Chapter 1Accruals and Prepayments
QUESTION 1
The following balances were extracted from the ledgers of K Hook’s business as at 31 March 2010:
$
Rent23,400Dr
Insurance5,500Dr
Loan from Peter20,000Cr
Commission revenue3,500Cr
The following additional information was ascertained:
(i)Two months’ rent totalling $4,680 was due but not yet paid.
(ii)Insurance included:
Building insurance of $1,100 for 12 months ended 31 March 2010.
Motor insurance of $4,400 for 12 months ended 31 July 2010.
(iii)The loan from Peter was borrowed on 1 April 2009, with an interest rate of 12% per annum. Only the interest for the first half of the year was paid.
(iv)Commissions of $1,500 were received for servicesto be provided in April 2010. This sum was included in the commission revenue account.
Required:
(a)Explain the meaning of accruals.(1.5 marks)
(b)Write up the aboveledger accounts and show the transfer to the profit and loss account.(8 marks)
(c)Prepare an income statement extract for the year ended 31 March 2010.(2 marks)
(d)Prepare for Mr Hook a balance sheet extract as at 31 March 2010 to show the accruals and prepayments. (2.5 marks)
Answer:
(a)Accruals are expenses/revenues that have been incurred/earned during a period but have not been paid/received by the end of that period. (1.5 marks)
(b)
Rent2010 / $ / 2010 / $
Mar / 31 / Balance b/d / 23,400 / Mar / 31 / Profit and loss / 28,080 / 0.50.5
“ / 31 / Accrued c/f / 4,680 / 0.5
28,080 / 28,080
2010
Apr / 1 / Accrued b/f / 4,680 / 0.5
Insurance
2010 / $ / 2010 / $
Mar / 31 / Balance b/d / 5,500 / Mar / 31 / Profit and loss / 4,033 / 0.50.5
“ / 31 / Prepaid c/f ($4,400 ) / 1,467 / 0.5
5,500 / 5,500
2010
Apr / 1 / Prepaid b/f / 1,467 / 0.5
Loan Interest
2010 / $ / 2010 / $
Mar / 31 / Balance b/d / 1,200 / Mar / 31 / Profit and loss / 2,400 / 0.50.5
“ / 31 / Accrued c/f / 1,200 / 0.5
($20,000 12% ) / 2,400 / 2,400
2010
Apr / 1 / Accrued b/f / 1,200 / 0.5
Commission Revenue
2010 / $ / 2010 / $
Mar / 31 / Profit and loss / 2,000 / Mar / 31 / Balance b/d / 3,500 / 0.50.5
“ / 31 / Prepaid c/f / 1,500 / 0.5
3,500 / 3,500
2010
Apr / 1 / Prepaid b/f / 1,500 / 0.5
(c)
K HookIncome Statement for the year ended 31 March 2010 (extract)
$ / $
Rent / 28,080 / Commission revenue / 2,000 / 0.50.5
Insurance / 4,033 / 0.5
Loan interest / 2,400 / 0.5
(d)
K HookBalance Sheet as at 31 March 2010 (extract)
$ / $
Current assets / Current liabilities / 0.50.5
Prepaid expenses / 1,467 / Accrued expenses ($4,680 + $1,200) / 5,880 / 0.50.5
Unearned revenues / 1,500 / 0.5
QUESTION 2
The following balances were extracted from the books of Paul Mak, a sole trader, as at 1 January 2010:
$
Insurance480Dr
Rates2,520Dr
Rent840Cr
Telephone and Internet508Cr
Commission revenue600Dr
During the year, the following sums were paid or received by cheque.
