14 Control accounts Activities Activity 1 Byit Limited Purchase ledger control account 2016 $ 2016 $ Mar 1 Balance b/d 16 Mar 1 Balance b/d 10 000 Mar 31 Purchases returns 824 Mar 31 Purchases journal 33 700 Bank 27 500 Balance c/d 156 Discounts received 1 300 Balance c/d 14 216 43 856 43 856 Apr 1 Balance b/d 156 Apr 1 Balance b/d 14 216 Activity 2 Soldit Limited Sales ledger control account 2016 $ 2016 $ May 1 Balance b/d 27 640 Balance b/d 545 May 31 Sales journal 109 650 Sales returns 2 220 Irrecoverable debt recovered 490 Bank 98 770 Balance c/d 800 Discounts allowed 3 150 Bank – irrecoverable debt recovered 490 Purchase ledger contra 2 624 Balance c/d 30 781 138 580 138 580 Jun 1 Balance b/d 30 781 Jun 1 Balance b/d 800 Activity 3 a Purchase ledger balances Sales ledger balances Debit Credit Debit Credit $ $ $ $ Before amendment 64 7 217 Before amendment 23 425 390 Deduct invoice entered twice (100) Correction of invoice $326 entered as $362 (36) – Debit balance incorrectly listed as credit balance 50 (50) Corrected balances 23 389 390 Corrected balances 114 7 067 51 Answers to activities, practice exercises and exam practice questions: Chapter 14 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737
52 b Corrected purchase ledger control 2015 $ 2015 $ Dec 31 Cancellation of invoice 100 Dec 31 Balance b/d 7 847 Discounts received 84 Balance c/d 114 Sales ledger contra – Trazom 710 Balance c/d 7 067 7 961 7 961 2016 2016 Jan 1 Balance b/d 114 Jan 1 Balance b/d 7 067 Corrected sales ledger control 2015 $ 2015 $ Dec 31 Balance b/d 22 909 Dec 31 Sales journal understatement 800 Purchase ledger contra – Trazom 710 Balance c/d 390 Balance c/d 23 389 24 099 24 099 2016 2016 Jan 1 Balance b/d 23 389 Jan 1 Balance b/d 390 c Amended profit for the year ended 31 December 2015 $ Profit per drafi income statement 31 000 Add: Reduction in purchases 100 Discounts received omitted 84 Increase in sales 800 Amended profit for the year 31 984 d Statement of financial position extract at 31 December 2015 $ $ Trade receivables Sales ledger 23 389 Purchase ledger 114 23 503 Trade payables Purchase ledger 7 067 Sales ledger 390 7 457 Cambridge International AS and A Level Accounting 52 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737
53 Practice exercises 1 Peter Sales ledger control account $ $ Mar 1 Balance b/d 55 650 Mar 31 Bank 36 900 Mar 31 Sales 47 700 Irrecoverable debts 2 250 Bank 1 920 Discounts allowed 930 Returns inwards 580 Purchase ledger control 810 Balance c/d 63 800 105 270 105 270 Apr 1 Balance b/d 63 800 Peter Purchase ledger control account $ $ Mar 31 Bank 24 300 Mar 1 Balance b/d 34 020 Discounts received 600 Mar 31 Purchases 21 840 Returns outwards 330 Sales ledger control 810 Balance c/d 29 820 55 860 55 860 Apr 1 Balance b/d 29 820 2 a Sellit Sales ledger control account $ $ Dec 31 Balance b/d 17 584 Dec 31 P. Ford 900 Discounts allowed 210 Sales 578 P. Williams 180 Balance c/d 17 096 Sales 600 18 574 18 574 Dec 31 Balance b/d 17 096 b Calculation of sales ledger balances before corrections $ Corrected balance per sales ledger control account 17 096 Add Minus $ $ Adjustment 2 900 Adjustment 3 (180) Adjustment 5 578 Adjustment 6 450 1 928 (180) 1 748 Uncorrected balance of sales ledger accounts 18 844 Answers to activities, practice exercises and exam practice questions: Chapter 14 53 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737
54 Proof Sales ledger control account Sales ledger balances $ $ Balances from above 17 584 18 844 Adjustment 1 210 Adjustment 2 (900) (900) Adjustment 3 180 180 Adjustment 4 600 Adjustment 6 (450) 17 674 17 674 Note: The goods treated as a sale to Will Dither will be in both balances at the time they are calculated. c Journal entries Account Debit Credit $ $ P. Ford 900 B. Ford 900 Receipt from customer posted to wrong account Note: the control accounts do not require correction P. Williams 180 Sales 180 Correction of sales invoice recorded in error Note: the sales ledger personal and control accounts and the revenue account all require correction Sales 578 Will Dither 578 Correction of goods on sale or return treated as sale in error Note: the sales ledger personal and control accounts and the revenue account all require correction. In addition, the goods held by Dither will have to be included in the year end inventory W. Yeo 450 Correction of sales invoice for $3160 recorded as $3600 in error Note: the only error was in the personal account Cambridge International AS and A Level Accounting 3 a There may be a credit balance on the sales ledger control account because of: • an overpayment by a customer • a payment in advance by a customer. 54 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737
55 b Julie Corrected sales ledger control account 2016 $ 2016 $ May 31 Balance b/d 18 640 May 31 Purchase ledger control 650 Irrecoverable debts 400 Cash sales 1 760 Balance c/d 20 586 Balance c/d 436 21 236 21 236 June 1 Balance b/d 20 586 June 1 Balance b/d 436 Exam practice questions Multiple-choice questions 1 B 2 C 3 C Structured questions 1 a Two advantages to a business of maintaining sales and purchase ledger control accounts: • provides quick totals of trade receivables and payables • helps to detect errors in the accounts. b Haeun Joo Purchase ledger control account 2016 $ 2015 $ Apr 30 Bank 1 118 970 May 1 Balance b/d 64 680 Discounts received 47 100 2016 Returns outwards 18 600 Apr 30 Purchases 1 236 210 Sales ledger control 7 815 Balance c/d 108 405 1 300 890 1 300 890 May 1 Balance b/d 108 405 c Haeun Joo Amended purchase ledger control account $ $ Contra with sales ledger 1 275 Balance from (a) 108 405 Bank 2 175 Discounts received 1 500 Balance c/d 109 515 Purchases 3 060 112 965 112 965 Balance b/d 109 515 Answers to activities, practice exercises and exam practice questions: Chapter 14 55 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737
56 d Statement to reconcile balances Add Minus Purchase ledger balances $ $ $ Starting balances at 30 April 2016 101 490 Adjustment 2 3 060 3 060 Adjustment 3 150 150 Adjustment 6 4 815 4 815 Amended balance on purchase ledger control account at 30 April 2016 109 515 2 Three reasons for keeping a control account are (any two): • provides a quick total for year-end financial statements • helps identify possible fraud • helps to detect errors in the accounts. 3 a It is sometimes the case where the customer of a business is also a supplier to the business. They will, therefore, have an account in both the sales and purchase ledger. In order to cut down on paperwork and the need to send cheques to each other, the balance on the sales ledger will be offlest against the balance in the purchase ledger. This means that only one party needs to send a cheque to the other. Whatever action is taken in the individual accounts in the sales and purchase ledgers, the same thing has to be done in the respective control accounts in the nominal ledger. b Dinh Truong Purchase ledger control account 2016 $ 2015 $ Apr 30 Bank 745 980 May 1 Balance b/d 43 120 Discounts received 31 400 2016 Purchases returns 12 400 Apr 30 Purchases 824 140 Sales ledger control 5 210 Balance c/d 72 270 867 260 867 260 May 1 Balance b/d 72 270 c Amended purchase ledger control account 2016 $ 2016 $ May 1 Balance b/d 72 270 Sales ledger control 850 Discounts received 1 000 Bank 1 450 Purchases 2 040 Revised balance c/d 73 010 75 310 75 310 May 1 Balance b/d 73 010 Cambridge International AS and A Level Accounting 56 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737
57 d Purchase ledger control account Purchase ledger balances $ $ Starting balances (purchase ledger control account was calculated in part a, purchase ledger balances is the balancing figure) 72 270 67 660 Adjustment 1 1 000 Adjustment 2 2 040 2 040 Adjustment 3 – 100 Adjustment 4 (850) – Adjustment 5 (1 450) – Adjustment 6 3 210 73 010 73 010 Answers to activities, practice exercises and exam practice questions: Chapter 14 57 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737
