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Chapter 1

Accruals and Prepayments

QUESTION 1 The following balances were extracted from the ledgers of K Hooks business as at 31 March 2010: $ Rent 23,400 Dr Insurance 5,500 Dr Loan from Peter 20,000 Cr Commission revenue 3,500 Cr The following additional information was ascertained: (i) Two months rent totalling $4,680 was due but not yet paid. (ii) Insurance included: Building insurance of $1,100 for 12 months ended 31 March 2010. Motor insurance of $4,400 for 12 months ended 31 July 2010.

(iii) The loan from Peter was borrowed on 1 April 2009, with an interest rate of 12% per annum. Only the interest for the first half of the year was paid. (iv) Commissions of $1,500 were received for services to be provided in April 2010. This sum was included in the commission revenue account.

Required: (a) Explain the meaning of accruals. (1.5 marks) (b) Write up the above ledger accounts and show the transfer to the profit and loss account. (8 marks) (c) Prepare an income statement extract for the year ended 31 March 2010. (2 marks) (d) Prepare for Mr Hook a balance sheet extract as at 31 March 2010 to show the accruals and prepayments. (2.5 marks) Answer: (a) Accruals are expenses/revenues that have been incurred/earned during a period but have not been paid/received by the end of that period. (1.5 marks) (b)
2010 Mar 31 Balance b/d 31 Accrued c/f $ 23,400 4,680 28,080 Rent 2010 Mar 31 Profit and loss $ 28,080 28,080 2010 Apr 2010 Mar 31 Balance b/d 1 Accrued b/f 4,680 $ 4,033 1,467 5,500
0.5 0.5 0.5 0.5 0.5

Insurance $ 2010 5,500 Mar 31 31 5,500

Profit and loss Prepaid c/f ($4,400


4 12

0.5 0.5 0.5

2010 Apr

1 Prepaid b/f

1,467 Loan Interest $ 2010 1,200 Mar 31 1,200 2,400 2010

2010 Mar 31 Balance b/d 31 Accrued c/f ($20,000 12% 1 ) 2

Profit and loss

$ 2,400 2,400

0.5 0.5 0.5

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Apr

Accrued b/f

1,200

0.5

2010 Mar 31 Profit and loss 31 Prepaid c/f

Commission Revenue $ 2010 2,000 Mar 31 1,500 3,500 2010 Apr 1

Balance b/d

$ 3,500 3,500

0.5 0.5 0.5

Prepaid b/f

1,500

0.5

(c)
K Hook Income Statement for the year ended 31 March 2010 (extract) $ 28,080 Commission revenue 4,033 2,400 K Hook Balance Sheet as at 31 March 2010 (extract) $ Current liabilities 1,467 Accrued expenses ($4,680 + $1,200) Unearned revenues $ 2,000

Rent Insurance Loan interest

0.5 0.5 0.5

0.5

(d)
$ 5,880 1,500
0.5 0.5 0.5 0.5 0.5

Current assets Prepaid expenses

QUESTION 2 The following balances were extracted from the books of Paul Mak, a sole trader, as at 1 January 2010: $ Insurance 480 Dr Rates 2,520 Dr Rent 840 Cr Telephone and Internet 508 Cr Commission revenue 600 Dr During the year, the following sums were paid or received by cheque. 2010 Jan 1 Payment of three months rent to 28 February 2010 1 Receipt of three months commissions to 28 February 2010 Feb 1 Payment of one years insurance premiums to 31 January 2011 Mar 1 Payment of telephone and Internet expenses for the past three months 1 Payment of three months rent in advance on a new rental contract Apr 1 Payment of six months rates to 30 September 2010 Jun 1 Payment of telephone and Internet expenses for the past three months 1 Rent payment 30 Receipt of six months commissions to 31 August 2010 Sept 1 Payment of rent 1 Payment of telephone and Internet expenses for the past three months Oct 1 Payment of six months rates to 31 March 2011 Dec 1 Payment of telephone and Internet expenses for the past three months 1 Rent paid 31 Receipt of five months commissions to 31 January 2011 2011 Mar 1 Payment of telephone and Internet expenses for the past three months $ 2,520 1,800 7,200 1,524 3,600 6,480 1,752 3,600 3,600 3,600 1,956 6,480 2,208 3,600 3,000 2,004

Required: (a) Write up the above ledger accounts for the year ended 31 December 2010 and show the transfer to the
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(b) (c)

profit and loss account. Prepare an income statement extract for the year ended 31 December 2010. Explain the meaning of prepayments.

