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Paper F3 (International) Course Notes ACF3CN07 (INT)
F3 Financial Accounting (INT) (Paper Based Exam) Study Programme
1 2 3 4 5
Page Introduction to the paper and the course............................................................................................................... (ii) Introduction to accounting ........................................................................................................................... 1.1 Home study chapter - The regulatory framework ........................................................................................ 2.1 Accounting conventions............................................................................................................................... 3.1 Sources, records and books of prime entry................................................................................................. 4.1 Ledger accounts and double entry .............................................................................................................. 5.1 Home Study
End of Day 1 – refer to Course Companion for 6 7 8 9 10 11
From trial balance to financial statements ................................................................................................... 6.1 Sales tax...................................................................................................................................................... 7.1 Inventory...................................................................................................................................................... 8.1 Tangible non-current assets........................................................................................................................ 9.1 Intangible non-current assets .................................................................................................................... 10.1 Accruals and prepayments........................................................................................................................ 11.1 Home Study
End of Day 2 – refer to Course Companion for 12 13 14 15
Irrecoverable debts and allowances .......................................................................................................... 12.1 Provisions and contingencies.................................................................................................................... 13.1 Control accounts ....................................................................................................................................... 14.1 Bank reconciliations................................................................................................................................... 15.1 Home Study
End of Day 3 – refer to Course Companion for 16 17 18 19 20 21 22 23 24 25 26
Correction of errors.................................................................................................................................... 16.1 Preparation of financial statements for sole traders .................................................................................. 17.1 Incomplete records.................................................................................................................................... 18.1 Partnerships .............................................................................................................................................. 19.1 Home Study Introduction to company accounting.......................................................................................................... 20.1 Preparation of financial statements for companies.................................................................................... 21.1 Events after the balance sheet date .......................................................................................................... 22.1 Cash flow statements ................................................................................................................................ 23.1 Home study chapter - Information technology........................................................................................... 24.1 Home Study Answers to Lecture Examples .................................................................................................................. 25.1 Pilot paper (Questions only) ...................................................................................................................... 26.1 Don’t forget to plan your revision phase!
End of Day 4 – refer to Course Companion for
End of Day 5 – refer to Course Companion for
• • • •
Revision of syllabus Testing of knowledge Question practice Exam technique practice
BPP provides revision courses, question days, mock days and specific material to assist you in this important phase of your studies.
Introduction to Paper F3 Financial Accounting (INT)
Overall aim of the syllabus
To develop knowledge and understanding of the underlying principles and concepts relating to financial accounting and technical proficiency in the use of double-entry accounting techniques including the preparation of basic financial statements.
The broad syllabus headings are: A B C D E F The context and purpose of financial reporting The qualitative characteristics of financial information and the fundamental bases of accounting The use of double entry and accounting systems Recording transactions and events Preparing a trial balance Preparing basic financial statements
On successful completion of this paper, candidates should be able to: • • • • • • Explain the context and purpose of financial reporting Define the qualitative characteristics of financial information and the fundamental bases of accounting Demonstrate the use of double entry and accounting systems Record transactions and events Prepare a trial balance (including identifying and correcting errors) Prepare basic financial statements for incorporated and unincorporated entities
Links with other papers
Corporate Reporting (P2)
Financial Reporting (P7)
Accountant in Business (F1)
Financial Accounting (F3)
This diagram shows where direct (solid line arrows) and indirect (dashed line arrows) links exist between this paper and other papers that may precede or follow it. Paper F7 Financial Reporting, assumes knowledge acquired in paper F3 Financial Accounting, and develops and applies this further and in greater depth. Paper P2 Corporate Reporting, assumes knowledge acquired at the Fundamentals level including core technical capabilities to prepare and analyse financial reports for single and combined entities.
Assessment methods and format of the exam
Examiner: Nicola Ventress The examination is a two hour paper and all questions are compulsory. Questions will assess all parts of the syllabus and will contain both computational and non-computational elements. Format of the Exam 40 two mark questions 10 one mark questions Marks 80 10 90
Achieving ACCA's Study Guide Outcomes
A The context and purpose of financial reporting
Chapter 1 Chapter 1 Chapter 1 Chapter 2
A1 The reasons for and objectives of financial reporting A2 Users’ and stakeholders’ needs A3 The main elements of financial reports A4 The regulatory framework
The qualitative characteristics of financial information and the fundamental bases of accounting
Chapter 3 Chapter 3
B1 The qualitative characteristics of financial reporting B2 Alternative bases used in the preparation of financial information
The use of double entry and accounting systems
Chapters 4 & 5 Chapters 4 & 5 Chapter 24
C1 Double entry bookkeeping principles including the maintenance of accounting records and sources of information C2 Ledger accounts, books of prime entry and journals C3 Accounting systems and the impact of information technology on financial reporting
Recording transactions and events
Chapters 4, 5, 7 & 14 Chapters 4 & 5 Chapter 8 Chapter 9 Chapter 9 Chapter 10 Chapter 11 Chapter 12 Chapter 13 Chapters 20 & 21
D1 Sales and purchases D2 Cash D3 Inventory D4 Tangible non-current assets D5 Depreciation D6 Intangible non-current assets and amortisation D7 Accruals and prepayments D8 Receivables and payables D9 Provisions and contingencies D10 Capital structure and finance costs
E1 E2 E3 E4 E5
Preparing a trial balance
Trial balance Correction of errors Control accounts and reconciliations Bank reconciliations Suspense accounts Chapter 6 Chapter 16 Chapter 14 Chapter 15 Chapter 16
F1 F2 F3 F4 F5 F6
Preparing basic financial statements
Balance sheets Income statements Events after the balance sheet date Accounting for partnerships Cash flow statements (excluding partnerships) Incomplete records Chapter 17 Chapter 17 Chapter 22 Chapter 19 Chapter 23 Chapter 18
Classroom tuition and Home study
Your studies for BPP consist of two elements, classroom tuition and home study.
In class we aim to cover the key areas of the syllabus. To ensure examination success you will to spend private study time reinforcing your classroom course with question practice and reviewing areas of the Course Notes and Study Text.
To support you with your private study BPP provides you with a Course Companion which helps you to work at home and aims to ensure your private study time is effectively used. The Course Companion includes a Home Study section which breaks down your home study by days, one to be covered at the end of each day of the course. You will find clear guidance as to the time to spend on various activities and their importance. You are also provided with progress tests and two course exams which should be submitted for marking as they become due. These may include questions on topics covered in class and home study.
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Question practice from the Study Text
This is a question we recommend you attempt for home study.
Section reference in the Study Text
Further reading is needed on this area to consolidate your knowledge.
INTRODUCTION (viii) .
Introduction to accounting Syllabus Guide Detailed Outcomes Having studied this chapter you will be able to: • • • • • • Define and understand the principles of financial reporting. Qualification Context Sole trader and partnership accounts are only examined in Financial Accounting. partnership and limited liability company and recognise the legal differences between them.1 . The Fundamentals and Professional level papers of Financial Reporting (F7) and Corporate Reporting (P2) are set in the context of a limited liability company. partnership and limited liability company. Identify the advantages and disadvantages of operating as each of the three types of business entity. Define and identify assets. liabilities. equity. revenue and expenses. Identify and define the different business entities of: sole trader. 1. Identify the users of financial statements and state and differentiate between their information needs. These papers will test your understanding of the content of financial statements and the detailed accounting rules which companies must apply. Questions on this area will most likely focus on the different characteristics of the three types of business entity: sole trader. Exam Context This chapter introduces the subject of accounting. Understand and identify the purpose of each of the main financial statements.
1: INTRODUCTION TO ACCOUNTING Overview Income statement Balance sheet Financial statements Users of financial information Introduction to accounting Types of business entities Sole trader Partnership Limited liability company Concept of separate entity 1.2 .
000 5.000 Income statement Profit for the period 1.3 .1 Accounting Accounting is a way of recording.000 110.000 2.1: INTRODUCTION TO ACCOUNTING 1 1.000) 45.000 88.000 7.000 4.000 $ 200.1 Proforma financial statements Income statement for the year ended 31 December 20X7: $ Sales Less: Cost of sales Opening inventories Purchases Carriage inwards Closing inventories Gross profit Sundry income Discounts receivable Less: Expenses Rent Carriage outwards Telephone Electricity Wages and salaries Depreciation Bad and doubtful debts Motor expenses Discounts allowable 11. analysing and summarising transactions of a business.000 3.000 40.000) (120. Definition 2 2.000 1.000 9.000 170.000 20.000 (43.000 3.000) 80.000 5.000 1.000 (50.
000 290.000 7.000 1.000 290.000 40.000) 190.000 (2.000 30.000 200.000 30.000 20.1: INTRODUCTION TO ACCOUNTING Balance sheet 2.000 40.000 (25.000) 28.4 .000 50.000 45.000 60.000 5.000 16.000 90.000 170.2 Balance sheet as at 31 December 20X7: $ ASSETS Non-current assets Land and buildings Office equipment Motor vehicles Furniture and fixtures Current assets Inventories Trade receivables Less: allowance for receivables Prepayments Cash in hand and at bank Total assets CAPITAL AND LIABILITIES Capital Capital Profit Less: drawings Non-current liabilities Bank loans Current liabilities Bank overdraft Trade payables Accruals Total capital and liabilities $ 100.000 50.000 4.
5 .1: INTRODUCTION TO ACCOUNTING 3 Users of financial information Idea generation Lecture example 1 Required What information would these users of financial information be interested in? Solution (a) Investors (b) Employees (c) Lenders (d) Suppliers (e) Customers (f) Governments and their agencies (g) Public 1.
2.1 (b) Partnership (c) Sections 2.1 6.1 4. The mechanics of bookkeeping and the accounting records a business should keep will be covered in Chapters 4.6 .1: INTRODUCTION TO ACCOUNTING 4 4. In preparing accounts.3.4 Accounting records In order to be able to produce an income statement and a balance sheet a business needs to keep a record of all its transactions. 1. 5 and 6. Accounting records should be complete. 5 Quick Quiz Q2 Types of business entities Businesses fall into three main types: (a) Sole trader 5.2 6. When considering a limited liability company this distinction is laid down in law – the company has a separate legal identity. any type of business is treated as being a separate entity from its owner(s). accurate and valid if the information produced is to be useful for the users of financial information.2 4.3 The concept of business entity (separate entity) A business is considered to be a separate entity from its owner and so the personal transactions of the owner should never be mixed with the business transactions.3 4. 6 6.4 Limited liability company The sole trader is the simplest of these forms. This process is called bookkeeping.
2 7. For sole traders and partnerships the owners have unlimited liability and bear all the risks and reap all the rewards of being in business.3 1. For a limited liability company the shareholders' liability is limited to the extent of their investment.1 Summary of Chapter 1 Financial statements are used by a wide variety of users. each with different information needs.7 .1: INTRODUCTION TO ACCOUNTING 7 7. Satisfying the investors’ needs will mean that the majority of other users’ needs are also met. The business entity concept states that a business is a separate entity from its owners 7. There are three main types of businesses.
1: INTRODUCTION TO ACCOUNTING 1.8 .
9 .Chapter 1: Questions 1.
2 If a limited liability company goes into liquidation will the shareholders have to make a financial contribution to help the company pay its creditors? A B Yes No The business must be treated as being separate from its owners. Is this statement true or false? A B True False (1 mark) 1. (1 mark) (1 mark) 1.10 .1: QUESTIONS 1.3 Which of the following statements most accurately defines the business entity concept? A B 1.1 In a sole trader and a partnership the owners are personally liable if the business cannot meet its debts. A business must be set up as a separate legal entity.
11 .Chapter 1: Answers 1.
3 A B A END OF CHAPTER 1.1: ANSWERS 1.1 1.2 1.12 .
Home study chapter The regulatory framework Syllabus Guide Detailed Outcomes Having studied this chapter you will be able to: • Understand the role of the regulatory system including the roles of the – – – – • International Accounting Standards Committee Foundation (IASCF) International Accounting Standards Board (IASB) Standards Advisory Council (SAC) International Financial Reporting Interpretations Committee (IFRIC) Understand the role of International Financial Reporting Standards (IFRS) Exam Context Questions on this chapter will be knowledge based and so it is important that you are familiar with the role of each body. Qualification Context Financial Accounting introduces the International Accounting Standards Board's role in issuing IFRSs and paper F3 examines some key standards.1 . The role of IFRIC was tested in the Pilot Paper. All of these standards are built upon in the Fundamentals level paper Financial Reporting (F7) and the Professional level paper Corporate Reporting (P2). 2.
2 .2: HOME STUDY CHAPTER .THE REGULATORY FRAMEWORK Overview Regulatory framework IASCF SAC IASB IFRIC Issue IFRS 2.
2 2. It has no involvement in the standard setting process.1 1. IFRIC and SAC. 2.1 The IASB's principal aim is to develop a single set of high quality accounting standards: International Financial Reporting Standards (IFRS). Its Trustees appoint members to the IASB. Company financial statements particularly need to show a true and fair view. International Accounting Standards Board (IASB) 2. It also liaises with national accounting standard setters (for example the UK's ASB) to achieve convergence in accounting standards around the world. They also oversee the regulatory system and raise the finance necessary to support it.2 Introduction Financial statements are produced by an entity's managers in order to show its owners how the entity has performed over a period of time.2 The IASCF is a not-for-profit organisation based in the United States which heads up the regulatory system.4.3 Section 1. This means a system of regulation is necessary to ensure that financial statements are produced to a high standard and are comparable across different companies.2: HOME STUDY CHAPTER .1 Regulatory system International Accounting Standards Committee Foundation (IASCF) (22 Trustees) Standards Advisory Council (SAC) International Accounting Standards Board (IASB) (14 Board members) International Financial Reporting Interpretations Committee (IFRIC) Key: Appoints Reports to Advises International Accounting Standards Committee Foundation (IASCF) 2.3 .THE REGULATORY FRAMEWORK 1 1.
4 The IFRIC issues guidance on both how to apply existing IFRSs in company financial statements and how to account for new financial reporting issues where no IFRS exists. 3 3. 3. Exam standard question for 1 mark Lecture example 1 A B To appoint members of the IASB What is the role of the International Accounting Standards Committee Foundation? To advise the IASB on new accounting standards they should consider issuing. Solution 2.THE REGULATORY FRAMEWORK International Financial Reporting Interpretations Committee (IFRIC) 2.1 The role of International Financial Reporting Standards (IFRS) IFRSs provide guidance as to how items should be shown in a set of financial statements both in terms of their monetary amount and any other disclosure. For example: IAS 2: Inventory states at what amount a company should value its inventory and also requires that the financial statements breakdown the inventory figure between its components such as raw materials. It reports to the IASB.2: HOME STUDY CHAPTER .4 . work in progress and finished goods. Standards Advisory Council (SAC) 2.2 If a company follows the relevant accounting standards its financial statements should show a true and fair view.5 The SAC's principal role is to advise the IASB on a range of issues which include: • • The IASB's agenda and timetable for developing IFRSs Advising the IASB of areas that may need to be considered by IFRIC.
5 .2 4. 2.1 4. The SAC advises the IASB on its agenda.4 Summary of Chapter 2 The IASCF appoints members to the IASB. The IFRIC issues guidance on how to apply accounting standards. The IASB issues International Financial Reporting Standards. IFRIC and SAC.THE REGULATORY FRAMEWORK Lecture example 2 Exam standard question for 1 mark Which of the following bodies is involved is trying to achieve convergence of global accounting standards? A B IASB IFRIC Solution 4 4.2: HOME STUDY CHAPTER .3 4.
2: HOME STUDY CHAPTER .THE REGULATORY FRAMEWORK 2.6 .
7 .Chapter 2: Questions 2.
Provides advice on the development of standards.2: QUESTIONS 2. (1 mark) 2.8 .1 Accounting standards are prepared by A B C the IASB the IASC Foundation the IAASB (1 mark) 2. Interprets International Financial Reporting Standards.2 Which of the following best describes the role of The International Financial Reporting Interpretations Committee? A B C Issues International Financial Reporting Standards.
Chapter 2: Answers 2.9 .
10 .2: ANSWERS 2.2 A C END OF CHAPTER 2.1 2.
You should also expect to see more detailed calculations on IAS 8 tested in Paper F7. Identify the appropriate accounting treatment if a company changes a material accounting policy. the Pilot Paper required you to identify the factors that make information reliable. Qualification Context Your understanding of the remaining chapters of IASB Framework will be developed in the Fundamentals level paper Financial Reporting (F7).1 . 3. Understand the balance between qualitative characteristics. Understand the advantages and disadvantages of historical cost accounting. Identify and explain the main characteristics of alternative valuation bases (for example net realisable value). Understand the provision of International Financial Reporting Standards governing financial statements regarding changes in accounting policies. Questions may also ask you to define accounting conventions. understand and apply accounting concepts and qualitative characteristics. Exam Context Questions on this chapter are likely to test your understanding of the qualitative characteristics of information. For example.Accounting conventions Syllabus Guide Detailed Outcomes Having studied this chapter you will be able to: • • • • • • Define.
changes in accounting estimates and errors 3.2 .3: ACCOUNTING CONVENTIONS Overview The objective of financial statements Underlying assumptions IASB Framework Qualitative characteristics of financial information Elements of financial statements Accounting conventions Other issues Concepts and conventions Alternative valuation bases IAS 8: Accounting policies.
the entity's activities. financial performance and changes in financial position of an entity that is useful to a wide range of users in making economic decisions.1 2.3 2. The objective of financial statements 2. 2 The IASB's Framework for the Preparation and Presentation of Financial Statements The IASB's Framework is not an accounting standard.3 . or present fairly. In order for this information to be useful it must possess certain characteristics. The Framework is divided into seven sections. 1) The objective of financial statements 2) Underlying assumptions 3) Qualitative characteristics of financial information 7) Concepts of capital and capital maintenance 6) Measurement of the elements of financial statements Conceptual framework 2. Whenever a new accounting standard is issued it will be based on the principles of the IASB Framework. It is a set of principles which underpin the foundations of financial accounting.2 Introduction As noted in Chapter 2 financial statements should show a true and fair view of. They are produced to provide information to the entity's owners. 3.3: ACCOUNTING CONVENTIONS 1 1.4 4) The elements of financial statements Framework 5) Recognition of the elements of financial statements Only sections 1 – 4 are examinable at Paper F3. Furthermore its principles should be applied to account for any item where no accounting standard exists.5 To provide information about the financial position.2 2.1 1.
4 .6 Accruals basis The effects of transactions and other events are recognised when they occur (and not as cash or its equivalent is received or paid) and they are recorded in the accounting records and reported in the financial statements of the period to which they relate. Going concern Quick Quiz Q3 The financial statements are normally prepared on the assumption that an entity is a going concern and will continue in operation for the foreseeable future. Qualitative characteristics of financial information 2. then additional disclosure about the basis of preparation must be made in the financial statements.7 Quick Quiz Q4.3: ACCOUNTING CONVENTIONS Underlying assumptions 2. Q10 Understandability Comparability • Information should be readily understandable by users who are assumed to have reasonable knowledge • • For same entity over different periods: consistency Between different entities: disclosure of accounting policies Relevance Reliability • • Assist users in evaluating past and predicting future events Materiality • • • • • Faithful representation Substance over form Neutrality Prudence Completeness 3. If this is not appropriate.
Equity The residual interest in the assets of an entity after deducting all its liabilities.1 Alternative valuation bases Financial statements are generally produced using the historical cost convention where items are recorded at their historic cost. other than those relating to distributions to equity participants. Asset A resource controlled by an entity as a result of past events and from which future economic benefits are expected to flow to the entity. 3 3. The $1 million asset would then be depreciated to reflect the wearing out of the building.3: ACCOUNTING CONVENTIONS 2. in reality.5 . so EQUITY = NET ASSETS = SHARE CAPITAL + RESERVES Income Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity. other than those relating to contributions from equity participants. Historic cost 3. the settlement of which is expected to result in an outflow of economic benefits. if an entity purchased a building in 20X6 for $1 million then the building would be recorded as an asset at $1 million. For example. the value of the building may appreciate over time depending on market values. Expenses Decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or increases of liabilities that result in decreases in equity. However.8 The elements of financial statements The five elements of financial statements and their definitions are listed below. Liability A present obligation of the entity arising from past events.
3. alternative valuation bases exist.3 Note that in times of rising prices using the historical cost convention will lead to asset values being too low and profits too high in a set of financial statements. Due to the limitations of historic cost. Net realisable value 3.6 . They are: • • • replacement cost net realisable value economic value Replacement cost 3.5 This values items at their expected selling price less any costs that need to be incurred before the item can be sold.4 Assets are carried at the amount it would cost to acquire an equivalent asset today. Inventory should always be shown in the financial statements at the lower of cost (historic cost) and net realisable value. Liabilities are shown at the amount that would be required to settle the obligation today. Solution Advantages of historic cost (1) (2) (3) Disadvantages of historic cost (1) (2) 3.2 3. Replacement cost is also known as 'current cost'.3: ACCOUNTING CONVENTIONS Lecture example 1 Idea generation What are the advantages and disadvantages of recording the building at its historic cost of $1 million? (consider the Framework's qualitative characteristics).
the economic value of a machine would be calculated by determining the value in today's prices.6 Quick Quiz Q6 This is the value of an item derived from its ability to generate net cash flows. For example. The following information is available: Total cost of items to date Expected selling price per item Costs which still need to be incurred per item before item can be sold Required (a) What is the historic cost of the inventory? (b) What is the net realisable value of the inventory? (c) What value for inventory should be shown in the financial statements? Workings $ $ $ $ 1.3: ACCOUNTING CONVENTIONS Lecture example 2 Preparation question A Ltd has 100 items in inventory at the year end. of the future cash inflows from selling items produced by the machine less the related cash outflows. 3. It can also be known as 'present value'.000 11 2 Economic value 3.7 .
8 .3 Summary of Chapter 3 The IASB Framework provides a set of principles on which financial accounting is based. financial performance and changes in financial position. reliability and comparability.1 4. Financial statements should provide information on an entity’s financial position. 3. In order for this information to be useful to users the financial statements should contain the qualitative characteristics of understandability.2 4.3: ACCOUNTING CONVENTIONS 4 4. relevance.
3: ACCOUNTING CONVENTIONS Additional Notes 3.9 .
4 Every transaction has two effects. It is the way the entity has decided to treat an item in its financial statements.5 Assets and liabilities are recorded at their historical cost.2 Changes in accounting policy will only arise if: (a) (b) There is a new accounting standard or statutory requirement. Accounting policies – definition 6. This is particularly important when considering sole trader or partnership accounts as these businesses are not separately identified by law. bases. 3. This is the amount recorded when the transaction took place. even though a loyal workforce may be of benefit to a business this value cannot be measured in monetary terms and is therefore not included on the balance sheet.1 Other examinable concepts and conventions In addition to the concepts and conventions set out in the Framework.10 . The historical cost convention 5. for example whether non-current assets are carried at historic cost or a revalued amount. Using the new policy makes the financial statements more relevant and reliable. the following are also relevant in the preparation of financial statements.2 This recognises the distinction between the business and its activities and the owners or managers themselves.3: ACCOUNTING CONVENTIONS 5 5. conventions. The business entity concept 5. For example. rules and practices applied by an entity in preparing and presenting the financial statements. This is the underlying principle of the double entry accounting system.1 Changes in accounting policy 6. changes in accounting estimates and errors Accounting policies are the significant principles. The money measurement concept 5. 6 IAS 8: Accounting policies. The duality concept 5.3 Only items which are capable of being measured in monetary terms should be recognised in the financial statements.
an entity may discover a material error in the 20X6 figures whilst producing the 20X7 financial statements. An error is accounted for in exactly the same way as a change in accounting policy. the financial statements that ought to have been identified before the financial statements were finalised. 3.11 .5 These are material omissions from. This means they will be reproduced and drawn up using the 20X7 accounting policies.3 Financial statements contain two years worth of figures. or misstatements in. The current year figures (20X7) will be produced using the new accounting policy. Errors 6.3: ACCOUNTING CONVENTIONS Accounting treatment 6. 6. When the 20X7 financial statements are produced the 20X6 comparatives should be restated and the error corrected. For example a company whose year end is 31 December 20X7 will show information for 20X7 and 20X6. For example.4 Disclosure The following disclosure should be made: (a) (b) (c) The nature of the change in accounting policy The reasons for the change The amount of the adjustment in the current period and the comparative period. In order for the financial statements to be comparable over time the comparative figures (20X6) will be restated.
12 .3: ACCOUNTING CONVENTIONS 3.
Chapter 3: Questions 3.13 .
14 .1 The Framework for the Preparation and Presentation of Financial Statements identifies two assumptions which are the bedrock of accounting.3: QUESTIONS 3.2 In which of the following circumstances can a change of accounting policy be made? (i) (ii) (iii) A B C D 3. (ii) and (iii) (2 marks) (1 mark) 3. What are they? A B C Consistency and prudence Accruals and going concern Materiality and separate entity If the directors want to improve the balance sheet value If required by an accounting standard If it results in reliable and more relevant information (ii) only (i) and (ii) (ii) and (iii) (i).
Chapter 3: Answers 3.15 .
1 3.2 B C END OF CHAPTER 3.3: ANSWERS 3.16 .
payments and receipts. records and books of prime entry Syllabus Guide Detailed Outcomes Having studied Chapters 4 and 5 you will be able to: • • • • • • • • • • • • Identify and explain the function of the main data sources in an accounting system and how the accounting system provides useful information. Understand the need for a record of petty cash transactions and security over the petty cash system.1 . Describe the features and operation of a petty cash imprest system. Account for petty cash using imprest and non-imprest methods.Sources. 4. liability. Qualification Context These topics are only examined in Financial Accounting. Understand and illustrate the uses of journals and the posting of journal entries into ledger accounts. income and expense. You should also be aware of the principal contents of each book of prime entry and the purpose of the memorandum ledgers. Understand and record sales and purchase returns. you should have a good understanding of what constitutes an asset. for example. Identify correct journals from given narrative. credit purchase and cash transactions in ledger accounts and day books. Identify the main types of business transactions. Outline the contents and purpose of different types of business documentation such as an invoice. Exam Context Questions are unlikely to feature solely on this chapter. Understand and apply the concept of double entry accounting. purchases. sales. capital. the duality concept and the accounting equation. however. Record credit sale. Identify the main types of ledger account and illustrate how to balance and close a ledger account.
RECORDS AND BOOKS OF PRIME ENTRY Overview Balance sheet Income statement Sources.4: SOURCES.2 . records and books of prime entry Books of prime entry Memorandum ledgers Cash book Sales day book Purchase day book Petty cash book Journal book 4.
2 For a business. Liability: is a present obligation of the entity arising from past events. this list is formalised as a balance sheet and show the entity's assets and liabilities. Idea generation Lecture example 1 Required List out everything you own and owe.4: SOURCES. (a) (b) Asset: is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity. Solution (a) Own (b) Owe 1. 4.3 . the settlement of which is expected to result in an outflow of economic benefits.1 The balance sheet An individual could prepare a list of everything they own and everything by owe. RECORDS AND BOOKS OF PRIME ENTRY 1 1.
what the business owes the proprietor/owner. Non-current assets .000 90.000 40. ∴ CAPITAL = = ASSETS . i.000 20. more than one year).000 30.000 16.000 30.000 5. In this case the sole trader owns all of the business.000 Key features 1.000 (25.000 290. Capital .000 290.assets held and used in the business over the long-term (i.e.not non-current assets! Conventionally listed in increasing order of liquidity (i.000 7.000 45. its total net worth.000 50.4 . closeness of assets to cash).000 40.e.e.4 (a) (b) (c) (d) Always headed as at. for the date of the balance sheet.000 170.LIABILITIES NET ASSETS 4. Current assets .000 50.000 4.000 60. RECORDS AND BOOKS OF PRIME ENTRY Proforma balance sheet – sole trader 1.000 (2.000) 190.3 Balance sheet as at 31 December 20X7: $ ASSETS Non-current assets Land and buildings Office equipment Motor vehicles Furniture and fixtures Current assets Inventories Trade receivables Less: allowance for receivables Prepayments Cash in hand and at bank Total assets CAPITAL AND LIABILITIES Capital Capital Profit Less: drawings Non-current liabilities Bank loans Current liabilities Bank overdraft Trade payables Accruals Total capital and liabilities $ 100.4: SOURCES.000 200.000) 28.
2 2.sole trader 2.000 9. etc.1 The income statement Suppose a business buys three books for $10 each.000 4.000 40. Then it sells them for $15 each: Sales Cost of sales Gross profit Profit is the excess of total income over total expenditure.000 20.000 2.000 3.000 Profit for the period 4.000 110.000) (120.000 1.000 88.000) 45.000 5.2 Income statement for the year ended 31 December 20X7: $ Sales Less: Cost of sales Opening inventories Purchases Carriage inwards Closing inventories Gross profit Sundry income Discounts receivable Less: Expenses Rent Carriage outwards Telephone Electricity Wages and salaries Depreciation Bad and doubtful debts Motor expenses Discounts allowable 11. RECORDS AND BOOKS OF PRIME ENTRY (e) Don't include a caption (item heading) if there isn’t a value for it.000 (43.4: SOURCES.000 (50.000) 80. NOTE: The business may have other expenses such as rent.5 .000 $ 200.000 170.000 3. to take off before the ‘true’ profit is shown. $ 45 Income (30) Expenditure 15 Profit – example Proforma income statement .000 5.000 1.000 7. The balance sheet is a snapshot of the business at one point in time. telephone bills.
The top part Sales Cost of sales Gross profit X (X) X is called the trading account as it records just the trading activities (buying and selling) of the business. The income statement is for the intervening period.2 3. Income statement for the year ended 31.X7 Balance sheet as at 31. Therefore.6 .X6 Balance sheet as at 31.12.12. Do not include nil value captions. there will be a balance sheet at the beginning of the year (prior year end) and at the end of the accounting period. The income statement is a summary of the business' performance over a period of time – think of it as a DVD! 3 3.X7 4. Income statement – shows the trading activities over a period of time (financial performance).1 Relationship between the balance sheet and the income statement Balance sheet – shows the worth of business at a point in time (financial position).12. (c) (d) Sundry income includes items like bank account interest. RECORDS AND BOOKS OF PRIME ENTRY Key features 2.3 The accounting period is the period for which the income statement was prepared.4: SOURCES. 3.3 (a) (b) Headed up with the period for which the income and expenses are being included. This is usually a year.
4. trial balance) FINANCIAL STATEMENTS (eg Balance Sheet and Income Statement) 4.7 .1 From business transactions to financial statements A business will enter into a number and variety of transactions during an accounting period: CASH TRANSACTIONS Sales Purchases Wages Stationery Acquisition of non-current assets CREDIT TRANSACTIONS Sales Purchases Ultimately all of these transactions must be summarised in the business' financial statements (ie the balance sheet and income statement).2 This is achieved by having accounting records to record each stage of the process: Assorted transactions (eg invoices) Categorised (in Books of Prime Entry) Summarised (eg nominal ledger. RECORDS AND BOOKS OF PRIME ENTRY 4 4.4: SOURCES.
Books of prime entry Cash book Sales day book Purchase day book Petty cash book Journal book Receipts Payments Cash transactions Credit sales Credit purchases Small cash transactions Adjustments and errors Cash book 5.000 200 500 4. Smith Total $ 4. one for receipts. Bloggs J.000 500 500 200 Capital $ 4.X7 Narrative F.3 (a) (b) Records receipts and payments into and out of the bank.1.1. RECORDS AND BOOKS OF PRIME ENTRY 5 5.4 Example: Date 2. For exam purposes often assumed to be two books.X7 6.8 .1 5.700 total cash received 4. one for payments.2 Books of prime entry The business' transactions are categorised with other similar transactions in the books of prime entry.4: SOURCES. Spalding J.000 200 Sales $ Receivables $ reason why cash was received 4. Cash book (receipts) 5.1.X7 5.
e. Example: Date 1.X7 8.1.1. i. TOTAL $ 400 350 200 950 4.4: SOURCES.000 1. McGregor J.000 350 50 total cash payment reason why payment was made Sales day book 5.400 350 50 1.9 Lists all purchases made on credit.300 Purchase day book 5. Spalding G. Spalding G.X7 5. i.X7 Customer J.8 5. McGregor TOTAL $ 200 400 400 300 1. Example: Date 3.X7 8.9 . Petty Cash Digby Co 350 50 1.1.000 1. RECORDS AND BOOKS OF PRIME ENTRY Cash book (payments) 5.7 Lists all sales made on credit.X7 Manley & Co.X7 Supplier Tewson Co. each individual invoice raised.1.X7 6.1. each individual invoice received.X7 14.e.5 Date Example: Narrative Total $ Purchases $ Van $ Rent $ Payables $ Petty cash $ Drawings $ 6.1.X7 184.108.40.206 5.1.1.X7 4. Manley & Co. Manley & Co.
J. 5.4: SOURCES.10 (a) (b) Records the movement of physical cash (kept on the premises) in and out of the petty cash tin.X7 City Stationers F. the petty cash book is filled in from the vouchers. Voucher filled in when money is taken out to pay expenses.1.1. Bloggs Metro fare 10 2 12 10 2 10 2 Controlling petty cash – the imprest system An imprest system acts as an accounting control by having a set amount of petty cash.11 Example: Receipts Date Narrative Total $ Payments Date Narrative Total $ Stationery $ Travel $ 6. 4. Spalding owes the business $400 but this cannot be seen from the books of prime entry without trawling back through the detailed information. for example: (a) (b) period end adjustments correction of errors The journal book lists these sundry transactions.10 Purpose . The amount needed to bring the balance back up to the pre-set limit = money spent. A separate memorandum ledger is kept to show this information. At any time. Used for small incidental expenses.12 (a) (b) (c) (d) (e) Pre-set limit. say $50.1. 5.X7 Cheque cashed 50 7.1 Memorandum ledgers To know how much is owed by a particular customer or to a certain supplier at a point in time. 6 6. Q6 Journal book 5.13 Certain transactions do not ‘fit’ in the main books. For example. At the end of the week/month. RECORDS AND BOOKS OF PRIME ENTRY Petty cash book 5.X7 8. the sales day book shows the sales made on credit to all customers and the cash book receipts shows the cash received from all sources. Quick Quiz Q5. vouchers + cash = pre-set limit.
1.3 Receivables ledger – showing how much is owed by each individual customer.4 Example: J. (Supplier) Date 4.X7 6. The entries in these ledgers are made by rearranging the information in the day books into individual customer and supplier accounts.X7 Narrative Invoice 1033 Invoice 1129 Sales $ 400 300 Cash $ Total $ 400 700 Payables ledger 6.X7 5. Spalding (Customer) Date 3.4: SOURCES.1.X7 14.X7 Narrative Invoice 1032 Cash received Invoice 1101 400 Sales $ 200 200 Cash $ Total $ 200 – 400 G. Payables ledger – showing how much is owed to each individual supplier.5 Example: Tewson Co.X7 Invoice 063 Cash book Invoice 097 350 200 Cash $ Purchases $ 350 Total $ 350 – 200 Cash $ Purchases $ 400 Total $ 400 4.1.X7 8. (Supplier) Date 1.X7 16.1.X7 Invoice A112 Manley & Co. McGregor (Customer) Date 220.127.116.11. RECORDS AND BOOKS OF PRIME ENTRY 6.1. Receivables ledger 6.11 .2 There are two types of memorandum ledgers kept by the business: (a) (b) 6.1.
4. RECORDS AND BOOKS OF PRIME ENTRY 7 7.4: SOURCES.12 .1 7. The totals on these books are then summarised in the nominal ledger. In order to produce a set of financial statements the business’ transactions must first be categorised into the books of prime entry.2 Summary of Chapter 4 The balance sheet shows the assets and liabilities of a business at a particular point in time whilst the income statement shows its performance over a period.
Chapter 4: Question 4.13 .
14 .1 Which of the following is not a book of prime entry? A B C Wages day book Cash book Sales ledger (1 mark) 4.4: QUESTION 4.
15 .Chapter 4: Answer 4.
1 C END OF CHAPTER 4.16 .4: ANSWER 4.
Outline the contents and purpose of different types of business documentation such as an invoice. the duality concept and the accounting equation. For example. Understand and record sales and purchase returns. payments and receipts. Identify the main types of business transactions. purchases. 5. Understand and illustrate the uses of journals and the posting of journal entries into ledger accounts. credit purchase and cash transactions in ledger accounts and day books. a question may ask you to derive the income statement expense for electricity where amounts need to be accrued at the year end. Corporate Reporting (P2).1 . Identify correct journals from given narrative. Account for petty cash using imprest and non-imprest methods. sales. Understand and apply the concept of double entry accounting. You will only get this right if you understand the double entry for recording expenses and accruals.Ledger accounts and double entry Syllabus Guide Detailed Outcomes Having studied Chapters 4 and 5 you will be able to: • • • • • • • • • • • • Identify and explain the function of the main data sources in an accounting system and how the accounting system provides useful information. Exam Context Your understanding of double entry will be crucial to passing Financial Accounting. for example. Understand the need for a record of petty cash transactions and security over the petty cash system. Describe the features and operation of a petty cash imprest system. Identify the main types of ledger account and illustrate how to balance and close a ledger account. Record credit sale. A question could also describe a transaction and ask you to identify the correct double entry to record this. Qualification Context Being confident at double entry will help you account for many of the more complex accounting standards you will meet in the Fundamentals level paper. Financial Reporting (F7) and the Professional level paper. Whilst an individual question may not ask you to produce a double entry it will be instrumental in answering the question.
5: LEDGER ACCOUNTS AND DOUBLE ENTRY Overview Ledger accounts and double entry Ledger accounts Double entry Debit Credit Balancing off 5.2 .
All the accounts are collected together in the nominal ledger. The nominal ledger 1. for example: (a) A sole trader pays $6. and the other one a Credit (Cr).1 Ledger accounts (T-accounts) Debit $ Decrease Capital Increase Capital CAPITAL Credit $ We make two entries from each total extracted from the books of prime entry. The dual effect 1.3 .3 (a) (b) (c) Each item in the balance sheet or income statement will have an "account" (which might be a page in a book or a record on a computer). and call one a Debit (Dr).2 Introduction This chapter is designed to enable you to explain the principles of double entry and apply these principles to the preparation of accounting records within the nominal/general ledger.1 1. The books of prime entry are totalled up and two entries will be made in these accounts with each of these totals – this is called double entry. In Chapter 4 we saw how transactions were categorised in books of prime entry. TOTAL DEBITS = TOTAL CREDITS 5.000 in the business bank account: Cash increases by $6.5: LEDGER ACCOUNTS AND DOUBLE ENTRY 1 1.000 (b) A sole trader purchases goods on credit for $400: Purchases increase by $400 Trade payables increase by $400 2 2.4 The method used stems from the fact that every transaction affects two things. the next step is to summarise the information in a format nearer to that of the final financial statements.000 Capital increases by $6.
2 The cash account is a good starting point: Dr $ CASH IN = DEBIT CASH OUT = CREDIT CASH $ Cr General rules 2.5: LEDGER ACCOUNTS AND DOUBLE ENTRY Principles of double entry bookkeeping 2. CREDIT entry represents: This can be remembered as follows Debits (increase) Quick Quiz Q1 .4 Credits (increase) Liabilities Income Capital Expenses Assets Drawings 5. an increase in a liability. an item of income. an item of expense.4 . a decrease in an asset.3 (a) DEBIT entry represents: (i) (ii) (iii) (b) (i) (ii) (iii) an increase in an asset. a decrease in a liability.
5. (e) Pay electricity bill. Debit Credit (b) Sales on credit. (g) Pay cash to a credit supplier.5: LEDGER ACCOUNTS AND DOUBLE ENTRY Lecture example 1 Required What is the double entry for each of the following? Explain each entry in terms of the general rules above. Preparation question Solution Transaction (a) Sales for cash. (c) Purchase for cash.5 . (f) Receive cash from a credit customer. (d) Purchase on credit.
6 . Solution 5.000. Paid electricity for one month. Debit Credit Lecture example 2 Douglas Douglas had the following transactions during January: (1) (2) (3) (4) (5) (6) (7) (8) Introduced $5. $1.5: LEDGER ACCOUNTS AND DOUBLE ENTRY Transaction (h) Borrow money from the bank. Sold goods for cash. Purchased car for cash.000. Technique demonstration Required Post transactions (1) to (8) to the relevant ledger accounts.100.750. worth $2.000 cash as capital. Drew $300 for his own expenses. $500. $200. Paid rent for one month. Sold half of the goods on credit to Tish for $1. $2. Purchased goods on credit from Richard.