15 Suspense accounts Activities Activity 1 a Lee Suspense account $ $ Sales 90 Difierence on trial balance 58* Doyle 18 Irrecoverable debt (expense) 50 108 108 *Balancing figure b Debit Credit $ $ Purchases 150 Bilder, purchase ledger 150 Machinery at cost 400 Machinery repairs 400 Income statement 40 Provision for depreciation of machinery 40 c Decrease Increase Dr Cr $ $ $ Profit for the year per draff accounts 3 775 (1) Increase in sales 90 (2) Increase in purchases 150 (4) Increase in irrecoverable debts 50 (5) Decrease in machinery repairs 400 (5) Increase in provision for depreciation of machinery 40 240 490 (240) 250 Correct profit for the year 4 025 Activity 2 a Journal entries to correct the errors Dr Cr $ $ 1 Suspense 2 700 Note. No debit entry is required. 2 Note. The trial balance was not afiected because the closing inventory was not shown in it. 3 Repairs to machinery 3 500 Suspense 1 800 Machinery at cost 5 300 4 Suspense 800 Sales 800 5 Suspense 126 Note. No credit entry is required. Cambridge International AS and A Level Accounting 58 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737
59 b Jayesh Suspense account $ $ Machinery at cost 1 800 Trial balance difierence 26 Sales 800 Adjustment of opening inventory 2 700 Adjustment to trade payables 126 2 726 2 726 c $ Net working capital per draff statement of financial position 3 200 Add: increase in closing inventory 2 000 Deduct: credit balance $63 extracted as debit balance (126) Corrected net working capital at 31 December 2015 5 074 Practice exercises 1 Bastien journal Account Debit Credit $ $ 1 Veeraj Suspense Discount received from Veeraj not posted to their account. 70 70 2 Bernard Suspense Correction of amount posted to Bernard’s account. 50 50 3 Suspense Rodney Correction of amount debited to Rodney’s account in error. 800 800 4 Motor vehicles at cost Purchases Transfer of purchase of new vehicle posted to purchases account in error. 12 000 12 000 5 Drawings Other operating expenses Transfer of drawings posted to other operating expenses. 60 60 Answers to activities, practice exercises and exam practice questions: Chapter 15 59 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737
60 2 a Boulder journal Account Debit Credit 1 Suspense Head Correction of amount and misposting of receipt from Head $(313 + 331). 644 644 2 Suspense Joey Return of goods from Joey not entered in his account. 100 100 3 Motor vehicles at cost Motor vehicle expenses Transfer of purchase of motor vehicle posted to motor expenses in error. 3 000 3 000 4 Discount allowed Suspense Correction of overcast of discounts allowed column in cash book. 300 300 5 Theff of cash Cash Theff of $700 by employee written ofi. 700 700 b Boulder Suspense account $ $ Mar 31 Head 644 Mar 31 Balance per trial balance (balancing figure) 444 Joey 100 Discounts allowed 300 744 744 c Working capital original balance Add Minus $ $ $ Original balance 2 400 Head 644 Joey 100 Cash 700 (1 444) 956 Cambridge International AS and A Level Accounting 60 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737
61 3 a Account Debit Credit $ $ 1 Bank Purchase ledger control, Victor 90 90 2 Purchase ledger control Suspense General expenses 420 180 240 3 Sales returns Purchases 900 900 4 Purchase ledger control Purchases returns 350 350 5 Discounts received Purchase ledger control 600 600 b Amber Suspense account $ $ Mar 31 Per trial balance 180 Mar 31 Purchase ledger control 180 4 a Account Debit Credit $ $ 1 Discount received Discount allowed Suspense 55 55 110 2 Suspense Sales returns Purchases returns 216 108 108 3 Sales control account Bank 400 400 4 Equipment Purchases 4 400 4 400 5 Drawings Purchases 800 800 6 Suspense General expenses Drawings General expenses 90 90 90 90 b Logan Suspense account $ $ Mar 31 Sales returns 108 Mar 31 Balance per trial balance 196 Purchases returns 108 Discounts received 55 General expenses 90 Discounts allowed 55 306 306 Answers to activities, practice exercises and exam practice questions: Chapter 15 61 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737
c Logan Corrected trial balance at 31 March 2016 Account Debit Credit $ $ Sales 131 940 Purchases $(33 000 − 4400 − 800) 27 800 Sales returns $(260 − 108) 152 Purchase returns $(315 + 108) 423 Opening inventory 6 900 Sales ledger control $(14 125 + 400) 14 525 Purchase ledger control 16 070 Discounts allowed $(700 + 55) 755 Discounts received $(614 − 55) 559 Wages and salaries 20 600 Advertising 1 000 General expenses $(2 340 − 180) 2 160 Bank $(13 710 − 400) 13 310 Premises 70 000 Motor vehicle 5 000 Equipment $(3 500 + 4 400) 7 900 Capital 25 000 Drawings $(3 000 + 800 + 90) 3 890 173 992 173 992 d Logan Statement to show corrected profit for the year ended 31 March 2016 Add Minus Original profit for the year $ $ $ Per question 68 069 Adjustment 1 110 Adjustment 2 216 – Adjustment 3 – – Adjustment 4 4 400 Adjustment 5 800 Adjustment 6 180 5 596 (110) 5 486 Corrected profit for the year 73 555 Cambridge International AS and A Level Accounting 62 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737
63 Exam practice questions Multiple-choice questions 1 A 2 B 3 C 4 B 5 C 6 C 7 A Answers to activities, practice exercises and exam practice questions: Chapter 15 63 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737
16 Incomplete records Activities Activity 1 Statements of afiairs at 1 January 2015 at 31 December 2015 $ $ Premises at cost or valuation 4 000 9 000* Motor van at cost 5 000 4 000 Motor car at cost – 3 000 Plant and equipment 1 100 1 300 Inventory of parts 400 200 Trade receivables for work done 700 800 Balance at bank 1 300 900 12 500 19 200 Less: Owing to suppliers 170 340 Capital 12 330 18 860 Less capital introduced: motor car 3 000** Less capital increase due to property valuation 5 000* 10 860 Add: drawings ($120 × 52) 6 240 17 100 Deduct capital at 1 January 12 330 Profit for the year ended 31 December 4 770 *The increase in the value of property is not regarded as part of the trading profit, but is in fact an unrealised capital profit. **The cost of the car is deducted because it was capital introduced during the year. Activity 2 Ammar Trading section of the income statement for the year ended 30 June $ $ Sales (balancing figure) 35 000 Less: Opening inventory 4 000 Purchases (balancing figure) 31 000 (Balancing figure) 35 000 Closing inventory 7 000 Cost of sales 28 000 Gross profit (margin 20%, so mark-up is 25%) 7 000 Cambridge International AS and A Level Accounting 64 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737
65 Activity 3 Neha Pro forma trading section of the income statement for the period 30 June 2015 to 5 November 2015 $ $ Sales $(122 000 − 16 000 + 37 000 + 17 000) 160 000 Less: cost of sales Inventory at 30 June 2015 47 000 Purchases $(138 000 − 23 000 + 28 000) 143 000 190 000 Less: inventory at 5 November 2015 (Balancing figure) 70 000 120 000 Gross profit (25% of $160 000) 40 000 Cost of inventory lost in fire: $(70 000 − 12 000) = $58 000. Practice exercices 1 a (i and ii) and b Seng Statement of afiairs at: 1 January 2015 31 December 2015 $ $ Assets Shop premises 20 000 Motor van 8 000 Shop fittings 3 000 Inventory 4 000 Trade receivables 1 000 Bank 60 000 5 000 60 000 41 000 Liabilities Trade payables (6 000) Loan from brother (20 000) (16 000) 40 000 19 000 Opening capital 40 000 40 000 Loss for the year (balancing figure) (15 800) Less: drawings (5 200) 40 000 19 000 Answers to activities, practice exercises and exam practice questions: Chapter 16 65 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737
