Professional Documents
Culture Documents
It is the loss of value of a non-current asset throughout its period of use by the
firm. IAS 16 on property, plant and equipment defines depreciation as the
allocation of a depreciable amount of a non-current asset over its estimated useful
life.
Under the matching concept, all incomes or revenues and expenses for a
particular period should be reported in the financial statements and because
depreciation is an expense of the business therefore, it will be charged in the P&L
A/C.
Causes of Depreciation
1. Physical Factors
a) Wear and tear: Some non-current assets depreciate or lose value due to
use overtime
e.g. machinery and motor vehicles.
b) Rot/decay/rust:: This happens on assets that are not well maintained by
the firm e.g.
Some machines.
2. Economic Factors
a) Inadequacy:
Some assets lose value due to them becoming
inadequate e.g. when a
business grows or expands then some buildings may become
inadequate due to space. Also some machines that are unable
to manufacture a large number of goods.
b) Obsolescence: Some assets become obsolete due to change in technology
or different
methods of production e.g. computers.
3. Time Factors
Some assets have a legal fixed time e.g. properties on lease.
4. Depletion
This occurs when some assets have a wasting character due to extraction of raw
materials, minerals or oil. Such assets include mines, oil wells, and quarries.
Methods of Calculating Depreciation
These are the methods developed to assist in estimating the amount of
depreciation to be charged in the P&L a/c as an expense.
The methods chosen by a firm should be in accordance with the agreed accounting
practice, accounting standards and suit the firms non-current assets. There are 2
main methods of estimating depreciation and 5 others that will apply in a firms
situation.
The main methods are: Straight-line method and Reducing Balance method. The
other 5 methods include:
i.
ii.
iii.
Lesson Four
iv.
v.
Lesson Four
Straight-Line Method
This method ensures that a uniform amount of depreciation is charged in the P&L
a/c for a particular asset and is based on the following formular:
Depreciation for year
20,000
100,000 8
= 10,000 per
year.
Cost of Asset Residual Value
Estimated useful life of asset.
Residual Value
The amount the firm expects to sell the asset after the period of use in the firm,
also called Sales Value / Scrap Value.
Estimated Useful Life
The period the asset is expected to be used in the firm.
Example 4.1
A firm buys a machine for 100,000 which it expects to use in the firm for eight
years. After the eight years the machine will be sold for 20,000. Under the
straight-line method, the depreciation amount will be computed as follows:
This means for this asset 10,000 will be charged in the P&L account as
depreciation expense on the machine.
The straight line method assumes that benefits accruing on use of a non-current
asset are spread out evenly over the life of the asset e.g. buildings use straight-line
method.
Percentage rate based on cost as opposed to number of years can also be used to
calculate the depreciation.
Reducing Balance Method
The firm determines a fixed percentage rate that is applied on the cost of the asset
during the first period of use. The same rate is applied in the subsequent financial
periods but the rate is applied on the reduced value of the asset. (Cost of asset
total depreciation provided to date).
This method ensures that higher amount of depreciation are charged in the P&L
account in the earlier periods of use and lower amounts in the latter periods of use
as shown in the following example:
Example 4.12
Lesson Four
Lesson Four
Year 1
Cost
Depreciation 20% of 100,000
Balance to YR 2
80,000
(16,000)
P&L YR 2
64,000
Year 3
Depreciation 20 % of 64,000
Balance to YR 4
P&L YR 1
80,000
Year 2
Depreciation 20% of 80,000
Balance to YR 3
100,000
(20,000)
64,000
(12,800)
P&L YR 3
51,200
Cashbook 100,000
31/12 Bal c/d
P&L
10,000
100,000
Lesson Four
Depreciation:
Buildings
x
Plant and machinery
Furniture, Fixtures and Fittings
Motor vehicles
10,000
x
x
Cost
Total
Depreciation ()
Land
x
Buildings
x
Plant and Machinery
Furniture, Fixtures & fittings
Motor vehicles
x
(x)
x
x
x
x
x
(x)
(x)
(x)
x
x
x
x
x
Example 4.13
A company starts in business on 1 January 2002. You are to write up the motor
cars account and the provision for depreciation account for the year ended 31
December 2002 from the information given below. Depreciation is at the rate of 20
per cent per annum. Using the basis of one months ownership needs one months
depreciation.
