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HOTS (KBAT) Worked Examples: Adjustments at the Balance Date and Preparation of Sole Proprietorship Financial Statements

These six HOTS examples, from easier to harder, test how you analyse, correct and interpret year-end adjustments (Form 4 Chapter 8): nominal accounts, doubtful debts, depreciation, asset disposal, error correction and complete sole-trader financial statements.

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Example 1: Nominal Account Adjustments & Their Effect

Question

Solution plan

Identify the four adjustment types: Rent RM3,000 = Prepaid expense (current asset) → Dr Prepaid Rent, Cr Rent. Interest RM600 = Accrued income (current asset) → Dr Interest Receivable, Cr Interest Received. Salaries RM2,000 = Accrued expense (current liability) → Dr Salaries, Cr Salaries Owing. Commission RM1,000 = Income received in advance (current liability) → Dr Commission Received, Cr Commission Unearned. Adjusted figures go to the Profit & Loss Account; the adjustment balances go to the Statement of Financial Position.

General Journal: Adjustments
ParticularsDebit (RM)Credit (RM)
Prepaid Rent3,000
Rent3,000
Interest Receivable600
Interest Received600
Salaries2,000
Salaries Owing2,000
Commission Received1,000
Commission Unearned1,000
Total6,6006,600
Profit & Loss Account extract (adjusted figures)
ParticularsRM
Expenses
Rent (18,000 − 3,000)15,000
Salaries (24,000 + 2,000)26,000
Income
Interest Received (3,600 + 600)4,200
Commission Received (6,000 − 1,000)5,000
Statement of Financial Position extract
ParticularsRM
Current Assets
Prepaid Rent3,000
Interest Receivable600
3,600
Current Liabilities
Salaries Owing2,000
Commission Unearned1,000
3,000

Answer

Adjusted figures to Profit & Loss: Rent RM15,000; Salaries RM26,000; Interest Received RM4,200; Commission Received RM5,000. Current assets rise by RM3,600 (Prepaid Rent RM3,000 + Interest Receivable RM600); current liabilities rise by RM3,000 (Salaries Owing RM2,000 + Commission Unearned RM1,000). If the accrual basis is not applied, net profit and the financial position would be misstated.

Where marks are usually lost

Example 2: Provision for Doubtful Debts, Bad Debts & Bad Debts Recovered

Question

Solution plan

Step 1: Write off the Bad Debt RM3,000 first → Dr Bad Debts, Cr Accounts Receivable. Net Accounts Receivable = 43,000 − 3,000 = 40,000. Step 2: Bad Debts Recovered RM300 → Dr Bank, Cr Bad Debts Recovered (income). Step 3: Required provision = 5% × 40,000 = RM2,000. Existing provision RM1,500, so the increase is RM500 → Dr Profit & Loss, Cr Provision for Doubtful Debts. Only the increase is charged to the Profit & Loss.

General Journal
ParticularsDebit (RM)Credit (RM)
Bad Debts3,000
Accounts Receivable3,000
Bank300
Bad Debts Recovered300
Profit & Loss (Doubtful Debts)500
Provision for Doubtful Debts500
Total3,8003,800
Provision for Doubtful Debts Account
Particulars (Dr)RMParticulars (Cr)RM
31/12 Balance c/d2,0001/1 Balance b/d1,500
31/12 Profit & Loss500
2,0002,000
1/1/2025 Balance b/d2,000
Statement of Financial Position extract
ParticularsRMRM
Current Assets
Accounts Receivable40,000
Less: Provision for Doubtful Debts2,00038,000

Answer

Bad Debts RM3,000 are charged to the Profit & Loss; Bad Debts Recovered RM300 as income. The new Provision for Doubtful Debts = RM2,000, with only the RM500 increase charged to the Profit & Loss. Net Accounts Receivable in the Statement of Financial Position = RM38,000.

Where marks are usually lost

Example 3: Comparing Depreciation Methods & Effect on Profit

Question

Solution plan

Straight line: (Cost − Residual) ÷ Life = (50,000 − 5,000) ÷ 5 = RM9,000 per year. Reducing balance: 25% on net book value. 2023: 25% × 50,000 = RM12,500; NBV 37,500. 2024: 25% × 37,500 = RM9,375. Compare accumulated depreciation and NBV. Entry: Dr Depreciation, Cr Accumulated Depreciation. The reducing balance method charges higher depreciation in the early years → lower net profit in the early years.

Depreciation Comparison (Machine RM50,000)
ParticularsStraight Line (RM)Reducing Balance 25% (RM)
Depreciation 20239,00012,500
Depreciation 20249,0009,375
Accumulated Depreciation (2 yrs)18,00021,875
Net Book Value at 31/12/202432,00028,125
General Journal: Straight Line Method
ParticularsDebit (RM)Credit (RM)
31/12/2023 Depreciation of Machine9,000
Accumulated Depreciation of Machine9,000
31/12/2024 Depreciation of Machine9,000
Accumulated Depreciation of Machine9,000
Total18,00018,000
Statement of Financial Position extract (Straight Line, 31/12/2024)
ParticularsCost (RM)Accumulated Depreciation (RM)Net Book Value (RM)
Non-Current Assets
Machine50,00018,00032,000

Answer

Straight line: depreciation RM9,000 per year; NBV at 31/12/2024 = RM32,000. Reducing balance 25%: RM12,500 (2023) and RM9,375 (2024); NBV = RM28,125. The reducing balance method charges higher depreciation expense in the early years, so early-year net profit is lower than under straight line.

