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Acc5202 Accounting Principle For Accrual Assessment Answers

Question 1
A. A student was overheard to say “The trial balance is a very important report. If the Trial Balance ‘balances’ the books are correct!” Comment on the statement (i) that the Trial Balance is a very important report and why, and (ii) whether it is correct to assume that the books are correct. Give 2 examples to either support or disprove this statement. 
B. As a graduate accountant you are confronted with the following task in your first job. Your boss informs you that the Trial Balance as at 31st December 2018 does not balance and asks why? You discover a number of errors and in order to correct the Trial Balance

Answer:

It is true that trial balance is very important statement; this is so because trial balance gives a bird’s eye view of the entire transactions posted in the books. In other words, it is the summary of the entries posted in the general ledgers. With the help of trial balance, the other financial statements like balance sheet, income statement, etc. are prepared, without trial balance one cannot think of preparing these statements (Accounting-simplified.com, 2018).
this is not correct to assume that if the trial balance “balances”, then the books are correct. Because the trial balance cannot highlight the compensating error like error of omission or error of commission. The examples of such errors are if the amount required to be posted to the fuel account is posted to the maintenance account, so this error will not be reflected by trial balance, since it is an error of commission, similarly if an entry is omitted to be posted in the books, then also it will not affect the trial balance (Accounting-simplified.com, 2018).
 

Would the error cause the Trial Balance not to balance

Which accounts would be affected and how?

How would the error be corrected

 Effect on Trial Balance totals

 

Yes

No

  

 Debit

 Credit

Example A payment for wages of $500 was credited to cash correctly but debited to wages twice expense.

Yes

 

Wages expense

Debit side of Wages Expense reduced by 500

$ (500)

 

1. The Accrued Wages account with a balance of $500 was omitted from the Trial Balance.

Yes

 

Accrued Wages

Credit side of Accrued Wages to be increased by 500

 

$ 500

2. A payment of $490 for Prepaid Rent was only posted to the Cash at Bank account and not to Prepaid Rent

Yes

 

Prepaid Rent

Debit side of Prepaid rent account to be increased by 490

$ 490

 

3. A debit of $458 to Cash at Bank was posted as $485. The credit entry was correct.

Yes

 

Cash at bank

Debit side of cash at bank account to be reduced by $27

$ (27)

 

4. A credit of $600 to Accounts Payable should have been made to Fees Revenue

 

No

Accounts Payable, Fees revenue

Credit side of accounts payable to be reduced by $600, and credit side of fees revenue account is increased by $600

$ -

 

5. A Dr for a cash receipt of $500 from customers in settlement of their accounts was posted twice as a DR to the Cash at Bank and a Dr to Accounts Receivable accounts

Yes

 

Cash at bank

Debit side of cash at bank account to be reduced by $500

$ (500)

 

6. The Prepaid Expense balance of $7280 was listed in the Trial Balance as $7820

Yes

 

Prepaid Expense

Debit side of prepaid expense account to be reduced by $540

$ (540)

 

7. A $5210 credit to Fees Revenue was posted as a $521 credit. The debit entry to Accounts Receivable was made correctly.

Yes

 

Fees revenue

Credit side of fees revenue account to be increased by $4689

 

$ 4,689

8. A purchase of office equipment for $3300 on credit was not recorded.

 

No

Office equipment, accounts payable

Debit side of office equipment to be increased by $3300 and credit side of accounts payable to be increased by $3300

$ 3,300

$ 3,300

9. A purchase of Furniture for $7500 using a loan was posted as a debit to the Loan Payable account and a debit to the Equipment account.

Yes

 

Loan Payable

Credit side of loan payable account to be increased by $15,000

 

$ 15,000

10. The drawings account balance was listed as a credit for $1500.

Yes

 

Drawings

Debit side of the Drawings account to be increased by $3000

$ 3,000

 

Matching principle is the basic accounting principle, which states that the expenses should be booked in the period in which associated income is booked. This principle works best with accrual method of accounting, but is not in line with cash method of accounting. Under accrual method of accounting, the expenses are booked on accrual basis, i.e. when they are incurred, irrespective of when their payment is made, whereas under cash basis of accounting, expenses are booked when they are actually paid in cash. So, if a company pays commission on its sales, which is required to be paid in the following month of sale let’s say for December sales, the commission is payable in January. So, matching principle and accrual method of accounting requires the company to account for commission payable in December only whereas cash method of accounting requires the commission to be accounted for in January, i.e. when it is paid (AccountingCoach.com, 2018).

