Question 1 

Mac Ltd. provides legal advice to customers for fees. On 30 June 2020, Mac Ltd. completed its first year of operations. Some of the ledger account balances of the business, before any financial year end (30 June) adjustments, are provided below:

 

$
Fees Revenue 442,500
Rent Expense 21,960
Electricity Expense 8,460
Wages Expense 163,200
Advertising Prepaid 2,700

 

No adjusting entries have been made to these accounts at any time during the year. An analysis of the business records reveals the following.

 

  1. The total Fees Revenue recorded includes $2,250 that was prepaid by a client as a deposit for legal advice to be provided in July 2020.
  2. The balance in Advertising Prepaid represents the amount paid for an advertising on a legal magazine for 6 months. The agreement with the publisher of the magazine covers the period 1 May 2020 to 31 October 2020.
  3. The Electricity Expense ledger balance does not include the amount for June 2020. The account amounted to $1,575 and was received and paid during July.
  4. The firm’s lease agreement for the office premises commenced from 1 July 2019. The agreement indicates a rent of $1,220 per month is to be paid on the first day of each month. In addition, an annual amount equal to 0.2% of the entity’s total fees revenue earned each year should be paid. This extra rental is payable within 15 days of the end of the reporting period.
  5. The entity hired part-time employees. Wages are paid fortnightly on Fridays (5 working day each week and each pay period covers Monday from preceding week to Friday in the pay week). In 2020, 30 June falls on a Tuesday and the wages for the two-week pay period ended on Friday 3 July 2020 is $11,700. All employees worked the normal office hours during the two–week pay period.

 

Required:

  1. Journalise the necessary adjusting entries at the end of the period.
  2. Apply the knowledge that you have learned from Lecture 4, using an example to explain the differences between cash basis and accrual basis accounting, and further discuss why adjusting entries are necessary.

 

 

Question 2 

You are the bookkeeper of Holmes Renovations. You undertake a bank reconciliation at the end of every month. Holmes Renovations received its bank statement for the month ending 31 July 2021. The bank reconciliation at the end of last month showed a deposit in transit of $14,040 and two outstanding cheques (no. 363 for $3,672 and no. 371 for $7,560). The adjusted cash balance in the entity’s records was $127,566 debit at the end of June.

 

Below are the entity’s July bank statement and the entity’s book records that indicate the deposits made and cheques written during the month of July:

 

AU Bank – Bank Statement

For the period 01/03/2021 – 31/03/2021

Holmes Traders, NSW
Dr Cr Balance $
Balance brought forward 124,758 CR
1 July Deposit 14,040 138,798 CR
3 July Deposit 12,744 151,542 CR
July Cheque # 382 5,616 145,926 CR
6 July Deposit 7,344 153,270 CR
8 July # 371 7,560 145,710 CR
9 July Deposit 9,072 154,782 CR
12 July Deposit 4,536 159,318 CR
July # 384 7,560 151,758 CR
13 July # 383 18,360 133,398 CR
15 July Deposit 17,496 150,894 CR
July # 387 15,984 134,910 CR
20 July Deposit 6,048 140,958 CR
22 July # 385 14,688 126,270 CR
26 July Deposit 16,416 142,686 CR
29 July # 386 13,608 129,078 CR
30 July # 380 9,288 119,790 CR
31 July interest 414 120,204 CR
31 July Transaction fees 234 119,970 CR

 

Holmes Renovations’ Book Records
Date Deposits made Cheques written
$ No. $
July 3                12,744 # 379 5,184
6                   7,344 # 380 9,288
9                   9,072 # 381 7,452
12                   4,536 # 382 5,616
15                17,496 # 383 18,360
20                   6,048 # 384 7,560
26                16,416 # 385 14,688
29                13,608 # 386 7,776
$ 87,264 # 387 15,984
$ 91,908

 

The cash at bank account balance on 31 July was $122,922.

In reviewing cheques, a mistake was discovered: Cheque no. 386, written for supplies expenses of $13,608, was recorded in the general journal as $7,776.

 

Required:

  1. As the entity does not use special journals, prepare the necessary general journal entries to bring the cash at bank account up to date as at 31 July 2021.
  2. Prepare a bank reconciliation statement for Holmes Renovations at 31 July 2021. Please ensure you indicate the balance of each amount with either a debit or credit in the bank reconciliation statement.

