CH-4 Adjusting the Accounts and Preparing Financial Statements – Accounting : Book Guide

Chapter 4: Adjusting the Accounts and Preparing the Financial Statements Questions and solutions which have a GST version: • Exercise 4.10 • Problem 4.16 • Problem 4.17 • Problem 4.18 • Problem 4.19 • Problem 4.21 • Problem 4.22 • Problem 4.24 • Problem 4.27 • Problem 4.29 • Problem 4.30 Discussion questions 1. How is profit determined under (a) the cash basis of accounting and (b) the accrual basis of accounting? (a) Under the cash basis, profit is the excess of cash inflows from revenues over cash outflows for expenses. (b) Under accrual accounting, profit is the excess of recognised revenues over recognised expenses. 2. Explain why the purchase of supplies is usually recorded in an asset account rather than in an expense account. If supplies were expensed when purchased, which accounts should be debited and which credited at the end of the period in order to reflect the amount of supplies on hand? Supplies are usually recorded in an asset account because they are normally used in more than one accounting period. The cost of supplies will be transferred from the asset account to an expense account, Supplies Used, as they are gradually consumed in the current period If the supplies are charged directly to an expense when purchased, then an adjusting entry is necessary at the end of the reporting period to record as an asset the supplies still on hand. The entry for the supplies still on hand is: Supplies Dr Supplies Expense Cr 3. During the year, the publishers of Fishing for the Family, a monthly magazine, received cash for a 3-year magazine subscription. A credit was made to the Unearned Subscriptions Revenue account. (a) Is the required adjusting entry made at the end of the period an example of accrual or a deferral? (b) What types of accounts will be affected by the required adjusting entry? (c) What effect will omission of the adjusting entry have on profit and on the statement of financial position? (a) Deferral. (b) Unearned Subscriptions Revenue, a liability account, will be debited and Subscriptions Revenue, a revenue account, will be credited in relation to subscriptions for the number of magazines already published. (c) Profit will be understated as the suitable amount of revenue has not been recognised in an adjusting entry. Liabilities will be overstated, and equity will be understated in the statement of financial position. 4. ‘Why are adjusting entries necessary? Surely they cause too much delay in preparing financial statements, and the financial effect of any entries made is immaterial in the long run.’ Respond to this criticism. Under an accrual accounting system, adjusting entries are necessary in order to ensure that an entity’s assets, liabilities, income (including revenues) and expenses are recorded in the appropriate accounting period. Sometimes the size of these adjusting entries may be small, and have an immaterial effect on the entity’s profits and financial position; but on many occasions, particularly with adjusting entries for items such as depreciation, the size and effect of the adjusting entries may be significant. The volume of work for adjusting entries at the end of the reporting period can be minimised, in that the accounts and the amount of certain adjusting entries are known prior to the end of the reporting period, e.g. for depreciation, for prepayments. While these adjusting entries must be recorded at the end of the reporting period, details to make these adjustments can be worked out prior to the end of the reporting period. Computerisation of the adjusting entries in the accounting system can also reduce the lead-time in preparing financial statements. 5. ‘If adjusting entries are not recorded in the accounts at the end of each month but are included on a worksheet for interim financial statements, why do we need to record them in the accounts for the financial statements at the end of the financial year?’ Discuss. Adjusting entries for interim financial statements are not recorded in the general journal. The adjusting entries for interim financial statements are recorded on the worksheet. Interim financial statements provide a profit figure for the period stated i.e. Month, quarter or half-yearly profit. The profit for the entire accounting cycle i.e. one year must be accurately recorded in line with accrual accounting principles. Hence adjusting entries are recorded in the general journal. The reported profit and the balances of all assets, liabilities and equity accounts must be accurately stated and presented in the annual statement of financial position. 6. The owner of a business reviews the income statement prepared by you and asks, ‘Why do you report a profit of only $30 000 when cash collections of $100 000 were received and cash payments for the period totalled only $50 000 for expenses?’ How would you respond to the owner’s question? The income statement reports income (including revenues) and expenses on an accrual basis, not a cash basis. In other words, revenue is recorded when it is generated as reflected by an increase in expected future economic benefits, not when the cash is received. Likewise, expenses are recognised when incurred as reflected by a consumption of future economic benefits, not when the cash is paid out to satisfy any amounts owing. The business records all amounts receivable and payable as assets and liabilities respectively, and thus the accounting system shows more than merely cash inflows and outflows. 7. On 31 March, Padbury Publishers received a subscription of $240 for the supply of twelve monthly magazines, beginning in April. At the end of the reporting period, 30 June, the accountant suggested that the owner make an adjusting entry to defer the revenue on nine issues until the new year. The owner of the business was reluctant to do so, claiming that he had already received the subscriptions in cash and could see no reason for the delay in recognising the revenue. Do you agree with the owner or the accountant? Respond to the owner, explaining the accountant’s position. Ignore GST. The accountant is correct under the accrual accounting system because, even though Padbury Publishers has received the money from the subscriptions, no work has yet been completed by the business in relation to magazines issued after 30 June. Gradually, as the firm produces and supplies the monthly magazines to its customers, revenue is generated month after month. Until a magazine has been supplied to a customer who has paid for it in advance, there is a present obligation (liability) to that customer. This liability to perform a service should be recognised in the Padbury Publishers’ statement of financial position. 8. The Claremont Cricket Club collects membership fees of $100 in advance from its members at the beginning of October each year for the summer season, which ends in April. This entitles members to free entry to all games played at the home ground for the season. The club’s financial year ends on 31 December. Should the club make any adjusting entry in its accounts at the end of the year in relation to membership fees received? Why or why not? Explain. Membership fees to the Claremont Cricket Club which have been collected in October may be recognised as income (revenue) by the club at the beginning of the cricket season, which is when the cash is received in October. The fees entitle each member to attend all games played during the season, but this entitlement need not be taken up by each member. In other words, the fees are not refundable to any member who does not attend any of the games. Hence, there is no need for any adjusting entry on 31 December, unless there have been any subscriptions received in advance for the next cricket season (beginning next October). 9. ‘Why would we bother classifying assets in order of their liquidity on a statement of financial position? After all, the value placed on assets is not a true reflection of how much we could sell them for.’ Discuss. Even though the accounts do not record assets at their selling price or realisable value, following the going concern assumption, listing the assets in order of liquidity should provide some information to users of the accounts as to the size and potential for selling assets at short notice. Nevertheless, the statement in the quote is correct. The asset values do not reflect their disposal values in current financial statements. If all assets were shown at disposal prices, there would be no need to list assets in order of their liquidity, as each asset is recorded at its ‘liquid’ price. The sum of these ‘liquid’ prices then reflects the entity’s liquidity. An entity is not barred from disclosing the disposal value of its assets if it so desires; however, there are extra costs to be incurred in generating the information in order to make such disclosures. 10. Describe the operating cycle. Is the operating cycle definition related in any way to the definitions of current and non-current assets? Explain. The operating cycle is the average period of time that it takes for a business to purchase inventory and ultimately collect cash from its sale. A current asset is defined (in IAS 1/AASB 101 para. 66). The first idea is that a current asset is an asset which is expected to be realised, or is intended to be sold or consumed in the normal operating cycle of the entity. However, another possibility is that a current asset is one which is expected to be realised within twelve months after the end of the reporting period. Hence, if an entity’s operating cycle extends beyond one year, it seems that items such as inventory and accounts receivable can still be regarded as current assets because these assets will be realised within the entity’s operating cycle. Any asset which does not satisfy the definition of a current asset is automatically a non-current asset. Exercises Exercise 4.1 Identifying adjusting journal entries Match the end-of-financial-year adjustments (for each independent situation) to the appropriate journal entry. Adjustments 1. Portion of prepaid insurance which has now expired (been used up) 2. Revenue earned but not yet received 3. Insurance expense which has not been used up (there is still future cover) 4. Portion of recognised revenue which is considered unearned 5. Expenses incurred but not yet paid 6. Revenue received in advance which is now earned Journal entry (a) Prepaid Insurance Dr, Insurance Expense Cr (b) Unearned Revenue Dr, Revenue Cr (c) Insurance Expense Dr, Prepaid Insurance Cr (d) Revenue Dr, Unearned Revenue Cr (e) Expenses Dr, Expenses Payable Cr (f) Revenue Receivable Dr, Revenue Cr (LO3) 1. (c) 2. (f) 3. (a) 4. (d) 5. (e) 6. (b) Exercise 4.2 Cash versus accrual basis of accounting At the end of the first year of operations, Arch Etec, owner of Architect Designs, engaged you to prepare yearly financial statements for the year ended 30 June 2019, on both the cash basis and the accrual basis. The following data are a summary of selected transactions that occurred during the year. Ignore GST. 1. Fees of $125 000 were collected for services provided during the year. 2. There were $8000 in receivables at 30 June 2019 for services performed on credit. 3. Cash payments of $106 000 were made for salaries, rent, insurance and other expenses incurred during the year. 4. Salaries owing but not yet paid amount to $4000. 5. On 15 June 2019, a client paid $3000 in advance for services to be rendered during the next financial year. 6. Expenses of $6000 were prepaid (not included in the $106 000) at 30 June. Required (a) Calculate profit under both the cash basis and the accrual basis. (b) Indicate how the following items would be reported in the business’s balance sheet under the accrual basis: (i) the $8000 receivables (ii) the unpaid salaries of $4000 (iii) the $3000 advance received on 15 June (iv) the cash payment of $6000 for prepaid expenses. (LO1) (a) Note that expenses and income are recorded excluding GST. ARCHITECT DESIGNS (ignoring GST) Cash basis Accrual basis Cash income (revenue) $125 000 $125 000 Revenue earned but not yet received 8 000 Revenue received in advance but not yet earned 3 000 TOTAL INCOME (REVENUE) $128 000 $133 000 Less Expenses Salaries, rent & insurance 106 000 106 000 Salaries owed but not yet paid 4 000 Expenses prepaid but not yet incurred 6 000 TOTAL EXPENSES $112 000 $110 000 PROFIT $16 000 $23 000 (b) (i) Accounts receivable $8000 – current asset (ii) Salaries payable $4000 – current liability (iii) Unearned design fees $3000 – current liability (iv) Prepaid expenses $6000 – current asset. Exercise 4.3 Cash versus accrual accounting 1. During March, Thuy Bui’s business performed services for a specific customer for which the fee was $9000. Payment was received in the following April. (a) Was the revenue earned in March or April? (b) What account should be debited in (i) March and (ii) April? 2. During the month a business received $160 000 in cash and paid out $120 000 in cash. Does this indicate that the business earned $40 000 during the month? Explain. 3. Gorajek Sole Traders purchased a 3-year insurance contract on 1 March. The business debited the entire cost of $12 000 to Insurance Expense. The financial year ends on 30 June. Under the accrual system, what is the correct expense for the current year, and what entry would be made to correct the accounts? Under the cash basis of accounting, what is the correct expense and the correct adjusting entry (if any)? (LO1) 1. (a) Under accrual accounting the revenue was earned in March but cash accounting would record the revenue in April. (b) Under Accrual accounting: (i) In March: •Debit – Accounts Receivable. •Credit – Sales. (ii) In April: •Debit – Cash at Bank. •Credit – Accounts Receivable. Under Cash accounting: (i) In March – not entry. (ii) In April: •Debit – Cash at Bank. •Credit – Sales. 2. The increase of $40 000 in cash does not necessarily indicate that a similar amount of profit was earned. Many other assets may have increased or decreased; and liabilities and capital also may have increased or decreased. Even under cash accounting the change in cash is not necessarily just due to factors associated with profit. 3. As $12 000 is the cost of a three year contract, the cost for one year is one-third or $4000. As the contract was taken out on 1 March, and the end of the reporting period is 30 June, only 4 months have been used in the current year. Hence, assuming equal usage of advertising services across all months, the correct expense for the current year is 4/12 of $4000 = $1333. The adjusting entry to be recorded on 30 June is: Prepaid Insurance Dr 10 667 Insurance Expense Cr 10 667 Under the cash basis of accounting the correct expense for the current year would be $12 000, and no adjusting entry would have been recorded at the end of the period. Exercise 4.4 Accrual basis income statement Victoria Holmes registered as a financial adviser several years ago. An income statement for the current period, prepared using cash accounting, is presented below. GST is ignored. Additional data 1. Fees for advice given for the year ended 30 June 2019 for $8000 were collected in the current year and are included above. 2. Fees earned in the current year of $12 000 are expected to be collected in the following year. These have not been included above. 3. Accrued salaries at 30 June 2019 and 2020 are $4000 and $4300, respectively. 4. Depreciation expense of $18 000 is not included in the expenses. 