FINANCIAL ACCOUNTING WEEK 4 SOLUTION TOPIC: RECORDING TRANSACTIONS AND EVENTS; Accruals and Prepayment, Irrecoverable debts and Allowances and Provisions and Contingencies REVIEW QUESTIONS 1. A company receives rent for subletting part of its office block. Rent, receivable quarterly in advance, is received as follows: Date of receipt Period covered $ 1 October 20X1 3 months to 31 December 20X1 7,500 30 December 20X1 3 months to 31 March 20X2 7,500 4 April 20X2 3 months to 30 June 20X2 9,000 1 July 20X2 3 months to 30 September 20X2 9,000 1 October 20X2 3 months to 31 December 20X2 9,000 What figures, based on these receipts, should appear in the company's financial statements for the year ended 30 November 20X2? Statement of profit or loss Statement of financial position A. $34,000 Debit Rent in arrears (Dr) $3,000 B. $34,500 Credit Rent received in advance (Cr) $6,000 C. $34,000 Credit Rent received in advance (Cr) $3,000 D. $34,000 Credit Rent in arrears (Dr) $3,000 2. A company pays rent quarterly in arrears on 1 January, 1 April, 1 July and 1 October each year. The rent was increased from $90,000 per year to$120,000 per year as from 1 October 20X2. What rent expense and accrual should be included in the company's financial statements for the year ended 31 January 20X3? Rent expense Accrual $ $ A. 100,000 20,000 STARRY GOLD ACADEMY +2348023428420, +2347038174484, info@starrygoldacademy.com, www.starrygoldacademy.com Page 1
B. 100,000 10,000 C. 97,500 10,000 D. 97,500 20,000 3. At 31 March 20X2 a company had oil in hand to be used for heating costing $8,200 and an unpaid heating oil bill for $3,600. At 31 March 20X3 the heating oil in hand was $9,300 and there was an outstanding heating oil bill of $3,200. Payments made for heating oil during the year ended 31 March 20X3 totalled $34,600.Based on these figures, what amount should appear in the company's statement of profit or loss and other comprehensive income for heating oil for the year? A. $23,900 B. $36,100 C. $45,300 D. $33,100 4. Diesel fuel in inventory at 1 November 20X7 was $12,500, and there were invoices awaited for $1,700. During the year to 31 October 20X8, diesel fuel bills of $85,400 were paid, and a delivery worth $1,300 had yet to be invoiced. At 31 October 20X8, the inventory of diesel fuel was valued at $9,800. What is the value of diesel fuel to be charged to the statement of profit or loss and other comprehensive income for the year to 31 October 20X8? A. $87,700 B. $89,400 C. $88,500 D. $91,100 5. During 20X4, B, a limited liability company, paid a total of $60,000 for rent, covering the period from 1 October 20X3 to 31 March 20X5. What figures should appear in the company's financial statements for the year ended 31 December 20X4? Statement of profit or loss and other Statement of comprehensive income financial position $ $ A. 40,000 10,000 Prepayment B. 40,000 15,000 Prepayment C. 50,000 10,000 Accrual D. 50,000 15,000 Accrual 6. What are the correct ledger entries to record an accrual in the accounts? A. Dr Asset Cr Expenses B. Dr Expenses Cr Liability C. Dr Liability Cr Expenses D. Dr Expenses Cr Asset 7. What are the correct ledger entries to record a prepayment in the accounts? A. Dr Asset Cr Expenses STARRY GOLD ACADEMY +2348023428420, +2347038174484, info@starrygoldacademy.com, www.starrygoldacademy.com Page 2
B. Dr Expenses Cr Liability C. Dr Liability Cr Expenses D. Dr Expenses Cr Asset 8. At 31 December 20X2 a company's receivables totalled $400,000 and an allowance for receivables of $50,000 had been brought forward from the year ended 31 December 20X1.It was decided to write off debts totalling $38,000 and to adjust the allowance for receivables to 10% of the receivables. What charge for receivables expense should appear inthe company's statement of profit or loss for the year ended 31 December 20X2? A. $74,200 B. $51,800 C. $28,000 D. $24,200 9. A company has received cash for a debt that was previously written off. Which of the following is the correct double entry to record the cash received? Debit Credit A. Irrecoverable debts expense Accounts receivable B. Cash Irrecoverable debts expense C. Allowance for receivables Accounts receivable D. Cash Allowance for receivables 10. At 31 December 20X4 a company's trade receivables totalled $864,000 and the allowance for receivables was $48,000.It was decided that debts totalling $13,000 were to be written off, and the allowance for receivables adjusted to five per cent of the receivables. What figures should appear in the statement of financial position for trade receivables (after deducting the allowance) and in the statement of profit or loss for receivables expense? Statement of profit or loss Statement of financial position $ $ A. 8,200 807,800 B. 7,550 808,450 C. 18,450 808,450 D. 55,550 808,450 11. A company has been notified that a customer has been declared bankrupt. The company had previously made an allowance for this debt. Which of the following is the correct double entry to account for this new information? Debit Credit A. Irrecoverable debts Receivables B. Receivables Irrecoverable debts C. Allowance for receivables Receivables STARRY GOLD ACADEMY +2348023428420, +2347038174484, info@starrygoldacademy.com, www.starrygoldacademy.com Page 3
