2.
Practice Questions

Practice Questions 1 to 18 for the workbook From Transactions to Financial Statements.

Practice Question 1: Introductory journal entry practice

Topics covered: cash and credit transactions, owner’s capital, bank loans, purchases and sales, and settlement of liabilities.

Practice Question 1.1

Mel starts a tutoring business and transfers CU 8,000 from their personal account into the business bank account. Which of the following journal entries correctly records this transaction?

  • Dr Capital 8,000
            Cr Bank 8,000
  • Dr Bank 8,000
            Cr Capital £8,000
  • Dr Bank £8,000
            Cr Revenue £8,000
  • Dr Loan £8,000
            Cr Bank £8,000
  • This reverses the correct entry. Capital should increase and be credited, while bank should increase and be debited.
  • The owner is investing funds into the business, so bank increases (debited) and capital increases (credited).
  • This incorrectly records the transaction as revenue. Revenue arises from business activities, not from owner’s investment.
  • This incorrectly treats the transaction as a loan. The funds are invested by the owner, so capital should increase, not a liability.

Practice Question 1.2

A clothing shop borrowed CU 60,000 from the bank, which was paid directly into its business bank account. Which of the following journal entries correctly records this transaction?

  • Dr Bank 60,000
            Cr Loan 60,000
  • Dr Loan 60,000
            Cr Bank 60,000
  • Dr Bank 60,000
            Cr Capital 60,000
  • Dr Expense 60,000
            Cr Bank 60,000
  • The funds from the loan increases bank creates a liability, so bank is debited and loan is credited.
  • This reverses the correct entry. The loan is being received, not repaid, so bank should be debited and the loan should be credited.
  • This incorrectly records the loan as capital. A loan creates a liability, not owner’s equity.
  • This incorrectly treats the loan as an expense. Borrowing does not affect profit, and bank should not be credited as cash is being received.

Practice Question 1.3

A coffee shop buys ingredients costing CU 1,200 and pays immediately using its business debit card. Which of the following journal entries correctly records this transaction?

  • Dr Inventory 1,200
            Cr Revenue 1,200
  • Dr Bank 1,200
            Cr Purchases 1,200
  • Dr Expense 1,200
            Cr Capital 1,200
  • Dr Purchases 1,200
            Cr Bank 1,200
  • Inventory may increase as a result of the purchase. However, purchases are recorded in a separate purchases account during the year, and inventory is updated at the end of the period. This transaction does not relate to any income earned, therefore the credit entry is incorrect.
  • This reverses the correct entries. Bank should decrease and therefore be credited, while purchases should be debited.
  • This incorrectly treats the purchase as if the owner has injected funds into the business, however, purchases relate to business operations.
  • The ingredients are purchased and paid immediately, so purchases increase (debited) and bank decreases (credited).

Practice Question 1.4

An online clothing store orders packaging materials worth CU 9,000 from a supplier and will pay the supplier next month. What is the correct journal entry?

  • Dr Purchases 9,000
            Cr Bank 9,000
  • Dr Purchases 9,000
            Cr Accounts payable 9,000
  • Dr Bank 9,000
            Cr Purchases 9,000
  • Dr Purchases 9,000
            Cr Revenue 9,000
  • This assumes the purchase was paid immediately. However, the supplier will be paid later, so a liability (accounts payable) should be recognised instead.
  • The goods are purchased on credit, so purchases are debited and a liability (accounts payable) is recognised.
  • This reverses the correct entry. Bank is not involved in a credit purchase, and purchases should be debited, not credited.
  • Revenue should only be recognised when goods or services are sold, not when they are purchased. This entry incorrectly records income instead of recognising a liability.

Practice Question 1.5

A market stall sells handmade jewellery for CU 250 and the customer pays in cash. Which of the following journal entries correctly records this transaction?

  • Dr Sales 250
            Cr Cash 250
  • Dr Sales 250
            Cr Capital 250
  • Dr Cash 250
            Cr Accounts receivable 250
  • Dr Cash 250
            Cr Sales 250
  • This reverses the correct entry. Sales revenue should increase and therefore be credited, while cash should be debited.
  • This incorrectly records the transaction as an increase in capital. Capital increases only when the owner invests in the business, not when a sale is made.
  • This records a receivable and would be correct if this were a credit sale. However, the customer paid immediately, so cash should be recognised instead.
  • Cash is received at the time of sale, so cash increases (debited) and sales revenue is recognised (credited).

Practice Question 1.6

A wholesaler sells goods worth CU 35,000 to a retailer and issues an invoice to be paid in 60 days. How would the wholesaler record this transaction?

  • Dr Accounts receivable 35,000
            Cr Sales 35,000
  • Dr Cash 35,000
            Cr Sales 35,000
  • Dr Sales 35,000
            Cr Accounts receivable 35,000
  • Dr Accounts payable 35,000
            Cr Sales EUR 35,000
  • The sale is made on credit, so accounts receivable increases and sales revenue is recognised.
  • This assumes cash is received immediately. However, the customer will pay later, so a receivable should be recognised instead.
  • This reverses the correct entry. Sales revenue should be credited, and accounts receivable should be debited.
  • Accounts payable represents amounts owed by the business to suppliers. Here, the customer owes the business, so accounts receivable should be recognised instead.

Practice Question 1.7

A hair salon purchases styling tools costing CU 6,000 using a business credit card. The amount will be paid at a later date. Which of the following journal entries correctly records this transaction?

  • Dr Expense 6,000
            Cr Bank 6,000
  • Dr Credit card payable 6,000
            Cr Bank 6,000
  • Dr Equipment 6,000
            Cr Credit card payable 6,000
  • Dr Equipment 6,000
            Cr Cash 6,000
  • No cash has been paid. Using a credit card creates a liability, not an immediate bank payment.
  • This records the settlement of a liability, but the purchase has just been made. Therefore, a liability should be recognised and bank should not be credited.
  • The styling tools are an asset (equipment) for the salon, and using a credit card creates a liability (credit card payable).
  • This assumes an immediate cash payment. However, the purchase was made using a credit card, so a liability should be recognised instead.

Practice Question 1.8

A restaurant settles CU 10,000 owed to a supplier for ingredients purchased last month, paying via bank transfer. How would the restaurant record this?

  • Dr Accounts payable 10,000
            Cr Bank 10,000
  • Dr Purchases 10,000
            Cr Bank 10,000
  • Dr Bank 10,000
            Cr Accounts payable 10,000
  • Dr Expense 10,000
            Cr Bank 10,000
  • The payment settles an existing liability, so accounts payable decreases (debited) and bank decreases (credited).
  • This records a new purchase, but the transaction relates to paying an existing liability. Purchases should not be recorded again.
  • This reverses the correct entry. Bank should decrease (credited), and accounts payable should decrease (debited), not increase.
  • This records a new expense, but the expense was already recognised when the goods were purchased. This transaction is a settlement, not a new expense.

Practice Question 1.9

A gym repays CU 2,000 of its bank loan using cash. Which of the following journal entries correctly records this transaction?

