ICAN MID DIET LIVE CLASS FOR MAY DIET 2015 FINANCIAL ACCOUNTING Introduction to financial accounting Recording non-current assets and depreciation
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1 ICAN MID DIET LIVE CLASS FOR MAY DIET 2015 FINANCIAL ACCOUNTING Introduction to financial accounting Recording non-current assets and depreciation Compiling financial statement Compiling financial statement of sole traders Accounts of incomplete records Account of partnership business 1
2 Introduction to financial accounting 1 Which of the following is the best description of why the IASB Framework requires financial statements to be prepared on the basis of accrual accounting? A As a result of the 'substance over form' requirement B So as to be prudent C Because it is the most objective basis D Because it presents both past transactions and future obligations 2
3 2 The following relate to the going concern assumption. (1) The entity has no need to liquidate (2) The entity has no intention to liquidate (3) The entity has no need to curtail materially its scale of operations 3
4 (4) The entity has no intention to curtail materially its scale of operations Which of the above are the best description of the conditions which the IASB Framework identifies as necessary if the going concern basis is to be used for the preparation of financial statements? A (1), (2) and (3) only B (1), (2) and (4) only C (1), (3) and (4) only D (1), (2), (3) and (4) 4
5 3 According to the IASB Framework which of the following is one of the qualitative characteristics which make information in financial statements useful? A True and fair view B Comparability C Timeliness D Historical cost 5
6 4 Which of the following is the closest approximation to the IASB Framework s definition of an asset? A A resource controlled by the entity from which future economic benefits are expected which can be measured reliably B A resource controlled by the entity as a result of past events from which future economic benefits are expected which can be measured reliably C A resource controlled by the entity from which future economic benefits are expected D A resource controlled by the entity as a result of past events from which future economic benefits are expected 6
7 5 Which of the following is the closest approximation to the IASB Framework s definition of a liability? A A legal obligation arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits B An obligation arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits which can be measured reliably C An obligation arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits D A legal obligation arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits which can be measured reliably 7
8 6 Future settlement is an essential part of the IASB Framework s definition of a liability. Which of the following best describes the way that settlement may occur? A Payment of cash B Payment of cash or transfer of other assets C Payment of cash or transfer of other assets or replacement of the obligation with another obligation D Payment of cash or transfer of other assets or replacement of the obligation with another obligation or conversion of the obligation to equity 8
9 7 Which of the following is the closest approximation to the IASB Framework s definition of income? A Increase in assets B Increase in assets or decrease in liabilities C Increase in assets or decrease in liabilities, other than those relating to transactions with equity participants D Increase in assets, other than those relating to transactions with equity participants 9
10 8 Which of the following is the closest approximation to the IASB Framework s requirement as to when an asset or liability should be recognised? A It is probable that future economic benefits will flow to or from the entity and the item s cost or value can be estimated B It is probable that future economic benefits will flow to or from the entity and the item s cost or value can be measured reliably C The item s cost or value can be measured reliably D The item s cost or value can be estimated 10
11 SET2 1 The main aim of accounting is to A Maintain ledger accounts for every asset and liability B Provide financial information to users of such information C Produce a trial balance D Record every financial transaction individually 11
12 2 In the time of rising prices, the historical cost convention has the effect of A Understating profits and understating statement of financial position asset values B Understating profits and overstating statement of financial position asset values C Overstating profits and understating statement of financial position asset values D Overstating profits and overstating statement of financial position asset values 12
