Tutorial Questions 19 – 23

19. The following information relates to Astley for the year to 30 November 2017:

Item Cash paid As at 1 As at 30

during the December November
year to 30 2015 2016
November Accruals/ Accruals/
2016 Prepayme Prepayme
nts nts

£ £ £ £ £
Electricity 26400 5200 – 8300 –
Gas 40100 – – – 4900
Insurance 25000 – 12000 – 14000
Rates 16000 – 4000 6000 –
Telephone 3000 1500 – – 200
Wages 66800 1800 – – –

Required:

a. Calculate the charge to the statement of profit or loss for the year to 30 November
2016 for each of the above items.
b. Demonstrate what amounts for accruals and prepayments would be shown in
the statement of financial position as at 30 November 2016.

Answer :

Astley
Statement of profit or loss for the year to 30 November 2017
£ £
Sales 0
Capital 0
Tax payables 0
Less: Cost of goods sold:
Purchases 0
Less: Closing inventory 0 0
Gross profit 0
Less: Expenses:
Electricity 26400
Gas 40100
Insurance 25000
Rates 16000
Telephone 3000
Wages 66800 177300
Net profit -177300

Astley
Statement of financial position at 30 November 2017
£ £ £
Non-current assets
Delivery van 0
Less: Depreciation (0) 0

Current assets
Electricity 26400
Gas 40100
Insurance 25000
Rates 16000
Telephone 3000
Wages 66800
177300

Less: Current liabilities

Payables 0
 Accrual 0 0 177300
177300
Financed by:
Capital
At 1 December 2017 0
Net profit for the year 0
0

20. Duxbury started in business on 1 January 2017. The following is his trial balance as at 31
December 2017:
Dr Cr
£ £
Capital 40.000
Cash 300
Delivery van, at cost 20 000
Drawings 10 600
Office expenses 12 100
Purchases 65 000
Sales 95 000
Trade payables 5 000
Trade receivables 32 000
140 000 140 000

Additional information:
a. Inventory at 31 December 2017 was valued at £10 000.
b. At 31 December 2017 an amount of £400 was outstanding for telephone expenses
and the business rates had been prepaid by £500.
c. The delivery van is to be depreciated at a rate of 20 per cent per annum on cost.
d. Duxbury decides to set aside a allowance for doubtful debts equal to 5 per
cent of trade receivables as at the end of the year.
 Required:
Prepare Duxbury’s statement of profit or loss and statement of retained earnings
for
the year to 31 December 2017 and a statement of financial position as at that date.
Answer :
Duxbury
Statement of profit or loss for the year to 31 Desember 2017
£ £
Sales 95000
Capital 40000
Tax payables 5000
Less: Cost of goods sold:
Purchases 65000
Less: Closing inventory 10000 55000
Gross profit 85000
Less: Expenses:
Depreciation: delivery van (20% * £20000) 4000
Office expenses 12100
Business rates 500
Telephone 400
Drawings 10 600
Tax receivables 32 000 59600
25400
Doubtful debts (5% x 59600) 2980
Net profit 22420
Duxbury
Statement of financial position at 31 Desember 2017
£ £ £
Non-current assets
Delivery van 20000
Less: Depreciation (4000) 16000
 Current assets
Drawings 10600
Receivables 32000
Prepayments 2980
Cash 300
45880

Less: Current liabilities

Payables 5000
Accrual 400 5400 40480
56480
Financed by:
Capital
At 1 November 2017 40000
Net profit for the year 22420
62420

21. Beech is a retailer. Most of his sales are made on credit terms. The following information
relates to the first four years that he has been in business:
2014 2015 2016 2017
Trade receivables at 31 January £60000 £55000 £65000 £70000
The trade is one that experiences a high level of bad debts. Accordingly, Beech decides to
set aside an allowance for doubtful debts equivalent to 10 per cent of trade receivables as
at the end of the year.

Required:
a. Show how the allowance for doubtful debts would be disclosed in the respective
statement of financial positions as at 31 January 2014, 2015, 2016 and 2017.
b. Calculate the increase/decrease in allowance for doubtful debts transferred to
the respective statement of profit or loss for each of the four years.
Answer :
 2014 2015 2016 2017

Trade receivables £6000 £5500 £6500 £7000

At 31 January Decrease Increase Increase

22. The following is Ash’s trial balance as at 31 March 2017:

Dr Cr
£ £
Cash at bank 4 000
Capital 20 500
Depreciation (at 1 April 2016): furniture 3 600
Drawings 10 000
Electricity 2 000
Furniture, at cost 9 000
Insurance 1 500
Miscellaneous expenses 65 800
Allowance for doubtful debts (at 1 April 2016) 1 200
Purchases 80 000
Sales 150 000
Inventory (at 1 April 2016) 10 000
Trade payables 20 000
Trade receivables 21 000
199 300 199 300

Additional information:
a. Inventory at 31 March 2017: £15 000.
b. At 31 March 2017 there was a specific bad debt of £6000. This was to be
written off.
c. Furniture is to be depreciated at a rate of 10 per cent per annum on cost.
d. At 31 March 2017 Ash owes the electricity board £600, and £100 had been
paid in advance for insurance.
e. The allowance for doubtful debts is to be set at 10 per cent of trade receivables as at
the end of the year.
Required:
Prepare Ash’s statement of profit or loss and statement of retained earnings for the
year to 31 March 2017 and a statement of financial position as at that date.

