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(1)

This resource material was developed to provide teachers with examples of graded

assignments for reference and is by no means exhaustive. Teachers are advised to

adapt the materials according to the diverse learning needs of students if deemed

necessary.

(2)

Elementary level: Page. 1 Graded Assignment 6:

Period-end Adjustments Relating to the Preparation of Financial Statements Elementary Level – Question Paper

The trial balance of Alan Company as at 31 December 2019 was prepared as follows:

Dr

$

Cr

$

Capital 1,310,000

Purchases 1,600,000

Sales 2,900,000

Electricity expenses 49,000

Insurance expenses 36,000

Rent and rates 150,000

Inventory, 1 January 2019 167,000

Returns inwards 38,000

Returns outwards 25,000

Trade receivables 864,000

Trade payables 420,000

Discounts 55,000 28,000

Allowance for doubtful accounts 20,000

Office equipment 1,900,000

Accumulated depreciation – office equipment 670,000

6% Bank loan 200,000

Cash at bank 714,000

5,573,000 5,573,000 Additional information:

(i) Inventory as at 31 December 2019 was valued at $180,000.

(ii) In November 2019, goods invoiced at $120,000 were sent to a customer on a sale-or-return basis at cost plus 50% mark-up. These had been recorded as credit sales for the year. As at 31 December 2019, 80% of the goods were accepted by the customer.

(iii) Annual insurance premium of $6,000 for the year ended 31 March 2020 was paid on 1 May 2019.

(iv) An electricity bill amounting to $3,000 was received but not yet recorded in the books.

(v) Debts amounting to $8,000 were found to be uncollectible and to be written off as bad.

Allowance for doubtful accounts is to be made at 5% of the trade receivables.

(vi) The bank loan was acquired on 1 September 2019 and is to be repaid on 30 August 2020.

(vii) Office equipment is to be depreciated at a rate of 20% per annum using the reducing balance method.

REQUIRED:

(a) Prepare the journal entries for items (ii) to (vi). Narrations are not required.

(7 marks) (b) Prepare an income statement for the year ended 31 December 2019. (7 marks) (c) Prepare a statement of financial position as at 31 December 2019. (6 marks) (Total: 20 marks)

(3)

Elementary level: Page. 2 Graded Assignment 6:

Period-end Adjustments Relating to the Preparation of Financial Statements Elementary Level – Student Worksheet

Hint: Steps to prepare a journal entry:

(1) Identify the accounts (at least 2) involved.

(2) Determine the nature and the double entry rules of the accounts involved.

(3) Identify whether an increase or a decrease to be recorded in the accounts.

(4) Determine which account(s) to be debited and which account(s) to be credited according to the double entry rules of the accounts involved. (refer to reference page)

(5) State by how much the accounts increased or decreased.

(a) General Journal

Dr Cr

$ $

(ii) (W1) Trade receivables (e.g.)

(W2) Profit and loss (e.g.) Hint 1: Sales overstated by 20%

Hint 2: Closing Inventory understated by 20%

= Cost of inventory × % of goods not yet accepted by the customer

= Invoice price ÷ (1 + mark-up) × % of goods not yet accepted by the customer

When goods are sent on a ‘sale-or-return’ basis, these goods are not treated as sales unless they are accepted by the customer. As at 31 December 2019, 20% of these goods were not yet accepted.

In this case, they should be included in Alan’s inventory valuation (at cost) but not in the figure of sales (selling price).

(W1) Sales overstated by

= $ _____________ × _____ %

= $______________

(W2) Closing inventory understated by

= $______________ ÷ ( 1 + _____ %) × _____ %

= $______________

(4)

Elementary level: Page. 3 General Journal

Dr Cr

$ $

(iii) (Working) Insurance expenses (e.g.)

Hint: Insurance expenses overstated by the amount not yet incurred in current financial year

= Insurance premium× number of months not yet incurred ÷ 12

(iv) (Working) Accrued electricity expenses

(e.g.) 24,000

Hint: Electricity expenses understated by the amount that are already incurred but have not yet been paid.

(v)

Hint 1: Write off bad debts from the trade receivables account (assets) when the debt is determined to be uncollectible.

(Hint 2)

Allowance for doubtful accounts (e.g.)

Prepaid expenses are payments made for expenses which have not yet been incurred (i.e.

period related to year 2020). The amount not yet incurred shall be transferred to prepaid insurance expenses (assets).

(Working) Prepaid insurance expenses

= $ _____________ × _____ months ÷ 12

= $______________

Accrued expenses are expenses that are already incurred but have not yet been paid. Accrued expenses are liabilities.

