1ST Mock Exam 2012-2013(Correction Errors)
6.The trial balances of Fish Limited at 31 March 2011 did not agree and the difference was posted to suspense account. The draft net profit for the year was $159,620. After closing all the nominal accounts and preparing the draft income statement, subsequent investigation revealed the following:
(i)A debt of $500 already written off in the previous year has been collected in the current year. The only entry made was debited bank account and credited accounts receivable account.
(ii)The closing stock as at 31 March 2010 was overcast by $1,050.
(iii)Discounts allowed of $1,850 had been credited to the discounts allowed account and debited to the accounts receivable’s account.
(iv)A bank overdraft of $3,190 had been listed in the trial balance as a debit balance.
(v)A total in the purchases day book had been carried forward as $11,950 instead of $11,590.
(vi)A free sample had been sent to Shark Limited and recorded as credit sales at a selling price of $26,000. The margin of the sample is 30% on sales.
(vii)A credit note for $375 received from a supplier had been posted to the wrong side of his account.
REQUIRED:
(a)Prepare journal entries to correct the errors above. (Narration is not required)
(b)Prepare a statement to correct net profit for the year ended 31 March 2011.
(c)Explain two underlying accounting concepts in the treatment of item (vi).
(a)
JournalDebit / Credit
$ / $
(i) / Accounts receivable / 500
Profit and loss : Bad debts recovered / 500
(ii) / Profit and loss : Closing inventory / 1,050
/ Inventory / 1,050
(iii) / Profit and loss : Discounts allowed ($1,850 x 2) / 3,700
Accounts receivable / 3,700
(iv) / Suspense ($3,190 x 2) / 6,380
(v) / Suspense ($11,950 $11,590) / 360
Profit and loss : Purchases / 360
(vi) / Profit and loss: Sales / 26,000
Shark Limited / 26,000
Profit and loss: Promotional expense / 18,200
Profit and loss: Purchases ($26,000 x 70%) / 18,200
(vii) / Accounts payable ($375 x 2) / 750
Suspense / 750
(b)
Fish LimitedStatement to calculate the corrected net profit for the year ended 31 March 2011
$ / $
Net profit before adjustments / 159,620
Add : Bad debts recovered omitted (i) / 500
Purchases overcast (v) / 360
Inventory taking omitted (vi) / 18,200 / 19,060
178,680
Less: Closing inventory overstated (ii) / 1,050
Discounts allowed recorded on the wrong side (iii) / 3,700
Sales overstated (vi) / 26,000
Promotional expense omitted (vi) / 18,200 / 48,950
Corrected net profit / 129,730
(c) / Materiality concept
—An item is material if its non-disclosure and omission would be likely to distort the view given by
the accounts.
—A free sample of $26,000 is considered material in the sense that it will increase expense, lower
the profit significantly and thus affect the decision made by users of financial statements.
Matching concept
—Revenues generated should be matched with expenses incurred for the same period of time.
—Since free samples are not supposed for sale so it should not be included in the sales account
and cost of goods sold.
HKDSE(2012, 9) (Limited company and correction of errors)
After closing all the nominal accounts and preparing the draft income statement, the ledger balances of Dragon Ltd as at 31 December 2011 are as follows:
Dr / Cr$ / $
$2 Ordinary shares, fully paid / 4 000 000
Share premium / 319 000
Retained profit as at 31 December 2011 / 996 500
Inventory as at 31 December 2011 / 545 000
Property, plant and equipment
– Cost / 4 800 000
–Accumulated depreciation as at 31 December 2011 / 1 240 000
Trade receivables and trade payables / 716 400 / 691 500
Prepayment [ note (vi) ] / 424 800
Cash at bank / 760 800
7 247 000 / 7 247 000
During the internal audit process, the following items were discovered:
(i)The management of the company decided to provide allowance for doubtful debts starting from 2011. An allowance of 5% on outstanding trade receivable should be provided for the year ended 31 December 2011, but no entries had been made in the books.
(ii)To finance the expansion of the business, the authorized share capital of $5,000,000 was increased to $15,000,000 on 15 December 2011. On the same date, 600 000 ordinary shares of $2 each had been issued at $6 each. All the monies subscribed had been received and shares had been allotted on 28 December 2011. However, no entries had been made in the books.
