SOLUTIONS MANUAL Frank Wood’s Business Accounting 1 & 2 ELEVENTH EDITION Frank Wood BSc(Econ), FCA and Alan Sangster BA, MSc, CertTESOL, CA ISBN 978-0-273-71824-6 © Pearson Education Limited 2008 Lecturers adopting the main text are permitted to download and photocopy this manual as required. Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies around the world Visit us on the World Wide Web at www.pearsoned.co.uk Eleventh edition published in 2008 © Pearson Education Limited 2008 The rights of Frank Wood and Alan Sangster to be identified as authors of this Work have been asserted by them in accordance with the Copyright, Designs and Patents Act 1988. All rights reserved. Permission is hereby given for the material in this publication to be reproduced for OHP transparencies and student handouts, without express permission of the Publishers, for educational purposes only. In all other cases, no part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without either the prior written permission of the Publishers or a licence permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, Saffron House, 6–10 Kirby Street, London ECIN 8TS. ISBN 978-0-273-71824-6 10 9 8 7 6 5 4 3 2 1 11 10 09 08 Printed in Great Britain Contents Preface iv Part 1 Business Accounting 1 1 Students and examination success 3 Answers 6 Part 2 Business Accounting 2 93 Answers 95 Preface This solutions manual contains answers to all the questions not already answered in Business Accounting 1 and Business Accounting 2. It can be seen that there are a considerable number of questions in both text- books. About one-half of these have the answers at the back of the relevant textbook, while the remainder of the answers are contained in this manual. The result of this is to give a high degree of flexibility in the use of the textbooks. To illustrate the contents of each chapter, the questions can be used which have answers in the textbook. Any students who are absent can be told what they have missed and can look up the answers themselves. Students who arrive late on the course can also be told what work to do and they can check their own progress against the answers as given. However, quite obviously work must be set, either in class or for homework, for which answers are not available to students. This manual can therefore be used to check such work. Whilst every endeavour has been made to show workings quite fully, it must be appreciated that there are often different ways of getting to the same answer. This manual would be unduly lengthy and complicated if every version of arriving at the answer were to be shown. The methods chosen are therefore those judged to be the best from a teaching point of view. Frank Wood and Alan Sangster By writing on letterheaded paper of the institution where you teach, giving details of the course for which you use Business Accounting 1 or Business Accounting 2 with your classes, you can obtain complimentary copies of this manual. This manual is not available for students, nor is it in any way available for sale to the general public. It is also available on the lecturer’s password-protected section of the Frank Wood website at www.pearsoned.co.uk/wood PART 1 BUSINESS ACCOUNTING 1 Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition © Pearson Education Limited 2008 3 Students and examination success Experienced teachers and lecturers know just as much as we do about this topic. There will, however, be quite a lot of people reading this who are new to teaching, and who have little experience in understand- ing how the examiner views things. If we have anything to offer, it is simply that we have, between us, been concerned with accounting education for many years and have been examiners for several external examining bodies. The Notes for Students at the start of both Business Accounting 1 and Business Accounting 2 deal with examination techniques. Make certain the students read these. Go through these with them. If we all tell students that what these say is true, then they are more likely to believe us. How students lose marks 1 Lack of knowledge (obviously) but they throw away marks unnecessarily for all of the following reasons: (a) Untidy work, including columns of figures not lined up. (b) Bad handwriting. Do not make it difficult for the examiner to read and mark. (c) Lack of headings, dates, sub-totals, etc. in accounting statements. (d) Not submitting proper workings. You can only get them to rectify everything under this heading by insisting on them correcting (a), (b), (c) and (d) from early on in the course. Do not wait until a few weeks before the examination to insist upon properly laid out and neatly constructed work. 2 Students very often do not follow the rubric on the examination paper. If it asks for two questions only from Section A, then it means just that. A remarkably high percentage do not follow the instructions per the rubric. 