CH-5 Completing the Accounting Cycle — Closing and Reversing Entries – Accounting : Book Guide

Chapter 5: Completing the Accounting Cycle – Closing and Reversing Entries Questions and solutions which have a GST version: • Exercise 5.5 • Exercise 5.14 • Problem 5.17 • Problem 5.19 • Problem 5.21 • Problem 5.28 • Problem 5.29 Discussion questions Please note: suggested topics for discussions are provided for each question. Discussions need not be confined to the topics indicated. 1. In figure 5.1, the accounting cycle is illustrated. Explain the purpose and importance of each step in the cycle. Step 1 of the accounting cycle is to capture the data from every transaction involving the entity in the form of source documents, which may take many different formats. For example, source documents can consist of sales or service invoices, cash dockets, credit card slips, purchase invoices, delivery notes, credit notes, computerised cash register tapes, EFTPOS records. Step 1 is important in that it is the chief means of collecting data about the economic activities of the entity, which then must be recorded in the accounting system. The step provides a vital first stage in developing an audit trail for auditors to assess the effectiveness of control procedures in the accounting information system. Step 2 records (enters), in journals, all of the transactions about the entity from source documents developed in Step 1. This is usually done as a double entry process. The journals are important in that they provide a chronological record of the economic transactions and events that affect the entity. Step 3 posts all of the information from the journals into the entity’s ledger accounts. In so doing, financial information is reclassified into items of a like nature, i.e. into different types of assets, liabilities and equity accounts. Step 4 is performed periodically e.g. at the end of each month, whereby the ledger accounts developed in Step 3 are totalled and a trial balance is prepared. This step is important in that it provides a preliminary check on the accuracy of the double entry process. If interim financial statements are to be prepared, a worksheet may be developed outside of the accounting records to generate and summarise the necessary information. Steps 5, 6 and 7 are the preparation of adjusting journal entries, the posting of these entries to the accounts, and the completion of an adjusted trial balance. These steps are important under an accrual system of accounting to record all accruals and deferrals of income and expenses that affect an entity at the end of the accounting period. Preparation of the adjusted trial balance after posting to the accounts provides a check on the accuracy of the adjustment process. Steps 8 and 9 are the preparation of closing entries at the end of the accounting period in order to close off all temporary equity accounts (income, expenses and drawings accounts). The step is useful in that it calculates the performance of the entity, and closes off the temporary accounts, leaving them with zero balances at the beginning of the next accounting period. As a result of this step, an entity’s financial performance, or profit, is determined. Step 10 is the process of footing the balances in all permanent accounts at the end of the period, and the preparation of a post-closing trial balance. The step is important in determining the financial position of the entity, as shown in the entity’s statement of financial position or balance sheet. The post-closing trial balance provides a further check on the accuracy of posting all closing entries. Step 11 is the preparation of financial statements after completion of the recording process. The entity’s statement of financial position can be prepared directly from the post-closing trial balance, and the income statement can be prepared from temporary account balances listed in the adjusted trial balance. Alternatively, the statements can be prepared from a worksheet. These financial statements are important sources of information about an entity for the use of interested parties. Steps 12 and 13 are the preparation and posting of reversing entries, which is performed on the first day of the new accounting period. This step is not necessary, but it is helpful in simplifying the recording of cash transactions in the new period in relation to economic events requiring adjusting entries at the end of the current period. Reversing entries are particularly helpful in the case of accrual adjusting entries at the end of the period. 2. Compare and contrast the purposes of adjusting entries, closing entries and reversing entries. Adjusting entries are made on the last day of each financial/reporting period in order to account for any accruals and deferrals arising from acceptance of the period assumption and the accrual basis of accounting. These entries are necessary to measure correctly the entity’s profits/performance and financial position, as opposed to the entity’s cash performance and cash position. Closing entries are made on the last day of the financial period in order to close off all temporary equity accounts, so that these accounts are given zero balances for the beginning of the new financial period. Temporary equity accounts consist of income (revenue), expenses, and drawings. These temporary accounts are used to determine the total value of such items for the current period. At the end of that period, they are closed into permanent equity accounts (capital or retained earnings) in preparation for the next period. Reversing entries, which are made on the first day of the new accounting period, are not necessary in the accounting cycle; however, they are handy for reversing certain types of adjusting entries where cash is to be received or paid in relation to that adjustment in the next accounting period. The main types of adjustments which benefit from reversing entries are accruals, as, by making reversing entries in relation to accruals, the entries for cash receipts and cash payments in the new period are simplified. Reversing entries are also useful for deferral adjustments where the initial cash transactions are recorded in temporary accounts rather than in permanent accounts. See the discussion in this chapter of the text, under reversing entries, in relation to the handling of an insurance payment as an example where reversing entries can be used for deferrals. 3. For a sole trader, which accounts generally are involved in closing entries? Why are these accounts closed? The accounts involved in the closing process are: •all revenue accounts •all expense accounts •the profit or loss summary account •the owner’s Drawings account •the owner’s Capital account, a permanent equity account. All revenue and expense accounts, which are temporary accounts set up each period in order to calculate the entity’s profit, are closed through closing entries to the profit or loss summary account. The balance of the profit or loss summary account then represents the profit or loss for the accounting period. This profit or loss is transferred, though closing entries, to the owner’s capital account, which is a permanent equity account reported on the balance sheet/statement of financial position. The owner’s Drawings account is also a temporary account established to record how much assets the owner has withdrawn from the entity during the period. This account is also closed off to the capital account at the end of the period. 4. So far, we have heard of the existence of three trial balances – the unadjusted trial balance, the adjusted trial balance and the post-closing trial balance. Explain the purpose of each, and indicate the types of account balances that are contained in each. The unadjusted trial balance is prepared periodically to provide a preliminary check on the accuracy of the posting process (debits and credits) from the journals to the ledger accounts. This trial balance contains the balances of all general ledger accounts as at the date on which the trial balance is prepared. The adjusted trial balance is prepared only at the end of the accounting period and includes the balances of all general ledger accounts after the adjusting entries have been posted to the accounts. It provides a preliminary check of the accuracy of posting all adjusting entries. The post-closing trial balance is prepared at the end of the accounting period after all closing entries have been posted to the accounts and the account balances determined. Since all temporary accounts are closed as a result of closing entries, the post-closing trial balance contains the balances of all permanent accounts only. Hence, the only types of accounts appearing in this trial balance are the assets, the liabilities, and permanent equity accounts such as the capital accounts, or, in the case of a company, the share capital, reserve, and retained earnings accounts. 5. You have been approached by a neighbour who is studying first-year accounting at university. He is very worried about reversing entries and can see no purpose for them. He also finds it very difficult to decide when a reversing entry would be helpful and when it would not. Discuss the major points to be included in a suitable tutorial to overcome his concerns. Reversing entries, which are made on the first day of the new accounting period, are not necessary in the accounting cycle; however, they are very handy to reverse the effects of certain adjusting entries where cash is to be received or to be paid in relation to that adjusting entry in the next accounting period. The main types of adjustments which benefit from reversing entries are accruals. By making reversing entries for accruals, the entries for cash receipts and cash payments in the new period are simplified. To illustrate, consider an accrual for interest payable at the end of the accounting period for $1 000. The adjusting entry is to debit Interest Expense, and to credit Interest Payable. In the new period, when an interest payment of, say, $1 400 is paid, the entry to record the payment, if a reversing entry is not made, requires a reference back to the existence of the Interest Payable account at the end of the previous period. Interest Expense 400 Interest Payable 1 000 Cash at Bank 1 400 To record payment of interest to creditor However, if a reversing entry is made to reverse the adjusting entry on the first day of the new period, the entry for payment of interest is then simplified, as no reference needs to be made back to the existence of the Interest Payable account at the beginning of the year. The reversing entry and subsequent cash entry for this example are: Interest Payable 1 000 Interest Expense 1 000 To reverse adjusting entry in previous period Interest Expense 1 400 Cash at Bank 1 400 To record payment of interest to creditor Reversing entries are also useful for adjustments involving deferrals where the initial cash transactions are recorded in temporary accounts rather than in permanent accounts. For example, if supplies, when purchased, are recorded in the Supplies Used expense account, an adjusting entry must be made at the end of the period for any supplies remaining on hand. This entry can then be reversed to put the supplies on hand back into the Supplies Used account for the new period, in which the consumption of such supplies is likely to occur. As a further example where reversing entries can be used for deferrals, see the discussion in Chapter 5 of the text, under reversing entries, in relation to the handling of an insurance payment recorded as an expense rather than as a prepaid asset. 6. At the end of the preceding period, a company recorded accrued salaries payable of $3 500. On 2 July, the second day of the new period, the company debited Salaries Expense and credited Cash at Bank for $4 000. (a) If a reversing entry had not been made on 1 July, would the financial statements be in error for the month of July? Explain. (b) What entry should have been made on 2 July given that a reversing entry was not made? (c) If the company made reversing entries, what reversing entry should have been made on 1 July and what entry would then be made on 2 July? (a) Yes; Salaries Expense for July will be overstated by $3 500, Salaries Payable will be overstated by $3 500, and equity will be understated by $3 500. (b) Salaries Payable Dr 3 500 Salaries Expense Dr 500 Cash at Bank Cr 4 000 (c) Salaries Payable Dr 3 500 Salaries Expense Cr 3 500 (Reversing entry) Salaries Expense Dr 4 000 Cash at Bank Cr 4 000 (Cash paid for salaries) 7. The accountant in Bede Cameron’s business has never worried about preparing reversing entries. However, a newly employed trainee accountant has strongly suggested to Bede that reversing entries are quite useful. Show, by way of a numerical example involving interest payable, how reversing entries can be used in the business accounts and discuss the benefits that reversing entries can provide. See the answer to discussion question 5 above. See also the answer to Exercise 5.8 below. 8. Different equity accounts are used depending on the type of organisational structure of the business. Illustrate and explain. It is traditional for different equity accounts to be used for different types of entities. For example, in a sole trader business, the owner’s capital contributions and all profits retained in the business are closed off to one account, Capital – J. Bloggs. Assets withdrawn from such a business are shown in the Drawings account. However, in a company, the capital contributed by owners (shareholders) is recorded separately in the Share Capital account, and profits retained in the company any distributions of those profits to owners (dividends) are recorded in a separate Retained Earnings account. Such a separation of contributed capital and retained earnings is possible even for a sole trader, or for a partnership, if so desired. Other types of organisations use different names for the equity accounts. As a further example, a not-for-profit club or society records the initial entrance fees of members on a Members Fees or Accumulated Surplus account, which is equivalent to the capital contributed by members to the club. 9. Explain the difference between the payment of cash dividends by a company and the withdrawal of cash by a sole trader. What is the effect of each on assets? On equity? On profit? Cash dividends is a term used to designate the distribution of cash to the shareholders of a company, usually based on profits. Both cash dividends and cash withdrawals by a sole trader reduce cash, total assets and the equity in the business entity. Cash dividends must be declared by the board of directors, a step not necessary for a sole trader. Profit is not reduced because such cash distributions to owners are not an expense incurred to produce revenue. 10. ‘When preparing interim financial statements, certain steps in the accounting cycle may be omitted.’ Discuss. Step 1: Transactions occur and source documents are prepared. Step 2: Transactions are recorded in the journal. Step 3: Entries are posted to ledgers. Step 4: A worksheet is prepared. Step 5: Financial statements are prepared. Adjusting entries will be made on the worksheet but not in the general journal when interim financial statements are prepared and closing entries are omitted completely. Exercises Exercise 5.1 Closing entries Craig’s Car Detailing Service had the following accounts and account balances in the adjusted trial balance columns of its worksheet for the year ended 30 June 2020. Required (a) Record the required closing entries for Craig’s Car Detailing Service. (LO4) (a) General journal Date Particulars Debit Credit 2020 June 30 Service Fees Revenue $124 600 Interest Revenue 5 750 Profit or Loss Summary $130 350 Close income accounts to Profit or Loss Summary Profit or Loss Summary 120 560 Salaries Expense 68 560 Rent Expense 17 980 Advertising Expense 12 100 Depreciation Expense 15 680 Sundry Expenses 6 240 Close expense accounts to Profit or Loss Summary Profit or Loss Summary 9 790 Craig Fraser, Capital 9 790 Close Profit or Loss Summary to Capital Account Craig Fraser, Capital 25 000 Craig Fraser, Drawings 25 000 Close Drawings to Capital Account Exercise 5.2 Closing entries and equity The accounts below are taken from the ledger of Bartel Music Consulting on 30 June 2019, the end of the current financial year. Required (a) Record the closing entries which affected the accounts. (b) Prepare a statement of changes in equity as at 30 June. (LO4) G. Bartel, Capital G. Bartel, Drawings 30/6 21 910 1/7 30/6 12 070 16 380 15/8 29/10 18/11 14/1 6 480 4 220 3 920 7 290 30/6 21 910 Profit or loss summary 30/6 30/6 39 470 16 380 30/6 55 850 (a) General journal Date Particulars Debit Credit 2019 June 30 Income accounts $55 850 Profit or Loss Summary $55 850 Close income accounts to Profit or Loss Summary Profit or Loss Summary 39 470 Expense accounts 39 470 Close expense accounts to Profit or Loss Summary Profit or Loss Summary 16 380 G. Bartel, Capital 16 380 Close Profit or Loss Summary to Capital G. Bartel, Capital 21 910 G. Bartel, Drawings 21 910 Close Drawings to Capital (b) BARTEL MUSIC CONSULTING Statement of Changes in Equity For the year ended 30 June 2019 G. Bartel, Capital – 1 July 2018 $12 070 Add: Profit for the year $16 380 Less: Drawings during the year (21 910) (5 530) G. Bartel, Capital – 30 June 2019 $6 540 Exercise 5.3 Completion of worksheet, preparation of financial statements and closing entries The following unadjusted trial balance was taken from the ledger of Miranda’s Management Services on 30 June 2019. Required (a) Prepare a 10-column worksheet using the following additional information on 30 June 2019. i. Accrued wages, $18 000. ii. Expired insurance, $16 000. iii. Depreciation on equipment, $60 000. (b) Prepare an income statement, a statement of changes in equity and a balance sheet. (c) Record the adjusting and closing entries in the general journal. (LO3 and LO4) (a) (b) MIRANDA’S MANAGEMENT SERVICES Income Statement for the year ended 30 June 2019 INCOME ($’000) ($’000) Service revenue $340 EXPENSES Wages expense $148 Depreciation expense 60 Insurance expense 16 Electricity expense 54 Sundry expense 26 304 PROFIT $36 MIRANDA’S MANAGEMENT SERVICES Statement of Changes in Equity for the year ended 30 June 2019 ($’000) Miranda Pike, Capital – 1 July 2018 $204 Profit for the year 36 $240 Drawings during the year (50) Miranda Pike, Capital – 30 June 2019 $190 MIRANDA’S MANAGEMENT SERVICES Balance Sheet as at 30 June 2019 CURRENT ASSETS ($’000) ($’000) Cash at bank $80 Accounts receivable 74 Prepaid insurance 8 162 NON-CURRENT ASSETS Equipment 230 Less: Accum. depreciation (120) 110 TOTAL ASSETS $272 CURRENT LIABILITIES Accounts payable 64 Wages payable 18 82 TOTAL LIABILITIES 82 NET ASSETS $190 EQUITY Miranda Pike, Capital 190 TOTAL EQUITY $190 (c) Adjusting entries ($’000) ($’000) Wages Expense 18 Wages Payable 18 Accrued wages. Insurance Expense 16 Prepaid Insurance 16 Insurance costs expired. Depreciation Expense – Equipment 60 Accumulated Depreciation – Equipment 60 Depreciation on equipment. Closing entries Service Revenue 340 Profit or Loss Summary 340 Close income accounts. Profit or Loss Summary 304 Wages Expense 148 Electricity