Chapter 16 Exercise Review

Question 1

referring to one accounting principle, explain why only one part of the rent received should be recognised as revenue for the year

Answer 1

Reporting Period

Only 4 months worth of rent (March – June) has been earned in the Reporting Period ending 30 June.The remaining 2 months remain a current liability as they are still owed to the solicitor.

Question 2

Explain how the deposit received in the cash receipts journal would be reported in the balance sheet of the business

Answer 2

Under Current Liabilities as Prepaid Sales $400, as it is a present obligation that is expected to result in an outflow of economic benefits sometime in the next 12 months when the goods are provided

Question 3

Referring to the cash receipts journal, explain why the amount recorded in the GST column does not equal 10% of the amount recorded in the sales column

Answer 3

Because GST is 10% of the total sales figure of $5 000, but $400 of this amount had already been received in advance as a deposit so this amount of sales revenue earned was recorded in the General Journal. (GST equals 10% of the sum of the amounts recorded as Sales in both journals.)

Question 4

Referring to one accounting principle, explain why the deposit is not recognised as revenue

Answer 4

Reporting Period
As at 31 December 2014, the goods have not been provided to the customer, so the revenue has not been earned in December 2014.The goods are owed to the customer, so Assets increases but so too does Liabilities: there is no increase in Owner’s Equity.

Question 5

Explain why no GST is recorded on a deposit

Answer 5

Because this is simply a deposit, GST is recognised at point of sale when the goods are provided to the customer

Question 6

Referring to the definitions of the elements of the reports, explain why the transaction (deposit) must not be reported as revenue

Answer 6

Although there is an inflow of economic benefits (cash) and assets (Bank) increase, the stock has not been provided/is still owed to the customer, so Liabilities (Prepaid Sales) increase too. As a result, there is no increase in Owner’s Equity

Question 7

State the effect on the accounting equation if the sale had not been recorded ( sale with deposit)

Answer 7

Assets: Understated

Liabilities: Overstated

Owners Equity: Understated

Question 8

Referring to one accounting principle, justify why the interest owing should be included in the interest revenue account for the reporting period

Answer 8

Reporting Period

The $700 interest was earned in the current Reporting Period (August 2015).

Question 9

State the effect of the adjustment for accrued interest revenue on the accounting equations

Answer 9

Assets: Increase

Liabilities: No Effect

Owners Equity: Increase

Question 10

Explain how the accrued interest revenue would be reported in the balance sheet

Answer 10

As a current asset, as it is a resource controlled by the entity, from past events, that is expected to provide a future economic benefit sometime in the next 12 months when the interest is received.

Question 11

Explain why only some of the interest received should be reported as revenue for the year

Answer 11

Of the $1 500 received, $500 was earned in the previous Reporting Period (June): only $1 000 is earned in the current Reporting Period (August). (The $500 represents a decrease in the current asset – Accrued Interest Revenue.)

Question 12

Discuss how the $5000 cash received form the term deposit should be reported in the cash flow statement

Answer 12

The Term Deposit does not fit neatly into any classification:

• it is not Operating as it is not a day-to-day trading activity
• it is not Financing as it is not changing the firm’s financial structure
• it is not Investing as it is not a non-current asset (as it was for 6 months).

However, given that it was taken out as an investment (to generate interest revenue), reporting it as Investing seems most useful for decision-making.

Question 13

Referring to one accounting principle, explain the purpose of making balance day adjustments

Answer 13

Reporting Period

To ensure that profit is calculated accurately by matching/comparing revenues earned against expenses incurred in the current Reporting Period

Question 14

Identify two items that resulted from the rug that was returned and thrown away

Answer 14

Sales Returns

Stock Write-down

Question 15

Suggest two possible reasons for the stock write down

Answer 15

Technical obsolescence

Lack of demand

Deliberate strategy to sell below cost

Question 16

Suggest two reasons for the loss on the disposal of the asset

Answer 16

Under-depreciation due to overstated useful life/residual value

Lack of demand due to damage or superseded by new model

Question 17

Referring to one qualitative characteristic, explain the purpose of closing the ledger

Answer 17

Relevance

Resetting revenue and expense accounts to zero in readiness for the next Reporting Period ensures that the Income Statement includes only information that is useful for decision-making about the current Reporting Period.