  • Dr Bank 2,000
            Cr Loan 2,000
  • Dr Cash 2,000
            Cr Loan 2,000
  • Dr Loan 2,000
            Cr Cash 2,000
  • Dr Loan 2,000
            Cr Revenue 2,000
  • This reverses the correct entry. Cash (not bank) should decrease and credited, while the loan (liability) should decrease and be debited.
  • This reverses the correct entry. Cash should decrease and credited, while the loan (liability) should decrease and be debited.
  • Repaying the loan reduces the liability, so the loan is debited, and cash decreases and is credited.
  • Revenue is not involved. Loan repayment reduces a liability and does not represent income.

Practice Question 1.10

A photography business completed a project for a client last month and issued an invoice for CU 750. The client has now paid the full amount via bank transfer. Which of the following journal entries records the receipt of this payment?

  • Dr Accounts receivable 750
            Cr Bank 750
  • Dr Bank 750
            Cr Accounts receivable 750
  • Dr Bank 750
            Cr Sales 750
  • Dr Accounts receivable 750
            Cr Sales 750
  • This reverses the correct entry. Accounts receivable should decrease (credited) and bank should increase (debited).
  • Payment is received, so bank increases (debited) and accounts receivable decreases (credited).
  • This records new revenue, but the revenue was already recognised when the invoice was issued. This transaction only records the receipt of payment and does not reduce receivables.
  • This records the original credit sale, not the receipt of payment. The sale has already been recorded.

Practice Question 2: Intermediate journal entry practice

Topics covered: accruals and prepayments, depreciation, provisions, inventory write-offs, receivables (bad debts and allowances), tax adjustments and error corrections.

Practice Question 2.1

A business receives an invoice for CU 1,000 for office supplies that were used immediately. It pays CU 400 by bank transfer, and the remaining balance will be paid later. Which of the following journal entries correctly records this transaction?

  • Dr Office supplies expense 1,000
            Cr Bank 400
            Cr Accounts payable 600
  • Dr Office supplies expense 1,000
            Cr Bank 1,000
  • Dr Office supplies expense 400
            Cr Bank 400
            Cr Accounts payable 600
  • Dr Office supplies expense 1,000
            Cr Accounts payable 1,000
  • The full expense of CU 1,000 is recognised because the supplies were used immediately. CU 400 has been paid (reducing bank) and CU 600 remains payable (a liability).
  • This assumes the full amount was paid in cash. However, only CU 400 was paid and the remaining CU 600 should be recorded as a liability (accounts payable).
  • This only records CU 400 as an expense. The full CU 1,000 should be recorded as an expense, regardless of how much has been paid. Another error is that debits do not equal credits, which violates the double-entry principle.
  • This assumes the entire amount is unpaid. However, CU 400 has already been paid, so bank should be credited for that portion.

Practice Question 2.2

A company has taken out a CU 10,000 bank loan with an annual interest rate of 6%. At the end of the year, it settles the interest owed using its bank account. How would the company record this transaction?

  • Dr Loan 600
            Cr Bank 600
  • Dr Interest expense 600
            Cr Loan 600
  • Dr Interest expense 600
            Cr Bank 600
  • Dr Interest payable 600
            Cr Bank 600
  • Interest is an expense and should not be confused with loan repayment, which reduces the loan (a liability).
  • This suggests that interest increases the loan balance, which is incorrect. Interest is an expense, not an addition to the principal.
  • Interest is a cost of borrowing and is recognised as an expense for the period. Here it is also paid, so bank is credited.
  • This would only be correct if interest had been accrued (recognised as a liability) in a previous period, which is not the case here.

Practice Question 2.3

During a year end inventory count, a business discovers that goods costing CU 500 have been damaged and can no longer be sold. The business decides to write off these items. Which of the following journal entries correctly records this transaction?

  • Dr Inventory write-off expense 500
            Cr Inventory 500
  • Dr Purchases 500
            Cr Inventory 500
  • Dr Inventory write-off expense 500
            Cr Bank 500
  • Dr Inventory 500
            Cr Inventory write-off expense 500
  • The damaged inventory is no longer an asset, so it is removed from inventory and recognised as an expense for the period.
  • Purchases are used to record new inventory acquired, not losses. This transaction related to inventory that is no longer usable, so an expense should be recognised.
  • No cash is involved in this transaction. The write-off reduces inventory and recognises an expense but does not affect bank.
  • This reverses the correct entry. Inventory should be reduced (credited), not increased, and the loss should be recorded as an expense.

Practice Question 2.4

A customer owing CU 8,000 is declared bankrupt, and the business decides the amount will not be recovered. How should the business record this transaction?

  • Dr Accounts receivable 800
            Cr Bad debt expense 800
  • Dr Loss allowance (SoFP) 800
            Cr Accounts receivable 800
  • Dr Bad debt expense 800
            Cr Accounts receivable 800
  • Dr Bad debt expense 800
            Cr Loss allowance (SoFP) 800
  • This reverses the correct entry. Receivables should be reduced (credited), and the loss should be recognised as an expense.
  • This would only be correct if a loss allowance receivables had previously been created. The question does not indicate that, so the write-off should be recorded directly as an expense.
  • The amount is no longer recoverable, so it is written off by removing it from receivables and recognising a bad debt expense.
  • This records a loss allowance (estimate of future losses), not a specific write-off. Here, the debt is known to be unrecoverable, so it should be removed from receivables.

Practice Question 2.5

A retail company is being sued by a customer. The company’s lawyers advise that it will probably lose the case, and estimate the compensation to be CU 5,000. Which of the following journal entries correctly records this transaction?

  • Dr Provision for legal claim 5,000
            Cr Legal expense 5,000
  • Dr Legal expense 5,000
            Cr Provision for legal claim 5,000
  • Dr Legal expense 5,000
            Cr Bank 5,000
  • No journal entry is required (disclose only)
  • This reverses the correct entry. A provision is a liability and should be credited, not debited. The legal expense should be debited.
  • Since the outflow is probable and can be reliably estimated, a provision should be recognised by recording an expense and a liability.
  • No payment has been made yet. A provision recognises a future obligation, not an immediate cash outflow.
  • Disclosure alone is only appropriate for contingent liabilities. Here, the outflow is probable and measurable, so a provision must be recognised.

Practice Question 2.6

A small wholesale business has accounts receivable of CU 10,000 at year end. Based on past experience, it expects that some customers may not pay and estimates that 5% of receivables will be uncollectible. No allowance has been previously recognised. Which of the following journal entries correctly records this transaction?

  • Dr Expected credit loss expense (SoPL) 500
            Cr Loss allowance (SoFP) 500
  • Dr Loss allowance (SoFP) 500
            Cr Accounts receivable 500
  • Dr Expected credit loss expense (SoPL) 500
            Cr Accounts receivable 500
  • Dr Accounts receivable 500
            Cr Revenue 500
  • This is an estimate of future uncollectible amounts, so an expense is recognised immediately and an allowance is created to reduce receivables.
  • This entry would be used to write off a receivable using an existing allowance. However, the question requires creating the allowance, not using it.
  • This removes a receivable directly. However, this adjustment is based on an estimate, so an allowance should be created instead.
  • This incorrectly increases accounts receivable and reduces revenue. The adjustment should instead reflect a reduction in the value of receivables through an allowance.

Practice Question 2.7

A delivery company purchases a van for CU 12,000. It is expected to have a useful life of four years with no residual value. The company uses the straight-line method for depreciation. Which of the following journal entries correctly records depreciation for the first year?

