Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
Answers Note: To save time and space, the months are omitted in the Ledger accounts which follow. The day of the month is shown in brackets.
Answer to Question 1.2A
BA 1
(a) 49,000 (d) 48,100
(c) 65,800 (f) 85,900
(b) 75,100 (e) 81,300
Answer to Question 1.4A (a) Asset (b) Asset (c) Liability (d) Asset (e) Asset
BA 1
(f) Asset (g) Liability (h) Liability (i) Asset
Answer to Question 1.6A
BA 1
Assets List Wrong: Accounts payable, Capital. Liabilities List Wrong: Equipment, Computers.
Answer to Question 1.8A
BA 1
Fixtures 3,200 + Van 4,750 + Inventory 2,340 + Bank 520 + Cash 100 = Total Assets 10,910. Loan 5,000 + Accounts payable 1,910 + Capital (difference) 4,000.
Answer to Question 1.10A
BA 1 G Cook Balance sheet as at 30 June 2019
Non-current assets Equipment
9,720
Current assets Inventory Accounts receivable Cash at bank
6,430 9,280 410 16,120
Less Current liabilities Accounts payable
(8,380) 17,460
Capital
17,460
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Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
Answer to Question 1.12A Assets (a) +Van (b) −Cash (c) +Inventory −Bank (d) +Cash (e) +Inventory −Accounts receivable (f ) +Inventory (g) −Cash (h) −Bank
BA 1
Liabilities +Accounts payable −Loan from F Duff
Capital
+Capital
+Accounts payable −Capital −Accounts payable
Answer to Question 1.14A
BA 1 J Hill Balance Sheet as at 7 December 2019
Non-current assets Equipment Motor Vehicle
6,310 7,300 13,610
Current assets Inventory Accounts receivable Bank Cash
8,480 3,320 9,510 485 21,795 35,405
Current liabilities Accounts payable
1,760 33,645
Capital
33,645
Answer to Question 2.11A Debited (a) Trailer (c) Loan from W Small (e) Office equipment (g) Bank (i) Cash
BA 1
Credited Cash Cash Dexter Ltd L Tait Loan from F Burns
Debited (b) J Tough (d) Cash (f) Cash (h) Bank (j) J Fife
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Credited Bank Trailer T Walls Capital Cash
Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
Answer to Question 2.14A (1) Capital (25) Cash
(5) Old Ltd (15) Cash (30) Bank
Bank 16,000 (2) Van 6,400 400 (12) Cash 180 (19) Carton Cars 7,100 (30) Office fixtures 480
Capital Loan Fox
(15) Bank (24) Cash
(5)
Drop
16,000
Vans Bank 6,400 Carton Cars 7,100
(19) Bank
Office fixtures 900
Carton Cars 7,100 (8) Van
7,100
Loan from Berry (21) Cash
500
BA 1
Bank 18,000 (8) Cash 4,000 (15) Loan Fox (17) Drop
Loan: T Fox 1,000 (2) Bank 500
400 1,000 840
(1) (8)
Capital Bank
Cash 1,500 (3) Computer 400 (24) Loan Fox
(3)
Cash
Computer 1,200
1,200 500
4,000
(17) Bank
Drop Ltd 840 (5) Display stands 840
(31) P Blake
P Blake (31) Printer Printer 400
Display Stands 840
Capital (1) (1)
Answer to Question 3.2A Debited (a) Purchases (c) C Riddle (e) Lorry (g) Bank (i) F Toms
Cash 180 (15) Office fixtures 120 500 (25) Bank 400
Old Ltd (5)
Bank
Answer to Question 2.15A
(12) Bank (21) Loan: Berry
(2) (8)
Office Fixtures 900 120 480 Capital (1)
(1) (2)
BA 1
Cash Bank
1,500 18,000
BA 1
Credited B Cowan Filing cabs M Davis Ltd M Peters Bank
Debited (b) Returns in (d) Purchases (f) J Hicks (h) Purchases (j) S Mulligan
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Credited L Keith Cash Returns Out Bank Sales
400
Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
Answer to Question 3.4A Cash 7,400 (2) 54 (7)
(1) Capital (19) Sales
(4) (7)
BA 1 Bank Purchases
7,000 362
(2) Cash (24) F Holmes (Loan)
Bank 7,000 (5) Van 4,920 (29) J Watson 368 1,500 (31) Firelighters Ltd 820
Purchases 410 362
J Watson Cash
Returns Outwards (12) J Watson
(12) Returns (29) Bank
J Watson 42 (4) Purchases 368
(10) Sales
L Less 218
Sales (10) L Less (19) Cash
42
Fixtures 410
(22) Firelighters Ltd
(5)
Bank
820 Van 4,920 F Holmes (Loan) (24) Bank
(31) Bank
Firelighters Ltd 820 (22) Fixtures Capital (1)
Answer to Question 3.6A
Bank 18,000 (21) Printer 250 (29) B Hind
(5) Sales (12) Sales
Cash 210 (18) Bank 305
620 1,373
(2) (3) (8)
B Hind G Smart G Smart
250
Sales (5) Cash (10) P Syme (12) Cash (22) H Buchan
1,455
Purchases Purchases
472 370
(10) Sales
P Syme 483 (23) Returns In
160
(22) Sales
H Buchan 394 (25) Returns In
18
A Cobb (31) Machinery
419
(31) A Cobb
Machinery 419
18,000
(21) Bank
Printer 620
G Smart 47 (3) (8)
Capital (1)
820 7,400
Purchases 1,455 472 370
Purchases
(28) Returns Out
Cash
1,500
BA 1
(1) Capital (18) Cash
B Hind (6) Returns Out 82 (2) (29) Bank 1,373
218 54
Bank
(23) P Syme (25) H Buchan
Returns Inwards 160 18 Returns Outwards (6) B Hind (28) G Smart
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210 483 305 394
82 47
Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
Answer to Question 4.3A
BA 1
July (1) Bank Cash Capital (2) Stationery Bank (3) Purchases T Smart (4) Cash Sales (5) Insurance Cash (7) Computer J Hott (8) Electricity Bank (10) C Biggins Sales (11) T Smart Returns Out (14) Wages Cash (17) Rent Bank (20) Bank C Biggins (21) J Hott Bank (23) Stationery News Ltd (25) F Tank Sales (31) News Ltd Bank
Dr 5,000 1,000
Cr
6,000 75 75 2,100 2,100 340 340 290 290 700 700 32 32 630 630 550 550 210 210 225 225 400 400 700 700 125 125 645 645 125 125
12 © Pearson Education Limited 2019
Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
Answer to Question 4.4A
BA 1
Bank (1) Capital 11,000 (5) Stationery 62 (24) K Fletcher 250 (16) Business rates 970 (28) Business rates 45 (19) Rent 75 (28) J Biggs 830 (28) D Martin 415 (28) B Black 6,100
(1)
Capital
Cash 1,600 (3) Purchases (4) Rent (7) Wages (11) Rent (18) Insurance (21) Motor exps (23) Wages Capital (1) (1)
Bank Cash
(2) (2) (2) (3)
370 75 160 75 280 24 170
11,000 1,600
Purchases 830 610 590 370
J Biggs D Martin P Lot Cash
Sales (6) D Twigg (6) B Hogan (6) K Fletcher (15) T Lee (15) F Sharp (15) G Rae
370 290 410 205 280 426
Returns Outwards (10) D Martin
195
(13) B Hogan
Returns Inwards 35
(28) Bank
B Black 6,100 (20) Van
(4) Cash (11) Cash (19) Bank
Rent 75 75 75
(28) Bank
J Biggs 830 (2)
Purchases
830
(7) Cash (23) Cash
Wages 160 170
(10) Returns Out (28) Bank
D Martin 195 (2) Purchases 415
610
(5)
Stationery 62
Bank
(16) Bank
P Lot (2)
Business rates 970 (28) Bank
45
(6)
Sales
D Twigg 370
6,100
Purchases
590
(18) Cash
Insurance 280
(6)
Sales
B Hogan 290 (13) Returns In
35
(21) Cash
Motor Expenses 24
(6)
Sales
K Fletcher 410 (24) Bank
250
(20) B Black
Van 6,100
(15) Sales
T Lee 205
(15) Sales
F Sharp 280
(15) Sales
G Rae 426
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Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
Answer to Question 4.6A
BA 1
(A) Goods bought on credit £27,000. (B) Borrowed £35,000 and immediately spent it on land and buildings £35,000. (C) Sold goods costing £20,000 for £30,000 on credit. (D) Debtors paid £13,000 which was deposited in the bank. (E) Debtors paid £2,000: This amount taken by proprietor as drawings. (F) Took £5,000 drawings by cheque and paid off £3,000 accrued expenses by cheque. (G) Equipment costing £30,000 sold for £21,000, resulting in a £9,000 loss on disposal. (H) Goods taken for owner’s personal use £1,000. (I) Took £6,000 cash as drawings. Alternatively could have been £6,000 cash stolen – thus reducing cash and causing a loss.
Answer to Question 5.6A (1) Sales (21) Sales (1)
Balance b/d
(1) Sales (8) Sales (21) Sales
BA 1
P Black 620 (19) Bank 180 (31) Balance c/d 800
620 180 800
(15) Returns Out (28) Bank
180 G Smith 84 (31) Balance c/d 322 860 1,266
(1)
Balance b/d 1,266
(1) (8)
Sales Sales
L Sime 1,200 (10) Returns In 448 (19) Bank (31) Balance c/d 1,648
(1)
Balance b/d 1,406
(1)
Sales
J Teel 608 (10) Returns In (12) Cash 608
(31) Balance c/d 1,266
(28) Bank (31) Balance c/d 62 180 1,406 1,648
Purchases
G Lime 180 (2) 30 210
Black, Smith and Sime are debtors. Donovan, Lime and Still are creditors.
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T Still 21 (2) 100 (9) 40 363 524 (1)
63 215 278
Balance b/d
278
Purchases
210 210
(31) Balance b/d
(15) Returns Out (28) Bank (31) Returns Out (31) Balance c/d
190 190
I Donovan 278 (2) Purchases (9) Purchases 278 (1)
1,266
164 444 608
P Best 25 (2) 165 190
Purchases Purchases
30
360 164
524 Balance b/d
363
Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
Answer to Question 5.7A 2020 May 1 May 19 May 21
2020 May 1 May 8 May 21
2020 May 1 May 8 May 10 May 19
2020 May 1 May 10 May 12
2020 May 2 May 15 May 28
2020 May 2 May 9
2020 May 2 May 28
2020 May 2 May 9 May 15 May 28 May 31
Sales Bank Sales
Sales Sales Sales
Sales Sales Returns Bank
Sales Returns Bank
BA 1 F Black Dr 620
620 180 G Smith Dr 84 322 860 L Sime Dr 1,200 448
J Teel Dr 608
G Lime Dr
Balance 1,200 Dr 1,648 Dr 1,586 Dr 1,406 Dr
Cr
21 100 40
15 © Pearson Education Limited 2019
Balance 608 Dr 444 Dr 0
Cr 190
Balance 190 Cr 165 Cr 0
Cr 63 215
Balance 63 Cr 278 Cr
Cr 210
Balance 210 Cr 30 Cr
Cr 360 164
Balance 360 Cr 524 Cr 503 Cr 403 Cr 363 Cr
180 T Still Dr
Purchases Purchases Returns Bank Returns
Cr
25 165
Purchases Purchases
Purchases Bank
Balance 84 Dr 406 Dr 1,206 Dr
164 444
I Donovan Dr
Balance 620 Dr 0 180 Dr
Cr
62 180
P Best Dr Purchases Returns Bank
Cr
Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
Answer to Question 6.3A (1) Capital (28) T Potts (28) J Field (30) Capital
(1)
Balance b/d
(5)
Sales (26) Loan from B Bennet
(1)
Balance b/d
(3) (3) (3) (3)
J Small F Brown R Charles T Rae (19) R Charles (19) T Rae (19) F Jack
(1)
Balance b/d
(30) Balance c/d
(30) Balance c/d
(20) J Field (20) T Potts
(1)
Balance b/d
(30) Balance c/d
BA 1
Bank 15,000 (6) Rent 175 71 (7) Business rates 130 42 (23) J Small 272 900 (23) F Brown 1,200 (23) T Rae 500 (25) Van 6,200 (30) Balance c/d 7,536 16,013 16,013 7,536 Cash 610 (17) Wages (30) Balance c/d 750 1,360
(6) (1)
Bank Balance b/d
F Brown 1,200 (3)
(23) Bank
Purchases 290 (30) Balance c/d 1,200 530 610 110 320 165 3,225
3,225 (23) Bank (30) Balance c/d
3,225 (30) Balance c/d
3,225 Sales 2,383 (5) Cash (11) T Potts (11) J Field (11) T Gray 2,383
610 85 48 1,640 2,383
(1)
2,383
Balance b/d
Returns Outwards 45 (18) J Small (18) R Charles 45
18 27 45
(1)
45
Balance b/d
Returns Inwards 6 (30) Balance c/d 14 20
(30) Balance c/d
20
15,000 900 15,900
Balance b/d
15,900 11,150 11,150
11,150 Rent 175 (30) Balance c/d 175
175
J Field 48 (20) Returns In (28) Bank 48
(11) Sales
20
20 Capital 15,900 (1) Bank (30) Bank 15,900
(11) Sales
(11) Sales (1) Balance b/d
T Gray 1,640 (30) Balance c/d 1,640 Turnkey Motors 4,950 (21) Van (1) Balance b/d Trial Balance 7,536 1,070 3,225
Bank Cash Purchases Sales Returns Outwards Returns Inwards Capital Van Rent Business rates Wages Loan from B Bennet R Charles T Rae F Jack T Gray Turnkey Motors
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Purchases
R Charles 27 (3) Purchases 613 (19) Purchases 640 (1) Balance b/d T Rae 500 (3) Purchases 430 (19) Purchases 930 (1) Balance b/d F Jack 165 (19) Purchases (1) Balance b/d T Potts 85 (20) Returns In (28) Bank 85
(18) Returns Out (30) Balance c/d
Van (21) Turnkey Motors 4,950 (30) Balance c/d (25) Bank 6,200 11,150 Balance b/d
Bank Balance b/d
1,360
1,070
(1)
(1)
290 1,070
Business rates 130 (30) Balance c/d 130 Wages (17) Cash 290 (30) Balance c/d (1) Balance b/d 290 Loan from B Bennet (30) Balance c/d 750 (26) Cash (1) Balance b/d J Small (18) Returns Out 18 (3) Purchases (23) Bank 272 290
(7) (1)
130
290
750 750 290 290 1,200 530 110 640 613 610 320 930 430 165 165 14 71 85 6 42 48 1,640
4,950 4,950
2,383 45 20 15,900 11,150 175 130 290 750 613 430 165 1,640 25,236
4,950 25,236
Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
Answer to Question 6.4A Cash (1) Capital 10,500 (2) (21) Sales 145 (3) (30) Loan: B Barclay 500 (11) (30) A Tom 614 (30) 11,759 (1) Balance b/d 1,419
BA 1
Bank Purchases Salaries Balance c/d
Bank (2) Cash 9,000 (8) Rent (16) Loan: B Barclay 2,000 (15) Van (29) R Pleat 158 (26) F Hood (29) L Fish 370 (26) M Smith (30) Balance c/d 11,528 (1) Balance b/d 3,790 (3) (4) (4) (4) (4)
Cash T Dry F Hood M Smith G Low
(1)
Balance b/d
(30) Balance c/d
(30) Balance c/d
(18) R Tong (18) M Singh (1)
Balance b/d
Purchases 550 (30) Balance c/d 800 930 160 510 2,950 2,950 Sales 1,783 (6) (6) (6) (6) (21) (24) (24) (24) 1,783 (1)
R Tong L Fish M Singh A Tom Cash L Fish A Tom R Pleat
9,000 550 790 1,419 11,759
220 6,500 900 118 3,790 11,528
Returns Outwards 72 (14) F Hood (14) M Smith 72 (1) Balance b/d
30 42 72 72
(30) Balance b/d
(30) Balance c/d
T Dry 800 (4) (1)
(14) Returns Out (26) Bank
M Smith 42 (4) 118 160
Cash Balance b/d
25
160 160
(30) Balance c/d
G Low 510 (4) (1)
Purchases Balance b/d
510 510
(30) Balance c/d
Buttons Ltd 89 (5) Stationery (1) Balance b/d
89 89 89
(1)
Balance b/d
89
790
(10) Chiefs Ltd (1) Balance b/d
Fixtures 610 (30) Balance c/d 610
610
(15) Bank (1) Balance b/d
Van 6,500 (30) Balance c/d 6,500
6,500
Loan from B Barclay 2,500 (16) Bank (30) Cash 2,500 (1) Balance b/d
2,000 500 2,500 2,500
(30) Balance c/d
Chiefs Ltd 610 (10) Fixtures (1) Balance b/d
610 610
(6) Sales (24) Sales
L Fish 240 (29) Bank 130 370
(30) Balance c/d
(6)
Sales
(1)
Balance b/d
(6) Sales (24) Sales
(24) Sales (6)
Sales
(1)
Balance b/d
10,500 10,500
Purchases
Stationery 89 (30) Balance c/d
Salaries 790 (30) Balance c/d 790
(14) Returns Out (26) Bank
800 800
Buttons Ltd
(11) Cash (1) Balance b/d
25
Purchases Balance b/d
(5)
220
2,950
Balance b/d
Capital 10,500 (1) (1)
Rent 220 (30) Balance c/d 220
2,950
170 240 326 204 145 130 410 158 1,783 1,783
Returns Inwards 5 (30) Balance c/d 20 25 25
Bank Balance b/d
(8) (1)
370 370
M Singh 326 (18) Returns In (30) Balance c/d 326 306 A Tom 204 (30) Cash 410 614
614 614
R Pleat 158 (29) Bank
158
R Tong 170 (18) Returns In (30) Balance c/d 170 165 F Hood 30 (4) 900 930
20 306 326
Purchases
5 165 170
930 930
Trial Balance Cash Bank Purchases Sales Returns Outwards Returns Inwards Capital Stationery Rent Salaries Fixtures Van Loan from B Barclay Chiefs Ltd M Singh R Tong T Dry G Low Buttons Ltd
1,419 3,790 2,950 1,783 72 25 10,500 89 220 790 610 6,500 2,500 610 306 165
16,864
17 © Pearson Education Limited 2019
800 510 89 16,864
Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
Answer to Question 9.2A
BA 1 Cash 295 310
(1) Balances b/d (2) Sales (3) Cash (4) F Bell (9) Business rates (11) Bank (13) Sales (16) J Bull (Loan) (20) K Brown
150 430 1,500
2,685
Answer to Question 9.4A
BA 1
Disct
Cash 420
(1) Balances b/d (2) S Braga (2) L Pine (2) G Hodd (2) M Rae (3) Sales (8) Bank (10) Sales (12) B Age (29) A Line (30) Sales (30) Balance c/d
41 16 22 52 400 1,260 4 980 135
3,060
Cash Book Bank 4,240 (3) Bank (5) Postage 200 (6) Office equipment 194 (7) L Root 115 (11) Cash (12) Wages (14) Motor expenses (28) General expenses 174 (30) Insurance (30) Balances c/d 4,923
Cash Book Bank 4,940 (5) Rent 779 (6) M Peters 304 (6) G Graham 418 (6) F Bell 988 (8) Cash 740 (14) Wages (16) R Todd (16) F Dury 276 (20) Fixtures 324 (24) Lorry (30) Stationery 12,623 (30) Balance c/d 21,392
Cash 200 80
Bank
310 94 150 400 81 35 1,970 2,685
Disct
Cash 340
9 24 10
320 3,968 4,923
Bank 351 936 390 400
540 15 12
70
295 400 4,320 14,300 56 2,124 3,060
21,392
Discounts Allowed 135
(30) Total for month
Discounts Received (30) Total for month
Answer to Question 9.6A
70
BA 1 Cash Book
Disct Balance b/d AB CD EF Bank ¢ Balance c/d
8 20 12
Bank 900 192 480 288
Disct Cash ¢ GH IJ Wages
Cash
45 70
Bank 100 555 1,330
130
100 40
Balance b/d
Cash 80
180 50
125 1,985
Balance c/d 115 Balance b/d
18 © Pearson Education Limited 2019
50 180
1,985 125
Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
AB Balance b/d
200
Bank Discount received
192 8
200
200 CD
Balance b/d
500
Bank Discount received
480 20
500
500 EF
Balance b/d
300
Bank Discount received
288 12
300
300 GH
Bank Discount allowed
555 45
Balance b/d
600
600
600 IJ
Bank Discount received
1,330 70
Balance b/d
1,400
1,400
Answer to Question 10.3A
BA 1 Petty Cash Book Total Office Exps
Receipts 450 (1) (1) (2) (2) (3) (6) (8) (11) (12) (12) (14) (16) (16) (21) (22) (23) (24) (25) (26)
