4.1. Capital and revenue expenditure and receipts
A subsection of Accounting, 7707, through 4. Accounting procedures
Listing 10 of 85 questions
Zahra and Panya are the shareholders and directors of Q Limited. The company directors of Q Limited have provided the following trial balance. Q Limited Trial Balance at 31 January 2024 Debit Credit $ $ Revenue 78 000 Purchases 38 200 Rent and insurance 10 600 Directors’ salaries 19 000 General expenses 3 420 Advertising 5 400 Dividends paid 2 500 Fittings at cost 18 000 Provision for depreciation of fittings 5 400 Inventory at 1 February 2023 2 950 Cash at bank Trade payables 2 288 Ordinary share capital 13 000 Retained earnings 2 297 100 985 100 985 Additional information Inventory at 31 January 2024 was valued at $4720. Depreciation on fittings is to be charged at 10% per annum using the straight-line method. Payment for advertising, $75, is outstanding at 31 January 2024. No dividends were outstanding at 31 January 2024. REQUIRED Prepare the income statement for Q Limited for the year ended 31 January 2024. Q Limited Income statement for the year ended 31 January 2024 $ $ Calculate the retained earnings at 31 January 2024. Prepare the statement of financial position for Q Limited at 31 January 2024. Q Limited Statement of financial position at 31 January 2024 $ $ Zahra and Panya would like to expand the company and increase sales. In order to do this they are considering increasing the amount spent on advertising by 100%. Advise Zahra and Panya whether or not they should go ahead with the 100% increase in the amount spent on advertising. Justify your answer by providing two points in favour and two points against this increase.
7707_s24_qp_21
THEORY
2024
Paper 2, Variant 1
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Ahmed owns a trading business. He prepares his financial statements to 31 December each year. Ahmed had some unused office space and he decided to use some of this to store inventory and to rent the rest to Bilal. On 1 January 2023 Bilal started renting the office space from Ahmed. The annual rental charge is $4800. During 2023 Bilal paid the following amounts of rent into Ahmed’s bank account. $ 1 April 30 September REQUIRED Prepare Ahmed’s rent receivable account for the year ended 31 December 2023. Balance the account and bring down the balance at 1 January 2024. Ahmed Rent receivable account Date Details $ Date Details $ Ahmed sold old office equipment for $1350 on 3 January 2023, on credit to Rahat. The equipment had been purchased for $3200 on 1 January 2021. Ahmed charges depreciation at 25% per annum using the reducing balance method. He does not charge depreciation in the year of disposal. REQUIRED Prepare the disposal of office equipment account. Ahmed Disposal of office equipment account Date Details $ Date Details $ Complete the table by placing a tick (✓) to indicate whether each amount of spending on the new inventory storage space is capital expenditure or revenue expenditure. $ Capital expenditure Revenue expenditure Painting the walls of the storage area Shelving for the storage area Installation of the shelving Light fittings for storage area Light bulbs for storage area Ahmed’s ledger accounts at 31 December 2023 include the following balances. $ Inventory at 1 January 2023 Receivables Cash Payables Bank overdraft Ahmed’s inventory at 31 December 2023 was valued at $12 130. His purchases for the year ended 31 December 2023 were $97 000. REQUIRED Complete the following table. ratio working answer (to 2 decimal places) Rate of inventory turnover Current ratio Liquid (acid test) ratio Ahmed’s rate of inventory turnover for 2023 was lower than for 2022. REQUIRED Suggest two problems which may be caused by Ahmed’s lower rate of inventory turnover.
