1990 (paper 1 - N0. 5) Correction of errors
The Po Toi Steelworks Company Limited’s profit and loss account for the year ended 31 March 1990 disclosed a profit of $123 456.
However the following items have been omitted, overlooked or need adjustment:
(i)The company has not adjusted its provision for doubtful debts nor the provision for discount. The balance in these accounts on 1 April 1989 was:
Provision for doubtful debts / $15 200Provision for discount / $6 245
The aging schedule of debtors as at 31 March 1990 showed:
Total / Current / Overdue30 days / 60 days / 90 + days
380 000 / 295 000 / 60 000 / 15 000 / 10 000
Debts of $1000 in 90 + days are bad but have not yet been written off.
A customer who owes $5000 has a dispute with the company over defective goods supplied and refuses to pay his account until the goods are replaced. The company is in the process of obtaining replacement goods for this customer and therefore regards the account as current even though it is in 90 + days.
It is the policy of the company to provide for doubtful debts as follows:
90+ days / 100%60 days / 25%
30 days / 10%
Current / 1%
The company also offers a discount of 2% to customers who pay their accounts by the due date and it is the company’s policy to provide for this.
(ii)A machine which cost $350 000 is exactly two years old and normally depreciated using the reducing balance method at 25%. In the second year, by mistake, it was depreciated using the straight line method for a five-year life and a residual value of $100 000. It is necessary to adjust for this error.
(iii)The stock sheets show the following:
Item / Cost $ / Net realizable value $A / 42 450 / 82 000
B / 64 500 / 32 500
C / 54 500 / 58 000
D / 65 000 / 30 000
E / 75 000 / 100 000
Total / 301 450 / 302 500
The closing stock figure used was $301 450.
(iv)A machine which cost $20 000 with a book value of $12 000 was sold during the year for $8000 and was wrongly credited to sales.
(v)Loose tools purchased during the year for $9000 to replace damaged and worn-out tools were debited to repairs and maintenance. Depreciation for loose tools is to be provided. Stocks of loose tools were as follows:
1 April 1989 / $27 00031 March 1990 / $24 000
(vi)During the year a new machine was acquired and the following costs incurred:
$Machine cost
Cost of transport to factory
Hire of crane to install machine
Wages of factory staff to assist in installation
Normal production running costs for the first two weeks which were considered unproductive / 100 000
10 000
2 000
5 000
3 000
Total: / 120 000
This total amount was debited to the machine account and depreciation has been provided for at 20% using the reducing balance method.
(vii)The company has debentures outstanding which are quoted on the stock exchange as follows:
Par value / $10Interest / 5% p.a due 20 September and 31 March each year
To take advantage of the low market price the company purchased its own debentures on 31 December 1989 and cancelled them as follows:
No. of debentures purchased / 10 000Market price (cum div) / $5 per debenture
Stamp duty / brokerage / 0.8% ($8 per $1000)
(viii)In the year, bonus shares were issued to the shareholders pro rata as follows:
Par value / $10Number of shares issued / 100 000
Market value / $12.50
The bonus issue is to debited equally to the general reserve and the share premium account. There are sufficient balances in these accounts to meet this issue.
You are required to prepare:
(a) journal entries to record there transactions; and (14 marks)
(b) a statement showing the corrected profit. (6 marks)