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ECOM 058 – Principles of Accounting 2020/21

Lecture 3 – Problem set

Explain the difference between direct and indirect expenses

Explain the difference between revenue and gains

Accruals are always objectively measured. Do you agree with this statement? Why?

Exercise 1

The following balances have been extracted from Field’s ledger accounts as at 28 February 2018:

£’000

Bank                                    13

Cash                                      2

Sales                                 100

Wages                                25

Compile Field’s trial balance as at 28 February 2018. Identify which elements of the trial     balance are revenue items (Income statement) and which are capital items (balance sheet)

Prepare Field’s income statement and balance sheet at 28 February 2018 . Assume no inventory (i.e. all purchases are sold)

Exercise 2

Suppose that the company Mismatched Ltd closes its accounts on 31/12/2018.

The company rents an office building, paying rent every six months in advance. The yearly rent is 12.000 and it falls due on 31/3 and 30/9 (so 2 payments of 6.000 each)

Mismatched Ltd pays business rates yearly in advance, following the UK tax year. The amount paid on 31/3/2017 was 8.000, while on 31/3/2018 it was 10.000.

Electricity is charged quarterly and paid in arrears, 15 days after the quarter close. The following table summarizes the electricity payments of Mismatched Ltd:

amount

For rent, business rates and electricity, calculate the expense for the year that is charged to the income statement in 2018 and any associated prepayment/accrual.

Exercise 3

Consider the following trial balance at 31/1/2018 for AAA Ltd (do not use the inventory for simplicity):

debit        credit

bank                                  5100

blue Ltd (payables)                           3000

DDD Ltd (receivables)    3500

prepaid rent                     500

electricity accrual                              100

In February the following transaction took place:

1.   bought goods for 2000, immediate bank payment

2.   paid 2500 to blue Ltd

3.   received a discount of 500 from blue ltd

4.   sold the entire goods bought for 3000 to DDD Ltd, immediate payment

5.   DDD returned goods worth 500 and his receivables balance is correspondingly reduced

6.   paid 600 towards March rent. The February rent (500) was paid in January

The electricity expense for February is estimated at 100. Electricity bill for the first quarter is due in March, so nothing has been paid yet.

Show the transactions above in the T accounts, starting from the balances in January’s trial balance.

Prepare the trial balance at the end of February without making any adjustment, then adjust it for accruals and prepayments.

Prepare the income statement for February and the balance sheet at 28/2/2018

Exercise 4

Biro Plc produces only one specific type of pen. On 1/1/2018 it had 1000 unit in its inventory and they costed £ 1 each. During 2018 it bought 5000 more pens at £ 1 each and sold 5500   pens at the price of £ 2 each. Moreover, in 2018 Biro Plc paid 300 £ in wages, 200 £ in rent    expenses and earned interest of 50 £ on its bank balance.

Calculate the profit of Biro Plc in 2018, highlighting gross profit and the calculation of cost of goods sold in the process.