1,400
Balance b/d T Wise Staples and tape dispenser Black Motors Cleaning materials Envelopes Petrol I Dodds J Marsh Paper clips Petrol Adhesive tape Petrol Car tyre T Randall J Marsh I Gray Paper Monday Cars
36 19 42 3 10 18 12 7 2 16 1 24 63 15 16 21 7 74
Motor Exps
Cleaning
Casual Labour 36
19 42 3 10 18 12 7 2 16 1 24 63 15 16 21 7
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Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
(29) (30) 425
(30) (30)
Petrol T Pointer
19 20 425
Cash Balance c/d
39
Sales Day Book 970 560 120 430 390 240 650 3,360 General Ledger Sales (31) Total for month
(a) Invoice summaries: A Portsmouth 22 metres plastic tubing @ £1 6 sheets foam rubber @ £3 4 boxes vinyl padding @ £5 Less Trade discount 25% B Butler 50 lengths polythene sheeting @ £2 8 boxes vinyl padding @ £5 20 sheets foam rubber @ £3 Less Trade discount 20% A Gate 4 metres plastic tubing @ £1 33 lengths polythene sheeting @ £2 30 sheets foam rubber @ £3 Less Trade discount 25%
26
20 104
BA 1
(1) S Fry (3) J Hall (5) R Dunn (7) P Kay (16) A Dale (23) D Fu (30) A Cook
Answer to Question 11.4A
256
450 875
875
Answer to Question 11.2A
19
(1)
Sales
Sales Ledger S Fry 970
(3)
Sales
J Hall 560
(5)
Sales
R Dunn 120
(7)
Sales
P Kay 430
(16) Sales
A Dale 390
(23) Sales
D Fu 240
(30) Sales
A Cook 650
3,360
BA 1
22 18 20 60 15 45 100 40 60 200 40 160 4 66 90 160 40 120
(b) Sales Day Book (1) A Portsmouth (5) B Butler (11) A Gate (21) L Mackeson (30) M Alison
(1)
Sales
Sales Ledger A Portsmouth 45
(5)
Sales
B Butler 160
(11) Sales
A Gate 120
(21) Sales
L Mackeson 29
(30) Sales
M Alison 120
20 © Pearson Education Limited 2019
45 160 120 29 120 474
Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
L Mackeson 29 metres plastic tubing @ £1
29
M Alison 32 metres plastic tubing @ £1 24 lengths polythene sheeting @ £2 20 boxes vinyl padding @ £5
32 48 100 180 60 120
Less Trade discount 331/3%
Answer to Question 11.6A
2,700 216 2,916 729 2,187
Less Trade discount 25%
F Clark 6 cricket bats @ £70 8 ice skates @ £40 5 rugby balls @ £34
420 320 170 910 182 728
Less Trade discount 20%
(a) Purchases Day Book (2) J Ring (11) F Clark (18) A Lane (25) J Jack (30) J Wood
(c) (30) Total for month
General Ledger Sales (30) Total for month
474
BA 1
Workings: Invoices J Ring 3 sets golf clubs @ £900 6 footballs @ £36
(b)
(c)
A Lane 6 sets golf trophies @ £55 4 sets golf clubs @ £720 Less Trade discount 331/3%
J Jack 5 cricket bats @ £48 Less Trade discount 25%
J Wood 8 goal posts @ £95 Less Trade discount 40%
2,187 728 2,140 180 456 5,691
Purchases Ledger J Ring (2) Purchases
2,187
F Clark (11) Purchases
728
A Lane (18) Purchases
2,140
J Jack (25) Purchases
180
J Wood (30) Purchases
456
General Ledger Purchases 5,691
21 © Pearson Education Limited 2019
330 2,880 3,210 1,070 2,140
240 60 180
760 304 456
Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
Answer to Question 11.8A
BA 1
(a) Purchases Day Book (9) C Clarke (16) A Charles (31) M Nelson
(b)
(c) (31) Total for month
Sales Day Book 240 160 50 450
(1) M Marshall (7) R Richards (23) T Young
Purchases Ledger C Clarke (9) Purchases
240
(1)
Sales
Sales Ledger M Marshall 45
A Charles (16) Purchases
160
(7)
Sales
R Richards 200
M Nelson (31) Purchases
50
(23) Sales
T Young 160
(1)
Sales
Sales Ledger B Dock 240 (10) Returns
(1)
Sales
M Ryan 126
(1) (6)
Sales Sales
G Soul 94 99
(1)
Sales
F Trip 107 (10) Returns
(6)
Sales
P Coates 182
(6)
Sales
L Job 203 (24) Returns
General Ledger Purchases Account 450 Sales Account (31) Total for month
Answer to Question 11.11A
405
BA 1
Sales Day Book
(1) B Dock (1) M Ryan (1) G Soul (1) F Trip (6) P Coates (6) L Job (6) T Mann (20) B Uphill (30) T Kane
240 126 94 107 182 203 99 1,790 302 3,143
Returns Inwards Day Book (10) B Dock (10) F Trip (24) L Job
General Ledger Sales (30) Total for the month
19 32 16 67
3,143
(20) Sales
B Uphill 1,790
(30) Sales
T Kane 302
(6)
T Mann 99
Returns Inwards (30) Total for the month
45 200 160 405
67 Sales
22 © Pearson Education Limited 2019
19
32
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Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
Answer to Question 11.13A
BA 1
Sales Day Book (3) E Rigby (3) E Phillips (3) F Thompson (8) A Green (8) H George (8) J Ferguson (20) E Phillips (20) F Powell (20) E Lee
510 246 356 307 250 185 188 310 420 2,772
Returns Inwards Day Book (14) E Phillips (14) F Thompson (31) E Phillips (31) E Rigby
18 22 27 30 97
Sales
Sales Ledger E Rigby 510 (31) Returns In
30
(3) Sales (20) Sales
E Phillips 246 (14) Returns In 188 (31) Returns In
18 27
(3)
Sales
F Thompson 356 (14) Returns In
Sales
A Green 307
Sales
H George 250
Sales
J Ferguson 185
(20) Sales
F Powell 310
(20) Sales
E Lee 420
(3)
(8) (8) (8)
Purchases Day Book (1) K Hill (1) M Norman (1) N Senior (5) R Morton (5) J Cook (5) D Edwards (5) C Davies (24) C Ferguson (24) K Ennevor
Returns Outwards Day Book (12) M Norman (12) N Senior (31) J Cook (31) C Davies
380 500 106 200 180 410 66 550 900 3,292
30 16 13 11 70
Purchases Ledger K Hill (1) Purchases
380
(12) Returns Out
M Norman 30 (1) Purchases
500
(12) Returns Out
N Senior 16 (1)
Purchases
106
R Morton (5) Purchases
200
J Cook 13 (5)
Purchases
180
D Edwards (5) Purchases
410
C Davies 11 (5)
Purchases
66
C Ferguson (24) Purchases
550
K Ennevor (24) Purchases
900
22
(31) Returns Out
(31) Returns Out
General Ledger Sales (31) Sales Day Book
Returns Inwards 2,772
(31) Returns In Day Book
Purchases (31) Purchases Day Book
97 Returns Outwards (31) Returns Out Day Book
3,292
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Answer to Question 12.2A Office furniture Drawings Purchases Display cabinets Durham Brothers Ltd Bad debts Computers
BA 1 Dr Dr Dr Dr Dr Dr Dr
Answer to Question 13.2A
1,400 270 90 460 36 80 2,300
: : : : : : :
Durham Brothers Ltd Purchases Drawings M Sharp Fixtures T Lyle OTF Ltd
Cr Cr Cr Cr Cr Cr Cr
1,400 270 90 460 36 80 2,300
BA 1
(a)
B Cox Middle Road Paisley INVOICE number 4632 To: T Ross 24 Peter Street Loughborough
VAT Registration No. Date: 1 March 2020 Your Order No. 9841 £ 134.00 208.00 216.00 558.00 111.60 669.60
20,000 Coils Sealing Tape @ £6.70 per 1,000 = 40,000 Sheets Bank A5 @ £5.20 per 1,000 = 24,000 Sheets Bank A4 @ £9.00 per 1,000 = Add VAT at 20%
(b) Books of T Ross: B Cox 2020 Mar 1 Purchases
669.60
Books of B Cox: T Ross 2020 Mar 1 Sales
Answer to Question 13.7A
669.60Answer to Question 14.3A
BA 1
BA 1
Output VAT payable to HMRC
£61,548×1/6 =
10,258
Input VAT reclaimable from HMRC
£46,020×2/3×20% =
(6,136)
Amount to be paid by the business to HMRC
Answer to Question 13.9A
BA 1
Let ‘y’ be the total value of net sales in Nov & Dec: 0.6y*1.2 + 0.4y = £280,000 1.12y = £280,000 so y = £250,000.00. Three-fifths of these are subject to VAT at 20%: £250,000*0.6*20% = £30,000 output VAT Let ‘z’ be the total value of net sales in Jan: 0.6z*1.225 + 0.4z = £110,000 1.135z = £110,000 so z = £96,916.30 Three-fifths of these are subject to VAT at 22.5%: £96,916.30*0.6*22.5% = £13,083.70 output VAT Therefore total output VAT for quarter is £30,000 + £13,083.70 = £43,083.70 24 © Pearson Education Limited 2019
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Answer to Question 13.11A (a) 2020 May 25 27 28 29 30
BA 1 Sales Day Book Invoice No 3045 3046 3047 3048 3049
Laira Brand Brown Bros Penfold’s T Tyrrell Laira Brand
Net 1,060.00 2,200.00 170.00 460.00 1,450.00 5,340.00
VAT 159.00 330.00 25.50 69.00 217.50 801.00
Gross 1,219.00 2,530.00 195.50 529.00 1,667.50 6,141.00
(b) Personal accounts in Sales Ledger: Debit gross amounts Sales account in General Ledger: Credit net total for week Output VAT account in General Ledger: Credit total of VAT column for week (c) 2020 May 1 Balance b/d 15 Sales 25 Sales 30 Sales
Laira Brand 2020 2,100.47 May 21 Bank 680.23 29 Returns In 1,219.00 31 Balance c/d 1,667.50 5,667.20
Answer to Question 14.3A
2,500.00 609.50 2,557.70 5,667.20
BA 1
F Dover Income Statement for the year ending 31 May 2020 Sales Less Cost of goods sold: Purchases Less Closing inventory Gross profit Less Expenses: Salaries Business rates Motor expenses General expenses Insurance Net profit
471,624 242,080 28,972 79,120 4,800 1,820 610 2,480
Answer to Question 14.4A
213,108 258,516
88,830 169,686
BA 1
G Graham Income Statement for the year ending 30 June 2019 Sales Less Cost of goods sold: Purchases Less Closing inventory Gross profit Less Expenses: Salaries and wages Equipment rental Insurance Lighting and heating Motor expenses Sundry expenses Net profit
382,420 245,950 29,304
48,580 940 1,804 1,990 2,350 624
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216,646 165,774
56,288 109,486
Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
Answer to Question 15.3A
BA 1 F Dover Balance Sheet as at 31 May 2020
Non-current assets Premises Car
106,000 8,600
Current assets Inventory Accounts receivable Bank Cash
28,972 42,160 5,430 650
114,600
77,212 191,812
Total assets Less Current liabilities Accounts payable
22,400 169,412
Capital Capital introduced Add Net profit
46,526 169,686 216,212 46,800
169,412
Non-current assets Shop Fixtures Lorry
174,000 4,600 19,400
198,000
Current assets Inventory Accounts receivable Bank
29,304 44,516 11,346
Less Drawings
Answer to Question 15.4A
BA 1 G Graham Balance Sheet as at 30 June 2019
85,166 283,166 Current liabilities Accounts payable
23,408 259,758
Capital Capital introduced Add Net profit
194,272 109,486 303,758 44,000
Less Drawings
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Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
Answer to Question 15.6A
BA 1
Capital at 1 January 2019
= 18,000 + 4,800 + 24,000 + 760 + 15,600 − 8,000 − 6,000 = 49,160 Capital at 31 December 2019 = 16,200 + 5,800 + 28,000 + 240 + 4,600 + 16,000 − 11,000 − 2,000 = 57,840 Increase in capital = 8,680 10,400 Add Drawings (200 × 52) 19,080 Less Capital introduced 4,000 Net profit 15,080 A Trader Balance Sheet as at 31 December 2019 Non-current assets Fixtures Motor vehicle
16,200 16,000 32,200
Current assets Inventory Accounts receivable Bank Cash
28,000 5,800 4,600 240
Current liabilities: Accounts payable
11,000
Non-current liabilities: Loan
2,000
Capital account Opening balance Add Capital introduced Net profit
13,000 57,840 49,160 4,000 15,080 68,240 10,400 57,840
Less Drawings
Answer to Question 16.2A
38,640 70,840
BA 1
A Higgins Trading Account part of the Income Statement for the year ending 31 December 2020 Sales 575,430 Less Returns in 23,010 Less Cost of goods sold: Purchases 353,690 Less Returns out 17,290 336,400 Carriage inwards 5,420 341,820 Less Closing inventory 37,880 Gross profit
27 © Pearson Education Limited 2019
552,420
303,940 248,480
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Answer to Question 16.5A
BA 1
T Owen Income Statement for the year ending 31 March 2019 Sales Less Cost of goods sold: Opening inventory Add Purchases Less Returns out Carriage inwards
276,400 52,800 141,300 2,408
Less Closing inventory Gross profit Less Expenses: Wages and salaries Carriage outwards Business rates Communication expenses Commissions paid Insurance Sundry expenses Net profit
138,892 1,350 193,042 58,440
63,400 5,840 3,800 714 1,930 1,830 208
134,602 141,798
77,722 64,076
Balance Sheet as at 31 March 2019 Non-current assets Buildings Fixtures
125,000 1,106 126,106
Current assets Inventory Accounts receivable Bank Cash
58,440 45,900 31,420 276
Current liabilities Accounts payable
136,036 262,142 24,870 237,272
Capital Opening balance Add Net profit
210,516 64,076 274,592 37,320
Less Drawings
237,272
Answer to Question 16.6A
BA 1
F Brown Income Statement for the year ending 30 September 2020 Sales Less Returns in Less Cost of goods sold: Opening inventory Add Purchases Less Returns out Carriage inwards
391,400 2,110
389,290
72,410 254,810 1,240
Less Closing inventory Gross profit 28 © Pearson Education Limited 2019
253,570 760 326,740 89,404
237,336 151,954
Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
Less Expenses: Wages and salaries Carriage out Motor expenses Rent Telephone charges Insurance Office expenses Sundry expenses
39,600 2,850 1,490 8,200 680 745 392 216
54,173 97,781
Balance Sheet as at 30 September 2020 Non-current assets Van Office equipment
5,650 7,470
Current assets Inventory Accounts receivable Bank Cash
89,404 38,100 4,420 112
Current liabilities Accounts payable
132,036 145,156 26,300 118,856
Capital Opening balance Add Net profit
49,675 97,781 147,456 28,600
Less Drawings
Answer to Question 16.8A
13,120
118,856
BA 1 Capital July 1
Balance b/d
9,700
Balance b/d Purchases
500 3,900 4,400 1,400
Inventory July 1
Balance b/d
5,000 OK Ltd
July July 31
Bank Balance c/d
3,000 1,400 4,400
July 1
Aug 1 Balance b/d AB Ltd July 1
Balance b/d Sales
Aug 1
Balance b/d
300 600 900 600
July Bank July 31 Balance c/d
300 600 900
Equipment July 1 Aug 1
Balance b/d Balance b/d
3,700 3,700
July 31
Balance c/d
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Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
Bank July 1
Balance b/d Sales AB Ltd
Aug 1
Balance b/d
1,200 3,200 300 4,700 1,200
July
OK Ltd General expenses July 31 Balance c/d
3,000 500 1,200 4,700
July
Bank AB Ltd
Aug 1
Balance b/d
3,200 600 3,800 3,800
Balance c/d
3,900
Balance c/d
500
Sales July 31
Balance c/d
3,800 3,800
Purchases July Aug 1
OK Ltd Balance b/d
3,900 3,900
July 31
General Expenses July Aug 1
Bank Balance b/d
500 500
July 31
Ms Porter Trial Balance as at 31 July Dr 3,700 5,000 1,200 500 3,900 600
Equipment Inventory at 1 July Bank General expenses Purchases AB Ltd OK Ltd Sales Capital at 1 July
14,900
Cr
1,400 3,800 9,700 14,900
Ms Porter Income Statement for July Sales Less Cost of goods sold: Opening inventory Purchases
3,800 5,000 3,900 8,900 6,200
Less Closing inventory
2,700 1,100 500 600
Gross profit Less General expenses Net profit Balance Sheet as at 31 July Non-current assets Equipment
3,700
Current assets Inventory Accounts receivable Bank
6,200 600 1,200
Current liability: Accounts payable Capital at 1 July Add Net profit 30 © Pearson Education Limited 2019
8,000 11,700 1,400 10,300 9,700 600 10,300
Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
Answer to Question 17.2A
BA 1
Capital (a) (c) (f ). Revenue (b) (d) (e) (g).
Answer to Question 17.4A
BA 1
See text for how to distinguish between capital and revenue expenditure. i) Cost of repairs is always revenue; an extension to an asset is always capital. ii) This is capital expenditure in the same way as buying a van to replace a van is capital expenditure. iii) This is capital expenditure because the asset was improved by the expenditure.
Answer to Question 17.6A
BA 1
Capital: 2,600 of (a); 600 of (c); 150 of (d); all of (e). Revenue: 300 of (a); all of (b); 2,680 of (c); 1,110 of (d).
Answer to Question 17.8A (a) Revenue (b) Revenue (c) Capital (d) Revenue (e) Capital (f) Revenue
BA 1
(g) Capital (h) Revenue (i) Revenue (j) Capital (k) Revenue (l) Capital
Answer to Question 17.10A (a) Capital (b) Revenue (c) Revenue (d) Revenue (e) Capital
BA 1
(f) Capital (g) Revenue (h) Revenue (i) Capital
Answer to Question 17.12A
BA 1
(a) Balance b/d Survey fees Legal charges Cost of site Architect’s fees Subcontractors Transfer from wages Inventory of materials used
Premises 521,100 1,500 3,000 90,000 8,700 69,400 11,600 76,800 Balance c/d 782,100
Balance b/d Vendor of Press A Installation costs (A) Vendor of Press B Installation costs (B) Transport costs (A)
407,500 87,300 2,310 105,800 2,550 2,900 608,360
782,100 782,100
Plant
Balance c/d
31 © Pearson Education Limited 2019
608,360 608,360
Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
(b) Cash discount 2% on Press A. Connected with finance not plant. Loan note interest similarly not applicable. The £4,700 demolition cost and £1,400 plus £1,750 cost of hiring lifting gear are not shown separately as they are included in other figures used above.
