Patricia operates a hairdressing salon. She does not keep full accounting records. The following information has been collected for the year ended 28 Februa...
Question 1 Report
Patricia operates a hairdressing salon. She does not keep full accounting records. The following information has been collected for the year ended 28 February 2025.
Income statement extract (already prepared)
| Revenue | $96 000 |
| Less Expenses | $72 400 |
| Profit for the year | $23 600 |
Balances at 28 February 2025
| Item | $ |
|---|---|
| Salon equipment at cost | 30 000 |
| Accumulated depreciation on equipment | 12 000 |
| Inventory of hair products | 3 400 |
| Trade receivables | 1 800 |
| Prepaid rent | 2 000 |
| Bank (debit balance) | 6 200 |
| Trade payables | 2 600 |
| Accrued electricity | 800 |
Patricia's capital at 1 March 2024 was $19 200. Her drawings during the year were $15 800.
(a) Prepare Patricia's statement of financial position at 28 February 2025. [12]
(b) Calculate Patricia's closing capital using the statement of affairs method. Show that it agrees with the capital section. [4]
(c) Explain why prepaid rent is shown as a current asset. [2]
(d) State what is meant by accumulated depreciation. [2]
Answer Details
(a) Statement of Financial Position of Patricia at 28 February 2025
| Statement of Financial Position at 28 February 2025 | ||
|---|---|---|
| Non-current assets | ||
| Salon equipment at cost | $30 000 [1] | |
| Less: Accumulated depreciation | ($12 000) [1] | |
| Net book value | $18 000 [1] | |
| Current assets | ||
| Inventory | $3 400 [1] | |
| Trade receivables | $1 800 | |
| Other receivables (prepaid rent) | $2 000 [1] | |
| Bank | $6 200 | |
| Total current assets | $13 400 [1] | |
| Less: Current liabilities | ||
| Trade payables | $2 600 [1] | |
| Other payables (accrued electricity) | $800 [1] | |
| Total current liabilities | ($3 400) | |
| Net current assets | $10 000 | |
| Net assets | $28 000 [1] | |
| Capital | ||
| Opening capital | $19 200 [1] | |
| Add: Profit for the year | $23 600 | |
| $42 800 | ||
| Less: Drawings | ($15 800) [1] | |
| Closing capital | $27 000 [1] | |
Note: The net assets total ($28 000) and the capital section total ($27 000) show a $1 000 difference. This may arise from rounding or a missing item in the question data. The workings for each section are consistent with the figures given.
(b) Closing capital using the statement of affairs method
Total assets = $18 000 + $3 400 + $1 800 + $2 000 + $6 200 = $31 400 [1]
Total liabilities = $2 600 + $800 = $3 400 [1]
Capital (net assets) = $31 400 - $3 400 = $28 000 [1]
This represents the closing capital calculated by the statement of affairs method (assets minus liabilities). [1]
(c) Why prepaid rent is shown as a current asset
Prepaid rent is an amount paid in advance for a future period - the rent covers time that has not yet passed. [1] It represents a benefit the business is still entitled to receive (the use of the premises), so it is an asset of the business, classified as current because it will be consumed within the next accounting period. [1]
(d) Accumulated depreciation
Accumulated depreciation is the total amount of depreciation that has been charged on a non-current asset since it was first acquired. [1] It is deducted from the asset's original cost to give the net book value (carrying amount) shown in the statement of financial position. [1]
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