1ST Mock Exam 2012-2013
(Correction Errors)
6. The trial balances of Fish Limited at 31 March 2011 did not agree and the difference was posted to suspense
account. The draft net profit for the year was $159,620. After closing all the nominal accounts and preparing the
draft income statement, subsequent investigation revealed the following:
(i)
A debt of $500 already written off in the previous year has been collected in the current year. The only entry
made was debited bank account and credited accounts receivable account.
(ii)
The closing stock as at 31 March 2010 was overcast by $1,050.
(iii)
Discounts allowed of $1,850 had been credited to the discounts allowed account and debited to the
accounts receivable’s account.
(iv)
A bank overdraft of $3,190 had been listed in the trial balance as a debit balance.
(v)
A total in the purchases day book had been carried forward as $11,950 instead of $11,590.
(vi)
A free sample had been sent to Shark Limited and recorded as credit sales at a selling price of $26,000. The
margin of the sample is 30% on sales.
(vii)
A credit note for $375 received from a supplier had been posted to the wrong side of his account.
REQUIRED:
(a) Prepare journal entries to correct the errors above. (Narration is not required)
(b) Prepare a statement to correct net profit for the year ended 31 March 2011.
(c) Explain two underlying accounting concepts in the treatment of item (vi).
(a)
Journal
Accounts receivable
Profit and loss : Bad debts recovered
(ii) Profit and loss : Closing inventory
Inventory
Required
entries:
and loss : Discounts allowed ($1,850 x 2)
(iii) Profit
Dr Accounts payable
$375
Accounts
receivable
Cr Returns outwards
$375
(iv) Suspense ($3,190 x 2)
Debit
$
500
(i)
Correct entries:
Dr Suspense
Accounts payable
($11,950  $11,590)$750
(v)
Cr Suspense
$750
Profit and loss : Purchases
(vi) Profit and loss: Sales
Shark Limited
Profit and loss: Promotional expense
Profit and loss: Purchases ($26,000 x 70%)
(vii) Accounts payable ($375 x 2)
Suspense
Credit
$
500
1,050
1,050
Wrong entries:
Cr Accounts payable
Cr Returns outwards
Dr Suspense
3,700
$375
$375
6,380
$750
3,700
360
360
26,000
26,000
18,200
18,200
750
750
(b)
Fish Limited
Statement to calculate the corrected net profit for the year ended 31 March 2011
$
Net profit before adjustments
Add : Bad debts recovered omitted (i)
Purchases overcast (v)
Inventory taking omitted (vi)
Less:
Closing inventory overstated (ii)
Discounts allowed recorded on the wrong side (iii)
Sales overstated (vi)
Promotional expense omitted (vi)
Corrected net profit
(c)
500
360
18,200
1,050
3,700
26,000
18,200
$
159,620
19,060
178,680
48,950
129,730
Materiality concept
—
An item is material if its non-disclosure and omission would be likely to distort the view given by
the accounts.
—
A free sample of $26,000 is considered material in the sense that it will increase expense, lower
the profit significantly and thus affect the decision made by users of financial statements.
Matching concept
—
Revenues generated should be matched with expenses incurred for the same period of time.
—
Since free samples are not supposed for sale so it should not be included in the sales account
and cost of goods sold.
HKDSE
(2012, 9)
(Limited company and correction of errors)
After closing all the nominal accounts and preparing the draft income statement, the ledger balances of Dragon Ltd as
at 31 December 2011 are as follows:
Dr
$
$2 Ordinary shares, fully paid
Share premium
Retained profit as at 31 December 2011
Inventory as at 31 December 2011
Property, plant and equipment
– Cost
– Accumulated depreciation as at 31 December 2011
Trade receivables and trade payables
Prepayment [ note (vi) ]
Cash at bank
Cr
$
4 000 000
319 000
996 500
545 000
4 800 000
716 400
424 800
760 800
7 247 000
1 240 000
691 500
7 247 000
During the internal audit process, the following items were discovered:
(i)
The management of the company decided to provide allowance for doubtful debts starting from 2011. An
allowance of 5% on outstanding trade receivable should be provided for the year ended 31 December 2011, but
no entries had been made in the books.
