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
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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
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Question 1 – continued Copyright © Insight Publications 2009
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)
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Question 1 – continued Copyright © Insight Publications 2009
1.2 The journals below are for the month of August. Transactions up until 24 August have been recorded.
Cash Receipts Journal
Date 2008
Details Rec. No.
Bank Disc Exp
Debtors Cost of Sales
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
Aug Totals to date 10815 100 5000 2300 1600 265 1750*
* 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.
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Question 1 – continued Copyright © Insight Publications 2009
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
Cash Receipts Journal
Date 2008
Details Rec. No.
Bank Disc Exp
Debtors Cost of Sales
Sales GST Sundries
Aug Totals to date 11400 150 3700 3100 6000 600 1250*
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
Creditors Stock Wages GST Sundries
Aug Totals to date 10815 100 5000 2300 1600 265 1750*
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
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Question 1 – continued Copyright © Insight Publications 2009
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
General Ledger Subsidiary Ledger Date 2008
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
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Question 1 – continued Copyright © Insight Publications 2009
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 $ 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
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Question 1 – continued Copyright © Insight Publications 2009
GST CLEARING
Date 2008
Cross Reference $ 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 $ 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
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Question 1 – continued Copyright © Insight Publications 2009
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
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Question 1 – continued Copyright © Insight Publications 2009
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
Qualitative Characteristic Reliability
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
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Question 1 – continued Copyright © Insight Publications 2009
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)
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Question 1 – continued Copyright © Insight Publications 2009
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
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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
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Question 2 – continued Copyright © Insight Publications 2009
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
Tax Invoice January 23 2009
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
Tax Invoice January 25 2009
Received from: P. Smith
For: Settlement of Account
Amount: $2100
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Question 2 – continued Copyright © Insight Publications 2009
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 $ 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
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Question 2 – continued Copyright © Insight Publications 2009
2.1.2 Explain, referring to a Qualitative Characteristic, the role of a physical stocktake.
Solution 2.1.2
Qualitative Characteristic Reliability
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
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Question 2 – continued Copyright © Insight Publications 2009
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
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Question 2 – continued Copyright © Insight Publications 2009
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
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Question 2 – continued Copyright © Insight Publications 2009
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
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Question 2 – continued Copyright © Insight Publications 2009
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
General Ledger Subsidiary Ledger Date 2009
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
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Question 2 – continued Copyright © Insight Publications 2009
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 $ Date 2009
Cross Reference $
Nov 30 Drawings 4100 Nov 30 Balance 149255
Profit and Loss Summary 530
2 marks
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Question 2 – continued Copyright © Insight Publications 2009
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).
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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
Creditors Stock Wages GST Sundries
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