2001 Principle of Account Question

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Answer any FOUR questions from this section. Each question carries 10 marks.

1. a. Explain the following accounting concepts and illustrate each with an example: i. Historical cost
ii. Stable monetary measures(5 marks)
b. For each of the independent situations described below, list the accounting principle or concept that has been violated and give your explanation: i. Andy Company accrued interest expense on the personal bank loan of the owner at year end. ii. Perfect Repairs adopts a policy of charging hand tools with small unit costs to expense when purchased, even though the tools have a useful life of several years. During the year, Perfect Repairs recorded revenue of $600000 and a hand tools expense of $150000 in its profit and loss account. (5 marks)

2. The cash book of Ronald Limited showed a favourable bank balance of $98777 at 30 April 2001. An examination of the bank column in the cash book and the bank statement disclosed the following: iii. Dividends amounting to $752 had been credited by the bank but not entered in the cash book. iv. The bank had credited the company’s account with $3725 being the proceeds of a bill receivable. This amount was recorded as a payment in the cash book. v. Bankings amounting to $8127 had been entered in the cash book but not credited by the bank until 1 May 2001. vi. A dishonoured cheque for $920 was identified in the bank statement. vii. Being allowed a cash discount of $15, a customer settled his account with a cheque of $300. However, an amount of $315 was entered in the bank column of the cash book. viii. Cheques issued amounting to $2647 had not been presented to the bank for payment. ix. The company had instructed the bank to transfer $5000 from the fixed deposit account to the current account. The bank had made the transfer in reverse. x. The company had recorded a payment by standing order of a sum of $1025 for the management fee of the office premises. The bank had debited the account of another customer. Required:

a. Show the necessary adjustments in the cash book. (5 marks) b. Prepare a bank reconciliation statement as at 30 April 2001, commencing with the adjusted cash book balance. (5 marks)

3. In preparing the accounts for the year to 31 March 2001, the accountant of Man Yee Limited identified from the trial balance a balances total of the purchases ledger of $139060. However, the purchases ledger control account showed a credit balance of $139193 and a debit balance of $367. Further investigation revealed the following: i. A cash discount of $180 from a creditor had been completely omitted from the accounting records. ii. A purchase invoice for $7542 had been entered in the purchases day book as $5724. iii. Purchases of $250 had been entered on the wrong side of a supplier’s account in the purchases ledger. iv. A credit note for $600 had been received and entered as if it was a debit note. v. No entry had been made to record a contra of an amount owed to Lam of $6000 against an amount owed by Lam of $4000. vi. The debit balance of $367 had been listed as a credit balance in the creditors’ schedule. Required:

a. Prepare a statement to adjust the balances total of the purchases ledger. (5 marks) b. Draw up the purchases ledger control account. (5 marks)

4. Mannix Company commenced business on 1 March 2001. An inexperienced bookkeeper for the company prepared the following profit and loss account based on the cash receipts and payments made during the month of March 2001: |Mannix Company | |Profit and Loss Account for the month ended 31 March 2001 | |...
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