13 3 Which of the following best explains what is meant by 'capital expenditure'? Capital expenditure is expenditure A On non-current assets, including repairs and maintenance B On expensive assets C Relating to the issue of share capital D Relating to the acquisition or improvement of non-current assets 13
14 4 Which of the following statements gives the best definition of the objective of accounting? A To provide useful information to users B To record, categorise and summarise financial transactions C To calculate the taxation due to the government D To calculate the amount of dividend to pay to shareholders 14
15 5 Which of the following is not an objective of financial statements? A Providing information regarding the financial position of a business B Providing information regarding the performance of a business C Enabling users to assess the performance of management to aid decision making D Helping to assess the going concern status of a business 15
16 6 Which of the following is not an information need for the 'Investor' group? A Assessment of repayment ability of an entity B Measuring performance, risk and return C Taking decisions regarding holding investments D Taking buy/sell decisions 16
17 SET 3 1 The historical cost convention A Fails to take account of changing price levels over time B Records only past transactions C Values all assets at their cost to the business, without any adjustment for depreciation D Has been replaced in accounting records by a system of current cost accounting 17
18 2 The accounting convention under which items in the accounts are adjusted by reference to the Retail Price Index is known as A Current cost accounting B Historical cost accounting C Alternative accounting rules D Current purchasing power accounting 18
19 3 The accounting equation can be rewritten as A Assets plus profit less drawings less liabilities equals closing capital B Assets less liabilities less drawings equals opening capital plus profit C Assets less liabilities less opening capital plus drawings equals profit D Opening capital plus profit less drawings less liabilities equals assets 19
20 4 If the owner of a business takes goods from inventory for his own personal use, the accounting concept to be considered is the A Prudence concept B Capitalisation concept C Money measurement concept D Separate entity concept 20
21 5 Sales revenue should be recognised when goods and services have been supplied; costs are incurred when goods and services have been received. The accounting concept which governs the above is the A Accruals concept B Materiality concept C Realisation concept D Dual aspect concept 21
22 6 The capital maintenance concept implies that A The capital of a business should be kept intact by not paying out dividends B A business should invest its profits in the purchase of capital assets C Non-current assets should be properly maintained D Profit is earned only if the value of an organisation's net assets or its operating capability has increased during the accounting period 22
23 7 In times of rising prices, the historical cost convention: A Understates asset values and profits B Understates asset values and overstates profits C Overstates asset values and profits D Overstates asset values and understates profits 23
24 8 Which of the following is not an accounting concept? A Prudence B Consistency C Depreciation D Accruals 24
25 9 Making bad debt provisions and valuing inventory on the same basis in each accounting period are examples of which accounting concepts? Bad debt provision Inventory valuation A Accruals Consistency B Accruals Going concern C Prudence Consistency D Prudence Going concern 25
26 10 The prudence concept means that profit is only included in the income statement if it is: A Expected B Material C Realised D Received 26
27 11 Which basic accounting concept is being followed when a charge is made for depreciation? A Accruals B Consistency C Going concern D Prudence 27
28 12 If, at the end of the financial year, a company makes a charge against the profits for stationery consumed but not yet invoiced, this adjustment is in accordance with the concept of A Materiality B Accruals C Consistency 28
29 SETS 1 Answers to Self-test 1 D 2 D 3 B 4 D 5 C 6 D 7 C 8 B 29
30 SET 2 ANSWERS 1 B Remember you were asked for the main aim. 2 C Overstating profits and understating statement of financial position asset values. 3 D Improvements are capital expenditure, repairs and maintenance are not. 4 A Shareholders and government are users of accounts. 5 D Correct. This is not an objective from the statement of principles. Additional data is required to assess this. A This is a primary objective. B Again, a major objective. C All classes of users require information for decision making. 6 A Correct. This information is a need for the 'lender' group. B This is an important need, particularly relative to other investment opportunities. C A primary need. 30
