2009 accounting written examination 1 -...

This trial examination produced by Insight Publications is NOT an official VCAA paper for the 2009 Accounting written examination 1. This examination paper is licensed to be printed, photocopied or placed on the school intranet and used only within the confines of the purchasing school for examining their students. No trial examination or part thereof may be issued or passed on to any other party including other schools, practising or non-practising teachers, tutors, parents, websites or publishing agencies without the written consent of Insight Publications. Copyright © Insight Publications 2009

INSIGHT Trial Exam Paper

2009 ACCOUNTING

Written examination 1

Suggested solutions

This book presents: • correct solutions • mark allocations

2

Question 1 – continued Copyright © Insight Publications 2009

Question 1

Robert’s Radios Robert Nolan is starting a trading business called Robert’s Radios. Robert will initially only sell one line of stock, the SK487 radio. He will maintain a double-entry accrual accounting system with control accounts for Debtors, Creditors and Stock. A perpetual inventory system will be used with the FIFO (first-in-first-out) method of cost assignment. Reports are to be prepared monthly, with balance day falling on the last day of every month.

1.1 Robert started the business on 1 July 2008. He contributed $50 000 in cash to the business’ bank account (Rec.1). He also contributed premises from which the business will operate worth $120 000 and Shop Fittings worth $20 000.

Required 1.1.1 Prepare the journal entries to start the business. (Narration is not required)

Solution 1.1.1

General Journal

General Ledger Subsidiary Ledger Date 2008

Particulars

Debit $ Credit $ Debit $ Credit $

July 1 Shop Fittings 20 000

Premises 120 000

Capital 140 000

Cash Receipts Journal

Date 2008

Details Rec. No.

Bank Disc. Exp.

Debtors Cost of Sales

Sales GST Sundries

July 1 Capital 1 50 000 50 000

3 marks

Mark allocation

• 1 mark for correct entry in the Cash Receipts Journal • 2 marks for correct General Journal entries • 1 mark deducted for any error – e.g. no date

3


1.1.2 Explain, with reference to a definition, how shop fittings would be classified.

Solution 1.1.2

Explanation Shop Fittings should be classified as a Non-Current Asset as they are a

resource .controlled by the entity, as a result of past events (owner contributed them to the

business) from which .a future economic benefit is expected to flow to the entity for more than

12 months (firm will use the shop fittings to help generate revenue for the business).

2 marks

Mark allocation • 1 mark for Non-Current Asset & 1 mark for definition of NCA (resource controlled by

the entity from which future economic benefits is expected for more than 12 months) Robert tells his accountant that he thinks it is pointless to keep stock cards when he still needs to conduct a physical stocktake at the end of every month.

1.1.3 Explain to Robert two benefits of using the perpetual inventory system of recording.

Solution 1.1.3

Benefit 1 Re-ordering of Stock is assisted

.If the business maintains a continuous record of the amount of Stock on hand, then the

owner will be .easily able to identify when stock levels are running low and re-order stock.

This is incredibly .important, as having low amounts of stock on hand could lead to lost sales.

Benefit 2 Stock Losses and Gains can be detected

By comparing the stock cards against the physical stocktake, the firm is able to highlight any

discrepancies and take corrective action (e.g. increase security to decrease theft or stock loss).

OR

Fast- and slow-moving lines of stock can be identified: This means by looking at the stock

cards the owner can see which stock items are selling well or not so well and in turn improve

the stock mix.

2 + 2 = 4 marks

Mark allocation • 2 marks for identifying the 2 benefits (e.g. re-ordering of stock is assisted) • 1 mark for each explanation. (Key statements are in italics)

4


1.2 The journals below are for the month of August. Transactions up until 24 August have been recorded.


Date 2008

Details Rec. No.

Bank Disc Exp


Sales GST Sundries

Aug Totals to date 11400 150 3700 3100 6000 600 1250*

* Sundries include: Capital $1000, Interest revenue $250 Cash Payments Journal

Date 2008

Details Chq No.

