Maynard: Financial Reporting, 2nd edition
CHAPTER 1
FINANCIAL REPORTING AND ACCOUNTING
Quick test
Question 1
Transaction Accounts Type of Increase /
affected account Decrease
(a) Owner started business by Bank Asset Increase
paying into a business bank
account Capital Capital Increase
(b) Loan received Bank Asset Increase
Loan Liability Increase
(c) Motor car purchased for Motor vehicles Asset Increase
cheque Bank Asset Decrease
(d) Goods purchased on credit Purchases Expense Increase
from supplier Hall Payables Liability Increase
(e) Goods sold on credit to Sales Income Increase
customer White Receivables Asset Increase
(f) Cheque paid for office Bank Asset Decrease
expenses Office expenses Expense Increase
(g) Goods sold for cash to Sales Income Increase
customer Black Bank Asset Increase
(h) Goods purchased on credit Purchases Expense Increase
from supplier Marks Payables Liability Increase
(i) Credit note issued for goods Sales Income Decrease
returned by White Receivables Asset Decrease
(j) Credit note received from Purchases Expense Decrease
Hall for return of faulty Payables Liability Decrease
goods
(k) Cheque paid for car Insurance Expense Increase
insurance Bank Asset Decrease
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Maynard: Financial Reporting, 2nd edition
(l) Cheque paid to Hall Bank Asset Decrease
Payables Liability Decrease
(m) Wages paid in cash Wages Expense Increase
Cash Asset Decrease
(n) Owner withdrawals to cover Bank Asset Decrease
personal expenses Drawings Capital Decrease
(o) Cheque received from White Bank Asset Increase
Receivables Asset Decrease
(p) Cheque paid to Marks after Bank Asset Decrease
deducting a £50 cash Payables Liability Decrease
discount Discounts Income Increase
received
(q) Payment made on loan Bank Asset Decrease
£1,500 Loan Liability Decrease
(NB - loan of £5,000 has
interest @ 10% p.a. and is Interest Expense Increase
being repaid in £1,000
instalments)
Question 2
Follow the rules of double-entry given in the text:
Statement of financial position accounts
ASSET LIABILITY CAPITAL
L
+ - - + - +
Statement of profit or loss accounts
INCOME EXPENSE
- + + -
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Maynard: Financial Reporting, 2nd edition
Transaction (a): Owner started business by paying into a business bank account
increases the asset account Bank and increases the capital account. So the double-entry
bookkeeping is:
£ £
Dr Bank 15,000
Cr Capital 15,000
Bank Capital
Capital 15,000 Bank 15,000
Double-entry for remaining transactions:
£ £
(b) Loan received
Dr Bank 5,000
Cr Loan 5,000
(c) Motor car purchased for cheque
Dr Motor vehicles 8,000
Cr Bank 8,000
(d) Goods purchased on credit from supplier Hall
Dr Purchases 2,250
Cr Payables 2,250
(e) Goods sold on credit to customer White
Dr Receivables 1,645
Cr Sales 1,645
(f) Cheque paid for office expenses
Dr Office Expenses 340
Cr Bank 340
(g) Goods sold for cash to customer Black
Dr Bank 1,300
Cr Sales 1,300
(h) Goods purchased on credit from supplier Marks
Dr Purchases 1,200
Cr Payables 1,200
(i) Credit note issued for goods returned by White
Dr Sales 245
Cr Receivables 245
(j) Credit note received from Hall for return of faulty goods
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Maynard: Financial Reporting, 2nd edition
Dr Payables 300
Cr Purchases 300
(k) Cheque paid for car insurance
Dr Insurance 195
Cr Bank 195
(l) Cheque paid to Hall
Dr Payables 1,125
Cr Bank 1,125
(m) Wages paid in cash
Dr Wages 250
Cr Cash 250
(n) Owner withdrawals to cover personal expenses
Dr Drawings 500
Cr Bank 500
(o) Cheque received from White
Dr Bank 900
Cr Receivables 900
(p) Cheque paid to Marks after deducting a £50 cash discount
Dr Payables 1,200
Cr Bank 1,150
Cr Discounts received 50
(q) Payment made on loan
(NB loan of £5,000 has interest @ 10% p.a. and is
being repaid in £1,000 instalments)
Dr Loan 1,000
Dr Loan interest 500
Cr Bank 1,500
Bank Motor Vehicles
Capital 15,000 Motor Vehicles 8,000 Bank 8,000 Balance c/d 8,000
Loan 5,000 Office expenses 340 8,000 8,000
Sales 1,300 Insurance 195 Balance b/d 8,000
Receivables 900 Payables 1,125
Drawings 500
Payables & disc. 1,150
