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FA – L1 – Q70 – Preparing financial statements of a sole trader

Prepare Henry's statement of profit or loss for the year ended 31 May 20X9 and statement of financial position as at that date using the trial balance.

Question

The following trial balance has been extracted from the ledger of Henry, a sole trader, as at 31 May 20X9, the end of his most recent financial year.

Henry: Trial balance as at 31 May 20X9

	DR GH₵(000)	CR GH₵(000)
Land and buildings at cost	90,000
Equipment at cost	57,500
Accumulated depreciation (as at 1 June 20X8)
On land and buildings		12,500
On equipment		32,500
Inventory as at 1 June 20X8	27,400
Sales		405,000
Purchases	259,600
Discounts received		4,420
Wages and salaries	52,360
Irrecoverable debts	1,720
Loan interest	1,560
Other operating expenses	38,800
Trade receivables	46,200
Trade payables		33,600
Allowance for receivables		280
Cash in hand	151
Bank overdraft		14,500
Carriage out	8,680
Drawings	28,930
10% loan		15,600
Capital as at 1 June 20X8		94,501
Total	612,901	612,901

The following additional information as at 31 May 20X9 is available:
(a) Inventory as at 31 May 20X9 was valued at GH₵25,900,000.
(b) Depreciation for the year ended 31 May 20X9 has yet to be provided as follows:

Property – 1% using the straight-line method;
Equipment – 15% using the straight-line method.
(c) There are accrued wages and salaries of GH₵140,000.
(d) Other operating expenses include some prepaid expenses of GH₵500,000 and some accrued expenses of GH₵200,000.
(e) The allowance for receivables should be adjusted to 5% of trade receivables as at 31 May 20X9.
(f) The amount for purchases includes goods valued at GH₵1,040,000 which were withdrawn by Henry for his own personal use.

Required
Prepare Henry’s statement of profit or loss for the year ended 31 May 20X9 and his statement of financial position as at that date.

Answer

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Tags: Accruals, Depreciation, Drawings, Financial Statements, Inventory, Prepayments, Profit or Loss, Receivables, Sole Trader, Statement of Financial Position
Level: Level 1

Topic: Preparing financial statements of a sole trader

FA – L1 – Q69 – Preparing financial statements of a sole trader

Prepare Sarah's statement of profit or loss for 20X8 and financial position as at 31 Dec 20X8 using given balances and adjustments.

Question

The following information relates to the business of Sarah for the year ended December 20X8.

	GH$	GH$
Capital account, 1 January 20X8		13,640
Freehold properties at cost	7,500
Furniture and fittings at cost	2,000
Motor cars at cost	6,300
Accumulated depreciation to 1 January
Freehold properties		450
Furniture and fittings		800
Motor cars		2,370
Inventory 1 January	6,740
Purchases	54,520
Sales		79,060
Salaries	8,760
Rates	1,170
Office expenses	3,950
Motor expenses	3,790
Drawings	4,800
Allowance for receivables 1 January		600
Loan		4,000
Trade receivables	9,240
Trade payables		10,040
Bank balance	2,190
	110,960	110,960

You are also supplied with the following information:
(1) Inventory at 31 December 20X8 was GH$7,330.
(2) Rates paid in advance at 31 December 20X8 amounted to GH$250.
(3) Allowance for receivables is to be made equal to 5% of accounts receivable at 31 December 20X8.
(4) Depreciation is to be provided for the year at the following annual rates calculated on cost at the year end:

Freehold properties: 1%
Furniture and fittings: 10%
Motor cars: 20%
(5) Interest on the loan at 5% per annum is to be provided.

Required:
Prepare a statement of profit or loss for the year ended 31 December 20X8 and a statement of financial position at that date.

Answer

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Tags: Accruals, Bad Debts, Depreciation, Financial Statements, Inventory, Loan Interest, Prepayments, Sole Trader, Statement of Financial Position, Statement of profit or loss
Level: Level 1

Topic: Preparing financial statements of a sole trader

FA – L1 – Q68 – Preparing financial statements of a sole trader

Prepare Michael Tan's statement of profit or loss for 20X9 and financial position as at 31 May 20X9 using trial balance and adjustments.

Question

The following trial balance was extracted from the main ledger of Michael Tan, a sole trader, as at 31 May 20X9 – the end of his financial year.