5. Victoria Holmes withdrew $2400 per month to cover personal living expenses. Required (a) Using the above information, prepare an income statement on the accrual basis. Show all calculations. (b) Briefly explain why the revised statement could be considered a better measure of profit. (c) Is it a correct accounting procedure to exclude drawings from expenses? Explain why. (LO1 and LO2) (a) HOLMES’ FINANCIAL ADVISORY SERVICE Income Statement for the year ended 30 June 2020 INCOME: FEES REVENUE 384 000 Less: Other expenses 304 700 Depreciation expense 18 000 PROFIT $61 300 Calculations: SERVICE FEES REVENUE as reported 380 000 Add: Fees for 2020 to be collected in 2021 12 000 Less: Fees for 2019 but collected in 2020 (8 000) ACCRUAL BASIS REVENUE $384 000 OTHER EXPENSES as reported $305 000 Add: Accrued salaries – end of 2020 4 000 Less: Accrued salaries – end of 2019 (4 300) ACCRUAL BASIS EXPENSES $304 700 Note: Drawings are not an expense of doing business; rather, they are withdrawals of cash from the business by the owner and hence treated as a negative adjustment to equity. (b) Under the accrual basis of accounting, income is recognised when the increase in benefits can be measured at a faithfully representative, verifiable amount, and expenses are recognised when the benefits consumed can be faithfully represented by a verifiable measure. (c) It is correct to exclude drawings from expenses. Drawings are withdrawals of cash or other assets from the business by the owner in anticipation of profits. Neither tax law nor accounting principles recognise the owner of a sole proprietorship as an employee of the firm. Consequently, drawings, even though the owner may call them a salary, are not considered an expense of the business. Exercise 4.5 Journalising adjusting entries Calvin’s Cleaning has employed you to investigate whether any accrual entries are needed in the business. On completion of your investigation on 30 June, you have discovered that the following items need attention. 1. Unearned cleaning services revenue now earned, $3200. 2. Depreciation not recorded, $12 000. 3. Employee salaries owed but not recorded, $6400. 4. Interest revenue accrued but not recorded, $1600. Required (a) Prepare the adjusting entries for items 1 to 5 at 30 June, the end of the accounting period. (b) Suppose the adjusting entries in requirement A were not made. Calculate the total overstatement or understatement of profit as a result of the omission of these adjustments. (LO3) (a) CALVIN’S CLEANING General Journal Date Particulars Debit Credit 30 June 1. Unearned Security Services Revenue 3 200 Security Services Revenue 3 200 Precollected revenue now earned. 2. Depreciation Expense 12 000 Accumulated Depreciation 12 000 Depreciation expense for the period. 3. Salary Expense 6 400 Salaries Payable 6 400 Salaries incurred but not yet paid. 4. Insurance Expense 1 200 Prepaid Insurance 1 200 Prepaid insurance expired. 5. Interest Receivable 1 600 Interest Revenue 1 600 Interest revenue accrued. (b) Profit would have been overstated as a result of expenses not being recorded ($12 000 + $6400 + $1200 = $19 600) and understated as a result of total revenues not being recorded ($3200 + $1600 = $4800). The net overstatement of profit is therefore $19 600 – $4800 = $14 800. Exercise 4.6 Adjusting entries and income statement The income statement of Peter’s Pest Control for the month of August 2019 shows a profit of $6800 based on: In reviewing the statement, you discover the following: 1. Depreciation on equipment of $460 was omitted. 2. Supplies expense includes $320 of supplies that are still on hand at 31 August. 3. Insurance expired during August of $400 was omitted. 4. Accrued wages at 31 August amounting to $260 were not included. 5. Services provided but unrecorded totalled $1600. Required (a) Prepare a corrected income statement for the month of August 2019. (LO3 and LO4) (a) PETER’S PEST CONTROL Income Statement for the month of August 2019 INCOME Services revenue $16 800 EXPENSES Depreciation expense $ 460 Wages expense 6 660 Supplies expense 780 Insurance expense 400 Electricity expense Total expenses 900 9200 PROFIT 7600 Exercise 4.7 Adjusting entries and ledger accounts The following information was extracted from the accounting records of the business of Wendy’s Lawnmowing Services: Payments made during the year ended 30 June 2019 were as follows: Assume that whenever cash was paid, the debit entry was made to the appropriate expense account, rather than the asset or liability, for the year. The only exception to this is the first payment for the year which is split between the accrual or deferral and the expense. Required (a) Write up and balance the Rent Payable, Prepaid Rates, and Prepaid Insurance accounts in the ledger of Wendy’s Lawnmowing Services for the year 1 July 2018 to 30 June 2019. (b) Show clearly any adjusting entries that may be required on 30 June 2019. Explain why these adjusting entries are necessary. (LO3 and LO5) (a) The accounts below assume that whenever cash was paid, the debit entry was made to the appropriate expense account, rather than the asset or liability, for the year. The only exception to this is the first payment for the year; for example, the rent payment of $4800 on 8 August is split between Rent Expense of $900 and Rent Payable of $3900. The adjusting entries below follow. Rent Accrued (Payable) 2018 2018 Aug 8 Cash at bank 3 600 Jul 1 Balance b/d 3 600 2019 June 30 Rent Expense (adj) 3 900 Prepaid Rates 2018 2018 Jul 1 Balance b/d 2 400 Nov 2 Rates Expense 2 400 2019 June 30 Rates Expense 2 700 Prepaid Insurance 2018 2018 Jul 1 Balance b/d 2 400 Oct 26 Insurance exp. 2 400 2019 June 30 Insurance Exp. 2 800 (b) WENDY’S LAWNMOWING SERVICES General Journal Adjusting Entries Date Particulars Debit Credit 2019 June 30 Rent Expense 3 900 Rent Payable 3 900 Rent payable in the next year. ($5200/4=$1300/month*3 months not yet paid) Prepaid Rates 2 700 Rates Expense 2 700 Rates not yet expired. ($5400/6=$900/month*3months prepaid) Prepaid Insurance 2 800 Insurance Expense 2 800 Insurance expenditure not yet expired. ($8400/12=$700/month*4 months prepaid) Explanation: Rent: at the beginning of the year, the rent is accrued before it is paid. Rent is paid in arrears at the rate of $1300 per month. The last rent payment of $5200 on 17 April was for the four month period up to 31 March 2019. Hence, at the end of the reporting period, 30 June 2019, three months’ rent is owing and needs to be recognised by the entity as an accrual adjusting entry on that date. Rates: rates are paid in advance and have been recorded in the Prepaid Rates (asset) account at the beginning of the reporting period for the amount of $2400. The prepaid rates will be transferred to Rates Expense during the current period as they expire. On 9 May, $5400 was paid in advance for rates covering the 6 month period from 1 April to 30 September. Hence, at the end of the reporting period on 30 June 2019, 3 months’ rates ($2700) have been paid in advance and need to be recognised in the Prepaid Rates account by an appropriate adjusting entry. Insurance: insurance services have also been paid for in advance and have been recorded in the Prepaid Insurance (asset) account at the beginning of the reporting period for the amount of $2400. The prepaid insurance will be transferred to Insurance Expense during the current period as the insurance services have been received. On 26 October 2018, $8400 was paid in advance for insurance covering the 12 month period from 1 November 2018 to 31 October 2019. Hence, at the end of the reporting period on 30 June 2019, 4 months’ insurance (namely $2800) has still been paid in advance and needs to be recognised in the Prepaid Insurance account by an appropriate adjusting entry. Exercise 4.8 Adjusting entry for prepaid insurance Kreative Kitchens purchased a 1-year insurance policy on 1 March 2020. The entire premium of $9000 was recorded by debiting Prepaid Insurance. Ignore GST. Required (a) Give the adjusting entry at 30 June for year ending 30 June 2020. (b) What amount should be reported in the 30 June 2020 statement of financial position for Prepaid Insurance? (c) If no adjusting entry was made on 30 June, by how much would profit be overstated or understated? Would assets be overstated or understated? Explain. (d) What would your adjusting entry in requirement A be if the premium of $9000 was recorded by debiting Insurance Expense? (LO3) (a) Insurance Expense 3 000 Prepaid Insurance 3 000 ($3000 = $9000 × 4/12) Insurance expired. Prepaid insurance recorded at $9000 initially. (b) Prepaid insurance $6000 ($9000 – $3000) – current asset. (c) Profit would be overstated by $3000, because the expense for insurance that had not been recorded. Assets would also be overstated as the correct balance for prepaid insurance should be $6000 and it would have been left at $9 000. Hence it would be overstated by $3000. (d) Prepaid Insurance 6 000 Insurance Expense 6 000 Insurance prepaid (thus leaving $3000 in Insurance Expense). Exercise 4.9 Adjusting entry for unearned revenue Easy Rentals Ltd received 4 months’ rent in advance from tenants on 1 April 2018. The entire amount of $6400 was credited to the Unearned Revenue account at this date. Ignore GST. Required (a) Give the adjusting entry at 30 June 2018. (b) What amount (if any) should be reported in the statement of financial position at 30 June 2018? (c) If no adjusting entry were made on 30 June, by how much would profit be overstated or understated? Would liabilities be overstated or understated? Explain. (d) What would your adjusting entry be in requirement A if the amount of $6400 had been credit to Rental Revenue on 1 April 2018? (LO3) (a) Unearned Revenue 4 800 Rental Revenue 4 800 Rent revenue earned ($6400 × 3/4 = $4800) (b) Unearned Revenue $1600 – current liability in the statement of financial position (c) Profit understated by $4800, because the rental revenue of $4800 would not have been recognised. Liabilities overstated by $4800 as the Unearned revenue account (a liability representing revenue received in advance of performance) would not have been reduced. (d) Rental Revenue 1 600 Unearned Revenue 1 600 Unearned rental revenue recognised. $6400 × 1/4 = $1600 Exercise 4.10 Extension of account balances to proper worksheet columns Non-GST version Listed below are ledger accounts that appear in the adjusted trial balance columns of a worksheet. 1. Cash at Bank 10. Prepaid Insurance 2. Wages Expense 11. Wages Payable 3. Building 12. Interest Payable 4. Lan Mei Tran, Capital 13. Interest Receivable 5. Service Revenue 14. Interest Expense 6. Depreciation Expense 15. Interest Revenue 7. Accounts Receivable 16. Office Supplies Expense 8. Accumulated Depreciation 17. Office Supplies 9. Equipment 18. Lan Mei Tran, Drawings Complete the tabulation shown below by entering a tick in the appropriate worksheet column where the amount in each account would be shown. Ignore GST. (LO4) Complete the tabulation by entering a tick in the proper worksheet column in which the amount in each account would be extended in completing the worksheet. Income Statement Balance sheet Account Debit Credit Debit Credit 1. Cash at Bank  2. Wages Expense  3. Building  4. Lan Mei Tran, Capital  5. Service Revenue  6. Depreciation Expense  7. Accounts Receivable  8. Accumulated Depreciation  9. Equipment  10. Prepaid Insurance  11. Wages Payable  12. Interest Payable  13. Interest Receivable  14. Interest Expense  15. Interest Revenue  16. Office Supplies Expense  17. Office Supplies  18. Lan Mei Tran, Drawings  Exercise 4.10 Extension of account balances to proper worksheet columns GST version Listed below are ledger accounts that appear in the adjusted trial balance columns of a worksheet. 10. Cash at Bank 10. Prepaid Insurance 11. Wages Expense 11. Wages Payable 12. Building 12. Interest Payable 13. Lan Mei Tran, Capital 13. Interest Receivable 14. Service Revenue 14. Interest Expense 15. Depreciation Expense 15. Interest Revenue 16. Accounts Receivable 16. Office Supplies Expense 17. Accumulated Depreciation 17. Office Supplies 18. Equipment 18. Lan Mei Tran, Drawings Complete the tabulation shown below by entering a tick in the appropriate worksheet column where the amount in each account would be shown. (LO4) Complete the tabulation by entering a tick in the proper worksheet column in which the amount in each account would be extended in completing the worksheet. Income Statement Balance sheet Account Debit Credit Debit Credit 1. Cash at Bank  2. Wages Expense  3. Building  4. Lan Mei Tran, Capital  5. Service Revenue  6. Depreciation Expense  7. Accounts Receivable  8. Accumulated Depreciation  9. Equipment  10. Prepaid Insurance  11. Wages Payable  12. Interest Payable  13. Interest Receivable  14. Interest Expense  15. Interest Revenue  16. Office Supplies Expense  17. Office Supplies  18. Lan Mei Tran, Drawings  Show the proper worksheet column for GST Payable and GST Receivable. Income Statement Balance sheet Account Debit Credit Debit Credit GST Payable  GST Receivable  Exercise 4.11 Adjusting entries for depreciation Trev’s Gardening Services purchased a trailer on 1 July 2019 for $26 200. It was estimated to have a useful life of 5 years and a residual value at the end of that time of $2800. Required (a) What is the depreciation expense for the year ended 30 June 2020? (b) What is the balance of the Accumulated Depreciation account at the end of June 2021? (c) What is the carrying amount of the hearse in the statement of financial position at 30 June 2020 and at 30 June 2021? (d) Explain why an entry is made to the Accumulated Depreciation account rather than to the Trailer account. (LO4) (a) Depreciation expense for the year ended 30 June 2020 = ($26 200 – $2800)/5 = $4680. (This assumes that the trailer was used at an even rate throughout the year.) (b) The Balance of the Accumulated Depreciation account after two years of service is $9360. (c) The carrying amount of the trailer represents the net amount to be carried forward to the next accounting period. Year ended Year ended 30 June 2020 30 June 2021 Trailer $26 200 $26 200 Accumulated depreciation (4 680) (9 360) Carrying amount $21 520 $16 840 (d) An entry is made to the Accumulated Depreciation account in order to keep the Trailer account recorded at its original cost. The Accumulated Depreciation is a contra account to the Trailer account, which is then deducted in the statement of financial position from the Trailer account to show the carrying amount at the end of each accounting period. By disclosing both accounts in the statement, the reader is able to assess the approximate age of the asset held by the entity. For instance, it can be seen that the Accumulated Depreciation account in 2021 is larger than in 2020, thus showing that, since more depreciation has been written off the asset, the asset is now older and the entity has not replaced it with a new one. Exercise 4.12 Adjusting entries Selected accounts of Amanda’s Art Supplies are shown below at 30 June of the current year before any adjusting entries have been made. Additional information 1. Prepaid insurance represents premiums for 1 year paid on 1 April. 2. Supplies of $430 were on hand at 30 June. 3. Shop shelving, which had been purchased on 1 January, is expected to last 10 years and have a residual value of $2000. 4. Amanda collected 4 months’ rent in advance on 1 June from a number of tenants. 