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FA Chapter 4 Questions Accruals and Prepayments

 

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  3. Hi, please correct me because my understanding is wrong…
    Q1
    1) Dr. Loan Receivable 28,800
    Cr. Cash 28,800
    Dr.Interest Receivable 576
    Cr. Interest income 576
    2)Dr. Prepaid Insurance 21,600
    Cr. Cash 21,600
    Dr. Insurance expense 7,200
    Cr. prepaid Insurance 7,200
    3) Dr. Rent Receivable 9,600
    Cr. Rent Income 9,600

    Current Liability:0
    Current Asset:1)+2)+3)=576-7200+9,600=16,224

    I’m getting lost…

    • Hi, Harukazu,

      Your calc on 2) seems not correct.
      2)Dr. Insurance Expense 21,600
      Cr. Cash 21,600
      Dr. Prepaid Insurance 14,400
      Cr. Insurance Expense 14,400

      1) is 28,800 + 576
      2) is 14,400
      3) is 9,600
      And the total is 53,376.
      You should simply add 28,800 up not thinking about its credit cashout.

    • We require the expense for the 12. months from 1 July 2007 to 30 June 2008.

      The period 1 July 2007 to 31 March 2008 (9 months) is part of the payment made for 12 months to 31 March 2008 and so the expense for 1 July 2007 to 31 March 2008 is 9/12 x 25,920 = $19,440

      The period 1 April 2008 to 30 June 2008 (3 months) is part of the payment made for 12 months to 31 March 2009 and so the expense for 1 April 2008 to 30 June 2008 is 3/12 x 28,800 = $7,200

      So the total expense = 19,440 + 7,200 = $26,640.

      As at 30 June 2008, they have already paid for 1 July 2008 to 31 March 2009 (9 months), and therefore there is a prepayment of 9/12 x 28,800 = $21,600.

  6. Please solve the rent questions, explaining the concept of rent arrears as well.

    Why and how per each calculation step would be appreciated. These things not covered during lecture.

    Also surprised no accrual questions I faced in this quiz. Mostly prepayment.

      • I think you explained in brief, I don’t understand when applied in the question. English is not my first language. Please do generously elaborate the solving of the answer.

      • In arrears means paying after you have incurred the expense (as in example 2 in my lecture), or for income receiving the cash after you earned the income.

        In advance means paying before you incur the expense (as in example 1 in my lecture), or for income receiving the cash before earning the income.

        The answer to question 6 is elaborated in the posts below, but here it is again:

        They are receiving rent. The cash received during the year was 1,154,880.
        50,880 of the cash was rent they were owed at the start of the year, so subtract it. At the end of the year they are owed 44,160, so add it.

        At the start of the year they had received 68,880 in advance – this is this years income so add it. At the end of the year they had received 74,880 in advance – this is next years income so subtract it.

        Therefore the income this year is 1,154,880 – 50,880 + 44,160 +68,880 – 74,880 = $1,142,160

  9. Good day Mr Moffat. Hope you are safe at home

    Just want to know in question 1 third transaction why. We have added the 9600 as it is mentioned the amount is covering six months to 31 December 2008.

    Got confused with this one.

  10. This is my first shot of the test,
    it really stuck me and i have to write them down on paper and figure it out .
    But everything just fine only Q5 and Q6 a bit confusing .

    Q5 knocked me out ,
    im confused the terms Rent in advance and Rent in arrears,
    and also no idea how ” all rent in arrears was subsequently received ” affects the answer .

    I thought that the money $2,003,040 received in the year ended 30 June 2006 has already included all the figure listed under Rent in advance and Rent in arrears .

    After reviewing the answer,
    i give it a guess :

    Rent in arrears $11,520 is the money tenants owed to the landloard last year ( 2004 ),
    it was deducted from $2,003,040 because this money has already included in the SOPL of June 2004 .
    so, it shouldn’t appear on the SOPL of June 2006

    And $346,560 was deducted because it is a payment for next financial period,
    it will be included in the SOPL June 2007 instead of June 2006.

    simlar logic applied to the amount $20,880 .

    am I right ?