Michael Tan: Trial balance as at 31 May 20X9

	DR GH$(000)	CR GH$(000)
Land and buildings at cost	120,000
Equipment at cost	80,000
Accumulated depreciation (as at 1 June 20X8)
On land and buildings		36,000
On equipment		38,000
Purchases	250,000
Sales		402,200
Inventory as at 1 June 20X8	50,000
Discounts received		4,800
Returns outwards		15,000
Wages and salaries	79,800
Irrecoverable debts	2,100
Loan interest	2,100
Other operating expenses	17,700
Trade payables		36,000
Trade receivables	38,000
Cash in hand	300
Bank	1,300
Drawings	24,000
Allowance for receivables		500
7% long-term loan		30,000
Capital as at 1 June 20X8		121,300
	665,300	683,800

The following additional information as at 31 May 20X9 is available:
(a) Inventory as at 31 May 20X9 was valued at GH$42,000,000.
(b) Depreciation for the year ended 31 May 20X9 has yet to be provided as follows:

Land and buildings: 1.5% using the straight-line method;
Equipment: 25% on the carrying amount at the year-end (i.e., cost less accumulated depreciation at 1 June 20X8).
(c) There are accrued wages and salaries of GH$800,000.
(d) Other operating expenses include some prepaid expenses of GH$300,000.
(e) The allowance for receivables should be adjusted to 2% of trade receivables as at 31 May 20X9.

Required:
Prepare Michael Tan’s statement of profit or loss for the year ended 31 May 20X9 and his statement of financial position as at that date.

Answer

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Tags: Accruals, Bad Debts, Depreciation, Drawings, Financial Statements, Inventory, Prepayments, Sole Trader, Statement of Financial Position, Statement of profit or loss
Level: Level 1

Topic: Preparing financial statements of a sole trader

FA – L1 – Q67 – Preparing financial statements of a sole trader

Prepare DOVE's statement of profit or loss for 20X9 and statement of financial position as at 31 Dec 20X9 using given ledger balances and adjustments.

Question

The following balances were extracted from the main ledger of DOVE on 31 December 20X9.

Description	GH$(000)
Capital	10,059
Inventory at 1 January 20X9	2,720
Cash in hand	55
Bank overdraft	2,522
Sundry receivables	7,009
Sundry payables	6,735
Motor vans (Cost GH$2,000)	1,500
Drawings in cash	2,459
Fixtures and fittings (Cost GH$4,000)	3,800
Purchases	33,436
Allowance for receivables	162
Sales	50,261
Purchases returns	120
Carriage inwards	546
Rent	626
Salaries and wages	5,226
Motor vehicle expenses	920
Interest on bank overdraft and bank charges	56
Carriage outwards	785
Returns inwards	240
Freehold land	10,300
Irrecoverable debts	240

You are given the following information:
(1) The inventory at 31 December 20X9 was GH$4,270,000.
(2) Wages and salaries payable at 31 December 20X9 were GH$426,000.
(3) Rent paid in advance at 31 December 20X9 amounted to GH$100,000.
(4) The allowance for receivables is to be increased to GH$260,000.
(5) Depreciation is to be charged as follows: motor vans at 25% per year on cost, fixtures and fittings 5% per year on cost.
(6) During 20X9, the owner of DOVE withdrew goods valued at GH$180,000 for his own use. No entry has been made in the accounts for the withdrawal of these goods.
(7) One quarter of the motor vehicle expenses is the cost of the owner’s private motoring, as distinct from expenses for business purposes.

Required:
Prepare a statement of profit or loss for the year ending on 31 December 20X9 and a statement of financial position as at that date.

Answer

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Tags: Accruals, Bad Debts, Depreciation, Drawings, Financial Statements, Inventory, Prepayments, Sole Trader, Statement of Financial Position, Statement of profit or loss
Level: Level 1

Topic: Inventory

MA – L2 – Q43 – Decision Making Techniques

Recommend whether to shut down internal production of Component A or B and switch to external purchasing based on cost analysis.

