Chapter 5: Basic financial statements with

year-end adjustments

TUTORIAL EXERCISE SOLUTIONS

Exercise 1
Indicate in the spaces below whether the following accounts must appear in the statement of
profit or loss and other comprehensive income, or the statement of financial position:

Purchases Loan: ABC Bank

Prepaid income Depreciation (year)

Debtors Refreshments

Wages Equipment

Rent paid Accumulated depreciation

Interest received Drawings

Unused stationery Prepaid expenses

Accrued income Accrued expenses

Purchases STATEMENT OF Loan: ABC Bank STATEMENT OF

PROFIT OR LOSS FINANCIAL
Cost of sales POSITION
Current liability
Income received in STATEMENT OF Depreciation (year) STATEMENT OF
advance FINANCIAL PROFIT OR LOSS
POSITION Expense
Current liability
Debtors STATEMENT OF Refreshments STATEMENT OF
FINANCIAL PROFIT OR LOSS
POSITION Expense
Current asset
Wages STATEMENT OF Equipment STATEMENT OF
PROFIT OR LOSS FINANCIAL
Expense POSITION
Current asset
Rent paid STATEMENT OF Accumulated STATEMENT OF
PROFIT OR LOSS depreciation FINANCIAL
Expense POSITION
Non-current asset
Interest received STATEMENT OF Drawings STATEMENT OF
PROFIT OR LOSS FINANCIAL
Income POSITION
Owners’ equity
Unused stationery STATEMENT OF Prepaid expenses STATEMENT OF
FINANCIAL FINANCIAL
POSITION POSITION
Current asset Current asset
Accrued income STATEMENT OF Accrued expenses STATEMENT OF
FINANCIAL FINANCIAL
POSITION POSITION
Current asset Current liability
Exercise 2

The following balances were extracted from the books of TKZ Stores as at 30 June 20x2.

Furniture and fittings at cost R42 000

Accumulated depreciation on furniture and fittings R6 300

Vehicles at cost R35 000

Accumulated depreciation on vehicles R18 000

Adjustments

1. Depreciation on vehicles must be provided for at 20% per annum using the straight-line
method.

2. Depreciation on furniture and fittings must be provided for at 15% per annum using the
reducing balance method.

Required

Prepare the journal entry for depreciation and indicate how the following will be shown in the
statement of profit or loss and other comprehensive income, as well as the statement of
financial position:

• Accumulated depreciation on furniture and fittings

• Accumulated depreciation on vehicles

• Depreciation

KZ Stores journal entry as at 30 June 20x2 – Vehicles

Debit Credit
R R
Depreciation 7 000
Accumulated depreciation of 7 000
vehicles
Workings
Cost × 20%

= R35 000 × 20% = 7 000

TKZ Stores journal entry as at 30 June 20x2 – Furniture and fittings

Debit Credit
R R
Depreciation 5 355
Accumulated depreciation on furniture and 5 355
fittings

Workings

Cost – Accumulated depreciation × 15%

= (R42 000 – R6 300) × 15% = R5 355

TKZ Stores statement of profit or loss and other comprehensive income as at 30 June 20x2

Less: Operating expenses

Depreciation (R7 000 + R5 355) = R12 355

TKZ Stores statement of financial position as at 30 June 20x2

Non-current assets

Cost Accumulated Book value/

depreciation Carrying value
R R R
Vehicles 35 000 25 000 (18 000 + 7 000) 10 000
Furniture and 42 000 11 655 (6 300 + 5 355) 30 345
fittings
Exercise 3
The following balances appeared among others in the books of ZZ Traders at 28 February
20x1, the last day of the financial year:

Debtors control account R58 200

Allowance for credit losses R2 150

Credit losses R9 360

Adjustments

1. Isaac, who owes the business R640, has been declared insolvent and his debt must be
written off.

2. Adjust the allowance for credit losses to 5% of outstanding debtors.

Required

Prepare the journal entry and indicate how the following accounts will be shown in the
statement of profit or loss and other comprehensive income and the statement of financial
position:

• Debtors control

• Allowance for credit losses

• Credit losses

ZZ Traders journal entry as at 28 February 20x1

Debit Credit
R R

Allowance for credit losses 640

Debtors control 640
Adjust allowance for credit losses to 5% of outstanding debtors

Outstanding debtors’ balance R58 200 – R640 = R57 560

Allowance for credit losses should be (R57 560 × 5%) = R2 878

Currently the allowance for credit losses is = R2 150 – R640 = R1 510

Therefore the allowance must be increased by R1 368 (R2 878 – R1 510) in order to equal R2
878.

