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1) Why might the directors of a company engage in creative accounting?
(25 marks)
2) Explain what is meant by relevance, faithful representation and comparability and how they make financial information useful.
(25 marks)
3) Jason Polo set up in business three years ago selling new and reconditioned office equipment. He has enjoyed success and is now looking to expand his operations with an injection of £60,000 of further capital.
The balances on his accounts, as at the end of December 2014, are as shown below:
Account Name
Amount £
Bank (debit)
12,000
Petty cash
600
Furniture and office equipment
10,500
Motor van
12,000
HMRC (credit)
1,500
Sales ledger control
14,000
Purchases ledger control
12,000
Accumulated depreciation on motor van
6,000
Loan from T. Green
5,000
Capital
?
The receivables balance consists of the following amounts:
£
Peter Jackson
1,000
Lorna Fetters
4,500
Henry Ricketts
8,200
Jane Boston
300
Total
14,000
The payables balance consists of the following amounts:
£
Irma Sheite
2,000
Nicola Fenton
2,500
Richard Coles
6,500
Roger Roughton
1,000
Total
12,000
The following transactions took place in January 2015:
1/1/2015 J. Polo injected further capital into his business – £60,000
2/1/2015 Equipment for the business costing £22,500 was purchased and paid for by cheque
4/1/2015 Purchased goods costing £13,000 on credit from Black & Sons
6/1/2015 Withdrew £300 from the bank for the till
7/1/2015 Sold goods on credit to P. Jackson for £1,000
9/1/2015 Sold some goods for £5,674 on credit to B. Treadstone
10/1/2015 Paid the rent on the business premises by cheque for £1,600
12/1/2015 Paid motor expenses of £77 in cash
13/1/2015 The owner of the business withdrew £200 from the till for personal use
14/1/2015 B. Treadstone returned some goods and an allowance of £120 was made
17/1/2015 Paid Black & Sons by cheque in full settlement of their invoice for £13,000
20/1/2015 Received news that P. Jackson has gone out of business and there is little likelihood of recovering any outstanding amounts
23/1/2015 The existing motor van was sold for £4,500
27/1/2015 Jason Polo buys a new motor van for £15,000
You are required to:
a) Post the opening balances as at 1st January 2015 into appropriate ledger accounts. You will need to calculate the amount of Jason’s capital. Open separate ledger accounts for each credit customer and supplier.
b) Post the transactions that took place in January 2015 into ledger accounts opening new accounts as needed.
c) Calculate the profit or loss arising from the disposal of the motor van on 23/1/2015 and make the relevant entries in the Disposals A/c.
d) Close off the ledger accounts.
e) Prepare a trial balance as at the end of January 2015.
(50 marks)
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