Chapter 5: Basic financial statements with

year-end adjustments

TUTORIAL EXERCISE SOLUTIONS

Exercise 1

The following balances were extracted from the books of TKZ Stores as at 30 June 20x2.

Furniture and fittings at cost R42 000

Accumulated depreciation on furniture and fittings R6 300

Vehicles at cost R35 000

Accumulated depreciation on vehicles R18 000

Adjustments

1. Depreciation on vehicles must be provided for at 20% per annum using the straight-line
method.

2. Depreciation on furniture and fittings must be provided for at 15% per annum using the
reducing balance method.

Required

Prepare the journal entry for depreciation and indicate how the following will be shown in the
statement of profit or loss and other comprehensive income, as well as the statement of
financial position:

• Accumulated depreciation on furniture and fittings

• Accumulated depreciation on vehicles

• Depreciation

KZ Stores journal entry as at 30 June 20x2 – Vehicles

Debit Credit

Tutorial exercise solutions (Chapter 1) 1

 R R
Depreciation 7 000
Accumulated depreciation of 7 000
vehicles

Workings R35 000 × 20% = 7 000

TKZ Stores journal entry as at 30 June 20x2 – Furniture and fittings

Debit Credit
R R
Depreciation 5 355
Accumulated depreciation on furniture and 5 355
fittings

Workings (R42 000 – R6 300) × 15% = R5 355

TKZ Stores statement of profit or loss and other comprehensive income as at 30 June
20x2

Less: Operating expenses

Depreciation (R7 000 + R5 355) = R12 355

TKZ Stores statement of financial position as at 30 June 20x2

Non-current assets

Cost Accumulated Book value/

depreciation Carrying value
R R R
Vehicles 35 000 25 000 (18 000 + 7000) 10 000
Furniture and 42 000 11 655 (6 300 + 5 355) 30 345
fittings

Tutorial exercise solutions (Chapter 1) 2

Tutorial exercise solutions (Chapter 1) 3
Exercise 2
The following balances appeared among others in the books of ZZ Traders at 28 February 20x1,
the last day of the financial year:

Debtors control account R58 200

Allowance for credit losses R2 150

Credit losses R9 360

Adjustments

1. Isaac, who owes the business R640, has been declared insolvent and his debt must be
written off.

2. Adjust the allowance for credit losses to 5% of outstanding debtors.

Required

Prepare the journal entry and indicate how the following accounts will be shown in the
statement of profit or loss and other comprehensive income and the statement of financial
position:

• Debtors control

• Allowance for credit losses

• Credit losses

ZZ Traders journal entry as at 28 February 20x1– credit losses

Debit Credit
R R
Credit losses 640
Allowance for credit losses 640

Adjust allowance for credit losses to 5% of outstanding debtors

Outstanding debtors’ balance R58 200 – R640 = R57 560

Allowance for credit losses should be (R57 560 × 5%) = R 2 878

Tutorial exercise solutions (Chapter 1) 4

Currently the allowance for credit losses is = R 2 150

Therefore the allowance must be increased by R728 in order to equal R2 878.

ZZ Traders statement of profit or loss and other comprehensive income as at 28

February 20x1

Less: Operating expenses

Credit losses (R9 360 + R640) =R10 000

ZZ Traders statement of financial position as at 28 February 20x1

Current assets

Debtors (R58 200 – R640) = R57 560

Less: Allowance for credit losses R 2 878

Tutorial exercise solutions (Chapter 1) 5

Exercise 3
Indicate in the spaces below whether the following accounts must appear in the statement of
profit or loss and other comprehensive income, or the statement of financial position:

Purchases Loan: ABC Bank

Prepaid income Depreciation (year)
Debtors Refreshments
Wages Equipment
Rent paid Accumulated depreciation
Interest received Drawings
Unused stationery Prepaid expenses
Accrued income Accrued expenses

Purchases STATEMENT OF Loan: ABC Bank STATEMENT OF

PROFIT OR LOSS FINANCIAL
Cost of sales POSITION
Current liability
Prepaid income STATEMENT OF Depreciation (year) STATEMENT OF
FINANCIAL PROFIT OR LOSS
POSITION Expense
Current liability
Debtors STATEMENT OF Refreshments STATEMENT OF
FINANCIAL PROFIT OR LOSS
POSITION Expense
Current asset
Wages STATEMENT OF Equipment STATEMENT OF
PROFIT OR LOSS FINANCIAL
Expense POSITION
Current asset
Rent paid STATEMENT OF Accumulated STATEMENT OF
PROFIT OR LOSS depreciation FINANCIAL
Expense POSITION
Non-current asset
Interest received STATEMENT OF Drawings STATEMENT OF
PROFIT OR LOSS FINANCIAL
Income POSITION
Owners’ equity