(iii)On 1 December 2011, a five-year 2% debenture of $900 000 in total had been issued at par. Debenture interest is payable on 31 March and 30 September each year. All the monies subscribed were duly collected. In order to obtain the cash discount of 4% from a supplier, one-quarter of the monies collected was used to pay the supplier during the discount period as the full settlement of its account. However, entries regarding all the above transactions were omitted from the books.
(iv)A piece of equipment with both cost and accumulated depreciation of $726 000 on 1 January 2011 was sold for $156 000 on the same date. The transaction was recorded in the books as cash sales of $165 000.
(v)On 31 December 2011, the board of directors of the company resolved to transfer $135 000 to the general reserve. However, no entries had been made in the books.
(vi)During the year 2011, advertising expenditure amounting to $424 800 had been incurred and paid. The company estimated that the sales volume could be increased by 5% and 15% in 2012 and 2013 respectively as a result of the advertising. The book-keeper had therefore recorded the payment for advertising as a prepayment in 2011, to be written off as expenses in 2012 and 2013.
REQUIRED:
(a)Prepare for Dragon Ltd
(1)the journal entries necessary for correcting the errors and the omission in (i) and (vi) above (narrations are not required); and
(2)the statement of financial position as at 31 December 2011 after taking into the account the above adjustments.
(b)Comment on the accounting treatment of advertising expenditure in item (vi).
(a) (1)
Journal2011 / Dr / Cr
December 31 / $ / $
(i) / Profit and Loss / 35,820
Allowance for doubtful debts (716,400 x 5%) / 35,820
(ii) / Cash at bank (600,000 x 6) / 3,600,000
Ordinary share capital (600,000 x 2) / 1,200,000
Share premium (600,000 x $4) / 2,400,000
(iii) / Cash at bank / 900,000
2% Debentures / 900,000
Trade payables (900,000 x 25% / 96%) / 234,375
Profit and Loss Discounts received / 9,375
Cash at bank (900,000 x 25%) / 225,000
Profit and Loss Debenture interest (900,000 x 2% x 1/12) / 1,500
Accrued expense / 1,500
(iv) / Accumulated depreciation / 726,000
Profit and Loss –Profit on disposal / 9,000
Property, plant and equipment / 726,000
Cash (165,000 – 156,000) / 9,000
(v) / Profit and Loss / 135,000
General reserve / 135,000
(vi) / Profit and Loss –Advertising expenditure / 424,800
Prepayment / 424,800
(a) (2)
Dragon Ltd
Statement of Financial Position as at 31December 2011
$ASSETS
Non-current assets
Property, plant and equipment [(4,800,000 – 726,000) – (1,240,000 – 726,000)] / 3,560,000
Current assets
Inventory / 545,000
Trade receivables (716,400 – 35,820) / 680,580
Cash at bank (760,800 + 3,600,000 + 900,000 – 225,000 – 9,000) / 5,026,800
6,252,380
Total assets / 9,812,380
EQUITY AND LIABILITIES
Capital and reserves
Ordinary shares of $2 each (4,000,000 + 1,200,000) / 5,200,000
Share premium (319,000 + 2,400,000 ) / 2,719,000
General reserves / 135,000
Retained profits (996,500 – 35,820 + 9,375 – 1,500 – 9,000 – 135,000 – 424,800) / 399,755
Total equity / 8,453,755
Non-current liabilities
2% Debentures / 900,000
Current liabilities
Trade payables (691,500 234,375) / 457,125
Accrued expenses / 1,500
458,625
Total liabilities / 1,358,625
Total equity and liabilities / 9,812,380
(b) / —should not be treated as prepayment
—should be charged to income statement as expense
—uncertain revenue recognition: increase in sales volume is just an estimate
HKDSE Sample 2 (Paper 2A, 3) (Accounting principle and error correction)
Subsequent checking of the records by the accountant of Easy Company revealed that no entries had been made for the following items:
(i)Loan interest of $5050 incurred in 2011 remains unpaid as at 31 December 2011.
(ii)A motor vehicle costing $80 000 with an accumulated depreciation of $40 000 as at 31 December 2011 was sold for $48 000 in cash on the same date.
REQUIRED:
(b)Prepare the journal entries to record the above transactions for the year ended 31 December 2011. (Narrations are not required.)
(c)Explain the accounting treatment of item (i) using a relevant accounting concept.
