Quiz revision 3

The definition of a liability is given in the Conceptual Framework for Financial Reporting.

Which of the following statements is the most accurate definition of a liability under the Conceptual

Framework for Financial Reporting?

• A liability is a present economic resource within an entity, which has arisen as a result of past

  events, and is controlled by that entity

• A liability is a transfer of cash which increases the net assets of an organisation

• A liability is an obligation, which is a duty that the entity has no practical ability to avoid.

• A liability is the residual interest in an entity after deducting its liabilities

Alex has a small business and the balance on his capital account, as of 1 March 20X8 was $45,200.

During the year Alex made drawings of $14,800 and the profit for the year was $4,500. He introduced

capital of $2,500.

What is the closing balance on Alex's capital account at 28 February 20X9?

Answer explanation

$45,200 – $14,800 + $4,500 + $2,500 = $37,400

When entering invoices in the payables ledger, Elaine recorded an invoice for $126 for motor expenses

as $162.

What entry will correct the error?

• DEBIT Motor expenses $36

  CREDIT Trade payables account $36

• DEBIT Trade payables account $36

  CREDIT Motor expenses $36

• DEBIT Motor expenses $288

  CREDIT Trade payables account $288

• DEBIT Trade payables account $288

  CREDIT Motor expenses $288

Snow Co undertakes the following transactions in March:

(i) Invoices totalling $5,000 are raised to Blizzard Co in March. These invoices offer the customer a

5% discount if they pay within 14 days. Of these invoices, Snow Co expects invoices amounting

to $2,000 to be paid with the discount taken.

(ii) Hurricane Co pays cash of $2,850 for invoices with face values of $3,000. They took advantage

of discounts totalling $150 for early payment; however, Snow Co had not expected Hurricane Co

to take up the discounts.

Which of the following entries correctly record these transactions?

• DEBIT Trade receivables $5,000, CREDIT sales $5,000, DEBIT Bank $2,850,

  CREDIT Trade receivables $2,850

• DEBIT Trade receivables $4,900, CREDIT sales $4,900, DEBIT Bank $2,850,

  DEBIT sales $150, CREDIT Trade receivables $3,000

• DEBIT Trade receivables $5,000, CREDIT sales $5,000, DEBIT Bank $2,850,

  DEBIT sales $150, CREDIT Trade receivables $3,000

• DEBIT Trade receivables $4,900, CREDIT sales $4,900, DEBIT Bank $2,850,

  CREDIT Trade receivables $2,850

Answer explanation

Sales invoices

Invoices amounting to $2,000 should be recorded net of the 5% settlement discount (ie, $1,900), since Snow Co expects Blizzard Co to take the discount on these. The remaining $3,000 of invoices should be recorded at the full amount.

Therefore, sales = ($1,900 + $3,000) = $4,900, with a corresponding amount for receivables.

Payment received:

Snow Co did not expect Hurricane Co to take the settlement discount on invoices of $3,000, so these would have been originally recorded in sales and receivables at the full amount of $3,000.

However Hurricane Co has paid $2,850 against receivables of $3,000. The difference of $150 is

debited to sales and credited to receivables, thereby accounting for the discount.

Jean's electricity expense account has a debit balance of $1,540. Jean had no opening accrual or

prepayment for electricity. The last electricity invoice was for $462 for the 3 months to 30 September

20X7.

What are the correct amounts to be charged to Jean's statement of profit or loss for the year to

30 November 20X7 and reported as an accrual on her statement of financial position at

30 November 20X7 for electricity?

• Charge to statement of profit or loss - $1,694

  Accrual - $154

• Charge to statement of profit or loss - $1,694

  Accrual - $308

• Charge to statement of profit or loss - $1,848

  Accrual - $154

• Charge to statement of profit or loss - $1,848

  Accrual - $308

Answer explanation

An accrual of $308 ($462 Å~ 2/3) is made for the period up to November and added to the statement of profit or loss charge. The statement of profit or loss charge is the sum of this accrual and the existing balance: $1,540 + $308 = $1,848.

Joan's draft financial statements were prepared including a prepayment for rent of $970. The

prepayment should have been $1,170.

When the error is corrected, how will the profit for the year be affected?

• Profit for the year will decrease by $200

• Profit for the year will increase by $200

• Profit for the year will decrease by $1,170

• Profit for the year will increase by $1,170

In September 20X1, Dora wrote off an amount of $120 due from a customer who had become

bankrupt. However, in January 20X2, she unexpectedly received half of the amount due from that

customer. Dora prepares her financial statements to 31 December each year.

How should Dora account for this amount?

• As an accrual for $60

• As sundry income of $60 in the statement of profit or loss

• As a new receivable of $60

• As a prepayment of $60

Answer explanation

If money is received from a previously written off debt and it is received after the end of the period in which it was written off, it can be recognised as sundry income in the statement of profit or loss.

At 1 July 20X3 a limited liability company had an allowance for receivables of $83,000.

During the year ended 30 June 20X4 debts totalling $146,000 were written off. At 30 June 20X4 it

was determined that a receivables allowance of $218,000 was required.

What figure should appear in the company's statement of profit or loss for the year ended 30 June

20X4 for receivables expense?

Answer explanation

$146,000 + ($218,000 – $83,000) = $281,000

Answer explanation

At 30 June 20X2 Dilip's inventory was valued at its cost of $45,400. This included items costing

$2,600 which have since been superseded by an updated design. Dilip will be able to sell these items

through an agent for $1,400. The agent's commission will be 10% of selling price.

What was the correct value of closing inventory at 30 June 20X2?

Answer explanation