  • Dr Depreciation expense 12,000
            Cr Van 12,000
  • Dr Van 3,000
            Cr Depreciation expense 3,000
  • Dr Accumulated depreciation 3,000
            Cr Depreciation expense 3,000
  • Dr Depreciation expense 3,000
            Cr Accumulated depreciation 3,000
  • This incorrectly depreciates the full cost in one year. Depreciation should be spread over the asset’s useful life.
  • This reverses the correct entry for expense. Depreciation increases expenses and should be debited, and the asset’s value should be reduced through the accumulated depreciation account.
  • This reverses the correct entry. Accumulated depreciation should be credited to reflect the reduction in the asset’s value and depreciation expense should be debited.
  • Depreciation allocates the cost of the asset over its useful life. Using the straight-line method, 12,000 ÷ 4 = 3,000 is recognised as an expense, and accumulated depreciation is created to record the reduction in asset value.

Practice Question 2.8

At year end, a company calculates its income tax expense for the year to be CU 2,000. During the year, it has already paid CU 2,500 to the tax authorities. All payments have already been recorded and there are no outstanding tax liabilities at year end. Which of the following journal entries correctly records the year end adjustment?

  • Dr Income tax receivable 500
            Cr Income tax expense 500
  • Dr Income tax expense 2,000
            Cr Bank 2,000
  • Dr Income tax expense 500
            Cr Income tax payable 500
  • Dr Income tax payable 500
            Cr Income tax expense 500
  • This adjustment reduces the tax expense to the correct amount and recognises the overpayment as a receivable. It does not represent income.
  • The payment of 2,500 has already been recorded, so the adjustment should correct the expense. This entry incorrectly records cash and does not reflect the year end adjustment.
  • This increases the expense and creates a payable, but the company has already overpaid tax. The expense should be reduced to the correct amount and a receivable should be recognised instead.
  • This reduces a payable, but there are no outstanding tax liabilities at year end. The overpayment should instead be recognised as a receivable.

Practice Question 2.9

On 1 October, a business pays CU 1,800 for insurance covering a period of 18 months. However, the company has recorded the full amount as an expense for the year. The financial year ends on 31 December. Which of the following journal entries correctly records the year end adjustment?

  • Dr Insurance expense 300
            Cr Prepaid insurance 300
  • Dr Prepaid insurance 300
            Cr Insurance expense 300
  • Dr Prepaid insurance 1,500
            Cr Insurance expense 1,500
  • Dr Insurance expense 1,800
            Cr Bank 1,800
  • This assumes the expense has not yet been recorded. However, the full amount has already been recorded.
  • This only adjusts 300, but 1,500 relates to future periods. The adjustment should recognise the full prepayment amount.
  • The company has overstated expense by recording the full 1,800. Only 300 relates to the current period, so 1,500 should be recognised as a prepayment, reducing the expense.
  • The payment has already been recorded. This entry incorrectly records it again and does not reflect the year end adjustment.

Practice Question 2.10

In the previous year, a company has recognised a provision for legal claims of CU 2,000. During the current year, the company settles the claim by paying CU 2,000 from its bank account. Which of the following journal entries correctly records this transaction?

  • Dr Legal expenses 2,000
            Cr Bank 2,000
  • Dr Provision for legal claim 2,000
            Cr Bank 2,000
  • Dr Provision for legal claim 2,000
            Cr Legal expense 2,000
  • Dr Legal expense 2,000
            Cr Provision for legal claim 2,000
  • This records a new expense, but the expense was already recognised when the provision was created in the previous year.
  • The payment settles the obligation that was already recognised in the previous year. Therefore, the provision is reduced and bank is credited for the payment.
  • This removes the provision but incorrectly reduces expense. Bank should be credited instead to reflect the payment.
  • This creates a new expense and increases a provision, which is incorrect. The obligation has already been recognised and is now being settled.

Practice Question 3: From transactions to T-accounts to trial balance

Transactions:

  1. The owner invested CU 10,000 cash in the business.
  2. Purchased equipment for CU 4,000 cash.
  3. Purchased inventory on credit for CU 2,500.
  4. Paid CU 600 rent in cash.
  5. Sold goods for CU 1,200 cash.
  6. Paid CU 800 to suppliers.

Accounts you may need:

  • Cash
  • Capital
  • Equipment
  • Purchases
  • Accounts payable
  • Sales revenue
  • Rent expense

Task:

  1. Record the transactions in T-accounts.
  2. Calculate the closing balance for each account.
  3. Prepare a trial balance as at 31 March 20x6.
Answer

Step 1: Analyse each transaction.

  1. The owner invested CU 10,000 cash in the business.
    • Cash increases Debit Cash CU 10,000
    • Capital increases Credit Capital CU 10,000
  2. Purchased equipment for CU 4,000 cash.
    • Equipment increases Debit Equipment CU 4,000
    • Cash decreases Credit Cash CU 4,000
  3. Purchased inventory on credit for CU 2,500.
    • Inventory increases Debit Inventory CU 2,500
    • Accounts payable increases Credit Accounts payable CU 2,500
  4. Paid CU 600 rent in cash.
    • Rent expense increases Debit Rent expense CU 600
    • Cash decreases Credit Cash CU 600
  5. Sold goods for CU 1,200 cash.
    • Cash increases Debit Cash CU 1,200
    • Sales revenue increases Credit Sales revenue CU 1,200
  6. Paid CU 800 to suppliers.
    • Accounts payable decreases Debit Accounts payable CU 800
    • Cash decreases Credit Cash CU 800

Step 2: Prepare the T-accounts.

Cash account
Debit Credit
Capital 10,000 Equipment 4,000
Sales revenue 1,200 Rent 600
Accounts payable 800
Carried down 5,800
Total 11,200 Total 11,200
Balance brought down 5,800 debit
 
1 Capital account
Debit Credit
Cash 10,000
Carried down 10,000
Total 10,000 Total 10,000
Balance brought down 10,000 credit
 
2 Equipment account
Debit Credit
Cash 4,000 Carried down 4,000
Total 4,000 Total 4,000
Balance brought down 4,000 debit
 
3 Purchases account
Debit Credit
Accounts payable 2,500 SoPL 2,500
Total 2,500 Total 2,500
 
6 Accounts payable account
Debit Credit
Cash 800 Inventory 2,500
Carried down 1,700
Total 2,500 Total 2,500
Balance brought down 1,700 credit
 
5 Sales revenue account
Debit Credit
SoPL 1,200 Cash 1,200
Total 1,200 Total 1,200
 
4 Rent expense account
Debit Credit
Cash 600 SoPL 600
Total 600 Total 600

Step 3: Extract balances for the trial balance.

Account Debit (CU) Credit (CU)
Cash 5,800
Equipment 4,000
Purchases 2,500
Rent expense 600
Accounts payable 1,700
Capital 10,000
Sales revenue 1,200
Total 12,900 12,900

Practice Question 4: From completed T-Accounts to trial balance

The following T-accounts have already been prepared.

Cash account
Debit Credit
12,000 2,500
5,000 1,200
5,000
 
Equipment account
Debit Credit
5,000
 
Accounts payable account
Debit Credit
1,200 3,000
 
Capital account
Debit Credit
12,000
 
Sales revenue account
Debit Credit
5,000
 
Wages expense account
Debit Credit
2,500
 
Purchases account
Debit Credit
3,000

Task:

  1. Calculate the balance of each T-account.
  2. Identify whether the balance is debit or credit.
  3. Prepare the trial balance in CU.
Answer

Step 1: Calculate the balance of each T-account.