Answer :
Ash
Statement of profit or loss for the year to 31 March 2017
£ £
Sales 150 000
Less: Cost of goods sold:
Purchases 80 000
Less: Closing inventory 15000 65000
Gross profit 85000
Less: Expenses:
Depreciation: furniture (10% * £3600) 360
Drawings 10 000
Electricity (2000 + 600) 2 600
Insurance (1500 – 100) 1 400
Tax receivables 21 000 35 360
Net profit 49 640

Ash
Statement of financial position at 31 March 2017
£ £ £
Non-current assets
Furniture 3 600
Less: Depreciation (360) 3240
Current assets
 Drawings 10 000
Furniture, at cost 9 000
Miscellaneous expenses 65 800
Inventory (at 1 April 2016) 10 000

94 800

Less: Current liabilities

Payables 20000
Accrual 100 20100 74700
77940
Financed by:
Capital
At 1 April 2017 20500
Net profit for the year 49640
70140

23. Lime’s business has had liquidity problems for some months. The following trial balance
was extracted from his books of account as at 30 September 2016:
Dr Cr
£ £
Cash at bank 15 200
Capital 19 300
Cash from sale of office equipment 500
Depreciation (at 1 October 2015): office equipment 22 000
Drawings 16 000
Insurance 1 800
Loan (long-term from Cedar) 50 000
Loan interest 7 500
Miscellaneous expenses 57 700
Office equipment, at cost 44 000
Allowance for doubtful debts (at 1 October 2015) 2 000
Purchases 320 000
Rates 10 000
Sales 372 000
Inventory (at 1 October 2015) 36 000
Trade payables 105 000
Trade receivables 93 000
586 000 586 000

Additional information:
a. Inventory at 30 September 2016: £68 000.
b. At 30 September 2016, accrual for rates of £2000 and insurance prepaid of
£200.
c. Depreciation on office equipment is charged at a rate of 25 per cent on cost.
During the year, office equipment costing £4000 had been sold for £500.
Accumulated depreciation on this equipment amounted to £3000. Lime’s
depreciation policy is to charge a full year’s depreciation in the year of acquisition
and none in the year of disposal.
d. Specific bad debts of £13 000 are to be written off.
e. The allowance for doubtful debts is to be made equal to 10 per cent of outstanding
trade receivables as at 30 September 2016.
Required:
Prepare Lime’s statement of profit or loss and statement of retained earnings for
the year to 30 September 2016 and a statement of financial position as at that date.
Answer :
Lime’s
Statement of profit or loss for the year to 30 September 2016
£ £
Sales 372 000
Less: Cost of goods sold:
Purchases 320 000
Less: Closing inventory 68000 252000
Gross profit 120000
Less: Expenses:
Depreciation: inventory (25% * £22000) 55000
Drawings 10 000
Electricity (2000 + 600) 2 600
Insurance (1500 – 100) 1 400
Tax receivables 21 000 35 360
Net profit 49 640

Lime
Statement of financial position at 30 September 2016
£ £ £
Non-current assets
Furniture 3 600
Less: Depreciation (360) 3240
Current assets
Drawings 10 000
Furniture, at cost 9 000
Miscellaneous expenses 65 800
Inventory (at 1 April 2016) 10 000

94 800

Less: Current liabilities

Payables 20000
Accrual 100 20100 74700
77940
Financed by:
Capital
At 1 October 2016 20500
Net profit for the year 49640
70140
What do you learn from the session 4 (today). Summarize using your OWN word.
This session (Session 4) we learnt about Sole Trader.
1.1. Sole Trader
 Sole come from word “Seul”, it means one
 Trader come from word “Trade”, which means sales
1.2. Kind of Business
 Trading / Merchandise = Reseller
 Service
 Manufacturing = Change raw materials into goods.
1.3. Financial Statements
 Legal / official documents reporting financial status / conditions
 Final result of company business transaction
 The period is 1 year
1.4. Kind of Financial Statements
 Income statements
 Financial positions
 Change in cash flow
 Change in shareholder’s equity
 Change in company’s note
1.5. Kind of Statement
 Statement of profit / loss (SPL)
 Statement of R/E (SRE)
 Statement of financial decision (SFD)

2. Do the exercises on the book: a) ALL activities and b)ALL the exercises at the end of the
chapter (Chapter 3)
2.1. Activity 4.1
 (a) accounting profit = cash received less cash paid True/false
(b) capital expenditure is normally the difference between cash received
and cash paid. True/false
(c) capital expenditure only provides a short-term benefit. True/false

2.2. Activity 4.2

In what order should the following balances be shown in a statement of financial

position?
(a) furniture and fittings; land; plant and machinery; property;
(b) cash; insurance paid in advance; other receivables; trade receivables; inventory
(c) bank overdraft; electricity owing; other payables; trade payables.