66 2 Miriam Statement of afiairs at: 1 July 2015 30 June 2016 Assets $ $ Land and buildings at cost 60 000 60 000 Fixtures and fittings 10 000 12 000 Ofiice machinery 8 000 7 000 Inventory 17 000 21 000 Trade receivables 4 000 5 000 Rent prepaid 1 000 600 Bank 14 000 16 000 114 000 121 600 Liabilities (3 000) (1 600) Trade payables Wages owing (2 000) (1 000) 109 000 119 000 Opening capital 109 000 Capital introduced 1 400 Profit for the year 21 000 Less: drawings (12 400) Closing capital 109 000 119 000 Note: The revaluation of the land and buildings is ignored as this is a capital profit. 3 Workings: Trade payables control account $ $ Payments from bank 54 000 Opening balance 3 600 Closing balance 5 200 Credit purchases 55 600 59 200 59 200 Calculation of closing inventory $ Per question 11 000 Less: damaged inventory at cost (5 000) 6 000 Add: damaged inventory at NRV 2 500 Value for trading account 8 500 Calculation of revenue $ Opening inventory 16 000 Add: purchases $(55 600 − 1 300) 54 300 70 300 Less: closing inventory1, 2 (11 000) Cost of sales 59 300 Mark up = $59 300 ÷ 60% = $98 833 Cambridge International AS and A Level Accounting 66 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737
67 Check: Sales 98 833 Less: cost of sales (59 300) Gross profit 39 533 Gross profit margin = $39 533 ÷ $98 833 × 100 = 40% Kim Trading section of income statement for the year ended 30 June 2016 $ $ Sales 98 833 Opening inventory 16 000 Add: purchases $(55 600 − 1300) 54 300 70 300 Less: closing inventory3 (8 500) Cost of sales (61 800) Gross profit (36 600) Notes: 1 The value given for closing inventory in the question ($11 000) is assumed to be the value of goods at their full price. 2 The mark-up has been calculated using the full value of closing inventory. 3 $(11 000 − (5 000 × 50%)) It is further assumed that all damaged goods were still inventory (i.e. that none of them had been sold before the year end). 4 a Cornelius Statement of afiairs at: 1 April 2014 31 March 2015 $ $ Assets Equipment 15 000 28 000 Premises 80 000 Inventory 37 500 52 000 Trade receivables 22 400 Other operating expenses 700 Bank 30 000 116 000 82 500 299 100 Liabilities Bank loan (40 000) Trade payables (56 000) Other operating expenses (2 280) Loan from father (20 000) (20 000) 62 500 180 820 Opening capital 62 500 62 500 Capital introduced 40 000 Profit for the year (balancing figure) 99 120 Less: drawings (20 800) 62 500 180 820 Answers to activities, practice exercises and exam practice questions: Chapter 16 67 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737
b Cornelius Income statement for the year ended 31 March 2016 $ $ Sales 468 650 Less: Cost of sales Opening inventory 52 000 Purchases 382 750 434 750 Less: closing inventory 74 250 360 500 Gross profit 108 150 Less: expenses Other operating expenses $(27 000 − 2 280 + 700 + 875 − 4 050) 22 245 Bank loan interest 6 000 Loan interest – father 1 600 Depreciation – equipment $(28 000 + 24 000 − 45 900) 6 100 35 945 Profit for the year 72 205 Workings: i Trade payables control account $ $ Payments from bank 371 340 Opening balance 56 000 Closing balance 67 410 Credit purchases 382 750 438 750 438 750 ii Calculation of cost of sales $ Opening inventory 52 000 Add: purchases 382 750 434 750 Less: closing inventory (74 250) Cost of sales 360 500 iii Calculation of sales Cost of sales + 30% = $468 650 iv Trade receivables control account $ $ Opening balance 22 400 Receipts banked 456 850 Credit sales for the year 468 650 Closing balance 34 200 491 050 491 050 Cambridge International AS and A Level Accounting 68 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737
69 v Bank account $ $ Opening balance 116 000 Suppliers 371 340 From customers 456 850 Drawings 26 000 Equipment 24 000 Other operating expenses 27 000 Bank loan interest 6 000 Interest on loan from father 1 600 Drawings for holiday 5 000 Additional drawings (bal fig) 800 Closing balance 111 110 572 850 572 850 c Cornelius Statement of financial position at 31 March 2016 Cost Accumulated depreciation Net book value Assets Non-current assets Premises 80 000 – 80 000 Equipment 45 900 80 000 125 900 Current assets Inventory 74 250 Trade receivables 34 200 Other receivables 4 050 Cash and cash equivalents 111 110 223 610 Total assets 349 510 Capital and liabilities Opening capital 180 820 Add: net profit 72 205 253 025 Less: drawings $(26 000 + 5 000 + 800) (31 800) 221 225 Non-current liabilities Bank loan 40 000 Loan from father 20 000 60 000 Current liabilities Trade payables 67 410 Other payables 875 68 285 Total capital and liabilities 349 510 Answers to activities, practice exercises and exam practice questions: Chapter 16 69 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737
70 Exam practice questions Multiple-choice questions 1 B 2 B 3 C 4 D 5 D 6 B 7 D 8 D 9 B 10 D Structured questions 1 a Benefits of maintaining proper books of account (any three): • helps Ahmed to control the businesses • helps to identify errors • aids future planning • satisfies the tax authorities • helps when approaching banks or other lenders for loans. b $ Assets Premises 60 000 Motor van 8 000 Inventory 6 250 Trade receivables 3 200 Rent prepaid 400 Bank 9 450 Cash 50 87 350 Liabilities Trade payables (1 800) Electricity owing (600) Loan interest owing (150) Loan from brother (2 000) 82 800 Opening capital 82 800 c Cash account $ $ Opening balance 50 Payments Cash sales for the year 21 750 $(3140 + 300 + 600 + 400) 4 440 Cash banked 17 000 Cash drawings (bal figure) 310 Closing balance 50 21 800 21 800 Cambridge International AS and A Level Accounting 70 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737
71 d Ahmed Income statement for the year ended 30 September 2016 $ $ Revenue 49 800 Less: cost of sales Opening inventory 6 250 Purchases 26 060 32 310 Less: closing inventory 8 000 24 310 Gross profit 25 490 Other income Discount received 420 25 910 Less: expenses Wages 7 400 Electricity $(2200 − 600 + 320) 1 920 Rent ($4000 + 400 − 450) 3 950 Motor van expenses $(1800 + 600) 2 400 Loan interest $(2 000 × 10% − 150 + 150) 200 Telephone and stationery $(1650 + 300) 1 950 Irrecoverable debt 250 Other operating expenses 400 Depreciation – motor van $(8000 − 6000) 2 000 Depreciation – fixtures and fittings ($3000 × 25%) 750 21 220 Profit for the year 4 690 Workings: Trade receivables control account $ $ Opening balance 3 200 Receipts banked 29 400 Credit sales for the year 28 050 Irrecoverable debts written ofi 250 31 250 Closing balance 1 600 31 250 Total sales for the year = credit sales $28 050 + cash sales $21 750 = $49 800. Trade payables control account $ $ Payments from bank 23 000 Opening balance 1 800 Discount received 420 Credit purchases 22 920 Closing balance 1 300 24 720 24 720 Total purchases for the year = credit purchases $22 920 + cash purchases $3140 = $26 060. Answers to activities, practice exercises and exam practice questions: Chapter 16 71 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737
72 e Yes he should, in order to reflect the usage of the premises with the revenue generated by using them (matching principle). If the premises are recorded at cost and were purchased some time ago then it is more likely that they have increased in value. He could revalue them and then begin depreciating them with a charge based on their new valuation. 2 a Margin (or gross margin) refers to the ratio between the gross profit earned on sales and the revenue figure, expressed as a percentage. The calculation is: Gross profit × 100 Revenue Alternatively: Revenue − Cost of sales × 100 = Margin Cost of sales Mark-up is the amount which is added to the purchase cost of an item to arrive at its selling price, usually expressed as a percentage. The calculation is: Gross profit × 100 Cost price Alternatively: Cost of sales × (100 + mark-up (as a %)) = Sales (or sales price) Cost of sales b Nadia Calculation of inventory at cost at 31 December 2015 Add Minus Total $ $ $ Value at 8 January 62 040 1 $62 040 × 20% 12 408 2 $2000 × 80% 1 600 3 i Cost of goods from suppliers 4 400 ii $12 000 × 80% 9 600 11 200 16 808 5 608 56 432 c $ $ Revenue 225 000 Less: sales returns (3 200) 221 800 Opening inventory 65 000 Add: purchases (balancing figure) 168 872 Less: closing inventory from above (56 432) Cost of sales 177 440 Gross profit ($221 800 × 20%) 44 360 Cambridge International AS and A Level Accounting 72 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737