7707_s24_qp_21
THEORY
2024
Paper 2, Variant 1
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Tadeen and Yadid are lawyers who have been in partnership for many years. The partners provided the following trial balance at 30 April 2024. Tadeen and Yadid Trial balance at 30 April 2024 $ $ Revenue 236 350 Salaries 79 800 Rates and insurance 17 320 Advertising 16 730 Office expenses 6 150 Interest on loan from Tadeen 1 200 Premises at cost 180 000 Fittings and equipment at cost 70 000 Provision for depreciation of fittings and equipment 31 500 Receivables 24 200 Cash at bank 19 335 Cash in hand 1 375 Loan from Tadeen 20 000 Capital accounts Tadeen 125 000 Yadid 85 000 Current accounts Tadeen 3 300 Yadid 4 240 Drawings Tadeen 34 300 Yadid 46 500 501 150 501 150 Additional information Rates and insurance include an amount of $1920 for the year 1 March 2024 to 28 February 2025. At 30 April 2024, $1800 for salaries was due but unpaid. Irrecoverable receivables of $670 are to be written off. Depreciation on fittings and equipment is to be charged at 15% per annum using the straight‑line method. The partnership agreement provides for interest on partner’s loan of 6% per annum interest on drawings of 5% interest on capital of 3% per annum a salary to Yadid of $10 000 per annum residual profits and losses are to be shared 60% to Tadeen and 40% to Yadid. REQUIRED Prepare the income statement for Tadeen and Yadid for the year ended 30 April 2024. Tadeen and Yadid Income Statement for the year ended 30 April 2024 $ $ …………………………………………………………… …………………………………………………………… …………………………………………………………… …………………………………………………………… …………………………………………………………… …………………………………………………………… …………………………………………………………… …………………………………………………………… …………………………………………………………… …………………………………………………………… …………………………………………………………… …………………………………………………………… …………………………………………………………… …………………………………………………………… …………………………………………………………… …………………………………………………………… …………………………………………………………… …………………………………………………………… …………………………………………………………… ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. Prepare the appropriation account for Tadeen and Yadid for the year ended 30 April 2024. Tadeen and Yadid Appropriation account for the year ended 30 April 2024 $ $ …………………………………………………………… …………………………………………………………… …………………………………………………………… …………………………………………………………… …………………………………………………………… …………………………………………………………… …………………………………………………………… …………………………………………………………… …………………………………………………………… …………………………………………………………… …………………………………………………………… …………………………………………………………… …………………………………………………………… …………………………………………………………… …………………………………………………………… ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. ……………. State one reason why the partners might consider reducing their drawings which accounting principle reflects the partners’ intention to continue trading indefinitely. The partners employ one lawyer and office staff. The lawyer, Lakia is paid $25 000 but has decided to leave. Tadeen and Yadid have found a replacement lawyer, Raim. He has worked as a lawyer for 15 years and is well known in the local area. However, Raim wants to be a partner in the business rather than an employee and would expect 40% of the residual profit of the partnership each year. REQUIRED Advise Tadeen and Yadid whether or not they should offer Raim a partnership. Justify your answer by providing points for and against offering Raim a partnership. .
7707_s24_qp_22
THEORY
2024
Paper 2, Variant 2
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JP Limited’s financial year ended on 30 September 2020. The following balances were available at that date. $ 7% debentures (2026) 20 000 Administrative expenses 44 000 Carriage inwards 1 500 Distribution costs 38 000 Debenture interest paid Inventory at 1 October 2019 66 000 Non-current assets at book value at 1 October 2019 610 000 Provision for doubtful debts 1 000 Purchases 263 000 Revenue 529 500 Trade receivables 80 500 Additional information Inventory at 30 September 2020 was valued at $59 000. Interest on the 7% debentures (2026) had been paid up to 31 March 2020. Administrative expenses included rates of $1200 for the six months ending 31 March 2021. Distribution costs of $800 were outstanding at 30 September 2020. Non-current assets should be depreciated by 10% per annum using the reducing balance method. Irrecoverable debts of $500 are to be written off. The directors wish to maintain the provision for doubtful debts at 2% of trade receivables. REQUIRED Calculate the cost of sales for the year ended 30 September 2020. Calculate the increase or decrease in the provision for doubtful debts at 30 September 2020. Prepare the income statement for the year ended 30 September 2020. JP Limited Income Statement for the year ended 30 September 2020 …………………………………………………………… …………………………………………………………… …………………………………………………………… …………………………………………………………… …………………………………………………………… …………………………………………………………… …………………………………………………………… …………………………………………………………… …………………………………………………………… …………………………………………………………… …………………………………………………………… …………………………………………………………… …………………………………………………………… …………………………………………………………… …………………………………………………………… …………………………………………………………… …………………………………………………………… …………………………………………………………… …………………………………………………………… …………………………………………………………… …………………………………………………………… …………………………………………………………… …………………………………………………………… …………………………………………………………… $ …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… $ …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… …………… Complete the table by placing a tick (✓) in the correct column to indicate the effect on the equity of JP Limited of each of the following. The first one has been completed as an example. Increase Decrease No effect Issue additional debentures ✓ Issue additional ordinary shares Payment of ordinary share dividend Proposal of ordinary share dividend Transfer from retained earnings to general reserve
7707_w20_qp_22
THEORY
2020
Paper 2, Variant 2
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Eniola compared her bank statement for July 2020 with the bank columns of her cash book. She provided the following information. $ Overdrawn balance shown in the cash book at 31 July 2020 Direct debit payment dated 25 July 2020, had not yet been entered in the cash book A cheque received from a customer on 12 July 2020 was dishonoured. This dishonoured cheque had not yet been recorded in the cash book Bank charges on the bank statement had not yet been entered in the cash book Unpresented cheques at 31 July 2020 Uncredited deposits at 31 July 2020 REQUIRED Calculate the corrected balance of the bank columns in the cash book at 31 July 2020. Prepare a bank reconciliation statement at 31 July 2020. Clearly identify the bank statement balance at that date. Eniola Bank Reconciliation Statement at 31 July 2020 Eniola is concerned that her bank balance has decreased significantly during the last year. She is considering how to improve her liquidity. REQUIRED Suggest one effect of each of the following proposals. Hire new non-current assets instead of purchasing them. Delay paying credit suppliers. Eniola’s financial year end is 31 July 2020. She provided the following information about the rent and rates of her business. On 1 August 2019, she owed two months’ rent totalling $900. On the same date, rates of $260 were prepaid up to 30 September 2019. During the year ended 31 July 2020 the following payments were made by credit transfer. $ August 1 Seven months’ rent October 1 Twelve months’ rates March 1 Six months’ rent REQUIRED Prepare the rent and rates account for the year ended 31 July 2020. Balance the account and bring down the balances on 1 August 2020. Eniola Rent and rates account Date Details $ Date Details $ Aug 1 Balance b/d Aug 1 Balance b/d Identify the sections of the statement of financial position at 31 July 2020 in which each of the balances on the rent and rates account would appear. Rent Rates Name one accounting principle Eniola would apply when recording the rent and rates in her financial statements. State how Eniola would apply the accounting principle named in .