Where marks are usually lost

Example 4: Disposal of a Non-Current Asset for Cash

Question

Solution plan

Depreciation per year = 10% × 80,000 = RM8,000. Held 2021, 2022, 2023 = 3 years → Accumulated Depreciation = RM24,000. Net book value = 80,000 − 24,000 = RM56,000. Sale price RM52,000 < NBV RM56,000 → LOSS RM4,000. Disposal Account: Dr Asset cost (80,000); Cr Accumulated Depreciation (24,000), Cr Bank (52,000), Cr Loss on Disposal (4,000) to Profit & Loss.

General Journal: Lorry Disposal
ParticularsDebit (RM)Credit (RM)
Disposal of Asset80,000
Motor Vehicle (Lorry)80,000
Accumulated Depreciation24,000
Disposal of Asset24,000
Bank52,000
Disposal of Asset52,000
Profit & Loss (Loss on Disposal)4,000
Disposal of Asset4,000
Total160,000160,000
Disposal of Asset Account
Particulars (Dr)RMParticulars (Cr)RM
Motor Vehicle (Lorry)80,000Accumulated Depreciation24,000
Bank52,000
Profit & Loss (Loss on Disposal)4,000
80,00080,000

Answer

Accumulated Depreciation (3 years) = RM24,000; net book value = RM56,000. Because the sale price RM52,000 is lower than the NBV RM56,000, there is a LOSS on disposal of RM4,000, charged to the Profit & Loss Account.

Where marks are usually lost

Example 5: Error Correction & Adjusted Net Profit

Question

Solution plan

Analyse each item's effect on profit: (a) purchases overstated RM2,000 → cost too high → correcting raises profit +2,000 (Dr Creditor, Cr Purchases). (b) depreciation omitted → expense rises → profit −1,200 (Dr Depreciation, Cr Accumulated Depreciation). (c) sale omitted → income rises → profit +900 (Dr Accounts Receivable, Cr Sales). (d) insurance overstated RM600 → expense falls → profit +600 (Dr Prepaid Insurance, Cr Insurance). Adjusted profit = 35,000 + 2,000 − 1,200 + 900 + 600.

General Journal: Corrections/Adjustments
ParticularsDebit (RM)Credit (RM)
(a) Creditor2,000
Purchases2,000
(b) Depreciation of Fittings1,200
Accumulated Depreciation of Fittings1,200
(c) Accounts Receivable900
Sales900
(d) Prepaid Insurance600
Insurance600
Total4,7004,700
Statement of Adjusted Net Profit
ParticularsRM
Draft net profit35,000
(a) Add: Double purchases corrected2,000
(b) Less: Depreciation omitted-1,200
(c) Add: Credit sale omitted900
(d) Add: Prepaid insurance adjusted600
Adjusted net profit37,300

Answer

Adjusted net profit = 35,000 + 2,000 − 1,200 + 900 + 600 = RM37,300. Items that raise profit: correcting the double-recorded purchases, the omitted sale, and prepaid insurance; the item that lowers profit: the omitted depreciation.

Where marks are usually lost

Example 6: Complete Financial Statements with Adjustments

Question

Solution plan

Gross Profit = Sales − Cost of Goods Sold. Cost = Opening 12,000 + Purchases 95,000 − Closing 15,000 = 92,000; Gross Profit = 180,000 − 92,000 = 88,000. Adjust expenses: Salaries 28,000 + 2,000 = 30,000; Rent 12,000 − 2,000 = 10,000. Provision for Doubtful Debts = 5% × 40,000 = 2,000. Depreciation = 10% × 30,000 = 3,000. Total expenses = 30,000 + 10,000 + 6,000 + 1,000 + 2,000 + 3,000 = 52,000. Net Profit = 88,000 − 52,000 = 36,000. Build the Statement of Financial Position with assets, equity (Capital + Profit − Drawings) and liabilities.

Income Statement for the year ended 31 December 2024
ParticularsRMRM
Sales180,000
Less: Cost of Goods Sold
Opening Inventory12,000
Add: Purchases95,000
107,000
Less: Closing Inventory15,000
Cost of Goods Sold92,000
Gross Profit88,000
Less: Expenses
Salaries (28,000 + 2,000)30,000
Rent (12,000 − 2,000)10,000
Sundry Expenses6,000
Bad Debts1,000
Provision for Doubtful Debts2,000
Depreciation of Fittings3,000
52,000
Net Profit36,000
Statement of Financial Position as at 31 December 2024
ParticularsRMRM
Non-Current Assets
Fittings (cost)30,000
Less: Accumulated Depreciation3,00027,000
Current Assets
Closing Inventory15,000
Accounts Receivable40,000
Less: Provision for Doubtful Debts2,000
Net Accounts Receivable38,000
Prepaid Rent2,000
Bank52,000
Total Current Assets107,000
TOTAL ASSETS134,000
Owner's Equity
Capital90,000
Add: Net Profit36,000
126,000
Less: Drawings8,000
118,000
Current Liabilities
Creditors14,000
Salaries Owing2,000
Total Current Liabilities16,000
TOTAL EQUITY AND LIABILITIES134,000

Answer

Gross Profit = RM88,000; Net Profit = RM36,000. In the Statement of Financial Position: Total Assets = RM134,000, comprising Non-Current Assets (fittings NBV RM27,000) and Current Assets RM107,000. Owner's Equity = RM118,000 and Current Liabilities RM16,000, totalling RM134,000. The statement balances.

Where marks are usually lost

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