[James]

Could you clarify the position for both the company that owned the asset vs the company that leases it with an example please…I know it is unlikely that it will be asked in the exam but just for my own understanding it would be helpful to see an extract from the balance sheet showing the asset value, expense etc

Thank you.

James

[James]

Tenjinsmith

Wouldn’t you only make an allowance for the 60% of the 1600 at the beginning?

Meaning the receivables balance to calculate the general allowance on would be:

62900
-2000 (IRR Debt)
-960

59940 * 10% =5994

adding back the specific allowance – 5994+960 = 6954 CR on her Allowance for receivables

Surely we would not provide for the other 40% in the specific allowance at the beginning, why would we include the 40% that we are not making an allowance for?

[James]

I would have thought that the correct answer was a because:

removing the non current assets cost of 40,000 from purchases (part of cost of sales) would increase gross profit by the same amount (therefore it is understated)

And Stationery would come under sundry expenses, which are only deducted after gross profit is calculated, which means an additional 10,000 is deducted from the cost of sales calculation and is subtracted after the gross profit meaning the net profit was understated by an additional 10,000.

Revenue X
COS:
Opening Inventory: X
Purchases (- NCA incorrectly DR to Purchases)
Closing Inventory (-stationery incorrectly incl) (X)

Gross Profit (Rev-COS) x (As COS was overstated, Gross profit will be understated by 40,000)

Sundry Expenses X

Net Profit X

(As Closing inventory was overstated, and sundry expenses understated Net profit will have also been understated by an additional 10,000).

Correct me if I’m wrong

[Author]

Posts