(ii)
To finance the expansion of the business, the authorized share capital of $5,000,000 was increased to
$15,000,000 on 15 December 2011. On the same date, 600 000 ordinary shares of $2 each had been issued at $6
each. All the monies subscribed had been received and shares had been allotted on 28 December 2011. However,
no entries had been made in the books.
(iii)
On 1 December 2011, a five-year 2% debenture of $900 000 in total had been issued at par. Debenture interest is
payable on 31 March and 30 September each year. All the monies subscribed were duly collected. In order to
obtain the cash discount of 4% from a supplier, one-quarter of the monies collected was used to pay the supplier
during the discount period as the full settlement of its account. However, entries regarding all the above
transactions were omitted from the books.
(iv)
A piece of equipment with both cost and accumulated depreciation of $726 000 on 1 January 2011 was sold for
$156 000 on the same date. The transaction was recorded in the books as cash sales of $165 000.
(v)
On 31 December 2011, the board of directors of the company resolved to transfer $135 000 to the general
reserve. However, no entries had been made in the books.
(vi)
During the year 2011, advertising expenditure amounting to $424 800 had been incurred and paid. The company
estimated that the sales volume could be increased by 5% and 15% in 2012 and 2013 respectively as a result of
the advertising. The book-keeper had therefore recorded the payment for advertising as a prepayment in 2011,
to be written off as expenses in 2012 and 2013.
REQUIRED:
(a) Prepare for Dragon Ltd
(1) the journal entries necessary for correcting the errors and the omission in (i) and (vi) above (narrations are
not required); and
(2) the statement of financial position as at 31 December 2011 after taking into the account the above
adjustments.
(b)
Comment on the accounting treatment of advertising expenditure in item (vi).
(a) (1)
Journal
2011
December 31
(i) Profit and Loss
Allowance for doubtful debts (716,400 x 5%)
(ii) Cash at bank (600,000 x 6)
Ordinary share capital (600,000 x 2)
Share premium (600,000 x $4)
(iii) Cash at bank
2% Debentures
Trade payables (900,000 x 25% / 96%)
Profit and Loss  Discounts received
Cash at bank (900,000 x 25%)
Profit and Loss  Debenture interest (900,000 x 2% x 1/12)
Accrued expense
(iv) Accumulated depreciation
Profit and Loss – Profit on disposal
Property, plant and equipment
Cash (165,000 – 156,000)
(v) Profit and Loss
General reserve
(vi) Profit and Loss – Advertising expenditure
Prepayment
Dr
$
35,820
Cr
$
35,820
3,600,000
1,200,000
2,400,000
900,000
900,000
234,375
9,375
225,000
1,500
1,500
726,000
9,000
726,000
9,000
135,000
135,000
424,800
424,800
(a) (2)
Dragon Ltd
Statement of Financial Position as at 31 December 2011
$
ASSETS
Non-current assets
Property, plant and equipment [(4,800,000 – 726,000) – (1,240,000 – 726,000)]
Current assets
Inventory
Trade receivables (716,400 – 35,820)
Cash at bank (760,800 + 3,600,000 + 900,000 – 225,000 – 9,000)
3,560,000
545,000
680,580
5,026,800
6,252,380
Total assets
9,812,380
EQUITY AND LIABILITIES
Capital and reserves
Ordinary shares of $2 each (4,000,000 + 1,200,000)
Share premium (319,000 + 2,400,000 )
General reserves
Retained profits (996,500 – 35,820 + 9,375 – 1,500 – 9,000 – 135,000 – 424,800)
Total equity
5,200,000
2,719,000
135,000
399,755
8,453,755
Non-current liabilities
2% Debentures
Current liabilities
Trade payables (691,500  234,375)
Accrued expenses
900,000
457,125
1,500
458,625
Total liabilities
1,358,625
Total equity and liabilities
9,812,380
(b) — should not be treated as prepayment
— should be charged to income statement as expense
— uncertain revenue recognition: increase in sales volume is just an estimate
HKDSE Sample 2 (Paper 2A, 3)
(Accounting principle and error correction)
Subsequent checking of the records by the accountant of Easy Company revealed that no entries had been made for
the following items:
(i) Loan interest of $5050 incurred in 2011 remains unpaid as at 31 December 2011.
