4.1. Capital and revenue expenditure and receipts
A subsection of Accounting, 7707, through 4. Accounting procedures
Listing 10 of 85 questions
Jules is a hairdresser. He bought some new energy-saving hairdrying equipment, $1900, on credit from YZH Limited on 30 April 2022. REQUIRED Prepare the journal entry to record the purchase of these hairdryers. A narrative is required. Jules Journal Date Details Debit $ Credit $ The new hairdryers will use less electricity than his old ones. There will be an additional insurance charge for the new hairdryers. The old hairdryers had been fully depreciated so that their net book value was nil. REQUIRED Complete the table by placing a tick (3) to show whether these changes in expenses increase or decrease the profit. Expense Increase in profit Decrease in profit Heat and light Depreciation Insurance Jules has discovered the following five errors in his accounting records for the year ended 30 April 2022. The total for general expenses, $28, in the petty cash book for April 2022 has not been posted to the general ledger. A direct debit to Isaac, a supplier, $195 had been recorded as $159 in the account for Isaac. A payment by credit transfer for wages, $144, has not been recorded in the accounting records. The discount received total for January 2022, $38, had been debited to the discount received account. The account for rent and the account for commission receivable had both been overcast by $200. REQUIRED Prepare the journal entries required to correct these five errors. Narratives are not required. Jules Journal Error number Details Debit $ Credit $ Prepare the suspense account. Include the original difference on the trial balance as a balancing figure. Jules Suspense account Date ………. ………. ………. ………. ………. ………. ………. Details .……………………… .……………………… .……………………… .……………………… .……………………… .……………………… .……………………… $ ……… ……… ……… ……… ……… ……… ……… Date ………. ………. ………. ………. ………. ………. ………. Details .……………………… .……………………… .……………………… .……………………… .……………………… .……………………… .……………………… $ ……… ……… ……… ……… ……… ……… ………
7707_s22_qp_21
THEORY
2022
Paper 2, Variant 1
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Nala is a trader who buys and sells stationery. She provided the following information about her inventory at 28 February 2022. Item Number of units Cost per unit $ Carriage inwards per unit $ Selling expenses per unit $ Selling price per unit $ Packs of paper 4.50 – – 8.00 Packs of envelopes 5.50 1.00 1.50 10.00 Notepads 4.00 2.00 – 5.00 Boxes of pencils 3.50 – – 6.00 REQUIRED Calculate the value of Nala’s inventory at 28 February 2022. State the accounting principle used to value inventory. Complete the table by placing a tick (✓) to show how Nala should treat each item of her expenditure. Capital expenditure Revenue expenditure Computer printer paper Computer equipment Installation of computer equipment Motor vehicle Insurance of motor vehicle Delivery of motor vehicle Explain how the materiality principle is applied to the treatment of non-current assets. Nala has treated the receipt of a bank loan as a revenue receipt. REQUIRED Complete the table by placing a tick (✓) to show the effect of the error on capital and on liabilities. overstated understated Effect on capital Effect on liabilities Nala has charged depreciation on her shop fittings at 25% per annum using the reducing balance method. This year she is considering changing this to 10% per annum using the straight-line method, as this would improve her profit for the year. REQUIRED Advise Nala whether or not she should change her depreciation method. Justify your answer.
7707_s22_qp_22
THEORY
2022
Paper 2, Variant 2
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The trial balance of M Limited at 30 November 2021 was as follows. M Limited Trial Balance at 30 November 2021 Debit Credit $ $ Revenue 203 600 Inventory at 1 December 2020 12 945 Purchases 143 750 Rent and rates 12 460 Operating expenses 12 920 Wages 24 380 Equipment at cost 40 000 Provision for depreciation of equipment 17 500 Trade receivables 9 800 Provision for irrecoverable debts Bank Trade payables 11 585 Ordinary share capital 20 000 General reserve 3 000 Retained earnings 2 037 Dividend paid on ordinary shares 1 600 258 017 258 017 Additional information Inventory at 30 November 2021 was valued at $12 830. Depreciation on equipment is to be charged at 25% per annum using the reducing balance method. Accrued operating expenses at 30 November 2021 were $415. Rent includes a payment of $2250 for the 3 months from 1 October 2021 to 31 December 2021. The provision for doubtful debts is to be set at 4% of trade receivables. No dividends were outstanding at 30 November 2021. $1000 is to be transferred to the general reserve at 30 November 2021. REQUIRED Prepare the income statement for M Limited for the year ended 30 November 2021. M Limited Income Statement for the year ended 30 November 2021 $ $ …. …. …. …. …. …. …. …. …. …. …. …. …. …. …. …. …. …. …. …. …. …. …. …. …. …. …. …. …. …. …. …. …. …. …. …. …. …. …. Prepare the statement of changes in equity for M Limited for the year ended 30 November 2021. M Limited Statement of Changes in Equity for the year ended 30 November 2021 Details Ordinary Share capital $ General reserve $ Retained earnings $ Total $ On 1 December 2020 ……. ……. ……. On 30 November 2021 … … … … … … … … … … … … … … … … … … … … Calculate the liquid ratio for M Limited at 30 November 2021. The answer should be correct to two decimal places. Liquid (acid test) ratio workings answer The managing director, Emily, plans to buy new equipment to be used to improve the profitability of the company. She is considering whether to fund the equipment by issuing further ordinary shares or requesting a bank overdraft. REQUIRED Advise Emily whether to fund the purchase of the equipment by issuing further ordinary shares or by requesting a bank overdraft. Justify your answer.
