CIMA CO2 Official Learning System - Fundamentals of Financial Accounting

FURTHER ASPECTS OF LEDGER ACCOUNTING

REVISION QUESTIONS C2

130

(b) Insert the missing ﬁ gures into the bank ledger account given below in order to

calculate the bank balance at 31 December 20XX.

Bank

$ $

Materials refund Balance b/f

Sales tax repayment Vehicle

Receivables Administration expenses

Payables

Balance c/f

(c) Explain the purpose of a trial balance by completing the gaps in this sentence.

The main purpose is to check _____ accuracy of the _____ system, that is each

transaction has matching _____ and _____ entries. Total _____ balances should

equal total _____ balances.

(d) Match the four different types of error that could occur in the trial balance, which

would prevent its agreement, with the examples in the table below.

Type of error

(A) Transposition

(B) Posting one entry only

(C) Posting both entries on the same side

(D) Bringing the opening balance down on the wrong side

Example

1. A sale of $432 to Wang debited correctly in Wang’s account, but recorded in the

sales account as $423. The trial balance would have $9 more on the debit total.

2. If a debit balance on Wang’s account was brought down on the credit side, the trial

balance would not agree.

3. Again using the same transaction as in 1 – if the $432 was debited in the sales

account as well as in Wang’s account, the trial balance would disagree.

4. Using the same transaction as in 1 – if the credit entry was not posted, but the debit

was, then the debit trial balance total would be $432 higher than the credit total.

Question 4

On 1 October 19X5, the following balances were brought forward in the ledger accounts

of XY:

$

Rent payable $1,500 debit

Electricity account $800 credit

Interest receivable $300 debit

Allowance for receivables account $4,800 credit

FURTHER ASPECTS OF LEDGER ACCOUNTING

131

FUNDAMENTALS OF FINANCIAL ACCOUNTING

You are told the following:

●

Rent is payable quarterly in advance on the last day of November, February, May and

August, at the rate of $6,000 per annum.

Electricity is paid as follows:

$

5 Nov. 19X5 $1,000 (for the period to 31 October 19X5)

10 Feb. 19X6 $1,300 (for the period to 31 January 19X6)

8 May 19X6 $1,500 (for the period to 30 April 19X6)

7 Aug. 19X6 $1,100 (for the period to 31 July 19X6)

On 30 September 19X6, the electricity meter shows that $900 has been consumed since

the last bill was received.

Interest was received during the years as follows:

2 Oct. 19X5 $250 (for the 6 months to 30 September 19X5)

3 Apr. 19X6 $600 (for the 6 months to 31 March 19X6)

●

You estimate that interest of $300 is accrued at 30 September 19X6.

●

On 30 September 19X6, the balance of receivables amounts to $125,000. The allowance

for receivables is to be amended to 5 per cent of receivables.

Requirements

(a) Insert the missing information into the following ledger accounts:

(i) rent payable;

(ii) electricity;

(iii) interest receivable;

(iv) allowance for receivables;

and bring down the balances at 30 September 19X6.

(i) Rent payable

19X5 $ $

19X6 19X6

FURTHER ASPECTS OF LEDGER ACCOUNTING

REVISION QUESTIONS C2

132

(ii) Electricity

19X5 $ 19X5 $

19X6 19X6

(iii) Interest receivable

19X5 $ 19X5 $

19X6

(iv) Allowance for receivables

$ 19X5 $

19X6 19X6

(b) State two accounting conventions that govern treatment of the above items in the

accounts of XY.

Convention 1 ……………

Convention 2 ……………

(c) Describe each of the four balances brought down on the accounts at 30 September

19X6, and state under which heading they should be shown in the statement of ﬁ nan-

cial position at 30 September 19X6.

Description Statement of ﬁ nancial

position Heading

Rent payable

Electricity

Interest receivable

Allowance for receivables

133

Solution 1

1.1 Answer: (A)

Capital employed is increased by making a proﬁ t, or by adding more capital. Writing

off a bad debt is clearly the opposite of making a proﬁ t; transactions such as (B) and

(C) merely adjust the split of assets and liabilities but do not add anything overall.

1.2 Answer: (C)

The year to 31 December 19X3 includes 3/4th of the rent for the year to 30

September 19X3 and 1/4th of the rent for the year to 30 September 1994, that is:

3

4

1200

1

4

1 600 1300 £, £ £,,

1.3 Answer: (D)

The change in allowance for receivables is taken to the income statement – an

increase is debited and therefore decreases net proﬁ t, while a decrease is credited and

therefore increases net proﬁ t. The resultant balance on the allowance for receivables

account is deducted from receivables (current assets), which in turn affects working

capital. A decrease in the allowance would increase net proﬁ t, and would also increase

current assets. The latter is not one of the options, therefore (D) is the answer.