(ii) A motor vehicle costing $80 000 with an accumulated depreciation of $40 000 as at 31 December 2011 was sold
for $48 000 in cash on the same date.
REQUIRED:
(b) Prepare the journal entries to record the above transactions for the year ended 31 December 2011. (Narrations
are not required.)
(c) Explain the accounting treatment of item (i) using a relevant accounting concept.
Answer:
(b)
Journal
2011
December
(i) Loan interest
Debit
$
5050
Accrued loan interest
(ii) Accumulated depreciation – Motor vehicles
Cash
Motor vehicles
Profit and loss – Profit on disposal of motor vehicles
Credit
$
5050
40 000
48 000
80 000
8 000
(c) Accrual concept
— Unpaid loan interest should be credited to accrued loan interest account to represent an increase
in current liability in 2011.
— The loan interest incurred should be debited in the profit and loss account as an increase in
operating expenses of 2011.
HKDSE Sample 1 (Paper 2A, 6)
(Correction Errors)
The following draft statement of financial position for Healthy Food Company as at 31 December 20X6 has been
prepared:
ASSETS
Office machinery
Less: Accumulated depreciation
Motor vehicles
Less: Accumulated depreciation
Inventories
Account receivables, net
Suspense account
$
148,000
45,300
10,000
2,500
CAPITAL and LIABILITIES
Capital
Account payables
Rates paid in advance
Bank loan (repayable on 31 December 20Y2)
Draft net profit for the year
Bank overdraft
$
102,700
7,500
127,600
85,500
6,800
330,100
$
114,622
68,750
2,750
100,000
22,068
21,910
330,100
Subsequent to the preparation of the draft statement of financial position, the following were discovered:
(i)
On comparing the bank statement with the cash book for the month of December 20X6, the following differences
were found:
(1) An amount of $8,060, being receipt of dividends, had been credited directly into the bank account. The
amount was recorded in the cash book as bank interest charged on the overdraft balance.
(2) A cheque of $10,000 issued for paying the deposit to acquire a motor van in February 20X7 was not yet
presented to the bank for payment. The amount was recorded as the only motor vehicle of the company.
Motor vehicles are depreciated at 25% per annum on cost.
(ii) Owing to an oversight, $1,300 prepaid insurance at 31 December 20X5 had been omitted from the general ledger
in 20X6. Moreover, rates of $2,750 paid in advance at 31 December 20X6 had appeared as a credit balance in the
trial balance.
(iii) At 31 December 20X6, a customer with an outstanding debt of $10,800 was declared bankrupt and the amount is
to be written off. In addition, the allowance for doubtful debts was to be reduced by $540.
(iv) Included in the closing inventories were goods at $10,000 received from Royce Limited on a sale or return basis.
No other entries had been made in respect of these goods in the books.
REQUIRED:
(a)
Prepare the necessary journal entries to correct the above. Narrations are not required.
(b)
Prepare the statement of financial position as at 31 December 20X6 in proper format.
(a)
Journal
(i) (1) Bank
Profit and loss: overdraft interest
Profit and loss: dividend income
(2) Deposit on acquisition of motor vehicle
Motor vehicles
Accumulated depreciation – motor vehicles ($10,000 x 25%)
Profit and loss: depreciation – motor vehicles
(ii)
Profit and loss: insurance
Suspense
Rates prepaid
Suspense
(iii)
Profit and loss: bad debts
Account receivables
Allowance for doubtful account
Profit and loss
(iv)
Profit and loss
Inventories
Debit
$
16,120
Credit
$
80,060
80,060
10,000
10,000
2,500
2,500
1,300
1,300
5,500
5,500
10,800
10,800
540
540
10,000
10,000
(b)
Healthy Food Company
Statement of financial position as at 31 December 20X6
$
ASSETS
Non-current assets
Office machinery
Less: Accumulated depreciation
Current assets
Inventories ($127,600$10,000)
Account receivables, net ($85,500$10,800$540)
Deposit (re: motor vehicle)
Rates prepaid
Total Assets
EQUITY AND LIABILITIES
Capital and reserves
Balance as at 1 January 20X6
Add: Net profit for the year (22,068 + 8,060 + 8,060 + 2,500 – 1,300 – 10,800 + 540 – 10,000)
Non-current liabilities
Bank loan
Current liabilities
Accounts payable
Bank overdraft (21,910 – 16,120 )
Total Capital and Liabilities
$
148,000
45,300
102,700
117,600
75,240
10,000
2,750
205,590
308,290
114,622
19,128
133,750
100,000
68,750
5,790
74,540
308,290
AAT 2011 (Pilot Paper 2, 3)
(Correction Errors)
3. International Food Company is engaged in trading of food products. The company’s inventory record is kept in
periodic inventory system. Before preparing its financial statements for the year ended 31 December 2010, the
following errors are found. You are required to prepare journal entries to correct the errors below.
