2020 NAS 3E POA EOY P2 Q4

2020 NAS 3E POA EOY P2 Q4

4 Autobot Trader buys and sells car accessories on credit. An extract from the business’ books on 1 September 2020 showed the following balances.

 

$

Amount owed to Optimus Prime

2 150

Amount owed by Bumblebee

5 390

In the month of September 2020, the following transactions took place

Sep 5

Purchased goods of list price $8 600 less 5% discount from Optimus Prime.

8

Sold goods costing $1 950 to Bumblebee for $2 400.

11

Returned goods of list price $720 to Optimus Prime. These goods were purchased on 5 September. 

13

Received a cheque of $3 724 from Bumblebee after giving her a 2% discount.

17

Bumblebee returned goods of list price $150.

22

Paid Optimus Prime $500 cash.

26

Purchased a delivery van worth $67 000 from Optimus Prime and paid a deposit of $10 000 by cheque. The balance is to be paid by instalments over the next 24 months. 

REQUIRED

a. Explain one difference between trade discount and cash discount.

[1]

b. Prepare the following accounts in Autobot Trader’s books for the month of September 2020, stating clearly the relationship between each of them and Autobot Trader, in the account title.

[7]

i. Optimus Prime

ii. Bumblebee

c. State the source documents used by Autobot Trader to record the transactions on the following dates:

[2]

i. 5 September 2020

ii. 13 September 2020

iii. 17 September 2020

iv. 22 September 2020

d. Explain, using a suitable accounting theory, why source documents are important

[2]

[TOTAL 12]

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Any one of the following: 

  • Trade discount is a reduction off the list price whereas cash discount is a reduction off the invoiced amount.

Trade discount is given to encourage bulk purchases, customer patronage and loyalty whereas cash discount is given to encourage early payment. 

(i) Invoice ✔

(ii) Receipt ✔

(iii) Credit note ✔

(iv) Payment voucher ✔

Source documents provides evidence ✔ that the transactions have taken place. ✔ This is consistent with the objectivity theory ✔ which states that business should only record transactions using reliable and verifiable information. ✔

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