Flashcards · 4AC1 · Topic 5

Accounting for end of period adjustments flashcards

21 cards on Topic 5, subtopics 5.1 to 5.4. Pick a subtopic or study them all.

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A business changes from straight line to reducing balance for one year only. Which concept is broken?: Consistency: profits of the two years are no longer comparable. A change needs a good reason and disclosure.
Inventory costs $540 and has a net realisable value of $410. Value and concept?: Prudence: use the lower figure, $410. The $130 loss reduces this year’s profit.
A payment of $3,000 covers 15 months from 1 October; the year ends 31 December. Expense and other receivable?: $200 a month. Expense for 3 months = $600. Other receivable (prepaid 12 months) = $2,400.
An item of $45 is bought when profit is $9,000. How is it treated, and why?: 45 ÷ 9,000 × 100 = 0.5% of profit, so it is immaterial (materiality) and is simply expensed.
The owner’s personal phone bill of $150 was charged to telephone expense. Correction?: Business entity: remove it from expenses and record it as drawings. Profit rises by $150 and drawings rise by $150.
What does the money measurement concept leave out of the statements?: Anything without a reliable money value: staff skill, reputation and customer loyalty. The statements are therefore incomplete.

A kiln costs $25,000 and is depreciated at 20% reducing balance. Charges and carrying value for years 1 to 3?: Y1 5,000 (carrying value 20,000); Y2 4,000 (16,000); Y3 3,200 (12,800). Accumulated depreciation $12,200.
A machine costs $15,000, residual value $1,500, life 9 years. Annual straight-line charge?: (15,000 − 1,500) ÷ 9 = $1,500 a year.
How is a non-current asset shown in the statement of financial position after depreciation?: For each class: cost, depreciation to date and carrying value (cost − accumulated depreciation).
The $25,000 kiln (accumulated depreciation $12,200) is sold for $12,000. Result, and where it is shown?: Carrying value 12,800; loss 12,800 − 12,000 = $800, an expense in the statement of profit or loss. A loss is not a cash payment.
Depletion as a cause of depreciation: Natural resources, such as a mine or quarry, are used up.

Order of work for irrecoverable debts and the provision at the year end: Write off the irrecoverable debts first, then calculate the provision on the remaining receivables, then compare it with the provision brought forward.
Receivables $40,000 before writing off $900; provision 3%; provision b/f $1,500. Provision change and net receivables?: Remaining 39,100 × 3% = 1,173, a decrease of $327 (income). Trade receivables 39,100 − 1,173 = $37,927.
In the same case, what is the net charge to the statement of profit or loss?: Irrecoverable debt 900 − decrease in provision 327 = $573.
Receivables $60,000, of which $2,000 is irrecoverable; 5% provision on the rest. Provision?: 5% × 58,000 = $2,900.
Irrecoverable debt compared with provision: effect on the customer’s account and on profit: Irrecoverable debt: the customer’s account is credited and closed; the whole amount is an expense. Provision: customer accounts are not touched; only the change is an expense or income.

Rent paid $9,600; prepaid $800 at the start and $1,000 at the end. Rent expense?: 800 + 9,600 − 1,000 = $9,400. The closing $1,000 is an other receivable (current asset).
Heating paid $3,000; accrued $400 at the start and $250 at the end. Expense?: 3,000 − 400 + 250 = $2,850. The closing $250 is an other payable (current liability).
Rent receivable: $6,000 received and $500 still owed at the year end. Income for the year?: 6,000 + 500 = $6,500, with an other receivable of $500.
An accrual of $700 is left out of the accounts. Effect?: Expenses too low, so profit is overstated by $700; liabilities (other payables) are understated by $700.
Why does an opening accrual reduce this year’s expense?: Part of the cash paid this year settled last year’s cost, which was already charged last year, so it is taken off.