four queries green light test

Lorenzo
Lorenzo Registered Posts: 4

can anyone advise in regards the answer in relation to four answers I could not comprehend , self explanatory please find below , I have highlighted my answer with query , may take some browsing , however I have sectioned each answer as best as poss, with both my explanation as to reason I ticked my answer and the AAT correct explanation one in contrary . all numbered 1-4
hope this helps , comments appreciated


1.At the end of an accounting period a sole trader realised that he had received some rental income in advance relating to the next period. What is the double entry required to adjust for this?
Dr rental income Cr other payables/ this was the correct answer
Dr other payables Cr rental income
Dr< rental income Cr other receivablesthis was correct answer
£0 surely this should be answer , the question is receivable not what is owed by the company ?
£186
£84
the question is receivable both are payable £102 is to payables so zero in receivable ?

Explanation of the correct answer:
The amount owing for electricity is an accrual at the end of the period and will be shown under other payables. The prepayment of the buildings insurance of £102 will be shown under other receivables.
If you think there is an error in this question, please quote reference: 4023


AAT diagnostic test results
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Show your answer
Question 8

Select the correct answer.

3.A partnership prepares accounts to 31 December annually. In April 20X1 they paid the business rates up to 31 March 20X2. What adjustment must be made in the business rates account at 31 December 20X1?
>Cr the business rates account because this is an accrual my answer
Dr the business rates account because this is a prepayment
Dr the business rates account because this is an accrual
>Cr the business rates because this is a prepayment, correct answer

my query being>
>Prepaid expense is considered accrual for the amount pre-paid , i.e look at Osborn book example i.e they are relating to December accounts not the following year
What are the accounting entries
• Credit The expense account with the accrued amount
• Debit The prepaid expenses account with accrued amount
• The total expense for the year is transferred to the SPL
The question is not clear on whether one is asking for adjusted accrued amount for following period or the whole amount minus the prepayment ?


>Explanation of the correct answer:
Where a payment made in a period relates partly to the following period, this is known as a prepayment. The business rates expense in the Income Statement must be reduced to reflect this, ie credit the business rates account.
If you think there is an error in this question, please quote reference: 4015
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AAT diagnostic test results
Here are the correct answers (marked in green and with a tick):
Show your answer
Question 5

Select the correct answer.

4.A sole trader prepares accounts to 31 March annually. On 1 April 20X1 there was a prepayment in respect of rent of £365. During the year the trader paid £4,680 in rent to their landlord, including a £395 prepayment in respect of the following year. How will these figures be reflected in the statement of profit or loss and Statement of Financial Position at 31 March 20X2?
PL - rent £4,710 SFP - other receivables £395
PL - rent £4,650 SFP - other payables £395 ? my answer , surely this is a payable ?
>PL - rent £4,650 SFP - other receivables £395AAT answer
PL - rent £4,710 SFP - other payables £395



Explanation of the correct answer:
The figure for the rent expense will be £(4,680 +365 - 395) = £4,650. The opening prepayment relates to this year so must be added to the payment made. The closing prepayment must be deducted as it relates to next year. The closing prepayment will be shown in the Statement of Financial Position as an other receivable of £395.
If you think there is an error in this question, please quote reference: 4024

Comments

  • Pian32
    Pian32 MAAT Posts: 423
    I've addressed each question but I think the confusion is mainly a persepective point.

    1.At the end of an accounting period a sole trader realised that he had received some rental income in advance relating to the next period. What is the double entry required to adjust for this?
    Dr rental income Cr other payables
    Dr other payables Cr rental income
    Dr rental income Cr other receivables

    The answer is the top one. You are removing income relating to the next period therefore DR. The amount of service is owed to the payee therefore CR other payables.

    2. (You've missed the question off so I can only guess based on what was said)

    £0
    £186
    £84
    £102

    From the blurb it looks like there has been a prepayment of £102 to the insurance this is representative of a service owed to the company and is therefore a receivable. The accrual is money they owe and there for a payable.

    3. A partnership prepares accounts to 31 December annually. In April 20X1 they paid the business rates up to 31 March 20X2. What adjustment must be made in the business rates account at 31 December 20X1?
    Cr the business rates account because this is an accrual
    Dr the business rates account because this is a prepayment
    Dr the business rates account because this is an accrual
    Cr the business rates because this is a prepayment

    Rates have been paid for the year 1/4/X1 to 31/3/X2 this means that there is the period 1/1/X2 to 31/3/X2 that has already been paid for at the year end. Hence it is a prepayment and needs to be removed from this years accounts. You may also need to reverse a previous prepayment if there was one in the year before.

    4. A sole trader prepares accounts to 31 March annually. On 1 April 20X1 there was a prepayment in respect of rent of £365. During the year the trader paid £4,680 in rent to their landlord, including a £395 prepayment in respect of the following year. How will these figures be reflected in the statement of profit or loss and Statement of Financial Position at 31 March 20X2?
    PL - rent £4,710 SFP - other receivables £395
    PL - rent £4,650 SFP - other payables £395
    PL - rent £4,650 SFP - other receivables £395
    PL - rent £4,710 SFP - other payables £395

    The prepayment of rent acts as a receivable as this is a service owed to the company.


    So the perspective problem is like this:
    Company makes a prepayment they are owed a service, this is a receivable as they can expect the service.
    Company receives a prepayment they owe a service, this is a payable as they owe the service.

    Similarly with accruals

    Company receives an invoice after the year end (for work completed in the year) this is a payable as the money relates to the period ended and can expect to be paid.
    Company sends an invoice after the year end (for work related to the year) this is a receivable as the money related to the period ended and can expect to be received.

    This means on a question you cant just assume the a reference to a prepayment/accrual is a payable/receiveable but you need to check which way round the funds are moving.
    AAT Level 4, MAAT
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  • Lorenzo
    Lorenzo Registered Posts: 4
    thanks very much , most helpful
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