Answer to Question 17.14A
BA 1
Part (a) Capitalised as cost of the machine in the balance sheet of J Barton: 195,000 – 29,250 trade discount + 8,700 + 3,000 + 4,400 + 5,800 = 187,650. Maintenance contract and insurance are revenue expenditure (the maintenance expense to be spread over 3 years and insurance over 12 months so prepayment adjustments will be required: see chapter 22 for explanation of prepayments) Cash discount 195,000 × 2.5% = 4,875 will appear as ‘other income’ after gross profit in the income statement. Part (b) When an amount is not considered to be ‘material’ (i.e. it is not of interest to readers of the financial statements mainly because the amount involved is insignificant) then it may be treated as a revenue expense rather than being capitalised. An example might be a business that buys a stapler or a hole-punch for office use. Such items may be used in the business for several years and not bought for the purpose of resale, so at face value they appear to meet the criteria of ‘non-current assets’. However, the insignificant cost and nature of these items means that they are ‘immaterial’ and would be treated as revenue expenses in the income statement in the period in which they were purchased.
Answer to Question 18.3A i)
BA 1
FIFO: 15 @ £19 = £285
ii) LIFO: Jan Apr
Received 120 @ £16 80 @ £18
June
Oct
Issued
Inventory after each transaction 120 @ £16 120 @ £16 1,920 80 @ £18 1,440
45 @ £16 80 @ £18 125 150 @ £19
Nov
Received
Jan Apr Jun Oct Nov
120 @ £16 80 @ £18
Issued
125 150 @ £19 210
Answer to Question 18.4A
BA 1
FIFO 6,210 285 5,925 2,075 8,000
LIFO 6,210 240 5,970 2,030 8,000
Purchases Less Closing inventory Cost of goods sold Gross profit Sales
1,200 2,850
15 @ £16
32 © Pearson Education Limited 2019
4,050 240
Average cost per unit of inventory £16 £16.80 £16.80 £18.27 £18.27
Trading Accounts AVCO 6,210 274 5,936 2,064 8,000
3,360 1,200
75 @ £16 150 @ £19 60 @ £16 150 @ £19 210
iii) AVCO:
75 @ £16
1,920
No. of units in inventory 120 200 75 225 15
Total value of inventory £1,920 £3,360 £1,260 £4,110 £274
Sales (All methods) 125 @ £22 2,750 210 @ £25 5,250 8,000
Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
Answer to Question 18.7A
BA 1
(a)
Mary Smith Income Statement for the 3 months ending 30 November 2019 FIFO 15,840 Sales Less Cost of sales (note 1) 10,408 Gross profit 5,432 Less Overhead expenses 1,520 Sales commission (note 2) 136 12 1,668 Depreciation of lawn mower (note 3) Net profit 3,764 Note 1 (FIFO) Closing inventory 10 @ 489 4,890 1 @ 350 (net realisable value) 350 5,240 Purchases Less Taken for business use 384 Inventory 5,240 Cost of sales (LIFO) Closing inventory 10 @ 384 3,840 1 @ 350 (net realisable value) 350 4,190 Purchases Less Taken for business use Inventory Note 2 Sales commission: Note 3 Depreciation:
LIFO 15,840 11,392 4,448 1,520 111 14
1,645 2,803
16,032 5,624 10,408
16,032 450 4,190
4,640 11,392
FIFO 21/2% @ 5,432 = 135.80 LIFO 21/2% @ 4,448 = 111.20 FIFO 1/8 @ 3 months @ 384 = 12.00 LIFO 1/8 @ 3 months @ 450 = 14.06
(b) Mary Smith’s income, 3 months to 31 August 2019: Salary 3,750 + Interest (1/4 @ 10% @ 7,000) 175 = 3,925 Business: 3 months to 30 November 2019 = 3,764 (c) FIFO: Advantage: Closing inventory values nearer to actual current price levels. Disadvantage: During inflation profits include holding gains. LIFO: Advantage: Cost of sales nearer to current price levels. Disadvantages: Closing inventory valuations will not match up to current price levels.
Answer to Question 18.10A
BA 1 £ Increase 33,400
(a) Inventory at 9 March 2018 Sales at cost [w1] Purchases Sales returns [w2] Purchase returns Office cleaning Inventory with Marketing [w3] Sale or return [w4] Free sample
£ Decrease
£ 100,600
14,000 3,336 850 600 1,320 320 35,890
Inventory at 28 February 2018
33 © Pearson Education Limited 2019
20 (17,956)
17,934 118,534
Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
Workings 1) (43,838 × 100/105) × 100/125 2) 4,170 × 100/125 3) 1,650 × 100/125 4) 800 × 100/125 = 640; 1/2 sold = 320. (b) Revised net profit for the year ending 28 February 2018 £ Draft net profit Add: Undervaluation of inventory Goods sold on sale or return [w5]
Less:
£ 249,600
17,934 400 18,334 267,934 600 267,334
Office cleaning material
Revised total current assets at 28 February 2018 £ 300,000 17,934 317,934
Draft current assets Add: Undervalued inventory Revised total current assets Workings 5) 320 × 125/100
Answer to Question 19.1A
BA 1
• Chapter 21 covers depreciation. A spreadsheet can be used to create what is commonly known as a ‘fixed asset register’. This is a list of all the individual non-current assets that the business owns, together with their date of purchase, expected useful life, expected residual value and so on. Some fairly simple formulas can then be employed to automatically calculate the monthly depreciation charge on each asset. (Accounting software will often have a ‘fixed asset register’ module that can alternatively be used for this purpose, but some businesses will still prefer to use a spreadsheet.) • Chapter 42 covers management accounting, of which budgeting is a central aspect. Spreadsheets are very commonly used to create annual budgets and forecasts. The structure of a spreadsheet is ideal for presenting a budget for the coming year, with a different column for each month and a row for each different item of revenue or cost. Moreover, as long as the formulas are written correctly, small changes in expectations during the budget-setting process can be input and the detailed forecast for each of the next 12 months will be updated automatically, saving hours of manual recalculations. Similarly, spreadsheets are ideal specifically for answering ‘what-if’ questions: different forecast data can be entered (selling prices, sales volumes, cost prices, interest rates etc.) and the spreadsheet will instantly display the financial impact of those assumptions. The use of spreadsheets in this way to explore the impact of different strategies and scenarios is extremely common. • Extended trial-balances are referred to in Chapter 22 and spreadsheets are ideal for creating these. Simple formulas can be used to add the initial trial balance and the adjustments to automatically create a final trial balance and financial statements. By avoiding repetitive manual calculations, a significant amount of time is saved by using a spreadsheet for this work. Moreover, once a template is set-up it can be used over and over again to help produce financial statements in future periods, or for other businesses. • A fourth example would be for ‘books of original entry’, covered in part 2 of the text. For example, a sole trader starting in business could simply start by keeping a cash book in Excel, most likely in a multiple column format. A very small business could function without purchasing specialist accounting software (initially at least) and simply record all business receipts and payments on a spreadsheet. Using a spreadsheet for this purpose would offer various advantages: for example, the column totals would be added up automatically, it would be easy to insert new columns as the business grew, and the workbook could be emailed to the sole trader’s accountant at the end of the year of the purposes of producing the business’s final accounts.
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Answer to Question 19.2A
BA 1
This particular US company misrecorded over $3 billion of expenses as assets in 2001 and 2002. In other words, over $3 billion of ‘revenue expenditure’ was treated as ‘capital expenditure’: the difference between these two is covered in Chapter 17 of the text. In this particular case, the company’s assets were overstated by some $3 billion, its expenses were understated by $3 billion, and profits were therefore overstated by $3 billion. The fraud was discovered by the internal auditors of the company. The discovery ultimately resulted in the company filing for bankruptcy, 500,000 people losing their jobs, and the CEO (along with several accounting staff) going to prison.
Answer to Question 19.3A
BA 1
Some people think that clever tax planning is simply sound business strategy and that there is no ethical problem. Arguments might include: 1) A company has a legal and moral obligation to its shareholders to maximise its value, and therefore has an obligation to make every effort to reduce its tax bill to the lowest possible level within the bounds of the law. Tax advisers are simply helping companies fulfil their obligations. 2) Some argue that companies’ efforts to minimise the tax they pay on their profits actually brings benefits to society: paying less tax means they have more money to invest in expansion and job creation. Moreover, a company’s continued success means that it will contribute even more in tax by way of PAYE and national insurance (i.e. taxes on their employees’ wages) and business rates (i.e. taxes on their business premises). ‘Tax-friendly’ economies attract more investment and grow faster which ultimately benefits everyone, it is argued. 3) ‘Fairness’ is both a subjective and emotive concept. Many would agree that companies should pay their ‘fair share’ of tax but who decides what is fair and what is unfair? It is unreasonable to expect tax advisers and their clients to make that judgement themselves; all we can expect is for them to remain within the law. Equally, the tax authorities are really only in a position to judge objectively whether an arrangement is legal, not whether it is ‘fair’. The onus is therefore on the government to tighten up tax legislation to remove loopholes and reduce the scope for clever tax planning schemes. Individuals, businesses and their advisers need certainty and this can only be provided by the law. Others would say that creation of complex schemes to avoid tax is an unethical activity, regardless of whether the schemes are technically legal. Arguments might include: 1) Tax revenues are needed to provide vital public services, such as healthcare, education, social care and policing. A society without this infrastructure would be completely uncivilised. Tax is therefore a levy that must be paid by everyone for the privilege of living in a civilised country. It is unacceptable for accounting firms to be advising wealthy clients on how to construct their affairs in order to avoid paying this levy. This is especially because (for example) successful companies indirectly gain a huge benefit from being able to trade in a country that has a strong infrastructure of schools, hospitals, roads and other public services. 2) Broadly speaking, companies and individuals should pay tax in proportion to their income. Suppose, for example, a multinational coffee chain has hundreds of profitable coffee shops in the UK: It is undoubtedly ‘fair’ that it should pay UK tax on those profits at the same rate as any other coffee shop companies in the UK. Using a clever scheme to ‘shift’ the profits to another country to avoid paying tax in the UK may be smart tax planning and completely legal, but it is certainly inequitable. 3) All professional accountants have a duty to act ethically, so it is not appropriate for them to be promoting extreme tax-avoiding schemes to their clients. The international code of ethics for accountants instructs that they should ‘avoid any action that discredits the profession’. Given the public outcry that has surrounded some recent high profile cases in the UK it is clear that many feel that tax advisers who promote the more aggressive tax planning schemes are breaching this instruction.
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Answer to Question 19.4A
BA 1
Suggestions could include charities, religious organisations, and trade unions. In other words, in addition to the ‘public sector’ there are various other types of organisation whose primary purpose is something other than to make a profit.
Answer to Question 19.5A
BA 1
Three suggestions could be: Internal audit Accountants in practice provide ‘external’ audit services in the sense that they are independent firms that review the financial statements of their client companies. In contrast ‘internal auditors’ are typically employees of the company itself: their task is to monitor and evaluate whether its own systems and procedures are working properly and to advise management on how things might be improved. All companies (above a certain size) are legally required to have their financial statements reviewed by external auditors but there is no legal requirement for businesses to employ their own internal auditors. It will therefore tend to be larger organisations that can afford to employ them. Forensic accounting ‘Forensic’ literally means appropriate for use in a court of law, so ‘forensic accountants’ are needed when legal cases that have a significant financial dimension require experts to provide evidence in relation to exactly what has happened. ‘Forensic accountants’ will generally therefore involved with investigating events (a financial fraud would be just one example), supplying their findings to solicitors for use in court, and sometimes appearing in court themselves as expert witnesses. Carrying out in-depth investigations can be arduous and require high levels of dedication and attention to detail: forensic accountants may need to examine accounting documents and records meticulously, identify discrepancies, quantify losses, trace where funds may have gone and how they might be recovered. Reports of their findings will also have to be written with a high degree of precision and clarity. And carrying out the role of ‘expert witness’ in court will require (among other things) excellent oral communication skills. Insolvency ‘Insolvency practitioners’ (IPs) are usually accountants or are insolvency specialists working for firms of accountants. It is a highly specialised field. Their main aim is essentially to sort out the financial situation of people or businesses that are in severe financial difficulty. For example, IPs may act as ‘liquidators’ of a company that is in such serious financial difficulty that it needs to be shut down permanently (also known as ‘winding up’ a company). ‘Liquidation’ is something of a last resort and the IPs will normally first try to rescue the company, so the company will typically first be placed in ‘administration’: the IPs, acting as ‘administrators’, will take over running of the company and decide what the best outcome is (which might include reorganising the company and negotiating with creditors so that it can keep trading, selling the business as a going concern to another company, or closing the company down altogether). Alternatively, lenders might appoint IPs to act as ‘receivers’ whose role is to take over the running of the company specifically to sell some of its assets so that the lenders can be repaid.
Answer to Question 19.6A
BA 1
(a) Advantages of training with one of the Big Four might include: • They are large, multinational organisations with the infrastructure and resources to provide first class training. • They are prestigious, world-renowned firms. Working for them will tend to impress future employers later in your career. • You will earn more: at every level, salaries will be a bit higher than at smaller firms. • If you manage to reach the top of a Big Four firm (i.e. to become a partner) then you will be extremely well-paid. • Big Four firms will have some large, prestigious client companies which could lead to job opportunities with those companies in the future (if your plan is to transfer to industry). 36 © Pearson Education Limited 2019
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• A bigger firm means a bigger network of potential contacts that could be useful later in your career. • Multinational firms also potentially offer opportunities for overseas secondments. (b) Possible disadvantages could be: • Competition for trainee positions at the Big Four is extremely fierce so (unless you are an exceptionally strong candidate) restricting your applications to these four may not be wise. • Some may find the working environment rather too competitive and pressured for their tastes. • Only a tiny percentage of trainees will succeed in becoming partner in a Big Four firm. (c) Possible advantages to training with a smaller firm might include: • Smaller firms will generally mean smaller clients. This has various implications: • You may be better-placed to see the whole picture of the client’s business, rather than just working on one or two small aspects of a big project • You may work on smaller jobs in smaller teams, which can mean greater responsibility, more face-toface exposure to clients, and earlier involvement in higher-level discussions with clients. In contrast, at the Big Four you could be given rather mundane, low profile tasks in the first couple of years. • You may be exposed to a wider range of different clients, rather than being stuck working on one big client for weeks on end. • Generally speaking, you might tend to work slightly fewer hours with slightly less pressure at a smaller firm. The work-life balance may be better. • There may be more opportunity to have a closer working relationship with partners, and be genuinely ‘mentored’ by one of them. It is quite understandable that many students would prefer to qualify with a Big Four firm but that doesn’t mean it is wise to rule out smaller firms altogether. Above all, qualifying as a professional accountant is a very worthwhile achievement whatever size of firm you train with, and smaller firms can sometimes have their own advantages.
Answer to Question 19.7A
BA 1
If you are reading this book you are probably a student but you might be doing a course in business, management, law, or some other discipline, and have no intention whatsoever of becoming an accountant. However, your aim will probably be to become a manager of some description, or at least work in some sort of senior role. You will therefore have to make decisions, and for many of these decisions you will need accounting information. This information will be provided to you by the accountants in your organisation, but you’ll need to understand exactly what it means before you can begin to use it effectively. Similarly, the success or failure of your decisions will often be primarily judged by whether they prove to be profitable for your organisation, so you’ll need an understanding of how business profits are calculated. If you understand the basics of accounting you will also understand the financial reports that will be discussed in meetings, you will be able to communicate far more effectively with your colleagues in the finance department, and you’ll understand how budgeting works and how your actual performance will be monitored against the plan. You’ll also understand that accounting is as much an art as it is a science, and that many figures in financial statements are imprecise estimates based on questionable assumptions. In so many ways, understanding accounting will help make you a better, more effective manager, whatever field you end up working in.
Answer to Question 19.8A
BA 1
There could be various suggestions. Some students will occasionally be more familiar with new technologies on the horizon than some of their instructors! However, one suggestion would be the potential emergence of a cashless society. Some observers believe that (over the course of the coming decades) notes and coins will disappear altogether and all payments will be made using either cards or (more likely) smartphones. This could potentially set some small businesses free of almost all bookkeeping tasks. All business receipts and payments could be transacted via the business’s smartphone(s), and the information regarding every transaction could be automatically recorded on some simple accounting software. All invoices would also be exchanged electronically, so there would be no need for filing or paperwork either. Basic financial statements could then be automatically produced by the accounting software. A cashless society could massively reduce the bookkeeping burden on small businesses. 37 © Pearson Education Limited 2019
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However, other observers think that the UK will never become completely cashless. For various reasons, certain sections of society might resist the change and notes and coins will stubbornly refuse to be entirely replaced. It certainly seems true that the prospect of a fully cashless society is a long way off in the UK. Certain other countries have made more progress in this direction than the UK: for example, the use of notes and coins has fallen significantly in Sweden in recent years and a completely cashless society seems a rather more realistic proposition there than it is in the UK.
