Suspense Account and Capitalised Van Purchase at Mola's Enterprise
At 31 December 2024 the trial balance of Mola's Enterprise, a sole trader, showed a suspense account with a debit balance of 115,000 FCFA. Draft profit for the year was 1,250,000 FCFA. The following were then discovered: • A credit sale of 80,000 FCFA had been posted to the sales account only. • A cheque for 60,000 FCFA paid to a supplier had been entered in the cash book only. • Purchase returns of 25,000 FCFA had been posted to the supplier's account only. • A delivery van bought on 1 April 2024 for 250,000 FCFA had been debited to purchases. No depreciation has been charged. The policy is 20% straight-line, pro rata from the month of purchase. All supplier accounts concerned are personal ledger accounts. Mola wants the suspense cleared and the corrected profit and balance sheet effects explained.
1. Prepare the suspense account and the correcting journal entries for the first three items. State clearly why each entry affects or does not affect suspense.
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Correcting entries
| Item | Journal entry | Effect on suspense |
|---|---|---|
| 1 | Dr Receivables 80,000; Cr Suspense 80,000 | The sale was credited but the receivable was not debited, so credits exceeded debits; credit suspense. |
| 2 | Dr Payable 60,000; Cr Suspense 60,000 | Cash was credited but the supplier was not debited; credit suspense. |
| 3 | Dr Suspense 25,000; Cr Returns outwards 25,000 | The supplier was debited but returns outwards was not credited; debit suspense. |
Suspense account
| Dr | FCFA | Cr | FCFA |
|---|---|---|---|
| Balance b/d | 115,000 | Receivables (item 1) | 80,000 |
| Returns outwards (item 3) | 25,000 | Payable (item 2) | 60,000 |
| Total | 140,000 | Total | 140,000 |
The account closes to nil. Items 1 and 2 affect only assets and liabilities; item 3 also affects profit because returns outwards had been omitted.
2. Calculate the corrected profit for 2024. Explain the treatment of the van and the purchase returns.
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| Adjustment | FCFA | Reason |
|---|---|---|
| Draft profit | 1,250,000 | Starting figure |
| Add back van purchase | 250,000 | Capital expenditure was wrongly treated as a revenue expense |
| Less depreciation on van | (37,500) | 250,000 × 20% × 9/12 |
| Add omitted purchase returns | 25,000 | Returns outwards were not credited, so net purchases were too high and profit too low |
| Corrected profit | 1,487,500 |
The sale and cheque errors do not change profit: the sale was already in sales, and the cheque payment affects only the supplier's account. The purchase-return error does affect profit because it changes net purchases.
3. State the net effect of all corrections on receivables, payables, the carrying amount of the van and the suspense account. Show that the effects reconcile to the profit adjustment.
Read the worked answer
| Item | Effect |
|---|---|
| Receivables | Increase by 80,000 FCFA because the sale had not been debited to the customer |
| Payables | Decrease by 60,000 FCFA because the supplier had not been debited with the cheque |
| Van carrying amount | Increase by 212,500 FCFA (cost 250,000 less depreciation 37,500) |
| Suspense account | Eliminated: the 115,000 FCFA debit balance is removed |
Reconciliation: increase in net assets = 80,000 + 60,000 + 212,500 − 115,000 = 237,500 FCFA. This equals the profit adjustment: 1,487,500 − 1,250,000 = 237,500 FCFA. The corrections are therefore consistent.