73 3 a i Calculation of credit sales Trade receivables control account $ $ Opening balance 20 400 Receipts banked 170 430 Credit sales for the year 182 030 Closing balance 32 000 202 430 202 430 ii Total sales for the year = credit sales $182 030 + cash sales banked $103 000 + cash taken as drawings before banking ($300 × 52) $15 600 = $300 630. iii Total purchases = credit purchases $227 068 − goods taken for own use $1 350 = $225 718. b Korn Income statement for the year ended 30 April 2016 $ $ Sales 300 630 Less: cost of sales Opening inventory 22 400 Purchases $(227 068 − 1 350) 225 718 248 118 Less: closing inventory ($21 923 ÷ 130 × 100) 16 864 231 254 Gross profit 69 376 Less: expenses Wages $(17 200 − 800 + 600) 17 000 Rent $(8 000 − 800 + 1000) 8 200 Electricity 9 670 General expenses 5 150 Loan interest ($30 000 × 10%) 3 000 Loss on sale of motor vehicle $(2 000 − 3 500) 1 500 Loss on sale of fixtures and fittings $(400 − 800) 400 Depreciation − motor van $(10 000 − 3 500 + 10 000 − 8 000) 8 500 Depreciation – fixtures and fittings 4 200 57 620 $(8 000 − 800 + 7 000 − 10 000) Profit for the year 11 576 Trade payables control account $ $ Payments from bank 227 668 Opening balance 7 500 Closing balance 6 900 Credit purchases 227 068 234 568 234 568 Answers to activities, practice exercises and exam practice questions: Chapter 16 73 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737
74 c Korn Statement of financial position at 30 April 2016 Cost Accumulated depreciation Net book value Assets Non-current assets Premises 70 000 – 70 000 Motor van 8 000 Fixtures and fittings 10 000 70 000 88 000 Current assets Inventory 16 864 Trade receivables 32 000 Bank including loan from brother (balancing figure here or in cash book) 50 142 99 006 Total assets 187 006 Capital and liabilities Opening capital 150 700 Add: net profit 11 756 162 456 Less: drawings $(15 600 + 1 350) (16 950) 145 506 Non-current liabilities Loan from brother 30 000 Current liabilities Trade payables 6 900 Other payables $(600 + 1000 + 3000) 4 600 11 500 Total capital and liabilities 187 006 d Korn should not value his inventory at selling price. • It would be contrary to the concept of realisation, as he has not yet obtained the selling price value from the inventory. • It woud be contrary to the matching principle when he does sell the inventory in the next year, such sales will show nil profit. • Accounting standards (accordingly) require the application of the rule ‘lower of cost and net realisable value’. Cambridge International AS and A Level Accounting 74 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737
17 Partnership accounts Activities Activity 1 a Tee and Shirt Income statement and appropriation account for the year ended 31 March 2016 $ $ $ Sales 215 000 Less: cost of sales Inventory at 1 April 2015 16 000 Purchases 84 000 100 000 Less: inventory at 31 March 2016 20 000 80 000 Gross profit 135 000 Selling expenses 24 000 Administration expenses 46 000 Depreciation: Fixtures and fittings 4 800 Ofiice equipment 5 400 10 200 Interest on loan 600 80 800 Profit for the year 54 200 Share of profit: Tee 1 2 27 100 Shirt 1 2 27 100 54 200 b Partners’ current accounts Tee Shirt Tee Shirt 2016 $ $ 2015 $ $ Mar 31 Drawings 29 000 31 000 Apr 1 Balances b/d 5 000 10 000 2016 Balance c/d 3 100 6 700 Mar 31 Interest on loan 600 Share of profit 27 100 27 100 32 100 37 700 32 100 37 700 Apr 1 Balance b/d 3 100 6 700 c Statement of financial position at 31 March 2016 Cost Accumulated depreciation Net book value $ $ $ Non-current assets Fixtures and fittings 48 000 12 800 35 200 Ofiice equipment 27 000 10 400 16 600 75 000 23 200 51 800 (cont.) Answers to activities, practice exercises and exam practice questions: Chapter 17 75 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737
76 Statement of financial position at 31 March 2016 Cost Accumulated depreciation Net book value $ $ $ Current assets Inventory 20 000 Trade receivables 24 000 Other receivables 6 000 Cash and cash equivalents 85 000 135 000 Total assets 186 800 Capital and liabilities Capital accounts: Tee 100 000 Shirt 50 000 150 000 Current accounts: Tee 3 100 Shirt 6 700 9 800 Non-current liability Loan – shirt 12 000 Current liabilities Trade payables 11 000 Other payables 4 000 15 000 Total capital and liabilities 186 800 Activity 2 a Tee and Shirt Income statement and appropriation account for the year ended 31 March 2016 $ $ $ Sales 215 000 Less: cost of sales Inventory at 1 April 2015 16 000 Purchases 84 000 100 000 Less: inventory at 31 March 2016 20 000 80 000 Gross profit 135 000 Selling expenses 24 000 Administration expenses 46 000 Depreciation: Fixtures and fittings 4 800 Ofiice equipment 5 400 10 200 Interest on loan 1 200 81 400 Profit for the year 53 600 Cambridge International AS and A Level Accounting 76 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737
77 $ $ $ Add Interest on drawings: Tee 2 900 Shirt 3 100 6 000 59 600 Less: interest on capitals Tee 10 000 Shirt 5 000 (15 000) Less: salary Shirt (4 000) 40 600 Share of profit: Tee 3 5 24 360 Shirt 2 5 16 240 40 600 b Partners’ current accounts Tee Shirt Tee Shirt 2016 $ $ 2015 $ $ Mar 31 Drawings 29 000 31 000 Apr 1 Balances b/d 5 000 10 000 Interest on drawings 2 900 3 100 2016 Balances c/d 7 460 2 340 Mar 31 Interest on capital 10 000 5 000 Interest on loan 1 200 Salary 4 000 Share of profit 24 360 16 240 39 360 36 440 39 360 36 440 Apr 1 Balance b/d 7 460 2 340 c Statement of financial position at 31 March 2016 Cost Accumulated depreciation Net book value $ $ $ Assets Non-current assets Fixtures and fittings 48 000 12 800 35 200 Ofiice equipment 27 000 10 400 16 600 75 000 23 200 51 800 Current assets Inventory 20 000 Trade receivables 24 000 Other receivables 6 000 Cash and cash equivalents 85 000 135 000 Total assets 186 800 (cont.) Answers to activities, practice exercises and exam practice questions: Chapter 17 77 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737
78 Cambridge International AS and A Level Accounting Statement of financial position at 31 March 2016 $ $ $ Capital and liabilities Capital accounts: Tee 100 000 Shirt 50 000 150 000 Current accounts: Tee 7 460 Shirt 2 340 9 800 Non-current liability Loan – shirt 12 000 Current liabilities Trade payables 11 000 Other payables 4 000 15 000 Total capital and liabilities 186 800 Practice exercises 1 a Bell and Binn Income statement and appropriation account for the year ended 30 April 2016 $ $ Revenue 425 000 Less: cost of sales Opening inventory 30 000 Add: purchases 200 000 230 000 Less: closing inventory (27 000) 203 000 Gross profit 222 000 Less: expenses Wages 98 000 Rent $(25 000 − 1 500) 23 500 Heat and light 16 000 Ofiice expenses 12 600 Vehicle expenses 5 510 Advertising $(3 500 − 2 000) 1 500 Irrecoverable debts written ofi 416 Bank charges $(314 + 860) 1 174 Depreciation of motor vehicles 3 800 Depreciation of plant and machinery 12 500 175 000 Profit for the year 47 000 78 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737
79 $ $ Add: interest on drawings Bell 3 000 Binn 1 350 4 350 51 350 Less: interest on capital Bell 5 000 Binn 4 000 9 000 Less: partner’s salary Bell 10 000 Binn 8 000 18 000 Share of profit: Bell 14 610 Binn 9 740 24 350 b Partners’ current accounts Bell Binn Bell Binn $ $ $ $ Drawings 30 000 13 500 Opening balance b/d 7 000 3 000 Interest on drawings 3 000 1 350 Interest on capital 5 000 4 000 Closing balance c/d 3 610 9 890 Salary 10 000 8 000 Share of profit 14 610 9 740 36 610 24 740 36 610 24 740 Balance b/d 3 610 9 890 c Statement of financial position at 30 April 2016 Cost Accumulated depreciation Net book value $ $ $ Non-current assets Plant and machinery 125 000 48 500 76 500 Motor vehicles 41 000 25 800 15 200 166 000 74 300 91 700 Current assets Inventory 27 000 Trade receivables 45 750 Less: provision for doubtful receivables (1 000) 44 750 Other receivables $(1500 + 2000) 3 500 Cash and cash equivalents $(15 724 − 314 − 860) 14 550 89 800 Total assets 181 500 (cont.) Answers to activities, practice exercises and exam practice questions: Chapter 17 79 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737