5. Accrued salaries not recorded as at 30 June are $2400. Required (a) Record in the general journal the necessary adjusting entries on 30 June. (LO3) (a) AMANDA’S ART SUPPLIES General Journal Date Particulars Debit Credit June 30 Insurance Expense 1 125 Prepaid Insurance 1 125 Insurance expired. ($4500 × 3/12) Supplies Expense 290 Supplies 290 Supplies used. ($720 – $430) Depreciation Expense – Shop Shelving 1 100 Accumulated Depreciation – Shop Shelving 1 100 Depreciation on office equipment. ($24 000 – $2000)/10 × 6/12 = $1100) Unearned Rental Fees 1 200 Rental Fees Revenue 1 200 Rental fees earned for one month. ($4800 ÷ 4) Salaries Expense 2 400 Salaries Payable 2 400 Accrued salaries. Exercise 4.13 Adjusting entries – missing data Selected T accounts for Trewhella Traders are shown below. Adjusting entries for the period have been posted. Required (a) Supplies of $390 were purchased during the year. Calculate the 1 July balance in the Supplies account. (b) No balance existed in the Unearned Rental Revenue account on 1 July. Calculate the total amount of rental fees that were received in cash during the period. (c) The balance in the Prepaid Insurance account on 1 July was $910. Calculate the total cash payment made during the year for insurance premiums. (LO4 and LO5) (a) $370 Supplies 1/7 Balance b/d 370 Supplies expense 360 Cash/Payables 390 30/6 Balance c/d 400 760 760 1/7 Balance b/d 400 (b) $12 600 + $980 = $13 580. (c) $810 Prepaid Insurance 1/7 Balance b/d 910 30/6 Insurance Expense 700 Cash at Bank 810 30/6 Balance c/d 1 020 1 720 1 720 1/7 Balance b/d 1 020 Exercise 4.14 Adjusting entries Investment Guru provides investment advice to customers for fees. On 30 June 2019, it completed its first year of operations. Some of the ledger account balances of the business, before any year-end adjustments, are given below: No adjusting entries have been made to these accounts at any time during the year. An analysis of the business records reveals the following. 1. The balance in Advertising Prepaid represents the amount paid for an advertisement in an investment magazine for 1 year. The agreement with the publisher stipulates the same amount of space each month and covers the period 1 September 2018 to 31 August 2019. 2. The firm’s lease in respect of the premises stipulates a rent of $1440 per month payable on the first day of each month, plus an annual amount equal to 0.5% of the annual fees earned. The extra rental is payable within 15 days of the end of the reporting period. 3. The computer database expense relates to an annual subscription to web based data on the share market and other investments. The subscription was taken out on 1 August 2018. 4. The wages are paid every Friday for a 5-day working week ending on the preceding Wednesday. In 2019, 30 June falls on a Thursday and the wages for the week ended 6 July 2019 amount to $9000. No overtime was worked and all employees worked the normal office hours during the 5-day week. 5. The Electricity Expense ledger balance does not include the amount for June 2019. The account was received during July and amounted to $1250. Required (a) Journalise the necessary adjusting entries. (LO3) (a) INVESTMENT GURU General Journal Date Particulars Debit Credit 2019 June 30 Advertising Expense 1 000 Prepaid Advertising 1 000 Advertising expense for 10 months: 10/12 × $1200. Rent Expense 1 750 Rent Payable 1 750 Additional rent owing based on fees earned: 0.5% × $350 000 Prepaid Subscription 1 020 Computer Database Expense 1 020 Prepaid Database subscription: $12 240/12 Wages Expense 1 800 Wages Payable 1 800 Wages owing at 30 June: 1/5 × $9000 Electricity Expense 1 250 Electricity Account Payable 1 250 Electricity owing for June. Exercise 4.15 Adjusting entries and effect on financial statements In the first column of the schedule presented below are the condensed financial statements for Melvin Motorvehicle Rentals before adjusting entries were made. The following items were not reflected in the statements. 1. Rental revenue earned but not collected or recorded, $1500. 2. Depreciation on vehicles not recorded, $14 500. 3. Wages earned by employees but not paid at year-end, $5600. 4. The company requires the first-day rental in advance as a deposit for making a reservation. The deposit is either deducted from the total rental charges or is forfeited. During the last week of June, deposits earned were not recorded as revenue, $990. Required (a) Prepare the necessary adjusting entries in general journal form. (b) Determine the effects of the adjustments on the financial statements by completing the schedule presented. (c) i. Did profit increase or decrease? By how much? ii. What was the effect of the adjusting entries on total assets? total liabilities? total equity? (LO3 and LO4) (a) MELVIN MOTORVEHICLE RENTALS General Journal Particulars Debit Credit 1. Accounts Receivable 1 500 Rental Revenue 1 500 Rent revenue earned 2. Depreciation Expense – Vehicles 14 500 Accum. Depreciation – Vehicles 14 500 Depreciation on vehicles 3. Wages Expense 5 600 Wages Payable 5 600 Wages owing to employees 4. Unearned Rental Revenue 990 Rental Revenue 990 Rent deposits in advance earned (b) MELVIN MOTORVEHICLE RENTALS Financial Statements Unadjusted balances Adjustments Adjusted balances Income statement Rental revenue $255 600 + 1 500 + 990 $258 090 Expenses: Depreciation expense — + 14 500 14 500 Insurance expense 46 800 46 800 Wages expense 140 000 + 5 600 145 600 General expenses 24 000 24 000 Profit $44 800 $27 190 Statement of changes in equity Beginning capital $90 000 $90 000 Add: Profit 44 800 27 190 Less: Drawings (72 000) (72 000) Ending capital $62 800 $45 190 Balance sheet/Statement of financial position Cash at bank $46 800 $46 800 Accounts receivable — + 1 500 1 500 Other receivables 10 800 10 800 Vehicles 124 000 124 000 Less: Accum. depreciation (38 000) + 14 500 (52 500) $143 600 $130 600 Wages payable — + 5 600 5 600 Unearned rental revenue 7 200 – 990 6 210 Loan payable 73 600 73 600 Melvin Mazarati, Capital 62 800 45 190 $143 600 $130 600 (c) i. Profit decreased by $17 610 ($44 800 – $27 190). ii. Total assets decreased by $13 000 ($143 600 – $130 600). Total liabilities increased by $4610 ($85 410 – $80 800). Total equity decreased by $17 610 ($62 800 – $45 190). Problems Problem 4.16 Adjusting entries Non-GST version Hui Yu, lawyer, had the following transactions related to the business during June. Ignore GST. Required (a) Prepare the journal entries to record each transaction and prepare any adjusting entries as at 30 June, the end of the accounting year. Ignore GST. (LO3) (a) HUI YU, LAWYER General Journal (EXCLUDING GST) Date Particulars Debit Credit June 1 Office Furniture 36 000 Cash at Bank 36 000 Purchased office furniture 1 Prepaid Insurance 3 000 Cash at Bank 3 000 Purchased 12 month insurance policy 2 Cash at Bank 42 000 Loan Payable 42 000 Borrowed $42 000 from the bank at 8% due in 3 months 11 Supplies 450 Cash at Bank 450 Purchased supplies 15 Rent Expense 1 200 Cash at Bank 1 200 Paid rent for one month 18 Cash at Bank 840 Unearned Services Revenue 840 Received payment from customer in advance 28 Telecommunications Expense 410 Tele. Account Payable 410 Amount due for telephone and internet charges Adjusting entries 30 Depreciation Expense 260 Accumulated Depreciation – Office Furniture 260 Calculation of depreciation expense [($36 000 – $4 800)/10 × 1/12] 30 Insurance Expense 250 Prepaid Insurance 250 Insurance expired for one month on policy ($3000 × 1/12) 30 Interest Expense 280 Interest Payable 280 Interest payable on loan from bank ($42 000 × 8%) × 1/12 30 Supplies Expense 220 Supplies 220 Supplies used during the month 30 Prepaid Rent 600 Rent Expense 600 Rent not yet expired for the month 30 Unearned Services Revenue 168 Services Revenue 168 Revenue recorded on completed work 30 No adjusting entry required as telephone and internet expense is recorded on 28 June. Problem 4.16 Adjusting entries GST version Hui Yu, lawyer, had the following transactions related to the business during June. Ignore GST. Required (a) Prepare the journal entries to record each transaction and prepare any adjusting entries as at 30 June, the end of the accounting year. Ignore GST. (b) Repeat requirement A. assuming the addition of 10% GST where necessary. Assume the telephone tax invoice for $451 was issued on 28 June. (LO3) (b) HUI YU, LAWYER General Journal (INCLUDING GST) Date Particulars Debit Credit June 1 Office Furniture 36 000 GST Receivable 3 600 Cash at Bank 39 600 Purchased office furniture 1 Prepaid Insurance 3 000 GST Receivable 300 Cash at Bank 3 300 Purchased 12 month insurance policy 2 Cash at Bank 42 000 Loan Payable 42 000 Borrowed $42 000 from the bank at 8% due in 3 months 11 Supplies 450 GST Receivable 45 Cash at Bank 495 Purchased supplies 15 Rent Expense 1 200 GST Receivable 120 Cash at Bank 1 320 Paid rent for one month 18 Cash at Bank 1 320 GST Payable 120 Unearned Services Revenue 1 200 Received payment from customer in advance 30 Telecommunications Expense 410 GST Receivable 41 Account Payable 451 Amount due for telephone charges Adjusting entries 30 Depreciation Expense 260 Accumulated Depreciation – Office Furniture 260 Calculation of depreciation expense [($36 000 – $4800)/10 × 1/12] 30 Insurance Expense 250 Prepaid Insurance 250 Insurance expired for one month on policy ($3000 × 1/12) 30 Interest Expense 280 Interest Payable 280 Interest payable on loan from bank ($42 000 × 8%) × 1/12 30 Supplies Expense 220 Supplies 220 Supplies used during the month 30 Prepaid Rent 600 Rent Expense 600 Rent not yet expired for the month 30 Unearned Services Revenue 168 Services Revenue 168 30 No adjusting entry required as telecommunications expense is recorded. Problem 4.17 Adjusting entries and effect on financial statements Non-GST version The financial year for Drip Dry Cleaning Services ends on 30 June. Using the following information, make the necessary adjusting entries at year-end. Ignore GST. 1. On 15 February, Danielle Drip’s business borrowed $16 000 from Northern Bank at 8% interest. The principal and interest are payable on 15 August. 2. Rent of $3600 for the 6-month period ending 31 July is due to be paid in August. 3. The annual depreciation on equipment is estimated to be $7200. The 1 July balance in the Accumulated Depreciation account was $15 600. 4. Drip Dry Cleaning Services purchased a 1-year insurance policy on 1 March of the current year for $660. A 3-year policy was purchased on 1 November of the previous year for $2700. Both purchases were recorded by debiting Prepaid Insurance. 5. The business has two part-time employees who each earn $220 a day. They both worked the last 3 days in June for which they have not yet been paid. 6. On 1 June, the Highup Hotel paid the business $2100 in advance for doing their dry cleaning for the next 3 months. This was recorded by a credit to Unearned Dry Cleaning Revenue. 7. Water for June of $850 is unpaid and unrecorded. 8. The supplies account had a $280 debit balance on 1 July. Supplies of $1560 were purchased during the year and $190 of supplies are on hand as at 30 June. As you know, all adjusting entries affect one statement of financial position account and one income statement account. Based on your adjusting entries prepared: (a) complete the schedule given above (b) calculate the increase or decrease in profit (c) calculate the increase or decrease in total assets, total liabilities and total equity. (LO3) (a) DRIP DRY CLEANING SERVICES General Journal Particulars Debit Credit 1. Interest Expense 480 Interest Payable 480 Accrued interest on bank loan ($16000*8%*4.5/12) 2. Rent Expense 3 000 Rent Payable 3 000 Rent due on office premises [5/6 of $3600] 3. Depreciation Expense 7 200 Accumulated Depreciation 7 200 Depreciation on equipment 4. Insurance Expense 820 Prepaid Insurance 820 Prepaid insurance expired ($660 × 4/12) + [$2700/3 × 8/12]=$220+$600 5. Wages Expense 1 320 Wages Payable 1 320 Wages owing to employees 6. Unearned Dry Cleaning Revenue 700 Dry Cleaning Revenue 700 To record dry cleaning revenue earned ($2100 × 1/3) 7. Water Expense 850 Water Account Payable 850 Water due and payable 8. Supplies Expense 1 650 Supplies 1 650 Supplies used [$280 + $1560 – $190 = $1650] (b)(i) Entry Account Balance in the account before adjustment Dollar effect of adjusting entries Balance reported in 30/6 position statement Position statement classification* 1. Interest Payable — +$480 $480 Current liability 2. Rent Payable — +3 000 3 000 Current liability 3. Accumulated Depreciation 15 600 +7 200 22 800 Contra asset to the equipment account 4. Prepaid Insurance 3 360 –820 2540 Current asset 5. Wages Payable — +1 320 1 320 Current liability 6. Unearned Dry Cleaning Revenue 2 100 –700 1 400 Current liability 7. Water Account Payable — +850 850 Current liability 8. Supplies 1 840 –1 650 190 Current asset (b)(ii) Decrease in profit, $14620 –$480 – $3000 – $7200 – $820 – $1320 + $700 – $850 – $1650 = $14620 (c) (i) Decrease in total assets, $9670 –$7 200 – $820 – $1650 = $9670 (ii) Increase in total liabilities, $4950 $480 + $3000 + $1320 – $700 + $850 = $4950 (iii) Decrease in equity, $14620 $9670 + $4950 = decrease in profit of $14620 Problem 4.17 Adjusting entries and effect on financial statements GST version The financial year for Drip Dry Cleaning Services ends on 30 June. Using the following information, make the necessary adjusting entries at year-end. Include GST. • On 15 February, Danielle Drip’s business borrowed $16 000 from Northern Bank at 8% interest. The principal and interest are payable on 15 August. • Rent of $3600, plus GST, for the 6-month period ending 31 July is due to be paid in August. • The annual depreciation on equipment is estimated to be $7200. The 1 July balance in the Accumulated Depreciation account was $15 600. • Drip Dry Cleaning Services purchased a 1-year insurance policy on 1 March of the current year for $660. A 3-year policy was purchased on 1 November of the previous year for $2700. Both purchases were recorded by debiting Prepaid Insurance. • The business has two part-time employees who each earn $220 a day. They both worked the last 3 days in June for which they have not yet been paid. • On 1 June, the Highup Hotel paid the business $2100 in advance for doing their dry cleaning for the next 3 months. This was recorded by a credit to Unearned Dry Cleaning Revenue. • Water for June of $850, plus GST, is unpaid and unrecorded. • The supplies account had a $280 debit balance on 1 July. Supplies of $1560 were purchased during the year and $190 of supplies are on hand as at 30 June. As you know, all adjusting entries affect one statement of financial position account and one income statement account. Based on your adjusting entries prepared above: (a) complete the schedule given above. (b) calculate the increase or decrease in profit. (c) calculate the increase or decrease in total assets, total liabilities and total equity. (LO3) (a) DRIP DRY CLEANING SERVICES General Journal Particulars Debit Credit 1. Interest Expense 480 Interest Payable 480 Accrued interest on bank loan ($16000*8%*4.5/12) 2. Rent Expense 3 000 GST Receivable 300 Rent Payable 3 300 Rent due on office premises [5/6 of $3600+ GST] 3. Depreciation Expense 7 200 Accumulated Depreciation 7 200 Depreciation on equipment 4. Insurance Expense 820 Prepaid Insurance 820 Prepaid insurance expired ($660 × 4/12) + [$2700/3 × 8/12]=$220+$600 5. Wages Expense 1 320 Wages Payable 1 320 Wages owing to employees 6. Unearned Dry Cleaning Revenue 700 Dry Cleaning Revenue 700 To record dry cleaning revenue earned ($2100 × 1/3) 7. Water Expense 850 GST Receivable 85 Water Account Payable 935 Water due and payable 8. Supplies