Level: Intermediate
Intermediate Worked Examples: Adjustments at the Balance Date and Preparation of Sole Proprietorship Financial Statements
These six graded examples cover nominal-account adjustments, bad debts and provision for doubtful debts, depreciation, disposal of non-current assets, the adjusted trial balance and preparing the financial statements of a sole proprietorship.
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Example 1: Adjustment of Nominal Accounts
Question
Solution plan
A prepayment creates an asset (debit Prepaid Rent, credit Rent). An amount owing creates a liability (debit Salaries, credit Salaries Accrued). Unearned income creates a liability (debit Commission Received, credit Commission Unearned). Income accrued creates an asset (debit Interest Accrued, credit Interest Received). The adjusted expenses and income go to the Profit and Loss Account; the adjustment items appear in the Statement of Financial Position.
| Particulars | Debit (RM) | Credit (RM) |
|---|---|---|
| Prepaid Rent | 2,000 | |
| Rent | 2,000 | |
| Salaries | 1,500 | |
| Salaries Accrued | 1,500 | |
| Commission Received | 500 | |
| Commission Unearned | 500 | |
| Interest Accrued | 400 | |
| Interest Received | 400 | |
| Total | 4,400 | 4,400 |
| Item | Profit and Loss (RM) | Statement of Financial Position (RM) |
|---|---|---|
| Rent (expense) | 10,000 | |
| Salaries (expense) | 25,500 | |
| Commission Received (income) | 2,500 | |
| Interest Received (income) | 400 | |
| Prepaid Rent (current asset) | 2,000 | |
| Interest Accrued (current asset) | 400 | |
| Salaries Accrued (current liability) | 1,500 | |
| Commission Unearned (current liability) | 500 |
Answer
After adjustment: rent expense RM10,000, salaries expense RM25,500, commission income RM2,500 and interest income RM400 are taken to the Profit and Loss Account. Prepaid Rent RM2,000 and Interest Accrued RM400 are current assets; Salaries Accrued RM1,500 and Commission Unearned RM500 are current liabilities. The journal totals debit = credit = RM4,400.
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Example 2: Bad Debts and Provision for Doubtful Debts
Question
Solution plan
Bad debt: debit Bad Debts RM2,000, credit Accounts Receivable RM2,000. Net AR = RM50,000 - RM2,000 = RM48,000. Provision for Doubtful Debts = 5% x RM48,000 = RM2,400. As it is newly created, the whole RM2,400 is debited to the Profit and Loss Account, crediting the Provision for Doubtful Debts. Both Bad Debts and Provision for Doubtful Debts are expenses in the Profit and Loss Account.
| Particulars | Debit (RM) | Credit (RM) |
|---|---|---|
| Bad Debts | 2,000 | |
| Accounts Receivable | 2,000 | |
| Profit and Loss (Provision for Doubtful Debts) | 2,400 | |
| Provision for Doubtful Debts | 2,400 | |
| Total | 4,400 | 4,400 |
| Particulars | RM | RM |
|---|---|---|
| Current Assets | ||
| Accounts Receivable | 48,000 | |
| Less: Provision for Doubtful Debts | 2,400 | |
| Net Accounts Receivable | 45,600 |
Answer
Bad Debts RM2,000 and Provision for Doubtful Debts RM2,400 (total RM4,400) are taken to the Profit and Loss Account as expenses. In the Statement of Financial Position, net Accounts Receivable is RM48,000 - RM2,400 = RM45,600. The journal totals debit = credit = RM4,400.
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Example 3: Depreciation: Straight-Line and Reducing Balance
Question
Solution plan
Straight-line: depreciation = 10% x cost = 10% x RM80,000 = RM8,000 each year. Reducing balance: 2022 = 10% x RM80,000 = RM8,000; 2023 = 10% x (RM80,000 - RM8,000) = 10% x RM72,000 = RM7,200. Yearly entry: debit Depreciation (Profit and Loss expense), credit Accumulated Depreciation. The Accumulated Depreciation Account builds up year on year; net book value = cost - accumulated depreciation.
| Year | Straight-Line (RM) | Reducing Balance (RM) |
|---|---|---|
| 2022 | 8,000 | 8,000 |
| 2023 | 8,000 | 7,200 |
| Accumulated Depreciation (31 Dec 2023) | 16,000 | 15,200 |
| Net Book Value (31 Dec 2023) | 64,000 | 64,800 |
| Particulars | Debit (RM) | Credit (RM) |
|---|---|---|
| Depreciation of Machine | 8,000 | |
| Accumulated Depreciation of Machine | 8,000 | |
| Total | 8,000 | 8,000 |
| Particulars | RM | Particulars | RM |
|---|---|---|---|
| Balance c/d | 16,000 | Balance b/d (2022) | 8,000 |
| Profit and Loss (Depreciation) | 8,000 | ||
| 16,000 | 16,000 | ||
| Balance b/d (2024) | 16,000 |
Answer
Straight-line method: depreciation RM8,000 per year; accumulated depreciation at 31 Dec 2023 = RM16,000; net book value = RM64,000. Reducing-balance method: 2022 RM8,000, 2023 RM7,200; accumulated depreciation = RM15,200; net book value = RM64,800. The 2023 entry (straight-line) debit = credit = RM8,000.
