Hi friends,
Can help me to understand the following? I disagree with official ACCA's answer to ACCA Paper 1.1 Dec 2006 exam Section B Q2. Can review my approach?
"During the year, $8,000 interest received on a holding of loan notes had been correctly entered in the cash book but debited to interest payable account."
Required
a) Prepare journal entries to correct error.
b) What is the impact on profit given the correction?
Edgar's answer
- DR Suspense a/c $8,000
- CR Interest payable a/c $8,000
[To cancel out the wrong entry into Interest Payable a/c.]
- DR Suspense a/c $8,000
- CR Interest Income $8,000
[To correctly place the entry into Interest Income a/c.]
This would increase profit by $8,000.
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ACCA's official answer
-DR Suspense a/c $16,000
- CR Interest payable $8,000
- CR Interest receivable $8,000
Profit to increase by $16,000.
* Why credit "Interest Receivable"?
8 comments:
Hi,
You have highlighted the word "payable" so the assumption was on the mistake of "receivable", mistakes like a Dr entry vs Cr entry (opposites).
I sat for the exams and that was how I interpret it. Agreed?
I think ACCA's answer that the profit will be increased by $16000 is correct.
When first $8000 was debited to the interest payable instead of the interest receivable account, we have already incurred $8000 as expenses and would have brought down our profit by $8000 when the profit should have gone up by $8000.
So therefore by crediting the interest payable account we should have the $8000 added back to the P&L and by crediting the interest receivable account to correct the entry, it will therefore bring up the profit to $16000. Agree?
Hi,
So that leads us to what was the original entry.
"interest received... correctly entered in the cash book"
--> DR Cash/Bank a/c
".. but debited to interest payable account"
--> DR Interest payable (a liability a/c)
So there was no impact on P&L from the two DR-sided error entries.
So how?
Hi,
But may I ask why interest payable is a liability a/c and not expense a/c? Cause if I treat this as an expense a/c then yes, I can agree with ACCA's answer.
Hi,
Consider this.
What is the difference between Interest Income a/c, Interest Receivable and Interest Payable?
What is Account Receivable? How about Trade payables?
Hi,
interest income a/c = income a/c
interest receivable a/c = income a/c
interest payable = expense a/c?
account receivable = income a/c
trade payables = expense a/c?
So basically all are either income or expense a/c wherein one is on the CR and the other is on the DR.
But I still don't get the answer to my previous question...will you explain?
What should have been the correct entries?
--------------------
DR Bank
CR Interest Income
ie. if I had not recognise the income earlier.
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DR Interest Receivable
CR Interest Income
ie. if I am recognising an accrued income.
In both the above, I would recognise an interest income in P&L.
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DR Bank
CR Interest Receivable
ie. I am recording monies received against a receivable. But no impact on P&L.
Hi,
Could you please explain the last part? Why CR Interest Receivable has no impact on P & L?
Is it on the assumption that previously it was recorded in the P & L as accrued income already?
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