Expense 1 650 Supplies 1 650 Supplies used [$280 + $1560 – $190 = $1650] (b)(i) Entry Account Balance in the account before adjustment Dollar effect of adjusting entries Balance reported in 30/6 position statement Position statement classification* 1. Interest Payable — +$480 $480 Current liability 2. Rent Payable GST Receivable — +3 300 +300 3 300 300 Current liability Current asset 3. Accumulated Depreciation 15 600 +7 200 22 800 Contra asset to the equipment account 4. Prepaid Insurance 3 360 –820 2540 Current asset 5. Wages Payable — +1 320 1 320 Current liability 6. Unearned Dry Cleaning Revenue 2 100 –700 1 400 Current liability 7. Water Account Payable GST Receivable — +935 +85 935 85 Current liability Current asset 8. Supplies 1 840 –1 650 190 Current asset (b)(ii) Decrease in profit, $14620 –$480 – $3000 – $7200 – $820 – $1320 + $700 – $850 – $1650 = $14620 (c) (i) Decrease in total assets, $9285 $300–$7 200–$820+$85–$1650 = $9285 (ii) Increase in total liabilities, $5335 $480+$3300+$1320–$700+$935 = $5335 (iii) Decrease in equity, $14620 $9285 + $5335 = decrease in profit of $14620 Problem 4.18 Adjusting entries for prepaid insurance, unearned revenue and prepaid rent and ledger accounts Non-GST version Monthly Foodies’ Magazine’s ledger includes the following accounts: Subscription Revenue, Unearned Subscriptions Revenue, Prepaid Insurance, Insurance Expense, Prepaid Rent and Rent Expense. The following transactions relating to subscriptions, insurance and rent occurred on the dates indicated. Ignore GST. Subscriptions • 1 July 2019. The Unearned Subscriptions Revenue account contained a credit balance of $77 500. Of this balance, $21 900 is for subscriptions expiring at the end of October and $55 600 is for subscriptions expiring at the end of February. • 1 November 2019. Monthly Foodies’ Magazine received $14 800 for subscriptions lasting 6 months. • 1 March 2020. Monthly Foodies’ Magazine received $34 200 for subscriptions lasting 12 months. • 1 May 2020. Monthly Foodies’ Magazine received $16 500 for subscriptions lasting 6 months. Insurance • 1 July 2019. The Prepaid Insurance account contained a debit balance of $11 970 for a policy that ends on 31 March. • 15 September 2019. Monthly Foodies’ Magazine paid $27 120 for a 12-month policy beginning coverage on 15 September. Rent • 1 July 2019. The Prepaid Rent account contained a debit balance of $12 995 for the period July to November inclusive. • 1 December 2019. Monthly Foodies’ Magazine paid $24 030 for 9 months’ rent. Required (a) For each of the situations listed, using T-accounts, enter the beginning balance in the proper ledger account and post the transactions directly to the accounts listed. Then record the necessary adjusting entry at 30 June 2020, the end of the financial year. (LO4) (a) Subscriptions Revenue 30/6/20 Unearned Revenue $109 200 Unearned Subscriptions Revenue 30/6/20 Subscriptions Revenue $109 200 1/7/19 Balance b/d $77 500 30/6/20 Balance c/d 33 800 1/11/19 Cash at Bank 14 800 1/3/20 Cash at Bank 34 200 1/5/20 Cash at Bank 16 500 $143 000 $143 000 1/7/20 Balance b/d $33 800 Prepaid Insurance 1/7/19 Balance b/d $11 970 30/6/20 Insurance Expense $33 440 15/9/19 Cash at Bank 27 120 30/6/20 Balance c/d 5 650 $39 090 $39 090 1/720 Balance b/d $5 650 Insurance Expense 30/6/20 Prepaid Insurance $33440 Prepaid Rent 1/7/19 Balance b/d $12 995 30/6/20 Rent Expense $31 685 1/12/19 Cash at Bank 24 030 30/6/20 Balance c/d 5 340 $37 025 $37 025 1/7/20 Balance b/d $5 340 Rent Expense 30/6/20 Prepaid rent $31685 MONTHLY FOODIES’ MAGAZINE General Journal Date Particulars Debit Credit Adjusting entries 2020 Jun 30 Unearned Subscriptions Revenue 109 200 Subscriptions Revenue 109 200 Subscriptions revenue earned $21 900 + $55 600 + $14 800 + (4/12 × $34 200) + (2/6 × $16 500) = $109 200 Insurance Expense 33 440 Prepaid Insurance 33 440 Expired insurance $11 970 + (9.5/12 × $27 120)]= $33 440 Rent Expense 31 685 Prepaid Rent 31 685 Rental costs expired $12 995 + (7/9 × $24 030) = $31 685 Problem 4.18 Adjusting entries for prepaid insurance, unearned revenue and prepaid rent and ledger accounts GST version Monthly Foodies’ Magazine’s ledger includes the following accounts: Subscription Revenue, Unearned Subscriptions Revenue, GST Payable, Prepaid Insurance, Insurance Expense, Prepaid Rent, Rent Expense GST Receivable. The following transactions relating to subscriptions, insurance and rent occurred on the dates indicated. Subscriptions • 1 July 2019. The Unearned Subscriptions Revenue account contained a credit balance of $77 500. Of this balance, $21 900 is for subscriptions expiring at the end of October and $55 600 is for subscriptions expiring at the end of February. • 1 November 2019. Monthly Foodies’ Magazine received $14 800, plus GST, for subscriptions lasting 6 months. • 1 March 2020. Monthly Foodies’ Magazine received $34 200, plus GST, for subscriptions lasting 12 months. • 1 May 2020. Monthly Foodies’ Magazine received $16 500, plus GST, for subscriptions lasting 6 months. Insurance • 1 July 2019. The Prepaid Insurance account contained a debit balance of $11 970 for a policy that ends on 31 March. • 15 September 2019. Monthly Foodies’ Magazine paid $27 120, plus GST, for a 12-month policy beginning coverage on 15 September. Rent • 1 July 2019. The Prepaid Rent account contained a debit balance of $12 995 for the period July to November inclusive. • 1 December 2019. Monthly Foodies’ Magazine paid $24 030, plus GST, for 9 months’ rent. Required For each of the situations listed, using T-accounts, enter the beginning balance in the proper ledger account and post the transactions directly to the accounts listed. Then record the necessary adjusting entry at 30 June 2020, the end of the financial year. (LO4) Subscriptions Revenue 30/6/20 Unearned Revenue $109 200 Unearned Subscriptions Revenue 30/6/20 Subscriptions Revenue $109 200 1/7/19 Balance b/d $77 500 30/6/20 Balance c/d 33 800 1/11/19 Cash at Bank 14 800 1/3/20 Cash at Bank 34 200 1/5/20 Cash at Bank 16 500 $143 000 $143 000 1/7/20 Balance b/d $33 800 GST Payable 1/11/19 Cash at Bank $1 480 1/3/20 Cash at Bank 3 420 1/5/20 Cash at Bank 1 650 30/6/20 Balance c/d 6 550 $6 550 $ 6 550 1/7/20 Balance c/d $6 550 Prepaid Insurance 1/7/19 Balance b/d $11 970 30/6/20 Insurance Expense $33 440 15/9/19 Cash at Bank 27 120 30/6/20 Balance c/d 5 650 $39 090 $39 090 1/7/20 Balance b/d $5 650 Insurance Expense 30/6/20 Prepaid Insurance $33440 Prepaid Rent 1/7/19 Balance b/d $12 995 30/6/20 Rent Expense $31 685 1/12/19 Cash at Bank 24 030 30/6/20 Balance c/d 5 340 $37 025 $37 025 1/7/20 Balance b/d $5 340 Rent Expense 30/6/20 Prepaid rent $31685 GST Receivable 15/9/19 Cash at Bank $2 712 1/12/19 Cash at Bank 2 403 30/6/20 Balance c/d 5 115 $5 115 $5 115 30/6/20 Balance b/d $5 115 MONTHLY FOODIES’ MAGAZINE General Journal Date Particulars Debit Credit Adjusting entries 2020 Jun 30 Unearned Subscriptions Revenue 109 200 Subscriptions Revenue 109 200 Subscriptions revenue earned $21 900 + $55 600 + $14 800 + (4/12 × $34 200) + (2/6 × $16 500) = $109 200 Insurance Expense 33 440 Prepaid Insurance 33 440 Expired insurance $11 970 + (9.5/12 × $27 120)]= $33 440 Rent Expense 31 685 Prepaid Rent 31 685 Rental costs expired $12 995 + (7/9 × $24 030) = $31 685 Problem 4.19 Adjusting entries and corrections Non-GST version The draft accounts for the year ended 30 June 2019 and a balance sheet as at that date for S. Steiner are submitted to you. Towards the end of the financial year her accountant resigned and she had completed the records herself. She thinks that errors have occurred and asks your help. An examination of the accounting records reveals the following. 1. Interest of $1920 on the investments held by the business was due, but has not been received. 2. A payment of $4160 for new office furniture has been incorrectly debited to the Sundry Expenses account. The furniture had been purchased late in June 2019. 3. Rent due from customers Raggatt and Petney amounting to $2560 is not included in the accounts. 4. Repairs to Steiner’s private motor vehicle, $1700, have been debited to the Vehicle Expenses account. 5. Commission due to sales representatives for the month of June, $4480, has been overlooked. 6. An insurance policy covering contents and buildings was taken out on 1 March 2019, the annual premium of $2400 being paid in advance on this date and debited to the Prepaid Insurance account. 7. A payment of $35 000 on 1 July 2018 for additions to buildings has been debited to Repairs and Maintenance. 8. No depreciation has been recognised for the year ending 30 June. The draft balance sheet shows the following. Depreciation is to be calculated as follows. (a) Buildings: 2% on cost (b) Office furniture and equipment: 20% on cost. Required (a) Ignoring GST, show the journal entries required to make the necessary adjustments. (b) Calculate the effect (increase or decrease) of each of the adjustments on the profit figure of $64 900 as shown in the draft accounts. (LO3 and LO4) (a) S. STEINER General Journal (IGNORING GST) Particulars Debit Credit 1. Interest Receivable 1 920 Interest Revenue 1 920 Adjusting entry to record accrued interest 2. Office Furniture 4 160 Sundry Expenses 4 160 Correct error in recording 3. Rent Receivable 2 560 Rent Revenue 2 560 Rent revenue due 4. S. Steiner, Drawings 1 700 Vehicle Expenses 1 700 Correcting entry to charge private repairs to drawings 5. Commission Expense 4 480 Commission Payable 4 480 Commission owing to sales representatives 6. Insurance Expense 800 Prepaid Insurance 800 Adjusting entry to record expired insurance 7. Buildings 35 000 Repairs & Maintenance Expense 35 000 Correcting entry on improvement to buildings 8. Depreciation Expense – Building 5 820 Accumulated Depreciation – Building 5 820 Calculation of depreciation on building 2% on adjusted cost $291 000 = $5820 Depreciation Expense – Office Furniture 6 720 Accumulated Depreciation – Office Furniture 6 720 Calculation of depreciation on office furniture 20% of $33 600 = $6720 (Do not include June 2019 furniture acquired at the end of the month as this furniture is brand new and not yet depreciated.) (b) Calculation of effect on draft profit: $64 900 + (1) $1920 + (2) $4160 + (3) $2560 + (4) $1700 – (5) $4480 – (6) $800 + (7) $35 000 – (8) $5820 – (8) $6720 = $92 420 Adjusted profit = $92 420 Problem 4.19 Adjusting entries and corrections GST version The draft accounts for the year ended 30 June 2019 and a balance sheet as at that date for S. Steiner are submitted to you. Towards the end of the financial year her accountant resigned and she had completed the records herself. She thinks that errors have occurred and asks your help. An examination of the accounting records reveals the following. 1. Interest of $1920 on the investments held by the business was due, but has not been received. 2. A payment of $4160 for new office furniture has been incorrectly debited to the Sundry Expenses account. The furniture had been purchased late in June 2019. 3. Rent due from customers Raggatt and Petney amounting to $2560, plus GST, is not included in the accounts. 4. Repairs to Steiner’s private motor vehicle, $1700, plus GST, have been debited to the Vehicle Expenses account and GST Receivable account. 5. Commission due to sales representatives for the month of June, $4480, has been overlooked. 6. An insurance policy covering contents and buildings was taken out on 1 March 2019, the annual premium of $2400 being paid in advance on this date and debited to the Prepaid Insurance account. 7. A payment of $35 000 on 1 July 2018 for additions to buildings has been debited to Repairs and Maintenance. 8. No depreciation has been recognised for the year ending 30 June. The draft balance sheet shows the following. Depreciation is to be calculated as follows. (c) Buildings: 2% on cost (d) Office furniture and equipment: 20% on cost Required (a) Show the journal entries required to make the necessary adjustments. (b) Calculate the effect (increase or decrease) of each of the adjustments on the profit figure of $64 900 as shown in the draft accounts. (LO3 and LO4) (a) S. STEINER General Journal (INCLUDING GST) Particulars Debit Credit 1. Interest Receivable 1 920 Interest Revenue 1 920 Adjusting entry to record accrued interest 2. Office Furniture 4 160 Sundry Expenses 4 160 Correct error in recording 3. Rent Receivable 2 816 GST Payable 256 Rent Revenue 2 560 Rent revenue due 4. S. Steiner, Drawings 1 870 GST Receivable 170 Vehicle Expenses 1 700 Correcting entry to charge private repairs to drawings 5. Commission Expense 4 480 Commission Payable 4 480 Commission owing to sales representatives 6. Insurance Expense 800 Prepaid Insurance 800 Adjusting entry to record expired insurance 7. Buildings 35 000 Repairs & Maintenance Expense 35 000 Correcting entry on improvement to buildings 8. Depreciation Expense – Building 5 820 Accumulated Depreciation – Building 5 820 Calculation of depreciation on building 2% on adjusted cost $291 000 = $5820 Depreciation Expense – Office Furniture 6 720 Accumulated Depreciation – Office Furniture 6 720 Calculation of depreciation on office furniture 20% of $33 600 = $6720 (Do not include June 2019 furniture acquired at the end of the month as this furniture is brand new and not yet depreciated.) (b) Calculation of effect on draft profit: $64 900 + (1) $1920 + (2) $4160 + (3) $2560 + (4) $1700 – (5) $4480 – (6) $800 + (7) $35 000 – (8) $5820 – (8) $6720 = $92 420 Adjusted profit = $92 420 Problem 4.20 Adjusting entries and analysis Instant Clothing Alterations is run by Marc Giannopolous in the local shopping centre. The business prepared the following unadjusted and adjusted trial balances at 30 June 2019: Required Prepare the adjusting entries that account for the differences between the two trial balances and explain the nature of each entry. The only account affected by more than one adjustment is Alterations Revenue. Ignore GST. (LO4, LO5 and LO6) INSTANT CLOTHING ALTERATIONS General Journal Date Particulars Debit Credit 2019 Jun 30 Insurance Expense 2 440 1. Prepaid Insurance 2 440 Insurance expired. 2. Supplies Expense 870 Supplies 870 Supplies used. 3. Depreciation Expense 6 380 Accumulated Depreciation 6 380 Depreciation on office furniture. 4. Unearned Alterations Revenue 1 340 Alterations Revenue 1 340 Alterations revenue earned, already received. 5. Accounts Receivable 2 330 Alterations Revenue 2 330 Alterations services earned but not received. 6. Salaries Expense 2 690 Salaries Payable 2 690 Accrued salaries. 7. Interest Expense 980 Interest Payable 980 Accrued interest on loan. Explanation of each item: 1. From the adjusted trial balance it is seen that prepaid insurance has fallen by $2440. When the entity has paid for insurance, it has recorded such payments as an asset, as insurance costs have been paid in advance before such services have been used. In other words, there has been a deferral of the insurance expense on initial payment. An adjusting entry is required to recognise the cost of insurance that has been used up during the current accounting period, costs which can no longer be deferred. 2. When supplies are purchased, the entity has recorded this event in the asset account, Supplies. As supplies are used up, they must then be transferred to an expense account. The entity has probably conducted a stocktake of supplies at the end of the period and found that supplies of $2180 were still on hand. Hence, supplies used must be recognised in an adjusting entry for $870. 