Chapter 1

Introduction to Accounting

Interactive question 1: Accounting information [Difficulty level: Intermediate]

It is easy to see how 'internal' people get hold of accounting information. A manager, for
example, can just go along to the accounts department and ask the staff there to prepare
whatever accounting statements she needs. But external users of accounts cannot do this.
How, in practice, can a business contact or a financial analyst access accounting
information about a company?

Interactive question 2: Value of reputation [Difficulty level: Intermediate]

An accountancy training firm has an excellent reputation amongst students and

employers. How would you value this?

Interactive question 3: Capital or revenue? [Difficulty level: Intermediate]

State whether each of the following items should be classified as 'capital' or 'revenue'
expenditure or income.

(a) The purchase of a property (e.g. an office building)

(b) Property depreciation

(c) Solicitors' fees in connection with the purchase of property

(d) The costs of adding extra memory to a computer

(e) Computer repairs and maintenance costs

(f) Profit on the sale of an office building

(g) Revenue from sales by credit card

(h) The cost of new machinery

(i) Customs duty charged on machinery when imported into the country

(j) The 'carriage' costs of transporting the new machinery from the supplier's
factory to the premises of the business purchasing it

(k) The cost of installing the new machinery in the premises of the business

(l) The wages of the machine operators

 Chapter 2
The Accounting Equation

Interactive question 1: Capital [Difficulty level: Easy]

Fill in the missing words.

Capital = ........................................ less ........................................

Interactive question 2: The accounting equation [Difficulty level: Intermediate]

How would each of these transactions affect the accounting equation in terms of increase
or decrease in asset, capital or liability?

(a) Purchasing CU800 worth of goods on credit

(b) Paying the telephone bill CU25
(c) Selling CU450 worth of goods for CU650
(d) Paying CU800 to a supplier

Interactive question 3: Residual value [Difficulty level: Exam standard]

Suppose a business buys a car for CU 10,000. It expects to keep the car for three years
and then to sell it for CU3,400. How much depreciation should be accounted for in each
year of the car's useful life?

Interactive question 4: Asset classification [Difficulty level: Intermediate]

Identify which of the following assets falls into the non-current category and which
should be treated as current. Could any be treated as either?

Asset Business Current or non-current

Van Delivery firm

Machine Manufacturing company

Car Car trader

Investment Any
Interactive question 5: Preparing a balance sheet 1
[Difficulty level: Intermediate]

You are given the following information about Liza Doolittle at the end of her first full
month of trading, 31 July 20X6:
CU
Capital at 1 July 20X6 2,500
Additional capital introduced 250
Profit for the month 3,620
Stall at cost 1,800
Van at cost 700
Drawings in month 960
Loan 50
Inventories 1,250
Cash in hand 20
Trade payables 675
Cash at bank 1,475
Trade receivables 890

Requirement

Prepare a balance sheet for Liza Doolittle as at 31 July 20X6.

Interactive question 6: Preparing a balance sheet 2

[Difficulty level: Intermediate]

Prepare a balance sheet as at 31 August 20X5 for Jock Heiss, using the information from
the Worked example below.

On 1 June 20X5, Jock Heiss commenced trading as an ice cream salesman, using a van.

(a) He borrowed CU2,000 from his bank, and the interest cost of the loan was
CU25 per month.

(b) He rented the van for CU 1,000 for three months. Running expenses for
the van averaged CU300 per month.

(c) He hired an assistant for CU 100 per month.

(d) His main business was to sell ice cream to customers in the street, but he
also did special catering for business customers, supplying ice creams for
office parties. Sales to these customers were usually on credit.
(e) For the three months to 31 August 20X5, his total sales were as follows.

(i) Cash sales CU8,900

(ii) Credit sales CU 1,100

(f) He purchased his ice cream from a local manufacturer, Floors Co. The
purchase cost in the three months to 31 August 20X5 was CU6,200, and at
31 August he had sold every item. He still owed CU700 to Floors Co for
unpaid purchases on credit.

(g) One of his credit sale customers has gone bankrupt (insolvent), owing Jock
CU250. Jock has decided to write off the debt in full, with no prospect of
getting any of the money owed.

(h) He used his own home for his office work. Telephone and postage
expenses for the three months to 31 August were CU 150, which he paid
in cash.

(i) During the period he paid himself CU300 per month.

An income statement can be presented in various formats, but here we will

use a vertical format similar to the one used in BAS 1.
(It is not exactly the same.)

