Cambridge IGCSE and O Level Accounting

Answers to Section 3 practice questions

1 D
2 C
3 D
4 B
5 D
6 a Loan from AB Limited capital receipt
Purchase of additional premises capital expenditure
Legal fees for purchase of additional premises capital expenditure
Insurance of additional premises revenue expenditure
Cash sales revenue receipt
Purchase of inventory revenue expenditure
Proceeds of sale of old motor vehicle at capital receipt
book value
Discount received       revenue receipt

b e rror 1 profit overstated

error 2 profit overstated
error 3 no effect
error 4 profit overstated

7 a i 
The cost of the inventory is the actual purchase price plus any additional costs (such as
carriage inwards) incurred in bringing the inventory to its present position and condition.
1
ii The net realisable value is the estimated receipts from the sale of the inventory, less any
costs of completing the goods or costs of selling the goods.
b Prudence
c $
Inventory code number BD20 300 units × (1.50 + $0.05)   465.00
Inventory code number BD23 119 units × $0.80     95.20
Inventory code number BD29 410 units × 1.78 729.80
1 290.00

d current assets at 30 November 20–8 understated

profit for the year ended 30 November 20–8 understated
gross profit for the year ended overstated
30 November 20–9

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8 a
Karima
Rates and insurance account
Date Details Fo. $ Date Details Fo. $
20–4 20–4
Jan 1 Balance (ins.) b/d 580 Jan 1 Balance (rates) b/d 560
Feb 28 Bank (rates) 1 120 Dec 31 Income statement
Apl 30 Bank (rates) 700 Rates     1 680
Jul 1 Bank (ins) 1 200 Insurance  1 180 2 860
Dec 31 Balance (rates) c/d 420 Balance (ins) c/d 600
4 020 4 020
20–5 20–5
Jan 1 Balance (ins) b/d 600 Jan 1 Balance (rates) b/d 420

b
Karima
Extract from statement of financial position at 31 December 20–4
Current assets $
Other receivables 600

Current liabilities
Other payables 420

c Adjusting for accrued and prepaid expenses is an application of the principle of matching.
The expense in the income statement must be the expense incurred in that financial year 2
irrespective of when actually paid.
If no adjustment is made the profit for the year will be incorrect, and consequently the
capital will be incorrect. If no adjustment is made the current assets and current liabilities
will be understated.
9 a i
Tanvir
Tabitha account
Date Details Fo. $ Date Details Fo. $
20–8 20–8
Apl 8 Stationery (returns) 22 Apl 1 Stationery 313
Jan  1 Bank 291 313
313 313

ii
Stationery account
Date Details Fo. $ Date Details Fo. $
20–8 20–8
Jan  1 Balance b/d 44 Apl 18 Tabitha (returns) 22
Apl 1 Tabitha 313 Dec  31 Income statement 270
357 Balance c/d 665
357 357
20–9
Jan  1 Balance b/d 65

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b i 
Tanvir
EE Limited account
Date Details Fo. $ Date Details Fo. $
20–8 20–8
Jan  20 Bank 239 Jan 1 Balance b/d 239
Aug 2 Bank 445 Jul   1 Electricity 445
684 684

ii
Electricity expense account
Date Details Fo. $ Date Details Fo. $
20–8 20–8
Jun 1 EE Limited 445 Dec 31 Income statement 833
Dec 31 Balance c/d 388 388
833 833
20–9
Jan 1 Balance b/d 388

10 a Loss on disposal = cost 15 000 − (Provision for depreciation 6 000 + proceeds 8 600) = 400
b Depreciation charge for the year = 20% × (18 000 + 21 000) = 7 800
c
3
Chibuzo
Income statement for the year ended 31 December 20–9
$ $ $
Revenue 108 200
Less Cost of sales
  Opening inventory 5 410
  Purchases 81 140
86 550
   Less Closing inventory 5 550 81 000
Gross profit 27 200
Add Commission receivable (2 050 + 420) 2 470
   Reduction in provision for doubtful
   debts (540 − 450) 90
29 760
Less Wages (10 300 + 120) 10 420
   Rent and rates (2 100 − 300) 1 800
   Administration and selling expenses 2 230
   Loss on disposal of motor vehicle 400
   Depreciation motor vehicles 7 800
   Depreciation office equipment
   (4 320 + 1 200 − 5 250) 270 22 920
Profit for the year 6 840

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Cambridge IGCSE and O Level Accounting

11 a Matching
The cost of the fixtures is spread over the years which benefit from the use of that asset.
Prudence
The depreciation for the year is included in the expenses so that the profit for the year is not
overstated. By recording the fixtures at net book value in the statement of financial position
it ensures that the non-current assets are not overstated.

b
Nadia
Office fixtures account
Date Details Fo. $ Date Details Fo. $
20–3 20–4
Sep 1 Balance b/d 4 500 Mar 1 Disposal 1 000
Dec 1 AB Limited 2 400 Aug 31 Balance c/d 5 900
6 900 6 900
20–4
Sep 1 Balance b/d 5 900

Provision for depreciation of office fixtures account

Date Details Fo. $ Date Details Fo. $

20–4 20–3 4
Mar 1 Disposal 750 Sep 1 Balance b/d 2 100
Aug 31 Balance c/d 2 675 20–4
Aug 31 Income statement
  (25% × (4 500 − 1 000))
  + ((25% × 2 400) × 9/12 )
1 325
3 425 3 425
20–4
Sep 1 Balance b/d 2 675

Disposal of office fixtures account

Date Details Fo. $ Date Details Fo. $

20–4 20–4
Mar 1 Office fixtures 1 000 Mar 1 Provision for
 depreciation 750
Cash 120
Aug 31 Income statement 130
1 000 1 000