80 Statement of financial position at 30 April 2016 $ $ $ Capital and liabilities Partners’ capital and current accounts Bell Binn $ $ Capital account 50 000 40 000 90 000 Current account 3 610 9 890 13 500 53 610 49 890 103 500 Non-current liability Long-term loan – Bell 60 000 Current liabilities Trade payables 18 000 Total capital and liabilities 181 500 2 a Miller and Meredith Forecast income statement and appropriation account for the year ended 31 December 2016 $ $ Forecast net profit for the year $(21 560 + 21 600) 43 160 Less: interest on capital Miller 2 000 Meredith 3 000 (5 000) Forecast profit 38 160 Share of profit: Miller 19 080 Meredith 19 080 (38 160) b If the two businesses combine then Miller will have a forecast total income of $21 080 compared with $19 600 he earned for himself in the previous year. Meredith will have a forecast income of $22 080 compared with $18 000 for the previous year as a sole trader. It appears from the figures that both partners will be better ofi by combining their businesses. However, there is no guarantee that the forecast increases in net profit will happen. Had they stayed as sole traders and the forecast increases had happened then Miller would be worse ofi, by $(21 560 − 21 080). Meredith, on the other hand would be better ofi by $(22 080 − 21 600). On a strictly short term calculation, Miller should not agree to a partnership with Meredith on those terms. However, the figures in both cases are very close together. On that basis, therefore, he should consider whether there are longer term factors that may outweigh the short term loss. There may be more scope to increase future net profits as a partnership than by trading alone. Workings: Miller Meredith $ $ Net profit for y/e 31 Dec 2015 19 600 18 000 Add: estimated increase 1 960 3 600 Forecast net profit 21 560 21 600 Cambridge International AS and A Level Accounting 80 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737
81 Exam practice questions Multiple-choice questions 1 C 2 D 3 A Note Since interest on loans is an expense of the business, the profit for the year can be assumed to have allowed for this. Accordingly, to answer the questions, no adjustment to profit should be made for interest; nor is the interest received to be viewed as part of a partner’s profit share. Similarly, a partner’s salary reduces the amount of profit to be shared, and in that strict sense her share of the remainder is her profit share. Structured question a Advantages of forming a partnership (any two): • The capital invested by partners is offen more than can be raised by a sole trader. • A greater fund of knowledge, experience and expertise in running a business is available to a partnership. • A partnership may be able to ofier a greater range of services to its customers (or clients). • The business does not have to close down, or be run by inexperienced stafi, in the absence of one of the partners; the other partner(s) will provide cover. • Losses are shared by all partners. Disadvantages of forming a partnership (any two): • A partner doesn’t have the same freedom to act independently as a sole trader has. • A partner may be frustrated by the other partner(s) in their plans for the direction and development of the business. • Profits have to be shared by all partners. • A partner may be legally liable for acts of the other partner(s). b Partners maintain separate capital and current accounts to keep better control of the amounts introduced into the business and drawn from the business by each partner. The capital account identifies how much each partner has introduced into the business. From this it is possible to calculate any interest on capital agreed between the partners. The capital account is adjusted only very occasionally, for example when a partner is admitted or retires, or when there is a substantial change in the business’s need for capital. The current account records each partner’s share of profits, either by way of profit share or interest on capital/salary. It also shows how much a partner draws. Keeping the current account also helps partners not to withdraw from the business more than their share of profit. This ensures cash is retained and partners do not withdraw capital. (A partner that deliberately withdrew excessive drawings would in efiect have repaid himself some of his capital whilst still charging interest on the full amount.) Answers to activities, practice exercises and exam practice questions: Chapter 17 81 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737
82 c Up and Down Corrected statement of financial position at 30 June 2016 $ $ Assets Non-current assets Fixtures and fittings at cost 33 500 $(45 000 − 15 000 + 3 500) Less: depreciation to date 22 500 $(34 500 − 10 500 − 1 500) 11 000 Current assets Inventory $(28 500 + 10 000) 38 500 Trade receivables 24 000 Less: provision for doubtful debt 960 23 040 Other receivables 750 Cash and cash equivalents 9 000 71 290 Total assets 82 290 Capital and liabilities Capital accounts: Up 22 000 Down 14 000 36 000 Current accounts: Up $(7 500 + 2 200 + 3579) 13 459 Down $(1 500 + 1 400 − 1075 + 2506) 4 331 17 790 Total capital 53 790 Non-current liability Loan – Up 15 000 Current liabilities Trade payables 12 000 Other payables 1 500 13 500 Total capital and liabilities 82 290 Workings: Adjustments to profit $ Loss on disposal of fixtures and fittings $(15 000 − 10 500 − 3 500) (1 000) Depreciation of fixtures sold written back 1 500 Loan interest on Up’s loan (1 500) Undervalue of closing inventory 10 000 Provision for doubtful debts ($24 000 × 4%) (960) Prepaid rent 750 Cambridge International AS and A Level Accounting 82 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737
83 $ Goods taken for personal use 1 075 Adjusted profit 9 865 Less: interest on capital Up 2 200 Down 1 400 6 265 Share of profit: Up 3 759 Down 2 506 6 265 d Up and Down Revised current accounts at 30 June 2016 Up Down Up Down $ $ $ $ Original balances 7 500 1 500 Goods taken 1 075 Balance c/d 13 459 4 331 Interest on capital 2 200 1 400 Share of profit 3 759 2 506 13 459 5 406 13 459 5 406 Opening balances b/d 13 459 4 331 e There are really only two ways in which Down could increase the balance on his capital account. The first is to introduce some assets into the business rather than cash. This would mean him purchasing, say, some inventory and introducing that into the business. He could also bring in some of his personal assets into the business, say, his car or computer. If he decides to purchase some assets then his ability to do so will depend on how much personal cash he has available. If he has very little then this is not a viable option. Likewise, he may not want to introduce his own assets into the business. The other option is for Down to explore ways in which he can give up a part of his other entitlements from the partnership and turn these into a further capital contribution. For example, he could agree that some of his current account can be credited to the capital account instead. Based on the above figures, he could contribute up to $4 331 this way. However, that would mean that Down would not have any balance leff on his current account to draw for his immediate needs, and in any case, Up wishes him to increase his capital by $8 000. Another idea would be for the partners to agree that a portion of Down’s future shares of profit are credited to the capital account, instead of to the current account. (For example, $2 000 for each of the next four years. If the partnership is highly profitable, it may be possible to complete this exercise in a shorter time or even in one year.) Down’s options are limited and it may be that he is unable to increase the balance on his capital account without introducing some more cash into the business. He may have to borrow money to do so. Answers to activities, practice exercises and exam practice questions: Chapter 17 83 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737
