Syllabus Topics 1.
The Accounting Equation
2.
Double Entry System
3.
Financial Statements
4.
The Division of the Ledger
5.
Banking Transactions and Cash Book: Two Columns
6.
Cash Book: Three Columns - Cash Discount
7.
Sales Day Book, Purchases Day Book, Returns inwards Day Book, Returns outwards Day Book
8.
The Journal
9.
The Petty Cash - Imprest System
10.
Adjusting for Accruals and Prepayments
11.
Depreciation of Non-current Assets
12.
Bad Debts and Allowance for Doubtful Debts
13.
Bank Reconciliation Statements
14.
Capital and Revenue Expenditure
15.
Preparing Financial Statements
If you have studied this textbook well, and prepared fully for your examination, luck will play only a very small part in the outcome. Page: 2
Syllabus Topics 1.
The Accounting Equation
2.
Double Entry System
3.
Financial Statements
4.
The Division of the Ledger
5.
Banking Transactions and Cash Book: Two Columns
6.
Cash Book: Three Columns - Cash Discount
7.
Sales Day Book, Purchases Day Book, Returns inwards Day Book, Returns outwards Day Book
8.
The Journal
9.
The Petty Cash - Imprest System
10.
Adjusting for Accruals and Prepayments
11.
Depreciation of Non-current Assets
12.
Bad Debts and Allowance for Doubtful Debts
13.
Bank Reconciliation Statements
14.
Capital and Revenue Expenditure
15.
Preparing Financial Statements
If you have studied this textbook well, and prepared fully for your examination, luck will play only a very small part in the outcome. Page: 2
CHAPTER 1 The Accounting Equation The resources of the business are termed „assets‟. Assets of the business business = Assets Assets provided by the owner ‘Assets provided by the owner’ is given the the term „equity term „equity (capital)‟.
Assets = Equity (Capital) (Capital) Any amounts owing to persons persons other than the owner owner are given the term „liabilities‟. The ‘accounting equation’ now reads: Assets = Equity Equity (Capital) + Liabilities This equations are a form of ‘Financial Statements ’ termed the Balance Sheet (Statement of Financial Position).
L Wang Statement of Financial Position as at 1 September Year 6 $ $ ASSETS Non-current Assets Premises Motor Vehicle Computer
xxx xxx xxx
xxx
Current Assets Inventories Trade Receivables Cash in hand
xxx xxx xxx
xxx
Total Assets Assets
xxx
EQUITY AND LIABILITIES Proprietor’s Capital
xxx
Non-current Liabilities Loan from T Wells
xxx
Current Liabilities Trade Payables Bank Overdraft Total Equity and Liabilities
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xxx xxx
xxx xxx
EXERCISES 1.1
Insert the missing figure in each of the following: Assets $ 1,260
(a) (b) (c) (d) (e) 1.2
5,800 7,840 9,000
Liabilities $ 750 920
4,910 0
List the following items and alongside each write the word „asset‟ or „liability‟ as appropriate: -
1.3
Equity $ 940 3,200
Loan from T Masters Trade Receivables Fixtures and Fittings Premises Trade Payables Inventories Bank overdraft
Draw up W Pentecost‟s complete Balance Sheet (Statement of Financial Position) from the following incomplete data at 30 June Year 9. Your answer should include the missing item. $ Cash at bank 2,614 Trade Payables 4,150 Inventories 5,860 Fixtures and fittings 1,900 Trade Receivables 3,750 Motor vehicles 4,200 Loan from D Galbraith 3,600
“End of Chapter - 1”
Page: 4
CHAPTER 2 Double Entry System 1.
Ledger Left-hand side = Debit side (or Dr)
Right-hand side = Credit side (or Cr)
Asset account
Increases +
Decreases -
Liabilitiy account Decreases -
Increases +
Capital account Decreases -
Increases +
Each of these represents a ‘T’ account. This two -sided account layout has long been used to apply and show double-entry book-keeping.
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EXERCISES 2.1
Draw up the following table. In the right-hand columns you should enter the names of the accounts which are to be debited and credited respectively. Debit
Credit
(a) Bought office furniture for cash (b) Sold goods on credit to T Rich (c) Bought motor vehicle on credit from L Wolfson & Co (d) A customer, R Price, pays the business by cheque (e) The owner puts a further amount into the business by cheque (f) Paid by cheque for the motor vehicle bought from L Wolfson & Co 2.2
Prepare accounts in the books of N Eley to record the following transactions: Year 5 Aug 1 Started business with $6,000 in the bank Aug 6 Bought a motor vehicle on credit from Elstead Garage for $2,800 Aug 15 Purchased goods by cheque $420 Aug 23 Bought office equipment on credit from Logmore & Sons for $370 Aug 29 Paid by cheque the amount due to Elstead Garage
2.3
Enter the following transactions into the accounts of T Pointer: Year 3 Mar 1 Started business with $5,000 cash Mar 4 Transferred $4,500 of the cash into a newly-opened business bank account Mar 8 Bought office equipment, paying by cheque $250 Mar 15 Bought goods on credit from T Earl for $360 Mar 20 Sold for cash $80 goods which had cost the same amount Mar 27 Paid T Earl by cheque the amount that was owing
2.4
You are required to enter the following transactions of D White in appropriate accounts: Year 4 Oct 2 Bought goods on credit $370 from W Steel Oct 5 Sold goods for cash $96 Oct 8 Bought delivery vehicle (for use in the business) by cheque $3,100 Oct 14 Returned goods to W Steel $30 Oct 20 Sold goods on credit $490 to F Platt Oct 24 Sent cheque to W Steel $340 Oct 27 F Platt returned goods $35
2.5
Enter the following transactions of R Webster in appropriate accounts: Year 5 Mar 1 Commenced business with $10,000 in the bank Mar 3 Bought office furniture by cheque $460 Mar 5 Bought goods on credit $375 from T Hunt Mar 8 Returned goods to T Hunt $55 Mar 12 Sold goods on credit $156 to B Wright Mar 15 Bought motor vehicle on credit from Scales Motors $3,600 Page: 6
Mar 19 Mar 23 Mar 26 Mar 30
B Wright returned goods $26 Sent cheque for $3,600 to Scales Motors Sent cheque to T Hunt in settlement of account Received cheque $70 from B Wright
2.6
Record the following in appropriate accounts, using the rules of double entry: Year 4 May 1 L Western commenced business with cash of $15,000 May 3 Transferred $13,000 cash into a bank account May 6 Purchased goods on credit from J White for $760 May 8 Paid rent in cash $250 May 10 Bought office equipment by cheque $1,300 May 14 Returned to J White goods $30 May 17 Sold goods on credit to T Swann for $270 May 21 Paid rent in cash $250 May 24 Paid insurance by cheque $140 May 26 Sent cheque to J White for $300 May 28 Sold goods for cash $290 May 30 Received cheque from T Swann in settlement May 31 L Western made drawings in cash of $120
2.7
Record the following in appropriate accounts, using the rules of double entry: Year 4 Apr 1 L Timms started in business with $5,000 in the bank Apr 3 Bought office equipment for $370 by cheque Apr 5 Paid rent by cheque $260 Apr 8 Purchased goods on credit $420 from A Smart Apr 11 Returned goods to A Smart $35 Apr 14 Drew from bank for office cash $130 Apr 15 Paid wages in cash $115 Apr 18 Sold goods on credit to R Squires $175 Apr 21 Bought stationery by cheque $20 Apr 24 Sold goods for cheque $85 Apr 27 Paid by cheque the amount owing to A Smart Apr 30 Timms paid a further $1,000 into the bank account
2.8
Enter the following in trade receibales and trade payables accounts only. Balance each account at 31 March Year 5 and bring your balances down as appropriate. Year 5 Mar 2 Bought goods $270 on credit from T Dove Mar 4 Sold goods $145 on credit to N Small Mar 7 Returned goods which had cost $35 to T Dove Mar 10 Bought goods $360 on credit from A Smith Mar 13 N Small returned goods which he had bought on 4 March for $20 Mar 15 Bought goods $310 on credit from T Dove Mar 18 Sold goods $185 on credit to N Small Mar 21 Sent cheque for $70 to A Smith in part payment Mar 23 Sold goods $185 on credit to N Small Mar 26 N Small returned goods which he had bought on 23 March for $35 Mar 28 Sent cheque for $235 to T Dove Mar 30 Received cheque from N Small for $125 Mar 31 Sent cheque for $290 to A Smith
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2.9
On 31 December Year 4, T Lennon had the following account balances: Motor vehicle Purchases Sale revenues Inventory Cash at bank Fixtures and fittings Wages Trade Receivables Trade Payables Rent Drawings General expenses Loan from D Waller Capital
$ 4,500 2,960 4,230 1,800 6,740 7,900 2,310 1,960 2,600 1,250 180 930 2,000 21,700
Prepare the trial balance of T Lennon at 31 December Year 4.
“End of Chapter - 2”
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CHAPTER 3 Preparing Financial Statements 3.1
Format of the Income Statement of a Sole Trader Owen Jones Income Statement for the year ended 31 December 20X0 $ $ Revenue xxx Less: Cost of goods sold Opening inventory xxx Purchases xxx xxx Less: Closing inventory xxx xxx Gross profit Add:
Income Discount Receive Interest Receivable
Less: Expenses Motor expenses Rent and rates Light and heat Sundry expenses Depreciation Motor Vans Office Equipment Net profit for the year
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xxx xxx xxx
xxx xxx
xxx xxx xxx xxx xxx xxx
xxx xxx
3.2
Format of the Statement of Financial Position for a Sole Trader Owen Jones Statement of Financial Position at 31 December 20X0 Cost
ASSETS Non-current Assets Premises Motor vehicles Current Assets Inventories Trade receivables Less: Allowance for doubtful debts Prepayments Cash at bank Cash in hand
$
Accumulated Depreciation $
Net Book Value $
xxx xxx xxx
xxx xxx xxx
xxx xxx xxx
xxx xxx xxx
xxx xxx xxx xxx
Total Assets
xxx xxx
EQUITY AND LIABILITIES Capital and Accumulated Profits Capital at 1 January 20X0 Add: Net profit for the year Less: Drawing for the year
xxx xxx (xxx) xxx
Non-current Liabilities 12% Debentures Current Liabilities Trade payables Accruals Total Equity and Liabilities
xxx xxx xxx
xxx xxx
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EXERCISES 3.1
From the following trial balance of T Wedburn, prepare Income Statement for the year ended 31 December Year 6 together with a Balance Sheet (Statement of Financial Position) at that date. T Wedburn Trial Balance at 31 December Year 6 Dr $ 26,200
Purchases Sales/Revenue Wages Rent Insurance Lighting and heating Trade Receivables Trade Payables Motor vehicles Cash at bank Premises Fixtures and fittings Drawings Capital
Cr $ 34,670
6,100 1,200 160 380 3,460 1,700 5,600 4,130 54,000 1,200 2,600 68,660 105,030
105,030
Wedburn valued his inventory at 31 December Year 6 at $3,100. 3.2
From the following trial balance of P Franks, prepare Income Statement for the year ended 28 February Year 5 together with a Balance Sheet (Statement of Financial Position) at that date. P Franks Trial Balance at 28 February Year 5 Dr $ 155,400
Purchases Sales/Revenue Inventory, 1 March Year 4 Returns inwards Returns outwards Heating and lighting Salaries and wages Sundry expenses Rent and rates Premises Equipment Motor vehicles Trade Receivables Bank Cash Pa e: 11
Cr $ 221,300
12,600 5,200 6,650 3,900 48,500 4,650 2,300 104,000 28,000 21,000 23,750 960 76
Trade Payables Loan; repayable 28 Feb Year 9 Drawings Capital
15,716 32,000 10,600 145,270 420,936
420,936
Inventory at 28 February Year 5 was valued at $16,100. 3.3
From the following trial balance of T Williams, prepare Income Statement for the year ended 31 May Year 7 together with a Balance Sheet (Statement of Financial Position) at that date.
Sales/Revenue Purchases Wages and salaries
T Williams Trial Balance at 31 May Year 7 Dr Cr $ $ 139,200 103,500 15,320
Buildings Inventory, 1 June Year 6 Carriage inwards Rent Fixtures and fittings Returns outwards Insurance Returns inwards Trade Receivables Trade Payables Loan from T Smart, repayable in Year 11 Sundry expenses Carriage outwards Cash at bank Cash in hand Drawings Capital
32,000 27,230 630 5,400 4,250 960 325 430 21,460 12,240 15,000 475 2,340 4,450 195 11,400 62,005 229,405
229,405
Inventory at 31 May Year 7 was valued at $30,580.
“End of Chapter - 3”
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CHAPTER 4 The division of the ledger The sub-divisions could be as follows: (a) customers’ personal accounts (receivable accounts)
Receivables Ledger
(b)
suppliers’ personal accounts (payable accounts)
Payables Ledger
(c)
concerned with the receiving and paying out of money, whether by cash, cheque or other methods
Cash Book
(d)
the remaining accounts
General Ledger (or nominal ledger)
Types of account The basic division is into: (a) Personal accounts - the individual accounts of receivables and payables (b) Impersonal accounts - the accounts of things rather than of people Impersonal accounts are sometimes sub-divided into: (i) Real accounts - covering assets, eg premises, motor vehicles, stock, cash and bank, etc. (ii)
Nominal accounts - the various income and expense accounts, eg s ales, wages, insurance
Further division of the ledger Possible sub-divisions of the sales ledger are: (i) on an alphabetic basis - according to customer names (first letter of surname), e.g A-E, F-J, K-N, O-S, T-Z (ii)
on a numerical basis - each new customer is given the next available number: the system builds up progressively, e.g 1-400; then starting 401-800; etc.
(iii)
on a geographic (or territorial) basis - areas or regions. Possibly according to sales territories
(iv)
on a product basis - according to product categories
(v)
by type of customer - trade customer accounts (=firms) might be kept separate from those of private individuals.
(vi)
Another possible sub-division is according to the level of credit (i.e outstanding debt) allowed.
Some organisations keep a separate private ledger. Instead of being kept in the general ledger, certain accounts - capital, drawings, income statements - are kept separately with only the proprietor and one or more senior staff having access. This is to maintain confidentiality. Pa e: 13
Note that the capital account and the drawings account are classed as personal accounts. The income statement, though, is classed as a nominal account.
Illustration Transaction (a) Purchase of goods by cheque
Name of ledger General ledger Cash book
Entries in accounts Dr Purchases Cr Bank
(b) purchase of goods on credit
General ledger Payables ledger
Dr Purchases Cr Trade Payables
(c) sale of goods for cash
Cash book General ledger
Dr Cash Cr Sales
(d) sale of goods on credit
Sales ledger General ledger
Dr Trade Receivable Cr Sales
(e) puchase of motor vehicle by cheque
General ledger Cash book
Dr Motor vehicle Cr Bank
(f) payment by cheque of a supplier
Purchases Cash book
Dr Trade Payables Cr Bank
EXERCISES 4.1
Set out and complete the following table:
Transaction
Account to be debited
Division Account of the to be ledger credited
Division of the ledger
(a) Goods bought for cash (b) Sold goods on credit (c) Paid rent by cheque (d) Bought furniture by cheque (e) Goods bought on credit (f) Customer paid account in cash
Page: 14
4.2
4.3
Name the ledger in which you would expect each of the following accounts to appear: (a) (b) (c) (d) (e) (f)
Purchases account D Smith - Trade Accounts Receivable Rent payable Machinery Drawings Sales
(a)
Name four types of personal account.
(b)
What type of account is each of the following? (i) (ii) (iii) (iv) (v)
machinery sales general expenses bank inventory
“End of Chapter - 4 ”
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CHAPTER 5 Banking Transactions and Cash book: two columns EXERCISES 5.1
Prepare a two-column cash book from the following transactions, balancing at the end of the month. Year 3 Nov 1 F Mills started in business with $3,000 in cash Nov 2 Banked $2,800 of the cash Nov 4 Paid rent by cheque $140 Nov 7 Bought goods by cheque $370 Nov 10 Bought stationery for cash $46 Nov 12 Paid wages in cash $120 Nov 14 Withdrew from bank for office cash $160 Nov 17 Cash sales paid direct into the bank $230 Nov 20 Paid carriage in cash $34 Nov 23 Cash sales $220 Nov 26 F Mills withdrew $60 in cash for private use Nov 28 Banked $200 of cash Nov 30 Bought goods by cheque $430
5.2
Prepare a two-column cash book from the following details, balancing it at the end of the month. Year 8 May 1 Balances brought forward from previous monthj: Cash $67; Bank $1,037 (Dr) May 3 Drew cheque payable to D Petts $215 May 5 Withdrew from bank for office cash $50 May 7 Paid wages in cash $80 May 10 Cash sales $375: $300 of this was paid direct into the bank account May 13 The proprietor withdrew by cheque for private use $360 May 16 Drew cheque payable to L Ryan $294 May 19 Bought goods by cheque $490 May 22 Cash sales $240 May 24 Banked $250 cash May 27 Paid general expenses in cash $32 May 29 Drew cheque payable to T Marle $330
“End of Chapter - 5”
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CHAPTER 6 Cash Book: Three Columns - Cash Discount There are two types of cash discounts that are recorded in the ledger accounts: (i) Discount allowed This is cash discounts allowed by the business to its customers (trade account receivables) when they pay their accounts quickly. (ii)Discount received This is cash discounts received by the business from its suppliers when it pays what it owes quickly.
EXERCISES 6.1
Maria Metaxa had the following Cash Book balances at 1 February 20X7. Cash Bank
$65 $3,196 Dr
During the month of February 20X7, she had the following transactions: Feb Feb Feb Feb Feb
2 4 6 6 8
Feb 10 Feb 12 Feb 12 Feb 15 Feb 16 Feb 19 Feb 19 Feb 21 Feb 23 Feb 25 Feb 27 Feb 28 Feb 28
Bought $50 of postage stamps from cash. Cash sales banked the same day, $2,610 Cash purchases, paid by cheque, for $1,075 Paid wages by cheque, $2,167 Received a cheque from D Pole for $1,250 in settlement of a debt of $1,280 Cash sales banked the same day, $2,730 Drew a cheque to increase cash in hand by $100 Paid wages by cheque, $1,964 Paid electricity by cheque, $53 Purchased stationery for cash, $38 Paid wages by cheque, $1,840 Cash sales banked the same day, $2,945 Paid travelling expenses of $19 from cash Received a cheque for $1,760 from E Holme in settlement of his account of $1,800 Paid telephone bill by cheque, $132 Paid wages by cheque, $1,920 Paid P Barratt & Co. $1,240 by cheque in settlement of their account of $1,260 Drew a cheque payable to D Smart in settlement of his account; $2,200 less 2½% cash discount.