2002
2002
1/1
Cashbook
1/7
Cashbook
38,000
2002
24,000
14,000
31/12
38,000
Bal c/d
38,000
24,000 x 20 x 12
100 12
= 1,400 )
Lesson Four
Lesson Four
2002
6,200
31/12
P&L
6,200
Depreciation:
Motor vans 6200
Cost
38,000
Total
Depreciation
(6200)
NBV
31,800
Example 4.14
A company starts in business on 1 January 1999, the financial year end being 31
December.
You are to show:
a. The plant account.
b. The provision for depreciation account.
c. The balance sheet extracts for each of the years 1999, 2000, 2001, 2002.
The machinery bought was:
1999 1 January
2000 1 July
1 October
2002 1 April
Depreciation is at the rate of 10 per cent per annum, using the straight-line
method, plant being depreciated for each proportion of a year.
Lesson Four
Plant a/c
199
8000
31/12
1999
1/1
Cashbook
2000
1/1
Bal b/d
1/7
Cashbook
1/10 Cashbook
2000
8000
10,000
6,000
24,000
2001
1/1
Bal b/d
24,000
2002
1/1
Bal b/d
1/4
Cashbook
8000
Bal c/d
31/12
2001
24,000
Bal c/d
31/12
2002
24,000
2,000 31/12
26,000
24,000
24,000
Bal c/d
Bal c/d
26,000
26,000
800
2000
10,000 x 10/100 x 6/12
500
150
=
800
1,450
2001
24,000 x 10/100 x 12/12
2400
2002
24,000 x 10/100 x 12/12
2400
150
2,250
Accumulated Depreciation
800
2,250
4,650
7,200
Lesson Four
1999
31/12 Bal c/d
10
2000
2000
1/1
Bal b/d
2,250
P&L
2,250
2001
800
1,450
2,250
2001
1/1
Bal b/d
4,650
P&L
4650
2002
2,250
2,400
4650
2002
1/1
Bal b/d
7,200
P&L
7,200
4,650
2,550
7,200
Cost
Total
Depreciation
NBV
1999
Motor vans
8,000
1999
Motor vans
24,000
(2,250)
21,750
1999
Motor vans
24,000
(4,650)
19,350
1999
Motor vans
26,000
(7,200)
18,800
(800)
7,200
DISPOSALS OF ASSETS
A firm may dispose off its non-current assets in the following 3 ways:
i. Selling the asset.
ii. Asset being written-off from damage/accident/theft.
iii. Asset is scrapped/not used anymore.
Lesson Four
11
When an asset is disposed and is no longer used by the firm, the appropriate
entries should be made in the asset account and the total depreciation provided to
date on the asset and the entries required will depend on the type of disposal.
When the asset is sold, the following entries will be made:
(a) Debit asset disposal a/c
Credit asset a/c
With the cost of the asset being disposed.
(b) Debit provision for depreciation of asset a/c.
Credit asset disposal a/c
With the total depreciation provided to date on the asset.
(c) Debit cashbook.
Credit asset disposal a/c
With the cash received on disposal.
When an asset is written off as a result of damage/accident/theft. If it was insured
and the insurance company accept liability but by the end of the period the
insurance company has not yet paid.
(a) Debit asset disposal a/c
Credit asset a/c
With the cost of the asset damaged.
(b) Debit provision for depreciation of asset a/c
Credit asset disposal a/c
(c) Debit insurance receivable a/c
Credit asset disposal a/c
With the amount expected from the insurance.
If the insurance pays before the end of the financial period, it will not be necessary
to create an insurance debtor so the following entries will be made:
Debit cashbook.
Credit asset disposal a/c
If the asset is not used anymore or scrapped by the firm, the appropriate entries
will be made in the asset account and provision for depreciation a/c only.
Debit asset disposal a/c
Credit asset a/c
With the cost of the asset no longer in use.
Debit provision for depreciation for asset
Credit asset disposal a/c
With the total depreciation provided to date.
The balance in the disposal a/c after the above entries will either be a debit
balance or a credit balance. A credit balance represents a profit on disposal,
Lesson Four
12
which is reported in the profit and loss a/c together with other incomes. The entry
will be:
Debit asset disposal a/c
Credit P&L a/c
With the balance in the account.
