Question Tag: Prepayments

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  • 20 Marks

FA – Aug 2022 – L1 – Q1 – Accruals and prepayments | The IASB’s Conceptual Framework

Explanation of the IASB’s enhancing qualitative characteristics of financial information and preparation of ledger accounts for commission received, stationery, and rates, including adjustments for accruals and prepayments.

a) IASB Conceptual Framework underpins what IFRS say and why they identify a particular accounting treatment. Another important aspect of the conceptual framework is an attempt to define “high quality” information or in other words, what makes financial information useful.

Required:
Explain in accordance with the IASB’s Conceptual Framework the enhancing qualitative characteristics of useful financial accounting information.
(10 marks)

b) On 1 January 2021, Koo Nimo, a trader, had the following entries in his ledger:

Account Amount (GHȼ)
Commission received (owing) 900
Stationery (owing) 400
Rates (prepaid) 600

The following information relates to the financial year ended 31 December 2021. All transactions were by cheque.

i) Commission received was as follows:

Date Amount (GHȼ)
14 January 850
16 November 3,200

On 31 December 2021 GHȼ800 was still owing in commission to Koo Nimo for the 2021 financial year.

ii) Stationery was paid as follows:

Date Amount (GHȼ)
19 January 800
13 November 4,200

On 1 January 2021 there was no stock of stationery, while at 31 December 2021 stock of stationery was GHȼ200. There were no outstanding invoices for stationery at 31 December 2021.

iii) Rates were paid as follows:

Date Amount (GHȼ)
9 April 2,600
24 November 2,800

A refund for rates of GHȼ800 was received on 15 December 2021. At 31 December 2021 rates were overpaid by GHȼ250.

Required:
Prepare the commission received, stationery and rates ledger accounts, including in each case the transfer to the Statement of Profit and Loss, for the year ended 31 December 2021, and the balance carried down to the next financial year.
(6 marks)

c) Explain TWO (2) reasons why a business entity will make adjustments for accruals and prepayments in the final accounts.
(4 marks)

a)
Enhancing Qualitative Characteristics:

  1. Comparability:
    Comparability allows users to identify similarities and differences between two sets of economic phenomena. Information is more useful if it can be compared with similar information about other entities or the same entity over different periods. Consistency in application helps in achieving comparability.
  2. Verifiability:
    Verifiability ensures that different knowledgeable and independent observers could reach consensus that a particular depiction is a faithful representation. It helps to assure users that information faithfully represents the economic phenomena it purports to represent.
  3. Timeliness:
    Timeliness means having information available to decision-makers in time to be capable of influencing their decisions. Information that is available after the decision-making process is less useful.
  4. Understandability:
    Information is understandable if it is classified, characterized, and presented clearly and concisely. Financial reports should be prepared for users who have a reasonable knowledge of business and economic activities.

(4 points @ 2.5 marks each = 10 marks)

b)

c)
Reasons for Adjustments for Accruals and Prepayments:

  1. Accurate Reflection of Financial Position:
    Adjusting for accruals and prepayments ensures that expenses and revenues are matched to the correct accounting period, providing an accurate reflection of the company’s financial position.
  2. Compliance with Accounting Standards:
    Making these adjustments ensures compliance with the accruals concept under accounting standards, which mandates that transactions be recorded in the period in which they occur, not when cash is received or paid.
  • 20 Marks

FA – April 2022 – L1 – Q4 – Accruals and prepayments | Bad and doubtful debt | Non-current assets and depreciation | Preparation of financial statements of a sole trader

Preparation of the Statement of Profit or Loss and Statement of Financial Position for a sole trader, including adjustments for depreciation, doubtful debts, and prepayments.

The following trial balance was extracted from the books of Nsaa Zolko, a sole trader, on 31 December 2020:

Account Debit (GHȼ) Credit (GHȼ)
Land 251,200
Equipment 202,220
Accumulated depreciation on equipment 62,830
Inventory 49,620
Receivable and Payable 124,200 104,350
Value Added Tax (refund due) 10,320
Deposit on rented premises (security deposit) 17,900
Bank and Cash balances 15,640
Allowance for doubtful debt 11,250
Tax Liability 7,420
Business Rent 30,000
Sales 804,500
Purchases 390,200
Returns 8,300 7,500
Discount 4,300 6,240
Distribution and Advertising 8,900
Power 4,200
Communication 1,540
Insurance 22,500
Wages and Salaries 164,380
Employers Social Security contribution 16,560
4% Long term loan 182,500
Long term loan interest 3,520
Bad debt 2,240
Drawings 10,580
Retained Earnings 44,820
Capital 103,710
Suspense 3,200
Total 1,338,320 1,338,320