Required: (a) Prepare a Three-column Cash Book, balancing it at 28 February. Bring down the balances at 1 March 20X7. (b) Post the totals of discount allowed and discount received from the Cash Book to the Discount Allowed and Discount Received Accounts. Pa e: 17
6.2
Sally Foon had the following balances at 1 Octorber 20X2: Cash Bank
$68 $1,692 Cr
The following are her transactions for the month of Octorber 20X2: Oct 2 Oct 10 Oct 12 Oct 12 Oct 14 Oct 16 Oct 18 Oct 20 Oct 21 Oct 22 Oct 22 Oct 24 Oct 26 Oct 28 Oct 30 Oct 30
Received a cheque of $160 from P Mace in full settlement of a debt of $168. This was paid straight into the bank. Cash sales paid direct to bank, $2,086 Drew a cheque for $75 in favour of W Eastern Received a cheque for $560 from G Lai in settlement of the balance owed Paid $35 cash for stationery Paid to F Samway the sum of $86 by cheque in settlement of an amount owed to him of $90 Drew cheque for office cash, $150 Cash sales $1,120: cash kept in office safe. Received loan interest of $60, and paid this into bank. The sales of the previous day were also banked Paid cleaner’s wages out of cash, $35 The cheque from G Lai, received on 12 Octorber 20X2, was returned by the bank marked ‘refer to drawer’. Paid telephone charges by cheque, $147 Received a cheque of $704 from B Charlke in settlement of his account amounting to $720. Paid $40 out of cash for office expenses. Paid to L Hall by cheque in full settlement of the $260 balance on his account, less 5% cash discount. The bank notified Sally that they had charged $20 interest to her account.
Required: (a) Prepare a Three-column Cash Book for the month of October 20X2. Balance the cash and bank columns, bringing down the balances at 1 November 20X2. (b) Total the two discount columns and state to which ledger accounts the totals will be posted and to which side of each account. (c) Post the totals of the discount allowed and discount received from the Cash Book to the Discount Allowed and Discount Received Accounts.
“End of Chapter - 6”
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CHAPTER 7 Sales Day Book, Purchases Day Book, Returns Inwards Day Book, Returns Outwards Day Book 1.
Sales Day Book (Sales Journal) Sales invoice = source document
Sales Day Book = book of prime entry Monthly transfer
Promptly transfer Receivables Ledger -Trade Accounts Receivable debited
General Ledger Sales Account credited
The structure of the sales day book 2.
Purchases Day Book (Purchases Journal) Purchases invoice = source document
Purchases Day Book = book of prime entry
Monthly transfer General Ledger - Purchases Account debited
Promptly transfer Payables Ledger - Trade Accounts Payable credited
The structure of the purchases day book
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3.
Return Inwards Day Book (Return Inwards Journal) Credit Note issued = source document
Return Inwards Day Book = book of prime entry Promptly transfer
Monthly transfer
General Ledger Receivables Ledger - Returns Inwards Accounts -Trade Accounts Receivable debited credited The structure of the return inwards system 4.
Return Outwards Day Book (Return Outwards Journal) Credit Note received = source document
Return Outwards Day Book = book of prime entry
Promptly transfer
Monthly transfer
Payables Ledger - Trade Accounts Payable debited
General Ledger -Return Outwards Accounts credited
The structure of the return outwards system
EXERCISES 7.1
From the following details you are to: (a)
enter the items in the Sales Day Book;
(b)
post the items to the relevant accounts in the Sales Ledger; and
(c)
record the transfer to the Sales Account in the General Ledger at the end of the month.
Page: 20
Credit sales to: 20X5 July 2 July 7 July 12 July 18 July 23 July 30 7.2
D Smith T Ronald N Smithers L Malt D Smith T Ronald
List Price £ 612 640 320 186 260 580
Trade Discount % 20 25 20 15 25
From the following details you are to: (a) enter the items in the Purchases Day Book; (b) post the items to the relevant accounts in the Purchases Ledger; and (c) record the transfer to the Purchases Account in the General Ledger at the end of the month. Credit purchases to: 20X3 April 1 D Bellamy April 3 A Browne April 10 Swift & Co April 14 D Bellamy April 21 R Green April 27 Swift & Co
7.3
20X8 July 2 July 4 July 7 July 12 July 15 July 18 July 21 July 23 July 25 July 28 July 30
Required: (a) (b) (c)
£ 306 215 438 280 176 342
Credit purchase from T Wilton, £216 Credit sale to A Dobbs at list price of £360, subject to 20% trade discount Returned goods to T Wilton, £30 Credit sale to R Western at list price of £430, subject to 20% trade discount A Dobbs returned to us goods with a list price of £40 Credit purchase from T Wilton, £340 Credit sale to J Fuller at list price of £420, subject to 15% trade discount R Western returned to us goods with a list price of £70 Credit purchase from Avon Supplies, £163 Returned goods to Avon Supplies, £27 Credit sale to F Long, £46
Enter the transactions in the Purchases, Sales, Returns Outwards and Returns Inwards Day Books. Post the items to the personal accounts in the Purchases and Sales Ledger. Record the transfer to appropriate accounts in the General Ledger at the end of the month.
“End of Chapter - 7”
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CHAPTER 8 The Journal (i)
The Journal is used to record transactions that are not entered in the other books of original entry.
(ii)
Alternative names for the Journal are the General Journal or Journal Proper.
(iii)
A journal entry states which account is to be debited and which account is to be credited, along with a narrative to explain the reason for the entry.
(iv)
The journal is not a part of the double entry system; it is just a form of diary supporting the double entry.
Advantages of using the journal
8.1
(i)
It is a valuable and easily accessible record concerning the purchase and sale of non-current assets on credit.
(ii)
There is less chance of omitting a transaction completely, or of making an entry on only one side of the accounts.
(iii)
It makes fraud by book-keepers more difficult.
(iv)
It helps in explaining entries, e.g. various adjustments or the correction of errors. G Gunter is a sole trader and the following were some of his transactions during the month ended 31 December 20X8. (i)
On 10 December 20X8, old office furniture was sold on credit to Y Underberg for $120.
(ii)
On 12 December 20X8, purchased a new delivery van on credit from KN Traders for $14,500.
(iii)
On 15 December 20X8, G Gunter took goods for his own use valued at $340.
(iv)
F Fern owed G Gunter $230 in respect of goods supplied on credit. Fern is bankrupt and Gunter receives a cheque for $130 in full settlement of the debt on 20 December 20X8. The balance of the debt was written off as a bad debt.
Required: Prepare journal entries for each of the above transactions. (Narratives are not required.)
Page: 22
8.2
Show the journal entries necessary to record the following: 20X7 Aug 1
Bought computers on credit from Siskin Computers, $900
Aug 2
The owner took $350 cash for personal use
Aug 7
Returned a faulty computer to Siskin Computers, $300
Aug 13
Bought motor van on credit from Motor Traders for $5,700
Aug 18
D Wong owed the business $2,990, which she is unable to pay in full. A cheque was received from her for $990 and it was decided to write off the balances as a bad debt.
Aug 29
Sold fixtures and fittings which were no longer suitable to J Cummings on credit for $1,250.
“End of Chapter - 8”
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CHAPTER 9 The Petty Cash - Imprest System (i)
Petty Cashier starts the period (week/month) with a fixed amount of money called the ‘float’ which is given by the Main Cashier.
(ii)
Petty Cashier makes petty cash payments to persons who have completed Petty Cash Vouchers.
(iii)
At the end of the period the Main Cashier checks how much of the Petty Cash float was paid out.
(iv)
Main Cashier reimburses the Petty Cashier with the amount paid out to bring the float back to the original amount.
EXERCISES 9.1
The following is an analytical petty cash book, using the imprest system, and applying the following particulars: Year 3 May 1
May 3 May 5 May 8 May 12 May 17 May 20 May 23 May 27 May 29 May 31
The cashier hands a cheque for $100 to the petty cashier to enable him to obtain cash for the starting float of petty cash. Voucher No. 1 2 3
Stationery Postage Cleaning expenses Payment of amountg owing to K Sutton in the payables Ledger 4 Postage 5 S Smitt - travel expenses 6 Stationery 7 Received by petty cashier; from A Gee, in payment for a private telephone call Postage 8 The cashier reimburses the petty cashier the amount paid out to date.
$ 5.60 8.70 15.20 27.40 6.30 4.50 3.20 1.20 6.30
Required: (a) Write up a Petty Cash Book for the month of May Year 3 using analysis columns for stationery, postage, ledger, cleaning and travel. (b)
Give two reasons why a business would use a Petty Cash Book in addition to the main Cash Book. Page: 24
9.2
S Garner keeps his petty cash on the imprest system. The imprest float was set at $200. On 1 May 20X3, the balance of petty cash brought forward amounted to $87. On 1 May 20X3, S Garner drew cash from the bank to restore the imprest. The following transactions took place during May 20X3: May 3 5 8 11 14 16 18 21 25 27 30
Paid motor vehicle expenses Purchased stationery Purchased postage stamps Paid cleaning expenses Paide travelling expenses Paid D Kane, a supplier Purchased postage stamps Purchased stationery Paid cleaning expenses Purchased petrol Parcel post charges
$ 32.00 12.70 9.50 8.00 11.30 24.80 12.80 15.10 9.00 14.50 13.20
On 1 June 20X3, S Garner decided to increase the imprest to $250. Required: (a) Write up S Garner‟s Petty Cash Book, using the following analysis columns: ◊ ◊ ◊ ◊ ◊ ◊
motor vehicle expenses stationery postage travelling expenses cleaning expenses ledger
Balance the Petty Cash Book at 31 May 20X3, carry down the balance and show the amount drawn from the bank to make up the imprest at 1 June 20X3. (b)
State the ledger to which the total of each analysis column will be posted.
(c)
What is the name of the source document for the petty cash book?
“End of Chapter - 9”
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CHAPTER 10 Adjusting for Accruals and Prepayments 10.1 Expense Accrual An expense accrual is an amount owing for an accounting period, which remains unpaid at the end of that period. Expense accrual is also known as “accrued expense.” This is done by: ● ●
adding the amount of accrual to the amount shown in the trial balance when including the item in the income statement. including the amount of the accrual in the balance sheet (statement of financial position) as a current liability.
10.2 Expense Prepayment An expense prepayment is an amount paid during the current financial period to cover an expense for the next financial period. Expense prepayment is also known as “prepaid expense”. This is done by: ● ●
Subtract the amount of the prepayment from the amount shown in the trial balance when including the item in the income statement. Include the amount of the prepayment in the balance sheet (statement of financial position) as a current asset.
10.3 Income accrual An income accrual is income that is due for the financial period, but has not been received by the end of that period. This is done by: ● ●
Add the amount of the accrual to the amount shown in the trial balance before it is added to the gross profit in the income statement. Include the amount of the accrual in the balance sheet (statement of financial position) as a current asset.
10.4 Income prepayment A prepaid income is an income received in advance of the accounting period that it relates to the next accounting period, not the current one. This is done by: ● Subtract the amount of the prepayment from the amount shown in the trial balance before it is added to the gross profit in the income statement. ● Include the amount of the accrual in the balance sheet as a current liability. Page: 26
EXERCISES 10.1
Ash prepares his accounts annually to 31 December and maintains a single expense account for Rent, Rates and Insurance. On 1 January 20X6, the opening accruals and prepayments on this ledger account were a rent accrual of $500, a rates prepayment of $400 and an insurance prepayment of $250. The following transactions occurred during the year to 31 December 20X6. (i) (ii) (iii)
Rent of $500 was paid on 15 January 20X6; $650 on 1 March 20X6, 1 June 20X6 and 1 September 20X6. The amount of $650 due on 1 December was not paid until 10 January 20X7. Insurance totaling $550 was paid on 30 June 20X6 for the year to 30 June 20X7. Rates of $1,700 were paid on 1 April 20X6 for the year to 31 March 20X7.
Required: (a) Prepare the Rent, Rates and Insurance account for the year ended 31 December 20X6, clearly showing the charge to the Income Statement. (b) Prepare a Balance Sheet (Statement of Financial Position) extract at 31 December 20X6 to show the accruals and prepayments. 10.2
The following balances were extracted from the books of B Kouzalai for the year ended 30 June 20X7: $ Revenues 286,370 Purchases 129,860 Inventory at 1 July 20X6 19,223 Inventory at 30 June 20X7 13,980 Wages and salaries 65,840 Stationery 3,650 Heat and light 2,840 Motor vehicle expenses 1,620 Rent payable 11,920 Trade Receivables 9,430 Trade Payables 7,620 Commission received 1,210 Additional information at 30 June 20X7: (1) Wages and salaries owing $820 (2) Rent payable accrued $300 (3) Heat and light prepaid $80 (4) Commission receivable due but unpaid $141. Required: (a) Prepare an Income Statement for the year ended 30 June 20X7. (b) Prepare a Balance Sheet (Statement of Financial Position) extract showing the entries required in the Current Assets and Current Liabilities at 30 June 20X7. (c) Explain the difference between an accrual and a prepayment. “End of Chapter - 10”
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CHAPTER 11 Depreciation of Non-current Assets 11.1 The nature of depreciation Depreciation is an estimate of the fall in value of non-current assets over a period. It is that part of the cost of a non-current asset used up during a period of use by a business.
11.2 Causes of depreciation The main causes of depreciation are as follows: ●
● ●
Physical deterioration, i.e. the wear and tear caused by using the non-current assets, such as motor vehicles and machinery, over time. In the case of land, it may be eroded or wasted away by the elements of nature. Economic factors, i.e. the non-current asset may become obsolete or out of date due to an improved product being available, e.g. computers. Passage of time, i.e. even if an item is not used very often, as the years pass and it becomes older, it will lose value.
11.3 Methods of calculating depreciation (i) (ii)
Straight-line Method (Fixed Instalment Method) Reducing Balance Method (Diminishing Balance Method)
EXERCISES 11.1 Andy Pang purchased the following: $ Fixtures and Fittings 25,000 Office Furniture 18,400 The fixtures and fittings have an estimated life of eight years and a disposal value of $1,000. The office furniture has an estimated life of ten years and a disposal value of $200. Required: Calculate the straight-line depreciation charge for: (a) Fixtures and Fittings (b) Office Furniture 11.2 V Hannah purchased machinery at a cost of $8,000 on 1 January 20X5. Depreciation is to be charged at 25% per annum using the reducing balance method. Required: (a) Calculate the depreciation charge for the years ended 31 December 20X5, 31 December 20X6 and 31 December 20X7. (b) Show the entries in the Provision for Depreciation account for the years ended 31 December 20X5, 31 December 20X6 and 31 December 20X7. (c) Show the Balance Sheet extracts for each of the years, 20X5, 20X6 and 20X7. Page: 28
11.3
M Dixon started business on 1 January 20X7. On that date she bought two motor vans for $4,200 each. On 1 August she bought another van for $5,600. Depreciation is 20% of cost per annum, on the basis that depreciation is charged for each month of ownership. Required: Write up the Motor Vans account and the Provision for Depreciation Account for the year ended 31 December 20X7.
11.4
On 1 January 20X4, Tisha Lee paid $9,200 for furniture and fittings. She depreciated these using the straight-line method. She estimates that, at the end of eight years, their residual value would be $1,400. On 1 July 20X4, she purchased motor vehicles costing $15,000 for the business. She depreciated vehicles at the rate of 40% per annum using the reducing balance method. Her depreciation policy is: any asset purchased in the first six months of a year has a whole year’s depreciation while any asset purchased in the second half of the year has only a half- year’s depreciation. Her financial year ends on 31 December. Required: (a) Prepare for the years ended 31 December 20X4, 20X5, 20X6 and 20X7: (i) (ii) (iii) (iv) (b)
The Furniture and Fittings Account The Provision for Depreciation of Furniture and Fittings The Motor Vehicles Account Provision for Depreciation of Motor Vehicles.
Show the Balance Sheet (Statement of Financial Position) Extracts at 31 December 20X7 for both Furniture and Fittings and Motor Vehicles.
“End of Chapter - 11”
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CHAPTER 12 Bad Debts Bad debts are debts that the business is unable to collect. Bad debts are an expe nse to the business and are charged against the current profit for the year.
EXERCISES 12.1
M Kassolides incurred the following bad debts during the financial year ended 31 March 20X7: 20X7 Jan 30 Feb 28 Mar 31
$ 348 268 125
C Lumas Dent and Son J Lowe
A debt of $560,owed by B Down, was paid in part by cheque, $140, on 31 March 20X7. The balance was written off as bad debt. Required: (a) Prepare a Bad Debts account.
12.2
(b)
Prepare an Income Statement extract for the year ended 31 March 20X7.
(c)
State the entries, including bank, that should be made when a bad debt is recovered in a later financial year to the one in which it was written off.
P Zander‟s financial year ends on 31 December 20X5.
On 1 December 20X5, he had a balance on his Bad Debts account of $4,340. On 10 December 20X5, he was informed that M Gorn, a debtor, had stopped trading and was unable to pay the balance on his account, $1,875. On 12 December 20X5, a cheque was received for $1,304 from B Late. This was in settlement of a debt written off as a bad debt on 31 October during the financial year ended 31 December 20X4. Required: Prepare the following for the year ended 31 December 20X5: (a) Bad Debts Account (b)
B Late Account
(c)
Bad Debts Recovered Account
(d)
Income Statement Extract.
“End of Chapter - 12 ”
Page: 30
CHAPTER 13 Bank Reconciliation Statements (i)
A bank reconciliation statement is prepared to reconcile and explain the difference between the cash book and bank statement balances and to identify any errors.
(ii)
Differences in the cash book and bank statement balances could be due to time differences, transactions conducted directly through the bank or errors.
(iii)
The reconciliation process has two stages; first, updating the cash book and second, preparing the bank reconciliation statement.
EXERCISES 13.1
The following information relates to the banking transactions of N Swann for August 20X9:
Cash Book (Bank Columns Only) $ 20X9 Aug 1 Aug 4 Aug 23 Aug 29 Aug 31
Bal b/d Sales Sales R Quaile Sales
2,420 835 716 185 640
$ 20X9 Aug 2 Aug 9 Aug 12 Aug 15 Aug 24 Aug 25 Aug 27 Aug 31
General Expenses (#1012) Wages (#1013) Drawings (#1014) Purchases (#1015) Rent (#1016) Wages (#1017) T Wagstaffe (#1018) Balance c/d
4,796
67 330 140 406 290 345 502 2,716 4,796
Bank Statement Debit $ 20X9 Aug 1 Aug 3 Aug 4 Aug 7 Aug 11 Aug 15 Aug 20 Aug 22 Aug 23 Aug 27 Aug 29 Aug 30
Bal b/f #1012 Credit S/O - rates #1013 #1014 #1015 D/D - insurance V Credit #1017 C/T - T Plamer Bank interest
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Credit $
67 835 136 330 140 406 153 716 345 268 8
Balance $ 2,420 Cr 2,352 Cr 3,188 Cr 3,052 Cr 2,722 Cr 2,582 Cr 2,176 Cr 2,023 Cr 2,739 Cr 2,394 Cr 2,662 Cr 2,670 Cr
Required: (a) Update the Cash Book with the appropriate items at the end of August and bring down the revised balance at September 1, 20X9. (b)
Prepare the Bank Reconciliation Statement for N Swann at 31 August 20X9, starting with the bank statement balance.