2010$
Jan1Payment of three months’ rent to 28 February 20102,520
“1Receipt of three months’ commissions to 28 February 20101,800
Feb1Payment of one year’s insurance premiums to 31 January 20117,200
Mar1Payment of telephone and Internet expenses for the past three months1,524
“1Payment of three months’rent in advance on a new rental contract3,600
Apr1Payment of six months’ rates to 30 September 20106,480
Jun1Payment of telephone and Internet expenses for the past three months1,752
“1Rent payment 3,600
“30Receipt of six months’ commissions to 31 August 20103,600
Sept1Payment of rent 3,600
“1Payment of telephone and Internet expensesfor the past three months1,956
Oct1Payment of six months’ rates to 31 March 20116,480
Dec1Payment of telephone and Internet expenses for the past three months2,208
“1Rent paid3,600
“31Receipt of five months’ commissions to 31 January 20113,000
2011
Mar1Payment of telephone and Internet expenses for the past three months2,004
Required:
(a)Write up the above ledger accounts for the year ended 31 December 2010 and show the transfer to the profit and loss account. (17.5 marks)
(b)Prepare an income statement extract for the year ended 31 December 2010. (2.5 marks)
(c)Explain the meaning of prepayments.(1 mark)
Answer:
(a)
Insurance2010 / $ / 2010 / $
Jan / 1 / Prepaid b/f / 480 / Dec / 31 / Profit and loss / 7,080 / 0.50.5
Feb / 1 / Bank / 7,200 / “ / 31 / Prepaid c/f ($7,200 ) / 600 / 0.50.5
7,680 / 7,680
2011
Jan / 1 / Prepaid b/f / 600 / 0.5
Rates
2010 / $ / 2010 / $
Jan / 1 / Prepaid b/f / 2,520 / Dec / 31 / Profit and loss / 12,240 / 0.50.5
Apr / 1 / Bank / 6,480 / “ / 31 / Prepaid c/f ($6,480 ) / 3,240 / 0.50.5
Oct / 1 / Bank / 6,480 / 0.5
15,480 / 15,480
2011
Jan / 1 / Prepaid b/f / 3,240 / 0.5
Rent
2010 / $ / 2010 / $
Jan / 1 / Bank / 2,520 / Jan / 1 / Accrued b/f / 840 / 0.50.5
Mar / 1 / Bank / 3,600 / Dec / 31 / Profit and loss / 13,680 / 0.50.5
Jun / 1 / Bank / 3,600 / “ / 31 / Prepaid c/f ($3,600 ) / 2,400 / 0.50.5
Sept / 1 / Bank / 3,600 / 0.5
Dec / 1 / Bank / 3,600 / 0.5
16,920 / 16,920
2011
Jan / 1 / Prepaid b/f / 2,400 / 0.5
Telephone and Internet
2010 / $ / 2010 / $
Mar / 1 / Bank / 1,524 / Jan / 1 / Accrued b/f / 508 / 0.50.5
Jun / 1 / Bank / 1,752 / Dec / 31 / Profit and loss / 7,600 / 0.50.5
Sept / 1 / Bank / 1,956 / 0.5
Dec / 1 / Bank / 2,208 / 0.5
Dec / 31 / Accrued c/f ($2,004 ) / 668 / 0.5
8,108 / 8,108
2011
Jan / 1 / Accrued b/f / 668 / 0.5
CommissionRevenue
2010 / $ / 2010 / $
Jan / 1 / Accrued b/f / 600 / Jan / 1 / Bank / 1,800 / 0.50.5
Dec / 31 / Profit and loss / 7,200 / Jun / 30 / Bank / 3,600 / 0.50.5
“ / 31 / Prepaid c/f ($3,000) / 600 / Dec / 31 / Bank / 3,000 / 0.50.5
8,400 / 8,400
2011
Jan / 1 / Prepaid b/f / 600 / 0.5
(b)
Paul MakIncome Statement for the year ended 31 December 2010 (extract)
$ / $
Insurance / 7,080 / Commission revenue / 7,200 / 0.50.5
Rates / 12,240 / 0.5
Rent / 13,680 / 0.5
Telephone and Internet / 7,600 / 0.5
(c)Prepayments are expenses/revenues that have been paid/received during a period but have not been incurred/earned by the end of that period. (1 mark)
QUESTION 3
Woody Chow started his business as a wholesaler on 1 January 2010. During the first year of business, the following operating expenses were incurred:
(i)He rented an office in Tsim Sha Tsui for $600,000 per annum, payable quarterly at the end of March, June, September and December.
Rates for the office, which totalled $3,000 per annum, were payable quarterly in advance until
31 March 2010. Starting from 1 April 2010, the rates increased by $1,000 per annum and were payable yearly in advance. The following payments were made in 2010:
2010$
Jan 1750
Apr 54,000
(ii)Woody took out a six-month fire insurance cover on the office and paid the $1,300 premium on
1 January 2010. He later found that the cover was inadequate and upgraded it to a comprehensive insurance plan as from 1 July 2010for an annual premium of $8,800, payable in advance. He paid the annual premium on 10 July 2010.
(iii)Water and electricity paid during the year totalled $8,000. Prepaid water expenses amounted to $200 and an accrual of $350 was made for electricity.
