Examkin

Question

Difficulty: HardThree-Column Cash Book and Trade/Cash Discounts

Olu, a sole trader, started the month of May with a cash balance of ₦45,000\text{₦}45,000 and a bank overdraft of ₦12,000\text{₦}12,000. During the month, the following transactions occurred:
1. Bought goods with a catalog list price of ₦80,000\text{₦}80,000 on credit, subject to a 10%10\% trade discount.
2. Settled the supplier's account by cheque within the stipulated period, receiving a 5%5\% cash discount.
3. Withdrew ₦15,000\text{₦}15,000 cash from the bank for business use.
4. Received a cheque of ₦28,500\text{₦}28,500 from a debtor in full settlement of a ₦30,000\text{₦}30,000 account balance.

What is the closing balance of the bank column in the three-column cash book at the end of May?

  1. ₦66,900\text{₦}66,900 overdraftAnswer
  2. B
    ₦66,500\text{₦}66,500 overdraft
  3. C
    ₦51,900\text{₦}51,900 overdraft
  4. D
    ₦42,900\text{₦}42,900 overdraft

Answer

₦66,900\text{₦}66,900 overdraft (Credit balance)
To find the closing bank balance, we calculate the net bank transactions:
1. Opening Bank Overdraft (Credit): ₦12,000\text{₦}12,000
2. Net Purchase Price after 10%10\% trade discount = ₦80,000−₦8,000=₦72,000\text{₦}80,000 - \text{₦}8,000 = \text{₦}72,000. Cash discount of 5%×₦72,000=₦3,6005\% \times \text{₦}72,000 = \text{₦}3,600. Cheque paid (Credit) = ₦72,000−₦3,600=₦68,400\text{₦}72,000 - \text{₦}3,600 = \text{₦}68,400.
3. Cash withdrawn for office use (Contra, Credit) = ₦15,000\text{₦}15,000.
4. Cheque received from debtor (Debit) = ₦28,500\text{₦}28,500.
Total Credit side = ₦12,000+₦68,400+₦15,000=₦95,400\text{₦}12,000 + \text{₦}68,400 + \text{₦}15,000 = \text{₦}95,400.
Total Debit side = ₦28,500\text{₦}28,500.
Closing Overdraft = ₦95,400−₦28,500=₦66,900\text{₦}95,400 - \text{₦}28,500 = \text{₦}66,900 overdraft.

Step-by-Step Solution

1
Calculate the net invoice price after trade discount and the net cheque payment after cash discount.
Invoice Price = ₦80,000−(10%×80,000)=₦72,000\text{₦}80,000 - (10\% \times 80,000) = \text{₦}72,000. Cash Discount Received = 5%×72,000=₦3,6005\% \times 72,000 = \text{₦}3,600. Cheque Paid = ₦72,000−₦3,600=₦68,400\text{₦}72,000 - \text{₦}3,600 = \text{₦}68,400.
Trade discounts are deducted from list price prior to entry and are not shown in the cash book; cash discount is computed on the net invoice amount.
2
Identify debit entries (bank receipts) in the bank column.
Cheque received from debtor = ₦28,500\text{₦}28,500. Total Debit = ₦28,500\text{₦}28,500.
Cheques received increase bank funds and are debited to the bank column.
3
Identify credit entries (bank payments/outflows) in the bank column.
Opening Overdraft = ₦12,000\text{₦}12,000; Cheque paid to supplier = ₦68,400\text{₦}68,400; Cash withdrawn for office use (Contra entry) = ₦15,000\text{₦}15,000. Total Credit = ₦12,000+₦68,400+₦15,000=₦95,400\text{₦}12,000 + \text{₦}68,400 + \text{₦}15,000 = \text{₦}95,400.
Overdrafts, payments, and contra withdrawals from the bank are all recorded on the credit side of the bank column.
4
Determine the net closing balance of the bank column.
Closing Balance = Credit Total (₦95,400\text{₦}95,400) - Debit Total (₦28,500\text{₦}28,500) = ₦66,900\text{₦}66,900 overdraft (Credit balance).
When the credit side exceeds the debit side in a cash book bank column, the remaining balance represents a bank overdraft.

Key Concept

Accounting treatment of trade/cash discounts and contra entries in a three-column cash book
Rate this question

Topics

Three-Column Cash Book and Trade/Cash Discounts

More questions from this topic