3. No new purchases of office furniture have occurred during the year. The increase in the Accumulated Depreciation account for office furniture equals the depreciation expense of $6380. Hence the entity has recorded an adjusting entry to recognise depreciation expense, representing the using-up of part of the office furniture during the current year. 4. Alterations revenue has been received in advance from some clients. Such receipts in advance have been recorded by the entity as a liability, Unearned Services Revenue. The difference in the two trial balances indicate a fall of $1340 in this account; hence, fees initially recorded as unearned must now have been earned and are correctly transferred to the Alterations Revenue account. 5. Accounts Receivable has risen by $2330, representing alteration services revenue earned but not yet paid for by clients. An adjusting entry (accrual) has been recorded to recognise these fees earned. Between no.4 above and no 5, this has now accounted for the total increase of $3670 in the Alterations Revenue account. 6. Salaries earned by employees but not yet paid for by the entity amount to $2690. This amount is correctly recorded as a liability of the entity by making an accrual adjusting entry to credit Salaries Payable and to debit Salaries Expense for the cost of the additional services received from employees. 7. Interest Expense on the loan payable has risen by $980, as has the Interest Payable account. The entity has recorded an adjusting entry to record the additional interest expense accrued and to recognise the current liability. Problem 4.21 Adjusting entries, posting to T accounts, and effect on profit Non-GST version The trial balance of Chelsea Elliott, marketing services provider, at 30 June 2018 was as follows (ignore GST). Required (a) Using the following information, prepare adjusting entries. Use the accounts shown in the trial balance and these additional accounts: Salaries Payable, Interest Payable, Telephone Account Payable, Depreciation Expense, Office Supplies Expense, Insurance Expense, Interest Expense. (a) Interest expense of $520 has accrued on the loan payable. (b) A physical count of office supplies on 30 June shows $560 of unused supplies on hand. (c) Depreciation of the office equipment this year is estimated to be $1020. (d) Half the amount in the Unearned Fees account had been earned by the end of the year. (e) The amount in the Prepaid Rent account covers this June and the next 2 months. (f) Of prepaid insurance, 80% expired this period. (g) Salaries expense accrued for the last 4 days in June amounts to $1660. (h) The telephone expense for June of $670 has not been recorded or paid. No tax invoice has been issued. (b) Open T accounts for the accounts shown in the trial balance and enter the 30 June balance in each account. Post the adjusting entries to the T accounts. (c) Prepare an adjusted trial balance, an income statement and a statement of financial position. (d) Assuming that adjusting entries 1–8 in requirement (a) were not made, determine what the profit would have been. What is the difference between this figure and the profit derived in requirement (c)? (LO3 and LO4) (a) CHELSEA ELLIOTT, MARKETING SERVICES General Journal Date Particulars Debit Credit Adjusting entries 2018 30 June 1. Interest Expense 520 Interest Payable 520 Accrued interest on loan payable 2. Office Supplies Expense 3 460 Office Supplies 3 460 Office supplies used 3. Depreciation Expense – Office Equipment 1 020 Accumulated Depreciation – Office Equipment 1 020 Depreciation on office equipment 4. Unearned Fees 550 Fees Revenue 550 Fees revenue received previously, now earned 5. Rent Expense 700 Prepaid Rent 700 Rent expense for June 6. Insurance Expense 2 184 Prepaid Insurance 2 184 Insurance prepaid now expired 7. Salaries Expense 1660 Salaries Payable 1660 Accrued salaries payable 8. Telephone Expense 670 Telephone Account Payable 670 Telephone expense for June (b) Cash at Bank 30/6 Balance $7 780 Accounts Receivable 30/6 Balance $21 700 Prepaid Rent 30/6 Balance $2 100 (5) Rent expense $700 Prepaid Insurance 30/6 Balance $2 730 (6) Insurance expense $2 184 Office Supplies 30/6 Balance $4 020 (2) Office supplies exp $3 460 Office Equipment 30/6 Balance $12 200 Accumulated Depreciation – Office Equipment 30/6 Balance $2 470 (3) Dep’n exp 1 020 Accounts Payable 30/6 Balance $2 800 Interest Payable (1) Interest expense $520 Telephone Account Payable (8) Telephone expense $670 Salaries Payable (7) Salaries expense $1 660 Unearned Fees (4) Fees revenue $550 30/6 Balance $1 100 Loan Payable 30/6 Balance $9 200 C. Elliott, Capital 30/6 Balance $22 060 C. Elliott, Drawings 30/6 Balance $52 000 Fees Revenue 30/6 Balance $138 400 (4) Unearned fees 550 Salaries Expense 30/6 Balance $57 200 (7) Salaries payable 1 660 Telephone Expense 30/6 Balance $6 100 (8) Telephone expense 670 Rent Expense 30/6 Balance $10 200 (5) Prepaid rent 700 Interest Expense (1) Interest payable $520 Depreciation Expense – Office Equipment (3) Accum dep’n $1 020 Office Supplies Expense (2) Office supplies $3 460 Insurance Expense (6) Prepaid insurance $2 184 (c) CHELSEA ELLIOTT, MARKETING SERVICES Adjusted Trial Balance as at 30 June 2018 Account Dr Cr Cash at bank $7 780 Accounts receivable 21 700 Prepaid rent 1 400 Prepaid insurance 546 Office supplies 560 Office equipment 12 200 Accumulated depreciation – office equip $3 490 Accounts payable 2 800 Interest payable 520 Telephone account payable 670 Salaries payable 1 660 Unearned fees 550 Loan payable 9 200 C. Elliott, Capital 22 060 C. Elliott, Drawings 52 000 Fees Revenue 138 950 Salaries expense 58 860 Telephone expense 6 770 Rent expense 10 900 Interest expense 520 Depreciation expense – office equipment 1 020 Office supplies expense 3 460 Insurance expense 2 184 $179 900 $179 900 CHELSEA ELLIOTT, MARKETING SERVICES Income Statement for the year ended 30 June 2018 INCOME Fees revenue $138 950 LESS EXPENSES Salaries expense $58 860 Telephone expense 6 770 Insurance expense 2 184 Rent expense 10 900 Interest expense 520 Office supplies expense 3 460 Depreciation expense 1 020 83 714 PROFIT $55 236 CHELSEA ELLIOTT, MARKETING SERVICES Statement of Financial Position as at 30 June 2018 CURRENT ASSETS CURRENT LIABILITIES Cash at Bank $7 780 Accounts payable $2 800 Accounts receivable 21 700 Interest payable 520 Telephone payable 670 Prepaid insurance 546 Salaries payable 1 660 Prepaid rent 1 400 Unearned fees 550 6 200 Office supplies 560 $31 986 NON-CURRENT LIABILITIES NON-CURRENT ASSETS Loan payable 9 200 Office equipment 12 200 15 400 Accum. depr. (3 490) 8 710 EQUITY C. Elliott, Capital 25 296 $40 696 $40 696 (d) Profit before adjustments $64 900 Profit after adjustments 55 236 Decrease in profit $9 664 Problem 4.21 Adjusting entries, posting to T accounts, and effect on profit GST version The trial balance of Chelsea Elliott, marketing services provider, at 30 June 2019 was as follows. CHELSEA ELLIOTT, MARKETING SERVICES Unadjusted Trial Balance as at 30 June 2019 Account Debit Credit Cash at bank Accounts receivable GST receivable Prepaid rent Prepaid insurance Office supplies Office equipment Accumulated depreciation — office equipment Accounts payable Unearned fees Loan payable — due 2019 GST collections C. Elliott, Capital C. Elliott, Drawings Fees revenue Salaries expense Telephone expense Rent expense $ 7 780 21 700 2 600 2 100 2 730 4 020 12 200 52 000 57 200 6 100 10 200 $ 2 470 2 800 1 100 9 200 8 060 16 600 138 400 $ 178 630 $ 178 630 Required (a) Using the following information, prepare adjusting entries. Use the accounts shown in the trial balance and these additional accounts: Salaries Payable, Interest Payable, Telephone Account Payable, Depreciation Expense, Office Supplies Expense, Insurance Expense, Interest Expense. (i) Interest expense of $520 has accrued on the loan payable. (ii) A physical count of office supplies on 30 June shows $560 of unused supplies on hand. (iii) Depreciation of the office equipment this year is estimated to be $1020. (iv) Half the amount in the Unearned Fees account had been earned by the end of the year. (v) The amount in the Prepaid Rent account covers this June and the next 2 months. (vi) Of prepaid insurance, 80% expired this period. (vii) Salaries expense accrued for the last 4 days in June amounts to $1660. (viii) The telephone expense for June of $670 has not been recorded or paid. No tax invoice has been issued. (b) Open T accounts for the accounts shown in the trial balance and enter the 30 June balance in each account. Post the adjusting entries to the T accounts. (c) Prepare an adjusted trial balance, an income statement and a statement of financial position. (d) Assuming that adjusting entries 1–8 in requirement (a) were not made, determine what the profit would have been. What is the difference between this figure and the profit derived in requirement (c)? (LO3 and LO4) (a) CHELSEA ELLIOTT, MARKETING SERVICES General Journal Date Particulars Debit Credit Adjusting entries 2019 30 June 1. Interest Expense 520 Interest Payable 520 Accrued interest on loan payable 2. Office Supplies Expense 3 460 Office Supplies 3 460 Office supplies used 3. Depreciation Expense – Office Equipment 1 020 Accumulated Depreciation – Office Equipment 1 020 Depreciation on office equipment 4. Unearned Fees 550 Fees Revenue 550 Fees revenue received previously, now earned 5. Rent Expense 700 Prepaid Rent 700 Rent expense for June 6. Insurance Expense 2 184 Prepaid Insurance 2 184 Insurance prepaid now expired 7. Salaries Expense 1660 Salaries Payable 1660 Accrued salaries payable 8. Telephone Expense 670 Telephone Account Payable 670 Telephone expense for June (b) Cash at Bank 30/6 Balance $7 780 Accounts Receivable 30/6 Balance $21 700 GST Receivable 30/6 Balance $2 600 Prepaid Rent 30/6 Balance $2 100 (5) Rent expense $700 Prepaid Insurance 30/6 Balance $2 730 (6) Insurance expense $2 184 Office Supplies 30/6 Balance $4 020 (2) Office supplies exp $3 460 Office Equipment 30/6 Balance $12 200 Accumulated Depreciation – Office Equipment 30/6 Balance $2 470 (3) Dep’n exp 1 020 Accounts Payable 30/6 Balance $2 800 Interest Payable (1) Interest expense $520 Telephone Account Payable (8) Telephone expense $670 Salaries Payable (7) Salaries expense $1 660 Unearned Fees (4) Fees revenue $550 30/6 Balance $1 100 Loan Payable 30/6 Balance $9 200 GST Payable 30/6 Balance $8 060 C. Elliott, Capital 30/6 Balance $16 600 C. Elliott, Drawings 30/6 Balance $52 000 Fees Revenue 30/6 Balance $138 400 (4) Unearned fees 550 Salaries Expense 30/6 Balance $57 200 (7) Salaries payable 1 660 Telephone Expense 30/6 Balance $6 100 (8) Telephone expense 670 Rent Expense 30/6 Balance $10 200 (5) Prepaid rent 700 Interest Expense (1) Interest payable $520 Depreciation Expense – Office Equipment (3) Accum dep’n $1 020 Office Supplies Expense (2) Office supplies $3 460 Insurance Expense (6) Prepaid insurance $2 184 (c) CHELSEA ELLIOTT, MARKETING SERVICES Adjusted Trial Balance as at 30 June 2019 Account Dr Cr Cash at bank $7 780 Accounts receivable 21 700 GST receivable 2 600 Prepaid rent 1 400 Prepaid insurance 546 Office supplies 560 Office equipment 12 200 Accumulated depreciation – office equip $3 490 Accounts payable 2 800 Interest payable 520 Telephone account payable 670 Salaries payable 1 660 Unearned fees 550 Loan payable 9 200 GST Payable 8 060 C. Elliott, Capital 16 600 C. Elliott, Drawings 52 000 Fees Revenue 138 950 Salaries expense 58 860 Telephone expense 6 770 Rent expense 10 900 Interest expense 520 Depreciation expense – office equipment 1 020 Office supplies expense 3 460 Insurance expense 2 184 $182 500 $182 500 CHELSEA ELLIOTT, MARKETING SERVICES Income Statement for the year ended 30 June 2019 INCOME Fees revenue $138 950 LESS EXPENSES Salaries expense $58 860 Telephone expense 6 770 Insurance expense 2 184 Rent expense 10 900 Interest expense 520 Office supplies expense 3 460 Depreciation expense 1 020 83 714 PROFIT $55 236 CHELSEA ELLIOTT, MARKETING SERVICES Statement of Financial Position as at 30 June 2019 CURRENT ASSETS CURRENT LIABILITIES Cash at Bank $7 780 Accounts payable $2 800 Accounts receivable 21 700 Interest payable 520 Telephone payable 670 Prepaid insurance 546 Salaries payable 1 660 Prepaid rent 1 400 GST payable 5 460 Office supplies 560 Unearned fees 550 11 660 $31 986 NON-CURRENT ASSETS NON-CURRENT LIABILITIES Office equipment 12 200 Loan payable 9 200 Accum. depr. (3 490) 8 710 20 860 EQUITY C. Elliott, Capital 19 836 $40 696 $40 696 (d) Profit before adjustments $64 900 Profit after adjustments 55 236 Decrease in profit $9 664 Problem 4.22 Preparing a worksheet Non-GST version JetSki Hire runs a business on the Murray River hiring out jet skis to holiday makers, tour operators and for corporate training sessions. The unadjusted trial balance of JetSki Hire is shown below (ignore GST). The following additional information is available at the end of June. 1. Repairs on one jet skis done in June for $1870 have not yet been paid for or recorded. An invoice has been issued by the repairer. 2. Expired insurance amounted to $11 000. 3. Depreciation on the jet ski fleet for 1 year is $28 500. Depreciation on the office equipment is $1320. 4. Salaries earned but not paid amounted to $3780. 5. The balance in the Unearned Rental Revenue account includes $560 received for services rendered on 27 June. 6. The June telephone costs of $600 have not been paid for or recorded at 30 June 2019. A tax invoice has been received. 7. Accrued interest on the loan payable is $7800. Required (a) Prepare a 10-column worksheet for the year ended 30 June 2019. (LO6) (a) Problem 4.22 Preparing a worksheet GST version JetSki Hire runs a business on the Murray River hiring out jet skis to holiday makers, tour operators and for corporate training sessions. The unadjusted trial balance of JetSki Hire is shown below. JETSKI HIRE Unadjusted Trial Balance as at 30 June 2019 Account Debit Credit Cash at bank Accounts receivable GST receivable Prepaid insurance Jet skis Accumulated depreciation — jet skis Office equipment Accumulated depreciation — office equipment Accounts payable Loan payable Unearned rental revenue GST payable J. Jetson, Capital J. Jetson, Drawings Rental revenue Salaries expense Rent expense Repairs and maintenance expense Marine supplies expense Telephone expense $ 19 690 15 200 4 400 12 500 267 300 6 930 27 390 50 160 8 680 9 770 22 440 4 620 $ 105 600 2 940 19 600 82 500 2 770 6 600 109 380 119 690 $ 449 080 $ 449 080 The following additional information is available at the end of June. 1. Repairs on one jet skis done in June for $1870 have not yet been paid for or recorded. A tax invoice has been issued by the repairer. 2. Expired insurance amounted to $11 000. 3. Depreciation on the jet ski fleet for 1 year is $28 500. Depreciation on the office equipment is $1320. 4. Salaries earned but not paid amounted to $3780. 5. The balance in the Unearned Rental Revenue account includes $560 received for services rendered on 27 June. 6. The June telephone costs of $600 have not been paid for or recorded at 30 June 2019. A tax invoice has been received. 