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FA Chapter 4 Questions Accruals and Prepayments

 

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  1. Hello sir concerning question 1
    Will the loan given to the employee not decrease the bank balance by the same amount and thus have no overall effect on the total current assets figure?

  3. denny122:

    This is rent received.

    We have received cash of 2,003,040 during the year but we need the rent that was earned by us this year.

    This will include the rent that was in arrears at the start of the year (i.e. was owing to us) and so this needs subtracting because it is not this years income.
    It will not include the rent that had been paid to us in advance last year – this needs adding because it is income of this year.

    It does include the rent paid to us in advance at the end of this year, but this is next years income and so needs subtracting. It does not include the rent in arrears at the end of this year, but this is this years income and so needs adding.

  7. Hi Sir,

    Question 1 (Number 3) If the year end is the 31st of December 2008 and the rent received on the beginning of the next financial year, how does becomes prepayment and not an accrual? What I clearly get from reading the question is that the rent is being owed for as at the end of the financial year.

    Can you please explain this thoroughly with example if necessary?

    Thank you.

  8. Can you please solve this
    1.The financial year of Mitex co. ended on 31 Dec. 20×1.An inventory counts on 4 January 20×2 gave a total inventory valu of $527,300.
    The following transaction occured between 1 january and 4 January.
    Purchase of goods $7,900
    Sales of goods(Gross profit margin 40% on sales) $15,000
    Goods returned by a customer $800
    What inventory value should be included in Mitex Co’s financial statements at 31 Dec. 20×1 ?

    • We need to total telephone expense for the period from 1 January 2006 to 31 December 2006 – the date on which the bills were actually paid.
      The first payment is not relevant because it was for 3 months to 30 November 2005.
      The next payment was for three months to 28 February 2006. Only 2 months are in 2006 (Jan and Feb) so we take 2/3 of the amount.
      The next 3 payments are all for 2006 (they cover the period 1 March to 30 November) so we add in all of these.
      The final payment is for 3 months to 28 February 2007. Only 1 month is in 2006 (Dec) and so we take 1/3 of this amount.

    • If it is the year ended 31 August 2009, therefore it is from 1 September 2008 to 31 August 2009.

      Therefore 4 months relate to 2008.

      However that is of no direct relevance to the question. The question asks for the amount to appear on the SOFP, so what is relevant is the fact that 8 months (1 January 2009 to 31 August 2009) have been prepaid – therefore a prepayment, i.e. a current asset on the SOFP at 31 December 2008.

      (Have you watched the free lectures on this? The lectures are a complete free course for Paper FA and cover everything needed to be able to pass the exam well.)

      • If we could calculate a cash account for a year, and it was a credit balance, would it have decreased current assets account?

      • There is no such thing as a ‘current assets account’. If there was a credit balance at the end of the year then it would mean that there was an overdraft, which is a current liability.

    • For the SOPL, we need the expense for the period 1 July 2007 to 30 June 2008.
      For 1 July 2007 to 31 March 2008, this is 9 months out of a 12 month bill to 31 March 2008 for $25,920
      For 1 April 2008 to 30 June 2008, this is 3 months out of a 12 month bill to 31 March 2009 for $28,800.
      Therefore the total expense = (9/12 x 25920) + (3/12 x 28800) = $26,640.

      For the SOFP, the prepayment is the period from 2 July 2008 to 31 March 2009, which is 9 months out of a 12 month bill for 28,800.
      So the amount of the prepayment is 9/12 x 28800 = $21,600

    • It is rent received and this is rent that was owing to us from last year (and so was last years income) but the cash was received this year. It is not this years rent so it needs subtracting from the cash received this year.

  15. I have another question:
    The electricity account for the year ended 30 june 20X1 was as follows.
    Opening balance for electricity accrued at 1 July 20X0: 300 $
    Payment made during the year:
    1 August 20X0 for 3 months to 31/7/20X0: 600$
    1 November 20X0 for 3 months to 31/10/20X0: 720$
    1 February 20X1 for 3 months to 31/1/20X1: 900$
    30 June 20X1 for 3 months to 30/4/20X1: 840$
    1 August 20X1 for 3 months to 31/7/20X1: 840$

    Caculate the amount of accrued at 30/6/20X1 and charge to SPL year ended 30/6/20X1 ?

    Thank you Sir 😀

  16. Hi John,
    I am having a bit of a hard time with the rent expense in Q2. Whilst I got it right, I had a doubt that 1Apr09 – 31Apr 09 isn’t included in the final rent expense amount. Shouldn’t be Apr-May 08 : 33600 + June 08: 19200 + period covering July 08 – 31 March 09: 57000*3 + additional 19200 for full April 2009?

    Thank you for your help

  18. sir for q5 or other questions I have seen how do I now the year which is relevant and which is not in this question it was required and asked 2006 and you add 2005 transactions. thanks

    • This is rent received.

      We have received cash of 2,003,040 during the year but we need the rent that was earned by us this year.

      This will include the rent that was in arrears at the start of the year (i.e. was owing to us) and so this needs subtracting because it is not this years income.
      It will not include the rent that had been paid to us in advance last year – this needs adding because it is income of this year.

      It does include the rent paid to us in advance at the end of this year, but this is next years income and so needs subtracting. It does not include the rent in arrears at the end of this year, but this is this years income and so needs adding.

      • Debit the rent received account with the rent that was in arrears at the start of the year.
        Credit the rent received account with the rent that has been paid in advance at the start of the year.
        Credit the rent received account with the cash received during the year.
        Debit the rent received account with the rent that had been paid in advance at the end of the year.
        Credit the rent received account with the rent that was in arrears at the end of the year.

        The missing figure on the account is the rental income for the year.

      • Part of the rent received this year was owing to us at the end of last year. Therefore it was income for last year and not part of this years income.

        It was a debit balance at the start of the year because it was rent that was owing to us from the previous year.

    • The first bill is not relevant because is is for 3 months to 30 November 2005.

      Of the second bill, 2 months – January and February – are relevant, so 2/3 of 798.

      The whole of the third bill is relevant – it is for March, April and May.
      The whole of the fourth bill is relevant – it is for June, July and August.
      The whole of the fifth bill is relevant – it is got September, October and November.

      The sixth bill is for December, January and February – only December is relevant so 1/3 x 966.

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