Answer to Question 20.4A
BA 1
(a) 2017 Dec 31 Various accounts receivable 2018 Dec 31 Various accounts receivable 2019 Dec 31 Various accounts receivable (b) 2017 Dec 31 Balance c/d 2018 Dec 31 Balance c/d
2019 Dec 31 Profit and Loss Dec 31 Balance c/d
Bad Debts 2017 2,480 Dec 31 Profit and Loss 2018 5,216 Dec 31 Profit and Loss 2019 10,620 Dec 31 Profit and Loss
2,480 5,216 10,620
Allowance for Doubtful Debts 2017 4,200 Dec 31 Profit and Loss 2018 6,160 Jan 1 Balance b/d Dec 31 Profit and Loss 6,160 2019 1,000 Jan 1 Balance b/d 5,160
4,200 4,200 1,960 6,160 6,160
6,160
(c) Account receivable Less Allowance for doubtful debts
Answer to Question 20.6A
Balance Sheet (extracts) 2017 84,000 154,000 4,200 79,800 6,160
6,160
2018 147,840
2019 172,000 5,160
166,840
BA 1
(a) Write-off £14,300 + increase in allowance £900 = £15,200 expense (b) Write-off £29,400 – decrease in allowance £1,700 = £27,700 net expense (c) Written-off Debt recovered that had been previously written-off Decrease in allowance Net total charge in Income Statement (d) Original total of accounts receivable i) Amount must be written-off, i.e. removed from accounts receivable ii) There is merely doubt over whether this amount will be received: it therefore remains in accounts receivable, and an allowance for it is set up separately iii) A separate allowance has already been set-up for this, implying the debt is still included in the £97,000. It has now been received, so total accounts receivable are reduced by £1,523 iv) This amount has already been written-off, so the debt is not included in the £97,000. Receipt will thus be credited to an Income Statement account Revised total of accounts receivable
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3,960 (261) (150) 3,549 97,000 (1,375) -
(1,523) 94,102
Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
Answer to Question 20.8A
BA 1 Allowance for Doubtful Debts 2018 2,700 Jan 1 Balance b/d Dec 31 Profit and loss 2,700
2,166 534 2,700
Provision for Discount on Accounts receivable 2018 648 Jan 1 Balance b/d Dec 31 Profit and loss 648
526 122 648
2018 Dec 31 Various debtors
Bad Debts 2018 16,349 Dec 31 Profit and loss
16,349
2018 Dec 31 Total for year
Discounts Allowed 2018 3,857 Dec 31 Profit and loss
3,857
2018 Dec 31 Balance c/d
2018 Dec 31 Balance c/d*
Income Statement (extract) Bad debts Increase in allowance for doubtful debts Discounts allowed Increase in provision for discounts on accounts receivable
16,349 534 3,857 122
* 1% of [67,500 − 2,700]
Answer to Question 20.11A
BA 1
Revised receivables are 145,000 – 6,000 = 139,000 Allowance required 139,000*4% = 5,560, that is, a increase in the allowance of 1,060 Therefore impact on net profit: Bad debts written off Increase in allowance for bad debts Bad debts recovered Net charge to income statement (i.e. negative impact on net profit)
Answer to Question 21.4A
BA 1
(a) Straight line Photocopier cost Yr 1 Depreciation
23,000 4,750* 18,250 4,750 13,500 4,750 8,750 4,750 4,000
Yr 2 Depreciation Yr 3 Depreciation Yr 4 Depreciation
(b) Reducing balance Photocopier cost Yr 1 Depn 35% of 23,000 Yr 2 Depn 35% of 14,950 Yr 3 Depn 35% of 9,717 Yr 4 Depn 35% of 6,316
* Calculation: 23,000 − 4,000 4
=
(29,200) (1,060) 830 (29,430)
19,000 = 4,750 4
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23,000 8,050 14,950 5,233 9,717 3,401 6,316 2,211 4,105
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Answer to Question 21.5A
BA 1
(a) Reducing balance Printer cost Yr 1 Depreciation 60%
800 480 320 192 128 77 51 31 20 12 8
Yr 2 Depn 60% of 320 Yr 3 Depn 60% of 128 Yr 4 Depn 60% of 51 Yr 5 Depn 60% of 20
(b) Straight line Printer cost Yr 1 Depreciation
800 160* 640 160 480 160 320 160 160 160 –
Yr 2 Depreciation Yr 3 Depreciation Yr 4 Depreciation Yr 5 Depreciation * Calculation: 800 = 160 5
Answer to Question 21.6A
BA 1
(a) Reducing balance Bus cost Yr 1 Depreciation 25%
56,000 14,000 42,000 10,500 31,500 7,875 23,625 5,906 17,719
Yr 2 Depn 25% of 42,000 Yr 3 Depn 25% of 31,500 Yr 4 Depn 25% of 23,625
(b) Straight line Bus cost Yr 1 Depreciation
56,000 9,500* 46,500 9,500 37,000 9,500 27,500 9,500 18,000
Yr 2 Depreciation Yr 3 Depreciation Yr 4 Depreciation * Calculation: 56,000 − 18,000 4
Answer to Question 21.10A
=
38,000 = 9,500 4
BA 1
(a) Purchased in Feb 2016, original cost Depreciation expense for year to 31/8/2016 (at 30%) Cost minus accumulated depreciation at 31 August 2016 Depreciation expense for year to 31/8/2017 (at 30% of NBV) Cost minus accumulated depreciation at 31 August 2017 Depreciation expense for year to 31/8/2018 (at 30% of NBV) Cost minus accumulated depreciation at 31 August 2018 Depreciation expense for year to 31/8/2019 (at 30% of NBV) Cost minus accumulated depreciation at 31 August 2019 Depreciation expense for year to 31/8/2020 (at 30% of NBV)
240,000.00 (72,000.00) 168,000.00 (50,400.00) 117,600.00 (35,280.00) 82,320.00 (24,696.00) 57,624.00 (17,287.20)
(b) The reducing balance method will allocate a greater proportion of the asset’s original cost to expenses in the early years of use, and a smaller proportion in its later years. This may be appropriate if the benefits obtained by the business from using the asset decline over time. See text for further explanation.
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Answer to Question 21.11A
BA 1
Part (a) Van: (11,360 – 2, 000)/4 = 2,340 Equipment (7,000 – 1,000)/10 = 600 Total depreciation expense = 2,940 Part (b) Van: (11,360 – 2,000)/4 = 2,340 x 9/12 months = 1,755 Equipment (7,000 – 1,000)/10 = 600 x 3/12 months =150 Total depreciation expense = 1,905
Answer to Question 21.13A
BA 1
(a) Balance 1 April 2020 Add Acquisitions during year
Plant at Cost 372,000 96,000 468,000 44,400 423,600
Less Disposals (36,000 + 4,000 + 4,400) Balance 31 March 2021 (b) Provision for Depreciation of Plant Balance 1 April 2020 Less Depreciation on disposals (W1)
205,400 25,200 180,200 48,680 228,880
Add charge for year 20% × (423,600 − 180,200) Balance 31 March 2021 Plant Sold Cost: year to 31 March 2017 Depreciation: year to 31 March 2017
20%
Depreciation: year to 31 March 2018
20%
Addition Depreciation: year to 31 March 2019
20%
Depreciation: year to 31 March 2020
20%
40,000 8,000 32,000 6,400 25,600 4,400 30,000 6,000 24,000 4,800 19,200
(W1) Depreciation accumulated: 8,000 + 6,400 + 6,000 + 4,800 = 25,200. (c) Sale of plant Less Cost (40,000 + 4,400) Depreciation Book value at date of sale Loss on disposal
13,700 44,400 25,200 19,200 5,500
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Answer to Question 21.16A (a) 2019 Jan 1 2020 Jan 1 Oct 1
(b) 2019 Jan 1 Jul 1
BA 1 Machinery 2019 2,800 Dec 31 Balance c/d 2020 2,800 Dec 31 Balance c/d 3,500 6,300
Bank Balance b/d Bank
6,300 6,300
Fixtures 2019 290 Dec 31 Balance c/d 620 910 2020 910 Dec 31 Balance c/d 130 1,040
Bank Bank
2020 Jan 1 Balance b/d Dec 1 Bank
(c) 2019 Dec 31 Balance c/d 2020 Dec 31 Balance c/d
2,800
910 910 1,040 1,040
Accumulated Provision for Depreciation: Machinery 2019 420 Dec 31 Profit and loss 2020 1,302 Jan 1 Balance b/d Dec 31 Profit and loss 1,302
420 420 882* 1,302
* (2,800 − 420) × 15% = 357 3,500 × 15% = 525 882
2019 Dec 31 Balance c/d 2020 Dec 31 Balance c/d
Accumulated Provision for Depreciation: Fixtures 2019 46 Dec 31 Profit and loss 2020 96 Jan 1 Balance b/d Dec 31 Profit and loss 96
46 46 50* 96
* (910 − 46) × 5% = 43.2 130 × 5% = 6.5 49.7 rounded to 50. (d) 31 December 2019 Machinery at cost Less Depreciation to date Fixtures at cost Less Depreciation to date
Balance Sheet (extracts) 2,800 420 910 46
31 December 2020 Machinery at cost Less Depreciation to date Fixtures at cost Less Depreciation to date
6,300 1,302 1,040 96
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2,380 864
4,998 944
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Answer to Question 21.19A
BA 1
Note: Lorry names have been added for clarity. 2019 April 1 June 7 October 30 2020 March 6
Lorry disposal – F
2020 April 1
Balance b/d
2019 June 1 August 21 2020 March 31
2019 June 1 August 21 2020 March 6
Lorries 2019 99,600 June 1 32,800 August 21 39,000 2020 March 6 37,600 31 209,000
Balance b/d Bank Bank
Lorry disposal – B Lorry disposal – A Balance c/d
Lorry disposal – B Lorry disposal – A
19,600 31,200
Lorry disposal – E Balance b/d
39,000 119,200 209,000
119,200 Accumulated depreciation on lorries 2019 7,840 April 1 Balance b/d 42,560 24,960 2020 March 31 Depreciation (119,200 × 20%) 23,840 33,600 66,400 66,400 2020 April 1 Balance b/d 33,600
Lorries – B Lorries – A
Lorry disposal 2019 19,600 June 1 31,200
Accumulated depreciation on lorries – B
7,840
Lorries – E
39,000
Bank
10,500
1
August 21 Accumulated depreciation on lorries – A 24,960 21 Bank 7,000 2020 March 6 Lorries – F 37,600 31 Profit and loss (loss on disposal) 1,900 89,800
89,800 Bank 2019 June 1 August 21
2020 March 31
Lorry disposal – B Lorry disposal – A
Accumulated depreciation on lorries
Answer to Question 21.21A Workings: AAT 101
10,500 7,000
2019 June 7 Lorries – D October 30 Lorries – E
Depreciation on lorries 2020 March 31 Profit and loss 23,840
32,800 39,000
23,840
BA 1
Cost Less Estimated residual value Estimated total depreciation Estimated life 5 years Depreciation charge per year Accumulated depreciation at 1.4.2017 2 years 6 months @ 1,200 43 © Pearson Education Limited 2019
8,500 2,500 6,000 1,200 3,000
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Depreciation 1.4.2017 to 30.6.2017 3 months @ 1,200 p.a. Accumulated depreciation at 30.6.2017 Cost was Written-down value on disposal Trade-in allowance Loss on disposal
300 3,300 8,500 5,200 5,000 200
DJH 202
Cost Less Estimated residual value Estimated total depreciation Estimated life 8 years Depreciation charge per year Accumulated depreciation at 1.4.2017 2 years @ 1,250 Remainder of estimated depreciation Adjust to cover 4 years in future: i.e. 7,500 ÷ 4 now yearly charge Depreciation for year to 31 March 2018 AAT 101 As above DJH 202 As above KGC 303 Cost 15,000 – residual value 4,000 = 11,000 ÷ 5 years = 2,200 p.a. For 9 months 30.6.2017 to 31.3.2018 2,200 × 9/12
12,000 2,000 10,000 1,250 2,500 7,500 1,875 300 1,875
1,650 3,825
(a) (Dates omitted) Motor vehicles Motor vehicle disposals Pinot Finance Bank Purchase of KGC 303 Motor vehicle disposals Motor vehicles Cost of vehicle AAT 101 Accumulated provision for depreciation: Motors Motor vehicle disposals Depreciation to date of disposal of AAT 101 Profit and loss Motor vehicle disposals Loss on disposal of vehicle AAT 101
Journal
Cr 5,000 6,000 4,000
8,500 8,500 3,300 3,300 200 200
(b) Profit and loss Provision for depreciation: Motor vehicles Depreciation on motor vehicles for year to 31 March 2018 (c) (Dates omitted) Balance b/d Purchase of KGC 303
Dr 15,000
Motor Vehicles 20,500 Motor vehicle disposals 15,000 Balance c/d 35,500
3,825 3,825
8,500 27,000 35,500
Accumulated Provision for Depreciation: Motor Vehicles Motor vehicle disposals Balance c/d
3,300 6,025 9,325
Balance b/d Profit and loss
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5,500 3,825 9,325
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Answer to Question 21.23A
BA 1
(a) i)
Depreciation on Machines each year 2019 2020 Machine 1 (95% 40,000 @ 10%) 3,800 (12 months) 3,800 (12 months) 3,800 (12 months) 3,800 (12 months) Machine 2 (95% 40,000 @ 10%) Machine 3 (95% 15,200 @ 10%) 361 (3 months) 1,444 (12 months) Machine 4 (95% 15,200 @ 10%) 361 (3 months) 1,444 (12 months) Machine 5 (95% 20,000 @ 10%) Total per year 8,322 10,488 ii) Sale proceeds Machine 3 cost Accumulated depreciation (361 + 1,444 + 722)
2021 3,800 (12 months) 3,800 (12 months) 722 (6 months) 1,444 (12 months) 950 (6 months) 10,716 12,640
15,200 2,527 12,673 33
Loss on sale of Machine 3
(b) Assuming that the depreciation rate was set to match the estimated useful economic life, it should not matter which depreciation method was used. The overall reported profits during the economic life of the vehicle would be identical. However, the diminishing balance method (or reducing balance method) will result in lower reported profits in the first few years, but higher reported profits in the later years.
Answer to Question 21.25A
BA 1
Annual depreciation charge on Z-15 machine = 19,000 x 10% = 1,900 per year Dixie owned the Z-15 for three years (i.e. 1/4/16 – 31/3/19). So accumulated depreciation after three years was 1,900 × 3 = 5,700. Thus the net book value of the Z-15 at the date it was traded-in was 19,000 – 5,700 = 13,300 Trade-in value given by vendor of the Z-18 =32,000 list price – 20,000 settlement figure = £12,000 trade-in value. Therefore the profit or loss on disposal:
Effective disposal proceeds (i.e. trade-in value received) NBV of Z-15 at date of disposal Loss on disposal
Answer to Question 21.27A 2019 Jan 1
Balance b/d Bank
2019 Machinery
£ 12,000 (13,300) (1,300)
BA 1 Machinery 2019 52,950 Machinery disposal 2,480 Dec 31 Balance c/d 55,430
2,800 52,630 55,430
Machinery disposal 2019 2,800 Accumulated provision for depreciation – machinery Bank Dec 31 Profit and loss (loss on disposal) 2,800
1,120 800 880 2,800
Accumulated provision for depreciation – machinery 2019 Machinery disposal 1,120 Jan 1 Balance b/d Dec 31 Balance c/d 29,813 Dec 31 Depreciation 30,933
2019
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25,670 5,263 30,933
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2019 Jan 1
Office furniture 2019 2,860 Dec 31 Balance c/d 320 3,180
Balance b/d Bank
2019 Dec 31 Balance c/d
3,180 3,180
Accumulated provision for depreciation – office furniture 2019 1,649 Jan 1 Balance b/d Dec 31 Depreciation 1,649
1,490 159 1,649
Balance Sheet extract as at 31 December 2019 Machinery, at cost Less Accumulated depreciation
52,630 29,813
Office furniture, at cost Less Accumulated depreciation
3,180 1,649
22,817
1,531
Answer to Question 21.28A (a)
BA 1
P Mackie Income Statement for the year ending 30 April 2020
Sales Less Returns inwards
26,200 670 25,530
Less Cost of sales Opening inventory Add Purchases Less Returns outwards
2,266 16,450 392 16,058 295 18,619 2,860
Carriage inwards Less Closing inventory
15,759 9,771 Gross profit Less Expenses: Carriage outwards Salaries Motor expenses Rent Sundry expenses Bad debts Depreciation: Fixtures and fittings Motor vehicles
534 2,692 729 843 1,390 365 80 1,900 8,533 1,238
Net profit Balance Sheet at 30 April 2020 Non-current assets Fixtures and fittings (800 – 240 – 80) Motor vehicles (7,600 – 3,800 – 1,900)
480 1,900 2,380
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Current assets Inventory Accounts receivable (4,965 – 365) Bank Cash
2,860 4,600 1,648 150 9,258 3,277
Less Current liabilities – Accounts payable
5,981 8,361 Capital account Opening balance Add Net profit
15,523 1,238 16,671 8,400 8,361
Less Drawings (b) See text Chapters 20 (bad debts) and 21 (depreciation).
Answer to Question 21.30A
BA 1
(a)
Annual Depreciation Charge (ii) Diminishing balance 60% × 1,800 = 1,080 60% × 720 = 432 60% × 288 = 173 60% × 115 = 69 1,754
(i) Straight line Year 1 Year 2 Year 3 Year 4
450 450 450 450 1,800
(b) (Dates omitted) Balance b/d
Assets disposals
(i) Laser Printer 1,800 Assets disposals
1,800
1,685 35 1,720
(iii) Assets Disposals 1,800 Provision for depreciation 120 Bank 1,920
1,720 200 1,920
Answer to Question 22.2A
(b) 2020 Jun 30 Cash and bank 30 Owing c/d
350 450 450 550 1,800
(ii) Accumulated Provision for Depreciation: Laser Printer 1,720 Balance b/d Profit and loss (69 × 6/12) 1,720
Laser printer Profit and loss
(a) 2019 Jul 1 Stock b/d 2020 Jun 30 Cash and bank
(iii) Units of output 35,000/180,000 × 1,800 = 45,000/180,000 × 1,800 = 45,000/180,000 × 1,800 = 55,000/180,000 × 1,800 =
BA 1 Stationery 2020 60 Jun 30 Profit and loss 30 Inventory c/d 240 300 General Expenses 2019 470 Jul 1 Owing b/d 60 2020 Jun 30 Profit and loss 530
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205 95 300
32 498 530
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(c) 2020 Jun 30 Cash and bank 30 Rates owing c/d
Rent and Rates 2019 5,410 Jul 1 393
Owing b/d Rent Rates
2020 Jun 30 Profit and loss 30 Rent prepaid c/d 5,803 (d) 2020 Jun 30 Cash and bank 30 Owing c/d
(e) 2019 Jul 1 Owing b/d 2020 Jun 30 Profit and loss
Answer to Question 22.4A
Motor Expenses 2019 1,410 Jul 1 Owing b/d 67 2020 Jun 30 Profit and loss 1,477 Commission Receivable 2020 50 Jun 30 Cash and bank 30 Owing c/d 1,132 1,182
Lighting and Heating 2019 192 Dec 31 Profit and loss 1,300 31 Inventory c/d 810 162 2,464
Balance b/d Bank (electricity) Bank (oil) 31 Owing c/d
Insurance 2019 1,410 Jun 30 Bank 1,164 Dec 31 Profit and loss 1,464 31 Prepaid c/d * 4,038
Balance b/d Bank (fire) Bank (general)
* Prepaid calculated: Fire 5 months 1,164 @ 5/12 = General 7 months 1,464 @ 7/12 =
Answer to Question 22.6A
5,022 370 5,803
92 1,385 1,477
1,100 82 1,182
BA 1
2019 Jan 1
2019 Jan 1
220 191
2,259 205
2,464
82 2,617 1,339 4,038
485 854 1,339
BA 1
(a) £2,930 paid in 2020 + £910 still owing re 2020 - £840 of payments made during 2020 that related to lighting & heating used in 2019 = £3,000 total expense (b) Expenses would be understated by £650, so net profit would be overstated by £650. (c) Premium is 20% more than the previous year, so the previous premium must have been 7,200/1.2 = 6,000 (i.e. 6,000 + 20% = 7,200). Insurance expense will therefore be: 1/4/18 to 31/8/18 was at the old price (5 months): 6,000 × 5/12 = 2,500 1/9/18 to 31/3/19 was at the new price (7 months): 7,200 × 7/12 = 4,200 Total expense in Income Statement 6,700
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(d) Electricity for three months to 31/5/18 = £864; therefore, as at 30/4/18, £864 × 2/3 = £576 had been used but not billed so represents an accrual. (The rent was paid in advance so a prepayment is required for rent, not an accrual.) (e) Calculations as follows: 1/9/19 to 31/3/20 was at the lower rent (7 months): 45,600 × 7/12 = 26,600 1/4/20 to 31/8/20 was at the higher rent (5 months): 51,600 × 5/12 = 21,500 Total expense in Income Statement 48,100 Prepayment in Balance Sheet: 1 month prepaid = 1/12 × 51,600 4,300 (f) Additional bills of 886 paid in April + 291 outstanding re April + one month of prepaid insurance ‘consumed’ in April (565/5) = 1,290 total expense.
Answer to Question 22.7A
BA 1
No set answer. Note: Avoid very technical language as it is for a non-accountant. Keep it fairly brief. (a) ‘Assets’ means the resources possessed by the business, but there is one important qualification to this statement. That is that the asset must have cost the business something that can easily be measured in monetary terms. Whilst, therefore, your skill and knowledge may be an ‘asset’ in ordinary everyday language, it cannot be classed as an ‘asset’ in an accounting sense as it did not cost anything to the business. (b) The house you live in, we assume, is not used at all for your business. It cannot therefore be included as a business asset. Accordingly the increase in the value is also irrelevant. If the house is owned by the business it would be included as an asset at £130,000 until a proper revaluation takes place. (c) Assets are called non-current assets when they are of long life, are to be used in the business and were not bought with the main purpose of resale. Examples are buildings, machinery, motor vehicles and fixtures and fittings. Assets are called current assets when they represent cash or are primarily for conversion into cash or have a short life. An example of a short-lived asset is that of the stock of oil held to power the boilers in a factory, as this will be used up in the near future. Other examples of current assets are cash itself, stocks of goods, debtors and bank balances. (d) Some vehicles may have been bought specifically for resale, and are therefore current assets. Other vehicles, such as a breakdown truck, have been bought for use, not resale, and are consequently noncurrent assets. See definitions in (c) above. (e) The profit in the income statement is calculated by matching up sales for the year with those costs that have been incurred in order to achieve the sales. Some of the costs were paid for in a previous year, some items are still owed for. This means that costs do not mean items paid for in the year. Similarly, a lot of sales will still be owed for – see accounts receivable – so that this does not equal cash received in the year. As many items in the income statement do not equal cash received or paid out, then obviously there is not necessarily any easy comparison between profit and cash and bank balances. (f) No, that is not true. Depreciation represents the part of the original cost used up in the year. As equipment may last for several years, only part will be charged against 1 year. The portion of the original cost of the asset that has not yet been expensed is shown in your balance sheet. The total cost will eventually be charged against your profits, but spread over several years. The total costs will only be charged once against the profits.