(17.5 marks) (2.5 marks) (1 mark)

Answer: (a)
2010 Jan Feb 2011 Jan 1 Prepaid b/f 1 Bank Insurance $ 2010 480 Dec 31 7,200 31 7,680 1 Prepaid b/f 600 Rates 2010 Dec 31 31 Profit and loss
1 Prepaid c/f ($7,200 12 )

$ 7,080 600 7,680

0.5 0.5 0.5 0.5

0.5

2010 Jan Apr Oct 2011 Jan

1 Prepaid b/f 1 Bank 1 Bank

$ 2,520 6,480 6,480 15,480 3,240

Profit and loss Prepaid c/f ($6,480 )


3 6

$ 12,240 3,240 15,480

0.5 0.5 0.5 0.5 0.5

1 Prepaid b/f

0.5

2010 Jan Mar Jun Sept Dec 2011 Jan

1 Bank 1 Bank 1 Bank 1 Bank 1 Bank

$ 2,520 3,600 3,600 3,600 3,600 16,920 2,400

Rent 2010 Jan 1 Dec 31 31

Accrued b/f Profit and loss Prepaid c/f ($3,600 2 ) 3

$ 840 13,680 2,400

0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5

16,920
0.5

1 Prepaid b/f

2010 Mar 1 Bank Jun 1 Bank Sept 1 Bank Dec 1 Bank Dec 31 Accrued c/f ($2,004 1 ) 3

Telephone and Internet $ 2010 1,524 Jan 1 1,752 Dec 31 1,956 2,208 668 8,108 2011 Jan 1

Accrued b/f Profit and loss

$ 508 7,600

0.5 0.5 0.5 0.5 0.5 0.5 0.5

8,108 Accrued b/f 668 $ 1,800 3,600 3,000 8,400 2011 Jan 1 Prepaid b/f 600
0.5 0.5

2010 Jan 1 Accrued b/f Dec 31 Profit and loss 31 Prepaid c/f ($3,000 1 ) 5

Commission Revenue $ 2010 600 Jan 1 7,200 Jun 30 600 Dec 31 8,400

Bank Bank Bank

0.5 0.5 0.5 0.5 0.5 0.5

(b)
Paul Mak
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Income Statement for the year ended 31 December 2010 (extract) Insurance Rates Rent Telephone and Internet $ 7,080 12,240 13,680 7,600 Commission revenue $ 7,200
0.5 0.5 0.5 0.5 0.5

(c)

Prepayments are expenses/revenues that have been paid/received during a period but have not been incurred/earned by the end of that period. (1 mark)

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QUESTION 3 Woody Chow started his business as a wholesaler on 1 January 2010. During the first year of business, the following operating expenses were incurred: (i) He rented an office in Tsim Sha Tsui for $600,000 per annum, payable quarterly at the end of March, June, September and December. Rates for the office, which totalled $3,000 per annum, were payable quarterly in advance until 31 March 2010. Starting from 1 April 2010, the rates increased by $1,000 per annum and were payable yearly in advance. The following payments were made in 2010: 2010 $ Jan 1 750 Apr 5 4,000 (ii) Woody took out a six-month fire insurance cover on the office and paid the $1,300 premium on 1 January 2010. He later found that the cover was inadequate and upgraded it to a comprehensive insurance plan as from 1 July 2010 for an annual premium of $8,800, payable in advance. He paid the annual premium on 10 July 2010.

(iii) Water and electricity paid during the year totalled $8,000. Prepaid water expenses amounted to $200 and an accrual of $350 was made for electricity. (iv) Other operating expenses paid during the year were $11,000 and $1,000 was accrued as at year end.