Expense 54 Sundry Expense 26 Insurance Expense 16 Depreciation Expense – Equipment 60 Close expense accounts. Profit or Loss Summary 36 Miranda Pike, Capital 36 Transfer loss to capital account. Miranda Pike, Capital 50 Miranda Pike, Drawings 50 Transfer drawings to capital. Exercise 5.4 Worksheet and closing entries The adjusted trial balance columns in the worksheet of Elliot Painting Services are as follows. Required (a) Complete the worksheet. (b) Prepare the closing entries necessary at 30 June 2019, assuming that this date is the end of the entity’s accounting period. (LO3 and LO4) (a) ELLIOT PAINTING SERVICES Worksheet (Partial) for the year ended 30 June 2019 Adjusted trial balance Income statement Balance sheet Account Debit Credit Debit Credit Debit Credit Cash at Bank 1 230 1 230 Accounts Receivable 75 600 75 600 Prepaid Rent 1 800 1 800 Office Supplies 8 320 8 320 Equipment 160 000 160 000 Accum. Depr. Equip’t 25 000 25 000 Accounts Payable 54 000 54 000 Salaries Payable 8 760 8 760 Unearned Revenue 3 430 3 430 F. Elliot, Capital 101 500 101 500 F. Elliot, Drawings 22 000 22 000 Painting Revenue 219 650 219 650 Salaries Expense 106 000 106 000 Rent Expense 6 050 6 050 Depreciation Expense 8 040 8 040 Telephone Expense 4 020 4 020 Office Supplies Used 10 080 10 080 Sundry Expenses 9 200 9 200 $412 340 $412 340 143 390 219 650 268 950 192 690 Profit for the period 76 260 76 260 $219 650 $219 650 $268 950 $268 950 (b) General journal Adjusting entries Date Particulars Debit Credit 2019 June 30 Painting Revenue 219 650 Profit or Loss Summary 219 650 Close revenue accounts. Profit or Loss Summary 143 390 Salaries Expense 106 000 Rent Expense 6 050 Depreciation Expense 8 040 Telephone Expense 4 020 Office Supplies Used 10 080 Sundry Expenses 9 200 Close expense accounts. Profit or Loss Summary 76 260 F Elliot, Capital 76 260 Transfer profit to capital. F. Elliot, Capital 22 000 F. Elliot, Drawings 22 000 Close drawings to capital. Exercise 5.5 Closing entries and post-closing trial balance Non-GST version Michael Rau founded Michael’s Fishing Supplies on 1 July 2019. The adjusted trial balance at 30 June 2020 (the end of the financial year) is shown below. Required (a) Prepare closing entries to be made on 30 June 2020. (b) Prepare a post-closing trial balance as at 30 June 2020. (LO4) (a) General journal Closing entries Particulars Debit Credit 2020 June 30 Sales $62 080 Profit or Loss Summary $62 080 Close income accounts to Profit or Loss Summary Profit or Loss Summary 26 760 Salaries Expense 14 040 Insurance Expense 1 080 Interest Expense 600 Depreciation Expense 4 200 Fishing Supplies Expense 2 040 Rent Expense 4 800 Close expense accounts to Profit or Loss Summary Profit or Loss Summary 35 320 Michael Rau, Capital 35 320 Close Profit or Loss Summary to Capital Michael Rau, Capital 14 400 Michael Rau, Drawings 14 400 Close Drawings to Capital (b) MICHAEL’S FISHING SUPPLIES Post Closing Trial Balance as at 30 June 2020 Account Dr Cr Cash at bank $12 400 Accounts receivable 25 200 Fishing supplies 6 000 Prepaid insurance 3 000 Boat 36 000 Accumulated depreciation – boat $18 000 Accounts payable 6 000 Salaries payable 2 040 Interest payable 3 120 Mortgage payable 7 800 Unearned revenue 6 720 Michael Rau, Capital 38 920 $82 600 $82 600 Exercise 5.5 Closing entries and post-closing trial balance GST version Michael Rau founded Michael’s Fishing Supplies on 1 July 2019. The adjusted trial balance at 30 June 2020 (the end of the financial year) is shown below. MICHAEL’S FISHING SUPPLIES Adjusted Trial Balance as at 30 June 2020 Account Debit Credit Cash at bank Accounts receivable GST receivable Fishing supplies Prepaid insurance Boat Accumulated depreciation – boat Accounts payable Salaries payable Interest payable Mortgage payable Unearned revenue GST payable Michael Rau, Capital Michael Rau, Drawings Sales Salaries expense Insurance expense Interest expense Depreciation expense Fishing supplies expense Rent expense $ 12 400 25 200 2 160 6 000 3 000 36 000 14 400 14 040 1 080 600 4 200 2 040 4 800 $ 18 000 6 000 2 040 3 120 7 800 6 720 3 600 18 000 60 640 $125 920 $125 920 Required (a) Prepare closing entries to be made on 30 June 2020. (b) Prepare a post-closing trial balance as at 30 June 2020. (LO4) (a) General journal Closing entries Particulars Debit Credit 2020 June 30 Sales $60 640 Profit or Loss Summary $60 640 Close income accounts to Profit or Loss Summary Profit or Loss Summary 26 760 Salaries Expense 14 040 Insurance Expense 1 080 Interest Expense 600 Depreciation Expense 4 200 Fishing Supplies Expense 2 040 Rent Expense 4 800 Close expense accounts to Profit or Loss Summary Profit or Loss Summary 33 880 Michael Rau, Capital 33 880 Close Profit or Loss Summary to Capital Michael Rau, Capital 14 400 Michael Rau, Drawings 14 400 Close Drawings to Capital (b) MICHAEL’S FISHING SUPPLIES Post Closing Trial Balance as at 30 June 2020 Account Dr Cr Cash at bank $12 400 Accounts receivable 25 200 GST receivable 2 160 Fishing supplies 6 000 Prepaid insurance 3 000 Boat 36 000 Accumulated depreciation – boat $18 000 Accounts payable 6 000 Salaries payable 2 040 Interest payable 3 120 Mortgage payable 7 800 Unearned revenue 6 720 GST payable 3 600 Michael Rau, Capital 37480 $84 760 $84 760 Exercise 5.6 Closing entries for a company Paradise Gardens Hire Ltd’s income statement is presented below. During the year, directors declared and paid a dividend of $16 000. Required (a) Prepare the necessary general journal entries to close the accounts of the company. (LO4 and LO6) (a) General journal Closing entries Particulars Debit Credit Hire Fees – Heavy Equipment 80 670 Hire Fees – Light Equipment 64 470 Profit or Loss Summary 145 140 Close income to Profit or Loss Summary Profit or Loss Summary 115 420 Salaries Expense 79 300 Depreciation Expense 21 580 Insurance Expense 6 770 Repairs and Maintenance Expense 4 090 Supplies Expense 1 820 Sundry Expenses 1 860 Close expenses to Profit or Loss Summary Profit or Loss Summary 29 720 Retained Earnings 29 720 Close Profit or Loss Summary to Retained Earnings No closing entry is necessary for dividends paid (unlike drawings) as the dividend paid is debited directly to retained earnings. However, if a separate Dividend Paid account (similar to a Drawings account for a sole trader) had been used by the company, then another closing entry would be required to close the Dividend Paid account (credit) to Retained Earnings (debit) for the amount of $16 000. Exercise 5.7 Closing accounts and preparing the Retained Earnings account for a company On 1 January 2019, the equity of Deadwood Pty Ltd consisted of share capital of $800 000 and retained earnings of $260 000. During the period, the company declared and paid a cash dividend of $70 000. The general ledger contains only two income statement accounts — Revenues and Expenses. On 31 December 2019, the balance in the Revenues account was $925 000 and the balance in the Expenses account was $862 000. Required (a) Prepare closing entries. (b) Show the Retained Earnings account at the end of 2019. (c) Calculate the total equity of the company at the end of 2019. (LO4 and LO8) (a) General journal Particulars Debit Credit 2019 Dec 31 Revenues $925 000 Profit or Loss Summary $925 000 Close revenue accounts Profit or Loss Summary 862 000 Expenses 862 000 Close expense accounts Profit or Loss Summary 63 000 Retained Earnings 63 000 Transfer profit to retained earnings (b) Retained earnings Dividend paid $70 000 1/1/16 Balance $260 000 31/12/16 Balance c/d 253 000 31/12/16 P or L Summary 63 000 $323 000 $323 000 1/1/17 Balance b/d $253 000 (c) Total equity Share capital $800 000 Add: Retained earnings $253 000 Total equity $1 053 000 Exercise 5.8 Reversing entries – accrued expense On 30 June 2020, the accountant for Nigel the Maintenance Man calculated that 1 month’s interest of $420 had accrued on a bank loan. An interest payment of $1600 was made on 30 September 2020. Required (a) Give the adjusting entry needed on 30 June 2020. (b) Give the closing entry. (c) Give the reversing entry that could be made on 1 July 2020 and the subsequent entry to record the payment of 30 September 2020. (d) Assuming that no reversing entry was made, give the entry to record the interest payment on 30 September 2020. (LO5) General journal Date Particulars Debit Credit 2020 (a) June 30 Interest Expense $420 Interest Payable $420 Accruals of interest (b) June 30 Profit or Loss Summary 420 Interest Expense 420 Close interest expense account (c) July 1 Interest Payable 420 Interest Expense 420 Reverse adjusting entry for accrual Sept. 30 Interest Expense 1 600 Cash at Bank 1 600 Payment of interest (d) Sept. 30 Interest Payable 420 Interest Expense 1 180 Cash at Bank 1 600 Payment for interest (if no reversing entry). Exercise 5.9 Adjusting entries and reversing entries On 30 June 2020, the adjusted trial balance of Outback Car Rentals showed the following selected balances: Both the Rentals Receivable and Interest Payable accounts had been recorded as a result of adjusting entries made on 30 June. Required (a) Prepare the adjusting entries that would have been recorded on 30 June for both items. (b) Prepare any necessary reversing entries that would be made on 1 July. (c) Prepare the entries on 10 July assuming that cash of $36 000 had been received on the outstanding rentals and $9000 was paid in interest. (d) Assuming that any reversing entries in B were not made, what entries would be made on 10 July for the cash receipt and cash payment? (LO5) General journal Date Particulars Debit Credit 2020 (a) June 30 Rentals Receivable 42 000 Rental Revenue 42 000 Accruals of rental revenue June 30 Interest Expense $8 200 Interest Payable $8 200 Accruals of interest (b) July 1 Rental Revenue 42 000 Rentals Receivable 42 000 Reversing entry for accrued rental revenue July 1 Interest Payable 8 200 Interest Expense 8 200 Reverse adjusting entry for accrued interest (c) July 10 Cash at Bank 36 000 Rental Revenue 36 000 Receipt of rental revenue July 10 Interest Expense 9 000 Cash at Bank 9 000 Payment of interest (d) July 10 Cash at Bank 36 000 Rentals Receivable 36 000 Cash received for rentals (if no reversing entry). July 10 Interest Payable 8 200 Interest Expense 800 Cash at Bank 9 000 Payment for interest (if no reversing entry). Exercise 5.10 Worksheet, income statement and closing entries The account balances taken from the trial balance and adjusted trial balance columns of the worksheet of Tran’s Transcription Service for the year ended 30 June 2020, the first year of operations, are shown below. Required (a) Reconstruct the 10 column worksheet for the year. (b) Prepare the income statement for Tran’s Transcription Service for the year ended 30 June 2020. (c) Prepare the closing entries required on 30 June 2020. (LO3 and LO4) (a) (b) TRAN’S TRANSCRIPTION SERVICE Income Statement for the year ended 30 June 2020 INCOME Transcription revenue $92 650 EXPENSES Wages expense $36 820 Depreciation expense 9 800 Insurance expense 900 Rent expense 9 600 Office supplies expense 4 800 Stationery supplies expense 3 400 General expense 11 200 76 520 PROFIT $16 130 (c) Closing entries Printing Revenue 92 650 Profit or Loss Summary 92 650 Close income accounts. Profit or Loss Summary 76 520 Wages Expense 36 820 Depreciation Expense 9 800 Insurance Expense 900 Rent Expense 9 600 Office Supplies Expense 4 800 Stationery Supplies Expense 3 400 General Expense 11 200 Close expense accounts. Profit or Loss Summary 16 130 T Skrybe, Capital 16 130 Transfer profit to capital account. T. Skrybe, Capital 16 800 T. Skrybe, Drawings 16 800 Transfer drawings to capital. Exercise 5.11 Closing entries, income statement and statement of changes in equity The accountant of the marketing firm, S. Preston, has posted adjusting entries (1) to (5) to the ledger accounts at 30 June 2019. All the income, expense and equity accounts of the entity are listed here in T-account form. Required (a) Prepare the closing entries of the marketing firm at 30 June 2019. (b) Prepare the income statement and the statement of changes in equity for the year ended 30 June 2019. (LO4) (a) General journal Date Particulars Debit Credit 2019 June 30 Service Revenue 186 500 Profit or Loss Summary 186 500 Close revenue accounts. Profit or Loss Summary 138 000 Salary Expense 82 400 Supplies Expense 26 000 Depreciation Expense – Furniture 5 600 Depreciation Expense – Building 24 000 Close expense accounts. Profit or Loss Summary $(186 500 – 138 000) 48 500 S. Preston, Capital 48 500 Transfer profit to capital. S. Preston, Capital 36 000 S. Preston, Drawings 36 000 Close drawings to capital. (b) S. PRESTON, MARKETING Income Statement for the year ended 30 June 2019 INCOME Service revenue $186 500 EXPENSES Salary expense $82 400 Depreciation expense – furniture 5 600 Depreciation expense – building 24000 Supplies expense 26 000 138 000 PROFIT $48 500 S. PRESTON, MARKETING Statement of Changes in Equity for the year ended 30 June 2019 S. Preston, Capital – 1 July 2018 $67 500 Profit for the year 48 500 $116 000 Drawings during the year 36 000 S. Preston, Capital – 30 June 2019 $80 000 Exercise 5.12 Adjusting and reversing entries, justification The management consulting firm of the Zimbardi Sisters supplied the following information as at 30 June 2019, the end of the financial year. 1. Interest earned but not received totals $2600. 2. The June electricity account for $1142 has not been paid or recorded. 3. Consulting fees owing to the business and unrecorded as at 30 June 2019 amounted to $8620. 4. The Zimbardi sisters received $6300 in rent revenue on 1 May for the 3-month period beginning on that date. The transaction was recorded by a credit to Unearned Rent Revenue. 5. Prepaid Insurance was debited for $5040 on 25 March to record the cost of a 12-month policy beginning on 1 April. Required (a) Prepare an adjusting entry for each item as at 30 June 2019. (b) Prepare reversing entries where appropriate. Justify why you have/have not prepared reversing entries for each adjustment. (LO5) (a) General journal Date Particulars Debit Credit Adjusting Entries 2019 1. June 30 Interest Receivable 2 600 Interest Revenue 2 600 Interest earned but not yet received. 2. Electricity Expense 1 142 Electricity Account Payable 1 142 Electricity used but unpaid. 3. Consulting Fees Receivable 8 620 Consulting Fees Revenue 8 620 Consulting fees earned but not received. 4. Unearned Rent Revenue 4 200 Rent Revenue 4 200 Rent for two months now earned. 5. Insurance Expense 1 260 Prepaid Insurance 1 260 Insurance costs expired. (b) Reversing Entries July 1 Interest Revenue 2 600 Interest Receivable 2 600 Reversing entry. Electricity Account Payable 1 142 Electricity Expense 1 142 Reversing entry. Consulting Fees Revenue 8 620 Consulting Fees Receivable 8 620 Reversing entry. Reversing entries, while not essential, are useful in those circumstances when cash is received or paid in the next accounting period (items 1, 2, and 3 above). They simplify the entry needed when the cash flow occurs in the new period. Exercise 5.13 Recording capital transactions of a company Prepare the general journal entries that are needed to record the transactions of Transformer Ltd. 1. Issued 100 000 shares for $200 000. 2. The board of directors declared a cash dividend of 50c per share. 3. The cash dividend declared in (2) above was paid. 4. Close the Profit or Loss Summary account which has a credit balance of $23 840. (LO6) 1. Cash at Bank 200 000 Share Capital 200 000 Issue of 10 000 shares at $1. 2. Retained Earnings 50 000 Cash Dividends Payable 50 000 Declaration of dividend of 50c per share. 3. Cash Dividends Payable 50 000 Cash at Bank 50 000 Payment of dividend. 4. Profit or Loss Summary 23 840 Retained Earnings 23 840 Transfer profit to retained earnings. Exercise 5.14 Reversing entries – accrued revenue Non-GST version Clean Sweep Services runs a professional office cleaning service. Its clients are charged $1200 a month for the service and tax invoices are prepared four times a year on 31 January, 30 April, 31 July and 31 October. Quarterly payments are due by the fifteenth of the month following the end of a quarter. The balance in the Cleaning Fees Revenue account was $264 000 on 31 December, the end of the period. Service fees for November and December not yet recorded were $44 000. Required (a) Prepare the adjusting entry in the general journal to record the fees revenue. (b) Assuming that reversing entries are not made, record the receipt of a $3600 quarterly payment from a client on 12 February and the receipt of $2400 on 13 February from a new client who had contracted for the service to start on 1 December. (c) Assuming that reversing entries are made to facilitate the record-keeping process, prepare the appropriate reversing entry, if any, and the receipt of cash on 12 and 13 February. (LO5) General journal (a) Dec. 31 Cleaning Fees Receivable $44 000 Cleaning Fees Revenue $44 000 Accruals of revenue. No tax invoice issued. (b) Feb. 12 Cash at Bank 3 600 Cleaning Fees Receivable 2 400 Cleaning Fees Revenue 1 200 Receipt of service fees Feb. 13 Cash at Bank 2 400 Cleaning Fee Receivable 1 200 Cleaning Fees Revenue 1 200 Receipt of service fees (c) Jan. 1 Cleaning Fees Revenue 44 000 Cleaning Fees Receivable 44 000 Reversing entry for the accrual Feb. 12 Cash at Bank 3 600 Cleaning Fees Revenue 3 600 Receipt of service fees Feb. 13 Cash at Bank 2 400 Cleaning Fees Revenue 2 400 Receipt of service fees Exercise 5.14 Reversing entries – accrued revenue GST version Clean Sweep Services runs a professional office cleaning service. Its clients are charged $1200 a month plus $120 GST for the service and tax invoices are prepared four times a year on 31 January, 30 April, 31 July and 31 October. Quarterly payments are due by the fifteenth of the month following the end of a quarter. The balance in the Cleaning Fees Revenue account was $264 000 on 31 December, the end of the period. Service fees for November and December not yet recorded were $44 000. Required (a) Prepare the adjusting entry in the general journal to record the fees revenue. (b) Assuming that reversing entries are not made, record the receipt of a $3960 quarterly payment from a client on 12 February and the receipt of $2640 on 13 February from a new client who had contracted for the service to start on 1 December. (c) Assuming that reversing entries are made to facilitate the record-keeping process, prepare the appropriate reversing entry, if any, and the receipt of cash on 12 and 13 February. (LO5) Please note: No GST is recorded until tax invoice issued. General journal (a) Dec. 31 Cleaning Fees Receivable $44 000 Cleaning Fees Revenue $44 000 Accruals of revenue. No tax invoice issued. (b) Feb. 12 Cash at Bank 3 960 Cleaning Fees Receivable 2 400 Cleaning Fees Revenue 1 200 GST Payable 360 Receipt of service fees and GST following tax invoice Feb. 13 Cash at Bank 2 640 Cleaning Fee Receivable 1 200 Cleaning Fees Revenue 1 200 GST Payable 240 Receipt of service fees and GST following tax invoice (c) Jan. 1 Cleaning Fees Revenue 44 000 Cleaning Fees Receivable 44 000 Reversing entry for the accrual Feb. 12 Cash at Bank 3 960 Cleaning Fees Revenue 3 600 GST Payable 360 Receipt of service fees and GST Feb. 13 Cash at Bank 2 640 Cleaning Fees Revenue 2 400 GST Payable 240 Receipt of service fees and GST Exercise 5.15 Reversing entries – unearned revenue During 2019, Mount Remarkable Golf Club received $180 000 for membership fees. The accountant credits Unearned Membership Fees, a liability account, for the full amount when cash is received. At 30 June 2019, it is determined that $36 420 of the membership fees are fees for the following financial year. Ignore GST. Required (a) What amount should be reported in the 2019 income statement for membership fees? (b) What amount should be reported in the 30 June 2019 balance sheet for unearned membership fees? (c) Prepare the adjusting entry needed at 30 June 2019. (d) What reversing entry, if any, would you make on 1 July 2019? (e) The record keeper could have recorded the receipt of cash initially in a revenue account. Prepare the adjusting entry, assuming that the Membership Fees Revenue account contains a credit balance of $180 000 at 30 June 2019. (f) Compare the balances in the Unearned Membership Fees account and the Membership Fees Revenue account derived in requirement E with those calculated in requirements A and B. (g) What reversing entry, if any, would you make on 1 July 2019 to reverse the adjusting entry made in requirement E? Explain your answer. (LO5) (a) $180 000 – $36 420 = $143 580 (b) $36 420 (c) Unearned Membership Fees 143 580 Membership Fees Revenue 143 580 Fees revenue earned (d) No entry necessary. (e) Membership Fees Revenue 36 420 Unearned Membership Fees 36 420 Fees revenue adjusted (f) Unearned Membership Fees (E) $36 420 (B) $36 420 Membership Fees Revenue (E) $143 580 (A) $143 580 (g) No reversing entry as all the revenue has been received. Reversing entries required for accruals and not normally for deferrals. However, since the entity has chosen to record precollected revenues in a revenue account, it may also choose to reverse the adjusting entry as follows: Unearned Membership Fees 36 420 Membership Fees Revenue 36 420 Problems Problem 5.16 Worksheet, financial statements and closing entries The unadjusted trial balance of Secretarial Services is as follows: The following additional information should be taken into account. 