7707_s22_qp_22
THEORY
2022
Paper 2, Variant 2
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Stalla is a sole trader who sells on credit. She maintains a provision for doubtful debts at 4% of trade receivables. Stalla’s trade receivables were: $ At 31 December 2021 75 000 At 31 December 2022 77 000 REQUIRED Prepare Stalla’s provision for doubtful debts account for the year ended 31 December 2022. Balance the account at 31 December 2022 and bring down the balance at 1 January 2023. Stalla Provision for doubtful debts account Date Details $ Date Details $ State two reasons why Stalla maintains a provision for doubtful debts. Stalla charges depreciation at 25% per annum, using the reducing balance method. She charges a full year’s depreciation in the year a vehicle is purchased and none in the year it is sold. On 31 December 2022, Stalla sold a vehicle for $9500. The vehicle had cost $16 000 on 1 September 2020. REQUIRED Calculate the gain or loss on disposal of the vehicle. The balances on Stalla’s ledger accounts at 1 January 2022 included the following. $ Motor vehicles 48 000 Provision for depreciation on motor vehicles 21 000 Prepare Stalla’s motor vehicles account for the year ended 31 December 2022. Balance the account at 31 December 2022 and bring down the balance at 1 January 2023. Stalla Motor vehicles account Date Details $ Date Details $ Prepare Stalla’s provision for depreciation on motor vehicles account for the year ended 31 December 2022. Balance the account at 31 December 2022 and bring down the balance at 1 January 2023. Stalla Provision for depreciation on motor vehicles account Date Details $ Date Details $ Stalla had an extension to her retail premises built during 2023. The extension will be used as an office. REQUIRED Place a tick (3) in the correct box below to indicate whether each cost is capital expenditure or revenue expenditure. Capital expenditure Revenue expenditure Legal fees for obtaining permission to build the extension Building costs for the extension Insurance for the office Painting the office extension Office calendar for 2023 Purchase of office equipment Installation of office equipment Stationery for office
7707_s23_qp_21
THEORY
2023
Paper 2, Variant 1
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Ramla has calculated her draft profit figure for the year ended 28 February 2023. Adjustments in Ramla’s ledger accounts have still to be made for the following items. An amount of $99 owed to Ramla by Mai is to be written off as irrecoverable. Fixtures and fittings, $875, were purchased on credit from Padma. A loan repayment, $500, had been incorrectly recorded as loan interest. Rent paid, $350, had been recorded as $530. Drawings, $120, had been debited to the wages account. REQUIRED Prepare the journal entries required for items 1–5. Narratives are not required. Ramla Journal Item number Details Debit $ Credit $ …… …… …… …… …… …… …… …… …… …… …… …… …… …… …… …… …… …… …… …… …… …… …… …… …… …… …… …… …… …… …… …… …… …… …… …… …… …… …… …… …… …… …… …… …… Complete the following table by entering the amount of each adjustment required to calculate Ramla’s adjusted profit. If an item has no effect on profit, enter zero (0) in the ‘no effect on profit’ box. Item Increase in profit $ Decrease in profit $ No effect on profit Profit $ Draft profit 11 650 Adjusted profit Explain how the journal for item 1 complies with the prudence principle. how the journal for item 5 complies with the business entity principle.
7707_s23_qp_22
THEORY
2023
Paper 2, Variant 2
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Questions Discovered
85