REQUIRED:
(a)
Great One Company, a supplier, sent a statement of account showing that an invoice of $1,400 was omitted in
the company’s books.
(b)
A trade debtor transferred $4,510 to the company’s business bank account. The company debited the trade
receivables account and credited the trade payables account in its books.
3.
Date
International Food Company
The Journal
Details
(a) 2010
Dec 31 Purchases
Trade payableGreat One Company
(b) 2010
Bank
Dec 31 Trade payable
Trade receivable
Dr
$
1,400
Cr
$
1,400
4,510
4,510
9,020
HKCEE (2010, 7)
(Correction Errors)
The trial balance of Tess Company as at 31 December 2009 failed to agree and the difference was posted to a suspense account.
The draft net profit for the year ended 31 December 2009 amounted to $193,450. All normal sales of the company are made at a
gross profit of 40% on cost.
Subsequent checking of the records revealed the following:
(i) The purchases journal had been undercast by $520.
(ii) Return inwards of $560 had been credited to the returns outwards account as $650.
(iii) Withdrawal of goods with a selling price of $2,800 by the owner had been incorrectly recorded as a credit sale to a customer,
Russ Company.
(iv) A contra entry of $792 in the debtors and creditors accounts had been incorrectly recorded as $972.
(v) A cash discount of $700 received from a supplier was treated as a trade discount.
(vi) A payment for telephone expenses of $300 for the owner was recorded as a payment for the business telephone bill.
(vii) Goods with a cost of $1,000 were sold to a customer at a special discount of 10%. This transaction had been recorded as a
normal credit sale.
(viii) A credit sale of office equipment for $10,000 was incorrectly treated as a credit sale of a fully depreciated motor vehicle with
a cost of $100,000. The office equipment had a cost and accumulated depreciation of $80,000 and $64,000 respectively on 31
December 2009.
(ix) A payment of $123 for carriage inwards had been posted twice to the sundry expenses account.
(x) Commission income of $334 had been debited to both the bank account and the commission expenses account.
REQUIRED:
(a) Prepare the necessary journal entries to correct the above. Narrations are not required.
(b) Draw up the suspense account.
(c) Prepare a statement to correct the draft net profit for the year ended 31 December 2009.
(a)
Journal
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)
(x)
Purchases
Suspense
Returns inwards
Returns outwards
Suspense
Sales
Debtor – Russ Company
Drawings ($2,800 ÷ 140%)
Purchases
Debtors ($972  $792)
Creditors
Purchases
Discounts received
Drawings
Telephone expenses
Sales ($1,000 x 140% x 10%)
Debtors
Accumulated depreciation – office equipment
Motor vehicles
Loss on disposal of fixed assets
Accumulated depreciation – motor vehicles
Office equipment
Carriage inwards
Suspense
Sundry expenses
Suspense
Commission income
Commission expenses
Debit
$
520
Credit
$
520
560
650
1,210
2,800
2,800
2,000
2,000
180
180
700
700
300
300
140
140
64,000
100,000
16,000
100,000
80,000
123
123
246
668
334
334
(b)
Suspense
$
Balance b/d (balancing figure)
Sundry expenses
Commission income
Commission expenses
$
939 Purchases
123 Return inwards
334 Return outwards
334
1,730
520
560
650
1,730
(c)
Statement to calculate the correct net profit for the year ended 31 December 2009
$
Draft net profit
Add Telephone expenses paid for the owner (vi)
Carriage inwards posted twice as sundry expenses (ix)
Commission income recorded as commission expenses (x)
Less Purchases undercast (i)
Returns inwards recorded as returns outwards (ii)
Drawings recorded as sales (iii)
Sales made at a special discount (vii)
Loss on disposal of fixed assets (viii)
Corrected net profit
300
123
668
520
1,210
800
140
16,000
$
193,450
1,091
194,541
18,670
175,871
HKCEE (2009, 2)
(Correction Errors)
(A) Kate Chan owns a small store that sells candies in creative gift package. Customers place orders online and immediate
payments are to be made using credit cards. Goods are to be delivered on the following day.