A debit balance in the asset disposal a/c is loss on disposal which is reported in
the P&L a/c as an expense and therefore the entry will be.
Example 4.15
A firm has a motor vehicle costing 1,000 total depreciation provided to date is
800. The firm decides to trade in the motor vehicle with a new one the value of
the new one being 500. The supplier of the new vehicle agree with the firm that
the old motor vehicle is worth 300, therefore the difference will be paid by cash.
Bal b/d
Disposals
Cashbook
1,000
Motor vehicle
P&L
a/c
1,000
Provision for depreciation
100
Motor vehicle
300
1,100
1,100
JOURNAL ENTRIES
800
1,000
800
800
500
100
300
200
100
Lesson Four
13
900
600
1,500
2000
1/1
Bal b/d
1,500
2001
1/1
Bal b/d
1/7
Cashbook
2,050
Plant a/c
1999
2001
1,500
550 31/12
1,500
1,500
31/12
Bal c/d
Bal c/d
2,050
2002
1/1
Bal b/d
900
2,050
2002
2,050
30/9
Disposal
Lesson Four
14
31/12
Bal c/d
1,150
2,050
2,050
Bal c/d
1999
210
31/12
Bal c/d
2000
1/1
510
2000
31/12
P&L
210
Bal b/d
P&L
210
300
510
2001
31/12
510
2001
1/1
865
Bal c/d
Bal b/d
P&L
865
2002
31/12
Disposals
Bal c/d
675
1,230
510
355
865
2002
1/1
555
Bal b/d
P&L
365
1,230
865
Cost
1999
1/1
1/10
900
600
12
3
=
=
210
2000
1/1
300
1,500
12
2001
1/1
300
1,500
12
180
30
Lesson Four
1/2
15
550
55
355
2002
30/9
31/12
31/12
900
550
600
2002
Plant a/c
P&L
9
12
12
900
50
950
=
=
=
365
30/9
Provision for depreciation
30/9
Cashbook
275
950
135
110
120
675
Cost
1,500
(210)
Depreciation
1,290
NBV
2000 Plant
1,500
(510)
990
2001 Plant
2,050
(865)
1,695
2002 Plant
1,150
(555)
595
Lesson Four
16
Bal c/d
10,000
Year 1
10,000
Year 2
31/12
Year 2
1/1
20,000
Bal c/d
10,000
20,000
Year 3
1/1
30,000
Year 3
31/12
Bal c/d
10,000
31/12
Bal b/d
31/12
Bal c/d
Year 4
1/1
31/12
44,000
10,000
P&L
20,000
Bal b/d
31/12
30,000
Year 4
P&L
20,000
P&L
30,000
Bal b/d
P&L
44,000
30,000
14,000
44,000
Workings:
The net book value at the beginning of Year 4 is 70,000 (100,000- 30,000). And
the remaining
useful life is 5 (8 years- 3 years). The charge for year 4 for depreciation will be
70,000 = 14,000.
5
Assuming that in this example the life of the machine does not decrease
but increases from 10 years to 13 years.
Required: Show the provision of depreciation account in year 4
Lesson Four
17
Year 1
10,000
Bal c/d
10,000
Year 2
31/12
31/12
Year 2
1/1
20,000
Bal c/d
10,000
P&L
Bal b/d
10,000
P&L
20,000
Year 3
31/12
20,000
Year 3
Bal c/d
30,000
1/1
Bal b/d
20,000
_____
P&L
10,000
30,000
30,000
Year 4
Year 4
1/1 Bal b/d
30,000
31/12
7,000
Bal c/d
37,000
31/12
P&L
37,000
37,000
Land
Buildings
Cost
Depreciation
1,000,000
800,000
40,000
Lesson Four
18
Illustration 1
The firm decides to revalue these two assets to reflect their current market prices
and these are revalued at:
Land
- 1,200,00
Buildings - 900,000
The following entries would be made
(a) Debit Land A/c with revaluation gain - 200,000
Credit Revaluation Reserve a/c with the same - 200,000
(Revaluation gain on the land
1,200,000 1,000,000)
900,000 800,000)
Bal B/D
Revaluation
reserve
1,000,000
__200,000
Bal C/D
1,2000,00
0
1,200,000
1,200,000
Buildings a/c
Bal B/D
800,000
Revaluation
reserve
100,000
Bal C/D
900,000
Revaluation Reserve a/c
900,000
900,000
Lesson Four
19
Bal C/D
340,000
Land
200,000
Buildings
100,000
340,000
40,000
340,000
Revaluation
40,000
Bal B/D
40,000
Bal c/d
45,000
P&L
45,000
85,000
85,000
The balances in the Land and Building a/c will be shown as cost in the
Balance Sheet and the revaluation reserve a/c appears together with the
capital as a revaluation reserve (especially used in company accounts.
