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- 31 Marks
Question
Asomdwee Enterprise is run by a sole trader. The following Trial Balance was prepared from the business accounts on 30th September 2015:
| Account | Dr (GH¢) | Cr (GH¢) |
|---|---|---|
| Capital | 185,280 | |
| Inventory | 24,200 | |
| Sales | 421,450 | |
| Purchases | 167,350 | |
| Purchase returns | 6,040 | |
| Electricity | 2,230 | |
| Discounts allowed | 2,420 | |
| Discounts received | 4,270 | |
| Motor expenses | 1,580 | |
| Drawings | 32,000 | |
| Bank | 24,511 | |
| Salaries | 108,000 | |
| Insurance | 15,400 | |
| Receivables | 110,140 | |
| Irrecoverable debts | 1,420 | |
| Allowance for receivables | 3,153 | |
| Payables | 76,288 | |
| General expenses | 6,780 | |
| 9% Loan (2012-2019) | 150,000 | |
| Loan interest | 12,000 | |
| Land and buildings | 340,000 | |
| Accumulated depreciation – buildings | 26,000 | |
| Equipment | 22,000 | |
| Accumulated depreciation – equipment | 10,300 | |
| Motor vehicles | 26,000 | |
| Accumulated depreciation – motor vehicles | 13,250 | |
| Total | 896,031 | 896,031 |
The following information is also available:
i) Only 10 months’ salaries are shown in the Trial Balance. An equal amount is paid for salaries for each month of the year.
ii) As at 30th September 2015, GH¢3,200 had been prepaid for insurance, whilst GH¢410 was owing for general expenses.
iii) GH¢4,600 had been charged to general expenses for the owner’s private holiday.
iv) As at 30th September 2015, inventory was valued at GH¢22,500.
v) A customer, owing GH¢5,040, has been declared bankrupt. This amount is to be written off in full.
vi) An allowance for receivables is to be maintained at 3% of the remaining receivables.
vii) As at 30th September 2015, the business’s land was valued at GH¢100,000. Land is not depreciated.
viii) Depreciation is to be provided as follows:
- Buildings: 4% per annum using the straight-line method.
- Equipment: 25% per annum using the straight-line method.
- Motor vehicles: 40% per annum using the reducing balance method.
ix) There were no additions or disposals of non-current assets during the financial year.
Required:
a) Prepare the Income Statement for the year ended 30th September 2015. (8 marks)
b) Prepare the Statement of Financial Position as at 30th September 2015. (6 marks)
c) i) Identify the accounting concept involved in each of the footnotes/items (i), (iii), and (v). (3 marks)
ii) Explain the correct accounting treatment in each case. (3 marks)
Answer
a) Asomdwee Enterprise
Income Statement for the year ended 30 September 2015
| Particulars | GH¢ | GH¢ |
|---|---|---|
| Sales | 421,450 | |
| Opening Inventory | 24,200 | |
| Purchases | 167,350 | |
| Less: Purchase Returns | (6,040) | |
| Net Purchases | 161,310 | |
| Cost of Goods Available for Sale | 185,510 | |
| Less: Closing Inventory | (22,500) | |
| Cost of Sales | (163,010) | |
| Gross Profit | 258,440 | |
| Discounts Received | 4,270 | |
| Total | 262,710 | |
| Electricity | 2,230 | |
| Discounts Allowed | 2,420 | |
| Motor Expenses | 1,580 | |
| Salaries (108,000 + 21,600) | 129,600 | |
| Insurance (15,400 – 3,200) | 12,200 | |
| Irrecoverable Debts (1,420 + 5,040) | 6,460 | |
| General Expenses (6,780 – 4,600 + 410) | 2,590 | |
| Loan Interest (9% x 150,000) | 13,500 | |
| Depreciation: | ||
| – Buildings (340,000 – 100,000) x 4% | 9,600 | |
| – Equipment (22,000 x 25%) | 5,500 | |
| – Motor Vehicles (26,000 – 13,250) x 40% | 5,100 | |
| Total Expenses | (190,780) | |
| Net Profit | 71,930 |
b) Asomdwee Enterprise
Statement of Financial Position as at 30 September 2015
| Assets | GH¢ | GH¢ |
|---|---|---|
| Non-Current Assets | ||
| Land and Buildings | 340,000 | |
| Less: Accumulated Depreciation | (26,000) | |
| Less: Depreciation for the Year | (9,600) | |
| Net Book Value (Land and Buildings) | 304,400 | |
| Equipment | 22,000 | |
| Less: Accumulated Depreciation | (10,300) | |
| Less: Depreciation for the Year | (5,500) | |
| Net Book Value (Equipment) | 6,200 | |
| Motor Vehicles | 26,000 | |
| Less: Accumulated Depreciation | (13,250) | |
| Less: Depreciation for the Year | (5,100) | |
| Net Book Value (Motor Vehicles) | 7,650 | |
| Total Non-Current Assets | 318,250 | |
| Current Assets | ||
| Inventory | 22,500 | |
| Receivables | 110,140 | |
| Less: Bad Debts | (5,040) | |
| Less: Allowance for Receivables | (3,153) | |
| Net Receivables | 101,947 | |
| Prepaid Insurance | 3,200 | |
| Bank | 24,511 | |
| Total Current Assets | 152,158 | |
| Total Assets | 470,408 | |
| Equity and Liabilities | ||
| Equity | ||
| Capital | 185,280 | |
| Net Profit | 71,930 | |
| Less: Drawings | (32,000) | |
| Less: Owner’s Holiday Expenses | (4,600) | |
| Total Equity | 220,610 | |
| Non-Current Liabilities | ||
| 9% Loan | 150,000 | |
| Current Liabilities | ||
| Payables | 76,288 | |
| Accruals: | ||
| – General Expenses | 410 | |
| – Salaries | 21,600 | |
| – Loan Interest | 1,500 | |
| Total Current Liabilities | 99,798 | |
| Total Equity and Liabilities | 470,408 |
c)
i) Item (i): Accruals/Matching Concept
This concept requires expenses to be matched with revenues in the period in which they are incurred. In this case, the salaries expense needs to be adjusted to account for the two months’ salaries not recorded in the trial balance.
ii) Item (iii): Business Entity Concept
The owner’s private holiday expenses should not be recorded as a business expense. These should be treated as drawings, reducing the capital of the owner.
iii) Item (v): Prudence Concept
This concept dictates that expenses and liabilities should not be understated. The bad debt from the customer declared bankrupt should be written off to ensure the accounts reflect a prudent view of the company’s financial position.
- Tags: Accruals, Bad Debts, Balance Sheet, Depreciation, Income Statement, Prepayments
- Level: Level 1
- Uploader: Theophilus