Exercises on financial accounting
Question 1
Suppose a business has the following aging schedule of its debtors.
$ of Doubtful Debt1-30 days / $107000 / 0.5%
31-60 days / 78000 / 1.2%
61-90 days / 69000 / 6%
>90days / 15000 / 50%
Total / 269000
The balance in the account “Allowance for Doubtful Debts” is $ 5910.
Show the entries for making additional provision and show what will be displayed under debtors on the balance sheet.
Question 2
Using the same information as above except that the balance in the account “provision for doubtful debts”is $15910.
Question 3
On 30 April 20X8. The bank statement for Elvis Limited showed a credit balance of $2000 and the cashbook showed a credit balance of 2000 and the cash book showed a debit balance of $2000 on the same date. At 31 Mat 20X8, the cashbook showed total of cash receipts and cash payments of $5000 and $4000 respectively.
The followings were found after checking the entries in the cashbook against the bank statement for the month of May 20X8:
(i)Cheques issued(#300900) amounting to $1500 had not been presented to the bank by
the recipient for thepayment
(ii)A total lodgment of $4000 for May was not recorded by the bank until 4 June 20X8
(iii)A cheque of $1069 banked in on 6 May 20X8 was recorded as $1096 in the cashbook.
(iv)The following items were shown on the bank statement but not in the cashbook:
(a)Bank charges of $50
(b)A direct deposit of $2400 lodged by Rock Limited
(c)Interest received on bond investment of $300
(d)Dishonoured cheques from Presley Limited in the amount of $1300; and
(e)An autopay item of $239 for a telephone bill.
(v)$532 paid into the bank had been entered twice in the cashbook.
Required:
(a)Show the necessary adjustments to be made in the cashbook on 31 May 20X8
(b)Prepare a bank reconciliation statement as at 31 May 20X8
Question 4
The following information relating to the month of August 2006 was extracted form the ledgers of Wendy limited:
At 1 August 2006 / $Sales Ledger / Debit balance / 18044
Sales Ledger / Credit balance / 330
Purchases Ledger / Debit balance / 194
Purchases Ledger / Credit balance / 10952
Provision for doubtful debt / 460
For the month ended 31 August 2006:
$Payment to suppliers / 74834
Credit Sales / 108256
Discount received / 2420
Credit Purchases / 82390
Returns inwards / 4410
Bad Debts written off / 384
Discount allowed / 3488
Customer's cheques dishonoured / 752
Receipts from customers / 98356
Legal expenses charged to customers' accounts / 180
Debit balances in Sales Ledger transferred to Purchases Ledger per contra / 690
Return outwards / 2136
At 31 August 2006 / $
Purchases Ledger / Debit balance / 266
Sales Ledger / Credit balance / 428
Provision for doubtful debt / 500
Required:
(a)Prepare Purchases Ledger Control Account and Sales Ledger Control Account for the month of August, 2006
(b)Prepare a Balance Sheet (extract) showing the debtors and creditors accounts shown in Current Assets and Current Liabilities at 31 August 2006
Question 5
The following items relate to H Grant's business during Year 20XX:
4FebruaryShe purchased new shop fittings, costing $5220,paid by cheque.
6 FebruaryT Mac,a debtor, paid a cheque for $300 towards an outstanding debt of $3600. H Grant wrote the balance off as a bad debt.
25 FebruaryThe bank returned to H Grant a cheque from B Armstrong for $356 marked 'refer to drawer'. No entries had been posted in the books covering this returned cheque.
26 FebruaryShe took from the business for her own private use goods which had been bought in January Year 20X for $246.
H Grant has also found that the following errors had been made in Year 20XX:
10 JanuaryShe had purchased goods costing $2520 , for cash,and entered this correctly in the Cash Book but incorrectly in the Purchases Account as $3240.
16 JanuaryShe had wrongly posted a payment of $120 for electricity to the Telephone Account.
Required:
In the books of H Grant, prepare Journal entries, including narration,to record the four transactions of February 20XX as well as adjustment for the errors made in January 20XX.
Question 6
Tom failed to agree his trial balance at 30 June 20XX. Despite this, he prepared a draft trading and profit & loss account for the six months ended on that date, which showed a net profit of $ 28260. The following errors were later discovered:
The purchases daybook total, $11920, had been posted to purchases account in the general ledger as $11380
The withdrawal by Tom of $190 in cash for private use had been posted to the debit of office expenses account
The purchases on credit of computer stationery, $270, had been debited to office equipment account.