Answer:
(b)
Journal2011 / Debit / Credit
December / $ / $
(i) / Loan interest / 5050
Accrued loan interest / 5050
(ii) / Accumulated depreciation – Motor vehicles / 40 000
Cash / 48 000
Motor vehicles / 80 000
Profit and loss – Profit on disposal of motor vehicles / 8 000
(c) / Accrual concept
—Unpaid loan interest should be credited to accrued loan interest account to represent anincrease
in current liability in 2011.
—The loan interest incurred should be debited in the profit and loss account as anincrease in
operating expenses of 2011.
HKDSE Sample 1 (Paper 2A, 6) (Correction Errors)
The following draft statement of financial position for Healthy Food Company as at 31 December 20X6 has been prepared:
ASSETS / $ / $Office machinery / 148,000
Less: Accumulated depreciation / 45,300 / 102,700
Motor vehicles / 10,000
Less: Accumulated depreciation / 2,500 / 7,500
Inventories / 127,600
Account receivables, net / 85,500
Suspense account / 6,800
330,100
CAPITAL and LIABILITIES / $
Capital / 114,622
Account payables / 68,750
Rates paid in advance / 2,750
Bank loan (repayable on 31 December 20Y2) / 100,000
Draft net profit for the year / 22,068
Bank overdraft / 21,910
330,100
Subsequent to the preparation of the draft statement of financial position, the following were discovered:
(i)On comparing the bank statement with the cash book for the month of December 20X6, the following differences were found:
(1)An amount of $8,060, being receipt of dividends, had been credited directly into the bank account. The amount was recorded in the cash book as bank interest charged on the overdraft balance.
(2)A cheque of $10,000 issued for paying the deposit to acquire a motor van in February 20X7 was not yet presented to the bank for payment. The amount was recorded as the only motor vehicle of the company. Motor vehicles are depreciated at 25% per annum on cost.
(ii)Owing to an oversight, $1,300 prepaid insurance at 31 December 20X5 had been omitted from the general ledger in 20X6. Moreover, rates of $2,750 paid in advance at 31 December 20X6 had appeared as a credit balance in the trial balance.
(iii)At 31 December 20X6, a customer with an outstanding debt of $10,800 was declared bankrupt and the amount is to be written off. In addition, the allowance for doubtful debts was to be reduced by $540.
(iv)Included in the closing inventories were goods at $10,000 received from Royce Limited on a sale or return basis. No other entries had been made in respect of these goods in the books.
REQUIRED:
(a)Prepare the necessary journal entries to correct the above. Narrations are not required.
(b)Prepare the statement of financial position as at 31 December 20X6 in proper format.
(a)
JournalDebit / Credit
$ / $
(i) / (1) / Bank / 16,120
Profit and loss: overdraft interest / 80,060
Profit and loss: dividend income / 80,060
(2) / Deposit on acquisition of motor vehicle / 10,000
Motor vehicles / 10,000
Accumulated depreciation – motor vehicles ($10,000 x 25%) / 2,500
Profit and loss: depreciation – motor vehicles / 2,500
(ii) / Profit and loss: insurance / 1,300
Suspense / 1,300
Rates prepaid / 5,500
Suspense / 5,500
(iii) / Profit and loss: bad debts / 10,800
Account receivables / 10,800
Allowance for doubtful account / 540
Profit and loss / 540
(iv) / Profit and loss / 10,000
Inventories / 10,000
(b)
Healthy Food CompanyStatement of financial position as at 31 December 20X6
$ / $
ASSETS
Non-current assets
Office machinery / 148,000
Less: Accumulated depreciation / 45,300
102,700
Current assets
Inventories ($127,600$10,000) / 117,600
Account receivables, net ($85,500$10,800$540) / 75,240
Deposit (re: motor vehicle) / 10,000
Rates prepaid / 2,750
205,590
Total Assets / 308,290
EQUITY AND LIABILITIES
Capital and reserves
Balance as at 1 January 20X6 / 114,622
Add: Net profit for the year (22,068 + 8,060 + 8,060 + 2,500 –1,300 – 10,800 + 540 – 10,000) / 19,128
133,750
Non-current liabilities
Bank loan / 100,000
Current liabilities
Accounts payable / 68,750
Bank overdraft (21,910 – 16,120 ) / 5,790
74,540
Total Capital and Liabilities / 308,290
AAT 2011 (Pilot Paper 2, 3) (Correction Errors)
3.International Food Company is engaged in trading of food products. The company’s inventory record is kept in periodic inventory system. Before preparing its financial statements for the year ended 31 December 2010, the following errors are found. You are required to prepare journal entries to correct the errors below.