Answer to Question 22.10A
BA 1
J Wright Income Statement for the year ending 31 March 2019 Sales Less Returns in Less Cost of goods sold: Opening inventory Add Purchases Less Returns out
127,245 3,486
123,759
7,940 61,420 1,356
Less Closing inventory Gross profit Add Discounts received Less Expenses: 49 © Pearson Education Limited 2019
60,064 68,004 6,805
61,199 62,560 62 62,622
Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
Wages and salaries (39,200 + 3,500) Rent and insurance (8,870 − 600) Carriage outwards General office expenses (319 + 16) Discounts allowed Increase in allowance for doubtful debts Depreciation: Fixtures and fittings Delivery van Net profit Balance Sheet as at 31 March 2019 Non-current assets Fixtures and fittings Less Accumulated depreciation (570 + 190) Delivery van Less Accumulated depreciation (700 + 1400) Current assets Inventory Accounts receivable Less Allowance for doubtful debts Prepaid expenses Cash in hand
42,700 8,270 3,210 335 2,480 110 190 1,400
1,590
1,900 760 5,600 2,100
58,695 3,927
1,140 3,500 4,640
6,805 12,418 740
Less Current liabilities Accounts payable Expenses owing (3,500 + 16) Bank overdraft
11,678 600 140
19,223 23,863
11,400 3,516 2,490 17,406 6,457
Financed by: Capital Opening balance Add Net profit
23,930 3,927 27,857 (21,400) 6,457
Less Drawings
Answer to Question 22.12A
BA 1
Mr Yousef Income Statement for the year ending 31 May 2019 Sales Less Cost of goods sold Opening inventory Purchases Carriage inwards
138,078
Less closing inventory Gross profit Less Carriage outwards Salaries and wages Rent, rates and insurance (6,622 + 210 – 880) Postage and stationery Advertising Bad debts Increase in allowance for doubtful debts Depreciation Net profit 50 © Pearson Education Limited 2019
11,927 82,350 2,211 96,488 13,551 2,933 26,420 5,952 3,001 1,330 877 40 8,700
82,937 55,141
49,253 5,888
Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
Balance Sheet as at 31 May 2019 Non-current assets Equipment at cost Less Accumulated depreciation (19,000 + 8,700) Current assets Inventory Accounts receivable Less Allowance for doubtful debts Prepayments Bank Cash
58,000 27,700
30,300
13,551 12,120 170
Current liabilities Accounts payable Expenses accrued
11,950 880 1,002 177
27,560 57,860
6,471 210 6,681 51,179
Financed by: Capital: Opening balance Add Net profit
53,091 5,888 58,979 7,800 51,179
Less Drawings
Answer to Question 23.2A Returns Outwards Bank Discounts received Balance c/d
Answer to Question 23.4A
BA 1 Purchases Ledger Control 950 Balance b/d 16,695 Purchases 845 19,410 37,900
1/1 Bal b/d Credit sales Refunds of credit balances Dishonoured cheques Late payment interest
37,900
BA 1 Sales Ledger Control 36,210 Bad debts 31,470 Bank 260 Discounts Returns in Set-offs to purchases ledger Balance c/d 67,940
Balance b/d Sales day book Bank: Dishonoured cheques
Answer to Question 23.7A
23,700 14,200
536 26,306 668 1,878 404 38,148 67,940
BA 1 Sales ledger control account 40,290 Cash from customers 240,740 Bad debt write-offs 2,150 Contras with payables 810 Discounts allowed 1,340 Returns Inwards 31/12 Bal c/d 285,330
51 © Pearson Education Limited 2019
213,420 7,220 3,230 4,860 12,280 44,320 285,330
Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
Discounts received from suppliers Paid to credit suppliers Contras with receivables Returns outwards to suppliers 31/12 Bal c/d
Answer to Question 23.8A a) Balance b/d Credit sales Refunds of credit balances Dishonoured cheques Late payment interest
Purchases ledger control account 4,870 1/1 Bal b/d 223,990 Credit purchases 3,230 Refunds of debit balances 9,780 33,150 275,020
30,490 243,920 610
275,020
BA 1 Sales ledger control account 80,436 Cash from customers 172,139 Bad debt write-offs 797 Set-offs/contras with payables 488 Discounts allowed 1,895 Returns inwards Balance c/d 255,755
147,593 5,164 479 3,441 8,606 90,472 255,755
Purchases ledger control account Discounts received 1,925 Balance b/d 48,261 Paid to credit suppliers 95,242 Credit purchases 96,255 Set-offs/contras with receivables 479 Refunds of debit balances 242 Returns outwards 3,850 Balance c/d 43,262 144,758 144,758 b) i) Sales invoice; and ii) credit note c) Benefits include: i) It helps check the accuracy of the entries made in the personal accounts. If at any time the balance on the control account disagrees with the total of all the balances on the purchase ledger control accounts then errors have occurred and can be investigated. ii) It helps prevent fraud: responsibility for the purchase ledger accounts and the control account can be separated, reducing the risk that one person would be able to tamper with both the personal accounts and the control account. iii) It instantly gives a single total for trade payables, avoiding the need (in a manual system) to add up all the balances on the personal accounts in the purchases ledger.
Answer to Question 24.2A
BA 1 Cash Book 8,340 Bank charges 435 DMC Ltd Balance c/d 8,775
Balance b/d P Fox
Bank Reconciliation Statement as on 31 March 2019 Bank balance per cash book Add Unpresented cheques Less Bankings not yet on bank statement Bank balance per bank statement
52 © Pearson Education Limited 2019
25 99 8,651 8,775 8,651 277 8,928 420 8,508
Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
Answer to Question 24.4A
BA 1
(a) 2019 Jun 1 Balance b/d 7 J May 16 T Wilson 28 F Slack 30 G Baker 30 Flynn
D Hogan: Cash Book 2019 1,410 Jun 5 L Holmes 62 12 J Rebus 75 16 T Silver 224 29 Blister Disco 582 29 SLM 64 30 Bank charges 30 Balance c/d 2,417
180 519 41 22 52 43 1,560 2,417
(b) D Hogan: Bank Reconciliation Statement as on 30 June 2019 Balance in hand per cash book Add unpresented cheque
1,560 22 1,582 582 1,000
Less Bank lodgement not yet on bank statement Balance in hand as per bank statement
Answer to Question 24.6A (a)
BA 1
Thomas P Lee Computation of Bank Balance for Balance Sheet Purposes as on 31 October 2019
Balance per cash book Add Cheque duplicated Traders’ credits not in cash book
15.10 210.10
894.68
Less
29.31
T Andrews: Dishonoured cheque Bank charges not in cash book: Bank commission Bank interest Incorrect entry of cheque (310.84 – 301.84) Standing order not in cash book Corrected bank balance
225.20 1,119.88
169.56 109.10 9.00 15.00
331.97 787.91
(b)
Thomas P Lee Bank Reconciliation Statement as on 31 October 2019 Corrected cash book balance Add Unpresented cheques Less Bankings not on bank statements Overdraft per bank statement
787.91 395.80 1,183.71 1,895.60 711.89
(c) Briefly: Helps verify correctness of cash book and bank statement.
Answer to Question 24.8A (a) 2020 Dec 6 P Pan 20 C Hook 31 W Britten 31 F Ray 31 Balance c/d
BA 1 F King: Cash Book 2020 230 Dec 1 Balance b/d 265 10 J Lamb 325 19 P Wilson 102 29 K Coull 1,746 30 Tox 31 Bank charges 2,668
53 © Pearson Education Limited 2019
1,900 304 261 37 94 72 2,668
Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
(b) F King: Bank Reconciliation Statement as on 31 December 2020 Bank overdraft per cash book Less Bank lodgements not yet on bank statement
(1,746) (325) (2,071) 37 (2,034)
Add Unpresented cheque Bank overdraft per bank statement
Answer to Question 25.2A
BA 1
Net profit for the year Depreciation Profit on disposal of non-current assets Decrease in inventory Increase in accounts receivable Decrease in accounts payable Net cash flow from operating activities
Answer to Question 25.4A
£’000 347 86 (19) 31 (44) (25) 376
BA 1
Non-current assets at NBV T-account working: £’000 Bal b/d 580 Acquisitions 170
£’000 45 95 610 750
NBV of disposals Depreciation expense Bal c/d
750 Disposal working: Proceeds from disposal of non-current assets (balancing figure) Net book value disposed of (from above) Loss on disposal
Answer to Question 25.5A
£’000 27 (45) (18)
BA 1
Pat Bond Statement of Cash Flows for the year ending 31 December 2020 Operating activities Profit from operations Adjustments for: Depreciation (fixtures 400 + van 4,040) Operating cash flows before movements in working capital Increase in inventory Increase in accounts receivable Decrease in accounts payable
42,320 4,440 46,760 (13,600) (3,600) (6,588) (23,788) 22,972
Cash generated by operations Tax paid Interest paid
– –
Net cash from operating activities Investing activities Payments to acquire tangible non-current assets (11,000 + 800) Net cash used in investing activities Financing activities Loan received Capital introduced Drawings 54 © Pearson Education Limited 2019
– 22,972 (11,800) (11,800) 10,000 20,000 (43,200)
Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
Net cash used in financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of year (1,800 + 440)
(13,200) (2,028) 2,240 212
Cash and cash equivalents at end of year Bank balances and cash (400 − 188)
Answer to Question 25.8A
212
BA 1
K Rock Statement of Cash Flows for the year ending 30 June 2020 Operating activities Profit from operations Adjustments for: Depreciation (5,200 + 6,300) Loss on sale of tangible non-current assets Reduction in allowance for doubtful debts Operating cash flows before movements in working capital Increase in inventory Decrease in accounts receivable Increase in accounts payable Cash generated by operations Tax paid Interest paid Net cash from operating activities Investing activities Payments to acquire tangible non-current assets Receipts from sale of tangible non-current assets Net cash used in investing activities Financing activities Loan repaid to T Pine Drawings Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year
51,000 11,500 1,600 ( 200) 12,900 63,900 (2,900) 1,600 3,200 1,900 65,800 – –
(18,100) 15,800 (2,300) (10,000) (38,000)
Cash and cash equivalents at end of year Bank balances and cash
Answer to Question 26.3A
– 65,800
(48,000) 15,500 12,600 28,100 28,100
BA 1
(a) B Roy Dr 1,410 : A Ray Cr (b) Cash Dr 94 : Bank Cr (c) D Rolls Dr 734 : D Rollo Cr (d) L Hand Dr 72 : Purchases Cr (e) G Boyd Dr 128 : Cash Cr (Needs double the amount to cancel out the error and replace it with the correct amount.) (f) Sales Dr 320 : Fittings Cr (g) Cash Dr 400 : Bank Cr (Needs double the amount.) (h) Purchases Dr 1,182 : Furnishings Cr
55 © Pearson Education Limited 2019
1,410 94 734 72 128 320 400 1,182
Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
Answer to Question 26.6A
BA 1
(a) Commissions received Dr (b) Bank charges Dr Dr (c) Motor expenses (d) Fax machine Dr (e) Returns Inwards Dr (f) Capital Dr (g) Loan interest Dr Dr (h) Drawings (double the original amount)
Answer to Question 26.7A (a)
430 34 37 242 216 2,000 400 168
: : : : : : : :
Rent received Business rates Bank Purchases Returns Outwards Loan G Bain Van Purchases
Cr Cr Cr Cr Cr Cr Cr Cr
430 34 37 242 216 2,000 400 168
BA 1
Thomas Smith Corrected Trial Balance as at 31 March 2018
Inventory in trade 1 April 2017 Discounts allowed Discounts received Allowance for doubtful debts Purchases Purchases returns Sales Sales returns Freehold property: At cost Accumulated depreciation Motor vehicle: At cost Accumulated depreciation Capital Bank Trade accounts receivable Trade accounts payable Establishment and administrative expenditure Drawings
10,700 310 450 960 94,000 1,400 132,100 1,100 70,000 3,500 15,000 4,500 84,600 7,100 11,300 7,600 16,600 9,000 235,110
235,110
(b) (Dates omitted) The Journal Dr Inventory 1,300 Capital (Being adjustment for items on mislaid inventory lists.) Trade accounts payable 210 Purchases returns (Being goods returned to J Hardwell Ltd.) Sales 1,000 Trade accounts receivable (Being reversal of trade sample sent to John Grey wrongly treated as a sale.) Trade samples 1,000 Purchases (Being correction of treatment of trade sample.) Repairs and renewals 150 Purchases (Being correction of treatment of paint used to paint stockroom wrongly charged to purchases.)
56 © Pearson Education Limited 2019
Cr 1,300
210
1,000
1,000
150
Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
Answer to Question 27.3A
BA 1
(a) (Narratives omitted) i) Sales Office equipment disposals ii) Suspense Purchases iii) Drawings Purchases iv) Bank charges Suspense v) Suspense K Lamb
The Journal
(b) Purchases K Lamb
Suspense 10 Balance 90 Bank charges 100
Dr 125
Cr 125
10 10 140 140 22 22 90 90
78 22 100
(c) Statement of Corrected Net Profit for the year ended 31 December 2017 Net profit per the financial statements Add Purchases overcast 10 Add Private purchases 140 Less Bank charges omitted Corrected net profit
28,400 150 28,550 22 28,528
Note: Error (i) does not affect profit because by correcting sales are reduced by £125 but loss on disposal is reduced by £125.
Answer to Question 27.7A
BA 1
Lee Crosby Balance Sheet as at 31 March 2018 Non-current assets Property Shop fittings (cost 38,000 − 3,500)
Cost 108,000 34,500 142,500
Current assets Inventory Trade receivables (3,740 − 1,040) Prepayments Cash at bank and in hand (2,140 + 155 − 75) Total assets Current liabilities Trade payables (4,220 – 55) Accruals
31,517 2,700 225 2,220
4,165 160
Non-current liabilities Loan Total liabilities Net assets
Acc dep 5,400 6,500 11,900
NBV 102,600 28,000 130,600
36,662 167,262
4,325 52,000 56,325 110,937
Capital: Opening capital Add profit for the year (see working) Less drawings in year (71,201 + 75) Closing capital
136,175 46,038 (71,276) 110,937 57 © Pearson Education Limited 2019
Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
Working: Original profit for the year 1) Purchases understated 2) Shop fittings depreciation (38,000 − 3,500 − 2,000)/5 years 3) Property depreciation (108,000 × 5%) 4) Increase in drawings; no effect on profit 5) Bad debt write-off 6) Wages overstated: correction is Dr Suspense 10,000; Cr Wages 10,000 7) Credit note received; returns outwards understated Corrected profit for the year
Answer to Question 27.9A
52,423 (3,500) (6,500) (5,400) (1,040) 10,000 55 46,038
BA 1
(a)
Suspense 1,536 i) 360 iii) v)
Balance b/d iv) Sales undercast
Debtor balance omitted Undercast of cash book Supplier incorrectly credited for returns out (double the amount) vii) Cheque omitted: Mr Smith
1,896
87 720 358 731 1,896
Items ii) and vi) do not pass through suspense account. (b) i) ii)
Accounts receivable increased in balance sheet. Net profit will be increased by 1,200 but further depreciation needed. Machinery increased by 1,200 (subject to depreciation) in the balance sheet. iii) Bank in the balance sheet increased by 720. iv) Sales increased by 360; so too are gross profit and net profit. v) Accounts payable reduced by 358 in balance sheet. vi) Electricity increased by 152, so net profit reduced by 152. Also electricity owing 152 to be included as extra accrual in balance sheet. vii) Bank increased by 731 in balance sheet. Can now be removed from allowance for doubtful debts, so net profit increased by 731 and accounts receivable (net) in balance sheet increased by 731.
Answer to Question 27.10A Balance b/d Customer Y (x)
Sales Ledger: Set-off (iii) Purchases: Wrong posting (vi) Purchases overcast (viii) Balance c/d
Balance b/d Insurances (xi)
BA 1 Sales Ledger Control 110,172 Purchases ledger: Set-off (iii) 200 Customer: Posting error (vii) Balance c/d 110,372 Purchases Ledger Control 700 Balance b/d 198 1,000 76,368 78,266 Suspense 2,315 Trial balance error (ix) 90 Balance c/d 2,405
58 © Pearson Education Limited 2019
700 100 109,572 110,372
78,266
78,266
2,400 5 2,405
Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
Purchases Ledger Balances As given Add M Smith: Credit posted in error (iv)
77,777 600 78,377 1,111 700 198
Less Debit balances Set-off (iii) Invoice entered in error (vi) Revised list of balances
2,009 76,368
Now, identify what has led to the balance on the suspense account, and make the appropriate correcting entries needed to close the account. Sales Ledger Balances 111,111 (1,234) 109,877 (700) 600 (300) (100) 200 109,577 (5) 109,572
Debit balances Credit balances Set-off (iii) Invoice not posted (iv) Allowance (i.e. credit note) (v) Cash receipt (vii) Excessive write-off (x) Suspense Sales Ledger Control Account The £5 in the suspense account remains unexplained and requires further investigation.
Answer to Question 27.13A
BA 1 Dr 62 62
(a) Discount allowed Discount received Suspense (b) Sales Suspense (c) Fittings Bank Motor van Gain on sale of motor van (d) Premises Wages Purchases (e) C Blimp Bank Discounts allowed (f) D Hood D I Hoade Suspense
Answer to Question 28.2A
Cr
124 100 100 1,400 700 1,800 300 810 470 340 90 86 4 76 67 9
BA 1
The Grampian Golf Club (a) Bar Trading Account for the year ending 31 December 2019 Sales Less Cost of supplies sold: Opening inventory Add Purchases Less Closing inventory Gross profit Wages of bar staff Profit to income & expenditure 59 © Pearson Education Limited 2019
169,200 18,800 82,600 101,400 12,820
88,580 80,620 58,400 22,220
Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
Income and Expenditure Account for the year ending 31 December 2019 (c) Income Subscriptions (366,800 − 3,740) Profit on bar Profits from raffles Less Expenditure: Golf professional’s salary Greenkeeper’s wages General expenses Depreciation of equipment Surplus of income over expenditure Balance Sheet as at 31 December 2019 Non-current assets Clubhouse Equipment Less Depreciation Current assets Bar inventory Bank
363,060 22,220 13,016 398,296
74,000 43,000 1,820 4,800
284,000 37,200 4,800
12,820 7,848
Current liabilities Subscriptions received in advance
(a)
32,400 316,400
20,668 337,068 3,740 333,328
(b) Financed by: Accumulated fund Balance at beginning of year Add Surplus of income over expenditure
Answer to Question 28.4A
123,620 274,676
58,652 274,676 333,328
BA 1
Plumpton Leisure Centre Trading Account for the year ending 31 December 2020
Takings Less Cost of supplies Opening inventory Add Purchases
16,290 680 4,320 5,000 920
Less Closing inventory Gross profit Wages Profit to income and expenditure (c) Income and Expenditure Account for the year ending 31 December 2020 Income Subscriptions (45,060 + 860) Refreshment bar profit Profits from dances Profit on exhibition Less Expenditure Wages (31,400 − 4,680) Rent of building Travelling expenses of teams Depreciation of equipment Loss on equipment sold (340 − 420) Surplus of income over expenditure
26,720 8,700 1,900 5,200 80
60 © Pearson Education Limited 2019
4,080 12,210 4,680 7,530
45,920 7,530 4,116 890 58,456
42,600 15,856
Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
Balance Sheet as at 31 December 2020 Non-current assets Equipment (32,400 − 420 + 18,200) Less Depreciation Current assets Refreshment bar inventory Accounts receivable for subscriptions Bank
50,180 5,200 920 860 6,076
Financed by: Accumulated fund Balance at beginning of year* Add Surplus for the year
44,980
7,856 52,836
36,980 15,856 52,836
* 1 January 2020 Equipment 32,400 + Inventory 680 + Bank 3,900 = 36,980.