Discount allowed of $314 had been credited to discount received account.
A cheque for $860 had been correctly debited in the cashbook but not posted to rent receivable account.
Required:
Prepare a statement showing the revised Net Profit.
Question 7
Mark Lui commenced his new trading firm on 30 April 20X3 by investing $1,000,000 as capital. Then he used $300,000 to buy an office premise. It was assumed that all purchases and sales were made on a credit basis.
On 30 April 20X4, he wondered why the amount in bank statement was different from the amount in cashbook. A bank overdraft of $89103 was indicated by bank statement and a $80000(Credit) was indicated by the cashbook.
Upon investigation, the following are found:
(1) A cheque (#030466) amounted to $30000 were deposited on 30 April 20X2 but were not yet credited by the bank.
(2) A telephone bill settled by the bank's autopay system in April 20X4 amounted to $3200. The company will record expense when they receive the receipt of the bank statement at the end of the month.
(3) The March balance of $36360 in the cashbook was carried forward as $33630.
(4) A debtor – Peterson settled his account of 25000 by credit transfer.
(5) Bank interest of $2633 was charged by the bank on the overdraft. No record of this had yet been made.
(6) A cheque for $40000 received – Richmond from a debtor was dishonored and returned by the bank. This amount was deducted from the balance in the bank statement but had not been recorded in cashbook.
(7) Two cheque drawn by Mark Lui were not yet presented to the bank for payment. They were(#4401) $33000 and (#4002) $11000.
(8) Martin's debt of $5000 previously written off as bad was now recovered. A cheque dated 4 May 20X4 was received from Martin and this had been recorded in the cashbook but the cheque had still not been presented to the bank.
(9) Mark Lui tried to draw up a balance sheet to reveal the financial situation of the business but he was hesitant on most of the figures:
(10) The only Fixed Assets are :Office Premises and Furniture and Fixture
The only Current Assets are : Stock, Debtors and Cash
The only Current Liabilities are Creditors and Bank Overdraft
The following data may be useful for you to prepare a balance sheet:
Sales for the year / $500,000Gross profit margin / 35%
Net profit to sales / 20%
Return on total assets employed / 8%
Depreciation of fixed assets / 15%
Stock turnover (Assume stock level constant throughout the year) / 5 times
Credit period allowed to debtors / 3 months
Current ratio / 1.5:1
Working Capital / $250,000
Required:
(a)Update the bank balance in the books of Mark Lui as at 30 April 20X4.
(b) Prepare a bank reconciliation statement as at 30 April 20X4.
(c)Draw up the balance sheet for Mark Lui's company as at 30 April
Question 8
Jefferson, an assistant accountant of Speedy Limited, found that he could not balance the total balance as at 31 January 20X4. He solved this problem by opening a suspense account.
After investigation, the following items were discovered:
(1) He had purchased goods costing $3260 , for cash , and entered this correctly in the Cash Book but incorrectly in the Purchases Account as $3620
(2) Discount Allowed to customers totalled $800. This had been posted to the credit side of the Discount Received Account.
(3) A cheque payment for the purchase of office equipment for $4400 had been entered into the Bank Account , but the double entry had not been completed.
(4) A receipt from a debtor $980 had been entered correctly into the customer's account, but had not yet been entered into the Bank Account.
(5) The sale, by cheque , of a motor vehicle for $900 had been entered into the Bank Account,but the double entry had not been competed.
(6) A customer had returned goods for $220. The transaction had been correctly treated in the Debtor Account but the Sales Account had been credited.
(7) The net profit figure $300000 was understated by $ 200.
(8) The company entered into a finance lease for a machine with a cash price of $50000 on 1 September 20X3. The company had to pay 12 monthly installments of $4200 each,commencing on 30 September 20X3. Jefferson recorded the transaction as follows:
Debit / CreditFixed assets – machine ($4200 x5) / 21000
Bank / 21000
Depreciation ($21000 x 10% x 5/12 / 875
Provision for depreciation / 875
(9) Sales return amounting to $500 was wrongly treated as purchases returns. The corresponding entry was made correctly in the debtor's personal account.
(10) Two motorcars purchased on 1 February 20X3 for $500000 had been depreciation by 20X4. However ,after consulting a professional accountant, Jefferson estimated that as at 1 February 20X3, the remaining years of useful life was 4 years without residual value . It was also decided to charge depreciation by the straight-line method.