(5)

Elementary level: Page. 4 Hint 2: Prepare the allowance for doubtful accounts account

*1st step: Calculate the adjusted trade receivables balance

= Original trade receivables balance (stated on trial balance) – credit sales overstated (item ii) – bad debts written off

= $____________ – $____________ – $____________

= $____________

*2nd step: Calculate the allowance for doubtful accounts as at 31 December 2019

= Adjusted trade receivables balance × % (stated in (v))

= $_______________ × _____ %

= $_______________

- Allowance for doubtful accounts +

2019 $ 2019

Dec 31 Trade receivables (Bad debts written off)

Jan 1 Bal b/d (Stated on trial balance)

Dec 31 Bal c/d

(Calculation step*) Dec 31 Bad debts

(Balancing figure)

General Journal

Dr Cr

$ $

(vi)

(6)

Elementary level: Page. 5 Hint: Loan interest expenses understated by the amount that are already incurred (i.e. period between 1 Sep and closing date of the year) but have not yet been paid

= Bank loan amount × interest rate × number of months incurred ÷ 12 Working: $____________ × _____ % × _____ ÷ 12 = $____________

(b) Alan Company

$’000 $’000 $’000 Sales ($_____________- $_____________ (ii))

Less: Returns inwards

Less: Cost of goods sold Opening inventory Add: Purchases

Less: Returns outwards

Less: Closing inventory

($_____________+ $_____________ (ii))

Gross profit

Add: Discounts received

Less: Expenses

Electricity expenses

($_____________+$_____________(iv))

Insurance expenses

($_____________- $_____________(iii))

Bad debts (v)

Rent and rates

Discounts allowed

Interest expenses (vi)

(7)

Elementary level: Page. 6 Depreciation expenses (vii)

($_____________-$_____________)× _____% * Net profit

*Depreciation expenses under reducing balance method

= (Cost – Accumulated Depreciation) x %

(c) Alan Company

$’000 $’000 $’000

Non-current assets

Office equipment at cost

Less :

Accumulated depreciation

($_______________+$_______________(vii))

Current assets

Inventory ($_______________+ $_______________(ii))

Trade receivables

($_____________- $_____________(ii) -$_____________(v))

Less: Allowance for doubtful accounts (v)

Prepaid insurance expenses (iii)

Cash at bank

Capital

Balance as at 1 January 2019

Add: Net profit for the year

Current liabilities

Trade payables

6% Bank loan

Interest payable (vi)

Accrued electricity expenses (iv)

(8)

Elementary level: Page. 7 Reference:

Principles of Double Entry System

Dr Asset Cr

Increase Decrease

Dr Liability Cr

Decrease Increase

Dr Capital Cr

Decrease Increase

Dr Revenue Cr

Decrease Increase

Dr Expense Cr

Increase Decrease

Dr Prepaid expense Cr

Increase Decrease

Dr Accrued expense Cr

Decrease Increase

Dr Allowance for doubtful accounts Cr

Decrease Increase

Dr Accumulated depreciation Cr

Decrease Increase

(9)

Elementary level: Page. 8 Graded Assignment 6:

Period-end Adjustments Relating to the Preparation of Financial Statements Elementary Level – Suggested Solution and Explanatory Notes

(a) General Journal

Dr Cr

$ $

(ii) Sales 24,000

Trade receivables 24,000

($120,000 × 20%)

Inventory 16,000

Profit and loss 16,000

[$120,000 ÷ (1+50%) × 20%]

(iii) Prepaid insurance expenses 1,500

Insurance expenses 1,500

($6,000 × 3 ÷ 12)

(iv) Electricity expenses 3,000

Accrued electricity expenses 3,000

(v) Allowance for doubtful accounts 8,000

Trade receivables 8,000

Bad debts 29,600

Allowance for doubtful accounts 29,600

Hint: Prepare the allowance for doubtful accounts account

*1st step: Calculate the adjusted trade receivables balance

= $864,000 - $24,000 - $8,000 = $832,000

- Allowance for doubtful accounts +

2019 $ 2019 $

Dec 31 Trade receivables (Bad debts written off)

8,000 Jan 1 Bal b/d (Stated on trial balance)

20,000

Dec 31 Bal c/d

(Calculation step*) 41,600 Dec 31 Bad debts (Balancing figure)

29,600

49,600 49,600

(10)

Elementary level: Page. 9

*2nd step: Calculate the allowance for doubtful accounts as at 31 December 2019

= $832,000 × 5% = $41,600

General Journal

Dr ($) Cr ($)

(vi) Interest expenses 4,000

Interest payable 4,000

($200,000 × 6% × 4 ÷ 12)

(b) Alan Company

Income statement for the year ended 31 December 2019

$’000 $’000 $’000

Sales ($2,900,000 – $24,000 (ii)) 2,876

Less: Returns inwards 38

2,838 Less: Cost of goods sold

Opening inventory 167

Add: Purchases 1,600

Less: Returns outwards 25 1,575

1,742

Less: Closing inventory

($180,000 + $16,000 (ii)) 196 1,546

Gross profit 1,292

Add: Discounts received 28

1,320

Less: Expenses

Electricity expenses ($49,000 + $3,000 (iv)) 52

Insurance expenses ($36,000 – $1,500 (iii)) 34.5

Bad debts (v) 29.6

Rent and rates 150

Discounts allowed 55

Interest expenses (vi) 4

Depreciation expenses (vii)