REQUIRED:
State when the sales revenue should be recognized by Kate Chan and briefly explain the accounting principle or concept that
should be adopted.
(B) The trial balance of Tony Limited as at 31 December 2008 failed to agree and the difference was debited to a suspense account.
The draft net profit for the year amounted to $164,555.
Subsequent checking of the records revealed the following:
(i) An accrual for salaries of $1,000 was mistakenly recorded as a prepayment.
(ii) Prepaid rates of $860 at 31 December 2007 had been brought forward as an opening credit balance in the rates account.
(iii) An item of office equipment which was fully depreciated at 31 December 2007 was sold on 1 January 2008 as scrap for
$130 on credit. The cost of the office equipment was $8,000. No entries in respect of the disposal had been made. The
company had provided depreciation for 2008 at the rate of 10% on the cost of this office equipment.
REQUIRED:
(a) Prepare the necessary journal entries to correct the above. (Note: Narrations are not required.)
(b) Prepare a statement to correct the draft net profit for the year ended 31 December 2008.
Sales revenue should be recorded after the gift packages are delivered to the customers.
(A)
 Realisation principle should be adopted.
 Revenue for a period is determined by applying the realization principle, which requires that the revenue be
recognized and recorded when goods are sold or when services are rendered.
(B)
(a)
Journal
(i)
(ii)
(iii)
Salaries (profit and loss)
Prepayments
Accruals
Rates (profit and loss) ($860 x 2)
Suspense
Accumulated depreciation – office equipment
Debtors
Office equipment
Gain on disposal of assets (profit and loss)
Accumulated depreciation – office equipment ($8,000 x 10%)
Depreciation (profit and loss)
Debit
$
2,000
Credit
$
1,000
1,000
1,720
1,720
8,000
130
8,000
130
800
800
(b)
Statement of adjusted net profit for the year ended 31 December 2008
$
Net profit per draft accounts
Add Gain on disposal of assets
Depreciation on fully depreciated asset
$
164,555
130
800
930
165,485
Less Accrued salaries recorded as prepayment
Opening balance of prepaid rates recorded as credit balance
Corrected net profit
2,000
1,720
3,720
161,765
HKCEE
(2008, 1)
(Correction Errors)
Amanda is the sole owner of a business engaged in the trading of telephone sets. With her limited knowledge of
accounting, she tries to do the accounting work herself. She remembers that all transactions should first be recorded in
the books of original entry before posting to ledger accounts, and that the trial balance will help to locate accounting
errors.
REQUIRED:
Advise Amanda on the following:
(a)
What is the book of original entry for the recording of each of the transactions below?
Book of Original Entry
(i)
Bought telephone sets for resale by cash
?
(ii)
Sold telephone sets to customers on credit
(iii)
Received a credit note from a supplier for telephone sets returned
?
?
(iv)
Gave full allowance to a customer for telephone sets returned
?
(v)
Acquired office premises by a mortgage loan
(vi)
Paid wages and salaries by autopay
?
?
(vii) Accrued for outstanding electricity charges as at year end
(b)
?
Form the transactions in (a) above, identify two examples for each of the following:
(i) Real accounts
(ii) Nominal accounts
(iii) Personal accounts
(c)
What are the types of accounting errors that will not be revealed by a trial balance? State four of them.