5: LEDGER ACCOUNTS AND DOUBLE ENTRY 5.7 .
1 Flow of information In Lecture example 2 the original transactions were posted to the ledger accounts. A business would firstly categorise this information in the books of prime entry. The totals from the books of prime entry are then posted to the nominal ledger using double entry.5: LEDGER ACCOUNTS AND DOUBLE ENTRY 3 3.2 4 4. Required Balance off the cash account to determine the amount of cash held at the end of January. A business will want to know the balance on each account. This is done by 'balancing off' each account. Technique demonstration Lecture example 3 The following information has been posted to the cash account below.8 .1 Balancing off the ledger accounts The totals from the books of prime entry may be posted to the nominal ledger each month. Solution Dr 2/1 Sales 10/1 Sales $ 500 500 Cash 1/1 Purchases 25/1 Telephone Cr $ 300 50 5. 3.
3 5. Literally 'balance' the account (what number do we need and on which side to make the two sides equal?) – balance c/d Complete the 'double entry' – balance b/d on opposite side. 5 5. Required Balance off the ledger accounts for Douglas Solution Complete in the solution space for Lecture example 2.5: LEDGER ACCOUNTS AND DOUBLE ENTRY Steps 4. expenses and drawings and a credit entry increases liabilities. The principles of double entry work on the basis that for each debit entry there must be a credit entry. income and capital – this can be remembered as DEAD CLIC. A debit entry increases assets.2 5. Fill in the higher of the two totals on both sides.4 Summary of Chapter 5 The totals on the books of prime entry are posted to the nominal ledger using double entry.2 (1) (2) (3) (4) Add the debit and credit sides separately.1 5. 5.9 . At the end of each period the nominal ledger accounts (T accounts) are 'balanced off' to determine the closing balance on each account. Technique demonstration Lecture example 4 Douglas Refer to Lecture example 2 on page 5.6.
10 .5: LEDGER ACCOUNTS AND DOUBLE ENTRY 5.
11 .Chapter 5: Questions 5.
000 brought down on X Co’s account in Y Co’s books means that A B C X Co is owed $3.12 .000 by Y Co Y Co is owed $3.5: QUESTIONS 5.2 Which of the statements below best describes the nominal ledger? A B C D 5.1 A credit balance of $3.000 of goods to X Co A list of all assets and liabilities at a point in time A collection of accounts to record the transactions of the business A record of amounts owed to/from individual suppliers and customers An initial record of internally generated transactions (2 marks) (1 mark) 5.000 by X Co Y Co has sold $3.
Chapter 5: Answers 5.13 .
2 A B The balance represents the outstanding amount i.5: ANSWERS 5. purchases less cash paid.e.1 5.14 . END OF CHAPTER 5.
profit for the period) using the accounting equation and identify the correct double entry to record transactions such as closing inventory or drawings. Financial Reporting (F7) and the Professional level paper. Corporate Reporting (P2).1 . Identify and understand the limitations of a trial balance. 6.From trial balance to financial statements Syllabus Guide Detailed Outcomes Having studied this chapter you will be able to: • • • • Identify the purpose of a trial balance. Extract ledger balances into a trial balance. Qualification Context Financial Accounting is the only paper where you are required to produce financial statements for a sole trader. Financial statements for limited liability companies are tested in detail in the Fundamentals level paper. Exam Context Questions on this chapter may require you to derive missing figures (for example. Prepare extracts of an opening trial balance.
2 .6: FROM TRIAL BALANCE TO FINANCIAL STATEMENTS Overview Trial balance Closing inventory adjustment From trial balance to financial statements Income statement Balance sheet Accounting equation 6.
6: FROM TRIAL BALANCE TO FINANCIAL STATEMENTS 1 1.2 Miss Smith – Trial Balance at as 31 December 20X7: Account Cash Capital Sales Purchases Furniture Electricity Telephone Drawings Total 2.3 . separated in to debits and credits as below.3 The trial balance should balance. the ledger accounts are then balanced off and the balances brought down. 2 2.1 The trial balance The trial balance consists of a list of the balances brought down on each ledger account. 1.700 2. Example 2. i.700 Debit $ 720 500 2. Total debits = Total credits If the trial balance doesn't balance then an error must have occurred. the totals are then posted to the ledger accounts in the nominal ledger using double entry. The correction of errors is covered in Chapter 16.100 500 120 60 200 2.1 Introduction We saw in Chapters 4 and 5 that: • • • transactions are categorised in the books of prime entry.e.200 Credit $ 6.
Using the ledger accounts for Douglas. prepare the trial balance as at the end of January.6 where the ledger accounts were balanced off.4 .6: FROM TRIAL BALANCE TO FINANCIAL STATEMENTS Lecture example 1 Douglas Technique demonstration Refer to Lecture example 2 in Chapter 5 on page 5. Solution 6.
and sells 20 for $30 each. These items will be sold in the year and so will form part of cost of sales. As the items are sold they will no longer be an asset of the business and should be removed from the balance sheet. In the first month he buys 50 phones for $20 each.5 . 6. The double entry is: Dr Inventories (B/S) Cr Closing inventories (COS – I/S) 3. Objective Lecture example 2 Preparation question Colin opens a business selling cordless telephones.1 The closing inventory adjustment Whilst a business will purchase items to sell during the year it is unlikely that all of them will have been sold by the year end. The items still held at the year end are known as inventories. Complete the trading account below. Solution $ Sales Cost of sales Purchases Less: closing inventories Gross profit $ Accounting treatment 3.4 This adjustment is usually made after the preliminary trial balance has been prepared.3 3.2 The closing inventory adjustment is accounted for via a journal entry. cost of sales. Also when a business determines its profit for the year it should match the sales revenue earned to the cost of goods it sold. These are an asset of the business and so should be included in inventories in the balance sheet. The double entry is: Dr Opening inventories (COS – I/S) Cr Inventories (B/S This can be done as soon as the new period begins.6: FROM TRIAL BALANCE TO FINANCIAL STATEMENTS 3 3. Last period's closing inventories will become this period's opening inventories. ie.
Required Prepare an income statement in ledger account form. Solution Income Statement a/c 6. Completing the income statement 4.1 The income statement The income statement is part of the double entry system and can be shown as a T-account.6 .4 The cost of goods remaining unsold at year end was $250.3 The balances on all the income and expenditure T-accounts are transferred to the income statement and the closing inventory adjustment is made. Technique demonstration Lecture example 3 Douglas Refer to Lecture example 1 on page 6.2 4.6: FROM TRIAL BALANCE TO FINANCIAL STATEMENTS 4 4. The income and expenditure accounts have now been closed out and a new account will be created for each income and expenditure item next year.
6. all assets and liabilities. Technique demonstration Lecture example 4 Douglas Refer to Lecture example 3 on page 6. Completing the balance sheet 5.2 At end of period.1 The balance sheet Balance sheet: (a) (b) (c) lists all ledger accounts with balances remaining.6: FROM TRIAL BALANCE TO FINANCIAL STATEMENTS 5 5. i. Required Draw up an income statement for the period and a balance sheet at the end of January.7 . Solution DOUGLAS INCOME STATEMENT FOR THE MONTH OF JANUARY $ Sales Less cost of sales: Purchases Less: closing inventories $ Gross profit Less expenses: Rent Electricity Net profit 6. is not part of double entry system so these balances are not transferred out. clear balances on income statement and drawings to capital account.e.
6: FROM TRIAL BALANCE TO FINANCIAL STATEMENTS DOUGLAS BALANCE SHEET AS AT 31 JANUARY NON-CURRENT ASSET Motor vehicle CURRENT ASSETS Inventories Trade receivables Cash $ $ PROPRIETOR’S INTEREST Capital introduced on 1 January Profit for the year Less: drawings Balance 31 January CURRENT LIABILITIES Trade payables $ $ 6.8 .
6: FROM TRIAL BALANCE TO FINANCIAL STATEMENTS Lecture example 5 Douglas Refer to Lecture example 4 on page 6.3 Drawings are amounts being taken out of a business by its owner.7.9 . but an owner may also take inventory out of the business. Drawings of inventories are recorded at the cost of the inventories not the sales price. Drawings are generally in the form of cash. 6. Required Transfer the profit and drawings to the capital account. Technique demonstration Solution Drawings 5.
Required Prepare the accounting equation for Douglas.1 6.2 The accounting equation The accounting equation expresses the balance sheet as an equation.10 . Technique demonstration Solution 6. At its most simple: ASSETS (debits) LIABILITIES (credits) = Different types of liabilities (credits) CAPITAL PROFIT (less drawings) PAYABLES Proprietor’s interest Lecture example 6 Douglas Refer to Lecture example 5.6: FROM TRIAL BALANCE TO FINANCIAL STATEMENTS 6 6.
2 Opening inventory adjustment: Dr Opening inventories (I/S) Cr Inventories (B/S) 8. 7.4 7.1 7.2 Summary of Chapter 6 The trial balance consists of a list of the balances brought down on each ledger account.3 The accounting equation: Assets = Liabilities Assets = Capital + Profit + Payables 6. At the end of the year an adjustment must be made for closing inventory to match sales revenue to the cost of making those sales and also to reflect the fact that the inventories are an asset of the business.11 .6: FROM TRIAL BALANCE TO FINANCIAL STATEMENTS 7 7.3 7. The opening inventory balance should also be transferred to cost of sales. The accounting equation expresses the balance sheet as an equation.5 8 8. The income statement and balance sheet are then produced from the trial balance (incorporating any adjustments such as closing inventory).1 Double Entry Summary for Chapter 6 Closing inventory adjustment: Dr Inventories (B/S) Cr Closing inventories (I/S) 8.
6: FROM TRIAL BALANCE TO FINANCIAL STATEMENTS 6.12 .
13 .Chapter 6: Questions 6.
set up business on 1 October 20X6 with $40.000 of his own money.000.000.200. paid J Fox $525 on account for the amount due to him.500. purchased. paid an odd-job man $75 to paint the exterior of the stall and repair a broken lock. put an advertisement in the local paper at a cost of $10. books at cost of $825.6: QUESTIONS 6. Write up the relevant ledger accounts for these transactions. made other cash sales during the two months of $1.4 Joan Joan.1 At the end of the accounting period and after the balance sheet and income statement have been prepared for a sole trader: A B C D All journals are reversed The balances on asset and liability accounts are transferred to the capital account The balances on the income statement and drawings account are transferred to the capital account Balances are carried forward on all the accounts in the nominal ledger (2 marks) 6. The annual rental was $1. Required 6. a sole trader.14 . He took cash drawings of $5.500. took the lease of a stall and paid two months’ rent.000 and land of $16. What is the proprietor's interest? $ (2 marks) 6. a second hand bookseller. trade payables of $2. received $200 from the school. During the year to 30 September 20X7 he won $50. Prepare a trial balance. In this time she: (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (a) (b) (c) paid in cash $5. Balance off all of the ledger accounts.3 Joe. spent $420 cash on the purchase of other books from W Smith.000 on the lottery and paid $30.000 profit $16. purchased cleaning materials at a cost of $10 and paid a char lady $30.000 as capital.000 loss (2 marks) 6.000 during the year and at 30 September 20X7 the net assets of the business totalled $59.2 A business has cash of $1.100. sold three volumes containing "The Complete Works of Shakespeare" to an American for $60 cash. a mortgage liability of $8. an income statement and a balance sheet. on credit from J Fox. sold six similar sets on credit to a local school for $300.000 profit $6.000 loss $6.000 of this into his business. What was the profit or loss of the business for the year ended 30 September 20X7? A B C D $4. took $100 from the business to pay for her own personal expenses. has been in business for two months. all books had been sold by the end of two months.
Calculate the profit of the business for the month of January.5 Brian Brian set himself up in business on 1 January selling ice creams. Draw up an income statement for the period and a balance sheet at the end of the period. inventories totalling $750.6 Dealers On 1 January the proprietor’s interest in a business.15 .000 of cash as capital into the business. Purchased a second hand ice cream van from John.000. for his own personal expenditure. Post transactions (1) – (9) to the relevant ledger accounts. On 14 January he had taken goods at a cost of $350 for his own consumption and on 30 January had drawn cash of $1.500 Cash in the till 250 On 7 January the proprietor had paid in additional capital of $2. He paid John $10. The cost of goods remaining unsold was $500. Balance off the ledger accounts.6: QUESTIONS 6. Required 6.500 Accrued expenses 250 Balance in the bank 3. $ Plant and equipment 10. Sold goods for $750 in cash. Spent $400 on petrol. Required (a) (b) (c) (d) Calculate the net asset value at 1 January. At 31 January the assets and liabilities of the business were as follows.000 Motor vehicles 5.250 from the business. Calculate the net asset value of the business at 31 January.500. During his first two months in business he: (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (a) (b) (c) (d) (e) (f) Introduced $20.000 Inventories 4.500 cash. Withdrew $300 for his own expenses. Show the accounting equation at 31 January. Transfer the loss and drawings to the capital account. was $18. Made additional cash purchases of $80 for strawberry sauce and chocolate flakes. 6.000 Trade payables 3. Prepare an income statement in ledger account form (remembering to deal with item 10). Paid Terry $200 to repair the ice cream machine in the van. Paid $600 in tax and insurance.000 Trade receivables 2. Prepare a trial balance. Dealers. Purchased on credit.
16 .6: QUESTIONS 6.
17 .Chapter 6: Answers 6.
100 Cr $ 2.000 (5.X6 Capital introduced Drawings ∴ loss for year (balancing figure) Net assets at 30.390 6.100 16.000 5.1 6.2 C $6.760 5.000 5.600 Cash Trade payables Mortgage liability Land Proprietor's interest (balancing figure) Dr $ 1.000 6.000 30.760 Balance b/d 6.9.6: ANSWERS 6.10.500 8.3 D Net assets at 1.000 6.000) 59.000 (1) Bank Balance b/d Rent (I/S) (2) Bank Balance b/d $ 200 200 200 Balance c/d $ 200 200 $ 5.X7 $ 40.000 60 200 1.600 17.100 6.000 6.000 17.18 .500 (2) (4) (5) (6) (9) (11) (11) (12) Rent Purchases Repairs Advertising Trade payables Cleaning materials Cleaning Drawings Balance c/d $ 200 420 75 10 525 10 30 100 5.4 Joan Bank (B/S) (1) (7) (10) (13) Capital Sales Trade receivables Sales $ 5.000) (6.000 5.390 Capital (B/S) Balance c/d $ 5.
245 1.860 (7) (8) (13) Bank Trade receivables Bank Balance b/d Trade receivables (B/S) (8) Sales Balance b/d $ 300 300 100 Cleaning materials (I/S) (11) Bank Balance b/d $ 10 10 10 Balance c/d $ 10 10 (10) Bank Balance c/d $ 200 100 300 $ 60 300 1.860 1.500 1.19 .6: ANSWERS Trade payables (B/S) (9) Bank Balance c/d $ 525 300 825 (3) Purchases Balance b/d $ 825 825 300 Purchases (I/S) (3) (4) Trade payables Bank Balance b/d $ 825 420 1.245 Balance c/d $ 1.860 Balance c/d $ 10 10 6.245 Repairs (I/S) (5) Bank Balance b/d $ 75 75 75 Balance c/d $ 75 75 Advertising (I/S) (6) Bank Balance b/d $ 10 10 10 Sales (I/S) Balance c/d $ 1.860 1.245 1.
390 200 1.6: ANSWERS Cleaning (I/S) (11) Bank Balance b/d $ 30 30 30 Balance c/d $ 30 30 Drawings (B/S) (12) Bank Balance b/d $ 100 100 100 Balance c/d $ 100 100 Trial Balance Bank Capital Rent Trade payables Purchases Repairs Advertising Sales Trade receivables Cleaning materials Cleaning Drawings Joan Income statement for the two months ended…… Sales Purchases Gross profit Rent Repairs Advertising Cleaning (10 + 30) Profit for the period Debit $ 5.000 300 1.860 (1.860 7.20 .245 75 10 100 10 30 100 7.245) 615 (325) 290 6.160 Credit $ 5.160 $ 200 75 10 40 $ 1.
5 Brian (a) (1) (6) Capital Sales Bank (B/S) $ 20.500 200 400 600 80 300 $ 100 5.21 .490 $ 5.000 290 (100) 5.6: ANSWERS Joan Balance sheet as at….500 Repairs & Maintenance (I/S) $ 200 Purchases (I/S) $ 750 80 Trade payables (B/S) $ (4) Purchases $ (3) Bank $ (4) (8) Trade payables Bank $ $ 750 6.000 $ 10. Current Assets Trade receivables Bank Proprietor's Interest Capital Profit Less: drawings Current Liabilities Trade payables 6.000 (2) 750 (3) (5) (7) (8) (9) Capital (B/S) $ (1) Bank $ 20.490 Van Repairs & Maintenance Petrol Tax & Insurance Purchases Drawings (2) Bank Van (B/S) $ 10.390 5.190 300 5.
000 (2) Bank Bal b/d $ 10.500 Bal c/d $ 10.000 20.500 10.670 20.750 Bal b/d 8.500 10.000 Bal b/d Van (B/S) Bal c/d $ 20.670 Capital (B/S) $ 20.000 (2) 750 (3) (5) (7) (8) (9) 20.22 .6: ANSWERS (5) Bank Petrol (I/S) $ 400 Sales (I/S) $ (6) Bank $ $ 750 (7) Bank Tax & Insurance (I/S) $ 600 Drawings (B/S) $ 300 Bank (B/S) $ 20.500 (3) Bank Bal b/d Repairs & Maintenance (I/S) $ 200 Bal c/d 200 200 $ 200 200 6.000 20.000 (1) Bank 20.750 $ (9) (b) (1) (6) Bank $ Capital Sales Van Repairs & Maintenance Petrol Tax & Insurance Purchases Drawings Bal c/d $ 10.500 200 400 600 80 300 8.500 10.
500 200 830 400 600 300 21.23 .500 6.500 $ 750 750 750 $ 600 600 (7) Bank Bal b/d (9) Bank Bal b/d $ Bal c/d 300 300 (c) Bank Capital Van Repairs and Maintenance Purchases Trade payables Petrol Sales Tax & Insurance Drawings Credit $ 20.6: ANSWERS (4) (8) Trade payables Bank Bal b/d Purchases (I/S) $ 750 80 Bal c/d 830 830 Trade payables (B/S) $ 750 (4) Purchases 750 Bal b/d Petrol (I/S) $ 830 830 Bal c/d $ 750 750 750 (5) Bank Bal b/d $ 400 400 400 Bal c/d $ 400 400 Bal c/d Sales (I/S) $ 750 (6) Bank 750 Bal b/d Tax & Insurance (I/S) $ 600 Bal c/d 600 600 Drawings (B/S) $ 300 300 300 Trial balance Debit $ 8.000 750 750 21.670 10.
250 420 780 1.24 .200 Net loss b/d 780 Purchases (I/S) $ 750 80 Balance c/d 830 830 Petrol (I/S) Income statement $ 830 830 830 (4) (8) Trade payables Bank Balance b/d (5) Bank Balance b/d $ 400 400 400 Balance c/d Income statement $ 400 400 400 (3) Bank Balance b/d Repairs & Maintenance (I/S) $ 200 Balance c/d 200 200 Income statement $ 200 200 200 (7) Bank Balance b/d Tax & Insurance (I/S) $ 600 Balance c/d 600 600 Income statement $ 600 600 600 Balance c/d Income statement Sales (I/S) $ 750 (6) Bank 750 750 Balance b/d $ 750 750 750 6.6: ANSWERS (d) Purchases Gross profit c/d Petrol Repairs & Maintenance Tax & Insurance Income Statement $ 830 Sales 420 Closing inventories 1.250 400 200 600 1.200 Gross profit b/d Net loss c/d $ 750 500 1.
6: ANSWERS Closing inventories (I/S) Inventories (B/S) $ 500 $ (e) Brian Income statement for the two months ended 28 February Sales Less cost of sales: Purchases Less: closing inventories Gross profit Less expenses: Petrol Repairs & Maintenance Tax & Insurance Net loss for the period Brian Balance sheet as at 28 February Non current assets Motor vehicles Current assets Inventories Bank Total assets Proprietor’s interest Capital introduced on 1 January Loss for the period Less: drawings Balance at 28 February Current liabilities Trade payables Total capital and liabilities $ 830 (500) $ 750 330 420 400 200 600 ((1.670 19.000 (1.500 500 500 8.670 $ (780) (300) $ 20.200) (780) $ 10.670 Drawings (B/S) $ 300 Bal c/d 300 (f) (9) Bank $ 300 300 300 Bal b/d 300 Capital a/c 6.920 750 19.25 .080) 18.
000 300 780 18.6: ANSWERS Purchases Gross profit c/d Petrol Repairs & Maintenance Tax & Insurance Income statement $ 830 Sales 420 Closing inventories 1.000 Bal b/d $ 750 500 1.200 780 Capital a/c Capital account (B/S) $ 20.000 4.500 250 3.920 20.000 = $3.000 – 18.000 250 $ 25.000 20.000 2.250 420 780 1.250 22.000 (1) Bank 20.000 20.000 20.500 Net assets = assets – liabilities At 31 January the assets total: Plant and equipment Motor vehicles Trade receivables Inventories Balance in the bank Cash in the till At 31 January the liabilities total: Trade payables Accrued expenses ∴ Net assets at 31 January (c) Profit = Increase in net assets between two points in time Drawings between the same two points in time $ 10.000 18.000 + – Additional capital paid in between the same two points in time ∴ Profit for the month of January = (22.6 Dealers (a) (b) Net assets = proprietor’s interest ∴ Net assets at 1 January are $18.250 3.200 780 $ 20.250 400 Gross profit b/d 200 600 Net loss c/d 1.920 Net loss b/d Bal c/d Drawings Net loss Bal c/d Bal b/d 6.500 3.000 5.250) – 2.26 .500) + (350 + 1.100 6.
600 1.500 2.250 Capital at 1 January Additional capital Profit Less: drawings Trade payables Accrued expenses 6.000 3.100 23.000 250 25.500 2.000 3.500 + 3.27 .500 250 25.250 + + PAYABLES 3.6: ANSWERS (d) Accounting equation at 31 January ASSETS = CAPITAL + PROFIT – DRAWINGS 25.100 – 1.000 4.250 $ 18.000 3.000 5.250 = 20.600 Plant & equipment Motor vehicles Inventories Trade receivables Balance in bank Cash in the till $ 10.600 22.
6: ANSWERS END OF CHAPTER 6.28 .
More detailed rules and calculations relating to this area are covered in the Fundamentals level paper. Calculate sales tax on transactions and record the consequent accounting entries. You may also be required to consider how sales tax affects the calculation of amounts to be capitalised for non-current assets and the amount for trade receivables where discounts are offered.Sales tax Syllabus Guide Detailed Outcomes Having studied this chapter you will be able to: • • Understand the general principles of the operation of a sales tax. Taxation (F6). Qualification Context Financial Accounting introduces accounting for sales tax. 7. You may be asked to identify the correct journal entry to post sales and purchases transactions including sales tax.1 . Exam Context This topic is likely to be tested in two main ways.
7: SALES TAX Overview Output tax Input tax Accounting treatment Sales tax Irrecoverable sales tax Discounts 7.2 .
1 Introduction This chapter is designed to enable you to prepare basic accounting entries for sales tax.e. as it is not levied directly on the individual like personal income tax.2 A business' sales and purchases are often subject to sales tax.3 . Typically. Sales tax is collected by traders who charge it on the goods they sell to the customer. a business which is registered for sales tax only needs to make a payment to the tax authorities of the net amount of sales tax (i. 1.4 Illustration (all figures include sales tax at 15%). $ Input tax Output tax $115.3 A registered business shows: (a) (b) items of income and expenditure net of sales tax. This is an indirect tax. trade receivables and trade payables gross of sales tax. sales tax owed on outputs less sales tax suffered on inputs). Purchase raw materials Sell finished product Required Calculate the amounts due to or from the sales tax authority.50 The rate of sales tax will always be provided in an exam question.00 $287. Sales tax 1. A business charges sales tax on its sales (output tax) and suffers sales tax on its purchases (input tax).7: SALES TAX 1 1. known in many countries as Value Added Tax (VAT). Purchases Goods into factory (input tax) Sales Goods out of factory (output tax) 1. 7.
They then sell those goods for $1.15) = $1. The sales tax is accounted for when the transaction occurs.725 The sales tax payable to tax authorities will be: Payable on outputs (sales) Reclaimable on inputs (purchases) Net sales tax to tax authorities (15% × $1.000 plus 15% sales tax.00 (150. Dr Purchases Dr Sales tax control account Cr Trade payables $ 1.000 150 $ 1.00) 75.4 .150 The sales will raise ($1.500 × 1.500 + 15% sales tax.00 As the business is purely collecting the sales tax for the tax authorities.500) (15% × $1. The purchases will cost ($1. and is able to set off its sales tax suffered it does not include sales tax as either an expense or income in the income statement.150 Solution (a) Purchases (I/S) Trade payables (B/S) Sales tax control account (B/S) 7.7: SALES TAX 2 Accounting treatment Lecture example 1 A business buys goods for $1.000) $ 225.000 × 1.15) = $1. Required (a) Post the double entry to the ledger account below.
7: SALES TAX Points to note Purchases – Trade payables – (b) NET GROSS $ 1. Dr Trade receivables Cr Sales Cr Sales tax control account Solution Sales (I/S) Trade receivables (B/S) Sales tax control account (B/S) $ Balance b/d 175 $ Points to note Sales Trade receivables – NET – GROSS 3 3. For example.1 Irrecoverable sales tax In some tax regimes. For example.725 $ 1. In this case the tax is a genuine expense of the business and is charged to the income statement or included in the cost of an asset to be depreciated. sales tax on certain inputs is never recoverable.5 Cost + sales tax Cost + sales tax .500 225 Post the double entry to the ledger account below. the double entry for buying a car where the sales tax is irrecoverable would be: Dr Cr Motor vehicles account Cash account 7. sales tax on business entertaining or on cars may not be recoverable.
6 . 5.3 Sales tax is calculated on the amount after all discounts. Sales and purchases are recorded at the net amount. Sales tax may be charged at various rates. however the rate of sales tax will always be provided in an exam question. 5 Quick Quiz Summary of Chapter 7 A business acts as a collecting agent for the tax authorities and charges sales tax (output tax) on its sales and reclaims sales tax (input tax) on its purchases.2 Recording a credit sale with sales tax: Dr Cr Cr Trade receivables gross Sales net Sales tax control account tax 7.3 5.1 5.1 Double Entry Summary for Chapter 7 Recording a credit purchase with sales tax: Dr Dr Cr Purchases net Sales tax control account tax Trade payables gross 6.7: SALES TAX 4 4. The effect of discounts on sales tax is covered in Chapter 14.2 5.2 4. The calculation and accounting treatment of discounts is covered in Chapter 14.4 6 6. There are two types: • • trade discounts settlement discounts 4.1 Sales tax and discounts Many businesses offer discounts to their customers.
7 .Chapter 7: Questions 7.
1 Elmo is a trader registered for sales tax. A B C D $5. The car will be used 70% for business use and 30% personal use. Credit sales tax $34. Debit sales tax $34.517 $6.7: QUESTIONS 7. All his sales and purchases carry sales tax at a rate of 15%. vans over five years and cars over six years.50 (2 marks) 2 During 20X1 Fergus buys two vans and a car each costing $10.50 Debit sales $230. the double entry for this transaction is A B C D Debit payables $264. Credit sales $230 Debit sales $264. Credit trade receivables $264.50. A customer has just returned goods sold for $230 plus sales tax.000 plus sales tax at 15%.666 (2 marks) 7.50.50. What is his depreciation expense to the nearest $ for the year? In the tax regime in which Fergus operates sales tax is only recoverable on items used wholly for business purposes.100 $5. He depreciates vehicles on a straight line basis.50. Credit trade receivables $264. Credit trade receivables $264. Debit irrecoverable sales tax $34.50.917 $6.8 .50 Debit sales $230.
9 .Chapter 7: Answers 7.
917 5.000 × 115%) ÷ 6 = 1.10 .7: ANSWERS 7.2 C A Sales tax on the car is not recoverable as it is not wholly used for business purposes.000 Car ($10.1 7.917 END OF CHAPTER 7.000) ÷ 5 = 4. $ Vans (2 × $10. Sales tax is however recoverable on the vans.
Understand the impact of accounting concepts on the valuation of inventory. Understand and apply the IASB requirements for valuing inventories. Exam Context Accounting for inventories and inventory valuation is a basic principle that affects any business. Identify the impact of inventory valuation methods on profit and on assets.1 . Qualification Context The Fundamentals level paper Management Accounting (F2) explores inventories in more detail. Identify the alternative methods of valuing inventory. Calculate the value of closing inventory using 'first in. Examination questions are likely to test your understanding of the terms cost and net realisable value. There you will look at the classification of costs (for example. You should also expect calculations on this area and be able to make adjustments for both opening and closing inventory. production versus non production and fixed versus variable) and you will also cover detailed calculations on overhead absorption. Understand the use of continuous and period end inventory records. Record opening and closing inventory. Recognise which costs should be included in valuing inventories. first out' and 'average cost'.Inventory Syllabus Guide Detailed Outcomes Having studied this chapter you will be able to: • • • • • • • • • Recognise the need for adjustments for inventory in preparing financial statements. 8.
2 .8: INVENTORY Overview Accounting adjustments Inventory Valuation Effects on profit Cost Net realisable value Methods of estimating cost FIFO AVCO 8.
3 Businesses must therefore ensure that their financial statements account for inventory accurately in terms of: (a) (b) the accounting adjustment its valuation 2 2.2 Introduction For some businesses. for example manufacturing entities.2 Accounting adjustment Inventory is generally accounted for as a year end adjustment via a journal entry.1 2. This amount generally relates to the opening inventory – i. Opening inventory The trial balance produced by the entity at the end of the year will show an inventory figure. The accounting entry is: Dr Cr Cost of sales (I/S) Inventories (B/S) 2. the goods held by the business at the beginning of the year.1 1. Such goods will have been sold during the year.3 . inventory can be a significant figure.e. It impacts the financial statement in two ways: (a) (b) Balance sheet: Income statement: a potentially large balance within Current Assets opening and closing inventory have a direct impact on cost of sales and therefore profits 1.8: INVENTORY 1 1. They are no longer an asset of the entity but will form part of the costs that should be matched against sales revenue when determining profit.3 Closing inventory The goods held by the business at the end of the year must be included as an asset in the balance sheet and within cost of sales in the income statement. The accounting entry is: Dr Cr Inventories (B/S) Cost of sales (I/S) 8.
value at net realisable value do provide for the future loss.4 The inventories figure comprises two elements: QUANTITY × VALUATION Quantity: Valuation: 2. so guidance is provided in IAS 2. much more subjective.2 This is another example of prudence in presenting financial information.1 Valuation The basic rule per IAS 2: Inventories is: 'Inventories should be measured at the lower of cost and net realisable value.5 normally ascertained by inventory count at end of accounting period or by continuous inventory records.8: INVENTORY 2.' 3. (a) If inventory is expected to be sold at a profit: (i) (ii) (b) (i) (ii) value at cost do not anticipate profit.4 . If inventory is expected to be sold at a loss: 8. Inventory overview Inventory = Quantity Inventory count x Valuation Lower of and NRV Continuous Inventory records Cost All costs to get item to current location in current condition Selling price Less: completion costs Less: selling costs $ X (X) (X) X Actual cost Deemed cost FIFO Average Cost 3 3.
4 Relating to productions: • direct labour • direct/variable overheads • an allocation of fixed overheads (based on normal level of activity) For example: • carriage inwards Other costs incurred in bringing the inventories to their present location and condition Lecture example 1 Exam standard question worth 2 marks According to IAS 2: Inventories. 3.1 Cost The cost of an item of inventory includes: • • For example: purchase price import duties But not: sales tax trade discounts Cost of purchase • • Costs of conversion Section 5. and 4 only Solution 8.8: INVENTORY 4 4. which of the following should not be included in valuing the inventories of an entity? (1) (2) (3) (4) A B C D Labour costs Transport costs to deliver goods to customers Administrative overheads Depreciation on factory machine All four items 1 only 2 and 3 only 2.5 .
8: INVENTORY 5 5. 8.3 The IAS 2 rule 'lower of cost and net realisable value' should be applied as far as possible on an item by item (or line by line) basis.2 Net realisable value (NRV) The net realisable value of an item is essentially its net selling proceeds after all costs have been deducted.6 . It is calculated as: Estimated selling price Less: estimated costs of completion Less: estimated selling and distribution costs $ X (X) (X) X Preparation question Lecture example 2 Jessie is trying to value her inventory. She has the following information available: Selling price Costs incurred to date Cost of work to complete item Selling costs per item Required What is the net realisable value of Jessie's inventory? Workings $ $ 35 20 12 1 No netting off 5.1 5.
This would be accounted for by the journal entry: Dr Cr Inventories (B/S) Cost of sales (I/S) $ 107 $ 107 6 6. first out (FIFO) Average cost FIFO Under FIFO it is assumed that: (i) (ii) first goods purchased/produced will be the first to be sold remaining inventories are the most recent purchases/production.4 Suppose an entity has four items of inventories on hand at the year end.8: INVENTORY Illustration 5. There are two methods examinable at Paper F3: • • Issue First in. Their costs and NRVs are as follows: Inventory item 1 2 3 4 Cost $ 27 14 43 29 113 NRV $ 32 8 55 40 135 Lower of cost and NRV $ 27 8 43 29 107 It would be incorrect to compare total cost of $113 with total NRV of $135 and state inventories as $113. A loss on item 2 of $6 can be foreseen and should therefore be recognised. it may be impossible to determine precisely which items are still held at the year end and therefore what the actual purchase cost of the goods was. The comparison should be made for each item of inventory and thus a value of $107 would be attributed to inventories. 6.3 Theoretical methods of estimating cost If various batches of inventories have been purchased at different times during the year and at different prices.7 .1 Section 4.2 (a) (b) Average Cost (AVCO) There are two average costs available: (i) Simple average cost The cost of all purchases/production during the year is divided by the total number of units purchased 8. IAS 2 therefore allows an entity to approximate the cost of its inventories.
8: INVENTORY (ii) Weighted average cost The weighted average of the cost of similar items is recalculated each time a new item is purchased/produced during the period (IAS 2 requires the weighted average to be used) Lecture example 3 Preparation question On 1 January 20X7 a company held 200 units of finished goods valued at $10 each.00 $18.85 $11.50 $13.X7 Cost of sales (FIFO) 8.1.8 .1.00 $18. Date 10 January 20 January 25 January Units purchased 300 350 250 Cost per unit $10.1.1.X7 25.00 Sales during January were as follows: Date 14 January 21 January 28 January Required Determine the valuation of closing inventories and cost of sales using: (a) (b) FIFO Weighted average cost Units sold 280 400 80 Sales price per unit $18.X7 20.00 Solution (a) Closing inventories (FIFO) 1. During January the following transactions took place.X7 Sales Purchases 10.
X7 28. Average cost: can be complex as weighted average is required by IAS 2.1.9 .X7 18.104.22.168: (b) Closing inventories and cost of sales (AVCO) Units 1.X7 10.1.1.X7 20.1. 8.X7 14.X7 21.X7 Workings b/f Purchase Sale Purchase Sale Purchase Sale Cost $ Average Unit Cost $ INVENTORY Total Cost $ Cost of Sales $ Advantages and disadvantages 6.1.3 FIFO: more “realistic” value on balance sheet.
FIFO $ Sales (760 × $18) Cost of sales Opening inventories Purchases Closing inventories Gross profit 2. Methods available to estimate the cost of inventories are first in.1 Valuation effects on profit All of the inventory valuation methods affect profits.680 Weighted average $ $ 13. The cost of inventory includes the cost of purchase. Notice that when prices are rising: FIFO will tend to give higher inventory values and higher profits.680 2. This re-emphasises the significance of inventory valuation in the preparation of financial statements.2 The only figure that varies is the closing inventories.310 7.10 . using FIFO will mean the financial statements show higher inventory values and higher profits.3 In the above example.4 8.530 (4.1 8. and average cost examples above.000 10. the result being quite different profit figures. Net realisable value is the estimated selling price less the costs to completion and any selling and distribution costs.5 Summary of Chapter 8 Inventories should be valued at the lower of cost and net realisable value.8: INVENTORY 7 7. In times of rising prices.160) 8. the purchase price of inventories was rising during the period.245 5. Using the FIFO.2 8. Effects in times of changing prices 7. this can be illustrated in an income statement.435 $ 13. costs of conversion and any other costs necessary to bring the inventory to its present location and condition.370 5. first out (FIFO) and average cost. 8.530 (4. 8 8.3 8.000 10.285) 8.
11 .Chapter 8: Questions 8.
These cannot be sold unless they are modified at a cost of $2 per unit.000 $2.750 512 780 1.622 $2.3 Lamp makes the following purchases in the year.00 13.50 12.080 At the year end 200 units are in inventory but eight are damaged and are only worth $10 per unit.50 Total ($) 1. The company’s selling costs are 25% of the selling price. At the year end it has 200 units in inventory which originally cost $10 per unit and had incurred delivery costs of $120 in total. Costs to date have amounted to $240 per unit and completion costs will amount to $90 per unit. The company incurs selling and distribution costs of 5% of selling price on each article sold. The figure for inventories at 31 December 20X9 is: A B C D 8. Biggs Co holds the following inventories: (1) (2) (3) (4) 10 units of L in a completed state.X9 Units 100 300 40 60 80 $/unit 12.11.80 13.X9 delivery.09.4 $2.1 An item of inventory could be sold for $100 after it has been modified at a cost of $21. These are identified as having been part of the 11. Lamp operates a FIFO system for valuing inventories.X9 31.12 .X9 30. These sell at $56 each and would now cost $48 each if additional units were bought.07.600 (2 marks) 8. 50 units of O costing $10 each. Required Calculate the value of inventories that would be shown on the balance sheet at the end of the year. Harrow Co incurs selling costs amounting to 10% of the selling price on all its sales. the selling price will be $8. 8.120 $2. They expect these goods to sell for $13 per unit. each unit cost $160 to make and has a selling price of $200. After that. 60 units of N purchased for $40 each.2 Harrow Co sells one line of inventory.01. (i) (ii) (iii) (iv) (v) 21.200 3.X9 11. In the balance sheet these items should be valued at: A B C D $2.00 12.8: QUESTIONS 8. 45 units of M in a partly completed state. The cost is $45 per unit excluding carriage inwards of $2 and production overheads of $17 per unit.X9 01.11.080 $2.524 $2. Following the rules in IAS 2 at what valuation should this item be included in the inventories of the company? $ (2 marks) 8.700 (2 marks) Inventories At the year end.04.594 $2. Selling price per unit is $360.
8: QUESTIONS 8.5 T Bag T Bag commenced business as a tea importer on 1 January 20X5.000 40 35 70 8.500 132.000 15.000 148.13 .000 35. His purchases and sales during his first six months of trading are set out below: Tonnes 1 January 15 February 27 February 31 March 16 April 30 April 30 May 8 June 28 June 30 20 40 25 35 10 Purchases Price per tonne $ 700 750 820 880 900 1.000 31.800 Required Calculate the value of closing inventories and produce a trading account for the 6 months ended 30 June 20X5 assuming: (a) (b) Inventories are valued on a FIFO basis Inventories are valued on a weighted average basis Tonnes Sales Proceeds $ 36.050 Total price $ 21.000 32.500 10.800 22.000 77.
14 .8: QUESTIONS 8.
Chapter 8: Answers 8.15 .
$ 56 14 42 40 $ 90 90 $ 360 180 180 240 $ 200 50 150 160 8.50 = = = = = $ 80 972 780 512 250 2.500 (2) 1 unit of M would be valued at: Selling price Less: Selling costs (25%) Costs to completion ∴ NRV Cost NRV is lower and so 45 units of M are valued at $8.8: ANSWERS 8.594 8.120 8. Workings (1) 1 unit of L would be valued at: Selling price Less selling costs (25%) ∴ NRV Cost NRV is lower and so 10 units of L are valued at $1.100 + $2.400 Replacement cost is irrelevant.70 ⇒ valued at cost $ 2.400 + $200).2 C 8.500 + $8.200 ($1.100 (3) 1 unit of N would be valued at: Selling price Less selling costs (25%) ∴ NRV Cost Cost is lower and 60 units of N are valued at $2.80 @ $12.000 120 2.4 Inventories The inventories total on the balance sheet would be: $12.3 B Inventories = 8 72 60 40 20 200 @ $10 @ $13.60 Net realisable value per unit = $13 × 90% = $11.50 @ $13 @ $12.1 $64 NRV = 100 – 21 – (5% × 100) = $74 Cost = 45 + 2 + 17 = $64 Lower of cost and NRV = $64 200 @ $10 = Delivery costs Cost/ unit = $10.16 .