Question

Vento Industries makes two components, A and B, for which costs in the next year are expected to be as follows:

	A	B
Production (units)	30,000	20,000
Variable costs per unit:	GH¢	GH¢
Direct materials	6	5
Direct labour	3	9
Variable production overheads	1	3
Variable production cost	10	17

Direct labour is paid GH¢12 per hour. There will be only 19,500 hours of direct labour time available next year, and any additional components must be purchased from an external supplier.
Total fixed costs per annum are expected to be as follows:

	GH¢
Incurred as a direct consequence of making A	40,000
Incurred as a direct consequence of making B	50,000
Other fixed costs	30,000
	120,000

An external supplier has offered to supply units of A for GH¢12.50 and units of B for GH¢23.

Required:
(a) Recommend whether Vento Industries should shut down internal production of Component A or Component B and switch to external purchasing.

(b) Recommend the quantities that Vento Industries should make of the components, and the quantities that it should buy externally, in order to obtain the required quantities of both components at the minimum cost. Calculate what the total annual cost will be.

Answer

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Tags: Cost Minimization, External Purchasing, Labour Hours, Limiting Factors, Make or Buy, Production Planning
Level: Level 2

Topic: Decision making techniques

FA – L1 – Q66 – Bank reconciliations

Prepare an adjusted cash book for Mama Clara as at 31st December 20X9 based on bank statement and cash book discrepancies.

Question

The following information was extracted from the records of Mama Clara, a sole trader as at 31st December, 20X9.
Balance as per bank statement as at 31st December, 20X9 was GH¢10,000 credit.
Cash book balance was GH¢40,000 credit in the bank account column.
The following had been reflected in the bank statement but not in the cash book.
(i) Bank loan interest GH¢2,000
(ii) Bank charges GH¢6,000
(iii) Dividends from Investment GH¢10,000
(iv) Interest from treasury bill GH¢4,000
In addition, a cheque of GH¢20,000 issued to Madam Grace was dishonoured because of insufficient funds. A cheque of GH¢25,000 from Samuel has not been credited. A cheque of GH¢49,000 issued to Simon remained unpresented.

You are required to prepare:
(i) An adjusted cash book.

(ii) Bank reconciliation statement as at 31st December, 20X9.

Answer

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Tags: Adjustments, Bank reconciliation, Cash book, Financial accounting, Uncredited deposits, Unpresented cheques
Level: Level 1

Topic: Bank reconciliations

MA – L2 – Q42 – Decision Making Techniques

Determine optimal production mix for four liquids with a contract obligation, maximizing profit within labour hour constraints.

Question

NexGen Ltd. manufactures four liquids: A, B, C, and D. The selling price and unit cost details for these products are as follows:

	Liquid A	Liquid B	Liquid C	Liquid D
	GH¢ per litre	GH¢ per litre	GH¢ per litre	GH¢ per litre
Selling price	100	120	120	110
Costs:
Direct materials	24	30	21	18
Direct labour (GH¢6/hour)	18	15	24	12
Direct expenses	0	0	0	0
Variable overhead	12	10	18	12
Fixed overhead (note 1)	24	20	36	24
Total cost per litre	78	75	102	66
Profit per litre	22	35	18	44

Note 1: Fixed overhead is absorbed on the basis of labour hours, based on a budget of 1,600 hours per quarter (three months).
During the next three months, the number of direct labour hours is expected to be limited to 1,345 hours. The same labour is used for all products.
The marketing director has identified the maximum demand for each of the four products during the next three months as follows:

Liquid A: 200 litres
Liquid B: 150 litres
Liquid C: 100 litres
Liquid D: 120 litres
No inventories are held at the beginning of the period that could be used to satisfy demand in the period.

Required:
(i) Determine the number of litres of liquids A, B, C, and D to be produced and sold in the next three months in order to maximise profits.
(ii) Calculate the profit that this would yield.

(B) Suppose that a contract has been made before the beginning of the period by NexGen Ltd. and one of its customers, PrimeCorp. NexGen Ltd. has agreed to supply PrimeCorp with 20 litres of each A, B, C, and D during the three-month period.
This sales demand from PrimeCorp is included in the demand levels shown above in part (a) of the question.

Required:
(i) Given the contract with PrimeCorp, determine the number of litres of liquids A, B, C, and D to be produced and sold in the next three months in order to maximise profits, if the maximum number of labour hours remain 1,345 hours for the period.
(ii) Calculate the profit that this would yield.