18 Partnership changes Activities Activity 1 a Revaluation account $000 $000 Property (old value) 120 Property (new value) 150 Plant and machinery (old value) 60 Plant and machinery (new value) 51 Inventory (old value) 20 Inventory (new value) 17 Trade receivables (old value) 30 Trade receivables (new value) 28 Trade payables (new value) 22 Trade payables (old value) 24 Profit on revaluation – Ann 12 Profit on revaluation – John 6 270 270 b Capital accounts $000 $000 $000 $000 Ann John Ann John Balance c/f 132 66 Opening balances 120 60 Profit on revaluation 12 6 132 66 132 66 Balance b/d 132 66 c Statement of financial position at 31 October 2016 following revaluation $000 Non-current assets Property 150 Plant and machinery 51 201 Current assets Inventory 17 Trade receivables 28 Bank account 1 46 Total assets 247 Capital and liabilities Capital accounts: Ann 132 John 66 198 Current accounts: Ann 17 John 10 27 Current liabilities Trade payables 22 Total capital and liabilities 247 Cambridge International AS and A Level Accounting 84 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737
85 Activity 2 Workings: Journal Name of account Dr Cr $ $ Freehold premises 25 000 Fixtures and fittings 3 000 Ofiice equipment 2 000 Inventory 3 000 Trade receivables control 1 000 Revaluation account 16 000 Revaluation of assets at 1 September 2016 as agreed by partners Revaluation account 16 000 Capital account – Tom 8 000 Capital account – Tilly 8 000 Apportionment of profit on revaluation of assets to partners in profit-sharing ratios a Revaluation account $ $ Journal on allocation of revaluation gains 16 000 Journal on revaluation of assets 16 000 Journal Name of account Dr Cr $ $ Freehold premises 25 000 Revaluation account 25 000 Revaluation account 3 000 Fixtures and fittings 3 000 Revaluation account 2 000 Ofiice equipment 2 000 Revaluation account 3 000 Inventory 3 000 Revaluation account 1 000 Trade receivables control 1 000 Revaluation account 8 000 Capital account – Tom 8 000 Revaluation account 8 000 Capital account – Tilly 8 000 Revaluations of assets at 1 September 2016 as agreed by partners, and apportionment of net profit on revaluation of assets to partners in profit-sharing ratios. Answers to activities, practice exercises and exam practice questions: Chapter 18 85 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737
86 Cambridge International AS and A Level Accounting Revaluation account $ $ Fixtures and fittings 3 000 Freehold premises 25 000 Ofiice equipment 2 000 Inventory 3 000 Trade receivables control 1 000 Capital account – Tom 8 000 Capital account – Tilly 8 000 25 000 25 000 b Tom and Tilly Statement of financial position as at 1 September 2016 $ $ Assets Non-current assets at new values Freehold premises 65 000 Fixtures and fittings 15 000 Ofiice equipment 5 000 85 000 Current assets Inventory 14 000 Trade receivables 3 000 Cash and cash equivalents 6 000 23 000 Total assets 108 000 Capital and liabilities Capital account – Tom 56 000 Capital account – Tilly 49 000 105 000 Current liabilities Trade payables 3 000 Total capital and liabilities 108 000 c As the terms of the partnership changed, with Tilly now being entitled to a salary as well as a share of profits, then the partners were correct to revalue the assets. This ensures that any efiort by the partners in the 'old' partnership that has generated a profit (or gain, or loss) that will be divided up in the future is rewarded in the proportions that were agreed to apply to the earlier period. 86 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737
87 Activity 3 a Vera and Ken Calculation of goodwill Value of net assets $ Premises 140 000 Fixtures and fittings 65 000 Motor vehicles 35 000 Ofiice equipment 15 000 Inventory 6 500 Trade receivables 11 800 Bank 3 620 276 920 Less: Trade payables 5 830 Net asset value 271 090 Value of goodwill: $(300 000 − 271 090) = $28 910 b Amounts to be credited to capital accounts for goodwill: Vera ( 1 2 of $28 910) : $14 455 Ken ( 1 2 of $28 910) : $14 455 Activity 4 a Old profit-sharing ratios New profit-sharing ratios Adjustments to capital accounts (net) $ $ $ Punch 12 000 10 800 1 200 credit Judy 6 000 7 200 1 200 debit 18 000 18 000 b Capital accounts Punch Judy Punch Judy 2016 $ $ 2016 $ $ Oct 1 Goodwill 1 200 Oct 1 Balance b/f 36 000 14 000 Goodwill 1 200 Oct 1 Balance c/d 37 200 12 800 37 200 14 000 37 200 14 000 Oct 1 Balance b/d 37 200 12 800 Note: In this case the net adjustment for each partner has been made. It would be equally correct to: • credit Punch’s capital account with $12 000 and debit it with $10 800 • credit Judy’s capital account with $6 000 and debit it with $7 200. Answers to activities, practice exercises and exam practice questions: Chapter 18 87 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737
Activity 5 Hook, Line and Sinker Trading section of the income statement and appropriation account for the year ended 31 December 2016 $ Sales 129 500 Less cost of sales 66 500 Gross profit carried down 63 000 Hook, Line and Sinker Income statement and appropriation account for the year ended 31 December 2016 Six months to 30 June 2016 Six months to 31 December 2016 Year to 31 December 2016 $ $ $ $ $ $ Gross profit brought down 31 500 31 500 63 000 Wages 7 000 7 000 14 000 General expenses 1 750 3 500 5 250 Interest on loan 200 400 600 Depreciation 875 9 825 875 11 775 1 750 21 600 Profit for the year 21 675 19 725 41 400 Salary – Hook 3 000 3 000 3 000 16 725 38 400 Share of profit: Hook 3 6 10 838 1 3 5 575 16 413 Line 2 6 7 225 1 3 5 575 12 800 Sinker 1 6 3 612 21 675 1 3 5 575 16 725 9 187 38 400 Activity 6 a Income statement and appropriation account for the year ended 31 December 2016 $ Turnover 600 000 Less: cost of sales (330 000) Gross profit 270 000 For eight months For four months Gross profit 270 000 → 8 : 4 180 000 90 000 Less: operating expenses: Manager salary (24 000 × 8/12) 16 000 − Wages and salaries (106 000 − 16 000) → 8 : 4 60 000 30 000 Rent (42,000 → 8 : 4) 28 000 14 000 Heating and lighting (6 000 → 8 : 4) 4 000 2 000 Cambridge International AS and A Level Accounting 88 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737
89 Other operating expenses (12 000 → 8 : 4) 8 000 4 000 Depreciation: Premises ( 180 000 × 4% × 8 12 ) 4 800 (210 000 × 4% × 4 12 ) 2 800 Plant (90 000 × 20% × 8 12 ) 12 000 (27 000 × 20% × 4 12 ) 1 800 Motor car (30 000 × 25% × 8 12 ) 5 000 (5 000 + 7 000 × 25% × 4 12 ) 1 000 Equipment (21 000 × 10% × 8 12 ) 1 400 (6 000 × 10% × 4 12 ) 200 Interest on loan (20 000 × 12% × 4 12 ) (139 200) 800 (56 600) Profit for the periods 40 800 33 400 Less: appropriation: Interest on capital: Hardeep (100 000 × 10% × 8 12 ) 6 667 (158 800 × 10% × 4 12 ) 5 293 Nasma (60 000 × 10% × 8 12 ) 4 000 (87 400 × 10% × 4 12 ) 2 913 Arfan (45 000 × 10% × 4 12 ) 1 500 Total interest 10 667 9 707 Salary – Nasma (15 000 × 8 12 ) 10 000 (18 000 × 4 12 ) – (20 667) 6 000 (15 707) Residual profits 20 133 17 693 Share of profit Hardeep (20133 × 2 3 ) 13 422 (17 693 × 2 5 ) 7 077 Nasma (20 133 × 1 3 ) 6 711 (17 693 × 2 5 ) 7 077 Arfan (17 693 × 1 5 ) (20 133) 3 539 (17 693) – – Answers to activities, practice exercises and exam practice questions: Chapter 18 89 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737
Cambridge International AS and A Level Accounting Current acounts Hardeep Nasma Arfan Hardeep Nasma Arfan Drawings 30 000 40 000 4 000 Balance b/d 16 000 12 000 Interest on loan 800 Interest on capital 11 960 6 913 1 500 Salary 16 000 Balance c/d 19 260 8 702 1 039 Share of profit 20 500 13 788 3 539 49 260 48 702 5 039 49 260 48 702 5 039 Balance b/d 19 260 8 702 1 039 Note: Rounding difierences have not been eliminated in presenting this answer. b Capital acounts Hardeep Nasma Arfan Hardeep Nasma Arfan Balance b/d 100 000 60 000 Gain on revaluation 62 800 31 400 Goodwill written ofi 24 000 24 000 12 000 Goodwill 40 000 20 000 Transfer to loan a/c 20 000 Bank 50 000 Balance c/d 158 800 87 400 45 000 Motor car 7 000 202 800 111 400 57 000 202 800 111 400 57 000 Balance b/d 158 800 87 400 45 000 Working for gain on revaluation Assets Book value on 1 Jan 2016 Dep for 8m Book value on 1 Jan 2016 Revalued 1 Sept 2016 Gain Premises 135 000 (4 800) 130 200 210 000 79 800 Plan 30 000 (12 000) 18 000 27 000 9 000 Motor van 5 000 (5 000) – 5 000 5 000 Ofiice equipment 7 000 (1 400) 5 600 6 000 400 Total (23 200) (94 200) → 2 : 1 Activity 7 a Wilfrid, Hide and Wyte Income statement and appropriation account for the year ended 30 June 2016 Six months ended 31 Dec 2015 Six months ended 30 June 2016 $ $ $ $ Gross profit 93 500 93 500 Wages 45 500 45 500 Rent 6 000 6 000 Electricity 4 200 4 200 Interest on loan – 3 750 Other operating expenses 4 500 60 200 4 500 63 950 Profit for the year 33 300 29 550 Interest on capital: – Wilfrid 4 000 Hide 2 500 1 650† Wyte 1 500 8 000 325†† 1 975 25 300 27 575 90 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737
