Published account

Hi Ivy

“Note(2)-How does the plant depreciation 2m come from?
The answer at the back is( 8*6m/24m), really don understand. Can I use (8m*25%=2m)?”

This first one is easy! The specialist plant has an estimated useful life of 2 years and has been used on this contract since the date of purchase on 1 October, 2008. The accounting year end is 31 March, 2009 so the plant has been in use for 6 months of its forecast 24 month life. Yes you can multiply by 25% but that’s only the same as multiplying by 6 months and dividing by 24 months

“Note(3)- Why debit $6400 Revenue and also credit COS $6400?
Why need to minus 6400 fr revenue and also add back 6400 to cos?”

Here’s the relevant extract from the question:

“Pricewell’s revenue includes $8 million for goods it sold acting as an agent for Trilby. Pricewell earned a commission of 20% on these sales and remitted the difference of $6·4 million (included in cost of sales) to Trilby.”

What Pricewell should have entered in Pricewell’s records is:

Dr Cash (20% x 8m) 1.6m
Cr Commission Income 1.6m

What they have done is

Dr Cash 8m
Cr Revenue 8m

Dr Cost of Sales 6.4m
Cr Cash 6.4m

So, in summary they have :

Dr Cash 1.6m
Dr Cost of Sales 6.4m and
Cr Revenue 8m

So, to get from this bad position to the good position, we need to

Dr Revenue 8m
Cr Cost of Sales 6.4m and
Cr Commission Income 1.6m

It would be acceptable to leave the 1.6m within the Revenue figure and not show it separately as Commission Income

Is that ok?

Dr Cost of Sales6.4m
Dr Cash

“Note (4) How the figure of $40m on 1.4.2007 become $41600 on 31.3.08, is it (40m *4%+40m)”

Here’s the relevant extract from the question:

“The 6% preference shares were issued on 1 April 2007 at par for $40 million. They have an effective finance cost of 10% per annum due to a premium payable on their redemption.”

In the trial balance, there is a credit balance for the 6% preference shares brought forward at the start of the year ie as at 31 March, 2008

These 6% preference shares were issued at the start of last year for proceeds of $40,000. Their effective annual cost is 10% so the finance charge last year was 4,000. However, during the year the company only paid 6% of $40,000 = $2,400

In double entry terms, the company has, when they paid 6% interest last year, entered:

Dr Finance costs 2.4m
Cr Cash 2.4m

But the TRUE cost of those preference shares is 10% and should therefore be $4m

The adjustment is therefore:

Dr Finance costs 1.6m
Cr 6% Preference shares 1.6m

and that’s why we have $41,600 brought forward – it’s $40,000 + the additional $1,600

All ok now?

Re the finance lease, have I ot worked it out for you in the recording?

If not, post again and I’ll explain it for you