13.2
G Johnson received his bank statement for the year ended 31 March 20X8. At that date, it showed that his balance in the bank was $22,900 while his cash book balance was $23,399. When he checked the bank statement with his cash book, he found the following: (i)
A standing order payment for rent of $672 had not been entered in his cash book.
(ii)
Cheques drawn by G Johnson amounting to $1,215 had not been presented to the bank.
(iii)
A credit transfer of $814 from T Brock had not been entered in his cash book.
(iv)
G Johnson had entered a payment of $470 to P May as $740 in his cash book.
(v)
Bank charges of $46 had not been entered in his cash book.
(vi)
The bank had not credited G Johnson with receipts of $2,186 paid into the bank on 31 March 2008.
(vii)
A cheque for $520 from D Holt had been returned by the bank marked ‘refer to drawer’ but this had not been recorded in the cash book.
(viii)
G Johnson had omitted sales receipts amounting to $626 from his cash book but they were shown on his bank statement.
Required: (a) Complete G Johnson’s Cash Book at 31 March 20X8. (b)
Prepare a Bank Reconciliation Statement starting with the bank statement balance.
(c)
State briefly the main reason for preparing a bank reconciliation statement.
“End of Chapter - 13”
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CHAPTER 14 Capital and Revenue Expenditure (i)
Capital expenditure is the expenditure on the purchase of non-current assets, or expenditure to increase the value of an existing non-current asset. Capital expenditure will increase the assets owned by a business and will appear on the balance sheet (statement of financial position).
(ii)
Revenue expenditure is the cost incurred in the day-to-day running of the business; it is not concerned with increasing the value of non-current assets. At the end of the financial year, these costs will be transferred to the income statement.
EXERCISES 14.1
State which of the following items should be treated as capital expenditure and which as revenue expenditure: (a) insurance premium for a delivery vehicle (b) repainting of the shop door (c) installation of a burglar alarm system (d) purchase of a shop display counter (e) purchase of goods for resale (f) purchase of new tyres for the delivery vehicle (g) wages of the shop assistant.
14.2
D Pinder had the following transactions during the year ended 31 December 20X2: (i) Purchased equipment for use in the business, $1,050. (ii) Paid installation charges for the equipment, $150. (iii) Took out an annual maintenance contract on the equipment, $210. (iv) Bought goods for the business, $2,300. (v) Purchased a new property for expansion purposes, $12,000. (vi) Paid legal fees relating to the purchase of the property, $890. Required: Complete the table below, showing whether each transaction is either capital or revenue expenditure by placing the relevant amount under the relevant column. The first transaction has been completed as an example. No.
Capital Expenditure
1.
$1,050
2. 3. 4. 5. 6. Pa e: 33
Revenue Expenditure
14.3
The following list of transactions relate to J Breasley‟s business for the year ended 28 February 20X5: (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x)
Purchased a new cash register for use in the business. Purchased goods for resale. Paid for repainting the office. Paid electric bill. Paid for installation of equipment. Paid manager’s salary. Paid for office extensions. Purchased vehicle. Bought petrol for vehicle. Paid bank charges.
Required: (a) State whether each of the above transactions are capital or revenue expenditure. (b)
Explain the meaning of: (i) (ii)
capital expenditure revenue expenditure.
“End of Chapter - 14”
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CHAPTER 15 Preparing Financial Statements EXERCISES 15.1
John Cleaver has just completed his second year of trading. His Trial Balance, extracted from the Ledger at 31 December 20X6, is as follows: John Cleaver Trial Balance at 31 December 20X6 Dr $ Capital Loan from brother Purchases and Sales/Revenues Returns inwards and outwards Inventory at 1 January 20X6 Drawings Receivables and Payables Bank overdraft Wages Rent Insurance Heat and light Advertising Carriage outwards Bad debts Non-current Assets (at cost) Accumulated depreciation on Non-current Assets
49,370 188 3,930 12,300 22,100
Cr $ 26,120 8,000 82,578 326 9,380 1,196
5,593 1,860 270 440 510 1,803 436 32,000 3,200 130,800
130,800
The following adjustments are to be taken into account: (i)
Inventory at 31 December 20X6 is $2,876.
(ii)
Cleaver borrowed the $8,000 from his brother on 1 January 20X6. He has agreed to pay 15% interest per annum but no payment has yet been made.
(iii)
Provide for annual depreciation of non-current assets at 10% on cost.
Required: Prepare Cleaver’s Income Statement for the year ended 31 December 20X6, and a Balance Sheet (Statement of Financial Position) at that date.
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15.2
M Tiong, a sole trader engaged in wholesaling, extracted the following Trial Balance from his books at the close of business on 30 April 20X5: M Tiong Trial Balance at 30 April 20X5 Office furniture and equipment Discounts Cash at bank Cash in hand Inventory at 1 May 20X4 Purchases and Sales/Revenue Rent, rates and insurance Delivery vehicle, at cost Provision for depreciation on delivery vehicle Receivables and Payables Wages and salaries Capital at 1 May 20X4 Drawings Vehicle running expenses Sundry expenses
Dr $ 6,000 1,170 3,240 160 2,970 13,890 2,340 7,400 8,400 9,350
Cr $ 390
35,030 2,000 3,650 20,600
4,500 1,840 410 61,670
61,670
In addition, Tiong has noted the following points: (i)
Inventory at 30 April 20X5 has been valued at $3,160.
(ii)
Wages accrued amount to $280.
(iii)
The depreciation provision on the delivery vehicle is to be increased by $1,200. A provision of $500 is to be created in respect of depreciation on office furniture and equipment.
(iv)
During the year, Tiong took goods, at a cost price of $90, for his own use. He has not yet recorded this in the books of account.
(v)
Insurance paid in advance is $120.
Required: Prepare, in respect of M Tiong: (a)
An Income Statement for the year ended 30 April 20X5.
(b)
A Balance Sheet (Statement of Financial Position) at 30 April 20X5.
“End of Chapter - 15 ”
Page: 36
Pañcagu¼aṁ ahaṁ vandæmi. LCCI LEVEL II Book-keeping & Accounts
“Attæ hi attano nætho, ko hi nætho paro siyæ?”
“One is one’s own refuge, who else can be the refuge?” Dhammapada Pa e: 37
Syllabus Topics 1.
Advanced aspects of Depreciation
2.
Adjusting for Accruals and Prepayments
3.
Bad Debts and Allowance for Doubtful Debts
4.
Errors and the Use of a Suspense Account
5.
Control Accounts
6.
Introduction to Partnership Accounts
7.
Admission and Retirement of Partners
8.
Dissolution of a Partnership
9.
Limited Companies – Preparing Financial Statements
10. Incomplete Records 11. Inventory Valuation 12. Manufacturing Accounts 13. Non-trading Organisations 14. Ratios Analysis
Page: 38
CHAPTER 1 Advanced Aspects of Depreciation Depreciation is an accounting adjustment that measures the fall in value of a non-current asset over a period of time.
1.1
Preparing entries in the depreciation expense account Example 1.1 Kerry leases a small shop. On 1 July 20X4, she purchased fixtures and fittings costing $25,000 and a van costing $12,000. She decided to depreciate the fixtures and fittings at 20% per year on a straight-line basis and the van at 30% per year on a reducing (or diminishing) balance basis. Kerry prepares her accounts annually to 30 June. Required: Record the transactions for the purchase and depreciation of the ass ets for the years ended 30 June 20X5 and 20X6, balancing the ledger accounts at the end of each year. Kerry maintains separate ledger accounts for f or the cost and accumulated depreciation of each type of non-current asset but only one depreciation expense account.
1.2
Other methods of depreciation Example 1.2 Excaliber bought a machine on 1 January 20X6 for $160,000. The expected useful life is four years and the residual value is estimated to be $20,000. Required: Calculate the depreciation charge for the year ended 31 De cember 20X6 and the net book value at 31 December 20X6, using each of the following bases: 1. 2. 3. 4.
1.3
Straight line Reducing (or diminishing) balance at 51% Revaluation - estimated value at 31 December 20X6 is $95,000 Machine hours - the machine worked for 60,000 hours and has an estimated useful working life of 150,000 hours.
Disposal of a non-current asset Example 1.3 PC Processing owns computer equipment with a cost of $45,000 and accumulated depreciation of $13,500 at 1 January 20X6. The computer equipment is depreciated at 30% per year, using the straight-line method, on a monthly basis. On 1 July 20X6, the company sold all of the computer equipment for $28,750. Required: Prepare the ledger accounts record the disposal and show the profit or loss on disposal transferred to the Income Statement at the year ended 31 December 20X6.
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1.4
Preparing entries for assets traded-in or exchanged for a replacement asset Example 1.4 Build-It is a manufacturing company company that owns three machines. The cost and accumulated depreciation of these machines at 1 January 20X6 is as follows:
Cost 1 January 20X6 Accumulated depreciation 1 January 20X6
Machine 1 $ 45,000
Machine 2 $ 62,500
Machine 3 $ 58,000
22,000
34,000
27,000
On 1 April 20X6, Machine 1 was traded-in (part exchanged) for Machine 4. The trade-in value was $20,000 and the company paid an additional $40,000 by cheque. On 31 October 20X6, Build-It exchanged Machine 3 for Machine 5, which was valued at $38,500. The year-end date is 31 December 20X6. Required: Prepare the Asset Disposal Account to calculate the profit or loss on disposal for Machine 1 and 3. The company does not charge any depreciation in the year of disposal.
EXERCISES 1.1
Denholm Ltd purchased a machine on 1 January 20X5 for $120,000 and two motor vehicles costing $14,000 each. The company depreciates its assets on the following bases: Machine - 10% straight-line Motor vehicles - 25% reducing balance. Required: Record the relevant entries in the ledger accounts for Motor Vehicle Cost, Accumulated Provision Provision for Depreciation and Depreciation Depreciation Expense for each of the the years ended 31 December 20X5 and 20X6. You may assume that the company maintains separate accounts for Cost and Accumulated Depreciation for each class of asset, but only one Depreciation Expense Account.
1.2
Silas Ltd purchased four machines on 1 January 20X7, Machine A Machine B Machine C Machine D
$35,000 $42,000 $22,500 $50,000
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The company depreciates its machines on an annual 12% straight-line method basis. Depreciation is calculated monthly from the date of acquisition to the date of disposal. On 30 April 20X7, the company sold Machine C for $15,360 and on 31 October 20X7 Machine A was sold for $28,600. Required: Record the relevant entries in the Machinery Cost, Accumulated Provision for Depreciation, Depreciation Expense and Asset Disposal Ledger Accounts for the year ended 31 December 20X7. 1.3
Thaw Ltd purchased four trucks on 1 April 20X5. The trucks are depreciated at 25% based on the straight-line method on a monthly basis. You have been supplied with the following information:
Cost 1 April 20X5 Accumulated depreciation 1 April 20X6
Truck 1 $
Truck 2 $
Truck 3 $
Truck 4 $
25,000
30,000
36,000
40,000
6,250
7,500
8,750
11,250
Sold 30 September 20X6
27,500
Sold 31December 20X6
22,800
Required: (a) Calculate the depreciation charge on each truck for the year ended 31 March 20X7. Truck 1 $
Truck 2 $
Truck 3 $
Truck 4 $
Depreciation for year ended 31 March 20X7 (b)
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Record the relevant entries in the ledger accounts for Truck Cost, Accumulated Provision for Depreciation, Depreciation Expense and Asset Disposal for the year ended 31 March 20X7.
1.4
Weber Industries started in business on 1 April 20X5 and purchased three machines for $30,000 each. Depreciation is charged on the machines using the reducing balance method at 35% per annum. On 1 April 20X6 the accumulated depreciation for each machine was $10,500. On 1 July 20X6, Weber Industries traded in one of the machines for a truck. The trade-in value was $18,000 and the business paid an additional $21,000 in cash. The truck is to be depreciated at 25% using the straight-line method. On 1 October 20X6, one of the machines was exchanged for a newer model with a value of $25,000. Depreciation is charged on an annual basis with a full year’s c harge in the year of
purchase and none in the year of disposal. Required: Prepare the asset disposal account for the year ended 31 March 20X7.
“End of Chapter - 1”
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CHAPTER 2 Adjusting for Accruals and Prepayments 2.1
Calculating accruals and prepayments When preparing the Income Statement, it is important to match income and expenses in the correct accounting period. This is known as the ‘matching concept’ and is carried out using accruals and prepayments. An „accrual‟ is a provision for income or expenses that relate to the accounting period, but that have not yet been invoiced.
A „prepayment‟ is an adjustment for income that has been received, or expenses that have been invoiced, in advance of any service or goods being provided.
EXERCISES 2.1
P Jones, a sole trader, had the following account balances on 1 January Year 7: ● ● ● ●
Rent payable Insurance Telephone Rates
Cr Dr Cr Dr
$70 $40 $45 $210
During the year, the following payments were made by cheque: Year 7 Jan 1 Feb 1 Feb 1 Mar 1 May 1 May 1 Jun 1 Aug 1 Sep 1 Nov 1 Nov 1 Dec 1
Rent payable (quarterly, in advance) Insurance premium for year to 31 January Year 8 Telephone bill Rent payable (increased amount) Telephone bill Rates for half year to 30 September Year 7 Rent payable Telephone bill Rent payable Rates for the half year to 31 March Year 8 Telephone bill Rent payable
210 600 127 300 146 540 300 163 300 540 184 300
P Jones calculates that at the end of the financial year; 31 December Year 7, he owes $60 for telephone calls.
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Required: Open the four accounts listed above and post the necessary items to them. Balance the accounts and make the appropriate transfers to the income statement for the year ended 31 December Year 7. 2.2
2.3
Calculate the following accruals and prepayments at 30 June 20X1: (a)
An invoice for telephone costs totaling $900 was received on 31 August 20X1 and related to the period 1 June 20X1 to 31 August 20X1.
(b)
Motor insurance of $420 was paid on 1 February 20X1 for the year to 31 January 20X2.
(c)
An invoice for electricity of $840 was received on 15 August 20X1 and related to the quarter ended 31 July 20X1.
(d)
Rent of $8,000 for the six months to 30 September 20X1 was paid on 1 April 20X1.
Cedar maintains a single ledger account for premises expenses, which includes costs for rent, rates, electricity and gas. At 1 October 20X6, the balances on this account consisted of prepayments for rent of $780 and rates of $1,500, and accruals of $275 for electricity and $130 for gas. During the year, Cedar paid 12 installments of $800 for rent. The payment made in September 20X7 related to October 20X7. Rates for the year to 31 March 20X8 were paid in April 20X7 and totaled $1,700. Total payments during the year amounted to $3,000 for electricity and $1,900 for gas. In October 20X7, Cedar received an invoice for electricity charges for the period ended 30 September 20X7 totaling $245. An invoice for $324 in respect of gas charges for the three months to 30 November 20X7 arrived in early December. Required: Write up the ledger account for premises expenses for the year ended 30 September 20X7 showing the balances c/d and the transfer to the income statement.
“End of Chapter - 2”
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CHAPTER 3 Bad Debts and Allowance for Doubtful Debts 3.1
The allowance for doubtful debts This is done for two reasons: (i)
To charge possible bad debts as an expense in the Income Statement, and
(ii)
To show a realistic trade receivables figure on the Balance Sheet.
A „specific‟ allowance for doubtful debts will be made for individual customer account balances that are unlikely to be
A „general‟ allowance for doubtful debts will be made for the remaining customer account balances. This is usually calculated as a percentage of outstanding trade receivables.
Example 3.1 The Flower Garden has total trade receivables of $29,555 at 30 April 20X3. Included in these balances are amounts of $560 from Kingsley and $ 1,495 from Bott. The owner of The Flower Garden believes that there is a chance that these debts may not be recovered and would like to provide for them in the accounts. In addition, a general allowance of 2% of the remaining trade receivables is to be created. Calculate total allowance for doubtful debts. Example 3.2 The following information relates to Kline, who has been trading for a number of years.
Total Receivables Specific allowance General allowance
31/12/X4 $ 83,260 1,260 1.5%
31/12/X5 $ 84,590 490 1.5%
31/12/X6 $ 88,600 4,600 2%
Required: Prepare the Allowance for Doubtful Debts Account for each of the years ended 31 December 20X4, 20X5, 20X6. Show the balances brought down and carried down and the transfer to the Income Statement. Also, prepare extracts from the Income Statement and the Balance Sheet for each year.
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EXERCISES 3.1
Alice Jones started a new business on 1 October 20X4 making and selling ladies’ hats. Below is a summary of the trade receivables, bad debts to be written off, bad debts recovered and specific and general allowances for doubtful debts for the three years ended 30 September 20X7.
Year ended
Bad Trade debts to Receivables write off $ $
30 September 20X5
34,150
500
30 September 20X6
39,275
1,800
245
1,475
2%
30 September 20X7
44,498
1,926
423
1,772
3%
Bad debts recovered $
Specific allowance required $
General allowance as % of Receivables
850
1%
Required: Calculate the total allowance for doubtful debts at 30 September 20X5, 30 September 20X6 and 30 September 20X7. 3.2
(a)
Using the information for Alice Jones (3.1 above), prepare the Ledger Accounts for Bad Debts, Bad Debts Recovered and Allowance for Doubtful Debts for each of the years ended 30 September 20X5, 30 September 20X6 and 30 September 20X7.
(b)
Also prepare extracts from the Income Statement and the Balance Sheet at 30 September 20X7.
