Chapter 9 – Credit transactions – solutions for exercises

Exercise 9.1 Source documents

a

Source document Purchase invoice

Transaction Stitch in Time purchased 10 spools of thread on credit from
Common Thread for a total cost of $418 including $38 GST.

Explanation Stitch in Time must pay the whole amount owing in 15 days (net owing
15 days).

c
Purchases Journal

Date Accounts Payable Inv. Inventor GST Total

No. y of Accounts
materials Payable
Nov. 3 Common Thread 112 380 38 418

TOTALS $

Explanatio GST is a tax imposed on the sale of goods and services. The $380 paid
n is for the 10 spools of thread – this is the value of the Inventory of
materials. The $38 is separate as it is the GST charged by the Australian
Government, which is being collected by the supplier on the ATO’s
behalf. It is not part of the cost of the Inventory of materials and will in fact
reduce Stitch in Time’s GST liability to the ATO.

Element Increase/Decrease/No Effect Amount $

Asset Increase – Inventory of materials increase 380
Liability Increase – Accounts Payables increase $418; GST 380
liability decrease (GST credit) $38
Owner’s equity No effect

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Chapter 9 – Credit transactions – solutions for exercises

Exercise 9.2 Purchases Journal

a

Explanation The purpose of a Purchases Journal is to summarise all purchases of

Inventory of materials on credit during a particular reporting period. This
aids in the process of turning raw data into financial information so it can
assist in decision-making.

b
Purchases Journal

Date Accounts Payable Inv. Inventory GST Total

No. of Accounts
materials Payable
July 2 Volt Industries V53 4 200 420 4 620
7 Wattage Supplies 346 2 500 250 2 750
16 Ampage Ltd A52 1 800 180 1 980
23 Wattage Supplies 387 1 400 140 1 540
28 Volt Industries V65 3 600 360 3 960
TOTALS $ 13 500 1 350 14 850

Explanation The source documents in the Purchases Journal won’t run in sequence
because they are not issued by Sparky Electricians but by their
suppliers who issue their invoices to all their customers. Therefore,
Sparky Electricians is receiving purchase invoices from a variety of
suppliers who have other customers as well.

Explanation The GST incurred on credit purchases will be forwarded to the ATO.
Therefore, this GST incurred by Sparky Electricians will reduce their
GST liability to the ATO.

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Chapter 9 – Credit transactions – solutions for exercises

Exercise 9.3 Purchases Journal and Cash Payments Journal

a
Purchases Journal

Date Accounts Payable Inv. Inventory GST Total

No. of Accounts
materials Payable
Sept. 3 Leather Emporium L56 360 36 396
8 Sole Man 201 750 75 825
16 Lillies Laces LL314 240 24 264
24 Sole Man 246 400 40 440
TOTALS $ 1 750 175 1 925

Cash Payments Journal

Date Details Doc. Bank Accounts Drawings Wages Sundries GST

Payables
Sept. 1 Lillies Laces 165 120 120
7 Wages WDWL 950 950
9560
11 Office equipment 166 2 200 2 000 200
14 Drawings ATM 500 500
653
19 Sole Man 167 770 770
21 Wages WDWL 950 950
9875
27 Drawings ATM 490 490
741
30 Leather 168 1 000 1 000
Emporium
TOTALS $ 6 980 1 890 990 1900 2 000 200

Explanation This transaction was a payment to an Accounts Payable. Therefore,

bank will decrease by $700, decreasing assets, and Accounts Payable
will decrease by $700, decreasing liabilities.

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Chapter 9 – Credit transactions – solutions for exercises

Calculation
Accounts Payable balance 2 870
at start
+ Credit purchases incl. GST 1 925
4 795
– Payments to Accounts 1 890
Payable
Accounts Payable balance $2 905
at end
Accounts Payables balance $ 2 905

Explanation There is no GST on a payment to an Accounts Payable because the

GST is recognised and recorded at the time the purchase is made and
becomes a part of what is owed to the Accounts Payable. The GST has
been recorded in the Purchases Journal. If it was recorded in the Cash
Payments Journal again the GST would be double counted.

