ACC2231 - Suspense Account (Exercise 1)

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The bookkeeping system of Turner is not computerised, and at 30 September 20X8 the bookkeeper was unable to balance the accounts. The trial balance totals were:

Debit $1,796,100
Credit $1,852,817

Nevertheless, he proceeded to prepare draft financial statements, inserting the difference as a balancing figure in the statement of financial position. The draft statement of profit or loss showed a profit of $141,280 for the year ended 30 September 20X8.

He then opened a suspense account for the difference and began to check through the accounting records to find the difference. He found the following errors and omissions:

1. $8,980 – the total of the sales returns book for September 20X8, had been credited to the purchases returns account.
2. $9,600 paid for an item of plant purchased on 1 April 20X8 had been debited to plant repairs account. The company depreciates its plant at 20% per annum on a straight line basis, with proportional depreciation in the year of purchase.
3. The cash discount totals for the month of September 20X8 had not been posted to the general ledger accounts. The figures were:
   Discount allowed $836
   Discount received $919
4. $580 insurance prepaid at 30 September 20X7 had not been brought down as an opening balance
5. The balance of $38,260 on the telephone expense account had been omitted from the trial balance
6. A car held as a non-current asset had been sold during the year for $4,800. The proceeds of sale were entered in the cash book but had been credited to the sales account in the general ledger. The original cost of the car $12,000, and the accumulated depreciation to date $8,000, were included in the motor vehicles account and the accumulated depreciation account. The company depreciates motor vehicles at 25% per annum on a straight line basis with proportionate depreciation in the year of purchase but none in the year of sale.

Required:
(a) Open a suspense account for the difference between the trial balance totals. Prepare the journal entries necessary to correct the errors and eliminate the balance on the suspense account. Narratives are not required. (10 marks)
(b) Draw up a statement showing the revised profit after correcting the above errors. (6 marks)

Total (16 marks)

Source: ACCA