“End of Chapter - 3”
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CHAPTER 4 Errors and the Use of a Suspense Account 4.1
Errors not affecting the trial balance agreement (1)
Error of Omission
This type of error occurs when an entry is simply omitted from the books of account. Example: Bank charges of $25 have not been entered. (2)
Error of Commission
This type of error occurs when an entry is posted for the correct amount but to the wrong account. However, the correct account in which the entry should have been made and the incorrect account in which the entry was actually made are of the same type/class of account, e.g. real, nominal or personal. Example: A payment of $215 to supplier ABC Ltd has been posted to the account of supplier ABE Ltd. (3)
Error of Principle
An error of principle occurs when an entry is posted to the wrong type of account, e.g. a capital account is used instead of a revenue account. Example: An invoice for a new machine costing $15,000 was posted to Repairs and Renewals. (4)
Reversal of Entries
This type of error occurs when the correct accounts are used but the debits and credits are reversed, i.e. each item shown on the wrong side of the account. Example: A sales invoice for $150 was debited to the Sales Account and credited to the Receivables ledger account of Jones Ltd.
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(5)
Error of Original Entry
This type of error occurs when the original posting is made for an incorrect amount. Example: A bank payment of $570 for rent was posted to the correct accounts but with a value of $750. Where the same numbers have been posted in a different order, as here, this is known as a „transposition error‟ . The figures have been transposed.
(6)
Compensating Errors
This occurs when two or more errors cancel each other out. This does not mean that these errors do not have to be found and corrected but it does mean that they will not prevent the Trial Balance from balancing. When only one of the errors has been identified and corrected, the Trial Balance will not balance until the other has been found and adjusted. Example: The Motor Expenses Account has been undercast by $150, the Sales Account has been overcast by $200 and the Purchases Account has been overcast by $350.
4.2
Using a Suspense Account A Suspense Account is a temporary holding account for any difference on the Trial Balance. It enables the final accounts to be prepared from the Trial Balance in the normal way, while the source of the error is found.
EXERCISES 4.1
Complete the table to identify each of the types of error listed. (None of these errors will affect the trial balance.) Error
Type of Error
(a) A purchases invoice for $452 had been entered into the books of accounts as $425. (b) A sales invoice for $200 was debited to the account of S Smith instead of S Smyth.
Page: 48
(c) A purchases invoice for stationery, totaling $375, had not been entered into the books of account. (d) The purchase of a computer, costing $1,200, had been posted to the Stationery Account. (e) A sales receipt from Co-Com Ltd was entered in the books of account as a debit in Co-Com Ltd’s ledger account and a credit in the bank account. (f) The additions on the Sales account were overcast by $200 and the additions on the Rent account were overcast by $200. 4.2
Prepare journal entries with narratives to correct the following: (a) (b) (c) (d) (e)
4.3
Credit purchases of $1,500 from Bryson Ltd were posted to the account of Britsom Ltd. A sales invoice for $295 for Walters Ltd had been entered in the books of account as $259. Carriage inwards of $62 had been posted to the debit side of the carriage outwards account. A purchases payment for Slipshod Ltd of $678 was posted to the debit side of the bank account and the credit side of the payables ledger account for Slipshod Ltd. A cheque payment for petrol, totaling $38, has not been entered in the books of account.
Henry Lim prepared a trial balance at 31 January 20X5. The trial balance agreed, but on inspecting the books the following errors were discovered: (i) (ii) (iii) (iv) (v)
General expenses, paid by cheque, $320, had not been entered in the books. Goods previously sold to the Kowloon Trading Co., $330, were returned. This had been debited to the personal account in the receivables ledger and credited to the sales returns account. A payment for insurance expenses of $103 had been posted to the Light and Heat account. The purchases journal was undercast by $250. The understatement of the Purchases account figure was compensated by the misposting from the cash book of wages, $3,420, as $3,670 to Wages account. Equipment sold at book value, for $1,198 cash. This was debited to the cash account but credited in error to the firm’s sales account.
Required: (a) (i)
(ii) Pa e: 49
Name the types of error made in items (i) - (v) above. A different type of error applies in each case. Prepare journal entries including narratives to correct these errors.
Henry Lim prepared provisional final accounts, before the errors in (a) above were discovered, which showed a net profit of $14,560. Required: (b) For each of the corrections in (a), enter in the appropriate column the amount by which the net profit will change. If there is no effect, write ‘no effect’. Calculate the correct net profit. The first entry has been made for you. Provisional Net Profit Item Number (1)
$14,56o +
$320
$14,240
(2) (3) (4) (5) 4.4
The following Trial Balance has been extracted from the books of account of Resin at 30 September 20X9. Depreciation has already been provided. Resin Trial Balance at 30 September 20X9 $ Non Current Assets - Cost 26,535 Non Current Assets - Provision for depreciation Inventory at 30 September 20X9 Trade Receivables 4,292 Allowance for doubtful debts Bank (Dr) 554 Trade Payables Revenues Cost of sales 26,574 Sundry expenses 10,011 Equity Drawings 68,101 Suspense account 30,563 98,664
$ 4,060 5,365 135 1,253 37,816 38,947 11,223 98,664 98,664
Page: 50
The following errors were subsequently discovered: (1)
Recording a ledger balance on the wrong side of the Trial Balance The balances for Inventory, Allowance for Doubtful Debts and Drawings were all on the incorrect side of the Trail Balance.
(2)
Posting two debit entries or two credit entries instead of one debit and one credit Resin’s drawings of $400 had been credited to the Bank Account and credited to the Drawings Account.
(3)
Posting the correct debit entry but posting a different credit amount Sales invoices raised by Resin for $1,250 had been correctly credited to the Sales Account but posted to Trade Receivables as $1,205.
(4)
Posting the debit entry but omitting the credit entry entirely Resin purchased non-current assets costing $4,388. The non-current assets account was correctly debited but no entry was made in the bank.
(5)
Incorrect additions on individual ledger accounts The figure for Trade Payables included on the Trial Balance of Resin was found to be understated by $300.
(6)
Omitting a ledger balance entirely from the Trial Balance When the accounting records for Resin were checked, it was discovered that a balance on the Wages and Salaries Account of $1,500 had not been included in the Trial Balance.
Required: (a) Prepare journal entries to correct errors 1-6 above. (b) Prepare the Suspense Account and the revised Trial Balance at 30 September 20X9. 4.5
D Swift keeps his accounts using the double entry system and drew up a trial balance at 31 December 20X9. It failed to agree, and D Swift incorrectly prepared provisional final accounts, which showed a net profit of $ 4,100. On investigation, the following errors were discovered: (i)
Purchases table total for month of December, $3,650, had been posted to the purchases account as $3,560.
(ii)
A payment of $600 made to a trade payable, B Jenkins, had been posted in error to C Jennings.
(iii)
Discounts received of $140 for the month of December had been posted to the debit side of discounts allowed.
(iv)
A bank payment of $54 for a telephone bill had been entered in the cash book but the double entry had not been posted.
Pa e: 51
(v)
A payment of $380 for rates had been debited to the Insurance Account in error.
(vi)
Wages Account had been debited with $1,480 in respect of the wages D Swift had paid to his employees.
Required: (a) Indicate the effect that each of these errors had on the trial balance using the following layout: Debit
Credit
Overstated Understated Overstated Understated $
$
$
$
(1) (2) (3) (4) (5) (6) (b)
Indicate the effect each correction would have on the net profit and calculate the correct profit. If there is no effect, state „no effect‟.
4.6
The book-keeper of Gardening Delight extracted a Trail Balance at 30 April 20X9 but it did not balance. The following errors were subsequently discovered: (i)
A sales receipt of $314 had been posted to the credit side of C Clark’s account instead of D Clerk’s account.
(ii)
A payment for motor expenses of $192 had been posted to the bank account but the double entry had been omitted.
(iii)
A new motor mower was purchased during the year for $2,650 but this had been posted to purchases.
(iv)
Discounts allowed of $98 had been posted to the credit side of the Discounts Received Account.
(v)
An invoice for gardening supplies (purchases) of $1,820 had been recorded in the Purchases Account as $1,280.
Required: (a) Prepare journal entries to correct errors (i) to (v) above. (b) Prepare the Suspense Account and calculate the original difference in the Trail Balance. “End of Chapter - 4”
Page: 52
CHAPTER 5 Control Accounts 5.1
The purpose of Control Accounts The purpose of Control Accounts is to summarize the transactions of more detailed Ledger Accounts. The Control Accounts perform several important functions:
5.2
(i)
They provide a summary balance, which can be used in the Trail Balance and in the Balance Sheet. For example, the balance on the Receivables Ledger Control Account is the total of all of the individual receivables’ balances. The Control Account balance is used on the Trial Balance and the Balance Sheet instead of listing every individual receivable balance.
(ii)
The Control Accounts provide instant information to the owner or manager of the business. They provide a total figure for receivables or payables without the need to spend time extracting a full list of receivables and payables.
(iii)
The balance on the Control Account will always equal to the total balances of the subsidiary accounts unless an error has occurred. This means that Control Accounts can be used to check the arithmetic accuracy of the accounting transactions and can be helpful in locating errors.
(iv)
Control Accounts can help with constructing final accounts where a business has not kept a full set of double entry accounts.
Receivables Ledger Control Account (Receivables‟ Control Account) Receivables Ledger Control Account $ Balance b/d Credit sales Interest charged to receivables Bank: (returned cheques)
Anything that increases the amount owing is debited.
Pa e: 53
$ Sales returns (return inwards) Bank (payments received) Discounts allowed Bad debts written off Contra entries Balance c/d Anything that decreases the amount owing is credited.
5.3
Payables Ledger Control Account (Payable s‟ Control Account) Payables Ledger Control Account
$ Purchases returns (returns outwards) Bank: (payments to suppliers) Discounts received Contra entries Balance c/d Anything that decreases the amount owed is debited.
5.4
$ Balance b/d Credit purchases Interest charged by payables
Anything that increases the amount owed is credited.
Discrepancies between the Ledgers and the Control Accounts (a)
(b)
Errors in the Control Account: ●
The source records are incorrect. For example, the Day Book or Cash Book might have been added up incorrectly.
●
Adjustments have been posted to the ledger accounts but not to the Control Account. For example, a bad debt might have been written off in a customer’s ledger account but not included in the Control Account.
●
The Control Account has been sub-totaled incorrectly.
Errors in the Ledger Accounts: ●
Entries could have been omitted or posted incorrectly on to an individual ledger account.
●
Individual ledger accounts have been incorrectly subtotaled.
●
The list of ledger balances might be incomplete, i.e. one or more of the individual balances have been omitted from the list.
Page: 54
Exercises 5.1 The following information has been extracted from the accounting records of Osman for the half year to 30 June 20X4: $ Balances at 1 January 20X4 Receivables Ledger Control Account - Dr 15,030 Receivables Ledger Control Account - Cr 42 Payables Ledger Control Account - Dr 9 Payables Ledger Control Account - Cr 11,145 Transactions to 30 June 20X4 Paid to suppliers Credit sales Return outwards Return inwards Receipts from customers Credit purchases Contra entries Bad debts written off Discounts allowed Discounts received
70,264 93,450 180 797 89,948 71,685 329 153 2,610 2,138
Balance at 30 June 20X4 Receivables Ledger Control Account - Dr Receivables Ledger Control Account - Cr Payables Ledger Control Account - Dr Payables Ledger Control Account - Cr
14,629 28 20 9,930
Required: Prepare the Receivables Ledger Control Account and the Payables Ledger Control Account for the half-year ended 30 June 20X4. 5.2
The following information relating to March 20X7 has been extracted from the ledger accounts of Foley Fixings: $ Balances at 1 March 20X7 Receivables Ledger Control Account - Dr Receivables Ledger Control Account - Cr Payables Ledger Control Account - Dr Payables Ledger Control Account - Cr Allowance for Doubtful Debts For the month ended 31 March 20X7 Paid to suppliers Credit sales Discounts received Credit purchases Return inwards Bad debts written off Discounts allowed Customer cheques dishonoured
Pa e: 55
11,278 206 121 6,845 287 46,771 67,660 1,512 51,494 2,756 240 2,180 470
Receipts from customers Interest charged to customers Contra entries Return outwards Balances at 31 March 20X7 Receivables Ledger Control Account - Cr Receivables Ledger Control Account - Dr Payables Ledger Control Account - Dr Payables Ledger Control Account - Cr Allowance for Doubtful Debts
61,472 112 431 1,335 268 ? 166 ? 312
Prepare the following: (a) Receivables Ledger Control Account for March 20X7 (b) Payables Ledger Control Account for March 20X7 (c) A Balance Sheet extracts showing receivables and payables at 31 March 20X7. 5.3
The following balances have been extracted from the books fo Lilley Logistics at 31 May 20X3. $ $ Receivables Ledger Control Account 69,246 Receivables Ledger 69,641 Payables Ledger Control Account 32,840 Payables Ledger 33,482 Suspense Account 119 Dr The balance on the Suspense Account was generated when the Trial Balance was prepared. The balance on the Receivables and Payables Ledger Control Accounts have been used in preparing the Trial Balance. A number of errors were discovered, following an examination of the accounting records for Lilley Logistics for the year ended 31 May 20X3: (i)
The Receivables Ledger includes a debit balance of $280 due from Smithson Industries Ltd and the Payables Ledger includes a credit balance of $195 due to the same company. Only the net balance will be received.
(ii)
Discount received of $87 had been correctly posted to the Payables Ledger Control Account but omitted from the Payables Ledger.
(iii)
A balance on the Customer Account of F Edgar for $116 had been omitted from the list of Receivables Ledger balances.
(iv)
The Payables Ledger Account for B Curran had been overstated by $63.
(v)
A sale invoice for $976 had been entered correctly into the Receivables Ledger but had been posted to the Receivables Ledger Control Account as $967.
(vi)
Payment of $342 to supplier had been correctly entered into the Payables Ledger and the Payables Ledger Control Account but had been entered in to the bank as $442. Page: 56
(vii)
The Purchase Day Book was undercast by $492.
(viii)
A bad debt of $600 had been written off in the Receivables Ledger but no entry had been made in the Receivables Ledger Control Account.
(iX)
The balance on the Receivables Ledger Control Account was understated $1,102.
Required: Record the correcting entries for these errors into the Receivables Ledger Control and Payables Ledger Control accounts and the Suspense Account. Reconcile the Receivables Ledger Control Account balance with the Receivables Ledger and the Payables Ledger Control Account with the Payables Ledger. 5.4
5.5
Prepare journal entries to correct the following (narratives are not required). You are to assume that the business uses Receivables and Payables Ledger Control Accounts. (i)
Credit purchases of $1,500 from Bryson Ltd were posted to the account of Britsom Ltd.
(ii)
A sales invoice for $295 for Walters Ltd had been entered in the books of account as $259.
(iiii)
Carriage inwards of $62 had been posted to the debit side of the Carriage Outwards Account.
(iv)
A purchases payment for Slipshod Ltd of $678 was posted to the debit side of the Bank Accounted and the credit side of the Payables Ledger Account for Slipshod Ltd.
(v)
A cheque payment for petrol, totaling $38, has not been entered in the books of account.
The following information has been extracted from the books of H Henry Ltd at 31 March 20X8: Balance on Receivables Ledger Control Account Total Receivables Ledger balances Balance on Suspense Account
$ 21,942 (Dr) 22,058 (Dr) 442 (Dr)
The book-keeper at H Henry Ltd enters sales and purchases invoices individually into the Receivables and Payables Ledgers and the income and expense accounts in the general ledger, but uses the totals from the Sales and Purchase Day Books to prepare the Receivables and Payables Ledger Control Accounts. (i)
A sales invoice has been recorded in the Sales Day Book and the Receivables Ledger as $2,800 instead of $2,300.
(ii)
The Sales Day Book has been under-cast by $750.
Pa e: 57
(iii)
A bad debt for $245 has been written out of the Receivables Ledger but no entry has been made in the Receivables Ledger Control Account.
(iv)
A sales invoice for $2,750 has not yet been recorded.
(v)
The balance on the account of customer T Tallis for $326 was omitted from the list of Receivables Ledger Balances.
(vi)
A sales receipt for $792 was posted correctly to the Bank Account and the Receivables Ledger but as $729.00 in the Receivables Ledger Control Account.
Required: Correct the errors to clear the Suspense Account and balance the Receivables Ledger Control Account with the list of Receivables Ledger balances.
“End of Chapter - 5 ”
Page: 58
CHAPTER 6 Introduction to Partnership Accounts 6.1
The Partnership Agreement The Partnership Agreement normally includes: (i) (ii) (iii) (iv) (v)
Fixed capital Interest on capital Interest on drawings Salary Profit share
If the partners do not have a formal Partnership Agreement then Section 24 of the Partnership Act of 1890 will apply. It states: ● ● ● ●
6.2
No partner will receive a salary. There will be no interest on capital or drawings. Profits and losses will be shared equally between the partners. Any loan to the partnership by the partners attract interest of 5% p.a.
