Unit 3 Accounting

Practice Revision Questions

Question 1
Explain what is meant by the term accrual accounting.

Question 2
The following transactions relate to an item of stock – the ‘Inky Printer’. The Inky Printer is
imported from China and has a selling price of $400 plus 10% GST.

April 4 Credit sale [Inv F38] of 6 units to Bayside Primary School

April 9 Cash sale of 1 unit [Rec. 81]
April 12 Credit purchase of 12 units @ $180 each (plus $18 GST each) from
Huang Computers [Inv H91].
April 19 Credit sale [Inv F42] of 5 units to Waves Leisure Centre
April 23 Donated 1 unit to local Primary School raffle [Memo 9]
April 27 Credit purchase of 10 units @ $170 each (plus $17 GST each) from
Huang Computers [Inv I04].
April 30 Physical stocktake revealed 17 units on hand [Memo 10]

a. Record the above transactions in the Stock Card for Inky Printers.

b. Prepare the General Journal entry necessary to record Memo 9.

[Note: A narration is required]

c. Explain, with reference to the appropriate accounting element, how the donation of
stock on April 23 would be reported.

d. The high value of the Australian dollar ($A) means the cost of importing stock will
fall. Explain how using FIFO will affect profit during these times.

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Question 3
At 31 May 2014 the accountant prepared the following Trial Balance:

Macca’s Mega Mart

Post-adjusted Trial Balance at 31 May 2014
Account Debit Credit
Accrued Wages 3 600
Accumulated Depreciation - Equipment 10 000
Accumulated Depreciation – Motor Vehicle 6 000
Bad Debts 1 500
Bank 5 600
Buildings 260 000
Business Insurance Expense 24 000
Capital – J. McKenzie 275 000
Cash Sales 110 000
Cost of Sales 275 000
Credit Sales 335 000
Creditors Control 41 872
Customs Duty 2 850
Debtors Control 19 800
Delivery Expenses 5 000
Depreciation – Equipment 2 000
Depreciation – Motor Vehicle 2 000
Discount Expense 1 340
Discount Revenue 2 288
Drawings 40 000
Equipment 62 000
GST Clearing 5 580
Interest Expense 7 500
Mortgage (Repayable $15 000 per quarter) 165 000
Motor Vehicle 44 000
Office Expenses 18 950
Prepaid Business Insurance Expense 27 000
Stock Control 47 000
Stock Gain 1 600
Vehicle Expenses 13 400
Wages Expense 97 000
955 940 955 940

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 a. Prepare the General Journal entry necessary to:
 Close the Revenue accounts
 Transfer Drawings to the Capital account
(Note: Narrations are not required)

b. Using the information above, prepare an extract of an Income Statement for the
year ending 31 May 2014 up to, and including Other Revenue.

c. The business reported a Net Loss for the period of $1,652. Show how the Capital
account would appear at 31 May 2014 after all entries had been posted.
(Note: You are required to balance the account)

Question 4
The following summary of the Cash Journals of Mark’s Music Land was prepared for the 12
months ended 30 June 2014:

Cash Receipts Journal Cash Payments Journal

Discount Expense $3,350 Discount Revenue $4,200
Debtors Control $261,750 Creditors Control $195,200
Cost of Sales $160,000 Cash Purchases of Stock $95,000
Cash Sales $280,000 Wages $118,000
GST Collected $28,000 Drawings $70,000
Capital $30,000 GST Paid $21,040
Loan - QBF $40,000 Loan - QBF $25,000
Prepaid Rent $36,000
Customs Duty $8,400
Advertising $12,000
Interest Expense $8,000
Vehicle Expenses $18,700
Freight Out $9,700
Office Expenses $22,600
GST Clearing $3,900

a. Prepare a classified Cash Flow Statement for the year ended 30 June 2014.

b. Explain what is meant by Cash Flows from Financing Activities.

c. The business has reported a Net Profit for the period yet has also reported a net cash
outflow for the same period. Explain, using two examples from the information
above, how this can occur.

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Question 5
At 30 June 2014 the accountant prepared the following pre-adjusted Trial Balance:

Paula’s Plants
Pre-adjusted Trial Balance as at 30 June 2014
Account Name Debit Credit
$ $
Accumulated Depreciation – Shop Fittings 12 000
Bank 7 800
Building 300 000
Capital – Blake 195 690
Cartage In 6 000
Cost of Sales 245 000
Creditors Control 36 900
Customs Duty 8 400
Debtors Control 47 890
Discount Expense 4 200
Discount Revenue 3 100
Drawings 49 000
Freight Out 9 000
GST Clearing 6 500
Interest Expense 12 000
Loan – NBA 90 000
Mortgage 150 000
Office Expense 15 700
Prepaid Insurance Expense 16 000
Sales 462 000
Shop Fittings 80 000
Stock Control 66 200
Wages Expense 89 000
Totals 956 190 956 190

Prior to preparation of reports the following information must be considered:

i/ Depreciation on Shop Fittings to be charged at 10% per annum on cost

ii/ Wages for two employees owing at $100 each per day for 4 days
iii/ A Debtor – L. Wilson has advised us that he has been declared bankrupt and has paid
$0.30 in the dollar of his $400 debt [Rec 62].
iv/ Insurance was paid on 1 January 2014 for 12 months ending 31 December 2014
v/ A payment for Customs Duty of $500 (plus $50 GST) was incorrectly recorded as
Freight Out.
vi/ A physical stocktake determined stock on hand to be $65 300

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 a. Record transactions into the journals of Paula’s Plants. (Narrations are not required)

b. Other than the error found in transaction v/. above, identify two other errors that
could occur yet still allow the Trial Balance to balance.

c. Explain, with reference to a Qualitative Characteristic, why it is necessary to record

balance day adjustments.

d. Explain the effect on

* Gross Profit, and
* Net Profit
if the error for Customs Duty had not been corrected.

e. Prepare an extract of the Income Statement for the year ended 30 June 2014 to
show all items up to and including Other Revenue.

Question 6
Erin Forrest has been selling flowers and plants at local markets for the past three years as a
hobby. She has decided to resign from her accounting job and commence operating a flower
shop called ‘Forrest Flowers’ in a local shopping centre.
At 1 February 2014 she had the following Assets and Liabilities:

Cash at Bank $2,600 Stock of flowers $13,400

Creditor – Mitcham Seeds $6 700 Creditor – Pots R Us $7,900
Debtor – Bayside Motels $850 Loan – Rims $20 000
Stock of Pots $3,450 Motor Vehicle $42 000
Shop Equipment $47,000 Debtor – Village Inn $4,300
Family home $250,000 Personal bank account $1,040

Notes:
 The principal on the Loan is repayable at $1,000 per month
 The Motor Vehicle has an agreed current value of $35,000
 The business will operate a double-entry recording system using accrual accounting.
 The business will use control accounts and subsidiary records for Debtors, Creditors
and Stock.
 The business will adopt the perpetual method of stock recording and the FIFO
method of cost assignment.

a. Explain at what value the Motor Vehicle should be reported at in the Balance Sheet
of the business. Identify a Qualitative Characteristic that supports your answer.

b. Prepare a classified Balance Sheet as at 1 February 2014

c. Explain, with reference to an Accounting Principle, your treatment of Erin’s personal

bank account.

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 d. Identify how the Qualitative Characteristic of Understandability is reflected in the
Balance Sheet.

Question 7
Discuss how using Control Accounts and subsidiary records for Debtors, Creditors and Stock
can improve the recording and reporting of these items.