9,100 12

5 Longman (2011, 1) 1 The following balances were extracted from the trial balance of Emerald Co as at 30 September 2012: Dr Cr Purchases 756,981 Sales 1,498,621 Rent and rates 228,963 Wages and salaries 318,692 Utilities 178,870 Repairs and maintenance 25,694 Sundry expenses 52,753 Inventory, 1 October ,896 Additional information: (i) Items accrued: repairs $5,680; water charges $3,861. (ii) Items prepaid: rates $12,865; salaries $8,756. (iii) Inventory as at 30 September 2012 was valued at $49,867. Prepare an income statement for Emerald Co for the year ended 30 September Emerald Co Income Statement for the year ended 30 September 2012 Sales 1,498,621 Less Cost of goods sold: Opening inventory 45,896 Add Purchases 756, ,877 Less Closing inventory (49,867) (753,010) Gross profit 745,611 Less Expenses: Rent and rates ($228,963 $12,865) 216,098 Wages and salaries ($318,692 $8,756) 309,936 Utilities ($178,870 + $3,861) 182,731 Repairs and maintenance ($25,694 + $5,680) 31,374 Sundry expenses 52,753 (792,892) Net loss (47,281) 13

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