31 D A major need for existing (and prospective) investors. 31
32 SET3 1 A Fails to take account of changing price levels over time. 2 D Current purchasing power accounting. 3 C Assets less liabilities = opening capital plus profits less drawings. Assets less liabilities less opening capital plus drawings = profit 4 D Separate entity concept. A business is separate from its owner. 5 A Accruals concept. 6 D Once capital has been maintained, anything earned in excess is profit. 7 B This is just a rewording of a previous question, be careful with these in the exam. 8 C Depreciation is an application of the accruals concept. 9 C In this way receivables are not overstated and accounts can be compared between periods. 10 C Only realised profits can be included in the Income statement. 32
33 11 A Depreciation allocates the cost of an asset to the periods expected to benefit from its use. 12 B Accruals. The stationery must be charged to the period in which it was consumed. 33
34 34
35 Recording non-current assets and depreciation Section 1 1 A transport business owned by a sole proprietor purchases a motor vehicle. This is charged to the Motor Vehicles Running Costs account. What are the effects of this on the end-of-year Balance Sheet? A Fixed assets understated current assets understated B Fixed assets overstated current assets overstated C Fixed assets overstated capital account overstated D Fixed assets understated capital account understated 35
36 2 Accountants prefer the commercial reality of a transaction to a strictly legal approach. This is an example of A consistency. B materiality. C prudence. D substance over form 36
37 3 A company s accounts showed a gross profit for the year of N After the accounts were prepared it was found that the opening stock had been overstated by N2400 and the closing stock had been understated by N3400. What is the corrected gross profit for the year? A N26700 B N31500 C N33500 D N
38 4 The treasurer of a club has decided not to include subscriptions owing by members in the Balance Sheet at the year-end. Which accounting concept is being applied? A accruals B going concern C money measurement D prudence 38
39 5 A trial balance does not balance and a Suspense account is opened. Subsequently the following errors are found and the Suspense account is cleared. 1A sales invoice for N1240 had been omitted from the books. 2 Rent paid of N2600 was entered correctly in the cash book but incorrectly as N6200 in the Rent account. 3 The purchases journal was undercast by N1980. What was the original balance on the Suspense account? A N1620 credit B N4340 debit C N5580 credit D N5580 debit 39
40 6 A sole trader pays private expenses from the business bank account and records them as drawings. Which accounting principle is applied? A business entity B going concern C matching D prudence 40
41 7 Which of the following would prevent a trial balance from balancing? A a credit note from a supplier entered in the sales journal B a discount allowed posted to the Discounts Received account C an invoice entered twice in the sales journal D a refund to a customer wrongly posted to Discounts Allowed account 41
42 8 The balance on the Sales Ledger Control account amounting to N has been entered in the trial balance as N The difference on the trial balance has been entered in a Suspense account. Which journal entry is required to correct the error? credited Account to be debited account to be A Sales Ledger Control account N9000 account N9000 Suspense B - Suspense account N9000 C Suspense account N D Suspense account N9000 account N9000 Sales Ledger Control 42
43 9 A business sells some of its stock for N80 on credit to a customer. The stock originally cost N50. Which statement actually reflects the effect of this transaction on the Balance Sheet? Current assets owner s capital A decrease by N30 decreases by N30 B decrease by N30 increases by N30 C increase by N30 increases by N30 D increase by N30 decreases by N30 43
44 10 A business values obsolete stock at net realisable value. Which accounting principle has been applied? A consistency B going concern C materiality D prudence 44