Cash account
Debit Credit
12,000 2,500
5,000 1,200
Carried down 8,300
Total 17,000 Total 17,000
Balance brought down 8,300 debit
 
Equipment account
Debit Credit
5,000 Carried down 5,000
Total 5,000 Total 5,000
Balance brought down 5,000 debit
 
Accounts payable account
Debit Credit
1,200 3,000
Carried forward 1,800
Total 3,000 Total 3,000
Balance brought down 1,800 credit
 
Capital account
Debit Credit
Carried forward 12,000 12,000
Total 12,000 Total 12,000
Balance brought down 12,000 credit
 
Sales revenue account
Debit Credit
SoPL 5,000 5,000
Total 5,000 Total 5,000
 
Wages expense account
Debit Credit
2,500 SoPL 2,500
Total 2,500 Total 2,500
 
Purchases account
Debit Credit
3,000 SoPL 3,000
Total 3,000 Total 3,000

Step 2: Prepare the trial balance.

Account Debit (CU) Credit (CU)
Cash 8,300
Equipment 5,000
Purchases 3,000
Wages expense 2,500
Accounts payable 1,800
Capital 12,000
Sales revenue 5,000
Total 18,800 18,800

Practice Question 5: Trial balance from completed T-accounts (including drawings)

The following T-accounts relate to a small sole trader.

Cash account
Debit Credit
Capital 15,000 Drawings 2,000
Revenues 4,000 Rent 3,000
Accounts payable 1,000
 
Purchases account
Debit Credit
Accounts payable 2,500
 
Accounts payable account
Debit Credit
Cash 1,000 Purchases 2,500
Carried down 1,500
 
Capital account
Debit Credit
Cash 15,000
 
Drawings account
Debit Credit
Cash 2,000
 
Sales revenue account
Debit Credit
Cash 4,000
 
Rent expense account
Debit Credit
Cash 3,000

Task:

  1. Determine the balance of each account.
  2. Prepare the trial balance in CU.

Question 6 practices:

  • posting to T-accounts
  • determining closing balances
  • distinguishing debit versus credit balances
  • preparing a trial balance
  • recognising normal balances of accounts.
Answer

Task: Calculate the balances from the T-accounts and prepare the trial balance.

Step 1: Calculate the balance of each T-account.

Cash account
Debit Credit
Capital 15,000 Drawings 2,000
Revenues 4,000 Rent 3,000
Accounts payable 1,000
Carried down 13,000
Total 19,000 Total 19,000
Balance brought down 13,000 debit
 
Purchases account
Debit Credit
Accounts payable 2,500
SoPL 2,500
Total 2,500 Total 2,500
 
Accounts payable account
Debit Credit
Cash 1,00 Purchases 2,500
Carried down 1,500
Total 2,500 Total 2,500
Balance brought down 1,500 credit
 
Capital account
Debit Credit
Carried down 15,000 Cash 15,000
Total 15,000 Total 15,000
Balance brought down 15,000 credit
 
Drawings account
Debit Credit
Cash 2,000 Carried down 2,000
Total 2,000 Total 2,000
Balance brought down 2,000 debit
 
Sales revenue account
Debit Credit
SoPL 4,000 Cash 4,000
Total 4,000 Total 4,000
 
Rent expense account
Debit Credit
Cash 3,000 SoPL 3,000
Total 3,000 Total 3,000

Step 2: Prepare the trial balance.

Account Debit (CU) Credit (CU)
Cash 13,800
Purchases 2,500
Drawings 2,000
Rent expense 3,000
Accounts payable 1,500
Capital 15,000
Sales revenue 4,000
Total 20,500 20,500

Practice Question 6: A trial balance with a posting error

A bookkeeper has already prepared the T-accounts and calculated the correct balances. They then attempted to prepare a trial balance, but the totals do not agree. Note that inventory is managed on a perpetual basis.

Step 1: T-Accounts

Cash account
Debit Credit
Capital 20,000 Equipment 8,000
Sales 5,000 Utilities 3,000
Accounts payable 2,000
 
Equipment account
Debit Credit
Cash 8,000
 
Purchases account
Debit Credit
Accounts payable 3,000
 
Accounts payable account
Debit Credit
Cash 2,000 Purchases 3,000
 
Capital account
Debit Credit
20,000
 
Sales revenue account
Debit Credit
Cash 5,000
 
Utilities expense account
Debit Credit
Cash 3,000

Step 2: Trial balance prepared by the bookkeeper

Account Debit (CU) Credit (CU)
Cash 12,000
Equipment 8,000
Purchases 3,000
Utilities expense 3,000
Accounts payable 1,000
Capital 20,000
Sales revenue 5,000
Total 29,000 29,000

The trial balance does not balance.

Task:

  1. Determine the correct balance for each T-account.
  2. Identify which account has been incorrectly posted to the trial balance.
  3. Prepare the correct trial balance.
Answer

Step 1: Calculate the correct balances.

Cash account
Debit Credit
Capital 20,000 Equipment 8,000
Sales 5,000 Utilities 3,000
Accounts payable 2,000
Carried down 12,000
Total 2,500 Total 25,000
Balance brought down 12,000 debit
 
Equipment account
Debit Credit
Cash 8,000 Carried down 8,000
Total 8,000 Total 8,000
Balance brought down 8,000 debit
 
Purchases account
Debit Credit
Accounts payable 3,000
Carried down 3,000
Total 3,000 Total 3,000
Balance brought down 3,000 debit
 
Accounts payable
Debit Credit
Cash 2,000 Purchases 3,000
Carried down 1,000
Total 3,000 Total 3,000
Balance brought down 1,000 credit
 
Capital account
Debit Credit
Cash 20,000 Carried down 20,000
Total 20,000 Total 20,000
Balance brought down 20,000 credit
 
Sales revenue account
Debit Credit
SoPL 5,000 Cash 5,000
Total 5,000 Total 5,000
 
Utilities expense account
Debit Credit
Cash 3,000 SoPL 3,000
Total 3,000 Total 3,000
Balance brought down 3,000 debit

Step 2: Identify the error.

The purchases account has a debit balance of 3,000, but in the trial balance it was incorrectly placed on the credit side.

Step 3: Correct the trial balance.

Account Debit (CU) Credit (CU)
Cash 12,000
Equipment 8,000
Purchases 3,000
Utilities expense 3,000
Accounts payable 1,000
Capital 20,000
Sales revenue 5,000
Total 26,000 26,000

This exercise illustrates that errors can occur when transferring balances from the ledger to the trial balance.

A trial balance will not balance if:

  • a balance is entered on the wrong side (debit versus credit),
  • an account is omitted,
  • a balance is copied incorrectly.

However, some errors will not be detected by a trial balance (e.g., errors of principle or complete omission of a transaction).

Practice Question 7: Basic adjustments (introductory)

Sunny Stationery provides office supplies to local businesses. The following trial balance at 31 December 20x7 has been extracted from the accounting records.

