Examkin

Question

Difficulty: HardAccrued and Prepaid Expenses

The Salaries Account of Bisi Stores for the year ended 31 December 2025 showed that salary expense charged to the Profit and Loss Account was ₦480,000\text{₦}480,000.

Additional information:
- Salaries accrued at 1 January 2025: ₦35,000\text{₦}35,000
- Salaries paid in advance at 1 January 2025: ₦15,000\text{₦}15,000
- Salaries accrued at 31 December 2025: ₦42,000\text{₦}42,000
- Salaries paid in advance at 31 December 2025: ₦20,000\text{₦}20,000

What was the total amount of cash paid for salaries during the year ended 31 December 2025?

  1. ₦478,000\text{₦}478,000Answer
  2. B
    ₦482,000\text{₦}482,000
  3. C
    ₦458,000\text{₦}458,000
  4. D
    ₦502,000\text{₦}502,000

Answer

₦478,000\text{₦}478,000
The correct response of ₦478,000\text{₦}478,000 correctly derives the total cash paid by subtracting closing accruals (₦42,000\text{₦}42,000), adding opening accruals (₦35,000\text{₦}35,000), adding closing prepayments (₦20,000\text{₦}20,000), and subtracting opening prepayments (₦15,000\text{₦}15,000) from the total expense charged to the Profit and Loss Account (₦480,000\text{₦}480,000).

Step-by-Step Solution

1
Set up the formula relating Cash Paid to the Profit and Loss expense charge
Profit & Loss Expense=Cash Paid+Opening Prepayment−Closing Prepayment+Closing Accrual−Opening Accrual\text{Profit \& Loss Expense} = \text{Cash Paid} + \text{Opening Prepayment} - \text{Closing Prepayment} + \text{Closing Accrual} - \text{Opening Accrual}
Accruals increase the expense of the period, while prepayments decrease the expense of the period.
2
Rearrange the formula to solve for Cash Paid
Cash Paid=Profit & Loss Expense−Closing Accrual+Opening Accrual+Closing Prepayment−Opening Prepayment\text{Cash Paid} = \text{Profit \& Loss Expense} - \text{Closing Accrual} + \text{Opening Accrual} + \text{Closing Prepayment} - \text{Opening Prepayment}
Working backwards from the Profit and Loss charge requires reversing the standard year-end adjustment operations.
3
Substitute the given values into the rearranged equation
Cash Paid=480,000−42,000+35,000+20,000−15,000=478,000\text{Cash Paid} = 480,000 - 42,000 + 35,000 + 20,000 - 15,000 = 478,000
Evaluating the expression gives the net cash outflow for salaries during the financial year.

Key Concept

Reconciling expense account cash payments with Profit and Loss charges using opening and closing accruals and prepayments.
Estimated Time:2m 0s
Rate this question

Topics

Accrued and Prepaid Expenses

More questions from this topic