Answer to Question 29.3A
BA 1
J Jones Manufacturing Account and Income Statement for the year ending 31 December 2019 Opening inventory of raw materials Add: Purchases Less: Closing inventory of raw materials Cost of raw materials consumed Factory wages Prime cost Indirect manufacturing costs Fuel and light (21,000 + 4,000) × 80% Rent and business rates (21,000 − 5,000) × 75% Repairs to plant and machinery Depreciation – plant and machinery (80,000 × 10%)
21,000 258,000 279,000 25,000 254,000 59,000 313,000
20,000 12,000 9,000 8,000 49,000 362,000 14,000 376,000 11,000 365,000 482,000 7,000 475,000
Add: Opening work in progress Less: Closing work in progress Production cost of goods completed Sales Less: Returns inward Less: Cost of goods sold Opening inventory of finished goods Add: Production cost of goods completed
23,000 365,000 388,000 26,000
Less: Closing inventory of finished goods Gross profit Less: Expenses Administration expenses Fuel (21,000 + 4,000) × 20% Salaries Rent and business rates (21,000 − 5,000) × 25% Office expenses
362,000 113,000
5,000 17,000 4,000 9,000 35,000
Selling and distribution expenses Carriage outwards Financial charges Increase in allowance for doubtful debts 61 © Pearson Education Limited 2019
4,000 1,000
Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
40,000 73,000
Net profit Balance Sheet as at 31 December 2019 Non-current assets Premises Plant and machinery (80,000 − 8,000 − 8,000) Current assets Inventory – raw materials work in progress finished goods
410,000 64,000 474,000
25,000 11,000 26,000
Accounts receivable (20,000 × 95%) Prepayments Bank
62,000 19,000 5,000 11,000
Current liabilities Accounts payable Accrual
37,000 4,000
97,000 571,000
41,000 530,000 Capital account Opening balance Add: Net profit
Answer to Question 29.6A
457,000 73,000 530,000
BA 1
Manufacturing Account and Trading Account part of the Income Statement for the 3 months ending 31 March 2020 Opening inventory of raw materials Add: Purchases Carriage in Less: Closing inventory of raw materials (a) Cost of raw materials used in production Add: Direct factory wages (b) Prime cost Indirect manufacturing costs: Factory wages Rent and business rates Power Repairs Sundry expenses Depreciation – machinery
10,500 27,200 700 38,400 10,200 28,200 72,600 100,800 13,900 1,200 2,000 1,300 900 3,900 23,200 124,000 2,400 126,400 2,900 123,500 160,400
Add: Opening work in progress Less: Closing work in progress (c) Production cost of goods completed Sales Less: Cost of goods sold Opening inventory of finished goods Production cost of goods completed Less: Closing inventory of finished goods (d) Cost of goods sold (e) Gross profit 62 © Pearson Education Limited 2019
14,300 123,500 137,800 13,200 124,600 35,800
Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
Answer to Question 29.9A
BA 1
(a)
Jean Marsh Manufacturing Account for the year ending 31 December 2020 Cost of raw materials consumed: Opening inventory of raw materials Add Purchases Carriage inwards Less Closing inventory of raw materials Factory wages Prime cost Factory overhead expenses: General expenses Lighting 4/5 Rent 4/5 Insurance 3/4 (of 950 − 150) Depreciation of plant and machinery Factory cost of production c/d
3,400 18,000 800 22,200 2,900
1,200 2,000 3,000 600 1,500
(b) Trading Account part of the Income Statement for the year ending 31 December 2020 Sales Less Cost of sales of finished goods: Opening inventory 6,100 Add Factory cost of production b/d 46,100 52,200 Less Closing inventory 8,200 Gross profit c/d
19,300 18,500 37,800
8,300 46,100
90,000
44,000 46,000
(c) Profit and Loss Account part of the Income Statement for the year ending 31 December 2020 Gross profit b/d 46,000 Add Discount received 1,600 47,600 Less Administrative costs: Office salaries 16,900 General expenses (750 + 75) 825 Lighting 1/5 500 Rent 1/5 750 Insurance 1/4 (950 − 150) 200 19,175 Selling costs: Jean Marsh: Salary and expenses 10,400 Depreciation of car 500 Advertising 1,400 Bad debts 650 Carriage outwards 375 13,325 32,500 Net profit after proprietor’s salary 15,100 Note: as a sole proprietor Jean’s ‘salary’ is really her drawings. Her salary should NOT therefore appear in the income statement. However, the question does not separate salary from expenses so, for convenience, her ‘salary’ is included as an expense above. (d) Non-current assets Plant and machinery Less Depreciation Motor vehicle Less Depreciation
Balance Sheet as at 31 December 2020 9,100 1,500 4,200 500
63 © Pearson Education Limited 2019
7,600 3,700 11,300
Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
Current assets Inventory: Raw materials Finished goods Accounts receivable Prepayments Bank Cash
2,900 8,200 7,700 150 3,600 325
Current liabilities Accounts payable Expenses owing
6,000 75
22,875 34,175
6,075 28,100 Financed by: Capital Balance at beginning of year Add Net profit after salary
15,000 15,100 30,100 2,000 28,100
Less Drawings
Answer to Question 30.3A
BA 1
Jack’s Superstores Departmental Income Statement for the year ending 31 March 2018 A B C Sales 180,000 138,000 82,000 Less Cost of goods sold: Opening inventory 27,100 21,410 17,060 Add Purchases 101,300 81,200 62,900 128,400 102,610 79,960 Less Closing inventory 23,590 104,810 15,360 87,250 18,200 61,760 Gross profits 75,190 50,750 20,240 Add Discounts received 1,013 812 629 Less Expenses: 76,203 51,562 20,869 Salaries and wages 45,600 30,400 15,200 Rent and rates 3,100 3,100 3,100 Delivery expenses 1,620 1,242 738 Commission 4,500 3,450 2,050 Insurance 900 600 300 Advertising 769 769 769 Administration expenses 6,600 6,600 6,600 Depreciation 1,400 64,489 1,400 47,561 1,400 30,157 Net profits/(losses) 11,714 4,001 ( 9,288)
Answer to Question 31.2A
BA 1
i) Memorandum Joint Venture Account for Frank and Graham Mowers purchased 135,260 Sales Carriage 404 Frank: Mowers taken over Net Profit: Frank 1/2 14,063 Graham 1/2 14,063 28,126 163,790
64 © Pearson Education Limited 2019
123,790 40,000
163,790
Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
ii) Mowers purchased Carriage Bank: Graham Profit and loss Balance c/d
(Frank’s books) Joint Venture with Graham 120,400 Bank 320 Mowers taken over 50,000 Sales 14,063 29,807 214,590
Bank: to Graham
Mowers purchased Carriage Bank: Frank Profit and loss
29,807
Balance b/d
(Graham’s books) Joint Venture with Frank 14,860 Bank 84 Sales 70,000 Balance c/d 14,063 99,007
Balance b/d
29,807
Answer to Question 31.4A
Bank: from Frank
Balance b/d
Van Paintings Profit and loss Balance b/d
Use of van Lighting Paintings General expenses Profit and loss Balance c/d
214,590 29,807
50,000 19,200 29,807 99,007 29,807
BA 1
Memorandum Joint Venture Account for Rock, Hill and Pine Paintings (8,000 + 17,000 + 1,700) 26,700 Sales (31,410 + 4,220 + 2,300) Lighting 86 Goods taken over Rent 2,100 Sale of van Van 2,200 Use of Pine’s van 600 General expenses 1,090 Net profit: Rock 3/8 4,895 Hill 1/2 6,527 Pine 1/8 1,632 13,054 45,830
Rent Paintings General expenses Profit and loss
70,000 40,000 104,590
(Rock’s Books) Joint Venture with Hill and Pine 2,100 Sale of van 17,000 Balance c/d 545 4,895 24,540 22,840
Cash: from Pine
(Hill’s Books) Joint Venture with Rock and Pine 2,200 Sales 8,000 Good taken over 6,527 Balance c/d 16,727 6,307
Cash: from Pine
(Pine’s Books) Joint Venture with Rock and Hill 600 Sales 86 Sales 1,700 545 1,632 29,147 33,710 65 © Pearson Education Limited 2019
37,930 6,200 1,700
45,830
1,700 22,840
24,540 22,840
4,220 6,200 6,307 16,727 6,307
31,410 2,300
33,710
Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
Cash: to Rock Cash: to Hill
22,840 6,307 29,147
Answer to Question 32.2A
Balance b/d
29,147 29,147
BA 1
George, Henry and Lee Appropriation Account for the year ending 31 December 2019 Net profit Less: Salaries – Henry Lee Interest on capital George Henry Lee
215,400 50,000 30,000
80,000
4,800 3,200 2,400
10,400
Share of profit George 5/10 Henry 3/10 Lee 2/10
62,500 37,500 25,000
Answer to Question 32.5A
90,400 125,000
125,000
BA 1
Cole, Knox and Lamb Appropriation Account for the year ending 31 December 2020 Net Profit Add: Interest on drawings Cole Knox Lamb
184,800 1,200 900 500 2,600 187,400
Less: Salaries Knox Lamb Interest on capital Cole Knox Lamb
22,000 28,000
50,000
3,600 2,700 2,100
8,400
Balance of profit shared: Cole 55% Knox 25% Lamb 20%
58,400 129,000
70,950 32,250 25,800 129,000
Capital: Cole Knox Lamb
Balance Sheet as at 31 December 2020 (extract) 60,000 45,000 35,000 140,000
Current accounts Opening balance Add: Salaries Interest on capital Share of profit Less: Drawings Interest on drawings
Cole 18,000 – 3,600 70,950 92,550 (27,000) (1,200) 64,350
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Knox 8,000 22,000 2,700 32,250 64,950 (23,000) (900) 41,050
Lamb 6,000 28,000 2,100 25,800 61,900 (17,000) (500) 44,400
149,800
Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
Answer to Question 32.6A (a)
BA 1
Smith & Tolhurst Appropriation account for the year ended 31 October 2019
Net profit Add Interest on drawings Smith Tolhurst
79,600 1,360 1,520
Less Salary: Tolhurst Less Interest on capital accounts Smith (4% × £160,000) Tolhurst (4% × £90,000)
6,400 3,600
2,880 82,480 (20,000)
(10,000) 52,480
Residual profits shared: Smith (⅝) Tolhurst (⅜)
32,800 19,680 52,480
b) Balance b/d Drawings Interest on drawings Balance c/d
Partners’ current accounts Tolhurst 9,200 Balance b/d 49,800 Salary 1,520 Interest on capital Residual profit share Balance c/d 60,520
Smith 37,300 1,360 12,940 51,600
Smith 12,400 6,400 32,800 51,600
Tolhurst 20,000 3,600 19,680 17,240 60,520
(c) That, up to 1 November, Tolhurst had taken out more (cumulatively) in drawings than he was entitled to (in terms of his cumulative share of net profits). (d) ‘Interest on capital’ compensates partners for their original investment in the business. Those who contribute more will be credited with more. Meanwhile partners are often charged interest on their drawings because this should deter them from taking unnecessary or excessive amounts out of the business.
Answer to Question 32.7A (a) Net profit Add: Interest on drawings A B
BA 1 Profit and Loss Appropriation Account 25,800 400 300 700 26,500 4,500 22,000
Less: Salary – B Less: Interest on capital A B
1,500 500 2,000 20,000
Less: Share of profit A (3/5) B (2/5)
12,000 8,000 20,000 –
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Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
(b)
Partners’ Current Accounts A (500) 1,500 1,000 – 12,000 13,000 (400) 12,600 (12,000) 600
Opening balance Add: Interest on capital Add: Salary Share of profit Less: Interest on drawings Less: Drawings Closing balance
Answer to Question 32.10A
B 1,280 500 1,780 4,500 8,000 14,280 (300) 13,980 (15,000) (1,020)
BA 1
Scot and Joplin: Income Statement and Profit and Loss Appropriation Account for the year ending 31 December 2020 Sales 180,400 Less Cost of goods sold: Opening inventory 38,410 Add Purchases 136,680 175,090 Less Closing inventory 41,312 133,778 Gross profit 46,622 Less Expenses: Salaries 27,400 Office expenses (2,130 + 240) 2,370 Discounts allowed 312 Depreciation: Motors 5,350 Office equipment 1,840 7,190 37,272 Net profit 9,350 Add Interest on drawings: Scot 300 Joplin 200 500 9,850 Less Interest on capital: Scot 2,500 Joplin 1,000 3,500 6,350 Balance of profit shared: Scot 70% 4,445 Joplin 30% 1,905 6,350 – Non-current assets Office equipment Motor vehicles
Balance Sheet as at 31 December 2020 Cost 9,200 21,400 30,600
Current assets Inventory Accounts receivable Bank Cash Less Current liabilities Accounts payable Expenses owing
Depreciation 5,440 18,150 23,590
3,760 3,250 7,010
41,312 41,940 2,118 317 85,687 32,216 240
Capitals Scot Joplin
32,456
50,000 20,000
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53,231 60,241
70,000
Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
Current accounts Opening balance Add Interest on capital Add Share of profits
Scot 7,382 2,500 4,445 14,327
Less Drawings Less Interest on drawings
17,500 300
Answer to Question 32.12A
Joplin 7,009 1,000 1,905 9,914 16,000 200
17,800 (3,473)
16,200 (6,286)
(9,759) 60,241
BA 1
Bush, Home and Wilson Income Statement for the year ending 30 April 2020 Sales Less Returns inwards
334,618 10,200 324,418
Less Cost of goods sold: Opening inventory Add Purchases Carriage inwards
68,127 196,239 3,100
Less Closing inventory Gross profit Less Expenses: Salaries and wages Discounts allowed Business rates (2,900 − 200) Postages (845 – 68) Bad debts Increase in allowance for doubtful debts General expenses Depreciation: Computers Office equipment Net profit Add Interest on drawings: Bush Home Wilson
2,800 1,100
3,900 300 200 240
18,000 14,000 4,800 800 2,400
Balance of profit shared: Bush 1/2 Home 1/8 Wilson 3/8
Current assets Inventory Accounts receivable Less Allowance for doubtful debts Prepayments (200 + 68) Bank
193,243 131,175
54,117 190 2,700 777 1,620 450 1,017
Less Salaries: Home Wilson Interest on capital: Bush Home Wilson
Non-current assets Office equipment Computers
199,339 267,466 74,223
740 67,144
32,000 8,000 13,572 3,393 10,179
Balance Sheet as at 30 April 2020 Cost 5,700 8,400 14,100
64,771 66,404
Depreciation 4,000 6,400 10,400
40,000 27,144 27,144 –
1,700 2,000 3,700
74,223 51,320 1,400
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49,920 268 5,214
129,625 133,325
Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
Current liabilities Accounts payable
36,480 96,845
Financed by: Capital: Bush Home Wilson
60,000 10,000 30,000
Current accounts: Opening balance Add Salaries Interest on capital Share of profit
Bush 5,940 – 4,800 13,572 24,312 (39,000) (300) (14,988)
Less Drawings Interest on drawings
Home (2,117) 18,000 800 3,393 20,076 (16,000) (200) 3,876
Answer to Question 33.2A
BA 1
(a) Goodwill Other assets
Balance Sheet as at 1 October 2019
(3,155) 96,845
150,000 330,000 480,000
Capitals Abel (55,000 + 15,000) Burt (120,000 + 60,000) Cole (65,000 + 30,000) Dodds (90,000 + 45,000)
(b) Before Abel 1/10 Burt 2/5 Cole 1/5 Dodds 3/10
Wilson 9,618 14,000 2,400 10,179 36,197 (28,000) (240) 7,957
100,000
15,000 60,000 30,000 45,000 150,000
70,000 180,000 95,000 135,000 480,000
After 1 /5 3 /10 2 /5 1 /10
30,000 45,000 60,000 15,000 150,000
Loss or gain Gain 15,000 Loss 15,000 Gain 30,000 Loss 30,000
Action needed Debit Abel 15,000 Credit Burt 15,000 Debit Cole 30,000 Credit Dodds 30,000
Balance Sheet as at 1 October 2019 Net assets
330,000 330,000
Capitals Abel (55,000 − 15,000) Burt (120,000 + 15,000) Cole (65,000 − 30,000) Dodds (90,000 + 30,000)
40,000 135,000 35,000 120,000 330,000
Answer to Question 33.4A (a) Blunt 1/6 Dodds 1/2 Fuller 1/3 Baxter
Share old goodwill 10,000 30,000 20,000 − 60,000
BA 1
1
/3 /12 1 /6 1 /12 5
Share new goodwill 20,000 25,000 10,000 5,000 60,000
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Action: Capital accounts Dr Capital 10,000 Cr Capital 5,000 Cr Capital 10,000 Dr Capital 5,000
Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
Capital Accounts Fuller Baxter Balances b/d 10,000 5,000 Adjustment for goodwill 4,000 29,400 30,400 19,000 Cash 14,000 29,400 30,400 24,000 Blunt Dodds
Adjustment for goodwill Balances c/d
(b) Other assets Cash (1,200 + 24,000)
Blunt Dodds Fuller Baxter 14,000 24,400 20,400 − 5,000 10,000 24,000 14,000 29,400 30,400 24,000
Balance Sheet 66,000 25,200 91,200 (8,400) 82,800
Accounts payable Capitals Blunt Dodds Fuller Baxter
4,000 29,400 30,400 19,000 82,800
Answer to Question 34.2A BA 1 (a) i) Balance b/d
Goodwill 12,400 Revaluation
ii) Goodwill Inventory
Revaluation 12,400 Plant and machinery 320 Loss on revaluation Fitch 5/8 Wall 3/8 12,720
iii) Loss on revaluation Balances c/d
Fitch 7,650 11,811 19,461
Wall 4,590 9,887 14,477
(b) Non-current assets Plant and machinery at valuation Current assets Inventory Accounts receivable Bank
Capitals Home Balances b/d 12,000 Cash 12,000
12,400
480 7,650 4,590
Fitch 19,461
Wall 14,477
19,461
14,477
12,240 12,720
Home 12,000 12,000
Balance Sheet 16,800 6,100 4,100 12,626
Less Current liabilities Accounts payable
22,826 38,626 5,928 33,698
Capitals Fitch Wall Home
11,811 9,887 12,000
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33,698
Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
Answer to Question 34.4A
BA 1
(a) Buildings Goodwill Fittings Inventory Accounts receivable Accrued expenses A Barnes (13,000 × 3/5) C Darwin (13,000 × 2/5) (b)
Dr 4,000 12,000
Cr
2,000 500 200 300 7,800 5,200 A Barnes, C Darwin and E Fox Balance Sheet as at 31 March 2018
Non-current assets Goodwill Buildings Fittings
12,000 55,000 27,000 94,000
Current assets Inventory Accounts receivable Bank
15,500 4,800 22,000
Current liabilities Accounts payable Accruals
8,000 300
42,300 136,300
8,300 128,000 Capital accounts A Barnes C Darwin E Fox
67,800 35,200 25,000 128,000
(c) A Barnes C Darwin E Fox Goodwill
Dr 6,000 4,000 2,000
Cr
12,000
Answer to Question 35.3A
BA 1
Gain and Main Profit and Loss Appropriation Account for the year ending 31 March 2018 Net profit b/d Less Salary: Main Interest on capital: Gain Main Balance of profit Shared: Gain Main
26,250 9,750 1,000 500
1,500 9,000 6,000
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11,250 15,000 15,000
Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
Current Accounts Main Balance b/d 2,000 Capitals transferred P&L appropriation: 16,000 Salary 4,170 Interest Share of profit Realisation profit shared Bank: to settle 22,170
Gain Balance b/d Realisation: Car taken over Plain Ltd: Shares Bank: to settle
1,000 24,000
25,000
Fixtures Land and buildings Motors Inventory Accounts receivable Profit on realisation: Gain Main
1,380 920
Gain 1,000 10,000
1,000 9,000 1,380 2,620 25,000
Main 5,000 9,750 500 6,000 920 22,170
Realisation 2,000 Accounts payable 30,000 Depreciation: Fixtures 4,500 Motors 3,000 Gain: Car taken over 2,000 Plain Ltd: Purchase price
500 1,000 1,300 1,000 40,000
2,300 43,800
43,800 Bank
Balance b/d Gain: to settle
1,550 2,620 4,170
4,170 4,170
Plain Ltd 40,000 Gain Main 40,000
Realisation
Answer to Question 35.4A
Main: to settle
24,000 16,000 40,000
BA 1
(a) (Narratives omitted) Realisation Freehold premises Equipment and machinery Cars Inventory
Dr 44,000
CNO Ltd Realisation
58,000
Cash Preference shares in CNO Ltd Ordinary shares in CNO Ltd CNO Ltd
10,000 12,000 36,000
Accounts payable Bank Realisation (discount)
10,000
Cash Realisation (bad debts 800, discounts 400) Accounts receivable
12,800 1,200
Realisation (profit) (58,000 − 44,000 + 190 − 1200) Capitals A 2/5 B 2/5 C 1/5
12,990
Cr 18,000 12,000 3,000 11,000 58,000
58,000 9,810 190
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14,000 5,196 5,196 2,598
Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
Capitals
A B C Preference shares in CNO Ltd Capitals A B C Ordinary shares in CNO Ltd
4,800 4,800 2,400 12,000 14,400 14,400 7,200 36,000
Loan Cash
A
7,000
Capitals
A (22,000 + 5,196 − 4,800 − 14,400) B (18,000 + 5,196 − 4,800 − 14,400) C (10,000 + 2,598 − 2,400 − 7,200)
7,000 7,996 3,996 2,998
Cash
14,990
(b) The partners will receive the following numbers of shares, the shares being split in profit sharing ratio: Ordinary 11,520 11,520 5,760 28,800
A B C
Answer to Question 35.6A
Preference 4,800 4,800 2,400 12,000
BA 1
(a) (All in £’000) Revaluation 7 Land and buildings: 6 increase (200 − 160) 5 2
Furniture: Decrease (12 − 5) Motors: Decrease 20 − (10 + 4) Inventory written down Bad debt written off Doubtful debts allowance: Increase (42 − 2) × 5% − 1 Office expenses accrued Dissolution costs Capitals: Proudie 3/5 9 Slope 1/5 3 Thorne 1/5 3
1 3 1
15 40
(b) Proudie Motor 4 Goodwill written off (W1) Cash 8 Loan a/c: Transfer 219 Balances c/d 231
40
Slope 45
28 73
Capitals Thorne Balances b/d 45 Current a/cs Revaluation Loan 6 Goodwill share (W1) 51
(W1) Goodwill: Profits 130 + 150 + 181 Less Stock reduction Bad debt written off Increase in allowance for doubtful debts Office expenses accrued Average profit 450 ÷ 3 = 150; Proudie’s share 150 × 3/5 = 90 Split equally between Slope and Thorne.
