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  1. Sir,

    I don’t understand in accruals, why is it that you’ve dr the telephone a/c with $2800?
    From my understanding all I know is that we’ve paid only $1850. Why are we including the accrual of $950 to the Income Statement? Should it have been the same in prepayments? Can you help me?

    • We have paid 1850, but we also owe 950 for this year. So the total expense for this year is 2,800, and the Income Statement should show the total cost for the year – not simply the cash that was paid.

      Prepayments are dealt with in a separate lecture (and are not going to happen with telephone because we don’t pay telephone in advance).

  3. Hi ! This my first time using OT and I have to say that you guys are doing a commendable job helping ACCA students. I have a problem with question 1 in the lecture notes regarding the insurance payment. It says in the question that the company has paid 21600 insurance in 2008 covering the year ended 31st august.2009. how do we find out the prepayment without knowing at what month the insurance was paid ?

  5. Hello sir, I have a problem understanding how the answer to question 5 on chapter 4 was derived.
    Premium for year ended 31 March 2008 paid April 2007 -$25920.
    Premium for the ended 31 March 2009 paid April 2008- $28800.
    What figures should be included in the company’s financial statements for the year ended.
    I checked the answer at the end of the notes but I didn’t understand the workings. kindly shed more light on this sir.

    • We need the expense from 1 July 2007 to 30 June 2008.
      From 1 July 2007 to 31 March 2008 is 9 months and therefore the expense is 9/12 x 25920 = 19440
      From 1 April 2008 to 30 June 2008 is 3 months and therefore the expense is 3/12 x 28800 = 7200
      So the total expense is 19440 + 7200 = 26640

      As at 30 June 2008, they have prepaid up to 31 March 2009, which is 9 months.
      So the amount of the prepayment is 9/12 x 28800 = 21600.

      • Dear Mr.Moffat,
        the payment in April 2007 distorted me; i mean we do not have to begin the period of the Expense from the date of payment of the premium, but to see the relevant year ?The payment date does not mean any thing in the prepayment? And after putting the year limit we cut where is the prepayment location and the expense of the period? Is this right ?
        thanks .

      • For the SOPL we need the expense for the accounting year. The date of the payments is irrelevant – all that matters is the periods that the payments were for.

        For the SOFP the date of payment is relevant in order to calculate whether there was a prepayment or an accrual needed as at the date of the SOFP.

        I do assume that you had watched the free lectures on this before attempting the test?

  7. Sir, since accruals is an estimation of what is to be paid, does it mean it is a form of provision?
    Also how will you account if we estimate the payment to be of $950 and we receive an invoice which might be more or less than that amount?

    • It is similar to a provision (certainly in the way it is accounted for). But a provision is where we are not certain of either the amount or the timing (or even whether it will end up having to be paid at all).

      With regard to the actual payment being different that the amount estimated, the entries do not change at all and this is actually dealt with towards the end of the lecture – I do explain the effect of the actual amount being different (and also why in practice it rarely happens anyway).

  8. Hello sir,

    I understand the T account of question 3 in another way. You told us that because they owed us $50,880.00 so it is debit and we owed them $68,800.00 so it is credit.

    But I think $50,880.00 is accrual income and $68,800.00 is prepaidment income. And this is how I explain the T account of Rent:

    For accrual income, we treat it in a way contrast with accrual expense.

    (1) Reverse any last period’s accruals:
    DR: Rent account
    CR: Accrual account

    (2) Enter any payments during the period:
    DR: Cash account
    CR: Rent account

    (3) Enter any accruals at the end of the period:
    DR: Rent account
    CR: Accrual account

    And also the prepaidment income, we treat it in a way contrast with prepaidment expense:

    (1) Reverse any last period’s prepaidments:
    DR: Prepaidment account
    CR: Rent account

    (2) Enter any payments during the period:
    DR: Cash account
    CR: Rent account

    (3) Enter any prepayments at the end of the period:
    DR: Rent account
    CR: Prepaidment account.

    And finally, the balance of Rent account is $1,142,160 – the rental income.

    Sorry for the long comment, I just try to make it clear. Is my explaination correct?

    Thank you.

    • The answer is certainly correct (1,142,160)

      However, do appreciate that F3 is not really a debit/credit exam – there is very little testing of debits and credits. Your job is to get the correct answer as fast as possible (on average you have 2.4 minutes for this type of question).
      A computer marks your answer and nobody looks at your workings, and so how you arrive at the figure is irrelevant (provided you end up with the correct figure 🙂 )

  10. Hi,
    I need help, I have a problem with question 1 in the Test. Why the answer doesn’t include cash a/c in current assets ?
    Here are my calculations to explain what I meant (numbers in thousands):
    1)
    Loan receivable 28,8 (DB) / Cash 28,8 (CR)
    Interest receivable (2% x 28,8) (DB) / Interest income (2% x 28,8) (CR)
    Loan is paid on 1.01.2009, so I didn’t include it in the Statement of Financial Position.
    2)
    Insurance 21,6 (DB) / Cash 21,6 (CR)
    Prepayment 14,4 (DB) / Insurance 14,4 (CR)
    3)
    Accrued receivable 9,6 (DB) / Rent income 9,6 (CR)
    Cash is paid on 1.01.2009, so I didn’t include it in Cash a/c.

