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9706 · 1.5.1

Adjustments to draft financial statements — practice questions

Practice and worked examples for 9706 Adjustments to draft financial statements. Short previews only — attempt the full question in MarkScheme against the official scheme.

Worked example 1

Draft rent expense in trial balance $12,000. Rent of $1,200 for January next year was paid in December. Electricity $800 owed at year-end. Depreciation on equipment $3,500. Calculate adjusted rent, electricity, and total expense increase.

Show solution outline

Rent prepayment: $1,200 paid for next period → reduce rent expense. Adjusted rent = 12,000 − 1,200 = **10,800∗∗10,800**

Electricity accrual: $800 owed → increase expense. Adjusted electricity = $800 (if nil in TB) or add to existing balance.

Depreciation: $3,500 charge to SPL.

Journals: DR Prepayments 1,200 / CR Rent 1,200 DR Electricity 800 / CR Accruals 800 DR Depreciation 3,500 / CR Acc. dep. 3,500

Total extra expense (net of prepayment) = 800 + 3,500 − 1,200 = $3,100 (plus any electricity already in TB).

Worked example 2

A business's draft accounts for the year ended 31 December 2023 show trade receivables of $52,000. The allowance for irrecoverable debts at 1 January 2023 was $2,500. The following adjustments are required:

  1. A debt of $2,000 from a customer who was declared bankrupt is to be written off.
  2. The allowance for irrecoverable debts is to be adjusted to 5% of the remaining trade receivables.

Calculate the total charge for irrecoverable debts in the Statement of Profit or Loss and the net trade receivables figure for the Statement of Financial Position.

Show solution outline

Step 1: Write off the specific irrecoverable debt. The receivables balance is reduced by the amount confirmed as irrecoverable. Journal: Dr Irrecoverable Debts Expense $2,000, Cr Trade Receivables $2,000.

Step 2: Calculate the adjusted trade receivables balance. This is the balance upon which the new allowance will be calculated. Adjusted Receivables = 52,000−52,000 - 2,000 = **50,000∗∗50,000**

Step 3: Calculate the required closing allowance. The policy is 5% of closing receivables. Closing Allowance = 5% x 50,000=∗∗50,000 = **2,500**

Step 4: Calculate the increase or decrease in the allowance. Compare the closing allowance with the opening allowance. Opening Allowance = 2,5002,500 Closing Allowance = 2,5002,500 Increase/(Decrease) in allowance = 2,500−2,500 - 2,500 = **0∗∗0**

Step 5: Calculate the total charge for the Statement of Profit or Loss (SPL). Total Charge = Specific Debt Written Off + Increase in Allowance Total Charge = 2,000+2,000 + 0 = **2,000∗∗2,000**

Step 6: Calculate the net trade receivables for the Statement of Financial Position (SOFP). Net Receivables = Adjusted Receivables - Closing Allowance Net Receivables = 50,000−50,000 - 2,500 = **47,500∗∗47,500**

Final Answer:

  • SPL Charge for Irrecoverable Debts: 2,0002,000
  • SOFP Net Trade Receivables: 47,50047,500
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