JOCK HEISS
INCOME STATEMENT
FOR THE THREE MONTHS ENDED 31 AUGUST 20X5
CU CU
Revenue (8,900 + 1,100) 10,000
Less cost of sales (6,200)
Gross profit 3,800

Expenses
Wages (3  100) 300
Van rental 1,000
Van expenses (3 300) 900
Irrecoverable debt written off 250
Telephone and postage 150
Interest charges (3 25) 75
(2,675)
Net profit 1,125
 Chapter 3
Recording Financial
Transactions

Interactive question 1: Credit note [Difficulty level: Easy]

Fill in the blanks.

'China Supplies sends out a ........................................ to a credit customer in order to correct an

error where a customer has been overcharged on a ......................................... '

Interactive question 2: Books of original entry [Difficulty level: Intermediate]

State which books of original entry the following transactions would be entered into.

(a) Your business pays A Brown (a supplier) a cheque for CU450.00.

(b) You send D Smith (a customer) an invoice for CU650.
(c) Your accounts manager asks you for CU 12 to buy envelopes.
(d) You receive an invoice from A Brown for CU300.
(e) You pay D Smith CU500 by online transfer.
(f) F Jones (a customer) returns goods valued CU250.
(g) You return goods to J Green valued CU504.
(h) F Jones pays you a cheque for CU500.

Interactive question 3: Payroll [Difficulty level: Exam standard]

Fantab Ltd has 10 employees who had gross pay of CU140,000 per annum between them in
20X4. In that year, Fantab Ltd made net pay payments to employees of CU129,200, and paid
CU20,900 to the pension trustees. Its total payroll cost was CU170,400. How much did Fantab
Ltd pay to Govt. Treasury in respect of Withholding Tax?
 Chapter 4
Ledger Accounting and
Double Entry

Interactive question 1: Debits and credits [Difficulty level: Intermediate]

Complete the following table relating to the transactions of a bookshop. (The first two
are done for you.)

(a) Purchase of books on credit

 Payables increase CREDIT payables

(increase in liability)

 Purchases increase DEBIT purchases

(increase in expense)

(b) Purchase of cash register by cheque

 Own a cash register DEBIT non-current asset

(increase in asset)

 Cash at bank decreases CREDIT cash at bank

(decrease in asset)

(c) Payment received from a credit customer

 Receivables decrease

 Cash at bank increases

(d) Sell books for cash

 Income increases

 Cash at bank increases

Interactive question 2: Debits and credits [Difficulty level: Intermediate]

Identify the debit and credit entries in the following transactions (ignore VAT).

(a) Bought a machine on credit from A, cost CU8,000.

(b) Bought goods on credit from B, cost CU500.
(c) Sold goods on credit to C, value CU 1,200.
(d) Paid D (a credit supplier) CU300.
(e) Collected CU 180 from E, a credit customer.
(f) Paid net pay CU4,000.
(g) Received rent bill of CU700 from landlord G.
(h) Paid rent of CU700 to landlord G.
(i) Paid insurance premium CU90.

Interactive question 3: Ledger entries [Difficulty level: Intermediate]

Ron Knuckle set up a business selling fitness equipment. He put CU7,000 of his own
money into a business bank account (transaction A) and in his first period of trading, the
following transactions occurred.

CU
Transaction
B Paid rent of shop for the period 3,500
C Purchased equipment (inventories) on credit 5,000
D Loan from bank 1,000
E Purchase of shop fittings (for cash) 2,000
F Sales of equipment: cash 10,000
G Sales of equipment: on credit 2,500
H Payments for trade payables (discount received CU50) 4,950
I Receipt from trade receivables (discount allowed CU20) 2,480
J Interest on loan (paid) 100
K Other expenses (all paid in cash) 1,900
L Drawings 1,500

Ignore VAT.
Complete the ledger accounts for Ron Knuckle by opening up the following accounts
and completing them:

 Cash at bank
 Capital
 Loan
 Purchases
 Trade payables
 Rent
 Shop fittings
 Sales
 Trade receivables
 Discount received
 Discount allowed
 Loan interest
 Other expenses
 Drawings

Interactive question 4: Petty cash [Difficulty level: Exam standard]

Summit Glazing operates an imprest petty cash system. The imprest amount is CU
150.00. At the end of the period the totals of the four analysis columns in the petty cash
book were as follows.
CU
Column 1 23.12
Column 2 6.74
Column 3 12.90
Column 4 28.50

How much cash is required to restore the imprest amount?