Tutorial exercise solutions (Chapter 1) 6

Unused stationery STATEMENT OF Prepaid expenses STATEMENT OF
FINANCIAL FINANCIAL
POSITION POSITION
Current asset Current asset
Accrued income STATEMENT OF Accrued expenses STATEMENT OF
FINANCIAL FINANCIAL
POSITION POSITION
Current asset Current liability

Tutorial exercise solutions (Chapter 1) 7

Exercise 4
The following balances are extracted from the ledger of Pretty Princess Delivery Services on 31
December 20x1:

Office equipment at cost R5 000

Delivery vehicle at cost 17 000
Cash in bank 36 000
Debtors 20 000
Stock of spares 15 000
Insurance paid in advance 3 000
Capital 30 000
Drawings 3 000
Creditors 30 500
Salaries 6 000
Municipal costs 1 500
Rental paid 3 000
Fees received for services rendered 49 000

ADDITIONAL INFORMATION

1. Spares costing R10 000 were used during the year.

2. Depreciation must be provided as follows:

Office equipment R1 500

Delivery vehicle R7 000

3. Interest owing to creditors amounted to R750.

4. Only R2 000 of the insurance paid in advance has expired.

Required

Draft a statement of profit or loss and other comprehensive income, as well as a statement of
financial position for Pretty Princess Delivery Services.

Statement of profit or loss and other comprehensive income of Pretty Princess Delivery
Services for year ended 31 December 20x1

R R
Income: Fees received 49 000
Less: Operating expenses 31 000
Spares used 10 000
Insurance
2 000
expense
Salaries 6 000

Tutorial exercise solutions (Chapter 1) 8

 Municipal costs 1 500
Rental paid 3 000
Depreciation on
office 1 500
equipment
Depreciation on
7 000
delivery
Less: Interest payable 750
Net income for the year 17 250

Statement of financial position of Pretty Princess Delivery Services at 31 December 20x1

ASSETS R R
Non-current assets Note
13 500
2
Office equipment 3 500
Delivery vehicles 10 000
Current assets 62 000
Stock of spares
5 000
(R15 000 – R10 000)
Debtors 20 000
Expenses prepaid
(insurance) 1 000
(R3 000 – R2 000)
Bank 36 000

Total assets 75 500

R R
EQUITY AND LIABILITIES

OWNERS’ EQUITY 44 250

Liabilities
Current liabilities 31 250
Creditors 30 500
Accrued expenses
750
(interest)
TOTAL EQUITY AND
75 500
LIABILITIES

Statement of changes in equity

Capital R30 000

Add: Net profit for the year R17 250

Tutorial exercise solutions (Chapter 1) 9

 Less: Drawings (R 3 000)

R44 250

Notes of Pretty Princess Delivery Services for the year ended 31 December 20x1:

Note 1: Accounting policies

The financial statements have been prepared in accordance with generally accepted
guidelines laid down in the International Financial Reporting Standards (IFRS). The financial
statements have used accounting policies that are consistent with previous financial periods.
Accumulated
Note 2 Cost Carrying value
depreciation
R R R
Office equipment 5 000 1 500 3 500
Delivery vehicles 17 000 7 000 10 000
13 500

Tutorial exercise solutions (Chapter 1) 10

Exercise 5
The following balances were, inter alia, taken from the ledger of Hot Chicks on 28 February
20x3.

R
Purchases 364 965
Carriage on sales 5 642
Discount received 3 690
Rates and taxes 4 320
Salaries and wages 67 420
Rent received 13 200
Sales 564 369
Telephone 3 622
Stationery 2 913
Carriage on purchases 3 696
Returns inwards 5 729
Furniture at cost 24 364
Allowance for credit losses 3 600
Returns outwards 2 984
Accumulated depreciation on furniture 1 464
Accumulated depreciation on plant 13 000
Repairs 995
Insurance 1 985
Credit losses 1 365
Debtors 74 965
Drawings 14 360
Plant at cost 73 000
Stock (1/3/02) 36 982

ADDITIONAL INFORMATION

1. Stock on 28 February 20x3 amounted to R42 029.

2. Provide depreciation as follows:

Furniture – 10% per annum on reducing balance method

Plant – 20% per annum on straight-line method

3. Write off a debtor to the value of R965 as irrecoverable.

4. Adjust the allowance of credit losses to 5% of outstanding debtors.

5.