45 11 A business has chosen to use the straight line method of providing for depreciation of equipment. Why should it continue to use this method in subsequent years? A Accounting principles never allow accounting methods to be changed. B Other methods of depreciation are unsuitable for depreciating equipment. C To ensure that profits are stated on a consistent basis over time. D To ensure that the Balance Sheet always shows the market value for equipment. 45
46 12 A business omitted discounts allowed of N700 from its trial balance. During the year a machine had been sold for cash of N500 but the only accounting entry made was a debit in the Bank account. What is the balance on the Suspense account? A N200 debit B N1200 debit C N200 credit D N1200 credit 46
47 13 A business has a draft net profit of N It is discovered that the closing stock was overvalued by N4000 and that discounts received of N1500 were treated as an expense. What is the corrected net profit? A N B N C N D N
48 14 What does the going concern principle mean? A a business is profitable B a business will continue to operate for the foreseeable future C the assets of a business exceed its liabilities D the assets of a business should be valued at disposal value 48
49 15. When a businessman introduces capital into his business, the transaction is debited in the Cash Book and credited to his Capital account. Of which accounting principle is this an example? A entity B going concern C matching Solutions 1. D prudence D 2. D 3. Profit par account N32, D Opening inventory overstated N2,400 Closing inventory understanding N3,400 N38, D SUSPENSE ACCOUNT N N Balance b/f 5,580 Rent (6,200-2,600) 3,600 Purchase 1,980 5,580 5, A 7. C 49
50 8. Difference N43,000 N34,000 = 9,000 DR suspense account CR sales account Option D 9. C 10. D 11. C 50
51 12. SUSPENSE ACCOUNT Disposal 500 Discount allowed 700 Balance c/f Balance b/f 200 Option B 13. Net profit par account 84,000 Inventory overstated (4,000) Discount Received (x2) 3,000 83, B 15. A 51
52 Section 2 1 That is the purpose of charging depreciation in accounts? A To allocate the cost less residual value of a non-current asset over the accounting periods expected to benefit from its use B To ensure that funds are available for the eventual replacement of the asset C To reduce the cost of the asset in the statement of financial position to its estimated market value (1 mark) 52
53 2 Your firm bought a machine for #5,000 on 1 January 20X1, which had an expected useful life of four years and an expected residual value of #1,000; the asset was to be depreciated on the straight-line basis. The firm's policy is to charge depreciation in the year of disposal. On 31 December 20X3, the machine was sold for #1,600. What amount should be entered in the 20X3 statement of comprehensive income for profit or loss on disposal? A Profit of #600 B Loss of #600 C Profit of #350 D Loss of #400 (2 marks) 53
54 3 An asset register showed a net book value of #67,460. A non-current asset costing #15,000 had been sold for #4,000, making a loss on disposal of #1,250. No entries had been made in the asset register for this disposal. What is the correct balance on the asset register? A #42,710 B #51,210 C #53,710 D #62,210 (2 marks) 54
55 4 An organisation's asset register shows a net book value of #145,600. The non-current asset account in the nominal ledger shows a net book value of #135,600. The difference could be due to a disposed asset not having been deducted from the asset register. Which one of the following could represent that asset? A Asset with disposal proceeds of #15,000 and a profit on disposal of #5,000 B Asset with disposal proceeds of #15,000 and a net book value of #5,000 C Asset with disposal proceeds of #15,000 and a loss on disposal of #5,000 D Asset with disposal proceeds of #5,000 and a net book value of #5,000 (2 marks) 55
56 5 Which one of the following would occur if the purchase of computer stationary was debited to the computer equipment at cost account? A An overstatement of profit and an overstatement of non-current assets B An understatement of profit and an overstatement of non-current assets C An overstatement of profit and an understatement of non-current assets (1 mark) 56
57 6 A company bought a property in Chelsea four years ago on 1 January for # 170,000. Since then property prices have risen substantially and the property has been revalued at #210,000. The property was estimated as having a useful life of 20 years when it was purchased. What is the amount transferred to the revaluation reserve? A #210,000 B #136,000 C #74,000 D #34,000 (2 marks) 57