Land
Buildings
340,000
Year 3
Lesson Four
20
1,200,000
31/12 Revaluation
200,000
P&L
100,000
________
Bal C/D
__900,000
1,200,000
1,200,000
Buildings
Year 3
1/1 Bal B/D
900,000
_______
Year 3
31/12
Revaluation
100,000
P&L
100,000
Bal C/D
700,000
900,000
900,000
Revaluation Reserve
Year 3
Year 3
1/1/ Bal B/D
31/12 Land
200,000
340,000
31/12 Building
100,000
_40,000
_______
340,000
340,000
Lesson Four
21
purchased for
Sh.960, 000.
The firms policy is to depreciate vehicles at the rate of 25 per cent on cost on
vehicles on hand at the end of the year irrespective of the date of purchase.
Depreciation is not provided for vehicle disposed of during the year. The firms
year ends on 31 December.
Required:
a) Calculate the amount of depreciation charged in the profit and loss
account for each of the five years.
(7 marks)
b)
c) Calculate the profit and loss on disposal of each of the vehicles disposed
of by the company.
(5 marks)
(Total: 20 marks)
a
Vehicle
1990
1991
1992
1993
KA
560,000
560,000
560,000
560,000
KB
720000
720,000
KC
800,000
KD
800,000
800,000
800,000
KE
840,000
KF
960,000
Total cost
1,280,00
0
1,280,00
0
2,160,00
0
1,360,00
0
2,600,00
0
320,00
0
320,00
0
540,00
0
340,00
0
650,00
0
Depreciation at
25%
Motor Vehicle
1990
1/3
Sh
Cashbook
1,280,00
0
1990
31/12
Sh
Bal c/d
1,280,000
1994
Lesson Four
22
1991
1/1
1991
Bal b/d
1,280,00
0
1992
1/1
31/12
Bal c/d
1992
bal b/d
1,280,00
0
1/2
Disposal
Cashbook
1,600,00
0
31/12
Bal c/d
2,880,00
0
1993
1/1
1,280,000
720,000
2,160,000
2,880,000
1993
Bal b/d
2,160,00
0
1/11
Disposal
________
31/12
Bal c/d
2,160,00
0
1994
800,000
1,360,000
2,160,000
1994
1/1
Bal b/d
1,360,00
0
1/1
Cashbook
840,000
1/3
Cashbook
960,000
3,160,00
31/12
Bal c/d
3,160,000
3,160,000
Lesson Four
23
Sh
Balc/d
320,000
1991
1990
31/12
Sh
P&L
320,000
1/1
Bal b/d
320,000
31/12
P& L
320,000
1991
1992
31/12
Bal c/d
640,000
640,000
1992
640,000
1992
1/2
Disposal
360,000
1/1
Bal b/d
640,000
31/12
Bal c/d
820,000
3/12
P&L
540,000
1,180,00
0
1993
1,180,000
1993
1/11
Disposal
200,000
1/1
Bal b/d
820,000
31/12
Bal c/
960,000
31/12
P&L
340,000
1,160,00
0
1994
1,1
60,000
1994
31/1
31/12
Bal c/d
1,610,00
0
1,610,00
0
Bal b/d
960,000
P&L
650,000
1,610,000
Note:
KA is fully depreciated by 1994,so no depreciation is charged for that asset. Cost
still remains until the asset is disposed. So depreciation ;
= 25% x 2,600,000
= 650,000
Exam type Question
Pentland Limited complies its financial statements for the year to 30 June each
year.