b Partners’ capital accounts Wilfrid Hide Wyte Wilfrid Hide Wyte 2015 $ $ $ 2015 $ $ $ Dec 31 Goodwill 10 000 20 000 Jul 1 Balance b/d 80 000 50 000 30 000 Revaluation of assets 10 500 7 000 3 500 Dec 31 Goodwill 30 000 Loan a/c 75 000 Current a/c 5 650 Bank 30 150 2016 Jun 30 Balance c/d 33 000 6 500 115 650 50 000 30 000 115 650 50 000 30 000 2016 Jul 1 1 Balance b/d 33 000 6 500 Note: The goodwill adjustments have been shown net. Partners’ current accounts Wilfrid Hide Wyte Wilfrid Hide Wyte 2015 $ $ $ 2015 $ $ $ Dec 31 Drawings 23 000 Jul 1 Balance b/d 12 000 3 000 4 000 Capital a/c 5 650 Dec 31 Interest 4 000 Profit 12 650 2016 Jun 30 Drawings 28 000 18 000 2016 Balance c/d 1 371 5 829 Jun 30 Interest 4 150 1 825 Profit 22 221 18 004 28 650 29 371 23 829 28 650 29 371 23 829 Jul 1 Balance b/d 1 371 5 829 Note: Some questions will combine the revaluation of assets with the introduction of a new partner. In this case, work through the revaluation account, transferring any profit or loss on revaluation to the old partners in their old profit sharing ratios. Then introduce the new partner and adjust the capital accounts for goodwill in line with Section 18.7. † $33 000 × 10% × 1 2 = $1 650 †† $6 500 × 10% × 1 2 = $325 $ $ $ $ Share of profit: Wilfrid 3 6 12 650 Hide 2 6 8 433 1 2 13 788 Wyte 1 6 4 217 25 300 1 2 13 787 27 575 Answers to activities, practice exercises and exam practice questions: Chapter 18 91 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737
92 Cambridge International AS and A Level Accounting b Capital accounts Raul Samir Raul Samir $000 $000 $000 $000 Vehicle taken 7 Opening balances 60 55 Current account – 4 Current accounts 10 – Bank 79 50 Profit on realisation 9 6 79 61 79 61 c Bank account $000 $000 Sale of property 106 Opening balance 4 Sale of vehicles 9 Trade payables 10 Sale of inventory 18 Expenses of sale 3 From trade receivables 13 Capital account – Raul 79 Capital account – Samir 50 146 146 Practice exercises 1 a When a new partner is admitted, it is only fair that the old partners are rewarded for their efiorts in building up the business. The assets should be revalued prior to admitting a new partner, because any profit on revaluation belongs to the old partners. The new partner should not benefit from any of this profit. b i Revaluation account $ $ Property account (current value) 40 000 Property account (new value) 60 000 Inventory account (current value) 12 000 Inventory account (new value) 10 000 Capital account – Ali 9 000 Capital account – Siri 9 000 70 000 70 000 Activity 8 a Realisation account $000 $000 Property (book value) 80 Bank – sale of property 106 Motor vehicles (book value) 20 Samir’s capital account – value of car taken 7 Inventory (book value) 19 Bank – sale of vehicles 9 Trade receivables (book value) 16 Bank – sale of inventory 18 Bank – payments to trade payables 10 Bank – from trade receivables 13 Bank – expenses of sale 3 Trade payables (book value) 10 Profit on realisation: Raul (3/5) 9 Samir (2/5) 6 163 163 92 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737
93 Note: This is the first account to be tackled because any profit or loss on revaluing assets belongs to the old partners. Fiona, the new partner, isn’t entitled to any of this profit as she has not been part of the business which generated it. It would have been acceptable to shortcut the answer by showing the changes in the value of the assets rather than show their old value and new value. This is shown below: Revaluation account $ $ Inventory account – loss $(12 000 – 10 000) 2 000 Property account – profit $(60 000 – 40 000) 20 000 Capital account – Ali 9 000 Capital account – Siri 9 000 20 000 20 000 Both approaches would be acceptable. It’s very much a question of how confident students feel. Putting in both the old and new values (the first approach) helps track everything better. There is too much opportunity to make an arithmetic mistake by shortcutting the approach. ii Capital accounts Ali Siri Fiona Ali Siri Fiona $000 $000 $000 $000 $000 $000 Goodwill account 8 8 8 Opening balance 36 36 – Balance c/d 49 49 22 Profit on revaluation 9 9 – Bank 30 Goodwill 12 12 – 57 57 30 57 57 30 Balance b/d 49 49 22 c The treatment of goodwill is similar to the treatment of any profit arising on revaluation of assets. The old partners’ capital accounts are credited with their share of goodwill in the old profit sharing ratio. The capital accounts of all three partners are then debited with goodwill in the new profit sharing ratio. This is done as the old partners have given up a share of their goodwill to the incoming partner. 2 a Capital accounts Wilson Betty Keppel Wilson Betty Keppel $000 $000 $000 $000 $000 $000 Goodwill account 12 12 – Opening balance 40 15 30 Current account 6 Goodwill 8 8 8 Bank 36 Balance c/d 40 15 – Profit on revaluation 4 4 4 52 27 42 52 27 42 Balance b/d 40 15 – Answers to activities, practice exercises and exam practice questions: Chapter 18 93 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737
94 Cambridge International AS and A Level Accounting e Partners’ current accounts Wilson Betty Imogen Wilson Betty Imogen $ $ $ $ $ $ $ Balance b/d 1 000 Balance b/d 2 000 Drawings 52 000 48 000 20 000 Interest on capital 5 366 1 666 500 Balances c/d 16 129 13 429 Share of profit 60 763 60 763 10 942 Balances c/d 8 558 68 129 62 429 20 000 68 129 62 429 20 000 Balance b/d 8 558 Balance b/d 16 129 13 429 b Partners’ capital accounts for the period from 1 May 2015 to 30 April 2016 Wilson Betty Imogen Wilson Betty Imogen 2015 $000 $000 $000 2015 $000 $000 $000 Nov 30 Goodwill account 16 16 8 May 1 Opening balance 52 15 – 2016 Nov 30 Bank 20 April 30 Balance c/d 56 19 12 Goodwill 20 20 – 72 35 20 72 35 20 2016 May 1 Balance b/d 56 19 12 c Two advantages of partners preparing a partnership agreement are: • It shows clearly how much of the profit earned by the partnership each partner is entitled to. It also shows how much each partner must bear of any loss incurred. • It will prevent future disputes between the partners. d Partnership appropriation account for the year ended 30 April 2016 7 months to 30 November 2015 5 months to 30 April 2016 $ $ $ $ Profit for the period 81 666 58 334 Less: interest on capital Wilson 3 033 2 333 Betty 875 791 Imogen – 3 908 500 3 624 Residual profit 77 758 54 710 Share of residual profit Wilson 38 879 21 884 Betty 38 879 21 884 Imogen – 10 942 77 758 54 710 94 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737