Answer

(a) Land; property; plant and machinery; furniture and fittings.

(b) Inventory; trade receivables; other receivables; insurance paid in advance;
cash.
(c) Bank overdraft; trade payables; other payables; electricity owing

2.3. Activity 4.3

Assume that company a has a sales revenue of £10000 for the year. The opening
inventory
had a value of £2000 and during the year the company made purchases of £6000.
What would be the gross profit if the closing inventory was valued as follows?:
(a) £1500

£ £
Sales 10000
Less : Cost of goods
sold
Opening 2000
inventory
Purchases 6000
8000
Less : Closing (1500) (1500)
 Inventory
GROSS PROFIT 8500

(b) £2000

£ £
Sales 10000
Less : Cost of goods
sold
Opening 2000
inventory
Purchases 6000
8000
Less : Closing (2000) (2000)
Inventory
GROSS PROFIT 8000

(c) £2500

£ £
Sales 10000
Less : Cost of goods
sold
Opening 2000
inventory
Purchases 6000
8000
Less : Closing (2500) (2500)
Inventory
GROSS PROFIT 7500

2.4. Activity 4.4

The cost of a company’s plant was £50,000. It was estimated that the plant would
have a life of 20 years and that it could then be sold for £5000. Using the straight-line
method of depreciation, how much depreciation would you charge to the statement of
profit or loss in Year 1?
 Depreciable cost = Cost – Residual Value
= £50,000 - £5000
= £45000
Depreciation = Depreciable cost / Useful life

= £45000 / 20

= £2250
Rate = 100% / Useful life
= 100% / 20
= 5%
Annual Depreciation = Depreciable cost × Rate
= £45000 × 5%
= £2250
2.5. Activity 4.5
What depreciation policy would you recommend? (a) straight-line for all assets; (b)
reducing balance for all assets; (c) reducing balance for certain types of non-current
assets and straight-line for all other assets; (d) other methods (state what).Answer: In
my opinion, I want to recommend the straight-line for all assets. Because this method
charges an equal amount of depreciation to each accounting period that benefits from
the purchases of a non-current assets.
2.6. Activity 4.6
You owed £500 to the telephone company at 31 December 2016. During the year to
31 December 2017 you paid the company £4000. At 31 December 2017, you owed
the company £1000. What amount for telephone charges would you charge to the
statement of profit or loss for the year to 31 December 2017?
The formula:
(amounts paid during the year + closing accruals) - opening accruals
= (£4000 + £1000) - £500
= £4500
2.7. Activity 4.7
 Jill had paid £3000 in advance for insurance at 31 December 2016. During the
year to 31 December 2017 she paid the insurance company £10,000. At 31
December 2017 she estimated that she had paid £2000 for insurance cover that
related to the following year. What amount for insurance charges should Jill
charge to her statement of profit or loss for the year to 31 December 2017?
The formula:
= (amount paid during the year + opening prepayments) - closing
prepayments
= (£10,000 + £3000) - £2000
= £11000
2.8. Activity 4.8
Gibson’s trade receivables at 31 December 2016 amount to £75,000. One of the
trade receivables has owed Gibson £5000 since 2014. Gibson thinks that the
receivable now lives abroad in exile. Should Gibson write off the £5000 as a bad
debt to the statement of profit or loss for the year to 31 December 2016? If so,
which account should be debited and which account should be credited? And
what amount for trade receivables should be shown in Gibson’s statement of
financial position at 31 December 2016?
Answer:
Probably yes. Debit the bad debt write-off (which reduced the profit in the state
meant of profit or loss) and credit Gibson’s account (which reduced the trade
receivables balance shown in the year-end statement of financial position):
£70000 (£75000 - 5000).

2.9. Activity 4.9

Watson keeps an allowance for doubtful debts account. it is maintained at a level
of 3 percent of his total outstanding trade receivables as at the end of the year.
The balance on the allowance account at 1 January 2017 was £9000. His trade
receivables at 31 December 2017 amounted to £250,000. What balance on his
allowance for doubtful debts does he need to carry forward as at
 31 December 2017? What amount does he need to write off to the statement of
profit or loss for that year? And will it increase or decrease his profit?
Answer
£1500 [£9000 - (250000 × 3%)]. It will increase his profit by £1500
2.10. Activity 4.10
List as many examples as you can of (a) cash transactions that are not normally
included in a statement of profit or loss and (b) non-cash items that are usually
included in such financial statements.
Answer

(a) Issue of share capital, receipt of cash from loans and other borrowing, capital
expenditure (when buying assets).
In one sentence describe what is meant by each of the following terms:
a) An account is possessions or resources owned and controlled by an entity
b) A ledger is the principal book or computer file for recording and totaling
economic transactions measured in terms of a monetary unit of account by
account type.
c) Debit means an accounting entry that results in either an increase in assets or
a decrease in liabilities on a company's balance sheet
d) Credit means an accounting entry that either decreases assets or increases
liabilities and equity on a company's balance sheet