3 Students fail to answer the questions as set. If, for example, an examiner wants a list, students will lose marks by giving explanations instead. Students must tackle the question in the prescribed way and not do it differently. The percentage of students passing examinations would rise dramatically if only we could correct this failing. A good plan is to get them to highlight the instruction that shows how the examiner wants the question to be answered, e.g. List the ways by which . . . Describe the ways by which . . . Write a report to the managing director about the ways by which . . . Discuss how the ways by which . . . Explain how the ways by which . . . Then, get them to underline the key words in the rest of the question. They need as much practice as possible in doing this, especially for essay-type questions. Practice is even more essential for students for whom English is not their first language. At the end of this section are 20 essay questions in which we have already highlighted the instruction and underlined the key words. See if your students can do the same. 4 Poor technique with essay questions. Business Accounting 2, Notes for students, the section headed ‘Answering essay questions’ covers this point. Discuss this with your students who have to tackle essay questions. 5 Not tackling the required number of questions. I have always found it very difficult to convince students to get hold of the idea that they will get more marks for five uncompleted questions than they will for four completed questions, when the examiner has asked for five to be attempted. Time planning is essential. 6 By not tackling the easiest questions first. Years ago, we did quite a lot of research into the results of students who had followed this advice, compared with those who ignored it. Following the advice pro- duced better results. 7 By simply regurgitating the contents of a textbook in essay answers. For instance, when an examiner set a question on, say, materiality. Most of the answers simply gave exactly the same examples, word for word sometimes, that we have given in Business Accounting 1. Examiners are looking for originality and imagination. Students will get excellent marks if they give their own examples. A good idea is that, for each of the concepts and conventions, they think up their own examples before the examination. There are going to be more and more questions on these things in the years ahead. Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition © Pearson Education Limited 2008 4 8 Examiners like to see answers where students realise that all accounting is not found in textbooks, but exists for the use of businesses. Get them to use examples in essay questions based on what they have observed in the businesses around them. For example, a question on ratios and interpretation will often be answered by students just using figures. They should also say why the figures have changed; what possible causes there might have been. In their life outside their studies, they should observe how accounting is carried out. They all go at one time or another to refectories, restaurants, shops, department stores, clothes shops, travel on buses and trains, etc. They should observe how the money is calculated and collected, what sort of bills or tickets are given out, how fraud or errors could occur, and so on. They can give this flavour of the real world in their answers. Believe us, they will get better marks. Essay questions – how not to misunderstand them 1 List the various pieces of information which should be shown on a sales invoice. 2 Describe what is meant by an imprest system. 3 Accounting based on historical costs can be misleading. Discuss. 4 The bookkeeper has said that if an error does not affect trial balance agreement then it cannot affect anything else very much. You are to write a report to the managing director stating whether or not you agree with the bookkeeper. 5 Give five examples of different compensating errors and explain why they cancel each other out. 6 Explain the differences between the straight line and reducing balance methods of depreciation. 7 Briefly describe the benefits to be gained from maintaining control accounts. 8 List six instances of errors which could cause the trial balance totals to disagree. 9 Name three methods of inventory valuation, and briefly describe any one of them. 10 ‘Without the use of accounting ratios, much of the accounting work already performed would be wasted.’ Discuss the amount of truth in this statement. 11 How can retail stores use accounting ratios to help them to plan future inventory levels? 12 Assess the benefits of double entry as compared with single entry methods of bookkeeping. 13 Define depreciation and describe how the annual charge is worked out using the straight line method. 14 For a firm buying goods on credit, how can it calculate the figure of purchases even though a Purchases Journal has not been kept? 15 List the differences between the income and expenditure account of a club and the income statement of a trading concern. 16 ‘It is unsatisfactory for the treasurer of a club to prepare and present to the members only the receipts and payments account as a summary of the records of the club’s activities for the year.’ Why is this true? What is the better thing to do? 17 You are to give your advice to the managing director of a company on the best manner of constructing departmental income statements. 18 How do the financial statements of a partnership vary from those of a sole trader, and why? 19 Consider the view that if profit was not calculated at all until the business was closed down, then such a calculation would be a simple and straightforward affair. 20 You are to write a letter to a friend explaining in simple terms why profit does not necessarily mean that you have cash in the bank. Practice on past full examination papers If students have not tackled past papers, under as near examination conditions as possible, they will often get quite a shock when they first sit an accounting examination. This very often is due to two main reasons: (a) There is such a lot to do in such a short time. (b) Even though there is so much to do, in professional examinations in particular, many of the questions are quite difficult with some complicated calculations or adjustments. If students can attempt, say, at least two such papers and then have their attempts marked and criticised, they will normally learn a lot from the experience. Examination questions and marking schemes We had originally intended to put here some typical examination questions and their marking schemes. However, after some considerable thought, we decided against doing so. There is no one precise mode of marking and any suggestions that we might make could perhaps create more arguments and consequent misunderstandings. Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition © Pearson Education Limited 2008 5 In front of a group of people, it would be possible to do this, as we could deal with all the comments from the group and arrive at a consensus of opinion. However, the books sell world-wide and practices can vary. It can, however, be said that: (a) By and large, marking is ‘positive’, i.e. marks are awarded for what a student gets right, rather than being deducted for what a student gets wrong. (b) However, marks are deducted for untidy work, lack of headings, dates, sub-totals, etc. (c) An incorrect part of an answer, with no workings attached to it, will get nil marks. (d) Extra, unnecessary answers, resulting from students failing to follow the rubric, will not be marked. (e) Not following the examiner’s instructions will lose marks. For example, marks will be lost if, when asked for a ‘report’, a student gives a ‘list’; or if asked to ‘discuss’, a student gives only one side of the argument; or if asked to ‘define’, a student gives an ‘explanation’. Some examiners will award zero marks, even though the answers given by the student show good knowledge of the topic. Others (including ourselves) would be kinder than that. (f ) An error which repeats itself through an answer should lose only one set of marks. For instance, an error in the trading account will also affect balances in the profit and loss account, appropriation account and balance sheet. In cases of this type, only one set of marks should be lost. (g) Guessing by students is not normally penalised. The one exception that may arise concerns multiple choice questions where wrong answers may be penalised as an incentive to prevent students guessing. In this case, the examining body would make this information known well in advance of the examina- tion date. (h) The easiest marks to get, especially in an essay question, are the first few marks. (i) Good handwriting and well displayed answers will often (although theoretically they should not) get higher marks than they deserve. This is simply because examiners are human beings with human fail- ings, and work that can be easily marked makes them feel generous. Frank Wood and Alan Sangster Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition © Pearson Education Limited 2008 6 Answers Answer to Question 1.2A BA 1 (a) 38,100 (b) 51,600 (c) 7,600 (d) 104,100 (e) 26,000 (f ) 159,000 Answer to Question 1.4A BA 1 Liabilities: Accounts payable for inventory Owing to bank Loan from D Jones Assets: Motor vehicles Premises Inventory Accounts receivable Cash in hand Machinery Answer to Question 1.6A BA 1 Wrong: Accounts payable, Capital, Machinery, Motor vehicles. Answer to Question 1.8A BA 1 Fixtures 1,200 + Van 6,000 + Inventory 2,800 + Bank 200 + Cash 175 = Total Assets 10,375. Loan 2,500 + Accounts payable 1,600 + Capital (difference) 6,275. Answer to Question 1.10A BA 1 M Kelly Balance Sheet as at 30 June 2006 Non-current assets Equipment 3,400 Current assets Inventory 3,600 Accounts receivable 4,500 Cash at bank 2,800 10,900 Less Current liabilities Accounts payable 4,100 6,800 10,200 Capital 10,200 Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition © Pearson Education Limited 2008 7 Answer to Question 1.12A BA 1 Assets Liabilities Capital (a) +Van +Accounts payable (b) −Cash −Loan from P Smith (c) +Inventory −Bank (d) +Cash +Capital (e) +Inventory −Accounts receivable (f) +Inventory +Accounts payable (g) −Cash −Capital (h) −Bank −Accounts payable Answer to Question 1.14A BA 1 J Hill Balance Sheet as at 7 December 2009 Non-current assets Equipment 6,310 Car 7,300 13,610 Current assets Inventory 8,480 Accounts receivable 3,320 Bank 9,510 Cash 485 21,795 35,405 Current liabilities Accounts payable 1,760 33,645 Capital 33,645 Answer to Question 2.2A BA 1 Debited Credited Debited Credited (a) Lorry Cash (b) T Lake Bank (c) Loan from P Logan Cash (d) Cash Lorry (e) Office machinery Ultra Ltd (f) Cash A Hill (g) Bank J Cross (h) Bank Capital (i) Cash Loan from L Lowe (j) D Lord Cash To save time and space, the months are omitted in the Ledger accounts which follow. The day of the month is shown in brackets. Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition © Pearson Education Limited 2008 8 Answer to Question 2.5A BA 1 Bank Cash (1) Capital 16,000 (2) Van 6,400 (12) Bank 180 (15) Office fixtures 120 (25) Cash 400 (12) Cash 180 (21) Loan: Berry 500 (25) Bank 400 (19) Carton Cars 7,100 (30) Office fixtures 480 Vans (2) Bank 6,400 Office Fixtures (8) Carton Cars 7,100 (5) Old Ltd 900 (15) Cash 120 Old Ltd (30) Bank 480 (5) Office fixtures 900 Capital Carton Cars (1) Bank 16,000 (19) Bank 7,100 (8) Van 7,100 Loan from Berry (21) Cash 500 Answer to Question 2.6A BA 1 Bank Cash (1) Capital 9,000 (8) Cash 200 (1) Capital 750 (3) Computer 600 (2) Loan Blane 2,000 (15) Loan Blane 500 (8) Bank 200 (24) Loan Blane 250 (17) Clearcount 420 Computer Loan: B Blane (3) Cash 600 (15) Bank 500 (2) Bank 2,000 (24) Cash 250 Clearcount Ltd (17) Bank 420 (5) Display eqt 420 Display Equipment (5) Clearcount 420 F Jones (31) Printer 200 Capital Printer (1) Cash 750 (31) F Jones 200 (1) Bank 9,000 Answer to Question 3.2A BA 1 Debited Credited Debited Credited (a) Purchases T Morgan (b) Returns in J Thomas (c) L Jones Ltd Machinery (d) Purchases Cash (e) Van D Davies Ltd (f ) I Prince Returns out (g) Bank D Picton (h) Purchases Bank (i) B Henry Bank (j) J Mullings Sales Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition © Pearson Education Limited 2008 9 Answer to Question 3.4A BA 1 Cash Bank (1) Capital 7,400 (2) Bank 7,000 (2) Cash 7,000 (5) Van 4,920 (19) Sales 54 (7) Purchases 362 (24) F Holmes (29) J Watson 368 (Loan) 1,500 (31) Firelighters Ltd820 Purchases (4) J Watson 410 (7) Cash 362 Sales Returns Outwards (10) L Less 218 (12) J Watson 42 (19) Cash 54 J Watson Fixtures (12) Returns 42 (4) Purchases 410 (22) Firelighters (29) Bank 368 Ltd 820 L Less Van (10) Sales 218 (5) Bank 4,920 F Holmes (Loan) (24) Bank 1,500 Firelighters Ltd (31) Bank 820 (22) Fixtures 820 Capital (1) Cash 7,400 Answer to Question 3.6A BA 1 Bank Purchases (1) Capital 18,000 (21) Printer 620 (2) B Hind 1,455 (18) Cash 250 (29) B Hind 1,373 (3) G Smart 472 (8) G Smart 370 Cash (5) Sales 210 (18) Bank 250 Sales (12) Sales 305 (5) Cash 210 (10) P Syme 483 B Hind (12) Cash 305 (6) Returns Out 82 (2) Purchases 1,455 (22) H Buchan 394 (29) Bank 1,373 G Smart Returns Inwards (28) Returns Out 47 (3) Purchases 472 (23) P Syme 160 (8) Purchases 370 (25) H Buchan 18 P Syme Returns Outwards (10) Sales 483 (23) Returns In 160 (6) B Hind 82 (28) G Smart 47 H Buchan (22) Sales 394 (25) Returns In 18 A Cobb Machinery (31) Machinery 419 (31) A Cobb 419 Capital Printer (1) Bank 18,000 (21) Bank 620 Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition © Pearson Education Limited 2008 10 Answer to Question 4.3A BA 1 July Dr Cr 1 Bank 5,000 Cash 1,000 Capital 6,000 2 Stationery 75 Bank 75 3 Purchases 2,100 T Smart 2,100 4 Cash 340 Sales 340 5 Insurance 290 Cash 290 7 Computer 700 J Hott 700 8 Expenses 32 Bank 32 10 C Biggins 630 Sales 630 11 T Smart 55 Returns Out 55 14 Wages 210 Cash 210 17 Rent 225 Bank 225 20 Bank 400 C Biggins 400 21 J Hott 700 Bank 700 23 Stationery 125 News Ltd 125 25 F Tank 645 Sales 645 31 News Ltd 125 Bank 125 Frank Wood and Alan Sangster, Business Accounting 1 & 2 Solutions Manual, 11th Edition © Pearson Education Limited 2008 11 Answer to Question 4.4A BA 1 Bank Purchases (1) Capital 11,000 (5) Stationery 62 (2) J Biggs 830 (24) K Fletcher 250 (16) Business rates 970 (2) D Martin 610 (28) Business rates 45 (19) Rent 75 (2) P Lot 590 (28) J Biggs 830 (3) Cash 370 (28) D Martin 415 (28) B Black 6,100 Sales (6) D Twigg 370 Cash (6) B Hogan 290 (1) Capital 1,600 (3) Purchases 370 (6) K Fletcher 410 (4) Rent 75 (15) T Lee 205 (7) Wages 160 (15) F Sharp 280 (11) Rent 75 (15) G Rae 426 (18) Insurance 280 (21) Motor exps 24 Returns Outwards (23) Wages 170 (10) D Martin 195 Capital Returns Inwards (1) Bank 11,000 (13) B Hogan 35 (1) Cash 1,600 B Black Rent (28) Bank 6,100 (20) Van 6,100 (4) Cash 75 (11) Cash 75 J Biggs (19) Bank 75 (28) Bank 830 (2) Purchases 830 Wages D Martin (7) Cash 160 (10) Returns Out 195 (2) Purchases 610 (23) Cash 170 (28) Bank 415 Stationery P Lot (5) Bank 62 (2) Purchases 590 Business rates D Twigg (16) Bank 970 (28) Bank 45 (6) Sales 370 Insurance B Hogan (18) Cash 280 (6) Sales 290 (13) Returns In 35 Motor Expenses K Fletcher (21) Cash 24 (6) Sales 410 (24) Bank 250 Van T Lee (20) B Black 6,100 (15) Sales 205 F Sharp (15) Sales 280 G Rae (15) Sales 426