VCE

Accounting - VCAA Unit 3 2012 Suggested Solutions

Prepared by Sam Kothari Please note: this is merely a suggested set of solutions created to give VCE Accounting students feedback about the 2012 VCAA exam. It is in no way endorsed by VCAA and should only be used as a guide. 1a)
Date Details General Ledger Debit $ Credit $ Subsidiary Ledger Debit $ Credit $

Feb 1 Stock Control Computer System Creditors Control Creditor Box Nursery Capital

15 000 3 000

4 000

4 000 14 000

Some debate about including the Loan: Usually, receipts of loans are recorded in the Cash Receipts Journal, not in the General Journal. However, commencing entries (especially from single- to double-entry accounting systems) require you to include all accounts in order to open balances in the General Ledger. Note that in this case the business is starting operation, not changing systems.

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 1b) Accounting Principle: Historical Cost Qualitative Characteristics: Relevance and Reliability The HC principle requires that all transactions be recorded at their original purchase price; this would imply that the computer system should be recorded at $5000. This would also satisfy Reliability, which requires that all transactions be free from bias. However, both HC and Reliability are undermined and overlooked in deference to Relevance. This requires that only information useful for decision making be included in reports. Therefore, the computer system should be (and was) recorded at its agreed value of $3000, as this will help to ensure that decisions made in relation to this asset (such as when to replace it, depreciation etc.) are not adversely affected and remain relevant. 1c) The bank overdraft would be treated as a current liability if the business took advantage of the credit facility, as it would represent a present obligation of the entity, as a result of past events, the settlement of which will result in an outflow of economic benefits within 12 months. On the facts, it is unclear whether the businesss cash balance has fallen below zero. 2a) Cost of Sales = 9000/1.5 = $6000 Sundries = 26000 11100 9000 900 = $5000

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 2b) Sales Journal

Date Debtor Inv. Number 232 Cost of Sales 2 000 Sales GST Total Debtors 3 300

May 28

Kafe Kool

3 000

300

Cash Receipts Journal

Date Details Rec. No. 872 Bank Disc. Exp 99 Debtors Cost of Sales Sales GST Sundries

May Kafe Kool 31

3 201

3 300

Cash Payments Journal

Date Details Chq. No. Bank Disc. Rev Creditors Stock Control GST Sundries

May Prepaid Rent 872 29 Expense

8 250

750

7 500

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 2c) Accounts must be balanced to get full marks.

STOCK CONTROL (A)

Date May. 1 Cross-reference Balance Amount ???? 6 000 Date May. 31 Cross-reference Cost of Sales Cost of Sales Amount 6 000 10 000

May. 31 Creditors Control

CREDITORS CONTROL (L)

Date Cross-reference Amount 15 000 Date May. 1 Cross-reference Balance Stock Control/GST Clearing Amount ???? 6 600

May. 31 Bank 2d)

Reported as a current asset. The prepaid rent represents a resource controlled by the entity as a result of past events, which will provide Shade Designs with future economic benefits (the availability of the premises) within 12 months.

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 2e) Discuss: Control accounts and subsidiary ledgers involve maintaining an overall control ledger account that contains the totals of the individual subsidiary ledger accounts (one is created for each individual debtor and creditor). Benefits: o Double checking mechanism (Schedules) o A single amount reported in the balance sheet o Allocation of responsibility Cost: o Time consuming o Financially costly (additional set of records may create higher administrative costs)

It should be noted that the business only has one supplier. This means that it would not require a control account and subsidiary records, as it would merely increase the time taken to prepare records without adding any of the benefits obtained when having multiple debtors or credits. Shade Designs should probably only have a control account system in place for debtors.

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 3a) Stock Item: Jazz 16GB USB Stock Code:

Date

Location: Supplier: DZ Systems

IN

Details

OUT Value $ Qty Unit cost

BALANCE Value $ Qty Unit cost

Qty

Unit cost

Value $

Jun. 1 Balance

132 150 32 150 114 110 65 60

11 12 11 12 12 12 12 12

3 252 2 152 1 368 1 320 780 720

11 Inv. 895

100

11

1 100

16 Inv. 896

32 36 4 45 5

11 12 12 12 12

784 48 540 60

22 Memo 6 26 Memo 9 30 Memo 10 3b)

Date

General Ledger Details Debit $ Credit $

Subsidiary Ledger Debit $ Credit $

June 30 Drawings Stock Control Advertising Expense Stock Control

48 540

48 540

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 3c) Sales = 100 x 20 + 68 x 22 = $3496 Cost of Sales = 1100 + 784 = $1884 Gross Profit = 3496 1884 = $1612 Adjusted Gross Profit = 1612 60 = $1552 3d) It is very difficult for businesses to actively trace and detect the cost price of each individual unit of stock, especially if the business resells stock with relatively low cost prices and experiences high volumes (as is the case with USBs). Therefore, businesses use the FIFO method for stock valuation: FIFO stock valuation assumes that the first stock purchased by the business is the first stock that is sold by the business. This cost assignment method removes the need to label each stock item with its cost price (a process which is both tedious and costly). 3e) Effects on Income Statement of Memo 9 (Advertising) As a result of the failure to record Memo 9, Net Profit would not be effected. This is because while advertising expense would be understated by $540, stock loss would be overstated by $540. The business would detect a much larger stock loss. Overall: no effect. 4a) Advertising Paid: 2 x 1200 + 10 x 1440 = $16800 4b) Advertising Expense: 3 x 1200 + 9 x 1440 = $16560 4c) Reporting Period: Profit should be calculated by matching revenues earned against expenses incurred. The business is prepaying its advertising expense a month in advance. This means that the effect of the increase in advertising expense by 20% is delayed by a month (affects the month immediately the increase).

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 5a) Income Statement: not appropriate. This would require the Post-Adjustment Trial Balance, as the Pre-Adjustment doesnt include changes to accounts as a result of balance day adjustments, which can have a significant effect on Net Profit. Cash Flow Statement: appropriate. Balance day adjustments will not affect the cash balance. 6a)
Date Details General Ledger Debit $ Credit $ Subsidiary Ledger Debit $ Credit $

June 30 Stock Control Stock Gain Cartage Outwards GST Clearing Discount Revenue Depreciation of Computer System Acc. Depn of Computer System Rent Expense Prepaid Rent Expense

2 080 900 90 4 920

2 080 990

4 920

6b)

22 600

22 600

Income Statement: Overstated by $4 920 Cash Flow Statement: No effect Balance Sheet: Assets and Owners Equity overstated by $4 920

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 6c) Income Statement Revenue Sales $ 251 180 3 090 161 500 21 400 22 600 4 920 5 400 $ 448 000 254 270 193 730 2 080 195 810 2 390 198 200 215 820

less Cost of Goods Sold Cost of Sales Freight Inwards Gross Profit

add Stock Gain Adjusted Gross Profit

add Other Revenue Discount Revenue

less Other Expenses Wages Advertising Expense Rent Expense Depreciation of Computer System Cartage Outwards

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 6d) Current liabilities Creditors Control GST Clearing Bank Overdraft Loan MCB Finance Non-current liabilities Loan MCB Finance Total Liabilities 6e) Discount Revenue: represents a savings in outflow of economic benefits in the form of a decrease in liabilities (Creditors Control) that leads to an increase in owners equity. Sales Revenue: represents an inflow of economic benefits in the form of an increase in assets (usually Bank or Debtors Control) that leads to an increase in owners equity. $ 51 300 3 360 16 000 27 600 $ 98 260 47 400 145 660 Net Profit $ (17 620)

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 7a)

PROFT/LOSS SUMMARY
Date Cross-reference Amount 16 500 22 000 38 500 Date June 30 Cross-reference Revenues Amount 38 500 38 500

June 30 Expenses Capital

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 8a)

Cash Flow Statement for the month of May 2012

OPERATING ACTIVITIES Receipts from Debtors GST Received Cash Sales Payments to Creditors Purchase of Stock GST Paid Wages GST Settlement Advertising Net Operating Cash Flows 8b) Mel is incorrect. Operating Cash Flows have suffered a shortfall in fact, reduced the overall cash balance by $3750. The only reason the business had an increase in its cash position was due to the capital contribution of $15000 (the loan seems to have correlated to the purchase of additional shop fittings). This indicates that the business is heavily reliant on funds from the owner, and is struggling to generate cash from its day-to-day trading activities; all in all, it is in a precarious cash position. $ 9 100 2 700 27 000 (10 800) (13 500) (2 770) (8 600) (1 900) (4 800) $ 38 800 (42 370) (3 570)

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 9a) Assets: Decrease (Bank) $19600 Liabilities: Decrease (Decrease Accrued Wages) $2800 Owners Equity: Decrease (Increase Wages Expense) $16800 A big thank you to everyone on AtarNotes for providing me with a copy of the exam, and also contributing in answering the questions!

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