Required: (a) Distinguish between accrual accounting and cash accounting. (3 marks) (b) Show the following expense accounts for the financial year ended 31 December 2010, complete with all the year-end adjustments and balances brought forward: Rent and rates Insurance Water and electricity Other operating expenses (12 marks) (c) Prepare an income statement extract for the year ended 31 December 2010. It was determined that Woody Chows business had earned a gross profit of $135,000 for the year. (3 marks) Answer: (a) Under cash accounting, revenues are recognised when received and expenses are recognised when paid. Under accrual accounting, revenues and expenses are recognised when they are earned or incurred. The main difference between cash accounting and accrual accounting lies in the treatment of accruals and prepayments of expenses and revenues. (3 marks) (b)
2010 Jan Mar Apr Jun Sept Dec 2011 Jan 1 31 5 30 30 31 Bank Bank Bank Bank Bank Bank Rent and Rates $ 2010 750 Dec 31 150,000 31 4,000 150,000 150,000 150,000 604,750 1,000 Insurance $ 2010 1,300 Dec 31 8,800 31 $ 5,700 4,400 Profit and loss Prepaid c/f $ 603,750 1,000
0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5

604,750
0.5

1 Prepaid b/f

2010 Jan 1 Bank Jul 10 Bank

Profit and loss Prepaid c/f ($8,800


6 12

0.5 0.5 0.5 0.5

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10,100 2011 Jan 1 Prepaid b/f 4,400 Water and Electricity $ 2010 8,000 Dec 31 350 31 8,350 2011 200 Jan 1

10,100
0.5

2010 Dec 31 Bank 31 Accrued c/f 2011 Jan

Profit and loss Prepaid c/f

$ 8,150 200 8,350 350 $ 12,000 12,000 1,000

0.5 0.5 0.5 0.5

1 Prepaid b/f

Accrued b/f

0.5 0.5

2010 Dec 31 Bank 31 Accrued c/f

Other Operating Expenses $ 2010 11,000 Dec 31 Profit and loss 1,000 12,000 2011 Jan 1 Accrued b/f

0.5 0.5 0.5

0.5

(c)
Woody Chow Income Statement for the year ended 31 December 2010 (extract) $ Rent and rates 603,750 Gross profit b/d Insurance 5,700 Net loss Water and electricity 8,150 Other operating expenses 12,000 629,600 $ 135,000 494,600 629,600

0.5 0.5 0.5 0.5 0.5 0.5

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QUESTION 4 The following revenues and expenses were received and paid by Larry & Co during 2010: (i) Larry & Co rented a building as its office premises in 2008 for three years at a cost of $48,000 per annum. In 2010, Larry & Co made the following payments relating to rent: 2010 $ Jan 8 Rent for the three months ended 28 February 2010 12,000 Mar 14 Rent for the three months ended 31 May 2010 12,000 Jun 2 Rent for the three months ended 31 August 2010 12,000 Oct 28 Rent for the three months ended 30 November 2010 12,000 (ii) Larry & Co sublet part of the building to three tenants: Tenant A entered into a one-year tenancy agreement on 1 March 2010 and paid the whole year's rent of $30,000 on 4 April 2010. Tenant B entered into a two-year tenancy agreement on 1 May 2010 and paid rent of $14,400 quarterly in advance. The first four rent payments were made on 1 June 2010, 1 September 2010, 1 December 2010 and 1 March 2011. Tenant C paid $1,500 on 1 November 2010 as rent for a conference room for 30 days from 1 February 2011 to 2 March 2011.

(iii) Rates: Rates were paid quarterly in advance. Rates of $3,000 for the first quarter of 2010 were paid on 31 December 2009. During 2010, Larry & Co paid $15,300 for the remaining three quarters of rates. Rates of $4,000 for the first quarter of 2011 were paid on 31 December 2010. Required: (a) Show the rent expense, rent income and rates accounts as they would appear in the ledgers of Larry & Co for the year ended 31 December 2010. (11.5 marks) (b) Prepare for Larry & Co a balance sheet extract as at 31 December 2010, showing both accruals and prepayments. (2.5 marks) Answer: (a)
2010 Jan 8 Bank Mar 14 Bank Jun 2 Bank Oct 28 Bank Dec 31 Accrued c/f $ 12,000 12,000 12,000 12,000 4,000 52,000 Rent 2010 Jan 1 Dec 31 Accrued b/f Profit and loss $ 4,000 48,000
0.5 0.5 0.5 0.5 0.5 0.5 0.5