Statement of profit or loss and other comprehensive income of Hot Chicks for the year
ended 28 February 20x3

R R

Tutorial exercise solutions (Chapter 1) 11

Sales 564 369
Less: Sales returns 5 729
Net sales
Less: Cost of sales
Opening stock
Add: Purchases 36 982 558 640
Less: Purchases 364 965 360 630
returns (2 984)
Add: Carriage on 3 696
purchases
Goods available
for sale 402 659
Less: Closing (42 029)
stock
Gross profit
Add: Other income 198 010
Rent received 13 200 16 890
Discount received 3 690
Gross income for the year 214 900
Less: Operating expenses 106 217
Carriage on sales
Rates and taxes
Salaries and
5 642
wages
4 320
Telephone
67 420
Stationery
3 622
Repairs
2 913
Insurance
995
Credit losses
1 985
(R1 365 + R1 065)
2 430
Depreciation
16 890
(R2 290 + R14
600)
Net profit for the year 108 683

Tutorial exercise solutions (Chapter 1) 12

Tutorial exercise solutions (Chapter 1) 13
Exercise 6
The following information relates to the trial balance of Speedy Dealers on 31 December 20x1.

Debit Credit
R R
Capital 500 000
Cash at bank 11 900
Buildings 360 000
Vehicles 240 000
Furniture 30 000
Salaries 77 000
Electricity and water 6 600
Sales 507 230
Carriage on sales 1 340
Purchases 341 000
Carriage on purchases 800
Sales returns and allowances 1 230
Purchases returns and allowances 1 100
Commission received 960
Rent received  5 720
Insurance 5 500 
Packing material 1 600
Drawings 8 800
Credit losses 460
Opening inventory 8 000
Debtors 80 280
Creditors 101 500
Accumulated depreciation: Vehicles 52 000
Accumulate depreciation: Furniture 6 000
1 174 510 1 174 510
ADDITIONAL INFORMATION

1. Inventory on 31 December 20x1:

Trading stock R13 000

Packing material R350

2. Debtor P. Jabu is insolvent; his debt of R240 has to be written off as irrecoverable.

3. An employee is on leave and his January salary of R3 000 has been paid to him in advance.

4. Delivery fees of R100 on purchases have not yet been paid.

5. An insurance premium of R500 per month has been paid until the end of November 20x1.

6. Rent has been received until the end of January 20x2.

Tutorial exercise solutions (Chapter 1) 14

7. Commission to the value of R1 760 was earned on 28 December 20x1. This amount is still
outstanding.

8. Provision must be allowed for depreciation as follows:

Vehicles R31 500

Furniture R2 500

Required

Draft a statement of profit or loss and other comprehensive income, and a statement of
financial position for Speedy Dealers.

Statement of profit or loss and other comprehensive income of Speedy Dealers for the
year ended 31 December 20x1

R R
Net sales:
506 000
(R507 230 – R1 230)

Less: Cost of goods sold 335 800

Opening stock 8 000
Add: Net purchases
(R341 000 – 339 900
R1 100)
Add: carriage on
purchases 900
(R800 + R100)
Goods available for
348 800
sale
Less: Closing stock (13 000)
Gross profit 170 200
Add: Other income 8 000
Commission
received 2 720
(R1 760 + R960)
Rent received
5 280
(R5 720 – R440)
Gross income for the year 178 200
Less: Operating expenses 123 890
Salaries
74 000
(R77 000 – R3 000)

Tutorial exercise solutions (Chapter 1) 15

 Electricity and
6 600
water
Insurance
6 000
(R5 500 + R500)
Packing material
1 250
(R1 600 – R350)
Credit losses
700
(R460 + R240)
Carriage on sales 1 340
Depreciation
34 000
(R31 500 + R2 500)
Net profit for the year 54 310

Statement of financial position of Speedy Dealers at 31 December 20x1

ASSETS R R
Non-current assets
538 000
Note 2
Buildings 360 000
Vehicles 156 500
Furniture 21 500
Current assets 110 050
Inventory 13 000
Packing material on hand 350
Debtors (R80 280 – R240) 80 040
Prepaid salary 3 000
Accrued income (commission
1 760
received)
Bank 11 900
648 050
OWNERS’ EQUITY AND
LIABILITIES
Owners’ equity 545 510
Liabilities
Current liabilities 102 540
Creditors 101 500
Accrued expenses
100
(delivery fees)
Income received in
advance (rent 440
received)
Accrued expense
500
(insurance)

Tutorial exercise solutions (Chapter 1) 16

TOTAL EQUITY AND
648 050
LIABILITIES

Statement of changes in equity:

