Comments

  1. avatar says

    Hi Sir,

    Please could you explain test – question 1.

    Part 2 I am not sure I understand why it is 8/12s. I work out anything other than half a year as it states “company paid insurance 21,600 in 2008 covering year ending 31st August 2009″.

    My thinking is that we have paid for the year from 31st August 2008 – 31st August 2009. I work that out to a half. Where am I going wrong and what am I missing?

  2. avatar says

    Hi Sir!

    I haven’t understood why in the Example 4, the balancing figure on the credit side (which is shown as to be gone into Income Statement) is 5050 for the Telephone A/C – shouldn’t it be 550? I mean first the balance was Dr. 3550 and after we’ve added accruals 1500, then the balancing figure on credit goes as 5050 – is it correct?

    Thanks!

  3. avatar says

    BUt at 7:04 what happens if the ACTUAL amount is lets say 1000 then what do we do? whats the dr and cr

    and what happens if its actually only 800? what is the db and cr?

    thank you

    • Profile photo of John Moffat says

      I do actually explain this later in the lecture.
      There are no additional entries necessary.

      If the accrual at the end of last year turned out to be too high, then it means that the expense last year was too high as well. However we cannot go back and change last year. So this year we carry on exactly as normal and the end result is that the expense in the Statement of profit or loss this year is lower (and effectively corrects the ‘mistake’ last year).

      (In practice it is rarely a problem because by the time the accounts are actually finished we will usually have received the next invoice and so will be able to accrue exactly the correct amount.)

  4. avatar says

    Hi.
    I’m having difficulty with this question. I have the answer but no idea how they arrive at it.. please assist.

    Here is the question.

    A company pays rent quarterly in arrears on 1 January, 1 April, 1 July and 1 October each year. The rent was increased from $90, 000 per year to $120, 000 per year as from 1 October 20×2.

    What rent expense and accrual should be included in the company’s financial statements for the year January 20×3?.

    • Profile photo of John Moffat says

      I am afraid that it is impossible for Andrew’s answer to be correct )the rent only went up to 120000 part way through the year and so the total for the year cannot possible be 120,000!!)

      Our year is 1 Feb to 31 Jan.

      From 1 Feb to 30 Sep (8 months) the rent is 90,000 per year, so for the 8 months it is 8/12 x 90,000.

      From 1 Oct to 31 Jan (4 months) then rent is 120,000 per year, so for the 4 months it is 4/12 x 120,000.

      If you do the arithmetic and then add them up, you should get the total expense for our year to be $100,000.

      As at 31 Jan – the end of our year – the last payment was on 1 Jan (for the previous 3 months) and so there is one month to accrue.

      One months rent at 120,000 per year is an accrual of 10,000.

  5. avatar says

    Hi John,

    With regards to Test Q1, the answer suggests that we should include the interest chargeable on the loan as an asset for the year ending 31.12.08. Isn’t it fair to say that the interest has not yet been realised, and as such, the company has not actually earned any income yet (and so should not be a current asset)?

    OR, do we consider the interest as a Receivable not yet paid (entailing it’s a current asset)?

    Cheers!

    • Profile photo of John Moffat says

      We must always account of all income earned and all expenses incurred, whether or not we have received or paid cash.

      Here, we have earned the interest (because they had the loan for 12 months) and so the income must appear in the Statement of Profit or Loss.
      Since they have not yet paid us the money, the amount owing will appear as a receivable in the Statement of financial position.

  6. avatar says

    When we pay the accrued expense of 950, why don’t we just Dr Accruals & Cr Cash? Why we need to Dr & Cr the telephone expense a/c again, as we have already recorded the expense in the previous year.

    • Profile photo of John Moffat says

      We could, but it would make things more complicated and confusing.

      Let me give you just one example of the problem it would create.
      Suppose our year end is 30 November, and we pay electricity in arrears for 3 months to end Mar, to end June, to end Sept, and to end Dec.

      At 30 November we would need to accrue for 2 months – oct and nov. But the first payment in the next year would be for October, nov, and dec.
      doing it your way we would have to split the payment with part debited to accruals and part debited to electricity.

      Since we only need to worry about accruals and prepayments once a year it is far easier to always debit the payments to the expense account, and at the end of each year to make the entries for the accruals and prepayments.

  7. avatar says

    Total rent received during year ended 30 April 2008: $ 1154880
    Less: Rent received in advance for year ended 30 April 2009: – $ 74880
    Add: Rent for year ended 30 Apr 2008 received as advance
    in year ended 30 Apr 2007 + $ 68880
    Less: Rent for year ended 30 Apr 2007 received in arrears
    in year ended 30 Apr 2008 – $ 50880
    Add: Rent for year ended 30 Apr 2008 which will be received
    in year ended 30 Apr 2009 + $ 44160

    Total Rental income for the year ended 30 Apr 2008 = $ 1142160

    I have assumed that rent to be received in arrears ($ 44160) on 30 Apr 2008 is an income for year ended 30 Apr 2008 in SOPOL and will be a receivable in balance sheet.