Part-B

  • Journal entries in the books of J. Jackson for the year ended 30thJune, 2018

Sr. No.

Particulars

Debit ($)

Credit ($)

(i)

Wages expense (21000/5*2)

8,400

 
 

To Wages payable

 

8,400

 

(To record the wages payable for the 2 days in June, 18)

  
    

(ii)

Commission fees receivable

1,520

 
 

To Commission fees

 

1,520

 

(To record income earned but not received)

  
    

(iii)

Prepaid Rent (36000/12*7)

21,000

 
 

To Rent expense

 

21,000

 

(To record prepaid rent)

  
    

(iv)

Interest receivable (25,000*6%*1/4)

375

 
 

To Interest income

 

375

 

(To record interest earned but not received)

  
    

(v)

Unearned revenue (12000*30%)

3,600

 
 

To Revenue

 

3,600

 

(To record revenue earned)

  
    

(vi)

Office furniture

6,000

 
 

To Office expenses

 

6,000

 

(To record the rectifying entry)

  
    

(vii)

Supplies expense (800+5200-1500)

4,500

 
 

To Office supplies

 

4,500

 

(To record consumption of office supplies)

  
    

(viii)

GST Collected

7,960

 
 

To GST Paid

 

7,960

 

(To record the settlement of amounts)

  
  • Calculation of new profit figure

Particulars

 

 Amount ($)

Old Profit

 

3,281,001

Adjustments

  

(Increase) / decrease in expense

  

Wages expense

(8,400)

 

Rent expense

21,000

 

Office furniture purchased

6,000

 

Supplies expenses

(4,500)

14,100

   

Increase / (decrease) in income

  

Commission fees

1,520

 

Interest income

375

 

Unearned revenue

3,600

5,495

   

Revised Profit

 

3,300,596

The four qualitative characteristics as mentioned in IASB’s conceptual framework are (Jan, 2018):

  • Relevance– Means the financial information should be relevant and useful to the users of the financial statements.
  • Materiality– All the possible information affecting the users of the financial statements should be disclosed
  • Faithful representation– The financial information should be free from errors and should reflect true and fair view.
  • Comparability– The financial information should be comparable with the financial information of other companies or for previous years. 

HARDYARDS ACCOUNTING SERVICES

Worksheet for period ended 30th June, 2018

       

Account

Adjusted Trial Balance

Income Statement

Balance Sheet

 Debit

Credit

 Debit

Credit

 Debit

Credit

Cash at Bank

14,900

   

14,900

 

Accounts Receivable

25,825

   

25,825

 

Prepaid Expenses

2,200

   

2,200

 

Office Supplies

6,160

   

6,160

 

Accrued Revenue

2,540

   

2,540

 

GST Paid

26,000

   

26,000

 

Equipment

163,000

   

163,000

 

Accumulated Depreciation

 

28,000

   

28,000

Accounts Payable

 

6,320

   

6,320

Loan Payable

 

55,000

   

55,000

Salaries Payable

 

1,930

   

1,930

GST Collected

 

32,740

   

32,740

Unearned Revenue

 

2,750

   

2,750

B. Bright Capital

 

50,000

   

50,000

B. Bright Drawings

5,000

   

5,000

 

Painting Revenue

 

204,055

 

204,055

  

Wages Expenses

100,020

 

100,020

   

Rent Expense

6,550

 

6,550

   

Depreciation Expense

11,000

 

11,000

   

Marketing Expense

5,520

 

5,520

   

Office Supplies Expense

6,180

 

6,180

   

Interest on Loan Expense

5,900

 

5,900

   
 

380,795

380,795

135,170

204,055

245,625

176,740

Profit

     

68,885

Total

    

245,625

245,625

Closing entries in the journal

Sr. No.

Particulars

 Debit ($)

 Credit ($)

1

Painting Revenue

204,055

 
 

To Income Summary

 

204,055

    

2

Income Summary

135,170

 
 

To Wages expense

 

100,020

 

To Rent expense

 

6,550

 

To Depreciation expense

 

11,000

 

To Marketing expense

 

5,520

 

To Office supplies expense

 

6,180

 

To Interest on loan expense

 

5,900

    

3

Income summary

68,885

 
 

To Retained earnings

 

68,885

    

4

B. Bright Capital

5,000

 
 

To B. Bright Drawings

 

5,000

    
  • No, the way the credit are offered will not change, however the process will change at the end of the businesses as now instead of collecting the debts on their own, they will hire the factors who will collect the debts on their behalf. They need to incur additional factoring costs for this.
  • Yes, the firms will no longer be required to monitor their receivables. Factoring means outsourcing the collections of debts to the third party.
  • Not allowing the bad and doubtful debts will make the profit and loss account reflect the false picture with overstated profits and overstated accounts receivable.