Forming a partnership Example 6.1 Charlie and David had been sole traders for several years but decided to form a partnership on 1 January 20X2. The Balance Sheets from their individual businesses at 31 December 20X1 were as follows:
Plant and equipment Motor vehicles Inventory Trade Receivables Bank Trade Payables Net assets
Charlie $ 42,000 4,000 8,500 18,200 (6,000) (11,750) 54,950
David $ 35,000 25,000 6,750 24,000 5,000 (14,260) 81,490
The plant and equipment was valued at $40,000 and $32,000 respectively. David decided to keep his motor vehicle ($25,000) as a personal asset. 5% of the trade receivables from each business were considered to be uncollectable and the value of trade receivables was reduced accordingly. Charlie agreed to pay $6,000 into the partnership bank account to clear the bank overdraft of his business. Required: Calculate the value of capital introduced by each partner and prepare the partnership Balance Sheet (Statement of Financial Position) at 1 January 20X2. Pa e: 59
6.3 Preparing Financial Statements (a) Format of the Income Statement of a Partnership Smith and Jones Income Statement for the year ended 31 March 20X0 $ $ Revenue xxx Less: Cost of goods sold Opening inventory xxx Purchases xxx xxx Less: Closing inventory xxx xxx Gross profit Less: Expenses Motor expenses Rent and rates Light and heat Sundry expenses Depreciation Motor Vans Office Equipment Net profit before appropriations
xxx xxx xxx xxx xxx xxx xxx
xxx xxx
(b) Format of Appropriation Statement of a Partnership Smith and Jones Appropriation Statement for the year ended 31 March 20X0 $ Net profit before appropriations Add: Interest on drawings Smith Jones
xxx xxx
Less: Salaries Smith Jones
xxx xxx
Less: Interest on Capital Smith Jones
xxx xxx
Sharing Profit: Smith Jones
xxx xxx
$ xxx
xxx xxx (xxx)
(xxx) xxx
(xxx) Page: 60
(c) Format of Partners‟ Current Accounts Smith $ Drawing xxx Interest on Drawing xxx
Balcance c/d
Smith $ xxx xxx
Jones $ xxx xxx
xxx
Jones $ xxx Balance b/d xxx Salaries Interest on Capital xxx Sharing Profit
xxx xxx
xxx xxx
xxx
xxx
xxx
xxx
xxx
xxx
Balance b/d
(d) Format of a Statement of Financial Position of a Partnership Smith and Jones Statement of Financial Position as at 31 March 20X0 Cost Accumulated Depreciation ASSETS $ $ Non-current Assets Intangible Assets Goodwill xxx xxx Tangible Assets Motor Vans Office Equipment Current Assets Inventories Trade receivables Less: Allowance for doubtful debts Prepayments Cash at bank Cash in hand
xxx xxx xxx
xxx xxx xxx
xxx xxx xxx xxx
xxx xxx xxx
xxx xxx xxx xxx
xxx
Total Assets EQUITY AND LIABILITIES Capital Accounts Smith Jones
Net Book Value $
xxx
xxx xxx
xxx
Current Accounts Smith Jones Pa e: 61
xxx xxx
xxx xxx
Non-current Liabilities 12% Debentures
xxx
Current Liabilities Trade payables Accruals
xxx xxx
Total Equity and Liabilities
xxx xxx
Example 6.2 Tiger and Snake are in partnership and share profits and losses 2:1. A draft Trial Balance has been extracted from the partnership books of account at the end of the year, 31 December 20X8. Dr Cr $ $ Equipment at cost 1 January 20X8 40,000 Equipment provision for depreciation 1 January 20X8 4,000 Buildings at cost 65,000 Motor vehicles at cost 1 January 20X8 18,500 Motor vehicles provision for depreciation 1 January 20X8 3,700 Sales 120,000 Purchases 45,000 Opening Inventory 2,750 Bank 6,400 Receivables and Payables 33,400 21,960 Insurance 2,800 Wages and salaries 24,000 Capital accounts: Tiger 40,000 Snake 20,000 Drawings: Tiger 2,000 Snake 4,000 Current accounts: Tiger 11,300 Snake 9,088 Allowance for doubtful debts 1,002 237,450 237,450 There are a number of items that need to be taken into consideration: ● Depreciation is to be provided at 10% straight-line on equipment and 25% reducing balance on motor vehicles. ● Closing Inventory is valued at $3,000. ● Insurance of $400 is prepaid and wages of $800 are to be accrued. ● The allowance for doubtful debts is to be increased to 5% of trade receivables. ● Interest on drawings is charged at 5% p.a. on the balance in the trial balance. ● Snake receives a salary of $4,000. Page: 62
Required: (a) Prepare the Partnership Income Statement and Appropriation Account for the year ended 31 December 20X8. (b)
Prepare the Partners’ Current Accounts at 31 December 20X8.
(c)
Prepare the Partnership Balance Sheet (Statement of Financial Position) at 31 December 20X8.
EXERCISES 6.1
Exe, Why and Zed had each been trading as a sole trader for many years but on 1 July 20X6 they decided to form a partnership to pool their expertise. Each of the new partners provided the Balance Sheets from their individual businesses at 30 June 20X6: Exe Why Zed $ $ $ Plant and equipment 32,800 40,000 15,750 Motor vehicles 18,700 6,400 10,900 Inventory 2,500 1,750 3,000 Trade Receivables 8,640 6,340 1,700 Bank 1,115 864 1,234 Trade Payables (5,850) (3,600) (885) Net assets 57,905 51,754 31,690 The partners have agreed that the plant and equipment was valued at $28,000, $37,500 and $15,000 respectively. Why decided to keep his motor vehicle ($6,400) as a personal asset. Zed estimates that the true value of his inventory is $3,250 and the other partners accept this valuation. 5% of the trade receivables from each business were considered to be uncollectable and the value of trade receivables was reduced accordingly. Required: Calculate the value of capital introduced by each partner and prepare the partnership Balance Sheet (Statement of Financial Position) at 1 July 20X6.
6.2
Jake and Misty are in partnership sharing profits and losses in the ratio 3:1. They have a partnership agreement that provides for interest on the partners’ Capital Accounts at 8% per annum and charges interest on drawings at 5% p er annum. The net profit for the year to 31 December 20X2 was $39,661, before accounting for interest of 5% on a loan of $20,000 to the partnership from Jake. The following additional information is available. Jake ($) Misty ($) Capital accounts 1 January 20X2 26,000 19,500 Current accounts 1 January 20X2 2,340 Cr 4,420 Dr Drawings for the year 16,620 23,760 Salary 7,800 Required: Prepare the partnership Appropriation Account for the year ended 31 December 20X2 and the partners’ Current Accounts for the same period. Interest on drawings is to be charged in full and no interest is chargeable on the debit balance b/d on Misty’s current account. “End of Chapter - 6 ”
Pa e: 63
CHAPTER 7 Admission and Retirement of Partners 7.1
Goodwill Goodwill is an intangible asset and is defined as „the excess of the value of the business as a whole over the value of the individual assets and liabilities‟.
Example 7.1 Eric had been trading as a window cleaner for ten years. He agreed to sell his business to Henry on 1 April 20X3. The Balance Sheet of Eric at 31 March 20X3 was as follows: Eric Balance Sheet at 31 March 20X3 $ $ ASSETS Non-current Assets Ladders and equipment Current Assets Inventory of cleaning materials Trade Receivables Cash in hand
500
120 25 15 160
Total Assets
660
EQUITY AND LIABILITIES Capital Account
575
Current Liabilities Trade Payables Total Equities and Liabilities
85 660
Eric agreed to retain responsibility for collecting the trade receivables and will keep the cash in hand. Henry agreed to pay the trade payables. If Henry paid Eric $800 for the window cleaning business, calculate the value of goodwill.
Page: 64
7.2
Accounting for Goodwill It is necessary to account for goodwill in a partnership when one of the following events occurs: (i)
When a partnership is formed from existing sole trader businesses.
(ii)
When there is a change in partners through the admission of a new partner or the retirement of an existing partner.
(iii)
When the profit share ratio between partners is changed.
When goodwill is created the journal entry is: Dr Cr
Goodwill Partners’ Capital Accounts
Example 7.2 Ink and Jet form a partnership on 1 May 20X7 introducing tangible net assets from their sole trader businesses of $35,000 and $38,500 respectively. They agree that the value of goodwill for In k’s business is $5,000 and $7,500 for Jet’s business. (a)
Prepare the ledger account for Goodwill, the Partners’ Capital Accounts and Balance Sheet to reflect this.
Ink and Jet decide to share profit in the ratio of 3:1 and do not wish goodwill to remain in the accounts of the partnership. (b)
7.3
Prepare the ledger account for Goodwill and the Partners’ Capital Accounts to reflect this, and the revised Balance Sheet.
The Revaluation Account It is important that when there is a change in the partnership the true value of the partnerships’ assets and liabilities are recognized when calculating the partners’ share. This is achieved through the use of a Revaluation Account. The relevant journal adjustments are: ●
For an increase in asset value: Dr Asset with the amount of the increase Cr Revaluation account
●
For a decrease in asset value: Dr Revaluation account Cr Asset with the amount of the decrease
●
For an increase in the value of a liability: Dr Revaluation account Cr Liability with the amount of the increase
●
For a decrease in the value of a liability: Dr Liability with the amount of the decrease Cr Revaluation account
Pa e: 65
Example 7.3 The Balance Sheet for King and Lyn on 1 January 20X3, before admitting Mann to the partnership, was as shown below. The old profit sharing ratio for King and Lyn was 3:2 respectively. The new profit sharing ratio for King, Lyn and Mann is 5:4:3 respectively. King and Lyn Balance Sheet at 1 January 20X3 $ $ ASSETS Non-current Assets Land and buildings Plant and machinery Current Assets Inventory Trade Receivables Bank
75,000 30,000 105,000 22,500 15,000 3,750 41,250
Total Assets EQUITY AND LIABILITIES Capital accounts King Lyn
146,250
60,000 40,000 100,000
Current accounts King Lyn
19,250 8,250 27,500 127,500
Current Liabilities Trade Payables Total Equity and Liabilities
18,750 146,250
The partners agree the following valuations at 1 January 20X3: $ Land and buildings 112,500 Plant and machinery 22,500 Inventory 15,750 Goodwill 24,000 Mann pays $26,000 into the partnership bank account as his capital contribution. The partners do not wish goodwill and the valuations to remain in the accounts. Required: Prepare the Revaluation Account, partners’ Capital Accounts and the Balance Sheet (Statement of Financial Position) following the admittance of Mann to the partnership. Page: 66
7.4
Retirement of a partner Example 7.4 Ned, Oli and Pete are in partnership and make up their accounts annually to 31 December. They share profits in the ratio 2:2:1 respectively. On 31 December 20X7, Ned retires. The partnership agreement states that any retiring partner should receive 25% of the amount due immediately, with the remaining balance being transferred to a loan account. The loan is to be repaid over the next three years in equal installments on 31 December. In addition, the loan will attract 5% interest calculated on the balance on 1 January each year to be paid with the capital repayment on the following 31 December. If there are insufficient funds available in the bank to pay the initial installment, then the partnership must negotiate a bank overdraft. Ned, Oli and Pete Balance Sheet at 31 December 20X7 $ ASSETS Non-current Assets Goodwill Plant and machinery Motor vehicles Current Assets Inventory Trade Receivables Bank
$ 25,000 97,000 22,000 144,000
8,900 24,400 15,200 48,500
Total Assets EQUITY AND LIABILITIES Capital accounts Ned Oli Pete
192,500
65,000 65,000 16,000 146,000
Current accounts Ned Oli Pete
9,600 8,750 6,800 25,150 171,150
Current Liabilities Trade Payables Total Equity and Liabilities
Pa e: 67
21,350 192,500
The partners agree the following valuations at 31 December 20X7: $ 110,000 8,700 18,900 36,000
Plant and machinery Inventory Trade Receivables Goodwill
The partners would like these valuations to remain in the Balance Sheet of the partnership. As part of the retirement settlement, Ned is to take his company motor vehicle valued at $8,000 on t he balance sheet. Following Ned’s retirement, Oli and Pete will share profits equally. Required: Prepare the Revaluation Account, the partners’ Capital Accounts and the Balance Sheet (Statement of Financial Position) following the retirement of Ned.
EXERCISES 7.1
Cary Grant has been a sole trader for many years. He decides to retire and sell his business, other than the motor vehicle and the bank balance, as a going concern to Henry Foda for $ 45,000 on 1 August 20X7. The Balance Sheet of Cary Grant’s business at 31 July 20X7 is as follows: Cary Grant Balance Sheet at 31 July 20X7 $ ASSETS Non-current Assets Fixtures and fittings Motor vehicle Current Assets Inventory Trade Receivables Bank
$
22,400 16,800 39,200 3,700 16,750 1,160 21,610
Total Assets
60,810
EQUITY AND LIABILITIES Capital Account
57,915
Current Liabilities Trade Payables Total Equity and Liabilities
2,895 60,810
Required: Calculate the value of the goodwill purchased by Henry Fonda. Page: 68
7.2
Knot and Berry are in partnership and share profits and losses in a ratio of 2:1. The Balance Sheet of the partnership at 31 December 20X2 is:
ASSETS Non-current Assets Plant and machinery Motor vehicles
Knot and Berry Balance Sheet at 31 December 20X2 $ $
Current Assets Inventory Trade Receivables Bank
99,000 32,700 131,700 19,125 22,950 12,120 54,195 185,895
Total Assets EQUITY AND LIABILITIES Capital accounts Knot Berry
90,000 74,000 164,000
Current accounts Knot Berry
6,792 4,003 10,795 174,795
Current Liabilities Trade Payables Total Equity and Liabilities
11,100 185,895
Knot decides to retire on 31 December 20X2 when goodwill was valued at $34,500 and the plant and machinery was valued at $92,000. $458 of the trade receivables was considered to be uncollectable. Knot was to be paid 25% of any balance due to him immediately, with the remaining balance converted to a loan repayable in two years’ time. On the same day, 31 December 20X2, Rasp was admitted to the partnership. It was agreed that the new profit sharing ratio would be 3 (Berry):1 (Rasp). Rasp introduced plant and machinery of $15,000, goodwill of $2,000 and paid $ 25,000 into the new partnership Bank Account. Goodwill is not to remain in the books of the partnership but the other valuations are to be kept in the accounts. Required: Prepare the following for the Knot and Berry Partnership: (a) (b) (c) (d) Pa e: 69
The Revaluation Account The partnership Bank Account The partnership Goodwill Account The partners’ Capital Accounts.
For the Berry and Rasp Partnership: (e) 7.3
The Balance Sheet at 1 January 20X3 for the Berry and Rasp partnership.
Freeman and Hardy share profits and losses 3:2. On 1 July 20X1, they prepared their partnership Balance Sheet: Freeman and Hardy Balance Sheet at 1 July 20X1 ASSETS $ Non-current Assets Land and buildings Fixtures and fittings Current Assets Inventory Trade Receivables Bank
$ 93,750 37,500 131,250
28,125 18,750 4,600 51,475 182,725
Total Assets Assets EQUITY AND LIABILITIES Capital accounts Freeman Hardy
75,000 50,000 125,000
Current accounts Freeman Hardy
24,060 10,215 34,275 159,275
Current Liabilities Trade Payables
23,450
Total Equity and Liabilities Liabilities
182,725
The partners admit Willis into the partnership on 1 July 20X1 and he pays $33,000 into the partnership Bank Account. Profits and losses will now be shared 2:2:1. The partners agree the following valuations of assets and liabilities at 1 July Jul y 20X1 but do not wish these values to remain in the Partnership Accounts: Land and buildings Fixtures and fittings Inventory Goodwill
$105,000 $35,000 $29,500 $28,000
Required: Prepare the Revaluation Account, Partners’ Capital Accounts and the Balance Sheet following the admittance of Willis to the partnership. “End of Chapter - 7”
Page: 70
CHAPTER 8 Dissolution of a Partnership 8.1
Accounting entries for dissolving a partnership There are many reasons why a partnership might cease, for example: ●
The partners may decide to stop trading and sell the business as a going concern.
●
A partner may decide to retire and the other partners may not be able to find a replacement partner or be able to continue.
●
The partners may decide to return to sole trader status.
●
The partners may decide to operate the business as a limited company.
●
The partnership might have failed, leading to the dissolution (termination) of the partnership.
DISSOLUTION PROCEDURES
Step 1
Step 2
Close the Asset Accounts by transferring the balances to the Dissolution Account (all except bank and cash balances). Close the Liability Accounts by transferring the balances to the Dissolution Account (except bank overdraft and loans from partners).
Debit
Credit
Dissolution Account
Asset Account
Liability Account
Dissolution Account
Step 3
Sell the assets and bank the proceeds.
Bank/Cash
Dissolution Account
Step 4
Deal with assets taken over by the partners.
Partners’ Capital Accounts
Dissolution Account
Step 5
Collect from trade receivables.
Bank/Cash
Dissolution Account
Step 6
Paid to trade payables
Dissolution Accounts
Bank/Cash
Step 7
Pay any costs of dissolution.
Dissolution Account
Bank/Cash
Pa e: 71
Step 8
Transfer the balance on the Dissolution Account to the partners’ Capital Accounts in the profit sharing ratio (entries reversed if loss on dissolution).
Dissolution Account
Partners’ Capital Accounts
Step 9
Repay any partners’ loans to the partnership.
Partners’ Loan Accounts
Bank/Cash
Partners’ Current Accounts
Partners’ Capital Accounts
Bank/Cash
Partners’ Capital Accounts
Partners’ Capital Accounts
Bank/Cash
Step 10
Step 11
Step 12
Transfer the partners’ Current Account balance to their Capital Account (the entries will be reversed if the Current Account is a debit balance). If a partner now has a debit balance on their Capital Account they need to pay cash into bank to clear the balance Pay the balances on the partners’ Capital Accounts with the bank and cash balance.
Example 8.1 Sally and Tanya had been in partnership for six years when they decided to dissolve their partnership. The partnership profits and losses loss es had been shared 3:2. The last las t Balance Sheet of the partnership was prepared to 31 December 20X7, when the partnership ceased trading. Sally and Tanya Balance Sheet at 31 December 20X7 $ $ ASSETS Non-current Assets Office equipment Motor vehicles Current Assets Inventory Trade Receivables Bank
14,700 18,500 33,200 4,200 12,250 2,665 19,115 52,315
Total Assets Assets EQUITY AND LIABILITIES Capital Accounts Sally Tanya
15,000 14,000 29,000 Page: 72
Current Accounts Sally Tanya
3,225 (2,152)
Current Liabilities Trade Payables Loan from Sally
9,742 12,500
Total Equity and Liabilities
1,073 30,073
22,242 52,315
The office equipment was sold at auction for $12,000 and the inventory was sold for $3,000. The partnership had two cars, which the partners took at an agreed valuation; Sally taking one for $9,000 and Tanya one for $7,500. The partners managed to collect $11,750 from trade receivables, after allowing for discounts and bad debts. Trade Payables were paid $9,257 after taking early settlement discounts. Dissolution costs of $450 were paid. Required: Prepare all the ledger accounts to record the dissolution of the partnership.
8.2
Garner versus Murray rule The Garner vs. Murray rule states that „if a partner is unable to clear his or her debt to the partnership, then the amount of the deficiency is shared amongst the other partners in the ratio of their last agreed capital.‟ The last agreed capital of the partners will be the credit balances on their Capital Accounts from the most recently prepared Balance Sheet. Example 8.2 Una, Vale and Wall dissolved their partnership on 31 December 20X4 and produced a Balance Sheet prior to making the final payments to the partners.
Bank
Una, Vale and Wall Balance Sheet at 31 December 20X4 $ 40,950
Capital Accounts
Una Vale (debit balance) Wall
34,500 (9,800) 16,250 40,950
Vale is unable to pay back her debit balance. Una, Vale and Wall have always shared profits 2:2:1 respectively, and the balances on the Capital Accounts according to the last agreed Balance Sheet before the dissolution were Una $30,000, Vale $20,000 and Wall $10,000. Required: Show how the deficiency will be dealt with according to the Garner vs. Murray rule. Pa e: 73
8.3
Sale of a partnership as a going concern ●
A Realisation Account is used when the partnership is sold as a going concern.
●
A Dissolution Account is used when the partnership is dissolved for any other reason.
There are a number of points to note: (i)
If the Balance Sheet has a Loan Account from a partner then this must be settled through the Bank Account and not credited to the partner’s Capital or Current Account.
(ii)
The valuations used for goodwill and assets are those agreed by the partners not the purchaser.
(iii)
If consideration is made in shares then the value used is the market value and not the nominal value of the shares.
(iv)
The full amount of the purchase consideration, share value and cash, is credited to the Realisation Account.