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Example 4: Disposal of a Non-Current Asset for Cash
Question
Solution plan
Transfer the cost to the Disposal Account (debit Disposal, credit Vehicle RM60,000). Transfer the accumulated depreciation (debit Accumulated Depreciation, credit Disposal RM45,000). Record the cash received (debit Cash, credit Disposal RM12,000). Net book value = RM60,000 - RM45,000 = RM15,000. Since the sale of RM12,000 < RM15,000, there is a loss of RM3,000 taken to the Profit and Loss Account (debit Profit and Loss, credit Disposal).
| Particulars | Debit (RM) | Credit (RM) |
|---|---|---|
| Vehicle Disposal | 60,000 | |
| Vehicle | 60,000 | |
| Accumulated Depreciation of Vehicle | 45,000 | |
| Vehicle Disposal | 45,000 | |
| Cash | 12,000 | |
| Vehicle Disposal | 12,000 | |
| Profit and Loss (Loss on Disposal) | 3,000 | |
| Vehicle Disposal | 3,000 | |
| Total | 120,000 | 120,000 |
| Particulars | RM | Particulars | RM |
|---|---|---|---|
| Vehicle | 60,000 | Accumulated Depreciation | 45,000 |
| Cash | 12,000 | ||
| Profit and Loss (Loss on Disposal) | 3,000 | ||
| 60,000 | 60,000 |
Answer
The vehicle's net book value = RM60,000 - RM45,000 = RM15,000. As it was sold for RM12,000, there is a LOSS on disposal of RM3,000 recorded as an expense in the Profit and Loss Account. The Disposal Account balances at RM60,000 on each side; the journal totals debit = credit = RM120,000.
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Example 5: Adjusted Trial Balance
Question
Solution plan
Rent: 6,000 - 1,000 = 5,000, create Prepaid Rent 1,000 (Dr). Salaries: 15,000 + 2,000 = 17,000, create Salaries Accrued 2,000 (Cr). Depreciation = 10% x 30,000 = 3,000 (Dr expense); Accumulated Depreciation = 3,000 + 3,000 = 6,000 (Cr). New PDD = 5% x 12,000 = 600; increase = 600 - 500 = 100 (Dr expense); PDD balance = 600 (Cr). Re-list all adjusted balances and ensure total debit = credit.
| Particulars | Debit (RM) | Credit (RM) |
|---|---|---|
| Capital | 43,500 | |
| Drawings | 5,000 | |
| Purchases | 40,000 | |
| Sales | 90,000 | |
| Opening Inventory | 8,000 | |
| Rent | 5,000 | |
| Salaries | 17,000 | |
| Accounts Receivable | 12,000 | |
| Accounts Payable | 9,000 | |
| Bank | 30,000 | |
| Fittings | 30,000 | |
| Accumulated Depreciation of Fittings | 6,000 | |
| Provision for Doubtful Debts | 600 | |
| Prepaid Rent | 1,000 | |
| Salaries Accrued | 2,000 | |
| Depreciation of Fittings | 3,000 | |
| Doubtful Debts Expense | 100 | |
| Total | 151,100 | 151,100 |
Answer
Adjusted balances: Rent RM5,000; Salaries RM17,000; Accumulated Depreciation of Fittings RM6,000; Provision for Doubtful Debts RM600. New items: Prepaid Rent RM1,000 (Dr), Salaries Accrued RM2,000 (Cr), Depreciation of Fittings RM3,000 (Dr), Doubtful Debts Expense RM100 (Dr). The Adjusted Trial Balance balances at RM151,100 in each column.
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Example 6: Financial Statements in Statement Form
Question
Solution plan
Cost of sales = opening inventory + purchases - closing inventory = 12,000 + 60,000 - 14,000 = 58,000. Gross profit = sales - cost of sales = 120,000 - 58,000 = 62,000. Net profit = gross profit - total expenses (8,000 + 20,000 + 5,000 + 4,000 = 37,000) = 25,000. In the Statement of Financial Position: Non-Current Assets (Vehicle), Current Assets (closing inventory, AR, bank), Owner's Equity = capital + net profit - drawings, and Current Liabilities (AP).
| Particulars | RM | RM |
|---|---|---|
| Sales | 120,000 | |
| Less: Cost of Sales | ||
| Opening Inventory | 12,000 | |
| Add: Purchases | 60,000 | |
| Cost of Goods Available for Sale | 72,000 | |
| Less: Closing Inventory | 14,000 | |
| Cost of Sales | 58,000 | |
| Gross Profit | 62,000 | |
| Less: Expenses | ||
| Rent | 8,000 | |
| Salaries | 20,000 | |
| General Expenses | 5,000 | |
| Utilities | 4,000 | |
| Total Expenses | 37,000 | |
| Net Profit | 25,000 |
| Particulars | RM | RM |
|---|---|---|
| Non-Current Assets | ||
| Vehicle | 40,000 | |
| Current Assets | ||
| Closing Inventory | 14,000 | |
| Accounts Receivable | 15,000 | |
| Bank | 18,000 | |
| Total Current Assets | 47,000 | |
| Total Assets | 87,000 | |
| Owner's Equity | ||
| Capital | 60,000 | |
| Add: Net Profit | 25,000 | |
| 85,000 | ||
| Less: Drawings | 8,000 | |
| Owner's Equity | 77,000 | |
| Current Liabilities | ||
| Accounts Payable | 10,000 | |
| Total Equity and Liabilities | 87,000 |
Answer
Gross profit = RM62,000; net profit = RM25,000. Total assets = RM87,000, equal to total equity and liabilities (Owner's Equity RM77,000 + Current Liabilities RM10,000 = RM87,000). Owner's Equity = RM60,000 + RM25,000 - RM8,000 = RM77,000.
Where marks are usually lost
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