1. Office supplies unused at 31 December 2020 amount to $2320. 2. Unexpired insurance at 31 December 2020 is $540. 3. Office equipment is to be depreciated by $7400. 4. Salaries accrued but unrecorded on 31 December, $260. 5. Electricity accrued and unpaid, $830. 6. On 31 December, telephone charges of $425 have accrued but are unrecorded and unpaid. 7. Interest accrued on bank loan at 31 December was $250. Required (a) Prepare adjusting and closing entries (b) Prepare an income statement for the year ended 31 December 2020 and a balance sheet as at 31 December 2020. (A worksheet may be prepared to assist but it is not necessary.) (LO1 and LO4) (a) (b) SECRETARIAL SERVICES Income Statement for the year ended 31 December 2020 INCOME Secretarial services revenue $126 500 EXPENSES Salaries expense $63 510 Advertising expense 2 250 Repairs expense 1 260 Sundry expense 7 520 Electricity expense 4 235 Telephone expense 3 045 Interest expense 1 600 Office supplies expense 4 940 Insurance expense 1 185 Depreciation expense – office equip. 7 400 96 945 PROFIT $29 555 SECRETARIAL SERVICES Balance Sheet as at 31 December 2020 CURRENT ASSETS Cash at bank $6 200 Prepaid insurance 540 Office supplies 2 320 $9 060 NON-CURRENT ASSETS Office equipment 82 800 Less. Accumulated depreciation (22 000) 60 800 TOTAL ASSETS $69 860 CURRENT LIABILITIES Salaries payable 260 Electricity payable 830 Telephone payable 425 Interest payable 250 1 765 NON-CURRENT LIABILITIES Bank loan payable 50 000 50 000 TOTAL LIABILITIES 51 765 NET ASSETS $18 095 EQUITY V Prim, Capital $18 095 TOTAL EQUITY $18 095 Problem 5.17 Worksheet, financial statements and closing entries Non-GST version Gemma Jones owns Australia Works, which provides employment placement services. The unadjusted trial balance on 30 June 2019 below was prepared by her accountant. The following additional information is available at 30 June. 1. Unused supplies on hand on 30 June totalled $180. 2. The Unearned Fees account includes $825 received for fees earned during June. 3. Estimated depreciation on the office equipment is $3500. 4. Advertising costing $1350 was consumed during the year. Required (a) Prepare a 10-column worksheet for the year ended 30 June 2019. (b) Prepare an income statement , a statement of changes in equity and a balance sheet. (c) Journalise the closing entries. (LO1, LO3 and LO4) (a) (b) AUSTRALIA WORKS Income Statement for the year ended 30 June 2019 INCOME Placement fees revenue $101 445 EXPENSES Rent expense $12 440 Salaries expense 62 500 Telephone expense 2 120 Office supplies expense 570 Depreciation expense 3 500 Advertising expense 1 350 82 280 PROFIT $19 165 AUSTRALIA WORKS Statement of Changes in Equity for the year ended 30 June 2019 G. Jones, Capital – 1 July 2018 $15 990 Profit for the year 19 165 $35 155 Drawings during the year (16 000) G. Jones, Capital – 30 June 2019 $19 155 AUSTRALIA WORKS Balance Sheet as at 30 June 2019 CURRENT ASSETS Cash at bank $4 560 Accounts receivable 14 230 Prepaid advertising 770 Office supplies 180 $19 740 NON-CURRENT ASSETS Office equipment 18 620 Less. Accumulated depreciation (5 780) 12 840 TOTAL ASSETS $32 580 CURRENT LIABILITIES Accounts payable 11 670 Unearned fees 1 755 TOTAL LIABILITIES 13 425 NET ASSETS $19 155 EQUITY G. Jones, Capital $19 155 TOTAL EQUITY $19 155 (c) Closing entries June 30 Placement Fees Revenue $101 445 Profit or Loss Summary $101 445 Close revenue accounts June 30 Profit or Loss Summary 82 280 Rent Expense 12 440 Salaries Expense 62 500 Telephone Expense 2 120 Office Supplies Expense 570 Depreciation Expense 3 500 Advertising Expense 1 350 Close expense accounts. June 30 Profit or Loss Summary 19 165 G. Jones, Capital 19 165 Transfer profit to capital. June 30 G. Jones, Capital 16 000 G. Jones, Drawings 16 000 Close drawings to capital. Problem 5.17 Worksheet, financial statements and closing entries GST version Gemma Jones owns Australia Works, which provides employment placement services. The unadjusted trial balance on 30 June 2019 below was prepared by her accountant. The following additional information is available at 30 June. 1. Unused supplies on hand on 30 June totalled $180. 2. The Unearned Fees account includes $825 received for fees earned during June. 3. Estimated depreciation on the office equipment is $3500. 4. Advertising costing $1350 was consumed during the year. AUSTRALIA WORKS Unadjusted Trial Balance as at 30 June 2019 Account Debit Credit Cash at bank Accounts receivable GST receivable Prepaid advertising Office supplies Office equipment Accumulated depreciation – office equipment Accounts payable Unearned fees GST payable G. Jones, Capital G. Jones, Drawings Placement fees revenue Rent expense Salaries expense Telephone expense $ 4 560 14 230 1 470 2 120 750 18 620 16 000 12 240 62 500 2 120 $ 2 280 11 670 2 580 3 220 14 240 100 620 $134 610 $134 610 Required (a) Prepare a 10-column worksheet for the year ended 30 June 2019. (b) Prepare an income statement , a statement of changes in equity and a balance sheet. (c) Journalise the closing entries. (LO1, LO3 and LO4) (a) (b) AUSTRALIA WORKS Income Statement for the year ended 30 June 2019 INCOME Placement fees revenue $101 445 EXPENSES Rent expense $12 440 Salaries expense 62 500 Telephone expense 2 120 Office supplies expense 570 Depreciation expense 3 500 Advertising expense 1 350 82 280 PROFIT $19 165 AUSTRALIA WORKS Statement of Changes in Equity for the year ended 30 June 2019 G. Jones, Capital – 1 July 2018 $14 240 Profit for the year 19 165 $33 405 Drawings during the year (16 000) G. Jones, Capital – 30 June 2019 $17 405 AUSTRALIA WORKS Balance Sheet as at 30 June 2019 CURRENT ASSETS Cash at bank $4 560 Accounts receivable 14 230 Prepaid advertising 770 Office supplies 180 $19 740 NON-CURRENT ASSETS Office equipment 18 620 Less. Accumulated depreciation (5 780) 12 840 TOTAL ASSETS $32 580 CURRENT LIABILITIES Accounts payable 11 670 GST payable 1 750 Unearned fees 1 755 TOTAL LIABILITIES 15 175 NET ASSETS $17 405 EQUITY G. Jones, Capital $17 405 TOTAL EQUITY $17 405 (c) Closing entries June 30 Placement Fees Revenue $101 445 Profit or Loss Summary $101 445 Close revenue accounts June 30 Profit or Loss Summary 82 280 Rent Expense 12 440 Salaries Expense 62 500 Telephone Expense 2 120 Office Supplies Expense 570 Depreciation Expense 3 500 Advertising Expense 1 350 Close expense accounts. June 30 Profit or Loss Summary 19 165 G. Jones, Capital 19 165 Transfer profit to capital. June 30 G. Jones, Capital 16 000 G. Jones, Drawings 16 000 Close drawings to capital. Problem 5.18 Worksheet, adjusting entries and financial statements Jack Thomas owns a men’s hairdressing salon which conducts business in a large shopping complex in Melbourne. Presented below are selected (incomplete) data from the three trial balances at the end of the current year, 30 June 2020. Accounts are arranged alphabetically. During the period, adjustments were made to record haircut revenue receivable, hair care supplies expense, rent expense, advertising expense, depreciation expense and wages accrued. Required (a) Prepare a worksheet in correct financial statement order, filling in the blank spaces where necessary. Note that the column totals for the trial balances are: No additional accounts are required. (b) Prepare the income statement and balance sheet as at the date of the worksheet. (LO1, LO3 and LO4) (a) (b) JACK THOMAS’ SALON Income Statement for the year ended 30 June 2020 INCOME Haircut revenue $180 540 EXPENSES Rent expense $20 400 Wages expense 58 490 Advertising expense 8 640 Hair care supplies expense 32 560 Electricity expense 19 000 Depreciation expense 5 630 144 720 PROFIT $35 820 JACK THOMAS’ SALON Balance Sheet as at 30 June 2020 CURRENT ASSETS Cash at bank $15 960 Haircut revenue receivable 4 680 Prepaid advertising 1 620 Hair care supplies 17 350 Prepaid rent 4 400 $44 010 NON-CURRENT ASSETS Equipment 53 460 Less. Accumulated depreciation (18 990) 34 470 TOTAL ASSETS $78 480 CURRENT LIABILITIES Accounts payable 10 230 Wages payable 2 010 TOTAL LIABILITIES 12 240 NET ASSETS $66 240 EQUITY J. Thomas, Capital* $66 240 TOTAL EQUITY $66 240 JACK THOMAS’ SALON* Statement of Changes in Equity for the year ended 30 June 2020 J. Thomas, Capital, 1 July 2018 $45 620 Add: Profit for the period 35 820 Less: J. Thomas, Drawings (15 200) J. Thomas, Capital, 30 June 2020 66 240 Problem 5.19 Worksheet, financial statements and closing entries Non-GST version The ledger of Catherine Delaney, Financial Consultant, contains the following account balances on 30 June 2020. The following additional account titles are included in the chart of accounts. • Prepaid Insurance • Telecommunications Expense Payable • Office Supplies Expense • Depreciation Expense – Buildings • Depreciation Expense – Office Equipment • Interest Payable • Salaries Payable The following information is also available. 1. A physical count of office supplies reveals that supplies totalling $420 are on hand at 30 June. 2. The balance in the Unearned Consulting Fees account includes $1200 earned for services rendered in the last week of June. 3. Estimated depreciation on the office equipment is $2140. Depreciation on the building is $8760. 4. A 12-month insurance policy was purchased on 1 April for $780. 5. The June monthly mortgage payment of $900 has not been paid or recorded. In each payment, $220 is attributable to interest. 6. The June telecommunications costs for $320 are unrecorded. No tax invoice has been received. 7. Salaries of $980 were owing to employees at 30 June 2020. Required (a) Prepare a 10-column worksheet for the year ended 30 June 2020. (b) Prepare the income statement, balance sheet and statement of changes in equity. (c) Journalise the closing entries. (LO1, LO3 and LO4) (a) (b) CATHERINE DELANEY, FINANCIAL CONSULTANT Income Statement for the year ended 30 June 2020 INCOME Consulting fees revenue $158 060 EXPENSES Office supplies expense $720 Depreciation expense – building 8 760 Depreciation expense – office equipment 2 140 Insurance expense 1075 Salaries expense 88 920 Electricity expense 760 Interest expense 2 310 Telecommunications expense Total Expenses 2 060 106 745 PROFIT $51 315 CATHERINE DELANEY, FINANCIAL CONSULTANT Statement of Changes in Equity for the year ended 30 June 2020 C. Delaney, Capital – 1 July 2019 $72 130 Profit for the year 51 315 $123 445 Drawings during the year (52 780) C. Delaney, Capital – 30 June 2020 $70 665 CATHERINE DELANEY, FINANCIAL CONSULTANT Balance Sheet as at 30 June 2020 CURRENT ASSETS Cash at bank $5 200 Accounts receivable 9 260 Prepaid insurance 585 Office supplies 420 $15465 NON-CURRENT ASSETS Land 60 000 Building $152 000 Less: Accum. depr. – building (72 760) 79 240 Office equipment 23 400 Less: Accum. depr. office equip. (8 560) 14 840 154 080 TOTAL ASSETS $169 545 CURRENT LIABILITIES Accounts payable 7 960 Unearned consulting fees 800 Interest payable 220 Telecommunications expense payable 320 Salaries payable 980 Current portion of mortgage payable* 8 840 19 120 NON-CURRENT LIABILITIES Mortgage payable 79 760 TOTAL LIABILITIES 98 880 NET ASSETS 70 665 EQUITY C. Delaney, Capital $70 665 TOTAL EQUITY $70 665 * Current portion of mortgage payable = 13 months  ($900 – $220) per month. (c) General journal Closing entries Consulting Fees Revenue 158 060 Profit or Loss Summary 158 060 Close revenue accounts Profit or Loss Summary 106 745 Office Supplies Expense 720 Depreciation Expense – Building 8 760 Depreciation Expense – Office Equipment 2 140 Insurance Expense 1075 Salaries Expense 88 920 Electricity Expense 760 Interest Expense 2 310 Telecommunications Expense 2 060 Close expense accounts Profit or Loss Summary 51 315 C. Delaney, Capital 51 315 Transfer profit to capital C. Delaney, Capital 52 780 C. Delaney, Drawings 52 780 Close drawings to capital Problem 5.19 Worksheet, financial statements and closing entries GST version The ledger of Catherine Delaney, Financial Consultant, contains the following account balances on 30 June 2017. Account Debit Credit Cash at Bank Accounts Receivable GST Receivable Office Supplies Land Building Accumulated Depreciation – Building Office Equipment Accumulated Depreciation – Office Equipment Accounts Payable Unearned Consulting Fees GST Payable Mortgage Payable C. Delaney, Capital C. Delaney, Drawings Consulting Fees Revenue Insurance Expense Salaries Expense Electricity Expense Interest Expense Telecommunications Expense $ 5 200 9 260 920 1 140 60 000 152 000 23 400 52 780 1 660 87 940 760 2 090 1 740 $ 64 000 6 420 7 960 1 560 2 000 88 600 71 490 156 860 $398 890 $398 890 The following additional account titles are included in the chart of accounts: •Prepaid Insurance •Telecommunications Expense Payable •Office Supplies Expense •Depreciation Expense – Buildings •Depreciation Expense – Office Equipment •Interest Payable •Salaries Payable The following information is also available. 1. A physical count of office supplies reveals that supplies totalling $420 are on hand at 30 June. 2. The balance in the Unearned Consulting Fees account includes $1200 earned for services rendered in the last week of June. 3. Estimated depreciation on the office equipment is $2140. Depreciation on the building is $8760. 4. A 12-month insurance policy was purchased on 1 April for $780 plus GST. 5. The June monthly mortgage payment of $900 has not been paid or recorded. In each payment, $220 is attributable to interest. 6. The June telecommunications costs for $320 are unrecorded. No tax invoice has been received. 7. Salaries of $980 were owing to employees at 30 June 2017. Required (a) Prepare a 10-column worksheet for the year ended 30 June 2017. (b) Prepare the income statement, balance sheet and statement of changes in equity. (c) Journalise the closing entries. (LO1, LO3 and LO4) (a) (b) CATHERINE DELANEY, FINANCIAL CONSULTANT Income Statement for the year ended 30 June 2017 INCOME Consulting fees revenue $158 060 EXPENSES Office supplies expense $720 Depreciation expense – building 8 760 Depreciation expense – office equipment 2 140 Insurance expense 1075 Salaries expense 88 920 Electricity expense 760 Interest expense 2 310 Telecommunications expense Total Expenses 2 060 106745 PROFIT $51315 CATHERINE DELANEY, FINANCIAL CONSULTANT Statement of Changes in Equity for the year ended 30 June 2017 C. Delaney, Capital – 1 July 2016 $71 490 Profit for the year 51315 $122 415 Drawings during the year (52 780) C. Delaney, Capital – 30 June 2017 $70025 CATHERINE DELANEY, FINANCIAL CONSULTANT Balance Sheet as at 30 June 2017 CURRENT ASSETS Cash at bank $5 200 Accounts receivable 9 260 Prepaid insurance 585 Office supplies 420 $15465 NON-CURRENT ASSETS Land 60 000 Building $152 000 Less: Accum. depr. – building (72 760) 79 240 Office equipment 23 400 Less: Accum. depr. office equip. (8 560) 14 840 154 080 TOTAL ASSETS $169545 CURRENT LIABILITIES Accounts payable 7 960 Unearned consulting fees 360 GST payable 1 080 Interest payable 220 Telecommunications expense payable 320 Salaries payable 980 Current portion of mortgage payable* 8 840 19 760 NON-CURRENT LIABILITIES Mortgage payable 79 760 TOTAL LIABILITIES 99 520 NET ASSETS 70025 EQUITY C. Delaney, Capital $70025 TOTAL EQUITY $70025 * Current portion of mortgage payable = 13 months  ($900 – $220) per month. (c) General journal Closing entries Consulting Fees Revenue 158 060 Profit or Loss Summary 158 060 Close revenue accounts Profit or Loss Summary 106745 Office Supplies Expense 720 Depreciation Expense – Building 8 760 Depreciation Expense – Office Equipment 2 140 Insurance Expense 1075 Salaries Expense 88 920 Electricity Expense 760 Interest Expense 2 310 Telecommunications Expense 2 060 Close expense accounts Profit or Loss Summary 51315 C. Delaney, Capital 51315 Transfer profit to capital C. Delaney, Capital 52 780 C. Delaney, Drawings 52 780 Close drawings to capital Problem 5.20 Preparation of worksheet, financial statements and closing entries The ledger of P. Oodle, Veterinary Surgeon, contains the accounts and account balances shown below on 30 June 2019. The following account titles are included in the chart of accounts. • Interest Payable • Salaries Payable • Rates Payable • Unearned Fees • Depreciation Expense – Building • Depreciation Expense – Equipment • Rates Expense The following information has not yet been recorded. 1. Rates owing at 30 June, $4820. 2. Depreciation on the equipment is $3680. Depreciation on the building is $9600. 3. An advance fee payment of $600 for minor surgery to be performed in July 2019 was credited to Fees Earned. 4. The mortgage contract provides for a monthly payment of $1000 plus accrued interest. The June payment was not made. Interest of $260 is accrued on the mortgage. 5. Prepaid insurance of $1340 has expired. 