(iv)Other operating expenses paid during the year were $11,000 and $1,000 was accrued as at year end.
Required:
(a)Distinguish between accrual accounting and cash accounting.(3 marks)
(b)Show the following expense accounts for the financial year ended 31 December 2010, complete with all the year-end adjustments and balances brought forward:
Rent and rates
Insurance
Water and electricity
Other operating expenses(12 marks)
(c)Prepare an income statement extract for the year ended 31 December 2010. It was determined that Woody Chow’s business had earned a gross profit of $135,000 for the year. (3 marks)
Answer:
(a)Under cash accounting, revenues are recognised when received and expenses are recognised when paid. Under accrual accounting, revenues and expenses are recognised when they are earned or incurred. The main difference between cash accounting and accrual accounting lies in the treatment of accruals and prepayments of expenses and revenues. (3 marks)
(b)
Rent and Rates2010 / $ / 2010 / $
Jan / 1 / Bank / 750 / Dec / 31 / Profit and loss / 603,750 / 0.50.5
Mar / 31 / Bank / 150,000 / “ / 31 / Prepaid c/f / 1,000 / 0.50.5
Apr / 5 / Bank / 4,000 / 0.5
Jun / 30 / Bank / 150,000 / 0.5
Sept / 30 / Bank / 150,000 / 0.5
Dec / 31 / Bank / 150,000 / 0.5
604,750 / 604,750
2011
Jan / 1 / Prepaid b/f / 1,000 / 0.5
Insurance
2010 / $ / 2010 / $
Jan / 1 / Bank / 1,300 / Dec / 31 / Profit and loss / 5,700 / 0.50.5
Jul / 10 / Bank / 8,800 / “ / 31 / Prepaid c/f ($8,800 ) / 4,400 / 0.50.5
10,100 / 10,100
2011
Jan / 1 / Prepaid b/f / 4,400 / 0.5
Water and Electricity
2010 / $ / 2010 / $
Dec / 31 / Bank / 8,000 / Dec / 31 / Profit and loss / 8,150 / 0.50.5
“ / 31 / Accrued c/f / 350 / “ / 31 / Prepaid c/f / 200 / 0.50.5
8,350 / 8,350
2011 / 2011
Jan / 1 / Prepaid b/f / 200 / Jan / 1 / Accrued b/f / 350 / 0.50.5
Other Operating Expenses
2010 / $ / 2010 / $
Dec / 31 / Bank / 11,000 / Dec / 31 / Profit and loss / 12,000 / 0.50.5
“ / 31 / Accrued c/f / 1,000 / 0.5
12,000 / 12,000
2011
Jan / 1 / Accrued b/f / 1,000 / 0.5
(c)
Woody ChowIncome Statement for the year ended 31 December 2010 (extract)
$ / $
Rent and rates / 603,750 / Gross profit b/d / 135,000 / 0.50.5
Insurance / 5,700 / Net loss / 494,600 / 0.50.5
Water and electricity / 8,150 / 0.5
Other operating expenses / 12,000 / 0.5
629,600 / 629,600
QUESTION 4
The following revenues and expenses were received and paid by Larry & Co during 2010:
(i)Larry & Co rented a building as its office premises in 2008 for three years at a cost of $48,000 per annum. In 2010, Larry & Co made the following payments relating to rent:
2010$
Jan8Rent for the three months ended 28 February 201012,000
Mar14Rent for the three months ended 31 May 201012,000
Jun2Rent for the three months ended 31 August 201012,000
Oct28Rent for the three months ended 30 November 201012,000
(ii)Larry & Co sublet part of the building to three tenants:
Tenant A entered into a one-year tenancyagreement on 1 March 2010 and paidthe whole year's rent of $30,000 on 4 April 2010. Tenant B entered into a two-year tenancy agreement on 1 May 2010 and paid rent of $14,400 quarterly in advance. The first four rent paymentswere made on 1 June 2010,
1 September 2010, 1 December 2010 and 1 March 2011. Tenant C paid $1,500 on 1 November 2010 as rent for a conference room for 30 days from 1 February 2011 to 2 March 2011.
(iii)Rates:
Rates were paid quarterly in advance. Rates of $3,000 for the first quarter of 2010 were paid on
31 December 2009. During 2010, Larry & Co paid $15,300for the remaining three quarters of rates. Rates of $4,000 for the first quarter of 2011 were paid on 31 December 2010.