    Is this correct?

      • Profile photo of John Moffat says

        The 44160 is recognised as income and aijaz has correctly included it in his calculation of the total income of 1142160.

        Because it is still owing to us, it also appears as a current asset in the Statement of financial position.

        Aijaz is correct.

  8. avatar says

    Chapter 4 test q3
    I have used this logic :

    Total rent received(01/05/07-30/04/2008) $ 1154880
    Less: rent advance(01/05/08-30/04/09) – $ 74880
    Add: rent advance(01/05/07-30/04/08). + $68880
    Less: rent arrears(01/05/06-30/04/07) – $50880
    = $ 1098000
    Add: rent to be received in arrears + $ 44160
    Rental income for year ended 30Apr2008 = $ 1142160
    I have assumed that, rent to be received in arrears on 30Apr2008 should be considered as rental income for year ended Apr 08.

    Is this method correct?

  9. avatar says

    Hello,

    Here is a different question from the BPP Revision kit. Please how can we go about it?

    The Trainee Accountant at Judd Co has forgotten to make an accrual for rent for December in the financial statements for the year ended 31st december, 2002. Rent is charged in arrears at the end of Feb, May, august, and November each year. The bill payable in Feb is expected to be 30,000. Judd Co’s draft income statement shows a profit of 25,000 and draft statement of financial position shows net assets of 275,000.

    What is the profit or loss for the year and what the net asset position after the the accrual has been included in the financial statements?

    Thank you.

    • Profile photo of John Moffat says

      The bill payable in February was for December, January and February.

      Their year end was December and so you can calculate how much was owing (i.e. should have been accrued) for December.

      They had forgotten to make the accrual, so they will need to do it.
      Making the accrual will make the rent expense higher, which will of course make the profit and the net assets lower.

      • avatar says

        Thanks for the explanation, the amount accrued for the the 3 months is 30000/3=10000 for each month.

        So deducting the 10000 for each month from the profit and net assets will reduce them to 15,000 and 265000 respectively.

        That is the right answer and I hope I got the explanation correctly.

        Thank you for your help.

  10. avatar says

    Please how do I go about solving this type of questions:

    A company pays rent quarterly in arrears on 1 January, 1 April, 1 July, and 1 October each year. the rent was increased from 90,000 to 120, 000 per year from 1 october 2002. What is the rent expense and accrual that should be included in the compnay’s financial statements for the year ended 31 January 2003?

    Rent Expense Accrual
    a. 100, 000, 20,000
    b. 100, 000 10,000
    c. 97,500 10,000
    d. 97,500 20, 000

    thanks in anticipation of your response.

    • Profile photo of John Moffat says

      The approach is exactly the same as for question 5, and I have been through that one in my answer to your previous question (below).
      The only difference (apart from obviously the numbers) is that this time the rent is payable in arrears. That does not affect how we calculate the expense for the year.
      However for the accrual – the last payment will have been on 1 January and will have been for October, November, and December 2002. Our year end is 31 January and so there will be an accrual of one months rent (at the rate of 120,000 per year).

  11. avatar says

    Please how do I sort out this type of questions

    A company pays rent quarterly in arrears on 1 Jan, 1 April, 1 July, and 1 oct each year. The rent was increased from 90,000 to 120, 000 per year from 1 Oct 2002.

    What rent expense and accrual should be included in the company’s financial statements for the year ended 31 January 2003? Also how do you answer the question if the rent was paid quarterly in advance?

  12. avatar says

    Can you please explain to me how questions 4 and 5 are worked out?
    Although I have seen how it is done at the end of the note I still don’t understand the answer.

    Can you please explain how to determine the dates of accruals and prepayments from the accounting period date and each debit and credits on the rental income account?

    • Profile photo of John Moffat says

      For question 4, the dates the invoices were received and paid are not relevant. We need the cost for the 12 months from January to December .

      So the first invoice is not relevant – they are all months for the previous year. The second is for three months dec, jan, and February. Only jan and February are in our year and so only 2/3 of the amount is relevant.
      The next three amounts are all for months in our year.
      The last amount is for three months dec jan and February. Only December is in our year and so only 1/3 of the amount is relevant.

      For question 5, we want the cost for the 12 months from 1 July 2007 to 30 June 2008. From 1 July 2007 to 31 march 2008 (which is 9 months ) the cost is 25920 per year and so the cost for the 9 months will be 9/12 of this figure. From 1 April 2008 to 30 June 2008 (which is 3 months) the cost is 28800 and so the cost for the 3 months will be 3/12 of this amount.
      With regard to the prepayment, we have already paid from 1 April 2008 though to 31 March 2009. Our year end is 30 June 2008 and so we have prepaid the period from 1 July 2008 through to 31 march 2009, which is 9 months. The bill for the year was 28800 and so we have prepaid 9/12 of the amount.