58 7 A business purchased a motor car on 1 July 20X3 for #20,000. It is to be depreciated at 20 per cent per year on the straight line basis, assuming a residual value at the end of five years of #4,000, with a proportionate depreciation charge in the year of purchase. The #20,000 cost was correctly entered in the cash book but posted to the debit of the motor vehicles repairs account. How will the business profit for the year ended 31 December 20X3 be affected by the error? A Understated by #18,400 B Understated by #16,800 C Overstated by #18,400 Solutions 1 A It is never B as funds are not set aside; nor C, this is revaluation. 2 D ($5,000 $1,000)/4 = $1,000 depreciation per annum? NBV = $2, D Balance b/d 67,460 Less: NBV of non-current asset sold (4, ,250) 5,250 $ 62,210 4 A If disposal proceeds were $15,000 and profit on disposal is $5,000, then net book value must be $10,000, the difference between the asset register figure and the noncurrent asset account in the nominal ledger. 5 A An expense has been posted as a non-current asset. 6 C 58
59 $ Valuation 210,000 Net book value (170,000 16/20) (136,000) Revaluation reserve 74,000 59
60 7 A $ Repairs cost overstated 20,000 Depreciation understated ((20,000 4,000) 20% 6/12) (1,600) Profit understated 18,400 60
61 Compiling financial statement 1 You are given the following information: Receivables at 1 January 20X3 #10,000 Receivables at 31 December 20X3 #9,000 Total receipts during 20X3 (including cash sales of #5,000) #85,000 What is the figure for sales on credit during 20X3? A #81,000 B #86,000 C #79,000 D #84,000 (2 marks) 61
62 2 A supplier sends you a statement showing a balance outstanding of #14,350. Your own records show a balance outstanding of #14,500. Which one of the following could be the reason for this difference? A the supplier sent an invoice for #150 which you have not yet received B the supplier has allowed you #150 cash discount which you had omitted to enter in your ledgers C you have paid the supplier #150 which he has not yet accounted for D you have returned goods worth #150 which the supplier has not yet accounted for (2 marks) 62
63 3 The receivables ledger control account at 1 May had balances of #32,750 debit and #1,275 credit. During May, sales of #125,000 were made on credit. Receipts from receivables amounted to #122,500 and cash discounts of #550 were allowed. Refunds of #1,300 were made to customers. Which one of the following could be the closing balances at 31 May? A #35,175 debit and #3,000 credit B #35,675 debit and #2,500 credit C #36,725 debit and #2,000 credit D #36,725 debit and #1,000 credit (2 marks) 63
64 4 The debit side of a trial balance totals #50 more than the credit side. Which one of the following could this be due to? A a purchase of goods for #50 being omitted from the supplier's account B a sale of goods for #50 being omitted from the customer's account C an invoice of #25 for electricity being credited to the electricity account D a receipt for #50 from a customer being omitted from the cash book (2 marks) 64
65 5 A receivables ledger control account had a closing balance of #8,500. It contained a contra to the payables ledger of #400, but this had been entered on the wrong side of the control account. What should be the correct balance on the control account? A #7,700 debit B #8,100 debit C #8,400 debit D #8,900 debit (2 marks) 65
66 6 Which of the following items could appear on the credit side of a receivables ledger control account? 1 Cash received from customers 2 Irrecoverable debts written off 3 Increase in allowance for receivables 4 Discounts allowed 5 Sales 6 Credits for goods returned by customers 7 Cash refunds to customers A 1, 2, 4 and 6 B 1, 2, 4 and 7 C 3, 4, 5 and 6 D 5 and 7 (2 marks) Solution 1 C Credit sales = #80,000 #10,000 + #9,000 = #79, B A, C and D would make the supplier's statement #150 higher. 3 C Debits total #32,750 + #125,000 + #1,300 = #159,050. Credits total #1,275 + #122,500 + #550 = #124,325. Therefore, net balance = #34,725 debit. 66
67 4 A B and C would make the credit side #50 higher. D would have no effect. 5 A #8,500 (2 X #400) = #7, A Sales and refunds are posted on the debit side, changes in the allowance for receivables do not appear in the control account. 67
68 Compiling financial statement of sole traders QUESTION 1 Jacobs Brown, a sole trader, extracted the following trial balance from his books at 31 December TRIAL BALANCE AS AT 31 DECEMBER 2012 Debit Credit L# L# Capital at 1 January ,940 Receivables 427,370 Cash in hand 14,110 Payables 354,040 Furniture and fittings at cost 422,000 Discounts allowed and received 13,040 11,750 Inventories at 1 January ,600 Purchases and sales 3,879,360 4,916,200 Motor vehicles at cost 457,300 Electricity 61,840 Vehicle running expenses 28,620 Rent 88,410 General expenses 74,130 68
