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Level 2 Book-keeping & Accounts Solutions Booklet
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CONTENTS
1 Advanced Aspects of Depreciation 1
2 Adjusting for Accruals and Prepayments 5
3 Bade Debts and Provision for Doubtful Debts 9
4 Introduction to Partnership Accounts 12
5 Admission and Retirement of Partners 17
6 Dissolution of a Partnership 21
7 Formation of a Company – Meaning, Purpose and Effect 26
8 Limited Companies – The Profit and Loss Account 28
9 Limited Companies – The Balance Sheet 30
10 Control Accounts 39
11 Incomplete Records 42
12 Stock Valuation 49
13 Manufacturing Accounts 51
14 Non-Trading Organisations 55
15 Non Trading Organisations: Subscriptions Account and Balance Sheet 58
16 Errors and Use of a Suspense Account 63
17 Calculation and Interpretation of Ratios 67
18 Preparing Simple Financial Statements Using Ratios 71
Chapter 1
Advanced Aspects of Depreciation
Answers to ‘Think about it’ Questions
Page 2 – Specific causes of depreciation:
Wear and tear
Depletion (of natural resources)
Technical obsolescence
Inadequacy
Passage of time
Page 5 – Three types of assets and methods to match:
Hand tools – revaluation method
Motor vehicle – reducing balance method
Machinery – machine hours
Page 6 – Effects of the different methods of depreciation:
The reducing balance method had the highest depreciation charge resulting in the
lowest net book value at the end of the first year.
The straight-line method has the lowest depreciation charge resulting in the highest net book value at the end of the first year.
Solutions to Target Practice Questions
Question 1
(a) Depreciation is an accounting adjustment, which measures the fall in value of a fixed
asset.
(b) The charge for deprecation is posted to the debit side of the Depreciation Expense
Account and the credit side of the Provision for Depreciation Account.
Question 2
Machinery Cost
£ £ 01/01/X5 Bank 120 00031/12/X5 Balance c/d 120 000
120 000120 000
01/01/X6 Balance b/d 120 00031/12/X6 Balance c/d 120 000
120 000120 000
Provision for Depreciation of Machinery
£ £ 31/12/X5 Balance c/d 12 00031/12/X5 Depreciation Expense 12 000
12 00012 000
000
b/d 12
01/01/X6
Balance
31/12/X6 Balance c/d 24 00031/12/X6 Depreciation Expense 12 000
000
000 24
24
Motor Vehicles Cost
£
£ 01/01/X5
Bank 28 00031/12/X5 Balance c/d
28 000
28 000
28 00001/01/X6
Balance b/d 28 00031/12/X6 Balance c/d 28 000
28 000
28 000
Provision for Depreciation of Motor Vehicles
£
£
31/12/X5 Balance c/d
7 00031/12/X5 Depreciation Expense 7 000
7 000
7 000
01/01/X6 Balance b/d
7 00031/12/X6 Balance c/d
12 25031/12/X6 Depreciation Expense 5 250 12 250
12 250
Depreciation Expense
£ £ 31/12/X5 PFD Machinery 12 000 31/12/X5 PFD Motor vehicles 7 00031/12/X5Profit and Loss 19 000
19 000 19 00031/12/X6 PFD Machinery 12 000 31/12/X6 PFD Motor vehicles 5 25031/12/X6Profit and Loss 17 250
17 250 17 250 Workings
Machinery
Motor vehicles Purchase cost £ 120 000 £ 28 000Depreciation 31 December 20X5 £120 000 x 10% 12 000£28 000 x 25% 7 000 108 000 21 000Depreciation 31 December 20X6 £120 000 x 10% 12 000£21 000 x 25% 5 250 96 000 15 750
Question 3
Machines: A £ B £ C £ D
£
Cost 01/01/X7 35 00042 00022 50050 000 Depreciation charge: (£35 000 x 12%) x 10/12 3 500 £42 000 x 12% 5 040 (£22 500 x 12%) x 4/12 900 £50 000 x 12% 6 000 NBV 31 50036 96021 60044 000 Sales proceeds 28 60015 360 Profit/(Loss) (2 900)(6 249)