    The question ask for Current assets/liabilities, so I exclude all expenses/income:
    Cash 28,8 + 21,6 = 50,4 (CR)
    Prepayment 14,4 (DB)
    Loan and interest 28,8 + (2% x 28,8) = 29,376 (DB) / I took loan as current assets (to 1 year)
    Accrued receivable 9,6 (DB)

    Current assets = – 50,4 + 14,4 + 29,376 + 9,6 = 2,976

    If we intend to receive money from Loan, Interest, Accruals, do we record them in Accounts Receivable position ? (as Assets)

    • You are correct except for the loan and interest. The loan is a current asset of 28,800. In addition there is a current asset of the interest owing, which is 2% x 28.800 = 576.

      (I hope you realise that the answers to all of the test questions are at the end of the lecture notes.)

      • Actually.., I included Loan and Interest. But I wonder why I can’t include cash which company spent on Loan and Insurance ?

        The answer at the end of the lecture notes is: 28,800 + (28,800 x 2%) + (21,600 x 8/12) + 9,600 = 53,376
        My calculation with included Cash account: 53,376 – (28,800 + 21,600) = 2,976

      • You cannot include cash because you do not know what the cash balance is. You are only required to show the balances for insurance etc..

  11. Ahh! Test 1 would have been so simple if I had payed attention to the details.
    I didn’t make the distinction between dec 31st and jan 1st hence me assuming everything had been paid. This caused me to make all the t accounts and write down the financial statements. Of course I ended up with the wrong answer after all this work.

    I assume the examiner will have plenty of these little tricks to try and fool us in the exam.

  12. can you explain this question plz
    tom owns two properties which it rents to tenants in the year ended 31 dec 2006 it received 280000 in respect of property 1 and 160000 in respect of property 2
    balances on the rental accounts were as follows
    31dec06 31 dec 05
    property 1 13400 dr 12300cr
    property 2 6700 cr 5400 db

  13. Question 3 i saw your answer, but i dont understand when you say to imeh
    “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”
    On the answer 44,160 is credited to the ledger.
    Have i mixed the format of a ledger and t account? cany you please explain where it is debited, and why its on the right hand side of the ledger.
    Thanking you in anticipation.

    • Remember that we always carry down balances from the opposite side.

      So to end up with a debit balance we need to carry it forward from the credit side (it is the missing figure on the credit side) and vice versa if we want to end up with a credit balance.

  14. Could you please explain me briefly how to solve this question?

    At 1 September, the motor expense account showed 4 months insurance prepaid of $80 and petrol accrued of $95. During September, the outstanding petrol bill is paid, plus further bills of $245. at 30 September there is a further outstanding bill of $120.

    What amount is to be shown in income statement for motor expenses in September?

    • In future you must ask this sort of question in the Ask the Tutor Forum, and not as a comment on a lecture.

      The cash paid during September was 95+245. However 95 was owing from last month and so only 245 relates to this month.
      At the start of September they had prepaid 80 insurance. At the end of September they will only have prepaid 3 months – 1 month insurance was ‘used’ in September and for 1 month it is 80/4 = 20.

      So the total expense is 245 + 20 = 265

      • Hey John, am confused 🙁

        Why do we ignore the 120 outstanding at the end of September. I keep looking at this and getting 385 as the months motor expenses

      • We don’t ignore it!

        Hemraj asked the same question in the Ask the Tutor Forum and I answered him there correctly (but forgot to come back here and add the 120).

        (Last time I saw you Biggles you were taking P2. It’s great that you are still watching F3 lectures 🙂 )

      • Just doing some basic revision before I get in to P2 🙂

        I don’t think I’ll ever get tired of watching the lecturers on this site

    • If you have watched the previous lectures, then to say you understand none of chapter 4 is a rather ridiculous comment – your other post elsewhere makes it clear that you do understand something.

      Have you watched the earlier lectures?

      Have you printed out the free Lecture Notes? There is no point in watching the lectures without the lecture notes in front of you because the examples that I am working through are from the Lecture Notes.

      It is obviously impossible (and unnecessary) to simply type out here the entire lecture. For any specific parts that you do not understand then ask in the Paper F3 Ask the Tutor Forum and I will try to help you.

      • I understand the earlier part, but I find it abit confusing. I have my lecture notes with me as well, I will go thru again the lecture again. Thanks for the advise,sir

      • Yes. I am being stupid again. For some strange reason I am thinking of rental expense and not income. Grr…. lack of concentration. I will get there. (Slaps self in face!)

      • No problem – that is by far the most common mistake 🙂

        (Be careful in the exam – when you are rushing it is even more likely that you will think that. It is always with rent questions, so whenever you see rent mentioned always stop and check whether it is rent expense or rent income.)

    • For question 3:

      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.

      It is exactly the same for question 6 except obviously with different numbers 🙂

      • Hello John,
        On you illustration of
        “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.)”.
        Sorry I still cant understand why you carried forward the closing balance but not the opening balance.
        And thanks for offering the second method! 🙂

      • I am not sure what you mean, because we bring forward opening balances from the previous period, but we never carry them forward at the end – the balances will have changed due to whatever happened during the period.

      • I mean : As you said we debt balance of 44,160 and credit balance 74,880. No prob. why in the T-account, 44160 stays in the credit side and 74880 stays in the debt side?they are carried to the opposite side.

  18. Around 11 Minutes 50 Seconds, you say credit accrual for reversal and debit expense. You enter it correctly but say it incorrectly… 🙂 Just thought Id give you a heads up.

  20. 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
    ans is d but i didn’t understand how prepayment would be 38400 ???

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