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Chapter 9 – Credit transactions – solutions for exercises

Exercise 9.4 Journals and Accounts Payable

a
Purchases Journal

Date Accounts Payable Inv. Inventory GST Total

No. of Accounts
materials Payable
7 Victor Mowers 385 1 800 180 1 980
12 ReeObi R47 2 100 210 2 310
18 Victor Mowers 413 6 350 635 6 985
23 Parts and Pieces P2501 5 000 500 5 500
28 ReeObi R65 4 500 450 4 950
TOTALS $ 19 750 1 975 21 725

Cash Payments Journal

Date Details Doc. Bank Accounts Drawings Wages Sundries GST
Payable
Apr. 2 ReeObi 215 6 000 6 000
5 Drawings ATM 800 800
902
8 Wages WDWL 1 200 1 200
6095
10 Victor Mowers 216 8 500 8 500
13 Electricity Bpay 341 310 31
612
19 ReeObi 217 2 000 2 000
21 Drawings ATM 600 600
6679
22 Wages WDWL 1 200 1 200
6438
24 Victor Mowers 218 3 500 3 500
27 Water bill Bpay 253 230 23
946
29 Parts and 219 12 000 12 000
Pieces
TOTALS $ 36 394 32 000 1 400 2 400 540 54

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Chapter 9 – Credit transactions – solutions for exercises

Calculation
Accounts Payable balance at start 34 400
+ Credit purchases incl. GST 19 750
54 150
– Payments to Accounts Payable 32 000
Accounts Payable balance at end $22 150
Accounts Payable balance $ 22 150

Qualitative characteristic Verifiability

Explanation Mow and Mulch must keep all the firm’s source documents as these
provide evidence of all the firms transactions. This makes sure that all
figures can be verified and ensures that the figures in the Financial
Statements are accurate and free from bias. Verifiability is maintained
by retention of source documents.

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Chapter 9 – Credit transactions – solutions for exercises

Exercise 9.5 Source documents

a

Source document Sales invoice

Transaction Credit fee – Good as New repaired a 3 three-seater Chesterfield
on credit for Ouch Dental for a total cost of $4 950, including $450
GST.

b
Explanation It is important that credit terms are stated on the invoice so that the
customer knows when they must pay the amount owing. A business will
only grant credit for a specific period of time as they require the cash
from the credit fee to pay their obligations.

Explanation This transaction is considered revenue because it has arisen from the
ordinary activities of the business and the transaction has increased
assets (Accounts Receivable) and will lead to an increase in owner’s
equity and it is not Capital contribution.

d
Sales Journal
Date Accounts Receivable Inv. No. Fees GST Total
Accounts
Receivable
Oct. 5 Ouch Dental 149 4 500 450 4 950
TOTALS $

e
Element Increase/Decrease/No Effect Amount $
Asset Increase – Accounts Receivable increase $4 950 4 950
Liability Increase – GST liability increase $450 450
Owner’s equity Increase – Revenue increase $4 500 4 500

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Chapter 9 – Credit transactions – solutions for exercises

Exercise 9.6 Sales Journal

a

Source document number Inv. 107

b
Sales Journal

Date Accounts Receivable Inv. No. Fees GST Total

Accounts
Receivable
Feb. 4 Plus Accounting 102 270 27 297
9 Shone Lawyers 103 520 52 572
15 French Apartments 104 850 85 935
22 Shone Lawyers 105 430 43 473
27 Plus Accounting 106 300 30 330
TOTALS $ 2 370 237 2 607

Reason 1 This does not take into account any existing balances of Accounts
Receivable that may have existed at the start of the period.
Reason 2 This does not take into account any receipts from Accounts Receivable
that may have occurred at the start of the period.

Explanation Any GST charged on Credit fees is GST charged and collected later by
the business on the Australian Government’s behalf. Therefore, this is
owed to the ATO and will increase GST payable.

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Chapter 9 – Credit transactions – solutions for exercises

Exercise 9.7 Sales Journal and Cash Receipts Journal

a

Explanatio The transaction on 1 May is not revenue as it is a receipt from an

n Account Receivable. Even though cash is flowing into the business it is a
transfer of assets from Accounts Receivable to Bank and has no resulting
impact on owner’s equity. The revenue has already been recorded in the
Sales Journal. To record it again would be to double count the revenue.

Explanation There is no GST to account for from a receipt from an Account

Receivable because the GST is recognised and recorded at the time the
fee is made and becomes a part of what is owed by the Accounts
Receivable to the business. The GST has been recorded in the Sales
Journal. If it was recorded in the Cash Receipts Journal again the GST
would be double counted.

c
Sales Journal

Date Accounts Receivable Inv.No. Fees GST Total

Accounts
Receivable
May 3 Fab Events 271 1 420 142 1 562
9 Party Dayz 272 1 450 145 1 595
13 Lando’s Café 273 900 90 990
16 Wow ART 274 720 72 792
27 Party Dayz 275 3 200 320 3 520
TOTALS $ 7 690 769 8 459