Interactive question 5: Discounts 1 [Difficulty level: Easy]

Soft Supplies Co recently purchased from Hard Imports Co 10 printers originally priced
at CU200 each. A 10% trade discount was negotiated together with a 5% cash discount if
payment was made within 14 days. Calculate the following.

(a) The total of the trade discount

(b) The total of the cash discount

Interactive question 6: Discounts II [Difficulty level: Intermediate]

You are required to prepare the income statement of Seesaw Timber Merchants for the
year ended 31 March 20X6, given the following information.

CU
Purchases at gross cost 120,000
Trade discounts received 4,000
Cash discounts received 1,500
Cash sales 34,000
Credit sales at invoice price 150,000
Cash discounts allowed 8,000
Distribution costs 32,000
Administrative expenses 40,000
Drawings by proprietor, Tim Burr 22,000
Interactive question 7: VAT [Difficulty level: Exam standard]

Mussel is preparing financial statements for the year ended 31 May 20X9. Included in its
balance sheet as at 31 May 20X8 was a balance for VAT due from Govt. of CU 15,000.

Mussel's summary income statement for the year to 31 May 20X9 is as follows.

CU'000 Revenue
(net) (all standard rated) 500
Purchases (net) (all standard rated) (120)
Gross profit 380
Expenses (see note) (280) Net profit
100

CU'000 Note:
expenses
Wages and salaries (exempt of VAT) 163
Entertainment expenditure (CU40 + irrecoverable VAT CU6) 46 Other
(net) (all standard rated at 15%) 70
279

Payments of CU5,000, CU 15,000 and CU20,000 have been made in the year to Govt.
and a repayment of CU 12,000 was received.

Requirement

What is the balance for VAT in the balance sheet as at 31 May 20X9? Assume a 15%
standard rate of VAT. (Hint: Use a T account for VAT.)
 Chapter 5
Preparing Basic Financial
Statements

Interactive question 1: Income statement [Difficulty level: Intermediate]

Here are the balances on Ron Knuckle's accounts.

Debit Credit
CU CU
Cash at bank 6,530
Capital 7,000
Bank loan 1,000
Purchases 5,000
Trade payables 0
Rent 3,500
Shop fittings 2,000
Sales 12,500
Trade receivables 0
Discount received 50
Discount allowed 20
Bank loan interest 100
Other expenses 1,900
Drawings 1,500
20,550 20,550

Draw up Ron Knuckle's income statement.

Interactive question 2: Balance sheet [Difficulty level: Intermediate]

Complete Ron Knuckle's simple balance sheet.

Interactive question 3: Profit and loss account [Difficulty level: Intermediate]

Polly had the following transactions in her first year of trading as a beauty therapist
visiting clients at home.

1.1. X1 Opened a bank account with CU400. Took out bank loan for CU5,000, and
agreed an overdraft limit of the same amount

1.1. X1 Bought car for CU2,500 cash. Insured it for CU300 cash. Bought other
equipment for CU 1,500, and consumable items for CU500, both on credit

During year: Charged customers CU 15,945, all on credit.

During year: Purchased further consumables for CU3,690 on credit, and diesel for car
for CU650 in cash.

During year: Took CU 1,250 in cash from ATMs for herself

By end of year: Received CU 12,935 from customers and paid CU3,250 to suppliers

Prepare Polly’s ledger accounts including a profit and loss ledger account, and draw up
an income statement and balance sheet in respect of her first year of trading.

Interactive question 4: Extended trial balance

[Difficulty level: Intermediate]

Prepare an extended trial balance for Polly, for whom we prepared an income statement
and balance sheet in Interactive question 3.
 Chapter 6
Control Accounts, Errors
and Omissions

Interactive question 1: Payables control account [Difficulty level: Exam standard]

A payables control account contains the following entries:

CU
Bank 79,500
Credit purchases 83,200
Discount received 3,750
Contra with receivables control account 4,000
Balance c/d at 31 December 20X8 12,920

There are no other entries in the account. What was the opening balance brought down at
1 January 20X8?

Interactive question 2: Receivables control account

[Difficulty level: Exam standard]

'
The total of the balances in a company s receivables ledger is CU800 more than the debit
balance on its receivables control account. Which one of the following errors could by
itself account for the discrepancy?

A. The sales day book total column has been undercast by CU800

B. Cash discounts totalling CU800 have been omitted from the nominal
ledger

C. One receivables ledger account with a credit balance of CU800 has

been treated as a debit balance in the list of balances

D. The cash receipts book has been undercast by CU800

Interactive question 3: Receivables and payables control accounts
[Difficulty level: Exam
standard]

For Exports Co on 1 October 20X8 the receivables ledger balances were CU8,024 debit
and CU57 credit, and the payables ledger balances on the same date were CU6,235 credit
and CU 105 debit. These balances have been checked and are correct.