Machinery Cost
£ £
01/01/X7 Bank 149 50030/04/X7 Disposal Machine C 22 500
31/10/X7 Disposal Machine A 35 000
31/12/X7
Balance
c/d 92
000
149 500149 500
Provision for Depreciation of Machinery
£ £
30/04/X7 Disposals - C 90030/04/X7 Depreciation expense - C 900
31/10/X7 Disposals - A 3 50031/10/X7 Depreciation expense - A 3 500
31/12/X7 Depreciation expense - B 5 040
31/12/X7 Balance c/d 11 04031/12/X7 Depreciation expense - D 6 000
15
44015
440
Depreciation Expense
£ £
30/04/X7 Depreciation expense - C 900
31/10/X7 Depreciation expense - A 3 500
31/12/X7 Depreciation expense - B 5 040
31/12/X7 Depreciation expense - D 6 00031/12/X7Profit and Loss 15 440
15
44015
440
Asset Disposal
£ £
30/04/X7 Machine C Cost 22 50030/04/X7 PFD Machine C 900
31/10/X7 Machine A Cost 35 00030/04/X7 Bank 18 000
31/10/X7 Profit
on Disposal –
Machine A 1 30030/04/X7 Loss on Disposal
Machine C 3 600
31/10/X7 PFD Machine A 3 500
31/10/X7
Bank 32
800
58
80058
800 Question 4
Truck 1
£ Truck 2
£
Truck 3
£
Truck 4
£
Depreciation for year ended 31
March 20X7
6 250 3 750 6 750 10 000
Trucks Cost
£ £
01/04/X6 Balance b/d 131 00030/09/X6 Disposal Truck 2 30 000
31/12/X6 Disposal Truck 3 36 000
31/12/X6
Balance
c/d 65
000
131
000131
000
Provision for Depreciation of Trucks
£ £
b/d 33
750
Balance
01/04/X6
30/09/X6 Disposals – Truck 2 11 25030/09/X6 Depreciation - Truck 2 3 750
31/12/X6 Disposals – Truck 3 15 50031/12/X6 Depreciation – Truck 3 6 750
31/03/X7 Depreciation – Truck 1 6 250
31/03/X7 Balance c/d 33 75031/03/X7 Depreciation – Truck 4 10 000
500
50060
60
Depreciation Expense
£ £ 30/09/X6 Depreciation - Truck 2 3 750
31/12/X6 Depreciation – Truck 3 6 750
31/03/X7 Depreciation – Truck 1 6 250
31/03/X7 Depreciation – Truck 4 10 00031/03/X7 Profit and Loss 26 750
750
75026
26
Asset Disposal
£ £ 30/09/X6 Truck 2 Cost 30 00030/09/X6 PFD Truck 2 11 250
30/09/X6 Profit on disposal – Truck 2 8 75030/09/X6 Bank 27 500
31/12/X6 Truck 3 Cost 36 00031/12/X6 PFD Truck 3 15 500
31/12/X6 Profit on disposal – Truck 3 2 30031/12/X6 Bank 22 800
77 05077 050 Question 5
Asset Disposal
£ £ 01/07/X6 Machine 1 Cost 30 00001/07/X6 Machine 1 Provision for
Depreciation 10 500
01/10/X6 Machine 2 Cost 30 00001/07/X6 Cost of truck (trade-in) 18 000
01/07/X6 Loss on disposal 1 500 on Disposal –
31/10/X6 Profit
Machine 2 5 500
31/10/X6 Machine 2 Provision for
Depreciation 10 500
2
Cost
Machine
31/10/X6
(exchange) 25 000
500
65
50065
Chapter 2
Adjusting for Accruals and Prepayments
Answers to ‘Think about it’ Questions
Page 16 – Why is an expense prepayment an asset on the balance sheet?
As the expense is paid for before it is used, the supplier owes the business the amount until such time when the expense prepayment is used up. Since the expense supplier
owes the business, he is similar to a debtor, which is a current asset.
Page 17 – Why is an expense accrual a liability on the on the balance sheet?
As the expense as been used up but unpaid at the end of the period the business owes the supplier; the supplier is similar to a creditor, therefore a current liability on the balance sheet.
Solutions to Target Practice Questions
Question 1
(a) A prepayment for Heat and Light of £330.
£ £ Dr Prepayments 330
Cr Heat and Light 330
(b) Accrued Motor Expenses of £927.
£ £ Dr Motor expenses 927
Cr Accruals 927
(c) Sales of £2500 invoiced in advance.
£ £ Dr Sales 2 500
500 Cr Accruals and deferred income 2
(d) Rent receivable but not yet collected of £700.
