Chapter 6: Errors and corrections to accounting records - Part 1

Indicate whether the following statements are true or false. The owner’s drawings are shown on the initial trial balance.

• True

• False

An error of commission is one in which:

• a transaction has not been recorded

• one side of a transaction has been recorded in the wrong account, and that account is of a different class to the correct account

• one side of a transaction has been recorded in the wrong account, and that account is of the same class as the correct account

• a transaction has been recorded using the wrong amount

Incorrectly recording the purchase of stationery by debiting the computer equipment account would result in:

• an overstatement of profit and an overstatement of non-current assets

• an understatement of profit and an overstatement of non-current assets

• an overstatement of profit and an understatement of non-current assets

• an understatement of profit and an understatement of non-current assets

Catt plc has prepared its draft statement of profit or loss at 31 May 20X1 which shows a gross profit of £99,500. Catt plc has now discovered that at both the beginning and the end of the period, one line of inventory, the Sungsa, has been included at selling price: £1,240 at 31 May 20X1 and £3,720 at 1 April 20X0. The Sungsa is always sold at a mark-up of 25% by Catt plc. After correcting this error Catt plc’s gross profit for the year to 31 May 20X1 is:

• £99,996

• £99,004

• £98,880

• £100,120

Which three of the following situations are likely to result in a suspense account being used to record a transaction?

• A receipt of £135 from a customer who unexpectedly, but correctly, has taken a 3% prompt payment discount.

• A payment of £84 made to a supplier in respect of an invoice of £70 plus VAT at 20%.

• A receipt of £3,500 from the disposal of a van with a carrying amount of £2,700.

• A journal entry posted by the bookkeeper to write off an irrecoverable debt of £55 in which the bookkeeper was unsure where to record the credit entry.

• A payment made to a supplier for £90.25 in respect of an invoice for £95 on which a prompt payment discount of 5% was expected to be taken.

Olivia’s exception report showed £265 received in the business bank account, and correctly recorded in cash at bank, could not be matched by the accounting system and so had been posted to a suspense account. Olivia discovered that the receipt was in respect of a sales invoice for £295 on which the customer had unexpectedly taken a prompt payment discount of £30. The customer had paid within the required timeframe and so was entitled to take the discount. Which of the following journal entries should Olivia post to correctly record the receipt and clear the suspense account?

• Debit Trade receivables £265, Credit Suspense account £265

• Debit Revenue £30, Debit Suspense account £265, Credit Trade receivables £295

• Debit Suspense account £265, Credit Trade receivables £265

• Debit Trade receivables £295, Credit Revenue £30, Credit Suspense account £265

All Elmo’s sales and purchases attract VAT at 20%. A customer has just returned goods sold for £230 excluding VAT. The double entry for this transaction is:

• Debit Trade receivables £276, Credit VAT £46, Credit Revenue £230

• Debit Revenue £276, Credit Trade receivables £276

• Debit Revenue £230, Debit VAT £46, Credit Trade receivables £276

• Debit Trade receivables £230, Debit VAT £46, Credit Revenue £276

Beta Ltd has calculated a draft gross profit of £150,000 and a draft net profit of £83,000 for the year ended 31 December 20X3. Two issues were then discovered:

(1) Inventory costing £5,000, with a resale value of £7,500, was received into the warehouse on 2 January 20X4 but had been included in the closing inventory amount at 31 December 20X3.

(2) £10,000 relating to staff training costs was incorrectly capitalised as part of the purchase cost of a new machine which had been purchased on 1 July 20X3. Beta Ltd depreciates machinery on a straight-line basis at a rate of 20% per annum. Depreciation should be included as an administrative expense in the year. After correcting these issues, what amounts should Beta Ltd report for gross profit and net profit?

• Gross profit: £142,500; Net profit: £66,500

• Gross profit: £145,000; Net profit: £69,000

• Gross profit: £145,000; Net profit: £74,000

• Gross profit: £142,500; Net profit: £65,500

Owais’s trial balance included a suspense account which had been automatically opened by the computerised accounting system. Using the exception report, the bookkeeper identified that the balance in the suspense account was due to the following unmatched transactions:

(1) A payment to a credit supplier for £135 related to an invoice for £120. The business missed the deadline to take the early settlement discount it had expected to take.

(2) A receipt of £90 from a credit customer who had unexpectedly (but appropriately) taken an early settlement discount of £10.

(3) Interest received in the business bank account of £70. What is the balance on the suspense account?

• Debit £25

• Credit £25

• Debit £65

• Credit £65

The following trade payables account contains some errors. All goods are purchased on credit.

• £325,200

  
  

• £350,400

  
  

• £333,600

  
  

• £410,400