At 1 July 1999 the companys balance sheet included the following figures:
l
Lesson Four
24
Accumulate
d
Net book
Depreciatio
n
Value
000
000
000
Land
4,000
Nil
4,000
Buildings
2,200
800
1,400
Plant and
machinery
1,600
600
1,000
600
200
400
Cost
Motor vehicles
Nil
Buildings
2%
15%
20%
1999
Lesson Four
1/7
25
Bal b/d
4,000
2000
1/1
2000
Revaluation
1,200
30/6
Bal c/d
5,200
5,200
1999
1/7
2000
1/1
Bal b/d
Revaluation
2000
30/6
Bal C/D
30/6
1999
1/7
Buildings
1999
2,200
1,200
3,400
2000
30/6
Bal c/d
3,400
3,400
Revaluation Reserve
2000
1/1
Buildings
2,022 1/1
Provision for
depr.
2,022
1,200
822
2,022
1/7
Bal b/d
800
1999
2000
1/1
5,200
Revaluation
Bal c/d
Bal B/D
82
2
2000
30/6
34
_
85
6
Plant
1999
1,600
P&L
2,200 x x
15
3,400 x x
15
56_
856
Lesson Four
2000
1/1
26
Cashbook
Disposal
Bal c/d
1999
1/7
Bal b/d
1/4
1/4
2000
1/4
2000
Disposal
Cash book
Motor Vehicle
P&L
2000
1/1
P&L
Disposal
Bal c/d
300
1,700
2,000
252.50
595.00
847.50
2000
30/6
P&L
Motor Vehicles
1999
600
12
18
630
Disposal
Bal c/d
1/4
30/6
2000
Disposal
Bal C/D
Plant
13
307.5
320.50
600
247.50
847.50
1999
2000
1/4
30/6
2000
1/1
30/6
1999
2000
1/1
400
_____
2,000
2000
1/4
30/6
P&L
Bal C/D
Plant - Disposal
2000
300 1/1 Provision for
depr.
2.50 Cash book
20
610
630
13
12
25
200
120.5
______
320.50
252.50
50___
Lesson Four
27
25
302.50
Lesson Four
Cost/
Valuation
28
Bal as at
1/1/01
Additions
Revaluations
(gains)
Reclassificati
ons
Disposals
Bal as at
31/12/01
Depreciation
/
Amortization
Bal as at
1/1/10
Change for
year
Revaluation
Eliminated
on Disposal
Bal as at
31/12/01
N.B. V as at
31/12/01
NBV as at
31/12/01
Total
Short
lease
()
x
Machine
ry ()
And fittings
()
()
Long
leases
()
x
xx
xx
xx
-
xx
-
xx
-
xx
-
xx
xx
(xx)
xx
(xx)
(xx)
(xx)
(xx)
(xx)
(xx)
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
(xx)
(xx)
(xx)
(xx)
(xx)
(xx)
(xx)
(xx)
(xx)
(xx)
(xx)
xx
xx
(xx)
xx
(xx)
xx
(xx)
xx
(xx)
xx
xx
xx
xx
xx
xx
xx
Lesson Four
b)
29
Lesson Four
Furniture
Trucks
Plant and machinery
Land
Buildings
30
Acquisition
Accumulated
Cost
Sh.
900,000
3,525,000
7,387,500
2,775,000
2,925,000
Depreciation
Sh.
300,000
1,470,000
4,462,500
292,500
Depreciatio
n
Rates
%
12.5
25
10
Nil
2.5
Lesson Four
31
Total
Sh.
3,225,000
Sh.
17,512,500
450,000
(248,250)
3,726,750
1,800,000
450,000
(435,750)
19,326,750
300,000
112,500
1,470,000
931,687.5
6,525,000
2,110,687.5
-______
(124,125)
(161,625)
5,784,000
412,500
8,474,062.5
8,332,500
8,916,000
600,000
487,500
2,277,562.
5
2,055,000
1,449,187.
5
4,755,000
1,066,500
(37,500)
NBV 1/5/99
NBV 30/4/2000
Motor
10,987,500
10852,687.