Bank Disc Rev

Creditors Stock Wages GST Sundries


* Sundries include: Payment to ATO $1200, Accrued Wages $200, Freight in $350 Sales Journal

Date 2008

Debtor Inv No.

Cost of Sales

Sales GST Total Debtors

Aug Totals to date 1700 3500 350 3850

Purchases Journal

Date 2008

Creditor Inv No.

Stock GST Total Creditors

Aug Totals to date 2900 290 3190

The following transactions are yet to be recorded in the journals.

• 25 August: Sold 9 radios at $99 each (including GST) on credit to John O’Brien (Invoice 67). Cost price of stock sold: $430 plus $43 GST

• 26 August: Purchased 20 radios at $55 each (including $5 GST) on credit from Radio Importers Ltd (Invoice E593).

• 27 August: Sold 12 radios at $110 each (including GST) (Receipt 45) Cost price of stock sold: $600 plus $60 GST

• 28 August: Debtor John O’Brien has been declared bankrupt. He pays 20% of what he owes Robert’s Radios (Rec 46). The remainder will be written off as a bad debt. (Memo 47). Note: As at August 1, John O’Brien owed Robert’s Radios $1119. There were no further transactions involving John O’Brien until 25 August.

• 30 August: Robert’s Radios paid Invoice E593 to Radio Importers Ltd, taking advantage of a 5% discount for early repayment. (Cheque 85)

• 31 August: A Physical stocktake showed there were 9 units of stock on hand. (Memo 48) The stock on hand before the stocktake total value was $500 and each unit of stock cost $50.

5


Required 1.2.1 State the qualitative characteristic that supports the use of source documents in the

accounting process.

Solution 1.2.1

Qualitative Characteristic Reliability

1 mark

Mark allocation • 1 mark for Reliability

1.2.2 Record the above transactions 25 to 31 August in the appropriate journals and then

total all relevant journals. (Narrations are required)

Solution 1.2.2


Date 2008

Details Rec. No.

Bank Disc Exp


Sales GST Sundries


Aug 27 Sales 45 1320 600 1200 120

Aug 28 John O’Brien 46 402 402

Aug 31 TOTALS $ 13122 150 4102 3700 7200 720 1250

* Sundries include: Cash Capital contribution $1000, Interest revenue $250 Cash Payments Journal

Date 2008

Details Chq No.

Bank Disc Rev



Aug 30 Radio import. Ltd 85 1045 55 1100

Aug 31 TOTALS $ 11860 155 6100 2300 1600 265 1750

* Sundries include: Payment to ATO $1200, Accrued Wages $200, Freight in $350

6


Sales Journal

Date 2008

Debtor Inv No.

Cost of Sales

Sales GST Total Debtors

Aug Totals to date 1700 3500 350 3850

Aug 25 John O’Brien 67 430 810 81 891

Aug 31 TOTALS $ 2130 4310 431 4741 Purchases Journal

Date 2008

Creditor Inv No.

Stock GST Total Creditors

Aug Totals to date 2900 290 3190

Aug 26 Radio Importers Ltd E593 1000 100 1100

Aug 31 TOTALS $ 3900 390 4290

General Journal


Particulars

Debit $ Credit $ Debit $ Credit $

Aug 28 Bad Debts Expense 1608

Debtors Control 1608

Debtor – John O’Brien 1608

80% of John O’Brien’s debt has been deemed irrecoverable and is to be written off (Memo 47)

Aug 31 Stock Loss 50

Stock Control 50

Adjusting entry to lower stock control to physical stocktake value (Memo 48)

2 + 1 + 1 + 1 +2 + 1 = 8 marks

Mark allocation

• 1 mark for each transaction being correctly recorded in the relevant journal (this includes narrations, correct dates and correct accounts)

• 1 mark for totalling the journals • 1 mark subtracted for making any recording errors

7


1.2.3 Complete the following General Ledger accounts for 31 August 2008 (balancing is required). Note: opening balances for each account have been entered in the answer book