Account Debit (CU) Credit (CU)
Cash 8,200
Accounts receivable 3,100
Purchases 1,200
Equipment 6,000
Accounts payable 2,400
Capital 11,200
Sales revenue 10,200
Wages expense 3,800
Rent expense 1,500
Totals 23,800 23,800
Additional information

At the end of the year:

  • CU 400 of purchases remain unused.
  • Wages of CU 250 have been earned by employees but not yet paid.
Required
  1. Prepare the adjusting journal entries.
  2. Update the trial balance to reflect the adjustments (Adjusted trial balance).
  3. Prepare:
    • a Statement of Profit and Loss for the year ended 31 December 20x7
    • a Statement of Financial Position as at 31 December 20x7
Answer
  1. Adjusting journal entries:
Closing inventory Dr Cr
Closing inventory (SoFP) 400
Closing inventory (cost of sales) 400
 
Accrued wages
Wage expense 250
Accrued wages 250
  1. Adjusted trial balance:
Trial balance Adjustments Adjusted trial balance
Account Debit (CU) Credit (CU) Debit (CU) Credit (CU) Debit (CU) Credit (CU)
Cash 8,200 8,200
Accounts receivable 3,100 3,100
Purchases 1,200 1,200
Equipment 6,000 6,000
Accounts payable 2,400 2,400
Capital 11,200 11,200
Sales revenue 10,200 10,200
Wages expense 3,800 250 4,050
Rent expense 1,500 1,500
Closing inventory (SoFP) 400 400
Closing inventory (cost of goods sold) 400 400
Accrued wages 250 250
Totals 23,800 23,800 650 650 24,450 24,450
  1. SoPL and SoFP:
Statement of Profit and Loss for Sunny Stationery for the year ending 31 December 20x7
CU
Revenue 10,200
Cost of sales
    Opening inventory 0
    Purchases 1,200
    Closing inventory (400) (400)
Gross profit 9,400
 
Expenses
Wages 4,050
Rent 1,500 (5,550)
Operating profit 3,850
Interest 0
Profit after interest 3,850
Tax  − 
Profit for the year 3,850
  >
Statement of Financial Position of Sunny Stationery as at 31 December 20x7
Non-current assets CU
Equipment 6,000
 
Total current assets
Inventory 400
Accounts receivable 3,100
Cash 8,200
11,700
Total assets 17,700
 
Equity and liabilities
Capital 15,050
 
Total current liabilities
Accounts payable 2,400
Accrued wages 250
2,650
Total equity and liabilities 17,700

Practice Question 8: Accruals and prepayments (intermediate)

GreenTech Repairs services electronic equipment for businesses.

The following trial balance at 31 March 20x6 has been prepared.

Account Debit (CU) Credit (CU)
Cash 5,400
Accounts receivable 4,600
Prepaid insurance 1,200
Equipment 10,000
Accounts payable 2,800
Bank loan 4,000
Capital 7,000
Service revenue 11,900
Salaries expense 3,600
Utilities expense 900
Totals 25,700 25,700
Additional information
  • Insurance of CU 600 relates to the current accounting period.
  • Wages of CU 400 have been earned but not yet paid.
  • Utilities of CU 150 have been incurred but not yet recorded.
  • CU 500 of service revenue has been received in advance but not yet earned.
Required
  1. Prepare adjusting journal entries.
  2. Prepare an adjusted trial balance.
  3. Prepare:
    • a Statement of Profit and Loss
    • a Statement of Financial Position
Answer
  1. Adjusting journal entries:
Prepaid insurance Dr Cr
Insurance expense 600
Prepaid insurance 600
 
Accrued wages
Wage expense 400
Accrued wages 400
 
Accrued utility bills
Utility expense 150
Accrued utilities 150
 
Unearned revenue
Revenue 500
Unearned revenue 500
  1. Extended trial balance:
Trial balance Adjustments Adjusted trial balance
Account Debit (CU) Credit (CU) Debit (CU) Credit (CU) Debit (CU) Credit (CU)
Cash 5,400 5,400
Accounts receivable 4,600 4,600
Prepaid insurance 1,200 600 600
Equipment 10,000 10,000
Accounts payable 2,800 2,800
Bank loan 4,000 4,000
Capital 7,000 7,000
Service revenue 11,900 500 11,400
Salaries expense 3,600 400 4,000
Utilities expense 900 150 1,050
Insurance expense 600 600
Accured wages 400 400
Accrued utilities 150 150
Unearned revenue 500 500
Totals 25,700 25,700 1,650 1,650 26,250 26,250
  1. SoPL and SoPF:
Statement of Profit and Loss for GreenTech Repairs for the year ending 31 March 20x6
  CU
Revenue 11,400
 
Expenses
Salaries 4,000
Utilities 1,050
Insurance 600 (5,650)
 
Operating profit 5,750
Interest 0
 
Profit after interest 5,750
Tax  − 
 
Profit for the year 5,750
 
Statement of Financial Position of GreenTech Repairs as at 31 March 20x6
Non-current assets CU
Equipment 10,000
 
Current assets
Inventory
Accounts receivable 4,600
Prepaid insurance 600
Cash 5,400
  10,600
Total assets 20,600
 
Equity and liabilities
Capital 12,750
 
Non-current liabilities
Bank loan 4,000
 
Current liabilities
Accounts payable 2,800
Accrued utilities 150
Unearned revenue 500
Accrued salaries 400
  3,850
Total equity and liabilities 20,600

Practice Question 9: Full adjustment set (more challenging)

Stream Café, a small business operating as a sole trader, prepared the following trial balance at 30 June 20x9.

Account Debit (CU) Credit (CU)
Cash 7,500
Accounts receivable 2,700
Inventory (1 July 20x8) 3,400
Equipment 12,000
Accounts payable 7,900
Bank loan 5,100
Capital 10,000
Sales revenue 18,600
Purchases 8,200
Rent expense 3,000
Wages expense 4,800
Totals 41,600 41,600
Additional information
  • Closing inventory at 30 June 20x9 is CU 2,900.
  • Equipment is depreciated 10% per year using straight-line depreciation.
  • Wages of CU 350 are owed but not yet paid.
  • Rent of CU 600 has been paid in advance.
Required
  1. Prepare adjusting journal entries.
  2. Prepare an adjusted trial balance.
  3. Prepare:
    1. a Statement of Profit and Loss.
    2. a Statement of Financial Position.
  4. Explain:
    1. why adjustments are necessary in accrual accounting.
    2. the function of the following adjustments:
      • accruals
      • prepayments
      • non-cash adjustments
      • inventory adjustments
Answer
  1. Adjusting entries:
Closing inventory Dr Cr
Closing inventory (SoFP) 2,900
Closing inventory (cost of sales) 2,900
 
Depreciation
Depreciation expense 1,200
Depreciation (SoFP) 1,200
 
Accrued wages
Wage expense 350
Accrued wages 350
 
Prepaid rent
Rent prepayment 600
Rent expense 600
  1. Extended trial balance:
Trial balance Adjustments Adjusted trial balance
Account Debit (CU) Credit (CU) Debit (CU) Credit (CU) Debit (CU) Credit (CU)
Cash 7,500 7,500
Accounts receivable 2,700 2,700
Inventory (1 July 2025) 3,400 3,400
Equipment 12,000 12,000
Accounts payable 7,900 7,900
Bank loan 5,100 5,100
Capital 10,000 10,000
Sales revenue 18,600 18,600
Purchases 8,200 8,200
Rent expense 3,000 600 2,400
Wages expense 4,800 350 5,150
Closing inventory (SoFP) 2,900 2,900
Closing inventory (COS) 2,900 2,900
Depreciation expense 1,200 1,200
Depreciation (SoFP) 1,200 1,200
Accrued wages 350 350
Rent prepayment 600 600
Totals 41,600 41,600 5,050 5,050 46,050 46,050
  1. SoPL and SoFP:
Statement of Profit and Loss for Stream Cafe for the year ending 30 June 20x9
CU
Revenue 18,600
Cost of sales
Opening inventory 3,400
Purchases 8,200
Closing inventory (2,900) (8,700)
Gross profit 9,900
 