Part-B

  • Journal Entries for June

Sr. No.

Particulars

 Debit ($)

 Credit ($)

    

(i)

Allowance for Doubtful Debts

11,510

 
 

To Accounts Receivable

 

11,510

 

(To record for bad debts written off)

  
    

(ii)

Cash (99550*20%)

19,910

 
 

Accounts receivable (99550*80%)

79,640

 
 

To GST Collected (99550/110%*10%)

 

9,050

 

To Sales (99,550/110%)

 

90,500

 

(To record sales during the month)

  
    

(iii)

Cash

121,600

 
 

To Accounts receivable

 

121,600

 

(To record cash collected from customers)

  
    

(iv)

Accounts receivable

1,870

 
 

To Allowance for Doubtful Debts

 

1,870

 

(To record reversal of accounts receivable)

  
    
 

Cash

1,870

 
 

To Accounts receivable

 

1,870

 

(To record cash collected from customers)

  
    

(v)

Accounts receivable

2,200

 
 

To Sales

 

2,200

 

(To record sale not recorded earlier)

  
    

(vi)

Bad debts expense

13,075

 
 

To Allowance for Doubtful Debts

 

13,075

 

(To record bad debts expense)

  
    
Ledger Accounts

Accounts Receivable

Date

Particulars

 Dr

 Cr

 Balance

01-Jun

Opening balance

$265,400

 

$ 265,400

30-June

Allowance for doubtful debts

 

$ 11,510

$ 253,890

30-June

GST Collected

$ 7,240

 

$ 261,130

30-June

Sales

$ 72,400

 

$ 333,530

30-June

Cash

 

$121,600

$ 211,930

30-June

Allowance for doubtful debts

$ 1,870

 

$ 213,800

30-June

Cash

 

$ 1,870

$ 211,930

30-June

Sales

$ 2,200

 

$ 214,130

     

Allowance for Doubtful Debts

Date

Particulars

 Dr

 Cr

 Balance

01-Jun

Opening balance

 

 $ 15,565

 $ (15,565)

30-June

Accounts receivable

 $ 11,510

 

 $ (4,055)

30-June

Accounts receivable

 

 $ 1,870

 $ (5,925)

30-June

Bad debts expense

 

 $ 13,075

 $ (19,000)

     
     

Cash at Bank

Date

Particulars

 Dr

 Cr

 Balance

01-Jun

Opening balance

 $106,000

 

 $ 106,000

30-June

GST Collected

 $ 1,810

 

 $ 107,810

30-June

Sales

 $ 18,100

 

 $ 125,910

30-June

Accounts receivable

 $121,600

 

 $ 247,510

30-June

Accounts receivable

 $ 1,870

 

 $ 249,380

     
     

Sales

Date

Particulars

 Dr

 Cr

 Balance

01-Jun

Opening balance

 

 $878,490

 $(878,490)

30-June

Cash

 

 $ 18,100

 $(896,590)

30-June

Accounts receivable

 

 $ 72,400

 $(968,990)

30-June

Accounts receivable

 

 $ 2,200

 $(971,190)

     
     

GST Collected

Date

Particulars

 Dr

 Cr

 Balance

01-Jun

Opening balance

   

30-June

Cash

 

 $ 1,810

 $ (1,810)

30-June

Accounts receivable

 

 $ 7,240

 $ (9,050)

     
     

Bad debt expense

Date

Particulars

 Dr

 Cr

 Balance

01-Jun

Opening balance

   

30-June

Allowance for doubtful debts

 $ 13,075

 

 $ 13,075

 Classified Income Statement and Balance Sheet

Extract Income Statement in the books of Homewares Company Ltd

Particulars

Amount ($)

Income

 

Sales

$ 971,190

Expense

 

Bad debts expense

$ 13,075

Extract Balance Sheet in the books of Homewares Company Ltd

 

Particulars

 

Amount ($)

Assets

  

Current assets

  

Accounts receivables

$ 214,130

 

Less: Allowance for doubtful debts

$ (19,000)

$ 195,130

Cash

 

$ 249,380

Total Assets

 

$ 444,510

   

Liabilities

  

Current liabilities

  

GST Collected

$ 9,050

$ 9,050

   

Total Liabilities

 

$ 9,050

   
  • The two methods that can be used to calculate allowance for bad debts are(Cliffsnotes.com, 2018):
    1. Percentage of credit sales method– In this method, bad debts are taken at a percentage of credit sales made during the year.
    2. Ageing of debtors method– In this method, debtors outstanding beyond a specified period say 1 year are taken for provisioning.