200 32.8: ANSWERS (4) 1 unit of O would be valued at: $ Selling price Less: Selling costs (25%) Costs of modification ∴ NRV Cost NRV is lower and so 50 units of O are valued at $200 2 2 $ 8 4 4 10 8.500 10 $1.000 132.945) 33.800 22.055 (61.17 .000 36.200 $ 148.000 (28.000 (25) – (30) 5 $900 $4.000 (W2) Weighted average method Tonnes 1 Jan 15 Feb 27 Feb 31 March 16 April 30 April 30 May 8 June 28 June 30 20 50 (40) 10 40 25 75 (35) 40 35 10 85 (70) 15 Cost $ 700 750 Average Unit Cost $ 720 Total Cost $ 21.555) 28.050 883 61.500 = $15.800) 7.000 (28.555 8.000 62.800 820 880 827 28.500 75.800 (13.810) 13.245 Cost of Sales $ 1 Jan 30 (30) – 15 Feb 20 (10) (10) – 31 Mar 40 (25) (15) – 16 Apr 25 30 May 35 8 June 10 132.800 (15.500 10.5 T Bag Trading account for the 6 months ended 30 June 20X5 FIFO Sales Cost of sales Purchases Closing inventories (W) Gross profit Workings (W1) FIFO method Purchases in tonnes Sales in tonnes: 27 Feb 30 Apr 28 June Inventories at 30 June 20X5 Cost per tonne ∴ Valuation Total valuation $4.500 28.000) (117.500 + $10.055 31.000 15.945 900 1.800) 30.245) (119.810 119.445 Weighted average $ 148.050 $10.
18 .8: ANSWERS END OF CHAPTER 8.
depreciation and accumulated depreciation of noncurrent assets. Record depreciation in the income statement and balance sheet. Exam Context Tangible non-current assets and depreciation are an important part of the F3 syllabus and you should expect several questions on this area. Prepare ledger entries to record the acquisition. profits or losses on disposal of assets and the components that can be included in the cost of a non-current asset. Explain the purpose and function of an asset register. Illustrate how non-current asset balances and movements are disclosed in company financial statements. 9. Calculate and record profits or losses on disposal of non-current assets in the income statement. identifying when each is appropriate.1 . Calculate the adjustments to depreciation necessary if changes are made in the estimated useful life and/or residual value of a non-current asset. Explain the difference between capital and revenue items and classify expenditure accordingly. Questions are likely to focus on areas such as calculating depreciation and asset values (both on assets held at historic cost and revalued amounts). Record the revaluation of a non-current asset and calculate its subsequent depreciation and profit or loss on disposal. Understand and explain the purpose of depreciation. Calculate the charge for depreciation using the straight line and reducing methods.Tangible non-current assets Syllabus Guide Detailed Outcomes Having studied this chapter you will be able to: • • • • • • • • • • • Define non-current assets and recognise the difference between current and non-current assets. Qualification Context The knowledge covered in this chapter is developed in the Fundamentals level paper Financial Reporting (F7) where you will deal with more complex issues such as impairments of non-current assets and leasing. disposal.
9: TANGIBLE NON-CURRENT ASSETS Overview Capital versus revenue expenditure Cost Tangible non-current assets Revaluations Depreciation Disposals Straight line method Reducing balance depreciation 9.2 .
Definition 2.1 1. Plant and equipment.2 The accounting treatment of tangible non-current assets is covered by IAS 16: Property. Tangible non-current assets are defined as those which: (a) (b) are held for use in the production or supply of goods or services or for administrative purposes. and are expected to be used during more than one period. Idea generation Lecture example 1 Required What examples of tangible non-current assets can you identify? Solution (a) (b) (c) (d) 9.1 Non-current assets Non-current assets are assets which are intended to be used by the business on a continuing basis and include both tangible and intangible assets. Intangible non-current assets are covered in Chapter 10. 2 2. It is important therefore that this expenditure is accounted for appropriately.9: TANGIBLE NON-CURRENT ASSETS 1 1.3 .2 Introduction The purchase of a non-current asset is often a significant cost to a business which will have a large impact on its financial statements.
5 Tangible non-current assets should initially be recorded at cost.6 The asset can then be kept at cost and depreciated or the entity may choose to revalue its tangible non-current assets. maintain and service non-current assets.3 (a) (b) Capital expenditure: Revenue expenditure: results in the acquisition. 2. Revenue expenditure results in an expense in the income statement. Cost includes: • • Purchase price: excluding sales tax and trade discounts but including import duties Directly attributable costs to bring the asset to its intended location and ready to use. Exam standard worth 2 marks Lecture example 2 On 10 December 20X7 an entity bought a machine. Cost 2.100 9. These include: (a) (b) (c) (d) (a) (b) (c) Initial delivery and handling costs Installation and assembly costs Costs of testing whether the asset is working properly Professional fees The cost of maintenance contracts Administration and general overhead costs Staff training costs The following costs may not be included: 2.000 200 900 21. or – to repair.3 Section 1.4 Capital expenditure results in the appearance of a non-current asset in the balance sheet of the business.4 . replacement or improvement of non-current assets. – for the trade of the business. $ 20. The breakdown on the invoice showed: Cost of machine Delivery costs One-year maintenance contract Further installation costs of $500 were also incurred.9: TANGIBLE NON-CURRENT ASSETS Capital versus revenue expenditure 2.
2 Depreciation results in the non-current asset being systematically charged to the income statement over several accounting periods in recognition of the fact that the asset will contribute to the income-generating activities of each of these periods. This cost should be shown in the income statement to 'match' against the income. This is called depreciation.000 $20. therefore. IAS 16: "…the systematic allocation of the depreciable amount of an asset over its useful life. Assets will eventually be worn out (used up) and so there is a cost of generating income. are depreciable assets. 3.200 $21.700 $20. 3.1 Depreciation Tangible non-current assets are used in the business to generate the income shown in the income statement.5 .9: TANGIBLE NON-CURRENT ASSETS Required At what amount should the machine be capitalised in the entity's records? A B C D $20. 9." 'Depreciable amount' 'Residual value' = = cost/revalued amount – residual value the amount the asset is expected to be sold for at the end of its useful life (scrap value). A formal definition is given by the accounting standard.600 Solution 3 3.3 Land normally has an unlimited useful life and is therefore not depreciated. Buildings have a limited life and.
1 Methods of depreciation There are two main methods for calculating depreciation: (a) (b) Straight line method Reducing balance method 5 5.3 = the number of years the business expects to make use of the asset.1 Straight line method The depreciation charge is the same every year. accumulated depreciation and net book value (NBV) for each year of the asset's life. Preparation question Lecture example 3 A business buys a machine for $2. cost − residual value useful life (years) Formula 5. It is expected to have a useful life of three years after which time it will have a scrap value of $250.2 Depreciation = where: or (Cost – Residual value) × % Residual value = expected proceeds/scrap value at the end of the asset's useful life. Note: NBV = cost – accumulated depreciation to date. Calculate the cost. Required (a) (b) Calculate the annual depreciation charge. Solution (a) (b) Year 1 2 3 Cost $ Accumulated depreciation $ NBV $ 9.500. Useful life 5.9: TANGIBLE NON-CURRENT ASSETS 4 4.6 . This method is suitable for assets which are used up evenly over their useful life.
2 Depreciation where: Note: = Depreciation rate (%) × Net Book Value (NBV) net book value (NBV) = cost – accumulated depreciation to date This method does not take account of any residual value. The depreciation rate percentage will be provided in the question. Under this method the depreciation charge will be higher in the earlier years and reduce over time. Formula 6.000. accumulated depreciation and net book value of the asset for the first three years.7 . Solution Year 1 2 3 NBV b/d $ Depreciation rate Depreciation expense $ Accumulated depreciation $ NBV c/d $ 9. Preparation question Lecture example 4 A business buys a machine costing $6. since the NBV under this method will never reach zero. The depreciation rate is 40% on a reducing balance basis. Required Calculate depreciation expense. for example a machine which may become progressively less efficient as it gets older.1 Reducing balance depreciation This method is suitable for those assets which generate more revenue in earlier years than in later years.9: TANGIBLE NON-CURRENT ASSETS 6 6.
8 . show: (a) (b) (c) The journal entry which would have been written at the end of the first year.1 Accounting for depreciation Depreciation has a dual effect which needs to be accounted for: (a) (b) It reduces the value of the asset on the face of the balance sheet.2 The asset remains at its original cost in the asset account. The treatment of depreciation for all years in the relevant ledger accounts. Reduces original cost of the asset on the balance sheet. (The balance on the account is offset against the cost account for the corresponding asset. The relevant income statement and balance sheet extracts for each year. plant and machinery).) Separate account kept for each class of asset (eg motor vehicles. It is an expense in the income statement.9: TANGIBLE NON-CURRENT ASSETS 7 7.3 (a) (b) (c) Used to provide for the reduction in value of the asset. Solution (a) Journal entry Debit $ Credit $ 9. buildings. Dual effect 7. Two accounts are set up to record depreciation: Dr Cr Depreciation expense Accumulated depreciation Accumulated depreciation account 7. Preparation question Lecture example 5 Required Using the information in Lecture example 3.
9: TANGIBLE NON-CURRENT ASSETS (b) Machine (B/S) Depreciation expense (I/S) Accumulated depreciation (B/S) (c) Income statement (extracts) Year 1 $ Expenses Year 2 $ Year 3 $ 9.9 .
9.9: TANGIBLE NON-CURRENT ASSETS Balance sheet (extracts) Cost $ (Year 1) (Year 2) (Year 3) Accumulated depreciation $ Net book value $ 8 8. of its net book value needs to be removed from the balance sheet. but rather a book adjustment to reflect the fact that the depreciation charged over the asset's life wasn't completely accurate.2 Everything to do with the disposal is transferred to a Disposal Account. The sales proceeds received are unlikely to be exactly the same as the asset's net book value and so a profit or loss on disposal will arise. Profit or loss on disposal Accounting treatment 8.10 .1 Disposal of non-current assets When a non-current asset is disposed. Steps: (1) Remove the cost of the asset: Dr Cr (2) Dr Cr Disposal account Non-current asset Accumulated depreciation Disposal account Remove the accumulated depreciation charged to date: Note: Steps (1) and (2) have effectively transferred the NBV of the asset to the disposal account. If: Sales proceeds > NBV ⇒ profit on disposal Sales proceeds < NBV ⇒ loss on disposal This is not a 'true' profit or loss.
A gain on disposal is shown in the income statement as sundry income.000 $ 9.9: TANGIBLE NON-CURRENT ASSETS (3) Account for the sales proceeds: Dr Cr (4) Cash Disposal account Balance off disposal account to find the profit or loss on disposal.11 .000 in Lecture example 4 is sold in year 3 for $3. a loss as an expense.000. Lecture example 6 Preparation question The machine costing $6. No depreciation is charged in the year of disposal. Required (a) (b) Calculate the profit or loss on disposal of the machine. Complete the ledger accounts to show how the disposal would be accounted for. Solution (a) (b) Machine (B/S) Bal b/d $ 6.
Complete the ledger accounts to show both the disposal and the acquisition. Lecture example 7 Preparation question Assume in Lecture example 6 that instead of cash proceeds of $3.12 .000 on a replacement machine costing $10.9: TANGIBLE NON-CURRENT ASSETS Accumulated depreciation (B/S) $ Bal b/d $ 3.000. there is a part exchange allowance of $3.3 Instead of receiving sales proceeds as cash. 9.000. Required (a) (b) (c) Calculate the profit or loss on disposal of the machine. a part exchange allowance could be offered against the cost of a replacement asset: Dr Cr New asset cost Disposal account The part exchange allowance takes the place of proceeds in the disposals account.840 Disposal account $ $ Part exchange allowance 8. Calculate the amount of cash paid for the new machine.
000 $ Accumulated depreciation (B/S) $ Bal b/d $ 3.9: TANGIBLE NON-CURRENT ASSETS Solution (a) (b) (c) Old machine (B/S) Bal b/d $ 6.840 New machine (B/S) $ $ Disposal account $ $ 9.13 .
1 9.9: TANGIBLE NON-CURRENT ASSETS 9 9. 9.6 The required journal is: Dr Dr Cr 9. 9. This is a choice of accounting policy. Put the balance to the revaluation reserve. Steps and accounting treatment 9. The entity can then either keep the asset at cost (and depreciate it) or choose to revalue it (depreciation is still required).14 .3 If an entity chooses a policy of revaluation then all items in the same class of assets must be revalued. IAS 16 requires tangible non-current assets to initially be recorded at cost. 9. Note: The balance posted to the revaluation reserve will equal the new revalued amount less the previous net book value. Examples of classes of assets are: • • • land and buildings plant and machinery motor vehicles 9.7 Non-current asset cost Accumulated depreciation Revaluation reserve Depreciation should now be based on the revalued amount.2 Revaluations If an entity owns a property it may notice that its value increases over time.4 Revaluations must be carried out sufficiently often so that the assets carrying value is not materially different from its market value. Remove accumulated depreciation charged on the asset to date.5 (1) (2) (3) Adjust cost account to revalued amount.
000 on which depreciation of $20.000 has been charged is to be revalued to $150.9: TANGIBLE NON-CURRENT ASSETS Lecture example 8 Preparation question A building costing $100.000. What would be the depreciation charge for the year if the building has a remaining useful life of 40 years? Solution (a) Building (B/S) $ $ Accumulated depreciation (B/S) $ $ 9. Required (a) (b) Show the double entry to record the revaluation and make the postings to the ledger accounts.15 .
10. it must revalue all assets in the same class and the depreciation charge will now be based on the revalued amount.2 Tangible non-current assets should initially be recorded at cost.3 Depreciation is an expense charged on the asset each year to reflect the using up of the asset. 10. Revenue expenditure.1 Capital expenditure results in a non-current asset being shown on the balance sheet. Where an entity revalues. This includes the purchase price of the item plus any directly attributable costs to bring the item to its intended location and ready to use. such as repairs and maintenance. Where an asset is given in part exchange for another asset. the part exchange allowance takes the place of the sales proceeds. is shown as an expense in the income statement.5 An entity may choose to revalue its assets rather than hold them at cost – this is a choice of accounting policy.4 On disposal of a non-current asset the sales proceeds are compared to the net book value of the asset in order to calculate the profit or loss on disposal. 9. 10. 10. Depreciation is usually calculated on a straight line or reducing balance basis.16 .9: TANGIBLE NON-CURRENT ASSETS Revaluation reserve (B/S) $ $ (b) 10 Summary of Chapter 9 10.
17 .1 Depreciation adjustment: Dr Cr Depreciation expense (I/S) Accumulated depreciation (B/S) 11. 11.3 Revaluation of a non-current asset: Dr Dr Cr Non-current asset cost (B/S) Accumulated depreciation (B/S) Revaluation reserve (B/S) 9.2 Disposal of a non-current asset (four steps): (1) Remove the cost of the asset: Dr Cr (2) Disposal account (I/S) Non-current assets (B/S) Remove the accumulated depreciation charged to date: Dr Cr Accumulated depreciation (B/S) Disposal account (I/S) (3) Account for the sales proceeds: Dr Cr Cash (B/S) Disposal account (I/S) (4) Balance off the disposal account to determine the profit or loss on disposal.9: TANGIBLE NON-CURRENT ASSETS 11 Double Entry Summary for Chapter 9 11.
9: TANGIBLE NON-CURRENT ASSETS 9.18 .
9: TANGIBLE NON-CURRENT ASSETS Additional Notes 9.19 .
1.12 12.20 .2 The useful life of an item of property.1. if expectations are significantly different from previous estimates. Solution Depreciation Accumulated charge depreciation $ $ 20X1 20X2 20X3 20X4 NBV $ 9.000 Estimated useful life five years No residual value Total useful life revised to four years.X3 Required Calculate the depreciation charge.X1 Asset cost $40. the depreciation charge for current and future periods should be revised. Preparation question 1. plant and equipment should be reviewed at least every financial year-end and. This is achieved by writing the net book value off over the asset's revised remaining useful life. accumulated depreciation and NBV for each year of the asset's life (year end 31 December). There are two main depreciation methods available: • • straight line reducing balance Section 3. Lecture example 9 1.1 Depreciation is charged to allocate the wearing out of an asset (depreciable amount) to the income statement over its useful life.9: TANGIBLE NON-CURRENT ASSETS 12 Depreciation revisited 12.
accumulated depreciation and NBV for each year of the asset’s life (year ended 31 December).3 The depreciation method should be reviewed at least every financial year-end and.21 .1. the method should be changed.X1 Asset cost $40. using the revised method. This is achieved by writing the net book amount off over the remaining useful life.9: TANGIBLE NON-CURRENT ASSETS Review of depreciation method Section 3.X3 Required Calculate the depreciation charge.000 Residual value $1. if there has been a significant change in the expected pattern of the asset's use. Solution Depreciation Accumulated charge depreciation $ $ 20X1 20X2 20X3 20X4 20X5 NBV $ 9.9 12. Lecture example 10 1.1.7-3.500 Useful life five years Depreciation: 25% reducing balance Change depreciation method to straight line Preparation question 1.
22 .9: TANGIBLE NON-CURRENT ASSETS 9.
Chapter 9: Questions 9.23 .
Data for Questions 9.1 and 9.2
Bungo Co purchases a car for its managing director, which would cost $17,000, by paying $1,000 cash, and trading in an old vehicle. The old vehicle had a net book value of $15,500 immediately before the trade in took place. 9.1 What is the effect of the above transaction on the profit for the year in respect of the disposal of the old vehicle? A B C D 9.2 Reduce profit by $1,500 Increase profit by $1,500 Reduce profit by $500 Increase profit by $500 (2 marks)
Bungo Co charges depreciation at 10% per annum, with a full year’s charge in the year of acquisition. What will the annual depreciation charge on the new vehicle be? $ (2 marks)
A company held property, plant and equipment at 31 December 20X5 with a net book value of $22,700. During 20X6 items with a net book value of $2,100 were sold, realising a profit of $700. The depreciation charge in the 20X6 income statement was $4,300. Items with a book value of $15,200 were revalued to $21,250. At 31 December 20X6 the company’s balance sheet showed the net book value of property, plant and equipment as $44,100. What was the cost of new property, plant and equipment acquired during 20X6? A B C D $13,150 $17,550 $22,050 $21,750 (2 marks)
Nick Nick started trading on 1 January 20X8 and bought equipment for his business as follows: 1 January 20X8 2 January 20X8 1 March 20X8 1 May 20X8 – – – – Purchased a cutting machine for $4,960. The estimated useful life of the machine is eight years, after which it will have no resale value. Purchased a car for $6,800. Purchased a van for $3,800. This has an estimated useful life of four years, after which Nick believes he could sell it for $200. Purchased office furniture costing $5,400. This has an estimated useful life of 10 years with no resale value.
Depreciation for all assets, except the car, is to be calculated on the straight line basis, time apportioned where the asset is owned for part of a year. The car is to be depreciated at 40% per annum on the reducing balance basis. Required For the years ending 31 December 20X8 and 31 December 20X9, prepare relevant extracts from the financial statements, together with the appropriate ledger accounts.
Eggo On 1 January 20X4 Eggo Co, a manufacturer, acquired two identical grinding machines at a cost of $10,000 each, and a duplicating machine at a cost of $3,000. The grinding machines are depreciated at the rate of 30% per annum on a reducing balance basis, and the duplicating machine, which has an estimated life of 10 years and a residual value of $500, is depreciated on a straight line basis. On 1 January 20X5 one of the grinding machines was sold for $5,000 and replaced by a new one costing $12,000. Required Prepare the relevant ledger accounts dealing with the non-current assets, depreciation and the disposal for the years to 31 December 20X4 and 31 December 20X5, respectively.
Hopkins During 20X4 Hopkins gave his old van in part-exchange for a new van. The old van had cost $4,000 and had accumulated depreciation of $2,400 at the date of exchange. Hopkins received a part-exchange allowance of $1,800 and made a cash payment of $6,200 for the new van. Depreciation is over four years on a straight line basis. Required (a) (b) Calculate the profit or loss on disposal of the old van. Calculate the depreciation expense for the year ended 20X4.
Chapter 9: Answers
Profit on disposal = (17,000 – 1,000) – 15,500 = $500
10% × $17,000 = $1,700 9.3 D Property, plant and equipment (NBV) $ 22,700 Disposals 6,050 Depreciation ? 50,500 C/d $ 2,100 4,300 44,100 50,500
B/d Revaluation (21,250-15,200) Additions
∴ additions = $21,750 9.4 Nick Income statement for the year ended 31 December .... (extract) Depreciation Expense Machine Car Van Furniture Balance sheet as at 31 December 20X8 (extract) Non-current assets Machine Car Van Furniture Balance sheet as at 31 December 20X9 (extract) Non-current assets Machine Car Van Furniture Machine (B/S) 1.1.X8 Bank $ 4,960 Cost $ 4,960 6,800 3,800 5,400 20,960 Accumulated depreciation $ 1,240 4,352 1,650 900 8,142 Net Book Value $ 3,720 2,448 2,150 4,500 12,818 Cost $ 4,960 6,800 3,800 5,400 20,960 Accumulated depreciation $ 620 2,720 750 360 4,450 Net Book Value $ 4,340 4,080 3,050 5,040 16,510 20X8 $ 620 2,720 750 360 4,450 20X9 $ 620 1,632 900 540 3,692
Machine – Accumulated Depreciation (B/S) 31.12.X8 bal c/d $ 620 620 31.12.X9 bal c/d 1,240 1,240 1.1.X9 31.12.X9 1.1.Y0 31.12.X8 Dep’n expense: machine bal b/d Dep’n expense : machine bal b/d $ 620 620 620 620 1,240 1,240
Car (B/S) 2.1.X8 Bank $ 6,800 Car – Accumulated Depreciation (B/S) 31.12.X8 bal c/d 31.12.X9 bal c/d $ 2,720 2,720 4,352 4,352 31.12.X8 1.1.X9 31.12.X9 1.1.Y0 Van (B/S) 1.3.X8 Bank $ 3,800 Van – Accumulated Depreciation (B/S) 31.12.X8 bal c/d 31.12.X9 bal c/d $ 750 750 1,650 1,650 31.12.X8 1.1.X9 31.12.X9 1.1.Y0 Furniture (B/S) 1.5.X8 Bank $ 5,400 Dep’n expense: van bal b/d Dep’n expense: van bal b/d $ 750 750 750 900 1,650 1,650 Dep’n expense: car bal b/d Dep'n expense: car bal b/d $ 2,720 2,720 2,720 1,632 4,352 4,352
Furniture – Accumulated Depreciation (B/S) 31.12.X8 bal c/d $ 360 360 31.12.X9 bal c/d 900 900 1.1.X9 31.12.X9 1.1.Y0 31.12.X8 Dep’n expense: furniture furniture bal b/d Dep’n expense: furniture bal b/d $ 360 360 360 540 900 900
Depreciation Expense : Machine (I/S) 31.12.X8 31.12.X9 Acc’d dep’n: machine Acc’d dep’n: machine $ 620 620 31.12.X8 31.12.X9 I/S I/S $ 620 620
Depreciation Expense : Car (I/S) 31.12.X8 31.12.X9 Acc’d dep’n: car Acc’d dep’n: car $ 2,720 1,632 31.12.X8 31.12.X9 I/S I/S $ 2,720 1,632
Depreciation Expense : Van (I/S) 31.12.X8 31.12.X9 Acc’d dep’n: van Acc’d dep’n: van $ 750 900 31.12.X8 31.12.X9 I/S I/S $ 750 900
Depreciation Expense : Furniture (I/S) 31.12.X8 31.12.X9 Acc’d dep’n: furniture Acc’d dep’n: furniture $ 360 540 20X8 $ 620 2,720 (6,800 – 2,720) × 40% (note: reducing balance method) 31.12.X8 31.12.X9 I/S I/S $ 360 540 20X9 $ 620 1,632
Workings: Depreciation charge Machine Car Van 4,960 ÷ 8 6,800 × 40% (3,800 – 200) ÷ 4 = 900 900 ×
10 = 750 12
(10 months) Furniture (5,400) ×
8 (8 months) 12
(full year) (full year)
Eggo Grinding machines (B/S) 1.1.X4 1.1.X5 1.1.X5 1.1.X6 Bank Balance b/d Bank Balance c/d $ 20,000 20,000 12,000 32,000 22,000 31.12.X4 Balance c/d 1.1.X5 Disposals 31.12.X5 Balance c/d $ 20,000 10,000 22,000 32,000
Grinding machines – Accumulated Depreciation (B/S) 31.12.X4 Balance c/d 1.1.X5 Disposals 31.12.X5 Balance c/d $ 6,000 3,000 8,700 11,700 31.12.X4 Dep'n expense (W) 1.1.X5 Balance b/d 31.12.X5 Dep'n expense (W) 1.1.X6 Balance b/d $ 6,000 6,000 5,700 11,700 8,700
Duplicating machine (B/S) 1.1.X4 1.1.X5 1.1.X5 Bank Balance b/d Balance b/d $ 3,000 3,000 3,000 31.12.X4 Balance c/d 31.12.X5 Balance c/d $ 3,000 3,000
Duplicating machine – Accumulated Deprecation 31.12.X4 Balance c/d $ 250 250 500 500 31.12.X4 1.1.X5 31.12.X5 1.1.X6 Depreciation expense Balance b/d Depreciation expense Balance b/d $ 250 250 250 250 500 500
Depreciation expense (I/S) 31.12.X4 Acc dep'n – grinding machines 31.12.X4 Acc dep'n – duplicating machine 31.12.X5 Acc dep'n – grinding machines 31.12.X5 Acc dep'n – duplicating machine $ 6,000 250 6,250 5,700 250 5,950 $ 31.12.X4 I/S 6,250 6,250 5,950 5,950
Disposal account (I/S) 1.1.X5 Grinding machines $ 10,000 10,000 Working Depreciation charge Year ended 31 December Grinding machines ($20,000 × 30%) Duplicating machine ($3,000 – $500) ÷ 10 Grinding machines Machine 1 ($10,000 – $3,000) × 30% Machine 2 ($12,000 × 30%) Duplicating machine 6,250 9.6 Hopkins (a) $200 profit Working Disposal account (I/S) Cost Profit on disposal $ 4,000 200 4,200 Or alternatively: "Proceeds" – part-exchange allowance Net book value ($4,000 – $2,400) Profit on disposal (b) $2,000 Cost of new van to be depreciated ($6,200 + $1,800) Depreciate over four years $ 8,000 2,000 $ 1,800 (1,600) 200 Accumulated depreciation Part exchange allowance $ 2,400 1,800 4,200 20X4 $ 6,000 250 20X5 $ 1.1.X5 Bank 1.1.X5 Acc Dep'n – grinding machine 31.12.X5 I/S – loss on disposal $ 5,000 3,000 2,000 10,000
2,100 3,600 250 5,950
END OF CHAPTER
10. There you will cover internally generated intangible assets and goodwill. however you should still expect this area to be tested.1 . Questions are likely to focus on the difference between tangible and intangible assets. the accounting treatment for research and the capitalisation criteria for development expenditure. Exam Context Intangible non-current assets are a smaller part of the syllabus than tangible non-current assets. Identify the definition and treatment of research and development costs in accordance with IFRS. Qualification Context The knowledge covered in this chapter forms a platform which will be built on in the Fundamentals level paper Financial Reporting (F7). You should also be confident in calculating amortisation.Intangible non-current assets Syllabus Guide Detailed Outcomes Having studied this chapter you will be able to: • • • • • Recognise the difference between tangible and intangible non-current assets. Calculate and account for the charge for amortisation and explain its purpose. Calculate amounts to be capitalised as development expenditure or to be expensed from given information. Identify types of intangible assets.
2 .10: INTANGIBLE NON-CURRENT ASSETS Overview Intangible non-current assets Research Development expenditure Accounting treatment Accounting treatment Amortisation 10.
Companies need to account for these costs and whilst the credit entry will be recorded as a current liability.1 1. The choices are: (a) (b) to debit the income statement with an expense. devices.10: INTANGIBLE NON-CURRENT ASSETS 1 1. spend huge amounts on research and development every year in order to maintain or enhance their competitive position. products. Development is the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials.2 Research and development expenditure Many companies. the question remains as to where the debit entry should be shown. such as pharmaceutical companies. patents.3 . An intangible non-current asset should only be recorded when the entity is confident that the expenditure will generate future profit.2 Definition An intangible non-current asset is an identifiable non-monetary asset without physical substance. licences.1 IAS 38: Intangible assets (a) (b) Research is original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding. 3 3. processes. systems or services before the start of commercial production or use.1 2. or to debit the balance sheet with an intangible non-current asset. Definitions 10. trade marks. The following are examples of intangible assets: – – – Development expenditure Goodwill Concessions. The Paper F3 syllabus only requires knowledge of the accounting treatment of research and development expenditure. 2 2.
The new car is expected to go on sale in 20X9. It has an estimated useful life of 10 years.000 to purchase a machine to manufacture components for the new car.4 .000 on salaries for market research staff sent out to canvass drivers' opinions on a potential new car.1 Accounting treatment Research • Development • No certainty that the expenditure will generate future profit Show as an expense in income statement Dr Research expense (I/S) Cr Bank/payables Future profits are expected MUST capitalise as an intangible noncurrent asset if all of the relevant criteria are satisfied Dr Intangible non-current assets (B/S) Cr Bank/payables • • • • P robable future economic benefits I ntention to complete and use/sell asset R esources adequate and available to complete and use/sell asset A bility to use/sell the asset T echnical feasibility of completing asset for use/sale E xpenditure can be measured reliably • Amortise asset over its useful life once asset is ready for use Preparation question Lecture example 1 Z Co incurred the following costs during the year ended 31 August 20X8. $25. Required How should each of the above items be shown in the financial statements for the year ended 31 August 20X8? 10.10: INTANGIBLE NON-CURRENT ASSETS 4 4.000 on materials to manufacture a prototype and $50. $100.000 on salaries relating to its design and manufacture. (1) (2) (3) $20.
The cost of the development expenditure should be matched against the revenue it produces.5 . such as a machine. In the same way development expenditure which is incurred now will generate revenue and profits in the future. This is to allocate its costs over the accounting periods which benefit from its use. Amortisation should begin when the asset is ready for use. 5.10: INTANGIBLE NON-CURRENT ASSETS Solution 5 5.1 5. 10.4 The 'depreciable amount' (cost less residual value) should be amortised over the useful life in the same way that revenues are expected to be generated. is capitalised and then depreciated over its useful life.2 Amortisation of capitalised development expenditure A tangible non-current asset.3 5. This is called amortisation.
000 – – – The development expenditure meets the IAS 38 criteria that require capitalisation ('PIRATE').000 – – – 38.1.10: INTANGIBLE NON-CURRENT ASSETS 5. Solution X1 $ Expenses Research expenditure Amortisation of development expenditure X1 $ Non-current assets Development expenditure Amortisation Net book value Balance sheet extracts X2 X3 X4 $ $ $ X5 $ Income statement extracts X2 X3 X4 $ $ $ X5 $ 10.000 65.6 .5 It is an expense in the income statement and is accounted for using the following entry: Dr Cr Amortisation expense (I/S) Accumulated amortisation (B/S) Technique demonstration Lecture example 2 Development Co incurs the following expenditure in years 20X1 – 20X5. 20X1 20X2 20X3 20X4 20X5 Research $ 35. The item developed in 20X1 and 20X2 goes on sale on 1. Required Show income statement and balance sheet extracts for the years 20X1 – 20X5 inclusive.000 Development $ 55.X3 and it will be three years from then until any competitor is expected to have a similar product on the market.
This asset will then be amortised over the period during which it is expected to generate income. 6. There is no certainty of future profit from this expenditure and so it should be shown as an expense in the income statement.1 Quick Quiz Summary of Chapter 10 Research relates to costs incurred to obtain knowledge or understanding.7 .10: INTANGIBLE NON-CURRENT ASSETS 6 6. Development expenditure should be capitalised as an intangible non-current asset provided all of the PIRATE criteria are met.2 10.
8 .10: INTANGIBLE NON-CURRENT ASSETS 10.
9 .Chapter 10: Question 10.
All of the above (1) and (2) (2) and (3) (1) and (3) (2 marks) 10. Development expenditure must be capitalised if it meets various criteria.1 Which of the following statements about research and development are true? (1) (2) (3) A B C D Development expenditure shown on the balance sheet should be amortised over the periods expected to benefit from the product or service.10 . Research expenditure is always written off.10: QUESTION 10.
11 .Chapter 10: Answer 10.
10: ANSWER 10.12 .1 A END OF CHAPTER 10.
Understand and identify the impact on profit and net assets of accruals and prepayments.Accruals and prepayments Syllabus Guide Detailed Outcomes Having studied this chapter you will be able to: • • • • Understand how the matching concept applies to accruals and prepayments. The matching concept however is fundamental to the preparation of financial statements and this is relevant to Paper F7. You may be asked to calculate the balance sheet amount for accruals and prepayments and/or the relevant expense that would be shown in the income statement. The Pilot Paper included questions on the calculation of a year-end prepayment of an expense and the income to be shown in the income statement where rent is received both in advance and in arrears. Alternatively. Financial Reporting. you may be asked to determine the appropriate journal entries to record accruals and prepayments. Exam Context Accruals and prepayments are key accounting adjustments and you should expect to see them tested in Paper F3. Prepare the journal entries and ledger entries for the creation of an accrual or prepayment. Identify and calculate the adjustments needed for accruals and prepayments in preparing financial statements. Qualification Context This area is a basic skill which is not tested in detail in any other paper. 11.1 .
2 .11: ACCRUALS AND PREPAYMENTS Overview Accruals and prepayments Accounting treatment Year-end adjustments Reversing out accruals and prepayments Balance sheet presentation Accrued income and deferred income Accounting treatment 11.
expenses in arrears. IAS 1 requires financial statements to be prepared on an accruals basis.3 Accruals are expenses incurred by the business during the accounting period but not yet paid for. this expense must be included in the accounts for the year ended 31 December 20X7.4 Fred prepares accounts to 31 December each year.6 On 20 December 20X7 Fred pays for insurance on his business premises for the 12 months commencing 1 January 20X8. the expense should not appear in the accounts for 20X7. The accounts for 20X7 will show a prepayment for the full amount of the insurance cost and the expense will be recorded in 20X8. as it was incurred during this period. This is so that transactions and events are recognised when they occur (and not as cash or its equivalent is received or paid) and they are recorded in the accounting records and reported in the financial statements of the period to which they relate. On 1 January 20X8. expenses in advance.1 1. Although the payment was made in 20X7. ie. The accruals basis is also an underlying assumption in the IASB's Framework for the Preparation and Presentation of Financial Statements. he pays a telephone bill of $60 which relates to the period October-December 20X7. Although the payment does not go through the cash book until 20X8. Accruals 1.11: ACCRUALS AND PREPAYMENTS 1 1. ie.3 . Example 1. 11.2 Introduction This chapter is designed to enable you to apply accounting concepts and principles in relation to the calculation of and adjustments for accruals and prepayments. Example 1.5 Prepayments arise when expenses are paid for before they have been used. Prepayments 1.
X7 Rent 1.12. 11.2 Accruals: Sub-heading under 'current liabilities' Prepayments: Sub-heading under 'current asset'.4 .11: ACCRUALS AND PREPAYMENTS 2 2. Lecture example 1 Preparation question Fiona set up a business on 1 January 20X7.X7 375 1.X7 6.3.1 Accounting treatment Adjustments for accruals and prepayments tend to occur at the end of the year and are made by way of a journal entry.6.X7 14.X7 10.2. Her cash payments for the year to 31 December 20X7 included: Date paid Electricity 10.9. The required entries are: Accruals Dr Expense (I/S) Cr Accruals (B/S) Prepayments Dr Prepayments (B/S) Cr Expense (I/S) Year-end adjustments Balance sheet presentation 2.584 3 months to 31 March 20X7 12 months to 31 March 20X8 96 120 104 145 2 months to 28 February 20X7 quarter to 31 May 20X7 quarter to 31 August 20X7 quarter to 30 November 20X7 Amount $ Period Note: On 6 March 20X8 Fiona received an electricity bill for $168 for the quarter to 28 February 20X8.4.X7 12.
Calculate the amount of any accruals/prepayments at the end of the year.11: ACCRUALS AND PREPAYMENTS Required (a) (b) (c) Calculate the expense incurred by Fiona for electricity and rent for the year ended 31 December 20X7. Solution 11.5 . State the journal entry required for the year-end adjustments.
584 $ Accruals (B/S) $ $ Prepayments (B/S) $ $ Section 1.3.X7 10.X7 Cash Cash Cash Cash 1.12.9. Solution Electricity expense (I/S) $ 96 120 104 145 $ 10.X7 Cash Cash Rent expense (I/S) $ 375 1.11: ACCRUALS AND PREPAYMENTS Lecture example 2 Required Using the figures from Lecture example 1: Preparation question Complete the necessary entries in Fiona’s ledger accounts as at 31 December 20X7.9 11. then balance off the accounts.X7 6.X7 14.2.X7 12.4.6 .6.
11: ACCRUALS AND PREPAYMENTS 3 3.12.X8 Rent Prepayments $ 396 435 $ This does not produce a sensible answer! The rent expense in the ledger account would result in a charge to the income statement of $1.740) = $1.584) + ( 9 12 × $1.12.X8 Balance b/d 31.740 for the 12 months commencing 1 April 20X8? 22.214.171.124 Expense = ( 3 12 × $1.740 ) 435 1.3 10.701) and the balance on the prepayment account would be overstated by $396.7 .305 (not $1.12.X8 Problem 3.X8 $ Prepayments ( 3 12 × 1. 11.1 Reversing out accruals and prepayments Using the figures from Lecture example 1.X8 Cash Rent expense $ 1. what is Fiona’s rent expense for the year to 31 December 20X8 assuming that on 10 April 20X8 she paid rent of $1.1.740 31.X8 31.701 Double entry 3.X8 1.4.
12.X8 12. Calculate the electricity expense and accrual for the year ended 31 December 20X8 and complete the ledger accounts.9.5 Accruals and prepayments brought forward at the start of the year must be reversed.8 . Reversal of accrual Dr Accruals (B/S) Cr Expense (I/S) Prepayments Dr Expense (I/S) Cr Prepayments (B/S) Approach to questions 3.X8 Required Amount $ 168 134 118 158 Period quarter to 28 February 20X8 quarter to 31 May 20X8 quarter to 31 August 20X8 quarter to 30 November 20X8 During March 20X9 Fiona received an electricity bill for $189 for the quarter to 28 February 20X9.6 There are four steps to follow: (1) (2) (3) (4) Reverse opening accrual/prepayment.X8 12. Preparation question Lecture example 3 In 20X8 Fiona paid the following electricity bills: Date paid 12. Post cash paid during the year. ie: Debit Credit Rent expense (I/S) Prepayments (B/S) $396 $396 Post this to the ledger accounts in 3. Post closing accrual/prepayment.11: ACCRUALS AND PREPAYMENTS Solution 3.X8 9.6. 11.3 and balance off – the expense should now be correct! Summary 3. Balance off the accounts.3.4 The opening prepayment must therefore be reversed.
Required What insurance expense and end of year prepayment should be included in the financial statements for the year ended 30 June 20X7? A B C D Expense $29. 1 September and 1 December each year. after that date it increased to $30.000 per year.000 until 31 August 20X6.11: ACCRUALS AND PREPAYMENTS Solution Electricity expense (I/S) $ $ Accruals (B/S) $ $ Lecture example 4 Exam standard question for 2 marks Jimmy Co prepares its financial statements for the year to 30 June each year.000 $2. The company pays for its insurance quarterly in advance on 1 March. The annual insurance premium was $24.500 $5.9 . 1 June.500 Prepayment $2.500 $28.000 $28.500 $5.000 11.000 $29.
Accruals are made when expenses are paid in arrears.2 Prepayments adjustment: Dr Cr Prepayments (B/S) Expense (I/S) 11.1 Double Entry Summary for Chapter 11 Accruals adjustment: Dr Cr Expense (I/S) Accruals (B/S) 5.10 .1 4.2 4. whereas prepayments arise when expenses are paid for in advance. Reverse accruals and prepayments at the beginning of the next accounting period so that the current year expense is correct. 4.11: ACCRUALS AND PREPAYMENTS Solution 4 Quick Quiz Q2-5 Summary of Chapter 11 Accruals and prepayments are an example of the accruals basis which is an underlying assumption from the IASB Framework.3 5 5.