      • They are receiving rent. The cash received during the year was 1,154,880.
        50,880 of the cash was rent they were owed at the start of the year, so subtract it. At the end of the year they are owed 44,160, so add it.

        At the start of the year they had received 68,880 in advance – this is this years income so add it. At the end of the year they had received 74,880 in advance – this is next years income so subtract it.

        Therefore the income this year is 1,154,880 – 50,880 + 44,160 +68,880 – 74,880 = $1,142,160

  12. Good day Mr Moffat !

    I was confused with question 1 transaction 2 where it says the company has paid for 8 month and the answer shows that we need to multiply 21600 by 8/12, can’t we just add the number itself without multiplying it by 8/12

    Thank you in advance

    • They have paid the insurance for a year (for the period 1 September 2008 to 31 August 2009).

      As at 31 December 2008 they have therefore prepaid the period from 1 January 2009 to 31 August 2009, which is 8 months of the total payment.

      • I also forgot to include the prepayment as current assets, but I wonder why the other questions don’t have to do so? As asking about what figure should be appear in company’s statement, we only need to calculate the expense included those periods of 12 months.

      • I don’t know what other questions you are referring to. On the SOPL we show the expense incurred for the period (not the amount actually paid) and on the SOFP we show accruals (any amount still owing) and prepayments (any amount paid in advance).
        Have you watched my free lectures on this?

  13. Thank you very much for your work, Question 4 has given me an issue, What does it mean to say premium for the year ended 31 March 2008 paid in April 2007 $25,920.00? Does this mean the company has paid premiums for the year 2008 when they paid in April for the year 2008 or they paid in advance for the year 2009? I am confused with the question

  14. hello sir, first i would like to thank you for contributing to develope such and amazing tutoring platform. it is very much appreciated.
    With regards to question 3 sir, please what is there most time effective way of coming up with the answer. i was able to solve it but it took me so much time and given the nature of the exam, i believe time management is of great importance. Thank you

    • Year ending December 2006. So only amounts from Jan 2006-Dec 2006 will be considered. $798 corresponds to Quarter “TO” February 2006 which means it includes Dec 2005, Jan 2006 and Feb 2006. 2/3 means we are only considering 2 months of Jan and Feb out of the 3. Hope this is okay.

  17. Oh my God! These questions really tested my accruals and prepayments knowledge and came through with 100% (12 points). This topic is one of the underpinning theories of accountancy and used in many accounting activities. It is a tricky area but once mastered like reporting on ratios it can be so rewarding if you want to push yourself in your career.

    I am with CIMA but needed to practice questions likes these so thank Open Tuition.

  19. Good day,

    my question is based on question 1 :
    I am confused with transaction 2. Insurance paid for in advance is 8 months and should we not subtract that from the SOFP amount as it is not considerable for the current period ? Please help me clear my doubts ASAP

  20. Q1. 1) Why should we include 28,800 in the SOFP under current asset? Is this because cash inflow?
    Q5. In the requirement it said that statement of profit and loss for rent receivable. My question is Receivable is the SOFP item why the requirement said SOPL?

    • 1. The 28,800 was money lent to an employee, so it is a receivable which is a current asset.

      2. Although I can understand it being confusing, ‘rent receivable’ is the name we give to the rental income and the income does appear in the SOPL

      • The bill received in March 2006 was for December 2005, January and February 2006. Only January and February are in our accounting period and so we take 2 out of the 3 months.
        The bill received in March 2007 was for December 2006, January and February 2007. Only December is in our accounting period and so we take 1 out of the 3 months.

      • In the first question, 2% interest would be recorded as what within the SOFP, and why ?

        The original loan to employee would be recorded as Accounts receivables of course if Im not mistaken.

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