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Marlon created a suspense account with a debit balance of $1,250 in order to balance his trial balance.
He subsequently investigated and found the following errors:
(1) The closing balance of the purchase ledger control account at the current year-end has been undercast by $160
(2) Cash received of $450 from customers has only been entered into the cash account
(3) The purchase returns day book has been overcast by $300
What is the remaining debit balance on the suspense account after these errors have been corrected?
A $640
B $2,160
C $1,860
D $1,560
The correct answer option is CSir, i have problem with the thrid entry, which is that the clsoing balance has been undercast, so we debit as the closing balance is a debit in the payable c/d. but i don get the answer, why do we credit when it says the closing balance??
The total from the purchase returns book is debited to payable account and credited to purchases account (or to purchases returns account if they use one).
So if it has been overcast (you wrote overcast first but then undercast later), then we credit the payables account and debit the purchases account (or purchases returns account if they use one).
But you said that your problem was with the third entry!!!
The balance on the payables control account is a credit balance. If it has been undercast then we need to credit with the difference to make it correct.
but it said the closing balance which is c/d ( debit side of the payables control account so we should be debiting it, why do we credit instead?
You need to watch my lectures on how we close off t-accounts!!!
The final balance on the purchase ledger control account (we don’t use that term any more – it is the payables control account) that is listed in the trial balance is always a credit balance – it is a liability.
I have a question:
The suspense account exist because the accounting trainee was not sure about the posting for a sale and service support of $12m on 1 April 2016. Therefore an entry for the $12m cash received was posted only in the cash account at that date.
For this sale, a key customer negotiated a sale and support services agreement with Butcher Buck Limited. The terns of this agreement was for the sale of the product plus ongoing service support for a period of two years from the date of sale. the annual cost of this support is $1m and the normal mark up on this support100%. Ignore the time value of money.T.B
Bank Dr 1,300
Suspense account Cr 1,2000This is how I answer it:
2year service support 100%@$1m = $2m
$12m-$2m= $10m Sale
by creating T account
Suspense Cr. 12000m – Dr. 12000m =cancel
Bank Dr. 12000m – Cr 2000m= 10000M
Sale and Service Support Cr. 12000m – Dr.2000mIn the SOCI
Other Income Service support 2000m
In the SOFP
Current Asset
Bank 1300m+10700m – 2000m there was a error of entryThe $10M should have been credited to the sales account, so debit suspense and credit sales account with $10M.
The $2M for the first years service and support should have been credited to other income account, so debit suspense account and credit other income account.
In the SOPL should be sales revenue of $10M and other income of $2M (in addition obviously to whatever revenue and other income already exists).
In the SOFP there is cash of 1,300. (The question says that the $12M received had been entered in cash, which was correct. Obviously there will have been lots of other cash receipts and payments, and if the final balance was 1,300 then there is nothing to correct.)
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