Loan & interest 1,500
Balance c/d 9,390
22,200 22,200
Balance b/d 9,390
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Maynard: Financial Reporting, 2nd edition
Purchases Payables
Payables 2,250 Payables 300 Purchases 300 Purchases 2,250
Payables 1,200 Balance c/d 3,150 Bank 1,125 Purchases 1,200
3,450 3,450 Bank 1,200
Balance b/d 3,150 Balance c/d 825
3,450 3,450
Balance b/d 825
Office expenses Receivables
Bank 340 Balance c/d 340 Sales 1,645 Sales 245
340 340 Bank 900
Balance b/d 340 Balance c/d 500
1,645 1,645
Balance b/d 500
Sales Insurance
Receivables 245 Receivables 1,645 Bank 195 Balance c/d 195
Balance c/d 2,700 Bank 1,300 195 195
2,945 2,945 Balance b/d 195
Balance b/d 2,700
Wages Cash
Cash 250 Balance c/d 250 Balance c/d 250 Wages 250
250 250 250 250
Balance b/d 250 Balance b/d 250
Drawings Loan
Bank 500 Balance c/d 500 Bank 1,000 Bank 5,000
500 500 Balance c/d 4,000
Balance b/d 500 5,000 5,000
Balance b/d 4,000
Loan interest Discounts received
Bank 500 Balance c/d 500 Balance c/d 50 Bank 50
500 500 50 50
Balance b/d 500 Balance b/d 50
Capital
Balance c/d 15,000 Bank 15,000
15,000 15,000
Balance b/d 15,000
Trial balance
Debit Credit
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Maynard: Financial Reporting, 2nd edition
£ £
Bank 9,390
Motor vehicles 8,000
Purchases 3,150
Payables 825
Office expenses 340
Receivables 500
Sales 2,700
Insurance 195
Wages 250
Cash 250
Drawings 500
Loan 4,000
Loan interest 500
Discounts received 50
Capital 15,000
22,825 22,825
Question 3
P. Glass
Statement of profit or loss for the year ended 30 June 20X4
£ £ £
Revenue 19,647
Less: Returns inwards (205)
19,442
Cost of sales
Opening inventories 2,368
Purchases 13,874
Less: Returns outwards (322)
13,552
Carriage inwards 250
16,170
Closing inventories (2,946)
(13,224)
Gross profit 6,218
Expenses
Salaries and wages 4,206
Rent 300
Insurance 76
Motor expenses 554
Office expenses 328
Heat and light 160
General expenses 325
Discounts allowed 68
(6,017)
Net profit for year 201
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Maynard: Financial Reporting, 2nd edition
P. Glass
Statement of financial position at 30 June 20X4
£ £
Non-current assets
Premises 5,000
Motor vehicles 1,800
Fixtures and fittings 450
7,250
Current assets
Inventories 2,946
Trade receivables 3,704
6,650
Total assets 13,900
Capital
Capital at 1 July 20X3 10,458
Net profit for year 201
10,659
Less: Drawings (1,200)
9,459
Current liabilities
Bank overdraft 1,710
Trade payables 2,731
4,441
Total capital and liabilities 13,900
Develop your understanding
Question 4
Lytax
Statement of profit or loss for the year ended 31 December 20X2
£ £
Revenue 159,000
Cost of sales
Opening inventories 7,800
Purchases 79,500 – 1,500 78,000
85,800
Closing inventories (8,000)
77,800
Gross profit 81,200
Expenses
Discounts allowed 700
Heat and light 1,300
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Maynard: Financial Reporting, 2nd edition
Insurance 1,400 – (6/12 x 1,000) 900
Wages and salaries 24,200 + 400 24,600
General expenses 1,200
Irrecoverable debts 700
Increase in allowance for receivables 450 – 300 150
Loan interest 8% x 15,000 1,200
Depreciation: Buildings 40,000/50 800
Plant and machinery 15% x 38,000 5,700
Fixtures and fittings
5% x (21,300 – 5,300) 800
38,050
Net profit for year £ 43,150
Lytax
Statement of financial position at 31 December 20X2
£ £ £
Non-current assets Cost Accumulated NBV
depreciation
Land and buildings 67,000 12,800 54,200
Plant and machinery 38,000 13,800 24,200
Fixtures and fittings 21,300 6,100 15,200
126,300 32,700 93,600
Current assets
Inventories 8,000
Receivables 9,000
Less: Allowance for receivables (450)
8,550
Prepayments 500
17,050
Total assets £110,650
Capital
Balance at 1 January 20X2 68,000
Net profit for the year 43,150
111,150
Drawings 25,000 + 1,500 (26,500)
Balance at 31 December 20X2 84,650
Non-current liabilities
5-year loan 15,000
Current liabilities
Bank overdraft 1,000
Payables 8,400
Accruals 1,200 + 400 1,600
11,000
Total capital and liabilities £110,650
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Maynard: Financial Reporting, 2nd edition
Question 5
Porter Ltd.