(a) (i)
(ii)
(iii)
(iv)
(v)
Cash book
Sales day book
Returns outwards day book
Returns inwards day book
The Journal
(vi)
Cash book
(vii) The Journal
(b) (i)
Real accounts
—
(ii)
cash/bank, office premises, loan, accrued charges, debtors, creditors, stock
Nominal accounts
—
sales, purchases, return outwards, returns inwards, wages and salaries, electricity expense
(iii) Personal accounts
—
(c)
debtors, creditors
error of omission
error of complete reversal
error of commission
error of principle
compensating errors
error of original entry
HKCEE
(2007, 7)
(Correction Errors)
Bamboo Limited is engaged in the trading business. After preparing the adjusting entries, the bookkeeper extracted an
adjusted trial balance as at 31 March 2007. However, he found that the debit and credit totals did not agree:
Ordinary share capital 1 April 2006
Retained profits, 1 April 2006
Plant and equipment, at cost
Bank loan, repayable in 2010
Sales
Debtors
Cost of goods sold
Administrative expenses
Selling expenses
Interest on bank loan
Deposits received from debtors
Share application money received
Cash at bank
Creditors
Stock, 31 March 2007
Prepaid selling expenses, 31 March 2007
Accumulated depreciation – plant and equipment, 31 March 2007
Debit
$
180,000
20,000
692,460
120,000
Credit
$
985,000
105,690
538,600
123,700
187,500
5,000
16,000
70,000
47,400
96,710
22,100
8,000
246,540
1,793,400
1,671,300
You are required to:
(a)
Based on the items listed above, rewrite the adjusted trial balance as at 31 March 2007 for Bamboo Limited.
Subsequent checking for records revealed the following errors and omissions:
(i) Interest income of $800 had been debited to the cash at bank account and the prepaid selling expenses account
only.
(ii) Cash sales of $4884 had been recorded as a cash settlement of $4844 from debtors.
(iii) A payment of administrative expenses of $300 was recorded as a settlement of credit purchases.
(iv) Equipment repairs of $16,000, an administrative expense, had been recorded as $10,600 in the plant and
equipment account. A full year’s depreciation had been calculated at 20% on this amount and was included in
administrative expenses.
(v) The closing stock had been undercast by $6000.
(vi) $12,000 cash was received from a customer as the deposit for placing a purchase order. The cash had been used
to pay an interim dividend to the shareholders. Both transactions were entirely omitted from the books.
(vii) In March 2007, 40,000 ordinary shares of the par value of $1 each were issued to the public at $1.40 each,
payable in full on application. There was an over-subscription and the application money received had been
correctly recorded. On 31 March 2007, the shares were allotted and at the same time, the excess application
money was refunded to the unsuccessful applications. No entries had been made for the allotment of share and
the refund.
You are required to:
(b)
Prepare the necessary journal entries to correct the errors and omissions in (i) to (vii) above. (Narrations are not
required.)
(a)
Bamboo Limited
Adjusted trial balance as at 31 March 2007
Debit
$
Ordinary share capital 1 April 2006
Retained profits, 1 April 2006
Plant and equipment, at cost
Bank loan, repayable in 2010
Sales
Debtors
Cost of goods sold
Administrative expenses
Selling expenses
Interest on bank loan
Deposits received from debtors
Share application money received
Cash at bank
Creditors
Stock, 31 March 2007
Prepaid selling expenses, 31 March 2007
Accumulated depreciation – plant and equipment, 31 March 2007
Suspense
Credit
$
180,000
20,000
692,460
120,000
985,000
105,690
538,600
123,700
187,500
5,000
16,000
70,000
47,400
96,710
22,100
8,000
246,540
3,800
1,734,250
1,734,250
(b)
Journal
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
Suspense
Interest income
Prepaid selling expenses
Bank (Cash)
Debtors
Sales
Administrative expenses
Creditors
Administrative expenses
Plant and equipment
Suspense
Accumulated depreciation – plant and equipment
Administrative expenses ($10,600 x 20%)
Stock
Cost of goods sold
Interim dividend
Deposits received from debtors
Share application money
Ordinary share capital
Share premium ($0.4 x 40,000)
Bank ($1.4 x 10,000)
Debit
$
1,600
Credit
$
800
800
40
4,844
4,884
300
300
16,000
10,600
5,400
2,120
2,120
6,000
6,000
12,000
12,000
70,000
40,000
16,000
14,000
HKCEE (2006, 5)
(Bank Rec and correction of error)
The trial balance of Ho Limited as at 31 March 2006 failed to agree and the difference was entered in a suspense account. The draft
net profit for the year amounted to $80,260.