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40
Proudie 100 24 9 8 90 231
Slope 60 10 3
Thorne 40 8 3
73
51 461
5 2 1 3
11 450
Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
(c)
Slope and Thorne Balance Sheet as at 1 June 2019
Non-current assets Land and buildings Furniture Motor vehicles
200 5 10 215
Current assets Inventory Accounts receivable Less Allowance for doubtful debts Prepaid expenses Cash (10 − 8)
18 40 2
Current liabilities Accounts payable Accrued expenses (3 + 1 + 3)
15 7
Non-current liabilities Loan – Proudie
38 2 2
22
219
Capitals: Slope Thorne
241 34
28 6 34
Answer to Question 35.8A
BA 1
(All answers shown in £000) (a) i) Grant and Herd Profit and Loss Appropriation Account for the year ending 31.12.2018 Net profit for the year Add Interest on drawings: Grant (40 × 10% × 1/2) Herd (40 × 10% × 3/4) Less Salary: Herd Interest on capital: Grant Herd
60 2 3
5 65
20
Balance of profit: Grant 3/5 Herd 2/5 ii) Grant Salary paid Drawings Interest on drawings Car Shares in Valley Ltd Bank
60 275
40 2 10 300 65 417
Capitals Herd 10 Balances b/d 40 Salary 3 Interest on capital Share of profit 200 Realisation Bank 253
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15 5
20
15 10
25
65
Grant 300 − 15 15 87
Herd 100 20 5 10 58 60 253
417
Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
iii) Non-current assets Inventory Accounts receivable and prepayments Trade accounts receivable Profit on realisation to capitals: Grant 3/5 Herd 2/5
(b)
Realisation 300 Depreciation 90 Trade accounts payable 18 Accounts payable and accruals 223 Grant: Car 87 58 776
100 141 25 10
Valley Ltd: Consideration (400,000 × 1.25)
500 776
Valley Ltd Balance Sheet as at 1 January 2019
Non-current assets at cost Intangible asset: Goodwill Tangible assets (300 − 100 − 10)
145 190 335
Current assets Inventory Trade accounts receivable Other accounts receivable and prepayments
90 223 18
Current liabilities Trade accounts payable Other accounts payable and accruals
141 25
Capital and reserves Called-up share capital Share premium
331 666
166 500 400 100 500
Answer to Question 36.5A
BA 1
Futurescope Ltd Statement of Changes in Equity (extract) for 2020 (£000s) Ordinary Preference Share Retained Shares Shares Premium Profits Opening balance 130 20 78 282 Retained profits for the year – – – 43 Transferred to General Reserve – – – (12) Closing balance 130 20 78 313
General Reserve 30 – 12 42
Balance Sheet as at 31 December 2020 (£000s) Non-current assets Current assets Less: Current liabilities – Accounts payable Less: Non-current liabilities – Loan notes Equity: Ordinary shares of 50p each 3% Preference shares of £1 each
612 191 803 (104) (116) 583 130 20 150 78 42 313 583
Share premium General reserve Retained profits
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Answer to Question 36.7A
BA 1
Loan notes in issue
Annual interest rate 1 Jun 19 – 31 Mar 20 £3.6m 4.5% I Oct 19 – 31 May 20 £1.1m 3.0% 1 Apr 20 – 31 May 20 £2.1m 4.5% Total interest expense in Income Statement for the year
Answer to Question 36.9A
Prorate by number of months in issue × 10/12 × 8/12 × 2/12
Interest expense £ 135,000 22,000 15,750 172,750
BA 1
Tully Ltd Income Statement for the year ending 31 December 2020 Sales Less Cost of goods sold Opening inventory Purchases
975,600 81,300 623,800 705,100 102,400
Less Closing inventory Gross profit Less Expenses Wages Motor expenses (4,300 + 280) Machinery repairs Sundry expenses Depreciation: Premises Machinery Motor vehicles Directors’ remuneration Net loss
Non-current assets Premises Machinery Motor vehicles
602,700 372,900
241.500 4,580 3,600 2,900 13,250 21,820 6,940
42,010 82,600
Balance sheet as at 31 December 2020 Cost Depn 265,000 73,250 109,100 63,220 34,700 25,140 408,800 161,610
Current assets Inventory Accounts receivable Bank
102,400 169,600 17,900
Current liabilities Accounts payable Motor expenses owing
74,900 280
377,190 4,290
Net 191,750 45,880 9,560 247,190
289,900 537,090
75,180 461,910
Total assets less current liabilities Equity Called-up share capital General reserve (60,000 + 7,500) Retained profits (−4,290 + 31,200 − 7,500) Note: The proposed dividend will be shown as a note.
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375,000 67,500 19,410
86,910 461,910
Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
Answer to Question 36.11A
BA 1
Hurmey plc Income Statement for the year ended 31 July 2020 1,138,555
Sales Less Cost of goods sold: Opening inventory Add Purchases Less Returns outwards Less Closing inventory
53,010 523,735 (2,928) (53,661) (520,156) 618,399
Gross profit Add Other income: Commissions received
7,958 626,357
Less Expenses Utilities (20479 per TB + 6757 accrued) Rent (19757 per TB − 2700 prepaid **) Wages & salaries Directors’ remuneration Audit fee Bad debt expense Increase in allowance for doubtful debts Depreciation expense: Premises (658600 × 0.02) Machinery (Cost 465840 × 0.2 straight-line) Vans ((278580 − 63900) × 0.3 reducing-balance)
27,236 17,057 113,856 91,080 18,000 25,174 1,043 13,172 93,168 64,404 (464,190) 162,167 (12,250) 149,917 (33,000) 116,917
Operating profit Less Interest expense Profit before tax Less Corporation tax expense Profit for the year Balance sheet as at 31 July 2020 Assets Non-current assets Premises Machinery Vans
(* Acc dep = 171236 TB + 13172 above) (* Acc dep = 105120 TB + 93168 above) (* Acc dep = 63900 TB + 64404 above)
Cost 658,600 465,840 278,580 1,403,020
Current assets Inventory Accounts receivable 105,600 Less allowance for doubtful debts (5,280) Prepayments (** 8100 payment × 4/12 months paid in advance) Cash at bank Total assets Current liabilities Accounts payable Accruals (6125 interest + 6757 + 18000) Corporation tax payable
Acc Dep* 184,408 198,288 128,304 511,000
NBV 474,192 267,552 150,276 892,020
53,661 100,320 2,700 2,435 159,116 1,051,136
85,810 30,882 33,000 149,692
Non-current liabilities Loan notes Total liabilities Net assets
175,000 (324,692) 726,444
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Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
Equity Ordinary shares Preference shares Share premium General reserve Retained profits Total equity
67,000 54,000 77,000 42,100 486,344 726,444
(34100 + 8000) (428867 + 116917 − 51440 − 8000)
Answer to Question 36.13A
BA 1
(a) (Narratives omitted) (i) Accounts payable Accounts receivable Operating profit Accounts receivable Operating profit Suspense (ii) Bank Accounts receivable Operating profit Bank (iii) Operating profit Accounts receivable Allowance for doubtful debts (note 1) Operating profit (iv) Retained profit brought forward Operating profit Inventory Operating profit (v) Suspense (note 2) Operating profit
The Journal
Dr 10,000
Cr 10,000
1,000 1,000 4,000 4,000 2,000 2,000 1,000 1,000 1,000 1,000 1,140 1,140 1,000 1,000 2,000 2,000 3,000 3,000
Notes: 1) Accounts receivable 200 − 10 (i) − 1 (i) − 2 (ii) − 1 (iii) = 186 (£000) New allowance 1% × 186,000 = 1,860 Reduction in allowance 3,000 − 1,860 = 1,140 2) See note (v) in question. Credit balance on suspense account treated as sales. Original balance on suspense must be £1,000 debit for trial balance to balance. £1,000 Dr + £4,000 Cr (i) = £3,000 Cr. (b)
Fiddles PLC Income Statement for the year ending . . .
Operating profit (note 1) Loan note interest (note 2) Net profit for the year
80,140 7,200 72,940 Balance Sheet as at . . .
Non-current assets Land Buildings Plant and machinery Less accumulated depreciation
100,000 120,000 170,000 120,000
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50,000 270,000
Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
Current assets Inventory Accounts receivable Less Allowance for doubtful debts Bank (12,000 + 2,000 − 1,000)
192,000 186,000 1,860
Current liabilities Accounts payable (110,000 − 10,000) Loan note interest
184,140 13,000
389,140 659,140
100,000 7,200 107,200
Non-current liabilities 16% Loan notes
180,000 287,200 371,940
Equity: Called-up share capital Retained profits (200,000 − 1,000 + 72,940)
100,000 271,940 371,940
Notes: 1) 80,000 + (iii) 1,140 + (iv) 1,000 + (iv) 2,000 + (v) 3,000 − (i) 1,000 − (i) 4,000 − (ii) 1,000 − (iii) 1,000 = 80,140 2) 180,000 × 16% × 3 months = 7,200 3) The proposed dividend will be shown as a note.
Answer to Question 36.18A
BA 1
Unsworthy plc Income Statement for the year ended 31 December 2020 £’000 Revenue (9,606 – 308 returns inwards) Less Cost of goods sold Opening inventory 468 Add Purchases 5,241 Add Carriage inwards 74 Less Returns out (157 – 16) 141 Less Closing inventory 517 Gross profit Add Other income Less Operating expenses Staff wages & salaries 1,253 Advertising 460 Directors’ remuneration 786 Depreciation expense − Buildings (1,640 × 2.5%) 41 Depreciation expense − Machinery ((1,728 − 948) × 15%) 117 Audit fee 95 Rent (853 − 65 prepaid) 788 Other operating expenses 665 Bad debts 159 Operating profit Less Interest expense (37 on loan notes (W1) + 19 on overdraft) Profit before tax Less Corporation tax expense Profit for the year W1 Loan note interest 1/1/20 – 31/3/20: 500 × 8% × 3/12 1/4/20 – 31/12/20: 600 × 6% × 9/12 Total loan note interest expense for the year 28 has been paid so 9 needs to be accrued. 80 © Pearson Education Limited 2019
£’000 10 27 37
£’000 9,298
5,125 4,173 378
4,364 187 56 131 41 90
Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
Non-current assets Land Buildings (W2) Machinery (W2)
Unsworthy plc Balance Sheet as at 31 December 2020 £’000 Cost 692 1,640 1,728 4,060
Current assets Inventory Trade receivables (922 – 7) Prepayments (195 × 1/3 months paid in advance) Total assets
517 915 65
Current liabilities Bank overdraft Trade payables (856 + 16 – 7) Accruals (95 audit + 9 interest (see W1)) Corporation tax payable
232 865 104 41
Non-current liabilities Loan notes Total liabilities
1,497 3,691
1,242
1,842 1,849
W2: Accumulated depreciation At 1 January 2020 Depreciation expense for year At 31 December 2020
375 568 906 1,849
Buildings 760 41 801
Machinery 948 117 1,065
W3: Share capital & premium: Balance at 1 Jan 2020 (3m ordinary shares of NV 10p each) 1-for-4 bonus issue: 3m × 1/4 = 750,000 new shares × 10p Balance at 31 December 2020
a) Trade payables Purchase price paid
£’000 NBV 692 839 663 2,194
600
Equity: Ordinary shares (W3) Share premium (W3) Retained profits (924 + 90 – 108 dividends)
Answer to Question 37.2A
£’000 Acc Dep 801 1,065 1,866
Share capital 300 75 375
Share premium 643 (75) 568
Business Purchase Account 19,000 Buildings 200,000 Machinery Inventory Trade receivables Goodwill (difference) 219,000
125,000 15,000 10,000 27,000 42,000 219,000
BA 1
b) Amy Adams Balance Sheet as at 1 April 2019 Non-current assets Goodwill Buildings (155,000 + 125,000) Machinery (86,000 + 15,000 – 2,000) Motor vehicles Computer equipment (12,000 + 4,750)
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42,000 280,000 99,000 37,000 16,750 474,750
Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
Current assets Inventory (20,600 + 10,000) Trade receivables (30,100 – 1,350 + 27,000) Prepayments Cash in hand Total assets
30,600 55,750 4,100 150
Current liabilities Bank overdraft (2,700 + 500 – 4,750) Trade payables (23,800 + 19,000) Accruals
90,600 565,350
1,550 42,800 1,800 46,150
Non-current liabilities Bank loan Total liabilities Net assets
150,000 196,150 369,200
Capital: Previous capital Add cash introduced by owner Less loss on disposal of equipment (500 proceeds – 2,000 book value) Less irrecoverable debt written-off Amy’s capital
322,050 50,000 (1,500) (1,350) 369,200
Answer to question 38.2A See section 38.6
Answer to question 38.4A See section 38.9
Answer to Question 39.2A
Sales Less Cost of goods sold: Opening inventory Add Purchases
BA 1
T Chan Income Statement for the year ending 31 March 2021 iv)
Less Closing inventory
i) ii) iii) vi) v)
Gross profit Less Expenses Net profit The closing inventory as at 31 March 2021, as shown above, is 22,000. Order of solving problem: 16,000 + (a) = 19,000 2
i)
Average inventory is 19,000. Therefore
ii) iii) iv) v) vi)
Therefore (a) = 22,000. Can now be found by deducting (a) 22,000 from 106,000 = 84,000. Is 50% of (ii), therefore (iii) is 42,000. Is therefore needed to balance the account, that is, 126,000. If net profit was 12% of sales it would be 15,120. Therefore expenses are 42,000 − (v) 15,120 = 26,880.
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126,000 16,000 90,000 106,000 22,000 84,000 42,000 26,880 15,120
Sangster and Gordon, Frank Wood’s Business Accounting 1, 14e, Solutions Manual
Answer to Question 39.4A BA 1 (a) Cost of goods sold = Sales less gross profit margin
Category X 15,000 − 25% = 11,250
Category Y 28,000 − 30% = 19,600
(b) Sales – Cost of goods sold = Gross profit
15,000 − 11,250 = 3,750
28,000 − 19,600 = 8,400
2,700
5,040
(d) Gross profit − Expenses = Net profit
3,750 − 2,700 = 1,050
8,400 − 5,040 = 3,360
(e) Cost of goods sold = Inventory turnover Average inventory
11,250 =9 ?
19,600 = 14 ?
= 1,250
= 1,400
(c) Total expenses = 18% of sales
So, by arithmetical deduction
Answer to Question 39.6A BA 1 (a) Mark-up therefore Margin 1 3
1 1 = (see text) = 25% 3+1 4
(b) 14,500 × 100 = 24.166% 60,000 1 (c) Such as: Wastage; pilferage; sales at reduced prices; incorrect inventory valuation and arithmetical errors on selling prices. (d) Trading Account for the year ending 31 December 2019 Sales Less: Cost of goods sold Opening inventory Add: Purchases (47,000 + 5%) Less: Closing inventory (4,500 + 5%) Gross profit (e)
45,500 (3,000 + 4,500)/2
=
45,500 = 12.133 times 3,750
(f) Gross profit 14,500 − Expenses (10% of 60,000) 6,000 = Net profit 8,500. (g) Amended net profit: Gross profit 12,375 − Expenses 6,000 = 6,375 Reduction compared with (f ) 8,500 − 6,375 = 2,125 2,125 100 As a percentage of (f ) × = 25% 8,500 1
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60,000 3,000 49,350 4,725
47,625 12,375
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Answer to Question 39.8A
BA 1
(a) Bank transactions Opening balance Add Receipts
3,063 1,467 4,530
Less Payments: Rent Adverts Miscellaneous Drawings
60 66 12 150 288 4,242
(b) Closing inventory A: (3 + 12 − 11) ⇒ 4 × 54 = B: (3 + 10 − 8) ⇒ 5 × 48 =
216 240 456
Arthur is correct (c) Gross profit A: (81 − 54) × 11 = B: (72 − 48) × 8 = Net profit 489 − (60 + 66 + 12) = (d)
297 192 489 =
33.33%
351 =
23.9 %
Arthur Income Statement for the month ending 31 October Sales (11 × 81) + (8 × 72) Opening inventory Purchases (12 × 54) + (10 × 48)
1,467 306 1,128 1,434 456
Closing inventory
978 489
Gross profit Less Expenses: Rent Advertising Miscellaneous
60 66 12 138 351
Net profit Balance Sheet as at 31 October Current assets Inventory Bank
456 4,242 4,698
Current liabilities Raleigh
1,128 3,570
Capital account Opening balance Add Net profit
3,369 351 3,720 150
Less Drawings
3,570
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Answer to Question 40.3A
BA 1 Opening Capital: 31 October 2019
Cash Bank Fixtures Inventory Accounts receivable Motor van Less Accounts payable
210 4,700 2,800 18,200 26,600 6,800
59,310 12,700 46,610
B Barnes Statement of Affairs as at 31 October 2020 Non-current assets Motor van Less Depreciation Fixtures (2,800 + 900) Less Depreciation Current assets Inventory Accounts receivable Prepaid expenses Cash
23,900 29,400 460 190
Current liabilities Trade accounts payable Expenses owing Bank overdraft
9,100 320 1,810
6,800 1,360 3,700 370
5,440 3,330 8,770
53,950 62,720
11,230 51,490 Financed by: Capital Opening balance Add Net profit Add Cash introduced
46,610 (C) 7,600 (B)
Less Drawings
32,200 (A)
Missing figures deduced: (A) 51,490 (B) 83,690 (C) 29,480.
