O-LevelAccountingAccounting procedures7707/21 · May/June 2024 · Q420 Marks

Ahmed owns a trading business. He prepares his financial statements to 31 December each year. Ahmed had some unused office space and he decided to use some of this to store inventory and to rent the rest to Bilal. On 1 January 2023 Bilal started renting the office space from Ahmed. The annual rental charge is $4800. During 2023 Bilal paid the following amounts of rent into Ahmed's bank account. 1 April $3600 30 September $2400 Ahmed sold old office equipment for $1350 on 3 January 2023, on credit to Rahat. The equipment had been purchased for $3200 on 1 January 2021. Ahmed charges depreciation at 25% per annum using the reducing balance method. He does not charge depreciation in the year of disposal.

(a)Prepare Ahmed's rent receivable account for the year ended 31 December 2023. Balance the account and bring down the balance at 1 January 2024.[3]
(b)Prepare the disposal of office equipment account.[5]
(c)Complete the table by placing a tick (✔) to indicate whether each amount of spending on the new inventory storage space is capital expenditure or revenue expenditure.[3]
(d)Complete the following table.[7]
(e)Suggest two problems which may be caused by Ahmed's lower rate of inventory turnover.[2]

Mark scheme

Marking points from the official mark scheme (May/June 2024). The mark or mark type is shown in brackets.

[1] Rent receivable account Credit Income statement $4800
[1] Rent receivable account Credit Balance c/d $1200
[1] Rent receivable account Debit Balance b/d $1200
[1] Disposal account Debit Office equipment $3200
[1] Disposal account Credit Provision for Depreciation $1400
[1] Disposal account Credit Rahat $1350
[1] Disposal account Credit Income statement $450 (OF)
[1] Disposal account Dates (all correct dates for entries)
[1] Painting the walls of the storage area: Revenue expenditure
[1] Shelving for the storage area, Installation of the shelving, Light fittings for storage area: Capital expenditure
[1] Light bulbs for storage area: Revenue expenditure
[1] Rate of inventory turnover working: Cost of sales (9000 + 97000 – 12130) = $93870
[1] Rate of inventory turnover working: Average inventory (9000 + 12130) / 2 = $10565
[1] Rate of inventory turnover answer: 8.88 (OF)
[1] Current ratio working: Current assets ($12130 + $6180 + 175) : Current liabilities (5500 + $640) = 18485 : 6140
[1] Current ratio answer: 3.01:1 (OF)
[1] Liquid (acid test) ratio working: Liquid assets ($6180 + $175) : Current liabilities ($5500 + $640) = 6355 : 6140
[1] Liquid (acid test) ratio answer: 1.04:1 (OF)
[1] Problem: The increased inventory may result in goods deteriorating or becoming obsolete
[1] Problem: Increase in storage costs
[1] Problem: Inefficient use of storage space
[1] Problem: Increase in funds tied up in inventory/may result in bank overdraft/may incur interest charges

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