REQUIRED:
(a)Great One Company, a supplier, sent a statement of account showing that an invoice of $1,400 was omitted in the company’s books.
(b)A trade debtor transferred $4,510 to the company’s business bank account. The company debited the trade receivables account and credited the trade payables account in its books.
3.
International Food CompanyThe Journal
Date / Details / Dr / Cr
(a) / 2010 / $ / $
Dec / 31 / Purchases / 1,400
Trade payableGreat One Company / 1,400
(b) / 2010 / Bank / 4,510
Dec / 31 / Trade payable / 4,510
Trade receivable / 9,020
HKCEE (2010, 7)(Correction Errors)
The trial balance of Tess Company as at 31 December 2009 failed to agree and the difference was posted to a suspense account. The draft net profit for the year ended 31 December 2009 amounted to $193,450. All normal sales of the company are made at a gross profit of 40% on cost.
Subsequent checking of the records revealed the following:
(i)The purchases journal had been undercast by $520.
(ii)Return inwards of $560 had been credited to the returns outwards account as $650.
(iii)Withdrawal of goods with a selling price of $2,800 by the owner had been incorrectly recorded as a credit sale to a customer, Russ Company.
(iv)A contra entry of $792 in the debtors and creditors accounts had been incorrectly recorded as $972.
(v)A cash discount of $700 received from a supplier was treated as a trade discount.
(vi)A payment for telephone expenses of $300 for the owner was recorded as a payment for the business telephone bill.
(vii)Goods with a cost of $1,000 were sold to a customer at a special discount of 10%. This transaction had been recorded as a normal credit sale.
(viii)A credit sale of office equipment for $10,000 was incorrectly treated as a credit sale of a fully depreciated motor vehicle with a cost of $100,000. The office equipment had a cost and accumulated depreciation of $80,000 and $64,000 respectively on 31 December 2009.
(ix)A payment of $123 for carriage inwards had been posted twice to the sundry expenses account.
(x)Commission income of $334 had been debited to both the bank account and the commission expenses account.
REQUIRED:
(a)Prepare the necessary journal entries to correct the above. Narrations are not required.
(b)Draw up the suspense account.
(c)Prepare a statement to correct the draft net profit for the year ended 31 December 2009.
(a)
JournalDebit / Credit
$ / $
(i) / Purchases / 520
Suspense / 520
(ii) / Returns inwards / 560
Returns outwards / 650
Suspense / 1,210
(iii) / Sales / 2,800
Debtor – Russ Company / 2,800
Drawings ($2,800 ÷ 140%) / 2,000
Purchases / 2,000
(iv) / Debtors ($972 $792) / 180
Creditors / 180
(v) / Purchases / 700
Discounts received / 700
(vi) / Drawings / 300
Telephone expenses / 300
(vii) / Sales ($1,000 x 140% x 10%) / 140
Debtors / 140
(viii) / Accumulated depreciation – office equipment / 64,000
Motor vehicles / 100,000
Loss on disposal of fixed assets / 16,000
Accumulated depreciation – motor vehicles / 100,000
Office equipment / 80,000
(ix) / Carriage inwards / 123
Suspense / 123
Sundry expenses / 246
(x) / Suspense / 668
Commission income / 334
Commission expenses / 334
(b)
Suspense$ / $
Balance b/d (balancing figure) / 939 / Purchases / 520
Sundry expenses / 123 / Return inwards / 560
Commission income / 334 / Return outwards / 650
Commission expenses / 334
1,730 / 1,730
(c)
Statement to calculate the correct net profit for the year ended 31 December 2009$ / $
Draft net profit / 193,450
AddTelephone expenses paid for the owner (vi) / 300
Carriage inwards posted twice as sundry expenses (ix) / 123
Commission income recorded as commission expenses (x) / 668 / 1,091
194,541
LessPurchases undercast (i) / 520
Returns inwards recorded as returns outwards (ii) / 1,210
Drawings recorded as sales (iii) / 800
Sales made at a special discount (vii) / 140
Loss on disposal of fixed assets (viii) / 16,000 / 18,670
Corrected net profit / 175,871
HKCEE (2009,2)(Correction Errors)
(A)Kate Chan owns a small store that sells candies in creative gift package. Customers place orders online and immediate payments are to be made using credit cards. Goods are to be delivered on the following day.
