Question 1

Retail operations and retail inventory

‘Kites Galore’ began business on 1 October 2019.  The business is owned and operated by Harry Smith as a sole-trader.  The business will sell kites via an online store.  The business is registered for GST.  The following transactions occurred during October 2019:

Harry Smith doesn’t have any experience keeping inventory and accounting records.   Harry has come to you for assistance, as he needs help preparing his records for October.

After meeting with Harry, he has agreed that the perpetual inventory system and the average-cost method should be used for his business.   When using the average-cost method, the business will calculate a new average cost per unit after each purchase.

Required:

1. Prepare an Excel worksheet for the kites for October, using the average-cost method to keep track of the number of kites purchased, kites sold, kites on hand, cost of goods sold and gross profit made.
2. Prepare journal entries in Excel (including any adjusting entries) for all of the business’s transactions for October (using the perpetual inventory system and average-cost method).  Include dates, references and narrations.
3. Prepare the ‘Adjusted Trial Balance’ in an Excel spreadsheet as at 31st October 2019.  Use formulas to generate all of the figures in the ‘Adjusted Trial Balance’.
4. Prepare the income statement, balance sheet, and statement of changes in equity in Excel. Use formulas to generate all of the figures in the financial statement reports from the ‘Adjusted Trial Balance’.
5. Calculate the business’s gross profit percentage and current ratio.

Question 2

Bank reconciliations and cash

This question continues on from question 1 above.

It is now January 2020, and Harry Smith has come to you for some assistance as he is having trouble reconciling the bank account as at 31 December 2019.

The December 2019 bank statement appeared as follows:

 Bank statement for December 2019: Date Description Deposit Withdrawal Balance 1/12/2019 Opening balance \$14,550.00 1/12/2019 Loan application fee 300.00 \$14,250.00 2/12/2019 EFT – Harry Smith Drawings 1,000.00 \$13,250.00 5/12/2019 Deposit 1,650.00 \$14,900.00 5/12/2019 Cheque 43 440.00 \$14,460.00 11/12/2019 EFT – Super Kites Ltd 5,500.00 \$8,960.00 14/12/2019 Deposit 2,200.00 \$11,160.00 18/12/2019 Cheque 44 330.00 \$10,830.00 18/12/2019 Deposit 3,300.00 \$14,130.00 20/12/2019 Cheque 45 220.00 \$13,910.00 21/12/2019 Cheque 46 110.00 \$13,800.00 21/12/2019 Deposit 440.00 \$14,240.00 21/12/2019 EFT – Harry Smith Drawings 1,000.00 \$13,240.00 22/12/2019 EFT – Super Kites Ltd 1,100.00 \$12,140.00 23/12/2019 Deposit 660.00 \$12,800.00 24/12/2019 EFT – Wages Tom Webb 600.00 \$12,200.00 31/12/2019 Direct debit – Telstra internet 99.00 \$12,101.00 31/12/2019 Interest 6.00 \$12,107.00 31/12/2019 Monthly bank fee 20.00 \$12,087.00

Kites Galore’s accounting records for December 2019 showed an opening balance for the ‘bank’ account of \$14,110. The bank reconciliation from November 2019 showed a bank balance of \$14,550, less one outstanding cheque (Cheque 43) for \$440. Following is a summary of deposits and withdrawals recorded in the accounting records during December:

 Withdrawals: Deposits: Amount Date Detail Amount Date banked 2/12/2019 EFT – Harry Smith Drawings \$1,000.00 11/12/2019 EFT – Super Kites Ltd \$5,500.00 5/12/2019 \$1,650.00 16/12/2019 Cheque 44 \$300.00 14/12/2019 \$2,200.00 18/12/2019 Cheque 45 \$220.00 18/12/2019 \$3,303.00 18/12/2019 Cheque 46 \$1,100.00 21/12/2019 \$440.00 21/12/2019 EFT – Harry Smith Drawings \$1,000.00 23/12/2019 \$606.00 22/12/2019 EFT – Super Kites Ltd \$1,100.00 31/12/2019 \$880.00 27/12/2019 Cheque 47 \$220.00 28/12/2019 Cheque 48 \$495.00 ________ \$10,935.00 \$9,079.00

As Harry reviewed the bank statement for the month, he noticed one bank error: the bank had incorrectly charged the business \$300 for a loan application fee on 1 December 2019. Harry has contacted the bank, and they will refund the fee charged in January 2020.   The bank did not make any other errors.

Required:

1. Prepare the bank reconciliation for Kites Galore as at 31 December 2019.
2. Prepare the journal entries to correct any errors made by Kites Galore, and to record transactions that have not yet been entered into the business’s accounting records.  (Note: The correction of any errors relating to the recording of cheque payments should be made to ‘Accounts payable’.  The correction of any errors relating to deposits (other than interest received) should be made to ‘Accounts receivable’.)
3. Prepare the ‘bank’ T-Account account for December 2019, in order to determine the balance in the ledger account after the above journal entries have been recorded and posted.

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