6. Salaries earned but not paid amount to $2360. Required (a) Prepare a 10-column worksheet for the year ended 30 June 2019. (b) Prepare an income statement, a statement of changes in equity and a balance sheet. (c) Journalise the closing entries. (LO1, LO3 and LO4) (a) (a) (b) P. OODLE, VETERINARY SURGEON Income Statement for the year ended 30 June 2019 INCOME Fees earned $261 830 Rent income 14 400 276 330 EXPENSES Salaries expense $126 960 Depreciation expense – building 9 600 Depreciation expense – equipment 3 680 Telephone expense 4 520 Interest expense 3 340 Insurance expense 37 820 Rates expense 4 820 190 740 PROFIT $85 490 P. OODLE, VETERINARY SURGEON Statement of Changes in Equity for the year ended 30 June 2019 P. Oodle, Capital – 1 July 2018 $236 950 Add: Profit for the year 85 490 $322 440 Less: Drawings during the year (86 500) P. Oodle, Capital – 30 June 2019 $235 940 P. OODLE, VETERINARY SURGEON Balance Sheet as at 30 June 2019 CURRENT ASSETS Cash at bank $12 600 Accounts receivable 11 800 Prepaid insurance 460 Total current assets $24 860 NON-CURRENT ASSETS Equipment $32 300 Less Accumulated depreciation (12 480) 19 820 Land 180 200 Building 196 000 Less Accumulated depreciation (96 500) 99 500 Total non-current assets 299 520 TOTAL ASSETS $324 380 CURRENT LIABILITIES Accounts payable 16 400 Interest payable 260 Salaries payable 2 360 Rates payable 4 820 Current portion of mortgage payable* 13 000 Unearned fees 600 Total current liabilities 37 440 NON-CURRENT LIABILITIES Mortgage payable 51 000 Total non-current liabilities 51 000 TOTAL LIABILITIES 88 440 NET ASSETS $235 940 EQUITY P. Oodle, Capital $235 940 TOTAL EQUITY $235 940 * Current portion of mortgage payable = 13 months  $1 000 per month (c) General journal Closing entries 2019 June 30 Fees Earned 261 830 Rent Revenue 14 400 Profit or Loss Summary 276 330 Close income a/cs to Profit or Loss Summary Profit or Loss Summary 190 740 Salaries Expense 126 960 Telephone Expense 4 520 Interest Expense 3 340 Insurance Expense 37 820 Depreciation Expense – Building 9 600 Depreciation Expense – Equipment 3 680 Rates Expense 4 820 Close expense a/cs to Profit or Loss Summary Profit or Loss Summary 85 490 P. Oodle, Capital 85 490 Close Profit or Loss Summary to Capital P. Oodle, Capital 86 500 P. Oodle, Drawings 86 500 Close Drawings to Capital Problem 5.21 Financial statements from an adjusted trial balance; adjusting and closing entries Non-GST version The adjusted trial balance of Brompton Bowling Alley at 30 June 2020, the end of the entity’s accounting year, follows. Additional data taken into account in the preparation of the above adjusted trial balance at 30 June 2020. 1. Unearned fees revenue earned during the year, $5540. 2. Prepaid insurance expired during the year, $16 800. 3. Accrued interest expense, $6100. 4. Supplies used during the year, $8300. 5. Fees revenue earned but not recorded, $7860. 6. Depreciation for the year: bowling equipment, $20 100; building, $9630. 7. Accrued wages and salaries expense, $3620. Required (a) Prepare the income statement and statement of changes in equity for the year ended 30 June 2020 and a classified balance sheet as at 30 June 2020. (b) Record adjusting and closing entries in the general journal. (c) Prepare any suitable reversing entries on 1 July 2020. (LO3, LO4 and LO5) (a) BROMPTON BOWLING ALLEY Income Statement for the year ended 30 June 2020 INCOME Fees revenue $248 320 EXPENSES Wages and salaries expense $89 400 Interest expense 14 510 Supplies expense 21 300 Depn. expense – bowling equipment 20 100 Depreciation expense – building 9 630 Electricity expense 17 010 Insurance expense 17 040 Council rates expense 8 830 197 820 PROFIT $50 500 BROMPTON BOWLING ALLEY Statement of Changes in Equity for the year ended 30 June 2020 B. Awls, Capital – 1 July 2019 $270 980 Add: Profit for the year 50 500 321 480 Less: Drawings during the year (90 000) B. Awls, Capital – 30 June 2020 $231 480 BROMPTON BOWLING ALLEY Balance Sheet as at 30 June 2020 CURRENT ASSETS Cash at bank $8 660 Accounts receivable 19 360 Accrued revenue 7 860 Supplies 11 070 Prepaid insurance 6 870 TOTAL CURRENT ASSETS 53 820 NON-CURRENT ASSETS Bowling equipment $230 790 Less. Accumulated depreciation (85 290) $145 500 Building 400 990 Less Accumulated depreciation (54 780) 346 210 TOTAL NON-CURRENT ASSETS 491 710 TOTAL ASSETS $545 530 CURRENT LIABILITIES Accounts payable 58 650 Interest payable 7 100 Wages and salaries payable 3 620 Unearned fees revenue 10 980 TOTAL CURRENT LIABILITIES 80 350 NON-CURRENT LIABILITIES Loan from XYZ Bank 233 700 TOTAL NON-CURRENT LIABILITIES $233 700 TOTAL LIABILITIES $314 050 NET ASSETS $231 480 EQUITY B. Awls, Capital $231 480 TOTAL EQUITY $231 480 (b) General journal Adjusting entries 2020 June 30 Unearned Fees Revenue $5 540 Fees Revenue $5 540 Revenue previously deferred Insurance Expense 16 800 Prepaid Insurance 16 800 Expired insurance Interest Expense 6 100 Interest Payable 6 100 Recognise accrued interest Supplies Expense 8 300 Supplies 8 300 Supplies used Accrued Revenue 7 860 Fees Revenue 7 860 Recognise accrued revenue Depreciation Expense – Bowling Equipment 20 100 Accum. Depr. – Bowling Equipment 20 100 Depreciation on equipment Depreciation Expense – Building 9 630 Accum. Depr. – Building 9 630 Depreciation on building Wages and Salaries Expense 3 620 Wages & Salaries Payable 3 620 Recognise accrued wages General journal Closing entries 2020 June 30 Fees Revenue $248 320 Profit or Loss Summary $248 320 Close revenue accounts Profit or Loss Summary 197 820 Wages and Salaries Expense 89 400 Interest Expense 14 510 Supplies Expense 21 300 Depr. Expense – Bowling Equip. 20 100 Electricity Expense 17 010 Insurance Expense 17 040 Depr. Expense – Building 9 630 Council Rates Expense 8 830 Close expense accounts. Profit or Loss Summary 50 500 B. Awls, Capital 50 500 Transfer profit to capital B. Awls, Capital 90 000 B. Awls, Drawings 90 000 Close drawings to capital. (c) Suitable reversing entries on 1 July 2020 would be for all items in which cash is paid or received in the new financial year. This means reversing the accrual adjusting entries, as follows. 2020 July 1 Interest Payable 6 100 Interest Expense 6 100 Reversing accrued interest Fees Revenue 7 860 Accrued Revenue 7 860 Reversing accrued revenue Wages and Salaries Payable 3 620 Wages and Salaries Expense 3 620 Reversing accrued wages Problem 5.21 Financial statements from an adjusted trial balance; adjusting and closing entries GST version The adjusted trial balance of Brompton Bowling Alley at 30 June 2020, the end of the entity’s accounting year, follows: BROMPTON BOWLING ALLEY Adjusted Trial Balance as at 30 June 2020 Account Debit Credit Cash at bank Accounts receivable Supplies Prepaid insurance GST receivable Bowling equipment Accumulated depreciation – bowling equipment Building Accumulated depreciation – building Accounts payable Interest payable Wages and salaries payable Unearned fees revenue GST payable Loan from XYZ Bank Ltd (non-current) B. Awls, Capital B. Awls, Drawings Fees revenue Depreciation expense – bowling equipment Depreciation expense – building Wage and salaries expense Insurance expense Interest expense Electricity expense Council rates expense Supplies expense $ 8 660 27 220 11 070 6 870 6 470 230 790 400 990 90 000 20 100 9 630 89 400 17 040 14 510 17 010 8 830 21 300 $ 85 290 54 780 58 650 7 100 3 620 10 980 15 020 233 700 262 430 248 320 $979 890 $979 890 Additional data taken into account in the preparation of the above adjusted trial balance at 30 June 2020. 1. Unearned fees revenue earned during the year, $5540. 2. Prepaid insurance expired during the year, $17 040. 3. Accrued interest expense, $7100. 4. Supplies used during the year, $21 300. 5. Fees revenue earned but not received, $7860. 6. Depreciation for the year: bowling equipment, $20 100; building, $9630. 7. Accrued wages and salaries expense, $3620. Required (a) Prepare the income statement and statement of changes in equity for the year ended 30 June 2020 and a classified balance sheet as at 30 June 2020. (b) Record adjusting and closing entries in the general journal. (c) Prepare any suitable reversing entries on 1 July 2020. (LO3, LO4 and LO5) (a) BROMPTON BOWLING ALLEY Income Statement for the year ended 30 June 2020 INCOME Fees revenue $248 320 EXPENSES Wages and salaries expense $89 400 Interest expense 14 510 Supplies expense 21 300 Depn. expense – bowling equipment 20 100 Depreciation expense – building 9 630 Electricity expense 17 010 Insurance expense 17 040 Council rates expense 8 830 197 820 PROFIT $50 500 BROMPTON BOWLING ALLEY Statement of Changes in Equity for the year ended 30 June 2020 B. Awls, Capital – 1 July 2019 $262 430 Add: Profit for the year 50 500 312 930 Less: Drawings during the year (90 000) B. Awls, Capital – 30 June 2020 $222 930 BROMPTON BOWLING ALLEY Balance Sheet as at 30 June 2020 CURRENT ASSETS Cash at bank $8 660 Accounts receivable 27 220 Supplies 11 070 Prepaid insurance 6 870 TOTAL CURRENT ASSETS 53 820 NON-CURRENT ASSETS Bowling equipment $230 790 Less. Accumulated depreciation (85 290) $145 500 Building 400 990 Less Accumulated depreciation (54 780) 346 210 TOTAL NON-CURRENT ASSETS 491 710 TOTAL ASSETS $545 530 CURRENT LIABILITIES Accounts payable 58 650 GST payable [$15 020 – $6 470] 8 550 Interest payable 7 100 Wages and salaries payable 3 620 Unearned fees revenue 10 980 TOTAL CURRENT LIABILITIES 88 900 NON-CURRENT LIABILITIES Loan from XYZ Bank 233 700 TOTAL NON-CURRENT LIABILITIES $233 700 TOTAL LIABILITIES $322 600 NET ASSETS $222 930 EQUITY B. Awls, Capital $222 930 TOTAL EQUITY $222 930 (b) General journal Adjusting entries 2020 June 30 Unearned Fees Revenue $5 540 Fees Revenue $5 540 Revenue previously deferred Insurance Expense 17 040 Prepaid Insurance 17 040 Expired insurance Interest Expense 7 100 Interest Payable 7 100 Recognise accrued interest Supplies Expense 21 300 Supplies 21 300 Supplies used Accounts Receivable 7 860 Fees Revenue 7 860 Recognise accrued revenue Depreciation Expense – Bowling Equipment 20 100 Accum. Depr. – Bowling Equipment 20 100 Depreciation on equipment Depreciation Expense – Building 9 630 Accum. Depr. – Building 9 630 Depreciation on building Wages and Salaries Expense 3 620 Wages & Salaries Payable 3 620 Recognise accrued wages General journal Closing entries 2020 June 30 Fees Revenue $248 320 Profit or Loss Summary $248 320 Close revenue accounts Profit or Loss Summary 197 820 Wages and Salaries Expense 89 400 Interest Expense 14 510 Supplies Expense 21 300 Depr. Expense – Bowling Equip. 20 100 Electricity Expense 17 010 Insurance Expense 17 040 Depr. Expense – Building 9 630 Council Rates Expense 8 830 Close expense accounts. Profit or Loss Summary 50 500 B. Awls, Capital 50 500 Transfer profit to capital B. Awls, Capital 90 000 B. Awls, Drawings 90 000 Close drawings to capital. (c) Suitable reversing entries on 1 July 2020 would be for all items in which cash is paid or received in the new financial year. This means reversing the accrual adjusting entries, as follows. 2020 July 1 Interest Payable 7 100 Interest Expense 7 100 Reversing accrued interest Fees Revenue 7 860 Accounts Receivable 7 860 Reversing accrued revenue Wages and Salaries Payable 3 620 Wages and Salaries Expense 3 620 Reversing accrued wages Problem 5.22 Adjusting and closing entries from two trial balances There is a travel agency operating in a suburban shopping centre in Broome called Top End Tours. Two trial balances prepared at different stages of the accounting cycle are presented below (account balances are all normal and GST is ignored). Required Show, in general journal format, the adjusting and closing entries that would have been made on 30 June 2020. Show also any suitable reversing entries on 1 July 2020. (LO3, LO4 and LO5) General journal Adjusting entries 2020 June 30 Office Supplies Expense $3 350 Office Supplies $3 350 Office supplies consumed. Insurance Expense 4 200 Prepaid Insurance 4 200 Insurance expired. Rent Expense 5 200 Prepaid Rent 5 200 Lease rental expired. Depreciation Expense 7 800 Acc. Depr. – Office Equipment 7 800 Depreciation of office equipment Salaries Expense 1 100 Salaries Payable 1 100 Salaries accrued and not paid Accounts Receivable 1 500 Commission Revenue 1 500 Commission revenue earned General Expense 200 Accounts Payable 200 Additional expenses incurred Closing entries 2020 June 30 Commission Revenue 64 000 Profit or Loss Summary 64 000 Close income to Profit or Loss Summary Profit or Loss Summary 54 750 Salaries Expense 25 400 General Expense 8 800 Office Supplies Expense 3 350 Insurance Expense 4 200 Rent Expense 5 200 Depreciation Expense 7 800 Close expenses to Profit or Loss Summary Profit or Loss Summary 9 250 Yim Yu Chang, Capital 9 250 Close profit to capital Yim Yu Chang, Capital 10500 Yim Yu Chang, Drawings 10500 Close drawings to capital. Reversing entries 2020 July 1 Salaries Payable 1 100 Salaries Expense 1 100 Reversing salaries accrued Commission Revenue 1 500 Accounts Receivable 1 500 Reversing commission revenue earned Accounts Payable 200 General Expenses 200 Reversing expenses incurred Problem 5.23 Adjusting entries, posting to T accounts, reversing entries and entries in subsequent period Selected accounts taken from the general ledger of Hampsteads showed the following balances at 31 December. Required (a) Prepare adjusting entries for the accounts based on the following data that are not yet recorded. i. Insurance expired during the year, $1400. ii. Wages earned by employees but not paid at year-end, $2280. iii. Interest accrued but not yet received on bills receivable, $580. (b) Open T accounts for each of the accounts listed. Enter the 31 December balances and the adjusting entries. (c) Enter in the appropriate accounts the effects of the closing entries that would be made at year-end. (d) Complete the following table. (e) Hampsteads follows the practice of making reversing entries. Prepare the reversing entries that would be made on 1 January of the next period. (f) Record the payment of $2940 in weekly wages on 3 January and the collection of $740 in interest on 18 January. What are the balances in the Wages Expense and Interest Revenue after these entries are posted? (g) Prepare the two entries given in requirement F assuming the company did not prepare reversing entries. (LO1, LO4 and LO5) (a) General journal Adjusting entries 1. Insurance Expense 1 400 Prepaid Insurance 1 400 Expired insurance 2. Wages Expense 2 280 Wages Payable 2 280 Wages accrued 3. Interest Receivable 580 Interest Revenue 580 Interest revenue accrued (b) and (c) Prepaid Insurance 31/12 Balance $2 750 (1) Insurance expense 1 400 Insurance Expense (1) Prepaid insurance 1 400 Closing entry 1 400 Interest Receivable (3) Interest revenue $580 Interest Revenue 31/12 Balance $6 720 Closing entry 7 300 (3) Interest receivable 580 $7 300 $7 300 Wages Payable (2) Wages expense $2 280 Wages Expense 31/12 Balance $124 400 (2) Wages payable 2 280 Closing entry $126 680 $126 680 $126 680 (d) Account Balance before adjustment Effects of adjusting entries Balance after adjustments Effects of closing entries Balance after closing entries Prepaid Insurance $2 750 – $1 400 $1 350 $0 $1 350 Insurance Expense 0 + 1 400 1 400 – 1 400 0 Interest Receivable 0 +580 580 0 580 Interest Revenue 6 720 +580 7 300 – 7 300 0 Wages Payable 0 + 2 280 2 280 0 2 280 Wages Expense 124 400 + 2 280 126 680 – 126 680 0 (e) General journal Reversing entries Wages Payable $2 280 Wages Expense $2 280 Reverse adjustment for wages accruals. Interest Revenue 580 Interest Receivable 580 Reverse adjustment for interest accruals. (f) General journal Jan. 3 Wages Expense $2 940 Cash at Bank $2 940 Payment of wages Jan. 18 Cash at Bank 740 Interest Revenue 740 Receipt of interest Interest Revenue Wages Expense 1/1 Rev. ent. 580 1/1 Begin. bal 0 1/1 Begin. bal 0 1/1 Rev. ent. 2 280 18/1 Cash at bank 740 3/1 Cash at bank 2 940 Balance = $160 Cr Balance = $660 Dr (g) General journal Jan. 3 Wages Expense $660 Wages Payable 2 280 Cash at Bank $2 940 Payment of wages. Jan. 18 Cash at Bank 740 Interest Receivable 580 Interest Revenue 160 Receipt of interest. Problem 5.24 Adjusting and reversing entries The records of Townsville Ltd contain the following information at 31 December, the end of the year. Ignore GST. 1. Wages earned but not paid total $2050. 2. Depreciation on the office equipment is $13 020. 3. Interest of $740 has accrued on a loan payable. 4. Services performed for clients, but not yet recorded, amount to $6528. 5. On 15 September, the company paid $2880 for a 6-month advertising campaign beginning on that date. This transaction was recorded by debiting Prepaid Advertising. At the end of the year, advertising costing $2240 had been consumed. 6. The unearned revenue account has a balance of $1605, recorded when cash was received on 1 November. It was expected the $1605 would be earned equally over November, December and January. 7. The company decided to declare a dividend of $12 000 to its shareholders on 31 December. Required (a) Prepare adjusting entries for items 1 to 7. (b) Prepare reversing entries where appropriate. Where no reversing entry is required, explain why. (LO5 and LO6) (a) General journal Adjusting entries 1. Wages Expense 2 050 Wages Payable 2 050 Wages accrued 2. Depreciation Expense 13 020 Accum. Depr. – Office Equipment 13 020 Depreciation on office equipment 3. Interest Expense 740 Interest Payable 740 Interest accrued on loan 4. Service Fees Receivable 6 528 Service Fees Revenue 6 528 Fees owed and not yet received. 5. Advertising Expense 2 240 Prepaid Advertising 2 240 Advertising used during financial year 6. Unearned Revenue 1 070 Service Fees Revenue 1 070 Service fees earned for two months. 7. Retained Earnings 12 000 Dividend Payable 12 000 Dividend declared. (b) General journal Reversing entries Note: reversing entries apply mainly to adjusting entries which are accruals, i.e. adjusting entries which involve a future receipt of cash (receivable) or a future payment of cash (payable). Only adjusting entries may be reversed. Reversals do not apply to normal external transactions. 1. Wages Payable 2 050 Wages Expense 2 050 Reversing entry on wages accrued 2. NO REVERSING ENTRY, NOT AN ACCRUAL 3. Interest Payable 740 Interest Expense 740 Reversing entry on interest accrued on loan 4. Service Fees Revenue 6 528 Service Fees Receivable 6 528 Reversing entry for fees owed and not yet received. 5. NO REVERSING ENTRY, NOT AN ACCRUAL, BUT A DEFERRAL 6. NO REVERSING ENTRY, NOT AN ACCRUAL, BUT A DEFERRAL 7. NO REVERSING ENTRY NEEDED AS CASH PAYMENT WILL EQUAL THE LIABILITY FOR DIVIDENDS. Problem 5.25 Adjusting and reversing entries The following information concerning Tsang & Family is available at 30 June, the end of the financial year. 1. Interest earned but not received totals $3105. 2. Tsang & Family received $3948 rental revenue on 1 May for the 3-month period beginning on that date. The transaction was recorded by a credit to Unearned Rental Revenue. 3. Prepaid Insurance was debited for $2124 on 28 February to record the cost of a 6-month policy beginning on 1 March. 4. The June electricity bill for $582 has not been paid or recorded. Required (a) Prepare an adjusting entry for each item. (b) Prepare reversing entries where appropriate. (LO5) (a) Adjusting entries June 30 1. Interest Receivable 3 105 Interest Revenue 3 105 Accrued interest. 2. Unearned Rental Revenue 2 632 Rental Revenue 2 632 Two months’ revenue previously deferred. 3. Insurance Expense 1 416 Prepaid Insurance 1 416 Expired insurance. 