Unit 3 Accounting

Practice Revision Questions

Question 1
Rachael Gillespie owns and operates ‘Gillie’s Gardens, a small business selling garden furniture and
features. The business uses the First In First Out (FIFO) assumption for assigning costs. Stock is sold
at a mark-up of 100%.
The owner has become concerned about some lines of stock that do not appear to be selling well.
Details of one of these lines of stock – the Outback Tables - were as follows:

2013
Aug 1: 12 units on hand @$400 each
Aug 9: Cash sale of 1 unit [Rec 93]
Aug 16: Used 1 unit for a store display [Memo 8]
Aug 28: Credit sale of 1 unit to M. Dodds [Inv GG7]
Aug 31: Physical stocktake determined that 10 units were on hand [Memo 9]

a. Record the transactions above into the Stock Card .

b. Convince the owner that a physical stocktake is a necessary procedure for their business.

c. Prepare the General Journal entry necessary on 31 August 2014. (A narration is not
required)

d. Identify two causes of a Stock Loss.

e. Analyse your treatment of the stock in the transaction on 16 August 2014.

f. State the effect on the Balance Sheet if the transaction on 16 August 2014 was not recorded.

Question 2
At 31 December 2014 the following journals and other information was provided:

Purchases Journal
Date Creditor Inv. Stock GST Creditors
2014 No. Control Control
Jan 1- Totals to date 84 000 8 400 92 400
Dec 31

Sales Journal
Date Debtor Inv. Cost of Sales GST Debtors
2014 Sales Control
Jan 1- Totals to date 47 500 95 000 9 500 104 500
Dec 31
.

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 Cash Payments Journal
Date Details Chq. Bank Disc. Creditors Stock Wages Sundries GST
2014 No. Rev. Control Control
Jan 1- Totals to date 310 010 3 400 90 400 25 000 45 000 144 100 8 910
Dec 31
Sundries include: Customs Duty $10 000
Bank Loan $20 000
Advertising Material $12 000
Other expenses $42 100
Drawings $60 000

Cash Receipts Journal

Date Details Rec. Bank Disc. Debtors Cost of Sales Sundries GST
2014 No. Exp. Control Sales
Jan 1-Dec Totals to 320 150 2 100 88 450 79 000 158 000 60 000 15 800
31 date
Sundries include: Capital $20 000
Bank Loan $40 000

Additional information:
Depreciation – Vehicle $1 200
Depreciation – Shop Equipment $5 500
Accrued Wages $1 900
Unused Advertising $4 000
Stock Gain $700
Donations of Stock $900
Drawings of Stock $1 200
Bad Debts $700

a. Prepare the General Journal entry required to close the Expense accounts.
(Note: A narration is not required)

b. Explain why it is necessary to close the Revenue and Expense Ledger accounts at the end of
each reporting period.

c. Prepare a fully classified Income Statement for the year ending 31 December 2014.

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Question 3
The following Debtors Schedule was prepared at 31 December 2014:
$
Jensen Motels 4,500
S. Collins 2,800
Western Motels 15,900
Debtors Control balance 22,200

In the 2 months ending 28 February 2014 the following information was available:
 Credit sales - $24,000 plus $2,400 GST
 Receipts from Debtors $27,000
 Discount Expense $2,100
 Bad Debt written off $1,000

On 28 February 2014 the following document was issued to a Debtor:

Gillie’s Gardens
2 Dyer Drive
Heyfield

Statement of Account
Debtor: Jensen Motels
14 Richards Street, Carrum Vale

Acc. No. D07 Date: 28-Feb-14

DateDetails Debit Credit Balance
Jan-01Balance 4 500
Jan-06Payment - Chq 102 4 450 50
Discount 50 0
Feb-10 Sale - Inv. EE98
* 8 Compost Bins @$1,000 8 000 8 000
* 5 Garden Swings @$500 2 500 10 500
* 5 Garden Chairs @$700 3 500 14 000
* GST 10% 1 400 15 400
Feb-18 Payment - Chq 167 6 000 9 400
Closing balance $9 400

a. Complete the following ledger accounts using the information above:

 Debtors Control
 Debtor – Jensen Motels
(You are required to balance the accounts

b. Explain the purpose of a Debtors Schedule.

c. Identify the Qualitative Characteristic best served by the use of a Debtors Control Account in
the reports of a business.

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 Question 4
During March, the business made the following entry in the Cash Payments Journal:

Cash Payments Journal (extract)

Date Chq Disc. Creditors Stock
2014 Particulars No. Bank Rev Control Control Wages Sundries GST

Mar 13 Shoen Ltd 34 10 800 200 11 000

a. The owner discovered later that this entry was incorrectly recorded. Cheque 34 was sent to
Harley Cycles for Stock purchased for cash (Cost $10,000 plus $1,000 GST).
Prepare the General Journal entry necessary to correct this error. A Narration is not
required.

b. In the recording process, why is the General Journal considered appropriate for recording
correcting entries? Justify the role of the General Journal.

c. State the effect and the amount of the effect of not recording this correction.