($1,900,000 – $670,000) ×20% 246 571.1

Net profit 748.9

(c) Alan Company

Statement of financial position as at 31 December 2019

$’000 $’000 $’000

Non-current assets

Office equipment, at cost 1,900

Less: Accumulated depreciation ($670,000 + $246,000 (vii)) 916 984

Current assets

Inventory ($180,000 + $16,000 (ii)) 196

Trade receivables

($864,000 – $24,000 (ii) – $8,000 (v))

832

(11)

Elementary level: Page. 10

Less: Allowance for doubtful accounts (v) 41.6 790.4

Prepaid insurance expenses (iii) 1.5

Cash at bank 714 1,701.9

2,685.9

Capital

Balance as at 1 January 2019 1,310

Add: Net profit for the year 748.9

2,058.9

Current liabilities

Trade payables 420

6% Bank loan 200

Interest payable (vi) 4

Accrued electricity expenses (iv) 3 627

2,685.9

Alternative Format

(c) Alan Company

Statement of financial position as at 31 December 2019

$’000 $’000 $’000

Non-current assets

Office equipment, at cost 1,900

Less: Accumulated depreciation ($670,000 + $246,000 (vii)) 916 984

Current assets

Inventory ($180,000 + $16,000 (ii)) 196

Trade receivables

($864,000 – $24,000 (ii) – $8,000 (v)) 832

Less: Allowance for doubtful accounts (v) 41.6 790.4

Prepaid insurance expenses (iii) 1.5

Cash at bank 714

1,701.9

Less: Current liabilities

Trade payables 420

6% Bank loan 200

Interest payable (vi) 4

Accrued electricity expenses (iv) 3 627

Working capital 1,074.9

2,058.9

Financed by

Capital

Balance as at 1 January 2019 1,310

Add: Net profit for the year 748.9

2,058.9

(12)

Elementary level: Page. 11 Points to be noted:

1. Important formula for preparation of an income statement (1) Cost of Goods Sold

= Opening inventory + (Purchases – Returns outwards) - Closing inventory (2) Gross Profit

= Sales – Cost of goods sold (3)

(4)

Net profit or Net loss

= Gross profit + Other revenues – Expenses Cost × (1 + mark-up) = Invoice price (Sales)

2. Discounts allowed – It occurs when the business grants a discount to the customer for earlier settlement of debt. It is an expense account with a debit balance.

3.

4.

Discounts received – It occurs when the business is granted a discount by the supplier for earlier settlement of debt. It is a revenue account with a credit balance.

As the bank loan will be repaid within one year (e.g. 30 Aug 2020), it is classified as current liabilities on the statement of financial position.

Common mistakes:

1. Unable to determine the accounts to be debited and credited correctly even though they can work out the correct figures.

2. Unable to handle the bad debts and the allowance for doubtful accounts.

3. Mixed up the discounts allowed and discounts received.

4.

5.

6.

Wrong classification of prepaid expenses and accrued expenses on the statement of financial position.

Wrong classification of bank loan as non-current liabilities on the statement of financial position.

Inaccurate headings for the financial statements. For example, income statement as at 31 December 2019 or balance sheet as at 31 December 2019.

(13)

Standard level: Page. 1 Graded Assignment 6:

Period-end Adjustments Relating to the Preparation of Financial Statements Standard Level – Question Paper

The trial balance of Alan Company as at 31 December 2019 was prepared as follows:

Dr

$

Cr

$

Capital 1,310,000

Purchases 1,600,000

Sales 2,900,000

Electricity expenses 49,000

Insurance expenses 36,000

Rent and rates 150,000

Inventory, 1 January 2019 167,000

Returns inwards 38,000

Returns outwards 25,000

Trade receivables 864,000

Trade payables 420,000

Discounts 55,000 28,000

Allowance for doubtful accounts 20,000

Office equipment 1,900,000

Accumulated depreciation – office equipment 670,000

6% Bank loan 200,000

Cash at bank 714,000

5,573,000 5,573,000 Additional information:

(i) Inventory as at 31 December 2019 was valued at $180,000.

(ii) In November 2019, goods invoiced at $120,000 were sent to a customer on a sale-or-return basis at cost plus 50% mark-up. These had been recorded as credit sales for the year. As at 31 December 2019, 80% of the goods were accepted by the customer.

(iii) Annual insurance premium of $6,000 for the year ended 31 March 2020 was paid on 1 May 2019.

(iv) An electricity bill amounting to $3,000 was received but not yet recorded in the books.

(v) Debts amounting to $8,000 were found to be uncollectible and to be written off as bad.

Allowance for doubtful accounts is to be made at 5% of the trade receivables.

(vi) The bank loan was acquired on 1 September 2019 and is to be repaid on 30 August 2020.

(vii) Office equipment is to be depreciated at a rate of 20% per annum using the reducing balance method.

