Reference no: EM13509365

Question 1

The owner of a business reviews the income statement prepared by you and asks, "Why do you report a profit of only $30,000 when cash collections of $100,000 were received and cash payments for the period totalled only $50,000 for expenses?" How would you respond to the owner's question?

Question 2

On 31 March, Padbury Publishers received a subscription of $240 for the supply of twelve monthly magazines, beginning in April. At the end of the reporting period, 30 June, the accountant suggested that the owner make an adjusting entry to defer the revenue on nine issues until the next financial year. The owner of the business was reluctant to do so, claiming that he had already received the subscriptions in cash and could see no reason for the delay in recognising the revenue. Do you agree with the owner or the accountant? Respond to the owner, explaining the accountant's position. Ignore GST.

Question 3

Depreciation is a process of allocation and not valuation. What do you think is meant by this statement? Give examples to support your answer.

Chalmers and oliver (2014, p.213) describes ‘depreciation as an allocation or what it is now called amortisation of the depreciable amount of a depreciable asset over its estimated useful life'. The nature of depreciation and amortisation is same because they both the expenses incurred in the income statement which further do not involve any outflow of cash as such. (Rama Rao 2010) further contribute to the statement of depreciation being an allocation process as it caters to spreading the cost of a fixed asset over its useful life less salvage value. So, a portion of that cost is recognised as an expense in each period that the asset is in service. For example:

A piece of machinery cost $ 11,000 with a serviceable life of 5 years.

The scrap value of the machine at the end 5th year is going to be $1,000 not $10,000 (i.e. $11,000 less $1,000) will be allocated over 5 years on rational basis.

(Accounting allocation 2011) fair value or valuation on the other hand, reflects the overall value of the remaining equipment, machinery etc., which is expected to be consumed by next 12 recognised months or so on. The net book value may not represent the actual market value of the asset. Many authors claimed that this approach is employed because the value/valuation of asset may fluctuate due to the time span when that has been purchased and the time it is sold. Also, values are difficult to measure where the allocation of price is rather straightforward. However, it is not a matter of valuation but a means of allocating the cost.

Question 4

Prepare an income statement for the year ended 30th June 2014 given the following account balances. Note: Some accounts may not be relevant.

Cash $3,000
Sales $280,000
Salary and wages $37,000
Accounts receivable $15,000
Loan interest $4,000
Insurance $2,000
Loan $40,000
Telephone and postage $1,500
Rent and rates $12,400
Cost of sales $160,000
Inventory $11,000
Accounts payable $9,100
Heat and light $3,700
Motor vehicles $32,000
Equipment repairs $1,600
Depreciation- motor vehicles $4,500
Motor vehicle running costs $1,700
Depreciation-equipment $3,200
Royalties received $1,700
Accounting and audit $3,400
Bad and doubtful debts $800

Question 5

The following is the statement of financial position of TT Ltd. at the end of the first year of trading

Statement of Financial Position as at 31st December 2013

Current Assets
Cash At Bank $750
Prepaid Expenses $5 300
Accounts Receivable $19,600
Inventory $65,000
$90,650
Non-Current Assets
Motor Vehicles- Cost $12,000
Accumulated Depreciation ($2,500)
$9,500
TOTAL ASSETS $100,150
Current Liabilities
Accrued Expenses $1,250
Accounts Payable $22,000
$23,250
Owner's Equity
Original $50,000
Retained Profit $26,900
$76,900
Total Liabilities And Owner's Equity $100,150

• Prepaid expenses included $5,000 for rent and $300 for rates.

• Accrued expenses included wages of $630 and electricity of $620.

During 2014, the following transactions took place:

• The owner's withdrawal capital In the form of cash of $20,000

• A premise continues to be rented at an annual rental of $20,000. During the year, rent of $15,000 was paid to owner of the premises.

• Rates on the premises were paid during the year for period 1st April 2014 to 31st March 2015, $1,300.

• A second delivery vehicle was bought on 1st January for $13,000. This is expected to be used in business for four years and then be sold for $3,000.

• Wages totalling $36,700 were paid during the year. At the end of the year the business owed $860 of wages for the last week of the year,

• Electricity bills totalling $1,820 for the first three quarters of the year were paid. After 31st December 2014, once the accounts had been finalised for the year, the bill for the last quarter arrived showing a charge of $690.

• Inventory totalling $67,000 was bought on credit.

• Inventory totalling $8,000 was bought for cash.

• Sales on credit totalled $179,000 (cost $89,000).

• Cash sales totalled $54,000 (cost $25,000).

• Receipts from accounts receivable totalled $178,000.

• Payments to accounts payable totalled $71,000.

• Vehicle running expenses paid totalled $16,200.

REQUIRED

Prepare a Statement of Financial Position as at 31st December 2014 and a Statement of Comprehensive Income for the year to date.