3 Approach to questions (four steps): (1) Reverse opening accrual/ prepayment: Accruals: Dr Accruals (B/S) Cr Expense (I/S) Prepayments: Dr Expense (I/S) Cr Prepayments (B/S) (2) (3) (4) Post cash paid during the year.11: ACCRUALS AND PREPAYMENTS 5. Balance off the ledger accounts.11 . 11. Post closing accrual/ prepayment.
11: ACCRUALS AND PREPAYMENTS 11.12 .
13 .11: ACCRUALS AND PREPAYMENTS Additional Notes 11.
11: ACCRUALS AND PREPAYMENTS
Accrued income and deferred income
Accruals and prepayments relate to when expenses are paid in arrears or advance. Income may also be received in arrears or advance.
6.2 This relates to when income has been earned during the accounting period but not invoiced or received.
6.3 Jenny owns a property which she rents out for $3,000 per quarter. The property was occupied all year; however Jenny only received $9,000 in rent because she forgot to send out the final invoice of the year. As the property was let for 12 months, Jenny's income statement should show income of $12,000 (4 × $3,000) as this is what she has earned. She will therefore need to accrue the 'missing' income of $3,000 as a year end journal and also show a receivable for "rent in arrears". The adjustment is: Dr Cr Rent in arrears (B/S) Rental income (I/S) $ 3,000 $ 3,000
The rent in arrears is shown in the balance sheet within current assets.
6.4 This relates to when income is received in advance of it being earned.
6.5 Ben has a year end of December and rents out his property for $1,000 per month. His tenant pays on time each month and during December 20X7 paid Ben $2,000 as he would be away when the January 20X8 payment was due. Ben has received income of $13,000 but only $12,000 of this relates to the current year. He must therefore remove $1,000 of income from this years accounts because it relates to next year. A liability will also be shown for "rent in advance". The adjustment is: Dr Cr Rental income (I/S) Rent in advance (B/S) $ 1,000 $ 1,000
The rent in advance is shown in the balance sheet within current liabilities.
11: ACCRUALS AND PREPAYMENTS
Approach to questions
6.6 The approach for accrued income and deferred income is exactly the same as for accruals and prepayments. There are four steps to follow: (1) (2) (3) (4) Reverse opening rent in arrears/advance. Post cash received during the year. Post closing rent in arrears/advance. Balance off the accounts.
11: ACCRUALS AND PREPAYMENTS
Chapter 11: Questions
Data for Questions 11.1 – 11.3
A company made the following payments in 20X5 in respect of rent and telephone expenses: Rent Quarter ended 31 January 20X5 Quarter ended 30 April 20X5 Quarter ended 31 July 20X5 Quarter ended 31 October 20X5 Quarter ended 31 January 20X6 Telephone Quarter ended 31 January 20X5 Quarter ended 30 April 20X5 Quarter ended 31 July 20X5 Quarter ended 31 October 20X5 Date paid 02.01.20X5 02.01.20X5 31.04.20X5 30.07.20X5 01.11.20X5 02.03.20X5 05.06.20X5 02.09.20X5 10.12.20X5 Amount $ 300 300 450 450 450 270 310 320 330
A telephone bill for $345 in respect of the quarter ended 31 January 20X6 was received by the company in February 20X6. The company's year end is December. 11.1 What balance should have been brought forward on the accruals account in relation to rent payable at 1 January 20X5? A B C D 11.2 $100 credit $200 credit $100 debit $200 debit (2 marks)
What will be the income statement charge for telephone expenses for the year ended 31 December 20X5? A B C D $1,165 $1,180 $1,255 $1,280 (2 marks)
At 31 December 20X5 what balance will be included as a prepayment or accrual in respect of rent? A B C D $300 prepayment $200 accrual $150 prepayment $150 accrual (2 marks)
At 31 December 20X8 Blue Anchor Co has an insurance prepayment of $250. During the year they pay $800 in respect of various insurance contracts. The closing accrual for insurance is $90. What is the income statement charge for insurance for year ended 31 December 20X9? $ (2 marks)
Max has paid his rent for the period 1 April 20X0 to 30 June 20X1 of $4,800. His first set of accounts is drawn up for the period from 1 April 20X0 to 28 February 20X1. His accounts should reflect A B C D Rent expense of $4,800 only Rent expense of $3,520, a prepayment of $1,280 Rent expense of $3,600, a prepayment of $1,200 Rent expense of $3,840, a prepayment of $960 (2 marks)
Constains Co has an insurance prepayment of $320 at 31 March 20X2. During the year ended 31 March 20X2 Constains paid two insurance bills, one for $1,300 and one for $520. The charge for the year in the accounts for insurance was $1,760. What was the prepayment at 31 March 20X1? $ (2 marks)
An electricity prepayment for $300 was treated as an accrual in a sole trader’s income statement. As a result the profit was A B C Overstated by $600 Understated by $300 Understated by $600 (1 mark)
A. Cruel A. Cruel prepares his financial statements for the year to 31 December each year. He pays rent on his premises quarterly in advance on 1 February, 1 May, 1 August and 1 November. The annual rent was $12,000 until 30 September 20X7 and $15,000 per year thereafter. (i) What rent expense and prepayment should be included in the financial statements for the year ended 31 December 20X7? Expense A B C D (ii) $12,750 $12,750 $15,000 $15,000 Prepayment $1,250 $2,500 $2,250 $1,250
The following year the reversal of the prepayment will result in which of the following in the rent expense account? A B C D Credit balance of $1,250 Debit balance of $1,250 Credit balance of $2,500 Debit balance of $2,250
A. Cruel has just looked at the accounts you have prepared and is confused as he knows he has paid more rent than is showing in the income statement. Which accounting concept means that the income statement may not just show the cash paid? A B C Going concern Accruals Business entity
Fairlop The accounts of Fairlop are made up to 31 December every year. When preparing the accounts for 20X7 you extract the following information from the payments side of the cash book: $ 20X6 1 October Rent (to 31.3.X7) 500 20X7 10 January 1 April 10 April 10 July 1 October 10 October 20X8 10 January Electricity Rent Electricity Electricity Rent Electricity Electricity 300 550 300 250 550 250 350
You ascertain that rent is paid half-yearly in advance and that electricity bills relate to the quarter ended in the month before payment. Required Calculate the following amounts: (i) (ii) (iii) (iv) The rent expense for the year ended 31 December 20X7 The electricity expense for the year ended 31 December 20X7 The balance on the prepayment account at 31 December 20X7 The balance on the accruals account at 31 December 20X7
Chapter 11: Answers
× 300 = 200
Reverse accrual at 1.1.X5 Paid (270 + 310 + 320 + 330) Accrual at 31.12.X5 ( 2 3 x 345) ∴ I/S charge 11.3 11.4 C $1,140 $250 + $800 + $90 = $1,140 11.5 B Rent for the 15-month period Prepayment 4 15 × $4,800 $4,800 $1,280
$ (180) 1,230 230 1,280
× 450 = 150
$260 Insurance Expense ∴ Prepayment reversal (β) Cash Cash $ 260 1,300 520 2,080 $ I/S Prepayment 1,760 320 2,080
The prepayment would have decreased the electricity expense by $300 and increased profits. Treating the prepayment as an accrual would have increased the electricity expense and decreased profit. Profit is therefore understated by 2 × $300 = $600. A Rent expense: January – September 20X7 ($12,000 × 9/12) October – December 20X7 ($15,000 × 3/12) Prepayment: 1 November payment of $3,750 ($15,000 × ¼) relates to November, December and January. ∴ prepay January 20X8 expense: $3,750 × 1/3 = $1,250. $ 9,000 3,750 12,750
A. Cruel (i)
X7 1.1.1.X7 Income statement 1.12.X7 10.X7 31.12.11: ANSWERS 11.X7 10.1.350 Balance b/d Electricity Balance b/d $ 300 350 650 350 1.4.12.X7 31.X7 126.96.36.199.188.8.131.52 .450 11.X7 1.1.X8 Balance b/d (500 × 3/6) Rent (550 × 3/6) Balance b/d $ 250 275 525 275 Accruals (B/S) 1.X7 Income statement Prepayments 1.1.X7 1.X7 31.X7 31.X7 Electricity Balance c/d $ 300 350 650 1.X7 Accruals $ 300 $ 31.1.7.X8 Rent (I/S) 1.1.075 275 1.350 Electricity (I/S) $ 10.450 1.X7 31.12.X7 Bank Bank Bank Bank Accruals 300 300 250 250 350 1.12.X7 Prepayments Bank Bank $ 250 550 550 1.X7 10.X7 184.108.40.206 1.075 $1.X7 Rent Balance c/d $ 250 275 525 Workings 31.150 $275 $350 Prepayments (B/S) 1.9 Fairlop (i) (ii) (iii) (iv) Rent expense: Electricity expense: Prepayments: Accruals: $1.
11: ANSWERS END OF CHAPTER 11.24 .
Identify the benefits and costs of offering credit facilities to customers. Qualification Context This area is a basic skill and detailed calculations are not tested in any other paper. record a bad debt recovered and create and adjust an allowance for receivables. Account for contras between trade receivables and payables. Understand the purpose of credit limits and an aged receivables analysis. Prepare. You will also need to be able to determine the balances to be shown in the income statement and balance sheet. Identify the impact of bad debts on the income statement and on the balance sheet.Irrecoverable debts and allowances Syllabus Guide Detailed Outcomes Having studied this chapter you will be able to: • • • • • • • • • Explain and identify examples of receivables and payables. reconcile and understand the purpose of supplier statements. Prepare the bookkeeping entries to write off a bad debt.1 . Illustrate how to include movements in the allowance for receivables in the income statement and how the closing balance of the allowance should appear in the balance sheet. Classify items as current or non-current liabilities in the balance sheet. 12. adjusting for cash subsequently received and adjusting the allowance for receivables. Exam Context Questions on this topic are likely to require you to perform basic calculations dealing with writing off debts.
12: IRRECOVERABLE DEBTS AND ALLOWANCES Overview Amounts recovered Bad debts Irrecoverable debts and allowances Doubtful debts Allowances Specific General 12.2 .
which owe $7. have gone bankrupt and their debts are considered irrecoverable. Solution Trade receivables (B/S) $ 65.000 respectively.2 Introduction This chapter is designed to enable you to calculate and make adjustment for bad debts. This is effectively the same thing. 2 2. Lecture example 1 Preparation question Fight & Co has trade receivables at 31 December 20X7 of $65. A review of customer files indicates that two customers. and allowances for receivables. Accounting treatment 2.1 Bad debts If a debt is definitely irrecoverable it should be written off to the income statement as a bad debt. Ali and Tyson. Calculate the bad debt expense shown in the income statement.12.1 1.000.000 and $8.12: IRRECOVERABLE DEBTS AND ALLOWANCES 1 1. A trade receivable should only be classed as an asset if it is probable that it is recoverable (ie that the customer will pay the amounts due).3 .000 $ 31.X7 Bal b/d Bad debt expense (I/S) $ $ 12.2 Dr Cr Bad debt expense (I/S) Trade receivables (B/S) You may see the debit entry being made to an 'irrecoverable debts expense' account. Required (a) (b) Calculate the balance c/d on the trade receivables account at the end of the year. This is an example of prudence.
Allowance for receivables. Solution Allowance for receivables (B/S) Doubtful debts expense (I/S) 12.1 Doubtful debts If a debt is possibly irrecoverable an allowance for the potential irrecoverability of that debt should be made. (a) (b) (c) Calculate the allowance for receivables shown on the balance sheet.12: IRRECOVERABLE DEBTS AND ALLOWANCES 3 3. an 'irrecoverable debts expense' account can also be used.500 owed by Bugner is recoverable. this account is offset against the trade receivables’ balance on the balance sheet and the expense taken to the income statement. Lecture example 2 Preparation question A further review of Fight & Co's customer files indicates there is some uncertainty as to whether a debt of $3. A new account is created. Show how the information from Lecture examples 1 and 2 would be shown in extracts from the income statement and balance sheet. Calculate the doubtful debts expense shown in the income statement.4 . Accounting treatment 3.2 Dr Cr Doubtful debts expense (I/S) Allowance for receivables (B/S) Again.
calculate the general allowance on trade receivables (after bad debts written off and excluding full amounts for which specific allowance has been made).12: IRRECOVERABLE DEBTS AND ALLOWANCES Types of allowance 3.4 (a) (b) Write up trade receivables account for credit sales and cash received in period. deducting full balance of any customers for which specific allowance has been created.5 . Order of calculation 3.3 (a) (b) Specific: General: (i) (ii) provided against a particular/named individual customer. Write off bad debts Dr Cr (c) Dr Cr (d) (e) Total trade receivables Less: specific allowances General allowance @ 5% = ∴total allowance: Specific General Bad debt expense (I/S) Trade receivables (B/S) Doubtful debts expense (I/S) Allowance for receivables (B/S) Make any entries for specific allowances: In workings. percentage applied to total trade receivables after: writing off bad debts. $ 100 (20) 80 4 20 4 24 12.
6 . Solution Trade receivables (B/S) $ 47.440 $ Balance b/d Allowances for receivables (B/S) $ $ Bad and doubtful debts expense (I/S) $ $ General allowance $ Trade receivables (net of bad debts written off) Less: specific allowance General allowance @ 2% 12.12: IRRECOVERABLE DEBTS AND ALLOWANCES Lecture example 3 Preparation question A business’s trade receivables account showed a year end balance of $47. Required (a) (b) Calculate the allowance for receivables shown in the balance sheet. Calculate the bad and doubtful debts expense shown in the income statement.440. a customer. It was decided that amounts totalling $340 should be written off as irrecoverable. a specific allowance was to be made against an amount of $400 due from Dodgy Co. and a general allowance of 2% was to be made against remaining debts.
customer pays this year Reverse original write off Dr Cr OR (2) Short method Dr Cr Cash Bad debt expense Preparation question Trade receivables Bad debt expense Lecture example 4 Required Show the treatment of this recovery in the relevant ‘T’ accounts.7 .12: IRRECOVERABLE DEBTS AND ALLOWANCES 4 4.000 $ 12.000 from Ali. Solution Trade receivables (B/S) 1. the accounting treatment from the original write-off is reversed.1.e.X8 Bal b/d $ 50. i.1 Effect in subsequent periods If a bad debt is recovered having previously been written off. Fight & Co (see Lecture example 1) subsequently receive a cheque of $7. it is credited to the bad debt expense account. Accounting treatment (1) Cash received Dr Cr Cash Trade receivables Bad debts written off last year.
Accounting treatment (a) Record the cash received Dr Cr then: (b) Remove allowance Dr Cr Allowance for receivables (B/S) Doubtful debts expense (I/S) Cash (B/S) Trade receivables (B/S) 12. The allowance is then reversed as it is no longer needed.2 A credit entry for the cash is made to the trade receivables account because the debt is still included in the total trade receivables figure.12: IRRECOVERABLE DEBTS AND ALLOWANCES Bad debt expense (I/S) $ $ Cash (B/S) $ $ Doubtful debts – specific allowance last year. customer pays outstanding amounts this year 4.8 .
X8 Bal b/d $ 3. having made a specific allowance (see Lecture example 2). It should therefore be removed from the trade receivables and the allowance for receivables accounts.3 The debt is no longer doubtful.12: IRRECOVERABLE DEBTS AND ALLOWANCES Lecture example 5 Required Preparation question Show the accounting treatment for Fight & Co if.X8 Bal b/d $ 50.000 $ Allowance for receivables (B/S) $ 1. Dr Cr Allowance for receivables (B/S) Trade receivables (B/S) 12. goes bad this year 4.500 Bad and doubtful debt expense (I/S) $ $ Doubtful debts – specific allowance last year.1.1. during the next year Bugner repays his debt of $3.500 to Fight & Co in cash? Solution Trade receivables (B/S) 1.9 . but definitely bad.
12: IRRECOVERABLE DEBTS AND ALLOWANCES Lecture example 6 Required Preparation question Following on from the information used in Lecture example 2. the debt from Bugner is considered to have gone bad.10 . What double entry would be required to record this? Solution Doubtful debts .4 Allowance is usually changed at the end of each period to reflect the change in value of total trade receivables.general allowance 4. Accounting treatment 4. suppose that in the next accounting period.5 (1) Dr Cr Remove opening allowance Allowance for receivables Doubtful debts expense Replace with closing allowance Dr Cr Doubtful debts expense Allowance for receivables 12.
11 .000 Year ended 31 December 20X8: Trade receivables $30.12: IRRECOVERABLE DEBTS AND ALLOWANCES OR (2) Short method: Increase/decrease opening allowance to arrive at required closing allowance Increase: Dr Cr Doubtful debts expense Allowance for receivables Decrease: Dr Cr Allowance for receivables Doubtful debts expense Preparation question Lecture example 7 The following information is available for A Co.5 Solution Long method: 4. Year ended 31 December 20X7: Trade receivables $20.5 (1) Allowance for receivables $ $ Doubtful debts expense $ $ 12.000 A Co requires a general allowance of 5% of trade receivables in each year. Required Show the required adjustment to the allowance for receivables account in the year ended 31 December 20X8 using both methods described in section 4.
12: IRRECOVERABLE DEBTS AND ALLOWANCES Short method: 4.000.000 $23. Required What amount should appear in the income statement for the year ended 30 September 20X8 for the above items? A B C D $13.000 $17.000. No adjustments have been made for this information.5 (2) Allowance for receivables $ $ Doubtful debts expense $ $ Lecture example 8 At 30 September 20X7 G Co had an allowance for receivables of $24. Exam standard for 2 marks During the year ended 30 September 20X8 G Co recovered $2.000 12.000 from a customer whose balance was written off in 20X7 and wrote off further debts totalling $18. The closing allowance for receivables is required to be $21.12 .000 $15.000.
There are two types of allowance: specific and general. Specific allowances relate to particular customer balances whereas a general allowance is usually a percentage of remaining debts.4 12.1 5. Bad or irrecoverable debts must therefore be written off as an expense in the income statement.12: IRRECOVERABLE DEBTS AND ALLOWANCES Solution 5 Quick Quiz Summary of Chapter 12 A trade receivable is an asset of the business which should only be shown in the financial statements if it is believed to be recoverable. 5.3 5. An allowance should be made against trade receivables where there is concern as to whether or not a balance will be recoverable.2 5.13 .
2 Doubtful debt adjustment: Dr Cr Doubtful debts expense (I/S) Allowance for receivables (B/S) 6.5 Writing a balance off as irrecoverable where a specific allowance was previously made: Dr Cr Allowance for receivables (B/S) Trade receivables (B/S) 12.1 Double Entry Summary for Chapter 12 Bad (irrecoverable) debt adjustment: Dr Cr Bad debt expense (I/S) Trade receivables (B/S) 6.4 Recording of cash received from a customer against which a specific allowance was previously made: Record cash received: Dr Cash (B/S) Cr Trade receivables (B/S) Remove the allowance: Dr Allowance for receivables (B/S) Cr Doubtful debts expense (I/S) 6.14 .3 Recording of cash received from a customer whose balance was previously written off: Dr Cr Cash (B/S) Bad debt expense (I/S) 6.12: IRRECOVERABLE DEBTS AND ALLOWANCES 6 6.
Chapter 12: Questions 12.15 .
1 A company receives news that a major customer has been declared bankrupt. a customer whose debt was written off during 20X3.615 are to be written off as irrecoverable. No other debts go bad and at 31 January 20X9 the balance on the trade receivables is $50. After a review of trade receivables at the year end.16 .5% of remaining debts. Gillian’s nominal ledger included a trade receivables balance of $47.3 The preliminary trial balance of Jessie and Co as at 30 September 20X7 included: Debit $ 90. Of this $537 relates to a specific customer. The bad and doubtful debts charged to the income statement for 20X9 is: A B C D $900 $924 $1. Show the relevant extracts from the financial statements.320 received from Dome Co whose balance had been written off last year.985 Credit $ 2.950. Farriers wishes to provide for a debt of $950 from Verulam and to have a general allowance of 2½% of good trade receivables.900 along with an allowance for receivables (brought forward as at 1 January 20X4) of $2. During the year Black Lion goes into liquidation and the debt is written off. The entries now required are: A B Debit bad debt expense.551. The amount due from Jim had been specifically provided against at 31 December 20X3.2 At 1 January 20X9 Farriers has an allowance for receivables of $2. Credit trade receivables Debit sales.000 consisting of a specific allowance for $700 in respect of Black Lion Co and a $1.490 Trade receivables Allowance for receivables (brought forward as at 1 October 20X6) Bad and doubtful debt expense Further adjustments are to be made as follows: (i) (ii) No entries have been made in respect of cash of $1.600 $2. Cash posted to the trade receivables account during the year include $537 from Jim.300 general allowance. the remainder being a general allowance. the following adjustments are to be made: (1) (2) (3) (4) Debts totalling $1. Credit trade receivables (1 mark) 12. Required (a) (b) Write up the relevant ledger accounts for the year ended 31 December 20X4. No entry has yet been made in the books for $418 cash received on 31 December 20X4 from David.950 due from Jed Co as well as a general allowance of 1. $ (2 marks) What is the bad and doubtful debt expense in the income statement? 12. and At 30 September 20X7 an allowance is required against a balance of $1.12: QUESTIONS 12.200 (2 marks) 12.350 1. 12.4 Gillian On 31 December 20X4. Specific allowance is to be made against debts totalling $835 together with a general allowance of 2%.
there was some doubt as to whether a debt of $450 owed by J Green would be met and it was decided to make an allowance against this specific debt and against 2% of the remaining debts. There were no irrecoverable debts. The general allowance was to be maintained at 2% of good debts. Allowance was to be made against an amount of $250 owed by P Brown.235 and cash of $37.140 was received from trade receivables.650. 20X8 and 20X9.12: QUESTIONS 12. They included $700 owed by T Black. During 20X8 Johnson & Co made sales on credit of $40.5 Johnson & Co (1) Johnson & Co had total receivables owing to them at 31 December 20X7 of $9. who had fled the country six months earlier. During 20X9 credit sales totalled $50. totalling $335 and dating back to the years 20X1-20X5.385 and received cash from trade receivables of $32. It was decided that the above debts should be written off. and various debts due from K White. (2) (3) 12. However. Other irrecoverable debts totalling $545 were to be written off.050. The amount owed by J Green was now considered irrecoverable and should be written off. A review of trade receivables at the year end revealed the following: (i) (ii) (iii) (iv) Required Produce ledger accounts to record the above transactions for the years ended 31 December 20X7.17 .
12: QUESTIONS 12.18 .
19 .Chapter 12: Answers 12.
950 (950) 50.615 Bank (bad debt recovered) Allowance for receivables ∴ Income statement 1.000 $1.12.985 (1.285 47.326 3.350 – 1.12: ANSWERS 12.900 $ 1.551 Trade receivables $ 418 807 390 1.X4 Balance c/d 47.12.950 1.451 $ 1.12.490 786 Allowance c/d – specific – general 1.615 46.2 A A Trade receivables balance Less specific allowance General allowance = 2½% × $50.1.276 2.X4 Balance b/d Trade receivables (B/S) $ 47.1 12.000 = Movement in general allowance is a reduction of $50 ($1.744 2.12.615 12.551 2.3 $1.300 – $1.950) Less allowance b/d ∴ increase 12.451 Bad and doubtful debts expense per trial balance Less: bad debt recovered Add: increase in allowance (W) $ 1.X4 Balance c/d (W1) 1.320) 786 1.5% × (90.250 12.X4 Balance b/d Irrecoverable & doubtful debts (β) 31.900 31.900 Allowance for receivables (B/S) $ 807 1.551 Irrecoverable and doubtful debts expense (I/S) $ 1.615 $ 2.X4 Bad debts 31.250) Charge to I/S Specific allowance Verulam Less: decrease in general allowance $ 950 (50) 900 $ 50.4 Gillian (a) 31.20 .
1.X8 Balance c/d Bank 31.000 37.12.615 40.X7 Balance c/d 9.450 × 2%) (b) Gillian Balance sheet as at 31 December 20X4 (extract) CURRENT ASSETS Trade receivables Less: allowance for receivables Receivables $ 46.650 31.YO Balance b/d 220.127.116.110 Allowance $ 835 909 1.X8 Allowance for receivables (W1) 31.12.385 49.050 Irrecoverable (bad) & doubtful debts expense (I/S) $ 31.12.X7 Trade receivables 1.235 Bank 31.185 390 31.X9 Income statement 46 1.12.650 8.950 49.615 9.21 .X9 67.X9 Irrecoverable debts expense (450 + 545) 31.950 18.104.22.168 Johnson & Co Trade receivables (B/S) $ 9.285 (835) 45.12.12.X7 Income statement 31.X7 Irrecoverable debts expense (700 + 335) 31.X9 Balance c/d $ 1.050 67.050 16.041 31.744 $ 46.744) $ 44.12.X8 Balance b/d Sales Balance b/d Sales 1.285 (1.041 12.12.185 1.X9 Allowances for receivables 780 995 31.12: ANSWERS Working Trade receivables Less: specific allowance General allowance ($45.035 8.650 32.035 780 1.X8 Income statement $ 1.140 995 29.541 $ Income statement for the year ended 31 December 20X4 (extract) Less expenses: Irrecoverable and doubtful debts expense 12.X7 Balance b/d 1.000 16.035 31.X9 Trade receivables 22.214.171.124.041 1.
X9 Irrecoverable and doubtful debts expense (β) 826 826 $ 780 780 46 826 Workings (W1) Allowance for receivables as at 31 December 20X8.12: ANSWERS 31.500 Allowance $ 450 330 780 Trade receivables Less: specific allowance (P Brown) General allowance required ($28.950 (450) 16.800 × 2%) END OF CHAPTER 12.500 × 2%) (W2) Allowance for receivables as at 31 December 20X9.X8 Irrecoverable and doubtful debts expense 1.12.800 Allowance $ 250 576 826 Receivables $ 16.1.X9 Balance b/d 31.050 (250) 28.12. Trade receivables Less: specific allowance (J Green) General allowance ($16.12.22 .X8 Balance b/d 31. Receivables $ 29.X9 Balance c/d (W2) Allowance for receivables (B/S) $ 780 31.12.
13. You may also be required to calculate a provision. Identify and illustrate the different methods of accounting for provisions. The Pilot Paper included a question on how a remote contingent liability should be accounted for. distinguish between them and classify items accordingly.Provisions and contingencies Syllabus Guide Detailed Outcomes Having studied this chapter you will be able to: • • • • Understand the definition of 'provision'.1 . contingent liabilities and contingent assets. Exam Context Questions on this area are likely to focus on identifying when a provision or contingent liability should be made/disclosed in the financial statements. Calculate provisions and changes in provisions and account for the movement in provisions. 'contingent liability' and 'contingent asset'. Qualification Context Your understanding of IAS 37 will be developed at the Fundamentals level paper Financial Reporting (F7) where you are likely to have to consider whether the provision criteria are satisfied based on more subjective scenarios. Report provisions in the final accounts.
2 .13: PROVISIONS AND CONTINGENCIES Overview Accounting treatment Recognition criteria Provisions Provisions and contingencies Contingent liabilities Contingent assets 13.
however it has a reputation for making free reasonable repairs to lawnmowers bought from the business.3 Legal obligation A legal obligation usually arises out of a contract.13: PROVISIONS AND CONTINGENCIES 1 1. Once Grass Co sells a lawnmower (the past event) it has a legal obligation to repair any defects according to the warranty agreement. IAS 37 aims to prevent this happening in the future. This caused problems as entities tended to choose to make and then release provisions in order to smooth out profits. It does not offer a warranty on its products. It is probable that an outflow of economic resources will be required to settle the obligation.3 . Illustration Grass Co sells lawnmowers and offers a one-year warranty on all models.4 Constructive obligation A constructive obligation arises through past behaviour and actions where the entity has raised a valid expectation that it will carry out a particular action.1 Provisions Definition A provision is a liability of uncertain timing or amount. 2. 2.1 IAS 37: Provisions. there was little guidance on when a provision must and must not be made. and A reliable estimate can be made of the amount of the obligation. 13. Unless all three conditions are met. no provision can be recognised.2 Recognition A provision should only be recognised (ie. rather than making a provision where they had an obligation to incur expenditure. contingent liabilities and contingent assets Introduction Before the introduction of IAS 37. 2 2. It should therefore make an estimate of the probable costs of repair and make a provision for this amount in its financial statements. 2. Customers buying from Seed Co all expect to receive this benefit. included in the financial statements) when: (a) (b) (c) An entity has a present obligation (legal or constructive) as a result of a past event. Illustration Seed Co also sells lawnmowers.
4 . It should also therefore make a provision for the probable costs of repairs. Grass Co expects that 75% of lawnmowers will have no faults. 2. 20% will need minor repairs and 5% major repairs.75m? What entry should be made in 20X9 assuming the provision required then is $0.13: PROVISIONS AND CONTINGENCIES Here no warranty is offered and so Seed Co does not have a legal obligation. To increase a provision: Dr Cr Dr Cr Expense (I/S) Provision (B/S) Provision (B/S) Expense (I/S) Preparation question To decrease a provision: Lecture example 1 Grass Co is reviewing its warranty obligations.5 Accounting treatment The provision represents both a cost to the business and a potential liability: Dr Cr Expense (I/S) Provision (B/S) The required provision will be reviewed at each year end and increased or decreased as necessary. Required (a) (b) (c) What provision should be made in 20X7 and what accounting entry is needed to record it? What entry should be made in 20X8 assuming the provision required then is $0.3m? Solution 13. Its past actions however have created a constructive obligation. Based on sales during 20X7 it has established that if all lawnmowers sold required minor repairs this would cost $1m whereas if major repairs were required this would cost $6m.
Mr Smith is a financially secure individual. How should company A account for this guarantee? Solution 3.1 Contingent liabilities A contingent liability is an uncertain liability that does not meet the three criteria for recognising a provision. in which case it should be ignored altogether).13: PROVISIONS AND CONTINGENCIES 3 3. or A present obligation that arises from past events but is not recognised because: (i) (ii) it is not probable that an outflow of economic resources will be required to settle the obligation. 13. IAS 37 defines a contingent liability as the following: (a) A possible obligation that arises from past events and whose existence will be confirmed only the occurrence or non-occurrence of one or more uncertain future event not wholly within the control of the entity. However. (b) Contingent liabilities should be disclosed in the notes unless probability of an outflow of resources embodying economic benefits is remote. Illustrative example 3. Instead.2 Company A has entered into an agreement to act as guarantor on a bank loan taken out by Mr Smith.5 . or the amount of the obligation cannot be measured with sufficient reliability.3 Company A has a present obligation (it is legally obliged to honour the guarantee). as the likelihood of Company A having to pay out under the guarantee is not probable then no provision for the liability should be made. the guarantee should be disclosed in the notes as a contingent liability (unless considered remote. and the directors are of the opinion that the chances of him defaulting on the loan are slim.
Contingent assets should be disclosed in the notes where an inflow of economic benefits is probable. If the probability of an inflow of economic benefits is virtually certain then the asset is not a contingent asset and should be recognised in the financial statements.13: PROVISIONS AND CONTINGENCIES 3.1 Contingent assets A possible asset 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 control of the entity.4 Decision Tree 4 4.6 . otherwise they should be ignored. 13.
A contingent liability should be disclosed where the criteria for making a provision are not met.13: PROVISIONS AND CONTINGENCIES 5 Quick Quiz Summary of Chapter 13 A provision should only be made in the financial statements when an entity has a present obligation to incur expenditure.2 5.1 5.1 Double Entry Summary for Chapter 13 Adjustment to create or increase a provision: Dr Cr Expense (I/S) Provision (B/S) 6. but where there is either a possible obligation or a present obligation but it is only possible that the expenditure will be incurred.2 Adjustment to decrease a provision: Dr Cr Provision (B/S) Expense (I/S) 13. It must also be more likely than not that the expenditure will be incurred and a reliable estimate of the amount is known.3 6 6.7 . 5. Contingent assets should only be included in the financial statements if it is certain to be received and should be disclosed if probable.
8 .13: PROVISIONS AND CONTINGENCIES 13.
Chapter 13: Questions 13.9 .
Contingent liabilities must always be either accrued or disclosed and probable contingent assets must always be disclosed in the financial statements.000. It is difficult to quantify any potential damages.13: QUESTIONS 13. (2 marks) (1 mark) 13.2 How should a contingent liability and a probable contingent asset be accounted for? A B C D 13. but the directors feel they are unlikely to exceed $50.1 H Co is currently in the middle of a protracted lawsuit which it is vigorously defending. Contingent liabilities must always be provided for and probable contingent assets must be disclosed in the financial statements. How should the above item be treated in the financial statements? A B C Provision Contingent liability Contingent asset Probable contingent assets and contingent liabilities should be disclosed in the financial statements. Probable contingent assets must always be accrued and contingent liabilities must always be disclosed in the financial statements.10 . The directors are reasonably confident that the action will not be successful but are aware that the opposite outcome is a possibility.
11 .Chapter 13: Answers 13.
13: ANSWERS 13.2 B A END OF CHAPTER 13.1 13.12 .
Understand how control accounts relate to the double entry system. Account for contras between trade receivables and trade payables. Prepare ledger control accounts from given information. Account for discounts allowed and discounts received. Perform basic control account reconciliations for accounts receivable and accounts payable and identify errors which would be highlighted by performing them. Qualification Context This chapter covers topics which are only examined in Financial Accounting.1 . You may also be required to calculate receivables/payables balances where goods are sold/bought with trade and/or settlement discounts. Identify and correct errors in control accounts and ledger accounts. Exam Context Questions on this topic are likely to require you to correct the closing balance on a receivables or payables control account including items such as contras and discounts. 14.Control accounts Syllabus Guide Detailed Outcomes Having studied this chapter you will be able to: • • • • • • • Understand the purpose of control accounts for accounts receivable and accounts payable.
2 . refunds and over payments Discounts allowed and received Trade discounts Settlement discounts Sales tax considerations 14.14: CONTROL ACCOUNTS Overview Reconciliations Receivables ledger control account Payables ledger control account Receivables ledger Payables ledger Control accounts Contra entries Returns. credit notes.
cash received and therefore the amount owed to the business.14: CONTROL ACCOUNTS 1 1.3 The nominal ledger contains three ledger accounts which are affected when a business sells on credit: (a) (b) (c) Sales Bank Trade receivables – this shows the total amount owed by all customers at a particular point in time. credit sales: 1. The totals of these were then posted using double entry to the nominal ledger to give a summary of the information. 14.5 The reverse is true when a business buys on credit.3 . – it is also called the receivables ledger control account (RLCA) 1. This memorandum ledger is called a receivables ledger. 1.1 Recap In Chapters 4 and 5 we saw how a business' transactions were categorised in the books of prime entry. This balance could be determined by going back into the detail of the books of prime entry and extracting the information for each customer. For example. This is a very time consuming process and so instead a memorandum ledger is maintained for each individual customer showing invoices raised.4 In order to chase overdue debts however a business must know how much each customer owes at a particular time.2 1.
4 .1 The flow of information Sales Invoice Receipt from customers Payment to suppliers Purchase Invoice Memo Receivables Ledger Customer A Customer B Customer C SDB Cash book PDB Memo Payables Ledger Supplier X Nominal Ledger PLCA Trade payables Supplier Y Supplier Z Bank (B/S) Sales (I/S) Purchases (I/S) Trial Balance Financial Statements 14. Memorandum ledgers: • • Receivables ledger: balance owed by each individual credit customer Payables ledger: balance owed to each individual credit supplier 2 2. Payables ledger control account (trade payables/PLCA): total owed to all credit suppliers.14: CONTROL ACCOUNTS Terminology 1.6 In the nominal ledger: • • Receivables ledger control account (trade receivables/RLCA): total owed by all credit customers.
This will be identified through a control account reconciliation (Section 5). Reconcile the memorandum ledgers to the control accounts.3 If the balances do not agree then an error has been made.300 of goods from supplier Z 21 January 20X6 A Co receives full payment from customer B and this money is used to pay supplier Y. Post the totals from the BOPE to the nominal ledger. Preparation question Lecture example 1 A Co has the following information: 10 January 20X6 Sells $150 of goods to customer A Sells $200 of goods to customer B 15 January 20X6 A Co purchases $100 of goods from supplier Y A Co purchases $1. Balance off nominal ledger accounts. Therefore the balance on the RLCA should equal the sum of all balances from the RL Similarly the balance on the PLCA should equal the sum of all balances from the PL 2.2 The information in the receivables ledger control account (RLCA) and receivables ledger (RL) is posted from the same source documents. Solution (1) Books of prime entry Sales day book Date Customer Amount 14.5 . Required (1) (2) (3) (4) Record the above transactions in the books of prime entry and the memorandum ledgers.14: CONTROL ACCOUNTS 2.
14: CONTROL ACCOUNTS Purchase day book Date Supplier Amount Cash rceipts book Date Narrative Total Sales Receivables Cash payments book Date Narrative Total Purchases Payables Memorandum ledgers Receivables ledger Customer A Customer B Payables ledger Supplier Y Supplier Z 14.6 .
14: CONTROL ACCOUNTS (2) & (3) Nominal ledger RLCA (B/S) PLCA (B/S) Bank (B/S) Sales (I/S) Purchases (I/S) (4) Reconciliation Balance per list of balances $ Receivables ledger Customer A Customer B Balance per RLCA Balance per list of balances $ Payables ledger Supplier Y Supplier Z Balance per PLCA 14.7 .
3. 14.2 A contra entry is always recorded as: Dr Cr PLCA RLCA This will reduce both receivables and payables.8 . Illustration: P Co is a printing business which sells stationery to F Co.3 Note that the memorandum ledgers will also need to be updated for the contra entry. F Co supplies P Co with flowers and plants for its offices. 3. This will decrease both receivables and payables by $70 and the remaining $130 can then be paid in cash. Contra entries 3. a florist. P Co has the following amounts in its books: Receivables: Payables: $200 $70 The two businesses agree to offset the balances receivable and payable via a contra.4 3. Returns. The contra will be for the lower of the two amounts: $70. Steps: (1) Goods are sold to the customer for $250: Dr Cr (2) Dr Cr RLCA Sales Bank RLCA $250 $250 $250 $250 Customer pays for goods: At this point the balance on the receivables ledger control account is nil. the customer will return the goods.14: CONTROL ACCOUNTS 3 Other entries A business must ensure that any transaction recorded in the receivables ledger control account or the payables ledger control account is also reflected in the memorandum ledgers.5 Sometimes when a business has made a sale. P Co sells stationery worth $200 to F Co and F Co delivers flowers and plants to P Co worth $70.1 Sometimes a business may have a customer which also supplies the business with goods. credit notes and refunds 3. During October.
3.7 If a customer pays too much to settle an invoice or pays an invoice twice the business will owe the excess to the customer. offered.e. Therefore trade discounts never appear in the financial statements. The receivables ledger control account will show a credit balance reflecting that the business owes money to the customer.e.2 Discounts allowed: offered by a seller to their customer. Discounts received: received by a business from their supplier.14: CONTROL ACCOUNTS (3) Customer returns the goods and is issued with a credit note: Dr Cr Sales (returns) RLCA $250 $250 This entry reverses the original sale. as an inducement to settle a debt early. 4 4. Over payment 3.3 Accounting treatment Sales are recorded net of (i.1 Discounts There are two types of discounts: (a) Trade discounts (i) (ii) (b) (a) (b) given at the time of the sale/purchase. 14. but not necessarily taken. eg. the memorandum ledgers must also be updated.9 . This could be offset against future purchases or the customer may request a refund. Settlement discounts Terminology 4. Discounts allowed 4. they reduce the selling price as an inducement to purchase. 5% discount if settled within 14 days. before) settlement discounts. after) trade discounts but inclusive of (i.6 Again. (4) The business refunds the customer: Dr Cr RLCA Bank $250 $250 Once again the balance on the receivables ledger control account is nil. This may be held and treated like a credit note or the monies refunded to the customer. usually for regular customers or bulk buyers.
1.000 was available with a further 10% settlement discount if payment were made within 10 days. Solution The initial sale would be recorded as: Sales (I/S) RLCA (B/S) (b) On 4.14: CONTROL ACCOUNTS Settlement discounts allowed are recorded as discounts allowed and are shown as an expense in the income statement: Dr Cr Discounts allowed (I/S) RLCA Preparation question Lecture example 2 (a) On 1 January 20X7 a business made a sale on credit for $12. the customer pays for the goods taking advantage of the settlement discount.X7. Required Record the initial sale. Solution Bank (B/S) Discounts allowed (I/S) 14. The discount will be 10% of sales value.10 . A trade discount of $2.000. Required Record the full settlement of the amount owed.