52,000 2011 Jan 1 Accrued b/f 4,000


0.5

2010 Dec 31 Profit and loss 31 Prepaid c/f [($30,000 2 ) 12 + ($14,400 1 ) + $1,500] 3

Rent Income $ 2010 63,400 Apr Jun 11,300 Sept Nov Dec 74,700 2011 Jan Rates 2010
7

4 1 1 1 1

Bank Bank Bank Bank Bank

$ 30,000 14,400 14,400 1,500 14,400 74,700 11,300

0.5 0.5 0.5 1 0.5 0.5 0.5

Prepaid b/f

0.5

2010
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$
Pearson Education Asia Limited 2010

Jan Dec 2011 Jan

1 Prepaid b/f 31 Bank 31 Bank

3,000 15,300 4,000 22,300 4,000

Dec

31 31

Profit and loss Prepaid c/f

18,300 4,000 22,300

0.5 0.5 0.5 0.5 0.5

1 Prepaid b/f

0.5

(b)
Larry & Co Balance Sheet as at 31 December 2010 (extract) $ Current liabilities 4,000 Accrued expenses Unearned revenues $ 4,000 11,300
0.5 0.5 0.5 0.5 0.5

Current assets Prepaid expenses

QUESTION 5 Sigma Chan, a sole proprietor, extracted the following trial balance from his books at the close of business on 30 April 2011: $ $ Capital as at 1 May 2010 ? Returns inwards 1,592 Accounts receivable 7,250 Returns outwards 858 Accounts payable 1,380 Wages and salaries 6,202 5% bank loan (repayable in 2015) 3,000 Bank 1,570 Office furniture 1,466 Cash 146 Discounts allowed 1,424 Rates and insurance 564 Discounts received 586 Premises 12,574 Fixtures and fittings 1,256 Drawings 3,562 Purchases 19,804 Rent 250 Sales 34,224 Inventory at 1 May 2010 4,148 Inventory as at 30 April 2011 was valued at $6,440.

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Additional information: (i) Prepaid wages amounted to $1,250. (ii) Loan interest for the year was not paid. (iii) Rent owing amounted to $1,790. Required: (a) Prepare a trial balance as at 30 April 2011. Calculate the capital account balance. (b) Draw up an income statement for the year ended 30 April 2011. (c) Draw up a balance sheet as at 30 April 2011. Answer: (a)
Sigma Chan Trial Balance as at 30 April 2011 Dr $ Capital at 1 May 2010 Accounts receivable Accounts payable 5% bank loan (repayable in 2015) Office furniture Discounts allowed Discounts received Fixtures and fittings Purchases Sales Returns inwards Returns outwards Wages and salaries Bank Cash Rates and insurance Premises Drawings Rent Inventory as at 1 May 2010 7,250 1,380 3,000 1,466 1,424 586 1,256 19,804 34,224 1,592 858 6,202 1,570 146 564 12,574 3,562 250 4,148 61,808 Cr $ 21,760
0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5

(11 marks) (8 marks) (7 marks)

61,808

(b)
Sigma Chan Income Statement for the year ended 30 April 2011 $ $ Opening inventory 4,148 Sales Add Purchases 19,804 Less Returns inwards Less Returns outwards (858 ) 18,946 23,094 Less Closing inventory (6,440 ) Cost of goods sold 16,654 Gross profit c/d 15,978 32,632 Discounts allowed 1,424 Gross profit b/d 4,952 Discounts received Wages and salaries ($6,202 $1,250) Rates and insurance 564 Rent ($250 + $1,790) 2,040 Loan interest ($3,000 5%) 150 Net profit 7,434 16,564 $ 34,224 (1,592 ) $ 32,632
0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5

32,632 15,978 586

0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5

16,564

(c)
Sigma Chan Balance Sheet as at 30 April 2011
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$ Non-current assets Premises Office furniture Fixtures and fittings Current assets Inventory Accounts receivable Prepaid expenses Bank Cash 12,574 1,466 1,256 6,440 7,250 1,250 1,570 146