Required:
(a)Show the rent expense, rentincome and rates accounts as they would appear in the ledgers of Larry & Co for the year ended 31 December 2010. (11.5 marks)
(b)Prepare for Larry & Co a balance sheet extract as at 31 December 2010, showing both accruals and prepayments. (2.5 marks)
Answer:
(a)
Rent2010 / $ / 2010 / $
Jan / 8 / Bank / 12,000 / Jan / 1 / Accrued b/f / 4,000 / 0.50.5
Mar / 14 / Bank / 12,000 / Dec / 31 / Profit and loss / 48,000 / 0.50.5
Jun / 2 / Bank / 12,000 / 0.5
Oct / 28 / Bank / 12,000 / 0.5
Dec / 31 / Accrued c/f / 4,000 / 0.5
52,000 / 52,000
2011
Jan / 1 / Accrued b/f / 4,000 / 0.5
Rent Income
2010 / $ / 2010 / $
Dec / 31 / Profit and loss / 63,400 / Apr / 4 / Bank / 30,000 / 0.50.5
“ / 31 / Prepaid c/f [($30,000 ) / Jun / 1 / Bank / 14,400 / 0.5
+ ($14,400 ) + $1,500] / 11,300 / Sept / 1 / Bank / 14,400 / 10.5
Nov / 1 / Bank / 1,500 / 0.5
Dec / 1 / Bank / 14,400 / 0.5
74,700 / 74,700
2011
Jan / 1 / Prepaid b/f / 11,300 / 0.5
Rates
2010 / $ / 2010 / $
Jan / 1 / Prepaid b/f / 3,000 / Dec / 31 / Profit and loss / 18,300 / 0.50.5
Dec / 31 / Bank / 15,300 / “ / 31 / Prepaid c/f / 4,000 / 0.50.5
“ / 31 / Bank / 4,000 / 0.5
22,300 / 22,300
2011
Jan / 1 / Prepaid b/f / 4,000 / 0.5
(b)
Larry & CoBalance Sheet as at 31 December 2010 (extract)
$ / $
Current assets / Current liabilities / 0.50.5
Prepaid expenses / 4,000 / Accrued expenses / 4,000 / 0.50.5
Unearned revenues / 11,300 / 0.5
QUESTION 5
Sigma Chan, a sole proprietor, extracted the following trial balance from his books at the close of business on 30 April 2011:
$$
Capital as at 1 May 2010?Returns inwards1,592
Accounts receivable7,250Returns outwards858
Accounts payable1,380Wages and salaries6,202
5% bank loan (repayable in 2015)3,000Bank1,570
Office furniture1,466Cash146
Discounts allowed1,424Rates and insurance564
Discounts received586Premises12,574
Fixtures and fittings1,256Drawings3,562
Purchases19,804Rent250
Sales34,224Inventory at 1 May 20104,148
Inventory as at 30 April 2011 was valued at $6,440.
Additional information:
(i)Prepaid wages amounted to $1,250.
(ii)Loan interest for the year was not paid.
(iii)Rent owing amounted to $1,790.
Required:
(a)Prepare a trial balance as at 30 April 2011. Calculate the capital account balance.(11 marks)
(b)Draw up an income statement for the year ended 30 April 2011.(8 marks)
(c)Draw up a balance sheet as at 30 April 2011.(7 marks)
Answer:
(a)
Sigma ChanTrial Balance as at 30 April 2011
Dr / Cr
$ / $
Capital at 1 May 2010 / 21,760 / 0.5
Accounts receivable / 7,250 / 0.5
Accounts payable / 1,380 / 0.5
5% bank loan (repayable in 2015) / 3,000 / 0.5
Office furniture / 1,466 / 0.5
Discounts allowed / 1,424 / 0.5
Discounts received / 586 / 0.5
Fixtures and fittings / 1,256 / 0.5
Purchases / 19,804 / 0.5