14.11 . Required (a) (b) (c) Show the initial recording of the purchase.14: CONTROL ACCOUNTS (c) Required What would your answer be to part (b) if the settlement discount were not taken? Solution Bank (B/S) RLCA (B/S) Discounts received 4. Settlement discounts received are recorded as discounts received and are shown as sundry income in the income statement. Ryan Co will receive a 5% settlement discount if the goods are paid for within seven days. Record the payment for the goods assuming Ryan pays within seven days.000 from Austin Co. Dr Cr PLCA (B/S) Discounts received (I/S) Preparation question Lecture example 3 Ryan Co purchases goods worth $5. Again trade discounts never appear in the financial statements. Ryan Co has every intention of taking advantage of the settlement discount.4 Accounting treatment Purchases are recorded net of trade discounts but inclusive of settlement discounts. Record the payment for the goods if payment is made after seven days.
14: CONTROL ACCOUNTS Solution Sales tax and discounts 4.600 $57.336 $50. Sales tax is at 15%.12 .576 $50.000 from Cement. Brick receives a trade discount of 12% from Cement and a further discount of 4% if payment is made within 10 days.500 14.5 Sales tax is calculated on the amount after all discounts. Required What amount should Brick show in Cement's payables ledger to record this purchase? A B C D $48. Exam standard for 2 marks Lecture example 4 Brick buys goods with a list price of $50. regardless of whether the discount is taken or not.
The easiest way to identify the error is to perform a reconciliation between the two amounts.13 .1 Control account reconciliations As mentioned in Section 2 if we add up the balances in the receivables and payables ledgers. they should agree to the balances per the RLCA and PLCA.14: CONTROL ACCOUNTS Solution 5 5.2 Proforma control account reconciliation RLCA $ X Transposition error in posting X X Balance c/d X Balance b/d X $ – $ X $ X X X Balance b/d Sales day book undercast Sales omitted from SDB Reconciliation Statement $ + Total per listing of receivables ledger balances Adjustments Balance omitted Credit balance listed as debit Balance as per adjusted control account X X (2X) X X X 14. 5. If not. an error must have occurred at some point in the system.
You have found the following errors: (i) (ii) (iii) The total of the sales day book was undercast by $3. Required Reconcile the receivables ledger control account to the receivables ledger list of balances.14: CONTROL ACCOUNTS Lecture example 5 (a) Required Technique demosntration Post the following transactions to and balance off the receivables ledger control account.000 Credit sales made during the month $302.900.400 Contras against amounts due to suppliers in payables ledger $8. A credit balance of $450 was included in the list of balances as a debit. A customer balance of $2. (1) (2) (3) (4) (5) (6) (b) Opening balance $614. Solution 14.14 .000 Bad debts were written off $32.150 was left out when the receivables ledger list of balances was totalled.600 Receipts from customers $311.650 The receivables ledger list of balances totals to $563.000 Discounts allowed for prompt payment $3.600.
2 6.3 Adjustment to record settlement discounts received from suppliers: Dr Cr Payables ledger control account (B/S) Discounts received (I/S) 14. Also the balance on the payables ledger control account should equal the total of all the balances in the payables ledger.5 7 7. Sometimes a business may offer discounts to attract custom. 6. Sales and purchases are recorded after trade discounts but before settlement discounts.1 Double Entry Summary for Chapter 14 Contra entry adjustment: Dr Cr Payables ledger control account (B/S) Receivables ledger control account (B/S) 7. Where the two balances are not the same an error must have arisen and a reconciliation should be performed to identify the errors. Sales tax is calculated on the amount after all discounts.4 6. regardless of whether the discount is taken or not.14: CONTROL ACCOUNTS 6 6. The contra is always for the lower of the two balances.15 .3 6. If a customer is also a supplier the two parties may choose to settle their accounts by making a contra entry.2 Adjustment to record settlement discounts allowed to customers: Dr Cr Discounts allowed (I/S) Receivables ledger control account (B/S) 7.1 Summary of Chapter 14 At any point in time the balance on the receivables ledger control account should equal the total of all the balances in the receivables ledger. There are two types of discounts: trade discounts and settlement discounts.
14: CONTROL ACCOUNTS 14.16 .
17 .Chapter 14: Questions 14.
Credit discounts received Debit discounts received. Credit sales $500 Debit sales $500. A credit balance of $420 on Orinoco’s account had been incorrectly treated as a debit entry when listing the receivables ledger.560 $126.1 and 14.665.590 relating to cash purchases). but the total of the individual accounts in the receivables ledger came to $127.3 A page of the sales day book is undercast by $250.240 $129.000 has been entered in Bungo’s account in the receivables ledger but no other entry had been made. The adjusted balance on the receivables ledger control account is: A B C D 14.400 $127.240 $129. Purchases for the period totalled $254.5 The double entry to record a discount granted by a supplier is: A B C D Debit trade payables. At that date the balance on the receivables ledger control account was $130.000. Credit trade receivables $500 Debit trade receivables $250. Upon investigation the following facts were discovered: (i) (ii) (iii) The sales day book total for week 22 had been overcast by $600.240.1 The adjusted balance on the receivables ledger is: A B C D $125. Credit trade receivables $250 (2 marks) 14.400 $127. Credit purchases (2 marks) 14. The journal necessary to correct the error is: A B C D Debit trade receivables $500.192 ($31.183 and closing trade payables of $34. Credit trade payables Debit trade payables.2 Womble & Sons have an accounting year ended 31 July 20X8.14: QUESTIONS Data for Questions 14. Credit discounts allowed Debit trade payables.400 (2 marks) 14. What were total payments recorded in the payables ledger for the period? $ (2 marks) 14.4 Winn Co has opening trade payables of $24.18 .2 $125. A contra of $3.400 (2 marks) 14. Credit sales $250 Debit sales $250.560 $126.
840 $15.520 1.740 (1. A payables ledger contra of $300 was not entered in the memorandum records.410 $13.650 890 12.7 Justin has attempted to write up his own nominal ledger but is very confused about debits and credits.19 .6 The following receivables ledger reconciliation has been prepared by the bookkeeper of Julian Co as at 31 October 20X7: Total per listing of receivables ledger balances Debit balance omitted Credit listed as debit Unexplained difference Balance per control account Which of the following errors could have produced the ‘unexplained difference’? A B C D A refund of $300 was omitted from the receivables ledger.14: QUESTIONS 14. What should the closing balance be? A B C D 14. The trade receivables column of the cash receipts book was overcast by $300.430 11.580 The opening balance is correct. The sales day book for October was undercast by $300.170 1.8 $9.220) 300 26.580 Cash sales Cheques from credit customers Discounts allowed Balance c/d $ 4.990 14.610 29. (2 marks) $ 26. He realises he has made some mistakes and has asked you to correct the following receivables ledger control account: Receivables ledger control account Balance b/d Sales on credit Purchase ledger contra $ 12.040 (2 marks) Which of the following is not a valid reason for a credit balance on a customer's account in the receivables ledger? A B C Over payment Cheque dishonoured by bank Returned goods credited to account (1 mark) 14.460 15.620 $17.600 29.
000 relating to goods bought on credit.165 Cheques dishonoured by customers Irrecoverable debts 180 Allowance for receivables 71. If there is no opening balance on the sales tax account at the beginning of April.9 During April a company receives an invoice for $12.240 Cheques received from customers 2.110 Cr $1.X6 Discounts allowed Cash paid to customers with credit balances Sales Returns inwards Purchase ledger contras Balance b/d 1.730 425 470 1. what is the closing balance at the end of April? A B C D $1.470 870 10.10 The following transactions were recorded in a company’s books during one week of its trading year: $ Trade purchases (at list price) 4. He has produced the following receivables ledger control account but is not sure whether his closing balance is correct. He has been reading a book on basic bookkeeping but his grasp of the subject is weak.250 230 Balance c/d 31. If the balance on the sales tax account was $2.460 A trade discount of $300 was given on the sales.200 Dr (2 marks) 14. Sales tax is not included in the above amounts.1.350 $ 74. Receivables ledger control account $ 12.500 Sales on credit (at list price) 6.14: QUESTIONS 14. Sales tax is applicable to all items and is at 15%. 14.20 .12.1.X7 Required Produce a corrected receivables ledger control account. The company also sells goods with a list price of $20.000 Purchase of a van 10.315 Balance b/d 1. what is the balance at the end of the week? $ (2 marks) 14.000.350 88.315 10.250 Cash received from customers 2.X6 88. A 6% trade discount is to be offered on these goods.110 Dr $1.11 Thomas Thomas is a sole trader.200 Cr $1. All figures are given exclusive of sales tax at 15%. These purchases qualify for a 5% trade discount which has not yet been taken into account.165 credit at the beginning of the week.
but no other entry had been made.070. this had been recorded only in the control account.12 Duff On 31 December 20X7 the balance on Duff’s receivables ledger control account was $1. $60 worth of goods had been returned by Smith Co in November. 14. but the receivables ledger balances totalled only $890. You ascertain the following: (1) (2) (3) (4) (5) (6) The sales day book was overcast by $100 on 1 December 20X7. but was in fact $190. The ledger account balance of Davis & Co had been listed as $90. had been to individual ledger accounts.14: QUESTIONS 14. $50 in total. Required Prepare a reconciliation between the receivables ledger control account and the receivables ledger. The only posting made in respect of sales on 15 December 20X7. Receivables ledger balances totalling $70 had been omitted from the list. A contra entry of $20 had been made between the payables ledger and receivables ledger accounts of Jones & Co.21 .
14: QUESTIONS 14.22 .
Chapter 14: Answers 14.23 .
000 $ 127.183 222.460 15.665 246.2 B Receivables Ledger Balance per list of balances Credit balance treated as a debit (2 × $420) 14. the receivables ledger total would have to be reduced by $300.4 $212.120 34.240 (840) 126.840 27.000 130. Purchase ledger contra Cheques from credit customers Discounts allowed Balance c/d $ 1.120 Trade payables $ Bal b/d ∴ Payments Bal c/d 212.7 B 14.8 B This would leave a debit balance as the original debt would be reinstated.24 . Receivables ledger control account Balance b/d Sales on credit $ 12.980 Note: Cash sales are not recorded in the control account 14.785 34.665 14.602 246.3 C 14.650 890 13.192 – $31.000 SDB overcast Contra ∴balance c/d $ 600 3.520 27.400 14.980 Purchases ($254.590) $ 24.785 Bal b/d 14.400 130. where individual invoice amounts will be entered.6 A B C D – – – Day book total has no effect on the receivables ledger.5 B 14.600 11.1 B Balance b/d Receivables ledger control account $ 130.000 126.14: ANSWERS 14. Cash book total has no effect on receivables ledger. If a contra had been omitted.
165 + [15% × ($6.120 Receivables ledger reconciliation statement Total balance per receivables ledger Adjustments: Balances omitted (2) Goods returned (5) Balance understated (6) Amended total $ + 70 100 170 $ – 60 60 110 1.710 (2.120 Balance b/d 1.250 $ Cheques Irrecoverable debts Cash received Discounts allowed Returns inwards Purchase ledger contras Balance c/d 74.000)] – [15% × $4.240 425 180 71.11 Thomas Receivables ledger control account Balance b/d Cash – cheque dishonoured Cash – credit balances Sales $ 12.380 84.500] – [15% × $10.070 50 1.12.12 Duff Receivables ledger control account Balance b/d Sales 15.000 SDB Overcast (1) Purchase ledger contra (3) Amended balance c/d $ 100 20 1.165 2.14: ANSWERS 14.000 × 95% × 15% Output sales tax $20.110) Cr 14.730 470 870 2.9 A Input sales tax $12.460] = $776 14.000 – $3.820) (1.000 $ 890 14.25 .250 230 3.095 14.10 $776 Cr $2.095 84.000 × 94% × 15% Closing balance on sales tax account at end of April $ 1.000 1.X7 (4) $ 1.
14: ANSWERS END OF CHAPTER 14.26 .
Bank reconciliations Syllabus Guide Detailed Outcomes Having studied this chapter you will be able to: • • • • • Understand the purpose of bank reconciliations. Alternatively they may ask you to state whether differences between the cash book and the bank statement should be adjusted in the cash book or in the reconciliation statement.1 . Exam Context Exam questions are likely to ask you to perform calculations to correct a bank reconciliation. Identify the main reasons for differences between the cash book and the bank statement. Correct cash book errors and/or omissions. 15. Derive bank statement and cash book balances from given information. Prepare bank reconciliation statements and identify the bank balance to be reported in the final accounts. Qualification Context This chapter covers a topic which is only examined in Paper F3.
2 .15: BANK RECONCILIATIONS Overview Bank reconciliations Cash book balance Bank statement balance Differences Timing differences Errors by the business Errors by the bank 15.
15: BANK RECONCILIATIONS
This chapter is designed to enable you to explain and apply the approach to identifying and correcting errors through the use of bank reconciliations. The cash book is used to record the detailed transactions of receipts and payments into and out of the bank account. These are then posted to the nominal ledger periodically using double entry. At the end of each accounting period, the balance on the cash book should equal the balance in the nominal ledger cash account. Bank statements provide an independent record of the balance on the bank account but this balance is unlikely to agree exactly to the cash book balance – therefore a reconciliation is required.
Differences between the cash book balance and the bank statement
1.4 Differences essentially occur for three reasons: (a) Timing differences: (i) (ii) (b) unrecorded lodgements (money paid into the bank by the business but not yet appearing as a receipt on bank statement) outstanding/unpresented cheques (cheques paid out by business which have not yet appeared on bank statement). omissions, such as: standing orders direct debits bank charges interest (ii) (iii) (c) transposition errors casting errors
Errors by the business (i.e. in the cash book): (i)
Errors by the bank.
A word of warning
1.5 In the books of the business: POSITIVE BANK BALANCE = ASSET = DEBIT NEGATIVE BANK BALANCE (OVERDRAFT) = LIABILITY = CREDIT But from the bank’s point of view: POSITIVE BALANCE = LIABILITY = CREDIT (the bank owes you your money) NEGATIVE BALANCE (OVERDRAFT) = ASSET = DEBIT (you owe the bank ∴ this is an asset for the bank)
15: BANK RECONCILIATIONS
Preparing a bank reconciliation
(a) (b) Compare the bank statement to the cash account and tick off all items which agree. Remaining items must represent timing differences or errors – decide which!
Example of how to set out a bank reconciliation
2.2 Cash account $ X Dishonoured cheque Bank charges Standing orders X Direct debits Balance c/d X $ X X X X X X $ X X (X) X/(X) X
Balance b/d Under cast error in balance b/d
Balance per bank statement plus unrecorded lodgements less outstanding cheques plus/less bank errors Balance per adjusted cash account
2.3 (a) (b) On reconciliation, put overdrafts and payments in brackets. It is the corrected cash account balance which is shown on the balance sheet. This figure will be the recalculated 'Balance c/d' on the cash account (or the total at the end of the reconciliation statement – which should be identical!).
15: BANK RECONCILIATIONS
Lecture example 1
The cash account of Graham showed a debit balance of $204 on 31 March 20X8. A comparison with the bank statements revealed the following. $ (1) Cheques drawn but not presented 3,168 (2) (3) Amounts paid into the bank but not credited Entries in the bank statements not recorded in the cash account (i) Standing order payments (ii) Interest on bank deposit account (iii) Bank charges Balance on the bank statement at 31 March 20X8 723 35 18 14 2,618
Required Make any necessary adjustments to the cash book balance and complete the bank reconciliation statement as at 31 March 20X8.
Adjustment of cash book balance Cash account $ $
Bank reconciliation statement $ Balance per bank statement 31 March 20X8 Unrecorded lodgements Outstanding cheques Balance per cash account at 31 March 20X8
15: BANK RECONCILIATIONS
Lecture example 2
Exam standard for 2 marks
Whilst preparing a bank reconciliation statement at 31 December. The following items caused a difference between the bank statement balance and the cash book balance. (1) (2) (3) (4) (5) Bank interest charged to the account in error Direct debit for $500 for insurance Bank charges of $70 Cheque paid to a supplier on 29 December Receipt from a trade receivable by electronic transfer
Required Which of these items will be shown in the bank reconciliation? A B C D 2, 3, and 5 1 and 4 1, 4, and 5 1, 3 and 5
Summary of Chapter 15
A business maintains a cash book to tell it how much cash it has at a particular point in time. It should reconcile this balance to the bank statement in order to ensure the cash book information is accurate. Differences between the cash book balance and the bank statement balance will arise for three reasons: timing differences, errors by the business and errors by the bank.
Chapter 15: Questions
Data for Questions 15.1 and 15.2
In the books of Ted Co the bank account shows a balance overdrawn of $6,530 as at 31 December 20X8. On comparing the bank statements with the cash book the following items are discovered: (i) (ii) (iii) (iv) (v) 15.1 Bank charges of $100 and overdraft interest of $50 have been omitted. Cheques received from customers totalling $1,900 have not yet been cleared by the bank. Cheques drawn in favour of suppliers amounting to $2,300 are outstanding at the year end. A credit transfer from a customer of $2,000 was not recorded. A direct debit to a supplier of $1,000 was omitted. What figure will be shown in the balance sheet as at 31 December 20X8 for ‘bank overdraft’? A B C D 15.2 $5,480 $5,680 $6,130 $7,380 (2 marks)
Assuming that the above items are all that is required to reconcile the cash book balance to the balance per the bank statement, what balance did the bank statement show as at 31 December 20X8? A B C D $5,280 overdrawn $6,080 overdrawn $7,780 overdrawn $8,580 overdrawn (2 marks)
Rectify A summary of the cash book of Rectify Co for the year to 31 May 20X5 is as follows: $ 805 145,720 146,525 Cash Book Payments Closing balance c/d $ 146,203 322 146,525
Opening balance b/d Receipts
After some investigation of the cash book and vouchers you discover that: (1) (2) (3) (4) (5) (6) (7) (8) bank charges of $143 shown on the bank statement have not yet been entered in the cash book; a cheque drawn for $98 has been entered in the cash book as $89, and another drawn at $230 has been entered as a receipt; a cheque received from a customer for $180 has been returned by the bank marked ‘refer to drawer’, but it has not yet been written back in the cash book; an error of transposition has occurred in that the opening balance of the cash book should have been brought down at $850; cheques paid to suppliers totalling $630 have not yet been presented at the bank, whilst payments in to the bank of $580 on 31 May 20X5 have not yet been credited to the company’s account; a cheque for $82 has been debited to the company’s account in error by the bank; the company owes $430 to the electricity board; standing orders appearing on the bank statement have not yet been entered in the cash book: (i) (ii) (iii) interest for the half year to 31 March on a loan of $20,000 at 11% pa; hire purchase repayments on the managing director’s car – 12 months at $55 per month; dividend received on a trade investment – $1,147;
a page of the receipts side of the cash book has been undercast by $200; the bank statement shows a balance overdrawn of $870.
Required Prepare a bank reconciliation as at 31 May 20X5.
Chapter 15: Answers
2 A Adjusted cash book balance Less: unrecorded lodgements Add: outstanding cheques Balance per bank statement 15.280) $ 143 9 460 180 1.900) 2.15: ANSWERS 15.680) $ (5.000 (1.147 200 838 Bank charges (1) Cheque drawn entered as $89 (2) (98 – 89) Cheque drawn entered as receipt (2) (2 × $230) Cheque returned written back (3) Loan interest (8i) HP repayments (8ii) 2.100 660 2.3 Rectify Bank $ Balance b/d Error in opening balance (4) (850 – 805) Dividend received (8iii) Undercast (9) Balance c/d 322 45 1.552 O/D O/D END OF CHAPTER 15.552 Bank reconciliation statement as at 31 May 20X5 Balance per bank statement Add: lodgements not yet credited Less: outstanding cheques Add: cheque wrongly debited by bank Balance per cash book $ (870) 580 (630) 82 (838) $ (6.530) (150) 2.000) (5.1 B Unadjusted cash book balance Corrections to cash book (i) interest (100 + 50) (iv) unrecorded cash received (v) payment to supplier omitted Adjusted cash book balance 15.300 (5.680) (1.12 .
Identify errors leading to the creation of a suspense account. 16. You may be asked to identify which explanations could have led to a particular difference or be asked to identify the journal entry to correct an error. Calculate and understand the impact of errors on the income statement and balance sheet. Record entries in a suspense account and make journal entries to clear it. Identify errors which would be highlighted by the extraction of a trial balance.Correction of errors Syllabus Guide Detailed Outcomes Having studied this chapter you will be able to: • • • • • • • Identify the types of error which may occur in bookkeeping systems. Qualification Context This topic is only tested in Financial Accounting. Understand the purpose of a suspense account. Prepare journal entries to correct errors. Exam Context Questions on this area are likely to focus on three main areas.1 . You may also need to determine the effect errors may have on the profit figure.
2 .16: CORRECTION OF ERRORS Overview Types of error Correction of errors Suspense account Adjustments to profit 16.
3 .1 Section 1 Types of error The following errors will still allow the trial balance to balance.1 1. 2 2.2 The trial balance will not balance if total debits do not equal total credits. This could be due to the following: (1) Transposition error (2) An entry has been posted where (a) debits ≠ credits (b) a debit entry has been posted and no corresponding credit made (or vice versa) 16.2 Introduction Chapter 6 showed us how the trial balance was extracted from the ledger accounts and that it should balance.16: CORRECTION OF ERRORS 1 1. total debits should equal total credits. i. Type of error Error of omission Example Error of commission Error of principle Compensating error 2.e. If the trial balance doesn't balance then an error has definitely been made and must be corrected.
It is used for two main reasons: (1) (2) To account for a debit or credit entry when the accountant is unsure as to where it should go To make a preliminary trial balance balance when an error has been detected.4 .500 $2. 16. The correction is therefore twice the original error: Dr Cr Suspense account Sales (2 × $2. a credit customer. These errors will be corrected by creating a suspense account and making a journal entry to correct the error. Decide what entry should have been made.2 Suspense accounts A suspense account is a temporary account.500 $2.500 to James. They never appear in the final accounts.16: CORRECTION OF ERRORS (c) two debit entries or two credit entries have been posted.500 $2. 3. 3 3.000 Being: correction of sales posting. Steps (1) Entry made was: Dr Dr (2) Dr Cr (3) Trade receivables Sales Trade receivables Sales $2.3 Steps to clear a suspense account.500 when they should have been credited by that amount. (1) (2) (3) Determine the original accounting entry which was made. When recording the sale W Co posted the transaction to the correct accounts but made two debit entries.500 Entry should have been: Correction: The trade receivables entry is correct but sales have been debited by $2.500) $5. Make the required adjustment.4 Illustration W Co sold goods with a value of $2. 3.1 3.000 $5.
has made his usual mess of things and produced the following attempt at a trial balance for the year ended 30 April 20X7.000 12. Discounts allowed of $500 during the year ended 30 April 20X7 had not been recorded in the books.640 85.620 made by cheque to V Woolf in March 20X7. at cost Receivables ledger control account Payables ledger control account Balance at bank As chief accountant you discover the following: (1) (2) (3) A rent payment of $350 in March 20X7 had been debited in the receivables ledger control account. Capital of $35.500 1.000 9.460 cash in June 20X6 has not been posted to the appropriate expense account. The total column of the cash receipts book had been overcast by $1. The purchase of stationery for $1. A suspense account showing how it is cleared.16: CORRECTION OF ERRORS Lecture example 1 Technique demonstration Dan.5 . V Woolf. No entry had been made for the refund of $2.000. in respect of defective goods returned to Tiffany.000 53. the bookkeeper of Tiffany's. $ Property. 60. 16.240 102. plant and equipment At cost Provision for depreciation Capital at 1 May 20X6 Profit for the year Inventory.600 6.000 31.800 $ (4) (5) (6) Required Prepare (a) (b) Journal entries to correct the above errors. returned them on 28 February 20X7. who had already paid for the goods.000 was recorded incorrectly as $53.900 in March 20X7.300 14.
16: CORRECTION OF ERRORS Solution 16.6 .
Increases $ Draft profit Adjustments Decreases $ $ Revised profit 16.4 Original profit Adjustment: (a) over depreciation (b) unrecorded expense (c) unrecorded sale Adjusted profit $ + X X X X (X) X X $ – $ X Lecture example 2 Required Prepare a statement of adjustments to profit for Lecture example 1.3 This is done by using a statement of adjustments to profit. item 5 tells us that a stationery expense of $1.16: CORRECTION OF ERRORS 4 4.2 Adjustments to profit When errors are corrected they may affect the business' profit for the year figure. For example in Lecture example 1.7 . The profit for the year figure in the trial balance of $12. 4. Technique demonstration Solution Statement of adjustments to profit for the year ended 30 April 20X7. Proforma 4.300 is therefore too high and needs to be corrected.460 has not been recorded in the expense account.1 4.
Where the trial balance does not balance a suspense account will be inserted and the errors. will be corrected via a journal entry. such as errors of omission and errors of principle.950 $108.700 had been recorded as a new sale. A machine which had been held for two years and had originally cost $15.250 $105.000 was 1 depreciated this year using a 33 3 % reducing balance basis. will still allow the trial balance to balance.400 for the year ended 30 September 20X7. Some of these corrections may impact the business’ profit. Required What would be the net profit after adjusting for these errors? A B C D $103.3 16.16: CORRECTION OF ERRORS Lecture example 3 Exam standard for 2 marks Z Co's income statement showed a profit of $112.750 $105. Z Co's policy is to depreciate machines over four years.2 5.8 . 5.1 5. in this case a statement of adjustments to profit can be prepared to determine the revised profit figure. The following errors were later discovered: (1) (2) Sales returns of $2. once identified.450 Solution 5 Quick Quiz Summary of Chapter 16 Some errors.
9 .Chapter 16: Questions 16.
000 debentures at par had been posted to a suspense account.10 .4 Which of the following errors would cause a trial balance imbalance? (i) (ii) (iii) A B C D The discounts received column of the cash payments book was overcast.16: QUESTIONS 16.018 Cr 16. Returns inwards were included on the credit side of the trial balance. What was the balance on the suspense account before he did this? (i) (ii) (iii) A B C D Sales day book for March overcast by $63. the totals on the trial balance would show: A B C D The debit side to be $150 more than the credit side The debit side to be $300 more than the credit side The debit side to be $150 less than the credit side The debit and credit sides to be equal in value (2 marks) 16.1 Which of the following errors could result in a suspense account being required to balance the trial balance? A B C Cash received from receivables treated as a cash sale Payments to suppliers of $513 recorded as $531 in the payables ledger A supplier’s invoice for $19 recorded as $91 in the purchases account (1 mark) 16. Cash receipts from receivables of $713 posted to the receivables ledger control account as $731. Cash paid for the purchase of office furniture was debited to the general expenses account. (i) only (i) and (ii) (iii) only all of the errors (2 marks) 16.5 If sales of $150 has been wrongly entered on the debit side of the purchases account. The entry required to correct this is A B C D Dr stationery $18 Dr wages $27 Dr wages $27 Dr suspense $45 Dr suspense $9 Dr stationery $18 Cr stationery $18 Cr wages $27 Cr wages $27 Cr suspense $45 Cr suspense $9 Cr stationery $18 (2 marks) 16. but correctly entered in the trade receivables account.018 Dr $1. Payments for staff wages of $125 were posted to the wages account as $152 and payments of $31 for stationery were posted to the stationery expense account as $13. Cash received from the issue of $1.2 Duncan corrected the following errors before producing his final balance sheet. $982 $982 Dr Cr (2 marks) $1.3 Russell’s bookkeeper transposed some figures when the week’s cash payments were being posted to the nominal ledger.
850 has gone bankrupt. has just produced its draft accounts for the year ended 30 September 20X7. Full allowance had been made against this amount in Platinum's accounts for the year ended 30 September 20X6. Silverman. An amount owing from Aluminium Co of $780 was written off in January 20X7. 16. the accountant has since discovered the following matters which require consideration before the final accounts can be prepared: (1) (2) (3) Returns outwards to Metals Co in June 20X7 of $490 have been treated as returns inwards in error in the nominal ledger. The proceeds were included in cash and credited to the motor expenses account.000 (cost $10.11 .000 in September 20X7.000) was sold for $5. (4) Required Calculate the corrected profit for the year ended 30 September 20X7. These show a draft profit of $28. R. a customer owing $1.16: QUESTIONS 16.960.6 Platinum Co Platinum Co. Unfortunately. a manufacturer of electrical goods. The amount was removed from trade receivables and debited to the sales account. No other entries were made. An item of equipment with a net book value of $6.
12 .16: QUESTIONS 16.
Chapter 16: Answers 16.13 .
960 980 6.6 A C B Platinum Co (a) Statement of corrected profit for the year ended 30 September 20X7.3 16.000) (5.5 16.000 Bal b/d 1.000 + $1.000 982 16.000 980 Revised profit (6.4 16.000 1.16: ANSWERS 16.000) No effect + $ $ – $ 28.2 B 16.14 .1 C Suspense account Transposition error (731 – 713) Bal c/d 18 Cash from debentures 982 1. Draft profit (1) (2) (3) (4) Returns outwards ($490 x 2) No effect Disposal of machine ($5.940 END OF CHAPTER 16.020) 23.
Preparation of financial statements for sole traders
Syllabus Guide Detailed Outcomes
Having studied this chapter you will be able to: • •
• • •
Prepare extracts of an opening trial balance. Prepare journal entries to correct errors. Record entries in a suspense account Make journal entries to clear a suspense account Prepare extracts of a balance sheet and income statement from given information.
This chapter recaps some of the key skills you have learnt in the chapters covered to date. Whilst you will not be asked to produce a balance sheet or an income statement in the real exam any of the adjustments in this chapter could be tested as an individual question. This chapter will also help you to see how financial accounting fits together.
The skills to produce a balance sheet and an income statement are tested in detail in the Fundamentals level paper, Financial Reporting (F7).
17: PREPARATION OF FINANCIAL STATEMENTS FOR SOLE TRADERS
Preparation of financial statements for sole traders
Income Statement and Balance Sheet
17: PREPARATION OF FINANCIAL STATEMENTS FOR SOLE TRADERS
The purpose of this chapter is to recap some of the skills covered in Chapters 1–16. You will not be required to answer a question in the format of Lecture example 1 in the exam. However completing this exercise will revise your understanding of topics covered so far and enable you to see the end product – a business' transactions ordered into a set of financial statements.
Lecture example 1
You have been given the information below and asked to prepare the accounts of Mugg for the year ended 31 December 20X7. Trial balance as at 31 December 20X7. Dr $ Capital account at 1 January 20X7 Rent Inventories 1 January 20X7 Electricity Insurance Wages Trade receivables Sales Repairs Purchases Discounts received Drawings Petty cash Bank Motor vehicles at cost Furniture and fixtures at cost Accumulated depreciation at 1 January 20X7 – Motor vehicles – Furniture and fixtures Travel and entertaining Trade payables Suspense account 500 510 240 120 1,634 672 15,542 635 9,876 129 1,200 5 762 1,740 830 435 166 192 700 433 19,349 The following information is also available: (1) (2) (3) (4) Closing inventories, valued at cost, amounts to $647; Mugg has drawn $10 a month and these drawings have been charged to wages; Depreciation is to be provided at 25% on cost on motor vehicles, and 20% on cost on furniture and fixtures; Bad debts totalling $37 are to be written off;
Cr $ 2,377
17: PREPARATION OF FINANCIAL STATEMENTS FOR SOLE TRADERS (5) (6) (7) (8) (a) (b) (c) $180 received from a credit customer was correctly entered in the trade receivables account and credited to the bank account; Mugg has taken goods from inventories for his own use. When purchased by his business these goods cost $63 and they would have been sold for $91; The annual rental of the business premises is $600, and $180 paid for electricity in August 20X7 covers the 12 months to 30 June 20X8; Discounts allowed of $73 have only been recorded in the trade payables account. Prepare journal entries to record items (1) – (8). Clear the suspense account. Produce an income statement for the year ended 31 December 20X7 and a balance sheet as at that date.
(a) Journals (1)
17: PREPARATION OF FINANCIAL STATEMENTS FOR SOLE TRADERS (5)
(b) Suspense account $ $
17: PREPARATION OF FINANCIAL STATEMENTS FOR SOLE TRADERS (c) Mugg Income statement for the year ended 31 December 20X7 $ Sales Less: cost of sales Opening inventories Purchases Less: closing inventories Gross profit Discounts received Less: expenses: Rent Electricity Insurance Wages Repairs Depreciation Travel and entertaining Bad debts Discounts allowed Profit for the period Mugg Balance sheet as at 31 December 20X7 Cost $ Non-current assets Motor vehicles Furniture and fixtures Current assets Inventories Trade receivables Prepayments Cash and bank balances Capital Capital as at 1 January 20X7 Profit for the period Less: drawings Current liabilities Trade payables Accruals Accumulated depreciation $ NBV $ $
17: PREPARATION OF FINANCIAL STATEMENTS FOR SOLE TRADERS
Summary of Chapter 17
The balance sheet and income statement are the end product produced by a business. All the business’ transactions need to be categorised into the books of prime entry and posted to the nominal ledger. The trial balance is then extracted and some adjustments may need to be made before the financial statements are drawn up. You will not have to produce a balance sheet or income statement however this chapter should reinforce your understanding of Chapters 1 – 16.
17: PREPARATION OF FINANCIAL STATEMENTS FOR SOLE TRADERS
Chapter 17: Question
10 .1 Drawings are an expense of the business. Is this statement true or false? A B True False (1 mark) 17.17: QUESTION 17.
11 .Chapter 17: Answer 17.
1 B END OF CHAPTER 17.12 .17: ANSWER 17.
1 . The Pilot Paper included two questions asking you to derive the value of closing inventories using information about the gross profit margin earned by the business. for example sales. Business Context Some sole traders do not keep very detailed accounting records. 18. The preparation of accounts from incomplete records can generate a lot of income for smaller accountancy practices.Incomplete records Syllabus Guide Detailed Outcomes Having studied this chapter you will be able to: • Understand and apply techniques used in incomplete record situations: (i) (ii) (iii) (iv) use of accounting equation use of ledger accounts to calculate missing figures use of cash and/or bank summaries use of profit percentages to calculate missing figures Exam Context Questions on this chapter will require you to identify missing figures. closing inventories and drawings. They still however need to produce accounts so they know how their business is performing and also how much tax to pay to the tax authorities. Qualification Context This topic is only tested in Financial Accounting.
18: INCOMPLETE RECORDS Overview Margin Cost structures Mark-up Incomplete records Techniques for solving incomplete records Derive missing figures from given information Sales Purchases Drawings Inventory 18.2 .
1 Issue Individuals running small businesses such as a newsagent or greengrocer may not keep all of the accounting records we have studied or have a detailed understanding of double entry bookkeeping. either as a margin or a mark-up.000. In 20X7 sales total $476. They still need to know how the business is performing and so will produce financial statements.18: INCOMPLETE RECORDS 1 1.2 2 2. for example a margin of 25% gives: Sales Cost of sales Gross profit (b) Mark-up: 100% 75% 25% here gross profit is expressed as a percentage of cost of sales. If some necessary information isn't maintained by the business. (a) Margin: here gross profit is expressed as a percentage of sales. it will need to be derived from other available information. for example a mark-up of 35% gives: Sales Cost of sales Gross profit 135% 100% 35% 2.3 .2 Remember that: Cost of sales = opening inventories + purchases – closing inventories Lecture example 1 W Co has on average a profit margin of 40%.1 Cost structures Cost structure information is usually expressed in one of two ways. Required What is cost of sales? Workings $ Preparation question 18. 1.
The owners salvaged inventory valued at $180. $ Sales 221.000 $401.000.000.000 Solution 18. What is the cost of inventory destroyed in the fire? A B C D $335.000 Opening inventories 43. Sales for the month amounted to $985.000.500 Required What is the value for purchases in 20X7? Workings $ Lecture example 3 Exam standard for 2 marks On 1 January 20X7 J Co had inventory of $620.000 $352. At the end of January a fire in the warehouse destroyed some inventory items.000 and purchases were $700. J Co operates with a mark up of 25%.18: INCOMPLETE RECORDS Lecture example 2 Preparation question Y Co operates with a standard mark-up of 30% and has the following information available for 20X7.4 .000 Closing inventories 47.250 $532.
X7 126.96.36.199: INCOMPLETE RECORDS 3 Other techniques for solving incomplete records Preparation question Lecture example 4 A Co has recorded the following details relating to trade payables: Balance at Cash paid from till Payments from bank Required 1.5 .224 Based on the information above what was the value of purchases made during the year? $ Workings Trade payables $ $ 18.450 43.825 430 167.X7 $ 38.
454. and opening and closing trade receivables were $1. after the following payments from the till had been made: General expenses Drawings $ 4.500 6.18: INCOMPLETE RECORDS Lecture example 5 Preparation question B Co maintains a cash float of $50. all receipts from credit customers were banked.250 Total bankings in the year amounted to $28. Required Based on the information above what was the value of sales made during the year? $ Workings Cash Trade receivables 18.447 and $1.6 .928 respectively. In 20X7.
He pays certain expenses from his till and then banks the remaining funds. All of Bob's sales are for cash. He has provided you with the following information.000 float and operates with a margin of 20%.7 .800 2.000 Bob is unsure of the level of drawings taken during the year but estimates they were between $60 and $90 per week.000 100 500 1. Bob maintains a $1. Required What were Bob's drawings during the year? Workings $ 18.200 12.18: INCOMPLETE RECORDS Lecture example 6 Exam standard for 2 marks Bob owns and manages B Co although he does not keep detailed accounting records.000 3. Purchases of goods Wages for clerical assistant (per week) Stationery Electricity Bankings Opening inventories Closing inventories $ 20.
They are taken out of purchases and not recorded against inventories.700 $ 300 480 During the year he had withdrawn two units for his own use. We have seen these before as drawings. Firstly.480 How should the drawings of goods be treated? 18. carried out the following transactions: Sales (40 units @ $100) Purchases (45 units @ $60) His inventories (at cost) were: 1 January 20X7 31 December 20X7 (5 units @ $60) (8 units @ $60) $ 4.8 .700 3. Note: If you are using a trade payables T account to calculate purchases remember to adjust purchases for any goods taken by proprietor. Example 4. an outline trading account would appear as follows: $ $ Sales 4. ignoring the drawings.520 Gross profit 1.1 Goods drawn by proprietor The owners of the business may at times take goods or cash from the business for their own use. Peter Albert. a sole trader.000 Cost of sales Opening inventories 300 Purchases 2.18: INCOMPLETE RECORDS 4 4.2 During the year ended 31 December 20X7. In incomplete records questions these drawings need to be included. Cash drawings Dr Cr Dr Cr Drawings Cash Drawings Purchases Goods taken for own use These are recorded at the cost to the business not at sale price.000 Less: closing inventories (480) 2.000 2.
18: INCOMPLETE RECORDS It should be fairly obvious that the debit entry will be to drawings on the balance sheet. A mark-up is where gross profit is expressed as a percentage of cost of sales.000 Cost of sales Opening inventories 300 Purchases 2. i. i. Where a business does not have sufficient records to produce financial statements they need to piece together the missing information. Gross profit figure now makes sense.700 Less: goods drawn by proprietor 2 units @ $60 (120) 2. as you might initially think. but what about the credit entry? It will not.400 Gross profit 1. Drawings of goods are recorded at cost.e. profit of $40 per unit × 40 units sold. go to inventories (because these goods were not in hand at the year end so they are not included in the value of $480) but rather to purchases (as this is where they will have been previously recorded).2 5.880 Less: closing inventories (480) 2. A margin is where a business expresses gross profit as a percentage of sales.600 Points to note 4.: $ $ Sales 4. however all businesses need to know how much profit they have made in a particular year so that they can pay the relevant amount of tax over to the tax authorities.1 5.3 5. In the trading account. A business is a separate entity from its owner which means that any monies or goods taken out of the business for personal use must be classified as drawings. 5 Quick Quiz Summary of Chapter 18 Not all businesses keep proper accounting records.e.3 (a) (b) Drawings of goods are recorded at cost.5 18. 5.9 .4 5. this credit entry is often shown as a separate deduction from cost of sales.
10 .2 Adjustment to record drawings of goods: Dr Cr Drawings (B/S) Purchases (I/S) 18.1 Double Entry Summary for Chapter 18 Adjustment to record cash drawings: Dr Cr Drawings (B/S) Cash (B/S) 6.18: INCOMPLETE RECORDS 6 6.