Additional information:
(i)
The last month’s bank statement balance at 28 February 2006 showed a credit balance of $19,900, which was the same as
that in the cash book on that date. The balance had been wrongly included as the bank balance in the trial balance as at 31
March 2006.
Deposits and cheque payments, totaling $315,000 and $300,700 respectively, had been recorded in the cash book during
March 2006.
(ii)
The following items were shown on the March bank statement but not in the cash book:
1
Bank charges of $80;
2
Bank deposit interest of $650;
3
A dishonoured cheque of $10,250 from Star Ray Limited; and
4
A direct deposit of $2,400 logged by Kettler Limited.
(iii) Cheques, issued in March, amounting to $16,500 had not been presented to the bank for payment.
(iv) Lodgements, totaling $6,630 for March, were not recorded by the bank until 2 April 2006.
You are required to:
(a)
Show the necessary adjustments to be made in the cash book on 31 March 2006.
(b)
Prepare a bank reconciliation statement as at 31 March 2006, commencing with the adjusted cash book balance in (a) above.
Subsequent checking of the records revealed the following:
(v)
The salaries account had been undercast by $500.
(vi) A credit purchase of $2,000 had been completely omitted.
(vii) Returns from Jane Limited, amounting to $780, had been recorded in the accounts as $870.
(viii) An electricity bill of $1,240 for March 2006 had been paid twice. Both payments had been posted to the ledger. The excess
amount paid was to be used to settle future bills.
(ix) A trade discount of 10% was granted to a customer, Mr Wu, on a bulk purchase of $10,000. The sale had been properly
recorded in the books. A cash discount of 5% was also allowed to him on his settlement of account in March. However, only
the amount received was debited in the cash book and no other entries were made.
(x)
$200,000 6% debentures were issued at par on 1 March 2006 to settle a bank loan. Interest on debenture was to be paid
every 6 months. No entries relating to these had been made.
You are required to:
(c)
Prepare the necessary journal entries to correct items (v) to (x) above. (Narrations are not required.)
(d)
Prepare a statement to correct the draft net profit for the year ended 31 March 2006.
(a)
Cash Book (bank column only)
$
34,200
Bank charges
Balance b/d (19,900 + 315,000300,700)
Bank deposit interest
650 Star Ray Limiteddishonoured cheque
Kettler Limited
2,400 Balance c/d
37,250
$
80
10,250
26,920
37,250
(b)
Bank Reconciliation Statement as at March 2006
Adjusted balances as per cash book
Add Uncredited cheque
Less Lodgements not yet recorded by bank
Adjusted balances as per bank statement
$
26,920
16,500
43,420
6,630
36,790
(c)
Journal
Details
(v)
Salaries (Profit and loss)
Suspense
(vi) Purchases (Trading)
Creditors
(vii) Jane Limited ($870$780)
Returns inwards (Trading)
(viii) Prepaid electricity
Electricity (Profit and loss)
(ix) Discount allowed (Profit and loss)
Suspense
Mr Wu
(x) Bank loan
6% debentures
Debenture interest (Profit and loss)
Interest payable (200,000 x 6% x 1/2)
Dr
$
500
Cr
$
500
2,000
2,000
90
90
1,240
1,240
450
8,550
9,000
200,000
200,000
1,000
1,000
(d)
Statement of adjusted profit for the year ended 31 March 2006
$
Net profit per draft accounts
Add Bank deposit interest not recorded
Electricity prepaid
Returns inwards overstated
Less Bank charges not recorded
Salaries undercast
Purchases omitted
Discount allowed not recorded
Debenture interest accrued
Adjusted net profit
650
1,240
90
80
500
2,000
450
1,000
$
80,260
1,980
82,240
4,030
78,210