Sales / 34,224 / 0.5
Returns inwards / 1,592 / 0.5
Returns outwards / 858 / 0.5
Wages and salaries / 6,202 / 0.5
Bank / 1,570 / 0.5
Cash / 146 / 0.5
Rates and insurance / 564 / 0.5
Premises / 12,574 / 0.5
Drawings / 3,562 / 0.5
Rent / 250 / 0.5
Inventory as at 1 May 2010 / 4,148 / 0.5
61,808 / 61,808 / 0.50.5
(b)
Sigma ChanIncome Statement for the year ended 30 April 2011
$ / $ / $ / $
Opening inventory / 4,148 / Sales / 34,224 / 0.50.5
Add Purchases / 19,804 / Less Returns inwards / (1,592 / ) / 32,632 / 0.50.5
Less Returns outwards / (858 / ) / 18,946 / 0.5
23,094
Less Closing inventory / (6,440 / ) / 0.5
Cost of goods sold / 16,654 / 0.5
Gross profit c/d / 15,978 / 0.5
32,632 / 32,632
Discounts allowed / 1,424 / Gross profit b/d / 15,978 / 0.50.5
Wages and salaries ($6,202 $1,250) / 4,952 / Discounts received / 586 / 0.50.5
Rates and insurance / 564 / 0.5
Rent ($250 + $1,790) / 2,040 / 0.5
Loan interest ($3,000 × 5%) / 150 / 0.5
Net profit / 7,434 / 0.5
16,564 / 16,564
(c)
Sigma ChanBalance Sheet as at 30 April 2011
$ / $ / $ / $
Non-current assets / Capital
Premises / 12,574 / Balance as at 1 May 2010 / 21,760 / 0.50.5
Office furniture / 1,466 / Add Net profit for the year / 7,434 / 0.50.5
Fixtures and fittings / 1,256 / 15,296 / 29,194 / 0.5
Less Drawings / (3,562 / ) / 0.5
Current assets / 25,632
Inventory / 6,440 / Non-current liabilities / 0.5
Accounts receivable / 7,250 / 5% bank loan / 3,000 / 0.5 0.5
Prepaid expenses / 1,250 / 0.5
Bank / 1,570 / Current liabilities / 0.5
Cash / 146 / 16,656 / Accounts payable / 1,380 / 0.50.5
Accrued expenses / 1,940 / 3,320 / 0.5
31,952 / ($1,790 + $150) / 31,952
QUESTION 6
Cyrus Lau is a confectionary retailer. The following trial balance was extracted from his ledgers on 31 March 2011:
Dr / Cr$ / $
Rent and rates / 3,440
Purchases and sales / 46,830 / 89,700
Office furniture / 5,985
Inventory as at 1 April 2010 / 10,695
Carriage inwards / 700
Accounts receivable and accounts payable / 27,380 / 10,170
Bank / 7,780
Capital as at 1 April 2010 / 39,590
Delivery van / 6,730
Discounts / 2,165 / 545
Returns / 1,570 / 500
Sundry expenses / 820
Wages and salaries / 16,010
Rental income / 5,000
Motor expenses / 2,765
Drawings / 12,415
Cash / 220
145,505 / 145,505
Additional information:
(i)Inventory as at 31 March 2011 was valued at $9,250.
(ii)Sundry expenses of $300 wereowing.
(iii)Rental income for the months of February and March 2011at $2,000 per month was outstanding.
(iv)Van maintenance expenses were due but unpaid. The amount was equivalent to 10% of the cost of the delivery van.
Required:
(a)Draw up an income statement for the year ended 31 March 2011 and a balance sheet as at that date.
(15 marks)
(b)Compute the following ratios for Cyrus Lau's business at 31 March 2011.
