Question

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

Answer 1

Solution to question a:

Solution to question b:

Income Statement (extract)

for the year 2020

Particulars	figures in RM
Revenue:
Rent income	2741
Expenses:
Insurance expenses	1236
Wage expenses	15113

Solution to question c and d:

	Effects on the financial statements	Purposes of accounting
Expenses accrued at year end	Outstanding or accrued expenses are added to the concerned expenses and the total is shown as expenses in the Income statement	To ascertain the true Net profit or loss of the business. To ascertain the true financial position of the business. To make a record of such expenses which have accrued but not been paid.
Income received in advance at year end	These amounts are treated as liabilities as the services are yet to be performed to earn such income. These are in the nature of unearned income.	To ascertain the true Net profit or loss of the business. To ascertain the true financial position of the business. To make a record of such transactions for which money is received, but services have not yet been performed.