Solution 1.2.3

General Ledger

STOCK CONTROL

Date 2008

Cross Reference $ Date 2008

Cross Reference $

Aug 1 Balance 130 Aug 31 Cost of Sales 3700

Aug 31 Creditors Control 3900 Cost of Sales 2130

Bank 2300 Stock Loss 50

Balance 450

6330 6330

Sept 1 Balance 450

CREDITORS CONTROL

Date 2008


Cross Reference $

Aug 31 Bank / Discount Revenue 6100 Aug 1 Balance 4200

Balance 2390 Aug 31 Stock Control / GST Clearing 4290

8490 8490

Sept 1 Balance 2390

8


GST CLEARING

Date 2008


Cross Reference $

Aug 31 Bank 1200 Aug 1 Balance 1200

Creditors Control 390 Aug 31 Debtors Control 431

Bank 265 Bank 720

Balance 496

2351 2351

Sept 1 Balance 496

4 + 2 + 4 = 10 marks

Mark allocation • 4 marks for posting the 5 entries to the stock control account • 2 marks for posting the 2 entries to the creditors control account • 4 marks for posting the 5 entries to the GST Clearing account • 1 mark subtracted for each error in the posting to the ledger accounts (e.g. wrong dates,

cross-references or not balancing the accounts correctly) 1.2.4 Show how the Debtors Subsidiary Ledger for John O’Brien would appear for 31

August 2008 after all transactions are posted. (Balancing is not required).

Solution 1.2.4

Subsidiary Ledger

DEBTOR – John O’Brien

Date 2008


Cross Reference $

Aug 1 Balance 1119 Aug 28 Bank 402

Aug 25 Sales / GST Clearing 891 Bad debts Expense 1608

2 marks

Mark allocation • 1 mark for correctly posting transaction on August 25 • 1 mark for correctly posting transaction on August 28 • 1 mark subtracted for not using correct dates and figures

9


1.2.5 Explain why Bad debts are classified as an expense in the Profit and Loss statement of Robert’s Radios.

Solution 1.2.5

Explanation Bad debts will be reported as an expense in the Profit and Loss Statement as it

is a reduction in an inflow of an economic benefit (cash is not received from Debtors) in the

form of a decrease in assets (Debtors Control) that decreases Owner’s equity (Bad Debts

expense decreases Net Profit hence decreasing Owner’s Equity).

2 marks

Mark allocation

• 1 mark for reduction in an inflow of an economic benefit • 1 mark for decrease in assets and decrease in OE

1.2.6 State one advantage and one disadvantage to Robert’s Radios of offering discounts to

credit customers for early repayment.

Solution 1.2.6

Advantage Cash is received faster from Debtors OR Greater sales are encouraged

OR Possibility of Bad Debts is reduced due to quick repayment

Disadvantage Less cash is received from debtors OR Net Profit decreases due to discount

expense 2 marks

Mark allocation

• 1 mark for stating one of the advantages mentioned • 1 mark for stating one of the disadvantages mentioned

10


1.2.7 Explain, with reference to a qualitative characteristic, the benefit of using both control accounts and subsidiary accounts in the recording process.

Solution 1.2.7


Explanation Having two sets of records on the same information allows errors to be

detected. The balance of the control account can be checked against a schedule, which

shows the balance of each individual subsidiary account, and errors which took place in the

recording process can be detected. Hence, having both control and subsidiary accounts will

ensure that the figures recorded are reliable and free of human error. Also, by having two

sets of records, the separation of duties can occur hence reducing the chances of fraud as the

two people in charge of the subsidiary records must check on each other. This once again

ensures that figures recorded are accurate and free from bias and fraud.

3 marks

Mark allocation • 1 mark for identifying the correct Qualitative characteristic • 2 marks for stating two of the four underlined statements

1.3 On 30 September 2008, Robert’s Radios purchased a vehicle for cash (Cheque 97).

• The supplier’s price for the vehicle was $25000. • Due to increasing petrol prices, Robert converted the vehicle to gas costing him a

further $4000. • Robert painted the vehicle for advertising purposes, costing him $500. • He paid $1200 for vehicle registration for the year ended 30 September 2009. • He paid a total of $3070 GST on the purchase.