REQUIRED:

(a) Prepare the journal entries for items (ii) to (vi). Narrations are not required.

(7 marks) (b) Prepare an income statement for the year ended 31 December 2019. (7 marks) (c) Prepare a statement of financial position as at 31 December 2019. (6 marks) (Total: 20 marks)

(14)

Standard level: Page. 2 Graded Assignment 6:

Period-end Adjustments Relating to the Preparation of Financial Statements Standard Level – Student Worksheet

(a) Please circle the correct answers* and do the calculation in the working box provided for each item.

General Journal

Dr Cr

$ $

(ii)

\

(iii)

Working 1: Credit sales (overstated / understated)* by the amount not yet confirmed by the customers: $______________ x ______% = $_____________

Working 2: Closing inventory (overstated / understated)* by the amount not yet confirmed by the customer at cost:

$________________÷ (1 + ______%) × ________% = $_____________

Insurance expenses (overstated / understated)* and (accrued / prepaid)* expenses understated by the number of months not yet incurred in the current financial year:

$_________________ x _______ ÷ 12 = $_____________

(15)

Standard level: Page. 3 General Journal

Dr Cr

$ $

(iv)

(v)

Electricity expenses (overstated / understated)* and accrued expenses (overstated / understated)*

Working 1: When writing off bad debts, trade receivables will (increase / decrease)*

while allowance for doubtful accounts will (increase / decrease)*.

Working 2: Prepare the allowance for doubtful accounts account

- Allowance for doubtful accounts +

2019 $ 2019 $

Dec 31 Jan 1

Dec 31 Bal c/d

(Calculation step#) Dec 31 Bad debts

(Balancing figure)

# Trade receivables after adjustment (ii) and bad debts written off x %

= $(__________ - _________ - _________) x ____%

= $_____________

(16)

Standard level: Page. 4 General Journal

Dr Cr

$ $

(vi)

Loan interest and interest payable are (overstated / understated)* by the amount of interest incurred but not yet paid:

= Bank loan amount x interest rate x number of months incurred ÷ 12

= $_____________x _______% x ________ ÷ 12

= $_____________

(17)

Standard level: Page. 5 (b)

$’000 $’000 $’000 Sales ($____________ - $_____________(ii))

Less:

Less: Cost of goods sold

Less: Closing inventory

($____________ + $_____________(ii))

Gross profit

Add:

Less: Expenses

Electricity expenses

($___________ + $___________(iv))

Insurance expenses

($___________ - $__________(iii))

Bad debts (v)

Net profit

(18)

Standard level: Page. 6 (c)

$’000 $’000 $’000

Non-current assets

Less: Accumulated depreciation

($____________ + $_____________(vii))

Current assets

Inventory($____________ + $_____________(ii))

Trade receivables

($____________ - $___________(ii) - $____________(v))

Less: Allowance for doubtful accounts (v) ($____________ × _____%)

Prepaid insurance expenses (iii)

Capital

Current liabilities

Interest payable (vi)

Accrued electricity expenses (iv)

(19)

Standard level: Page. 7 Graded Assignment 6:

Period-end Adjustments Relating to the Preparation of Financial Statements Standard Level – Suggested Solution and Explanatory Notes

(a) General Journal

Dr Cr

$ $

(ii) Sales 24,000

Trade receivables 24,000

Inventory 16,000

Profit and loss 16,000

(iii) Prepaid insurance expenses 1,500

Insurance expenses 1,500

(iv) Electricity expenses 3,000

Accrued electricity expenses 3,000

Working 1: Credit sales (overstated / understated)* by the amount not yet confirmed by the customers: $120,000 x 20% = $24,000

Working 2: Closing inventory (overstated / understated)* by the amount not yet confirmed by the customer at cost:

$120,000 ÷ (1 + 50%) × 20% = $16,000

Insurance expenses (overstated / understated)* and (accrued / prepaid)* expenses understated by the number of months not yet incurred in the current financial year:

$6,000 x 3 ÷ 12 = $1,500

Point to note: Insurance expenses incurred in the current financial year is determined by the starting date of covering period (i.e. Apr – Dec 2019) of the insurance policy instead of the payment date (i.e. 1 May).

Electricity expenses (overstated / understated)* and accrued expenses (overstated / understated)*

(20)

Standard level: Page. 8

(v) Allowance for doubtful accounts 8,000

Trade receivables 8,000

Bad debts 29,600

Allowance for doubtful accounts 29,600

(vi) Interest expenses 4,000

Interest payable 4,000

Working 1: When writing off bad debts, trade receivables will (increase / decrease)*

while allowance for doubtful accounts will (increase / decrease)*.