1.4 Answer: (B)

A is incorrect as the employer’s social security tax has been deducted from the net

wages accrued. (C) is incorrect as there has been no deduction from wages accrued

for tax, social security tax or pension contributions. Nor is there any record of lia-

bility for these items. (D) is similar, with the added error of employer’s SS being

included with wages accrued.

1.5 Answer: (B)

Sales tax is excluded from sales and purchases accounts, so (A) and (C) are incorrect.

Sales is revenue, and therefore the sales account is credited.

Solutions to Revision

Questions

5

FURTHER ASPECTS OF LEDGER ACCOUNTING

SOLUTIONS TO REVISION QUESTIONS C2

134

1.6 The stationery ledger account would appear as:

$ $

Opening inventories b/d 165 Outstanding invoice at 1.1.19X5 80

Paid during year 1,350 Closing inventories c/d 140

Outstanding invoice at 70 Income statement 1,365

31.12.19X5

1,585 1,585

1.7 Reconstruction of the bank account:

$ $

Balance b/d 2,500 Payment (1,000  20%)  10% 720

Receipt (200  5%) 190 Balance c/f (diff) 1,970

2,690 2,690

1.8 Answer: (C)

A is incorrect as this is an error of omission. (B) is incorrect as an error of principle

occurs where the two accounts are of different classes. (D) is an example of an error

of original entry.

1.9 Answer: (D)

Opening statement of ﬁ nancial position and adjustments required:

$ $

Assets (cash) 1,000 Liabilities (capital) 1,000

Transaction 1 (inventories) 800 Payables 800

Transaction 2 (cash) 1,175 Sales tax owing 175

Inventories (400) Proﬁ t (add to capital) 600

Closing balance 2,575 2,575

Assets ($2,575) less liabilities ($975)  capital ($1,600)

1.10

$

Capital at 1/4/ X7 6,500

Add: proﬁ t (after drawings) 32,500

Less: sales tax element (70)

Capital at 31/5/ X8 38,930

1.11 Answer: (D)

Income statement Paid to employee

$ $

36  $3.50 126.00 Gross pay 126.00

Employer’s SS (10%) 12.60 7% SS (8.82)

Gross wages cost 138.60 Tax (10.20)

Net pay 106.98

FURTHER ASPECTS OF LEDGER ACCOUNTING

135

FUNDAMENTALS OF FINANCIAL ACCOUNTING

1.12 The charge to the income statement is $9,000 for 9 months ’ interest, at an annual

rate of $12,000 (12 per cent of $100,000). The payment for the third quarter end-

ing 30 September 19X6 is not paid until 1 October 19X6, so 3 months ’ interest is

accrued, that is, $3,000.

1.13

Electricity

$ $

Balance b/f 300

19X9

1 Aug. Paid bank 600

1 Nov. Paid bank 720

20X0

1 Feb. Paid bank 900

30 Jun. Paid bank 840

30 Jun. Accrual c/d ($840  2/3) 560 Income statement 3,320

3,620 3,620

1.14

Gas supplier

$ $

Balance b/f 200

Bank ($600  12) 7,200 28 Feb. Invoice 1,300

31 May Invoice 1,400

31 Aug. Invoice 2,100

30 Nov. Invoice 2,000

30 Nov. Balance c/d 600

7,400 7,400

Gas

$ $

28 Feb. Invoice 1,300

31 May Invoice 1,400

31 Aug. Invoice 2,100

30 Nov. Invoice 2,000 30 Nov. Income Statement 6,800

6,800 6,800

1.15 Answer: (C)

1.16 The charge for the salary in the income statement is the gross salary plus the

employer’s social security tax contribution. This is $1,000 plus $100, a total of

$1,100.

1.17 Debit $1,000

1.18 Answer: (C)

1.19 Income statement $1,050; Statement of ﬁ nancial position $750; Prepayment

FURTHER ASPECTS OF LEDGER ACCOUNTING

SOLUTIONS TO REVISION QUESTIONS C2

136

1.20 $12,000

1.21 $21,500

1.22 $17,000

1.23 $14,000

Solution 2

●

Start by entering the balances brought forward at 1 July 20X5.

●

Enter the transactions in chronological (i.e. date) order.

●

Calculate the amounts to be carried forward for accrued and/or prepaid expenses at 30

June 20X6.

●

Calculate the amounts to be transferred to the income statement.

●

Carry down the balances at 1 July 20X6.