£ £ Dr Prepayments and accrued income 700
Cr Rent receivable 700
Question 2
(a) Telephone accrual: 1/3 x £900 = £300
(b) Insurance prepayment: 7/12 x £420 = £245
(c) Electricity accrual: 2/3 x £840 = £560
(d) Rent prepayment: 1/2 x £8000 = £4000
Question 3
Telephone
£ £
30/06/X1 Accrual 30030/06/X1 Profit and Loss Account 300
300300
Motor Insurance
£ £ 01/02/X1 Bank 42030/06/X1 Prepayment 245
30/06/X1 Profit and Loss Account 175
420420
Electricity
£ £
30/06/X1 Accrual 56030/06/X1 Profit and Loss Account 560
560560
Rent
£ £
01/04/X1 Bank 8 00030/06/X1 Prepayment 4
000
30/06/X1 Profit and Loss Account 4 000
0008
000
8
Accruals
£ £
30/06/X1
Telephone 300
c/d 86030/06/X1 Electricity 560
30/06/X1 Balance
860860
Prepayments
£ £ insurance 245
30/06/X7 Motor
30/06/X7 Rent 4 00030/06/X7 Balance c/d 4 245
245
4
245 4
Question 4
Rent, Rates, Electricity and Gas
£ £
01/10/X6 Balance b/d - Rent 78001/10/X6 Balance b/d - Electricity 275
01/10/X6 Balance b/d - Rates 1 50001/10/X6 Balance b/d - Gas 130
01/04/X7 Bank - Rates 1 700
30/09/X7 Bank - Rent (12 x £800) 9 600
30/09/X7 Bank - Electricity 3 00030/09/X7 Profit and Loss Account 16 778
30/09/X7 Bank - Gas 1 900
30/09/X7 Balance c/d - Electricity 24530/09/X7 Balance c/d – Rent 800
30/09/X7 Balance c/d - Rent 10830/09/X7 Balance c/d – Rates 850
18 83318 833
01/10/X7 Balance b/d – Rent 80001/10/X7 Balance b/d - Electricity 245
01/10/X7 Balance b/d – Rates 85001/10/X7 Balance b/d - Rent 108
Workings:
Rent prepayment: 1 x £800 = £800
Rates prepayment: 6/12 x £1700 = £850
Electricity accrual: £245
Gas accrual: 1/3 x £324 = £108
Question 5
Birch
Trading, Profit and Loss Account for the year ended
31 December 20X3
£ £
750 Sales 113
Cost of Sales
Opening stock 4 025
Purchases (£50 925 + £665) 51 590
615
55
Less: Closing stock 3 765
850
51
Gross profit 61 900
Less: Expenses
500
Wages 23
Rent, rates and insurance (£6125 + £350 - £1312) 5 163
Heat and light (£5525 – £210) 5 315
Motor expenses (£3489 + £300 - £442) 3 347
Telephone and stationery (£1672 + £136 - £95) 1 713
Depreciation 3
938
976
42
Net profit 18 924
Birch
Balance Sheet at 31 December 20X3
Fixed assets
Motor vehicles: cost 15 750
Less Accumulated depreciation 5 907
843 9 Current assets
765
Stock 3
553
Debtors 3
Prepayments (£442 + £1312 + £210 + £95) 2 059
Bank 195
572
9
Current liabilities
290
Creditors 3
Accruals (£300 + £350 + £665 + £136) 1 451
4
741
Net Current Assets 4 831
674 14 Capital account
Balance b/d 13 250
Add: Net profit 18 924
174 32 Less: Drawings 17 500
674 14
Chapter 3
Bad Debts and Provision for Doubtful Debts
Answers to ‘Think about it’ Questions
Page 28 – Why would a business decide to increase or decrease its provision for
doubtful debts?
If the business financial records over a period of time show a trend in an increasing number of bad debts, or if the economy is not doing well, then it is likely that the business would increase the provision to ensure that profits and current assets are not overstated.
If trends shows that the level of bad debts is decreasing then the business may decrease the provision.
Solutions to Target Practice Questions
Question 1
Dr Provision for Doubtful Debts
Cr Profit and Loss Account
Question 2
An increase in the provision for doubtful debts will decrease the net profit for the year and a decrease in the provision for doubtful debts will increase the net profit for the year.
