VCE Accounting Question Thread!

[ashs_vb]

Roger plans to accept an offer from an online business to display and sell their gym clothing on a commission
basis. A commission of 5% of sales will be paid for all sales orders taken by Roger. The commission will be
paid the month after the sales have occurred. Commission estimated to be received during the year is $5 000.

Actual sales December 2013  5000$ plus GST

Estimated Sales December 2014 $8000 plus GST

Show how the Commission Revenue account is expected to appear after closing the General
Ledger accounts at the year ended 31 December 2014.

How is the opening balance calculated to 4750? Why do you take 250(5000*5%) from 5000? I had 250 as the opening balance, and then added the 400.
Thank you in advance

Commission revenue account would just have the credit entry of 400 with the cross reference to accrued revenue. This is where the account will be settled when the commission is received. As this is a revenue account, under accrual accounting, we record the revenue earned, not the cash received so we just have to calculate the commission revenue earned in the period( which i am assuming is the whole year). It would be debited with a p and l summary cross reference and closed to calculate net profit, blah blah..
Apart from that, i think you are mixing up the accrued revenue and revenue accounts, and btw, how many marks was the question?

[unfamila]

It's a Neap 2013 exam -Practice exam 3.

[Damoz.G]

It's a Neap 2013 exam -Practice exam 3.

Hmmm...okay. I'm just trying to find my other Accounting folder with my Practice Exams with it, but I just gotta find it.

So all the information you posted is correct?

[unfamila]

yeah i copied and pasted it...
It's all apart of a 16 mark budgeting question though, with a reporting period of 1 year.

[Damoz.G]

yeah i copied and pasted it...
It's all apart of a 16 mark budgeting question though, with a reporting period of 1 year.

Oh okay. I have the first 2013 NEAP Exam because it was our trial, but I don't have the third one. =/

That's a bit odd though, because the Reporting Periods are different. =/

[FunkyAfrican]

Can someone help clarify a confusing point for me?

Why is it that when accrued liability is incurred or accrued revenue is earnt, sometimes in the General ledger for that revenue or expense item it will either be split up or added on top of the original amount.

For example, in an engage trial exam; they presented you with a pre-adjustment trial balance that said wages was 10,000 and the extra info down the bottom said that 2,000 was outstanding and not paid at the end of the period. When preparing the Wages ledger, the added the 10,000 and 2,000 and closed wages expense of to the p & l summary for 12,000.

In the same exam, another question said that John earnt 6,000 interest revenue and 2,000 was accrued. Now this time the interest revenue was closed to the p&l summary as 6,000 (with cross references bank and accrued interest rev.)

My question is why is it that we split up the amount in some cases and add to the original amount in others ?  I'd really appreciate some clarification.   

[Damoz.G]

Can someone help clarify a confusing point for me?

Why is it that when accrued liability is incurred or accrued revenue is earnt, sometimes in the General ledger for that revenue or expense item it will either be split up or added on top of the original amount.

For example, in an engage trial exam; they presented you with a pre-adjustment trial balance that said wages was 10,000 and the extra info down the bottom said that 2,000 was outstanding and not paid at the end of the period. When preparing the Wages ledger, the added the 10,000 and 2,000 and closed wages expense of to the p & l summary for 12,000.

In the same exam, another question said that John earnt 6,000 interest revenue and 2,000 was accrued. Now this time the interest revenue was closed to the p&l summary as 6,000 (with cross references bank and accrued interest rev.)

My question is why is it that we split up the amount in some cases and add to the original amount in others ?  I'd really appreciate some clarification.   

A Liability is someone that we have received but not yet paid. So Accrued Wages is a Liability because the employees have done work, but we haven't paid them yet. So they become a Current Liability to us until we pay them their wage.

Accrued Interest Revenue is a Current Asset because the business has earned it from sitting in the Bank Account, but we won't receive it until the Bank gives us the Interest. Therefore, we have earned it, but not yet received it so it will become a future inflow of economic benefits (when we actually receive the Interest from the Bank).

Should always refer to the definitions of Assets and Liabilities if a question like this came up.

[Kuchiki]

Can someone help clarify a confusing point for me?

Why is it that when accrued liability is incurred or accrued revenue is earnt, sometimes in the General ledger for that revenue or expense item it will either be split up or added on top of the original amount.

For example, in an engage trial exam; they presented you with a pre-adjustment trial balance that said wages was 10,000 and the extra info down the bottom said that 2,000 was outstanding and not paid at the end of the period. When preparing the Wages ledger, the added the 10,000 and 2,000 and closed wages expense of to the p & l summary for 12,000.

In the same exam, another question said that John earnt 6,000 interest revenue and 2,000 was accrued. Now this time the interest revenue was closed to the p&l summary as 6,000 (with cross references bank and accrued interest rev.)

My question is why is it that we split up the amount in some cases and add to the original amount in others ?  I'd really appreciate some clarification.   

You have to read the question very carefully.

Remember that all figures in the pre-adjustment trial balance are based on what cash transactions occurred during the period and will not include any balance day adjustments, like accrued wages that have been incurred but not paid. Therefore, the total amount of wages expense for that period will be the amount of wages paid in cash plus the amount outstanding.