(v)
If the partners have a deficit on their Capital Account they are required to repay this into the partnership Bank Account.
Example 8.3 Xeno, Yum and Zip have been in partnership for a number of years and have always shared profits in the ratio 2:2:1 respectively. On 31 December 20X3, Applegate plc made an offer to purchase the partnership business as a going concern. The Balance Sheet of the partnership at 31 December 20X3 was as follows: Xeno, Yum and Zip Balance Sheet at 31 December 20X3 $ ASSETS Non-current Assets Land and buildings Plant and machinery Motor vehicles Current Assets Inventory Trade Receivables Bank Total Assets
$
375,810 116,100 27,096 519,006 55,500 176,500 16,300 248,300 767,306
Page: 74
EQUITY AND LIABILITIES Capital accounts Xeno Yum Zip
200,000 180,000 90,000 470,000
Current accounts Xeno Yum Zip
85,600 35,250 18,356 139,206 609,206
Current Liabilities Trade Payables Loan from Xeno
137,100 21,000 158,100
Total Equity and Liabilities
767,306
All assets and liabilities of the partnership were taken over by Applegate plc with the exception of the motor vehicles, the bank balance and the loan from Xeno. The partners retained their own motor vehicle, each valued at $9,032, and the partnership repaid the loan to Xeno. Applegate plc discharged the purchase price by paying $50,000 into the partnership Bank Account and issuing, to the partnership, 250,000 Ordinary $1 shares, which had a market value of $2.60 per share. The shares were allocated in the profit sharing ratio. On 31 December 20X3, the partners valued goodwill at $35,000 and the land and buildings at $395,000. Applegate plc considered the land and buildings to be worth $425,000. Required: Write up the following Ledger Accounts in the partnership to account for the above transactions: (a) (b) (c) (d) (e) (f)
Pa e: 75
Revaluation Account Realisation Account Bank Account Applegate plc Account Ordinary Shares in Applegate plc Account Partners’ Capital Accounts
EXERCISES 8.1
Ham, Shem and Jake are in partnership and share profits and losses equally. In the year to 31 December 20X7, they noticed a significant drop in sales and decided to dissolve the partnership. The fixtures and fittings and stock were sold at auction. The total proceeds were $29,500. Shem agreed to take the delivery van at a valuation of $2,500. Costs of $600 were incurred on dissolution. The partners collected in all of the trade receivables and took $299 discount before paying to their trade payables. The last Balance Sheet prior to dissolution was as follows: Ham, Shem and Jake Balance Sheet at 31 December 20X7 $ ASSETS Non-current Assets Fixtures and fittings Delivery van Current Assets Inventory Trade Receivables Bank
24,000 4,000 28,000
8,400 12,200 355 20,955 48,955
Total Assets EQUITY AND LIABILITIES Capital accounts Ham Shem Jake
$
10,000 10,000 10,000 30,000
Current accounts Ham Shem Jake
851 (2,265) (980) (2,394) 27,606
Current Liabilities Trade Payables Loan from Jake Total Equity and Liabilities
9,349 12,000 21,349 48,955
Required: Prepare the relevant Ledger Accounts to record the dissolution of the partnership.
Page: 76
8.2
Con, Cave and Round dissolved their partnership on 30 June 20X6. The final balances, after realizing the assets and paying the liabilities, were as follows: Con, Cave and Round Balance Sheet at 30 June 20X6 $ Bank Capital Acocunts
6,650 Con (debit balance) (27,000) Cave 18,900 Round 14,750 6,650
Con, Cave and Round have always shared profits 3:2:1 respectively and the balances on the Capital Accounts, according to the last Balance Sheet before the dissolution, were Con $40,000, Cave $30,000 and Round $20,000. Con has filed for personal bankruptcy and is unable to repay the debit balance on his Capital Account. Required: Prepare the partners’ Capital Accounts to deal with Con’s balance and calculate the final payments to Cave and Round. 8.3
Ely and Bath were in partnership sharing profits and losses equally. Lincoln Ltd offered to purchase the partnership as a going concern on 1 July 20X2. The terms of the agreement were that Lincoln Ltd purchased the land and buildings, the plant and equipment and the stock for a total of $965,000. $400,000 was paid into the partnership Bank Account and the remainder was settled by ordinary shares in Lincoln Ltd. The partnership collected 95% of the trade receivables, the remainder being considered bad debts and uncollectable. The partnership was also responsible for paying the trade payables and the loan from Ely. The final Balance Sheet of the partnership before the sale showed the following: Ely and Bath Balance Sheet at 30 June 20X2 $ $ ASSETS Non-current Assets Land and buildings Plant and machinery Current Assets Inventory Trade Receivables Bank Total Assets
Pa e: 77
564,000 174,150 738,150 83,250 142,600 6,520 232,370 970,520
EQUITY AND LIABILITIES Capital accounts Ely Bath Current accounts Ely Bath
400,000 400,000 35,622 17,218
Current Liabilities Creditors Loan from Ely Total Equity and Liabilities
109,680 8,000
800,000
52,840 852,840 117,680 970,520
Required: Prepare the following ledger accounts to reflect the above: (a) Realisation Account (b) Account with Lincoln Ltd (c) Bank Account (d) Capital Accounts for Ely and Bath. 8.4
Hales and Owen traded as partners until 30 June 20X4, when they both decided to dissolve the partnership and retire. Profits and losses had been shared in the ratio of 2:1 respectively. The summarized Balance Sheet at 30 June 20X4 was: Hales and Owen Balance Sheet at 30 June 20X4 ASSETS $ $ Goodwill 4,500 Tangible assets other than bank 41,000 Total Assets 45,500 EQUITY AND LIABILITIES Capital accounts Hales Owen Current accounts
Hales Owen
15,000 10,000 3,000 1,925
Current Liabilities Bank overdraft Creditors
25,000 4,925 29,925
3,675 11,900
Total Equity and Liabilities
15,575 45,500
They sold the tangible assets for $35,000 and banked the proceeds. They paid the trade payables in full. The partners agreed that the goodwill was worthless. Prepare the journal entries to dissolve the partnership. “End of Chapter - 8”
Page: 78
CHAPTER 9 Limited Companies – Preparing Financial Statements 9.1
Limited Companies ●
A limited company is regarded as a separate legal entity from its owners, who are known as shareholders. This means that the company is a legal person; it has a different legal existence from the shareholders. A company may sue or be sued in its own name and owns property separately from its shareholders. This concept of a separate legal entity forms the basis of limited liability of shareholders, which means that they are only liable for the debts of the company to the level of investment. There are two types of limited company, private limited companies and public limited companies:
● ● ●
●
9.2
9.3
●
A private limited company must include „Ltd‟ in its name and may not offer its shares to the public.
●
A public limited company must include „plc‟ in its name, may offer its shares and debentures to the public and is probably listed on the Stock Exchange.
Types of Shares (i)
Ordinary Shares (Equity Shares) The shareholders of ordinary or equity shares are the owner of the company. They will usually have the right to vote at the Annual General Meeting and are entitled dividends but these are not guaranteed.
(ii)
Preference Shares Preference shareholders are not usually entitled to vote at General Meetings. They receive a specified dividend which is payable before dividends for ordinary shares.
Different meanings of share capital ●
Authorised share capital is the maximum number of shares that a company can issue.
●
Issued share capital is the number of shares that have been issued or sold to shareholders. Share premium arises when a company issues shares for more than their nominal or par value. The premium over this amount must be transferred to a S hare Premium Account.
Pa e: 79
9.4
Format of the Income Statement of a Limited Company Peter Pope Ltd Income Statement for the year ended 31 March 20X0 $ $ Revenue 18,300 Less: Cost of goods sold Opening inventory 2,200 Purchases 13,100 15,300 Less: Closing inventory 2,100 13,200 Gross profit
5,100
Less: Expenses Motor expenses Rent and rates Light and heat Sundry expenses
1,000 1,500 1,300 200
Profit from operations
4,000 1,100
Less: Finance Costs Debenture Interest Preference Dividend Paid Preference Dividend Proposed
30 5 5
Net profit before tax
1,060
Less: Corporation Tax paid
60
Net profit after tax
9.5
40
1,000
A typical Statement of Changes in Equity
Peter Pope Ltd Statement of Changes in Equity for the year ended 31 December 20X0 Share Share General Retained Total Capital Premium Reserve Earnings Equity $ $ $ $ $ Balance at 1 January 20XO xxx xxx xxx xxx xxx Changes in equity for 20XO Issue of share capital xxx Transfer to General Reserve Net profit after tax Ordinary Dividends Paid Proposed Balance at 31 Dec 20XO xxx
xxx
xxx xxx
xxx
xxx
(xxx) xxx
xxx
(xxx) (xxx) xxx
(xxx) (xxx) xxx Page: 80
9.6
A typical Statement of Financial Position Peter Pope Ltd Statement of Financial Position at 31 March 20X0 Cost $
Accumulated Depreciation $
Net Book Value $
xxx
xxx
xxx
xxx xxx xxx
xxx xxx xxx
xxx xxx xxx
ASSETS Non-current Assets Intangible Assets Goodwill Tangible Assets Plant and equipment Motor vehicles
Current Assets Inventories Trade receivables Less: Allowance for doubtful debts Prepayments Cash at bank Cash in hand
xxx xxx xxx
xxx xxx xxx xxx
Total Assets
xxx xxx
EQUITY AND LIABILITIES Capital and Reserves $1 ordinary shares Share premium General reserve Accumulated profits Equity
xxx xxx xxx xxx xxx
Non-current Liabilities 10% $1 preferred shares 12% Debentures
xxx xxx
xxx
xxx xxx xxx
xxx
Current Liabilities Trade payables Accruals Proposed dividends Total Equity and Liabilities
Pa e: 81
xxx
EXERCISES 9.1
You have been given the following Trial Balance for Largo Ltd for the year ended 30 September 20X1. Largo Ltd Trial Balance at 30 September 20X1 $‟000 $‟000 Administrative expenses 540 Debenture interest for half-year 48 Ordinary shares of $1 each 240 Interim ordinary dividend paid 25 Bank 150 12% Debentures (redeemable 20X8) 800 Trade receivables 590 Trade payables 476 Motor vehicles - cost 600 Plant and machinery - cost 1,800 Motor vehicles - accumulated depreciation 1.10.X0 60 Plant and machinery - accumulated depreciation 1.10.X0 320 Wages and salaries 30 Purchases 2,120 Retained profits 1.10.X0 111 Rent, rates and insurance 244 Directors’ remuneration 160 Revenue 4,800 Inventory at 1.10.X0 500 6,807 6,807 Additional information: (i) The inventory at 30 September 20X1 has been valued at $568,000. (ii)
At 30 September 20X1 rent and rates owing amounted to $28,000 and $20,000 had been paid in advance for insurance.
(iii)
The interest on the debenture loan needs to be accrued for a half-year.
(iv)
The directors propose a final dividend of 10p per share. Th is was declar ed befor e the year end.
(v)
Depreciation is provided at 10% straight line on motor vehicles and 25% reducing balance on plant and machinery.
Required: Prepare Income Statement and Statement of Changes in Equity for the year ended 30 September 20X1 and a Balance Sheet (Statement of Financial Position) at that date for Largo Ltd.
Page: 82
9.2
Legato plc prepares its accounts to 31 December each year. At 31 December 20X8, its Trial Balance was as follows: Legato plc Trial Balance at 31 December 20X8 $ $ Plant - cost 144,000 Plant - accumulated depreciation Jan 1 20X8 24,000 Motor vehicles - cost 64,000 Motor vehicles - accumulated depreciation Jan 1 20X8 24,000 Inventory Jan1 20X8 20,000 Retained profits Jan 1 20X8 12,000 Purchases 100,000 Revenue 224,000 Cash at bank 4,800 Ordinary shares of 25p each 64,000 10% Preference shares of $1 each 24,000 Wages and salaries 32,000 Directors fees 23,200 Printing, telephone and stationery 5,600 Trade payables 11,200 General expenses 4,800 Rent, rates and insurance 8,800 Share premium account 4,800 8% debenture loan 40,000 Trade receivables 20,800 428,000 428,000 Additional information: (i) The interest on the debenture loan needs to be accrued for the whole year. (ii)
Depreciation of the non-current assets is to be provided for as follows: Plant - 10% on cost Motor vehicles - 25% reducing balance.
(iii)
Closing inventory is valued at $39,200.
(iv)
The directors propose that the preference dividend be paid in full and an ordinary dividend of 2p per share. Th ese decisions wer e publi cly an noun ced befor e the year end.
Required: Prepare Income Statement and Statement of Changes in Equity for the year ended 31 December 20X8 and a Balance Sheet (Statement of Financial Position) at that date for Legato plc.
Pa e: 83
9.3
Molto plc extracted a list of balances from their accounting records on 31 December 20X3.
Net profit for the year ended Dec 31, 20X3 Profit and loss account at Jan 1 20X3 General reserve at Jan 1 20X3 Bank (debit) 6% Preference shares 5% Debentures Ordinary shares of $1 each Fixtures - cost Fixtures - accumulated depreciation Dec 31 20X3 Vehicles - cost Vehicles- accumulated depreciation Dec 31 20X3 Receivables Payables Prepayments Inventory at Dec 31 20X3
$ 166,100 52,800 34,100 31,900 110,000 22,000 198,000 159,500 33,550 22,000 5,500 111,100 103,400 4,950 396,000
The dividend of the preference shares is to be paid and the directors propose ordinary dividend of 5p per share. They also wish to transfer $22,000 to the general reserves. Al l of t hese i tems wer e publ i cly announced before the year end. Debenture interest of $1,100 was paid during the year and is already included in the net profit figure. Required: Prepare Statement of Changes in Equity for the year ended 31 December 20X3 and Balance Sheet (Statement of Financial Position) at that date for Motor plc. 9.4
Rall Ltd prepares their accounts annually to 31 March. The Trial Balance has been extracted from the books and records of the company at 31 March 20X6. Rall Ltd Trial Balance at 31 March 20X6 $ $ Freehold property - cost Motor vehicles - cost Plant and machinery - cost Freehold property - accumulated depreciation April 1 20X5 Motor vehicles- accumulated depreciation April 1 20X5 Plant and machinery - accumulated depreciation April 1 20X5 Wages and salaries Directors’ remuneration Revenue Purchases Inventory at April 1 20X5 10% Debentures (redeemable 20X9)
201,600 90,000 160,800 40,320 28,480 72,360 151,786 88,000 1,071,900 567,000 80,400 90,000 Page: 84
Administrative expenses Debenture interest Distribution expenses Bank Trade receivables Allowance for doubtful debts Trade payables Ordinary shares of $1 each Share premium account Retained profits April 1 20X5 Interim ordinary dividend paid
114,374 6,750 18,264 2,924 124,968 5,918 70,878 120,000 18,000 119,010 30,000 1,636,866
1,636,866
Additional information: (i)
The closing inventory valuation at 31 March 20X6 is $84,420.
(ii)
Additional directors’ remuneration of $ 3,000 is to be accrued.
(iii)
The Depreciation expense should be a full year’s charge.
(iv)
Depreciation is to be provided at the following rates: Freehold property - 4% on cost Motor vehicles - 25% reducing balance Plant and machinery - 15% on cost
(v)
A final ordinary dividend of 7p per share has been proposed by the directors. Thi s was decl ared befor e the year end.
Required: Prepare Income Statement and Statement of Changes in Equity for the year ended 31 March 20X6 and a Balance Sheet (Statement of Financial Position) at that date for Rall Ltd. 9.5
Poco plc has authorized share capital consisting of 200,000 ordinary shares at $1 each and 65,000 8% preference shares at $1 each. The company prepared the following Trial Balance at 31 May 20X8. $ Receivables Debenture interest Directors salaries Fixtures and fittings (cost $45,500) General reserve Advertising Bad debts Bank interest Bank overdraft Cash in hand
Pa e: 85
$
140,153 1,690 43,680 23,270 91,000 13,650 763 2,639 23,075 481
Payables Delivery expenses Purchases Rent and rates Allowance for doubtful debts Revenue Share premium account Inventory at 1 June 20X7 Insurance Ordinary shares of $1 each 8% preference shares of $1 each Leasehold premises (cost $364,000) Motor vehicles (cost $73,060) Profit and loss account at 1 June 20X7 Wages and salaries 10% debentures Sundry expenses
40,654 19,634 349,003 15,015 3,120 609,141 45,825 26,364 2,470 130,000 56,875 318,500 69,615 45,362 41,177 33,800 10,748 1,078,852
1,078,852
Additional information: (i)
Inventory at 31 May 20X8 was valued at $48,230.
(ii)
Half a year’s debenture interest is to be accrued.
(iii)
Depreciation is to be provided as follows: (a) (b) (c)
(iv)
Leasehold premises at 4% per annum on cost Motor vehicles at 20% per annum on cost Fixtures and fittings at 40% reducing balance.
A dividend of 8p per share is proposed on the ordinary shares and the full year’s preference dividend is proposed. Th ese decisi ons wer e publi cly announced before the year end.
(v)
$5,460 owes for wages and salaries and $260 has been prepaid for rent at 31 May 20X8.
(vi)
The allowance for doubtful debts is to be increased to $3,770.
Required: Prepare Income Statement and Statement of Changes in Equity for the year ended 31 May 20X8 and Balance Sheet (Statement of Financial Position) at that date for Poco plc.
“End of Chapter - 9”
Page: 86
CHAPTER 10 Incomplete Records “Incomplete records” is the term used to describe a book keeping system that does not use double entry principles.
EXERCISES 10.1
Phil Fordham runs a stationery wholesale business. He uses a cash book to record his bank transactions. He has provided the following information:
Assets and Liabilities at Shop fittings Inventory Trade Receivables Bank (debit) Cash Trade Payables
1 January 20X3
31 December 20X3
$ 13,200 42,240 48,180 23,100 1,650 34,320
$ 11,200 49,170 33,660 30,060 2,640 26,400
Bank transactions in the year ended 31 December 20X3 Receipts from sales Payments to supplies Drawings Business expenses
$ 210,870 136,920 16,500 50,490
During the year, cash sales amounted to $1,900 and business expenses paid in cash amounted to $910. There were no additions to shop fittings during the year. Required: (a) Calculate the opening and closing capital. (b)
Calculate net profit.
(c)
Draw up Income Statement for the year ended 31 December 20X3 and a Balance Sheet (Statement of Financial Position) at that date.