ZZ Traders statement of profit or loss and other comprehensive income as at 28 February

20x1

Suggested correction:

Less: Operating expenses

Credit losses (R9 360 + R1 368) = R10 728

ZZ Traders statement of financial position as at 28 February 20x1

Current assets

Debtors (R58 200 – R640) = R57 560

Less: Allowance for credit losses R 2 878

Exercise 4
The following trial balance was extracted from the books of A Shabalala at the close of business on 28
February 20x7.

Debit Credit
R R
Sales 394 800
Purchases 225 600
Cash at bank 22 800
Cash in hand 4 200
Capital account 1 March 20X6 198 000
Drawings 57 000
Office furniture 32 400
Accumulated depreciation – office furniture 3 600
Rent 20 400
Wages and salaries 51 600
Discount allowed 13 800
Discount received 7 200
Debtors 98 400
Creditors 49 800
Inventory 1 March 20x6 59 400
Allowances for credit losses 1 March 20x6 5 400
Delivery van 57 600
Accumulated depreciation – delivery van 9 600
Van running costs 9 000
Bad debts written off 16 200
668 400 668 400

Additional information

1. Inventory as at 28 February 20x7, R70 200.

2. Wages and salaries accrued at 28 February 20x7, R1 800.

3. Rent prepaid at 28 February 20x7, R2 800.

4. Van running costs owing at 28 February 20x7, R1 200.

5. Increase the allowances for credit losses by R1 200.

6. Provide for depreciation as follows: office furniture R3 600; delivery van R9 600.

Required

Draw up the statement of profit and loss for the year ending 28 February 20X7

Statement of profit or loss and other comprehensive income of Shabalala for the year ending 28
February 20x7

R
Revenue 394 800
Less: Cost of Sales 214 800
Opening stock 59 400
Add: Net purchases 225 600
Goods available for sale 285 000
Less: Closing stock 70 200
Gross Profit 180 000
Add: Other Operating Income 7 200
Discount received 7 200
Less: Other Operating Expense 125 600
Wages and Salaries (51 600 + 1 800) 53 400
Discount allowed 18 600
Credit losses 16 200
Allowances for Credit losses 1 200
Rent expense (20 400 – 2 800) 17 600
Depreciation 13 200
Van running cost 10 200
Net profit for the year 61 600
 Statement of Financial Position of Shabalala as at 28 February 20x7.
R
Assets
Non Current Assets Note 2 63 600
Office Furniture 25 200
Delivery Van 38 400

Current Assets 191 800

Inventory 70 200
Debtors/Trade Receivables (98 400 – 5 400 -1 200) 91 800
Cash and Cash Equivalent (22 800 + 4 200) 27 000
Prepaid expense 2 800

Total Assets 255 400

Equity and Liabilities

Equity 202 600

Non Current Liabilities 0

Current Liabilities 52 800

Trade Creditors 49 800
Accrued expenses (18 000 + 1 200) 3 000

Total Equity and Liabilities 255 400

Statement of changes in equity

Capital R198 000

Add: Net profit R61 600

Less: Drawings R57 000

R202 600

Notes of Shabalala for the year ended 28 February 20x7

Note 1: Accounting policies

The financial statements have been prepared in accordance with generally accepted
guidelines laid down in the International Financial Reporting Standards (IFRS). The financial
statements have used accounting policies that are consistent with previous financial periods.

Note 2 Non-Current Assets

Accumulated
Cost price Book value
depreciation
R R R

Office furniture 32 400 7 200 25 200

Delivery van 57 600 19 200 38 400
90 000 26 400 63 600
Exercise 5
T. Shezi, a sole trader, extracted the following trial balance from his books at the close of
business on 31 March 20x9.

Debit
R R
Sales 839 400
Purchases 457 200
Inventory 1 April 20x8 103 200
Capital 1 April 20x8 144 000
Bank overdrafts 87 000
Cash 1 800
Discount allowed 28 800
Discount received 18 600
Return inwards 16 200
Return outwards 11 400
Carriage outwards 43 200
Rent and insurance 34 800
Allowances for credit losses 13 200
Fixtures and fittings 24 000
Delivery van 42 000
Debtors 238 200
Creditors 121 200
Drawings 57 600
Wages and salaries 178 800
General office expenses 9 000
1 234 800 1 234 800

Additional information

1. Inventory as at 31 March 20x9, R85 800.

2. Wages and salaries accrued as at 31 March 20x9, R4 200; office expense owing, R400.
3. Rent prepaid 31 March 20x9, R3 600.