$ Capital Balance as at 1 May 2010 Add Net profit for the year 15,296 Less Drawings Non-current liabilities 5% bank loan 16,656 31,952 Current liabilities Accounts payable Accrued expenses ($1,790 + $150)

$ 21,760 7,434 29,194 (3,562 ) 25,632 3,000


0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5

1,380 1,940

3,320 31,952

QUESTION 6 Cyrus Lau is a confectionary retailer. The following trial balance was extracted from his ledgers on 31 March 2011:
Rent and rates Purchases and sales Office furniture Inventory as at 1 April 2010 Carriage inwards Accounts receivable and accounts payable Bank Capital as at 1 April 2010 Delivery van Discounts Returns Sundry expenses Wages and salaries Rental income Motor expenses Drawings Cash Dr $ 3,440 46,830 5,985 10,695 700 27,380 7,780 6,730 2,165 1,570 820 16,010 2,765 12,415 220 145,505 Cr $ 89,700

10,170 39,590 545 500 5,000

145,505

Additional information: (i) Inventory as at 31 March 2011 was valued at $9,250. (ii) Sundry expenses of $300 were owing. (iii) Rental income for the months of February and March 2011 at $2,000 per month was outstanding. (iv) Van maintenance expenses were due but unpaid. The amount was equivalent to 10% of the cost of the delivery van.

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Required: (a) Draw up an income statement for the year ended 31 March 2011 and a balance sheet as at that date. (15 marks) (b) Compute the following ratios for Cyrus Lau's business at 31 March 2011. (i) Gross profit ratio (iv) Current ratio (ii) Net profit ratio (v) Quick ratio (iii) Return on capital employed (5 marks) (All calculations to 2 decimal places) Answer: (a)
Cyrus Lau Income Statement for the year ended 31 March 2011 $ $ $ Opening inventory 10,695 Sales 89,700 Add Purchases 46,830 Less Returns inwards (1,570 ) Carriage inwards 700 47,530 Less Returns outwards (500 ) 47,030 57,725 Less Closing inventory (9,250 ) Cost of goods sold 48,475 Gross profit c/d 39,655 88,130 Rent and rates 3,440 Gross profit b/d Discounts allowed 2,165 Discounts received Sundry expenses ($820 + $300) 1,120 Rental income ($5,000 + $4,000) Wages and salaries 16,010 3,438 Motor expenses [$2,765 + ($6,730 10%)] Net profit 23,027 49,200 Cyrus Lau Balance Sheet as at 31 March 2011 $ $ Capital 5,985 Balance as at 1 April 2010 6,730 12,715 Add Net profit for the year Less Drawings 9,250 27,380 4,000 7,780 220 Current liabilities Accounts payable Accrued expenses ($300 + $673) $ 88,130
0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5

88,130 39,655 545 9,000

0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5

49,200

$ 39,590 23,027 62,617 (12,415 ) 50,202


0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5

Non-current assets Office furniture Delivery van Current assets Inventory Accounts receivable Accrued rental income Bank Cash

48,630 61,345

10,170 973

11,143 61,345

(b)

(i) (ii) (iii) (iv) (v)

Gross profit ratio: $39,655 $88,130 = 45.00% Net profit ratio: $23,027 $88,130 = 26.13% Return on capital employed: $23,027 [($39,590 + $50,202) 2] = 51.29% Current ratio: $48,630 $11,143 = 4.36 : 1 Quick ratio: ($48,630 $9,250) $11,143 = 3.53 : 1

(1 mark) (1 mark) (1 mark) (1 mark) (1 mark)

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QUESTION 7 Candy Ho is a florist owner. The following trial balance was extracted from her books on 31 March 2010.
Accounts receivable and accounts payable Capital as at 1 April 2009 Carriage inwards Carriage outwards Cash at bank Cash in hand Discounts allowed Discounts received Drawings Electricity Fixtures and fittings Inventory as at 1 April 2009 Loan from Billy Chan (repayable in 2012) Purchases Rates Rent Repairs and maintenance Returns outwards Salaries Sales Dr $ 63,252 330 376 11,104 1,903 3,138 4,104 5,793 964 21,206 28,245 14,480 94,878 1,447 2,655 723 1,445 3,620 239,634 116,076 239,634 Cr $ 32,349 71,180