Statement of profit or loss for the year ended 31 May 20X6
£000 £000
Revenue 4,377
Cost of sales
Opening inventories 1,071
Purchases 2,225
3,296
Closing inventories 1,123
(2,173)
Gross profit 2,204
Royalties receivable 42
2,246
Expenses
Wages and salaries 808
Motor expenses 164
Rent 210
General distribution costs 81
General administration expenses
(79 - 7/12 x 24 + 2/3 x 6) 69
Directors’ remuneration 185
Irrecoverable debts 31
Increase in allowance for receivables 34 - 29 5
Directors’ bonuses 36
Auditors’ fees 12
Depreciation:
Plant and machinery 10% x 1,750 175
Motor vehicles 35% x (320 - 145) 61
(1,837)
Profit from operations 409
Debenture interest 7% x 800 (56)
Profit before tax 353
Income tax (102)
Profit for the year £ 251
Porter Ltd.
Statement of changes in equity for the year ended 31 May 20X6
Equity Preference
share share Retained
capital capital earnings Total
£000 £000 £000 £000
Balance at 1 June 20X5 600 500 336 1,436
Profit for the year 251 251
Dividends paid (119) (119)
Balance at 31 May 20X6 600 500 468 1,568
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Maynard: Financial Reporting, 2nd edition
Porter Ltd.
Statement of financial position at 31 May 20X6
£000 £000 £000
Non-current assets Cost Accumulated NBV
depreciation
Plant and machinery 1,750 679 1,071
Motor vehicles 320 206 114
2,070 885 1,185
Current assets
Inventories 1,123
Trade receivables 781
Less: Allowance for receivables (34) 747
Prepayments 14
1,884
Total assets 3,069
Equity
Equity share capital 600
Preference share capital 500
1,100
Retained earnings 468
1,568
Non-current liabilities
7% debentures 800
Current liabilities
Bank overdraft 43
Trade payables 498
Accruals 4 + 28 + 12 + 36 80
VAT 54
Income tax 102 - 76 26
701
Total equity and liabilities 3,069
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Maynard: Financial Reporting, 2nd edition
Take it further
Question 6
Falmouth plc
Statement of profit or loss for the year ended 30 June 20X1
£000 £000
Revenue 6,590
Cost of sales
Opening inventories 380
Purchases 4,304
4,684
Closing inventories (440)
(4,244)
Gross profit 2,346
Expenses
Wages and salaries 508
Light and heat 62 + 12 74
Irrecoverable debts expense 30 – 8 22
Increase in allowance for receivables 24 - 20 4
Other administration expenses 196 - 5/12 x 18 188.5
Directors' bonuses 24
Depreciation: Freehold buildings 400 / 50 8
Plant and machinery
(1,460- 320 + 40) x 10% 118
Motor vehicles 33% x (440 - 230) 69.3
Loss on sale 88
(1,103.8)
Profit from operations 1,242.2
Interest payable on debentures 8% x 400 32
Dividends on redeemable preference shares 12% x 200 24
(56)
Profit before tax 1,186.2
Income tax (256)
Profit for the year 930.2
Falmouth plc
Statement of changes in equity for the year ended 30 June 20X1
Equity
share Retained
capital earnings Total
£000 £000 £000
Balance at 1 July 20X0 500 368 868
Profit for the year 930.2 930.2
Dividends paid (56) (56)
Balance at 30 June 20X1 500 1,242.2 1,742.2
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Maynard: Financial Reporting, 2nd edition
Falmouth plc
Statement of financial position at 30 June 20X1
£000 £000 £000
Non-current assets Cost Accumulated NBV
depreciation
Freehold land and buildings 860 48 812
Plant and machinery 1,180 370 810
Motor vehicles 440 299.3 140.7
2,480 717.3 1,762.7
Current assets
Inventories 440
Receivables 578 + 8 586
Less: allowance for receivables (24)
562
Prepayments 7.5
Bank 168
1,177.5
Total assets 2,940.2
Equity
Equity share capital 500
Retained earnings 1,242.2
1,742.2
Long-term liabilities
Redeemable preference share capital 200
8% debentures 400
600
Current liabilities
Payables 390
Accruals 12 + 24 36
Debenture interest payable 32 – 16 16
Redeemable preference dividend 24 – 12 12
Income tax payable 256 – 112 144
598
Total equity and liabilities 2,940.2
Workings
Sale of plant and machinery £000
Original cost 320
Accumulated depreciation 60% x 320 (192)
Net book value at time of disposal 128
Proceeds 40
Loss on sale 88
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Maynard: Financial Reporting, 2nd edition
Cost of plant and machinery
Per trial balance 1,460
+ Proceeds incorrectly credited 40
- Plant sold (320)
1,180
Previous irrecoverable debt received
This amount had been written off as an irrecoverable debt in previous years. The
correct accounting treatment is to credit the amount received to irrecoverable debts,
i.e. to reduce this year’s irrecoverable debts expense. The adjustment required is
therefore:
Dr Receivables
Cr Irrecoverable debts
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