Required 1.3.1 Calculate the cost of the vehicle.

Solution 1.3.1

Note: Vehicle registration is not part of the cost of the vehicle as it does not bring a benefit for the life of the vehicle.

1 mark

Mark allocation • 1 mark for stating the correct cost of the vehicle

Supplier’s Price: $25000 + Gas tank: $4000 + Paint job: $500 = $29500 Cost of Vehicle: $29500

11


1.3.2 Explain your treatment of the $500 paint job.

Solution 1.3.2

Explanation The paint job is part of the cost of the vehicle as it is a cost incurred in order to

bring the vehicle into a condition ready for use and will provide a benefit for the life of the

asset.

2 marks

Mark allocation

• 1 mark for each of the underlined statements (must know the correct definition of the cost of an asset)

1.3.3 Show how the vehicle registration would appear in the Balance Sheet as at 31 October

2008.

Solution 1.3.3

Robert’s Radios

Balance Sheet (extract) as at 31 October 2008

Current Assets $

Prepaid Vehicle Registration 1100

1 mark

Mark allocation • 1 mark for correct figure (Note: must state Prepaid vehicle registration) (Figure is

$1100 because $100 of Vehicle registration has been consumed)

12


1.4 Below is a Profit and Loss statement for the month ended 31 December 2008.

Robert’s Radios

Profit and Loss Statement for the month ended 31 December 2008.

Revenue $ $

Sales 11000

less Cost of Goods Sold

Cost of Sales 5200

Freight in 230 5430

Gross Profit 5570

add Stock gain 100

Adjusted Gross Profit 5670

add Other Revenue

Discount revenue 145

5815

less Other Expenses

Wages 1700

Discount expense 275

Depreciation – Shop Fittings 500

Depreciation – Vehicle 400 2875

Net Profit $ 2940

Required 1.4.1 Explain the benefit of separating Gross Profit in the Profit and Loss Statement.

Solution 1.4.1

Explanation By detailing Gross Profit separately in the Profit and Loss Statement, the

owner is able to assess the adequacy of the firm’s mark-up. Gross Profit = Sales – Cost of

Goods Sold therefore it is a relationship between selling prices and cost prices. Decisions

can then be made about adjusting selling prices and possibly adjusting cost prices, to achieve

the greatest Gross Profit possible, so the firm is able to cover its other expenses and still

have a healthy Net Profit figure.

2 marks

Mark allocation

• 1 mark for assess the adequacy of the firm’s mark-up • 1 mark for decisions can then be made about adjusting selling prices or coverage of

other expense

13

END OF QUESTION 1 Copyright © Insight Publications 2009

Robert believes that the figure stated for December’s depreciation is too high. He decides to change his depreciation method as of 1 January 2009.

1.4.2 Identify and explain which accounting principle would be breached if Robert decides to change his depreciation methods.

Solution 1.4.2

Accounting Principle Consistency

Explanation Consistency demands that accounting methods should be applied in a

consistent manner so that reports are comparable from one period to the next. If Robert

changes his depreciation methods, then changes in reports might be as a result of a change in

depreciation methods, rather than changes in performance. Hence reports and performance

are not able to be compared from one period to the next due to a change in the firm’s

depreciation methods.

2 marks

Mark allocation • 1 mark for identifying the correct accounting principle • 1 mark for the explanation

Total 45 marks

14


Question 2

Tree Hill Sports Joshua Purcell operates a small business, Tree Hill Sports, selling a vast range of sporting apparel and equipment. Joshua’s accountant maintains a double-entry accrual accounting system with control accounts for Debtors, Creditors and Stock. The business uses a perpetual inventory recording system with the FIFO (First In First Out) cost assignment method.

2.1 Hitpro is a tennis racket that is sold by Tree Hill Sports. All Hitpro rackets are purchased on credit from All Sports. No rackets were stocked prior to 1 January 2009. Rackets are sold at a 100% mark-up. Also note that the balance of P. Smith in the Debtors Subsidiary Ledger was $2 100 as at 1 January 2009.