Expenses
Rent 2,400
Depreciation 1,200
Wages 5,150 (8,750)
Operating profit 1,150
Interest 0
Profit after interest 1,150
Tax 0
Profit for the year 1,150
 
Statement of Financial Position of Stream Cafe as at 30 June 20x9
Non-current assets CU
Equipment 12,000
Depreciation (1,200)
Net book value 10,800
 
Current assets
Inventory 2,900
Accounts receivable 2,700
Prepaid rent 600
Cash 7,500
13,700
Total assets 24,500
 
Equity and liabilities
Capital 11,150
 
Non-current liabilities
Bank loan 5,100
 
Current liabilities
Accounts payable 7,900
Accrued wages 350
8,250
Total equity and liabilities 24,500
  1. Explain:
    1. why adjustments are necessary in accrual accounting: Adjustments need to be made so that the expenses are matched to the income generated in the accounting period in question.
    2. the function of the following adjustments:
      • Accruals: These are expenses incurred in the period that have not been settled at year end, and are shown as current liabilities.
      • Prepayments: These are expenses paid but relate to future accounting periods. They are shown as current assets.
      • Non-cash adjustments: These relate to items such as depreciation that seek to apply the matching concept but do not result in a cash movement.
      • Inventory adjustments: Under a periodic inventory system, a year end adjustment is made following an inventory count. This ensures that the inventory in the SoFP is accurate and cost of sales can be calculated.

Practice Question 10: Extended adjustment set (more challenging)

Brighton Office Supplies Ltd extracted the following trial balance at 31 December 20x5:

Account Debit (CU) Credit (CU)
Purchases 70,000
Opening inventory 9,000
Wages 18,000
Rent 6,000
General administrative expenses 4,500
Accounts receivable 16,000
Bank 11,500
Machinary at cost 30,000
Drawings 15,000
Sales revenue 120,000
Capital 13,000
Bank loan 20,000
Accounts payable 14,000
Loss allowance 1,000
Accumulated depreciation – machinery 12,000
Totals 180,000 180,000
Additional information
  • Machinery is to be depreciated at 10% per annum on cost.
  • The bank loan carries interest at 6% per annum. Interest for the final three months of the year has not yet been recorded.
  • A specific accounts receivable of CU 800 is to be written off as irrecoverable.
  • After the write-off above, the allowance for credit losses is to be adjusted to 10% of closing accounts receivable.
  • The company’s solicitor advises that it is probable the company will lose an ongoing legal case and estimates the payment at CU 2,400.
  • Closing inventory at 31 December 20x5 is CU 11,500.
Required

Prepare:

  1. The journal adjustments with Dr/Cr entries.
  2. The extended trial balance after adjustments.
Answer
  1. Journal adjusting entries:
Depreciation Dr Cr
Depreciation expense 3,000
Depreciation (SoFP) 3,000
 
Accrued loan interest
Interest expense 300
Accrued interest 300
 
Bad debt write-off
Bad debt expense 800
Accounts receivable 800
 
Allowance for credit losses (doubtful debts)
Expected credit losses (doubtful debts) 520
Loss allowance (doubtful debts) 520
 
Accounts receivable prior to write-off: CU 16,000
Bad debt written off: CU 800
Closing Accounts receivable: CU 15,200
Loss allowance = 10% x 15,200
Existing allowance (from trial balance): CU 1,000
Therefore, increase required = CU 520
 
Provision for legal case
Legal expense 2,400
Provision for legal claim 2,400
 
Closing inventory
Closing inventory (SoFP) 11,500
Closing inventory (COS) 11,500
  1. Extended trial balance:
Trial balance Adjustments Adjusted trial balance
Account Debit (CU) Credit (CU) Debit (CU) Credit (CU) Debit (CU) Credit (CU)
Purchases 70,000 70,000
Opening inventory 9,000 9,000
Wages 18,000 18,000
Rent 6,000 6,000
General administrative expenses 4,500 4,500
Accounts receivable 16,000 800 15,200
Bank 11,500 11,500
Machinery at cost 30,000 30,000
Drawings 15,000 15,000
Sales revenue 120,000 120,000
Capital 13,000 13,000
Bank loan 20,000 20,000
Accounts payable 14,000 14,000
Loss allowance 1,000 520 1,520
Accumulated depreciation – machinery 12,000 3,000 15,000
Depreciation expense 3,000 3,000
Interest expense 300 300
Interest payable 300 300
Bad debts expense 800 800
Expected credit loss expense 520 520
Legal expense 2,400 2,400
Provision for legal claim 2,400 2,400
Closing inventory 11,500 11,500
Inventory adjustment 11,500 11,500
Totals 180,000 180,000 18,520 18,520 197,720 197,720

Practice Question 11

Use the information provided to answer the questions.

Elm Tree Learning is a small tutoring business owned by Alex, offering one-to-one and group lessons. During the year, the business expanded its services and attracted more students. The following relates to some of the key financial information for the year:

  • Opening capital was CU 10,000.
  • Opening cash balance was CU 10,000.
  • Alex introduced additional capital of CU 3,000 in cash.
  • The business generated a profit of CU 5,000 for the year.
  • During the year, Alex withdrew CU 2,000 in cash for personal use.

Practice Question 11.1

What amount will be reported as profit for the year in the SoPL?

  • CU 3,000
  • CU 5,000
  • CU 7,000
  • CU 2,000
  • This incorrectly deducts drawings from profit. Drawings reduce capital, not profit.
  • Profit is CU 5,000. Drawings do not affect profit as they are distribution to the owner, not an expense.
  • This overstates profit by incorrectly adding drawings to profit.
  • This incorrectly treats drawings as profit for the year.

Practice Question 11.2

What is the closing capital balance at the end of the year?

  • CU 16,000
  • CU 18,000
  • CU 15,000
  • CU 13,000
  • Closing capital = opening capital + additional capital + profit –drawings = 10,000 + 3,000 + 5,000 – 2,000 = 16,000.
  • This overstates capital by not subtracting drawings, which should reduce capital.
  • This omits the additional capital of 3,000 and drawings of 2,000.
  • This ignores profit for the year and drawings entirely.

Practice Question 11.3

What is the cash balance at the end of the year?

  • CU 16,000
  • CU 13,000
  • CU 8,000
  • CU 11,000
  • This incorrectly includes profit as cash. Profit does not automatically affect cash.
  • This ignores drawings as cash outflow.
  • The question clearly states that additional capital introduced was cash and this answer ignores this cash inflow.
  • Cash increases with capital introduced and decreases with drawings: 10,000 + 3,000 – 2,000 = 11,000.

Practice Question 12

Use the information provided to answer the questions.

