Question

Question 1

Mr. Chai sells various types of toys throughout Malaysia. Three of the accounts in the ledger of Mr. Chai indicated the following;

Balances at 1 January 2020:

(i)        Insurance paid in advance RM562

(ii)       Wages outstanding RM306

(iii)      Rent receivable, received in advance RM36

During 2020, Mr. Chai:

(i)           Paid for insurance RM1,019, by bank standing order

(ii)       Paid RM15,000 wages, in cash

(iii)      Received RM2,600 rent, by cheque, from the tenant

At 31 December 2020:

(i)           Insurance prepaid was RM345

(ii)       Wages accrued amounted to RM419

(iii)      Rent receivable in arrears was RM105

Required;

(a)       Prepare the prepaid insurance, accrued wages and rent receivable accounts for the year ended 31 December 2020.

(b)       Prepare the income statement extract showing clearly the amounts of insurance expense, wages expense and rent revenue for the year ended 31 December 2020.

(c)        Explain the effects on the financial statements of accounting for:

               (i)           the expenses accrued at year-end

               (ii)       the income received in advance at year end

(d)       Explain the purposes of accounting for:

              (i)           the expenses accrued at year end

              (ii)       the income received in advance at year end

(Total: 20 marks)

Answer 1

A)
Prepaid Insurance Account for the year ended 31 December 2020
Particulars	Debit Amount	Particulars	Credit Amount
Opening Balance	562	Insurance	1236
Bank	1019	Closing Balance	345
Total	1581	Total	1581
Wages Outstanding Account for the year ended 31 December 2020
Particulars	Debit Amount	Particulars	Credit Amount
Cash	1019	Opening Balance	306
Closing Balance	419	Wages	1132
Total	1438	Total	1438
Rent Receivable Account for the year ended 31 December 2020
Particulars	Debit Amount	Particulars	Credit Amount
Rent Receivable	2741	Opening Balance	36
		Bank	2600
		Closing Balance	105
Total	2741	Total	2741
B)
Income Statement Account for the year ended 31 December 2020
Particulars	Credit Amount
Rent Recievable	2741
Less:
Wages	1132
Insurance	1236
Net profit	373
C)
i) expenses accrued at year end is the expenses that company incurs during the year but remain unpaid at the year end. This amount will be shown as Current Liabilities in Balance Sheet
ii) income received in advance at year end is the income which was not recievable during the year but received during the year in advance for upcoming period. This amount will be shown as Current Liabilities in Balance Sheet
D)
i) expenses accrued at year end - As per accrual basis of accounting, expenses accrued during the year must be shown as expenses in income statement and expenses accrured will be shown as Current Liabilities in Balance Sheet
ii) income received in advance at year end - As per accrual basis of accounting, income earned during the year must be shown as revenue in income statement and any income received does not pretains to the year of accounting but received in advance will be shown as Current Liabilities in Balance Sheet