Pa e: 87
10.2
Fran Fosset is a sole trader. She does not keep a full set of book-keeping records but assures you that she pays all her takings into the bank and makes all business payments by cheque. A summary of the bank statements for the year to 30 June 20X8 shows the following transactions: $ Receipts: Cash received from Trade Receivables Bank interest Payments: Wages for staff Rent Vehicle running expenses Other general expenses Payments to Trade Payables Drawings
98,450 138 11,770 1,045 1,815 4,202 53,020 5,720
You have also managed to obtain some information relating to balances at 30 June 20X7 and 30 June 20X8.
Motor vehicle (cost less depreciation) Bank Trade Receivables Trade Payables Inventory
30 June 20X7 $
30 June 20X8 $
5,225 963 4,290 3,718 4,400
3,850 21,979 5,225 4,532 4,950
Fran Fosset has informed you that at 30 June 20X8 rent of $550 needs to be accrued and general expenses of $935 have been prepaid. Required: (a) Calculate the opening capital for Fran Fosset as at 1 July 20X7. (b)
Calculate the Revenues figure for the year to 30 June 20X8.
(c)
Calculate the Purchases figure for the year to 30 June 20X8.
(d)
Prepare the Income Statement for the year ended 30 June 20X8 and a Balance Sheet (Statement of Financial Position) at that date.
Page: 88
10.3
Sand and Iego are in partnership trading as electrical engineers. They prepare accounts annually to 31 March but do not keep a full double entry set of bookkeeping records. They provide you with the following information: Assets and liabilities at
1 April 20X1
31 March 20X2
Inventory Plant and equipment Trade Receivables Bank Trade Payables Business expenses prepaid Business expenses accrued Capital account: Sand Capital account: Iego Current account: Sand Current account: Iego
$ 35,000 70,000 50,400 2,100 45,500 420 870 60,000 30,000 15,290 6,260
$ 38,500 64,750 49,000 1,694 42,000 543 762 60,000 30,000 Unknown Unknown
Bank summary: Business expenses paid Drawings: Sand Drawings: Iego Receipts from customers Payments to suppliers
$ 42,000 24,000 18,000 141,400 57,806
The partnership agreement provides for interest at 5% per annum on capital account balances, a salary for Iego of $5,000 per annum and profit to be shared 3:2 to Sand and Iego respectively. Required: Prepare Income Statement (including an Appropriation Account) for Sand and Iego for the year ended 31 March 20X2 and a Partnership Balance Sheet (Statement of Financial Position) at that date.
“End of Chapter - 10”
Pa e: 89
CHAPTER 11 Inventory Valuation 11.1
Valuing Closing Inventory Closing inventory is valued at the close of a trading year (or other period). This is done through inventory taking. Each category of inventory is valued by multiplying the actual number of items in inventory by the inventory value per item. Number of item in inventory x inventory value per item = inventory value
Each item of inventory should be valued according to the rule of valuing at: The lower of cost price or net realizable value „Net realizable value‟ (NRV) is defined as the selling price less the costs of getting the goods into a saleable condition. This means, for example, that any costs which have to be incurred in repairing any damaged goods before they can be sold must be subtracted first.
Example 11.1 Alistair Wardle valued his inventory in hand at cost $4,670. Included in this are four items whose inventory value he is now reconsidering. ●
Item 1 cost $320. The likely selling price has fallen from $480 to $450.
●
Item 2, which cost $175, has been damaged and cannot be repaired. Its normal selling price is $260 but it is now expected to sell for $230.
●
Item 3, which cost $210, has been damaged and is to be repaired at a cost of $55. Once repaired it is expected to sell for only $220.
●
Item 4, which is cost $186. Its normal selling price is $240 but it is now expected to sell for only $160.
Calculate revised inventory valuation using the principle of ‘lower of cost or net realizable value’. 11.2 Raymond sells household electrical appliances. As a part of his closing inventory he has a microwave, which cost $47. The microwave will sell for $65. However, before it can be sold it requires a repair, which will cost $20. Required: (a) Calculate the value of the microwave to be included as a part of Raymond’s closing inventory. Show all your workings. (b)
Complete the following sentences: Inventory should be valued at ----------------------- or ---------------------, whichever is lower. This is example of using the concept of ------------- . Page: 90
11.2 Valuing goods in customers‟ hands In valuing inventory, consideration must be given to circumstances where goods are physically or legally in the hands of the customer. Two such circumstances are: (a)
Where goods have been supplied on a sale or return basis, and
(b)
Where customers’ goods remain on the premises of the business.
Example 11.3 The owner of Notley Engineering values the inventory of his business at $89,250 on 30 June 20X5, after undertaking a physical inventory taking. He informs you that: (i)
In April he sold $15,000 of goods to Teecass Ltd on a sale or return basis. The original cost of the goods was 75% of the selling price. Teecass Ltd has sold half of these goods by 30 June 20X5.
(ii)
On 28 June 20X5, Notley Enginerring sold, and invoiced, goods to Fenchard Brothers. These goods are still in the warehouse waiting to be delivered. The goods cost $17,100 and have been included in the inventory valuation.
Required: Calculate the value of inventory to be included in the financial statements of Notley Engineering on 30 June 20X5.
11.3 Inventory Valuation Adjustments Example 11.4 Adie Gianna owns a retail dress shop. Her financial year ended on 31 December 20X2. She was unable to take inventory until 5 January 20X3. Inventory in the shop at that date, valued at cost, was $43,830. The following additional information was available. (i)
A delivery of dresses from her supplier was made to the shop on 2 January 20X3. The purchase cost of the delivery was $9,780. No other deliveries were received between 31 December 20X2 and 5 January 20X3.
(ii)
Sales made between 31 December 20X2 and 5 January 20X3 amounted to $6,300. These sales were made at her usual gross profit mark-up of 50%.
(iii)
Returns inwards between 31 December 20X2 and 5 January 20X3 were $330 at the selling price. The sales were made at her normal mark -up.
Required: Prepare a calculation showing the inventory valuation at 31 December 20X2.
Pa e: 91
11.4 Inventory losses There are a number of reasons why a business might suffer a loss of inventory. For example, theft of goods or inventory destroyed by fire or flood. Three steps can be used to calculate the inventory loss: Step 1:
Inventory available for sale = Opening Inventory + Purchases
Step 2:
Cost of goods sold = Sales - Gross Profit
Step 3:
Estimated closing inventory = Inventory available for sale Cost of goods sold Inventory loss = Estimated closing inventory - Actual inventory
Example 11.5 Karen Wolff owns a stationery shop and believes that some of her inventory has been stolen during the year ended 31 December 20X8. She provides you with the following information: Sales for the year Opening Inventory
$95,000 $8,000
Purchases for the year Closing Inventory
$62,000 $15,000
Her gross margin is 45% on sales. Calculate the inventory loss for the year. Example 11.6 Fenwick and Sons had their warehouse destroyed by fire on 31 May 20x5. None of their inventory was salvaged. Inventory had been valued at the year ended 31 March 20X5 as $29,260. Sales in the period 1 April to 31 May 20X5 were $61,300 and purchases were $25,770. On 31 May 20X5, Fenwick and Sons s old some goods to a customer on a sale or return basis, therefore this inventory was not in their warehouse. The sale for $5,000 is included in the sales figure of $61,300. Sales are made at a gross profit of 25%. Calculate the value of the insurance claim.
11.5 Cash losses If it is suspected that cash has been stolen, then the approach is slightly different. Goods have been sold, and gross profit earned on those sales, then cash has been stolen from takings. The loss will appear in the Profit and Loss Account as an expense if it is not covered by insurance. Example 11.7 The owner of Ariadnee Fashions has contacted you because she believes that one of her part-time employees has been stealing cash from the business. All sales are made on a cash basis and sales are recorded through an electronic till. She does not believe that any inventory has been stolen. Page: 92
The business has had a constant gross profit of 30% for many years and the following information is available: Opening inventory Closing inventory
$18,300 $21,200
Cash sales through till Purchases
$58,870 $45,600
EXERCISES 11.1
Geoffrey Willowmead started in business on 1 July 20X6 importing birdhouses and selling them to garden centres. A summary of his transactions for the year ended 30 June 20X7 is as follows:
Type of birdhouse
Purchases
Revenues
Quantity
$ per house
Quantity
$ per house
Small hanging birdhouse
5,000
15
3,500
22
Large hanging birdhouse
8,000
19
6,200
25
Small thatched birdhouse
9,000
35
6,500
45
45
9,700
65
Large thatched birdhouse 12,000
Required: Calculate the value of inventory at 30 June 20X7 and prepare a Trading Account for Geoffrey Willowmead at that date. 11.2
Classy Feet, a shoe shop, valued its inventory at 31 March 20X4 at £15,692. Included in this inventory figure are the following items: (i)
Fifteen pairs of multi-coloured trainers, which had faded after being in the window display. The selling price of these will have to be reduced to 80% of their cost price of $35.
(ii)
Due to a mild winter the shop sold fewer boots than usual. This inventory, which cost $1,200, must be sold at a discount of 70% on its total selling price of $2,000.
(iii)
A consignment of twenty pairs of ladies shoes, which cost $26 per pair, require new heels at a cost of $4 per pair before they can be sold for $28 per pair.
(iv)
A selection of men’s formal footwear, extra large and extra small sizes, with an original total cost of $500, are now out of fashion and unsaleable; they will be donated to a local charity shop.
Required: Calculate the correct value of inventory at 31 March 20X4 to be included in the financial statements of Classy Feet.
Pa e: 93
11.3
Carol Carlton is a sole trader. She has shop premises in the High Street and a small warehouse on a local industrial estate. On 14 February 20X7, the warehouse was broken into and some of the inventory was stolen. Carol had valued her inventory at 31 December 20x6 at $38,720. During the period 1 January 20X7 to 14 February 20X7 she had made sales of $18,000 and purchased goods at a cost of $12,000. Carol sells all her products at a gross profit of 35%. The value of inventory in the shop on 14 February 20X7 was $9,360. Required: Calculate the value of inventory stolen from the warehouse on 14 February 20X7.
“End of Chapter - 11”
Page: 94
CHAPTER 12 Manufacturing Accounts 12.1 Cost analysis in Manufacturing Accounts Costs may be categorized as Direct costs and Indirect manufacturing costs/Production overheads.
Direct costs are costs that may be traced specifically to the item being manufactured.
Direct costs may be further broken down into: (i) (ii) (iii)
Direct materials Direct labour Direct expenses
When all of the direct costs are added, the total is known as Prime cost. Indirect manufacturing costs/Production overheads include all those other costs which occur in the factory but which cannot be easily traced to the products being manufactured. These are sometimes referred to as Factory overheads.
Examples of indirect manufacturing costs include: ● ● ● ● ● ●
rent and rates of the factory heating and lighting of the factory depreciation of production machinery repairs to production machinery wages to forklift drivers or cleaners salary of the factory supervisor
Production (or manufacturing) cost = Prime cost + Production overheads
Other indirect costs are; (i)
Selling and distribution overheads - such as sales staff salaries and commission, carriage outwards, depreciation of delivery vans, advertising, etc.
(ii)
Administration overheads - such as office manager’s salaries, legal and accountancy charges, depreciation of office equipment, office staff salaries, etc.
Pa e: 95
12.2 The Format of Manufacturing and Income Statement (All figures are illustration only)
Trimble Ltd Manufacturing and Income Statement for the year ended 30 September 20X5 £
£
Raw materials Opening inventory - raw materials 12,160 Purchases - raw materials 138,227 Less Closing inventory - raw material (13,920) Cost of raw materials consumed Direct wages/labour Direct expenses
136,467 97235 17,315
Prime cost
251,017
Production overheads Indirect wages Rent and rates Insurance Power, heat and light Motor expenses Plant and machinery repairs Depreciation: Plant and machinery Motor vehicles
Add
44,800 25,200 15,400 13,132 15,168 11,232 16,200 5,586 146,718 397,735
Add Opening
work in progress Less Closing work in progress
6,320 (5,200) 1,120
Production (manufacturing) cost Manufacturing Profit
398,855 79,771
Transfer to Trading Account
478,626
Page: 96
Revenues Opening inventory - finished goods 29,160 Production (manufacturing) cost 478,626 Less Closing Inventory - F.G. (30,560)
779,771
477,226 Gross Profit
302,545
Less expenses
Salesmen’s salaries Rent and rates Administrative expenses Insurance Power, light and heat Motor expenses Plant and machinery repairs Depreciation: Plant and machinery Fixtures and fittings Motor vehicles Increase in allowance for doubtful debts
19,600 10,800 26,600 6,600 5,630 15,170 1,248 1,800 6,800 6,775 800 (101,823)
Net profit Add Manufacturing Profit Total Profit
200,722 79,771 280,493
EXERCISES 12.1
Ribble Ltd manufactures a variety of plastic garden furniture. The company prepares accounts annually to 30 April. At 1 May 20X7, the Trial Balance was as follows: $‟000
Ordinary share capital Inventory at 1 May 20X7: Raw materials Work in progress Finished goods Revenues Salesmen’s salaries Purchases - raw materials Direct wages Indirect wages Plant and machinery - cost Plant and machinery - accumulated depreciation 1 May 20X7 Fixtures and fittings - cost Fixtures and fittings - accumulated depreciation 1 May 20X7 Motor vehicles - cost Motor vehicles - accumulated depreciation 1 May 20X7 Pa e: 97
$‟000 177,900
9,880 5,135 23,692 455,000 15,925 112,309 146,185 36,400 146,200 87,700 27,625 11,050 62,740 31,500
Rent and rates Administrative expenses Insurance Power, heat and light Motor expenses Plant and machinery repairs Trade receivables Trade payables Bank Allowance for doubtful debts
29,250 21,612 17,870 15,240 24,648 11,700 70,200 18,791 8,840 3,510 784,451
784,451
Additional information: (i) Depreciation is to be provided at the following rates: Plant and machinery 10% using the straight-line method Fixtures and fittings 20% using the straight-line method Motor vehicles 30% using the reducing balance method (ii)
Inventories and work in progress at 30 April 20X8 were: Raw materials $11,310 Work in progress $14,225 Finished goods $24,830
(iii)
Expenses are to be apportioned as follows: Factory % Rent and rates 70 Insurance 70 Power, heat and light 70 Motor expenses 50 Plant and machinery repairs 90 Depreciation - Plant and machinery 90 Fixtures and fittings Motor vehicles 50
(iv)
Administration % 30 30 30 50 10 10 100 50
Direct wages of $2,730 need to be accrued and there is a prepayment of $1,560 for plant and machinery repairs.
Required: Assume that Ribble Ltd wish to transfer the production cost to the Trading Account at a mark-up of 15%. (a)
Prepare the Manufacturing and Income Statement for Ribble Ltd for the year ended 30 April 20X8 and the Balance Sheet at that date.
(b)
Prepare the provision for unrealised profit account and show the revised manufacturing profit and the balance sheet figure for inventories of finished goods.
Page: 98
12.2
Classify each of these costs by ticking the relevant box.
Direct materials
Indirect materials
Direct Labour
Direct expenses
Production overheads
Raw materials Business rates Wages of factory foreman Crane hire for one order Royalties Depreciation of machinery Machine operator’s wages Grease for machines
12.3
Resin Ltd is a manufacturing company. At 30 September 20X7, the following balances were extracted from their ledger: $ $ Inventory at 1 October 20X6 - Raw materials 89,900 - Work in progress 188,500 Production overheads 609,000 Carriage on raw materials purchased 39,150 Direct wages 861,300 Direct expenses 47,850 Purchases of raw materials 756,900 Returns to raw materials suppliers 26,100 The work in progress, valued at production cost at 30 September 20X7, was $220,400; Raw materials at 30 September 20X7 were valued at $146,450. Direct wages of $17,400 are to be accrued. Required: Prepare the Manufacturing Account for Resin Ltd for the year ended 30 September 20X7.
12.4
Assume that Resin Ltd (in question 12.3 above) values its work in progress at prime cost. Work in progress at 1 October 20X6 was valued at $139,200 and work in progress at 30 September 20X7 was valued at $162,400. Required: (a) Prepare the Manufacturing Account for the year ended 30 September 20X7. (b)
Pa e: 99
Calculate the production cost transferred to the Trading Account of Resin Ltd if the company transfers production cost at a mark-up of 20%.
12.5
Edwin Crump Ltd sells golf accessories. They manufacture golf clubs and buy in other finished golf accessories for resale. An analysis of opening and closing inventory was as follows:
Raw materials Work in progress Finished goods: Golf clubs Other purchased golf accessories
1 January 20X8 $ 29,900 20,800
31 December 20X8 $ 50,700 28,600
32,500 31,200
44,295 36,750
Wages and salaries are to be allocated:
Wages Salaries
Total for the year $ 403,000 109,200
Direct production % 75
Indirect production % 15 50
Administrative % 10 50
Other balances extracted from the books of Edwin Crump at 31 December 20X8 were: Revenues of golf clubs Revenues of other golf accessories Carriage on raw materials Carriage on purchases of golf accessories Depreciation (60% Factory, 40% Office) Purchases of raw materials Purchases of golf accessories for resale Purchases returns of raw materials Production overheads Administrative overheads
$ 1,665,300 713,700 35,640 18,960 114,400 651,300 509,600 19,500 241,800 132,600
Required: (a) Prepare the Manufacturing Account for Edwin Crump Ltd for the year ended 31 December 20X8. (b)
Prepare the Trading Account for the same period. This should be in columnar form to show the gross profit on sale of manufactured golf clubs and gross profit on bought-in golf accessories.