Harbour Foods Ltd is a small company that produces and sells packaged food products to local supermarkets. The company has expanded its distribution network and increased sales. The following information relates to key financial information for the year. Note that all transactions are in cash unless stated otherwise.

  • Opening retained earnings CU 13,200.
  • Opening cash balance CU 7,450.
  • Profit for the year CU 5,750.
  • A dividend of CU 1,350 was declared during the year.
  • The dividend will be paid next year.

Practice Question 12.1

The company reported a profit of CU 5,750. After considering the dividend declared, what amount of profit is shown in the SoPL?

  • CU 4,400
  • CU 5,750
  • CU 7,100
  • CU 1,350
  • This incorrectly deducts dividends from profit. Dividends reduce retained earnings, not profit.
  • Profit is 5,750. Dividends do not affect profit as they are a distribution of profit, not an expense.
  • This incorrectly adds dividends to profit. Dividends are distributions of profit and should not increase it.
  • This incorrectly treats dividend as profit. Dividends are distributions, not a measure of performance.

Practice Question 12.2

What is the cash balance at the end of the year?

  • CU 13,200
  • CU 11,850
  • CU 12,100
  • CU 14,550
  • Cash increases with profit earned in cash and is not affected by dividends until they are paid: 7,450 + 5,750 = 13,200.
  • This incorrectly reduces cash as if the dividend has been paid. The dividend is only declared and will be paid in the future, so there is no cash outflow yet.
  • This reflects an incorrect adjustment to cash. It does not correctly account for the full cash inflow from profit.
  • This overstates cash, likely by incorrectly adding dividend. Dividend declaration has no impact on cash.

Practice Question 12.3

What is the closing retained earnings balance at the end of the year?

  • CU 18,950
  • CU 17,600
  • CU 12,850
  • CU 14,550
  • This ignores dividends. Dividends for the year will reduce retained earnings.
  • Closing retained earnings = opening retained earnings + profit – dividends = 13,200 + 5,750 – 1,350 = 17,600.
  • This ignores profit. Profit increases retained earnings and must be added.
  • This incorrectly adds the dividend. Dividends reduce retained earnings and should be subtracted, not added.

Practice Question 13: GreenPea Retail

GreenPea Retail Ltd is a small retailer selling eco-friendly home products that began operations on 1 January 20x5.

The following transactions occurred during the first month of operations (Jan 20x5).

  1. The owner invested CU 50,000 cash into the business in exchange for ordinary shares.
  2. The company purchased inventory for CU 12,000 on credit.
  3. The company purchased shop equipment for CU 8,000 cash.
  4. The company paid CU 2,400 for rent.
  5. The company sold goods for CU 9,000 cash.
  6. The company sold goods on credit for CU 6,000.
  7. The company received CU 3,000 from customers relating to the credit sale.
  8. The company paid CU 4,000 to suppliers.
  9. The company paid CU 2,200 salaries to employees.
  10. The company paid a CU 500 utilities expense.
Adjustments (31 January 20x5):
  • The rent paid covers six months, of which one month has been used.
  • Utilities of CU 150 are outstanding (not yet paid).
  • Depreciation on shop equipment for the month is CU 200.
  • A physical inventory count shows closing inventory of CU 2,800.
  • Due to damage, CU 200 of inventory must be written down to net realisable value.

After you have attempted the question, see the sample answer to Practice Question 13 in the Answer Bank.

Required

Using the information provided, complete the following tasks.

  1. Record journal entries for the 10 transactions.
  2. Prepare the trial balance.
  3. Record the adjusting journal entries.
  4. Update the trial balance to reflect the adjustments (adjusted trial balance).
  5. Prepare the Statement of Profit and Loss for the month ending 31 January 20x5.
  6. Prepare the Statement of Financial Position as at 31 January 20x5.

Practice Question 14: Apex Consulting

Apex Consulting Pty Ltd is a management consulting firm providing strategic and operational advisory services to corporate clients. The company began operations on 1 January 20x8.

Note: As a service company, Apex Consulting Ltd does not hold inventory. Instead, it incurs costs of providing services, primarily in the form of consulting staff salaries.

The following transactions took place during the year ended 31 December 20x8 and are presented to the nearest thousand.

  1. The owner invested CU 100 cash into the business in exchange for ordinary shares.
  2. The company obtained a bank loan of CU 40 at an annual interest rate of 6%.
  3. The company purchased office equipment for CU 25 cash.
  4. The company paid CU 36 for rent.
  5. The company provided consulting services and received CU 120 in cash.
  6. The company provided consulting services on credit for CU 60.
  7. The company received CU 40 from clients for amounts previously owed.
  8. The company paid CU 50 in salaries to consulting staff.
  9. The company paid CU 20 in salaries to administrative staff.
  10. The company paid CU 6 for insurance.

At the year end, the accountant identified the following adjustments that need to be recorded in the books:

  • The rent paid relates to a three-year period commencing 1 January 20x8.
  • The insurance paid related to a three-year period commencing 1 January 20x8.
  • CU 5 of consulting staff salaries relate to the year but have not yet been paid.
  • The office equipment is depreciated using straight-line method over five years, with no residual value.
  • Interest on the bank loan for the year has not yet been paid.
  • The company estimates an income tax expense of CU 15 for the year.
Required

Using the information provided, complete the following tasks. Assume the company prepares financial statements for the year ended 31 December 20x8.

  1. Record journal entries for all transactions.
  2. Prepare the trial balance as at 31 December 20x8.
  3. Record the adjusting journal entries.
  4. Update the trial balance to reflect the adjustments (adjusted trial balance).
  5. Prepare the Statement of Profit and Loss for the year ending 31 December 20x8.
  6. Prepare the Statement of Financial Position as at 31 December 20x8.

After you have attempted the question, see the sample answer to Practice Question 14 in the Answer Bank.

Practice Question 15: Jones

Jones Enterprises is a wholesale supplier of household goods, owned and managed by a sole trader, Ms Elly Jones. The business is now in its second year of operations. At the beginning of the year, the owner’s capital was CU 15,000. The business also had CU 3,000 cash and an opening inventory of CU 12,000.

Note: The business sells goods on credit and provides warranties on some products. Not all customers pay in full, so allowances are made for expected credit losses.

The following transactions took place during the year ending 31 December 20x6:

  1. Ms Elly Jones invested CU 100,000 cash into the business.
  2. The business purchased inventory for CU 70,000 on credit.
  3. The business paid CU 50,000 to suppliers.
  4. The business sold goods on credit for CU 120,000.
  5. The business received CU 90,000 from customers.
  6. The business paid CU 30,000 in wages.
  7. The business paid CU 12,000 for rent.
  8. Ms Elly Jones withdrew CU 8,000 for personal use.
  9. The business obtained a bank loan of CU 20,000 at an annual interest rate of 5%.
  10. The business purchased office equipment for CU 15,000 cash.

At the year end, 31 December 20x6, the following adjustments were identified and need to be recorded:

  • A physical inventory count shows inventory of CU 20,000.
  • A customer owing CU 3,000 has gone bankrupt and will not pay.
  • The business estimates that 5% of remaining receivables may be uncollectible.
  • The equipment is depreciated using the reducing balance method at 20% per annum.
  • Interest on the bank loan for the year has not yet been paid.
  • The business estimates the income tax expense for the year to be CU 6,000.
  • The business estimates that CU 2,000 will be required to cover warranty claims on goods sold during this year.
Required

Using the information above, complete the following tasks.