The following transactions occurred during January 2009:

• January 1 – 15 Hitpro rackets were purchased for $150 each plus $15 GST each (Inv. 34)

• January 2 – 4 Hitpro rackets were sold to P. Smith (Inv. T58) • January 9 – 3 Hitpro rackets were donated to the local community raffle (Memo 13) • January 31 – A physical stocktake was conducted and it was determined that 13 Hitpro

Rackets were on the shelf (Memo 21)

The following not yet recorded source documents were also found:

ALL SPORTS Invoice 38

Tax Invoice January 18 2009

Charge To: Tree Hill Sports Terms: 5/7, n/30

Description Quantity Unit Cost Stock GST Total

Hitpro Racket 15 170 2550 255 2805

Tree Hill Sports Invoice T65


Charge To: P. Smith Terms: n/30

Description Quantity Unit Cost Stock GST Total

Hitpro Racket 9 300 2700 270 2970

Tree Hill Sports Receipt 103


Received from: P. Smith

For: Settlement of Account

Amount: $2100

15


Required 2.1.1 Record the above transactions and source documents into the Stock Card and

P. Smith’s Debtors Subsidiary Ledger account. (Note the account must be balanced).

Solution 2.1.1

Stock Card

Hitpro Tennis Racket

IN OUT BALANCE

Date 2009

Details Qty Unit Cost

Value Qty Unit Cost Value Qty Unit Cost Value

Jan 1 Inv. 34 15 150 2250 15 150 2250

Jan 2 Inv. T58 4 150 600 11 150 1650

Jan 9 Memo 13 3 150 450 8 150 1200

Jan 18 Inv. 38 15 170 2550 8 150 1200

15 170 2550

Jan 23 Inv. T65 8 150 1200

1 170 170 14 170 2380

Jan 31 Memo 21 1 170 170 13 170 2210

6 marks

Mark allocation • 1 mark for each correctly recorded transaction

DEBTOR – P. SMITH

Date 2009


Cross Reference $

Jan 1 Balance 2100 Jan 25 Bank 2100

Jan 2 Sales / GST Clearing 1320 Jan 31 Balance 4290

Jan 23 Sales / GST Clearing 2970

6390 6390

Feb 1 Balance 4290

4 marks

Mark allocation • 1 mark for both balances and then each correct entry • 1 mark subtracted for incorrect dates and/or title

16


2.1.2 Explain, referring to a Qualitative Characteristic, the role of a physical stocktake.

Solution 2.1.2


Explanation The role of a physical stocktake is to verify the accuracy of the stock cards to

ensure that they are reliable, and in the process detect any stock loss or gain. By making

sure that the figures in the stock cards are accurate, we are ensuring the reports contain

information that is accurate and from bias.

2 marks Mark allocation

• 1 mark for correctly identifying Reliability • 1 mark for identifying that a stocktake detects a stock loss or gain and ensures reports

are accurate and free from bias 2.2 Tree Hill Sports had the following Statement of Receipts and Payments for August 2009:

$ $ Cash Receipts Sales 53000 Sale of Display Shelves 4400 Receipts From Debtors 17800 Interest Revenue 960 GST Received 5740 Cash Capital Contribution 12000 93900 less Cash Payments Payments to Creditors 21300 Wages 29100 Drawings 3000 Prepaid Advertising 6000 Telephone Bill 350 Interest Expense 600 Rent Expense 7500 Purchase of Stock 11700 GST Paid 2555 82105 Cash Surplus (Deficit) 11795 add Opening Bank Balance (1/8/09) (1100) Closing Bank Balance (31/8/09) $ 10695

17


Required 2.2.1 Prepare the Operating Activities section of the Cash Flow Statement for August 2009.