Additional Information: i) The inventory count as at 31 December 2020 showed closing inventory value at GHȼ42,390. ii) Nsaa Zolko has agreed an annual rent of GHȼ40,000 with his landlord. iii) Included in insurance above is an amount of GHȼ18,000 paid to insure the equipment. The policy year ends 28 February 2021. iv) Nsaa Zolko has specific concerns over GHȼ5,120 of receivables balance and wishes to set up a specific provision with respect to these balances. The general provision on the remaining receivable balance should be at 5%. v) Depreciation is to be charged as follows:

  • Land: No Provision
  • Equipment: 15% reducing balance method (Depreciation should be calculated to the nearest whole number). vi) The suspense account balance above relates to sales of GHȼ1,600 which was recorded as purchases in error. The receivables and payables balances are correct.

Required:
a) Prepare a Statement of Profit or Loss for the year ended 31 December 2020.
(10 marks)

b) Prepare a Statement of Financial Position as at 31 December 2020.
(10 marks)

  • 20 Marks

FA – Nov 2021 – L1 – Q2 – Accruals and prepayments | Preparation of Partnership accounts

Recording rent transactions and preparing financial statements related to the retirement of a partner, including revaluation and goodwill adjustments.

a) Ansong is a sole proprietor whose accounting year is 1 November to 31 October. Ansong rents factory space at the cost of GHȼ10,000 per quarter, payable in advance. Payments for rent were made on 1 January, 1 April, 1 July, and 1 October during the year 2020.

Required:
i) Show the ledger entries to record the above transactions for the year ended 31 October 2020.
(4 marks)

ii) Prepare an extract for the Statement of Profit or Loss and Statement of Financial Position.
(1 mark)

b) Agyei, Bobo, and Dago have been in partnership for some years, sharing profits and losses in the ratio 3:2:1, respectively. The partnership statement of financial position as at 30 June 2020 was as follows:

Assets GHȼ GHȼ
Non-current assets
Premises 80,000
Office equipment 58,400
Motor vehicles 45,000
Total Non-current assets 183,400
Current assets
Inventory 28,600
Trade receivables 25,800
Bank 5,650
Total Current assets 60,050
Total assets 243,450
Capital and Liabilities
Capital accounts
Agyei 95,000
Bobo 60,000
Dago 50,000
Total Capital 205,000
Current accounts
Agyei 15,200
Bobo 7,040
Dago (debit balance) (10,200)
Total Current accounts 12,040
Current liabilities
Trade payables 26,410
Total Capital and Liabilities 243,450

The partners have agreed that the following should take effect on 1 July 2020 upon the retirement of Dago:

  • Goodwill is to be valued at GHȼ60,000 and will not remain in the books of account.
  • Premises are to be revalued to GHȼ116,325.
  • Dago is to take inventory costing GHȼ8,400 and a Motor Vehicle with a net book value of GHȼ20,500 as part settlement of his capital.
  • A specific allowance for receivables is to be made for GHȼ5,300 owed by an individual customer. In addition, a general allowance for receivables is to be made at 5% of the remaining trade receivables.
  • Agyei and Bobo will continue in partnership, sharing profits and losses in the ratio 3:2.
  • Dago will transfer GHȼ12,000 to a loan account to be repaid in full in 2025. No loan interest will be charged on this amount.
  • The remaining balance from combining both Dago’s capital account and current account will be paid from the business bank account.

Required:
i) Prepare the partners’ capital accounts on 1 July 2020 to show the retirement of Dago.
(7 marks)

ii) Prepare the partnership statement of financial position as at 1 July 2020.
(8 marks)

a)

Workings:
1. Revaluation surplus calculation:
GHȼ (116,325 – 80,000) – GHS (5,300 + (25,800 – 5,300) x 5%) = GHȼ30,000
Agyei 30,000 x 3/6 = 15,000
Bobo 30,000 x 2/6 = 10,000
Dago 30,000 x 1/6 = 5,000
2. Goodwill in old ratio:
Agyei 60,000 x 3/6 = 30,000
Bobo 60,000 x 2/6 = 20,000
Dago 60,000 x 1/6 = 10,000
3. Goodwill in new ratio:
Agyei 60,000 x 3/5 = 36,000
Bobo 60,000 x 2/5 = 24,000

ii) Partnership Statement of Financial Position as at 1 July 2020

  • 20 Marks

FA – Nov 2020 – L1 – Q4 – Accruals and prepayments | Inventory | Non-current assets and depreciation | Preparation of financial statements of a sole trader

Preparation of the income statement and statement of financial position for a sole trader with adjustments for inventory, accruals, prepayments, depreciation, and other relevant adjustments.

