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Dear Mr. Moffat,
This question has been brought up in previous forums, but I hope you don’t mind me bringing it up again.
Question
The electricity account for the year ended 30 June 20X1 was as follows.
$
Opening balance for electricity accrued at 1 July 20X0 300
Payments made during the year
1 August 20X0 for three months to 31 July 20X0 600
1 November 20X0 for three months to 31 October 20X0 720
1 February 20X1 for three months to 31 January 20X1 900
30 June 20X1 for three months to 30 April 20X1 840
1 August 20X1 for three months to 31 July 20X1 840Which of the following is the appropriate entry for electricity?
Accrued Charge to SPL
at 30 June 20X1 year ended 30 June 20X1A $Nil $3,060
B $460 $3,320
C $560 $3,320
D $560 $3,420Revision Kit answer is (C).
…………………………………………………………………..
Charge to SPL is acceptable as $3,320 considering (200+720+900+840+560). However, (1) The accruals account had a balance of $300 at the beginning.
(2) Out of the 600 payment on 1st August, 400/= would have been against this 300/= leaving a prepayment of $100.
(3) At the end of the period a further $280/= (840/3) would get Credited to the accrual.This should leave a balance of $180= accrued and not $560, as option (C) states.
Am I missing something here?
Could you please explain this to me Sir?
Best Regards
Mathews
As at the end of the year (30 June X1) they had paid up to the 30 April X1.
Therefore an accrual is needed to May and June X1 – 2 months.
The bill for May, June and July X1 – 3 months – is 840.
Therefore the accrual for May and June is 2/3 x 840 = 560.
Although the expense for the year is 3,320, it is not really calculated as you have written it. It is the total cash paid during the year of 3,060 (600 + 720 + 900 + 840), less the opening accrual of 300, plus the closing accrual of 560.
3060 – 300 + 560 = 3,320.I do show the t-account entries in my free lectures, but the exam does not ask for t-accounts and it is wasting time solving the question using t-accounts. They are not needed and there is enormous time pressure in the exam.
I do suggest that you watch the free lectures – they are a complete course for Paper F3 and cover everything needed to be able to pass the exam well.
Dear Mr. Moffat,
Thank you for your reply. I used the T-accounts as it makes it easier for me to understand in Dr/Cr form. However as you say I will practice without T-account to save time.
Following your explanation I Credited the Expense account with $300 at the beginning of the year and Debited the payments in full which were made during the year (600 + 720 + 900 + 840). These are the actual cash payments before the year end. Since the last payment is after the f/y I need to Debit $560 to the expense account and accrue same for year end?
Hope I got my thinking pattern straight
Regards
Mathews
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