4. Electricity Expense 582 Electricity Account Payable 582 Accrued liability for electricity. (b) Reversing entries July 1 1. Interest Revenue 3 105 Interest Receivable 3 105 Reverse accrual for interest. 2. and 3. No reversing entry required 4. Electricity Account Payable 582 Electricity Expense 582 Reverse accrual for electricity. Problem 5.26 Adjusting entries, financial statements, closing entries, reversing entries The trial balance shown below summarises the year’s activities for Nova Caine’s dental surgery. The following additional information should be considered. 1. Inventory of dental supplies on hand at 30 June is $16 400; $2400 office supplies are on hand. 2. Depreciate equipment at the rate of 15% p.a. on cost ($520 000). 3. Rent of $5000 has been paid in advance and has been debited to rent expense. 4. Wages earned by the dental assistants but unpaid, $1620. Required (a) Journalise the adjusting entries. (b) Journalise the closing entries. (c) Prepare an income statement, a statement of changes in equity and a balance sheet. (d) Journalise the reversing entries (if any). (LO1, LO4 and LO5) (a) Adjusting entries June 30 1. Dental Supplies Expense 125 600 Dental Supplies 125 600 Dental supplies used. Office Expenses 5 600 Office Supplies 5 600 Office supplies used. 2. Depreciation Expense – Equipment 78 000 Accum. Depreciation – Equipment 78 000 Depreciation of equipment 3. Prepaid Rent 5 000 Rent Expense 5 000 Rent paid in advance. 4. Wages Expense 1 620 Wages Payable 1 620 Wages owing to nurse. (b) Closing entries Fees Revenue 610 000 Profit or Loss Summary 610 000 Profit or Loss Summary 506 820 Dental Supplies Expense 125 600 Depreciation Expense – Equipment 78 000 Wages Expense 143 620 Rent Expense 60 000 Office Expenses 32 600 General Expenses 67 000 Profit or Loss Summary 103 180 Nova Caine, Capital 103 180 Nova Caine, Capital 120 000 Nova Caine, Drawings 120 000 (c) NOVA CAINE, DENTIST Income Statement for the year ended 30 June 2019 INCOME Dental fees revenue $610 000 EXPENSES Dental supplies expense $125 600 Wages expense 143 620 Office expenses 32 600 Depreciation expense 78 000 Rent expense 60 000 General expense 67 000 506 820 PROFIT $103 180 NOVA CAINE, DENTIST Statement of Changes in Equity for the year ended 30 June 2019 Nova Caine, Capital – 1 July 2018 $357 600 Add: Profit for the year 103 180 460 780 Less: Drawings during the year (120 000) Nova Caine, Capital – 30 June 2019 $340 780 NOVA CAINE, DENTIST Balance Sheet as at 30 June 2019 CURRENT ASSETS Cash at bank $5 600 Accounts receivable 56 000 Prepaid rent 5 000 Office Supplies 2 400 Dental Supplies 16 400 Total current assets $85 400 NON-CURRENT ASSETS Dental equipment 520 000 Less: Accum. depn. – dental equip. (243 000) Total non-current assets 277 000 TOTAL ASSETS $362 400 CURRENT LIABILITIES Accounts payable 20 000 Wages payable 1 620 TOTAL LIABILITIES 21 620 NET ASSETS $340 780 EQUITY Nova Caine, Capital $340 780 TOTAL EQUITY $340 780 (d) Reversing entries 3. Rent Expense 5 000 Prepaid Rent 5 000 Reversing entry for deferral recorded in expense. 4. Wages Payable 1 620 Wages Expense 1 620 Reversing entry for accrual. Problem 5.27 The complete accounting cycle Andy Harris owns Piano Tuning Service. The post-closing trial balance at 30 June 2019 is shown below. Ignore GST. Transactions completed during the year ended 30 June 2020 are summarised below. 1. Tuning fees of $78 000 were receivable during the year; $42 700 of this total was received in cash. The remainder consisted of transactions on credit. 2. Revenue from piano repairs was $48 700. Cash received totalled $33 500, and accounts receivable increased by $15 200. 3. Supplies costing $820 were purchased during the year on credit. 4. On 1 January 2020, Andy Harris paid $6000 off the bank loan plus interest of $1800. The interest payment consisted of $880 accrued up to 1 July 2019 and a further $920 which accrued for the period to 31 December 2019. 5. Fuel for the vehicle cost $5200 in cash. 6. Insurance on the vehicle, paid in advance, was $1260. 7. Telephone expense of $1480 was paid. 8. Accounts receivable of $47 800 were collected, and $4000 was paid on accounts payable. 9. Andy Harris withdrew $48 000 cash from the business. The following information relating to adjusting entries is available at the end of June 2020. 10. A physical count showed supplies costing $400 on hand at 30 June 2020. 11. Accrued interest on the bank loan is $420. 12. Insurance costing $1200 expired during the year. 13. Depreciation on the vehicle is $8700. 14. The June telephone account for $264 has not been paid or recorded. Required (a) Open T accounts for the accounts listed in the post-closing trial balance and the accounts below. Insert beginning balances in the accounts as shown in the post-closing trial balance. (b) Prepare journal entries to record the transactions (numbers 1–9) completed in the year to 30 June 2020. (c) Post the entries to T accounts. (d) Prepare a 10-column worksheet. (e) Prepare and post the adjusting entries. (f) Prepare an income statement, statement of changes in equity and a balance sheet. (g) Prepare and post the closing entries. (h) Prepare a post-closing trial balance. (LO3 and LO4) (a), (c), (f) and (g) Cash at Bank 1100 1/7/16 Balance b/d 4 200 (4) Bank loan and interest 7 800 (1) Piano tuning fees revenue 42 700 (5) Fuel expense 5 200 (2) Piano repair fees revenue 33 500 (6) Prepaid insurance 1 260 (8) Accounts receivable 47 800 (7) Telephone expense 1 480 (8) Accounts payable 4 000 (9) A. Harris, Drawings 48 000 Balance c/d 60 460 128 200 128 200 1/7/17 Balance b/d 60 460 Accounts Receivable 1200 1/7/16 Balance b/d 3 520 (8) Cash at bank 47 800 (1) Piano tuning fees revenue 35 300 Balance c/d 6 220 (2) Piano repair fees revenue 15 200 54 020 54 020 1/7/17 Balance b/d 6 220 Prepaid Insurance 1300 1/7/16 Balance b/d 460 (12) Insurance expense 1 200 (6) Cash at bank 1 260 Balance c/d 560 2 060 2 060 1/7/17 Balance b/d 560 Supplies 1400 1/7/16 Balance b/d 680 (10) Supplies expense 1 100 (3) Accounts payable 820 Balance c/d 400 1 500 1 500 1/7/17 Balance b/d 400 Motor Vehicle 1500 1/7/17 Balance b/d 42 800 Accumulated Depreciation – Motor Vehicle 1100 Balance c/d 24 750 1/7/16 Balance b/d 16 050 (13) Depreciation expense 8 700 24 750 24 750 1/7/17 Balance b/d 24 750 Accounts Payable 2000 (8) Cash at bank 4 000 1/7/16 Balance b/d 6 880 Balance c/d 3 700 (3) Supplies 820 7 700 7 700 1/7/17 Balance b/d 3 700 Interest Payable 2100 (4) Cash at bank 880 1/7/16 Balance b/d 880 Balance c/d 420 (11) Interest expense 420 1 300 1300 1/7/17 Balance b/d 420 Bank Loan 2200 (4) Cash at bank 6 000 1/7/16 Balance b/d 14 000 Balance c/d 8 000 14 000 14 000 1/7/17 Balance b/d 8 000 Telephone Expense Payable 2300 (14) Telephone expense 264 A. Harris, Capital 3000 30/6/17 Harris, Drawings 48 000 1/7/16 Balance b/d 13 850 Balance c/d 73 266 30/6/17 P or L Summary 107 416 121 266 121 266 1/7/17 Balance b/d 73 266 A. Harris, Drawings 3100 (9) Cash at bank 48 000 30/6/17 Harris, Capital 48 000 Profit or Loss Summary 3200 30/6/17 Expenses 19 284 30/6/17 Revenues 126 700 30/6/17 Harris, Capital 107 416 126 700 126 700 Piano Tuning Fees Revenue 4000 30/6/17 P or L Summary 78 000 (1) Cash/Accs receivable 78 000 Piano Repair Fees Revenue 4100 30/6/17 P or L Summary 48 700 (2) Cash/ Accs receivable 48 700 Fuel Expense 5000 (5) Cash at bank 5 200 30/6/17 P or L Summary 5 200 Telephone Expense 5100 (7) Cash at bank 1 480 30/6/17 P or L Summary 1 744 (14) Telephone exp payable 264 1 744 1 744 Supplies Expense 5200 (10) Supplies 1 100 30/6/17 P or L Summary 1 100 Insurance Expense 5300 (12) Prepaid insurance 1 200 30/6/17 P or L Summary 1 200 Depreciation Expense – Vehicle 5400 (13) Accum. Depreciation 8 700 30/6/17 P or L Summary 8 700 Interest Expense 5500 (4) Cash at bank 920 30/6/17 P or L Summary 1 340 (11) Interest payable 420 1 340 1 340 (b) 2019–17 1. Cash at Bank 1100 42 700 Accounts Receivable 1200 35 300 Piano Tuning Fees Revenue 4000 78 000 Tuning fees revenue 2. Cash at Bank 1100 33 500 Accounts Receivable 1200 15 200 Piano Repair Fees Revenue 4100 48 700 Repair fees revenue 3. Supplies 1400 820 Accounts Payable 2000 820 Purchase of supplies 4. Bank Loan 2200 6 000 Interest Payable 2100 880 Interest Expense 5500 920 Cash at Bank 1100 7 800 Payment of loan and interest 5. Fuel Expense 5000 5 200 Cash at Bank 1100 5 200 Fuel costs for vehicle 6. Prepaid Insurance 1300 1 260 Cash at Bank 1100 1 260 Purchase of insurance 7. Telephone Expense 5100 1 480 Cash at Bank 1100 1 480 Payment for telephone 8. Cash at Bank 1100 47 800 Accounts Receivable 1200 47 800 Collection from debtors Accounts Payable 2000 4 000 Cash at Bank 1100 4 000 Payment of accounts payable 9. A. Harris, Drawings 3100 48 000 Cash at Bank 1100 48 000 Drawings by owner (d) (e) General Journal Adjusting entries 2020 June 30 (10) Supplies Expense 5200 1 100 Supplies 1400 1 100 Supplies used (11) Interest Expense 5500 420 Interest Payable 2100 420 Accrual of interest (12) Insurance Expense 5300 1 200 Prepaid Insurance 1300 1 200 Insurance expired (13) Depreciation Expense – Vehicle 5400 8 700 Accum. Depn. – Vehicle 1510 8 700 Depreciation of vehicle (14) Telephone Expense 5100 264 Telephone Expense Payable 2300 264 June’s telephone account (f) PIANO TUNING SERVICE Income Statement for the year ended 30 June 2020 INCOME Piano tuning fees $78 000 Piano repairs fees 48 700 $126 700 EXPENSES Fuel expense 5 200 Telephone expense 1 744 Supplies expense 1 100 Insurance expense 1 200 Depreciation expense – vehicle 8 700 Interest expense 1 340 19 284 PROFIT $107 416 PIANO TUNING SERVICE Statement of Changes in Equity for the year ended 30 June 2020 A. Harris, Capital – 1 July 2019 $13 850 Add: Profit for the year 107 416 121 266 Less: Drawings for the year (48 000) A. Harris, Capital – 30 June 2020 $73 266 PIANO TUNING SERVICE Balance Sheet as at 30 June 2020 CURRENT ASSETS Cash at bank $60 460 Accounts receivable 6 220 Prepaid insurance 520 Supplies 400 $67 600 NON-CURRENT ASSETS Motor vehicle 42 800 Less: Accum. depn. – vehicle (24 750) 18 050 TOTAL ASSETS $85 650 CURRENT LIABILITIES Accounts payable 3 700 Interest payable 420 Telephone expense payable 264 Bank loan 8 000 12 384 TOTAL LIABILITIES $12 384 NET ASSETS $73 266 EQUITY A. Harris, Capital $73 266 TOTAL EQUITY $73 266 (g) General journal Closing entries 2020 June 30 Piano Tuning Fees Revenue 4000 78 000 Piano Repair Fees Revenue 4100 48 700 Profit or Loss Summary 3200 126 700 Close revenue accounts Profit or Loss Summary 3200 19 284 Fuel Expense 5000 5 200 Telephone Expense 5100 1 744 Supplies Expense 5200 1 100 Insurance Expense 5300 1 200 Depn. Expense – Vehicle 5400 8 700 Interest Expense 5500 1 340 Close expense accounts Profit or Loss Summary 3200 107 416 A. Harris, Capital 3000 107 416 Transfer profit to capital A. Harris, Capital 3000 48 000 A. Harris, Drawings 3100 48 000 Close drawings to capital (h) PIANO TUNING SERVICE Post-Closing Trial Balance as at 30 June 2020 Account Dr Cr Cash at bank $60 460 Accounts receivable 6 220 Prepaid insurance 520 Supplies 400 Motor vehicle 42 800 Accum. depreciation – vehicle 24 750 Accounts payable 3 700 Interest payable 420 Telephone expense payable 264 Bank loan 8 000 A. Harris, Capital 73 266 $110 400 $110 400 Problem 5.28 The complete accounting cycle Non-GST version The post-closing trial balance at 30 June 2019 of Payneham Professional Services is shown below. Transactions completed during the year ended 30 June 2020 are summarised below. 1. Collections on accounts receivable totalled $82 060. 2. Consulting fees of $88 150 were receivable during the year. Clients are invoiced after services are provided and are given 30 days in which to pay. 3. Rent paid in advance was $14 580. 4. Office supplies were purchased during the year for $380 in cash and $420 plus GST on credit. 5. Tat withdrew $25 000 for private use. 6. Salary payments amounted to $31 940, of which $420 was for salaries accrued to the end of the year ending 30 June 2020. 7. Advertising totalling $3360 was purchased on credit. 8. Electricity expense of $3600 was paid. 9. Accounts payable of $2880 were paid. The following additional information should be considered for adjusting entries. 10. Unused office supplies on hand at the end of the year totalled $760. 11. Depreciation on the furniture and equipment is $4600. 12. Salaries earned but not paid amount to $1180. 13. Rent paid in advance in transaction 3. Rent for 6 months of $7290 plus GST was paid in advance on 1 August and 1 February. Required (a) Prepare the ledger of Payneham Professional Services by opening T accounts for the accounts listed in the post-closing trial balance and for the accounts listed below. Post the 30 June 2020 balances. (b) Prepare journal entries to record the transactions completed (numbers 1–9). (c) Post the entries to the T accounts. (d) Journalise and post the adjusting entries. (e) Prepare a 10-column worksheet for the year ended 30 June 2020. (f) Prepare an income statement, a statement of changes in equity and a balance sheet. (g) Journalise and post the closing entries. (h) Prepare a post-closing trial balance. (i) Prepare any suitable reversing entries on 1 July 2020. (LO3, LO4 and LO5) (a), (c), (f) and (g) Cash at Bank 1100 1/7/19 Balance b/d 14 800 (3) Prepaid rent. 14 580 (1) Accounts receivable 82 060 (4) Office supplies 380 (5) T. Chiang, Drawings 25 000 (6) Salaries exp/payable 31 940 (8) Electricity exp 3 600 (9) Accounts payable 2 880 30/6/20 Balance c/d 18 480 96 860 96 860 1/7/20 Balance b/d 18 480 Accounts Receivable 1101 1/7/19 Balance b/d 9 440 (1) Cash at bank 82 060 (2) Consulting fees rev 88 150 30/6/20 Balance c/d 15 530 97 590 97 590 1/7/20 Balance b/d 15 530 Prepaid Rent 1102 1/7/19 Balance b/d 1 220 (14) Rent expense 14 585 (3) Cash at bank 14 580 30/6/20 Balance c/d 1215 15 800 15 800 1/7/20 Balance b/d 1215 Office Supplies 1106 1/7/19 Balance b/d 1 320 (11) Office supplies expense 1360 (4) Cash/accounts payable 800 30/6/20 Balance c/d 760 2 120 2 120 1/7/20 Balance b/d 760 Furniture and Equipment 1110 1/7/10 Balance b/d 28 720 Accum. Depreciation – Furniture &Equipment 1111 30/6/20 Balance c/d 14320 1/7/19 Balance b/d 9 720 (12) Depreciation expense 4600 14320 14320 1/7/20 Balance b/d 14320 Accounts Payable 2200 (9) Cash at bank 2 880 1/7/19 Balance b/d 5 440 30/6/20 Balance c/d 6 340 (4) Office supplies 420 (7) Advertising 3 360 9 220 9 220 1/7/20 Balance b/d 6 340 Salaries Payable 2201 (6) Cash at bank 420 1/7/19 Balance b/d 420 30/6/20 Balance c/d 1180 (13) Salaries expense 1180 1600 1600 1/7/20 Balance b/d 1180 Tat Chiang Capital 3000 (d) T. Chiang, Drawings 16 000 1/7/19 Balance b/d 37 040 30/6/20 Balance c/d 25 200 (c) P or L Summary 18 070 41 200 41 200 1/7/20 Balance b/d 25 200 Tat Chiang, Drawings 3301 (5) Cash at bank 25 000 (d) T. Chiang, Capital 25000 Profit or Loss Summary 3320 (b) Expenses 60205 (a) Income (Revenues) 88150 (c) T. Chiang Capital 27945 88150 88150 Consulting Fees Revenue 4400 (a) P or L Summary 88150 (2) Accounts receivable 88 150 Salaries Expense 5500 (6) Cash at bank 31 520 (b) P or L Summary 32700 (13) Salaries payable 1180 32700 32700 Electricity Expense 5503 (8) Cash at bank 3 600 (b) P or L Summary 3600 Advertising Expense 5504 (7) Accounts payable 3 360 (b) P or L Summary 3360 Depreciation Expense – Furniture and Equipment 5505 (12) Accum. depreciation 4600 (b) P or L Summary 4600 Rent Expense 5512 (14) Prepaid rent 14585 (b) P or L Summary 14585 Office Supplies Expense 5513 (11) Office supplies 1360 (b) P or L Summary 1360 (b) General journal 1. Cash at Bank 1100 82 060 Accounts Receivable 1101 82 060 Collection of receivables 2. Accounts Receivable 1101 88 150 Consulting Fees Revenue 4400 88 150 Fees receivable for year 3. Prepaid Rent 1102 14 580 Cash at Bank 1100 14 580 Rent paid for in advance 4. Office Supplies 1106 800 Cash at Bank 1100 380 Accounts Payable 2200 420 Office supplies purchased 5. Tat Chiang, Drawings 3301 25 000 Cash at Bank 1100 25 000 Drawings by owner 6. Salaries Payable 2201 420 Salaries Expense 5500 31 520 Cash at Bank 1100 31 940 Salaries paid 7. Advertising Expense 5504 3 360 Accounts Payable 2200 3 360 Purchase of advertising 8. Electricity Expense 5503 3 600 Cash at Bank 1100 3 6000 Payments for electricity 9. Accounts Payable 2000 2 880 Cash at Bank 1100 2 880 Payment to creditors. (d) General journal Adjusting entries 2020 June 30 (10) Office Supplies Expense 5513 1 360 Office Supplies 1106 1 360 Office supplies used (11) Depn. Exp. Furn. & Equip. 5505 4 600 Acc. Depn. Furn. & Equip. 1111 4 600 Depreciation of assets (12) Salaries Expense 5500 1 180 Salaries Payable 2201 1 180 Accrued salaries (13) Rent Expense 5512 14585 Prepaid Rent 1102 14585 Expiry of prepaid rent (e) (f) PAYNEHAM PROFESSIONAL SERVICES Income Statement for the year ended 30 June 2020 INCOME Consulting fees revenue $88 150 EXPENSES Salaries expense $32 700 Electricity expense 3 600 Advertising expense 3 360 Depreciation expense 4 600 Rent expense 14585 Office supplies expense 1 360 60205 PROFIT 27945 PAYNEHAM PROFESSIONAL SERVICES Statement of Changes in Equity for the year ended 30 June 2020 T. Chiang, Capital – 1 July 2019 $39 920 Add: Profit for the year 27 945 67 865 Less: Drawings during the year (25 000) T. Chiang, Capital – 30 June 2020 42 865 PAYNEHAM PROFESSIONAL SERVICES Balance Sheet as at 30 June 2020 CURRENT ASSETS Cash at bank $18 480 Accounts receivable 15 530 Prepaid rent 1215 Office Supplies 760 Total current assets 35 985 NON-CURRENT ASSETS Furniture and equipment 28 720 Less: Accum. depn. – furn. & equip. (14 320) Total non-current assets 14 400 TOTAL ASSETS $50 385 CURRENT LIABILITIES Accounts payable 6 340 Salaries payable 1 180 TOTAL LIABILITIES 7 520 NET ASSETS 42 865 EQUITY T. Chiang, Capital 42 865 TOTAL EQUITY 42 865 (g) General journal Closing entries 2020 June 30 (i) Consulting Fees Revenue 4400 88 150 Profit or Loss Summary 3320 88 150 Close revenue accounts (ii) Profit or Loss Summary 3320 60205 Salaries Expense 5500 32 700 Electricity Expense 5503 3 600 Advertising Expense 5504 3 360 Depn. Exp. – Furn. & Equip. 5505 4 600 Rent Expense 5512 14585 Office Supplies Expense 5513 1 360 Close expense accounts (iii) Profit or Loss Summary 3320 27945 T. Chiang, Capital 3000 27945 Transfer profit to capital (iv) T. Chiang, Capital 3000 25 000 T. Chiang, Drawings 3301 25 000 Close drawings to capital (h) PAYNEHAM PROFESSIONAL SERVICES Post-Closing Trial Balance as at 30 June 2020 Account Dr Cr Cash at bank $18 480 Accounts receivable 15 530 Prepaid rent 1 215 Office supplies 760 Furniture & equipment 28 720 Accumulated depreciation $14 320 Accounts payable 6 340 Salaries payable 1 180 T. Chiang, Capital 42 865 64 705 64 705 (i) Reversing entry on 1 July 2020: (13) Salaries Payable 2201 1 180 Salaries Expense 5500 1 180 Reversal of accrued salaries Problem 5.28 The complete accounting cycle GST version The post-closing trial balance at 30 June 2019 of Payneham Professional Services is shown below. PAYNEHAM PROFESSIONAL SERVICES Post-Closing Trial Balance as at 30 June 2019 Account Account no. Debit Credit Cash at bank Accounts receivable Prepaid rent GST receivable Office supplies Furniture and equipment Accumulated depreciation – furniture and equipment Accounts payable Salaries payable GST payable Tat Chiang, Capital 1100 1101 1102 1105 1106 1110 1111 2200 2201 2203 3000 $ 14 800 9 440 1 220 2 240 1 320 28 720 $ 9 720 5 440 420 5 120 37 040 $57 740 $57 740 Transactions completed during the year ended 30 June 2020 are summarised below. 