Additional information: (i) Inventory as at 31 March 2010 was valued at $12,000. (ii) Items prepaid: rent $400; electricity $250. Accruals: rates $120; repairs $57. (iii) 20% of the rent expenses were used for Candy's private purposes. (iv) 10% loan interest was not provided for during the year. Required: (a) Draw up an income statement for the year ended 31 March 2010 and a balance sheet as at that date. (16 marks) (b) Compute the following ratios for Candy Ho's business. (i) Gross profit ratio (ii) Current ratio (iii) Quick ratio (3 mark) (All calculations to 2 decimal places)

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Answer: (a)
Candy Ho Income Statement for the year ended 31 March 2010 $ $ Opening inventory 28,245 Sales Add Purchases 94,878 Carriage inwards 330 95,208 Less Returns outwards (1,445 ) 93,763 122,008 Less Closing inventory (12,000 ) Cost of goods sold 110,008 Gross profit c/d 6,068 116,076 Carriages outwards 376 Gross profit b/d Discounts allowed 3,138 Discounts received 714 Net loss Electricity ($964 $250) Rates ($1,447 + $120) 1,567 1,804 Rent [($2,655 $400) 80%] Repairs and maintenance ($723 + $57) 780 Salaries 3,620 Loan interest ($14,480 10%) 1,448 13,447 Candy Ho Balance Sheet as at 31 March 2010 $ $ $ Non-current assets Capital Fixtures and fittings 21,206 Balance as at 1 April 2009 Less Net loss for the year 3,275 Current assets Drawings [$5,793 + ($2,655 Inventory 12,000 6,244 $400) 20%] Accounts receivable 63,252 Prepaid expenses ($250 + $400) 650 Non-current liabilities Bank 11,104 Loan from Billy Chan Cash 1,903 88,909 Current liabilities Accounts payable 32,349 Accrued expenses 1,625 110,115 ($120 + $57 + $1,448) $ 116,076

0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5

116,076 6,068 4,104 3,275

0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5

13,447

$ 71,180 (9,519 ) 61,661 14,480


0.5 0.5 0.5 0.5 1 0.5 0.5 0.5 0.5 0.5 0.5 0.5

33,974 110,115

(b)

(i) Gross profit ratio: $6,068 $116,076 = 5.23% (ii) Current ratio: $88,909 $33,974 = 2.62 : 1 (iii) Quick ratio: ($88,909 $12,000) $33,974 = 2.26 : 1

(1 mark) (1 mark) (1 mark)

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QUESTION 8 Michael Lee, a sole proprietor, extracted the following trial balance from his books at the close of business on 30 April 2009:
Accounts receivable and accounts payable Advertising Bank Capital Carriage inwards Carriage outwards Delivery van at cost Drawings Water and electricity Insurance Interest on bank overdraft Inventory at 1 May 2008 Premises at cost Purchases Rent expense and revenue Repair expenses Return of goods to suppliers Sales Telephone and Internet expenses Returns inwards Office equipment Dr $ 6,410 4,920 1,410 1,045 17,850 51,480 5,350 7,850 140 19,895 159,380 217,085 2,000 5,925 1,205 750 49,000 551,695 Cr $ 8,640 3,100 237,740

10,330 4,985 286,900

551,695

Additional information: (i) Inventory as at 30 April 2009 was valued at $3,719. (ii) Items prepaid: telephone $600; electricity $390. Accruals: rent revenue $3,200, repair expenses $150; carriage inwards $60.