For the year ended 30 September 20X9 the following particulars are available.
CU
Sales 62,514
Purchases 39,439
Cash from credit customers 55,212
Cash to credit suppliers 37,307
Discount received 1,475
Discount allowed 2,328
Irrecoverable debts written off 326
Cash received in respect of debit balances in payables ledger
(refunds from suppliers) 105

CU
Amount due from customer as shown by receivables ledger, offset against
amount due to the same firm as shown by payables ledger
(settlement by contra) 434

What are the balances as at 30 September 20X9 on:

(a) Receivables control account

(b) Payables control account?

Interactive question 4: Receivables control account [Difficulty level: Intermediate]

April Showers sells goods on credit to most of its customers and maintains a receivables
control account. For the year to 30 October 20X3 the accountant discovers that the total
of all personal accounts in the receivables ledger is CU 12,802, whereas the receivables
control account balance is CU 12,550.
The following errors are discovered.

(a) Sales for the week ending 27 March 20X3 amounting to CU850 had been
omitted from the control account.

(b) A customer's debit balance of CU300 had not been included in the list of
balances.

(c) Cash received of CU750 had been entered in a personal account as CU570.

(d) Discount allowed totalling CU 100 had not been entered in the control
account.

(e) A personal account debit balance had been undercast by CU200.

(f) A contra item of CU400 with the payables ledger had not been entered in
the control account.

(g) An irrecoverable debt of CU500 had not been entered in the control account.

(h) Cash received of CU250 had been debited to a personal account.

(i) Discounts received of CU50 had been debited to Bell's receivables ledger
account.

(j) A Credit note for CU200 had been omitted from the casting of the sales day
book.

(k) Cash received of CU80 had been credited to a personal account as CU8.

(l) A cheque for CU300 received from a customer and entered in the control
account and personal account had been dishonoured by the bank, but no
adjustment had been made in the control account.

Requirements

(a) Prepare a corrected receivables control account, bringing down the amended
balance as at 1 November 20X3.

(b) Prepare a statement showing the adjustments that are necessary to the list of
personal account balances so that it reconciles with the amended
receivables control account balance.
Interactive question 5: Bank reconciliation I [Difficulty level: Exam standard]

A bank reconciliation statement is being prepared. Using the table select the effect of
each of the following on the closing balance shown by the bank statement of CU388 in
hand. (The closing balance shown by the cash book is CU 106 in hand.) Tick one box for
each finding.

Increase – Decrease- No effect

A. The bank has made a mistake in crediting the account

with CU 110 belonging to another customer– an error
not yet rectified.

B. CU 120 received by the bank under a standing order

arrangement has not been entered in the cash book.

C. Cheques totaling CU5,629 have been drawn, entered

in the cash book and sent out to suppliers but they
have not been presented for payment.

D. Cheques totaling CU5,577 have been received and

entered in the cash book but not yet credited in the
bank statements.

Interactive question 6: Bank reconciliation II [Difficulty level: Exam

standard]

Tilfer's bank statement shows CU715 direct debits and CU353 investment income not
recorded in the cash book. The bank statement does not show a customer's cheque for
CU875 entered in the cash book on the last day of the accounting period. The cash book
has a credit balance of CU610.

What balance appears on the bank statement?

Interactive question 7: Journal entries [Difficulty level: Intermediate]

Write out the journal entries which would correct these errors.

(a) A business receives an invoice for CU250 from a supplier which was omitted
from the books entirely.

(b) Repairs worth CU 150 were incorrectly debited to the non-current asset
(machinery) account instead of the repairs account.

(c) The bookkeeper of a business reduces cash sales by CU280 because he was not
sure what the CU280 represented. In fact, it was drawings.

(d) Telephone expenses of CU540 are incorrectly debited to the electricity account.

(e) A page in the sales day book has been added up to CU28,425 instead of
CU28,825.

Interactive question 8: Errors [Difficulty level: Exam standard]

At T Down & Co year end, the trial balance contained a suspense account with a credit
balance of CU 1,040.

Investigations revealed the following errors.

(i) A sale of goods on credit for CU 1,000 had been omitted from the sales account.

(ii) Delivery and installation costs of CU240 on a new item of plant had been
recorded as revenue expenditure in the distribution costs account.

