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Assignment:: Do It in Group With A Member of 5

The document provides information about a group assignment involving critical analysis of four statements related to accounting concepts. It also provides a statement of financial position for WW Associates as of December 31, 2014 and details of transactions that occurred during 2015. The summary is to prepare an income statement for the year ended December 31, 2015 and statement of financial position as of that date based on the provided information.

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72 views3 pages

Assignment:: Do It in Group With A Member of 5

The document provides information about a group assignment involving critical analysis of four statements related to accounting concepts. It also provides a statement of financial position for WW Associates as of December 31, 2014 and details of transactions that occurred during 2015. The summary is to prepare an income statement for the year ended December 31, 2015 and statement of financial position as of that date based on the provided information.

Uploaded by

yaregal
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Assignment: Do it in group with a member of 5.

1. You have heard the following statements made. Comment critically on them:
a) Equity only increases or decreases as a result of the owners putting more cash into the
business or taking some out.
b) An accrued expense is one that relates to next year.
c) Unless we depreciate this asset, we shall be unable to provide for its replacement.
d) There is no point in depreciating the factory building. It is appreciating in value each
year.
You have heard the following statements made. Comment critically on them.

(a) ‘Equity only increases or decreases as a result of the owners putting more cash into the
business or taking some out.’

It is true that equity either increases or decreases as a result of the owners putting more cash
into the business or taking some out. However, it should be underlined that putting more cash
or taking some cash out are not the only ways for the occurrence of either an increase or a
decrease in equity respectively.

To begin with, there are more than one way in which an increase in equity occurs. In

particular, equity increases when a) revenue from sales is gained, and b) new assets are

introduced in the company. Concerning a) revenue from sales, when a business operation

sells inventories, revenue occurs, and equity increases. In addition, b) equity increases when

new assets are introduced to the business, for example equipment, vehicles, machinery, et

cetera.

As far as the decrease of equity is concerned, it happens when a) expenses incur and b) assets

of the business are withdrawn by the owners of the company.

(b) ‘An accrued expense is one that relates to next year.’

With the term “accrued expense”, we refer to an expense that has occurred, but has not been

paid yet. An accrued expense should be reported in the statements of the year in which this

expense has occurred and not in the statements of the year during which it will be paid. The
journal entry used to report an accrued expense is the following: we debit the expense and

we credit accounts payable.

(c) ‘Unless we depreciate this asset, we shall be unable to provide for its replacement.’

It is a fact that a lot of people share the opinion that the purpose of the depreciation of an
asset is to provide the money needed for the replacement of the asset when its useful life
comes to an end. However, depreciation does not serve this purpose. On the contrary, it
helps the cost or fair value (less any residual value) of a non-current asset to be allocated
over its useful life. Depreciation expense is very useful in the income statement of a
business, as it is used in order for profits or losses to be determined and calculated. There
is no connection between depreciation of a non-current asset and provision for its
replacement in the future.

(d) ‘There is no point in depreciating the factory building. It is appreciating in value each
year.’

The purpose of depreciation of a non-current asset is the allocation of its cost or fair value
(less residual value) over its useful life. Depreciation is really necessary, as it shows how
much the non-current asset is consumed over its useful life until a moment comes when this
asset has been totally consumed.

2. The following is the statement of financial position of WW Associates as at 31 December


2014 (expressed in €):
ASSETS 67,500
Non-current Assets 25,300
Machinery 25,300
Current Assets 42,200
Inventories 12,200
Trade receivables 21,300
Prepaid expenses (rates) 400
Cash 8,300
EQUITY AND LIABILITIES 67,500
Equity 48,900
Original 25,000
Retained Earnings 23,900
Current Liabilities 18,600
Trade payables 16,900
Accrued expenses (wages) 1,700

During 2015, the following transactions took place:


1. The owners withdrew equity in the form of cash of 23,000 €.
2. Premises were rented at an annual rental of 20,000 €. During the year, rent of 25,000 €
was paid to the owner of the premises.
3. Rates on the premises were paid during the year for the period 1 April 2015 to 31 March
2016 and amounted 2,000 €.
4. Some machinery (a non-current asset), which was bought on 1 January 2014 for 13,000
€, has proved to be unsatisfactory. It was part-exchanged for some new machinery on 1
January 2015 and WW Associates paid a cash amount of 6,000 €. The new machinery
would have cost 15,000 € had the business bought with the trade-in.
5. Wages totalling 23,800 € were paid during the year. At the end of the year, the business
owed 860 € of wages.
6. Electricity bills for the four quarters of the year were paid totalling 2,700 €.
7. Inventories totalling 143,000 € were bought on credit.
8. Inventories totalling 12,000 € were bought for cash.
9. Sales revenue on credit totalled 211,000 (cost 127,000 €).
10. Cash sales revenue totalled 42,000 (cost 25,000 €).
11. Receipts from trade receivables totalled 198,000 €.
12. Payments to trade payables totalled 156,000 €.
13. Van running expenses paid totalled 17,500 €.
14. WW Associates borrowed 25,000 € on January 1. The company paid off 2,500 € of the
debt and 2,000 € of interests on December 31.
The business uses the reducing-balance method of depreciation for non-current asset at the
rate of 30 per cent each year.
Prepare an income statement for the year ended 31 December 2015 and a statement of
financial position as at that date.

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