69 Bank overdraft 198,610 Provision for depreciation: Furniture and fittings 22,000 Motor Vehicles 152,920 Drawings 265,680 5,916,460 5,916,460 Additional information: a. L#2,180 was unpaid for motor expenses. b. L#6,800 was prepaid for rent. c. Depreciation is to be provided for the year as follows: Motor vehicles 20% on cost Furniture and fittings 10% reducing balance method d. Inventory at the close of business was valued at L#199,260 You are required to: Prepare Jacobs Brown s Income Statement for the year ended 31 December 2012 and his Statement of Financial position as at that date. 69
70 70
71 QUESTION 2 A Pakenham Ltd has a financial year end of 30 April each year. The manufacturing account showed the following: Manufacturing account for the year ended 30 April 2010 # # Inventory (stock) of raw materials at 1 May Purchases of raw materials Inventory (stock) of raw materials at 30 April 2010 (18 000) Direct labour Prime cost Factory overheads Rent and rates Electricity Other Factory cost of goods produced Factory profit Other information is as follows: During the year ended 30 April 2010 sales were # and selling and administration costs were #
72 2 Rent and rates are allocated on the basis of floor space. The factory occupies 100 m2 and the office and showroom 150 m2. 3 Electricity is allocated on the basis of usage with 80% being used in the factory. 4 Pakenham Ltd maintains a provision for unrealised profit account. The balance on this account was #4500 on 1 May 2009 and was #4800 on 30 April The rate of factory profit had remained constant during the year. REQUIRED (a) Prepare an income statement (trading and profit and loss account) for the year ended 30 April (b) Calculate the value of inventory (stock) for inclusion in the balance sheet at 30 April
73 Solution QUESTION JACOBS BROWN INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2012 LS LS Sales 4,916,200 Cost of Sales: Opening Inventory 184,600 Purchases 3,879,360 4,063,960 Closing inventory (199,260) (3,864,700) GROSS PROFIT 1,051,500 Discount received 11,750 1,063,250 OPERATING EXPENSES: Vehicle running expenses (Wk 10) 30,800 Rent (Wk 2) 81,610 Depreciation Motor vehicles (Wk 3) 91,460 Depreciation Furniture and fittings (Wk 4) 40,000 73
74 Discount allowed 13,040 Electricity 61,840 General expenses 74,130 (392,880) NET PROFIT 670,370 JACOBS BROWN STATEMENT OF FINACIAL POSITION FOR THE YEAR ENDED DECEMBER 31, 2012 LS LS LS CARRYING COST DEP AMOUNT NON-CURRENT ASSETS: Motor vehicles 457,300 (244,380) 212,920 Furniture and fittings 422,000 (62,000) 360,000 CURRENT ASSETS: 879,300 (306,380) 572,920 Inventory 199,260 Receivables 427,370 Prepaid rent 6,800 Cash in hand 14, ,540 74
75 TOTAL ASSETS 1,220,460 EQUITY AND LIABILITIES: Owners equity 260,940 Net profit 670, ,310 Drawings (265,680) CURRENT LIABILITIES: Payables 354,040 Accrued motor expenses 2, ,630 Bank overdraft 198, ,830 TOTAL EQUITY AND LIABILITIES 1,220,460 JACOBS BROWN WORKING NOTES WK 1: Determination of vehicle running expenses figure as per income statement LS Vehicle running expenses as per account 28,620 Accrued motor expenses 2,180 30,800 WK 2: Determination of rent figure as per income statement 75
76 Rent as per account 88,410 Prepaid rent (6,800) 81,610 WK 3: Calculation of depreciation on motor vehicles Motor cost 457,300 20% 91,460 WK 4: Calculation of depreciation on furniture and fittings Furniture and cost 422,000 Accumulated depreciation on furniture and beginning (22,000) NBV on furniture and fittings 400,000 10% 40,000 76
77 QUESTION (a) Income statement (Trading and profit and loss account) for the year ended 30 April 2010 $ $ Sales 602,000 Finished goods at 1 May ,500 Transfer from manufacturing account 483,000 Finished goods at 30 April , ,700 Gross profit 121,300 Rent and rates 30,000 Electricity 18,000 Selling and admin 39,000 87,000 Manufacturing profit 63,000 34,300 Less increase in provision for unrealised profit ,700 Total profit for the year (net profit) 97,000 (b) Value of inventory (stock): Raw materials 18,000 Finished goods 36,800 Less PUP 4,800 32,000 77
78 50,000 Accounts of incomplete records 78
79 1 Your cash book at 31 December 20X3 shows a bank balance of $565 overdrawn. On comparing this with your bank statement at the same date, you discover the following. 1 A cheque for $57 drawn by you on 29 December 20X3 has not yet been presented for payment. 2 A cheque for $92 from a customer, which was paid into the bank on 24 December 20X3, has been dishonoured on 31 December 20X3. What is the correct bank balance to be shown in the statement of financial position at 31 December 20X3? A $714 overdrawn B $657 overdrawn C $473 overdrawn D $53 overdrawn (2 marks) 2 The cash book shows a bank balance of $5,675 overdrawn at 31 August 20X5. It is subsequently discovered that a standing order for $125 has been entered twice, and that a dishonoured cheque for $450 has been debited in the cash book instead of credited. What is the correct bank balance? A $5,100 overdrawn B $6,000 overdrawn C $6,250 overdrawn D $6,450 overdrawn (2 marks) 3 A business had a balance at the bank of $2,500 at the start of the month. During the following month, it paid for materials invoiced at $1,000 less trade discount of 20% and cash discount of 10%. It received a cheque from a customer in respect of an invoice for $200, subject to cash discount of 5%. What was the balance at the bank at the end of the month? 79