 

Question 3 

The information in the following table relates to the accounts receivable and allowance for doubtful debts of Prime Moving Ltd. The company’s accounting period ends on 30 June each year. The company policy is to provide an allowance for doubtful debts at the rate of 3% of accounts receivable at 30 June each year. The balance of the Allowance for Doubtful Debts account on 1 July 2019 was $13,000. The following information is given for the year ending 30 June 2020 and 30 June 2021, in order to determine the bad debts expense for each year and the balance of allowance for doubtful debts at the end of each year.

2020 2021
Accounts receivable (ending balance at 30 June) $520,000 $585,000
Bad debts written off during the year 7,800 0
Allowance for doubtful debts at 1 July (Beginning of the period) (a) (d)
Bad debts expense for the year (b) (e)
Allowance for doubtful debts at 30 June (Ending balance) (c) (f)

 

Required:

  1. Determine the missing amounts in the table.
  2. Discuss how the following accounts are recognised or disclosed in the entity’s financial statements and their effect on the financial statements.
    • discount allowed
    • discount received
    • bad debts expenses
    • bad debts recovered
  3. Show the relevant section of the balance sheet prepared at 30 June 2021.

 

 

Question 4  

You are the senior accountant for a shoe wholesaler that uses the periodic inventory method. You have determined the following information from your company’s records, which you assume is correct:

  1. Inventory of $370,080 was on hand at the start of the year.
  2. Purchases for the year totalled $2,535,000. Of this, $2,118,000 was purchased on account; that is, accounts payable was credited for this amount at the time of the purchase.
  3. A year-end inventory count revealed inventory of $487,200

 

Required:

  1. Assume that the company uses periodic inventory system, calculate cost of sales.
  2. Assume now that your company uses the perpetual method of inventory control, and that your records show that $2,322,488 of inventory (at cost) was sold during the year. What is the adjustment needed to correct the records, given the inventory count in item 3 above?
  3. What might the need for this adjustment indicate about company operations?
  4. Assume that during the year, total inventory was sold for $3,200,000 on credit. What would be the entries to record the sales transaction under periodic inventory control system? What would be the entries to record the sales transaction under perpetual inventory control system?

 

Question 5  

Adam’s mowing Limited purchased a group of new lawnmowers for $24,000 at 1 July 2020. As the accountant of the business, you have estimated that the mowers are to last five years and to have $600 residual value at that point. The entity’s business plan projects cutting 6,500 lawns over the five years, with per-year projections of 700, 1,300, 1,500, 2,200 and 800 lawns over the five years.

 

Required:

  1. Calculate the Accumulated Depreciation balance at the end of the second year using each of the following depreciation bases. Show your working.
    • straight-line
    • diminishing balance (52 per cent rate)
    • units-of-production.
  2. You are asked by the owner of the business which depreciation basis would result in the entity paying less tax at the end of the second year and so you should adopt that method for the mowers as it would save cost for the entity. Provide appropriate response to the owner’s question and request.
  3. If the 52 per cent reducing balance method is used, accumulated depreciation will be $23,400 at the end of the fifth year. Suppose that, on the first day of the sixth year, all the lawnmowers are sold as junk for $150 cash in total. Ignoring income taxes, calculate the loss on sale that would be recorded that day.

  

Question 6                                                                     

The following events occurred during the year ended 30 June 2020 for Electrical Limited.

  1. On 1 June 2020, Electrical Ltd. signed a three-month 11% per annum note payable to purchase a new equipment costing $72,000. Interest and principal are paid at maturity.
  2. On 29 June 2020, Electrical Ltd. received deposit in advance of $11,000 from a construction company for completing the electrical work for a new project during the next 6 months.
  3. Electricity charges of $46,000 from 24 April to 23 June are payable on 10 July.
  4. Electrical’s main product is backed by warranty. Sales of this product for the year totalled $445,000. The opening balance of provision for warranty claims was $12,720. During the year, Electrical’s warranty expense was $38,040 and claims paid to customers totalled $30,240.
  5. June sales totalled $312,000. Electrical Ltd. collected GST of 10% on this amount. This is due to be paid to the tax office by the seventh day of the following collection.
  6. On 30 June 2020, Electrical Ltd. took out a loan for $130,000 from AUZ Bank. Repayments of principal are scheduled evenly over a five-year period. Interest on the loan is paid in the year it is incurred.

 

Required:

For each item, indicate the account name and the amount to be included as a current liability on Electrical’s balance sheet prepared at 30 June 2020. (show your working for your calculation for each amount).

 

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