11 .Chapter 18: Questions 18.
529 $99.000 $239. The proprietor removes goods costing $87 for his own use.470 during the year ended 31 October 20X7.000 (2 marks) 18. What is the cost of closing inventories? $ (2 marks) 18. What was the total value of purchases in the year ended 31 October 20X7? A B C D $77.4 Jethro sold goods for $157.000.18: QUESTIONS 18.680 $117. what is the gross profit? $ (1 mark) 18.520 (2 marks) 18. The business achieves a constant mark-up of 20% on cost and records sales for the year of $3.000 and a margin of 20%.000 over the year.000 $226. He achieves a constant mark-up of 25% on cost.781. Inventories at that date were valued at $8.3 A business has opening inventories of $273 and makes purchases during the year of $2.920 more than at the previous year end. Jethro prices his goods to give a mark-up of 45%. How much will his purchases for the year be? A B C D $211.2 A trader has budgeted sales for the coming year of $300. He plans to reduce his inventory level by $14.360.689 $95.1 If a business has sales of $6.12 .000 $254.
13 .Chapter 18: Answers 18.
470 x 100/145 = $108.200 $6.14 .18: ANSWERS 18.1 $1.360 × 120 $ 2.600 + $8.781 – 87) ∴ closing inventories 18.4 D Cost of sales ∴ purchases = $157.600 = $108.000 × 0.2 C 100 Cost of sales = $300.000 × 125 $ 240.2 = $1.000 (14.000) 226.800 (273) (2.920 = $117.520 END OF CHAPTER 18.694) 167 Less: opening inventories purchases (2.000 Less: decrease in inventories 18.200 18.3 $167 Cost of sales 100 $3.
interest on capital and drawings and loan interest. and balance sheet of a partnership. One way of obtaining this is to go into partnership with someone else. Qualification Context Partnerships are only examined in this paper. Prepare extracts of the income statement. including division of profit. This may include dealing with partners' salaries. Understand the nature of capital accounts. Business Context Many individuals set up business as a sole trader – as they expand they need new finance. Account for guaranteed minimum profit shares. Calculate the value of goodwill from given information. Calculate and record the partners' shares of profits/losses. Exam Context Questions on this topic are likely to require you to calculate a partner's profit share. That other person could provide some of the finance needed. They may also bring new ideas to the table. including profit sharing terms.1 . You may also need to allocate goodwill to partners when a new partner is admitted. current accounts and division of profits. Becoming a partnership will mean that the sole trader will share some of their risk but they will also need to share their profits too! It is always recommended that a partnership agreement is drawn up to retain a legal record of how the partnership will operate. 19.Partnerships Syllabus Guide Detailed Outcomes Having studied this chapter you will be able to: • • • • • Understand and identify the typical content of a partnership agreement. Calculate and record (i) (ii) (iii) (iv) partners' drawings interest on drawings interest on capital partner salaries • • • • Prepare an extract of a capital account and a current account. Define goodwill in relation to partnership accounts and identify the factors leading to the creation of goodwill.
19: PARTNERSHIPS Overview Partnership agreements Appropriation account Partnerships Capital accounts Current accounts Other issues Guaranteed minimum profit share Loans Goodwill 19.2 .
This is done by way of a partnership agreement which usually covers the following areas: 2. With a sole trader the owner will run the business and any profits belong to him.1 1.19: PARTNERSHIPS 1 1. These are outside the scope of the F3 syllabus.4 Limited liability partnerships (LLPs) exist nowadays to limit partner liability.1 Area Capital Profit sharing ratio (PSR) Consideration • • • • • • how much each partner pays in whether a "Fixed Capital" level is specified allocation of profit more to senior partners? equal shares? guaranteed minimum profit share? whether or not partners are entitled to salaries it is an appropriation of profit it is not an income statement expense whether or not allowed paid on capital injected interest rate may set a limit may set an interest charge Salaries • • • Interest on capital • • • Drawings • • 19. and decide.3 Most partnerships have unlimited liability which means the partners are personally liable for the debts of the business.2 Definition Partnership: The relationship which exists between two or more persons carrying on a business with a view to profit. 2 Partnership agreements The partners will need to agree the terms under which the partnership will operate. the owners (partners) run the business together and share profits and risk. Liability is also joint and several so if one partner cannot meet the partnership's obligations the other partners must make up any shortfall. The sole trader also bears the risk that the business may not be successful. In a partnership.3 . Partnerships are similar to sole traders. 1. 1. for example how much capital each partner will contribute and what share of profits they will be entitled to.
Income statement Sole trader Sales Cost of sales Gross profit Less: expenses Profit for period All belongs to sole trader $ X (X) X (X) X Partnership Sales Cost of sales Gross profit Less: expenses Profit for period Shared between partners according to the partnership agreement $ X (X) X (X) X Appropriating the profit for the period 3.3 The profit for the period is appropriated (shared out) between the partners according to their partnership agreement.19: PARTNERSHIPS 3 3. These are illustrated below. splitting the residual profit after all other allocations X This is done using an appropriation account. Salaries Partner A Partner B Interest on capital Partner A Partner B * PSR Partner A Partner B X X X 19.1 3. Steps (1) (2) (3) (4) Allocate the partner salaries Allocate any interest on capital Charge any interest on drawings Allocate remaining profit balance in profit sharing ratio Appropriation account Profit before appropriation Interest on drawings X Partner A X Partner B X X X X X * PSR is always the last entry.2 Accounting for partnerships There are two key differences between accounting for a sole trader and a partnership.4 .
4 Balance sheet Sole trader $ Capital Capital Profit Less: drawings X X (X) X Capital accounts Partner A Partner B Current accounts Partner A Partner B Amount owed back to the partners by the business Partnership $ X X X X X X Amount owed back to the owner by the business 3.900 100 4.19: PARTNERSHIPS 3. Current account Ptnr A $ 2.000 Drawings Interest on drawings Bal c/d Bal b/d Salaries Interest on capital Profit share 19.000 Ptnr B $ 970 30 5.000 7. the capital account would show.000. Capital account Ptnr A $ Ptnr B $ Bal b/d Ptnr A $ 5. The main entries in the current account will be the partners’ appropriation of profits (salary.500 500 4. interest on capital and profit share) less drawings they have taken from the business and any interest charged on those drawings.6 Current accounts These record each partner's day to day transactions with the business.700 6.000 1. The capital account can be shown as one T account subdivided into columns.5 . The balances in these accounts will remain relatively static. For example.500 – 800 3.000 Ptnr B $ 8.000 3.5 Capital accounts These represent the capital invested in the business by each individual partner.000 7.000 and Partner B $8.000 6.000 Ptnr A $ 1. if Partner A contributed $5.000 Ptnr B $ 1.
000 $4. and they would share profits in the ratio: Tick five tenths.000 In the year to 31 December 20X4 their profit for the period was $50. They paid in the following capital amounts: Tick Cast Balance $50.6 .000 $30.a.20X4 Tick 30.000 p. Show the partners' balances on the balance sheet.19: PARTNERSHIPS Lecture example 1 (a) Preparation question On 1 January 20X4 Tick.6. $6. Cast and Balance entered into partnership together as chartered certified accountants.. Write up their current accounts in columnar form.9. Balance two tenths.12.20X4 Cast 31.000 $20. During the year they had made drawings in cash as follows: 30.000. Cast three tenths. They agreed that Balance would receive a salary of $15.a.20X4 Balance Required (i) (ii) (iii) (iv) Write up their capital accounts in columnar form.800 Solution (i) Tick $ Cast $ Capital Accounts Balance $ Tick $ Cast $ Balance $ 19.000 $8. Write up the appropriation account. they would all be allowed interest on capital of 12% p.
7 .19: PARTNERSHIPS (ii) Appropriation account for the year ended 31 December 20X4 $ $ (iii) Current accounts Tick Cast Balance $ $ $ Tick $ Cast $ Balance $ 19.
a.8 . Cast and Balance Balance sheet as at 31 December 20X4 (extract) $ Capital accounts Tick Cast Balance Current accounts Tick Cast Balance $ (b) What would your answer be to (ii) and (iii) if the agreement had also provided for interest to be charged on drawings at the rate of 10% p.19: PARTNERSHIPS (iv) Tick.? (ii) Appropriation account for the year ended 31 December 20X4 $ $ 19.
9 .19: PARTNERSHIPS (iii) Tick $ Current accounts Cast Balance $ $ Tick $ Cast $ Balance $ 19.
Interest due on the partners' capital is $2.2 (a) (b) (c) (d) Partnership may be short of funds.000 8. If. there is a shortfall then this will be made up by the remaining partners in their profit sharing ratio. A $ 12.3 4. however.2 4.10 . there is nothing further to do. The interest incurred on the loan is shown as an expense in the income statement (just like bank interest).320 22.000.320 (670) 21.340 7.000. Reasons for making a loan 5.000 1.000.700 8.000. If when the appropriation of profits is made this level is exceeded.660 1.000 – 50.800 50. a partner can make a loan to the partnership.020 (670) 21.500 4. No interest is charged on drawings. It will need to be deducted from the profit figure before any appropriation is made if it has not already been accounted for.1 4.160 5. A and B each receive a salary of $12. Partner wants to earn interest.350 C $ – 1. $1.1 Loans Unlike sole traders.4 The loan is shown as a non-current liability on the balance sheet and not in the partner's capital account.000 Total $ 24.000 2.3 5.19: PARTNERSHIPS 4 4. Partner is unwilling to tie cash up for long period.000 Salaries Interest on capital Profit share (2:2:1) Subtotal Guaranteed minimum profit share shortfall (2:2) 5 5.000 5. B and C are in partnership and share profits in the ratio 2:2:1.200 20.320 22.650 B $ 12. C has a guaranteed minimum profit share of $7. Illustration A. Accounting treatment 5. Partner retires but partnership does not have enough cash to buy out his share.4 Guaranteed minimum profit share It may be that the partnership agreement specifies that one or more partners must receive a minimum share of profits. 19.700 and $1. The partnership made a profit for the year of $50.500 respectively.
19: PARTNERSHIPS 5. The double entry would be: Dr Cr Loan interest expense (I/S) Current account (B/S) Lecture example 2 X.11 .000. The profit for the year to 31 December 20X7 was $67. Y and Z are in partnership sharing profits in the ratio 6:3:1.000 and $8. The loan carries interest at 12% but this has not yet been accounted for.000 respectively and interest due on capital to each partner is $400.000 to the partnership on 1 July 20X7. X and Z receive salaries of $15. Exam standard for 2 marks Y made a loan of $10. the liability will be shown in the relevant partner’s current account.5 If the loan interest has not been paid by the end of the year. Required What is the amount of profit appropriated to each partner for the year ended 31 December 20X7? $ Workings 19.
000 Profit sharing ratio Melanie: Sarah: Angela is 60:20:20: From 1 July 20X3 Salaries to be discontinued.000 before charging partners' salaries. Sarah and Angela are in partnership.12 . Therefore if the terms of the agreement change during the period this will affect the profit appropriation.000 88.000 198. Required How should the profit for the year be divided among the partners? Use a separate page for your workings. profit sharing ratio to be: 50:30:20 The profit for the year ended 31 December 20X3 was $400. Always use the old partnership agreement to appropriate the profits for the first part of the year and the new partnership agreement for the latter part of the year.2 6.000 84. accruing evenly through the year and after charging an expense of $40.000 116.000 19.19: PARTNERSHIPS 6 6. Exam standard for 2 marks Lecture example 3 Melanie. which it was agreed related wholly to the first six months of the year.000 200. Melanie $ A B C D 182.000 $20. The partnership agreement states the following: Until 30 June 20X3 Annual salaries Sarah Angela $40.3 Changes to the partnership agreement Profits are always appropriated according to the partnership agreement.000 132.000 118.000 Sarah $ 130. compiling their accounts for the year to 31 December each year. Assume profits accrue evenly unless the question specifies otherwise.000.1 6.000 Angela $ 88.000 88.000 180.
Preparation question On 1 September Heather decides to retire and leaves the partnership. Required Show how the goodwill would be accounted for at each change of the partnership.1 7. his share of goodwill.10 The worth of a business over and above its individual assets is called goodwill. It is likely that over time the value of items such as property. At that time goodwill is valued at $210. This is done using the new profit sharing ratio.5 Similarly. On 1 December Stacy joins the partnership contributing $200. i. Chantel and Heather are in partnership sharing profits in the ratio 4:3:2.000.6 Lecture example 4 Katie.19: PARTNERSHIPS 7 7. but is removed. When a partner retires it is important that he is paid a sum that represents not just the money he invested but also his share of the extra value created in the business. It is important that the original partners value the partnership so they know its worth and can determine how much the partner should contribute. he will pay in a sum of money (capital).3 Section 2.000.e. Goodwill is an extremely subjective figure and so it is not left in the partnership's balance sheet. At that point the partnership has goodwill valued at $180.4 7.13 . 7.8-2. 7. when a new partner joins. However. Chantel and Stacy is 3:2:2. 7.000. plant and equipment will increase over their net book value. The new profit sharing ratio for Katie. hopefully the business will also have built up a good reputation and a loyal customer base and the business itself will be worth more than its individual assets. Katie and Chantel continue to share profits 4:3.2 Changes to the partnership – goodwill When a partner retires from the partnership or a new partner is admitted to the partnership it is usual for the partners to value the business. 19. Goodwill is therefore added to the partners' accounts according to the existing or old profit sharing ratio.
The worth of the partnership over and above the balance sheet valued is called goodwill. Capital accounts represent the capital paid in by each partner and are generally static.2 8.4 8. whether interest is charged on drawings and the profit sharing ratio. 8.1 8.14 . Partners’ salaries are not an expense of the business but an appropriation of profit. whether they are entitled to a salary.5 19. Current accounts record the partners’ day to day transactions with the business. This is allocated to the partners according to their profit sharing ratio. Whenever a new partner is admitted or an existing partner retires the partnership will be valued.19: PARTNERSHIPS Solution Goodwill $ $ Capital account $ $ 8 Quick Quiz Summary of Chapter 19 The purpose of a partnership agreement is to specify how the partnership operates in terms of the how much capital the partners pay in and whether they are paid interest on capital.3 8.
Chapter 19: Questions 19.15 .
interest on drawings @ 5% per annum.1 and 19.000. The partnership agreement provides for the following: • • • • a salary to John of $5. Loan interest is to be included in the current account.000 Paul $25.1 19.000 on 30 June 20X2 Paul $2.500 on 31 March 20X3 On 30 September 20X2 Paul lent the partnership $100. The profit for the year ended 31 March 20X3 was $40. Interest (which has not been included in the accounts) is to be charged at 4% per annum. profit sharing ratio of 2:2:1 respectively. The capital accounts as at 31 March 20X3 showed the following balances: John $30.000 on 31 December 20X2 David $1.000 per annum.2 19.19: QUESTIONS Data for Questions 19.000. 19. interest on capital balances @ 10% per annum.000 The partners made the following drawings during the year: John $6.3 What is John’s share of the residual profits? $ What will be the balance on Paul’s current account at 31 March 20X3? $ Which of the following is not true? A B C Partners are jointly and severally liable Partner salaries are an appropriation of profits Interest on drawings is an appropriation of profits (2 marks) (2 marks) (1 mark) 19.2 John.000 David $20.16 . Paul and David have been in a partnership for one year providing advice on landscape gardening.
Profit for the year to 30 June 20X9 was $24. The partnership made a payment to A for loan interest on 29 June 20X9 but has not recorded this in its books. Required Prepare the current accounts and the appropriation account for the partners as at 30 June 20X9.000 10.000 107.400. with all sums being withdrawn on 1 July 20X8. 19. agreeing to share profits in the ratio of 4:2:1. They have also agreed to allow interest on capital at 8% per annum.733 Drawings were: A $6. C $2. before charging interest on A's loan. and to charge interest on drawings made in advance of the year end at a rate of 10% per annum.000 30.750. B $3.630 521 (418) $ Current accounts 90.000 2.4 A. B and C are in partnership.17 .000.000 per annum.000 Loan account (5% interest) 2.733 15. The balance sheet as at 30 June 20X8 disclosed the following: Capital accounts A B C A B C A $ 50.19: QUESTIONS 19. a salary to C of $5. B and C A.100.
18 .19: QUESTIONS 19.
19 .Chapter 19: Answers 19.
621 3.150 Total $ 5.300 12.150 7.500 2.000 – 5.990 14.000 200 5.400 14.100 310 3.000 25 12.000 3.800 12.000 (2.000 10.4 A. B and C A $ Balance b/d Drawings 6.030 B $ 3. Partner salaries are an appropriation of profit.032 19.2 $12.400 3.300 14.700 6.075 Paul $ – 2. not an expense.000 John $ 5.990 B $ 521 2.300 Profit per accounts Less loan interest 4% × $100.775 19.775 Current account – Paul Drawings Interest on drawings c/d 2.20 .032 7.000 Salary Interest on capital Interest on drawings PSR (2:2:1) Total profit 19.000) 38.621 Current accounts C $ 418 2.211 6.000 7.775 David $ – 2.500 (25) 10.19: ANSWERS 19.030 6.800 Interest on capital Loan interest PSR b/d 2.000 7.775 14. 19.3 C Interest on drawings increases available profits to share and is therefore not an appropriation of profit.000 800 1.000 × 6 12 $ 40.1 $10.400 Interest on drawings 640 Balance c/d 6.300 18.850 7.000 (225) 10.630 4.500 (250) 25.650 5.211 C $ 5.750 (β) 38.650 Balance b/d Salary Interest on capital Share of profit Balance b/d A $ 2.
150 Share of profits in PSR A(4/7) B(2/7) C(1/7) 7.000 Profit (W1) Interest on drawings $ 24.700 1.200 A B C 640 310 200 1.400 800 7.150 24.000 4.21 .400 3.150 (W1) Profit Interest on loan 19.750 (750) 24.19: ANSWERS Appropriation account Salary Interest on capital C A B C $ 5.950 25.000 2.850 β 12.000 25.
22 .19: ANSWERS END OF CHAPTER 19.
The area of income taxes is also extended to include adjustments for deferred tax as well as current tax. Define a bonus issue and a rights issue. You may also see a question comparing a sole trader and a limited company as was included in the Pilot Paper. Identify and record the other reserves which may appear in the company balance sheet. Record movements in the share capital and share premium accounts. dividends and finance costs and their associated journal entries. Qualification Context The knowledge covered in this chapter is developed further in the Fundamentals level paper Financial Reporting (F7).1 . bonus issues and rights issues). Record dividends in ledger accounts and the financial statements. Business Context When a company is seeking to raise finance it will evaluate its current financing structure and gearing levels before deciding how to secure additional funds. their advantages and disadvantages and show how they are recorded in the balance sheet. It will also consider the degree of risk attached to each method of financing and will weigh up the cost in terms of interest payments versus future dividends.Introduction to company accounting Syllabus Guide Detailed Outcomes Having studied this chapter you will be able to: • • • • • • Understand the capital structure of a limited liability company including ordinary shares. 20. Calculate and record finance costs in ledger accounts and the financial statements. Exam Context Questions on this chapter are likely to focus on the calculation of share capital movements (new issues. This paper looks in more detail at whether shares and borrowings should be classified as debt or equity and also at how they should be valued. preference shares and loan notes. A company will also receive tax relief on its interest payments (but not on dividends) and so the tax implications will form part of the final decision.
2 .20: INTRODUCTION TO COMPANY ACCOUNTING Overview Finance costs Reserves Long term borrowings Income taxes Introduction to company accounting Shares Accounting treatment Issue at a premium Bonus issue Rights issue Dividends 20.
the financial statements they produce are subject to regulation and must follow a prescribed format.1 Introduction We have seen how financial statements are produced for sole traders and partnerships. however.1 Proforma financial statements Income statement for the year ended 31 March 20X7 Revenue Cost of sales Gross profit Other income Distribution costs Administrative expenses Other expenses Finance costs Investment income Profit before tax Income tax expense Profit for the period $'000 X (X) X X (X) (X) (X) X (X) X X (X) X 20. These accounts are not subject to any specific regulation and so there is some flexibility as to how they are presented.2 2 2. Many of the differences are due to the terminology used by company financial statements.3 . Companies use exactly the same bookkeeping process as sole traders and partnerships.20: INTRODUCTION TO COMPANY ACCOUNTING 1 1. 1.
1 Section 2.20: INTRODUCTION TO COMPANY ACCOUNTING 2.4 . number of shares actually issued to shareholders. Share capital 20. $'000 X X X X X X X X X X X X X X X X X X X X X X 3 3.3 Share capital It is necessary to be able to distinguish between the following types of share capital: (a) (b) (c) (d) Authorised share capital – Issued share capital Called up share capital Paid up share capital – – – maximum number of shares the company may issue.2 Balance sheet as at 31 March 20X7 ASSETS Non-current assets Property.3 These proformas will be covered in more detail in Chapter 21. plant and equipment Other intangible assets Current assets Inventories Trade receivables Other current assets Cash and cash equivalents Total assets EQUITY AND LIABILITIES Equity Share capital Share premium account Revaluation reserve Retained earnings Non-current liabilities Long term borrowings Long term provisions Current liabilities Trade payables Short term borrowings Current tax payable Short term provisions Total equity and liabilities 2. the amount of issued share capital the company has asked shareholders to pay for to date. amount of called up share capital which has been paid for.
20.2 Ordinary share • • • • Preference share • • • Equity share Ordinary shareholders – own business Usually have voting rights No right to a dividend. receive what directors decide to pay Fixed rate of dividends (eg 7% preference share) Receive dividend in priority to ordinary shareholders On winding up.20: INTRODUCTION TO COMPANY ACCOUNTING Types of shares 3.2 Where shares are issued for more than their nominal value.1 Share capital: accounting treatment Rab Co started business on 1 January 20X6 issuing 100.000 ordinary shares of 50c each for 80c per share.5 . receive capital in priority 4 4. Preparation question Lecture example 1 Required On 1 June 20X6 Rab Co issued a further 200.000 ordinary shares of 50c each for 50c per share.000 Issue of new shares Issue of new shares at a premium 4.000 50. The initial balance sheet would be: Cash Share capital – 50c ordinary shares $ 50. Show how this issue of shares would be accounted for and what the balance sheet would look like immediately after the issue. the excess must be credited to a share premium account.
20. Any reserve may be used including the share premium account.6 .3 This is used when a company wishes to increase its share capital without needing to raise additional finance by issuing new shares. Advantages • 4.20: INTRODUCTION TO COMPANY ACCOUNTING Solution Dr $ Dr Cash Cr Share capital Cr Share premium account Rab Co balance sheet (extract) as at 1 June 20X6 Equity $ Share capital – 50c ordinary shares Share premium account Cr $ Bonus issue (capitalisation issue) 4.4 Disadvantage • Bonus issue can be made from the share premium account which has few other uses Will allow the share price to fall (without disadvantaging shareholder wealth) to make the company's shares more affordable to new investors Shareholders will now own more shares and could sell part of their holding The rationale for a bonus issue is not always understood by shareholders • • 4.5 A bonus issue is always done at nominal value.
20. Solution Dr $ Dr Share premium account Cr Share capital Rab Co Balance Sheet (extract) $ Share capital – 50c ordinary shares Share premium account Retained earnings Cr $ Rights issue 4.000 200. ‘Rights’ are offered to the existing shareholders who can sell them if they wish.7 .6 (a) (b) A rights issue is an issue of shares for cash (unlike a bonus issue) to existing shareholders.20: INTRODUCTION TO COMPANY ACCOUNTING Lecture example 2 Rab Co Balance sheet (extract) Share capital – 50c ordinary shares Share premium account Retained earnings Several years later Rab Co is to make a bonus issue on a 1 for 4 basis.000 Show how this issue of shares would be accounted for and prepare the balance sheet of Rab Co immediately after the issue. Required Preparation question $ 150.000 60.000 410.
50.500 22.20: INTRODUCTION TO COMPANY ACCOUNTING 4. All shareholders take up their rights.8 .7 Advantages • Disadvantages • More cost effective way for the company to raise finance than a fresh issue to the public A more time efficient way to issue shares If all rights are taken up shareholders will maintain their existing percentage shareholding Lack of shareholder interest may reflect badly on the company Unwelcome predators may try to acquire shares where not all rights are taken up Effect on future dividend policy as company will have issued more shares under the rights issue than it would have under a fresh issue to the public Preparation question • • • • Lecture example 3 One year later. The rights price is $1. Rab Co is to make a rights issue on a 1 for 5 basis. The following balance sheet extract shows the position before the issue Rab Co Balance sheet (extract) Share capital – 50c ordinary shares Share premium account Retained earnings Required Show how this issue of shares would be accounted for and prepare the balance sheet of Rab Co immediately following the issue.500 230.000 Solution Dr $ Dr Cash Cr Share capital Cr Share premium account Rab Co Balance sheet (extract) Share capital – 50c ordinary shares Share premium account Retained earnings Cr $ $ 20. $ 187.000 440.
Retained earnings: cumulative undistributed profits less any losses. The revaluation reserve (see Chapter 9): Other reserves: as designated by the individual company.1 Reserves The following reserves are commonly found in limited liability company accounts. retain it in the business. (a) The share premium account: (i) Typical permitted uses: (1) (2) (b) (c) (d) to issue bonus shares. Definition Illustration 6.4 $ 1. to write off share issue expenses.000 ordinary $1 shares in issue made a profit of $500 in its first year. The double entry is: Dr Cr Retained earnings Dividends payable (B/S) 20.20: INTRODUCTION TO COMPANY ACCOUNTING 5 5.9 .000 400 1.2 Suppose a company with 1. They are not an expense of the income statement. If this company decides to pay a dividend of 10c per share and retain the remaining profits. The company has two choices as to what can be done with this profit: (a) (b) distribute it as a dividend to the shareholders. for example a 'general reserve'. 6 6.1 Dividends Dividends – a sharing out/appropriation of retained earnings to owners/shareholders.3 6.400 $ 500 Dividends are charged directly to retained earnings as they are an appropriation of profits earned to date. the financial statements would appear as follows: Income statement for the year ended 31 December 20X7 Profit for the period Balance Sheet as at 31 December 20X7 (extract) Share capital – $1 shares Retained earnings (500 – 100) 6.
000 10. During the year ended 31 December 20X7 it made the following profit: Profit before tax Income tax expense Profit for the period Dividends paid and declared during the year were as follows: Interim dividend paid 5c per share Final dividend declared on 20 January 20X8 10c per share Required Show the movement in retained earnings for ABC Co for the year ended 31 December 20X7.000.000 Solution $ Retained earnings at beginning of year Profit for the period Dividends – Preference – Ordinary Retained earnings at end of year $ 20. $ 60.20: INTRODUCTION TO COMPANY ACCOUNTING 6.5 A company may pay dividends in two stages: (a) (b) Interim Final (mid year) (end year) In reality the directors will wait until they know the company's full year profit before declaring the final dividend.000 6% $1 preference shares 50c ordinary shares Preparation question Retained earnings at the beginning of the year were $125.000 50.10 . Otherwise it will be disclosed in a note to the financial statements (see Chapter 22). Lecture example 4 ABC Co has the following share capital: 100.000 200. The final dividend will only be accounted for in the current year if it is declared before the year end.
7.000 borrowed each year. This over or under provision is simply adjusted in the next financial statements. 8 8. 20.2 9.1 8. $50.2 One way of raising long term finance is for a company to issue loan notes (also called loan stock or debentures). It will be accounted for as follows: Dr Cr Finance costs (I/S) Bank 9 9. These loans usually carry a fixed rate of interest and have a pre-determined redemption date.1 Income taxes Companies must pay income tax on their profits.3 Often the actual amount of tax paid will be different from the amount that was recorded in the financial statements.2 Finance costs The interest expense incurred on long term borrowings will be shown as an expense called 'finance costs' in the income statement.000 will be repaid in 2012.20: INTRODUCTION TO COMPANY ACCOUNTING 7 7. for example.11 .000 10% debentures 2012. This tax is payable after the end of the financial year and so the financial statements will include an accrual for the directors' best estimate of the tax due on the profit for the period. This means the company will pay interest at 10% on the $50. Alternatively it can raise funds by issuing debt.1 Long term borrowings A company may choose to raise finance by issuing shares (equity). The capital amount of $50. The tax is shown as an expense in the income statement and a current liability in the balance sheet and will be accounted for as follows: Dr Cr Income tax expense (I/S) Current tax payable (B/S) 9.
Required (1) (2) Record the tax entries for the years ended 31 December 20X5 and 20X6 in the ledger accounts. Lauren Ltd settled this tax liability on 30 September 20X6.12 . The tax estimate for the year ended 31 December 20X6 is $43.000. paying $65. Solution (1) Income tax expense (I/S) $ $ Current tax payable (B/S) $ $ (2) Tax note for the year ended 31 December 20X6 20.000. Preparation question When preparing its financial statements for the year ended 31 December 20X5.000. Prepare the tax note which relates to the income statement for the year ended 31 December 20X6.20: INTRODUCTION TO COMPANY ACCOUNTING Lecture example 5 Lauren Ltd has a year end of December. Lauren Ltd estimated that its income tax payable would be $62.
The proprietor usually owns and manages the business. The middle of the balance sheet is split into 'opening capital'. The remainder of the profits are retained in the company. Liability The proprietor has unlimited legal liability regarding the business. A company is a separate legal entity. Members/shareholders receive profits in the form of dividends.13 . There are extensive legal requirements governing limited companies. 'profits' and 'drawings'. There are no legal requirements specific to a sole trader. The middle of the balance sheet is split into 'share capital' and 'reserves'. Legal status The business and the proprietor share legal identity (although the business is a separate business entity for reporting purposes). Management Members/shareholders do not usually manage the business. Sole trader Ownership The proprietor owns the business. using individual's tax rates. but appoint a Board of Directors to run the company on their behalf.20: INTRODUCTION TO COMPANY ACCOUNTING 10 Comparison The following table shows a comparison between a sole trader and a limited liability company. This means that they are only liable to the extent of their investment in the business. The business is closed to outside investors. Income tax is paid on the company profits. Investors can invest in a company. Members/shareholders have limited liability. Company There are often a large number of owners. Taxation Business profits are taxed in the hands of the proprietor. The directors receive a salary from the company and this is an expense in the income statement. Profits The proprietor takes 'drawings' out of the business. who are called shareholders or members. Balance sheet Legal requirements Other 20. Any cash amounts taken as a salary are not an expense of the business but drawings.
11. 11. 12 Double Entry Summary for Chapter 20 12.2 Adjustment to record finance costs: Dr Cr Finance costs (I/S) Bank (B/S) 12.3 Adjustment to record the income tax expense: Dr Cr Income tax expense (I/S) Current tax payable (B/S) 20. shares are issued for cash but the price charged is slightly lower than the current market price. 11. It will have to pay interest on these and this will be shown as 'finance costs' in the income statement.20: INTRODUCTION TO COMPANY ACCOUNTING 11 Summary of Chapter 20 Quick Quiz 11.3 Shareholders may receive a dividend as a return on their investment.1 In a limited liability company the shareholders own the business. With a rights issue.1 Adjustment to record dividends: Dr Cr Retained earnings (B/S) Dividends payable (B/S) 12. the premium is recorded in the share premium account.14 . A company may raise finance by issuing new share capital. these are accounted for as a deduction to retained earnings. Where shares are issued at a premium to their nominal value.4 A company may also raise finance by issuing debt such as loan notes or debentures.5 Companies pay income tax on their profits.2 A bonus issue is where the company issues shares for no cash consideration. 11.
15 .Chapter 20: Questions 20.
If an ordinary dividend of 5% is declared what is the amount payable to shareholders? $ (1 mark) 20.500 $11.3 A company’s issued share capital consists of $100. What is the company’s total dividend for the year? A B C D $8.2 If a shareholder in a limited liability company sells his shares to another private investor.000 in 50c ordinary shares.000 50c ordinary shares.000 in 6% $1 preference shares and $50.000 50c ordinary shares and an issued share capital of 800. for less than he paid for them.000. The directors wish to pay an ordinary dividend for the year of 5 cents per share. the share capital of the company will A B C D Remain unchanged Increase by the nominal value of the shares Increase by the amount received for the shares Decrease by the nominal value of the shares (2 marks) 20.1 A company has an authorised share capital of 1.20: QUESTIONS 20.16 .000 $17.000 (2 marks) 20.000 $5.
17 .Chapter 20: Answers 20.
2 20.000 × 2 × 5c) END OF CHAPTER 20.18 .20: ANSWERS 20.3 A B ($100.1 $20.000 5% × (800.000 × 6%) + ($50.000 × 0.50) 20.
Financial statements need to be prepared in a consistent way in order for users to be able to compare different companies.1 . Identify the components of the statement of changes in equity. 21. Business Context Financial statements are used by a wide range of user groups to make decisions. a company discontinues part of its operations. gross profit and net profit from given information and disclose items of income and expenditure in the income statement. Calculate revenue. Record income taxes in the income statement of a company.Preparation of financial statements for companies Syllabus Guide Detailed Outcomes Having studied this chapter you will be able to: • • • • • • • • • • • Recognise how the balance sheet equation and business entity convention underlie the balance sheet. cost of sales. Understand the inter-relationship between the balance sheet and income statement. You will also learn how accounting standards such as IFRS 5 affect the presentation of the financial statements if. A question on the Pilot Paper required you to demonstrate understanding of what was included in the statement of changes in equity. Understand the nature of reserves and report them in a company balance sheet. Understand how accounting concepts apply to revenue and expenses. Understand why the heading 'retained earnings' appears in a company balance sheet. Here you will need to produce financial statements using the format specified by IAS 1. Prepare extracts of an income statement from given information. Qualification Context The topics covered in this chapter are developed further in the Fundamentals level paper Financial Reporting (F7). The notes to the accounts will also provide a lot more detail on the headline figures shown in the income statement and balance sheet. Identify items requiring separate disclosure on the face of the income statement. Exam Context Whilst you will not be required to produce an entire income statement. for example whether or not to buy shares in a company. for example. Prepare extracts of a balance sheet from given information. balance sheet or statement of changes in equity you may be asked to calculate individual elements of each statement.
21: PREPARATION OF FINANCIAL STATEMENTS FOR COMPANIES Overview Income statement Balance sheet Preparation of financial statements for companies Statement of changes in equity Notes to the accounts 21.2 .
a cash flow statement. This accounting standard states what should be included in a set of financial statements and how they should be presented.3 . comprising a summary of significant accounting policies and other explanatory notes. 2 2.2 Introduction As stated in Chapter 20 the financial statements of a limited liability company are subject to regulation and must follow a prescribed format.1 Proforma financial statements Income statement for the year ended 31 March 20X7 Revenue Cost of sales Gross profit Other income Distribution costs Administrative expenses Other expenses Finance costs Investment income Profit before tax Income tax expense Profit for the period $'000 X (X) X X (X) (X) (X) X (X) X X (X) X 21. Much of the prescribed format is determined by IAS 1.21: PREPARATION OF FINANCIAL STATEMENTS FOR COMPANIES 1 1. or changes in equity other than those arising from transactions with equity holders acting in their capacity as equity holders. A complete set of financial statements in accordance with IAS 1 comprises: (a) (b) (c) a balance sheet an income statement a statement showing either: (i) (ii) (d) (e) all changes in equity. and notes.1 1.
4 .2 Balance sheet as at 31 March 20X7 $'000 ASSETS Non-current assets Property. plant and equipment Other intangible assets Current assets Inventories Trade receivables Other current assets Cash and cash equivalents Total assets EQUITY AND LIABILITIES Equity Share capital Share premium account Revaluation reserve Retained earnings Non-current liabilities Long term borrowings Long term provisions Current liabilities Trade payables Short term borrowings Current tax payable Short term provisions Total equity and liabilities X X X X X X X X X X X X X X X X X X X X X 21.21: PREPARATION OF FINANCIAL STATEMENTS FOR COMPANIES 2.
The property.800 4.060 450 550 500 1. The estimate for tax payable on this year's profit is $270.000 was paid in the year but this has not been accounted for. at 30 September 20X6. A dividend of $300. a limited liability company.250 Required Prepare the income statement of Arrow for the year ended 30 September 20X6 and a balance sheet as at that date. Sales Share capital – 50c ordinary shares Share premium account Trade receivables Bad debts written off Bank balance Purchases Revaluation reserve Office expenses Property. No account has been taken of the interest on the loan notes.000 45 835 7.500 200 1. plant and equipment was valued at $5m and this amount needs to be incorporated in the financial statements.200 800 1.000. The issue was fully subscribed and the rights price was $1. plant and equipment 6% loan notes 20X9 Short term warranty provisions Vehicle distribution costs Inventories at 1 October 20X5 Trade payables Administrative staff salaries Retained earnings The following information still needs to be accounted for: (1) (2) (3) (4) (5) (6) (7) During the year the company made a rights issue on a 1 for 6 basis. $'000 12.000.740 1.21: PREPARATION OF FINANCIAL STATEMENTS FOR COMPANIES Lecture example 1 Technique demonstration The following balances have been extracted from the trial balance of Arrow.5 .400 1.000. The warranty provision needs to be increased to $80.200 50 2. 21. Inventories held at the year end amounted to $610.27.
21: PREPARATION OF FINANCIAL STATEMENTS FOR COMPANIES Solution Arrow Income statement for the year ended 30 September 20X6 $'000 Revenue Cost of sales Gross profit Distribution costs Administrative expenses Finance costs Profit before tax Income tax expense Profit for the period Arrow Balance sheet as at 30 September 20X6 $'000 ASSETS Non-current assets Property.6 . plant and equipment Current assets Inventories Trade receivables Cash and cash equivalents Total assets EQUITY AND LIABILITIES EQUITY Share capital Share premium account Revaluation reserve Retained earnings Non-current liabilities Long term borrowings Current liabilities Trade payables Other payables Current tax payable Short term provisions Total equity and liabilities 21.
21: PREPARATION OF FINANCIAL STATEMENTS FOR COMPANIES 21.7 .
In this case it is replaced by the statement of recognised gains and losses as a primary statement. Statement of recognised gains and losses for the year ended 31 March 20X7 Gain on revaluation of properties Tax on items taken directly to equity Net income recognised directly in equity Profit for the period Total recognised income and expense for the period $'000 X (X) X X X 21.8 .4 X X X X X X X (X) X X X X X X X X X X (X) X X Retained Total earnings equity $'000 X (X) X $'000 X (X) X X (X) X X X (X) X X As an alternative the statement of changes in equity may be presented as a note to the financial statements.21: PREPARATION OF FINANCIAL STATEMENTS FOR COMPANIES 2.3 Statement of changes in equity for the year ended 31 March 20X7 Share Share Revalcapital premium uation account reserve $'000 $'000 $'000 Balance at 31 March 20X6 Changes in accounting policies Restated balance Gain on revaluation of properties Tax on items taken directly to equity Net income recognised directly in equity Profit for the period Total recognised income and expense for the period Dividends Issue of share capital Balance at 31 March 20X7 2.
21: PREPARATION OF FINANCIAL STATEMENTS FOR COMPANIES Lecture example 2 Technique demonstration From the trial balance in Lecture example 1.500 200 800 1. produce a statement of changes in equity for Arrow for the year ended 30 September 20X6.9 . Arrow had the following equity balances at 1 October 20X5: Share capital – 50c ordinary shares Share premium account Revaluation reserve Retained earnings Required Using the information from Lecture example 1. plant and equipment Net income recognised directly in equity Profit for the period Total recognised income and expense for the period Dividends Issue of share capital Balance at 30 September 20X6 Share premium account $'000 Revaluation reserve $'000 Retained earnings $'000 Total equity $'000 21. $'000 1.750 Solution Share capital $'000 Balance at 30 September 20X5 Gain on revaluation of property.250 3.
2 Intangible non-current assets (Chapter 10) Development expenditure $ X X (X) (X) X X (X) X X (X) X Net book value at 1 April 20X6 Additions Amortisation charge Disposals Net book value at 31 March 20X7 At 31 March 20X7 Cost Accumulated amortisation Net book value At 31 March 20X6 Cost Accumulated amortisation Net book value 21. You should be aware of the following notes: 3.10 .21: PREPARATION OF FINANCIAL STATEMENTS FOR COMPANIES 3 Notes to the accounts Notes are included in a set of financial statements to give users extra information.1 Property. plant and equipment (Chapter 9) Land and buildings $ X X X (X) (X) X X (X) X X (X) X Machinery $ X X – (X) (X) X X (X) X X (X) X Office equipment $ X X – (X) (X) X X (X) X X (X) X Total $ X X X (X) (X) X X (X) X X (X) X Net book value at 1 April 20X6 Additions Revaluation surplus Depreciation charge Disposals Net book value at 31 March 20X7 At 31 March 20X7 Cost or valuation Accumulated depreciation Net book value At 31 March 20X6 Cost or valuation Accumulated depreciation Net book value 3.