Capital: R500 000
Add: Net profit for the year R54 310
Less: Drawings (R8 800)
R545 510

Notes of Speedy dealers for the year ended 31 December 20x1

Note 1: Accounting policies
The financial statements have been prepared in accordance with generally accepted
guidelines laid down in the International Financial Reporting Standards (IFRS). The financial
statements have used accounting policies that are consistent with previous financial periods

Accumulated
Note 2: Noncurrent Cost Carrying value
depreciation
assets
R R R
Buildings 360 000 - 360 000
83 500 (52 000+ 31
Vehicles 240 000 156 500
500)
Furniture 30 000 8 500 (6 000 + 2 500) 21 500
538 000

Tutorial exercise solutions (Chapter 1) 17

Exercise 7
The following are taken from the pre-adjustment trial balance of Valerie Irons, a general
dealer, on 31 December 20x4.

R
Capital 39 000
Drawings 7 000
Carriage on sales 582
Insurance 150
Rates 270
Salaries and wages 7 300
Railage on purchases 540
Telephone 250
Repairs 400
Stationery and printing 208
Discount allowed 180
Discount received 120
Rent received 440
Inventory 1/1/20x4 8 370
Purchases 26 850
Sales 50 682
Returns inwards 190
Returns outwards 220
Trade debtors 6 130
Bond on land and buildings 10 000
Bank overdraft 1 200
Cash on hand 467
Trade creditors 2 375
Bills payable 3 800
Bill receivable 700
Furniture and fittings 6 400
Land and buildings 43 000
Accumulated depreciation on furniture 1 000
Allowance for credit losses 150

ADDITIONAL INFORMATION

1. Inventory at 31 December 20x4 was R9 560.

2. On checking debtors accounts it was found that debts of R130 must be written off.

3. Adjust the allowance for credit losses to 5% of debtors.

4. Calculate the depreciation on furniture and fittings at 10% per annum on the diminishing
balance method.

Required

Tutorial exercise solutions (Chapter 1) 18

7.1 Prepare the statement of profit or loss and other comprehensive income for the year
ended 31 December 20x4.

7.2 Prepare the statement of financial position at 31 December 20x4.

Statement of profit or loss and other comprehensive income of Valerie Irons for the
year ended 31 December 20x4

R R
Sales 50 682
Less: Returns inwards 190 50 492
Less: Cost of sales 25 980
Opening inventory 8 370
Add: Purchases 26 850
Railage on
540
purchases
35 760
Less: Returns
220
outward
35 540
Less: Closing
9 560
inventory
Gross profit for the year 24 512

Add: Other income 560

Discount received 120
Rent received 440
25 072

Less: Operating expenses 10 160

Carriage on sales 582
Insurance 150
Rates 270
Salaries and wages 7 300
Telephone 250
Repairs 400
Stationery 208
Discount allowed 180
Credit losses 280
Depreciation
540
(10% × R5 400)

Net profit for the year 14 912

Statement of financial position of Valerie Irons as at 31 December 20x4

Tutorial exercise solutions (Chapter 1) 19

 Notes

ASSETS
Non-current 2
assets Land and 43 000
furniture
buildings 4 860
and 47 860

Current assets 16 427

Debtors 3 5 700
Bills 700
Inventory
receivable 9 560
Cash on 467
TOTALhand
ASSETS 64 287
EQUITY AND
Owners’
LIABILITIES 46 912
Non-current
equity 10 000
Bond on
liabilities 10 000
land and
Current 7 375
Bills
liabilities 3 800
Bank
payable 1 200
Creditors
Overdraft 2 375
TOTAL EQUITY 64 287
AND LIABILITIES

Statement of changes in equity

Capital R39 000

+ Net profit for the year R14 912

- Drawings (R 7 000)

R46 912

Notes of Valerie Irons for the year ended 31 December 20x4

Note 1: Accounting policies

The financial statements have been prepared in accordance with generally accepted
guidelines laid down in the International Financial Reporting Standards (IFRS). The
financial statements have used accounting policies that are consistent with previous
financial periods.

Tutorial exercise solutions (Chapter 1) 20

 Accumulated
At cost Book value
depreciation
R R R
Note 2: Non-current
assets Land and 43 000 43 000
Furniture
buildings and 6 400 1 540 4 860
fittings 47 860

Note 3: Debtors

Debtors R6 130

- Credit losses R 130

Net debtors R6 000

- Allowance for credit losses R 300

R5 700

Tutorial exercise solutions (Chapter 1) 21

Exercise 8
The following information was obtained from the accounting records of Nitro Traders on 28
February 20x6, the end of the accounting period of the entity.