80 A $1,970 B $1,980 C $1,990 D $2,000 (2 marks) 4 The bank statement on 31 October 20X7 showed an overdraft of $800. On reconciling the bank statement, it was discovered that a cheque drawn by your company for $80 had not been presented for payment, and that a cheque for $130 from a customer had been dishonoured on 30 October 20X7, but that this had not yet been notified to you by the bank. What is the correct bank balance to be shown in the statement of financial position at 31 October 20X7? A $1,010 overdrawn B $880 overdrawn C $750 overdrawn D $720 overdrawn (2 marks) 5 Your firm's cash book at 30 April 20X8 shows a balance at the bank of $2,490. Comparison with the bank statement at the same date reveals the following differences: $ Unpresented cheques 840 Bank charges not in cash book 50 Receipts not yet credited by the bank 470 Dishonoured cheque not in cash book 140 What is the adjusted bank balance per the cash book at 30 April 20X8? A $1,460 B $2,300 C $2,580 D $3,140 (2 marks) 80
81 6 The following bank reconciliation statement has been prepared by a trainee accountant: BANK RECONCILIATION 30 SEPTEMBER 20X2 Balance per bank statement (overdrawn) 36,840 Add: lodgements credited after date 51,240 $ 88,080 Less: outstanding cheques 43,620 Balance per cash book (credit) 44,460 Assuming the amounts stated for items other than the cash book balance are correct, what should the cash book balance be? A $44,460 credit as stated B $60,020 credit C $29,220 debit D $29,220 credit (2 marks) 7 Listed below are some possible causes of difference between the cash book balance and the bank statement balance when preparing a bank reconciliation: 1 Cheque paid in, subsequently dishonoured. 2 Error by bank 3 Bank charges 4 Lodgements credited after date 5 Outstanding cheques not yet presented. Which of these items require an entry in the cash book? 81
82 A 1 and 3 only B 1, 2, 3, 4 and 5 C 2, 4, and 5 only (1 mark) 8 In preparing a company's bank reconciliation statement at March 20X3, the following items are causing the difference between the cash book balance and the bank statement balance: 1 Bank charges $380 2 Error by bank $1,000 (cheque incorrectly debited to the account) 3 Lodgements not credited $4,580 4 Outstanding cheques $1,475 5 Direct debit $350 6 Cheque paid in by the company and dishonoured $400 Which of these items will require an entry in the cash book? A 2, 4 and 6 B 1, 5 and 6 C 3 and 4 D 3 and 5 (2 marks) 9 The following bank reconciliation statement has been prepared by a trainee accountant: $ Overdraft per bank statement 3,860 Less: outstanding cheques 9,160 5,300 Add: deposits credited after date 16,690 Cash at bank as calculated above 21,990 82
83 What should be the correct balance per the cash book? A $21,990 balance at bank as stated B $3,670 balance at bank C $11,390 balance at bank D $3,670 overdrawn (2 marks) 10 Which of the following statements about bank reconciliations are correct? 1 A difference between the cash book and the bank statement must be corrected by means of a journal entry. 2 In preparing a bank reconciliation, lodgements recorded before date in the cash book but credited by the bank after date should reduce an overdrawn balance in the bank statement. 3 Bank charges not yet entered in the cash book should be dealt with by an adjustment in the bank reconciliation statement. 4 If a cheque received from a customer is dishonoured after date, a credit entry in the cash book is required. A 2 and 4 B 1 and 4 C 2 and 3 D 1 and 3 83
84 Solutions 1 B $(565)o/d $92 dishonoured cheque = $(657) o/d 2 D $ Balance b/d 5,675 o/d Less: standing order (125) Add: dishonoured cheque (450 2) 900 6,450 o/d 3 A $ Opening bank balance 2,500 Payment ($1,000 $200) u 90% (720) Receipt ($200 $10) 190 Closing bank balance 1,970 4 B $ Balance per bank statement (800) Unpresented cheque (80) Dishonoured cheque (affects cash book only) (880) 5 B $ Original cash book figure 2,490 84