Solution-5

Part-A

  • Calculation of the value of the machine for depreciation purposes

As per AASB 116, the cost of asset includes initial purchase price, any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating as per intended use. Hence, the following costs will become part of the asset cost.

Particulars

Is it a part of asset?

Remarks

Initial price paid to the supplier

Yes

Purchase cost is part of asset cost as per AASB 116

Cost to deliver the machine to the site

Yes

Delivery costs are part of asset cost as per AASB 116

Amount to paint the company name on the machine

No

Not required for putting machine to use

Amount paid to an engineer to fit the machine ready for work

Yes

Installation costs are part of asset cost as per AASB 116

Repairs to the factory door damaged when bringing in the machine

No

Since, it is not related to machine and would come under repairs

Repairs made to replace bolts which had dislodged during transit

Yes

As it is mandatory for putting machine to use

Particulars

Amount ($)

Initial price paid to the supplier

$65,000

Cost to deliver the machine to the site

$3,500

Amount paid to an engineer to fit the machine ready for work

$14,500

Repairs made to replace bolts which had dislodged during transit

$1,500

Total Machine Cost

$84,500

The best method would be straight line depreciation method.

  1. Depreciation under SLM using years as life (84,500-7,000)/10 = $7,750
  2. Depreciation under SLM using hours as life (84,500-7,000)/100,000*10,000 = $7,750

Assuming 10,000 hours are used in each year

Hence, no change in depreciation under both of the methods, however the depreciation may change in the 2nd method, if the usage of machine hours changes.

  • When the fair value of assets differ significantly from its carrying value, then the revaluation of assets is considered. It is necessary so that the assets reflect true and fair view in the books.

Part-B

  • Journal Entries

Sr. No.

Particulars

 Debit ($)

 Credit ($)

    

01-Mar-18

Truck 3

130,000

 
 

GST paid

13,000

 
 

To Cash

 

30,000

 

To Loan payable

 

113,000

 

(To record purchase of truck)

  
    

31-Mar-18

Depreciation

8,543

 
 

To Accumulated Depreciation

 

8,543

 

(To record depreciation till the date of sale)

  
    

31-Mar-18

Accumulated Depreciation

70,980

 
 

To Truck 2

 

70,980

 

(To record transfer of amount)

  
    

31-Mar-18

Cash

44,000

 
 

To Truck 2

 

37,020

 

To Profit on sale (refer WN-1)

 

2,980

 

To GST collected

 

4,000

 

(To record sale of truck)

  
    

30-Jun-18

Depreciation (130,000*9%/12*4)

3,900

 
 

To Accumulated Depreciation

 

3,900

 

(To record deprecation for the year end)

  
    
    

Note: GST to be assumed at 10%

WN-1 Calculation of Profit on sale of Truck -2

Given Information

Truck 2

Truck 3

Date of purchase

1st July, 2014

1st March, 2018

Purchase cost

108,000

130000

Residual value

12,000

13000

Useful life (years)

8

10

Dep method

WDV

SLM

Dep rate

25%

9.00%

Year ended on

Opening WDV

Dep

Closing WDV

30/06/2015

108,000

27,000

81,000

30/06/2016

81,000

20,250

60,750

30/06/2017

60,750

15,188

45,563

31/03/2018

45,563

8,543

37,020

  

70,980

 

WDV as on 31st March, 2018

37,020

Sale value (44,000/110%)

40,000

Profit on sale

 

2,980

  • Calculation of depreciation charges if the method of dep is change to SLM for Truck 2

Depreciation on Truck 2 as per WDV method

  

Year ended on

Opening WDV

Dep

Closing WDV

30/06/2015

108,000

27,000

81,000

30/06/2016

81,000

20,250

60,750

30/06/2017

60,750

15,188

45,563

31/03/2018

45,563

8,542.97

37,020

  

70,980

 

Depreciation on Truck 2 as per SLM method

  

Depreciation rate

((108000-12000)/8)/108000 =

11.11%

 
    

