O-LevelAccountingAccounting procedures7707/23 · Oct/Nov 2023 · Q320 Marks
Logan is a trader who sells goods on credit. His year end is 30 September. Logan has provided the following information. At 1 October 2022 Inventory $8400 Trade receivables $7500 Other receivables (rent prepaid) $820 For the year ended 30 September 2023 Rent charge for the year $4940 Bank payments for rent 1 December 2022 $2460 1 June 2023 $2490 At 30 September 2023 Inventory $8675 Trade receivables $8700 Other receivables ? Irrecoverable debts to be written off $325 The provision for doubtful debts is to be maintained at 4% of trade receivables.
- (a)Prepare the inventory account for the year ended 30 September 2023. Logan Inventory account Date Details $ Date Details $[3]
- (b)Prepare the provision for doubtful debts account for the year ended 30 September 2023. Balance the account at 30 September 2023 and bring down the balance at 1 October 2023. Logan Provision for doubtful debts account Date Details $ Date Details $[4]
- (c)Prepare the rent payable account for the year ended 30 September 2023. Balance the account at 30 September 2023 and bring down the balance at 1 October 2023. Logan Rent payable account Date Details $ Date Details $[6]
- (d)(i)State how: the prudence principle is applied to the valuation of Logan's inventory[1]
- (d)(ii)State how: the matching principle is applied when the rent payable account is prepared[1]
- (e)Logan is considering buying business premises instead of renting. He would request a long-term bank loan to finance the purchase of the premises. REQUIRED Advise Logan whether he should purchase business premises using a long-term bank loan. Justify your answer with advantages and disadvantages of purchasing business premises using a long-term bank loan.[5]
Mark scheme
Marking points from the official mark scheme (Oct/Nov 2023). The mark or mark type is shown in brackets.
- [1] Inventory account Debit Balance b/d $8400
- [1] Inventory account Credit Income statement $8400
- [1] Inventory account Debit Income statement $8675
- [1] Provision for doubtful debts account Credit Balance b/d $300
- [1] Provision for doubtful debts account Credit Income statement $35 (own figure rule applies)
- [1] Provision for doubtful debts account Debit Balance c/d $335
- [1] Provision for doubtful debts account Credit Balance b/d $335 (own figure rule applies)
- [1] Rent payable account Debit Balance b/d $820
- [1] Rent payable account Debit Bank $2460
- [1] Rent payable account Debit Bank $2490
- [1] Rent payable account Credit Income statement $4940
- [1] Rent payable account Credit Balance c/d $830
- [1] Rent payable account Debit Balance b/d $830 (own figure rule applies)
- [1] Inventory is valued at the lower of cost and net realisable value
- [1] The rent relating to the current year is transferred to the income statement / The total rent paid is adjusted for prepayments before transfer to the income statement
- [1] Advantage: Would not have to pay rent / will not be subject to future rent increases / may be cheaper in the long run / property will be owned so can adapt to requirements / rent out etc. / have several years to repay the loan / no further obligation after loan repaid / over a period of time property may increase in value (Max 3)
- [1] Disadvantage: Have to pay interest on loan / loan must be repaid when due / loan would probably be secured on the property / assets may be at risk if loan not repaid / will be responsible for maintenance of property / percentage of interest on loan may increase / issue may not raise adequate funds (Max 3)
- [1] Recommendation (1 mark for a justified conclusion based on the arguments provided)
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