Working 2: Prepare the allowance for doubtful accounts account

- Allowance for doubtful accounts +

2019 $ 2019 $

Dec 31 Trade receivables (Bad debts written off)

8,000 Jan 1 Bal b/d

(Stated on trial balance)

20,000

Dec 31 Bal c/d

(Calculation step#)

41,600 Dec 31 Bad debts (Balancing figure)

29,600

49,000 49,600

# Trade receivables after adjustment (ii) and bad debts written off x %

= $(864,000 – 24,000 – 8,000) x 5% = $41,600

Loan interest and interest payable are (overstated / understated)* by the amount of interest incurred but not yet paid:

= Bank loan amount x interest rate x number of months incurred ÷ 12

= $200,000 x 6% x 4 ÷ 12

= $4,000

Point to note: Pay attention to the loan amount with interest rate stated in the trial balance. You are required to calculate the interest expenses and interest payable based on the loan amount and interest rate even though there is no additional information about the loan interest.

(21)

Standard level: Page. 9

(b) Alan Company

Income statement for the year ended 31 December 2019

$’000 $’000 $’000

Sales ($2,900,000 - $24,000 (ii)) 2,876

Less: Returns inwards 38

2,838 Less: Cost of goods sold

Opening inventory 167

Add: Purchases 1,600

Less: Returns outwards 25 1,575

1,742

Less: Closing inventory

($180,000 + $16,000 (ii)) 196 1,546

Gross profit 1,292

Add: Discounts received 28

1,320

Less: Expenses

Electricity expenses ($49,000 + $3,000 (iv)) 52

Insurance expenses ($36,000 - $1,500 (iii)) 34.5

Bad debts (v) 29.6

Rent and rates 150

Discounts allowed 55

Interest expenses (vi) 4

Depreciation expenses (vii)

($1,900,000 - $670,000) × 20% 246 571.1

Net profit 748.9

(22)

Standard level: Page. 10

(c) Alan Company

Statement of financial position as at 31 December 2019

$’000 $’000 $’000

Non-current assets

Office equipment, at cost 1,900

Less: Accumulated depreciation $(670,000 + 246,000 (vii)) 916 984

Current assets

Inventory ($180,000 + 16,000 (ii)) 196

Trade receivables

($864,000 - $24,000 (ii) - $8,000 (v)) 832

Less: Allowance for doubtful accounts (v)

($832,000 × 5%) 41.6 790.4

Prepaid insurance expenses (iii) 1.5

Cash at bank 714 1,701.9

2,685.9

Capital

Balance as at 1 January 2019 1,310

Add: Net profit for the year 748.9

2,058.9

Current liabilities

Trade payables 420

6% Bank loan 200

Interest payable (vi) 4

Accrued electricity expenses (iv) 3 627

2,685.9

(23)

Standard level: Page. 11 Alternative Format

(c) Alan Company

Statement of financial position as at 31 December 2019

$’000 $’000 $’000

Non-current assets

Office equipment, at cost 1,900

Less: Accumulated depreciation ($670,000 +$246,000 (vii)) 916 984

Current assets

Inventory ($180,000 + $16,000 (ii)) 196

Trade receivables

($864,000 – $24,000 (ii) – $8,000 (v)) 832

Less: Allowance for doubtful accounts (v)

($832,000 × 5%) 41.6 790.4

Prepaid insurance expenses (iii) 1.5

Cash at bank 714

1,701.9

Less: Current liabilities

Trade payables 420

6% Bank loan 200

Interest payable (vi) 4

Accrued electricity expenses (iv) 3 627

Working capital 1,074.9

2,058.9

Financed by

Capital

Balance as at 1 January 2019 1,310

Add: Net profit for the year 748.9

2,058.9

(24)

Standard level: Page. 12 Points to be noted:

1. Principles of Double Entry System

Dr Asset (e.g. prepaid expenses) Cr

Increase Decrease

Dr Liability (e.g. accrued expenses) Cr

Decrease Increase

Dr Capital Cr

Decrease Increase

Dr Revenue (e.g. discounts received) Cr

Decrease Increase

Dr Expense (e.g. discounts allowed) Cr

Increase Decrease

Dr Allowance for doubtful accounts Cr

Decrease Increase

Dr Accumulated depreciation Cr

Decrease Increase

2. Important formula:

(a) Cost × (1 + mark-up) = Selling Price

(b) Closing balance of allowance for doubtful accounts

=Trade receivables after adjustment and bad debt written off × % (c) Depreciation expense under reducing balance method

= (Cost – Accumulated Depreciation) × %

Common mistakes:

1. Failed to convert the selling price to the cost of inventory based on the mark-up formula.

3. When goods are sent on a ‘sale-or-return’ basis, these goods are not treated as sales unless they are accepted by the customer. In item (ii), 20% of these goods were still not accepted by the customer at the end of the financial year. In this case, they should be included in Alan’s inventory valuation (at cost) but not in the figure of sales (selling price).

4. In item (vi), the acquisition date and repayment date of the bank loan were given. As the bank loan was borrowed in between the financial year, the interest expenses should be calculated based on the number of months incurred for the current year only. Since the bank loan would be repaid within one year, it should be classified as current liability instead of non-current liability.