7. Accrued interest on the loan payable is $7800. Required (a) Prepare a 10-column worksheet for the year ended 30 June 2019. (LO6) (a) (a) Problem 4.23 Worksheet and financial statements The adjusted trial balance columns of the worksheet for Chris’ Cleaning Services are as shown on the next page. Required (a) Complete the worksheet and prepare and income statement, a statement of changes in equity and a classified balance sheet. (LO7, LO8 and LO9) (a) CHRIS’ CLEANING SERVICES Work Sheet (Partial) for the month ended 28 February 2019 Adjusted Trial Balance Income Statement Balance Sheet Account titles Dr Cr Dr Cr Dr Cr. Cash at Bank 41 300 41 300 Accounts Receivable 21 950 21 950 Prepaid Rent 6 380 6 380 Equipment 64 540 64 540 Accumulated Depreciation 13 280 13 280 Loan Payable 17 400 17 400 Accounts Payable 15 660 15 660 C. Kleen, Capital 94 230 94 230 C. Kleen, Drawings 10 200 10 200 Service Revenue 35 350 35 350 Salaries Expense 27 550 27 550 Rent Expense 2 120 2 120 Depreciation Expense 1 880 1 880 Interest Expense 160 160 Interest Payable 160 160 176 080 176 080 31 710 35 350 144 370 140 730 Profit for the period 3 640 3 640 $35 350 $35 350 $144 370 $144 370 Chris’ Cleaning Services Income Statement For the Month Ended 28 February 2019 Revenues Services Revenue $35 350 Expenses Salaries Expense $27 550 Rent Expense 2 120 Depreciation Expense 1 880 Interest Expense 160 Total expenses 31 710 Profit for the month $3 640 Chris’ Cleaning Services Statement of Changes in Equity For the Month Ended 28 February 2019 C. Kleen, Capital, 1 February $94 230 Profit for month 3 640 97 870 Drawings 10 200 C. Kleen, Capital, 28 February $87 670 Chris’ Cleaning Services Statement of Financial Position As at 28 February 2019 ASSETS Current assets Cash at Bank $41 300 Accounts Receivable 21 950 Prepaid Rent 6 380 Total current assets $69 630 Non-current assets Equipment $64 540 Accumulated Depreciation (13 280) Total non-current assets 51 260 TOTAL ASSETS $120 890 LIABILITIES AND EQUITY Current liabilities Loan Payable $17 400 Accounts Payable 15 660 Interest Payable 160 Total current liabilities $33 220 Equity C. Kleen, Capital 87 670 TOTAL LIABILITIES AND EQUITY $120 890 Problem 4.24 Adjusting entries and impact on financial statements Non-GST version The financial year for Bankstown Rental Services ends on 30 June. Required (a) Using the following information, make the necessary adjusting entries. • The $765 telephone expense is unpaid and unrecorded at 30 June. • The balance in Accumulated Depreciation at the beginning of the financial year was $51 300. Annual depreciation on equipment is estimated to be $34 200. • Rent of office premises of $3165 for the 3-month period ending 31 July is due to be paid in July. • Bankstown Rental Services borrowed $70 000 from Bank on 15 March. The principal, plus 8% interest, is payable on 15 September. Accrued interest on 30 June has not been recorded. • Bankstown Rental Services purchased a 12-month insurance policy for $2940 on 1 November. A 24-month policy was purchased on 1 April for $6600. Both purchases were recorded by debiting Prepaid Insurance. • The Supplies account had a $1500 debit balance on 1 July of the preceding year. Supplies costing $7100 were purchased during the year, and $1310 of supplies are on hand as at 30 June. • On 1 June, Bankstown Rental Services received 2 months’ rent in advance, totalling $4660. This was recorded by a credit to Unearned Rental Revenue. • The office assistant earns $280 a day. He will be paid in July for the 5-day period ending 2 July. (b) As you know, all adjusting entries affect one balance sheet account and one income statement account. Based on your adjusting entries prepared in requirement (a): i. calculate the increase or decrease in profit ii. calculate the increase or decrease in total assets, total liabilities and total equity. (LO3 and LO4) (a) BANKSTOWN RENTAL SERVICES General Journal Date Particulars Debit Credit Adjusting entries June 30 i. Telephone Expense 765 Telephone Account Payable 765 Telephone bill due. ii. Depreciation Expense 34200 Accumulated Depreciation 34200 Depreciation on equipment. iii. Rent Expense 2 110 Rent Payable 2 110 Rent due on office premises [2/3 of $3165]. iv. Interest Expense 1 633 Interest Payable 1 633 Accrued interest on bank loan ($70 000 × 0.08 × 3.5/12 = $399). v. Insurance Expense 2 785 Prepaid Insurance 2 785 Insurance expired ($2940 × 8/12) + ($6600 × 3/24) =1960+825=2785. vi. Supplies Expense 7 290 Supplies 7 290 Supplies used. ($1500 + $7100 – $1310) vii. Unearned Rental Revenue 2 330 Rental Revenue 2 330 Rent precollected and now earned. viii. Salaries Expense 840 Salaries Payable 840 Salary owing to assistant for 3 days. (b) i. Decrease in profit, $47,293 –$765 – $34200 – $2110 – $1633 – $2785 – $7290 + 2330 – $840 = $47293 ii. (a) Decrease in total assets, $44275 – $34200 – $2785 – $7290 = $44275 (b) Increase in total liabilities, $3018 $765 + $2 110 + $1633 – $2330 + $840 = $3018 (c) Decrease in equity, $47,293 $44275 + $3018 = $47293 Problem 4.24 Adjusting entries and impact on financial statements GST version The financial year for Bankstown Rental Services ends on 30 June. Required (a) Using the following information, make the necessary adjusting entries. i. The $765, plus GST, telephone expense is unpaid and unrecorded at 30 June. ii. The balance in Accumulated Depreciation at the beginning of the financial year was $51 300. Annual depreciation on equipment is estimated to be $34 200. iii. Rent of office premises of $3165, plus GST, for the 3-month period ending 31 July is due to be paid in July. iv. Bankstown Rental Services borrowed $70 000 from Bank on 15 March. The principal, plus 8% interest, is payable on 15 September. Accrued interest on 30 June has not been recorded. v. Bankstown Rental Services purchased a 12-month insurance policy for $2940 on 1 November. A 24-month policy was purchased on 1 April for $6600. Both purchases were recorded by debiting Prepaid Insurance. vi. The Supplies account had a $1500 debit balance on 1 July of the preceding year. Supplies costing $7100 were purchased during the year, and $1310 of supplies are on hand as at 30 June. vii. On 1 June, Bankstown Rental Services received 2 months’ rent in advance, totalling $4660. This was recorded by a credit to Unearned Rental Revenue. viii. The office assistant earns $280 a day. He will be paid in July for the 5-day period ending 2 July. (b) As you know, all adjusting entries affect one balance sheet account and one income statement account. Based on your adjusting entries prepared in requirement A: i. calculate the increase or decrease in profit ii. calculate the increase or decrease in total assets, total liabilities and total equity. (LO3 and LO4) (a) BANKSTOWN RENTAL SERVICES General Journal Date Particulars Debit Credit Adjusting entries June 30 i. Telephone Expense 765.00 GST Receivable 76.50 Telephone Account Payable 841.50 Telephone bill due. ii. Depreciation Expense 34200 Accumulated Depreciation 34200 Depreciation on equipment. iii. Rent Expense 2 110 GST Receivable 211 Rent Payable 2 321 Rent due on office premises [2/3 of $3165]. iv. Interest Expense 1 633 Interest Payable 1 633 Accrued interest on bank loan ($70 000 × 0.08 × 3.5/12 = $399). v. Insurance Expense 2 785 Prepaid Insurance 2 785 Insurance expired ($2940 × 8/12) + ($6600 × 3/24)=1960+825=2785. vi. Supplies Expense 7 290 Supplies 7 290 Supplies used. ($1500 + $7100 – $1310) vii. Unearned Rental Revenue 2 330 Rental Revenue 2 330 Rent precollected and now earned. viii. Salaries Expense 840 Salaries Payable 840 Salary owing to assistant for 3 days. (b) i. Decrease in profit, $47,293 –$765 – $34200 – $2110 – $1633 – $2785 – $7290 + 2330 – $840 = $47293 ii. (a) Decrease in total assets, $43987.50 +$76.50– $34200 + 211 – $2785 – $7290 = $43987.50 (b) Increase in total liabilities, $3305.50 $841.50 + $2 321 + $1633 – $2330 + $840 = $3305.50 (c) Decrease in equity, $47,293 $43987.50 + $3305.50 = $47293 Problem 4.25 Adjusting entries, cash v. accrual accounting Tania Angus established Angus’ Phone App Productions in 2018 and kept her accounting records on a cash basis. During 2020, Tania decided to switch her accounting to the accrual basis and has asked you to help her convert the 2018 and 2019 financial statements to an accrual basis. Your analysis of the accounting records revealed the following data: Required (a) Using the above data, complete abbreviated income statements in the form shown below for the years 2018 and 2019 for both the cash basis and accrual basis of accounting. Show supporting calculations in good form. (b) Show the differences that would result in the 31 December 2019 statement of financial position accounts from using the accrual basis as compared to the cash basis. (LO4, LO5 and LO7) (a) Cash basis Accrual basis 2018 2019 2018 2019 Consulting fees revenue $168 150 $210 900 $205 200 $230 850 Expenses 113 200 170 800 135 900 149 900 Profit $54 950 $40 100 $69 300 $80 950 Calculation of revenue: Cash basis Accrual basis 2018 2019 2018 2019 Cash collected for services performed during year $159 600 $165 300 $159 600 $165 300 Services performed but uncollected — 45 600 45 600 57 000 Unearned revenue 8 550 8 550 $168 150 $210 900 $205 200 $230 850 Accrued revenue of $57 000 for services performed in 2019 would be reported as revenue in 2020 under the cash basis. Calculation of expenses: Cash basis Accrual basis 2018 2019 2018 2019 Cash paid for services received $91 200 $96 900 $91 200 $96 900 Accrued expenses 39 900 39900 41600 Prepaid expenses 22 000 34 000 4 800* 11 400** $113 200 $170 800 $135 900 $149 900 *$22 000– $17 200 = $4 800 **($17 200 + $34 000) – $39 800 = $11 400 Accrued expenses of $39 800 at the end of 2019 would be reported as an expense in 2020 under the cash basis. (b) Differences at end of 2019 2019 ASSETS Prepaid expenses +$39 800 Receivables +57 000 $96 800 LIABILITIES Unearned revenue — Accrued liability $41 600 41 600 EQUITY +55 200 $96 800 * Cash basis ($54 950 + $40 100) $95 050 Accrual basis ($69 300 + $80 950) 150 250 Difference 55 200 Problem 4.26 Adjusting entries and justifications Miranda’s Motor Mechanics analysed the accounting records and other data for the business. The following information is made available for the year ended 30 June 2019. 1. Salaries and wages owing to employees at the end of the financial year amounted to $2480. 2. Included in the Prepaid Rent account is an amount of $1600 paid in June for the month of July 2019. The Prepaid Rent account has a debit balance of $4800. 3. All equipment had been acquired when the business was established on 1 July 2016. The Equipment account has a debit balance of $142 000. The equipment has a useful life of 10 years and an estimated residual value of $6000. 4. The Motor Vehicle account has a debit balance of $80 000. The vehicle was purchased on 1 January 2019 and has an estimated useful life of 5 years and an estimated residual value of $10 000. 5. The Prepaid Insurance account has a debit balance of $3444. It consists of the following policies purchased during the financial year ending 30 June 2019. 6. A physical count of office supplies on hand at 30 June gives a total of $890. The Office Supplies account has a debit balance of $2920. 7. Included in the Prepaid Advertising account balance of $8400 is the amount is $1650 paid to the local newspaper for advertising space in their July 2019 papers. The remainder of the balance is used up by 30 June 2019. 8. At the end of the year, the business had outstanding a long-term loan of $40 000 from one of Miranda’s friends. Interest of 8% p.a. is payable half-yearly on this loan, every 1 April and 1 October. The last interest payment made by the business was on 1 April 2019. 9. The Motor Mechanic Services Revenue account had a credit balance of $123 600. Included in this amount was $3280 for services to be provided in July 2019. 10. Accrued council rates at 30 June 2019 were $4200. Required (a) Prepare the end-of-period adjusting entries required on 30 June 2019. Show clearly your calculations. (b) Provide reasons for your answers to items 2, 4 and 8 above. (LO4 and LO5) (a) MIRANDA’S MOTOR MECHANICS General Journal Date Particulars Debit Credit Adjusting entries 2019 30 June 1. Salaries Expense 2 480 Salaries Payable 2 480 Accrued salaries payable 2. Rent Expense 3 200 Prepaid Rent 3 200 Rent expense for June 3. Depreciation Expense – Equipment 13 600 Accumulated Depreciation – Equipment 13 600 Depreciation on equipment for the year ($142 000 – $6000) × 10% 4. Depreciation Expense – Motor Vehicle 7 000 Accumulated Depreciation – Motor Vehicle 7 000 Depreciation on vehicle for the year 5. Insurance Expense 1 759 Prepaid Insurance 1 759 Insurance prepaid now expired (11/12 × $876 + 7/24 × $2019 + 4/6 × $552) 6. Office Supplies Expense 2 030 Office Supplies 2 030 Office supplies used 7. Advertising Expense 6 750 Prepaid Advertising 6 750 Advertising prepaid now expired 8. Interest Expense 800 Interest Payable 800 Accrued interest on loan payable ($40 000 × 8% × 3/12) 9. Motor Mechanic Services Revenue 3 280 Unearned Revenue 3 280 Fees revenue received, not yet earned 10. Rates Expense 4 200 Rates Payable 4 200 Council rates for the year (b) Item 2 Rent Expense 3 200 Prepaid Rent 3 200 Rent expense for June The business is in the habit of initially recording insurance paid in advance in the Prepaid Rent account. At the end of the year, the balance of this account was $4800, but only $1600 represents prepayments for the next financial year. Hence, $3200 of rent services have expired and therefore must be transferred out of the asset account into an expense account. Item 4 9. Depreciation Expense – Motor Vehicle 7 000 Accumulated Depreciation – Motor Vehicle 7 000 Depreciation on vehicle for the year As the vehicle was purchased on 1 January 2019, the entity has only used it for 6 months and therefore depreciation expense should be for only 6 months. The estimated useful life is 5 years, and the vehicle is expected to have a residual value of $10 000 at the end of its useful life. Hence, the total amount to be depreciated on the vehicle over 5 years is $80 000 – $10 000 = $70 000. Assuming that the vehicle is used evenly over its life, it can be argued that the depreciation expense should reflect an equal amount of usage per year. As the vehicle was purchased on 1 January, depreciation up to 30 June 2019 is therefore calculated as: $70 000 × 1/5 × ½ = $7000 Item 8 Interest Expense 800 Interest Payable 800 Accrued interest on loan payable The outstanding loan of $40 000 requires interest to be paid at the rate of 8% p.a. As interest is paid half-yearly, and the last interest payment was on 1 April 2019, there is interest expense accrued on the loan for the months of April, May and June. The interest liability at 30 June 2019 is therefore equal to 8% × $40 000 × 3/12 = $800 Problem 4.27 Adjusting entries and financial statements Non-GST version The unadjusted trial balance of the general ledger of Antonio’s Small Appliance Repair Service on 30 June 2019 is presented below (ignore GST). Additional data for adjustment purposes 1. Supplies on 30 June 2019 were: (i) advertising supplies (originally debited to Advertising Expense), $6900. (ii) store supplies (originally debited to Sundry Expenses), $3600. 2. On 1 January 2019, the business rented half of its shop space to Joshua’s Cafe for 12 months and received a cheque for $19 200, representing the entire year’s rental fee. 3. Purchases of electrical repair equipment were as follows. 4. The Prepaid Insurance account consists of the following. 5. Wages earned by employees but unpaid as at 30 June 2019 totalled $5040. 