  1. Record journal entries for all transactions.
  2. Prepare the trial balance.
  3. Record the adjusting journal entries.
  4. Prepare the adjusted trial balance.
  5. Prepare the Statement of Profit and Loss for the year ended 31 December 20x6.
  6. Prepare the Statement of Financial Position as at 31 December 20x6.

After you have attempted the question, see the sample answer to Practice Question 15 in the Answer Bank.

Practice Question 16: FitLife

FitLife Ltd provides online fitness and wellness programmes to customers through annual subscription plans. The company began operations on 1 April 20x5.

Note: Customers pay in advance for access to services over a subscription period. Revenue is recognised as services are provided.

The following transactions took place during the year ended 31 March 20x6.

  1. The owner invested CU 80,000 cash into the business in exchange for ordinary shares.
  2. The company obtained a bank loan of CU 30,000 at an annual interest rate of 5%.
  3. The company purchased fitness equipment and software licences for CU 20,000 cash.
  4. The company paid CU 24,000 for rent.
  5. The company received CU 48,000 in advance from customers for annual subscription plans.
  6. The company provided subscription services and received CU 60,000 in cash.
  7. The company provided subscription services on credit for CU 20,000.
  8. The company received CU 15,000 from customers for amounts previously owed.
  9. The company paid CU 35,000 in salaries to fitness instructors.
  10. The company paid CU 12,000 in administrative salaries.
  11. The company paid CU 3,600 for insurance.
  12. The company paid CU 10,000 in dividends to shareholders during the year.

The following adjustments are required at the year-end:

  • The rent paid relates to a 12-month period commencing 1 April 20x5.
  • The insurance paid relates to a three-year period commencing 1 April 20x5.
  • At year-end, CU 36,000 of the subscription services relating to advance payments have been delivered.
  • CU 4,000 of salaries relate to the year but have not yet been paid.
  • The equipment is depreciated using the straight-line method over five years, with no residual value.
  • Interest on the bank loan for the year has not yet been paid (the loan carries an interest rate of 5% per annum).
  • The company estimates an income tax expense of CU 6,000 for the year.
Required

Using the information provided, complete the following tasks. Assume the company prepares financial statements for the year ended 31 March 20x6.

  1. Record journal entries for all transactions.
  2. Prepare the trial balance as at 31 March 20x6.
  3. Record the adjusting journal entries.
  4. Update the trial balance to reflect the adjustments (adjusted trial balance).
  5. Prepare the Statement of Profit and Loss for the year ending 31 March 20x6.
  6. Prepare the Statement of Financial Position as at 31 March 20x6.

After you have attempted the question, see the sample answer to Practice Question 16 in the Answer Bank.

Practice Question 17: FreshMart

FreshMart Ltd operates a chain of supermarkets selling groceries and household goods. The company began operations on 1 January 20x9. Assume the company prepares financial statements for the year ended 31 December 20x9.

Note: The company sells goods for cash and on credit. It also sells gift cards which can be redeemed in future periods.

The following transactions took place during the year ended 31 December 20x9:

  1. The owner invested CU 120,000 cash into the business in exchange for ordinary shares.
  2. The company purchased inventory for CU 80,000 on credit.
  3. The company paid CU 50,000 to suppliers.
  4. The company sold goods for CU 190,000 in cash.
  5. The company paid CU 45,000 in wages to staff.
  6. The company paid CU 24,000 for rent.
  7. The company paid CU 6,000 for utilities.
  8. The company sold CU 10,000 of gift cards to customers.

At the year-end, 31 December 20x9, the following adjustments were identified and need to be recorded:

  • A physical inventory count at year-end shows inventory of CU 25,000.
  • A CU 2,000 supplier discount relating to purchases made during the year has not yet been recorded.
  • Included in closing inventory are goods costing CU 2,000 which can only be sold for CU 1,200.
  • At year-end, CU 6,000 of the gift cards sold remain unredeemed.
  • The income tax payable for the previous year was overestimated by CU 1,000, which has not yet been recorded. In addition, the company estimates the current year’s income tax expense to be CU 8,000.
Required

Using the information above, complete the following tasks.

  1. Record journal entries for all transactions.
  2. Prepare the trial balance.
  3. Record the adjusting journal entries.
  4. Prepare the adjusted trial balance.
  5. Prepare the Statement of Profit and Loss for the year ended 31 December 20x9.
  6. Prepare the Statement of Financial Position as at 31 December 20x9.

After you have attempted the question, see the sample answer to Practice Question 17 in the Answer Bank.

Practice Question 18: Derma Ltd

Derma Ltd manufactures and distributes skincare and dermatology products to pharmacies, clinics and retailers. The company has been operating for three years. The Statement of Financial Position as at 31 December Year 3 is given below. All amounts are in m (millions).

Derma Ltd
Statement of Financial Position as at December Year 3
CU (m)
Non-current assets
Equipment 80
Less: Accumulated depreciation (24)
Net book value 56
 
Current assets
Inventory 18
Accounts receivable 16
Less: Loss allowance (1)
Net receivables 15
Cash 20
Prepaid insurance 2
55
Total assets 111
 
Equity and liabilities
Share Capital 70
Retained Earnings 10
80
 
Non-current liabilities
Bank loan 10
 
Current liabilities
Accounts payable 9
Wages payable 3
Interest payable 1
Tax payable 6
Provision for product returns 2
21
Total equity and liabilities 111

The following transactions took place during the year ended 31 December Year 4:

  1. The company made credit sales of CU 95m to customers.
  2. In addition, the company generated cash sales worth CU 25m.
  3. Cash of CU 92m was received from customers, relating to amounts previously recognised as receivables.
  4. Inventory costing CU 60m was purchased on credit from suppliers.
  5. The company made payments of CU 58m to suppliers, settling amounts owed for purchases.
  6. Wages of CU 20m were paid to employees during the year.
  7. The company paid CU 8m for insurance.
  8. Administrative expenses of CU 6m were paid in cash.
  9. The company paid CU 2m in interest on the bank loan.
  10. The company paid CU 5m in income tax relating to prior year obligations.
  11. The company paid dividends of CU 4m in cash to shareholders during the year.

The following adjustments are required at the year-end:

  • A physical inventory count at the year end showed inventory of CU 15m, which includes CU 2m of expired products with no recoverable value.
  • At the year-end, prepaid insurance amounted to CU 3m.
  • At the year-end, wages of CU 4m remain unpaid and should be accrued.
  • Depreciation on equipment for the year is CU 8m.
  • Accounts receivable of CU 1m are irrecoverable and should be written off.
  • The allowance for expected credit losses is to be maintained at 5% of remaining accounts receivable.
  • The provision for product returns is to be increased to CU 3m.
  • At the year-end, interest payable amounts to CU 2m.
  • The income tax expense for the year is estimated to be CU 7m.
Required

Using the information above, complete the following tasks.

  1. Record journal entries for all transactions.
  2. Prepare the trial balance.
  3. Record the adjusting journal entries.
  4. Prepare the adjusted trial balance.
  5. Prepare the Statement of Profit and Loss for the year ended 31 December Year 4.
  6. Prepare the Statement of Financial Position as at 31 December Year 4.

After you have attempted the question, see the sample answer to Practice Question 18 in the Answer Bank.