(25)

Standard level: Page. 13 2. Mixed up the closing balance of and the change in allowance for doubtful accounts. For

instance, reporting the closing balance of allowance for doubtful accounts account in the income statement.

3.

4.

Unable to identify the bank loan as current liability.

Missing headings for financial statements.

5. Inaccurate account name: Students are expected to adopt the account names given for answering the questions. For example: trade payables given in the question cannot be replaced by accounts payables.

(26)

Advanced level: Page. 1 Graded Assignment 6:

Period-end Adjustments Relating to the Preparation of Financial Statements Advanced Level – Question Paper

The trial balance of Alan Company as at 31 December 2019 was prepared as follows:

Dr

$

Cr

$

Capital 1,310,000

Purchases 1,600,000

Sales 2,900,000

Electricity expenses 49,000

Insurance expenses 36,000

Rent and rates 150,000

Inventory, 1 January 2019 167,000

Returns inwards 38,000

Returns outwards 25,000

Trade receivables 864,000

Trade payables 420,000

Discounts 55,000 28,000

Allowance for doubtful accounts 20,000

Office equipment 1,900,000

Accumulated depreciation – office equipment 670,000

6% Bank loan 200,000

Cash at bank 714,000

5,573,000 5,573,000 Additional information:

(i) Inventory as at 31 December 2019 was valued at $180,000.

(ii) In November 2019, goods invoiced at $120,000 were sent to a customer on a sale-or-return basis at cost plus 50% mark-up. These had been recorded as credit sales for the year. As at 31 December 2019, 80% of the goods were accepted by the customer.

(iii) Annual insurance premium of $6,000 for the year ended 31 March 2020 was paid on 1 May 2019.

(iv) An electricity bill amounting to $3,000 was received but not yet recorded in the books.

(v) Debts amounting to $8,000 were found to be uncollectible and to be written off as bad.

Allowance for doubtful accounts is to be made at 5% of the trade receivables.

(vi) The bank loan was acquired on 1 September 2019 and is to be repaid on 30 August 2020.

(vii) Office equipment is to be depreciated at a rate of 20% per annum using the reducing balance method.

REQUIRED:

(a) Prepare the journal entries for items (ii) to (vi). Narrations are not required.

(7 marks) (b) Prepare an income statement for the year ended 31 December 2019. (7 marks) (c) Prepare a statement of financial position as at 31 December 2019. (6 marks) (Total: 20 marks)

(27)

Advanced level: Page. 2 Challenging question

On 31 December 2019, it was discovered that part of the closing inventory costing $32,000 had been damaged and could only be sold at 30% of the normal selling price after having them repaired for

$2,500. Alan Company normally sold goods at a gross profit margin of 20%. No adjustment had been made in the closing inventory mentioned in (i).

(d) Prepare the journal entry for adjusting the inventory. (3 marks)

(28)

Advanced level: Page. 3 Graded Assignment 6:

Period-end Adjustments Relating to the Preparation of Financial Statements Advanced Level – Student Worksheet

(a)

(29)

Advanced level: Page. 4 (b)

(30)

Advanced level: Page. 5 (c)

(31)

Advanced level: Page. 6 Challenging question

(d)

(32)

Advanced level: Page. 7 Graded Assignment 6:

Period-end Adjustments Relating to the Preparation of Financial Statements Advanced Level – Suggested Solution and Explanatory Notes

(a) General Journal

Dr Cr

$ $

(ii) Sales ($120,000 × 20%) 24,000

Trade receivables 24,000

Inventory ($120,000 ÷ 1.5 × 20%) 16,000

Profit and loss 16,000

(iii) Prepaid insurance expenses ($6,000 ÷ 12 × 3) 1,500

Insurance expenses 1,500

(iv) Electricity expenses 3,000

Accrued electricity expenses 3,000

(v) Allowance for doubtful accounts 8,000

Trade receivables 8,000

Bad debts (W1) 29,600

Allowance for doubtful accounts 29,600

(vi) Interest expenses ($200,000 × 6% ÷ 12 × 4) 4,000

Interest payable 4,000

(W1)

*Allowance for doubtful accounts as at 31 December = $(864,000 – 24,000 – 8,000) × 5% = $41,600

- Allowance for doubtful accounts +

2019 $ 2019 $

Dec 31 Trade receivables

(Bad debts written off) 8,000 Jan 1 Bal b/d

(stated on trial balance)

20,000

Dec 31 Bal c/d

(Calculation)* 41,600 Dec 31 Bad debts

(Balancing figure)

29,600

49,600 49,600

(33)

Advanced level: Page. 8

(b) Alan Company

Income statement for the year ended 31 December 2019

$’000 $’000 $’000

Sales ($2,900,000 - $24,000 (ii)) 2,876

Less: Returns inwards 38

2,838 Less: Cost of goods sold

Opening inventory 167

Add: Purchases 1,600

Less: Returns outwards 25 1,575

1,742

Less: Closing inventory ($180,000 + $16,000 (ii))