REQUIRED:
State when the sales revenue should be recognized by Kate Chan and briefly explain the accounting principle or concept that should be adopted.
(B)The trial balance of Tony Limited as at 31 December 2008 failed to agree and the difference was debited to a suspense account. The draft net profit for the year amounted to $164,555.
Subsequent checking of the records revealed the following:
(i)An accrual for salaries of $1,000 was mistakenly recorded as a prepayment.
(ii)Prepaid rates of $860 at 31 December 2007 had been brought forward as an opening credit balance in the rates account.
(iii)An item of office equipment which was fully depreciated at 31 December 2007 was sold on 1 January 2008 as scrap for $130 on credit. The cost of the office equipment was $8,000. No entries in respect of the disposal had been made. The company had provided depreciation for 2008 at the rate of 10% on the cost of this office equipment.
REQUIRED:
(a)Prepare the necessary journal entries to correct the above. (Note: Narrations are not required.)
(b)Prepare a statement to correct the draft net profit for the year ended 31 December 2008.
(A) / Sales revenue should be recorded after the gift packages are delivered to the customers.Realisation principle should be adopted.
Revenue for a period is determined by applying the realization principle, which requires that the revenue be
recognized and recorded when goods are sold or when services are rendered.
(B)
(a)
JournalDebit / Credit
$ / $
(i) / Salaries (profit and loss) / 2,000
Prepayments / 1,000
Accruals / 1,000
(ii) / Rates (profit and loss) ($860 x 2) / 1,720
Suspense / 1,720
(iii) / Accumulated depreciation – office equipment / 8,000
Debtors / 130
Office equipment / 8,000
Gain on disposal of assets (profit and loss) / 130
Accumulated depreciation – office equipment ($8,000 x 10%) / 800
Depreciation (profit and loss) / 800
(b)
Statement of adjusted net profit for the year ended 31 December 2008$ / $
Net profit per draft accounts / 164,555
AddGain on disposal of assets / 130
Depreciation on fully depreciated asset / 800 / 930
165,485
LessAccrued salaries recorded as prepayment / 2,000
Opening balance of prepaid rates recorded as credit balance / 1,720 / 3,720
Corrected net profit / 161,765
HKCEE(2008, 1) (Correction Errors)
Amanda is the sole owner of a business engaged in the trading of telephone sets. With her limited knowledge of accounting, she tries to do the accounting work herself. She remembers that all transactions should first be recorded in the books of original entry before posting to ledger accounts, and that the trial balance will help to locate accounting errors.
REQUIRED:
Advise Amanda on the following:
(a)What is the book of original entry for the recording of each of the transactions below?
Book of Original Entry(i) / Bought telephone sets for resale by cash / ?
(ii) / Sold telephone sets to customers on credit / ?
(iii) / Received a credit note from a supplier for telephone sets returned / ?
(iv) / Gave full allowance to a customer for telephone sets returned / ?
(v) / Acquired office premises by a mortgage loan / ?
(vi) / Paid wages and salaries by autopay / ?
(vii) / Accrued for outstanding electricity charges as at year end / ?
(b)Form the transactions in (a) above, identify two examples for each of the following:
(i)Real accounts
(ii)Nominal accounts
(iii)Personal accounts
(c)What are the types of accounting errors that will not be revealed by a trial balance? State four of them.
(a) / (i) / Cash book(ii) / Sales day book
(iii) / Returns outwards day book
(iv) / Returns inwards day book
(v) / The Journal
(vi) / Cash book
(vii) / The Journal
(b) / (i) / Real accounts
—cash/bank, office premises, loan, accrued charges, debtors, creditors, stock
(ii) / Nominal accounts
—sales, purchases, return outwards, returns inwards, wages and salaries, electricity expense
(iii) / Personal accounts
—debtors, creditors
(c) / error of omission
error of complete reversal
error of commission
error of principle
compensating errors
error of original entry
HKCEE(2007, 7) (Correction Errors)