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Hello sir,
This question is from one of the test kits:
The draft financial statements of Haseen’s business for the year shows a profit of 54,250 prior to correction of the following errors:
1. Cash drawings of 250 have not been accounted for.
2. Debts amounting to 420, which were provided for against in full during the year should have been written off as irrecoverable.
3. Rental Income of 300 has been classified as Interest Receivable.
4. On the last day of the accounting period, 200 in cash was received from a customer but no bookkeeping entries have been made.What is the amended profit for the year?
Ans: 54,250.
Explanation: None of the errors would impact profit.I’m having trouble understanding how to deal with points 3 and 4.
For point 3, they have said that it’s a misclassification and that both accounts will be increased/reduced by same amount. however, isn’t rental Income a SOPL account and interest receivable a SOFP account? would the SOPL account not affect profit?For point 4, They don’t mention if it’s a receivable that was paid or a cash sale that was made. What would the interpretation be for this error?
For point 3, It is confusing, but I am afraid that the income account (for the SOPL) is often called ‘interest receivable’ whether or not they have yet received the cash. It is bad use of English but is very common with regard to interest.
For point 4, it is bad of your Kit to word the question like this. If it is cash received from a receivable then it will not affect the profit. If on the other hand it was a cash sale then it will affect the profit.
Thank you sir, that makes sense now.
Yes, I’m afraid that’s why I got confused with point 4.
Also, just to clarify your explanation for point 3, Interest income(SOPL) is often termed as interest receivable? would you say that that unless otherwise stated we should consider the term Interest receivable to be an SOPL account in such cases?Thank you!
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