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Cash Receipts Journal

Date Details Rec. Bank Accounts Fees Sundries GST
No. Receivable
May 1 Fab Events 56 1 500 1 500
4 Cash fees 57 308 280 28
6 Loan – Fincorp BS 8 000 8 000
10 Fab Events 58 1 800 1 800
18 Party Dayz 59 4 450 4 450
22 Lando’s Café 60 990 990
25 Cash fees 61 132 120 12
31 Wow ART 62 500 500
TOTALS $ 17 680 9 240 400 8 000 40

Calculation
Accounts Receivable 8 000
balance at start
+ Credit fees incl. GST 8 459
16 459
– Receipts from Accounts 9 240
Receivable
Accounts Receivable $ 7 219
balance at end
Accounts Receivable balance $ 7 219

Explanation Not all Accounts Receivable have met their credit terms as Fab Events
still has $250 outstanding from the last period that exceeds the 30-day
credit terms set by Unbreakable Gear. Party Dayz and Lando’s Café
paid within the specified credit terms. Party Dayz and Wow ART are still
within their credit terms.

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Chapter 9 – Credit transactions – solutions for exercises

Exercise 9.8 Credit transactions

a
Purchases Journal

Date Accounts Payable Inv. Inventor GST Total

No. y of Accounts
materials Payable
Jul. 7 Buff and Shine 16X 3 100 310 3 410
9 Strung Instruments 403 1 780 178 1 958
20 Buff and Shine B71 2 200 220 2 420
24 Strung Instruments 431 850 85 935
TOTALS $ 7 930 793 8 723

Sales Journal
Date Accounts Receivable Inv. No. Fees GST Total
Accounts
Receivable
Jul. 2 Sunshine Secondary College 109 3 400 340 3 740
5 Blackburn Secondary College 110 1 530 153 1 683
12 Beaconsfield Primary 111 400 40 440
23 Sunshine Secondary College 112 1 000 100 1 100
30 Beaconsfield Primary 113 510 51 561
TOTALS $ 6 840 684 7 524

Cash Receipts Journal

Date Details Rec. Bank Accounts Fees Sundries GST

No. Receivable

Jul. 3 Beaconsfield 57 500 500

Primary
14 Cash fees 58 242 220 22
17 Sunshine 59 4 100 4 100
Secondary
College
25 Cash fees 60 253 230 23
28 Blackburn 61 3 113 3 113
Secondary
College
31 Interest BS 8 8

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Chapter 9 – Credit transactions – solutions for exercises

TOTALS $ 8 216 7 713 450 8 45

Cash Payments Journal

Date Details Doc. Bank Accounts Drawings Wages Sundries GST

Payables

Jul. 1 Rent 205 1 320 1 200 120

4 Buff and Shine 206 800 800
8 Wages WDW 1 100 1 100
L 3864
11 Drawings ATM 1 500 1 500
6309
16 Strung 207 1 900 1 900
Instruments
22 Wages WDW 600 600
L 3892
27 Advertising BPay 539 490 49
495
29 Buff and Shine 208 1 000 1 000
TOTALS $ 8 759 3 700 1 500 1 700 1 690 169

Calculation
Accounts Payable balance 3 150
at start
+ Credit purchases incl. GST 8 723
11 873
– Payments to Account 3 700
Payable
Accounts Payable balance $8 173
at end
Accounts Payable balance $ 8 173

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Chapter 9 – Credit transactions – solutions for exercises

Calculation
Accounts Receivable 5 280
balance at start
+ Credit fees incl. GST 7 524
12 804
– Receipts from Accounts 7 713
Receivable
Accounts Receivable $5 091
balance at end
Accounts Receivable balance $ 5 091

Explanation Musical Beat can verify these balances by cross checking the original
source documents with the relevant journals to ensure all information is
correct and free from bias. Another double check would be to add up all
the relevant Account Receivables / Payables and see if the same
answer was reached.
 

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Chapter 9 – Credit transactions – solutions for exercises

Exercise 9.9 Statement of Account

a

Explanation The function of a Statement of Account is to inform the customer of their

recent transactions. It can also serve as a reminder of a balance that is
owing. If a business receives a Statement of Account, they can check
the transactions against their records and source documents.

Explanation Paint World would be reported as an Accounts Payable under current

liabilities in the Balance Sheet of No Drips Painting. This is because the
business has purchased goods on credit and now has a present
obligation that it must transfer economic resources to meet within 12
months after the end of a reporting period.

c
Explanation No Drips Painting would be reported as an Account Receivable under
current assets in the Balance Sheet of Paint World. This is because
Paint World has sold goods on credit to the No Drips Painting and now
has a present economic resource which has the potential to produce
future economic benefits within 12 months at the end of a reporting
period.

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