Module 2: Financial Accounting Handout

1. State whether the following should be Asset/Expense/ Income/

Liability/ Equity

Plant and Machinery Goodwill

Office Equipment Purchases
Bills Receivables Rent Paid
Carriage Inwards Carriage outwards
Provision Printing and Stationery
Interest on Capital Interest on drawings
Drawings Bank Overdraft
Unearned income Income Receivable
Investments Loan given
Loan taken Unpaid wages
Salesmen Commission Discount allowed
Bad Debts Depreciation
Inventories Accrued Income
Capital Accounts Payable
Accounts Receivables

2. The following transactions are related to Small Traders: Use double-entry

system of accounting to evaluate the transactions.

1. Started business with cash $95,000.

2. Furniture purchased for cash to be used in business $8,000.
3. Purchased goods for cash $40,000.
4. Purchased goods on credit from Big Traders $57,000.
5. Sold goods for cash $5,000.
6. Purchased equipment for business $4,000.
7. Sold goods on credit to John Retailers $1,500.
8. Paid salary to employees $1,200
9. Recorded annual depreciation on building $250
10. Recorded uncollectible accounts expense at the end of the year
$150

3. Dara entered into the following transactions:

1 Dara transferred $10,000 of personal savings into a business bank
account.
2 Dara then bought goods from Isa, a supplier, for $1,000 and paid
by cheque.
3. A sale was made for $400 – the customer paid by cheque.
4. Dara made a sale for $600 and the customer promised to pay at a
 later date.
6. Dara then bought goods from a supplier, Kamen, for $500 on credit.
7. Dara paid a telephone bill of $150 by cheque.
10. The credit customer paid the balance due on their account.
11. Dara paid Kamen $340.
12. Bank interest of $30 was received.
13. A cash customer returned $20 goods to Dara for a refund.
14. Dara returned goods which cost $100 to Kamen.
Required:
For each of the transactions noted, state the double entry required to
record the transaction in the accounting records.

4. The following balances appeared in the books of Vishal Stores on 1 st

Jan 20X1 :
Assets : Cash Rs. 15,000; Bank Balance Rs. 5,000; Inventories Rs.
40,000; Furniture Rs. 3,600; Accounts Receivables: Rs. 24,000 (X Rs.
6,000; Y Rs. 8,000 and Z Rs. 10,000)
Liabilities: Bank loan Rs. 10,000 ; Accounts Payables: Rs. 12,500 (Ajay
Rs. 5,000 ; Vijay Rs. 7,500)

Following transactions took place during January 20X1

Jan 2 : Bought goods from Kailash for Rs. 20,000 at a trade discount of
10% and cash discount of 2%. Paid 60 % amount immediately.

Jan 4 : Sold goods to X for Rs. 9,000.

Jan 5 : Received Rs. 14,800 from X in full settlement of his account.

Jan 6 : Cash deposited into bank Rs. 10,000.

Jan 8 : Cheque received from Y for Rs. 7,850 in full settlement of his
account. This cheque was immediately deposited into bank.

Jan 10 : Received a cheque from Z Rs. 2,000.

Jan 12 : Cheque received from Z deposited into bank.

Jan 15: Cheque received from Y dishonoured.

Jan 16 : Cash sales Rs. 15,000; Out of this amount Rs.12,000 deposited
into bank.

Jan 18 : Old newspapers sold Rs. 50; Old furniture sold Rs, 750.

Jan 20 : Z became insolvent and 40 paise in a rupee could be received

from his estate.
 Jan 22 : Purchased goods from Gopal and paid by cheque Rs. 8,000

Jan 24 : Sold half of the above goods to Chanderkant at a profit of 30

% on cost.

Jan 25: Proprietor withdrew for private use Rs. 2,000 from office and
Rs. 3,000 from bank.

Jan 31 : Paid salary to Motilal by cheque Rs. 2,000.

Jan 31 : Paid rent by cheque Rs. 1,500

Jan 31 : Paid trade expenses Rs. 500.

You are required to pass Journal Entries for the above transactions, Post
them to Ledger and Prepare the Trial Balance.

5. Georgie owes a supplier, Razan, $2,000 and is owed $3,400 by a

customer, Uli. Georgie offers a cash discount to customers of 2.5% if
they pay within 14 days, and Herbie has offered Georgie a cash
discount of 3% for payment within ten days.
Georgie took advantage of the early settlement discount offered and
paid Razan within ten days. Uli was expected to take advantage of
the early settlement discount offered, and therefore the sales invoice
raised by Georgie was prepared on that basis. However, Uli did not
pay within 14 days and paid the full amount due after 30 days.

Required:
(a) What ledger entries are required to record the payment by Georgie to
Razan, along with the calculation of the net cost of the goods purchased?
(b) What accounting entries are required by Georgie to record the receipt
from Uli?

6. Norris notes down the following transactions that happened in June.

1 Sell goods for cash for $60.

2 Pay insurance premium by cheque – $400.

3 Sell goods for $250 – the customer will pay in a month.

4 Pay $50 petrol for the delivery van.

5 Buy $170 goods for resale on credit.

6 Buys $57 of goods for resale, paying by cheque.

7 Buy another $40 goods for resale, paying cash.

8 Buy a new computer for the business for $800, paying cash.

Record these transactions using ledger accounts.