196 1,546

Gross profit 1,292

Add: Discounts received 28

1,320

Less: Expenses

Electricity expenses ($49,000 + $3,000 (iv)) 52

Insurance expenses ($36,000 - $1,500 (iii)) 34.5

Bad debts (v) 29.6

Rent and rates 150

Discounts allowed 55

Interest expenses (vi) ($200,000 × 6% × 4/12) 4

Depreciation expenses (vii) ($1,900,000 - $670,000) × 20%

246 571.1

Net profit 748.9

(c) Alan Company

Statement of financial position as at 31 December 2019

$’000 $’000 $’000

Non-current assets

Office equipment at cost 1,900

Less: Accumulated depreciation ($670,000 + $246,000 (vii)) 916 984

Current assets

Inventory ($180,000 + $16,000 (ii)) 196

Trade receivables

($864,000 – $24,000 (ii) – $8,000 (v)) 832

Less: Allowance for doubtful accounts (v) 41.6 790.4

Prepaid insurance expenses (iii) 1.5

Cash at bank 714 1,701.9

2,685.9

Capital

Balance as at 1 January 2019 1,310

Add: Net profit for the year 748.9

2,058.9

(34)

Advanced level: Page. 9

Current liabilities

Trade payables 420

6% Bank loan 200

Interest payable (vi) 4

Accrued electricity expenses (iv) 3 627

2,685.9 Alternative Format

(c) Alan Company

Statement of financial position as at 31 December 2019

$’000 $’000 $’000

Non-current assets

Office equipment at cost 1,900

Less: Accumulated depreciation ($670,000 + $246,000 (vii)) 916 984

Current assets

Inventory ($180,000 + $16,000 (ii)) 196

Trade receivables

($864,000 – $24,000 (ii) – $8,000(v)) 832

Less: Allowance for doubtful accounts (v) 41.6 790.4

Prepaid insurance expenses (iii) 1.5

Cash at bank 714

1,701.9

Less: Current liabilities

Trade payables 420

6% Bank loan 200

Interest payable (vi) 4

Accrued electricity expenses (iv) 3 627

Working capital 1,074.9

2,058.9

Financed by

Capital

Balance as at 1 January 2019 1,310

Add: Net profit for the year 748.9

2,058.9 Challenging question

(d)

General Journal

Dr Cr

$ $

Profit and loss 22,500

Inventory 22,500

Narrations: Inventory value written down

(35)

Advanced level: Page. 10 Explanatory note

Under Prudence Concept, assets and profits should not be overstated while liabilities and expenses should not be understated. Hence, inventory should be valued at lower of cost and net realisable value (NRV) as follows:

If NRV > Cost, inventory is valued at cost;

If Cost > NRV, inventory is valued at NRV Net realisable value (NRV)

= Estimated selling price – Estimated costs of completion and disposal

= $32,000 ÷ (1 – 20%)* × 30% - $2,500

= $9,500

As the NRV of $9,500 is lower than the cost of the inventory amounting to $32,000, the inventory value has to be written down by $22,500.

* Conversion from Cost (C) to Sales (S) based on gross profit margin (M) M = (S – C) ÷ S

S – C = S × M S – S × M = C S × (1 – M) = C S = C ÷ (1 – M)

Sales = Cost ÷ (1 – Margin)

In the challenging question, the normal selling price = $32,000 ÷ (1 – 20%) = $40,000

Points to be noted:

1. Important formula:

a) Mark-up = Profit ÷ Cost

b) Gross profit margin = Profit ÷ Sales

c) Closing balance of allowance for doubtful accounts

=Trade receivables after adjustment (ii) and bad debt written off × %

(36)

Advanced level: Page. 11 d) Depreciation expense under reducing balance method

= (Cost – Accumulated Depreciation) × %

e) Net realisable value = Expected selling price - expected cost associate with the sales 2. According to the realisation concept, revenue should be recognised in the period when the

goods are dispatched and accepted by customers or when the services are rendered. Revenues are recognised only when the whole earning process is completed. When goods are sent on a

‘sale-or-return’ basis, these goods are not treated as sales unless they are accepted by the customer. In item (ii), 20% of these goods were still not accepted by the customer at the end of the financial year. In this case, they should be included in Alan’s inventory valuation (at cost) but not in the figure of sales (selling price).

3. Accrual concept states that income and expenses are recognised when they are earned or incurred, not when they are received or paid. For example, even though no payment was made on the interest expenses for the bank loan in item (vi), the interest expenses should be calculated based on the number of months incurred for the year (i.e. from Sep to Dec 2019) and recorded in the financial statements.