85 Adjustment re charges (50) Adjustment re dishonoured cheque (140) 2,300 6 D $ Bank statement (36,840) Lodgements credited after date 51,240 Outstanding cheques (43,620) Balance per cash book (o/d) (29,220) 7 A Dishonoured cheques and bank charges must be entered in the cash book. 8 B Bank charges, direct debits and dishonoured cheques will all be written into the cash book. 9 B Overdraft (3,860) Outstanding cheques (9,160) $ (13,020) Deposits 16,690 Cash at bank 3, A Bank charges not entered in the cash book can be entered, and the cash book balance adjusted 85
86 Account of partnership business QUESTION 1 Hexham, Creakle and Quilp started working in partnership on 1 January 2011, but did not produce a written partnership agreement. On 1 July 2011 Creakle made a short-term loan to the partnership. No part was repaid before the year end. At the end of the first year of trading Hexham produced the following statements. Income statement and appropriation account for the year ended 31 December 2011 $ $ Profit from operations 117,200 Bank interest 700 Interest on loan from Creakle Profit for the year 116,000 Salary to Hexham 18,000 Interest on capital Hexham 5,000 Creakle 5,000 Quilp 5,000 33,000 86
87 83,000 Share of profit Hexham 41,500 Creakle 20,750 Quilp 20,750 83,000 Statement of financial position at 31 December 2011 $ $ $ Non-current assets Property 110,000 Other 40, ,000 Current assets Inventory 24,800 Trade receivables 14,200 39,000 Current liabilities Trade payables 9,800 Short-term loan from Creakle 40,000 Cash and cash equivalents 6,200 56, 000 (17 000) Capital accounts Hexham 50,000 87
88 Creakle 50,000 Quilp 50, ,000 Current accounts EHexham Creakle 3,500 Cr 6,250 Dr Quilp 14,250 Dr (17 000) REQUIRED 133,000 (a) Applying the provisions of the Partnership Act 1890, prepare a corrected income statement and appropriation account for the year ended 31 December [5] (b) Calculate the drawings made by each partner in the year ended 31 December [6] (c) Calculate the correct current account balances at 31 December [4] (d) Comment on the performance of the partnership during the year and its financial position at 31 December [8] Additional information: Quilp was discouraged by the performance of the business and decided to withdraw from the partnership on 1 January It was agreed that goodwill of $ had been generated over the year of trading, although it was not to be shown in the books. Property prices had risen during the year and the property was then valued at $ The business did not have the funds to pay Quilp for his share of the partnership and created a long-term loan paying Quilp interest at 10% a year. REQUIRED (e) Prepare the partners capital accounts at 1 January [7] 88
89 (f) Prepare the partners statement of financial position immediately after the departure of Quilp on 1 January [6] On 1 January 2012 Quilp took up employment with a competitor, earning a salary of $ a year. REQUIRED (g) Comment on Quilp s decision to leave the partnership and work for the competitor. [4] Solutions QUESTION 1 (a) Income statement and appropriation account for the year ended 31 December 2011 # # Profit from operations 117,200 Bank interest 700 Interest on loan from Creakle 1,000 1, ,500 Interest on capital Salaries nil nil Shares of profit H C Q ,500 (b) H C =
90 Q (c) H C Q # # # Original balance (6 250) (14 250) IOC (5 000) (5 000) (5 000) Salary (18 000) Original profit (41 500) (20 750) (20 750) + Revised profit Original interest (500) + Revised interest (22 500) Alternative approach H C Q # # # Profit Interest Drawings ( ) (32 500) ( ) Balance (22 500) (1 500) 90
91 (d) Partnership is under-capitalised 1. The fixed capital has paid for non-current assets 1 but not for working capital 1 Hexham s drawings are higher than the others 1. due to/justified by salary and higher profit share 1. Basic profitability good 1 ROCE = 77.1% 1 Drawings higher than profits. No liquid funds. Current ratio is 0.7:1 1. Quick ratio is 0.25:1 Other sensible comment to be rewarded. (e) Capital Accounts H C Q H C Q # # # # # # Goodwill Balance b/d Current account Goodwill Loan Premises Balance c/d Balance b/d (f) Statement of Financial Position at 1 January 2012 # # Non-current assets Premises Other
92 Current assets Current liabilities (56 000) (17 000) Long term loan to Quilp Fixed capital H C Current accounts H (22 500) C (15 500) (g) Q now receives = a year. This is less than his share of profit. Now he is only an employee with no control. As partnership is illiquid it may not pay the interest. The partnership may never pay back the loan. Q will not share in future growth of property value. Employment may offer better security. Other sensible comment to be rewarded. 92
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