(11) A payment of $6900 to a creditor Mr. Peterson was wrongly entered in the account of another creditor , Mr. Peterson was wrongly entered in the account of another creditor,Mr . Peter, as $9600. The amount of $6900 had been correctly recorded in the cashbook.
You are required to:
(a)Show how to find the reasons for the difference when the two sides of a Trial Balance do not agree.
(b)Show the necessary journal entries to correct the above errors. If no entry is required , state that.
(c)Write up the suspense account.
(d)Calculate the revised net profit for the year ended 31 January 20X4.
Question 9
May lau and Associates has poor internal control over its cash transactions. Recently May Lau , the founder , has suspected the cashier of stealing. Below are some details of the business's cash record on April 30.
The Cash account shows a balance of $201020. This amount includes an April 30 deposit of $37940 that does not appear on April 30 bank statement.
The April 30 bank stationery shows a balance of $166240. The bank statement lists a $2000 credit for a bank collection , an $80 debit for the service charge, and a $360 debit for a dishonoured cheque. The accountant has not recorded any of these items on the books.
On April 30 ,the following cheque are outstanding:
Cheque No. / Amount154 / $1160
256 / 1500
278 / 3530
291 / 1900
292 / 2060
293 / 1450
The cashier handles all incoming cash and makes bank deposits. She also reconciles the monthly bank statement. Below is the April 30 reconciliation:
Balance per bank, April 30 / $201020Add:Outstanding cheques / 1600
Bank collection / 2000
Subtotal / 204620
Less:Deposits in transit / 37940
Service charge / 80
Dishonoured cheque / 360
Subtotal / 38380
Balance per bank, April 30 / 166240
May Lau requested you to determine whether the cashier has stolen cash from the business and if it is true, its amount. She also wants to know the reason of the theft (Hint: prepare your own bank reconciliation statement). Evaluate the internal control system of May Lau and make recommendations.
Question 10
Stock data for Kenny Logistics Limited for the year ended Dec. 31 20X4 are as follows:
Beginning stock / 500 units at $150 eachMarch 31 purchase / 500 units at $155 each
1st quarter sales / 600 units
June 30 purchase / 550 units at $160 each
2nd quarter sales / 700 units
September 30 purchase / 600 units at $170 each
3rd quarter sales / 550 units
December 15 purchase / 550 units at $175 each
4th quarter sales / 600 units
Compute the ending stock and cost of goods sold balance on December 31,20X4, using:
(a)FIFO ; (b)LIFO ; (c) Weighted-average
Question 11
Jackson Limited uses the FIFO stock method and reports the followings data for 20X4:
Beginning stock / $750,000Purchases during 20X4 / 3,000,000
Ending stock / 1,000,000
Income before income taxes / 800,000
Tax rate / 40%
If Jackson Limited had used LIFO, ending stock would have been valued at $850000.
(a)Compute the tax payable using FIFO.
(b)Compute the tax payable if Jackson Limited had used the LIFO stock method
Question 12
Avery Limited has various goods that costs and net realizable value at the end of the year are as follows:
Stock Item / Cost ($) / Net Realizable Value(NRV) ($)1 / 1700 / 1500
2 / 1800 / 1500
3 / 1800 / 1500
4 / 2000 / 2500
5 / 2000 / 2500
6 / 2200 / 2500
7 / 1500 / 1000
8 / 1500 / 2500
9 / 1500 / 2500
16000 / 18000
Question 13
Assume a period of rising prices. How will a year-end purchase affect reported profits if a business uses LIFO?
Question 14
Opening stock is $35000, purchases during the year total$ 172500.Net sales are $345,000. If the usual gross profit rate is 55%, what is estimated closing stock ?
Question 15
Stock data for Francis Corporation for January 20X4 are as follows:
January 1 balance / 800 units at $25January 10 purchase / 1000 units at $28
January 15 sale / 1200 units
January 21 purchase / 900 units at $32
January 28 sale / 1100 units
Using FIFO, compute ending stock as of January 31. 20X4 and determine cost of good sold for January.
Question 16
Stock data for Harry Porter Limited for August, 20X4 are as follows:
August 1 balance / 750 units at $100August 5 sale / 600 units
August 12 purchase / 700 units at $105
August 16 sale / 650 units
August 21 purchase / 800 units at $107
August 30 sale / 750 units
Using the LIFO stock method, compute ending stock as of August 31, 20X4, and determine cost of goods sold for August.