4. Increase the allowances for credit losses by R3 000 to R16 200.

5. Provide for depreciation as follows: fixtures and fittings R2 400; delivery van R6 000.

Required

Prepare a statement of profit and loss for the year ended 31 March 20X9 together with a
statement of financial position as at that date, using vertical format.

Statement of Profit and Loss and other comprehensive income of Shezi for
the year ending 31 March 20x9

Revenue (839 400 – 16 200) 823 200

Cost of Sales 506 400
Opening Stock 103 200
Add: Net Purchases (457 200 – 11 400) 445 800
Add: Outwards 43 200
Good Available for Sale 592 200
Less: Closing Stock -85 800
Gross Profit 316 800
Add: Other Operating Income 18 600
Discount Received 18 600
Less: Other Operating Expenses 263 800
Rent and Insurance (34 500 – 3 600) 31 200
Depreciation (2 400 + 6 000) 8 400
Credit losses 3 000
Wages and Salaries (178 800 + 4 200) 183 000
General Office Expense (9 000 + 400) 9 400
Discount allowed 28 800
Net Profit for the year 71 600

Statement of Financial Position of Shezi as at 31 March 20x9

R
 Assets
Non-Current Assets Note 2 57 600

Current Assets 313 200

Inventory 85 800
Trade Receivables (238 200 – 16 200) 222 000
Cash and Cash Equivalent 1 800
Rent Prepaid 3 600

Total Assets 370 800

Equity and Liabilitities

Equity 158 000

Non-Current Liabilities 0

Current Liabilities 212 800

Trade Creditors 121 200
Accrued Expense (4 200 – 400) 4 600
Bank Overdraft 87 000

Total Equity and Liabilities 370 800

Statement of changes in equity

144
Capital 000
Add: Net profit 71 600
Less: Drawings 57 600
158
000

Notes of Shezi for the year ended 31 March 20x9

Note 1: Accounting policies

The financial statements have been prepared in accordance with generally accepted
guidelines laid down in the International Financial Reporting Standards (IFRS). The financial
statements have used accounting policies that are consistent with previous financial periods.

Note 2: Non-current assets

Cost Accumulated Book

Price Depreciation value
Delivery Van (42 000 – 6 000) 42 000 6 000 36 000
Fixture and Fittings (24 000 – 2 400) 24 000 2 400 21 600
66 000 8 400 57 600
Exercise 6
From the following trial balance of J. Sithole, store owner, prepare a statement of profit and
loss for the year ended 31 December 20x7, and a statement of financial position as at that
date, taking consideration of the adjustments shown below.

Debit Credit
R R
Sales 8 000 000
Purchases 7 000 000
Sales returns 100 000
Purchases returns 124 000
Opening stock at 1 January 20x7 2 000 000
Allowances for credit losses 16 000
Wages and salaries 600 000
Rates 120 000
Telephone 20 000
Shop fittings at cost 880 000
Accumulated depreciation – shop fittings 80 000
Van at cost 720 000
Accumulated depreciation – van 120 000
Debtors 196 000
Creditors 140 000
Bad debts 4 000
Capital 3 580 000
Bank balance 60 000
Drawings 360 000
12 060 000 12 060 000

Additional information

1. Closing inventory as at 31 December 20x7, R2 400 000.

2. Accrued wages, R100 000.

3. Rates prepaid, R10 000.

4. The allowances for credit losses is to be increased to 10% of debtors.

5. Telephone account outstanding, R4 400.

6. Depreciate shop fittings at 10% annum, and van at 20% per annum, on cost.

Statement of Profit and Loss and other comprehensive income of Sithole

for the year ending 31 December 20x7
R
Revenue 7 900 000
Less: Cost of Sales 6 476 000
Opening inventory 2 000 000
Add: Purchases (7 000 000 – 124 000) 6 876 000
Goods Available for sale 8 876 000
Less: Closing inventory 2 400 000
Gross profit 1 424 000
Add: Other operating income 0
Less: Other operating expenses 1 074 000
Wages and Salaries (600 000 + 100 000) 700 000
Rate (120 000 – 10 000) 110 000
Telephone (20 000 – 4 400) 24 400
Depreciation (88 000 + 144 000)
Credit losses 17 600
Net Profit for the year 350 000