Answer to Question 40.5A
BA 1
Workings: Balance b/d Receipts from debtors Cash sales Loan from F Tung Bank
Cash 194
Bank 920 94,200
1,540 2,500 12,600
14,334
Cash Cash Trade accounts payable Rent Insurance Drawings* Sundry expenses Balance c/d
97,620
* Figure for drawings is that needed to make cash columns balance, that is, 12,572.
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1,310
xxx 180 272 14,334
Bank 12,600 63,400 3,200 1,900 11,400 820 4,300 97,620
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Capital at 31 December 2017 920 Bank Cash 194 Inventory 24,200 Accounts receivable 9,200 Insurance prepaid 340 5,500 Motor van 40,354 Less Accounts payable 7,300 33,054
Purchases Bank Cash − Opening Crs + Closing Crs
63,400 1,310 64,710 7,300 57,410 8,100 65,510
Sales Bank Cash − Opening Drs + Closing Drs
94,200 1,540 95,740 9,200 86,540 11,400 97,940
A Bell Income Statement for the year ending 31 December 2018 Sales Less Cost of goods sold: Opening inventory Add Purchases
97,940
Less Closing inventory Gross profit Less Expenses: Rent (3,200 + 360) Insurance (1,900 + 340 − 400) Sundry expenses (820 + 180) Depreciation: Motor van (5,500 – 4,600) Net profit
24,200 65,510 89,710 27,100
3,560 1,840 1,000 900
62,610 35,330
7,300 28,030
Balance Sheet as at 31 December 2018 Non-current assets Motor van Less depreciation Current assets Inventory Accounts receivable Prepayments Bank Cash
5,500 900 27,100 11,400 400 4,300 272
Current liabilities Trade accounts payable Rent owing
8,100 360
Non-current liabilities Loan – F Tung
43,472 48,072
8,460 2,500
Capital Opening balance Add Net profit
4,600
10,960 37,112
33,054 28,030 61,084 23,972 37,112
Less Drawings (12,572 + 11,400)
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Answer to Question 40.7A
BA 1
(a) i) Balance b/d Credit sales (difference)
Accounts Receivable Control Bank 2,643 46,215 Balance c/d 48,858
44,846 4,012 48,858
Total sales = credit 46,215 + cash 3,921 = 50,136 Accounts Payable Control 22,177 Balance b/d 2,445 Purchases (difference) 24,622
Bank Balance c/d
1,598 23,024 24,622
Total purchases = 23,024 + table 300 = 23,324 ii)
Bill Smithson Income Statement for the year ending 31 March 2019
Sales Less Cost of goods sold: Opening inventory Add Purchases
50,136
Less Closing inventory Gross profit Less Expenses: Electricity Telephone Rent Advertising Insurance (946 − 177) Motor expenses (2,116 − 432 + 291) Depreciation: Motor Fittings (4,200 + 2,550 −300 − 250) × 10% Net profit
3,210 23,324 26,534 4,063
1,090 360 2,000 1,430 769 1,975 1,020 620
(b) Balance Sheet as at 31 March 2019 Non-current assets Fittings (4,200 + 2,550 − 300 − 250) Less Depreciation Motor Less Depreciation
6,200 620 5,100 1,020
Current assets Inventory Accounts receivable Prepayment Bank
4,063 4,012 177 1,775
Current liabilities Accounts payable Expenses owing
2,445 291
Capital Balance at start of year Add Net profit
22,471 27,665
9,264 18,401
5,580 4,080 9,660
10,027 19,687
2,736 16,951 15,543 18,401 33,944 16,993 16,951
Less Drawings (16,743 + shelving 250) * 3,210 + 2,643 − 1,598 + 5,100 + 4,200 − 432 + 2,420 = 15,543 87 © Pearson Education Limited 2019
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Answer to Question 40.9A
BA 1
Jean Smith Income Statement for the year ending 31 March 2019 Sales [(24,900 × 2) + 600] Less Cost of sales: Purchases (26,400 + 120 + 880) Less Closing inventory Gross profit (25,500 − 600) Less Expenses: Wages Rent (3,500 − 700) Rates Electricity (760 + 180) Postages, stationery and sundries Van running expenses Van licence and insurance (250 − 125) Van depreciation (7,500/5) × 6/12 months Loan interest (10,000 × 5%) × 3/12 months Net profit Balance Sheet as at 31 March 2019 Non-current assets Motor van at cost Less Accumulated depreciation Current assets Inventory Accounts receivable Prepayments (125 + 700) Bank (W1) Cash Less Current liabilities Accounts payable Accrued expenses (125 + 180) Non-current liabilities Loan from John Peacock
50,400 27,400 1,900
14,700 2,800 1,200 940 355 890 125 750 125
7,600 750 1,900 2,300 825 4,310 640
880 305
10,000
48,100
6,850
9,975 16,825
11,185 5,640 15,000 3,015 18,015 12,375 5,640
Less Drawings (3,875 (W1) + 8,500)
Cash
21,885 3,015
1,185
Capital: Opening balance at start of year Add Net profit
(W1) Capital Loan: J Peacock Bankings 42,000 + 340 Cash sales 50,400 − 2,300
25,500 24,900
Bank 15,000 10,000 42,340
Van running expenses Van licence and insurance Van Caravan Wages Rates Rent Electricity Purchases (26,400 + 120) Postages, etc. Bankings Drawings (difference) Balances c/d
48,100 67,340 *Bank statement 4090 + 340 uncredited deposits − 120 unpresented cheques = 4,310 88 © Pearson Education Limited 2019
Cash 890
Bank 250 7,600 8,500 14,700 1,200 3,500 760 26,520
355 42,340 3,875 640 48,100
4,310* 67,340
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Answer to Question 40.13A (a)
BA 1 P Maclaran Capital on 1 January 2018 6,000 60 2,300 9,800 8,100 26,260
Bank Cash Inventory Machinery Accounts receivable Less: Accruals Accounts payable Loan
150 5,700 7,000 12,850 13,410 P Maclaran Income Statement for the year ending 31 December 2018
Sales Less: Sales returns
47,700 640 47,060
Less: Cost of sales Opening inventory Add: Purchases
2,300 30,700 33,000
Less: Withdrawn by the owner Less: Closing inventory
1,200 5,400 6,600 26,400 20,660 600 21,260
Gross profit Add: Discount received Less: Expenses Rent (1,100 − 100 − 150) Bad debts written off Wages Insurance Loan interest (500 + 200) Depreciation Repairs Electricity
850 240 9,200 850 700 2,800 1,400 570 16,610 4,650
Net profit Workings: Sales: 35,000 − 80 + 9,700 + 240 − 8,100 + 9,200 + 640 + 1,100 = 47,700. Purchases: 31,000 − 5,700 + 4,800 + 600 = 30,700. Depreciation: 9,800 + 3,400 − 10,400 = 2,800.
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Answer to Question 40.14A
BA 1
P Maclaran Balance Sheet as at 31 December 2018 Non-current assets Machinery opening balance Add: Additions
9,800 3,400 13,200 2,800
Less: Depreciation
10,400 Current assets Inventory Accounts receivable Prepayments Cash
5,400 9,200 100 90
Current liabilities Accounts payable Bank overdraft
14,790 25,190
4,800 2,930 7,730 200 7,930
Accrued charges: Loan interest Non-current liabilities Bank loan 10%
7,000
Capital Account Balance at start of year Add: Net profit
14,930 10,260
13,410 4,650 18,060 7,800
Less: Drawings (6,600 + 1,200)
10,260
Answer to Question 41.11A (a)
BA 1 Abraxas
Buscema
i)
Gross profit as % of sales
1,010 100 × = 30.6% 3,300 1
1,020 100 × = 37.8% 2,700 1
ii)
Net profit as % of sales
66 100 × = 2% 3,300 1
108 100 × = 4% 2,700 1
iii)
Expenses as % of sales
944 100 × = 28.6% 3,300 1
912 100 × = 33.8% 2,700 1
iv)
Inventory turnover
2,290 = 5.3 times (410 + 460) ÷ 2
1,680 = 7.5 times (216 + 233) ÷ 2
v)
ROCE
66 100 × = 10.3% 638 1
108 100 × = 26.9% 401 1
vi)
Current ratio
992 = 1.3:1 744
360 = 2.0:1 179
vii)
Acid test ratio
532 = 0.72:1 744
127 = 0.71:1 179
viii) Accounts receivable days
524 × 365 = 58 days 3,300
106 × 365 = 14 days 2,700
ix)
744 × 365 = 116 days 2,340
179 × 365 = 39 days 1,697
Accounts payable days
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(b) Buscema appears to be performing better in relation to virtually all of the ratios. The only one in which it is inferior is (iii) expenses as a percentage of sales, which seems to be purely because of the higher level of directors’ remuneration. The senior management at Buscema certainly appear to be doing a better job of their stewardship of the company than their counterparts at Abraxas. Possible reasons for some of the key observations in connection with the ratios might include: • Buscema focuses on higher margin products and therefore earns a higher rate of gross profit. Alternatively perhaps Abraxas simply charges lower prices in an attempt to boost its sales. • Buscema uses its resources more efficiently: the company generates a greater net profit with lower capital employed (and a lower wage bill). Its operating processes may be more streamlined and efficient than those at Abraxas. • Buscema collects its debts much faster than Abraxas. Perhaps its credit control department is more efficient, or it has better relationships with its customers. Alternatively Abraxas may have offered generous credit terms to its customers in a deliberate attempt to boost sales. • Abraxas appears to be taking over 3 months to pay its suppliers. This could be a risky policy because some suppliers may refuse to trade with Abraxas in the future. It could also be a sign that Abraxas is experiencing some cash flow difficulties. • Buscema has a higher rate of inventory turnover. Maybe its buyers are more effective at identifying household products that are in high demand. The slower inventory turnover of Abraxas, and the fact that its inventory levels have actually increased this year, are further worrying signs in terms of their potential impact on the company’s cash flow.
Answer to Question 41.14A
BA 1
Author’s note: By necessity, the scenario presented in this question is highly simplified and one would never dispense investment advice on the basis of such limited information. However, the question is an excellent introduction to the ‘shareholder ratios’ presented in this chapter. Laura (L) wishes to maximise her income, which means she would seek to maximise the value of dividends she receives each year. At first sight, Gogro (G) would therefore appear to be preferable. The dividend yield, which compares the latest annual dividend paid with the current market share price, is nearly double for G compared to Stabilo (S). This means that, for the same total investment, L’s annual dividend income (assuming dividends continue to be paid at similar levels) will be almost double if she buys shares in G rather than S. This is the same as pointing out that the dividend paid per share of G is slightly higher, but the share price is much cheaper: thus the same total investment would buy a greater number of shares in G and hence would produce a higher annual income. The price-earnings ratio is also significantly higher for G than S, which means that the market price of G’s shares is higher compared to the current level of G’s profits than it is for S. This could indicate that the market is optimistic about G’s prospects to generate profits in the future. The current price of G is near the top of the range of its price over the last 52 weeks, which also may suggest current levels of optimism about G’s situation. It may also point to the fact that G’s share price is on an upwards trend, and the price could rise even higher in the coming months. We are told that L wishes to maximise her income, but it is highly likely she would appreciate some growth in the value of her investment too. The ROCE (return on capital employed) of G is higher than S which at face value suggests that G is managing to generate higher profits than S relative to the book value of its assets. However, it is difficult to deduce a great deal from this alone: it is possible that G and S are very different businesses in very different industries, so the fact that ROCE differs may not reveal much about how efficiently they are using their capital employed. Moreover, some of the other information might make one very cautious about advising L to invest in G. First, the market price of G’s shares has been much more volatile in the last 52 weeks. This could suggest that a degree of uncertainty surrounds G’s business, or that it has been going through difficult or fluctuating circumstances. The share price of S appears far more stable, which suggests that the value of L’s £50,000 might be safer if invested in S. Of potentially even greater concern is the dividend cover. According to the data given, S only paid a quarter of its annual profit for the year in the form of a dividend. This has various implications, including: • S is retaining a significant portion of profits within the company, which can be used for reinvestment, expansion and growth. This could boost its future profits. • S’s current level of dividend is more likely to be sustainable, because it is making annual profits well in excess of the amounts it is paying out. 91 © Pearson Education Limited 2019
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On the other hand, G paid a dividend greater than its annual profit, which means that none of this year’s profit was retained for reinvestment and that it could be difficult for G to sustain this level of dividends going forward. Another concern is that G’s gearing is much higher than S’s. This means that, relative to its equity, G has borrowed a lot more than S. Since interest on loans must (unlike dividends) be paid each year, this increases the risk that if profits fall it may not be possible for G to pay a dividend. Furthermore it may mean that G is unable to borrow any further (without paying very high rates of interest) which means it could struggle to get the funds needed expand and grow in the future. S’s gearing is much lower, so it is less likely to face either of these problems. We are also given details of the property, plant & equipment (PPE) of the two companies. S appears to have a much greater investment in PPE than G. The ‘depreciation to date’ figures possibly also indicate that S’s assets are newer, given that a much higher proportion of the cost of G’s assets has been depreciated. However, it is very difficult to draw any firm conclusions because S and G may be very different businesses in very different industries, and accordingly hold very different types of PPE. In summary, on the basis of last year only, investment in G may potentially offer greater dividend income. But S appears to be a safer, more stable investment, offering greater assurance that current levels of dividend can be maintained or improved. Much more information about the two companies (their line of business, industry averages, future prospects, historical financial data and so forth) would be necessary before making any decision, as would information about L’s own financial circumstances and risk preferences. It would also appear unwise, of course, to invest all £50,000 in the shares of one company: a more diversified portfolio of investments is likely to be advisable.
Answer to Question 41.15A
BA 1
(a) 50% (b) 33⅓% (c) 5% (d) Receivable days have steadily improved over the last four years. Alistair has managed to reduce the average time waiting for his customers to pay from 60 to 40 days, which will benefit his cash flow and liquidity. It is possible he may have employed a new credit controller; or he has simply tightened up his collection procedures; or perhaps is offering cash discounts to incentivise some customers to pay more promptly. There is still room for further improvement as his ideal target would be to collect his money in accordance with his 30-day credit policy. Meanwhile payable days have increased steadily, which will also boost his business’s liquidity because he is holding on to his cash for longer. His average payment period is now roughly in line with the 30-day credit terms offered by his suppliers. It appears that he was paying his suppliers much quicker than this four years ago: perhaps he was taking advantage of prompt payment discounts offered by some of his suppliers in the past? The receivable days remain greater than the payable days which is still not ideal: he is essentially paying his suppliers faster than he is collecting money from his customers. But the ‘gap’ has closed significantly (from 40 days to 7 days) which is certainly a positive trend. However, his inventory turnover has slowed dramatically. Perhaps he has decided to hold much higher levels of inventory for some reason, or his sales have declined significantly so that his stock is moving much slower. Either way, money is tied up in inventory for much longer, which will have a negative effect on his business’s liquidity. It is definitely this trend in inventory turnover that is most worrying for Alistair and this is the aspect of his business that he should investigate further as a priority.
Answer to Question 41.17A (a)
BA 1
Schedule of Accounting Ratios and Resource Utilisation Year ended 30 September 2018 2019
2020
i) Net profit as % of sales
13,000 90,000
= 14.4%
20,000 = 20% 100,000
22,000 = 18.3% 120,000
ii) Gross profit as % of sales
16,000 90,000
= 17.8%
25,000 = 25% 100,000
28,000 = 23.3% 120,000
iii) Inventory turnover
74,000 3,500
= 21.1
75,000 5,500
92,000 18,500
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= 13.6
= 5.0
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iv) Current ratio
24,000 4,000
= 6:1
25,000 6,000
= 4.2:1
40,000 11,000
= 3.6:1
v) Acid test ratio
20,000 4,000
= 5:1
18,000 6,000
= 3:1
10,000 11,000
= 0.9:1
vi) Accounts receivable/ sales (months)
19,000 × 12 = 2.5 90,000
15,000 × 12 = 1.8 100,000
10,000 × 12 = 1.0 120,000
These are not the only six ratios or measures available. (b) Your answer should be in report fashion. The main points you should cover include: i)
The increase of sales by £20,000 from 2019 to 2020 has been accompanied by a fall in net profit ratio of 1.7%, and worse liquidity ratios. The acid test ratio shows that there may be difficulties in paying your debts soon. ii) The year to 2019 showed a considerable increase in profitability. Can this be maintained? iii) Why has inventory increased to £30,000 at end of 2020? Does this show difficulties in achieving sales? Investigate. iv) If the above indicate problems in the future, what is the value of assets if sold at break-up prices? v) A government investment involves no risk, except for inflation. vi) Your return from Space Age should have a figure deducted for the value of your services. Only then can we sensibly compare the return from the business with the return from the investment. vii) There is a case for the investment in the loan stock being better than carrying on the business.
Answer to Question 41.19A
BA 1
(a)
Table of Accounting Ratios A
1) Current ratios
180 160
2) Acid test
B = 1.1
200 120
= 1.7
100 160
= 0.6
100 120
= 0.8
3) Net profit as % of sales
30 1,000
= 3%
100 3,000
= 3.3%
4) Gross profit as % of sales
600 1,000
= 60%
1,000 3,000
= 33%
5) Accounts receivable/sales (months)
100 × 12 = 1.2 1,000
90 × 12 = 0.36 3,000
6) Accounts payable/cost of sales (months)
110 × 12 = 3.3 400
120 × 12 = 0.7 2,000
7) Return on owners’ equity
30 100
= 30%
100 520
= 19.2%
8) Gearing
100 200
= 50%
130 650
= 20%
(b) Should be in report fashion. Main points, briefly: i)
Both have similar net profit percentage: A 3%; B 3.3%. However, result obtained very differently as A has high GP% and very high expenses, whereas B has lower GP% and relatively lower expenses. This could simply reflect differing judgements regarding whether to allocate certain expenses to ‘cost of sales’. 93 © Pearson Education Limited 2019
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ii) Higher gearing of A leads to higher return on owners’ equity. The extra debt of A could lead to problems if profits fall. iii) A’s high accounts payable/cost of sales ratio is very worrying, as is the low current ratio. Some of A’s suppliers might refuse to trade with A if A takes this long to pay its bills. iv) Figures considerably distorted by B’s land revaluation. This leads to B’s ROOE being understated, whilst that of A – by comparison – is overstated.
Answer to Question 41.29A
BA 1
For the benefits, see sections 41.1–41.3 of the text. The limitations include: • Ratios only provide clues in relation to identifying what the significant trends or weaknesses might be. Further investigation is usually required to truly understand what is going on. • Ratios are calculated on the basis of published financial statements: the weaknesses of this information are discussed in section 41.8 of the text. • Comparisons between businesses may be distorted by different accounting policies being used: see section 41.10 of the text.
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