question archive Question 2 As the auditor of a business you discover the following items during your review of the financial statements and books of account that are not quite in compliance with the appropriate concepts
Question 2 As the auditor of a business you discover the following items during your review of the financial statements and books of account that are not quite in compliance with the appropriate concepts
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Question 2
As the auditor of a business you discover the following items during your review of the financial statements and books of account that are not quite in compliance with the appropriate concepts.
Required:
Indicate the effect on the statement of financial position and the profit and loss of the adjustments needed to account for these items.
(i) No depreciation has yet been calculated for motor vehicles that cost RM20,000. The business writes off motor vehicles on a straight-line basis over 4 years.
(ii) Wages amounting to RM2,500 for the final week of the year had not been paid or accounted for by the end of the accounting year.
(iii) Motor vehicle insurance for a whole year in advance - RM1,200 - had been paid 3 months before the year-end.
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i) The depreciation expense will increase by RM5000. The net income of profit and loss statement will be reduced by $5000. Accumulated depreciation will increase by RM5000, hence total assets will be reduced by RM5000 on the statement of financial position.
ii) The wages expense will increase by RM2500. The net income of profit and loss statement will be reduced by $2500. Cash will decrease by RM2500, hence total assets will be reduced by RM2500 on the statement of financial position.
iii) There will be no change on profit and loss statement. Prepaid insurance will increase by RM1200 and cash will be reduced by RM1200, hence total assets will remain unchanged on the statement of financial position.
Step-by-step explanation
i) Depreciation Expense = 20000 / 4 = RM5000
Depreciation Expense RM5000
Accumulated Depreciation RM5000
ii)
Wages Expense RM2500
Cash RM2500
iii)
Prepaid Insurance RM1200
Cash RM1200