Statement of Financial Position of Sithole as at 31 December 20x7

R
Assets
Non Current Assets 1 168 000
Shop fittings 712000
Van 456 000

Current Assets 2 646 400

 Inventory 2 400 000
Debtors (196 000 – 19 600) 176 400
Cash and Cash Equivalent 60 000
Prepaid Expense 10 000

Total Assets 3 814 400

Equity and Liabilities

Equity 3 570 000

Non Current Liabilities 0

Current Liabilities 244 400

Creditors 140 000
Accrued expense (100 000 + 4 400) 104 400

Total Equity and Liabilities 3 814 400

Statement of changes in equity

Capital 3 580 000
Add: Net profit 350 000
Less: Drawings 360 000
3 570 000

Notes of Sithole for the year ended 31 December 20x7

Note 1: Accounting policies

The financial statements have been prepared in accordance with generally accepted
guidelines laid down in the International Financial Reporting Standards (IFRS). The financial
statements have used accounting policies that are consistent with previous financial periods.

Note 2: Non-current assets

Cost Price Accumulated Book value

Depreciation
Shop fittings 880 000 168 000 712 000
Van 720 000 264 000 456 000
1 600 000 432 000 1 168 000
Exercise 7
The following trial balance has been extracted from the ledger of Mrs Joy, a sole trader. Trial
balance as at 31 May 20x6.

Debit Credit
R R
Sales 2 761 560
Purchases 1 647 000
Carriage 102 880
Drawings 156 000
Rent, rates and insurance 132 440
Postage and stationery 60 020
Advertising 26 600
Salaries and wages 528 400
Bad debts 17 540
Allowances for credit losses 2 600
Debtors 242 400
Creditors 129 420
Cash in hand 3 540
Cash at bank 20 040
Inventory as at 1 June 20x5 238 540
Equipment at cost 1 160 000
Accumulated depreciation 380 000
Capital 1 061 820
4 335 400 4 335 400

Additional information

The following additional information as at 31 May 20x6 is available:

1. Rent is accrued by R4 200.

2. Rates have been prepaid by R17 600.

3. R44 200 of carriage represents carriage inwards on purchases.

4. Equipment is to be depreciated at 15% per annum using the straight-line method.

5. The provision for bad debts to be increased by R800.

6. Inventory at the close of business has been valued at R271 020.

Required

Prepare the statement of profit or loss and other comprehensive income and the statement of
financial position for Mrs Joy.

Statement of Profit and Loss and other comprehensive income of Joy for
the year ended 31 May 20x6
R
Revenue 2 761 560
Less: Cost of Sales 1 658 720
Opening inventory 238 540
Add: Purchases 1 647 000
Add: Carriage on purchases 44 200
Goods available for sales 1 956 740
Less: Closing inventory 271 020
Gross profit 1 102 840
Add: Other income 0
Less: Other operating expenses –985 080
Rent, Rate and Insurance (132 440 – 4 200 – 17 600) 119 040
Postage and Stationery 60 020
Advertising 26 600
Salaries and Wages 528 400
Credit losses 18 340
Depreciation (1 160 000 × 11%) 174 000
Carriage on Sales 58 680
Net profit for the year 117 760

Statement of Financial Position of Joy as at 31 May 20x6

R
Assets
 Non Current Assets Note 2 606 000
Equipment
606 000

Current Assets 551 200

Inventory 271 000
Debtors (242 400 – 3 400) 239 000
Cash and Cash Equivalent (20 040 + 3 540) 23 580
Prepaid expense 7 600
Total Assets 1 157 200

Equity and Liability

Equity 1 023 580

Non Current Liability 0

Current Liability 133 620

Creditors 129 420
Accrued Expense 4 200

Total Equity and Liabilities 1 157 200

Workings: Depreciation
Cost Price Method.
1 160 000 × 15% = 174 000

Statement of changes in equity

Capital 1 061 820
Add: Net profit 117 760
Less: Drawings 156 000
1 023 580

Notes of Joy for the year ended 31 May 20x6

Note 1: Accounting policies

The financial statements have been prepared in accordance with generally accepted
guidelines laid down in the International Financial Reporting Standards (IFRS). The financial
statements have used accounting policies that are consistent with previous financial periods.

Note 2: Non-current assets

Cost Price Accumulate Book

d value
Depreciation
Equipment 1 160 000 554 000 606 000
Exercise 8
The following information was obtained from the accounting records of Nitro Traders on 28
February 20x6, the end of the accounting period of the entity.