(i)Gross profit ratio(iv)Current ratio
(ii)Net profit ratio(v)Quick ratio
(iii)Return on capital employed(5 marks)
(All calculations to 2 decimal places)
Answer:
(a)
Cyrus LauIncome Statement for the year ended 31 March 2011
$ / $ / $ / $
Opening inventory / 10,695 / Sales / 89,700 / 0.50.5
AddPurchases / 46,830 / Less Returns inwards / (1,570 / ) / 88,130 / 0.50.5
Carriage inwards / 700 / 0.5
47,530
LessReturns outwards / (500 / ) / 47,030 / 0.5
57,725
LessClosing inventory / (9,250 / ) / 0.5
Cost of goods sold / 48,475 / 0.5
Gross profit c/d / 39,655 / 0.5
88,130 / 88,130
Rent and rates / 3,440 / Gross profit b/d / 39,655 / 0.50.5
Discounts allowed / 2,165 / Discounts received / 545 / 0.50.5
Sundry expenses ($820 + $300) / 1,120 / Rental income ($5,000 + $4,000) / 9,000 / 0.50.5
Wages and salaries / 16,010 / 0.5
Motor expenses[$2,765 + ($6,730 10%)] / 3,438 / 0.5
Net profit / 23,027 / 0.5
49,200 / 49,200
Cyrus Lau
Balance Sheet as at 31 March 2011
$ / $ / $ / $
Non-current assets / Capital
Office furniture / 5,985 / Balance as at 1 April 2010 / 39,590 / 0.50.5
Delivery van / 6,730 / 12,715 / Add Net profit for the year / 23,027 / 0.50.5
62,617
Current assets / Less Drawings / (12,415 / )0.5
Inventory / 9,250 / 50,202 / 0.5
Accounts receivable / 27,380 / 0.5
Accrued rental income / 4,000 / Current liabilities / 0.5
Bank / 7,780 / Accounts payable / 10,170 / 0.50.5
Cash / 220 / 48,630 / Accrued expenses ($300 + $673) / 973 / 11,143 / 0.50.5
61,345 / 61,345
(b)(i)Gross profit ratio:$39,655 ÷ $88,130 = 45.00%(1 mark)
(ii)Net profit ratio:$23,027 ÷ $88,130 = 26.13%(1 mark)
(iii)Return on capital employed: $23,027 ÷ [($39,590 + $50,202) ÷ 2] = 51.29%(1 mark)
(iv)Current ratio:$48,630 ÷ $11,143 = 4.36 : 1(1 mark)
(v)Quick ratio:($48,630 $9,250) ÷ $11,143 = 3.53 : 1(1 mark)
QUESTION 7
Candy Ho is a florist owner. The following trial balance was extracted from her books on 31 March 2010.
Dr / Cr$ / $
Accounts receivable and accounts payable / 63,252 / 32,349
Capital as at 1 April 2009 / 71,180
Carriage inwards / 330
Carriage outwards / 376
Cash at bank / 11,104
Cash in hand / 1,903
Discounts allowed / 3,138
Discounts received / 4,104
Drawings / 5,793
Electricity / 964
Fixtures and fittings / 21,206
Inventory as at 1 April 2009 / 28,245
Loan from Billy Chan (repayable in 2012) / 14,480
Purchases / 94,878
Rates / 1,447
Rent / 2,655
Repairs and maintenance / 723
Returns outwards / 1,445
Salaries / 3,620
Sales / 116,076
239,634 / 239,634
Additional information:
(i)Inventory as at 31 March 2010 was valued at $12,000.
(ii)Items prepaid: rent $400;electricity $250.
Accruals: rates $120;repairs $57.
(iii)20% of the rent expenses were used for Candy's private purposes.
(iv)10% loan interest was not provided for during the year.
Required:
(a)Draw up an income statement for the year ended 31 March 2010 and a balance sheet as at that date.
(16 marks)
(b)Compute the following ratios for Candy Ho's business.
(i)Gross profit ratio
(ii)Current ratio
(iii)Quick ratio(3 mark)
(All calculations to 2 decimal places)
Answer:
(a)
Candy HoIncome Statement for the year ended 31 March 2010
$ / $ / $
Opening inventory / 28,245 / Sales / 116,076 / 0.50.5
AddPurchases / 94,878 / 0.5
Carriage inwards / 330 / 0.5
95,208
LessReturns outwards / (1,445 / ) / 93,763 / 0.5
122,008
LessClosing inventory / (12,000 / ) / 0.5
Cost of goods sold / 110,008 / 0.5
Gross profit c/d / 6,068 / 0.5
116,076 / 116,076
Carriages outwards / 376 / Gross profit b/d / 6,068 / 0.50.5
Discounts allowed / 3,138 / Discounts received / 4,104 / 0.50.5
Electricity ($964$250) / 714 / Net loss / 3,275 / 0.50.5
Rates ($1,447 + $120) / 1,567 / 0.5
Rent [($2,655 $400) × 80%] / 1,804 / 0.5
Repairs and maintenance($723 + $57) / 780 / 0.5
Salaries / 3,620 / 0.5
Loan interest ($14,480 × 10%) / 1,448 / 0.5
13,447 / 13,447
Candy Ho
Balance Sheet as at 31 March 2010
$ / $ / $ / $
Non-current assets / Capital
Fixtures and fittings / 21,206 / Balance as at 1 April 2009 / 71,180 / 0.50.5
