A.A.T Why do you use 15,000 as the disposal coz i thought it should be 10200 ?

also the charge for the year for plant and machinery the answer was 17125 but i didnt get it coz i did NBV x 20% i thought reducing balance is based on nbv

lastly, i don't understand the eliminated on disposal or eliminated on revaluation figures

sorry 4 all the questions we weren't taught how to prepare this schedule thing

Reply 25

originalsteph

Could you check if my answers are correct for task 2 question 3 and 4

Closing stock : 25400
Purchase returns 2478
Sales Returns(1608/1.20) (1340)
Damaged goods (9537)

Closing stock 17001

Question 4). IAS 7 deals with the preparation of cash flow statements. IAS 2 deals with inventory stock and states that stock should be valued at lower of cost or NRV which is selling price - costs involved in repairing the stock to a saleable condition

Reply 26

A.A.T.

Original post by sukhys

A.A.T. wouldn't you include the company's name in the title?

You could just put "Austen Ltd" at the very top for argument sake but labeling this as "schedule of non-current (fixed) assets" will achieve marks as well as use of sub-headings.

Reply 27

A.A.T.

Original post by originalsteph

Could you check if my answers are correct for task 2 question 3 and 4

Closing stock : 25400
Purchase returns 2478
Sales Returns(1608/1.20) (1340)
Damaged goods (9537)

Closing stock 17001

5/6 marks is v good. It is a strange question in terms of the adjustment for damaged goods. It states "It was also discovered on 2 May 2011 that some inventory (stock) with a cost price of £9889 was damaged and can be sold for only £9537."

So it is this quote "some inventory (stock) with a cost price of £9889 was damaged" that tells you the £9889 is damanged and so no longer worth £9889 so must be REMOVED. "can be sold for only £9537." is the NRV and is lower than cost so will be the new value and INCLUDED. You can just net these two values off by DEDUCTING 352 (9899-9537).

I would like Accounting students to come up with something along that train of thought but it is actually NOT clear in the question if RayJen Ltd has made an adjustment already (at the point of discovery on 2 May 2011) as it only says they "discovered some inventory damaged" and NOT that they have acted upon this information. So benefit of the doubt here for students however you cannot just leave this out without doing something as that is what most students who do not understand the question would do so how do you reward students who realise and not reward ones who do not. You will have to make an entry (see my diagram) and include "0" which is strange as this is not normal Accounting OR at least made a written statement (see diagram). A note would be my preference as we never put something in an account with "zero".

Hope this is useful!

Question 4). IAS 7 deals with the preparation of cash flow statements. IAS 2 deals with inventory stock and states that stock should be valued at lower of cost or NRV which is selling price - costs involved in repairing the stock to a saleable condition

Mark = 1 / 3

Q 4 is "Identify the relevant IAS which deals with the preparation of a statement of cash flows and explain how inventory (stock) is treated"

I suspect many other students misread the question or just "jumped" on the typical IAS2 definition. The question does specifically refer to "dealing with the preparation of a statement of cash flows" and then "explain how it is treated" (meaning in the statement of cashflows. so IAS7 is appropriate NOT IAS2. The fact that Q3 dealt with "IAS2" in terms of damaged goods / NRV it is a rather leading question for students to fall down on. So no marks for any reference to IAS2 as this is NAQ (Not answering question).

Answer:
IAS 7 (1) deals with the preparation of cash flow statements. Inventory (stock)
is adjusted against profit from operations (1) by either adding a decrease (1) or deducting an increase (1). (Students should know why it is true that we "add" a decrease and "deduct" an increase. Do you know?

AQA-ACCN3- Jun11 - Task 2 RayJen Ltd Q3.jpg291.0KB

Reply 28

A.A.T.

Added Company name and readjusted my lines as they did not sync.

A.A.T Why do you use 15,000 as the disposal coz i thought it should be 10200?
Explanation:
When disposing of a Non-current (fixed) asset we always remove the asset at COST value (since it was originally recorded at COST). We also REMOVE all accumulated depreciation (Acc. Dep) associated with this individual asset. The £10,200 given in the question is called "proceeds" and is the money / cash you receive upon the sale.

"also the charge for the year for plant and machinery the answer was 17125 but i didnt get it coz i did NBV x 20% i thought reducing balance is based on nbv"

Explanation: My calculation was 50625 + 35000 = 85625 x 20% = 17125
You are correct that NBV must be used and I have as COST - ACC. DEP = NBV
I would keep the existing plant and machinery in mind and then remember the addition.

so:
existing: 90000 - 39375 = 50625
addition: 35000 - 0 = 35000 (zero as this asset has NOT accumulated any depreciation yet - we are working out the first lot of depreciation now for the year.
So we get 50625 + 35000 = 85625 x 20% = 17125

Ok with this?

lastly, i don't understand the eliminated on disposal or eliminated on revaluation figures

sorry 4 all the questions we weren't taught how to prepare this schedule thing

Explanation of "Eliminated on disposal of £4,500"

As above when a fixed asset is sold we do two things:
- remove the asset at cost price (what we bought it for)
- remove all depreciation associated with the fixed asset.

