Accruals and Prepayments — OpenTuition Forums

HHien11y ago

Sir, "Lily pays rent on her office in advance and telephone bill in arrears. The balance on these accounts at 1st January 2013 was: Rent $12,800 Dr Telephone $ 450 Cr During the year ended 31 December 2012, Lily paid $78,000 to her landlord and $6,250 to her telephone provider. Included in the $78,000 paid to her landlord was a bill for $19,500 covering the period 1 December 2012 to 28 February 2013. On 7 January 2013, Lily received a telephone bill for $589 to cover the month of December 2012. What's the charge to profit and loss for each of these items for the year to 31 December 2012?" I got the answer: $77,800 for rent and $6,389 for telephone but I didn't know whether it was the correct answer or not. Can you give me the correction and some explanation, please? Thank you so much!

HHien11y ago#1

Another question, Sir: "At 1 July 2013, a company had prepaid insurance of $8,200. On 1 January 2014, the company paid $38,000 for insurance for the year to 30 September 2014. What figure should appear for insurance in the company's financial statements for the year ended 30 June 2014?" The correct answer is $36,700 of Insurance expense on the Income Statement and $9,500 of Prepayments on the Statement of financial position, right? Was it true when I added $8,200 and $38,000 and then subtracted the total from $9,500 (=$38,000*3/12) to calculate insurance expense for the year ended 30 June 2014? Thank you so much!

John MoffatTutor11y ago#2

Fist question: Rent: During the year 78,000 cash was paid. However at the start of the year they have overpaid 12,800 (because a Dr balance) and so this is an extra cost for this year. Also, however, at the end of the year they had overpaid for the period 1 January to 28 February - 2 months - which is 2/3 x 19500 = 13,000. So the expense for the year is 78,000 + 12,800 - 13000 = $77,800 - your answer is correct :-) Telephone: Your answer of $6389 is correct also.

John MoffatTutor11y ago#3

Second question: Yes - it is true. The 8200 at the start of the year is an expense of this year. At the end of this year there is an overpayment of 3/12 x 38,000 = 9,500.

HHien11y ago#4

Thanks for you help! ^^

John MoffatTutor11y ago#5

No problem :-)

John MoffatTutor11y ago#8

Question 1: We want the expense from 1 July 2005 to 30 June 2006. 1 July 2005 to 31 March 2006 (9 months) is part of the first premium, and is therefore 9/12 x 10,800. 1 April 2006 to 30 June 2006 (3 months) is part of the second premium, and is therefore 3/12 x 12,000. The total expense is the two added together. As at 30 June 2006, we have already paid insurance up to 31 March 2007. So there is a prepayment for 9 months. So 9/12 x 12,000.

John MoffatTutor11y ago#9

Question 2: We want the rental income for the year 1 February 2005 to 31 January 2006. For the period 1 Feb 2005 to 30 Jun 2005 (5 months), the rent was 24,000 a year. So the rent for the period is 5/12 x 24,000. For the period 1 Jul 2005 to 31 Jan 2006 (7 months), the rent was 30,000 a year. So the rent for that period is 7/12 x 30,000. The total income is the two added together. The last receipt in our year was on 1 Jan 2006, and this was for Jan, Feb and Mar 2006. So we have prepaid income for 2 months (Feb and Mar) and therefore the prepaid income is 2/12 x 30,000.

John MoffatTutor11y ago#12

First question: The question tells you that rent is received quarterly in advance on 1 Jan, 1 Mar, 1 Jun, and 1 Sep. Our year end is 30 Jan, so the last receipt before the year end will have been on 1 Jan.

John MoffatTutor11y ago#14

Second question: If the previous years insurance was X, then this years is 10% higher. It is therefore higher by 0.1X. So this year is X + 0.1X = 1.1X So 1.1X = 13200. So X = 13200/1.1 = 12,000. (and, of course it checks, in that 12,000 + 10%x12,000 = 13,200) Now you can calculate the expense for the year in the same way as your earlier question.

John MoffatTutor11y ago#16

For the Statement of profit or loss, since they will have had the loan for 9 months (1 Jan to 30 Sep), the expense will be 9/12 x 12% x $100,000, which is $9,000. As at the 30 September, the last interest payment will have been on 1 July. (Because the payment are 1 April, 1 July, 1 October, and 1 january). The payments are in arrears, so the payment on 1 July will have been for April, May and June. So that means that they were still owing for July, August and September (these three months are not paid until 1 October). So there needs to be an accrual of 3/12 x 12% x $100,000 = $3,000

John MoffatTutor11y ago#18

It means pay later. For example, you use electricity and pay for it after you have used it. It is a very common word used in the exams. (You really should watch the lectures because these things are explained in them)

Xxia11y ago#19

hi,sir the following transactions relate to a's electricity expense ledger account for the year ended 30 june 2009. prepayment brought forward: $550 cash paid: $5400 accruals carried forward: $650 what amount should be charged to the statement of profit or loss in the year ended 30 june 2009 for electricity? I think it should be 550+5400-650, but the answer is 550+650+5400, i dont understand why should add the accruals?

John MoffatTutor11y ago#20

The accrual at the end of the year means that we owe money for this years expense. So the total expense this year is 550 + 5400 (which you are happy about) + the amount still owing for this year of 650.

Xxia11y ago#21

thank you very much

John MoffatTutor11y ago#22

You are welcome :-)

Jjithendra7y ago#23

what should be the cash balance I mean it is 28500 or 19000

John MoffatTutor7y ago#24

I have no idea which question you are asking about. Rather that attempt questions that have been posted here, you should buy a Revision Kit from one of the ACCA approved publishers. They are full of exam standard questions, together with answers and explanations.

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