Regarding the interest revenue, if it said in the question that $6,000 was earned, then that's the amount of revenue earned for that period, where $4,000 was received in cash and $2,000 has not been received yet. (If the question had said that $6,000 had been received, then you would have to add the $2,000 accrued to get the total amount earned for that period. Just depends on the wording.)

[Kuroyuki]

Can someone help clarify a confusing point for me?

Why is it that when accrued liability is incurred or accrued revenue is earnt, sometimes in the General ledger for that revenue or expense item it will either be split up or added on top of the original amount.

For example, in an engage trial exam; they presented you with a pre-adjustment trial balance that said wages was 10,000 and the extra info down the bottom said that 2,000 was outstanding and not paid at the end of the period. When preparing the Wages ledger, the added the 10,000 and 2,000 and closed wages expense of to the p & l summary for 12,000.

In the same exam, another question said that John earnt 6,000 interest revenue and 2,000 was accrued. Now this time the interest revenue was closed to the p&l summary as 6,000 (with cross references bank and accrued interest rev.)

My question is why is it that we split up the amount in some cases and add to the original amount in others ?  I'd really appreciate some clarification.   

Alright so you have to distinguish between pre adjustment and post adjustment. Pre adjusted is b4 any balance day adjustments to record any revenue earned but not received and any expenses incurred but not paid. 
In the first example it is stated that it is a pre adjustment trial balance. That means no adjustments have taken place. So when it says wages is 10000 in the trial balance, this is only the wages expense PAID. The 2000 outstanding is the wages incurred but not paid.
A bda must be done to recognise this
Wages 2000 dr
Accrued wages 2000 cr
Thus in the wages ledger, it will 10000 bank and another 2000 from accrued. Then you transfer this amount to the pl summary.
For the second example, it clearly states that John EARNT 6000 revenue not received, this indicates that this is post adjusted. This 6000 is the total amount after the adjusting entry. So if 2000 was accrued it means 4000 was paid, resulting in the bank and accrued interest cross references.
So basically read the question carefully looking for keywords such as pre adjusted, post, earned, received, incurred and paid.
Hope my poor explanation makes some sort of sense. 
EDIT- beaten x 2

[FunkyAfrican]

Thank you all, I've re-read it and now understand why one was split up and the other was not. Very slight wording changes, sneaky.

[Damoz.G]

Thank you all, I've re-read it and now understand why one was split up and the other was not. Very slight wording changes, sneaky.

Yup, and watch out for those dates, particularly for BDA's!

[FunkyAfrican]

What effect does the FIFO method of cost allocation have on assets, cost of sales, net profit and owner's equity?           (4 marks)

The FIFO method of cost allocation operates under the assumption that the first stock bought is the first stock sold. In times of rising stock prices, it assumes that the older and cheaper stock is sold first. This overstates assets (stock control) in the balance sheet as we are holding onto the more expensive stock purchased last. This then means that the cost of sales figure is understated, leading to the overstating of net profit in the income statement and Owner's equity.

Would that suffice?

[Damoz.G]

What effect does the FIFO method of cost allocation have on assets, cost of sales, net profit and owner's equity?           (4 marks)

The FIFO method of cost allocation operates under the assumption that the first stock bought is the first stock sold. In times of rising stock prices, it assumes that the older and cheaper stock is sold first. This overstates assets (stock control) in the balance sheet as we are holding onto the more expensive stock purchased last. This then means that the cost of sales figure is understated, leading to the overstating of net profit in the income statement and Owner's equity.

Would that suffice?

The first sentence is good, but after that sentence, it went downhill for me. Plus, the first sentence is probably good to demonstrate understanding, but I don't think it is one of the four marks allocated.

No business can know which cost price of a Stock item is sold, so yes it is the assumption, but FIFO helps to improve the accuracy of Stock movements. So it doesn't actually overstate Assets, instead it helps to determine an accurate value of Stock on hand.

In fact, what's the Solutions say for this Question? Does it link to any information like Accounting Reports or something, or is it a stand alone question?

[Kuroyuki]

Does the question specifically mention in times of rising prices?
Or is it present in the questions b4 it like in a stock card or something?

[FunkyAfrican]

The first sentence is good, but after that sentence, it went downhill for me. Plus, the first sentence is probably good to demonstrate understanding, but I don't think it is one of the four marks allocated.

No business can know which cost price of a Stock item is sold, so yes it is the assumption, but FIFO helps to improve the accuracy of Stock movements. So it doesn't actually overstate Assets, instead it helps to determine an accurate value of Stock on hand.

In fact, what's the Solutions say for this Question? Does it link to any information like Accounting Reports or something, or is it a stand alone question?

Solutions:
FIFO is a system of stock recording where the first stock purchased is assumed to be the first stock sold. This method of cost assignment is used when it is impractical to label the cost price of each individual item. FIFO however does not match the actual flow of goods when stock is sold. This may have implications for profit calculation if stock that was actually purchased at a higher price is the stock that is actually sold first. Profit calculation by FIFO will see a higher profit reported in this case. However the more practical ease of recording justifies the use of FIFO system of cost assignment on stock.

I can't break down this jargon.