95 f It is possible that the partners will benefit from converting their business to a limited company. It will give them limited liability for the debts of the business, unlike now where they are all fully liable for the partnership debts and may have to use their own personal assets to meet payment for them. A limited company can issue shares to passive investors who share in the risk and reward instead of taking a lender’s return in interest. Small parcels of shares can be awarded or sold to key employees as a motivational bonus arrangement. Having the option to issue shares or to take loans, or a mixture, may make raising capital easier in the future. However, there is the need to decide how many shares each partner will be issued with. If they are issued in proportion to the balances on their capital and current accounts then Wilson will clearly have the most shares. This will give him control of the company in making decisions on the way it is developed in the future. This may upset Betty and Imogen as at the moment all three have an equal share in the decision making. This could cause future friction between all three, leading to the business failing. Clearly then, the shares should be issued in the same proportions as the partners intend to share the profits going forward. This may mean that some amounts of capital are repaid on incorporation, or are converted to loans from the individuals to the company, or that Imogen will have to take out some personal loans so that she has enough to pay for her full portion of the new shares. All this should be a matter for agreement between the partners based around the capital needs of the business and their personal financial circumstances. The primary drawback of being a limited company is that there is extensive legislation (in the UK in the Companies Act 2006) which regulates the conduct of companies and their directors, and requires that information, including the annual accounts, are placed on public record. In contrast, partnerships are allowed considerable privacy and relative freedom of conduct. It is usual to consider incorporation when the scale or nature of the business are such that the advantage of limited liability outweighs the additional administrative burden. Exam practice questions Multiple-choice questions 1 D 2 A 3 D 4 B 5 A Answers to activities, practice exercises and exam practice questions: Chapter 18 95 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737
19 An introduction to the accounts of limited companies Activities Activity 1 a Year 2011 2012 2013 2014 2015 2016 $ $ $ $ $ $ Profit 10 000 5 000 7 000 4 000 7 000 12 000 Preference dividend paid 6 000 5 000 6 000 4 000 6 000 6 000 Profit lefi for ordinary shareholders 4 000 nil 1 000 nil 1 000 6 000 Maximum ordinary dividend payable 4% – 1% – 1% 6% b Year 2011 2012 2013 2014 2015 2016 $ $ $ $ $ $ Profit 10 000 5 000 7 000 4 000 7 000 12 000 Preference dividend for year 6 000 5 000 6 000 4 000 6 000 6 000 Arrears of dividend carried forward – – 1 000 – 1 000 1 000 Profit lefi for ordinary shareholders 4 000 nil nil nil nil 5 000 Maximum ordinary dividend payable 4% – – – – 5% Activity 2 a Premium Share Limited Journal Dr Cr $ $ Bank 120 000 Ordinary share capital 100 000 Share premium account 20 000 Issue of 100 000 ordinary shares of $1 at $1.20 per share b Cash book Bank account (extract) $ $ June 1 Ordinary share capital 100 000 Share premium 20 000 Ordinary share capital account $ $ June 1 Bank 100 000 Share premium account $ $ June 1 Bank 20 000 Cambridge International AS and A Level Accounting 96 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737
97 Activity 3 a Doingwell Limited Journal Dr Cr Details $ $ Aug 1 Bank account 220 000 Ordinary share capital account 110 000 Share premium account 110 000 Receipt of first payment on application for the issue of 150 000 ordinary shares at $1.50 each First payment = 220 000 × $1. This represents $0.50 share capital and the full share premium of $0.50 per share Sep 1 Ordinary share capital account 35 000 Share premium account 35 000 Bank account 70 000 Refund of payment to unsuccessful applicants Ordinary share capital 70 000 shares × $0.50 Share premium 70 000 shares × $0.50 Oct 1 Bank account 75 000 Ordinary share capital account 75 000 Balance of money due from successful applicants b Cash book Bank account (extract) $ $ Aug 1 Ordinary share capital 110 000 Sep 1 Ordinary share capital 35 000 Share premium 110 000 Share premium 35 000 Oct 1 Ordinary share capital 75 000 Share premium 75 000 Note: The bank account is only showing the transactions relating to the issue of shares. It is only an extract, as during the period from August 1 to October 1 there would have been other transactions which affected the bank account. Ordinary share capital account $ $ Sep 1 Bank 35 000 Aug 1 Bank 110 000 Oct 1 Bank 75 000 Share premium account $ $ Sep 1 Bank 35 000 Aug 1 Bank 110 000 Answers to activities, practice exercises and exam practice questions: Chapter 19 97 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737
98 Activity 4 Journal Dr Cr Details $ $ Freehold premises at cost 60 000 Freehold premises accumulated depreciation 18 000 Revaluation reserve 42 000 Transfer of existing balances to revaluation reserve account Freehold premises at cost 80 000 Revaluation reserve 80 000 Revaluation of premises at new valuation Note: Any depreciation to be charged on the premises will be calculated on the new valuation of $80 000. The alternative journal, following the style on page 268 of the text, is also perfectly acceptable: Journal Name of account $ $ Freehold premises at cost 20 000 Freehold premises accumulated depreciation 18 000 Revaluation reserve 38 000 Revaluation of premises at new valuation Activity 5 Total of ordinary share capital and reserves: $(200 000 + 50 000 + 100 000 − 40 000) = $310 000 Net asset value of 100 ordinary shares = $310 000 × 100 = $155 200 000 Activity 6 a Michel Pillay Limited Income statement for the year ended 30 April 2016 $000 $000 Revenue 300 Opening inventories 20 Purchases 113 133 Closing inventories 31 Cost of sales 102 Gross profit 198 Overheads: Sales office salaries 57 Selling expenses 39 General office wages 32 Other general expenses 35 Cambridge International AS and A Level Accounting 98 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737
99 $000 $000 Depreciation: Warehouse machinery 8 Office machinery 10 181 Profit for the year 17 b Michel Pillay Limited Statement of changes in equity for the year ended 30 April 2016 Share capital Share premium General reserve Retained earnings Total $000 $000 $000 $000 $000 Balance at 30 April 2015 60 15 25 8 108 Profit for the year 17 17 Transfer to general reserve [1] 10 (10) Balance at 30 April 2016 60 15 35 15 125 c Michel Pillay Limited Statement of financial position at 30 April 2016 Cost Accumulated depreciation Net book value $000 $000 $000 Assets Non-current assets: Warehouse machinery 70 38 32 Office machinery 42 30 12 112 68 44 Current assets Inventories 31 Trade receivables 38 Cash and cash equivalents 28 97 Total assets 141 Equity and liabilities Capital and reserves Share capital 60 Share premium 15 General reserve 35 Retained earnings 15 [1] 125 Non-current liabilities 10% debentures 2023/2025 5 Current liabilities Trade payables 11 Total liabilities 141 [1] The transfer to general reserves is made from retained earnings. Thus no entry appears in the ‘Total’ column. [1] Notice that the total of capital and reserves ($125 000) matches the closing total on the statement of changes in equity. Answers to activities, practice exercises and exam practice questions: Chapter 19 99 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737
Activity 7 Good Ofiers Limited Re-draffed statement of financial position $000 Assets Non-current assets 1 400 Current assets 350 1 750 Equity and liabilities Capital and reserves Ordinary shares of $1[ 800 + (800 ÷ 4 × 3)] 1 400 Share premium 200 General reserves 100 Retained earnings 50 1 750 Note: The least flexible reserve is the revaluation reserve. This was $600 000 and exactly matched the increase in ordinary shares resulting from the bonus issue. Hence it was used first. Had any more reserves been required then the share premium would have been used as this is less flexible than the general reserve and retained earnings. Activity 8 a Journal Dr Cr 2016 Details $ $ July 1 Share premium 500 000 Revaluation reserve 300 000 Ordinary share capital 800 000 Issue of bonus shares at 4 for every 5 held, leaving the reserves in their most flexible form b Bonarite Limited Statement of financial position at 1 July 2016, immediately affer the issue of the bonus shares $ Net assets 2 000 Equity Share capital and reserves Ordinary shares of $1 1 800 General reserves 120 Retained earnings 80 2 000 Cambridge International AS and A Level Accounting 100 Downloaded by Nuraisyah Dahiyah Binti Hashim ([email protected]) lOMoARcPSD|20729737