Question 3
Bad debt provision: (£55 400 - £2650) x 4% = 2110
Balance Sheet Extract at 31 December 20X4
Current Assets
£
Debtors (£55 400 - £2650) 52 750
Less: Provision for Doubtful Debts 2 110
50 640
Question 4
September: 20X5 20X6 20X7
30
Year
ended
£ £ £
Debtors 34 15039 27544 498
Bad debts written off (500)(1 800)(1 926)
Revised debtors 33 65037 47542 572
Less: specific provision (850)(1 475)(1 772)
Balance of debtors 32 80036 00040 800
1% 2% 3%
General provision 328720 1 224
Add: specific provision 850 1 475 1 772
Total provision
Increase in provision
Question 5
Bad Debts
£ £
30/09/X5 Bad debts written off 500
1 17830/09/X5 Profit and Loss Account 1 678
30/09/X5 Increase in provision for bad
debts
678
1
678 1
30/09/X6 Bad debts written off 1 800
1 01730/09/X6 Profit and Loss Account
2 817
30/09/X6 Increase in provision for bad
debts
2
817
817 2
30/09/X7 Bad debts written off 1 926
80130/09/X7 Profit and Loss Account 2 727
30/09/X7 Increase in provision for bad
debts
2
727
727 2
Bad Debts Recovered
£ £ 30/09/X6 Profit and Loss Account 24530/09/X6 Bank 245
245245
30/06/X7 Profit and Loss Account 42330/09/X7 Bank 423
423423
Provision for Doubtful Debts
£ £
30/09/X5 Balance c/d 1 17830/09/X5 Bad debts 1 178
178
178 1
1
178
Balance
b/d 1
01/10/X5
30/09/X6 Balance c/d 2 19530/09/X6 Bad debts 1 017
195
195 2
2
195
b/d 2
01/10/X6
Balance
c/d 2 99630/09/X7 Bad debts 801
30/09/X7 Balance
996
2
996 2
Alice Jones - Profit and Loss Account for the year ended 30 September 20X7
£
Profit xxx
Gross
Add: Bad debts recovered 423
Expenses£
Increase in provision for doubtful debts 801
Bad debts 1 926
Alice Jones – Balance Sheet at 30 September 20X7
Current Assets
£
Debtors 42 572
Less: Provision for Doubtful Debts 2 996
576
39
Chapter 4
Introduction to Partnership Accounts
Answers to ‘Think about it’ Questions
Page 33 – What are some of the benefits of a partnership in comparison to a
s ole trader?
More capital available to invest in the business; greater opportunity to expand the
business
Sharing of work load
Access to a wider range of skills and knowledge which contributes to the success of the business
Each partner won’t have bear the loss on their own; losses are shared among partners Page 38 – What do these partner balances on their current account tells you?
Both George and Fred have credit balances on their current accounts; this means that the business owes them money. If the balances were debit then this would
mean that the partners’ owe the business/partnership.
Solutions to Target Practice questions
Question 1
Term Definition
Partnership A partnership is formed when two or more people set up in
business together.
Partnership agreement A written document that sets out the terms of trade with each
partner.
Capital Account Capital is the amount invested by a partner in the business
and this is held in the capital account.
Current Account This is the account that records the balance owed to or from
the partnership by the partners. The balance on this account
will fluctuate as profits are earned and drawings are taken.
Interest on capital This is an annual amount awarded to the partners based on
a percentage of the capital they have invested. It represents
a return on their investment.
Drawings These are the amounts withdrawn from the partnership by
the partners.
Interest on drawings This is interest charged at an agreed percentage to take
account of the timing of drawings and to discourage partners
from drawing from the business.
Salary This is a specified amount due to a partner before the profits
are shared.
