1.5. Preparation of financial statements
A subsection of Accounting, 9706, through 1. Financial accounting (AS Level)
Listing 10 of 637 questions
Sofia has provided the following information relating to her trade receivables at 31 December 2018: Analysis of trade receivables 0-60 days 61-90 days Over 90 days Percentage of total trade receivables 68% 20% 12% At 31 December 2018 total trade receivables were $54 500. Dixie, who had been declared bankrupt, owed $1500. This debt was 110 days old at 31 December 2018 and was to be written off. Sofia’s policy is to make a provision for doubtful debts as follows: 5% for debts aged between 61 and 90 days old 7.5% for debts aged over 90 days old. The balance on the provision for doubtful debts at 1 January 2018 was $1100. REQUIRED State the journal entry to write off an irrecoverable debt. Calculate the amount of provision for doubtful debts at 31 December 2018. Prepare the provision for doubtful debts account for the year ended 31 December 2018. Dates are required. Explain one accounting concept which is applied when making a provision for doubtful debts. Additional information Sofia is considering changing the basis of the provision for doubtful debts to a general provision of 2.5% on all trade receivables. She has calculated her profit for the year ended 31 December 2018 as $4300 after writing off Dixie’s debt but before making any adjustment for the provision for doubtful debts. REQUIRED Describe how this change will affect Sofia’s profit. Support your answer with relevant calculations.
9706_s19_qp_22
THEORY
2019
Paper 2, Variant 2
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Daniel, a retailer, receives rent from a tenant. The balance on the rent receivable account on 1 January 2019 was $700. This represented rent received in advance at the beginning of the year. During the year ended 31 December 2019 Daniel received total rent of $4800 covering the 12-month period beginning 1 March 2019. REQUIRED Prepare the rent receivable account for the year ended 31 December 2019. Rent receivable account $ $ State in which section of the income statement for the year ended 31 December 2019 Daniel’s rent receivable should appear. State in which section of the statement of financial position at 31 December 2019 the balance of the rent receivable account should appear. Additional information Daniel had created a provision for doubtful debts of $672 on 31 December 2018. At this date trade receivables appeared on the statement on financial position with a net value of $16 128. At 31 December 2019 Daniel decided to maintain the provision for doubtful debts at the same rate as in the previous year. Total trade receivables at 31 December 2019 were $15 300 before making any adjustment for provision for doubtful debts. REQUIRED Calculate the increase or decrease in the provision for doubtful debts at 31 December 2019. State two accounting concepts which are applied when creating a provision for doubtful debts. State two factors that a business could consider when setting a rate for provision for doubtful debts.
9706_s20_qp_23
THEORY
2020
Paper 2, Variant 3
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N Limited is a trading business. Sales are made on the credit basis only. The following information was available at 31 December 2020. Debit $000 Credit $000 8% Debentures (2025) Administrative expenses Cash and cash equivalents Cost of sales Debenture interest Distribution costs Dividends paid Inventory at 31 December 2020 Issued capital: Ordinary shares of $0.25 each at 31 December 2020 Non-current assets Cost Provision for depreciation at 1 January 2020 Retained earnings at 1 January 2020 Revenue Share premium at 31 December 2020 Trade payables Trade receivables The following information is also available at 31 December 2020. Administrative expenses included insurance of $16 000 for four months ended 31 January 2021. Depreciation should be provided on non-current assets at 25% per annum using the reducing balance method. Depreciation charges should be allocated 20% to distribution costs and 80% to administrative expenses. The account of a credit customer, $3000, should be written off to administrative expenses as an irrecoverable debt. Debenture interest was outstanding for the second half of the year. The directors had issued additional debentures of $50 000 on 1 October 2020. REQUIRED Prepare the company’s income statement for the year ended 31 December 2020. N Limited Income statement for the year ended 31 December 2020 $000 Workings: Distribution costs Administrative expenses Finance costs Additional information On 1 July 2020 the directors had decided to make a rights issue of two ordinary shares for every three shares held at a price of $0.30 per share. The rights issue was fully subscribed. REQUIRED Explain two reasons why a company may make a rights issue of shares rather than an issue of debentures. Calculate the amount raised by the rights issue. Prepare a statement of changes in equity for the year ended 31 December 2020. N Limited Statement of changes in equity for the year ended 31 December 2020 Ordinary share capital $000 Share premium $000 Retained earnings $000 Total $000 Balance at 1 January 2020 Additional information The directors are concerned about the company’s credit control and wish to improve the company’s liquidity position. They are considering a proposal to offer a 5% cash discount to customers for settlement within 30 days on all invoices of more than $2000. REQUIRED Identify two ratios which can be used to assess the liquidity of a business. Advise the directors whether or not they should go ahead with this proposal. Justify your answer.
9706_s21_qp_22
THEORY
2021
Paper 2, Variant 2
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Zak owns a wholesale business. He makes sales on credit. REQUIRED Explain why it may be important for a business to maintain a provision for doubtful debts. Additional information Zak has prepared an aged schedule of trade receivables at 31 December 2020. Period outstanding Amount $ Estimated irrecoverable debts Less than 1 month 34 200 1% Between 1 month and 3 months 6 680 5% Between 4 and 6 months 2 130 10% In addition, two accounts had been outstanding for over 6 months. $ P Limited Q Limited Zak’s policy is to write off as irrecoverable any amounts outstanding for more than 6 months. Zak updates the provision for doubtful debts at each financial year end based on the estimated percentage of irrecoverable debts. REQUIRED Prepare a journal entry to write off the irrecoverable debts. A narrative is not required. Journal Dr Cr $ $ State two ways in which the risk of irrecoverable debts may be reduced. Additional information At 1 January 2020 the business had a provision for doubtful debts of $980. REQUIRED Calculate the adjustment required to the provision for doubtful debts at 31 December 2020. Prepare the provision for doubtful debts account for the year ended 31 December 2020. Provision for doubtful debts account $ $ State two factors that should be taken into account when setting a provision for doubtful debts.
9706_s21_qp_22
THEORY
2021
Paper 2, Variant 2
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