7707_w20_qp_23
THEORY
2020
Paper 2, Variant 3
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The directors of DW Limited provided the following information at 30 September 2020. $ 6% debentures (2028) 18 000 Bank overdraft 6 450 Dividend paid 2 000 General reserve at 1 October 2019 6 500 Inventory at 30 September 2020 26 300 Issued share capital at 1 October 2019 200 000 Non-current assets at 30 September 2020 Cost Provision for depreciation 462 000 106 000 Other payables 2 200 Other receivables 1 600 Provision for doubtful debts at 1 October 2019 Retained earnings 73 475 Trade payables 8 250 Trade receivables 14 500 Additional information A draft income statement for the year ended 30 September 2020 was prepared showing a profit of $84 900. The following errors were later discovered. Inventory of $26 300 included items valued at cost $5200 that needed repair. After repairs costing $600, the items could be sold for $5000. Operating expenses included insurance of $400 that was prepaid at 30 September 2020. The provision for doubtful debts should have been adjusted so that it equals 5% of trade receivables. The directors decided to transfer $5000 to general reserve. There was no change to the issued share capital during the year ended 30 September 2020. REQUIRED Calculate the correct value of inventory at 30 September 2020. Calculate the revised profit for the year ended 30 September 2020 after adjusting for errors 1–3. Prepare the statement of changes in equity for the year ended 30 September 2020. DW Limited Statement of Changes in Equity for the year ended 30 September 2020 Details Share capital $ General reserve $ Retained earnings $ Total $ On 1 October 2019 _________ _________ _________ _________ On 30 September 2020 _________ _________ _________ _________ Prepare the statement of financial position at 30 September 2020. DW Limited Statement of Financial Position at 30 September 2020 $ $ $
7707_w20_qp_23
THEORY
2020
Paper 2, Variant 3
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Nazim owns a wholesale business and has prepared draft financial statements for the year ended 30 June 2020, his first year of trading. After the preparation of these financial statements, some errors were discovered. REQUIRED Complete the table to indicate the effect of each error on the profit for the year and on working capital at 30 June 2020. Write ‘understated’, ‘overstated’ or ‘no effect’. The first one has been completed as an example. Error Effect on profit for the year Effect on working capital Repairs to office equipment had been entered in the office equipment account. Overstated No effect No adjustment had been made for insurance prepaid. An irrecoverable debt had not been written off. No record had been made of additional capital introduced in cash. Closing inventory had been overstated. After correcting the errors, Nazim compared his results with those of his brother Aziz, who has a similar business. Nazim Aziz Current ratio 1.71:1 2.12:1 Liquid (acid test) ratio 0.77:1 1.28:1 Return on capital employed 13.65% 15.25% REQUIRED Suggest two reasons for the differences in each ratio. Current ratio Liquid (acid test) ratio Return on capital employed (ROCE) Nazim discovered that his rate of inventory turnover was also lower than that of Aziz. REQUIRED Suggest one reason for this difference. Nazim is concerned about the length of time his credit customers are taking to pay their accounts. He is considering operating a strict credit control policy requiring customers to pay within 30 days. REQUIRED Advise Nazim whether or not he should introduce this strict credit control policy. Justify your answer by providing two advantages and two disadvantages.
7707_w20_qp_23
THEORY
2020
Paper 2, Variant 3
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Questions Discovered
85