“End of Chapter - 12”
Page: 100
CHAPTER 13 Non-trading Organisations 13.1 Terminology There are some differences in terminology between financial statements for trading orgainsations and those for non-trading orgainisations. Business
Non-trading organization
Income Statement
Income and Expenditure Account
Net Profit
Surplus or Excess of income over expenditure
Net Loss
Deficit or Excess of expenditure over income
Capital
Accumulated Fund
13.2 Receipts and Payments Account A Receipts and Payments Account summarises all of the cash received and cash paid during the year. The cash in hand and the balance at the bank are shown in one account, therefore any transfers between cash and bank will not be shown in the Receipts and Payments Account. An example of a Receipts and Payments Account is shown in ‘T’ account format below: Receipts and Payments Account $ RECEIPTS Balance b/d - Cash in hand Balance b/d - Cash at bank Subscriptions Donations
150 668 3,564 500
4,972
Pa e: 101
$ PAYMENTS Rent paid Electricity Purchases of assets Secretary’s expenses Sundry expenses Balance c/d - Cash in hand Balance c/d - Cash at bank
750 228 1,200 425 635 170 1,564 4,972
It is possible to show the receipts and payments in the form of a vertical statement: Receipts and Payments Account for the year ended 31 March 20X7 $ $ Cash in hand April 1 20X6 150 Cash at bank April 1 20X6 668 818 Receipts Subscriptions Donations
3,654 500 4,154
Payments Rent Paid Electricity Purchase of assets Secretary’s expenses Sundry expenses
750 228 1,200 425 635 3,238
Cash in hand March 31 20X7 Cash at bank March 31 20X7
170 1,564 1,734
13.3 Subscriptions Account Subscriptions Account Balance b/d - Subscriptions owing Income and Expenditure Account Balance c/d - Subscriptions prepaid
Balance b/d - Subscriptions owing
$
$
150 Balance b/d - Subscriptions prepaid 3,532 Subscriptions received 145 Balance c/d - Subscriptions owing
125 3,542 210
3,877
3,877
210 Balance b/d - Subscriptions prepaid
145
Page: 102
13.4 Preparing Financial Statements (a) Format of Café Trading Account of a Club and Society Bamm Rugby Club Café Trading Account for the year ended 31 December 20X0 $ $ Revenue xxx Less: Cost of goods sold Opening inventory xxx Purchases xxx xxx Less: Closing inventory xxx xxx Profit from Café
xxx
(b) Format of Income and Expenditure Account of a Club and Society Bamm Rugby Club Income and Expenditure Account for the year ended 31 December 20X0 $ $ Income Subscriptions Function room hire Advertising revenue Profit from Café Less: Expenditure Caterers for function room Groundsmen’s wages Heat and Light Gym staff wages Printing, Stationery, and telephone Other expenses Excess of income over expenditure
Pa e: 103
xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx
xxx xxx
(c) Format of Statement of Financial Position of a Club and Society Bamm Rugby Club Statement of Financial Position as at 31 December 20X0 Cost ASSETS Non-current Assets Premises Equipment Current Assets Inventories Subscriptions in arrears Prepayments Cash at bank
$
Accumulated Depreciation $
Net Book Value $
xxx xxx xxx
xxx xxx xxx
xxx xxx xxx
xxx xxx xxx xxx
xxx
Total Assets
xxx
EQUITY AND LIABILITIES Accumulated Funds Accumulated Funds at 1 January 20X0 Add: Excess of income over expenditure
xxx xxx xxx
Non-current Liabilities Life year membership funds Current Liabilities Café Trade payables Subscriptions paid in advance Accruals Total Equity and Liabilities
xxx xxx xxx xxx
xxx xxx
Page: 104
EXERCISES 13.1
The treasurer for Kidling Gardeners Association has prepared a Receipts and Payments Account for the year ended 30 June 20X6. Receipts and Payments Account
RECEIPTS $ PAYMENTS Balance b/d - Cash at bank 345 Costs of visiting speakers Subscriptions 2,175 Purchase of seeds Flower show entry fees 210 Hire of hall for meetings Revenues of seeds 1,812 Advertising Annual trip to Chelsea Flower Show 650 Insurance Equipment hire 490 Secretary’s expenses Flower show prizes Annual trip expenses Balance c/d - Cash at bank 5,682 Balance b/d - Cash at bank
$ 900 1,090 1,200 95 120 375 195 530 1,177 5,682
1,177
The following additional information is available:
Gardening tools and equipment (NBV) Inventory of seeds Trade Payables for seeds Prepaid insurance Subscriptions in arrears Subscriptions in advance
30 June 20X5 $ 2,725 130 175 55 115 85
30 June 20X6 $ 2,044 145 126 60 105 145
The association buys seeds in bulk and sells them to members. Members can also hire the associations gardening equipment for a nominal charge. There were no additions to gardening tools and equipment during the year. Required: Prepare the Seeds’ Trading, Income and Expenditure Account for Kidling Gardeners Association for the year ended 30 June 20X6 and the Balance Sheet (Statement of Financial Position) at that date.
Pa e: 105
13.2
Covington Handbell Ringers’ Society has 50 members who pay an annual subscription of $150 each. You have been given the following information:
Receipts for the year ended 31 December 20X7 Subscriptions received for 20X7 Subscriptions received for 20X6 (in arrears) Subscriptions received for 20X8 (in advance) Concert ticket sales
$ 6,000 600 450 3,000 10,050
Payments for the year ended 31 December 20X7 Hire of concert venue Hire of practice hall Maintenance of hand bells Purchase of music Club secretary expenses
$ 2,025 2,600 1,200 2,450 275 8,550
Assets and liabilities
31 December 20X6 $ Bank balance 1,312 Hand bells - valuation 12,000 Subscriptions in arrears 600 Subscriptions paid in advance 300 Owed to suppliers of music 65
31 December 20X7 $ 2,812 10,000 1,200 450 112
The difference in the valuation of the handbells is due to depreciation. On 31 December 20X7, the society received a bequest from a former member of three sets of handbells valued at $4,000. The policy of the society is to credit large donations or bequests to the Accumulated Fund. These handbells are not included in the valuation at 31 December 20X7. Required: (a)
Calculate the Accumulated Fund for Covington Handbell Ringers’ Society at 31 December 20X6.
(b)
Prepare the Subscriptions Account for the year ended 31 December 20X7.
(c)
Prepare the Income and Expenditure Account for Covington Handbell Ringers’ Society for the year ended 31 December 20X7.
(d)
Prepare the Balance Sheet (Statement of Financial Position) for Covington Handbell Ringers’ Society at 31 December 20X7.
Page: 106
13.3
Bamm Rugby Club and Gymnasium has three outdoor rugby pitches, a club house with café, a function room and a gymnasium. The function room is available for hire by non-members and the club will provide a paying café and will subcontract caterers for more formal dining, if required. The rugby pitches are hired during the week by local schools. The club prepares its accounts to 31 December each year. Members of the rugby club have full access to the gym and the café. Annual membership fees, due by 1 January each year, were £100 for 20X6 and $120 for 20X7. The fees for 20X8 will be $140. From 1 January 20X6, members were offered the opportunity to take out a five-year membership for $500. The five-year membership fees are released to the Income and Expenditure Account, equally over five years, and the balance is held in a five-year Membership Fund. The five-year membership offer was taken up by 50 members in 20X6 and 42 members in 20X7. The Receipts and Payments account for the year ended 31 December 20X7 was as follows: Receipts and Payments Account
RECEIPTS Balance b/d - Cash at bank Annual Subscriptions Five-year subscriptions School hire of rugby pitches Café takings Function room hire Advertising revenue
$ 14,732 48,000 21,000 18,500 96,830 36,200 9,640
PAYMENTS $ Suppliers of café food and drink 68,290 Caterers for function room 25,000 Groundsmen’s wages 12,450 Purchase of equipment 8,000 Heat and Light 19,450 Printing, stationery and telephone 11,300 Café staff wages 25,600 Gym staff wages 32,000 Other expenses 29,892 Balance c/d - Cash at bank 12,920 244,902 244,902
Fifteen members had not paid their subscriptions for 20X6 by 31 December 20X6 but 24 members had paid in advance for 20X7. At 31 December 20X7, the club had not re ceived subscriptions for 20X7 from 21 members but 10 members had paid in advance for 20X8. 20% of heat and light costs are to be transferred to the Café Trading Account. Other information: 31 December 20X6 Café Inventory Club equipment (NBV) Club premises (NBV) Owed to supplier for café food and drink Prepaid other expenses
31 December 20X7
$
$
9,264 102,750 240,000 2,400 1,122
9,875 99,675 225,000 3,650 1,976
No equipment was disposed of during the year ended 31 December 20X7. Pa e: 107
Required: In respect of Bamm Rugby Club and Gym:
13.4
(a)
Calculate the balance on the Accumulated Fund and the Five Year Membership Fund at 31 December 20X6.
(b)
Prepare the Annual Subscriptions Account for the year ended 31 December 20X7.
(c)
Prepare the Café Trading Account for the year ended 31 December 20X7.
(d)
Prepare the Income and Expenditure Account for the year ended 31 December 20X7.
(e)
Prepare a Balance Sheet (Statement of Financial Position) at 31 December 20X7.
A musical appreciation society had 35 members for the year ended 31 December 20X5. The annual subscription fee is $50 per member. (i)
On 1 January 20X5, five members had not paid their subscriptions for 20X4 and two members had already paid their subscription for 20X5.
(ii)
At 31 December 20X5, four members had not yet paid their subscription for 20X5 but twelve members had paid their subscriptions for 20X6.
(iii)
The receipts and payments account for the year ended 31 December 20X5 showed that the society had received subscriptions of $200 relating to 20X4, $1,450 relating to 20X5 and $600 relating to 20X6.
Required: Prepare the Subscriptions Account for the year ended 31 December 20X5.
“End of Chapter - 13”
Page: 108
CHAPTER 14 Ratio Analysis 14.1 Ratio Analysis Ratio analysis can be used to assess a business’s financial performance, to evaluate its financial position and as an aid when trying to predict future performance and suitability.
Ratios can be sub-divided into three categories:
(a)
Profitability or Performance ratios (i)
Return on Capital Employed (ROCE)
The ROCE measures the return or profit of a business in relation to the owners‟ capital. It shows how well a business is utilizing capital to create revenue. The return is expressed as a ercenta e of the ca ital em lo ed. The formula for Return on Total Capital Employed is: ()
= − − −%
Where: Total Capital employed = Ordinary share capital + % Preference Share Capital + Reserves + Non-current Liabilities The formula for Return on Total Shareholders‟ Funds is: () ′
= − − −%
Where: Total Shareholders’ Funds = Ordinary share capital + % Preference Share Capital + Reserves
The formula for Return on Equity (Ordinary Shareholders‟ Funds) is: ′
Where: Ordinary Shareholders’ Funds = Ordinary share capital + Reserves
Pa e: 109
(ii)
Gross profit as a percentage of revenues
This measures the percentage of sales revenue remaining after meeting the cost of goods sold. It shows how much gross profit is being generated per £1 of sales. It enables a judgment to be made on how successfully the business has been trading. The formula to calculate this is:
(iii)
= − − −%
Gross profit as a percentage of cost of sales This measures the percentage of profit added to the purchase or cost price of the goods sold. The formula to calculate this is:
(iv)
= − − −%
Net profit as a percentage of Revenues This measures the percentage of sales revenue retained by the business after the cost of sales and all other operating expenses have been paid. The formula to calculate this is:
(b)
= − − −%
Liquidity/Working Capital ratios (i)
Current/Working Capital Ratio
The current or working capital ratio expresses how many times the current liabilities of a business are covered by its current assets.
Page: 110
The formula to calculate current ratio is:
= − − −∶
(ii) Liquidity/Acid test ratio The liquidity ratio is similar to the current asset ratio but it omits invenotry from the calculation. This is because inventory is the least liquid current asset. It has to be sold, converted to receivables and then collected before the cash appears in the business bank account. The formula to calculate liquidity ratio is: −
= − − −∶
Effects of transactions on working capital and liquidity
Effect on working capital Sale of a fixed asset Purchase of inventory for cash
Purchase of inventory on credit
Increase in bank balance so increase working capital Nil effect as cash will be replaced by inventory Nil effect as the increase in inventory is offset by the increase in trade payables
Effect on working capital ratio
Effect on liquid funds (bank + receivables)
Effect on liquidity ratio
Increase
Increase
Increase
No effect
Decrease
Decrease
No effect
No change
Decrease because of increased payables
Repayment of a long term loan
Decrease in working capital
Decrease
Decrease
Decrease
Receipt of cash from trade receivables
Nil effect as the receivables are replaced by cash
No effect
No effect
No effect
Pa e: 111
(C)
Asset Utilization (i)
Inventory turnover Ratio
The inventory turnover rate calculates the number of times that inventory is replaced during an accounting period, usually one The formula to calculate Inventory turnover rate is:
= − − −
Where: Average inventory = ½ (Opening inventory + Closing inventory)
An alternative way of looking at inventory turnover is to calculate the average inventoryholding period in days or months. This is calculated as:
= − − −
or
(ii)
= − − −
Receivables‟ collection period
This ratio is used to calculate the average time in days that it takes a business to collect from its trade receivables. The formula to calculate Receivables’ collection period is:
= − − −
Page: 112
(iii)
Payables‟ settlement period
The payables‟ settlement period ratio calculates the average time in da s that a business takes to a its a ables.
The formula to calculate Payables’ settlement period is:
(iv)
= − − −
Revenues to capital employed
This calculation measures the investment needed to achieve the level of sale revenues. It is often expressed as the value of sale revenues achieved for every $1 of investment. The formula to calculate Revenues to capital employed ratio i s: Expressed as a percentage;
= − − −%
Expressed as a ratio;
= − − −∶
Expressed as a turnover rate;
Pa e: 113
= − − −
EXERCISES 14.1
Meridian Ltd sells outdoor clothing to the public through two retail shops located in the west of England. You are provided with the financial statements of Meridian Ltd for the year ended 31 October 20X3 and are required to analyse these in terms of profitability, liquidity and asset utilisation. Meridian Ltd Income Statement for the year ended 31 October 20X3 $ $ Revenues Cost of sales Opening inventory Purchases Less Closing inventory
572,000 80,000 400,000 480,000 (96,000) 384,000 188,000
Gross profit Less: Expenses Administrative expenses Profit before interest
116,000 72,000
Less: Debenture interest Net profit for the year 10% Preference dividend paid Proposed final ordinary dividend
4,000 68,000 10,000 30,000
Retained profit for the year Retained profit at 1 November 20X2 Retained profit c/d
28,000 72,000 100,000
Meridian Ltd Balance Sheet at 31 Octorber 20X3 Cost Acc Dep‟n ASSETS $ $ Non-current Assets Land and buildings 440,000 100,000 Fixtures and fittings 120,000 48,000 Motor vehicles 140,000 40,000 700,000 188,000 Current Assets Inventory Receivables Bank and cash in hand
40,000
NBV $ 340,000 72,000 100,000 512,000
96,000 60,000 54,000 210,000
Total Assets
722,000 Page: 114
EQUITY AND LIABILITIES Capital and Reserves Called up ordinary shares capital Closing Retained earning
400,000 100,000 500,000
Non-current Liabilities 10% Preference shares 10% Debentures
100,000 40,000
Current Liabilities Bank loans and overdraft Trade Payables Dividends
52,000 30,000 82,000 722,000
Total Equity and Liabilities 14.2
140,000 640,000
The following extracts are from the financial accounts of Danrow for the year ended 31 March 20X8. Danrow Balance Sheet at 31 March 20X8 $ $ ASSETS Non-current Assets Plant and equipment Fixtures and fittings Current Assets Inventory Trade Receivables Bank
Cost 78,600 18,300 96,900
Dep‟n 29,640 7,980 37,620
49,560 108,840
EQUITY AND LIABILITIES Capital and Accumulated Profits Opening balance Add: Profit for the year
98,340 34,320 132,660 45,600 87,060
Less: Drawings
Total Equity and Liabilities
Pa e: 115
NBV 48,960 10,320 59,280
18,000 28,800 2,760
Total Assets
Current Liabilities Trade Payables Accruals
$
20,160 1,620 21,780 108,840
Extract from the income statement for the year ended 31 March 20X8. $ 345,600 255,000 259,200 52,080 34,320
Revenues Purchases Cost of goods sold Expenses Net Profit
Required: Calculate the following ratios for Danrow for the year ended 31 March 20X8 (calculations to be taken to 1 decimal place), and state the importance of each ratio. (a) (b) (c) (d) (e) (f) 14.3
Gross profit margin percentage Net profit percentage Receivables’ collection period Payables’ settlement period Working capital/Current ratio Liquidity/Acid test ratio
Steer plc is interested in investing in another company and has obtained financial information from two possible companies. Income Statement for the year ended 31 March 20X1 Rond Ltd Trub Ltd $‟000 $‟000 Sale Revenues 3,825 4,950 Cost of sales 1,710 2,575 Gross profit 2,115 2,375 Distribution costs 540 675 Administration expenses 450 765 Profit before interest 1,125 935 Interest payable 225 Net profit 1,125 710 Proposed dividend 225 315 Retained profit for the year 900 395 Sale revenues and purchases of both companies are all occur on a credit basis. Balance Sheets at 31 March 20X1 Rond Ltd ASSETS Non-current Assets (NBV) Current Assets Inventory Trade Receivables Bank and cash in hand Total Assets
Trub Ltd
$‟000 3,150
$‟000 6,300
1,125 450 225 4,950
900 1,125 5 8,330
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EQUITY AND LIABILITIES Capital and Reserves Ordinary shares of $1 Retained Earning Non-current Liabilities Loan Current Liabilities Trade Payable Bank overdraft Dividends Total Equity and Liabilities
1,350 2,970 4,320
1,125 2,885 4,010
-
3,150
405 225 4,950
675 180 315 8,330
Required: Calculate the following ratios (to two decimal places) for Rond Ltd and Trub Ltd and recommend which company offers the best investment opportunity for Steer plc. ● ● ● ● ● ● ● ● ●
14.4
Return on capital employed Gross profit margin percentage Net profit percentage Sales to capital employed (times per annum) Stock turnover (use closing stock and number of times) Debtors’ collection period Creditors’ settlement period (use cost of sales instead of purchases) Working capital/Current ratio Liquidity ratio/Acid test
Anita Watson was in business and at 1 April 20X8 the balance on her capital account was $60,000. All her sales and purchases are on a credit basis. Anita has provided you with some information for the year ended 31 March 20X9. Inventory turnover Mark-up Selling expenses Inventory at 31 March 20X8 Inventory at 31 March 20X9 Net profit percentage Non-current Asset NBV Current Assets Receivables’ collection period Payables’ settlement period
6 times 25% 4% of sale revenues $5,000 less than the following year $28,500 10% $39,000 $48,750 30 days 60 days
Current assets consist of inventory, trade receivables and the balance at the bank. Required: Prepare Income Statement for the year ended 31 March 20X9 and a Balance Sheet at that date, in as much detail as possible.
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14.5
You have acquired the following information from John Duffy regarding his business transactions for the year ended 31 December 20X8: ● ● ● ● ● ● ● ● ● ● ● ●
The balance on John Duffy’s Capital Account at 1 January 20X8 was $33,937. Sale Revenues for the year were $262,500. All sales and purchases are on credit. Receivables’ collection period: 28 days. Payables’ settlement period: 35 days. Net book value of non-current assets at 31 December 20X8 (after charging depreciation of $13,125): $52,500 Inventory at 1 January 20X8 was $7,392 and inventory at 31 December 20X8 was $11,088. Inventory turnover: 15 times Net profit percentage: 15% Current ratio: 2:1 The only current assets are inventory and trade receivables. The bank account is overdrawn at 31 December 20X8. John Duffy withdrew $100 a week for personal expenses.
Required: Prepare Income Statement for John Duffy for the year ended 31 December 20X8 and a Balance Sheet at that date. (Calculations should be to the nearest $)
“End of Chapter - 14”
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