6. Interest on the mortgage payable is $3672 per year, paid in half-yearly instalments on 1 May and 1 November. Required (a) Journalise adjustments in the general journal of the entity. (b) Prepare an income statement and a statement of changes in equity for the year ended 30 June 2019. (c) Prepare a statement of financial position (properly classified in narrative form) as at 30 June 2019. (d) Present the Interest on Mortgage Expense account showing detailed entries for the year ended 30 June 2019 as it would appear after all adjustments have been made. (LO3 and LO4) (a) ANTONIO’S SMALL APPLIANCE REPAIR SERVICE General Journal Date Particulars Debit Credit Adjusting entries 2019 Jun 30 Advertising Supplies 6 900 Advertising Expense 6 900 Advertising supplies not yet used. Stores Supplies 3 600 Sundry Expenses 3 600 Store supplies not yet used Rent Revenue 9 600 Unearned Rent 9 600 Rent not yet earned Depreciation – Electrical Repair Equip. 37 000 Accumulated Depreciation – Electrical Repair Equipment 37 000 Depreciation on equipment ($280 000/8 + $80 000/10 × 3/12) Insurance Expense 5 100 Prepaid Insurance 5 100 Insurance expired ($6200 × 1/2 + $4000 × 6/12) Wages Expense 5 040 Wages Payable 5 040 Accrued wages Interest Expense 612 Interest Payable 612 Interest accrued on mortgage since 1 May. ($3672 × 2/12) (b) ANTONIO’S SMALL APPLIANCE REPAIR SERVICE Income Statement for the year ended 30 June 2019 INCOME Small appliance repairs revenue $434 600 Rent revenue 9 600 $444 200 EXPENSES Advertising expense $13 200 Other selling expenses 30 750 Electricity expense 20 100 Rent expense 19 680 Wages expense 160 840 Insurance expense 5 100 Depreciation of store equipment 37 000 Sundry expenses 35 600 Interest expense 3 672 325 942 PROFIT $118 258 ANTONIO’S SMALL APPLIANCE REPAIR SERVICE Statement of Changes in Equity for the year ended 30 June 2019 A. Calabrese, Capital – 1 July 2018 $181 010 Add: Profit for the period 118 258 Less: A. Calabrese, Drawings (31 540) A. Calabrese, Capital – 30 June 2019 $267 728 ANTONIO’S SMALL APPLIANCE REPAIR SERVICE Statement of Financial Position as at 30 June 2019 CURRENT ASSETS Cash at bank $37 770 Accounts receivable 198 850 Prepaid insurance 5 100 Advertising supplies 6 900 Store supplies 3 600 Marketable securities 76 260 TOTAL CURRENT ASSETS $328 480 NON-CURRENT ASSETS Electrical equipment 360 000 Less: Accum. depreciation – electrical equipment (159 500) TOTAL NON-CURRENT ASSETS 200 500 TOTAL ASSETS $528 980 CURRENT LIABILITIES Accounts payable $184 500 Wages payable 5 040 Interest payable 612 Unearned rent 9 600 TOTAL CURRENT LIABILITIES $199 752 NON-CURRENT LIABILITIES Mortgage payable 61 500 TOTAL LIABILITIES 261 252 NET ASSETS $267 728 EQUITY A. Calabrese, Capital $267 728 TOTAL EQUITY $267 728 (d) Interest Expense 2018 2018 Nov 1 Cash 1 836 Jul 1 Interest payable 612 2019 (reversing entry) May 1 Cash 1 836 2019 Jun 31 Interest payable 612 Jun 30 P/L Summary 3 672 $4 284 $4 284 Problem 4.27 Adjusting entries and financial statements GST version The unadjusted trial balance of the general ledger of Antonio’s Small Appliance Repair Service on 30 June 2016 is presented below. ANTONIO’S SMALL APPLIANCE REPAIR SERVICE Trial Balance as at 30 June 2016 Account Debit Credit Cash at bank Investment in marketable securities Accounts receivable GST receivable Prepaid insurance Electrical repair equipment Accumulated depreciation – electrical equipment Accounts payable Mortgage payable (due 31 December 2021) GST payable A. Calabrese, Capital A. Calabrese, Drawings Small appliance repairs revenue Advertising expense Other selling expenses Electricity expense Sundry expenses Rent expense Wages expense Interest on mortgage expense Rent revenue $ 37 770 76 260 198 850 18 860 10 200 360 000 31 540 20 100 30 750 20 100 39 200 19 680 155 800 3 060 $ 122 500 184 500 61 500 27 100 172 770 434 600 19 200 $ 1 022 170 $ 1 022 170 Additional data for adjustment purposes 1. Supplies on 30 June 2016 were: (i) advertising supplies (originally debited to Advertising Expense), $6900. (ii) store supplies (originally debited to Sundry Expenses), $3600. 2. On 1 January 2016, the business rented half of its shop space to Joshua’s Cafe for 12 months and received a cheque for $19 200 plus GST, representing the entire year’s rental fee. 3. Purchases of electrical repair equipment were as follows, net of GST: 4. The Prepaid Insurance account consists of the following, net of GST: 5. Wages earned by employees but unpaid as at 30 June 2016 totalled $5040. 6. Interest on the mortgage payable is $3672 per year, paid in half-yearly instalments on 1 May and 1 November. Required (a) Journalise adjustments in the general journal of the entity. (b) Prepare an income statement and a statement of changes in equity for the year ended 30 June 2016. (c) Prepare a statement of financial position (properly classified in narrative form) as at 30 June 2016. (d) Present the Interest on Mortgage Expense account showing detailed entries for the year ended 30 June 2016 as it would appear after all adjustments have been made. (LO3 and LO4) (a) ANTONIO’S SMALL APPLIANCE REPAIR SERVICE General Journal Date Particulars Debit Credit Adjusting entries 2016 Jun 30 Advertising Supplies 6 900 Advertising Expense 6 900 Advertising supplies not yet used. Stores Supplies 3 600 Sundry Expenses 3 600 Store supplies not yet used Rent Revenue 9 600 Unearned Rent 9 600 Rent not yet earned (net of GST) Depreciation – Electrical Repair Equip. 37 000 Accumulated Depreciation – Electrical Repair Equipment 37 000 Depreciation on equipment ($280 000/8 + $80 000/10 × 3/12) Insurance Expense 5 100 Prepaid Insurance 5 100 Insurance expired ($6200 × 1/2 + $4000 × 6/12) Wages Expense 5 040 Wages Payable 5 040 Accrued wages Interest Expense 612 Interest Payable 612 Interest accrued on mortgage since 1 May. ($3672 × 2/12) (b) ANTONIO’S SMALL APPLIANCE REPAIR SERVICE Income Statement for the year ended 30 June 2016 INCOME Small appliance repairs revenue $434 600 Rent revenue 9 600 $444 200 EXPENSES Advertising expense $13 200 Other selling expenses 30 750 Electricity expense 20 100 Rent expense 19 680 Wages expense 160 840 Insurance expense 5 100 Depreciation of store equipment 37 000 Sundry expenses 35 600 Interest expense 3 672 325 942 PROFIT $118 258 ANTONIO’S SMALL APPLIANCE REPAIR SERVICE Statement of Changes in Equity for the year ended 30 June 2016 A. Calabrese, Capital – 1 July 2015 $172 770 Add: Profit for the period 118 258 Less: A. Calabrese, Drawings (31 540) A. Calabrese, Capital – 30 June 2016 $259 488 (c) ANTONIO’S SMALL APPLIANCE REPAIR SERVICE Statement of Financial Position as at 30 June 2016 CURRENT ASSETS Cash at bank $37 770 Accounts receivable 198 850 Prepaid insurance 5 100 Advertising supplies 6 900 Store supplies 3 600 Marketable securities 76 260 TOTAL CURRENT ASSETS $328 480 NON-CURRENT ASSETS Electrical equipment 360 000 Less: Accum. depreciation – electrical equipment (159 500) TOTAL NON-CURRENT ASSETS 200 500 TOTAL ASSETS $528 980 CURRENT LIABILITIES Accounts payable $184 500 Wages payable 5 040 Interest payable 612 GST payable 8 240 Unearned rent 9 600 TOTAL CURRENT LIABILITIES $207 992 NON-CURRENT LIABILITIES Mortgage payable 61 500 TOTAL LIABILITIES 269 492 NET ASSETS $259 488 EQUITY A. Calabrese, Capital $259 488 TOTAL EQUITY $259 488 (d) Interest Expense 2015 2015 Nov 1 Cash 1 836 Jul 1 Interest payable 612 2016 (reversing entry) May 1 Cash 1 836 2016 Jun 31 Interest payable 612 Jun 30 P/L Summary 3 672 $4 284 $4 284 Problem 4.28 Cash and accrual accounting Trang Nguyen operates a roofing business that specialises in replacing broken tiles and cleaning and repairing roofs and gutters. He began business in April 2019 but has not yet established a formal set of records. His son, Tram, has prepared cash receipts and payments statements for each of the first 3 months of the business, but Trang Nguyen is worried about relying on them. He asks you to prepare a ‘proper’ set of financial statements for the month of June. By reviewing the bank statements, cheque butts, invoice files and other data, you derive a set of balance sheets at 1 June and 30 June. These are shown below, followed by a statement of cash receipts and payments for March. GST is ignored. Required (a) From the information, prepare an income statement on the accrual basis for the month of June. Hint: you may wish to prepare (reconstruct) relevant accounts. (b) Illustrate the apparent correctness of your profit amount by preparing a statement of changes in equity for June 2019. (LO1 and LO4) (a) NGUYEN ROOFING SERVICE Income Statement for the month ended 30 June 2019 INCOME Service fees revenue $29 920 EXPENSES Supplies used $5 650 Salaries expense 9 440 Electricity expense 1 470 Rent expense 2 000 Sundry expense 2 370 Depreciation expense – equipment 2 700 23 630 PROFIT $6 290 Most of the information in the income statement is obtained by reconstructing the relevant accounts. Accounts Receivable 1/6 Balance b/d $7 220 30/6 Cash at Bank $27 860 Service Revenue 29 920 Balance c/d 9 280 $37 140 $37 140 Balance b/d $9 280 Supplies on Hand 1/6 Balance b/d $4 100 30/6 Supplies Expense $5 650 Cash at Bank 6 190 Balance c/d 4 640 $10 290 $10 290 Balance b/d $4 640 Salaries Payable 30/6 Cast at Bank $6 700 1/6 Balance b/d $4 640 Balance c/d 7 380 Salaries Expense 9 440 $14 080 $14 080 Balance b/d $7 380 Electricity Account Payable 30/6 Electricity Expense $1 470 Accumulated Depreciation – Equipment 30/6 Balance c/d $10 300 1/6 Balance b/d $7 600 30/6 Depreciation Expense 2 700 $10 300 $10 300 Balance b/d $10 300 Rent and miscellaneous expenses were as shown in the cash payments records. (b) NGUYEN ROOFING SERVICE Statement of Changes in Equity for the month ended 30 June 2019 T. Nguyen, Capital – 1 June $70 360 Profit for month 6 290 Additional capital paid in 20 000 $96 650 Less: Drawings 12 000 T. Nguyen, Capital – 30 June $84 650 Problem 4.29 Opening T accounts, adjusting entries and preparing financial statements Non-GST version Gavin’s Gardening Equipment Hire’s unadjusted trial balance of the business appears as shown below. Additional information 1. Expired insurance amounts to $750. 2. June electricity costs of $330 have not been paid or recorded. No tax invoice has been received. 3. Depreciation on the gardening equipment is $16 250. 4. Hire fees of $1320 were received in advance and were not considered to be revenue at balance date. 5. The Rent Expense account contains $1440 paid for July 2019 rent. 6. A hire fee of $380 received in cash was recorded by debiting Accounts Receivable. 7. Salaries earned amounting to $530 will be paid in July and have not been recorded. Required (a) Set up T accounts for the accounts listed in the trial balance. i. Enter the account balances from the trial balance to the T accounts. ii. Post the adjusting information directly to the T accounts. (b) Prepare an adjusted trial balance. (c) Prepare an income statement and a statement of changes in equity for the year ended 30 June 2019. (d) Prepare a balance sheet as at 30 June 2019. (LO3 and LO4) (a) Cash at Bank Balance $5 200 (f) Accounts receivable 380 Accounts Receivable Balance $2 400 (f) Cash at bank 380 Prepaid Insurance Balance $1 200 (a) Insurance expense $750 Prepaid Rent (e) Rent expense $1 440 Gardening Equipment Balance $78 700 Accumulated Depreciation – Gardening Equipment Balance $40 600 (c) Dep’n exp 16 250 Accounts Payable Balance $6 800 Salaries Payable (g) Salaries expense $530 Electricity Payable (b) Electricity expense $330 Unearned Hire Fees (d) Hire fees revenue $1 320 G. Greene, Capital Balance $20 410 G. Greene, Drawings Balance $18 310 Hire Fees Revenue (d) Unearned hire fees $1 320 Balance $74 700 Salaries Expense Balance $26 500 (g) Salaries payable 530 Rent Expense Balance $5 700 (e) Prepaid rent $1 440 Maintenance Expense Balance $3 100 Electricity Expense Balance $1 400 (b) Electricity payable 330 Depreciation Expense – Gardening Equipment (c) Accum. dep’n $16 250 Insurance Expense (a) Prepaid insurance $750 (b) GAVIN’S GARDENING EQUIPMENT HIRE Adjusted Trial Balance as at 30 June 2019 Account Debit Credit Cash at bank $5 580 Accounts receivable 2 020 Prepaid insurance 450 Prepaid rent 1 440 Gardening equipment 78 700 Accumulated depreciation $56 850 Accounts payable 6 800 Salaries payable 530 Electricity payable 330 Unearned hire fees 1 320 G. Greene, Capital 20 410 G. Greene, Drawings 18 310 Hire fees revenue 73 380 Salaries expense 27 030 Rent expense 4 260 Maintenance expense 3 100 Electricity expense 1 730 Depreciation expense 16 250 Insurance expense 750 $159 620 $159 620 (c) GAVIN’S GARDENING EQUIPMENT HIRE Income Statement for the year ended 30 June 2019 INCOME Hire fees revenue $73 380 EXPENSES Salaries expense $27 030 Rent expense 4 260 Maintenance expense 3 100 Electricity expense 1 730 Depreciation expense 16 250 Insurance expense 750 Total Expenses 53 120 PROFIT $20 260 GAVIN’S GARDENING EQUIPMENT HIRE Statement of Changes in Equity for the year ended 30 June 2019 G. Greene, Capital – 1 July 2018 $20 410 Profit for year 20 260 $40 670 Less Drawings 18 310 G. Greene, Capital – 30 June 2019 $22 360 (d) GAVIN’S GARDENING EQUIPMENT HIRE Balance Sheet as at 30 June 2019 CURRENT ASSETS Cash at bank $5 618 Accounts receivable 1 982 Prepaid insurance 450 Prepaid Rent 1 440 $9 490 NON-CURRENT ASSETS Gardening equipment 78 700 Less: Accumulated depreciation (56 850) 21 850 TOTAL ASSETS $31 340 CURRENT LIABILITIES Accounts payable $6 800 Salaries payable 530 Electricity payable 330 Unearned hire fees 1 320 8 980 NET ASSETS $22 360 EQUITY G. Greene, Capital 22 360 TOTAL EQUITY $22 360 Problem 4.29 Opening T accounts, adjusting entries and preparing financial statements GST version Gavin’s Gardening Equipment Hire’s unadjusted trial balance of the business appears as shown below. GAVIN’S GARDENING EQUIPMENT HIRE Unadjusted Trial Balance as at 30 June 2019 Account Debit Credit Cash at bank Accounts receivable GST receivable Prepaid insurance Gardening equipment Accumulated depreciation – party equipment Accounts payable GST payable G. Greene, Capital G. Greene, Drawings Hire fees revenue Salaries expense Rent expense Maintenance expense Electricity expense $ 5 200 2 400 3 300 1 200 78 700 18 310 26 500 5 700 3 100 1 400 $ 40 600 6 800 5 000 18 710 74 700 $ 145 810 $ 145 810 Additional information 1. Expired insurance amounts to $750. 2. June electricity costs of $330 have not been paid or recorded. No tax invoice has been received. 3. Depreciation on the gardening equipment is $16 250. 4. Hire fees of $1320 (plus GST of $132) were received in advance and were not considered to be revenue at balance date. 5. The Rent Expense account contains $1440 paid for July 2019 rent. 6. A hire fee of $418 received in cash (including $38 GST) was recorded by debiting Accounts Receivable. 