LessNet loss for the year / 3,275 / 0.5
Current assets / Drawings [$5,793 + ($2,655
Inventory / 12,000 / $400) × 20%] / 6,244 / (9,519 / )0.51
Accounts receivable / 63,252 / 61,661 / 0.5
Prepaid expenses ($250 + $400) / 650 / Non-current liabilities / 0.5
Bank / 11,104 / Loan from Billy Chan / 14,480 / 0.50.5
Cash / 1,903 / 88,909 / 0.5
Current liabilities
Accounts payable / 32,349 / 0.5
Accrued expenses / 1,625 / 33,974 / 0.5
110,115 / ($120 + $57 + $1,448) / 110,115
(b)(i)Gross profit ratio:$6,068 ÷ $116,076 = 5.23%(1 mark)
(ii)Current ratio:$88,909 ÷ $33,974 = 2.62 : 1(1 mark)
(iii)Quick ratio:($88,909 $12,000) ÷ $33,974 = 2.26 : 1(1 mark)
QUESTION 8
Michael Lee, a sole proprietor, extracted the following trial balance from his books at the close of business on 30 April 2009:
Dr / Cr$ / $
Accounts receivable and accounts payable / 6,410 / 8,640
Advertising / 4,920
Bank / 3,100
Capital / 237,740
Carriage inwards / 1,410
Carriage outwards / 1,045
Delivery van at cost / 17,850
Drawings / 51,480
Water and electricity / 5,350
Insurance / 7,850
Interest on bank overdraft / 140
Inventory at 1 May 2008 / 19,895
Premises at cost / 159,380
Purchases / 217,085
Rent expense and revenue / 2,000 / 10,330
Repair expenses / 5,925
Return of goods to suppliers / 4,985
Sales / 286,900
Telephone and Internet expenses / 1,205
Returns inwards / 750
Office equipment / 49,000
551,695 / 551,695
Additional information:
(i)Inventory as at 30 April 2009 was valued at $3,719.
(ii)Items prepaid: telephone $600;electricity $390.
Accruals: rent revenue $3,200, repair expenses $150;carriage inwards $60.
(iii)It was agreed that one-tenth of the water and electricity expenses should be charged to Michael in respect of private use.
(iv) / Insurance consisted of: / $Motor insurance paid on 1 June 2008 for the period up to 30 April 2009 / 3,350
Property insurance paid on 1 May 2008 for the threemonths ended 31 July 2008 / 900
Property insurance paid on 1 September 2008 for the 12 monthsending 31 July 2009 / 3,600
7,850
(v)Rent of $1,600 had been paid for four months ending 31 July 2009.
Required:
Draw up a vertical-style income statement for the year ended 30 April 2009 and a balance sheet as at that date. (16 marks)
Answer:
Michael LeeIncome Statement for the year ended 30 April 2009
$ / $ / $
Sales / 286,900 / 0.5
LessReturns inwards / (750 / )0.5
286,150
LessCost of goods sold:
Opening inventory / 19,895 / 0.5
AddPurchases / 217,085 / 0.5
Carriage inwards ($1,410 + $60) / 1,470 / 0.5
218,555
LessReturns outwards / (4,985 / ) / 213,570 / 0.5
233,465
LessClosing inventory / (3,719 / ) / (229,746 / )0.5
Gross profit / 56,404 / 0.5
AddOther revenues:
Rent received ($10,330 + $3,200) / 13,530 / 0.5
69,934
LessExpenses:
Advertising / 4,920 / 0.5
Carriage outwards / 1,045 / 0.5
Water and electricity [($5,350 $390) ] / 4,464 / 0.5
Insurance [$7,850($3,600 )] / 6,950 / 0.5
Interest on bank overdraft / 140 / 0.5
Repair expenses ($5,925 + $150) / 6,075 / 0.5
Rent [$2,000 ($1,600 )] / 800 / 0.5
Telephone and Internet expenses($1,205 $600) / 605 / (24,999 / )0.5
Net profit / 44,935 / 0.5
Michael Lee
Balance Sheet as at 30 April 2009
$ / $ / $
Non-current assets
Premises at cost / 159,380 / 0.5
Office equipment / 49,000 / 0.5
Delivery van at cost / 17,850 / 226,230 / 0.5
Current assets
Inventory / 3,719 / 0.5
Accounts receivable / 6,410 / 0.5
Accrued rent revenue / 3,200 / 0.5
Prepaid expenses ($600 + $390 + $900 + $1,200) / 3,090 / 0.5
16,419
LessCurrent liabilities:
Accounts payable / 8,640 / 0.5
Accrued expenses ($150 + $60) / 210 / 0.5
Bank overdraft / 3,100 / (11,950 / ) / 0.5
Net current assets / 4,469 / 0.5
230,699
Financed by:
Capital
Balance as at 1 May 2008 / 237,740 / 0.5
AddNet profit for the year / 44,935 / 0.5
282,675
LessDrawings ($51,480 + $496) / (51,976 / )0.5
230,699
QUESTION 9
The following is a summary of Judy Ku's bank account for the year ended 30 June 2012.