Pre-adjustment trial balance of Nitro Traders on 28 February 20x6

Debit Credit

R R

Capital 66 100

Drawings 16 000

Vehicles (at cost price) 100 000

Equipment (at cost price) 40 000

Accumulated depreciation on vehicles 36 000

Accumulated depreciation on equipment 8 000

Loan: Zuza Bank 20 000

Bank 4 300

Fixed deposit: Zuza Bank 15 000

Debtors control 5 200

Trading inventory (1 March 20x5) 10 000

Creditors control 4 100

Sales 250 000

Purchases 153 600

Carriage of purchases 4 200

Carriage on sales 550

Rent expense 15 600

Stationery 3 800

Insurance 4 800
 Rates and taxes 350

Credit losses 400

Telephone 1 980

Water and electricity 10 800

Commission received 180

Rental income 2 200

Adjustments

1. A physical stocktaking on 28 February 20x6 showed the following:

Stationery on hand R200

Inventory on hand R17 800

2. Depreciation must be provided for as follows:

Vehicles – 20% per annum on the cost price

Equipment – 10% per annum on reducing balance method

3. The loan from Zuza Bank was obtained on 31 December 20x5. Interest was payable at
the end of each six months at 15% per annum. As yet, no interest has been paid.

4. A fixed deposit was made on 1 September 20x5. The interest rate amounted to 10% per
annum. As yet, no interest has been received.

5. An additional amount of R200 must be written off as irrecoverable.

6. Insurance included an amount of R1 800 in respect of additional insurance taken out and
paid for, for the period 1 January 20x6 to 31 December 20x6.

7. Rental income of R200 was received in advance.

Required

8.1 Prepare the statement of profit or loss and other comprehensive income for the year
ended 28 February 20x6.

8.2 Prepare the statement of financial position as at 28 February 20x6

Statement of profit or loss and other comprehensive income of Nitro Traders for
the year ended 28 February 20x6

R R
Sales 250 000

Less: Cost of sales

Opening inventory 10 000
Purchases 153 600
Carriage on purchase 4 200
Goods available for sale 167 800
Less: Closing inventory 17 800 150 000

Gross profit 100 000

Add: Other income

Interest on fixed deposit 750
Rental income (2 200 – 200) 2 000
Commissioned received 180 2 930

Operating income 102 930

Less: Operating expenses 59 980

Stationery (3 800 – 200) 3 600
Depreciation 23 200
Credit losses (400 + 200) 600
Insurance 3 300
Rent expenses 15 600
Rates and taxes 350
Carriage on sales 550
Water and electricity 10 800
 Telephone 1 980
Less: Interest on loan 500
Net profit for the year 42 450

WORKINGS

1. Interest on fixed deposit

R15 000 × 10% × 6/12 = R750

2. Insurance

(R4 800 – R1 800) = R3 000 + (R1 800 ×2/12) = R3 300

3. Depreciation

Vehicles = 100 000 × 20% = R20 000

Equipment = R40 000 – R8 000 × 10% = R3 200

R23 200

4. Interest on loan

R20 000 × 15% × 2/12 = R500

Statement of financial position of Nitro Traders at 28 February 20x6

R
R
ASSETS
Non-current assets Note 2 87 800
Vehicles 44 000
Equipment 28 800
Fixed deposit 15 000

Current assets
Trading inventory 17 800
Stationery on hand 200
 Accrued income 750
Debtors
5 000
(R5 200 – R200)
Prepaid expenses 1 500
Bank 4 300 29 550

Total assets 117 350

EQUITY AND LIABILITIES

Equity 92 550

Non-current liabilities
Loan 20 000

Current liabilities
Creditors 4 100
Income received in advance 200
Accrued expenses 500 4 800

TOTAL EQUITY AND LIABILITIES 117 350

Statement of changes in equity

Capital R66 100

Add: Net profit R42 450

Less: Drawings R16 000

R92 550

Notes of Nitro Traders for the year ended 28 February 20x6

Note 1: Accounting policies

The financial statements have been prepared in accordance with generally accepted
guidelines laid down in the International Financial Reporting Standards (IFRS). The
financial statements have used accounting policies that are consistent with previous
financial periods.
Note 2: Non-current assets

Accumulated
Cost price Book value
depreciation
R R R

Vehicles 100 000 56 000 44 000

Equipment 40 000 11 200 28 800
140 000 67 200 72 800