PES

2019 ACCOUNTING UNIT 4

Outcome 1 – Set 2
EXTENSIONS OF RECORDING AND REPORTING

SOLUTION

1
Question 1 (3 marks)

Explanation: A bad debt is an account receivable that cannot pay the amount owing.
Faithful representation [1] dictates that if a bad debt is expected by a business
this should be recognised so that the true financial situation of the business is represented [1].
Furthermore this creates an expense for the current reporting period which acknowledges that
the business does not expect to collect all amounts owing from accounts receivable [1].

2
Question 2 (20 marks)

a. 1+4+3 = 8 marks

Basic Sports
General Journal

Date Details Debit Credit

Oct 31 Depreciation Computer Equipment 150

1
Accumulated Depreciation Computer Equipment 150
Disposal of Computer Equipment 3 700
1
Computer Equipment 3 700
Accumulated Depreciation Computer Equipment 2 350
1
Disposal of Computer Equipment 2 350
Computer Equipment 500
1
Disposal of Computer Equipment 500
Loss on Disposal of Computer Equipment 850
1
Disposal of Computer Equipment 850
Bank 6 100
1
Loan – ZNA Finance 6 100
Computer 5 500
1
GST Clearing 600
Bank 6 100 1

QUESTION 2 - continued

3
b 3 marks

Bryan’s Party Supplies

Cash Flow Statement

Item Classification Inflow/Outflow Amount

Operating/Investing/Financing $
Computer Investing Outflow 5 500 1
GST Paid Operating Outflow 600 1
Loan Financing Inflow 6 100 1

c. 1+1= 2 marks
Calculation Straight Line method:

$6 000 x 20% = $1 200

Computer Equipment: $ 1 200

Calculation Reducing Balance method:

$6 000 – 300 = $5 700 x 30% =

Computer Equipment: $ 1 710

QUESTION 2 - continued

4
d. 2 marks

Explanation: Over the life of the asset the depreciation expense would be the same [1].
The only difference between the straight line and reducing balance methods is the amount of
the cost that is allocated in a particular reporting period [1].

e. 2 marks

Explanation: When selecting a depreciation method the most appropriate method to select is
the one that best satisfies the revenue-earning pattern of the asset [1]. If the asset is expected
to earn more revenue in its earlier years than later in its life then the reducing balance method
is more appropriate. If however, the asset is expected to have the same revenue earning
capacity regardless of its age then the straight-line method should be used [1].

f. 3 marks

Identification and Explanation: Comparability [1] demands that once a method of

Depreciation is selected it should be applied consistently over the asset’s life so that users of
the information can compare similar types of financial information effectively over different
reporting periods [1]. If not comparisons will be difficult to make [1].

5
Question 3 (4 marks)

Discussion: The effect of this decision will result in the manager receiving a higher bonus
as the revenue earned will be higher [1].
However the way he is achieving this bonus is not ethical and will have financial implications
in future reporting periods when these accounts receivable are unable to pay their accounts
and their debts are written off as irrecoverable – subsequently decreasing future profits [1].
Furthermore, the selling of inventory to customers whom the manager knows are highly
likely not to pay inflates the revenue generated and provides a misleading financial view
of the profitability of the business to the users of the information [1].
It means the reports represented the firm’s profit and position in a more favourable
light, but one that was ultimately inaccurate. The reports would actually be misleading, so
any decisions made based on the information they contained could be false and ultimately
damaging to the business and its owner [1].

6
Question 4 (5 marks)
a. 2 marks

Laser Life
General Journal

Date Details Debit Credit

Dec 31 Accrued Interest Revenue 1 400 1

Interest Revenue 1 400 1

b. 3 marks

Laser Life
General Journal

Date Details Debit Credit

Mar 31 Bank 82 400

Investment 80 000 1
Accrued Interest Revenue 1 400 1
Interest Revenue 1 000 1

7
Question 5 (11 marks)
a. 2 marks

Calculation Doubtful Debts:

$110 000 - $ 9 000 - $101 000 Net Credit Sales [1]

101 000 x 3% [1] = $3 030 Doubtful Debts

Doubtful Debts: $3 030

b. 3 marks

Working Space:

Allowance for Doubtful Debts $ 3030 – existing allowance $2 800 = $230 increase required

Jagger Stones
General Ledger

Allowance for Doubtful debts

Date Date
Cross-reference Amount Cross-reference Amount
2019 2019
Dec 31 Balance [1] 3 030 Dec 31 Balance [1] 2 800
Bad Debts [1] 230
3 030 3 030
2020
Jan 1 Balance 3 030

c. 2 marks
Jagger Stones
Balance Sheet (extract) as at 31 December 2019

$ $

CURRENT ASSETS

Accounts Receivable 81 100 [1]

Less Allowance for Doubtful Debts (3 030) [1] 78 070

QUESTION 5 – continued
8
d. 4 marks

Explanation: Whilst the amount calculated for doubtful debts will be an estimate and not
verifiable as there will be no source document it will however be less inaccurate than
reporting Accounts Receivable in full, and not reporting any bad debts until the debt
is confirmed as irrecoverable [1].
Providing for doubtful debts allows the bad debts expense to be recognised in the period
in which the credit sale is made upholding the Accrual Basis Assumption [1] and allowing for
profit to be accurately calculated by matching the expense incurred (bad debts) in the same
period of as the revenue earned (Credit Sale) [1].
Furthermore, estimating doubtful debts ensures that the Income Statement and Balance Sheet
provide a more faithful representation of the firm’s performance and position, and the
owner has all relevant information that may affect decision making [1].

Question 6 (7 marks)
a. 2 marks

Stitch in Time
General Journal

Date Details Debit Credit

Dec 31 Advertising 1 500

1
Prepaid Advertising 1 500
Allowance for Doubtful Debts 900
GST Clearing 90 1
Accounts Receivable – Linen Emporium 990

QUESTION 6 - continued

9
b. 5 marks
Stitch in Time
Income Statement for six months ended 31 December 2019

$ $

Revenue

Sales
198 000
1
Less Sales Returns
(2 000) 196 000
Less Cost of Goods Sold

Cost of Sales
132 000
Add Cartage In
1
540
Import Duties
490 133 030
GROSS PROFIT
62 970
Add Other Revenue

Discount Revenue 1
4 300

67 270
Less Other Expenses

Advertising
1 500
Bad Debts 1
1 440
Delivery Out
650
Rent Expense
14 000
Wages 1
7 890
Interest Expense
2 500 27 980
NET PROFIT
39 290

END OF ANSWER BOOK

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