3 Provisions (Chapter 13) At 1 April 20X6 Increase in period Released in period At 31 March 20X7 3.6 Events after the balance sheet date (Chapter 22) In respect of non-adjusting events after the balance sheet date disclose (a) (b) the nature of the event an estimate of its financial effect (or a statement that an estimate cannot be made). 21. The statement of changes in equity shows the movements on each of the accounts in the equity section of the balance sheet in a separate statement. and where practicable an estimate of the financial effect an indication of the uncertainties relating to the amount or timing of any outflow.4 Contingent liabilities (Chapter 13) Unless remote. 4 4. and where practicable an estimate of the financial effect 3. disclose for each contingent liability: (a) (b) (c) (d) 3.21: PREPARATION OF FINANCIAL STATEMENTS FOR COMPANIES 3.2 Summary of Chapter 21 The financial statements produced by a company need to follow the format prescribed by IAS 1. and the possibility of any reimbursement $ X X (X) X Contingent assets (Chapter 13) Where an inflow of economic benefits is probable. an entity should disclose (a) (b) a brief description of its nature.5 a brief description of its nature.11 .1 4.
12 .21: PREPARATION OF FINANCIAL STATEMENTS FOR COMPANIES 21.
13 .Chapter 21: Questions 21.
000 Irrecoverable debts 340 Gross profit for the period 81.000 Share premium account 10.000 $1 ordinary shares 80. Office furniture and equipment is to be depreciated at 15% on cost.440 Land and buildings at valuation 132.200 Insurance 1.000 8% $1 preference shares 40.21: QUESTIONS 21.252 The following information is also available: (1) (2) (3) (4) The land and buildings are to be revalued at $150.108 Vehicles (cost $19.722 Bank balance 7.200 Retained earnings at 1 July 20X7 24.2 Spend Co The following balances remain in the books of Spend Co at 30 June 20X8 after the preparation of the trading account. and vehicles at 20% on cost. The amount for insurance includes a premium of $300 paid in December 20X7 to cover the company against fire loss for the year 1 January 20X8 to 31 December 20X8.200 Trade payables and accruals 13.14 .796 10% debentures 16.000 Inventories at 30 June 20X8 83. (iii) (ii).000. $ Share capital 80. 21.400) 6.216 Debenture interest (½ year to 31 December 20X7) 800 Directors fees 2.640) 27.800 Office furniture and equipment (cost $44. A bill for $348 in respect of electricity consumed up to 30 June 20X8 has not been entered in the ledger.000 Revaluation reserve 30. (iii) All of the above (2 marks) 21.000 General reserve 28.410 Postage and telephone 620 Light and heat 1.500 General expenses 3.852 Trade receivables and prepayments 27.1 Which of the following items impact on the Statement of Changes in Equity? (i) (ii) (iii) (iv) A B C D Issue of ordinary shares Revaluation of a building Profit for the period Revaluation of a non-current asset investment (i) (i).000 40.508 Wages and salaries 28.
000 should be transferred to a general reserve. 21.200 (6) The directors made the following recommendations prior to the year end which have not yet been adjusted for: (i) (ii) $12.000 1.21: QUESTIONS (5) Provisions are to be made for: Directors’ fees Audit fee The outstanding debenture interest. the preference dividend be should accrued for payment. $ 5. Required Prepare the income statement from the gross profit line downwards for the period ended 30 June 20X8 and a balance sheet as at that date (ignore income tax).15 .
21: QUESTIONS 21.16 .
Chapter 21: Answers 21.17 .
696 3.1 21.000 44.18 .592 252.000) Retained earnings (Working) NON-CURRENT LIABILITIES 10% debentures CURRENT LIABILITIES Trade payables and accruals (13.000 + 1.270 292.500 + 5.920 173.600 7.2 D Spend Co Spend Co Income statement for the period ended 30 June 20X8 $ Gross profit for the period Less expenses: Irrecoverable debts Wages and salaries Insurance (1.21: ANSWERS 21.260 620 1.216 + 384) Debenture interest (800 + 800) Directors’ fees (2.896 16.800 40.410 – (300 x 6/12)) Postage and telephone Light and heat (1.040 Acc.000 20.200 + (300 × 6/12)) Cash and cash equivalents EQUITY Share capital 80.744 2.000 47.640 19.000 34.392 16.000 $1 ordinary shares 40.664 83.564 1.800) General reserve (28.400 214.722 + 5.000 21.200 1.000 + 12.000 + 17. Dep'n $ – 23.200 24.662 CURRENT ASSETS Inventories Trade receivables and prepayments (27.480 40.540 $ 81.500 1.968 25.998 292.000 40.796 118.880 55.200 3.200 + 800 + 348) Dividends payable 80.108 6.000 8% $1 preference shares Share premium account Revaluation reserve (30.508 NON-CURRENT ASSETS Land and buildings Furniture and equipment Motor vehicles Cost or Valuation $ 150.376 NBV $ 150.852 27.070 3.350 7.662 21.000) Audit fee General expenses Depreciation: Office furniture and equipment Vehicles Profit for the period Spend Co Balance sheet as at 30 June 20X8 340 28.000 10.
000) 34.200) (12.21: ANSWERS Working Retained earnings Retained earnings at 1 July 20X7 Profit for the period Dividends declared 8% preference dividend Transfer to general reserve Retained earnings at 30 June 20X8 $ 24.540 (3.252 25.592 21.19 .
21: ANSWERS END OF CHAPTER 21.20 .
Classify events as adjusting or non-adjusting. Qualification Context The knowledge in this chapter is tested again at the Professional level paper. Both these types of questions were tested in the Pilot Paper.Events after the balance sheet date Syllabus Guide Detailed Outcomes Having studied this chapter you will be able to: • • • Define an event after the balance sheet date in accordance with International Financial Reporting Standards. Exam Context Questions on this topic are likely to require you to identify adjusting and non-adjusting events from a list of options and the appropriate accounting treatment of each event. 22.1 . Distinguish between how adjusting and non-adjusting events are reported in the financial statements. Corporate Reporting (P2) where you will be expected to consider how events after the balance sheet date may impact the way in which transactions are reported.
22: EVENTS AFTER THE BALANCE SHEET DATE Overview Definition Events after the balance sheet date Adjusting events Non-adjusting events 22.2 .
2 (a) (b) Disclose non-adjusting event in a note to the financial statements Dividends proposed or declared after the balance sheet date but before the financial statements are approved should be disclosed in a note to the financial statements. that occur between the balance sheet date and the date when the financial statements are authorised for issue.2 2 2. • Events that relate to conditions which arose after the balance sheet date • (1) (2) (3) (4) Examples: resolution of a court case bankruptcy of a major customer evidence of NRV of inventories discovery of fraud or errors that show the financial statements were incorrect Examples: (1) destruction of major asset.1 Definition Events after the balance sheet date: events.22: EVENTS AFTER THE BALANCE SHEET DATE 1 1. 1. eg by flood or fire (2) major share transactions (3) announcement of a plan to close part of a business • • Accounting treatment: • Accounting treatment: Change the amounts in the financial statements 2. There are two types of event after the balance sheet date. both favourable and unfavourable.3 . 22. A non-adjusting event that affects going concern becomes an adjusting event.1 Adjusting and non-adjusting events Adjusting events Non-adjusting events • Events which provide evidence of conditions which existed at the balance sheet date.
1 3. Insolvency of a trade receivable with a balance of $200. Declaration of the year-end dividend by the directors. Non-adjusting events relate to conditions which arose after the balance sheet date. These should be disclosed as a note to the financial statements. There are two types: adjusting and non-adjusting. 3.22: EVENTS AFTER THE BALANCE SHEET DATE Lecture example 1 Exam standard for 2 marks Which of the following events after the balance sheet date would normally qualify as a nonadjusting event? 1 2 3 4 A B C D A fall in the market price of shares held by the entity as investments.2 3.3 3.4 . The financial statements should be changed to include this information. 2 only 1 and 3 1. Confirmation of the amount of damages awarded to an employee who sued for unfair dismissal after being sacked two months before the year end. Adjusting events provide evidence of conditions that existed at the balance sheet date.4 22.000 outstanding at the balance sheet date. 3 and 4 2 and 4 Solution 3 Quick Quiz Summary of Chapter 22 Events after the balance sheet date are events which occur between the balance sheet date and the date the financial statements are approved for issue.
Chapter 22: Questions 22.5 .
During the preparation of the financial statements in March 20X8 the following issues arose: (1) Sales of a particular inventory line were poor during the second half of 20X7.6 . Since the year end sales to Sporran Co were $12. Sporran Co is a valued customer which owed A Co $34.000 as a result of this. Events after the balance sheet date.3 1. On 3 March 20X9 the directors of Robin Co were informed that a major customer had gone into liquidation. the directors were informed on 27 February 20X9 that a serious fire at one of the company's factories would stop production there for at least six months to come. how should the two events be treated in the financial statements? Fire A B C D Accounts adjusted Disclosed in notes Accounts adjusted Disclosed in notes Liquidation Disclosed in notes Disclosed in notes Accounts adjusted Accounts adjusted (2 marks) 22. The financial statements for the year ended 31 December 20X8 were approved on 20 March 20X9. The company will suffer a net loss of $55.000. In accordance with IAS 10. The directors have just received notification that Sporran Co has gone into liquidation.3 A Co has a year end of 31 December 20X7. 3 Non-adjusting event 1 3 2 (2 marks) (2) (3) How should the above events be classified according to IAS 10 Events after the balance sheet date? 22. The directors had hoped that sales would pick up in 20X8 but it is now apparent that the inventory will need to be marked down below their original cost in order to sell them. (2) and (3) (1) and (2) (1) and (3) (2) and (3) (2 marks) Which of the examples given should normally be classified as an adjusting event? 22. On 12 February 20X8 one of the company's production plants was struck by lightening. 2 1.000 at the balance sheet date.1 The following are examples of events which might occur between the balance sheet date and the date on which the financial statements are authorised for issue: (1) (2) (3) A B C D Losses on inventories as a result of a catastrophe such as a fire or flood after the year end The discovery of fraud which shows that the financial statements were incorrect Revaluations of property which provide evidence of an impairment in value (1). Adjusting event A B C D 2.3 1. The liquidator was pessimistic about the prospect of recovering anything for unsecured creditors.22: QUESTIONS 22. 2. although they were behind with their payments.2 Robin Co has a year end of 31 December 20X8.
Chapter 22: Answers 22.7 .
22: ANSWERS 22.1 D (1) (2) (3) After the balance sheet date and therefore non-adjusting. It is therefore only disclosed in a note to the financial statements unless it threatens the company's going concern in which case it would become an adjusting event.8 .3 C END OF CHAPTER 22. We simply did not find out until later. therefore clearly we must adjust.2 D The fire is a non-adjusting event as it does not affect the value of the building at 31 December 20X8. We simply did not know this and therefore it is an adjusting event and it should be adjusted for. 22. The customer is assumed to be insolvent at 31 December 20X8. The financial statements are incorrect. The impairment is assumed to have taken place by the balance sheet date. 22.
Exam Context Questions on this chapter are likely to focus on whether you can identify which items should and should not go into the cash flow statement and also on performing basic calculations.Cash flow statements Syllabus Guide Detailed Outcomes Having studied this chapter you will be able to: • • • • • • Differentiate between profit and cash flows and understand the need for management to control cash flow. This is likely to involve more complex areas such as cash flows related to non-current assets held on finance leases. Calculate the cash flow from operating activities using the direct and indirect method.1 . Business Context The ability to generate cash is key to the survival of an entity. You will also need to be able to interpret a cash flow. Whilst directors may use cash budgets to estimate future cash flows. Qualification Context The knowledge covered in this chapter is developed in the Fundamentals level paper Financial Reporting (F7) where you will have to produce a cash flow statement in full. Calculate the figures needed for the cash flow statement including cash flows from operating. Cash is not subject to manipulation through an entity's choice of accounting policies. Recognise the benefits and drawbacks to users of the financial statements of a cash flow statement. you may be asked to calculate figures such as the cash generated from operations from given information or the cash paid to acquire property. 23. Group cash flows are examined in the Professional level paper Corporate Reporting (P2). Classify the effect of transactions on cash flows and how they should be treated in a company's cash flow statement. plant and equipment. It is therefore a reliable measure of performance that is relevant to users of the financial statements. For example. the cash flow statement shows an historic record of how cash has been generated and where it was spent. investing and financing activities. Prepare extracts from cash flow statements from given information.
2 .23: CASH FLOW STATEMENTS Overview Cash Cash equivalents Cash flows Cash flow statements IAS 7 Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities Indirect method Direct method 23.
as opposed to income statements and balance sheets which are subject to manipulation by the use of different accounting policies.2 (a) Cash (b) Cash equivalents • • cash on hand demand deposits • • • short term.1 IAS 7: Cash flow statements IAS 7 splits cash flows into the following headings: • • • Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities Definitions 2. 2 2.23: CASH FLOW STATEMENTS 1 1. It is thought that users of accounts can readily understand cash flows.1 Purpose To show the effect of a company’s commercial transactions on its cash balance. highly liquid investments readily convertible to known amounts of cash insignificant risk of changes in value eg current asset investments (shares) (c) Cash flows • inflows and outflows of cash and cash equivalents 23.3 . Cash flows are used as an investment appraisal method such as net present value and hence a cash flow statement gives potential investors a method with which to evaluate a business.
plant and equipment Proceeds from sale of equipment Interest received Dividends received Net cash used in investing activities Cash flows from financing activities Proceeds from issue of share capital Proceeds from long-term borrowings Dividends paid* Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period * This could also be shown as an operating cash flow.050 (1.290) (790) 110 120 230 (900) 20 200 200 (480) 3.3 XYZ CO Cash flow statement for the year ended 31 December 20X7 (indirect method) $000 Cash flows from operating activities Profit before taxation Adjustment for: Depreciation Investment income Interest expense Increase in trade and other receivables Decrease in inventories Decrease in trade payables Cash generated from operations Interest paid Income taxes paid Net cash from operating activities Cash flows from investing activities Purchase of property.390 450 (500) 400 3.23: CASH FLOW STATEMENTS 2.4 .740) 2.740 (500) 1.550 (270) (900) 1. 250 250 (1.380 $000 23.
or The indirect method (as above).5 . This is best achieved by putting the relevant figures into a 'T' account working.23: CASH FLOW STATEMENTS 3 3. An entity should report cash flows from operating activities using either: (a) (b) The direct method.000. Required What is the amount of income taxes paid during the year? Workings Income tax payable $'000 $ $'000 23. whereby reported profit or loss is adjusted for the effects of transactions of a non cash nature. Income taxes paid 3. Preparation question Lecture example 1 In the balance sheets of Tacks Co as at 31 December 20X9 and 31 December 20X8 were the following amounts for income tax payable.1 Cash flows from operating activities These represent cash flows derived from operating or trading activities.1).2 Income taxes paid may need to be calculated from other data given to you.000 168. whereby major classes of gross cash receipts and payments are disclosed (preferred method per IAS 7 – see Section 6.000 Income tax payable The income statement tax charge for 20X9 amounted to $104. any accruals or prepayments of operating expenses. 31 December 20X9 20X8 $ $ 156.1 Section 1. and items relating to investing or financing cash flows.7.
000 120.000 which had originally cost $20.000 111.e. $ 280.7.6 . i. This section shows the extent to which expenditures have been made for resources intended to generate future income and cash flows. dividends and interest.000 at the time of sale.000 80.2 Cash flows from investing activities The cash flows included in this section are those related to the acquisition or disposal of any non-current assets or investments together with returns received in cash from investments.1 Section 1. (The balance sheet values shown above do not show that this sale has taken place. Preparation question Lecture example 2 On 31 December 20X8 the value of plant and equipment in the books of Erosion Co was as follows: Plant and equipment at cost Accumulated depreciation Plant and equipment at net book value $ 200. plant and equipment which would appear in a cash flow statement for Erosion Co in 20X9.) On 31 December 20X9 the value of plant and equipment in the balance sheet was: Plant and equipment at cost Accumulated depreciation Plant and equipment at net book value Required Show the relevant entries for property.000 when new.000 169.000 Solution Workings Plant & equipment – cost $'000 $'000 Accumulated depreciation $'000 $'000 23.23: CASH FLOW STATEMENTS 4 4. but had a net book value of $11.000 On 1 January 20X9 an item of plant was sold for $8.
bonds. loans.7.1 Section 1. Examples of financing cash flows are: • • • • Cash proceeds from issuing shares Cash proceeds from issuing debentures. notes.2 The cash outflows included in dividends paid are dividends paid on the reporting company's equity shares.23: CASH FLOW STATEMENTS 5 5. Preparation question Lecture example 3 20X9 $'000 45 Distribution Co balance sheet extract for the year ended 31 December 20X9 20X8 $'000 35 Dividends payable Dividends charged to retained earnings were $60.000.7 . Dividends paid 5. Required What are the dividends paid during the year ended 31 December 20X9? Workings Dividends payable $'000 $ $'000 23.3 Cash flows from financing activities Financing cash flows comprise receipts from or repayments to external providers of finance in respect of principal amounts of finance. mortgages and other short or long term borrowings Cash repayments of amounts borrowed Dividends paid to shareholders In order to calculate such figures the closing balance sheet figure for debt or share capital and share premium is compared with the opening position for the same items.
017 250 70 110 314 744 80 136 39 18 – 193 1.8 .23: CASH FLOW STATEMENTS Lecture example 4 Balance sheets as at 31 December 20X8 $'000 Non-current assets Property. plant and equipment Current assets: Inventories Trade receivables Cash 628 214 168 7 389 1.017 Technique question The summarised accounts of the Emma Co for the year ended 31 December 20X8 are as follows: 20X7 $'000 514 210 147 – 357 871 200 60 100 282 642 50 121 28 16 14 179 871 $'000 600 319 281 186 8 87 31 56 Equity Share capital ($1 ordinary shares) Share premium account Revaluation reserve Retained earnings Non-current liabilities 10% debentures Current liabilities Trade payables Income tax payable Dividends payable Overdraft Income statement for the year ended 31 December 20X8 Revenue Cost of sales Gross profit Other expenses (including depreciation of $42.000) Finance costs (interest paid) Profit before tax Income tax expense Profit for the period 23.
Required Produce a cash flow statement for Emma Co for the year ended 31 December 20X8. plant and equipment during the year. The new debentures were issued on 1 January 20X8. plant and equipment Net cash used in investing activities Cash flows from financing activities Proceeds from issue of shares Proceeds from issue of debentures Dividends paid Net cash from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year $’000 23.23: CASH FLOW STATEMENTS Statement of changes in equity (extract) Balance at 31 December 20X7 Profit for the period Dividends Balance at 31 December 20X8 Retained earnings $000 282 56 (24) 314 You are additionally informed that there have been no disposals of property. Solution EMMA CO Cash flow statement for the year ended 31 December 20X8 $’000 Cash flows from operating activities Profit before taxation Adjustments for: Depreciation Interest expense Increase in trade receivables Increase in inventories Increase in trade payables Cash generated from operations Interest paid Income taxes paid Net cash from operating activities Cash flows from investing activities Purchase of property.9 .
10 .23: CASH FLOW STATEMENTS Workings 23.
23: CASH FLOW STATEMENTS 6 6. The operating element of the cash flow statement should be shown as follows: $000 Cash flows from operating activities Cash receipts from customers Cash payments to suppliers and employees Cash generated from operations Interest paid Income taxes paid Net cash from operating activities 30.600) 2. 23.4 This represents cash flows made during the accounting period in respect of goods and services and amounts paid to employees. IAS 7 has two methods available under which the cash flow statement can be prepared: • • indirect method (seen previously) direct method 6. Cash payments to suppliers and employees 6.11 .2 The only difference is the direct method derives the 'cash generated from operations' figure in a different way.150 (27.1 Cash flows from operating activities using the direct method As noted in Section 3.1.380 $000 Cash received from customers 6.550 (270) (900) 1.3 This represents cash flows received during the accounting period in respect of sales.
12 .23: CASH FLOW STATEMENTS Lecture example 5 Required Technique question Using the information in Lecture example 4 produce the 'cash flows from operating activities' section of the cash flow statement using the direct method. Solution EMMA CO Cash flow statement for year ended 31 December 20X8 (extract) $ Cash flows from operating activities Cash receipts from customers Cash payments to suppliers and employees Cash generated from operations Interest paid Income taxes paid Net cash used in operating activities $ 23.
23: CASH FLOW STATEMENTS 7 7.13 .3 23.1 Quick Quiz Summary of Chapter 23 The cash flow statement shows the movement between a company’s cash and cash equivalents at the beginning and the end of the year.2 7. Cash equivalents are short term. Cash comprises cash on hand and on demand deposits. 7. The cash flow categorises cash flows under one of three headings: cash flows from operating activities. highly liquid investments such as shares held as a current asset investment. cash flows from investing activities and cash flows from financing activities.
14 .23: CASH FLOW STATEMENTS 23.
Chapter 23: Questions 23.15 .
000 and then revalued on 30 June 20X7 by $95.000 105.000 The building element of the freehold property was depreciated by $6.000.000 of depreciation had been charged. which had cost $49. A B 23. plant and equipment? $ (2 marks) What is the total expenditure on property.750 23. was disposed of in November 20X6 for $8. plant and equipment included under ‘cash flows from investing activities’? $ (2 marks) In a cash flow statement.000 90.230. Plant and equipment.250 (2 marks) 31 October 20X7 9.000.500. What will appear as “dividends paid” in the cash flow statement for the year ended 31 October 20X7? A B C D $5.5 True False (1 mark) These extracts have been taken from the accounts of Jeanne Co.000 465.000 20X6 $ 750.500 $15.000. Depreciation on the plant and equipment for the year amounted to $37.000 when purchased in January 20X2 on which $35.3 Extracts from a company’s balance sheets show the following items of property.750 31 October 20X6 5. plant and equipment at net book value: 30 June 20X7 $ Property.16 . Depreciation of $55.750 $11.2 23.500 $21. a decrease in loan stock would be shown as a cash inflow under 'cash flows from financing activities'. plant and equipment Freehold property Plant and equipment Furniture and fixtures 1.4 What is the total figure to be adjusted for in ‘cash flows from operating activities’ in respect of property.23: QUESTIONS 23.3 23. Balance sheet (extracts) Current liabilities Dividends payable Dividends charged to retained earnings during the year were $15.2 and 23.1 In a cash flow statement which of the items below would not appear as an outflow of cash? A B C The nominal value of debenture redeemed at par during the year The dividends paid to preference shareholders during the year The income statement charge for tax for the year (1 mark) Data for Questions 23. 23.000 380.000 has been charged on furniture and fixtures.
553 1. plant and equipment Development expenditure Investments Current assets Inventories Trade receivables Short-term investments Cash in hand Total assets Equity Share capital ($1 ordinary shares) Share premium account Revaluation reserve Retained earnings Non-current liabilities Long term loan Current liabilities Trade payables Bank overdraft Income tax payable Dividends payable Total equity and liabilities 20X7 $’000 380 250 – 630 150 390 50 2 592 1.23: QUESTIONS 23.6 Jane Co Income statement for the year ended 31 December 20X2 Revenue Cost of sales Gross profit Distribution costs Administrative expenses Investment income Finance costs Profit before tax Income tax expense Profit for the period Balance sheet as at 31 December Non-current assets Property.17 .222 200 160 100 160 620 100 127 85 190 100 502 1.222 $’000 2.814 739 125 264 25 75 300 140 160 20X6 $’000 305 200 25 530 102 315 – 1 418 948 150 150 91 100 491 – 119 98 160 80 457 948 23.
with an original cost of $85. The current asset investments fall within the definition of cash equivalents under IAS 7.000 during the year. were sold for $32. Dividends charged to retained earnings were $100. Required Prepare a cash flow statement for the year to 31 December 20X7.000. Development expenditure has not yet started being amortised. Furniture and fixtures.000.000 in 20X7. 23.000 $1 ordinary shares were issued during the year at a premium of 20c per share. The following information relates to property.23: QUESTIONS The following information is available: (a) (b) (c) (d) The proceeds of the sale of non-current asset investments amounted to $30.18 . plant and equipment: 20X7 $’000 720 340 380 20X6 $’000 595 290 305 Cost Accumulated depreciation Net book value (e) (f) (g) 50.000 and a net book value of $45.
Chapter 23: Answers 23.19 .
750 21.3 $567.1 C Income tax paid is a cash flow not the income statement tax charge.4 B Dividends payable $ Balance b/d ∴ Paid Balance c/d 11.5 B $ 5. plant and equipment Bal b/d Freehold property Plant & Equipment Furniture & Fixtures $’000 750 380 105 $’000 Disposal – Plant & Equipment (49 – 35) Depreciation Freehold property 6 Plant & Equipment 37 Furniture & Fixtures 55 Bal c/d Freehold property Plant & Equipment Furniture & Fixtures 14 Revaluation Freehold property ∴ Acquisitions 95 567 1.897 $’000 98 6 104 Total adjustments in the reconciliation: Depreciation Loss on disposal of plant and equipment (8 – 14) 23. 23.23: ANSWERS 23.250 23.500 Retained earnings 9.000 Property.230 465 90 1.2 $104.897 98 1.250 23.500 21.20 .750 15.000 See previous calculation 23.
plant and equipment Proceeds from sale of non-current asset investments Payments for development expenditure (W3) Net cash used in investing activities Cash flows from financing activities Proceeds from issue of ordinary share capital Proceeds from long term loan Dividends paid (W5) Net cash from financing activities Increase in cash and cash equivalents Cash and cash equivalents at beginning of period (1 – 98) Cash and cash equivalents at end of period (50 + 2 – 85) Workings (W1) Property.Accumulated depreciation Disposals (85 – 45) Balance c/d $’000 40 340 380 Balance b/d ∴Depreciation charge $’000 290 90 380 23. plant and equipment .23: ANSWERS 23. plant and equipment (W1) Proceeds from sale of property.21 . plant and equipment – cost Balance b/d Revaluation (100 – 91) Additions (bal fig) $’000 595 9 201 805 Disposals Balance c/d $’000 85 720 805 60 100 (80) 80 64 (97) (33) (201) 32 30 (50) (189) $’000 300 90 13 (5) (25) 75 448 (75) (48) 8 333 25 (75) (110) 173 $’000 (W2) Property. plant and equipment (45 – 32) Profit on sale of non-current asset investments (30 – 25) Investment income Finance costs Increase in trade receivables (390 – 315) Increase in inventories (150 – 102) Increase in trade payables (127 – 119) Cash generated from operations Interest received Interest paid Income taxes paid (W4) Net cash from operating activities Cash flows from investing activities Purchase of property.6 Jane Co Cash flow statement for the year ended 31 December 20X7 Cash flows from operating activities Profit before taxation Adjustments for: Depreciation (W2) Loss on sale of property.
23: ANSWERS (W3) Development expenditure Balance b/d ∴ additions $’000 200 50 250 $’000 Balance c/d 250 250 (W4) Income tax payable ∴ Income tax paid Balance c/d $’000 110 190 300 Balance b/d Income statement $’000 160 140 300 (W5) Dividends payable ∴ Dividends paid Balance c/d $’000 80 100 180 Balance b/d Retained earnings $’000 80 100 180 END OF CHAPTER 23.22 .
Home study chapter – Information technology Syllabus Guide Detailed Outcomes Having studied this chapter you will be able to: • • • • Understanding the basic function and form of accounting records in manual and computerised systems. Understand the uses of integrated accounting software packages. 24. Compare manual and computerised systems and identify advantages and disadvantages of computerised accounting systems. Qualification Context The importance of accounting systems and internal controls is tested in the Fundamentals level paper. Exam Context Questions on this topic are likely to focus on the advantages and disadvantages of using a computerised system and the differences between a manual and a computerised system. Understand business use of computers and the nature and purpose of spreadsheets and database systems. Accountant in Business (F1).1 .
2 .24: HOME STUDY CHAPTER – INFORMATION TECHNOLOGY Overview Integrated software Computerised accounting packages Accounting modules Information technology Databases Spreadsheets 24.
2. General software. for example spreadsheets which can be used to keep accounting records.1 1. 2 2. although some smaller businesses may keep manual records. The same principles of double entry are used regardless of whether an accounting system is manual or computerised. Advantages (1) Large amounts of data can be processed very quickly (2) Computerised systems are more accurate (3) Large volumes of data can be processed (4) Little training is required (5) Computer can analyse data into tailored reports Disadvantages (1) Time and cost in setting up the system and staff training (2) Need for internal controls and security checks to ensure the accuracy of data (3) Lack of 'audit trail' (4) Staff may resist the introduction of a computerised system 3 3.1 Accounting packages There are two main types of computerised accounting packages: (a) (b) Dedicated accounting packages. for example SAGE.2 Advantages and disadvantages of computerised accounting packages.3 .24: HOME STUDY CHAPTER – INFORMATION TECHNOLOGY 1 1.2 Accounting modules Accounting module – a program which deals with one part of a business' accounting system Examples of modules include: (a) (b) (c) (d) (e) (f) Invoicing Receivables ledger Nominal ledger Payroll Cash book Non-current asset register Definition 24.2 Introduction In today's world most businesses use accounting systems which are computerised.1 3.
2 Databases A database is a 'pool of data' which can be used by any number of applications. The invoicing module may be integrated with the inventory. Advantages (1) An entry in one module automatically updates all the others Reports generated by the system can draw information from all relevant modules Reduction in clerical time used to input information and errors Disadvantages (1) These systems require more memory than a stand-alone system so there is less space to store actual data Each module may be limited to fewer functions than a specialised module (because one program is doing everything) An error in one part of the system will flow through to all areas (2) (2) (3) (3) 4 4.3 Section 1.1 4.4 Advantages and disadvantages of integrated software. Examples: (a) (b) (c) Non-current asset register List of customers/suppliers Price lists Definition 24. Examples: (a) The payroll module may be integrated with the nominal ledger module so that once the payroll information is determined the associated wages expense is updated in the nominal ledger. (b) 3. receivables ledger and nominal ledger modules so that once an invoice is sent the inventory levels are updated as is the customer's account in the receivables ledger.4 .5 Each module may be integrated with other modules so that when information is recorded in one module it is automatically updated in another module.24: HOME STUDY CHAPTER – INFORMATION TECHNOLOGY Integrated software 3.
Uses of spreadsheets by the accounting function: (a) (b) (c) (d) To maintain accounting records.3 A database should have four major objectives. For example. the accounts department may be interested predominantly in the net book value of the non-current assets but the production manager will need to know their whereabouts in order to schedule jobs efficiently (d) The database must be able to grow and develop according to the needs of the business It should be shared 5 5.5 .1 5. predominantly to perform numerical calculations.24: HOME STUDY CHAPTER – INFORMATION TECHNOLOGY Lecture example 1 Idea generation What sort of information might be contained in a database file for a non-current asset register? Solution 4.2 Spreadsheets Spreadsheets are essentially an electronic piece of paper. (a) (b) (c) – different individuals should be able to access the same information Its integrity must be preserved – only valid alterations to information should be made It should meet the needs of different users. They are used in all parts of a business. for example a cash book To produce financial statements To produce budgets/forecasts To conduct variance analysis 24.
An accounting module is a program which deals with one part of a business’ accounting system. These modules may or may not be integrated with other modules.3 24.2 6.24: HOME STUDY CHAPTER – INFORMATION TECHNOLOGY 6 Quick Quiz Summary of Chapter 24 There are two main types of accounting packages: dedicated packages and general software.6 . Databases and spreadsheets are electronic ways of holding and manipulating information.1 6. 6.
Chapter 24: Questions 24.7 .
2 If a database is to contain accurate and valid information it should only be amended by authorised personnel.8 . Is this statement true or false? A B True False (1 mark) 24. Is this statement true or false? A B True False (1 mark) 24.1 All businesses will apply the same principles of double entry bookkeeping regardless of whether they operate a manual or a computerised system.24: QUESTIONS 24.
9 .Chapter 24: Answers 24.
10 .1 24.24: ANSWERS 24.2 A A END OF CHAPTER 24.
Answers to Lecture Examples 25.1 .
25: ANSWERS TO LECTURE EXAMPLES Chapter 1 Answer to Lecture Example 1 Users of financial information (a) Investors – – – – – (b) – – – – – – (c) – – – (d) – – – (e) – – (f) – – – – – – – – (g) – – – Profitability Future prospects Likely risk and return Chance of capital growth Ability to pay dividends Profitability Long-term growth Security of their job Likelihood of bonus Number of employees Ability to pay retirement benefits Whether return on finance will continue to be met Other providers and security of their debt Likelihood of repayment of capital amount Likelihood of payment on time Likelihood of payment at all Whether they should continue to supply Ability of entity to continue supplying Profitability as a measure of value for money of goods bought Statistics Size of company Growth rates Average payment periods Foreign trade Profits made Corporate income tax liability Sales tax liability Contribution to local economy Information about trends in the prosperity of the entity Range of activities provided Employees Lenders Suppliers Customers Government and their agencies Public 25.2 .
Using current market values for the building may lead to volatility in asset values due to changing market prices. This makes comparability more difficult. Disadvantages of historic cost (1) (2) Answer to Lecture Example 2 (a) (b) Historic cost is $1. Profits will therefore look artificially high.000 Net realisable value is Selling price (100 × $11) Less: completion costs (100 × $2) (c) Show inventory at the lower of cost and net realisable value = $900. $ 1.25: ANSWERS TO LECTURE EXAMPLES Chapter 2 Answer to Lecture Example 1 A The IASCF appoints members to the IASB. Any change in the asset's value will affect the amount of depreciation charged and therefore the entity's profits. Asset values generally appreciate over time and so using historic cost will mean that the financial statements contain information which is out of date and therefore less useful for decision making. The SAC advises the IASB on its agenda. Answer to Lecture Example 2 A Chapter 3 Answer to Lecture Example 1 Advantages of historic cost (1) (2) (3) The transaction cost of $1 million is a very reliable figure which was quantified at the date of acquisition. IFRIC and SAC. Sales revenue and costs will be shown at current prices but depreciation will be based on historic cost and therefore too low a figure.100 (200) 900 25.3 .
25: ANSWERS TO LECTURE EXAMPLES Chapter 4 Answer to Lecture Example 1 Own Examples: (i) (ii) (iii) Owe Examples: (i) (ii) (iii) Mortgage Car loan Credit card House Car Cash Chapter 5 Answer to Lecture Example 1 Transaction (a) (b) (c) (d) (e) (f) (g) (h) Sales for cash Sales on credit Purchases for cash Purchases on credit Pay electricity bill Receive cash from a credit customer Pay cash to a credit supplier Borrow money from the bank Debit Cash increase asset Receivables increase asset Purchases expense Purchases expense Electricity expense Cash increase assets Payables decrease liability Cash increase asset Credit Sales income Sales income Cash decrease asset Payables increase liability Cash decrease asset Receivables decrease assets Cash decrease asset Loan increase liability 25.4 .
000 $ Capital $ Cash Trade payables $ Purchases Purchases $ 2.000 2.750 2.100 Rent Electricity Car Drawings $ 500 200 1.100 Answer to Lecture Example 3 Dr 2/1 10/1 Sales Sales $ 500 500 1.25: ANSWERS TO LECTURE EXAMPLES Answer to Lecture Example 2 Cash Capital Sales $ 5.000 $ 2.000 Rent Cash $ 500 Electricity $ 200 Car Cash $ 1.750 Sales $ Trade receivables Cash Trade payables $ Cash $ $ Cash $ Sales $ $ 1.000 Drawings $ 300 Trade receivables $ 1.5 .000 Cr 25.000 Bal b/d 650 Cash 1/1 Purchases 25/1 Telephone Bal c/d $ 300 50 650 1.000 300 $ 5.
000 Bal c/d Trade Payables Bal b/d Cash Bal b/d Sales Bal b/d 25.000 $ 2.000 2.000 5.000 Rent Cash Bal b/d $ 500 500 Electricity Cash Bal b/d $ 200 200 Car Cash Bal b/d $ 1.100 7.000 Cash Bal b/d Trade payables $ 2.000 Drawings $ 300 Bal c/d 300 Trade receivables $ 1.100 Bal b/d 5.000 Purchases 2.750 Bal c/d 1.6 .000 5.000 2.750 $ 1.000 300 5.100 Rent Electricity Car Drawings Bal c/d $ 500 200 1.100 7.25: ANSWERS TO LECTURE EXAMPLES Answer to Lecture Example 4 Cash Capital Sales $ 5.000 2.000 $ 2.000 5.100 Capital Bal c/d $ 5.000 1.000 Bal c/d 2.000 Bal b/d Purchases $ 2.000 Bal c/d $ 200 Bal c/d $ 500 $ 5.750 $ 300 Bal c/d $ 1.
000 2.100 3.750 2.850 10.000 Bal c/d 2.850 $ 2.850 Debit $ 5.000 2.000 Creditors Bal b/d Electricity Cash Bal b/d Bal c/d Income statement Sales Bal c/d Trade receivables Cash Bal b/d 25.850 3.850 3.850 Income statement 3.000 500 200 1.750 10.000 300 1.750 2.000 $ 500 500 $ 200 200 $ 3.850 Credit $ 5.850 3.100 3.000 3.850 3.850 Bal b/d Trade receivables Cash $ 1.850 Income statement Rent Cash Bal b/d Bal c/d Income statement $ 500 500 $ 200 200 $ 1.850 Chapter 6 Answer to Lecture Example 1 Trial Balance Cash Capital Trade payables Purchases Rent Electricity Car Drawings Trade receivables Sales Purchases $ 2.100 2.25: ANSWERS TO LECTURE EXAMPLES Sales Bal c/d $ 3.7 .
850 2.750 2.8 .400 $ $ 3.000 ( 250) 1.400 2.100 2.100 Closing inventory 4.100 500 Gross profit b/d 200 1.100 2.100 25.100 Net profit b/d $ 3.100 1.850 250 4.25: ANSWERS TO LECTURE EXAMPLES Answer to Lecture Example 2 Colin Income Statement Sales (20 telephones) Cost of sales Purchases (50 telephones) Less: closing inventories (30 telephones) Gross profit $ 1.400 Answer to Lecture Example 4 (e) DOUGLAS INCOME STATEMENT FOR THE MONTH OF JANUARY Sales Less cost of sales: Purchases Less: closing inventories Gross profit Less expenses: Rent Electricity Net profit 500 200 (700) 1.000 Sales 2.000 (600) 400 200 $ 600 Answer to Lecture Example 3 Purchases Gross profit c/d Rent Electricity Net profit c/d Income Statement $ 2.
100 8.100 7.750 5.400 Purchases Gross profit c/d Rent Electricity Net profit c/d Capital Answer to Lecture Example 6 Assets = capital + (profit – drawings) + payables 8.000 1.400 2.400 6.000 8.400 – 300) + 2.000 Sales 2.400 6.100 2.000 5.100 Answer to Lecture Example 5 Cash Bal b/d Drawings $ 300 Bal c/d 300 Capital Income statement $ 2.9 .100 = 5.100 2.000 25.400 Cash Balance b/d Net profit Balance b/d $ 5.000 250 1.100 $ 300 300 $ 3.100 500 Gross profit b/d 200 1.100 1.850 250 4.100 2.25: ANSWERS TO LECTURE EXAMPLES DOUGLAS BALANCE SHEET AS AT 31 JANUARY NON-CURRENT ASSET Motor vehicle CURRENT ASSETS Inventories Trade receivables Cash $ $ 1.100 1.100 $ PROPRIETOR’S INTEREST Capital introduced on 1 January Profit for the year Less: drawings Balance 31 January CURRENT LIABILITIES Trade payables $ 5.400 300 6.400 Net profit b/d Capital Balance c/d Drawings Balance c/d $ 5.000 300 6.100 6.000 1.100 Closing inventory 4.000 + (1.