Rents, local business tax and insurance

20X5 $ 20X5 $

1 Jul. Insurance prepaid b/d 180 1 Jul. Rent accrued b/d 200

Local business tax prepaid b/d 150

10 Aug. Rent paid 300

26 Oct. Insurance paid 600

2 Nov. Local business tax paid 350

12 Dec. Rent paid 400

20X6 20X6

17 Apr. Rent paid 400 30 Jun. Rent: income statement 1,200

9 May Local business tax paid 350 Local business tax: income

statement

675

30 Jun. Rent accrued c/d 300 Insurance: income statement 580

Local business tax prepaid c/d 175

Insurance prepaid c/d 200

3,030 3,030

20X5 $ 20X5 $

1 Jul. Local business tax prepaid b/d 175 1 Jul. Rent accrued b/d 300

1 Jul. Insurance prepaid b/d 200

You should note how the account shows the extent of any balance to be carried forward

and also the amount transferred to the income statement.

The three individual ﬁ gures for the income statement could be combined in a single

ﬁ gure of $2,455.

FURTHER ASPECTS OF LEDGER ACCOUNTING

137

FUNDAMENTALS OF FINANCIAL ACCOUNTING

The statement of ﬁ nancial position at 30 June would include the following ﬁ gures:

$

Current assets

Local business tax prepaid 175

Insurance prepaid 200

Current liabilities

Rent accrued 300

Solution 3

●

Remember that sales tax on sales is owed to the tax authorities, while sales tax on pur-

chases is refundable from the tax authorities.

●

Remember that sales tax is not reclaimable on passenger cars.

(a)

Sales tax

$ $

Purchases 4,725 Balance b/f 3,250

Administration expenses 420 Sales 14,875

Balance c/f 15,072 Purchases returns 525

Sales tax repayment 1,567

20,217 20,217

(b)

Bank

$ $

Materials refund 3,525 Balance b/f 6,250

Sales tax repayment 1,567 Vehicle 9,400

Receivables 125,000 Admin expenses 2,820

Payables 42,000

Balance c/f 69,622

130,092 130,092

(c) The main purpose is to check arithmetical accuracy of the double-entry system, that

is each transaction has matching debit and credit entries. Total debit balances should

equal total credit balances.

(d) (A) 1

(B) 4

(C) 3

(D) 2

FURTHER ASPECTS OF LEDGER ACCOUNTING

SOLUTIONS TO REVISION QUESTIONS C2

138

Solution 4

●

Deal with each ledger account in turn.

●

Enter the balances at 1 October 19X5, using the correct side, as given in the question.

●

Record the payments or receipts in chronological (i.e. date) order.

●

Calculate the balance to be carried forward at the end of the period.

●

Calculate the amount to be transferred to the income statement.

●

Bring down the balances at 1 October 19X6.

●

For Part (b), accounting conventions are covered in more detail in Chapter 10.

(a)

(i) Rent payable

19X5 $ $

1 Oct. Prepayment b/d 1 , 500

30 Nov. Bank 1,500

19X6 19X6

29 Feb. Bank 1,500 30 Sep. Income statement 6,000

31 May Bank 1,500 30 Sep. Prepayment c/d 1,500

31 Aug. Bank 1,500

7,500 7,500

1 Oct. Prepayment b/d 1,500

(ii) Electricity

19X5 $ 19X5 $

5 Nov. Bank 1,000 1 Oct. Accrual b/d 800

19X6 19X6

10 Feb. Bank 1,300 30 Sep. Income statement 5 , 000

8 May Bank 1,500

7 Aug. Bank 1,100

30 Sep. Accrual c/d 900

5,800 5 , 800

1 Oct. Accrual b/d 900

(iii) Interest receivable

19X5 $ 19X5 $

1 Oct. Accrual b/d 300 2 Oct. Bank 250

19X6 19X6

30 Sep. Income statement 850 30 Apr. Bank 600

30 Sep. Accrual c/d 300

1,150 1,150

1 Oct. Accrual b/d 300

FURTHER ASPECTS OF LEDGER ACCOUNTING

139

FUNDAMENTALS OF FINANCIAL ACCOUNTING

(iv) Allowance for receivables

$ 19X5 $

1 Oct. Balance b/f 4,800

19X6 19X6

30 Sep. Balance c/d 6,250 30 Sep. Income statement 1,450

6,250 6,250

1 Oct. Balance b/f 6,250

(b) Convention 1 Accruals

Convention 2 Prudence (conservatism)

Ledger Account Description Statement of ﬁ nancial position

Heading

Rent payable Prepayment Current assets

Electricity Accrual Current liabilities

Interest receivable Accrued income Current assets

Allowance for receivables Allowance Current assets (netted off receivables)

CIMA CO2 Official Learning System - Fundamentals of Financial Accounting

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