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FA Chapter 4 Questions Accruals and Prepayments

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  2. hello sir
    dear sir for question number 1 the loan to employ is taken as current asset. its is because dr receivables and cr cash and this receivable is our current asset?

    and for the questions 5 and 6 i am really confused that what it says and how it is calculated so if its possible please help me.

    • For question 1 – yes, the loan is a receivable.

      Question 5 and 6 are both about rent received, which is income (not an expense).

      We know how much cash was received during the year, but we need to adjust by the rent already received in advance and the rent still owing to us, in order to get the income earned during the year.

  5. Hello, John. Please, help me with the first question. Why should we include the interest of 2% of the loan to current assets?

    I consider that the right answer is:

    28800+(21000*8/12)+9600 = $52400 ,

    because we paid the whole of the interest due on the loan (=> current liabilities= 0), and 28800$ is our cash we recieved from the bank. Therefore, current assets include cash, insuranse and rent.

    Please, explain me why I am wrong/

    • not sure is this help or not but the company did not borrow money from the bank. Read the question again, it said the company made a loan for employee, hence, the interest is paid to the company 馃檪
      hope this help you 馃檪

    • Vladimir: Sorry for not answering earlier but I cannot always see comments on lectures and tests. It is better to ask in the Ask the Tutor Forum – questions there are always answered within 24 hours.

      Hoale is correct. The money is owed to the company by an employee and the employee also owes interest at the end of the year.
      (Cash is not relevant because it is not one of the three items required, and we have no idea what the cash balance is anyway because there will be lots of other things during the year that will have affected the cash balance)

      • Hello John, I am not quite sure why the 28800 was included only with plus sign at the beginning of the year when the loan was given to the employee as the accounting formula should be : Loan (receivable short term/current asset) increase Debit 28800, and Cash/Bank account( current assets) given to the employee Credit 28800 so basically the impact on current assets is 0. Could you please clarify? Thanks in advance!

      • The question only wants to know the current assets and liabilities in relation to the items listed. Certainly cash is a current asset, but there are lots of other transactions that we do not know about that would affect the cash balance – not just the loan.

        I appreciate that it is a bit confusing, but I am afraid that this was an actual exam question.

    • The practice tests are meant to be short tests after each chapter, and each contains 5 or 6 questions.

      We also have an online mock exam where questions are taken at random from a large bank of questions (just as in the real exam) and so every time you attempt the exam you are likely to get different questions. This is to be attempted after you have watched all our free lectures because it covers the whole syllabus.

      You should obviously have bought a Revision Kit from one of the ACCA approved publishers, and these contain lots of questions to practice.

  9. Sir, I do not understand Q 5 and 6 workings. For q 5 Why do we have to add arrears of 2006 since we have yet not received them, and should we not add arrears of 2005, since we have recieved them in 2006 which becomes our rental income? Thanks

    • Although we have not received the arrears of 2006, the rent was earned in 2006 and is therefore income of 2006.
      Similarly although the arrears of 2005 were actually received in 2006, they were earned in 2005 and not in 2006.
      We need to show the total amount earned during the year (not the cash received).

      • Thank you Sir, I understood for the arrears part. We add the arrears we have earned in the following month. However, I do not seem to understand the rent in advance. The rent in advance is the rent we have earned in 2006, so why do we subtract it. Should it not be our income?

      • Rent in advance at the end of the year means that although we have received the cash this year, it is rent for next year and therefore it not income of this year and needs subtracting.

  10. sir can you please answer this question ?

    The profit earned by a business in 20X7 was $72,500. The proprietor injected new capital of $8,000
    during the year and withdrew goods for his private use which had cost $2,200.

    If net assets at the beginning of 20X7 were $101,700, what were the closing net assets?

    • You must ask this sort of question in the F3 Ask the Tutor Forum.

      (Although I do suggest that you watch our free lectures because this is a straightforward application of the accounting equation. Our free lectures are a complete course for Paper F3 and cover everything needed to be able to pass the exam well.)

    • The current year arrears are money that we have earned, but we have not received the cash. The Statement of profit and loss should show the total earned, which is the cash received plus the money still owing to us.

      The answers to both questions are correct.

  13. Hi John, where can I find the written solutions to these questions? I’ve been watching your lectures and they are amazing, thank you very much for them and for creating such a wonderful platform.

    Thanks,
    Cindy

    • The asset is that part of the payment that is prepaid at the end of the year.
      As at 31 December 2008 they have already paid for the period from 1 January 2009 up to 31 August 2009, so those 8 months are prepaid and the prepayment is the asset.

      I hope that you have watched the free lecture on prepayments and accruals (otherwise there would be no point in attempting the test).

      • This is how I journalized for transaction 2:

        Debit: insurance (paid in 2008) 21,600

        Credit:
        Cash (paid in 2008) 21,600

        Debit:
        Pre Payment: 14,400 (8/12*21,600)

        Credit:
        Insurance: 14,400

        Is this wrong?

      • That is correct, and I now realised what your problem was.
        You agree (I think) that the prepayment is 14,400.
        We can not include the cash balance because there are likely to have been lots of other cash transactions that we do not know about.
        So all that is relevant for the question with respect of insurance is the prepayment (which is obviously a current asset).

      • When they pay is not relevant for calculating the actual expense for the year – it is only relevant when calculating the prepayment for the Statement of financial position.
        The year end is 30 April 2009, and so the last payment before the year end will have been on 1 April 2009. Since they are paying in advance, this payment will have been for April, May, and June. Therefore May and June are prepaid (two months) and since the rate is 230,400 per year, the prepayment for 2 months will be 2/12 x 230,400 = 38,400.

    • We need the total expense for January to December.

      The first bill is for three months to November of the previous year and so is not relevant.
      The second bill is for three months to February. Only January and February are a cost for this year and so only 2 out of the three months is this years expense.
      The final bill is for December, January and February. Only December is this year and so only 1 out of the three months is this years expense.

      (I do assume that you have watched our free lectures before attempting the test.)

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