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Cambridge IGCSE and O Level Accounting

c
Nadia
Extract from statement of financial position at 31 August 20–4
$ $ $
Cost Accumulated Net book
deprecation value
Non-current assets
Office fixtures 5 900 2 675 3 325

12 a i An irrecoverable debt is an amount owing to a business which will not be paid by the
credit customer.
ii A provision for doubtful debts is an estimate of the amount which a business will lose in
a financial year because of irrecoverable debts.
b Maintaining a provision for doubtful debts ensures that the profit for the year and the
amount of trade receivables (current assets) are not overstated.
c Matching
d Two from:
• reduce credit sales / sell on a cash basis only
• obtain references from new credit customers
• fix a credit limit for each customer
• improve credit control
• issue invoices and statements promptly
5
• refuse further supplies until outstanding balance paid
• allow cash discount for prompt payment
• charge interest on overdue accounts.
e
Charlotte
Provision for doubtful debts account
Date Details Fo. $ Date Details Fo. $
20–3 20–2
Jul 31 Income statement  23 Aug 1 Balance b/d 210
Balance c/d 187
210 210
20–3
Aug 1 Balance b/d 187

f
Charlotte
Extracts from income statement for the year ended 31 July 20–3
$
Income
Reduction in provision for doubtful debts   23
Expenses
Irrecoverable debts (167 + 66) 233

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g
Charlotte
Extract from statement of financial position at 31 July 20–3
$ $ $
Current assets
Trade receivables 7 480
Trade receivables 187 7 293

13 a and b

Sharif
Sales account
Date Details Fo. $ Date Details Fo. $
20–7 20–7
Apl 30 Income statement 49 750 Apl 30 Balance b/d 49 750
49 750 49 750

Rent receivable account

Date Details Fo. $ Date Details Fo. $
20–7 20–7
6
Apl 30 Income statement 2 400 Apl 30 Balance b/d 2 000
Balance c/d 400
2 400 2 400
20–7
May 1 Balance b/d 400

Irrecoverable debts account

Date Details Fo. $ Date Details Fo. $
20–7 20–7
Apl 30 Balance b/d 960 Apl 30 Income statement 1 076
Halijah 116
1 076 1 076

Provision for doubtful debts account

Date Details Fo. $ Date Details Fo. $
20–7 20–7
Apl 30 Balance c/d 1 500 Apl 30 Balance b/d 1 400
Income statement 100
1 500 1 500
20-7
May 1 Balance b/d 1 500

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Cambridge IGCSE and O Level Accounting

Stationery and office expenses account

Date Details Fo. $ Date Details Fo. $

20–7 20–7
Apl 30 Balance b/d 3 210 Apl 30 Income statement 3 165
Balance c/d 45
3 210 3 210
20–7
May 1 Balance b/d 45

Inventory account
Date Details Fo. $ Date Details Fo. $
20–7 20–7
Apl 30 Balance b/d 4 520 Apl 30 Income statement 4 520
4 520 4 520
20–7 20–7
Apl 30 Income statement 4 970 Apl 30 Balance c/d 4 970
4 970 4 970
20–7
May 1 Balance b/d 4 970

Office fixtures account 7

Date Details Fo. $ Date Details Fo. $

20–7 20–7
Apl 30 Balance b/d 14 500 Apl 28 Disposal 2 000
    30 Balance c/d 12 500
14 550 14 500
20–7
May 1 Balance b/d 12 500

Provision for depreciation of office fixtures account

Date Details Fo. $ Date Details Fo. $
20–7 20–7
Apl 28 Disposal   800 Apl 30 Balance b/d 5 800
Balance c/d 6 250 Income statement 1 250
7 050 7 050
20–7
May 1 Balance b/d 6 250

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Disposal of office fixtures account

Date Details Fo. $ Date Details Fo. $
20–4 20–7
Apl 28 Office fixtures 2 000 Apl 28 Provision for
 depreciation   800
Cash/bank   780
    30 Income   420
statement
2 000 2 000

14 a
Priti
Income statement for the year ended 31 March 20–4
$ $ $

Revenue 644 000

Less sales returns    1 050 642 950
Less Cost of sales
  Opening inventory   36 000
  Purchases 528 850
  Carriage inwards 750 529 600
8
565 600
   Less Closing inventory 41 050 524 550
Gross profit 118 400
Add Commission receivable (1 030 + 110) 1 140
119 540
Less Rates and insurance 10 480
  (10 400 − 180 + 260)
  Wages (39 400 + 1 600) 41 000
  Administration expenses 5 335
  Irrecoverable debt 150
   Provision for doubtful debts
   ((2 456 − 150) − 2 360) 96
   Depreciation fixtures and fitting
   (20% × 35 000) 7 000
   Depreciation motor vehicle
   (25% × (24 000 − 10 500)) 3 375 67 436
Profit for the year 52 104

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Cambridge IGCSE and O Level Accounting

b
Priti
Statement of financial positon at 31 March 20–4
$ $ $
Cost Accumulated Net book value
depreciation
Assets
Non-current assets
Premises 300 000 300 000
Fixtures and fittings 35 000 21 000 14 000
Motor vehicles 24 000 13 875 10 125
359 000 34 875 324 125
Current assets
Inventory 41 050
Trade receivables 49 120
Less Provision for doubtful debts 2 456 46 664
Other receivables 180
Income accrued 110
Bank 21 335
109 339
Total assets 433 464
Capital and liabilities
9
Capital
Opening balance 390 000
Plus Profit for the year 52 104
442 104
Less Drawings 54 000
388 104
Current liabilities
Trade payables 43 500
Other payables (260 + 1600) 1 860
45 360
Total capital and liabilities 433 464

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