Solution 2.2.1

OPERATING ACTIVITIES $ $

Cash Sales 53000

Receipts from Debtors 17800

Interest Revenue Received 960

GST Received 5740 77500

Payments to Creditors (21300)

Wages (29100)

Prepaid Advertising (6000)

Telephone Bill (350)

Interest Expense (600)

Rent Expense (7500)

GST Paid (2555)

Purchase of Stock (11700) (79105)

NET OPERATING CASH FLOWS (1605)

7 marks

Mark allocation

• 2 marks for correctly stating and identifying Operating Inflows (including total) • 4 marks for correctly stating and identifying Operating Outflows (including total) • 1 mark for correctly stating Net Operating Cash Flows total • 1 mark subtracted for each incorrect entry or alien entry • 1 mark subtracted for not differentiating between Operating Inflows and Outflows • 1 mark subtracted for not including totals

18


2.2.2 Explain how a negative Net Investing Cash Flows may lead to a reduction in Net Profit.

Solution 2.2.2

Explanation If the Net Investing Cash Flow is negative it means that non-current assets

have been purchased, and as a result of more non-current assets and the need to depreciate

these assets, the depreciation expense will increase, resulting in a reduction of profit.

2 marks

Mark allocation

• 1 mark for stating that the negative Investing Cash Flows would be caused by purchases of non-current assets

• 1 mark for stating that non-current assets need to be depreciated and an increase in assets will cause an increase in depreciation expense

2.2.3 Explain two benefits of preparing a Cash Flow Statement.

Solution 2.2.3

First Benefit To aid decision-making about the firm’s cash activities;

To assess whether the business is meeting its cash targets;

Second Benefit To identify whether the business is generating enough cash from operating

activities; To assist in planning for future cash activities

2 marks

Mark allocation • 1 mark each for identifying one of the above benefits (maximum of 2 marks)

During August 2009, Tree Hill Sports generated a Net Profit of $328.

2.2.4 Giving an example from the information provided above, explain the difference between cash and profit.

Solution 2.2.4

Explanation Cash and profit are different resources and are different measures of

performance. Cash is difference between cash inflows and cash outflows, while profit is the

difference between revenues earned and expense incurred. Some cash inflows are not

revenues, e.g. cash drawings decrease the firm’s cash position but have no effect on profit.

3 marks

Mark allocation • 1 mark for stating that cash and profit are different resources or different measures • 1 mark for stating the difference in the calculation of cash and profit • 1 mark for giving an accurate and correct example from the given information and a

relevant explanation for the example

19


2.3 Tree Hill Sports had the following Post-Adjustment Trial Balance for November 2009:

Account Debit $

Credit $

Accumulated Depreciation – Shop Fittings 13200

Accumulated Depreciation – Vehicle 2300

Administration Expenses 4390

Bank 1300

Capital 149255

Cash Sales 61370

Cost of Sales 38695

Credit Sales 24500

Creditors Control 49600

Debtors Control 51330

Depreciation – Shop Fittings 540

Depreciation – Vehicle 900

Discount Expense 573

Discount Revenue 634

Drawings 4100

Freight In 970

GST Clearing 3200

Interest Revenue 200

Loan – ANZ Bank 145000

Premises 163000

Prepaid Advertising Expense 1800

Rent Expense 7500

Shop Fittings 64530

Stock Control 47865

Stock Loss 400

Telephone Expenses 50

Vehicle 31760

Wages 32156

450559 450559

20


Required As the total debits equal the total credits in the Trial Balance, Joshua assumes that it must be correct.

2.3.1 State two errors that will not be detected by the preparation of a Trial Balance.

Solution 2.3.1

First Error If a transaction has been omitted altogether;

If the debit and credit entries have been reversed;

Second Error If the transaction has been recorded in the wrong ledger account;

If an incorrect amount has been recorded on both sides of the ledger

2 marks

Mark allocation • 1 mark each for identifying any errors (maximum of two marks)

2.3.2 Prepare the General Journal entries to record the closing entry for expenses and the

transfer of profit (or loss) to the Capital account. (Narration is not required)