(iii) It was agreed that one-tenth of the water and electricity expenses should be charged to Michael in respect of private use. (iv) Insurance consisted of: Motor insurance paid on 1 June 2008 for the period up to 30 April 2009 Property insurance paid on 1 May 2008 for the three months ended 31 July 2008 Property insurance paid on 1 September 2008 for the 12 months ending 31 July 2009 Rent of $1,600 had been paid for four months ending 31 July 2009. $ 3,350 900 3,600 7,850

(v)

Required: Draw up a vertical-style income statement for the year ended 30 April 2009 and a balance sheet as at that date. (16 marks)

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Answer:
Michael Lee Income Statement for the year ended 30 April 2009 $ Sales Less Returns inwards Less Cost of goods sold: Opening inventory Add Purchases Carriage inwards ($1,410 + $60) Less Returns outwards Less Closing inventory Gross profit Add Other revenues: Rent received ($10,330 + $3,200) Less Expenses: Advertising Carriage outwards
9 Water and electricity [($5,350 $390) 10 ] 3 Insurance [$7,850 ($3,600 12 )] Interest on bank overdraft Repair expenses ($5,925 + $150)

$ 286,900 (750 ) 286,150


0.5 0.5

0.5 0.5

19,895 217,085 1,470 218,555 (4,985 )

0.5

213,570 233,465 (3,719 )

0.5

(229,746 ) 56,404 13,530 69,934

0.5 0.5 0.5

4,920 1,045 4,464 6,950 140 6,075 800 605 (24,999 ) 44,935

0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5

Rent [$2,000 ($1,600 3 )] 4 Telephone and Internet expenses ($1,205 $600) Net profit Michael Lee Balance Sheet as at 30 April 2009 $ Non-current assets Premises at cost Office equipment Delivery van at cost Current assets Inventory Accounts receivable Accrued rent revenue Prepaid expenses ($600 + $390 + $900 + $1,200) Less Current liabilities: Accounts payable Accrued expenses ($150 + $60) Bank overdraft Net current assets 8,640 210 3,100

$ 159,380 49,000 17,850 3,719 6,410 3,200 3,090 16,419

$
0.5 0.5 0.5

226,230

0.5 0.5 0.5 0.5

(11,950 ) 4,469 230,699

0.5 0.5 0.5 0.5

Financed by: Capital Balance as at 1 May 2008 Add Net profit for the year Less Drawings ($51,480 + $496)

237,740 44,935 282,675 (51,976 ) 230,699

0.5 0.5 0.5

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QUESTION 9 The following is a summary of Judy Ku's bank account for the year ended 30 June 2012.
Bank $ 138,800 Accounts payable 136,002 Carriage inwards 3,425 Drawings 13,695 Water and electricity Rent and rates Wages Sundry expenses Balance c/f 291,922 $ 122,200 8,562 7,595 5,744 4,110 29,885 1,198 112,628 291,922

Balance b/f Accounts receivable Bank interest revenue Commissions revenue

Additional information was available on 30 June 2012: (i) Accounts payable Accounts receivable Capital as at 1 July 2011 Cash Inventory as at 30 June 2012 Inventory as at 1 July 2011 Plant and machinery Purchases Returns inwards Returns outwards Sales (ii) Prepaid water charges amounted to $100.

$ 114,244 222,616 219,573 16,130 13,905 9,525 104,230 203,561 2,799 1,250 376,396

(iii) Rent owing amounted to $190. (iv) (v) Electricity charges of $50 were owing. Sundry expenses of $340 were accrued.

Required: Prepare for Judy Ku an income statement for the year ended 30 June 2012 and a balance sheet as at that date. (14 marks)

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Answer:
Judy Ku Income Statement for the year ended 30 June 2012 $ $ Opening inventory 9,525 Sales Add Purchases 203,561 Less Returns inwards Carriage inwards 8,562 212,123 Less Returns outwards (1,250 ) 210,873 220,398 Less Closing inventory (13,905 ) Cost of goods sold 206,493 Gross profit c/d 167,104 373,597 Gross profit b/d Water and electricity ($5,744 $100 + $50) 5,694 Rent and rates ($4,110 + $190) 4,300 Bank interest revenue Wages 29,885 Commissions revenue Sundry expenses ($1,198 + $340) 1,538 Net profit 142,807 184,224 Judy Ku Balance Sheet as at 30 June 2012 $ $ Capital 104,230 Balance as at 1 July 2011 Add Net profit for the year 13,905 222,616 100 112,628 16,130 Less Drawings Current liabilities Accounts payable Accrued expenses ($50 + $190 + $340) 114,244 580 114,824 469,609 $ 376,396 (2,799 ) $ 373,597
0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5