1. Collections on accounts receivable totalled $82 060. 2. Consulting fees of $88 150 plus GST of 10% were receivable during the year. Clients are invoiced after services are provided and are given 30 days in which to pay. 3. Rent paid in advance was $14 580, plus GST. 4. Office supplies were purchased during the year for $380 plus GST in cash and $420 plus GST on credit. 5. Tat withdrew $25 000 for private use. 6. Salary payments amounted to $31 940, of which $420 was for salaries accrued to the end of the year ending 30 June 2020. 7. Advertising totalling $3360 plus GST was purchased on credit. 8. Electricity expense of $3600 plus GST was paid. 9. Accounts payable of $2880 were paid. 10. GST payable of $9120 less GST receivable of $2400 were forwarded in cash during the year to the Australian Taxation Office. The following additional information should be considered for adjusting entries. 11. Unused office supplies on hand at the end of the year totalled $760. 12. Depreciation on the furniture and equipment is $4600. 13. Salaries earned but not paid amount to $1180. 14. Rent paid in advance in transaction 3. Rent for 6 months of $7290 plus GST was paid in advance on 1 August and 1 February. Required (a) Prepare the ledger of Payneham Professional Services by opening T accounts for the accounts listed in the post-closing trial balance and for the accounts listed below. Post the 30 June 2020 balances. (b) Prepare journal entries to record the transactions completed (numbers 1–10). (c) Post the entries to the T accounts. (d) Journalise and post the adjusting entries. (e) Prepare a 10-column worksheet for the year ended 30 June 2021. (f) Prepare an income statement, a statement of changes in equity and a balance sheet. (g) Journalise and post the closing entries. (h) Prepare a post-closing trial balance. (i) Prepare any suitable reversing entries on 1 July 2021. (LO3, LO4 and LO5) (a), (c), (f) and (g) Cash at Bank 1100 1/7/19 Balance b/d 14 800 (3) Prepaid rent/GST Rec. 16 038 (1) Accounts receivable 82 060 (4) Office supplies/GST Rec. 418 (5) T. Chiang, Drawings 25 000 (6) Salaries exp/payable 31 940 (8) Electricity exp/GST Rec. 3 960 (9) Accounts payable 2 880 (10) GST Payable 6 720 30/6/20 Balance c/d 9 904 96 860 96 860 1/7/20 Balance b/d 9 904 Accounts Receivable 1101 1/7/19 Balance b/d 9 440 (1) Cash at bank 82 060 (2) Consulting fees rev/GST 96 965 30/6/20 Balance c/d 24 345 106 405 106 405 1/7/20 Balance b/d 24 345 Prepaid Rent 1102 1/7/19 Balance b/d 1 220 (14) Rent expense 14 585 (3) Cash at bank 14 580 30/6/20 Balance c/d 1215 15 800 15 800 1/7/20 Balance b/d 1215 GST Receivable 1105 1/7/19 Balance b/d 2 240 (10) GST Payable 2 400 (3) Cash at bank 1 458 (4) Cash/accounts payable 80 (7) Accounts payable 336 (8) Cash at bank 360 30/6/20 Balance c/d 2 074 4 474 4 474 1/7/20 Balance b/d 2 074 Office Supplies 1106 1/7/19 Balance b/d 1 320 (11) Office supplies expense 1360 (4) Cash/accounts payable 800 30/6/20 Balance c/d 760 2 120 2 120 1/7/20 Balance b/d 760 Furniture and Equipment 1110 1/7/20 Balance b/d 28 720 Accum. Depreciation – Furniture &Equipment 1111 30/6/20 Balance c/d 14320 1/7/19 Balance b/d 9 720 (12) Depreciation expense 4600 14320 14320 1/7/20 Balance b/d 14320 Accounts Payable 2200 (9) Cash at bank 2 880 1/7/19 Balance b/d 5 440 30/6/20 Balance c/d 6 718 (4) Office supplies/GST rec. 462 (7) Advertising/GST rec. 3 696 9 598 9 598 1/7/20 Balance b/d 6 718 Salaries Payable 2201 (6) Cash at bank 420 1/7/19 Balance b/d 420 30/6/20 Balance c/d 1180 (13) Salaries expense 1180 1600 1600 1/7/20 Balance b/d 1180 GST Payable 2203 (10) GST Rec. 9 120 1/7/19 Balance b/d 5 120 (2) Accounts receivable 8 815 30/6/20 Balance c/d 4 815 13 935 13 935 1/7/20 Balance b/d 4 815 Tat Chiang Capital 3000 (d) T. Chiang, Drawings 16 000 1/7/19 Balance b/d 37 040 30/6/20 Balance c/d 25 200 (c) P or L Summary 18 070 41 200 41 200 1/7/20 Balance b/d 25 200 Tat Chiang, Drawings 3301 (5) Cash at bank 25 000 (d) T. Chiang, Capital 25000 Profit or Loss Summary 3320 (b) Expenses 60205 (a) Income (Revenues) 88150 (c) T. Chiang Capital 27945 88150 88150 Consulting Fees Revenue 4400 (a) P or L Summary 88150 (2) Accounts receivable 88 150 Salaries Expense 5500 (6) Cash at bank 31 520 (b) P or L Summary 32700 (13) Salaries payable 1180 32700 32700 Electricity Expense 5503 (8) Cash at bank 3 600 (b) P or L Summary 3600 Advertising Expense 5504 (7) Accounts payable 3 360 (b) P or L Summary 3360 Depreciation Expense – Furniture and Equipment 5505 (12) Accum. depreciation 4600 (b) P or L Summary 4600 Rent Expense 5512 (14) Prepaid rent 14585 (b) P or L Summary 14585 Office Supplies Expense 5513 (11) Office supplies 1360 (b) P or L Summary 1360 (b) General journal 1. Cash at Bank 1100 82 060 Accounts Receivable 1101 82 060 Collection of receivables 2. Accounts Receivable 1101 96 965 Consulting Fees Revenue 4400 88 150 GST Payable 2203 8 815 Fees receivable for year 3. Prepaid Rent 1102 14 580 GST Receivable 1105 1 458 Cash at Bank 1100 16 038 Rent paid for in advance 4. Office Supplies 1106 800 GST Receivable 1105 80 Cash at Bank 1100 418 Accounts Payable 2200 462 Office supplies purchased 5. Tat Chiang, Drawings 3301 25 000 Cash at Bank 1100 25 000 Drawings by owner 6. Salaries Payable 2201 420 Salaries Expense 5500 31 520 Cash at Bank 1100 31 940 Salaries paid 7. Advertising Expense 5504 3 360 GST Receivable 1105 336 Accounts Payable 2200 3 696 Purchase of advertising 8. Electricity Expense 5503 3 600 GST Receivable 1105 360 Cash at Bank 1100 3 960 Payments for electricity 9. Accounts Payable 2000 2 880 Cash at Bank 1100 2 880 Payment to creditors. 10. GST Payable 2203 9 120 GST Receivable 1105 2 400 Cash at Bank 1100 6 720 GST paid to government (d) General journal Adjusting entries 2020 June 30 11. Office Supplies Expense 5513 1 360 Office Supplies 1106 1 360 Office supplies used 12. Depn. Exp. Furn. & Equip. 5505 4 600 Acc. Depn. Furn. & Equip. 1111 4 600 Depreciation of assets 13. Salaries Expense 5500 1 180 Salaries Payable 2201 1 180 Accrued salaries 14. Rent Expense 5512 14585 Prepaid Rent 1102 14585 Expiry of prepaid rent (e) (f) PAYNEHAM PROFESSIONAL SERVICES Income Statement for the year ended 30 June 2020 INCOME Consulting fees revenue $88 150 EXPENSES Salaries expense $32 700 Electricity expense 3 600 Advertising expense 3 360 Depreciation expense 4 600 Rent expense 14585 Office supplies expense 1 360 60205 PROFIT 27945 PAYNEHAM PROFESSIONAL SERVICES Statement of Changes in Equity for the year ended 30 June 2021 T. Chiang, Capital – 1 July 2019 $37 040 Add: Profit for the year 27945 64985 Less: Drawings during the year (25 000) T. Chiang, Capital – 30 June 2020 39985 PAYNEHAM PROFESSIONAL SERVICES Balance Sheet as at 30 June 2020 CURRENT ASSETS Cash at bank $9 904 Accounts receivable 24 345 Prepaid rent 1215 Office Supplies 760 Total current assets 36224 NON-CURRENT ASSETS Furniture and equipment 28 720 Less: Accum. depn. – furn. & equip. (14 320) Total non-current assets 14 400 TOTAL ASSETS $50624 CURRENT LIABILITIES Accounts payable 6 718 GST payable [$4 815 – $2 074] 2 741 Salaries payable 1 180 TOTAL LIABILITIES 10 639 NET ASSETS 39985 EQUITY T. Chiang, Capital 39985 TOTAL EQUITY 39985 (g) General journal Closing entries 2020 June 30 (i) Consulting Fees Revenue 4400 88 150 Profit or Loss Summary 3320 88 150 Close revenue accounts (ii) Profit or Loss Summary 3320 60205 Salaries Expense 5500 32 700 Electricity Expense 5503 3 600 Advertising Expense 5504 3 360 Depn. Exp. – Furn. & Equip. 5505 4 600 Rent Expense 5512 14585 Office Supplies Expense 5513 1 360 Close expense accounts (iii) Profit or Loss Summary 3320 27945 T. Chiang, Capital 3000 27945 Transfer profit to capital (iv) T. Chiang, Capital 3000 25 000 T. Chiang, Drawings 3301 25 000 Close drawings to capital (h) PAYNEHAM PROFESSIONAL SERVICES Post-Closing Trial Balance as at 30 June 2020 Account Dr Cr Cash at bank $9 904 Accounts receivable 24 345 GST receivable 2 074 Prepaid rent 1215 Office supplies 760 Furniture & equipment 28 720 Accumulated depreciation $14 320 Accounts payable 6 718 GST payable 4 815 Salaries payable 1 180 T. Chiang, Capital 39985 67018 67018 (i) Reversing entry on 1 July 2020: (13) Salaries Payable 2201 1 180 Salaries Expense 5500 1 180 Reversal of accrued salaries Problem 5.29 Complete accounting cycle, running balance ledgers Non-GST version Browne Cleaning and Gardening Services commenced on 1 June 2020 when Lorne Browne contributed $120 000 into a business bank account. Perhaps more thought could have been given to the business name. The following transactions occurred in the month of June. Ignore GST. Additional information The accounting period closed on 30 June 2020, and the following additional data was available. 1. Wages owing to the assistant on 30 June amounted to $620. 2. A physical count showed that only $260 of washing supplies and $750 of fuel and oil supplies were still on hand. 3. Four weeks of advertisements had appeared in the local community newspaper up to 30 June. 4. Cleaning services of $550 had been rendered to clients on 29 June but the invoice to bill these clients had not been prepared. 5. The business had provided cleaning services to its shopping centre client for 3 weeks of the first month (assumed to be 4 weeks long). Required (a) Prepare journal entries to record the June 2020 transactions for Browne Cleaning and Gardening Services and post these journal entries to suitable running balance ledger accounts. Provide appropriate account numbers and journal page numbers and record them in post ref. columns. (b) Prepare an unadjusted trial balance as at 30 June 2020 (c) Prepare adjusting entries and post them to the ledger accounts. Be careful to ensure that all adjusting entries have been recorded. Explain the reasons for each adjusting entry that you have made. (d) Prepare an adjusted trial balance. (e) Prepare closing entries and a post-closing trial balance (f) Prepare the income statement, the statement of changes in equity and the balance sheet as at 30 June 2020. (g) Prepare any suitable reversing entries on 1 July 2020 and post them to the accounts. (LO3, LO4 and LO5) (a) General journal Page 1 2020 Jun 1 Cash at Bank 1000 120 000 Lorne Browne, Capital 3000 120 000 Contribution of cash by owner 1 Prepaid Rent 1003 7 800 Cash at Bank 1000 7 800 Rent for 3 months paid in advance 2 Cleaning and Gardening Equipment 1010 40 320 Cash at Bank 1000 8 500 Accounts Payable 2000 31 820 Equipment purchased for cash deposit and 30-day loan 2 Washing Supplies 1004 1 060 Fuel Supplies 1005 1 740 Cash at Bank 1000 2 800 Supplies purchased for cash 3 Prepaid Advertising 1006 960 Cash at Bank 1000 960 Advertising purchased in advance General journal Page 2 2020 June 6 Cash at Bank 1000 180 Cleaning Revenue 4000 180 Cleaning revenue received 6 Cash at Bank 1000 2 800 Gardening Revenue 4001 2 800 Gardening revenue received 8 Cash at Bank 1000 6 400 Unearned Cleaning Revenue 2013 6 400 Cleaning revenue received in advance 13 Cash at Bank 1000 3 000 Gardening Revenue 4001 3 000 Gardening revenue received 14 Wages Expense 5000 1 540 Cash at Bank 1000 1 540 Casual wages paid 21 Cash at Bank 1000 1 300 Accounts Receivable 1001 300 Cleaning Revenue 4000 1 600 Cleaning revenue earned 21 Cash at Bank 1000 2 790 Gardening Revenue 4001 2 790 Gardening revenue received 28 Cash at Bank 1000 1 760 Cleaning Revenue 4000 1 760 Cleaning revenue received 28 Cash at Bank 1000 2 530 Gardening Revenue 4001 2 530 Gardening revenue received 28 Wages Expense 5000 1 670 Cash at Bank 1000 1 670 Casual wages paid 30 Lorne Browne, Drawings 3001 4 000 Cash at Bank 1100 4 000 Drawings by owner General ledger ACCOUNT: Cash at Bank Account No. 1000 Date Explanation Post Ref Debit Credit Balance 2020 1 6 Lorne Browne, Capital G1 120 000 120 000 1 6 Prepaid Rent G1 7 800 112 200 2 6 Cleaning and Gardening Equipment G1 8 500 103 700 2 6 Washing and Fuel Supplies G1 2 800 100 900 3 6 Prepaid Advertising G1 960 99 940 6 6 Cleaning Revenue G2 180 100 120 6 6 Gardening revenue G2 2 800 102 920 8 6 Unearned Cleaning Revenue G2 6 400 109 320 13 6 Gardening Revenue G2 3 000 112 320 14 6 Wages Expense G2 1 540 110 780 21 6 Cleaning Revenue G2 1 300 112 080 21 6 Gardening Revenue G2 2 790 114 870 28 6 Cleaning Revenue G2 1 760 116 630 28 6 Gardening Revenue G2 2 530 119 160 28 6 Wages Expense G2 1 670 117 490 30 6 Lorne Browne, Drawings G2 4 000 113 490 ACCOUNT: Accounts Receivable Account No. 1001 Date Explanation Post Ref Debit Credit Balance 2020 21 6 Cleaning Revenue G2 300 300 ACCOUNT: Prepaid Rent Account No. 1003 Date Explanation Post Ref Debit Credit Balance 2020 1 6 Cash at Bank G1 7 800 7 800 30 6 Rent Expense G3 2600 5200 ACCOUNT: Washing Supplies Account No. 1004 Date Explanation Post Ref Debit Credit Balance 2020 2 6 Cash at Bank G1 1 060 1 060 30 6 Washing Supplies Used G3 800 260 ACCOUNT: Fuel Supplies Account No. 1005 Date Explanation Post Ref Debit Credit Balance 2020 2 6 Cash at Bank G1 1 740 1 740 30 6 Fuel Supplies Used G3 990 750 ACCOUNT: Prepaid Advertising Account No. 1006 Date Explanation Post Ref Debit Credit Balance 2020 3 6 Cash at Bank G1 960 960 30 6 Advertising Expense G3 320 640 ACCOUNT: Accrued Revenue Account No. 1007 Date Explanation Post Ref Debit Credit Balance 2020 30 6 Cleaning Revenue G3 550 550 ACCOUNT: Cleaning and Gardening Equipment Account No. 1010 Date Explanation Post Ref Debit Credit Balance 2020 2 6 Cash at Bank and Accounts Payable G1 40 320 40 320 ACCOUNT: Accumulated Depreciation Account No. 1011 Date Explanation Post Ref Debit Credit Balance 2020 30 6 Depreciation Expense G3 560 560 ACCOUNT: Accounts Payable Account No. 2000 Date Explanation Post Ref Debit Credit Balance 2020 2 6 Cleaning and Gardening Equipment G1 31 820 31 820 ACCOUNT: Unearned Cleaning Revenue Account No. 2001 Date Explanation Post Ref Debit Credit Balance 2020 8 6 Cash at Bank G2 6 400 6 400 30 6 Cleaning Revenue G3 2 400 4 000 ACCOUNT: Wages Payable Account No. 2002 Date Explanation Post Ref Debit Credit Balance 2020 30 6 Wages Expense G3 620 620 1 7 Wages Expense (reversing) G5 620 — ACCOUNT: Lorne Browne, Capital Account No. 3000 Date Explanation Post Ref Debit Credit Balance 2020 1 6 Cash at Bank G1 120 000 120 000 30 6 Profit or Loss Summary G4 8 510 128 510 30 6 Lorne Browne, Drawings G4 4 000 124 510 ACCOUNT: Lorne Browne, Drawings Account No. 3001 Date Explanation Post Ref Debit Credit Balance 2020 30 6 Cash at Bank G2 4 000 4 000 30 6 Lorne Browne, Capital G4 4 000 — ACCOUNT: Cleaning Revenue Account No. 4000 Date Explanation Post Ref Debit Credit Balance 2020 6 6 Cash at Bank G2 180 180 21 6 Cash and Accounts Receivable G2 1 600 1 780 28 6 Cash at Bank G2 1 760 3 540 30 6 Accounts Receivable G3 550 4090 30 6 Unearned Cleaning Revenue G3 2 400 6 490 30 6 Profit or Loss Summary G4 6 490 — ACCOUNT: Gardening Revenue Account No. 4001 Date Explanation Post Ref Debit Credit Balance 2020 6 6 Cash at Bank G2 2 800 2 800 13 6 Cash at Bank G2 3 000 5 800 21 6 Cash at Bank G2 2 790 8 590 28 6 Cash at Bank G2 2 530 11 120 30 6 Profit or Loss Summary G4 11 120 — ACCOUNT: Wages Expense Account No. 5000 Date Explanation Post Ref Debit Credit Balance 2020 14 6 Cash at Bank G2 1 540 1 540 28 6 Cash at Bank G2 1 670 3 210 30 6 Wages Payable G3 620 3 830 30 6 Profit or Loss Summary G4 3 830 — 1 7 Wages Payable (reversing) G5 280 ACCOUNT: Advertising Expense Account No. 5001 Date Explanation Post Ref Debit Credit Balance 2020 30 6 Prepaid Advertising G3 320 320 30 6 Profit or Loss Summary G4 320 — ACCOUNT: Rent Expense Account No. 5002 Date Explanation Post Ref Debit Credit Balance 2020 30 6 Prepaid Rent G3 2 600 2 600 30 6 Profit or Loss Summary G4 2 600 — ACCOUNT: Washing Supplies Used Account No. 5003 Date Explanation Post Ref Debit Credit Balance 2020 30 6 Washing supplies G3 800 800 30 6 Profit or Loss Summary G4 800 — ACCOUNT: Fuel Supplies Used Account No. 5004 Date Explanation Post Ref Debit Credit Balance 2020 30 6 Fuel Supplies G3 990 990 30 6 Profit or Loss Summary G4 990 — ACCOUNT: Depreciation Expense Account No. 5005 Date Explanation Post Ref Debit Credit Balance 2020 30 6 Accumulated Depreciation G3 560 560 30 6 Profit or Loss Summary G4 560 — ACCOUNT: Profit or Loss Summary Account No. 6000 Date Explanation Post Ref Debit Credit Balance 2020 30 6 Revenues G4 17 610 17 610 30 6 Expenses G4 9 100 8 510 30 6 Lorne Browne, Capital G4 8 510 — (b) BROWNE CLEANING AND GARDENING SERVICES Unadjusted Trial Balance as at 30 June 2020 Account Account No. Debit Credit Cash at Bank 1000 $113 490 Accounts Receivable 1001 300 Prepaid Rent 1003 7 800 Washing Supplies 1004 1 060 Fuel Supplies 1005 1 740 Prepaid Advertising 1006 960 Accrued Revenue 1007 Cleaning and Gardening Equipment 1010 40 320 Accumulated Depreciation 1011 Accounts Payable 2000 $31 820 Unearned Cleaning Revenue 2001 6 400 Wages Payable 2002 Lorne Browne, Capital 3000 120 000 Lorne Browne, Drawings 3001 4 000 Cleaning Revenue 4000 3 540 Gardening Revenue 4001 11 120 Wages Expense 5000 3 210 Advertising Expense 5001 Rent Expense 5002 Washing Supplies Used 5003 Fuel Supplies Used 5004 Depreciation Expense 5005 $172 880 $172 880 (c) Adjusting entries General journal Page 3 2020 Jun 30 Wages Expense 5000 620 (i) Wages Payable 2002 620 Accrued Wages owing to employee 30 Washing Supplies Used 5003 800 (ii) Washing Supplies 1004 800 Washing supplies that have been used 30 Fuel Supplies Used 5004 990 (iii) Fuel Supplies 1005 990 Fuel supplies that have been used 30 Advertising Expense 5001 320 (iv) Prepaid Advertising 1006 320 Four weeks advertising expired 30 Accrued Revenue 1007 550 (v) Cleaning Revenue 4000 550 Cleaning services performed 30 Unearned Cleaning Revenue 2001 2 400 (vi) Cleaning Revenue 4000 2 400 Three weeks’ cleaning services provided to shopping centre (vii) Rent Expense 5002 2 600 Prepaid Rent 1003 2 600 Rent expense for the month of June Depreciation Expense 5005 560 (viii) Accumulated Depreciation 1011 560 Depreciation on cleaning and gardening equipment for one month = $40 320 ÷6  1/12 Explanations: (i) Since 28 June, the casual worker has performed additional services for the business but has not been paid for those services. Hence, the business owes the worker an additional $620, and needs to record the amount owing as a liability. An accrual adjusting entry is made by the business on 30 June to reflect the additional expense and the corresponding liability. (ii) When washing supplies were purchased for $1060 on 2 June, the business treated these supplies as an asset. When the supplies are used in conducting cleaning services, the business needs to recognise the expense for supplies used and the reduction of the original asset representing supplies on hand. An inventory taken of washing supplies, amounting to $260 on 30 June, means that $800 are no longer in the store. It is assumed that the missing supplies were used by the business, (rather than being stolen). (iii) The same argument applies for fuel supplies as for washing supplies in (b) above. (iv) The advertising contract undertaken with Community Newspapers for the total amount of $960 means that the newspaper is