Kofi Badu, a sole trader, extracted the following Trial Balance from the business books as of 30 April 2019:

The following information is also relevant:
i) The closing inventory as at 30 April 2019 was valued at GH¢8,010.
ii) As at 30 April 2019, accrued rent income for the year amounted to GH¢420; heat and light accrued was GH¢260; whilst salaries of GH¢720 was paid in advance.
iii) During the year, Kofi Badu had withdrawn goods costing GH¢720 for his personal use. This had not been recorded in the accounts.
iv) New equipment costing GH¢2,650 was purchased during the year but had been mistakenly included in purchases. This is yet to be corrected.
v) A cheque for GH¢440 received from a customer in full settlement of a debt of GH¢450 has not yet been entered in the accounts.
vi) Allowance for doubtful debt is to be maintained at 2% of receivables.
vii) Depreciation is to be provided for as follows:

  • Equipment- 20% per annum using the straight-line method. A full year’s depreciation is provided on all equipment held at 30 April 2019, regardless of the date of purchase.
  • Motor vehicles- 40% per annum using the reducing balance method.

Required:
a) Prepare a statement of profit or loss for Kofi Badu for the year ended 30 April 2019.
(12 marks)

b) Prepare a statement of financial position for Kofi Badu as at 30 April 2019.

a)
Statement of Profit or Loss for Kofi Badu for the Year Ended 30 April 2019

b)
Statement of Financial Position for Kofi Badu as at 30 April 2019

  • 20 Marks

FA – May 2019 – L1 – Q3 – Accruals and prepayments | Non-current assets and depreciation

Explain accruals and depreciation concepts, and adjust the financial statements of a sole trader for various accruals, prepayments, and depreciation.

a) Identify, and briefly explain, the basic accounting principle which requires prepayments to be included in final accounts. (3 marks)

b) Briefly explain the purpose of depreciation charge in the statement of profit or loss. (2 marks)

c) A newly qualified accountant has prepared draft accounts for a client for the year ended September 2018, but has not dealt with the adjustments for accrued expenses, prepaid expenses, irrecoverable debts, allowance for receivables, and depreciation.

Below is the statement of financial position prepared by the newly qualified accountant.

The newly qualified accountant has given the following information about the remaining adjustments:

  • The last fixed bill paid for electricity covered three months period to 31 July 2018. The bill was GH¢34,350.
  • Rent of GH¢142,500 for six months to December 2018 was paid in March 2018.
  • The trade receivables figure of GH¢747,055 in the draft account is stated after deducting allowance for doubtful debts of GH¢39,500 from the total receivable balance of GH¢786,555.
  • The trade receivable balance of GH¢786,555 includes a balance of GH¢3,300 which has been outstanding for 10 months. The client has decided to write this balance off his books.
  • The policy of the client is to allow for receivables on the basis of the length of time the debt has been outstanding. The aged analysis of trade receivables as at 30 September 2018 is as follows:

Required:
i) Calculate the accrued electricity expense and the prepayment for rent, and update the financial statements. (4 marks)

ii) Calculate the new allowance for receivables and update the financial statements. (3 marks)

iii) Calculate the depreciation charge and update the financial statements. (2 marks)

iv) Prepare the updated Statement of Financial Position after accounting for the above adjustments. (6 marks)

a) Accruals Concept
The accruals or matching concept requires that the revenue earned in a period is matched with the expenses incurred in earning that profit. Therefore, if a payment includes a prepayment for the following period, this must be excluded from expenses in the statement of profit or loss. Costs are recognized on the basis of the period covered by those costs, not by the timing of the payment. (3 marks)

b) Purpose of Depreciation Charge
Depreciation is a way of charging for the use of an asset in earning the current period’s profits. It spreads the cost of a non-current asset over its useful life. This is an example of the accrual or matching concept. (2 marks)

c) Adjustments to Financial Statements
i) Accrued Expenses and Prepayment Calculation

  • Accrued Electricity Expense:
    Electricity (2/3 * 34,350) = GH¢22,900 (2 marks)
  • Prepayment for Rent:
    Rent (3/6 * 142,500) = GH¢71,250 (2 marks)

ii) Allowance for Receivables Calculation

  • 31 Marks

FA – May 2016 – L1 – Q1 – Accruals and prepayments | Bad and doubtful debt | Preparation of financial statements of a sole trader

Prepare income statement and balance sheet, identify and explain accounting concepts related to specific adjustments.

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)

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.

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