(iii) Cash discount of CU 150 had been taken on paying a supplier, JW, even though
the payment was made outside the time limit. JW is insisting that CU 150 is still
payable.

(iv) A raw materials purchase of CU350 had been recorded in the purchases account
as CU850, but the trade payables account was correctly written up.

(v) The purchases day book included a credit note for CU230 as an invoice in the
total column. The correct entry was made in the purchases account.
 Requirements

(a) Prepare journal entries to correct each of the above errors. Narratives are not
required.

(b) Open a suspense account and show the corrections to be made.

(c) Before the errors were corrected, T Down & Co's gross profit was calculated at
CU35,750 and the net profit for the year at CU 18,500. Calculate the revised
gross and net profit figures after correction of the errors.

Chapter 7
Accounting Concepts and
Conventions

Interactive question 1: Going concern [Difficulty level: Intermediate]

A retailer commences business on 1 January and buys 20 washing machines, each

costing CU 100. During the year he sells 17 machines at CU 150 each. How should the
remaining machines be valued at 31 December in the following circumstances?

(a) He is forced to close down his business at the end of the year and the remaining
machines will realize only CU60 each in a forced sale.

(b) He intends to continue his business into the next year.

Interactive question 2: Accounting concepts [Difficulty level: Intermediate]

(a) Your office equipment will be used, on average, for five years, so you
depreciate it by 20% a year. This year your business profitability is down
and you think you can squeeze an extra year's life out of your equipment. Is
it acceptable not to charge any depreciation this year?

(b) You have recently paid CU4.95 for a waste paper bin which should be used
for about five years.

Should you treat it as a non-current asset?

 Chapter 8
Cost of Sales, Accruals and
Prepayments

Interactive question 1: Gross profit [Difficulty level: Easy]

On 1 January 20X6, Grand Union Food Stores had goods in inventory valued at
CU6,000. During 20X6 its proprietor purchased supplies costing CU50,000. Sales for the
year to 31 December 20X6 amounted to CU80,000. The cost of goods in inventory at 31
December 20X6 was CU 12,500.

Requirement

Calculate the business's gross profit for the year.

Interactive question 2: Insurance claim [Difficulty level: Exam standard]

Wasa lost inventory that cost CU64,500 in a fire. The goods were insured for 60% of
their cost.

Requirement

Prepare a journal to account for this in Wasa's books.

Interactive question 3: Accruals I [Difficulty level: Exam standard]

Cleverly started in business as a paper plate and cup manufacturer on 1 January 20X2,
preparing financial statements to 31 December 20X2. He is not registered for VAT.
Electricity bills received were as follows.

20X2 20X3 20X4

CU CU CU
31 January – 491.52 753.24
30 April 279.47 400.93 192.82
31 July 663.80 700.94 706.20
31 October 117.28 620.00 156.40

Requirement

What should the electricity charge be for the year ended 31 December 20X2? Prepare
a journal to record the accrual or prepayment as at 31 December 20X2.
Interactive question 4: Accruals II [Difficulty level: Exam standard]

Ratsnuffer is a business dealing in pest control. Its owner, Roy Dent, employs a team of
eight people who were paid CU 12,000 per annum each in the year to 31 December
20X5. At the start of 20X6 he raised salaries by 10% to CU 13,200 per annum each.

On 1 July 20X6, he hired a trainee at a salary of CU8,400 per annum.

He pays his work force on the first working day of every month, one month in arrears, so
that his employees receive their salary for January on the first working day in February,
etc.

Requirements

(a) Calculate the cost of salaries charged in Ratsnuffer's income statement for
the year ended 31 December 20X6.

(b) Calculate the amount actually paid in salaries during the year (i.e. the
amount of cash received by the work force).

(c) State the amount of the accrual for salaries which will appear in
Ratsnuffer's balance sheet as at 31 December 20X6.

Interactive question 5: Accruals and prepayments

[Difficulty level: Exam standard]

The Batley Print Shop, which is not registered for VAT, rents a photocopying machine.
It makes a quarterly payment as follows:

(a) Three months rental in advance

(b) A charge of 2 pence per copy made during the quarter just ended

The rental agreement began on 1 August 20X4. The first six quarterly bills were as
follows.

Bills dated Rental Cost of Total

copies taken
CU CU CU
1 August 20X4 2,100 0 2,100
1 November 20X4 2,100 1,500 3,600
1 February 20X5 2,100 1,400 3,500
1 May 20X5 2,100 1,800 3,900
1 August 20X5 2,700 1,650 4,350
1 November 20X5 2,700 1,950 4,650

The bills are paid promptly, as soon as they are received.