Year ended on

Opening WDV

Dep

Closing WDV

30/06/2015

108,000

12,000

96,000

30/06/2016

96,000

12,000

84,000

30/06/2017

84,000

12,000

72,000

31/03/2018

72,000

9,000

63,000

  

45,000

 
  • Effect on Profit under two methods of depreciation

Particulars

WDV

SLM

Revenue as on 30th June, 2017

212,000

212,000

Depreciation for the year

15,188

12,000

Revenue after depreciation

196,813

200,000

Difference between profits is $3,188 (200,000-196,813)

Solution-6

Part-A

  • Journal Entries

Perpetual

Periodic

Transaction

Particulars

Debit ($)

Credit ($)

Transaction

Particulars

Debit ($)

Credit ($)

1

Inventory (32*55)

1,760

 

1

Purchases (32*55)

1,760

 
 

To Accounts payable

 

1,760

 

To Accounts payable

 

1,760

        

2

Accounts payable

110

 

2

Accounts payable

110

 
 

To Inventory (2*55)

 

110

 

To Purchase return (2*55)

 

110

        

3

Accounts receivable (58*180)

10,440

 

3

Accounts receivable (58*180)

10,440

 
 

To Sales

 

10,440

 

To Sales

 

10,440

        
 

Cost of goods sold (58*48)

2,784

     
 

To Inventory

 

2,784

    
        

4

Sales return (2*180)

360

 

4

Sales return (2*180)

360

 
 

To Accounts receivable

 

360

 

To Accounts receivable

 

360

        
 

Stock loss (2*48)

96

  

Inventory (ending)

3,570

 
 

To Cost of goods sold

 

96

 

COGS

2,880

 
     

To Inventory (opening)

 

4,800

5

Stock loss (2*48)

96

  

To Purchases

 

1,650

 

To Inventory

 

96

    

Income Statement

Income Statement under Perpetual Method

Particulars

Amount ($)

Sales

10,440

Less: Sales return

(360)

Less: Cost of goods sold

(2,688)

Less: Stock loss

(192)

Gross Profit

7,200

 Income Statement under Periodic Method

Particulars

Amount ($)

Sales

10,440

Less: Sales return

(360)

Less: Cost of goods sold

(2,880)

Gross Profit

7,200

Perpetual method is preferable because it provides the real time details of inventory, sale and purchases.

As per accounting standards, the inventory should be measured at lower of cost of NRV, NRV or net realizable value means the amount at which the inventory can be sold in the open market.

Part-B

  • Identifying the approach and method adopted for below items on the basis of Annual Report 2017 of Super Retail Group:
  • Revenue Recognition- Revenue is measured at the fair value of the consideration received or receivable. Amounts disclosed as revenue are net of returns, trade allowances, duties and taxes paid. 
  • Inventory Valuation- Inventories are measured at the lower of cost and net realisable value. Costs are assigned to individual items of stock on the basis of weighted average costs.
  • Depreciation of non-current assets- Depreciation and amortisation are calculated on a straight line basis for accounting and on a diminishing value basis for tax. Depreciation and amortisation allocates the cost of an item of property, plant and equipment net of residual values over the expected useful life of each asset to the consolidated entity. 
  • The company makes the following statement:
  • Ethical Practice- We are committed to romoting better working conditions in our global supply chain and ensuring the products we provide to our customers are ethically and sustainably sourced. 
  • Sustainability- At Super Retail Group we share your passion to make our world a cleaner, healthier and happier place. We recognise the important role we have to play ensuring the well-being of the environment and the communities in which we operate.

References:

AccountingCoach.com. (2018). What is the matching principle? | AccountingCoach. [online] Available at: https://www.accountingcoach.com/blog/what-is-the-matching-principle [Accessed 4 May 2018].

Accounting-simplified.com. (2018). Trial Balance | Explanation & Example. [online] Available at: https://accounting-simplified.com/trial-balance.html [Accessed 4 May 2018].

Jan, O. (2018). Qualitative Characteristics of Financial Information. [online] accountingexplained.com. Available at: https://accountingexplained.com/financial/principles/qualitative-characteristics [Accessed 4 May 2018].

Cliffsnotes.com. (2018). Estimating Bad Debts—Allowance Method. [online] Available at: https://www.cliffsnotes.com/study-guides/accounting/accounting-principles-i/receivables/estimating-bad-debts-allowance-method [Accessed 4 May 2018].


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