Common mistakes:

1. Fail to do conversion between cost and sales based on formulas of mark-up and margin.

2. Missing interest expenses in the income statement.

3. Mistakenly using the unadjusted balance of trade receivables to calculate allowance for doubtful accounts.

4. Missing narrations in part (d).

(37)

Marking scheme: Page. 1 Graded Assignment 6:

Period-end Adjustments Relating to the Preparation of Financial Statements Marking Scheme

Marks

(a) General Journal

Dr Cr

$ $

(ii) Sales ($120,000 × 20%) 24,000 0.5

Trade receivables 24,000 0.5

Inventory ($120,000 ÷ 1.5 × 20%) 16,000 0.5

Profit and loss 16,000 0.5

(iii) Prepaid insurance expenses ($6,000 ÷ 12 × 3) 1,500 0.5

Insurance expenses 1,500 0.5

(iv) Electricity expenses 3,000 0.5

Accrued electricity expenses 3,000 0.5

(v) Allowance for doubtful accounts 8,000 0.5

Trade receivables 8,000 0.5

Bad debts (W1) 29,600 0.5

Allowance for doubtful accounts 29,600 0.5

(vi) Interest expenses ($200,000 × 0.06 ÷ 12 × 4) 4,000 0.5

Interest payable 4,000 0.5

(Total: 7 marks)

(b) Alan Company

Income statement for the year ended 31 December 2019

$’000 $’000 $’000

Sales $(2,900,000 – 24,000) 2,876 0.5

Less: Returns inwards 38 0.5

2,838 Less: Cost of goods sold

Opening inventory 167

Add: Purchases 1,600

Less: Returns outwards 25 1,575

1,742 0.5

Less: Closing inventory $(180,000 + 16,000) 196 1,546 0.5

Gross profit 1,292

Add: Discounts received 28 0.5

1,320 Less: Expenses

Electricity expenses $(49,000 + 3,000) 52 0.5

Insurance expenses $(36,000 – 1,500) 34.5 0.5

(38)

Marking scheme: Page. 2

Bad debts (W1) 29.6 1

Rent and rates 150 0.5

Discounts allowed 55 0.5

Interest expenses 4 0.5

Depreciation expenses ($1,900,000 - $670,000) × 20% 246 571.1 0.5

Net profit 748.9 0.5

(Total: 7 marks)

(c) Alan Company

Statement of financial position as at 31 December 2019

$’000 $’000 $’000 Non-current assets

Office equipment at cost 1,900

Less: Accumulated depreciation ($670,000 + $246,000) 916

984 0.5

Current assets

Inventory $(180,000 + 16,000) 196 0.5

Trade receivables $(864,000 – 24,000 – 8,000) 832 0.5

Less: Allowance for doubtful accounts ($832,000 × 0.05)

41.6 790.4 0.5

Prepaid insurance expenses ($6,000 ÷ 12 × 3) 1.5 0.5

Cash at bank 714 1,701.9 0.5

2,685.9

Capital

Balance as at 1 January 2019 1,310 0.5

Add: Net profit for the year 748.9 0.5

2,058.9 Current liabilities

Trade payables 420 0.5

6% Bank loan 200 0.5

Interest payable 4 0.5

Accrued electricity expenses 3 627 0.5

2,685.9

(Total: 6 marks) Alternative Format

Alan Company

Statement of financial position as at 31 December 2019

$’000 $’000 $’000 Non-current assets

Office equipment at cost 1,900

Less: Accumulated depreciation ($670,000 +$246,000) 916

984 0.5

Current assets

Inventory ($180,000 + $16,000) 196 0.5

(39)

Marking scheme: Page. 3 Trade receivables

($864,000 – $24,000 – $8,000) 832 0.5

Less: Allowance for doubtful accounts ($832,000 × 0.05) 41.6 790.4 0.5

Prepaid insurance expenses 1.5 0.5

Cash at bank 714 0.5

1,701.9

Less: Current liabilities

Trade payables 420 0.5

6% Bank loan 200 0.5

Interest payable 4 0.5

Accrued electricity expenses 3 627 0.5

Working capital 1,074.9

2,058.9 Financed by

Capital

Balance as at 1 January 2019 1,310 0.5

Add: Net profit for the year 748.9 0.5

2,058.9

(Total: 6 marks)

(W1)

* Calculation steps

Step 1: Calculate the adjusted balance of trade receivables

= $(864,000 – 24,000 – 8,000) = $832,000

Step 2: Calculate the allowance for doubtful accounts as at 31 December 2019

= $832,000 × 5% = $41,600

- Allowance for doubtful accounts +

2019 $ 2019 $

Dec 31 Trade receivables

(Bad debts written off) 8,000 Jan 1 Bal b/d

(Stated on trial balance)

20,000

Dec 31 Bal c/d

(Calculation step*) 41,600 Dec 31 Bad debts (Balancing figure)

29,600

49,600 49,600

(40)

Marking scheme: Page. 4 Challenging question

(d)

General Journal

Dr Cr

$ $

Profit and loss 22,500 (1)

Inventory 22,500 (1)

Narrations: Inventory value written down (1)

(3 marks) Workings

Net realisable value (NRV)

= $32,000 ÷ (1 – 20%) × 30% - $2,500

= $9,500 (1 mark)

Amount written down in the inventory value

= $32,000 - $9,500

= $22,500 (1 mark)

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