Profit share ratio The share or split of the remaining profits or losses between
the partners. This could be expressed as a percentage or as
a ratio e.g. 2:1
Question 2
Debit Credit Share of profit Appropriation Account Partners’ Current
Account
Share of loss Partners’ Current
account
Appropriation Account
Salary Appropriation Account Partners’ Current
Account
Interest on capital Appropriation Account Partners’ Current
Account
Interest on drawings Partners’ Current
Account
Appropriation Account
Interest on loan from partner Profit and Loss Account Partners’ Current
Account or Bank
account
Question 3
Using the accounting equation (Assets = Capital + Liabilities), the capital introduced by each
partner can be calculated:
Exe £ Why
£
Zed
£
Total
£
Plant and equipment 28 000 37 500 15 000 80 500 Motor vehicles 18 700 10 900 29 600 Stock 2 500 1 750 3 250 7 500 Debtors 8 208 6 023 1 615 15 846 Bank 1 115 864 1 234 3 213 Creditors (5 850)(3 600)(885) (10 335)
52 673 42 537 31 114 126 324
Exe, Why and Zed
Balance Sheet at 1 July 20X6
£ £
Fixed assets
Plant and equipment 80 500
Motor vehicles 29 600
100 110 Current assets
500
Stock 7
846
Debtors 15
213
Bank 3
559
26
Current liabilities
Creditors (10
335)
Net Current Assets 16 224
324 126 Represented by:
Capital Accounts Exe 52 673
537
Why 42
114
Zed 31
324 126
Note:
As the assets and liabilities contributed by each partner now become the partnership assets and
liabilities, they are shown as a total figure on the partnership balance sheet.
Question 4
The profit needs to be adjusted to account for the loan interest of
5% x £20 000 = £1000.
The revised profit for appropriation is £39 661 - £1000 = £38 661.
Jake and Misty
Appropriation Account
for the year ended 31 December 20X2
£ £
Revised profit 38 661
Add: Interest on drawings Jake (£16 620 x 5%) 831
Misty (£23 760 x 5%) 1 188
019
2
680
40
Less: Interest on capital Jake (£26 000 x 8%) 2 080
George (£19 500 x 8%) 1 560
640)
(3
Less: Salary Misty (7 800)
240
29
Profit share Jake (75%) 21 930
Misty (25%) 7 310
240
29
Partners’ Current Accounts
Jake £ Misty £ Jake £ Misty
£
01/01/X2 Balance b/d - 4 42001/01/X2 Balance b/d 2 340-
31/12/X2 Interest on drawings 831 1 18831/12/X2 Interest on capital 2 080 1 560
31/12/X2 Drawings 16 62023 76031/12/X2 Salary - 7 800
31/12/X2 Profit share 21 9307 310
31/12/X2 Balance c/d 8 899- 31/12/X2 Balance c/d - 12 698
26 35029 368 26 35029 368
Question 5
Tiger and Snake
Trading, Profit and Loss Account for the year ended
31 December 20X8
£ £
Sales 120 000
Cost of Sales
Opening stock 2 750 Purchases 45 000
47 750
Less: Closing stock 3 000
44 750
Gross profit
75 250
Less: Expenses
Wages (£24 000 + £800) 24 800
Insurance (£2800 - £400) 2 400
Depreciation: equipment (£40 000 x 10%) 4 000
Depreciation: motor vehicles ((£18 500 - £3700) x 25%) 3 700
Bad debts ((£33 400 x 5%) - £1002) 668
35 568
Net profit
39 682
Tiger and Snake
Appropriation Account for the year ended 31 December 20X8 £ £
Net profit 39 682
Add: Interest on drawings Tiger (£2000 x 5%) 100
Snake (£4000 x 5%) 200
300
39 982
Less: Interest on capital Tiger (£40 000 x 7%) 2 800
Snake (£20 000 x 7%) 1 400
(4 200)
Less: Salary Snake (4 000)
31 782
Profit share Tiger (2/3) 21 188
Snake (1/3) 10 594
31 782
Partners’ Current Accounts
Tiger £ Snake
£
Tiger
£
Snake
£
31/12/X8 Interest on drawings 10020001/01/X8 Balance b/d 11 3009 088
31/12/X8 Drawings 2 000 4 00031/12/X8 Interest on capital 2 800 1 400
31/12/X8
Salary - 4
000
31/12/X8 Balance c/d 33 18820 88231/12/X8 Profit share 21 18810 594
35 28825 08235 28825 082
Tiger and Snake
Balance Sheet at 31 December 20X8
£ £
Fixed assets
Buildings at cost 65 000
Plant and equipment (NBV) (£40 000 - £4000 - £4000) 32 000
Motor vehicles (NBV) (£18 500 - £3700 - £3700) 11 100
108
100 Current assets
Stock 3
000
Debtors (£33 400 - £1670) 31 730
Prepayments 400
35
130
Current liabilities
Bank overdraft 6 400
Creditors 21
960
Accruals 800
29
160
Net Current Assets 5 970
114
070 Represented by:
Capital Accounts Tiger 40 000
Snake 20
000
60
000
Current Accounts Tiger 33 188
Snake 20
882
54
070
114
070