- March 10, 2021 at 3:31 pm #614122
The suspense account is made up of two items:
(a) The proceeds of issue of 4,000,000 50c shares at $1.10 per share, credited to the suspense
account from the cash book.
(b) The balance of the account is the proceeds of sale of some plant on 1 January 20X4 with a
carrying value at the date of sale of $700,000 and which had originally cost $1,400,000. No
other accounting entries have yet been made for the disposal apart from the cash book entry for
the receipt of the proceeds. Depreciation on plant has been charged at 25% (straight line basis)
in preparing the draft statement of financial position without allowing for the sale. The
depreciation for the year relating to the plant sold should be adjusted for in full.
how do I calculate the profit or loss at disposal of the plant?
also can you explain what is going on I have no clue for both part a) and part b)
for part b 700000 has been credited into the suspense account also 4000000 x 1.1 has also been credited into the account, but on the statement of financial position the suspense account has a balance of 5000? really confused with what is going on.March 11, 2021 at 7:05 am #614147John MoffatKeymaster
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(a) The correct entry for the issue of shares is Dr Cash 4,4,00,000 Cr Share capital 2,000,000 and Cr Share premium 2,400,000.
The bookkeeper correctly debit cash, but did not know what credit entries to make and so has credited the suspense account with 4,400,000
(b) The balance on the suspense account is given in the question as being a credit balance of 5,000,000 (not 5,000 – the column heading shows that everything is in thousands!!).
Given that 4,400,000 is because of (a), the remaining 600,000 is the proceeds of sale of the plant. Given that the carrying value of the plant sold was 700,000, there is a loss on sales which reduces the retained earnings.
Also, because the disposal had not been recorded and depreciation had therefore been charged on the full 21,000,000 cost appearing on the SOFP, too much depreciation will have been charged and needs reducing by 25% x 1,400,000 = 350,000. This correction will increase the retained earnings and , of course, the cost and accumulated depreciation figures for the plane both need changing.
Presumably this is the question that prompted your original post. You have headed up the post “preparing basic financial statements”, but that is not a separate topic. This question is testing your knowledge of suspense accounts, limited companies, and non-current assets – all of which are explained in full in my free lectures.March 11, 2021 at 7:17 am #614153
HI John, thank you for this, I am still learning about little details, like what does 50c mean, and how do you work out the split of share premium and share capital. Sorry when I put 5000 I meant 5000,000 my mistake. How do we know that the suspense account is a credit balance and not a debit balance, it it because it appeared under the equity and liability on the sofp? Little details like this I am still not clear about. Would the loss of the sale of the plant reduce the profit by increasing the expense account on the profit and loss ? also for the depreciation would we reduce the plant accumulated depreciation by 0.25 x 40000000? you mentioned that the double entry of this in another post goes back to retained earnings , but why?
on the end of the second to last of your paragraph, you mention the cost needs changing, since the value of the plant is 1400000 before depreciation, so the cost would be reduced by that? is there a double entry for this?March 11, 2021 at 10:49 am #614178
also that the proceeds have been put in the cash book, so the total in cash in bank on the balance sheet is correct and needs no adjustment ? Is cash in bank same terminology as a cash account in the ledger ?
Please ignore my last question on my last reply, I realise the double entry required cr plant and equipment account and debit disposal account. so cost on the balance sheet will reduce by 1400,000.March 11, 2021 at 12:57 pm #614186John MoffatKeymaster
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50c is the nominal value of the shares. The extra 60c that is being paid is the share premium.
The suspense account is a credit balance because it appears on the liabilities half of the Statement of Financial Position (it has not been called the Balance Sheet for many years and will not be called that in the exam).
A loss on sales always reduces the profit – a loss is a negative profit!
The double entries for the disposal of a non-current asset are all explained in my free lectures.
It seems that you are not watching the lectures, but you cannot expect me to type them all out here 🙂
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