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Unit 1: May 2009, Question#2

1/31/2018

13 Comments

 
​Note 1:
Issue of ordinary shares – 30,000 shares x $5.00 = $150,000
Double entry: Debit          Bank Account    $150,000
                          Credit        Ordinary shares Account    $150,000
​
Note 2:
​Loan interest – 16% x $100,000 = $16,000
Double entry: Debit        Loan Interest expense Account   $16,000
                          Credit      Bank Account    $16,000

Preference dividends – 10% x $80,000 = $8,000.
​Double entry: Debit        Bank Account    $8,000
                          Credit      Dividends paid Account $8,000

Ordinary dividends – 40¢ x{ [$200,000/$5] + 30,000 shares}  = 40¢ x 70,000 shares = $28,000
Double entry: Debit        Dividends paid  $28,000
                          Credit      Bank Account    $28,000
​
Note 3:
  • Depreciation on Buildings - $160,000/50yrs = $3,200 per year. This is the depreciation charge for the Statement of Comprehensive Income.
  • Accumulated depreciation charged on Buildings as at 31st December, 2008 - [$16,000 + $3,200] = $19,200. This is the accumulated depreciation figure for the Statement of Financial Position.
  • Depreciation on Motor Vehicles -  20% x $80,000 = $16,000 per year. This is the depreciation charge for the Statement of Comprehensive Income
  • Accumulated depreciation charged on Motor Vehicles as at 31st December, 2008  - [$8,000 + $16,000] = $24,000. This is the accumulated depreciation figure for the Statement of Financial Position.
  • Depreciation on Fixtures and Fittings - 25% x [$180,000 - $86,000] = $23,500 per year. This is the depreciation charge for the Statement of Comprehensive Income.
  • Accumulated depreciation charged on Fixtures and Fittings as at 31st December, 2008  - [$86,000 + $23,500] = $109,500. This is the accumulated depreciation figure for the Statement of Financial Position.
​​
Note 4:
Adjustment on operating expenses for accrued operating expenses= $360,000 + $10,000 = $370,000. The $370,000 is for the Statement of Comprehensive Income and the $10,000 will fall under the Current Liabilities section of the Statement of Financial Position.

Note 5:
​​Corporation Tax expense = 30% x $74,300** = $22,290.
** See calculation of profit before tax (PBT) in the Income Statement.
Note 6:
​The bank loan will fall under the Non Current Liabilities section of the Statement of Financial Position.
Lastly, before the Statement of Comprehensive Income and the Statement of Financial Position can be prepared the Bank account's balance needs to be adjusted for the transactions recorded in Note 1 and Note 2, since both notes clearly state that these transactions were not reflected in the trial balance presented.
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Now that all of the additional information has been accounted for the Statement of Comprehensive Income can be prepared.
 
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Now that the Statement of Comprehensive Income has been completed the Statement of
Financial Position can be prepared.

 
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I hope that you found this proposed solution helpful! If you did please share it! Also, feel free to ask any questions or to comment below. Best of luck!
13 Comments
Kathrina link
1/16/2019 03:29:12 pm

how did you get 370,000 as operating expenses in the statement of comprehensive income?

Reply
Accounting Lyceum link
1/18/2019 07:45:59 pm

Hi Kathrina!

There was an accrual of $10,000 for operating expenses, see note 4 of the past paper question and then refer to note 4 of the workings in the blog okay.
I hope this helps, if not feel free to let me know!

Reply
Alisha
2/17/2019 06:34:12 pm

Very Useful !!!!! ♡

Reply
Sarah
2/25/2019 07:23:17 pm

Why was bank overdraft omitted and where did the figure for bank come from

Reply
Accounting Lyceum
4/6/2019 07:29:09 am

Hi Sarah,

The bank overdraft figure was not omitted. Look at the adjustment to the bank balance workings above and you will see that we started off with the bank overdraft of $14,000. After adjusting for all the additional information given in the question the adjusted bank balance ends up being a debit balance of $84,000. This figure is subsequently included in the classified Balance Sheet.

Reply
Aliyah Davy
3/3/2019 12:00:02 pm

why is bank overdraft not listed in the current liabilities section?
and why is corporation tax placed in current liabilities? pleas explained based on the question

Reply
Accounting Lyceum
4/6/2019 07:35:11 am

Hi Aliyah,

Look at the adjustment to the bank balance workings above and you will see that while we started off with the bank overdraft of $14,000 after adjustments the bank balance ends up being a debit balance of $84,000. This figure is subsequently included in the classified Balance Sheet.

The corporation tax was only calculated at the end of the period and the question did not state that it was paid. It follows then that the amount calculated is owed to the tax authority and will be paid within the next 12 months. Therefore it is a current liability. This is the standard treatment for tax calculated at the end of the period, okay.

I hope this clears things up!

Reply
Evelyn
4/27/2019 06:57:24 pm

Hi, thank you so much for this but I'm a bit confused about a few things:

(1) For salaries under expenses, you have in brackets (96,000 + 34,000) but the total you have is 96,000, shouldn't it be 130,000?

(2) Why didn't you subtract bad debts written off from accounts receivable in the balance sheet?

(3) In the past paper under the note explaining the issue of ordinary shares, they stated it was a cash transaction, but you used it as affecting bank.

Thank you in advance!

Reply
Accounting Lyceum
5/2/2019 09:08:30 pm

Hi Evelyn!

1. Sorry for the confusion! The brackets were preliminary notes and should have been deleted. (This will be remedied soon).
The note attached to the figure for salaries of $96,000 reads "salary expense" not "salaries paid". This indicates that the $34,000 is already included in this figure, therefore there is no need to adjust for the accrual, okay.

2. In order for a bad debt to be "written off" the following entry must be made:

Dr: Bad debt expenses a/c
Cr: Customer's ledger
With the value of the debt being written off

As a result there is not need to adjust the accounts receivables' balance for a bad debt that has already been written off, unless information in the question indicates that you need to. I think perhaps you are mixing up the treatment of "bad debts written off" with "provision for doubtful debts", as "provisions for doubtful debts" is deducted from the accounts receivable balance to arrive at net debtors in the Balance Sheet.

3. The term "cash transaction" does not literally mean that payments were made in cash. It simply means that the transaction was not a credit one and that payment was received instantly. Since no cash balance was given and this payment was made very early in the year, I opted to include it in the adjustment of the bank balance as it unrealistic to expect that a business will hold $150,000 in cash for the entire year and not deposit it.

Please note that if you opted to enter it as a cash payment the balance sheet will still balance, so its really for you to decide. I practice accounting so my suggested solutions are influenced by my real life experiences. Feel free to treat it as a cash payment as that would be acceptable, okay.

Hope this helps and best of luck in your upcoming exams!

Reply
Evelyn
5/3/2019 03:16:42 am

Thank you so much for all of your help, I really appreciate it! ❤️

Krystal
5/5/2019 11:11:46 am

You are most welcome Evelyn!

Reply
kimberley
5/23/2019 09:01:05 pm

where did you get $74 300 as a figure to calculate the corporation tax

Reply
Krystal
11/28/2019 05:37:13 pm

Hi Kimberley!

Sorry for such a late response! The $74,300 was calculated via the Statement of Comprehensive Income.

Hope this clears it up!

Best of luck!

Krystal.

Reply

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    The author holds a Bsc (Hons) Degree in Applied Accounting from Oxford Brookes University, England and enjoys a successful career as an Accounting Supervisor and a private tutor.

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