Answer

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Tags: Contract Obligations, Contribution Analysis, Labour Hours, Limiting Factors, Production Planning, Profit Maximization
Level: Level 2

Topic: Decision making techniques

FA – L1 – Q65 – Bank Reconciliations

Demonstrate adjustments needed to KW Ltd's cash book for July 20X9 due to errors and unrecorded transactions.

Question

The following is a summary from the cash book of KW Ltd for July 20X9:

Opening balance	1,530
Receipts	23,104
Payments	23,005
Closing balance	1,629

On investigation it was discovered that:
(i) Bank charges of GH₵15 shown on the bank statement have not been entered in the cash book.
(ii) A cheque drawn for GH₵110 to pay a supplier has been entered in the cash book as a receipt.
(iii) A cheque from a customer for GH₵120, which was banked (and included above in receipts), has been returned by the bank, but this has not been adjusted in the company’s books.
(iv) An error of transposition which occurred in the opening balance of the cash book should have been recorded as GH₵1,350.
(v) Cheques totaling GH₵264 have been sent by post to suppliers but were not presented to the company’s bank until August 20X9.
(vi) The last page of a bank account paying-in book shows a deposit of GH₵1,040 which was not credited to the account by the bank until 1st August 20X9.
(vii) The company’s bank statement at 31st July 20X9 shows a balance of GH₵318.

Required:
(a) Demonstrate any adjustments needed to the company’s accounting records.

(b) Prepare a Bank Reconciliation Statement as at 31st July 20X9.

Answer

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Tags: Adjustments, Bank reconciliation, Bank statement, Cash book, Cheques, Deposits, Error Correction, Financial accounting
Level: Level 1

Topic: Bank reconciliations

FA – L1 – Q64 – Correction of Errors

Prepare journal entries to correct errors in Mensah and Partners' trial balance, including irrecoverable debts and misposted transactions.

Question

The trial balance of Mensah and Partners did not agree as at 31 December 20X9, and the difference was carried to a suspense account. On scrutinising the books of account, the following types of errors were detected:
(i) Receivables include GH₵15,000 which are irrecoverable and need to be written off.
(ii) Goods invoiced at GH₵4,600 were returned by a customer. It was entered in the purchases book and posted from there to a creditor’s account as GH₵6,400.
(iii) A cheque of GH₵8,000 received from a customer was not posted to his ledger account. Moreover, the corresponding sales invoice for GH₵12,000 was incorrectly passed through the sales day book as GH₵2,000.
(iv) Sales include goods sold for cash amounting to GH₵25,000 on behalf of Mr Kwame. Mensah and Partners were entitled to a commission of 10% on the sales plus selling expenses, for which no adjustment was made. The related selling expenses amounted to GH₵1,500.
(v) An amount of GH₵3,800 owed by Y & Co. for goods supplied was to be adjusted against an amount of GH₵8,500 owed to Y & Co. No entry has been made in this regard.
(vi) A purchase of GH₵15,100 was entered in the purchase day book as GH₵1,500 and posted to the supplier’s account as GH₵5,100.
(vii) Goods invoiced at GH₵23,000 and returned by J K, a debtor, were entered in the purchase day book and posted therefrom to K J, a creditor, as GH₵32,000.
(viii) A supplier’s invoice for GH₵12,300 had been entered in the purchase day book on 28 December 20X9. However, the goods were received on 2 January 20Y0.
(ix) Some items of furniture which stood in the books at GH₵24,000 on 1 January 20X9 were disposed of on 30 June 20X9 in exchange for new furniture costing GH₵20,800. A net invoice of GH₵9,200 was passed through the purchase day book. Depreciation on furniture is charged at 10% on written down value.
(x) Mensah and Partners maintains an allowance of 5% of the gross amount of receivables.

Required:
Prepare journal entries to rectify the errors identified above.
(Narrative is not required.)

Answer

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Tags: Bad Debt, Depreciation, Error Correction, Inventory, Journal entries, Purchases, Receivables, Sales, suspense account, Trial Balance
Level: Level 1

Topic: Correction of Errors

FA – L1 – Q63 – Correction of Errors

Prepare journal entries to correct errors in B.B. Ventures' trial balance, including unposted returns, sales errors, and inventory issues.