Requirements

(a) Calculate the charge for photocopying expenses for the year to 31 August 20X4 and
the amount of prepayments and/or accrued charges as at that date.

(b) Calculate the charge for photocopying expenses for the following year to 31 August
20X5, and the amount of prepayments and/or accrued charges as at that date.

Interactive question 6: Income statement and balance sheet

[Difficulty level: Intermediate]

The Umbrella Shop has the following trial balance as at 30 September 20X8.

CU CU
Sales 156,000
Purchases 65,000
Non-current assets 200,000
Inventory at 1.10.X7 10,000
Cash at bank 12,000
Trade receivables 54,000
Trade payables 40,000
Distribution costs 10,000
Cash in hand 2,000
Administrative expenses 15,000
Finance costs 5,000
Carriage inwards 1,000
Carriage outwards 2,000
Capital account at 1.10.X7 180,000
376,000 376,000

The following information is available:

(a) Closing inventory at 30.9.X8 is CU 13,000, after writing off damaged goods of
CU2,000.

(b) Included in administrative expenses is machinery rental of CU6,000 covering the

year to 31 December 20X8.
(c) A late invoice for CU 12,000 covering rent for the year ended 30 June 20X9 has not
been included in the trial balance.

Requirement

Prepare an income statement and balance sheet for the year ended 30 September 20X8.

Interactive question 7: Administrative expenses account

[Difficulty level: Exam
standard]

Xbat has posted CU 10,500from its purchases day book to its administrative expenses
ledger account during 20X2, and CU250 direct from its cash book. At 31 December
20X2 the business estimates that the year-end accrual should be CU 100 less than the
accrual brought forward, and the prepayment should be CU 150 less.

Requirement

What is the total cost of administrative expenses in the year ended 31 December 20X2?

Interactive question 8: Accrued income [Difficulty level: Exam standard]

The Drones Club has a year end of 30 June. Its annual subscription for the year ended 30
June 20X7 was CU 100, and this rose to CU 120 per annum for the year to 30 June
20X8. As at 1 July 20X6 the Club's members had paid CU2,380 in advance, and were
CU4,840 in arrears. The Club only has 200 members, and there are no irrecoverable
amounts. It received CU23,620 in respect of subscriptions in the year to 30 June 20X7,
and four members are known to be in arrears at 30 June 20X8.

Requirement

How many members have paid their subscriptions for the year ended 30 June 20X8 in
advance?

[Hint: Use the subscriptions receivable T account.]

 Chapter 9
Irrecoverable Debts and
Allowances

Interactive question 1: Irrecoverable debts written off

[Difficulty level: Intermediate]

At 1 October 20X5 a business had total outstanding debts of CU8,600. During the year to
30 September 20X6 the following transactions took place.

(a) Credit sales CU44,000.

(b) Payments from customers CU49,000.

(c) Two debts, for CU 180 and CU420, were declared irrecoverable and the
customers are no longer purchasing goods from the company. These are to be
written off.

Requirement

Prepare the trade receivables account and the irrecoverable debts account for the year.

Interactive question 2: Receivables allowance [Difficulty level: Exam standard]

Horace Goodrunning realises that his business will suffer an increase in customers not
paying in the future and so he decides to make an allowance against those who are at
greater risk at each year end.

Balance on Balance at
receivables risk of
account default
CU CU
Y/e 28.2.20X6 15,200 304
Y/e 28.2.20X7 17,100 342
Y/e 28.2.20X8 21,400 214

Requirements

For each of the three years:

 (a) What are the closing trade receivables and allowance for receivables balances?
(b) What charge is made to the income statement?
(c) How would receivables appear in the balance sheet?

Chapter 10
Inventories

Interactive question 1: Journals for inventory [Difficulty level: Intermediate]

In its nominal ledger Wickham Ltd had a balance on its inventory account at 1 July 20X2
of CU23,490. At 30 June 20X3 it had inventory of CU40,285.

Prepare a journal to record the situation as at the year end in the nominal ledger of
Wickham Ltd, in preparation for drawing up the income statement and balance sheet.

Interactive question 2: Inventory valuation [Difficulty level: Exam standard]

The following figures relate to inventory held at the year end.

Item Item Item

A B C
Cost CU20 CU9 CU 14
Selling price CU30 CU 12 CU22
Modification cost to enable sale – CU2 CU8
Marketing costs CU7 CU2 CU2
Units held 200 150 300

Requirement

Calculate the value of inventory for inclusion in the financial statements.

