Susan White is a trader whose financial year ends on 31 July 2013. She does not maintain a full set of accounting records but was able to provide the following information:
Assets and liabilities at 31 July 2013
Machinery at cost
Furniture at cost
Trade receivables (debtors)
Trade payables (creditors)
Inventory (stock)
Bank
Accrued income
Prepaid expense
Additional information at 31 July 2013
1. Furniture is to be depreciated by 20% on cost
2. The machinery is to be revalued
3. A provision for doubtful debts of 2% of the trade receivables (debtors) is to be created
Answer (2)
The financial adjustments for Susan White include a depreciation expense of $1,360 for furniture, a revaluation adjustment of $1,600 for machinery, and a provision for doubtful debts amounting to $114. These calculations ensure accurate financial reporting for the year ended 31 July 2013.
;
Calculate the depreciation expense for furniture: 0.20 × $6800 = $1360 .
Calculate the revaluation adjustment for machinery: $14800 − $13200 = $1600 .
Calculate the provision for doubtful debts: 0.02 × $5700 = $114 .
The adjustments are furniture depreciation $\boxed{1360} , ma c hin eryre v a l u a t i o n $ 1600 , and provision for doubtful debts $\boxed{114}.
Explanation
Problem Analysis We are given the task of calculating adjustments to Susan White's financial records. These adjustments include depreciation of furniture, revaluation of machinery, and a provision for doubtful debts. We will calculate each of these adjustments separately.
Furniture Depreciation Calculation First, we need to calculate the depreciation expense for the furniture. The furniture's cost is $6800, and it is to be depreciated by 20%. Therefore, the depreciation expense is: 0.20 × $6800 = $1360 So, the depreciation expense for the furniture is $1360.
Machinery Revaluation Calculation Next, we need to calculate the revaluation adjustment for the machinery. The machinery's original cost is $14800, and it is to be revalued at $13200. The revaluation adjustment is the difference between the original cost and the revalued amount: $14800 − $13200 = $1600 Therefore, the revaluation adjustment for the machinery is $1600.
Provision for Doubtful Debts Calculation Finally, we need to calculate the provision for doubtful debts. The trade receivables (debtors) are $5700, and a provision of 2% of the trade receivables is to be created. Therefore, the provision for doubtful debts is: 0.02 × $5700 = $114 So, the provision for doubtful debts is $114.
Summary of Adjustments In summary, the adjustments are:
Furniture depreciation: $1360
Machinery revaluation: $1600
Provision for doubtful debts: $114
Examples
Understanding depreciation, revaluation, and provisions for doubtful debts is crucial in accounting. For example, when a company owns a fleet of vehicles, they need to account for the depreciation of these vehicles over time. Similarly, if a company owns a building that increases in value, they may need to revalue the asset. Provisions for doubtful debts are essential when a company sells goods or services on credit, as there is always a risk that some customers may not pay their debts. These adjustments ensure that the financial statements accurately reflect the company's financial position.
