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Question: Joanna has prepared her draft accounts for the year ended 30 april 2008, and needs to adjust them for the following items.
1. Rent of $10500 was paid and recorded on 2 january 2007 for the period 1 january to 31 december 2007. the land lord has advised that the annual rent will be 12000 although it has not been invoiced or paid yet.
2.Property and contents insurance is paid annually on 1 march. Joanna paid and recorded $6000 on 1 march 2008 fr the year from 1 march to 28 february 2009.What should the net effect on profit be in the draft accounts for the year ended 2008 for adjusting for the above items?
A. 1000 decrease
B.1000 increase
C.1500 increase
D.1500 decreaseThe rent would be 11000 for the period .. but i cant go any further than that .. !! please help me …
I don’t understand why you do not have answer for this in the same book in which you found the question. You should use this forum to ask about whatever you do not understand in the answer!
An accrual is needed for rent of 4/12 x 12,000 = 4,000. This will reduce the profit when entered.
Of the insurance, there is a prepayment of 10/12 x 6,000 = 5,000. This will increase the profit when entered.
So the overall effect in an increase in profit of 1,000.
Good day, what I don’t understand about this question is why are we calculatin for the beyond the financial year 30 April 2008? I did the opposite of the answer and I can’t seem to understand why it was calculated the way you did it.Can you further explain please.
The amounts charged in the SOPL should be the total expense for the year – regardless of how much has actually been paid.
You need to watch my free lectures on accruals and prepayments. The lectures are a complete free course for Paper F3 and cover everything needed to be able to pass the exam well.
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