Question

The accountant at Summerhill Traders was on sick leave during the month of September 20.7. Her assistant, who has limited accounting knowledge, prepared the trade receivables control account below. She has given you the following financial information for the month of September 20.7 and requested your help in identifying and rectifying her mistakes.

Additional information:

In addition to the errors made in the trade receivables control account above, you have listed the following errors and omissions made by the assistant:

• Interest was charged on Mrs A Naidoo, a debtor, who owed Summerhill Traders R2 000. Her account was overdue by six months. Interest is charged at 12% per annum on the overdue account.

• Miss T Luna’s attorneys declared a dividend of 30c in the rand from her insolvent estate. Miss T Luna owed Summerhill Traders R1 000 on 1 September 20.7. Her outstanding debt must be written off as irrecoverable.

• The sales journal was undercast by R100.

8. What will be the general ledger entries for the interest charged on Miss A Naidoo’s overdue account?

(1) The trade receivables control account in the general ledger will be debited with R120 and the interest income account in the general ledger will be credited with R120.

(2) The trade receivables control account in the general ledger will be debited with R240 and the interest income account in the general ledger will be credited with R240.

(3) The interest income account in the general ledger will be debited with R120 and the trade receivables control account in the general ledger will be credited with R120.

(4) The interest income account in the general ledger will be debited with R240 and the trade receivables control account in the general ledger will be credited with R240.

(5) The trade payables control account in the general ledger will be debited with R240 and the interest income account in the general ledger will be credited with R240.

9. What will be the general ledger entries be for the outstanding debt of Miss T Luna which must be written off as irrecoverable?

(1) The trade receivables control account in the general ledger will be debited with R700 and the credit losses account in the general ledger will be credited with R700.

(2) The trade receivables control account in the general ledger will be debited with R1 000 and the credit losses account in the general ledger will be credited with R1 000.

(3) The trade receivables control account in the general ledger will be debited with R300 and the credit losses account in the general ledger will be credited with R300.

(4) The credit losses account in the general ledger will be debited with R700 and the trade receivables control account in the general ledger will be credited with R700.

(5) The credit losses account in the general ledger will be debited with R1 000 and the trade receivables control account in the general ledger will be credited with R1 000.

10. What will the general ledger entries be for the credit losses recovered from Miss T Luna’s insolvent estate?

(1) The credit losses recovered account in the general ledger will be debited with R300 and the bank account in the general ledger will be credited with R300.

(2) The bank account in the general ledger will be debited with R300 and the credit losses recovered account in the general ledger will credited with R300.

(3) The credit losses recovered account in the general ledger will be debited with R700 and the bank account in the general ledger will be credited with R700.

(4) The bank account in the general ledger will be debited with R700 and the credit losses recovered account in the general ledger will credited with R700.

(5) The trade receivables control account in the general ledger will be debited with R300 and the credit losses recovered account in the general ledger will be credited with R300.

11. The sales journal was under cast by R100. The rectification of this error will be recorded as follows in the trade receivables control account:

(1) The sales amount in the trade receivables control account will be decreased by R100.

(2) The sales returns amount in the trade receivables control account will be decreased by R100.

(3) The sales returns amount in the trade receivables control account will be increased by R100.

(4) The balance brought down on 1 September 20.7 will be increased by R100.

(5) The sales amount in the trade receivables control account will be increased by R100.

Answer 1

8. (1) The trade receivables control account in the general ledger will be debited with R120 and the interest income account in the general ledger will be credited with R120.

Explanation:

The entry will have the effect of increase in trade receivables and interest income of the Summerhill Traders.

Interest Income = R2,000 * 12% * (6 months / 12 months) i.e. R120

9. (5) The credit losses account in the general ledger will be debited with R1 000 and the trade receivables control account in the general ledger will be credited with R1 000.

Explanation:

The entry will have effect of decreasing accounts receivable by the amount owed by Miss T Luna i.e. R1,000 because it is specified in question to write off her debt as irrecoverable

10. (2) The bank account in the general ledger will be debited with R300 and the credit losses recovered account in the general ledger will credited with R300.

Explanation:

The entry will increase the cash (because it is mentioned that the amount is recovered) and decrease the Credit losses

Amount Recovered = Outstanding amount * Receverable %

= R1,000 * 0.3

= R300

11. (5) The sales amount in the trade receivables control account will be increased by R100.

Explanation:

The sales is undercasted by R100. Therefore to rectify the effect of undercasted sales in accounts receivable account, the accounts receivable should be increased by R100.