Interactive question 3: FIFO [Difficulty level: Exam

standard]

A firm has the following transactions with respect to its product R.

Year 1

Opening inventory: nil

 Buys 10 units at CU300 per unit
Buys 12 units at CU250 per unit
Sells 8 units at CU400 per unit
Buys 6 units at CU200 per unit
Sells 12 units at CU400 per unit

Year 2

Buys 10 units at CU200 per unit

Sells 5 units at CU400 per unit
Buys 12 units at CU 150 per unit
Sells 25 units at CU400 per unit

Requirement

Using FIFO, calculate the following on an item by item basis for both year 1 and year 2.

 Closing inventory
 Sales
 Cost of sales
 Gross profit

Interactive question 4: Mark-up [Difficulty level: Exam

standard]

A business has valued its inventory at CU 1,000, being the selling price of the items.

Requirement

What is the cost of closing inventory at cost assuming the business operates:

(a) On a margin of 25%?

(b) On a mark-up of 25%?
 Chapter 11
Non-current Assets and
Depreciation

Interactive question 1: Depreciable amount [Difficulty level: Exam standard]

Arundel Enterprises purchased a new car for a sales representative. The invoice received
contained the following information:
CU
List price of the car 18,720
Part-exchange allowance on old car traded in (6,200)
Amount due 12,520

It is estimated that the new car will have a useful life of three years and will have a
residual value of CU6,360.

Calculate the total amount to be depreciated in respect of the new car.

Interactive question 2: Depreciation [Difficulty level: Exam standard]

A lorry bought for a business cost CU 17,000 plus VAT at 15%. It is expected to last for
five years and then to be sold for CU2,000 plus VAT.

Requirement

Work out the depreciation to be charged each year under:

(a) The straight line method

(b) The reducing balance method, using a rate of 35%

Interactive question 3: Annual depreciation [Difficulty level: Exam standard]

Ford Ltd makes up its financial statements to 31 December each year. On 1 January
20X0 it bought a machine for CU 100,000 and depreciated it at 10% per annum on the
reducing balance basis.

On 31 December 20X3, the machine will be included in Ford Ltd’s financial statements
at:
CU
Cost 100,000
Accumulated depreciation (10,000 + 9,000 + 8,100 + 7,290) (34,390)
Carrying amount 65,610

On 1 January 20X4, the company decided to change the basis of depreciation to straight
line over a total life of nine years, i.e. five years remaining from 1 January 20X4. There
is no residual value.

Calculate the revised annual depreciation charge.

Interactive question 4: Change in residual value [Difficulty level: Exam standard]

An asset had a cost of CU 1,000, an estimated useful life of 10 years and a residual value
of CU200. At the start of year 3 a review shows its remaining useful life was unchanged
but the residual value was reduced to nil.

Calculate the depreciation charge for each of years 1 to 3 on the straight line basis.

Interactive question 5: Impairment [Difficulty level: Exam standard]

On 1 January 20X1 Tiger buys a non-current asset for CU 120,000, with an estimated
useful life of 20 years and no residual value. Tiger depreciates its non-current assets on a
straight line basis. Its year end is 31 December.

On 31 December 20X3 the asset will be included in the balance sheet as follows:
CU
Non-current asset at cost 120,000
Accumulated depreciation (3 (CU 120,000 20)) (18,000)
Carrying amount 102,000

Requirements

Consider each of these alternatives separately.

(a) On 1 January 20X4 the remaining useful life is revised to 15 years from that date.

Calculate the revised annual depreciation charge.

 (b) On 1 January 20X4 the remaining useful life is revised to 10 years from that date.
An impairment review shows that the value is CU95,000 as at 1 January 20X4.

Show how the impairment loss would be recorded and calculate the revised annual
depreciation charge.

Interactive question 6: Non-current asset ledger accounts

[Difficulty level: Exam standard]

A business purchased two machines on 1 January 20X5 at a cost of CU 15,000 each.

Each had an estimated life of five years and a nil residual value. The straight line method
of depreciation is used.

Owing to an unforeseen slump in market demand for its end product, the business
decided to reduce its output, and switch to making other products instead. On 31 March
20X7, one machine was sold (on credit) to a buyer for CU8,000.

Later in the year, however, it was decided to abandon production altogether, and the
second machine was sold on 1 December 20X7 for CU2,500 cash.

Prepare the machinery account, accumulated depreciation of machinery account and

disposal account for the accounting year to 31 December 20X7 to determine the profit or
loss on disposal of each machine.