7. Matthew set up a company and in the first nine days of trading the
following transactions occurred:

1 January -Matthew subscribes for $10,000 of share capital in the

newly formed company, paying by cheque.

2 January -Matthew buys supplies worth $4,000 and pays by cheque.

3 January -Matthew buys a delivery van for $2,000 and pays by

cheque.

4 January -Matthew buys $1,000 of purchases on credit.

5 January -Matthew sells goods for $1,500 and receives a cheque of

that amount.

6 January -Matthew sells all his remaining goods for $5,000 on credit.

7 January -Matthew pays $800 to his supplier by cheque.

8 January -Matthew pays rent of $200 by cheque.

A. Complete the relevant ledger accounts.

B. Extract a trial balance.

8. Settlement of discount – Seller perspective:

An entity sold goods to a customer on credit at a price of $200, and
the customer was offered a 3% settlement discount for settlement
within ten days of the invoice date.
How should this be accounted for in the books of the seller if:
(a) The customer was not expected to take advantage of the early
settlement discount terms offered?
(b) The customer was expected to take advantage of the early
settlement discount terms offered?

9. Settlement of discount – Purchase perspective:

An entity sold goods to a customer on credit at a price of $200, and
the customer was offered a 3% settlement discount for settlement
within ten days of the invoice date.
How should this be accounted for in the books of the purchaser?
State the net cost of the goods purchased.

Sales Tax

1. Orlando sells the following goods:

To Bruno at a tax inclusive price of $470.

To Cosmo at a tax exclusive price of $700.

Required:
 How much sales tax is Orlando collecting on behalf of the tax
authority if the rate of sales tax is 17.5%?

2. Lorie purchased goods for $174,240 (including sales tax) and

sold goods for $230,400 (including sales tax). The sales tax rate is
20%. What amount of sales tax is ultimately payable to the tax
authority based upon this information?

3. Val’s business is registered for sales tax purposes. During the

quarter ending 31 March 20X6, Val made the following sales, all of
which were subject to sales tax at 17.5%: $10,000 excluding sales tax
$7,402 including sales tax $6,745 excluding sales tax $11,632
including sales tax. Val also made the following purchases all of which
were subject to sales tax at 17.5%: $15,000 excluding sales tax
$12,455 including sales tax $11,338 including sales tax $9,870
including sales tax.

Required: What was the balance on the sales tax account as at 31

March 20X6?

Problems on IAS 2:

1. At the beginning of the financial year a business has $1,500 of

inventory left over from the preceding accounting period. During the
year it purchases additional goods costing $21,000 and make sales
totalling $25,000. At the end of the year there are $3,000 of goods
left that have not been sold What is the gross profit for the year?

2. Tao buys and sells washing machines and has been trading for many
years. On 1 January 20X7, Tao had opening inventory of 30 washing
machines which cost $9,500. Tao purchased 65 machines in the year
amounting to $150,000 and on 31 December 20X7 there were 25
washing machines left in inventory at a cost of $7,500. Tao has sold
70 machines with a sales value of $215,000 in the year. Calculate the
gross profit for the year ended 31 December 20X7.

3. The trading position of Min’s cash-based business for its first week of
trading was as follows: $ Capital introduced by the owner 1,000
Purchases for cash 800 Sales for cash 900 At the end of the week
there were goods which had cost $300 remaining in inventory. Write
up the ledger accounts for the first week and then prepare a vertical
statement of profit or loss (i.e. sales revenue, costs of sales and gross
profit). Clearly show the closing inventory asset that would be shown
on the statement of financial position at the end of the first week. You
 will need to set up two inventory T-accounts: one for inventory assets
and one for inventory within cost of sales.

4. Invicta Co has closing inventory of 5 units at a cost of $3.50 per unit

at 31 December 20X5. During the first week of January 20X6, Invicta
Co entered into the following transactions:

Purchases

• 2nd January – 5 units at $4.00 per unit

• 4th January – 5 units at $5.00 per unit

• 6th January – 5 units at $5.50 per unit

Invicta Co sold 7 units for $10.00 per unit on 5th January.

Required:

(a) Calculate the value of the closing inventory at the end of

the first week of trading using the following inventory
valuation methods:

1 FIFO

2 periodic weighted average cost

3 continuous weighted average cost.

(b) Prepare the statement of profit or loss (sales revenue, cost

of sales, gross profit) for the first week of trading using each
method of inventory valuation.

5. On 1 July 20X6 an entity, Pinto Co, had 10 items of inventory at a

unit cost of $8.50. Pinto Co, then made the following purchases and
sales during a six month period to 31 December 20X6:

Purchases:

Date Quantity Unit cost ($) Total cost

14 Oct X8 15 9.00 135.00
22 Nov X8 25 9.20 230.00
13 Dec X8 20 9.50 190.00
60 555.00

Sales:

Date Quantity Unit cost ($) Total cost

23 Aug X8 7 12.00 84.00
20 Oct X8 10 12.25 122.50
30 Nov X8 15 12.50 187.50
 24 Dec X8 18 13.00 234.00
50 628.00
Required:

Based upon the available information, calculate the closing inventory

valuation at 31 December 20X6 using:

(a) periodic weighted average cost

(b) continuous weighted average cost.