Pre-adjustment trial balance of Nitro Traders on 28 February 20x6

Debit Credit
R R
Capital 66 100
Drawings 16 000
Vehicles (at cost price) 100 000
Equipment (at cost price) 40 000
Accumulated depreciation on vehicles 36 000
Accumulated depreciation on equipment 8 000
Loan: Zuza Bank 20 000
Bank 4 300
Fixed deposit: Zuza Bank 15 000
Debtors’ control 5 200
Trading inventory (1 March 20x5) 10 000
Creditors’ control 4 100
Sales 250 000
Purchases 153 600
Carriage of purchases 4 200
Carriage on sales 550
Rent expense 15 600
Debit Credit
R R
Stationery 3 800
Insurance 4 800
Rates and taxes 350
Credit losses 400
Telephone 1 980
Water and electricity 10 800
Commission received 180
Rental income 2 200

ADJUSTMENTS

1. A physical stocktaking on 28 February 20x6 showed the following:

Stationery on hand R200

Inventory on hand R17 800

2. Depreciation must be provided for as follows:

Tutorial exercise solutions (Chapter 1) 22

 Vehicles – 20% per annum on the cost price

Equipment – 10% per annum on reducing balance method

3. The loan from Zuza Bank was obtained on 31 December 20x5. Interest was payable at the
end of each six months at 15% per annum. As yet, no interest has been paid.

4. A fixed deposit was made on 1 September 20x5. The interest rate amounted to 10% per
annum. As yet, no interest has been received.

5. An additional amount of R200 must be written off as irrecoverable.

6. Insurance included an amount of R1 800 in respect of additional insurance taken out and
paid for, for the period 1 January 20x6 to 31 December 20x6.

7. Rental income of R200 was received in advance.

Required

8.1 Prepare the statement of profit or loss and other comprehensive income for the year
ended 28 February 20x6.

8.2 Prepare the statement of financial position as at 28 February 20x6

Statement of profit or loss and other comprehensive income of Nitro Traders for the
year ended 28 February 20x6

R R
Sales 250 000

Less: Cost of sales

Opening 10 000
Purchases 153 600
Carriage on 4 200
Goods available 167 800
Less: Closing inventory 17 800 150 000

Gross profit 100 000

Add: Other income

Interest on fixed 750
Rental income 2 000
Commissioned 180 2 930

Operating income 102 930

Less: Operating expenses 59 980

Stationery (3 3 600
Depreciation 23 200
Credit 600
Insurance 3 300
Rent expenses 15 600
Rates and taxes 350

Tutorial exercise solutions (Chapter 1) 23

 Carriage on 550
Water and 10 800
Telephone 1 980
Less: Interest on loan 500
Net profit for the year 42 450

WORKINGS

1. Interest on fixed deposit

R15 000 × 10% × 6/12 = R750

2. Insurance

(R4 800 - R1 800) = R3 000 + (R1 800 ×2/12) = R3 300

3. Depreciation

Vehicles = 100 000 × 20% = R20 000

Equipment = R40 000 - R8 000 × 10% = R3 200

R23 200

4. Interest on loan

R20 000 × 15% × 7/12 = R500

Statement of financial position of Nitro Traders at 28 February 20x6

R R
ASSETS
Non-current assets Note 2 87 800
Vehicles 44 000
Equipment 28 800
Fixed deposit 15 000

Current assets
Trading inventory 17 800
Stationery on hand 200
Accrued income 750
Debtors
5 000
(R5 200 - R200)
Prepaid expenses 1 500
Bank 4 300 29 550

Total assets 117 350

Tutorial exercise solutions (Chapter 1) 24

EQUITY AND LIABILITIES
Equity 92 550

Non-current liabilities
Loan 20 000

Current liabilities
Creditors 4 100
Income received in
200
advance
Accrued expenses 500 4 800

TOTAL EQUITY AND

117 350
LIABILITIES

Statement of changes in equity

Capital R66 100

Add: Net profit R42 450

Less: Drawings R16 000

R92 550

Notes of Nitro Traders for the year ended 28 February 20x6

Note 1: Accounting policies

The financial statements have been prepared in accordance with generally accepted
guidelines laid down in the International Financial Reporting Standards (IFRS). The
financial statements have used accounting policies that are consistent with previous
financial periods.

Accumulated
Cost price Book value
depreciation
R R R
Note 2:
Non-current assets
Vehicles 100 000 56 000 44 000
Equipment 40 000 11 200 28 800
140 000 67 200 72 800

Tutorial exercise solutions (Chapter 1) 25