Interactive question 7: Goodwill [Difficulty level: Intermediate]

Toad goes into business with CU 10,000 capital and agrees to buy Thrush's shop for
CU6,500. Thrush's recent financial statements show total assets less liabilities of
CU3,500, which Toad values at CU4,000.

Requirement

Prepare the balance sheet of Toad's business at the following times.

(a) Before he purchases Thrush's business

(b) After the purchase
 Chapter 12
Company Financial
Statements

Interactive question 1: Rights issue [Difficulty level: Exam standard]

The balance sheet of Omnibus Ltd contains the following information.

Assets CU'000
Non-current assets 18,600
Current assets 2,900
Total assets 21,500

Equity and liabilities

Ordinary shares of 20 p each 6,000
Share premium account 5,700
Retained earnings 7,000
Liabilities 2,800
Total equity and liabilities 21,500

The company decides to make a 1 for 3 rights issue for cash, fully paid, at a price of CU
1.80 per share.

Requirement

What are the balances for (a) current assets, (b) ordinary shares and (c) share premium
after the rights issue?

Interactive question 2: Bonus issue [Difficulty level: Intermediate]

The balance sheet of Canvat Ltd at 31 December 20X1 is as follows:

CU'000
ASSETS 2,000
EQUITY AND LIABILITIES
Ordinary share capital (800,000 50p ordinary shares) 400
Share premium account 500
Retained earnings 300
Equity 1,200
Liabilities 800
Total equity and liabilities 2,000

The directors decide to make a 1 for 5 bonus issue. This will be followed by a 1 for 3
rights issue at CU 1.60 per share.

Show the revised balance sheet of Canvat Ltd after both share issues have taken place.

Chapter 13
Sole Trader and Partnership
Financial Statements

Interactive question 1: Sole trader financial statements

[Difficulty level: Exam standard]

Wasto had the following trial balance as at 31 December 20X4:

CU'000 CU'000
Owner's capital at 1.1.X4 450
Bank loan 613
Freehold land and buildings 430
Freehold land and buildings – accumulated depreciation 20
Plant and machinery – cost 830
Plant and machinery – accumulated depreciation 222
Stock 190
Sales 2,695
Purchases 2,152
Loan interest 10
Wages and salaries 254
Drawings 31
Sundry expenses 113
Suspense account 420
Debtors 464
Creditors 195
Cash 141
4,615 4,615

The following matters have now been discovered:

(a) On 1 January 20X4 Wasto injected a further CU 190,000 into the business. The
only entry made was to debit cash.

(b) On 1 January 20X4 an item of plant that had cost CU350,000 and on which
depreciation of CU74,000 had been charged was disposed of for CU230,000. The
only entry made was to debit cash.

(c) Depreciation of CU36,000 needs to be charged on the remaining plant and

machinery, and CU5,000 on the land and buildings.
(d) Loan interest of CU 10,000 should be accrued at 31 December 20X4.

(e) Stock on hand at 31 December 20X4 cost CU220,000.

Requirement

Prepare Wasto’s ETB, his profit and loss account for the year ended 31 December 20X4
and his balance sheet at that date.

In 20X5 Wasto takes drawings of CU40,000 and ends 20X5 with net assets of
CU850,000. He did not introduce any capital in the year.

What was Wasto’s net profit in 20X5?

Interactive question 2: Sale to a company [Difficulty level: Exam standard]

Anja, a sole trader, has agreed to sell her business to Wexeter Ltd for CU 100,000, the
consideration to be paid in 50p shares valued at 80p each. The following information is
available about Anja’s business as at the sale date:

CU
Fixed assets (net book value) 49,500
Stock 4,200
Debtors 5,740
Cash 1,850
Creditors 2,860

Wexeter Ltd values Anja’s fixed assets at CU60,000 and stock at CU3,000; Anja is to
retain the cash and pay off the creditors.

(a) What is the gain on realisation in Anja’s books?

(b) With how many shares in Wexeter Ltd will Anja be issued?

Interactive question 3: Profit share [Difficulty level: Exam standard]

Tom, Dick and Harry want to share out net profit of CU 170,000, in the ratio 7:3:5. Dick
gets a salary of CU20,000 pa. How much would each partner get?

Interactive question 4: Profit appropriation [Difficulty level: Exam standard]

Anna, Brian and Clare have a profit-sharing ratio of 3:2:1, with Clare due a salary of
CU8,000. Brian has a minimum profit share of CU 16,000 guaranteed by Anna. The
partnership made a profit of CU26,000 in the year.

How much profit will be appropriated to each partner?