obliged to provide advertising services to the business for 12 weeks. As the amount was paid in advance by the business, it is correct to treat the amount paid as an asset until the advertising services have been received. At 30 June, four weeks of services have been received; hence, it is necessary that 4/12 of the prepaid asset now be transferred to expense as an adjusting entry. (v) As cleaning services have been rendered to clients on 29 June, but these services have not been paid for in cash, the business must issue an invoice for the amount receivable. Even though the invoice has not yet been issued on 30 June, the entity is entitled to receive payment for services rendered; hence, on 30 June an adjusting entry is needed to ensure that all revenues are recognised in the period in which services are performed, and all amounts receivable are recorded as assets. This is recorded as an accrual rather than a receivable as there has been no invoice issued. Issuing an invoice usually automatically adjusts accounts receivable. (vi) The business has provided three weeks of cleaning services under the contract with the shopping centre. The services were paid for in advance by the shopping centre and recorded by the business as a liability, Unearned Cleaning Services, on receipt of the cash. As $3 200 was paid for the first month, and ¾ of those services ($2400) have now been provided by the business, an adjusting entry must be made to transfer the cleaning revenue out of Unearned Revenue. (vii) On 1 June the business paid $ 7800 for three months’ rent in advance on the storage facility by debiting prepaid rent (asset). By 30 June, one month has passed and therefore one month’s rental services have been received. An adjusting entry is required to transfer out of the prepaid rent account $2600 representing the rent expense for the month of June. (viii) The entity purchased equipment on 2 June for a total cost of $40 320. The useful life of this equipment is expected to be six years. Hence, for the month of June, depreciation of this equipment must be recorded to reflect the usage of the equipment for that period of time. Depreciation is calculated as follows. $40 320 ÷ 6 years  1/12 (one month) = $560 (rounded to nearest whole number) (d) BROWNE CLEANING AND GARDENING SERVICES Adjusted Trial Balance as at 30 June 2020 Account Account No. Debit Credit Cash at Bank 1000 $113 490 Accounts Receivable 1001 300 Prepaid Rent 1003 5 200 Washing Supplies 1004 260 Fuel Supplies 1005 750 Prepaid Advertising 1006 640 Accrued Revenue 1007 550 Cleaning and Gardening Equipment 1010 40 320 Accumulated Depreciation 1011 $560 Accounts Payable 2000 31 820 Unearned Cleaning Revenue 2001 4 000 Wages Payable 2002 620 Lorne Browne, Capital 3000 120 000 Lorne Browne, Drawings 3001 4 000 Cleaning Revenue 4000 6 490 Gardening Revenue 4001 11 120 Wages Expense 5000 3 830 Advertising Expense 5001 320 Rent Expense 5002 2 600 Washing Supplies Used 5003 800 Fuel Supplies Used 5004 990 Depreciation Expense 5005 560 $174 610 $174 610 (e) Closing entries General journal Page 4 2020 June 30 (i) Cleaning Revenue 4000 6 490 Gardening Revenue 4001 11 120 Profit or Loss Summary 6000 17 610 Close revenue accounts (ii) Profit or Loss Summary 6000 9 100 Wages Expense 5000 3 830 Advertising Expense 5001 320 Rent Expense 5002 2 600 Washing Supplies Used 5003 800 Fuel Supplies Used 5004 990 Depreciation Expense 5005 560 Close expense accounts (iii) Profit or Loss Summary 6000 8 510 Lorne Browne, Capital 3000 8 510 Transfer profit to capital (iv) Lorne Browne, Capital 3000 4 000 Lorne Browne, Drawings 3001 4 000 Close drawings to capital BROWNE CLEANING AND GARDENING SERVICES Adjusted Trial Balance as at 30 June 2020 Account Account No. Debit Credit Cash at Bank 1000 $113 490 Accounts Receivable 1001 300 Prepaid Rent 1003 5 200 Washing Supplies 1004 260 Fuel Supplies 1005 750 Prepaid Advertising 1006 640 Accrued Revenue 1007 550 Cleaning and Gardening Equipment 1010 40 320 Accumulated Depreciation 1011 $560 Accounts Payable 2000 31 820 Unearned Cleaning Revenue 2001 4 000 Wages Payable 2002 620 Lorne Browne, Capital 3000 124 510 $161 510 $161 510 (f) BROWNE CLEANING AND GARDENING SERVICES Income Statement for the month ended 30 June 2020 INCOME Cleaning revenue $6 490 Gardening revenue 11 120 $17 610 EXPENSES Wages expense 43 830 Advertising expense 320 Rent expense 2 600 Washing supplies used 800 Fuel supplies used 990 Depreciation expense 560 9 100 PROFIT $8 510 BROWNE CLEANING AND GARDENING SERVICES Statement of Changes in Equity for the month ended 30 June 2020 Lorne Browne, Capital – 1 June 2020 $120 000 Profit for the month 8 510 128 510 Drawings during the month (4 000) Lorne Browne, Capital – 30 June 2020 $124 510 BROWNE CLEANING AND GARDENING SERVICES Balance Sheet as at 30 June 2020 CURRENT ASSETS Cash at bank $113 490 Accounts receivable 300 Prepaid rent 5 200 Washing supplies 260 Fuel supplies 750 Accrued Revenue 550 Prepaid advertising 640 Total current assets $121 190 NON-CURRENT ASSETS Cleaning and gardening equipment 40 320 Less: Accumulated depreciation (560) Total non-current assets 39 760 TOTAL ASSETS $160 950 CURRENT LIABILITIES Accounts payable 31 820 Unearned cleaning revenue 4 000 Wages payable 620 TOTAL LIABILITIES 36 440 NET ASSETS $124 510 EQUITY Lorne Browne, Capital $124 510 TOTAL EQUITY $124 510 (g) Reversing entries General journal Page 5 2020 July 1 Wages Payable 2002 620 Wages Expense 5000 620 Reverse accruals for wages. This entry has been posted to the accounts in (c)(i) above. Problem 5.29 Complete accounting cycle, running balance ledgers GST version Browne Cleaning and Gardening Services commenced on 1 June 2020 when Lorne Browne contributed $120 000 into a business bank account. Perhaps more thought could have been given to the business name. The following transactions occurred in the month of June. The GST rate is 10%. June 1 2 2 3 6 8 13 14 21 28 28 30 Lorne signed a lease agreement to lease a suitable storage shed for a monthly rental of $2600 plus GST. Rent for 3 months was paid in advance. He also hired an assistant to help him with cleaning and lawn mowing tasks. The assistant was to be paid casual wages. The business acquired suitable cleaning and gardening equipment for a total cost of $40 320 plus GST. A deposit of $8500 was paid immediately and the balance was to be paid in 30 days. The equipment was expected to have a useful life of 6 years. Purchased a quantity of washing supplies for $1060, plus GST, cash. Purchased fuel and oil supplies for $1740, plus GST, cash. Signed a contract with Community Newspapers for 12 weeks of advertisements in its weekly, free newspaper delivered to local homes. The business paid $960, plus GST, in advance for these advertisements. Received cash of $180, plus GST, from a grateful client whose house had been cleaned by the business before the monthly rent inspection. Received cash of $2800, plus GST, for several lawns that had been mowed for clients during the week. Signed a contract with the local shopping centre to provide cleaning services to its outside walls (including graffiti removal) for a monthly fee of $3200, plus GST. The shopping centre paid for 2 months’ services in advance. Received cash of $3000, plus GST, for lawn mowing services provided to clients during the past week. Paid the assistant casual wages of $1540 for services provided to the business during the past fortnight. Earned $1600, plus GST, for cleaning services from clients and $2790, plus GST, for lawn mowing during the past week. All money was received in cash except for one client for cleaning services, who arranged to pay the business $330, including GST, in 3 weeks’ time for services rendered. Received in cash the sum of $1760, plus GST, for cleaning services provided to clients and $2530, plus GST, for lawn mowing and gardening services provided during the past week. Paid the assistant $1670 for services provided to the business during the past fortnight. Lorne withdrew $4000 in cash from the business in order to pay for essential provisions for his family. Additional information The accounting period closed on 30 June 2020, and the following additional data was available. 1. Wages owing to the assistant on 30 June amounted to $620. 2. A physical count showed that only $260 of washing supplies and $750 of fuel and oil supplies were still on hand. 3. Four weeks of advertisements had appeared in the local community newspaper up to 30 June. 4. Cleaning services of $550 had been rendered to clients on 29 June but the invoice to bill these clients had not been prepared. 5. The business had provided cleaning services to its shopping centre client for 3 weeks of the first month (assumed to be 4 weeks long). Required (a) Prepare journal entries to record the June 2020 transactions for Browne Cleaning and Gardening Services and post these journal entries to suitable running balance ledger accounts. Provide appropriate account numbers and journal page numbers and record them in post ref. columns. (b) Prepare an unadjusted trial balance as at 30 June 2020 (c) Prepare adjusting entries and post them to the ledger accounts. Be careful to ensure that all adjusting entries have been recorded. Explain the reasons for each adjusting entry that you have made. (d) Prepare an adjusted trial balance. (e) Prepare closing entries and a post-closing trial balance (f) Prepare the income statement, the statement of changes in equity and the balance sheet as at 30 June 2020. (g) Prepare any suitable reversing entries on 1 July 2020 and post them to the accounts. (LO3, LO4 and LO5) (a) General journal Page 1 2020 Jun 1 Cash at Bank 1000 120 000 Lorne Browne, Capital 3000 120 000 Contribution of cash by owner 1 Prepaid Rent 1003 7 800 GST Receivable 1002 780 Cash at Bank 1000 8 580 Rent for 3 months paid in advance 2 Cleaning and Gardening Equipment 1010 40 320 GST Receivable 1002 4 032 Cash at Bank 1000 8 500 Accounts Payable 2000 35 852 Equipment purchased for cash deposit and 30-day loan 2 Washing Supplies 1004 1 060 Fuel Supplies 1005 1 740 GST Receivable 1002 280 Cash at Bank 1000 3 080 Supplies purchased for cash 3 Prepaid Advertising 1006 960 GST Receivable 1002 96 Cash at Bank 1000 1 056 Advertising purchased in advance General Journal Page 2 2020 June 6 Cash at Bank 1000 198 GST Payable 2004 18 Cleaning Revenue 4000 180 Cleaning revenue received 6 Cash at Bank 1000 3 080 GST Payable 2004 280 Gardening Revenue 4001 2 800 Gardening revenue received 8 Cash at Bank 1000 7 040 GST Payable 2004 640 Unearned Cleaning Revenue 2013 6 400 Cleaning revenue received in advance 13 Cash at Bank 1000 3 300 GST Payable 2004 300 Gardening Revenue 4001 3 000 Gardening revenue received 14 Wages Expense 5000 1 540 Cash at Bank 1000 1 540 Casual wages paid 21 Cash at Bank 1000 1 430 Accounts Receivable 1001 330 GST Payable 2004 160 Cleaning Revenue 4000 1 600 Cleaning revenue earned 21 Cash at Bank 1000 3 069 GST Payable 2004 279 Gardening Revenue 4001 2 790 Gardening revenue received 28 Cash at Bank 1000 1 936 GST Payable 2004 176 Cleaning Revenue 4000 1 760 Cleaning revenue received 28 Cash at Bank 1000 2 783 GST Payable 2004 253 Gardening Revenue 4001 2 530 Gardening revenue received 28 Wages Expense 5000 1 670 Cash at Bank 1000 1 670 Casual wages paid 30 Lorne Browne, Drawings 3001 4 000 Cash at Bank 1100 4 000 Drawings by owner General Ledger ACCOUNT: Cash at Bank Account No. 1000 Date Explanation Post Ref Debit Credit Balance 2020 1 6 Lorne Browne, Capital G1 120 000 120 000 1 6 Prepaid Rent/GST Rece G1 8 580 111 420 2 6 Cleaning and Gardening Equipment/GST Rec G1 8 500 102 920 2 6 Washing and Fuel Supplies/GST Rec G1 3 080 99 840 3 6 Prepaid Advertising/GST Rec G1 1 056 98 784 6 6 Cleaning Revenue/GST Pay G2 198 98 982 6 6 Gardening revenue/GST Pay G2 3 080 102 062 8 6 Unearned Cleaning Revenue/GST Pay G2 7 040 109 102 13 6 Gardening Revenue/GST Pay G2 3 300 112 402 14 6 Wages Expense G2 1 540 110 862 21 6 Cleaning Revenue/GST Pay G2 1 430 112 292 21 6 Gardening Revenue/GST Pay G2 3 069 115 361 28 6 Cleaning Revenue/GST Pay G2 1 936 117 297 28 6 Gardening Revenue/GST Pay G2 2 783 120 080 28 6 Wages Expense G2 1 670 118 410 30 6 Lorne Browne, Drawings G2 4 000 114 410 ACCOUNT: Accounts Receivable Account No. 1001 Date Explanation Post Ref Debit Credit Balance 2020 21 6 Cleaning Revenue G2 330 330 ACCOUNT: GST Receivable Account No. 1002 Date Explanation Post Ref Debit Credit Balance 2020 1 6 Cash at Bank G1 780 780 2 6 Cash at Bank G1 4 032 4 812 2 6 Cash at Bank G1 280 5 092 3 6 Cash at Bank G1 96 5 188 ACCOUNT: Prepaid Rent Account No. 1003 Date Explanation Post Ref Debit Credit Balance 2020 1 6 Cash at Bank G1 7 800 7 800 30 6 Rent Expense G3 2600 5200 ACCOUNT: Washing Supplies Account No. 1004 Date Explanation Post Ref Debit Credit Balance 2020 2 6 Cash at Bank G1 1 060 1 060 30 6 Washing Supplies Used G3 800 260 ACCOUNT: Fuel Supplies Account No. 1005 Date Explanation Post Ref Debit Credit Balance 2020 2 6 Cash at Bank G1 1 740 1 740 30 6 Fuel Supplies Used G3 990 750 ACCOUNT: Prepaid Advertising Account No. 1006 Date Explanation Post Ref Debit Credit Balance 2020 3 6 Cash at Bank G1 960 960 30 6 Advertising Expense G3 320 640 ACCOUNT: Accrued Revenue Account No. 1007 Date Explanation Post Ref Debit Credit Balance 2020 30 6 Cleaning Revenue G3 550 550 ACCOUNT: Cleaning and Gardening Equipment Account No. 1010 Date Explanation Post Ref Debit Credit Balance 2020 2 6 Cash at Bank and Accounts Payable G1 40 320 40 320 ACCOUNT: Accumulated Depreciation Account No. 1011 Date Explanation Post Ref Debit Credit Balance 2020 30 6 Depreciation Expense G3 560 560 ACCOUNT: Accounts Payable Account No. 2000 Date Explanation Post Ref Debit Credit Balance 2020 2 6 Cleaning and Gardening Equipment G1 35 852 35 852 ACCOUNT: Unearned Cleaning Revenue Account No. 2001 Date Explanation Post Ref Debit Credit Balance 2020 8 6 Cash at Bank G2 6 400 6 400 30 6 Cleaning Revenue G3 2 400 4 000 ACCOUNT: Wages Payable Account No. 2002 Date Explanation Post Ref Debit Credit Balance 2020 30 6 Wages Expense G3 620 620 1 7 Wages Expense (reversing) G5 620 — ACCOUNT: GST Payable Account No. 2004 Date Explanation Post Ref Debit Credit Balance 2020 6 6 Cash at Bank G2 18 18 6 6 Cash at Bank G2 280 298 8 6 Cash at Bank G2 640 938 13 6 Cash at Bank G2 300 1 238 21 6 Cash at Bank/Accounts Rec G2 160 1 398 21 6 Cash at Bank G2 279 1 677 28 6 Cash at Bank G2 176 1 853 28 6 Cash at Bank G2 253 2 106 ACCOUNT: Lorne Browne, Capital Account No. 3000 Date Explanation Post Ref Debit Credit Balance 2020 1 6 Cash at Bank G1 120 000 120 000 30 6 Profit or Loss Summary G4 8 510 128 510 30 6 Lorne Browne, Drawings G4 4 000 124 510 ACCOUNT: Lorne Browne, Drawings Account No. 3001 Date Explanation Post Ref Debit Credit Balance 2020 30 6 Cash at Bank G2 4 000 4 000 30 6 Lorne Browne, Capital G4 4 000 — ACCOUNT: Cleaning Revenue Account No. 4000 Date Explanation Post Ref Debit Credit Balance 2020 6 6 Cash at Bank G2 180 180 21 6 Cash and Accounts Receivable G2 1 600 1 780 28 6 Cash at Bank G2 1 760 3 540 30 6 Accounts Receivable G3 550 4090 30 6 Unearned Cleaning Revenue G3 2 400 6 490 30 6 Profit or Loss Summary G4 6 490 — ACCOUNT: Gardening Revenue Account No. 4001 Date Explanation Post Ref Debit Credit Balance 2020 6 6 Cash at Bank G2 2 800 2 800 13 6 Cash at Bank G2 3 000 5 800 21 6 Cash at Bank G2 2 790 8 590 28 6 Cash at Bank G2 2 530 11 120 30 6 Profit or Loss Summary G4 11 120 — ACCOUNT: Wages Expense Account No. 5000 Date Explanation Post Ref Debit Credit Balance 2020 14 6 Cash at Bank G2 1 540 1 540 28 6 Cash at Bank G2 1 670 3 210 30 6 Wages Payable G3 620 3 830 30 6 Profit or Loss Summary G4 3 830 — 1 7 Wages Payable (reversing) G5 280 ACCOUNT: Advertising Expense Account No. 5001 Date Explanation Post Ref Debit Credit Balance 2020 30 6 Prepaid Advertising G3 320 320 30 6 Profit or Loss Summary G4 320 — ACCOUNT: Rent Expense Account No. 5002 Date Explanation Post Ref Debit Credit Balance 2020 30 6 Prepaid Rent G3 2 600 2 600 30 6 Profit or Loss Summary G4 2 600 — ACCOUNT: Washing Supplies Used Account No. 5003 Date Explanation Post Ref Debit Credit Balance 2020 30 6 Washing supplies G3 800 800 30 6 Profit or Loss Summary G4 800 — ACCOUNT: Fuel Supplies Used Account No. 5004 Date Explanation Post Ref Debit Credit Balance 2020 30 6 Fuel Supplies G3 990 990 30 6 Profit or Loss Summary G4 990 — ACCOUNT: Depreciation Expense Account No. 5005 Date Explanation Post Ref Debit Credit Balance 2020 30 6 Accumulated Depreciation G3 560 560 30 6 Profit or Loss Summary G4 560 — ACCOUNT: Profit or Loss Summary Account No. 6000 Date Explanation Post Ref Debit Credit Balance 2020 30 6 Revenues G4 17 610 17 610 30 6 Expenses G4 9 100 8 510 30 6 Lorne Browne, Capital G4 8 510 — (b) BROWNE CLEANING AND GARDENING SERVICES Unadjusted Trial Balance as at 30 June 2020 Account Account No. Debit Credit Cash at Bank 1000 $114 410 Accounts Receivable 1001 330 GST Receivable 1002 5 188 Prepaid Rent 1003 7 800 Washing Supplies 1004 1 060 Fuel Supplies 1005 1 740 Prepaid Advertising 1006 960 Accrued Revenue 1007 Cleaning and Gardening Equipment 1010 40 320 Accumulated Depreciation 1011 Accounts Payable 2000 $35 852 Unearned Cleaning Revenue 2001 6 400 Wages Payable 2002 GST Payable 2004 2 106 Lorne Browne, Capital 3000 120 000 Lorne Browne, Drawings 3001 4 000 Cleaning Revenue 4000 3 540 Gardening Revenue 4001 11 120 Wages Expense 5000 3 210 Advertising Expense 5001 Rent Expense 5002 Washing Supplies Used 5003 Fuel Supplies Used 5004 Depreciation Expense 5005 $179 018 $179 018 (c) Adjusting entries General journal Page 3 2020 Jun 30 Wages Expense 5000 620 (i) Wages Payable 2002 620 Accrued Wages owing to employee 30 Washing Supplies Used 5003 800 (ii) Washing Supplies 1004 800 Washing supplies that have been used 30 Fuel Supplies Used 5004 990 (iii) Fuel Supplies 1005 990 Fuel supplies that have been used 30 Advertising Expense 5001 320 (iv) Prepaid Advertising 1006 320 Four weeks advertising expired 30 Accrued Revenue 1001 550 (v) Cleaning Revenue 4000 550 Cleaning services performed 30 Unearned Cleaning Revenue 2001 2 400 (vi) Cleaning Revenue 4000 2 400 Three weeks’ cleaning services provided to shopping centre (vii) Rent Expense 5002 2 600 Prepaid Rent 1003 2 600 Rent expense for the month of June Depreciation Expense 5005 560 (vii) Accumulated Depreciation 1011 560 Depreciation on cleaning and gardening equipment for one month = $40 320 ÷6  1/12 Explanations: (i) Since 28 June, the casual worker has performed additional services for the business but has not been paid for those services. Hence, the business owes the worker an additional $620, and needs to record the amount owing as a liability. An accrual adjusting entry is made by the business on 30 June to reflect the additional expense and the corresponding liability. (ii) When washing supplies were purchased for $1060 on 2 June, the business treated these supplies as an asset. When the supplies are used in conducting cleaning services, the business needs to recognise the expense for supplies used and the reduction of the original asset representing supplies on hand. An inventory taken of washing supplies, amounting to $260 on 30 June, means that $800 are no longer in the store. It is assumed that the missing supplies were used by the business, (rather than being stolen). (iii) The