D. Receivables Allowance for receivables 12. An increase in an allowance for receivables of $8,000 has been treated as a reduction in the allowance in the financial statements. Which of the following explains the resulting effects? A. Net profit is overstated by $16,000, receivables overstated by $8,000 B. Net profit understated by $16,000, receivables understated by $16,000 C. Net profit overstated by $16,000, receivables overstated by $16,000 D. Gross profit overstated by $16,000, receivables overstated by $16,000 13. At 1 January 20X1, there was an allowance for receivables of $3,000. During the year, $1,000 of debts were written off as irrecoverable, and $800 of debts previously written off were recovered. At 31 December 20X1, it was decided to adjust the allowance for receivables to 5% of receivables which are $20,000.What is the total receivables expense for the year? A. $200 debit B. $1,800 debit C. $2,200 debit D. $1,800 credit 14. Allowances for receivables are an example of which accounting concept? A. Accruals B. Consistency C. Matching D. Prudence 15. Which of the following statements about provisions and contingencies is/are correct? 1. A company should disclose details of the change in carrying value of a provision from the beginning to the end of the year. 2. Contingent assets must be recognised in the financial statements in accordance with the prudence concept. 3. Contingent liabilities must be treated as actual liabilities and provided for if it is probable that they will arise. A. 3 only B. 2 and 3 only C. 1 and 3 only D. All three statements are correct 16. An ex-director of X company has commenced an action against the company claiming substantial damages for wrongful dismissal. The company's solicitors have advised that the ex-director is unlikely to succeed with his claim, although the chance of X paying any monies to the ex-director is not remote. The solicitors' estimates of the company's potential liabilities are: $ Legal costs (to be incurred whether the claim is successful or not) 50,000 Settlement of claim if successful 500,000 550,000 STARRY GOLD ACADEMY +2348023428420, +2347038174484, info@starrygoldacademy.com, www.starrygoldacademy.com Page 4
According to IAS 37 Provisions, contingent liabilities and continent assets, how should this claim, be treated in the financial statements? A. Provision of $550,000 B. Disclose a contingent liability of $550,000 C. Disclose a provision of $50,000 and a contingent liability of $500,000 D. Provision for $500,000 and a contingent liability of $50,000 17. The following items have to be considered in finalizing the financial statements of Q, a limited liability company: 1. The company gives warranties on its products. The company s statistics show that about 5% of sales give rise to a warranty claim. 2. The company has guaranteed the overdraft of another company. The likelihood of a liability arising under the guarantee is assessed as possible. According to IAS 37 Provisions, contingent liabilities and continent assets, what is the correct action to be taken in the financial statements for these items? Create a provision Disclose by note only No action A 1 2 B 1 2 C 1, 2 D 2 1 18. Doggard Co is a business that sells second hand cars. If a car develops a fault within 30 days of the sale, Doggard Co will repair it free of charge. At 30 April 20X4 Doggard Co had made a provision for repairs of $2,500. At 30 April 20X5 Doggard Co calculated that the provision should be $2,000. What entry should be made for the provision in Doggard Co's statement of profit or loss for the year to 30 April 20X5? A. A charge of $500 B. A credit of $500 C. A charge of $2,000 D. A credit of $2,000 19. Which of the following best describes a provision according to IAS 37 Provisions, contingent liabilities and contingent assets? A. A provision is a liability of uncertain timing or amount. B. A provision is a possible obligation of uncertain timing or amount. C. A provision is a credit balance set up to offset a contingent asset so that the effect on the statement of financial position is nil. D. A provision is a possible asset that arises from past events. 20. Which of the following items does the statement below describe? A possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the entity's control A. A provision B. A current liability C. A contingent liability STARRY GOLD ACADEMY +2348023428420, +2347038174484, info@starrygoldacademy.com, www.starrygoldacademy.com Page 5
D. A contingent asset STARRY GOLD ACADEMY +2348023428420, +2347038174484, info@starrygoldacademy.com, www.starrygoldacademy.com Page 6