725 Trade payables Sales tax control a/c $ 150 Trade rec. Administrative overheads do not relate to production and cannot therefore be included. Answer to Lecture Example 2 Net realisable value is: Estimated selling price Less: costs of completion Less: selling costs $ 35 (12) (1) 22 25. $ 1.50 22.25: ANSWERS TO LECTURE EXAMPLES Chapter 7 Answer to Exercise (1) (2) Factory buys raw material Manufactures goods and sells to wholesaler Net $ 100 250 Sales tax $ 15.150 Trade receivables Sales $ 1.000 Trade payables Purchases $ 1. $ 225 Sales $ Trade rec.00 Gross $ 115.50 37.500 Chapter 8 Answer to Lecture Example 1 C Transport costs to deliver goods to customers are an example of carriage outwards and should not be included.10 .00 287.50 Due to sales tax authority Answer to Lecture Example 1 Purchases $ Trade payables 1. The depreciation of the factory machine is a production overhead and should be included.
24 b/f Purchase Sale Purchase Sale Purchase Sale 200 300 500 (280) 220 350 570 (400) 170 250 420 (80) 340 (W2) $6.337 570 Cost $ 10.85 Cost of Sales $ (W1) 10.00 = $3.337 (4.X2 14.160 $5.11 .1.12 (W3) 25.312 4.250 5.943) 2.943 4.139 (979) 4.245 Average Unit Cost $ Total Cost $ 2.139 420 = $12.50 = $1.X2 $5.1.X2 10.00 10.025 6.1.285 Cost of sales (FIFO) Opening inventories (200 x $10) Purchases Less: closing inventories (b) Closing inventories and cost of sales (AVCO) Units 1.50 (W2) 11.1.51 = $11.1.X2 20.255 500 25 Jan 250 250 @ $13.51 11.530 (4.X2 25.24 979 8.12 13.X2 28.X2 21.1.370 (W1) = $10.000 10.448 (W3) 12.035 $4.530 12.51 10.24 12.1.889 3.448) 1.250 $ 2.255 (2.285) 8.12 11.25: ANSWERS TO LECTURE EXAMPLES Answer to Lecture Example 3 (a) Closing inventories (FIFO) Purchases Opening inventories 200 Sales 14 Jan 21 Jan 28 Jan (200) Nil 10 Jan 300 (80) (220) Nil 20 Jan 350 (180) (80) Nil @ $11.000 3.255 5.00 2.
Answer to Lecture Example 3 Straight line method: (a) Depreciation charge = = (b) Year 1 2 3 Cost $ 2.750 1.160 1. computers Answer to Lecture Example 2 B The cost capitalised should include the purchase price ($20.500 .000 – 3.400) (6.400 3. The cost of the maintenance contract should be shown as an expense in the income statement.$250 3 years $750 per annum Accumulated depreciation $ 750 1.500 2.440 864 Accumulated depreciation $ 2.12 .250 NBV $ 1.296 Answer to Lecture Example 5 (a) Journal entry Depreciation expense Accumulated depreciation Being annual depreciation charged on machine Debit $ 750 Credit $ 750 25.000 – 2.25: ANSWERS TO LECTURE EXAMPLES Chapter 9 Answer to Lecture Example 1 Examples include: (a) (b) (c) (d) Land and buildings Plant and equipment Motor vehicles Furniture and fittings.704 NBV c/d $ 3.840 4.500 2.840) Dep’n rate × 40% × 40% × 40% Dep’n expense $ 2.500 $2.500 2.000 250 Answer to Lecture Example 4 Reducing balance method: NBV b/d Year 1 Year 2 Year 3 (6.000 – 0) (6.000) plus all directly attributable costs (delivery and installation).600 2.400 1.
250 25.500 2.500 1.500 2.500 Bal c/d 2.250 2.000 250 750 Year 2 $ 750 Year 3 $ 750 Year 3 Bal b/d Depreciation expense Year 1 Year 2 Depreciation expense Bal b/d Depreciation expense $ 750 750 750 1.500 2.500 1.500 Depreciation expense (I/S) $ Year 1 Year 2 Year 3 Accumulated dep’n Accumulated dep’n Accumulated dep’n 750 750 750 Year 1 Year 2 Year 3 I/S I/S I/S $ 750 750 750 Accumulated depreciation (B/S) $ Bal c/d Bal c/d 750 1.750 1.250) Net Book Value $ 1.500 750 2.500 2.25: ANSWERS TO LECTURE EXAMPLES (b) Accounting for depreciation: Machine (B/S) $ Cash Bal b/d 2.500 Bal c/d $ 2.13 .250 (c) Income statement (extracts): Year 1 $ Expenses Depreciation Balance sheet (extracts): Cost (Year 1) (Year 2) (Year 3) Machine Machine Machine $ 2.500) (2.500 2.500 Accumulated Depreciation $ (750) (1.
000 (a) Disposal account $ 6.840 Disposal account (a) Machine Balance = profit on disposal (I/S) $ 6.000 10.000 10.000 10.000 – $3.000 $ 3.000 Answer to Lecture Example 7 (a) (b) The profit on disposal is still $840.840 (c) Cash $ 3.25: ANSWERS TO LECTURE EXAMPLES Answer to Lecture Example 6 (a) Sales proceeds NBV at end of year 2 (b) Machine (B/S) Bal b/d $ 6.840 Accumulated dep’n 3. the only difference is that the proceeds were not received in cash.000 25.000 (2.840 New machine (B/S) (c) Disposal account Cash Bal b/d $ 3.000) Old machine (B/S) Bal b/d $ 6.000 840 (b) 6. but in the form of a part exchange allowance.840 6.14 . Cash paid for the new machine is $7.840 Bal b/d $ 3.160) 840 Accumulated depreciation (B/S) $ (b) Disposal account 3.840 Bal b/d $ 3.000 ($10.000 7.000 Accumulated depreciation (B/S) (b) Disposal account $ 3.000 Bal c/d $ 10.000 (a) Disposal account $ 6.
000 20.000 150.000 50.000 $ 50.000 Accumulated depreciation $ 8.000 150.000 0 25.840 (c) (b) New machine (part exchange) Accumulated depreciation $ 3.000 NBV $ 32.000 Revaluation reserve Accumulated depreciation (B/S) $ 20.750 40 years Answer to Lecture Example 9 Review of useful life: Year 20X1 20X2 20X3 20X4 40.000 $ 50.000 $ 70.000 5 24.000 5 40.000 40.000 16.000 3.000 Bal b/d Revaluation reserve (B/S) $ Building Accumulated depreciation Bal b/d $ 20.840 6.000 24.000 28.000 Bal c/d 70.000 12.000 20.000 150.000 70.000 840 6.000 = $3.000 70.840 Answer to Lecture Example 8 (a) The double entry is Dr Dr Cr Non-current asset – building (150 – 100) Accumulated depreciation – building Revaluation reserve (β) Building (B/S) Bal b/d Revaluation reserve Bal b/d $ 100.000 12.000 2 = = = = Depreciation charge $ 8.000 $ Bal c/d 150.25: ANSWERS TO LECTURE EXAMPLES Disposal account (a) Machine Profit on disposal (I/S) $ 6.000 8.000 2 24.000 (b) Depreciation charge is $150.000 40.000 12.15 .000 70.
They should be capitalised as an intangible non-current asset provided that all of the 'PIRATE' criteria are met.000 38.000 (40.000 X5 $ 38.000 – 55.000 22.000 7.000) – 25. The costs should be amortised in 20X9 once the car is available to be sold on the market.500 7.500 24. The $100. Material costs and design and manufacture salaries are part of the development process.000 40.000 (120.000 – 120.000 X4 $ 120.500 31.000 Balance sheet extracts Non-current assets Development expenditure Amortisation Net book value X1 $ 55.500 20X1 20X2 20X3 20X4 20X5 40.500 8. (2) (3) Answer to Lecture Example 2 Income statement extracts Expenses Research expenditure Amortisation of development expenditure X1 $ 35.000 X2 $ 120.000 17.1. At this point in time an entity cannot be certain that the expenditure will lead to profits and so the costs are research costs.000 should be capitalised as a tangible non-current asset and depreciated over its useful life of 10 years.000 X4 $ – 40.25: ANSWERS TO LECTURE EXAMPLES Answer to Lecture Example 10 Change in method of depreciation: Depreciation charge $ 10.500 38.000 – X2 $ – – X3 $ – 40.000 7.000 × 25% 22.500 15.500 3 Chapter 10 Answer to Lecture Example 1 (1) Market research would take place at an early stage in any development process.000 should be shown as an expense in the income statement.000 (80.16 .500 1.000 × 25% 30. Its purpose is to gather information about whether there may be interest in a potential product.000 X3 $ 120.500 .000 X5 $ 120.000 7.000) 80.000) 40. A machine is a tangible non-current asset and is accounted for under IAS 16 regardless of its use.500 NBV $ 30. $20.500 Accumulated depreciation $ 10.
X7 Cash Cash Cash Cash Accruals $ 96 120 104 145 56 521 $ 31.584) (b) & (c) Electricity accrual is $56 Dr Electricity expense (I/S) Cr Accruals (B/S) Being: electricity expense accrued at 31 December 20X7.X7 Transfer to income statement 521 521 25.9.X7 14.6.X7 December expense missing ( 1 × $168) 3 $ 96 120 104 145 465 56 521 $ Rent expense Cash paid: 1.X7 31.3.563 $ 56 $ 396 Answer to Lecture Example 2 Electricity expense (I/S) 10.959 (396) 188.8.131.52.17 .X7 14.3.X7 10.X7 10.12.25: ANSWERS TO LECTURE EXAMPLES Chapter 11 Answer to Lecture Example 1 (a) Electricity expense Cash paid: 10.6. Rent prepayment is $396 Dr Prepayments (B/S) Cr Rent expense (I/S) Being: rent expense prepaid at 31 December 20X7.12.X7 12.9.X7 12.4.584 1. $ 396 $ 56 375 1.X7 6.X7 12 Less: expense relating to Jan – March × ( 3 × $1.
1.X8 9.X7 6.2.500) 3 $ 4.12.959 Answer to Lecture Example 3 Working Electricity expense (I/S) 12.4.X8 12.1.500) 5.X7 Cash Cash $ 375 1.6.000 29.X8 31.959 Accruals (B/S) 31.X9 Bal b/d Electricity accrual (W) Bal b/d $ 56 63 119 63 1.X7 1.000 25.X7 Bal c/d $ 56 56 31.X8 31.X7 1.12.X8 31.1.25: ANSWERS TO LECTURE EXAMPLES Rent expense (I/S) 1.1.X7 31.9.12.000) 4 1 × $7.X8 Cash Cash Cash Cash Accrual ( 13 × $189) $ 168 134 118 158 63 641 Accruals (B/S) 1.X8 Rent Bal b/d $ 396 31.12.563 396 1.X7 1.12.X8 1.X8 Accrual reversed To Income statement $ 56 585 641 Answer to Lecture Example 4 B Insurance expense July X6 – August X6 ( 212 × $24.12.X7 396 396 Bal c/d $ 396 396 Electricity Bal b/d $ 56 56 56 Transfer to income statement Prepayments 1.18 .12.X8 Prepayments (B/S) 31.000) Prepayment 1 June X7 paid ( Less: June X7 ( 1 × $30.X8 Accrual reversed Bal c/d $ 56 63 119 1.12.12.X8 31.1.000) Sept X6 – June X7 ( 1012 × $30.500 (2.584 $ 31.12.000 7.3.000 25.X8 12.12.1.
25: ANSWERS TO LECTURE EXAMPLES Chapter 12 Answer to Lecture Example 1 (a) (b) The balance c/d on the trade receivables account at the end of the year is $50.000) (3.12.500) 46.12.500 3.000 Trade receivables (B/S) 31.X7 To I/S $ 15.500 Allowance for receivables (B/S) $ Bal c/d 3.X7 Bal b/d $ 65.12.000 31.000 Answer to Lecture Example 2 Allowance for receivables: (a) (b) The allowance for receivables shown on the balance sheet is $3.X7 Bad debt expense (Ali $7.12.500 Doubtful debts expense $ 3.000 50.500) $ 25.500 The doubtful debts expense shown in the I/S is $3.000 Bad debt expense (I/S) $ 31.000 $ 31.000 65.000) (Tyson $8. The bad debt expense shown in the I/S is $15.000.19 .500 Working Doubtful debts expense (I/S) $ Allowance for receivables Income statement extract Expenses Bad debts (see Lecture Example 1) Doubtful debts expense Balance sheet extract Current assets Trade receivables Less: allowance for receivables 50.500 I/S $ 3.500 $ (15.X7 Trade receivables 15.000 Workings 65.12.000 (3.000) Bal c/d 15.X7 31.
100 Allowance for receivables (B/S) Bal c/d Specific General (W) $ 400 934 Bad and doubtful debts expense $ 1.440 Bal b/d 47.674 $ I/S 1.334 Bal b/d 1.700 × 2% = $934 $ 340 1.25: ANSWERS TO LECTURE EXAMPLES Answer to Lecture Example 3 (a) (b) The allowance for receivables shown in the balance sheet is $1.000 25. Trade receivables (B/S) Bal b/d $ 47.334 1.100 47.334 1.440 47.000 Cash $ 7.100 1.000 $ Bad debt expense (I/S) $ I/S 7.334 Bad & doubtful debts expense Bal c/d $ 340 47.334 The bad and doubtful debts expense shown in the income statement is $1.X8 Bal b/d 50.1.674.334 Bad and doubtful debts expense (I/S) Trade receivables Allowance for receivables Working (W) General allowance: Trade receivables (net of bad debts written off) Less: specific allowance $ 47.334 1.20 .674 1.100 (400) 46.674 Answer to Lecture Example 4 Bad debts recovered: Trade receivables (B/S) $ 1.
500 2.000 Allowance for receivables (B/S) $ (b) Doubtful debts expense 3.3.500 Answer to Lecture Example 6 $ Dr Cr Allowance for receivables Trade receivables 3.500 (a) Cash Bal c/d $ 3.500 (b) Allowance for doubtful debts $ 3.500 50.500 25.000 31.000 Answer to Lecture Example 5 Specific allowance recovered: Trade receivables (B/S) Bal b/d $ 50.21 .000 50.000 × 5%) 1.500 $ 3.500 2.X7 Bal b/d ($20.000 Bad and doubtful debts expense (I/S) $ I/S 3.500 (ii) 31.3.25: ANSWERS TO LECTURE EXAMPLES Cash (B/S) $ Bad debt expense 7.000 × 5%) $ 1.000 1.000 x 5%) – (20.000 × 5%) Bal c/d $ 1.000 x 5%)] Long method Allowance for receivables (B/S) (a) Doubtful debts expense (20.500 46.500 Bal b/d $ 3.500 Answer to Lecture Example 7 Changes in general allowance: The doubtful debts expense in 20X8 is $500 [(30.X8 Doubtful debts expense ($30.
3.3.25: ANSWERS TO LECTURE EXAMPLES Doubtful debts expense (I/S) (ii) Allowance for receivables $ 1.500 Short method Allowance for receivables (B/S) $ 31.000) 13.000 Chapter 13 Answer to Lecture Example 1 (a) A provision should be made using expected values: ($1m × 20%) + ($6m × 5%) = $0.X8 Decrease required Income statement $ (2.000 21.000 500 1.25m ($0.5m).9.500 1.000 (3.000 × 5%) 31.000 3.000 24.22 .500 1.000 × 5%) Doubtful debts expense (increase in allowance) $ 1.000 500 1.5m Dr Cr (b) Dr Cr Warranty cost expense (I/S) Provisions (B/S) Warranty cost expense (I/S) Provisions (B/S) $0.500 Doubtful debts expense (I/S) $ $ I/S 500 Allowance for receivables 500 Answer to Lecture Example 8 A $13.X7 At 30.25m In 20X8 the provision needs to increase by $0.9. Entry is: 25.5m $0.X8 Bal c/d ($30.000 Allowance for receivables $ (1) (2) (3) Write off recovered Write off in 20X8 Change in allowance: At 30.X7 Bal b/d ($20.25m $0.5m $0.000) 18.500 1.75m – $0.500 (a) Allowance for receivables I/S $ 1.
3m).X6 Payment received 200 $ 150 150 Purchases Payables 100 100 Sales Receivables 200 200 10.45m ($0.45m $0.400 Cash receipts book Date 21 Jan X6 Narrative Customer B Total 200 200 Cash payments book Date 21 Jan X6 Narrative Supplier Y Total 100 100 Memorandum ledgers Receivables ledger Customer A $ 150 Bal c/d 150 150 Customer B $ 200 21.45m Chapter 14 Answer to Lecture Example 1 (1) Books of prime entry Sales day book Date 10 Jan X6 10 Jan X6 Customer Customer A Customer B Amount 150 200 350 Purchase day book Date 15 Jan X6 15 Jan X6 Supplier Supplier Y Supplier Z Amount 100 1.1. Entry is Dr Cr Provisions (B/S) Warranty cost expense (I/S) $0.23 .25: ANSWERS TO LECTURE EXAMPLES (c) In 20X9 the provision needs to decrease by $0.75m – $0.1.X6 Bal b/d Sales 10.X6 Sales $ 200 200 25.1.300 1.
400 1.400 1.300 1.1.300 15.X6 PLCA Bal c/d 200 100 $ I/S (4) Sales (I/S) 10.1.X6 Payment made Bal c/d 10.1.X6 PLCA Reconciliation Balance per list of balances Receivables ledger Customer A Customer B Balance per RLCA Balance per list of balances Payables ledger Supplier Y Supplier Z Balance per PLCA $ – 1.1.X6 Purchases 1.1.X6 RLCA 350 350 $ 350 350 Purchases (I/S) $ 1.1.300 1.400 1.24 .1.300 1.300 $ 150 – 150 150 25.X6 Purchases 100 Supplier Z $ 1.X6 RLCA Bal b/d $ 1.1.300 21.X6 Sales Bal b/d 21.X6 Bank Bal c/d 350 150 PLCA (B/S) $ 100 15.X6 Bank Bal c/d $ 1.1.400 15.400 Bal b/d Bank (B/S) $ 200 21.25: ANSWERS TO LECTURE EXAMPLES Payables ledger Supplier Y $ 100 15.300 1.400 1.X6 Purchases 1.400 I/S $ 200 150 350 $ 100 100 $ 1.1.300 $ 100 100 200 21.1.300 (2)&(3) Nominal ledger RLCA (B/S) $ 350 21.
000 RLCA (B/S) $ 4.X7 Sales 10.1.X7 Bank 10.X7 RLCA 10.000 $ Answer to Lecture Example 3 (a) Purchases PLCA (b) Bank $ Bank $ 4.1.000 Purchases $ 5.750 250 5.000 $ PLCA (B/S) $ Purchases $ 5.000 $ 4.1.000 RLCA (B/S) $ (b) Bank (B/S) 4.000 10.1.000 5.1.25: ANSWERS TO LECTURE EXAMPLES Answer to Lecture Example 2 (a) Sales $ 1.1.1.X7 RLCA $ 10.000 $ $ 1.000 10.X7 RLCA (c) Bank $ 4.X7 Sales 10.000 $ 5.X7 Sales 10.750 Bank Discounts received PLCA (B/S) $ 4.X7 Bank 9.000 Discounts allowed (I/S) 4.000 25.X7 RLCA $ 9.25 .000 $ 1.1.1.000 $ RLCA (B/S) $ 1.000 $ 1.000 allowed 10.000 Discounts 1.000 10.
150 1.550 3.400 8.600 Discounts allowed Contras (PLCA) Bad debts Bal c/d 916.900 (900) 2.000 Bank 302.000) 44.000 561.336 $50.600 $ 311.600 (b) Reconciliation RLCA $ 561.000 (6.150 565.760) 42.240 6.000 3.336 Answer to Lecture Example 5 (a) Balance b/d Sales RLCA $ 614.250 565.150 Bal b/d (part (a)) (i) Sales (SDB undercast) Balance per list of balances (ii) Credit balance included as a debit (2 × $450) Customer balance omitted 25.25: ANSWERS TO LECTURE EXAMPLES Discounts received (I/S) $ PLCA (c) Bank $ PLCA $ 5.26 .550 916.000 Purchases PLCA (B/S) $ 5.000 $ 250 Answer to Lecture Example 4 B List price Less: trade discount (12%) Record purchase at this value Less: settlement discount (4%) Calculate sales tax on this value Sales tax at 15% $ 50.000 Bank $ 5.150 Bal c/d $ 565.000 (1.150 $ 563.650 32.600 565.
Chapter 16 Answer to Lecture Example 1 (a) Journal entries (1) (2) (3) (4) (5) (6) (b) Brought forward (102.620 25.460 18.240) Cash at bank (4) Rent and rates Trade receivables Discounts allowed Trade receivables Trade receivables Cash at bank Suspense account Cash at bank Stationery and postage Suspense account Capital Suspense account Suspense account $ 17.620 1.168) 173 Bank reconciliation statement Balance per bank statement at 31 March 20X8 Unrecorded lodgements Outstanding cheques Balance per cash book at 31 March 20X8 Answer to Lecture Example 2 B (1) is a bank error. (4) is an outstanding cheque (2).000 $ 1.900 19.000 18.560 1.25: ANSWERS TO LECTURE EXAMPLES Chapter 15 Answer to Lecture Example 1 Adjustment of cash book balance Balance b/d Bank interest (3ii) Cash account $ 204 Standing order (3i) 18 Bank charges (3iii) Balance c/d 222 $ 35 14 173 222 $ 2.460 Cr $ 350 500 2.800 – 85. (3) and (5) have all been processed correctly by the bank but need recording in the cash book.27 .618 723 (3.900 1.460 1.000 19.900 1.460 18.460 Stationery and postage (5) Capital (6) Dr $ 350 500 2.
28 .25: ANSWERS TO LECTURE EXAMPLES Answer to Lecture Example 2 Adjustment of profits statement for the year ended 30 April 20X2 Increases $ Decreases $ 350 500 1.250 6.310) 9.400 – (6. Being: correction of cash drawings posted as wages.750 Incremental depreciation to be charged $1.990 $ 12. 25.650) 105.300 Draft profit Adjustments Rent (1) Discounts allowed (2) Stationery (5) Total adjustments Revised profit Answer to Lecture Example 3 B Draft profit Adjustments: (1) sales returns (2 × $2.750 Chapter 17 Answer to Lecture Example 1 (a) (1) Dr Cr (2) Dr Cr Drawings (12 × $10) Wages $ 120 $ 120 Inventories (B/S) Closing inventories (I/S) Dr $ 647 Cr $ 647 Being: adjustment to record year end closing inventories.650 $ 112.000 ÷ 4 years = $3.500 Depreciation charge should have been $15.250 Increases $ Decreases $ 5.700) (2) depreciation (W) Adjusted profit (W ) Depreciation charge was 33 13 % × ($15.460 (2.000 × 2/4) = $2.400 1.
Being: adjustment for discounts allowed omitted.25: ANSWERS TO LECTURE EXAMPLES (3) Dr Cr Depreciation expense (I/S) Accumulated depreciation: Motor vehicles ($1. Dr Cr (8) Dr Cr (b) Suspense account Bal b/d $ 433 $ (5) Bank (8) Discounts allowed 360 73 433 Discounts allowed (I/S) Suspense account $ 73 $ 73 Prepayments ($180 × 6/12) Electricity expense Being: prepayment of electricity expense. Being: adjustment for goods drawn from business (removed at cost value) Being: accrual of rent expense.29 . 433 25.740 × 25%) Furniture and fittings ($829 × 20%) $ 601 $ 435 166 Being: adjustment to record depreciation for the year (4) Dr Cr (5) Dr Cr (6) Dr Cr (7) Dr Cr Rent expense (600 – 500) Accruals $ 100 $ 100 $ 90 $ 90 Drawings Purchases $ 63 $ 63 Bank (2 × $180) Suspense account $ 360 $ 360 Bad debt expense Trade receivables $ 37 $ 37 Being: write off of irrecoverable customer balance. Being: adjustment to correct cash receipt from trade receivables.
740 830 2.368 647 635 90 1.867 Capital Capital as at 1 January 20X7 Profit for the period Less: drawings (1.569 Accumulated depreciation $ 870 332 1.127 2.499 3.922 2.073 $ 510 9.202 NBV $ 870 498 1.514 635 601 192 37 73 3.067 700 100 800 3.813 10.634 – 120) Repairs Depreciation Travel and entertaining Bad debts Discounts allowed Profit for the period Mugg Balance sheet as at 31 December 20X7 Cost $ Non-current assets Motor vehicles Furniture and fixtures Current assets Inventories Trade receivables (672 – 37) Prepayments Cash and bank balances (5 + 762 + 360) 1.30 .25: ANSWERS TO LECTURE EXAMPLES (c) Mugg Income statement for the year ended 31 December 20X7 Sales Less: cost of sales Opening inventories Purchases (9.867 $ 2.866 129 5.323 647 9.073 (1.200 + 63 + 120) Current liabilities Trade payables Accruals 25.383) 3.676 5.876 – 63) Less: closing inventories Gross profit Discounts received Less expenses: Rent (500 + 100) Electricity (240 – ( 612 × 180)) 600 150 120 1.542 Insurance Wages (1.377 2.995 $ 15.
400 x 60% Answer to Lecture Example 2 Sales COS GP % 130 100 30 $ 221. Sales ∴ COS Gross profit Cost of sales Opening inventories Purchases Less: cost of sales Closing inventories should be Closing inventories is ∴ inventory lost in fire $ 620.25: ANSWERS TO LECTURE EXAMPLES Chapter 18 Answer to Lecture Example 1 Sales COS GP % 100 60 40 $ 476.500 47.000 788.000) 532.31 .000 51.000 = = 125% 100% 25% = = $ 985.500 170.000 25.000 197.000 285.000 174.000) 352.000 170.000 (788.320.000 x 100/130 Purchases: Cost of sales Opening inventory + Purchases – Closing inventory $ 43.600 190.000 (180.000 Answer to Lecture Example 3 B Cost structure: 25% mark up.000 1.000 700.
800 4.200 12.254 $ 39.928 41.450 173.32 .132 Answer to Lecture Example 6 $4.029 $ 38.25: ANSWERS TO LECTURE EXAMPLES Answer to Lecture Example 4 Trade payables $ Till Bank Balance c/d * Dr Purchases (I/S) Cr Trade payables 430 167.000 Wages Stationery 23.750 $ 5.825 211.204 1.254 Bal b/d Sales* (2) Trade receivables $ 1.000 4.685 cash a/c) Bal c/d 41.750 19.029 211.250 28.132 39.479 Answer to Lecture Example 5 Cash Bal b/d Receipts from Trade receivables (1) $ 50 General expenses Drawings Bankings Bal c/d $ 4.454 50 39.447 Cash (deduced from 39.204 39.224 43.200 500 1.479 Bal b/d Purchases* $173.050 Cost structure: Sales ∴ COS Gross profit = = 100% 80% 20% = = $ 23.750 25.029 $173.000 24.750 Electricity Bankings ∴ drawings Bal c/d 24.500 6.050 1.750 Balance b/d Sales Cash $ 1.
000 11.500 6.600 22.000 Drawings Bal c/d 25.500 Balance $ 15.000 Bal b/d Tick $ 50.000 50.400 4.000 20.000 Salary – Balance Interest on capital (12% Tick Cast Balance Profit share Tick (5/10) Cast (3/10) Balance (2/10) 12.000 23.500 Cast $ 3.000 3.000 Capital accounts Cast Balance $ $ 30.000 20.000 Cast $ 30.000 income statement 6.600 $ 50.25: ANSWERS TO LECTURE EXAMPLES Chapter 19 Answer to Lecture Example 1 (a) (i) Tick $ 50.500 13.800 Salary 6.500 22.400 11.000 50.000 20.600 6.200 Interest on capital Profit share 10.000 (iii) Tick $ 6.500 Current accounts Cast Balance $ $ 4.000 11.900 10.000 Bank 30.000 30.500 17.000 50.000 50.600 2.000 Balance $ 20.500 17.000 2.900 4.000 8.000 Bal c/d (ii) Appropriation account for the year ended 31 December 20X4 $ $ Profit b/d from the 15.000 30.33 .000 20.000 Tick $ 6.000 50.
400 4.200 31.280 Profit share 10.520 13.000 30.520 $ 50.600 Balance 2.080 Bal b/d Tick $ 6.000 Cast 3.400 Drawings Interest on drawings Balance c/d Balance $ 15.020 Balance (2/10) 4.700 17.000 2.34 .620 22.000 20.700 Cast (3/10) 7.000 x 10% x 3/12) Tick 6.700 11.25: ANSWERS TO LECTURE EXAMPLES (iv) TICK.000 8.000 $ 100.700 Current accounts Cast Balance $ $ 4.500 6. CAST AND BALANCE Balance Sheet as at 31 December 20X4 (extract) $ Capital accounts Tick Cast Balance Current accounts Tick Cast Balance 50.620 6.000 x 10% x 6/12) Interest on capital (12%) Cast (4.080 13.800 Salary Interest on 100 – capital 6.500 13.000 300 100 50.000 11.680 22.400 (iii) Tick $ 6.200 (b) Alternative answer to parts (ii) and (iii) (including interest on drawings) (ii) Appropriation account for the year ended 31 December 20X4 $ $ Profit b/d Salary – Balance 15.400 50.000 Profit share Tick (5/10) 11.400 17.200 131.600 7.000 300 11.020 10.400 Cast $ 3.000 Interest on drawings Tick (6.680 23.000 11.400 12.280 25.
000 (20.000 (600) 66.35 .000 44.000) (66.000 30.000 440.000 (40.000 A Profit for year Add bank expense relating to first half of year 1st Half (150.220 Total $ 23.25: ANSWERS TO LECTURE EXAMPLES Answer to Lecture Example 2 Salaries Interest on capital Profit share (6:3:1) Total profit for the year (W) (W) Profit before loan interest Loan interest ($10.000 $ 400.000 x 6/12) Salary PSR M 50% S 30% A 20% (110.400 (β) $ 67.000 S $ 20.000) (10.000) 180.000 $ Profit ($440.000) – 25.000 x 6/12) Expense relevant to first half of year Salary S (40.000) (220.000 110.000 $ 10.000) – $ 220.200 42.400 Answer to Lecture Example 3 B Salary PSR (1st half) PSR (2nd half) M $ 90.000 – 220.000 400 25.000) $ 220.000 30.320 Y $ – 400 12.000 40.000 x 6/12) A (20.000 2nd Half $ Profit ($440.000 66.000 x 6/12) PSR M 60% S 20% A 20% (90.000 116.000 × 12% × 6/12) X $ 15.000 200.660 Z $ 8.000 400 4.000) (30.000 84.000) 150.000) (30.000) (44.200 66.000 1.
25: ANSWERS TO LECTURE EXAMPLES Answer to Lecture Example 4 Goodwill 1 Sept 1 Dec Capital a/c Capital a/c $ 180.500 $ 187.000 C $ 77.500 22.000) Share premium account $ 150.36 .000 + 37.000 H $ 40.000 120.500 $ 37.000 – S $ – – 1 Sept Goodwill 1 Dec Goodwill 1 Sept Goodwill 1 Dec Goodwill Chapter 20 Answer to Lecture Example 1 Rab Co Dr Cash (200.000 210.000 Answer to Lecture Example 2 Bonus Issue New share capital: Double entry: Dr Share premium account Cr Share capital Balance sheet Share capital – 50c ordinary shares (150.000 H $ – – S $ – 60.000 60.000 $ 160.000 60.000 × 80c) Cr Share capital (200.143 60.000 × 50c = $37.857 90.000 K $ 80.000 210.000 × 50c) Cr Share premium account (200.000 90.000 25.500 4 $ 37.500) Share premium account (60.000 210.000 + 100.000 1 Sept 1 Dec Capital a/c Capital a/c $ 180.000 Capital account K $ 102.000 – 37.000 410.500 200.000 × 30c) Balance sheet (extract) as at 1 June 20X0 Equity Share capital – 50c ordinary shares (50.000 C $ 60.500) Retained earnings 300.000 $ 100.
X6 Current tax payable 25.25: ANSWERS TO LECTURE EXAMPLES Answer to Lecture Example 3 Rights Issue $ New share capital: 375.X5 Current tax payable 30.000 × 50c 5 375.000 50.000 10.X6 Current tax payable $ 62.000 31.000 Retained earnings at end of year Answer to Lecture Example 5 (1) Income tax expense (I/S) 31.000 31.500 75.500 $ 37.12.000 × $1 5 $ 37.12.000 $ 225.9.500 Share premium: 75.000 (16.37 .000) 159.X5 Income statement $ 62.000 3.000 525.000 43.000 $ 125.500 230.000 97.000 Dr Cash Cr Share capital Cr Share premium account Rab Co Balance Sheet (extract) Share capital – 50c ordinary shares Share premium account Retained earnings $ 112.500 Answer to Lecture Example 4 ABC Co Reconciliation of movement in retained earnings for year ended 31 December 20X6 $ Retained earnings at beginning of year Profit for the period Dividends – preference – ordinary 6.12.
193 270 923 25.12.170 2.000 46.9.X6 Income tax expense 1.375 72 1.780 7.740 7.X6 Income tax expense 31.000 65.000 62.000 108.000 108.000 43.000 610 1.000 62.000 1.12.040 5.X6 Balance b/d 30.25: ANSWERS TO LECTURE EXAMPLES Current tax payable (B/S) 31. plant and equipment Current assets Inventories Trade receivables Cash and cash equivalents (W2) Total assets 5.000 62.1.000 3.12.9.000 31.X5 Balance c/d 30.060 2.X6 Bal c/d Chapter 21 Answer to Lecture Example 1 Arrow Income statement for the year ended 30 September 20X6 Revenue Cost of sales (W3) Gross profit Distribution costs Administrative expenses (W1) Finance costs (W6) Profit before tax Income tax expense Profit for the period Arrow Balance sheet as at 30 September 20X6 $'000 ASSETS Non-current assets Property.1.780 $'000 12.12.000 43.000 5.000 43.X7 (2) Tax note for the year ended 31 December 20X6 Tax charge for the year Under provision in respect of prior periods $ 43.000 Balance b/d $ 62.38 .X5 Income tax expense 1.X6 Bank $ 62.000 3.700 2.000 31.
39 .200 1.500 + 250) (W5) Share premium account (200 + 385) (W5) Revaluation reserve (800 + 600) (W7) Retained earnings (W4) Non-current liabilities Long term borrowings Current liabilities Trade payables Other payables (W6) Current tax payable Short term provisions Total equity and liabilities Workings (W1) Administrative expenses Bad debts written off Office expenses Administrative staff salaries Increase in warranty provision (80 – 50) (W2) Cash and cash equivalents Per trial balance Issue of shares (W5) Dividend paid (W3) Cost of sales Purchases Opening inventories Closing inventories (W4) Retained earnings Per trial balance Less: dividend paid Profit for period (per I/S) $'000 1.375 $'000 835 635 (300) 1.170 $'000 7.200 550 72 270 80 972 7.250 (300) 923 1.750 585 1.608 1.25: ANSWERS TO LECTURE EXAMPLES EQUITY AND LIABILITIES Equity Share capital (1.780 $'000 45 1.873 25.040 $'000 1.800 500 30 2.400 1.873 5.200 450 (610) 7.
000 × 6% = $72.250 Total equity $'000 3.000 3.500 Share premium account $'000 200 Revaluation reserve $'000 800 600 600 923 1.000. plant and equipment Net income recognised directly in equity Profit for period Total recognised income and expense for the period Dividends Issue of share capital Balance at 30 September 20X6 1.000 $250.500 200 $'000 1.750 600 600 923 5.500.000 ÷ 6) Record as: Dr Cr Cr Bank (500.713 (300) 250 1.273 (300) 635 5.40 .750 385 585 1.400 1.000 × 77c) $635.25: ANSWERS TO LECTURE EXAMPLES (W5) Rights issue Number of shares in issue before rights issue (1.000 (4.000.27) Share capital (500.400 2.000 × $1.400) 600 Answer to Lecture Example 2 Share capital Balance at 30 September 20X5 Gain on revaluation of property.000 × 50c) Share premium account (500.608 Chapter 22 Answer to Lecture Example 1 B 1 and 3 are non-adjusting events as the condition did not exist at the balance sheet date.000 (W7) Revaluation Revalued amount PPE per trial balance Increase $'000 5.200.000 (W6) Loan interest $1.000 $385. 25.000 × 2) Rights issue 1 for 6 basis (3.000 500.873 Retained earnings $'000 1.
. plant and equipment Plant and equipment – cost Bal b/d Addition $'000 200 100 300 Disposal Bal c/d $'000 20 280 300 Accumulated depreciation Disposal Bal c/d $'000 9 111 120 Bal b/d .000 (92.000 43.000 (8.25: ANSWERS TO LECTURE EXAMPLES Chapter 23 Answer to Lecture Example 1 Income taxes paid Income tax payable Income tax paid Bal c/d $'000 116 156 272 Bal b/d I/S $'000 168 104 272 Answer to Lecture Example 2 Property..000) 8.41 .000) $ 40.000) (3. Charge $'000 80 40 120 Profit/loss on disposal: Net book value of asset sold Sales proceeds Loss on sale The entries in the cash flow statement for 20X9 would be: (i) Cash flows from operating activities (extract) Adjustments for Depreciation Loss on sale of plant (ii) Cash flows from investing activities (extract) Purchase of property. plant and equipment Proceeds from sale of plant $ 11.000 (100.000) 25.000 3.
plant and equipment at NBV $’000 Bal b/d 514 Depreciation Revaluation during the year 10 Bal c/d (110 – 100) Additions 146 670 $’000 42 628 670 $’000 87 42 8 137 (21) (4) 15 127 (8) (20) 99 (146) (146) 60 30 (22) 68 21 (14) 7 $’000 25. plant and equipment (W1) Net cash used in investing activities Cash flows from financing activities Proceeds from issue of shares (250 + 70 – 200 – 60) Proceeds from issue of debentures Dividends paid (W3) Net cash from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Workings (W1) Property.25: ANSWERS TO LECTURE EXAMPLES Answer to Lecture Example 3 Dividends paid Dividends payable Dividends paid Bal c/d $'000 50 45 95 Bal b/d Retained earnings $'000 35 60 95 Answer to Lecture Example 4 Emma Co Cash flow statement for the year ended 31 December 20X8 Cash flows from operating activities Profit before taxation Adjustments for: Depreciation Interest expense Increase in trade receivables (168 – 147) Increase in inventories (214 – 210) Increase in trade payables (136 – 121) Cash generated from operations Interest paid Income taxes paid (W2) Net cash from operating activities Cash flows from investing activities Purchase of property.42 .
43 . Trade receivables $'000 147 ∴ cash received 600 Bal c/d 747 (W2) ∴ cash paid Bal c/d (W3) Cost of sales Add: closing inventories Less: opening inventories Purchases Other expenses Less: depreciation Trade payables $'000 Bal b/d 452 Expenses (W3) 136 588 $'000 319 214 (210) 186 (42) Workings $'000 579 168 747 $'000 121 467 588 $'000 579 (452) 127 (8) (20) 99 $'000 323 144 467 25.25: ANSWERS TO LECTURE EXAMPLES (W2) Income tax paid Bal c/d Income tax payable $’000 20 Bal b/d 39 Income tax expense (I/S) 59 Dividends payable $’000 22 Bal b/d 18 Dividend for year 40 $’000 28 31 59 (W3) Dividends paid Bal c/d $’000 16 24 40 Answer to Lecture Example 5 Emma Co Cash flow statement for the year ended 31 December 20X8 (extract) $'000 Cash flow from operating activities Cash receipts from customers (W1) Cash payments to suppliers and employees (W2) Cash generated from operations Interest paid* Income taxes paid* Net cash from operating activities * (W1) Bal b/d Revenue (I/S) These amounts are the same amounts as in Lecture Example 4.
25: ANSWERS TO LECTURE EXAMPLES Chapter 24 Answer to Lecture Example 1 Information that may be included in a database file for a non-current asset register: (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) Code/item number to identify asset Details of category of asset (motor vehicles. machine etc) Serial number of the asset Details of physical location of the asset Person responsible for the asset Cost of the asset Date of purchase Depreciation policy for the asset Accumulated depreciation charged to date Net book value of the asset Insurance details END OF ANSWERS TO LECTURE EXAMPLES 25.44 .
1 .Pilot Paper Questions only 26.
3 .26: PILOT PAPER (QUESTIONS ONLY) 26.
26: PILOT PAPER (QUESTIONS ONLY) 26.4 .
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26: PILOT PAPER (QUESTIONS ONLY) 26.6 .
26: PILOT PAPER (QUESTIONS ONLY) 26.7 .
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26: PILOT PAPER (QUESTIONS ONLY) 26.9 .
26: PILOT PAPER (QUESTIONS ONLY) 26.10 .
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26: PILOT PAPER (QUESTIONS ONLY) 26.12 .
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26: PILOT PAPER (QUESTIONS ONLY) 26.14 .
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