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FA Chapter 4 Questions Accruals and Prepayments
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Hello Sir,
I have difficulties understanding question where we had to calculate total amount appearing in SoFP for December 2008, exactly point (2).
The company has paid insurance and I thought that part (8/12) x 21600 = 14400 will be an expense appearing in SOPL and what’s left over; (4/12) x 21600 = 7200 is a prepayment, an asset that will be included in SoFP, but it turned out that amount 14400 goes to SoFP and I cannot understand why.
Any help would be greatly appreciated.
As at 31 December 2008 they have prepaid for the period from 1 January 2009 to 31 August 2009.
Therefore the amount for this period (8/12 x 21600) is a prepayment as at 31 December 2008 and is not an expense for the year to 31 December 2008.
It is making it all clear now.
Thank you for taking your time explaining it.
You are welcome 馃檪
Im having difficulty in understanding question 2. can you explain it to me?
Will you give me the FA1 chapter 4 lecture sir,please?
We do not have lectures for Paper FA1, only free notes.
We do have free lectures for Paper FA and you can find them by going to the main Paper FA page.
Kindly explain question 5 and 6.
Had a hundred percent score, felt like i had passed the exam already?? Realised a few things as i was going through the quiz:
1. GO THROUGH THE QUESTIONS WORD BY WORD, DO NOT RUSH AND PAY ATTENTION TO EVERY DETAIL
2. DO NOT MAKE ANY ASSUMPTIONS APPROACH THE QUESTION AS IT IS
3. TAKE NOTE OF THE DATES
dear sir, in question 3, a monthly telephone bill can differ in amount in each month. i don’t get the logic of 1/3rd-ing it to find the bill amount of a particular month.
should we record the transaction, the day the bill it is recieved or the same it is paid, or both?
If bills are only received every three months (as they are in this example) then it will be impossible to know how much it cost for each individual month. All we can do is estimate and therefore divide by 3.
As explained in the free lectures, the invoice is recorded when it is received. The payment is recorded when it is paid.
Q1- Regarding the amount 28,800 (loan to employee) – why should the amount be included in the SOFP as a current asset as the net effect is zero? I understand that this is a receivable but in the same year we gave the loan so the cash has decreased for the same amount. The net effect is zero (receivable increased but also cash decreased for the same amonut)
The question asks what would be shown in the SOFP for the items listed, and the receivable for the loan will be shown. It does not ask what the cash balance will be, and we have no idea what it will be – there will be lots of cash transactions that we do not know about. (And we do not net items off anyway 馃檪 )
Hello Sir, the lectures are very explicit. Thank you so much.
Why is interest on loan not considered as an income but an asset? ( On question 1)
It is income, but is also an asset at the year end because the year end is 31 December, but the interest is not received until 1 January.
Hello
Its clear for now. Thank you very much for answer.
You are welcome.
Hello
In question 3 why we have 2/3 and 1/3? I try to find the correct answer but I can’t get 3 (its from ?) I thought that should be 2/4 and 1/4 as an April is second quarter and March its a first quarter.
Thank you for help.
Each bill is for a 3 month period.
The bill for the quarter to 28 February is for the three months December, January, and February.
So the amount we need to accrue for the month of December is 1/3 of the total bill for the three months.
How different is Rent in advance and Rent in arrears from rent prepaid and rent accrued respectively ?
If it is rent payable then rent in advance is indeed rent prepaid and rent in arrears is a rent accrual.
However if is is rent receivable, then rent received in advance is treated like an accrual (the renter has paid too much and so it is owed back) and rent received in arrears is treated like a prepayment (the renter has not paid enough and so owes us money).
Hello Sir,
Can you explain further the equation in question 6, please? Thank you very much.
Nevermind, I found your explanation in the older comment. Thanks for your help.
Hello
Just on question 1, it says that the company has paid insurance totaling $21,600 in 2008, covering the year ended 31 August 2009.
Surely that would mean that the amount of $21,600 would need to be divided by 20 months (the whole of 2008 plus the 8 months in 2009) which would leave a total of 1080 a month times by 8 leaving a prepayment asset of $8,640………..
Am I missing something?
Thanks
The question says that the $21,600 is covering the year ended 31 August 2009. It is therefore for the year (12 months) from 1 September 2008 to 31 August 2009.
The question asks what should appear in the SFP ending 31 Dec 2008. Since the 21600 is covering 12 months, should we not focus on the months from Sept to December 2008, which are within its financial year? I don’t understand where the 8 months is coming from. kindly assist
No. In the SOFP we show the amount that is prepaid as at 31 December 2008.
Quetion 1:
If we write t accounts for the transcactions in question 1, cash t account shows credit balance of $50,400. Will not it be listed in the SOFP as current liability?
The questions asks only in relation to “these items” and cash is not listed as one of the items. In addition, there will certainly have been lots of other cash transactions and so it is not possible to know what the closing balance of cash will be.
Thank you sir
You are welcome 馃檪
Sir may I please sak why on the first question the 9600 was taken as the current asset even though it was paid in January *2009* for the six months *to* December *2008*
I thought I should be treated as a current liability because it was owed to the business from July 2009-December 2008 as it was only paid in January 2009
Sir may I please ask why on the first question the 9600 was taken as the current asset even though it was paid in January *2009* for the six months *to* December *2008*
I thought It should be treated as a current liability because it was owed to the business from July 2008-December 2008 as it was only paid in January 2009
I am sorry this question has too many typos. I reposted the correct one
Thank you now I understand… I mistakenly took the rent as an expense not income… Which is wrong
Now I understand.. I mistakenly took rent as an expense not income… Which is wrong
That is correct 馃檪
The business earned the rent in 2008 but the tenant didn’t pay the business until Hanuray 2009.
So at the end of 2008 the business was owed the money from the tenant, so it is a current asset.
this test has got me confused. clearly am not getting something right
Sir is question 3 table like structure …my screen show me like one statement??
I am not sure what you mean. It is like a statement listing 6 invoices with the dates on which they were paid.
For question 4. How you obtained the fraction 3/4 and 1/4?
We need the expense for the period 1 July 2007 to 30 June 2008.
From 1 July 2007 to 31 March 2008 is 9 months, and so the expense is 9/12 (i.e. 3/4) of the bill for the year to 31 March 2008.
From 1 April 2008 to 30 June 2008 is 3 months, and so the expense is 3/12 (i.e. 1/4) of the bill for the year to 31 March 2009.
Thanks you Sir.
You are welcome 馃檪
Hello, teacher
#5, why we need to subtract “Rent in arrears” for 30/Jun/2005($11,520) and add “Rent in arrears” for 30/Jun/2006($20,880) ?
Because it is rental income, and part of the cash received during the year was rent that was owing to us at the start of the year (and so is not part of this years income) and at the end of the year we are still owed rent and this is part of this years income.
Thank you so much!! 馃檪
You are welcome 馃檪
Hi Sir,
I have failed question 3. I understand the calculation for the correct answer, however, I don’t understand why we have to assume that as of 31st December we are supposed to know the value of an invoice we will receive in March 07 (Which includes December month). In a normal circumstance wouldn’t we accrue for December’s charge based on the last invoice we receive in the year (840/3) ? Same at the beginning of year 07 we would have the reverse (negative accrual 739.20/3) from December 06 but is paid in March 07. Why is this not consider in this exercise for the P&L? Many thanks
As I explain in my free lectures, we make the best estimate for an accrual on the information we have.
The accounting statements will take some time to prepare, and although it is unlikely that we will have received the March invoice by the time that we finish preparing the accounts then if we do know the amount we will use it.
Thank you very much
You are welcome 馃檪