Solution 2.3.2


Particulars Debit

$

Credit

$

Debit

$

Credit

$ Nov. 30 Profit and Loss Summary 86174 Administration Expenses 4390 Cost of Sales 38695 Depreciation – Shop Fittings 540 Depreciation – Vehicle 900 Discount Expense 573 Freight In 970 Rent Expense 7500 Stock Loss 400 Telephone Expenses 50 Wages 32156 Profit and Loss Summary 530 Capital 530

6 marks

21


Mark allocation • 3 marks for correctly identifying and crediting all expenses • 1 mark for the correct debit to the Profit and Loss Summary account for the closing

entry • 1 mark for the debit entry to the Capital account for the transferring entry • 1 mark for the credit entry to the Profit and Loss Summary account for the transferring

entry • 1 mark subtracted per incorrect or alien entries • 1 mark subtracted for reversing the debits and credits • 1 mark subtracted for wrong account names and/or missing date

2.3.3 Explain, referring to one Accounting Principle, why some ledger accounts must be

closed.

Solution 2.3.3

Accounting Principle Reporting Period

Explanation Ledgers must be closed so that revenue and expense accounts can be

transferred to the Profit and Loss Summary account so that profit can be calculated for the

current Reporting period. Also revenue and expense accounts must also be reset to zero in

preparation for the next Reporting period.

3 marks

Mark allocation • 1 mark for correctly identifying Reporting Period principle • 1 mark for correctly stating the need for calculating profit for this reporting period • 1 mark for correctly stating the need to reset the revenue and expense accounts in

preparation for next reporting period. • Note: This is the most correct answer and therefore the only acceptable one

2.3.4 Show how the Capital account would appear after all closing and transferring entries

have been posted. (You are not required to balance the account).

Solution 2.3.4

CAPITAL

Date 2009


Cross Reference $

Nov 30 Drawings 4100 Nov 30 Balance 149255

Profit and Loss Summary 530

2 marks

22


Mark allocation • 1 mark for the correct Profit and Loss Summary debit entry • 1 mark for the correct debit for Drawings • 1 mark subtracted for incorrect accounts/dates/alien entries/absence of balance

2.3.5 Explain why Drawings is not closed to the Profit and Loss Summary account.

Solution 2.3.5

Explanation Drawings is not closed to the Profit and Loss Summary account because the

Profit and Loss Summary account facilitates the calculation of profit and so deals only with

revenues and expenses. Drawings is not an expense as it is expressly excluded from the

definition as it is a transaction with the owner; as it is not an expense it is not closed to the

Profit and Loss Summary.

2 marks

Mark allocation • 1 mark for stating that the Profit and Loss Summary account only deals with revenues

and expenses • 1 mark for stating that Drawings is not an expense

2.4 Tree Hill Sports vehicle insurance started on 1 November, 2009. The annual policy costs $3600 (plus $360 GST). Due to a cash shortage, Tree Hill Sports negotiated to pay the policy at the end of December.

A Balance Sheet for the end of November showed the following account:

Balance Sheet extract as at 30 November 2009 Current Liabilities Accrued Insurance expense $300

On 31 December 2009, Tree Hill Sports made the insurance payment on the vehicle of $3600 (plus $360 GST) to AAMI (Chq. 512).

23

Copyright © Insight Publications 2009

Required 2.4.1 Record the Insurance payment on 31 December 2009 in the Cash Payment Journal of

Tree Hill Sports.

Solution 2.4.1

Cash Payments Journal

Date 2009

Details Chq No.

Bank Disc Rev


31 Dec Accrued Insurance expense

512 3960 360 300

Prepaid Insurance expense

3300

3 marks

Mark allocation • 1 mark for each line of the Cash Payments Journal

2.4.2 State why the accrued insurance expense was classified as a current liability as at 30

November.

Solution 2.4.2

Explanation It represents a present obligation of the business it is owed to;

The insurance has been used but not yet paid for.

1 mark

Mark allocation • 1 mark for stating any one of the above.

Total 45 marks

END OF SOLUTIONS

2009 accounting written examination 1 -...

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