      Debits and credits are really not relevant here. You are under time pressure in the exam and messing around with t accounts will waste ages. (The exam is not a debits and credits exam and there is not much tested of just debits and credits)

      There is no rental income mentioned in either of the two questions. I hope that I have not just wasted half an hour typing all this while I am on holiday because you wrote the wrong test question numbers!!

      • avatar says

        Hello John Moffat,

        Thank you very much for the detailed explanation. I got the year counting wrong so i was using the wrong number of months to calculate, but i am clear now and i understand. I need to read questions more closely and carefully now.

        You most definitely did not waste your time explaining to me. The test question numbers were the right ones. The question on rental income was not related to any of the questions, perhaps i should have asked how to treat questions if the rental income is asked to be calculated.

        Can I ask other questions relating to accruals and prepayments that are not part of the test questions?

        Many thanks.

  13. avatar says

    Please how did you come about the answer D from the Test questions? I did not get it after doing it on my own and even after checking the test answers after the course notes.

    The Question is:

    Morias prepares its financial statements for the year end to 30 April each year.
    The company pays rent quarterly in advance on 1 Jan, 1 April, 1 July, and 1 October each year. The annual rent was 201, 600 per year until June 30 2008. it was increased to 230, 400 per year from that date.

    What is the rent expense and prepayment to be included in the statement of financial position for 30 April, 2009?

    Expense Prepayment
    A 223,200 19,200
    B 223,200 38,400
    C 225,600 9,200
    D 225,600 38,400

  14. Profile photo of bluanne says

    hello all, i am asking this without looking at answers for the tests for this chapter ….but i noticed in the notes that RENT EXPENSE prepaid and accrued which is a debit balance account was dealt with….are the journal entries the same for RENTAL INCOME which i would say is a credit balance account.?……i would think not right…so how is prepaid and accrued income dealt with….

  15. Profile photo of Javeria says

    How is the answer A i dont get it ??????????????????????????????????? :(

    Details of a company’s insurance policy are shown below:
    Premium for the year ended 31 March 2006, paid in April 2005 $21,600
    Premium for the year ended 31 March 2007, paid in April 2006 $24,000
    What figures should be included in the company’s financial statements for the year ended 30 June 2006?
    Income Statement Statement of Financial Position
    A 22,200 18,000 prepayment
    B 23,400 18,000 prepayment
    C 22,200 18,000 accrual
    D 23,400 18,000 accrual

    Correct answer is A

    • Profile photo of John Moffat says

      We are looking at the period from 1 July 2005 to 30 June 2006.

      From 1 July 2005 to 31 March 2006 is 9 months and is part of the first premium so is 9/12 x 21,600
      From 1 April 2006 to 30 June 2006 is 3 months and is part of the second premium, so is 3/12 x 24,000
      So the total expense for our year is 22,200.

      Payment was made in April 2006 for year to 31 March 2007, and so the period 1 July 2006 to 31 March 2007 (9 months) has been prepaid.

      • Profile photo of Javeria says

        ohh i did the first one with 10 months thank u so muchhhhhhhhhhh i can always count on u for a great explanation =D thank u thank u

  16. avatar says

    Dear Sir,
    Can you explain for me how question number 3 is worked out? Although I have seen how it is done at the end of the note I still don’t understand the answer. Can you explain for me each debit and credits on the rental income account?

    • Profile photo of John Moffat says

      At the start of the year (30.4.2007) we had tenants who owed us 50,880 (their rent was in arrears, so they had not paid and were still owing us). They owed us, so there is a debit balance.
      Also, there were tenants who had paid us in advance – at the end of last year they had paid too much and so we owed them the money. Therefore a credit balance of 68,880.

      During the year we had received cash of 1,154,880 – so Dr Cash and Cr rental income.

      At the end of the year we need to end up with a debit balance of 44,160 and a credit balance of 74,880 (for the same reasons as the balances at the start of the year, and so these balances need carrying forward.

      The missing figure is the rental income for the year.

      You might find it easier without using a t-account:

      The cash received was 1154880
      However, part of the cash was the amount that was owed to us from last year (50,880). That is not this years income but last years and so we need to subtract it from the cash received.
      Also, some people had paid us last year for this years rent (68,880). Although we did not get the cash this year, it is this years income, so we need to add it to the cash received.
      At the end of this year, 44,160 still owe us rent – it is this years income but we have not received the cash, so add it to the cash received.
      At the end of this year, 74,880 had paid us next years rent. We have had the cash but it is not this years income, so subtract it from the cash received.

      If you add and subtract as above, then again you will come to the rental income earned this year.

    • Profile photo of John Moffat says

      It is not possible to answer in BRIEF because accrued expense etc. do not themselves appear in the income statement. They are needed in the workings to get the income or expense for the year.

      The concept is that in the income statement we show the total expense for the year (not simply the cash paid) and the total income earned for the year (not simply the cash received).
      For expenses, if we have not paid enough and still owe money then the total expense is higher than the cash paid (we have an accrual). If we have paid too must then the total expense is lower than the cash paid (we have a prepayment).
      The accrual or prepayment appears in the Statement of Financial Position as a current liability or a current asset

Leave a Reply