So the 15,000 in disposals fixtures and fittings was removed and now we must calculate how much depreciation the company has charged to each years P+L i.e. what is the acc. dep at the point of sale / disposal.

So look at the depreciation "policy" of the company.
"All non-current (fixed) assets are depreciated for a whole year in the year of purchase but are not depreciated during the year of disposal." and we are told "Fixtures and fittings purchased on 1 May 2007 for £15 000 were sold during the year for £10 200."

So from 1 May 2007 to 30 April 2011 we can work out years and months BUT read the policy as we are not dealing with a complicated depreciation question involving "pro-rata". Depreciate in accounting period 07-08, 08-09 and 09-10 but NOT 11 as per policy. So this gives 3 years.

Formula to use if helpful is ACC. DEP = COST X RATE OF DEP X LENGTH OF TIME
so 15000 x 10% x 3years = 4500 and this 4500 is the ACC. DEP for the disposal fixture and fitting which must be REMOVED. Why? We no longer need this depreciation in the accounts as we will no longer own it. Only assets we own are depreciated to accurately assess a net book value (market value) of them. This being a prudent approach to accounting.

Explanation of eliminated on revaluation figures
Refer back to the depreciation point. "Only assets we own are depreciated to accurately assess a net book value (market value) of them" So when a revaluation occurs it causes the COST value to change either up or down. This fixed asset must now be stated in the balance sheet at valuation NOT COST. However, a change to the COST price will mean the NBV needs recalculating as the acc. dep has NOT changed proportionally to the change in COST. So when a revaluation occurs you must REMOVE all acc. dep and restart again to depreciate that asset as if it is now year 1 of that asset. Technically it is now year 1 again as the asset is now at valuation not cost. A rebranding so to spealk.

So look at the answer. The acc. dep. of 45 000 is what gets removed.

Total is , year 2 is 2008 etc but Length of ownershp of this asset would be

When ever you have an accounting year end such as 30 April 2011 i.e NOT 31 Dec 2011 you will automatically be split between two calendar years so it is best to think of one year as a period e.g. from 08-09 rather than absolute years such as year 1 being 2008 and year 2 being 2009 etc. See above where I mentioned the years i.e. "Depreciate in accounting period 07-08, 08-09 and 09-10 but NOT 11 as per policy. So this gives 3 years."

Hope this is all useful.

Any more queries - just ask!

AQA-ACCN3- Jun11 - Task 4 Austen Ltd Q10.jpg276.1KB

Reply 29

originalsteph

Thanks I understand it now, but the Accumulated Deprecation formula you used, is that just because of the 4th policy
" All fixed assets are depreciated for a whole year in the year of purchase but are not during the year of disposal"

or can you use that formula even without that policy for example if you needed to calculate the disposal for fixtures and fitting how would you do that ( if policy 4 wasn't there)

Reply 30

Khan - 786

Original post by A.A.T.

Any more queries - just ask!

Ermm..
I was doing the Income Statement and i came across the Rent anr Rates section under neath the expenses, i have realised that Sukhy's rent and rates came to 6295. What i dont get is theirs an accrual and a prepayment on Rent and Rates so surely:

7300 - 470 + 535 = 7365? Can you please explain why it isnt this? Thanks

Reply 31

sukhys

Original post by Khan - 786

yh the reason why is rent accrued of 535 is at 1 may 2010, so you have to do the opposite as this is at the start of the year. theres a difference between the start of the year and the end. try doing it through the ledger accounts it might make more sense.

Reply 32

A.A.T.

Original post by sukhys

The payment in the cashbook is for Rent and rates of 7300 so you need to treat the accruals / prepayments in one go.

According to the accruals / matching concept, a business must match expenses and revenues to the time period in which those expenses or revenues were incurred.

So start with the payment of Rent and rates of £7300. We are told:
Rates paid in advance at the end of the year by 470.
Rent accrued at the start of the year by 535.

The time of the accrual / prepayment is important as it indicates which accounting period the adjustment relates to.

So think of it this way - Rent accrued at the start of the year means last year the business "Lance" paid less rent than he should so owes 535 which is to be paid this accounting year. When paying rent this year relating to this period since Lance still has to pay off the 535 owing from last year first we deduct this from the 7300 so we get 7300 - 535 so far as the expense for this year. Now at the end of the year in question we are told Rates paid in advance at the end of the year so this relates to the amount extra paid this year relating to the next accounting year. i.e. 7300 includes a payment of 470 for next year so for this years expense we must remove / deduct it. So we now get 7300 - 535 - 470 = 6295 expenses for rent and rate for this year.

Ok?