Bank$ / $
Balance b/f / 138,800 / Accounts payable / 122,200
Accounts receivable / 136,002 / Carriage inwards / 8,562
Bank interest revenue / 3,425 / Drawings / 7,595
Commissions revenue / 13,695 / Water and electricity / 5,744
Rent and rates / 4,110
Wages / 29,885
Sundry expenses / 1,198
Balance c/f / 112,628
291,922 / 291,922
Additional information was available on 30 June 2012:
(i)$
Accounts payable114,244
Accounts receivable222,616
Capital as at 1 July 2011219,573
Cash16,130
Inventory as at 30 June 201213,905
Inventory as at 1 July 20119,525
Plant and machinery104,230
Purchases203,561
Returns inwards2,799
Returns outwards1,250
Sales376,396
(ii)Prepaid water charges amounted to $100.
(iii)Rent owing amounted to $190.
(iv)Electricity charges of $50 were owing.
(v)Sundry expenses of $340 were accrued.
Required:
Prepare for Judy Ku an income statement for the year ended 30 June 2012 and a balance sheet as at that date.
(14 marks)
Answer:
Judy KuIncome Statement for the year ended 30 June 2012
$ / $ / $ / $
Opening inventory / 9,525 / Sales / 376,396 / 0.50.5
AddPurchases / 203,561 / Less Returns inwards / (2,799 / ) / 373,597 / 0.50.5
Carriage inwards / 8,562 / 0.5
212,123
LessReturns outwards / (1,250 / ) / 210,873 / 0.5
220,398
LessClosing inventory / (13,905 / ) / 0.5
Cost of goods sold / 206,493 / 0.5
Gross profit c/d / 167,104 / 0.5
373,597 / 373,597
Water and electricity ($5,744 $100 + $50) / 5,694 / Gross profit b/d / 167,104 / 0.50.5
Rent and rates ($4,110 + $190) / 4,300 / Bank interest revenue / 3,425 / 0.50.5
Wages / 29,885 / Commissions revenue / 13,695 / 0.50.5
Sundry expenses ($1,198 + $340) / 1,538 / 0.5
Net profit / 142,807 / 0.5
184,224 / 184,224
Judy Ku
Balance Sheet as at 30 June 2012
$ / $ / $ / $
Non-current assets / Capital
Plant and machinery / 104,230 / Balance as at 1 July 2011 / 219,573 / 0.50.5
Add Net profit for the year / 142,807 / 0.5
Current assets / 362,380
Inventory / 13,905 / Less Drawings / (7,595 / )0.50.5
Accounts receivable / 222,616 / 354,785 / 0.5
Prepaid expenses / 100 / Current liabilities / 0.5
Bank / 112,628 / Accounts payable / 114,244 / 0.50.5
Cash / 16,130 / 365,379 / Accrued expenses / 0.5
($50 + $190 + $340) / 580 / 114,824 / 0.5
469,609 / 469,609
QUESTION 10
The trial balance of Stephen Chow’s business as at 12 October 2011 is shown below:
Stephen ChowTrial Balance as at 12 October 2011
Dr / Cr
$ / $
Accounts payable / 66,885
Accounts receivable / 198,120
Bank overdraft / 61,945
Capital at 1 November 2010 / 371,575
Cash in hand / 2,220
Discounts allowed / 20,640
Discounts received / 12,090
Carriage inwards / 16,920
Drawings / 31,800
Premises / 251,100
Inventory at 1 November 2010 / 15,060
Purchases / 212,040
Sales / 392,665
Rent and rates / 5,580
Wages and salaries / 151,680
905,160 / 905,160
During the rest of October 2011, the following transactions were made:
2011$
Oct13Cash sales69,405
“16Credit purchases47,550
“17Settled the amount owing to a supplier by cheque15,025
“20Paid wages by cheque4,000
“21Cash received from a customer25,000
“25Stephen took cash from the business for his private use.11,500
“28Stephen took goods from the business for his private use.5,000