373,597 167,104 3,425 13,695 184,224

0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5

$ 219,573 142,807 362,380 (7,595 ) 354,785


0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5

Non-current assets Plant and machinery Current assets Inventory Accounts receivable Prepaid expenses Bank Cash

365,379 469,609

QUESTION 10 The trial balance of Stephen Chows business as at 12 October 2011 is shown below:
Stephen Chow Trial Balance as at 12 October 2011 Dr $ Accounts payable Accounts receivable Bank overdraft Capital at 1 November 2010 Cash in hand Discounts allowed Discounts received Carriage inwards Drawings Premises Inventory at 1 November 2010 Purchases Sales Rent and rates Wages and salaries 198,120 61,945 371,575 2,220 20,640 12,090 16,920 31,800 251,100 15,060 212,040 392,665 5,580 151,680 905,160 905,160 Cr $ 66,885

During the rest of October 2011, the following transactions were made:
NSS BAFS: Frank Woods Financial Accounting 1 Question Bank 17 Pearson Education Asia Limited 2010

2011 Oct

13 16 17 20 21 25 28 30

Cash sales Credit purchases Settled the amount owing to a supplier by cheque Paid wages by cheque Cash received from a customer Stephen took cash from the business for his private use. Stephen took goods from the business for his private use. Cash banked

$ 69,405 47,550 15,025 4,000 25,000 11,500 5,000 76,150

Inventory as at 31 October 2011 was valued at $10,885. Required: (a) Draw up the trial balance as at 31 October 2011. (b) (8 marks)

Taking into consideration the following additional information, prepare for Stephen Chow an income statement for the year ended 31 October 2011 and a balance sheet as at that date. (12 marks) Additional information as at 31 October 2011: (i) Wages of $3,500 were owed. (ii) Half of the rent and rates were incurred by Stephen's private apartment. (iii) Carriage inwards of $2,000 was prepaid.

Answer: (a)
Stephen Chow Trial Balance as at 31 October 2011 Dr $ Accounts payable (W1) Accounts receivable (W2) Bank overdraft (W3) Capital at 1 November 2010 Cash in hand (W4) Discounts allowed Discounts received Carriage inwards Drawings (W5) Premises Inventory at 1 November 2010 Purchases (W6) Sales (W7) Rent and rates Wages and salaries (W8) 173,120 4,820 371,575 8,975 20,640 12,090 16,920 48,300 251,100 15,060 254,590 462,070 5,580 155,680 949,965 949,965 Cr $ 99,410
0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5

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Workings: (W1) $66,885 + $47,550 $15,025 (W2) $198,120 $25,000 (W3) $61,945 + $15,025 + $4,000 $76,150 (W4) $2,220 + $69,405 + $25,000 $11,500 $76,150 (W5) $31,800 + $11,500 + $5,000 (W6) $212,040 + $47,550 $5,000 (W7) $392,665 + $69,405 (W8) $151,680 + $4,000 (b)
Stephen Chow Income Statement for the year ended 31 October 2011 $ $ 15,060 Sales 254,590 14,920 269,510 284,570 (10,885 ) 273,685 188,385 462,070 20,640 2,790 159,180 17,865 200,475 $ 462,070

Opening inventory Add Purchases Carriage inwards ($16,920 $2,000) Less Closing inventory Cost of goods sold Gross profit c/d

0.5 0.5 0.5 0.5 0.5 0.5 0.5

Discounts allowed Rent and rates ($5,580 1 ) 2 Wages and salaries ($155,680 + $3,500) Net profit

Gross profit b/d Discounts received

462,070 188,385 12,090

0.5 0.5 0.5 0.5 0.5 0.5

200,475

Non-current assets Premises Current assets Inventory Accounts receivable Prepayments Cash

Stephen Chow Balance Sheet as at 31 October 2011 $ $ Capital 251,100 Balance as at 1 November 2010 Add Net profit for the year 10,885 173,120 2,000 8,975 Less Drawings ($48,300 + $2,790) 194,980 Current liabilities Accounts payable Accruals Bank overdraft

$ 371,575 17,865 389,440 (51,090 ) 338,350


0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5

99,410 3,500 4,820

446,080

107,730 446,080

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Pearson Education Asia Limited 2010