Question 5
Fiona Roberts has been working for a small business for a number of years and is about to start her
own business, ‘Budget Sports’, selling a range of sporting equipment and clothing.
The business will use the accrual method of recognising transactions and records stock through a
perpetual recording system. Control accounts are maintained for Debtors, Creditors and Stock.

On 2 January 2014 Fiona opened a business bank account in the name of ‘Budget Sports’ and
deposited $45,000 cash [Rec. 1]. At this time she also transferred ownership of her personal Vehicle
purchased in 2009 for $47,000 which now has a current agreed value of $32,000, to the business.
Fiona borrowed $18,000 to purchase the Vehicle and currently owes $12,000 to ZNA Finance which
the business will take over, paying $500 per month. Fiona will also transfer ownership of her
computer, printer, desk and filing cabinet to the business. These items will be classified as Office
Equipment and have been valued at $7,000.

Fiona has agreed to purchase the stock of an existing business which has an agreed value of $42 000
plus $4,200 GST as of 29 January 2014. The stock was paid for on 1 February 2014 – Cheque No. 001.

On 31 January 2014 the business arranged to utilise a $10,000 overdraft with the bank. The business
commenced trading on 1 February 2014.

a. Prepare the journal entries necessary to record the information above (Narrations are not
required).

b. Prepare a classified Balance Sheet as at 1 February 2014.

c. Explain, with reference to a Qualitative Characteristic, your valuation of the Vehicle at 1

February 2014.

d. Explain, with reference to a Qualitative Characteristic, why it is necessary to classify the

Balance Sheet in part b. above.

e. Explain what is meant by a double-entry recording system.

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 f. State what is meant by Owner’s Equity

Question 6
At 30 June 2014 the following journals were provided by ‘Ali’s Art Supplies’ for the quarter:

Cash Receipts Journal

Date Details Rec. Bank Disc. Debtors Cost of Sales Sundries GST
2014 No. Exp. Control Sales
Apr 1 – Totals to 350 12 600 62 200 124 600 80 000 12 460
Jun 30 date
Sundries comprise: Capital $30,000
Loan – EziFinance $50,000

Cash Payments Journal

Date Details Chq. Bank Disc. Creditors Stock Wages Sundries GST
2014 No. Rev. Control Control
Apr 1 – Totals to date 207 850 16 840 40 000 46 900 97 900 8 050
Jun 30
Sundries comprise: Advertising Material $12,000
Shop Fittings $6,000
Loan Repayments $2,000
Loan Interest $1,400
Other Cash Expenses $12,000
Insurance $10,500
Drawings $54,000

a. Calculate the missing amounts from the journals above.

b. Using the information contained in the journals, prepare an extract of a classified Cash Flow
Statement for the quarter ended 30 June 2014 to show Net Cash from Operations.

c. Show how the Bank ledger account would appear after all journals had been posted. [Note:
Cash at Start was $3,650 Dr]. You are required to balance the account.

d. Explain what is meant by the term ‘Investing Activities’ and identify one possible inflow from
Investing Activities.

e. Explain why the total of the Sundries column in the Cash payments Journal is not posted to
one ledger account.

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Question 7
At 6 months ended 31 December 2014 the following Trial Balance was prepared:
Creative Cakes
Trial Balance at 31 December 2014
Account Debit Credit
Accumulated Depreciation –Shop Fittings 10,000
Accumulated Depreciation – Vehicle 12,600
Bank 6,900
Buying Expenses 12,400
Capital – P. Collins 144,520
Cost of Sales 194,000
Creditors Control 37,400
Debtors Control 45,620
Delivery Expenses 8,000
Discount Expense 2,000
Discount Revenue 2,100
Drawings 82,800
GST Clearing 8,500
Loan 72,000
Office Expenses 12,500
Prepaid Rent Expense 36,000
Sales 388,000
Shop Fittings 57,000
Stock Control 49,900
Stock of Advertising Material 4,000
Vehicle 63,000
Vehicle Expenses 18,000
Wages 83,000

675,120 675,120

The accountant has provided the following additional information:

 Depreciation to be charged at the rate of 10% per annum on cost [Memo 13]
The business did not purchase or dispose of any Non-current Assets during the year.
 The balance of Prepaid Rent at 1 July 2014 was $6,000. The business moved to a new shop
on 1 August 2014 and paid $30,000 for 6 month’s rent in advance on that date [Memo 14].
 The Stock of Advertising Material relates to a quantity of pamphlets produced for
distribution to houses in the local area. Only a quarter of the pamphlets were delivered by
31 December 2014 [Memo 15]
 Wages owing at 31 December 2014 were $1,450 [Memo 16]

Prepare the journal entries necessary to record Memos 13 – 16 in the General Journal as at 31
December 2014. Note: Narrations are not required.