same argument applies for fuel supplies as for washing supplies in (b) above. (iv) The advertising contract undertaken with Community Newspapers for the total amount of $960 means that the newspaper is obliged to provide advertising services to the business for 12 weeks. As the amount was paid in advance by the business, it is correct to treat the amount paid as an asset until the advertising services have been received. At 30 June, four weeks of services have been received; hence, it is necessary that 4/12 of the prepaid asset now be transferred to expense as an adjusting entry. (v) As cleaning services have been rendered to clients on 29 June, but these services have not been paid for in cash, the business must issue an invoice for the amount receivable. Even though the invoice has not yet been issued on 30 June, the entity is entitled to receive payment for services rendered; hence, on 30 June an adjusting entry is needed to ensure that all revenues are recognised in the period in which services are performed, and all amounts receivable are recorded as assets. This is recorded as an accrual rather than a receivable as there has been no invoice issued. Issuing an invoice usually automatically adjusts accounts receivable. (vi) The business has provided three weeks of cleaning services under the contract with the shopping centre. The services were paid for in advance by the shopping centre and recorded by the business as a liability, Unearned Cleaning Services, on receipt of the cash. As $3 200 was paid for the first month, and ¾ of those services ($2400) have now been provided by the business, an adjusting entry must be made to transfer the cleaning revenue out of Unearned Revenue. (vii) On 1 June the business paid $ 7800 for three months’ rent in advance on the storage facility by debiting prepaid rent (asset). By 30 June, one month has passed and therefore one month’s rental services have been received. An adjusting entry is required to transfer out of the prepaid rent account $2600 representing the rent expense for the month of June. (viii) The entity purchased equipment on 2 June for a total cost of $40 320. The useful life of this equipment is expected to be six years. Hence, for the month of June, depreciation of this equipment must be recorded to reflect the usage of the equipment for that period of time. Depreciation is calculated as follows. $40 320 ÷ 6 years  1/12 (one month) = $560 (rounded to nearest whole number) (d) BROWNE CLEANING AND GARDENING SERVICES Adjusted Trial Balance as at 30 June 2020 Account Account No. Debit Credit Cash at Bank 1000 $114 410 Accounts Receivable 1001 330 GST Receivable 1002 5 188 Prepaid Rent 1003 5 200 Washing Supplies 1004 260 Fuel Supplies 1005 750 Prepaid Advertising 1006 640 Accrued Revenue 1007 550 Cleaning and Gardening Equipment 1010 40 320 Accumulated Depreciation 1011 $560 Accounts Payable 2000 35 852 Unearned Cleaning Revenue 2001 4 000 Wages Payable 2002 620 GST Payable 2004 2 106 Lorne Browne, Capital 3000 120 000 Lorne Browne, Drawings 3001 4 000 Cleaning Revenue 4000 6 490 Gardening Revenue 4001 11 120 Wages Expense 5000 3 830 Advertising Expense 5001 320 Rent Expense 5002 2 600 Washing Supplies Used 5003 800 Fuel Supplies Used 5004 990 Depreciation Expense 5005 560 $180 748 $180 748 (e) Closing entries General journal Page 4 2020 June 30 (i) Cleaning Revenue 4000 6 490 Gardening Revenue 4001 11 120 Profit or Loss Summary 6000 17 610 Close revenue accounts (ii) Profit or Loss Summary 6000 9 100 Wages Expense 5000 3 830 Advertising Expense 5001 320 Rent Expense 5002 2 600 Washing Supplies Used 5003 800 Fuel Supplies Used 5004 990 Depreciation Expense 5005 560 Close expense accounts (iii) Profit or Loss Summary 6000 8 510 Lorne Browne, Capital 3000 8 510 Transfer profit to capital (iv) Lorne Browne, Capital 3000 4 000 Lorne Browne, Drawings 3001 4 000 Close drawings to capital BROWNE CLEANING AND GARDENING SERVICES Adjusted Trial Balance as at 30 June 2020 Account Account No. Debit Credit Cash at Bank 1000 $114 410 Accounts Receivable 1001 330 GST Receivable 1002 5 188 Prepaid Rent 1003 5 200 Washing Supplies 1004 260 Fuel Supplies 1005 750 Prepaid Advertising 1006 640 Accrued Revenue 1007 550 Cleaning and Gardening Equipment 1010 40 320 Accumulated Depreciation 1011 $560 Accounts Payable 2000 35 852 Unearned Cleaning Revenue 2001 4 000 Wages Payable 2002 620 GST Payable 2004 2 106 Lorne Browne, Capital 3000 124 510 $167 648 $167 648 (f) BROWNE CLEANING AND GARDENING SERVICES Income Statement for the month ended 30 June 2020 INCOME Cleaning revenue $6 490 Gardening revenue 11 120 $17 610 EXPENSES Wages expense 43 830 Advertising expense 320 Rent expense 2 600 Washing supplies used 800 Fuel supplies used 990 Depreciation expense 560 9 100 PROFIT $8 510 BROWNE CLEANING AND GARDENING SERVICES Statement of Changes in Equity for the month ended 30 June 2020 Lorne Browne, Capital – 1 June 2020 $120 000 Profit for the month 8 510 128 510 Drawings during the month (4 000) Lorne Browne, Capital – 30 June 2020 $124 510 BROWNE CLEANING AND GARDENING SERVICES Balance Sheet as at 30 June 2020 CURRENT ASSETS Cash at bank $114 410 Accounts receivable 330 GST Receivable 3 082 Prepaid rent 5 200 Washing supplies 260 Fuel supplies 750 Prepaid advertising 640 Accrued revenue 550 Total current assets $125 222 NON-CURRENT ASSETS Cleaning and gardening equipment 40 320 Less: Accumulated depreciation (560) Total non-current assets 39 760 TOTAL ASSETS $164 982 CURRENT LIABILITIES Accounts payable 35 852 Unearned cleaning revenue 4 000 Wages payable 620 TOTAL LIABILITIES 40 472 NET ASSETS $124 510 EQUITY Lorne Browne, Capital $124 510 TOTAL EQUITY $124 510 (g) Reversing entries General journal Page 5 2020 July 1 Wages Payable 2002 620 Wages Expense 5000 620 Reverse accruals for wages. This entry has been posted to the accounts in (c)(i) above. Problem 5.30 Income statement, adjusting and closing entries, advice for client Lara Knoffs, a qualified commercial artist, had worked as an employee of a large advertising agency for a number of years. She decided to resign her position and set up her own business which would be coordinated from the new home she and her husband had bought. To establish the business, she invested $25 000 of her cash savings as capital. From this capital, she then purchased for the business equipment worth $15 000 with an expected life of 10 years and no residual value. Other specialist equipment cost $6600 (estimated life 6 years — expected residual value of $600). Lara charged competitive prices, produced quality work and built up a good clientele. Most customers paid a deposit before work started and bad debts had never been a problem. Although there was a general feeling that the business was going well, Lara was concerned that she always seemed to have cash problems when trying to withdraw cash from the business at the same levels and above that she had earned as an employee. You have been asked by Lara to examine her business as she feels that it is not profitable. An analysis of the Cash at Bank account for the financial year ended 30 June 2020 revealed the following. This analysis highlighted Lara’s major concern in that the $31 000 she had withdrawn was several thousand dollars below the wage which she had earned as an employee of the advertising firm. She believed, given her assessment of the poor profitability of her business, that perhaps she should return to work as an employee. Other enquiries reveal the following. 1. Cash received from clients ($88 750) included payments for work done in the financial year ended 30 June 2019 to the value of $6750 and also $8000 prepaid for work to be done in the next financial year. 2. Materials and stationery on hand at 30 June 2020 were costed at $4500. 3. $14 250 was yet to be collected from clients for work done during the year ended 30 June 2020. Required (a) Prepare a report for Lara which discloses the profitability of her business. Produce figures to substantiate the report. (b) Prepare the closing entries that would be needed on 30 June 2020. (c) Advise Lara as to whether she should dispose of the business and return to the advertising firm as an employee. (LO1, LO4 and LO5) (a) and (c) Report should emphasise that profitability is best disclosed in an income statement prepared under the accrual basis assumption and not by a cash analysis. Profitability is concerned with revenues (not only received in cash) and expenses in the financial year (not only paid in cash). Report should include an income statement as below. LARA KNOFFS Income Statement for the year ended 30 June 2020 INCOME Fees revenue from clients $88 250* EXPENSES Insurance ($3 600 / 2) $1 800 Materials/stationery ($10 000 – $4 500) 5 500 Electricity/telephone 5 500 Sundry expenses 14 700 Depreciation ($15 000 /10 + ($6 600 – $600)/6) 2 500 30 000 PROFIT $58 250 * ($88 750 – $6 750 – $8 000 + $14 250) The income statement reveals that the business is quite profitable, exceeding past earnings by a comfortable margin. The report could stress that the above analysis is done on the accrual basis of accounting and not on a cash basis. Differences of significance are the fees earned but not received. Likewise, the insurance cash payment benefits two years, and a large proportion of the materials purchased will be used in the following year. She should however consider ways of collecting fees earned but not received. With the above financial analysis in mind and non-quantitative factors such as independence, being one’s ‘own boss’, working from home, flexibility of working hours, it would suggest that Ms Knoffs should not dispose of her business. (b) Closing entries Fees Revenue 88 250 Profit or Loss Summary 88 250 Close revenue accounts. Profit or Loss Summary 30 000 Insurance Expense 1 800 Materials and Stationery Expense 5 500 Electricity/Telephone Expense 5 500 Sundry Expenses 14 700 Depreciation Expense 2 500 Close expense accounts. Profit or Loss Summary 58 250 L. Knoffs, Capital 58 250 Transfer profit to capital. L. Knoffs, Capital 31 000 L. Knoffs, Drawings 31 000 Close drawings to capital. Case studies Decision analysis Retain or sell a business Retain or sell a business Lucy Chan owns an online financial services company called RightFinance.com. She has some idea about accrual accounting but is not very clear on what to do, so she has come to you for help. Lucy aims to achieve a profit margin on her business of 10%. That is, she expects profit divided by total revenue to be at least 10% or more. Lucy has provided the income statement below, which shows a profit margin of 7% ($29 000/$414 285). If the profit margin falls below 10%, Lucy intends to sell the business. Lucy knows that some accrual accounting adjustments need to be made and that is why she is seeking your help. To determine the adjustments that need to be made, you have a long discussion with Lucy that reveals the following. 1. The fees revenue includes $900 for cash received but the services have not yet been provided to the customer. 2. A staff member went on holidays at the end of June and his July wages of $2300 are included in ‘salaries’. 3. A prepayment of rent of $1400 for June is still shown in the balance sheet as an asset. 4. Depreciation expense of $6000 for the year has not yet been charged to the accounts. Required Should Lucy retain the business or sell it, given her requirement that the profit margin must be 10%? Explain the reason for your conclusion, showing calculations. RIGHTFINANCE.COM General Journal Adjusting entries 1. Fees revenue 900 Unearned revenue 900 2. Prepaid salaries 2 300 Salaries Expense 2 300 3. Rent expense 1 400 Prepaid rent 1 400 4. Depreciation expense 6 000 Accumulated depreciation 6 000 RIGHTFINANCE.COM Revised Income Statement For the year ended 30 June 2019 INCOME Fees revenue $413 385 EXPENSES Salaries $280 870 Subcontracting expenses 57 815 Council rates expense 2 600 Insurance expense 7 000 Advertising expense 12 500 Rent expense 21 200 Sundry expenses 2 400 Depreciation expense 6 000 390 385 PROFIT $ 23 000 Recommendation: Sell the business. The profit margin is $23 000/$413 385 = 5.56% <10% required. So when the correct adjustments are taken into account the business has performed even worse than Lucy first thought. Critical thinking Accountability of aid organisations Aid and development organisations, such as World Vision, have many different programs and campaigns to raise money for the purpose of emergency relief work in specific countries, and for large development projects. They are also involved in alleviating poverty around the world. Furthermore, World Vision has a program of child sponsorship in under-developed countries to provide a basic education for underprivileged children. It is important that World Vision (and other similar organisations) is accountable for the money collected, for the money spent, and for any government assistance received. In order for this to happen, the management requires monthly financial reports. Assume that it is your job to prepare these reports. Required (a) Consider carefully the types of information that you would need to provide to management in order to satisfy their needs for accountability in relation to the activities of the organisation. (b) What advantages (if any) would be provided by the use of worksheets in the preparation of this information? As a guide to discussion, consideration of the following points is suggested: (a) Since World Vision is a not-for-profit organisation, profit motives are not important. Nevertheless, management is accountable for its actions. Control over cash resources (and other assets) is extremely important. In order to carry out its functions, management would need to know: • the amounts of money donated/raised for each special program and campaign, as well as for general funds • the amounts of money which have been spent on each special program and project • the amount of funds spent on advertising for such projects and campaigns • the amounts spent on wages to staff as well as other expenses, such as rental of buildings, and machinery, and emergency supplies of food and equipment • the amount of money potentially wasted through spending on superfluous activities • the amount spent on training/education programs in order to help develop skilled workforces in assisted countries • the amounts received from government to assist each program, and how the government assistance was spent • details of pledges in order to follow up on monies promised to the organisation • billing mechanism in order to send out accounts to those who have undertaken to assist in the child sponsorship program • the current state of repair of all non-current assets used by World Vision • control over levels of inventory of emergency supplies in cases of relief work • cash flow budgets for each program would help in controlling expenditure. (b) Monthly worksheets (or spreadsheets), as illustrated in this chapter, would be of limited usefulness in that monthly profit levels do not need to be calculated. A detailed monthly statement of cash flows would be of more use to management. Nevertheless, if World Vision (and similar organisations) use a form of accrual accounting, worksheets will be of more use in helping to analyse cash flow for the organisation. Reporting of cash flows would assist in providing information about gross inflows and outflows. Communication and leadership To reverse or not to reverse Form into groups of three or four. Half of the groups are to prepare a report on the advantages of not reversing adjusting entries at the beginning of the next financial year and the disadvantages of preparing reversing entries. The other groups are to prepare a report on the disadvantages of not reversing adjusting entries at the beginning of the next financial year and the advantages of preparing reversing entries. Then, alternating between arguments, the groups report back to the class. Points that can be covered by each group include: Advantages of not reversing adjusting entries and disadvantages of preparing reversing entries: • The main advantage of not reversing adjusting entries is that it removes one step from the accounting cycle as extra entries do not have to be made on the first day of a new accounting period. Disadvantages of not reversing adjusting entries and the advantages of preparing reversing entries: • Although it is one extra step in the accounting cycle it can actually the process much simpler. If the reversing entries are made then care doesn’t have to be taken in splitting any payments between accruals and current period expenses. The transactions in the new accounting period can be carried out as they would normally without having to split amounts between accruals/deferrals and current period expenses or revenue. Financial analysis Refer to the consolidated financial statements in the latest financial report of JB Hi–Fi Limited and answer the following questions. 1. What are the different types of revenues generated by the consolidated group? 2. How are the group’s assets classified? 3. What are the major categories listed among the group’s equity? Have there been any shares issued during the past financial year? How many ordinary shareholders did JB Hi-Fi Limited have at the end of the financial year? 4. What is the group’s current liability for dividends to ordinary shareholders? If you owned only 100 ordinary shares in JB Hi-Fi Limited, how much would you receive in dividends? 5. How do the dividends per share compare with the group’s ‘earnings’ per share? Answers have been taken from the 2016 annual report. 1. Different types of revenue, apart from revenue on the sale of goods, include interest revenue and other income (not specified). See note 2 to the financial statements. 2. The group’s assets are classified as current and non-current. Current assets are sub-classified as cash and cash equivalents, trade and other receivables, inventories, and other. Non-current assets are subclassified as other financial assets, plant and equipment, deferred tax assets and intangible assets. For further details see notes 10-17 to the financial statements. 3. Equity has three major categories: contributed equity (share capital), reserves, and retained earnings. Shares issued during the year are outlined in note 25. Employee and executive share option plan The number of ordinary shares in JB Hi-Fi Ltd at the end of the reporting period 2016 is 98 947 309. See note 16. 4. See note 4 to the financial statements. The group’s expected future liability for dividends to ordinary shareholders, not recognised in the financial statements is $36 610 000. If you owned only 100 ordinary shares of JB Hi-Fi Limited, you would receive $37 from the final dividend (37c per share) to be paid in August 2016, making a total of $1 per ordinary share for the year when you add in the interim dividend of 63c per share as well. See note4. Last year’s final dividend paid in the current period was 31c per share. 5. See Note 3. Basic earnings per ordinary share for 2016 is 153.76c. Hence, the company has paid or is paying out 65% of its profits as ordinary dividends. Solution Manual for Accounting John Hoggett, John Medlin, Claire Beattie, Keryn Chalmers, Andreas Hellmann, Jodie Maxfield 9780730344568