Question 17
Keywood Manufacturing Limited is in the process of filing a claim with its insurance company for the stock loss due to the fire. Other information is in the following:
Being stock / $4,280,000Purchases through August30, 20X4 / 6,905,000
Net sales through August30, 20X4 / 13,350,000
The gross profit rate historically has been 40% of net sales
Estimate the value of the stock destroyed in the fire using the gross profit method.
Question 18 Z
The following data is available for Grace Limited:
Beginning stock / $125,000Purchases returns and allowances / 8,000
Purchases / 450,000
Sales / 854,000
Purchases discount / 12,000
Sales returns and allowances / 20,000
Sales discounts / 13,000
Operating expenses / 317,000
Ending stock / 150,000
Compute:
(a)Net purchases (b)Net sales
(c)Cost of goods sold (d)Gross profit
(e)Gross profit rate (f)Net income
Question 19
State which of the stock valuation methods shown below should be used to achieve the following objectives.
(a)The company sells unique items.
(b)The company wants to report current stock values on the balance sheet.
(c) The company wants to minimize income tax when costs are rising
(d)The company wants to maintain a middle-of-the-road approach in paying taxes and
reporting income
Hints: Specific identification method
1. Gross profit method 2. LIFO method
3. FIFO method 4. Weighted-average method
Question 20
The stock valuation method a company uses can affect the financial statements and the decisions of the people who use those statements.
(a) Conservation is an important accounting concept. Would you want management to be conservative in accounting for stock if you are (i) shareholder (ii) a prospective shareholder .
(b) Ayers Rock Company follows conservative accounting and writes the value of its stock down to market value which has declined below cost. In the following year, an unexpected change in the market environment results in huge demand for its products and the market prices increase. What effect will conservatism have on the profit of Ayers Rock over these two years.
(c) An accountant stated that one inventory valuation method reports the most recent costs in the Profit and Loss Account whereas another method reports the most recent costs in the balance sheet. Thus, the result is that one or the other of the statements is “inaccurate” when prices are rising. What is the meaning?
Question 21
Jamison Limited dealing in a single product had the following transactions during 20X4.
Jan 1 / Opening stock 5 units at cost of $800 eachPurchased / $ / Sold
Feb 5 / 10 units at $860 each / 8600 / Apr 19 / 6 units
Mar 10 / 3 units at $900 each / 2700 / June 28 / 3 units
May 20 / 2 units at $850 each / 1700
Prepare stock accounts and find the value of the closing stock under FIFO ,LIFO , and weighted average methods. Assume the product was sold at $1200 each , prepare a comparative trading account for the three methods in the columnar form for the year ended 30 June 20X4.
Question 22
A physical stocktaking by Foster Limited, a furniture retailer, was valued at cost at $517000 on 31December 20X4 , the end of the financial year. His profit mark up was 100% on cost. During the stocktaking , certain defects in item of furniture had been discovered. The bookkeeper also found some financial errors.
It was decided to correct the following:
1. 12 chairs which had cost $460 each had been included in the stock list at $640 each.
2. A damaged cupboard, on sale at 4,200, was scrapped
3. A total of $86000 on one stock sheet had been carried forward to the net stock sheet
as $68000.
4. Goods with a sale price of $226000 had been omitted from the stock valuation.
5. Goods belonging to a customer had been included in the valuation at $45000
6. Certain items showed signs of damage and it would cost $4300 to repair them after which they could be sold at normal selling prices.
7. Included in the valuation were goods costing $4956 bought from Kelvin Limiter on
2 December 20X4. This invoice was included in the Purchases Account but had not been paid by 31 December 20X4.
8. On 21 November 20X4, Foster Limited had sent goods costing $32000 to the shop of A and B on A sale or return basis. By 31 December 20X4, the customer had neither returned the goods nor bought them.
9. As goods on sale for $1600 were obviously unpopular, it was decided to sell them at half the cost price.
Required:
Calculate the correct stock valuation at 31 December 20X4.
Question 23
Greg Limited took stock at the end of 20X4 and valued it at $256500. Before this was entered in the books or tear end accounts, the following matters were discovered:
Goods receiver on a Sale or Return basis from Dan Limited and valued at $7320 have been included in the stock valuation.
Stocks valued at $3250, kept at another location, have not been included in the stock valuation.
Physical stock losses had a value of $4820. This is not considered unusual
An item included in the stock valuation at $8600 is now considered to be worth $3200 only.
Stocks issued to subcontractors, valued at $7500,have not been included in the stock valuation.
An item of stock has been included in the stock valuation at its selling price of $10000. The normal mark up on such stock is 150% on cost.