Question

The trial balance prepared by B.B. Ventures showed a difference of GH₵47,060, which was put on the credit side of a suspense account. An investigation disclosed that:
(i) The total of purchase return day book amounting to GH₵16,160 had not been posted to the ledger.
(iii) The sales account had been added short by GH₵10,000.
(iv) An asset bought four years ago for GH₵7,000 and depreciated to GH₵1,200 had been sold for GH₵1,500 at the beginning of the year. The receipt of cash has been posted in the bank book but corresponding entries have not been recorded.
(v) A credit sale of GH₵1,470 had been credited to the customer’s account as GH₵1,740. An irrecoverable debt of GH₵1,560 has to be written off. Allowance for receivables is to be maintained at 10% of receivables. Receivables appearing in the trial balance are GH₵23,390, and the allowance for receivables account shows a credit balance of GH₵2,320.
(vi) A sub-total of GH₵29,830 on the list of closing inventory had been carried over as GH₵29,380, and another sheet had been overcast by GH₵1,000.

Required:
(a) Prepare journal entries to correct the above errors. (Narrations are not required)

(b) Explain why it is important that the accountant of B.B. Ventures behaves in an ethical manner when preparing financial statements.

Answer

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Tags: Error Correction, Ethics, Financial accounting, Financial Reporting, Professional conduct, Trial Balance
Level: Level 1

Topic: Correction of Errors

Program (SQ): PROFESSIONAL PROGRAM

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FA – L1 – Q70 – Preparing financial statements of a sole trader

Prepare Henry's statement of profit or loss for the year ended 31 May 20X9 and statement of financial position as at that date using the trial balance.

FA – L1 – Q69 – Preparing financial statements of a sole trader

Prepare Sarah's statement of profit or loss for 20X8 and financial position as at 31 Dec 20X8 using given balances and adjustments.

FA – L1 – Q68 – Preparing financial statements of a sole trader

Prepare Michael Tan's statement of profit or loss for 20X9 and financial position as at 31 May 20X9 using trial balance and adjustments.

FA – L1 – Q67 – Preparing financial statements of a sole trader

Prepare DOVE's statement of profit or loss for 20X9 and statement of financial position as at 31 Dec 20X9 using given ledger balances and adjustments.

MA – L2 – Q43 – Decision Making Techniques

Recommend whether to shut down internal production of Component A or B and switch to external purchasing based on cost analysis.

FA – L1 – Q66 – Bank reconciliations

Prepare an adjusted cash book for Mama Clara as at 31st December 20X9 based on bank statement and cash book discrepancies.

MA – L2 – Q42 – Decision Making Techniques

Determine optimal production mix for four liquids with a contract obligation, maximizing profit within labour hour constraints.

FA – L1 – Q65 – Bank Reconciliations

Demonstrate adjustments needed to KW Ltd's cash book for July 20X9 due to errors and unrecorded transactions.

FA – L1 – Q64 – Correction of Errors

Prepare journal entries to correct errors in Mensah and Partners' trial balance, including irrecoverable debts and misposted transactions.

FA – L1 – Q63 – Correction of Errors

Prepare journal entries to correct errors in B.B. Ventures' trial balance, including unposted returns, sales errors, and inventory issues.

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Prepare Henry's statement of profit or loss for the year ended 31 May 20X9 and statement of financial position as at that date using the trial balance.

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Prepare Michael Tan's statement of profit or loss for 20X9 and financial position as at 31 May 20X9 using trial balance and adjustments.

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Prepare DOVE's statement of profit or loss for 20X9 and statement of financial position as at 31 Dec 20X9 using given ledger balances and adjustments.

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Recommend whether to shut down internal production of Component A or B and switch to external purchasing based on cost analysis.

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Prepare an adjusted cash book for Mama Clara as at 31st December 20X9 based on bank statement and cash book discrepancies.

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Determine optimal production mix for four liquids with a contract obligation, maximizing profit within labour hour constraints.

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Demonstrate adjustments needed to KW Ltd's cash book for July 20X9 due to errors and unrecorded transactions.

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Prepare journal entries to correct errors in Mensah and Partners' trial balance, including irrecoverable debts and misposted transactions.

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Prepare journal entries to correct errors in B.B. Ventures' trial balance, including unposted returns, sales errors, and inventory issues.

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