8
Workings:
Depreciation on Furniture = 900,000 x 12.5% = 112,500
Motor vehicle
= cost 3,525,000
Add 450,000
3,726,750 x 25% = 931,687.5
Buildings
At 2.5%
4%
= (292,500 + 600,000) x 4%
= 141,000
= 2,925,000 x 2.5% x 4 = 292,500
= 292,500 x 4% x 4
= 468,000
175,500
Machinery: cost
Lesson Four
32
Lesson Four
33
REINFORCING QUESTIONS
QUESTION ONE
Otter Limited operates a computerized accounting system for its sales and
purchases ledgers. The control accounts for the month of September 1999 are in
balance and incorporate the following totals:
Sales ledger:
Balances at 1 September
1999: Debit
386,430
190
Credit
Sales
Cash received
Discounts allowed
Sales returns inwards
Credit balances at 30
September 1999
Purchases ledger:
Balances at 1 September
1999: Credit
163,194
158,288
2,160
590
370
184,740
520
Debit
Purchases
Cash payments
Discounts received
Purchases returns outwards
Debit balances at 30
September 1999
98,192
103,040
990
1,370
520
Although the control accounts agree with the underlying ledgers, a number of
errors have been found, and there are also several adjustments to be made. These
errors and adjustments are detailed below:
1. Four sales invoices totaling 1,386 have been omitted from the records.
2. A cash refund of 350 paid to a customer, A Smith, was mistakenly treated
as a payment to a supplier, A Smith Limited.
3. A contra settlement offsetting a balance of 870 due to a supplier against
the sales ledger account for the same company is to be made.
4. Bad debts totaling 1,360 are to be written off.
5. During the month, settlement was reached with a supplier over a disputed
account. As a result, the supplier issued a credit note for 2,000 on 26
September. No entry has yet been made for this.
6. A purchases invoice for 1,395 was keyed in as 1,359.
7. A payment of 2,130 to a supplier, B Jones, was mistakenly entered to the
account of R Jones.
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8. A debit balance of 420 existed in the purchases ledger at the end of August
1999. The supplier concerned cannot now be traced and it has been decided
to write off this balance.
Required:
Prepare the sales ledger and purchases ledger control accounts as they should
appear after allowing, where necessary, for the errors and adjustments listed.
QUESTION TWO
April showers sells goods on credit to most of its customers. In order to control its
debtor collection system, the company maintains a sales ledger control account. In
preparing the accounts for the year to 31 October 20X3 the accountant discovers
that the total of all the personal accounts in the sales ledger amounts to 12,802,
whereas the balance on the sales ledger control account is 12,550.
Upon investigating the matter, the following errors were discovered:
1. Sales for the week ending 27 March 20X3 amounting to 850 had been
omitted from the control account.
2. A debtors account balance of 300 had not been included in the list of
balances.
3. Cash received of 750 had been entered in a personal account as 570.
4. Discounts allowed totaling 100 had not been entered in the control
account.
5. A personal account balance had been undercast by 200.
6. A contra item of 400 with the purchase ledger had not been entered in the
control account.
7. A bad debt of 500 had not been entered in the control account.
8. Cash received of 250 had been debited to a personal account.
9. Discounts received of 50 had been debited to Bells sales ledger account.
10.Returns inwards valued at 200 had not been included in the control
account.
11.Cash received of 80 had been credited to a personal account as 8.
12.A cheque for 300 received from a customer had been dishonored by the
bank, but no adjustment had been made in the control account.
Required:
Prepare a corrected sales ledger control account, bringing down the amended
balance as at 1 November 20X3.
Prepare a statement showing the adjustments that are necessary to the list of
personal account balances so that it reconciles with the amended sales ledger
control account balance.
QUESTION THREE
George had completed his financial statements for the year ended 31 March 1999,
which showed a profit of 81,208, when he realized that no bank reconciliation
statement had been prepared at that date.
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When checking the cashbook against the bank statement and carrying out other
checks, he found the following:
1. A cheque for 1,000 had been entered in the cashbook but had not yet been
presented.
2. Cheques from customers totaling 2,890 entered in the cashbook on 31
March 1999 were credited by the bank on 1 April 1999.
3. Bank charges of 320 appear in the bank statement on 30 March 1999 but
have not been recoded by George.
4. A cheque for 12,900 drawn by George to pay for a new item of plant had
been mistakenly entered in the cash book and the plant account as 2,900.