7. Salaries earned amounting to $530 will be paid in July and have not been recorded. Required (a) Set up T accounts for the accounts listed in the trial balance. i. Enter the account balances from the trial balance to the T accounts. ii. Post the adjusting information directly to the T accounts. (b) Prepare an adjusted trial balance. (c) Prepare an income statement and a statement of changes in equity for the year ended 30 June 2019. (d) Prepare a balance sheet as at 30 June 2019. (LO3 and LO4) (a) Cash at Bank Balance $5 200 (f) Accounts receivable 418 Accounts Receivable Balance $2 400 (f) Cash at bank 418 GST Receivable Balance $3 300 Prepaid Insurance Balance $1 200 (a) Insurance expense $750 Prepaid Rent (e) Rent expense $1 440 Gardening Equipment Balance $78 700 Accumulated Depreciation – Gardening Equipment Balance $40 600 (c) Dep’n exp 16 250 Accounts Payable Balance $6 800 Salaries Payable (g) Salaries expense $530 Electricity Payable (b) Electricity expense $330 Unearned Hire Fees (d) Hire fees revenue $1 320 GST Payable Balance $5 000 G. Greene, Capital Balance $18 710 G. Greene, Drawings Balance $18 310 Hire Fees Revenue (d) Unearned hire fees $1 320 Balance $74 700 Salaries Expense Balance $26 500 (g) Salaries payable 530 Rent Expense Balance $5 700 (e) Prepaid rent $1 440 Maintenance Expense Balance $3 100 Electricity Expense Balance $1 400 (b) Electricity payable 330 Depreciation Expense – Gardening Equipment (c) Accum. dep’n $16 250 Insurance Expense (a) Prepaid insurance $750 (b) GAVIN’S GARDENING EQUIPMENT HIRE Adjusted Trial Balance as at 30 June 2019 Account Debit Credit Cash at bank $5 618 Accounts receivable 1 982 GST Receivable 3 300 Prepaid insurance 450 Prepaid rent 1 440 Gardening equipment 78 700 Accumulated depreciation $56 850 Accounts payable 6 800 Salaries payable 530 Electricity payable 330 GST Payable 5 000 Unearned hire fees 1 320 G. Greene, Capital 18 710 G. Greene, Drawings 18 310 Hire fees revenue 73 380 Salaries expense 27 030 Rent expense 4 260 Maintenance expense 3 100 Electricity expense 1 730 Depreciation expense 16 250 Insurance expense 750 $162 920 $162 920 (c) GAVIN’S GARDENING EQUIPMENT HIRE Income Statement for the year ended 30 June 2019 INCOME Hire fees revenue $73 380 EXPENSES Salaries expense $27 030 Rent expense 4 260 Maintenance expense 3 100 Electricity expense 1 730 Depreciation expense 16 250 Insurance expense 750 Total Expenses 53 120 PROFIT $20 260 GAVIN’S GARDENING EQUIPMENT HIRE Statement of Changes in Equity for the year ended 30 June 2019 G. Greene, Capital – 1 July 2018 $18 710 Profit for year 20 260 $38 970 Less Drawings 18 310 G. Greene, Capital – 30 June 2019 $20 660 (d) GAVIN’S GARDENING EQUIPMENT HIRE Balance Sheet as at 30 June 2019 CURRENT ASSETS Cash at bank $5 618 Accounts receivable 1 982 Prepaid insurance 450 Prepaid Rent 1 440 $9 490 NON-CURRENT ASSETS Gardening equipment 78 700 Less: Accumulated depreciation (56 850) 21 850 TOTAL ASSETS $31 340 CURRENT LIABILITIES Accounts payable $6 800 Salaries payable 530 GST payable 1 700 Electricity payable 330 Unearned hire fees 1 320 10 680 NET ASSETS $20 660 EQUITY G. Greene, Capital 20 660 TOTAL EQUITY $20 660 Problem 4.30 Preparing a worksheet and financial statements Non-GST version The unadjusted trial balance of Helena’s Hire Cars is shown below (ignore GST). Additional information 1. Petrol purchased on credit for $680 and used during the last week in June has not been paid for or recorded. 2. A physical count showed office supplies totalling $340 were still on hand at 30 June. 3. Depreciation for 1 year on the hire cars is $12 400. Depreciation on the office equipment is $980. 4. The balance in the Advertising Expense account includes $600 prepayment for an advertising campaign beginning in July. 5. The balance in the Unearned Hire Fees account includes $1800 received in May for hire services completed in June. 6. The June insurance premium of $700 is overdue and has not been recorded. A tax invoice has not been received. 7. Wages earned but not paid amounted to $1150. Required (a) Prepare a 10-column worksheet for the year ended 30 June 2019. (b) Prepare the income statement for the business for the year ended 30 June 2019. (c) Prepare a statement of changes in equity for the year ended 30 June 2019. (d) Prepare a balance sheet as at 30 June 2019. (LO3, LO4 and LO6) (a) (b) HELENA’S HIRE CARS Income Statement for the year ended 30 June 2019 INCOME Removal fees $100 500 EXPENSES Insurance expense $8 880 Wages expense 51 770 Advertising expense 3 280 Maintenance expense 7 600 Fuel and oil expense 11 360 Depreciation – cars 12 400 Depreciation – office equipment 980 Office supplies expense 300 Total Expenses 96 570 PROFIT $3 930 (c) HELENA’S HIRE CARS Statement of Changes in Equity for the year ended 30 June 2019 H. Savva, Capital – 1 July 2018 $68 340 Profit for the year 3 930 Less Drawings (20 600) H. Savva, Capital – 30 June 2019 $51 670 (d) HELENA’S HIRE CARS Balance Sheet as at 30 June 2019 CURRENT ASSETS Cash at bank $8 140 Accounts receivable 12 860 Office supplies 340 Prepaid advertising 600 $21 940 NON-CURRENT ASSETS Hire cars $93 600 Accumulated depreciation (51 800) 41 800 Office equipment 6 200 Accumulated depreciation (4 480) 1 720 43 520 TOTAL ASSETS $65 460 CURRENT LIABILITIES Accounts payable 10 800 Unearned removal fees 460 Wages payable 1 150 Fuel and oil payable 680 Insurance payable 700 13 790 NET ASSETS $51 670 EQUITY H. Savva, Capital 51 670 TOTAL EQUITY $51 670 Problem 4.30 Preparing a worksheet and financial statements GST version The unadjusted trial balance of Helena’s Hire Cars is shown below: HELENA’S HIRE CARS Unadjusted Trial Balance as at 30 June 2019 Account Debit Credit Cash at bank Accounts receivable GST receivable Office supplies Hire cars Accumulated depreciation – hire cars Office equipment Accumulated depreciation – office equipment Accounts payable Unearned hire fees GST payable H. Savva, Capital H. Savva, Drawings Hire fees revenue Insurance expense Wages expense Advertising expense Maintenance expense Fuel and oil expense $ 8 140 12 860 1 500 640 93 600 6 200 20 600 8 180 50 620 3 880 7 600 10 680 $ 39 400 3 500 10 800 2 260 3 240 66 600 98 700 $ 224 500 $ 224 500 Additional information 1. Petrol purchased on credit for $680 plus GST of 10% and used during the last week in June has not been paid for or recorded. 2. A physical count showed office supplies totalling $340 were still on hand at 30 June. 3. Depreciation for 1 year on the hire cars is $12 400. Depreciation on the office equipment is $980. 4. The balance in the Advertising Expense account includes $600 prepayment (net of GST) for an advertising campaign beginning in July. 5. The balance in the Unearned Hire Fees account includes $1800 received in May for hire services completed in June. 6. The June insurance premium of $700 plus GST is overdue and has not been recorded. A tax invoice has not been received. 7. Wages earned but not paid amounted to $1150. Required (a) Prepare a 10-column worksheet for the year ended 30 June 2019. (b) Prepare the income statement for the business for the year ended 30 June 2019. (c) Prepare a statement of changes in equity for the year ended 30 June 2019. (d) Prepare a balance sheet as at 30 June 2019. (LO3, LO4 and LO6) (a) (b) HELENA’S HIRE CARS Income Statement for the year ended 30 June 2019 INCOME Removal fees $100 500 EXPENSES Insurance expense $8 880 Wages expense 51 770 Advertising expense 3 280 Maintenance expense 7 600 Fuel and oil expense 11 360 Depreciation – cars 12 400 Depreciation – office equipment 980 Office supplies expense 300 Total Expenses 96 570 PROFIT $3 930 (c) HELENA’S HIRE CARS Statement of Changes in Equity for the year ended 30 June 2019 H. Savva, Capital – 1 July 2018 $66 600 Profit for the year 3 930 Less Drawings (20 600) H. Savva, Capital – 30 June 2019 $49 930 (d) HELENA’S HIRE CARS Balance Sheet as at 30 June 2019 CURRENT ASSETS Cash at bank $8 140 Accounts receivable 12 860 Office supplies 340 Prepaid advertising 600 $21 940 NON-CURRENT ASSETS Hire cars $93 600 Accumulated depreciation (51 800) 41 800 Office equipment 6 200 Accumulated depreciation (4 480) 1 720 43 520 TOTAL ASSETS $65 460 CURRENT LIABILITIES Accounts payable 10 800 Unearned removal fees 460 GST payable 1 602 Wages payable 1 150 Fuel and oil payable 748 Insurance payable 770 15 530 NET ASSETS $49 930 EQUITY H. Savva, Capital 49 930 TOTAL EQUITY $49 930 Case studies Decision analysis Home sewing business Lana Priest set up a home sewing business on 1 July 2019. Usually, Lana collects $20 per hour for sewing on the completion of each day’s work and pays for the maintenance of her machine with cash. Lana did an accounting subject at secondary school and so has kept her own accrual-based accounting records. At the end of the first year, Lana produced the following unadjusted trial balance: The following adjustments were required at the year-end. 1. Sewing supplies on hand at year-end, $230. 2. An account was received for repairs done to machines before year-end but not recorded, $270. Ignore the GST in your answers. Required (a) Prepare an income statement for the year ended 30 June 2020 using accrual accounting. (b) Prepare an income statement for the year ended 30 June 2020 using cash accounting. (c) Lana was not sure whether she could use cash accounting rather than accrual accounting for her business records. From the information provided, decide whether Lana should use accrual or cash accounting, and explain to her the reasons for your decision. (a) and (b) LANA PRIEST Income Statement for the year ending 30 June 2020 Accrual Basis Cash Basis Sewing revenue $38 400 $38 360 Sewing supplies expense 4 610 4 840 Insurance expense 2 300 2 300 Repairs to machines 2 830 2 560 Sundry expenses 540 540 10 280 10 240 Profit $28 120 $28 120 Sewing supplies expense (Accrual) = $4840 – $230 = $4610 Repairs expense (Accrual) = $2560 + $270 = $2830 Sewing revenue (Cash) = $38 400 – $40 = $38 360 (c) In this business it would be acceptable to apply cash basis accounting due to the balance of accounts receivable being only $40 compared to total revenue of $38 400. Although the sewing supplies might suggest it would be more appropriate to account for on an accrual basis the overall impact on profit is not material. (in fact there is no change at all!) For Lana’s business the cash basis is probably accurate enough for decision-making purposes and simpler for her to understand. Communication and leadership End-of-period adjusting entries In groups of three, select three companies and obtain a copy of their financial statements. Paper copies can be obtained from the companies, and electronic copies are available for most publicly listed companies on their websites. Alternatively, many university libraries have a copy of public company accounts in electronic form. Required (a) For each of the three companies find information on accruals and deferrals in the financial statements. These will usually be in the notes to the financial statements, and will include such things as depreciation expense, prepaid rent, unearned fees, salaries payable and interest payable. Compare the accruals and deferrals to the profit for each company to assess the impact of accrual accounting adjustments on the measures of profitability. (b) Prepare an overhead of your group’s findings to present to the class. See class discussion. Ethics and governance The impact of a bonus incentive scheme on the financial statements Lucia works as an accountant for a motor vehicle engine parts manufacturer called Vroom Ltd, owned by an international car firm. Her manager, Freda Chuse, is paid a bonus depending on the profitability of the company. If Vroom Ltd makes $1 million profit, Freda receives a bonus of $20 000 that increases progressively to $30 000 for a $3 million profit. If the profit of Vroom Ltd exceeds $3 million, Freda receives the maximum bonus of $30 000. Vroom Ltd currently receives a grant from the government of $100 000 per year to employ and train apprentice mechanics. At the end of May, it appears that Vroom Ltd will make a profit of approximately $3.5 million for the year ending 30 June 2019. Freda approached Lucia and said that if the company made too much profit then the government may stop paying Vroom Ltd the grant for training apprentice mechanics, and it would lose the $100 000 tax-free cash inflow. Freda instructed Lucia to find ways of deferring recognition of as much revenue as possible until the following financial year, for which the forecasts for the industry were quite poor, and to accrue as many expenses as possible at the end of the current accounting period when it came to making the end-of-period adjustments. Although Lucia was not happy with this instruction, she did not want to risk her own opportunities for promotion by upsetting her manager. Required (a) Who are the stakeholders in this situation? (b) Why do you believe Freda asked Lucia to do this? (c) What are the ethical issues involved her? (d) Can Lucia defer revenues and accrue as many expenses as possible and still be ethical? (a) The stakeholders are: • The manager, Freda Chuse. • The accountant, Lucia. • The present and potential shareholders of the entity. (b) Freda may well be asking Lucia to reduce the reported profit in an attempt to avoid losing the government grant for employing and training apprentice mechanics. It may also be that as Freda’s bonus is maximised when the firm earns $3m. there is no benefit to her in making $3.5m profit. However, if Freda believes that the following accounting period is not likely to make as much profit it is in her best interests to defer the recognition in excess of $3m. until the following accounting period to maximise her bonus in that period while having no negative impact on her current period’s bonus. (c) It is acceptable for Lucia to ensure that all assets, liabilities, income and expenses are recorded in the correct accounting period. It becomes unacceptable, and unethical, if Lucia recognises other assets, liabilities which do not legitimately reflect the entity’s performance and financial position in the current period. Nevertheless, there are several techniques which Lucia could use to manipulate (or ‘massage’) the profit figure e.g. changing the method of calculating depreciation, or changing useful lives of assets. These changes in techniques may be generally acceptable, and quite legal; but are they ethical? It becomes unethical if the manager places so much pressure on Lucia to carry out adjustments that she believes should not be made, on the grounds that the results for the period would become distorted. (d) Lucia can accrue all possible incomes and defer all possible expenses through adjusting entries, but should not be involved in going so far as to distort the financial performance and financial position of the entity so as to mislead present and potential shareholders. However, how does Lucia assess that the entity’s results are ‘real’ or ‘distorted and misleading’ to shareholders? Discuss. Financial analysis Refer to the income (revenues) and expenses as shown in the notes in the latest financial report of JB Hi-Fi Limited on its website, www.jbhifi.com.au, and answer the following questions: 1. Which of these items, if any, would have been affected by adjusting entries for deferrals? 2. Which of these items, if any, would have been affected by adjusting entries for accruals? 3. What is the total amount of expense for depreciation of plant and equipment? Please note that the answer below is based on the 2015 annual report. 1. The following items in notes 3, 4 and 5 are most likely affected by deferrals: expense on leases (if paid in advance), depreciation and amortisation of plant and equipment, and leasehold improvements (note 16 contains details of the depreciation charge on each of these items). Note the existence of a prepayments amount of $5 205 000 in note 14. It is unclear as to the nature of prepayments for this amount, but it could be items such as prepaid insurance, prepaid advertising, and prepayments on leased assets. 2. The following items in notes 3, 4 and 5 are most likely affected by accruals: interest revenue and interest expense, leases charges (if paid in arrears). Other accruals not shown in note 5 would include wages (and commissions, if any) not paid at the end of the year, as well as other employee benefits such as holiday pay and long service leave. Note 5: total depreciation in the consolidated financial statements for 2015 amounts to $30 754 000. On plant and equipment only, the amount of depreciation is $19 203 000. Solution Manual for Accounting John Hoggett, John Medlin, Claire Beattie, Keryn Chalmers, Andreas Hellmann, Jodie Maxfield 9780730344568