Depreciation of 290 had been charged in the profit and loss account for this
plant.
5. A cheque for 980 from a credit customer paid in on 26 March was
dishonoured after 31 March and George decided that the debt would have to
be written off as the customer was now untraceable.
6. A cheque for 2,400 in payment for some motor repairs had mistakenly been
entered in the cash book as a debit and posted to the credit of motor
vehicles account. Depreciation at 25% per annum (straight line) is charged
on motor vehicles, with a full years charge calculated on the balance at the
end of each year.
7. The total of the payments side of the cash book had been understated by
1,000. On further investigation it was found that the debit side of the
purchases account had also been understated by 1,000.
George had instructed his bank to credit the interest of 160 on the deposit
account maintained for surplus business funds to the current account. This the
bank had done on 28 March. George had made an entry on the payments side of
the cashbook for this 160 and had posted it to the debit of interest payable
account.
George had mistakenly paid an account for 870 for repairs to his house with a
cheque drawn on the business account. The entry in the cashbook had been
debited to repairs to premises account.
George had also mistakenly paid 540 to Paul, a trade supplier, to clear his account
in the purchases ledger, using a cheque drawn on Georges personal bank account.
No entries have yet been made for this transaction.
The cashbook showed a debit balance of 4,890 before any correcting entries had
been made. The balance in the bank statement is to be derived in your answer.
Required:
1. Prepare an adjusted cash book showing the revised balance which should
appear in Georges balance sheet at 31 March 1999.
(6 marks)
2. Prepare a bank reconciliation statement as at 31 March 1999.
(2
marks)
3. Draw up a statement for George showing the effect on his profit of the
adjustments necessary to correct the errors found.
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(8
marks)
4. Prepare journal entries to correct items (9) and (10). Narratives are
required.
(4 marks)
QUESTION FOUR
1. Name and explain four types of errors which are not disclosed by the trial
balance.
(8 marks)
The trial balance of S Juma, a sole trader, did not balance on 30 April 1995.
The difference was put in the suspense account. The final accounts which
were then prepared showed a net profit of Sh. 64,000. During audit, the
following errors were noted:
Required:
1.
2.
3.
(8 marks)
(2 marks)
(2 marks)
(Total: 20 marks)
QUESTION FIVE
The following Trial Balance was taken from the ledger of P Spike, a sole trader, on
31st December 2002:
Capital
Purchases
Sales
Salaries
40,000
26,154
36,246
4,814
Lesson Four
Opening stock
Insurance
Rent
Buildings
Furniture
Debtors
Other expenses
Creditors
Commission
37
4,307
820
965
25,000
14,500
6,140
1,060
_____
82,795
4,638
__946
82,795
Adjustments:
1.
2.
3.
4.
5.
6.
7.
Required:
Prepare a 10 column worksheet.
QUESTION SIX
1.
Explain the purposes for which control accounts are prepared in a business
organization.
(3 marks)
XML Ltd maintains control accounts in its business records. The balances and
transactions relating to the companys control accounts for the month of December
1994 are listed below:
Balance at 1 December 1994:
Sales ledger
Purchases ledger
Transactions during December
1994:
Sales on credit
Purchases on credit
6,185,0
00
52,500
16,500
4,285,0
00
8,452,0
00
5,687,5
00
(debit)
(credit)
(debit)
(credit)
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Returns inwards
Returns outwards
Bills of exchange payable
Bills of exchange receivable
Cheques received from
customers
Cheques paid to suppliers
Cash paid to suppliers
Bill payable dishonoured
Charges on bill payable
dishounered
Cash received from credit
customers
Bad debts written off
Cash discounts allowed
38
203,50
0
284,00
0
930,00
0
615,00
0
7,985,0
00
4,732,0
00
88,500
400,00
0
10,000
153,00
0
64,500
302,00
0
88,500
44,000 (credit)
23,500 (debit)
Required:
Post the sales ledger and the purchases ledger control accounts for the month of
December 1994 and derive the respective debit and credit closing balances on 31
December 1994.
(17 marks)
CHECK YOUR ANSWERS WITH THOSE GIVEN IN LESSON 9 OF THE
STUDY PACK
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