Week 2 Tutorial Solutions PDF [PDF]

Zitiervorschau

CHAPTER 2 FINANCIAL STATEMENTS FOR DECISION MAKING DISCUSSION QUESTIONS SOLUTIONS 7.

A local football club has won the premiership for the past four years. Accordingly, the club has a very strong supporter base. Rationalise if the players would be regarded as an asset of the business to be recognised on the balance sheet.

To be recognised as an asset on the balance sheet, an item must satisfy definition and recognition criteria specified in the Conceptual Framework. An asset is defined in the Framework as a resource controlled by the entity as a result of past events and from which future economic benefits will flow to the entity. The three definition criteria must be satisfied if the players were to be recognised on the balance sheet as assets to the football club: a. future economic benefits The players do provide future economic benefits to the football club through the use of their skills. The benefits could be in the form of ticket sales to see the players, winning the premiership, strong supporter base, product’s endorsements, sponsorships, etc. b. control Control is the ability to benefit from the use of the assets and deny access of others to the benefits. It could be argued that the football club does not have sufficient control over its players. Although the players might have signed a contract with the club, they can still leave the club and play somewhere else. The club does not own its players and the players’ skills that are used to generate future economic benefits ultimately belong to the players, not the club. c. past events These are past transactions that give rise to control. Since the football club does not have control over its players, there is no past transaction that gives rise to control. Signing a contract or giving a lump sum amount as ‘advance payment’ does not give the club control over the players. In addition to the definition criteria, two recognition criteria must also be satisfied for an asset to be recorded on the balance sheet: d. probable occurrence This means that the future economic benefits are more like (than less likely) to flow into the football club. It can be argued that future economic benefits as mentioned above are likely to flow to the club as a result of players using their skills. e. reliable measurement To be recognised on the balance sheet, the players must have value that can be measured with reliability. In this case, there is no reliable system that can be applied to measure how much players are worth. Each player is unique, and hence it is very difficult to assign an objective value to each player. To be recorded on the financial statements, all criteria must be satisfied. From the explanation above, it can be seen that players do not satisfy the definition and recognition criteria of assets. Subsequently, they cannot be recorded as assets on the balance sheet. It should be noted that it is not necessary to work through the recognition criteria if it is determined that the item does no satisfy the definition criteria. All aspects of the definition and recognition criteria must be satisfied for the item to be recognised on the balance sheet.

Page 1 of 23

10.

Discuss the significance of the following assumptions in the preparation of an entity’s financial statements: (a) entity assumption (b) accrual basis assumption (c) going concern assumption (d) period assumption (a) Entity Assumption If the transactions of an entity are to be recorded, classified and summarised into financial statements, the accountant must be able to identify clearly the boundaries of the entity being accounted for. Under the accounting entity assumption, the entity is considered a separate entity distinguishable from its owner and from all other entities. It is assumed that each entity controls its assets and incurs its liabilities. The records of assets, liabilities and business activities of the entity are kept completely separate from those of the owner of the entity as well as from those of other entities. The accounting entity assumption is important since it leads to the derivation of the accounting equation. The nature of the entity’s business will also affect classification of elements recorded. For example, a table would be recorded as a fixed asset (Furniture) for a restaurant business but a table can be recorded as a current asset (Inventory or Stock) for a business selling furniture. (b) The Accrual Basis Assumption Under the accrual basis of accounting, the effects of transactions and events are recognised in accounting records when they occur, and not when the cash is received or paid. Hence, financial statements report not only on cash transactions but also on obligations to pay cash in the future and on resources that represent receivables of cash in future. It is argued in the Conceptual Framework that accounting on an accrual basis provides significantly better information about the transactions and other events for the purpose of decision making by users of financial statements than does the cash basis. (c) The Going Concern Assumption According to the Conceptual Framework, financial statements are prepared on the assumption that the existing entity is expected to continue operating into the future. It is assumed that the assets of the entity will not be sold off and that the entity will continue its activities; hence, liquidation values (prices in a forced sale) of the entity’s assets are not generally reported in financial statements, as this assumes that an entity is to be wound up. When management plans the sale or liquidation of the entity, the going concern assumption is then set aside and the financial statements are prepared on the basis of estimated sales or liquidation values. The significance of the going concern assumption is in the valuation placed on the assets of an entity in the entity’s financial statements. The statements should identify clearly the basis upon which asset values are determined — going concern? Or liquidation? (d) The Period Assumption For financial reporting purposes, it is assumed that the total life of an entity can be divided into equal time intervals. Hence, the financial performance of the entity can be determined for a given time period, and the financial position of the entity can be determined on the last day of that reporting period. As a result of this assumption, profit determination involves a process of recognising the income for a period and deducting the expenses incurred for that same period. Together, the period assumption and accrual basis assumption lead to the requirement for making end-of-period adjustments on the last day of the reporting period. These adjustments will be considered in chapter 4.

Page 2 of 23

EXERCISE SOLUTIONS Exercise 2.4

Determining profit from equity balances

Equity balances for Sen Widyaya appearing in the balance sheets of Widyaya’s Window Washing Services as at 30 June 2016, 2015 and 2014 are set out below:

EQUITY Sen Widyaya, Capital

30 June 2016

30 June 2015

30 June 2014

$27 300

$30 000

$28 000

During 2014–15, Sen withdrew $25 000 for personal use and also contributed additional capital of $8000. During 2015–16, he withdrew $10 000 capital from the business, and withdrew $15 000 cash for his own use in anticipation of profits.

Required Determine the profit/loss earned by the business in each of the 2 years ended 30 June 2016 and 30 June 2015.

WIDYAYA’S WINDOW WASHING SERVICES Profit for years ended 30 June

2015

2016

Beginning Capital

$28 000

$30 000

8 000

—

—

(10 000)

(25 000)

(15 000)

19 000

22 300

$30 000

$27 300

+ Additional Capital Contributions – Withdrawals of Capital – Drawings Profit Ending Capital

Page 3 of 23

Exercise 2.6

Elements in financial statements

A friend who has established a new dance studio, Hip and Hop, has asked you to give some advice as to the contents of financial statements. Transactions of Hip Hop include: (a) (b) (c) (d) (e) (f) (g) (h) (i)

contribution of cash by your friend to the business purchase of studio sound equipment on credit electricity costs paid studio fees received in cash the owner’s house rental of a chilled water machine, paid in cash money withdrawn by your friend to pay university fees for a friend cash held by the business at the end of the year money borrowed for purchase of building.

Required Indicate whether these items would appear in Hip and Hop’s balance sheet, income statement, statement of changes in equity and/or statement of cash flows. For those items included in the statement of cash flows, indicate whether the item relates to operating activities, investing activities, or financing activities. [Hint: Some items may appear in more than one financial statement.] (a) (b) (c) (d) (e) (f) (g) (h) (i)

Balance sheet, statement of changes in equity, and statement of cash flows (Financing — treated as a contribution of capital) Balance sheet only Income statement and statement of cash flows (Operating) Income statement and statement of cash flows (Operating) Not reported in the financial statements as not part of the accounting entity ‘Hip and Hop’ Income statement and statement of cash flows (Operating) Balance sheet (reduction of capital), statement of cash flows (Financing as part of owner’s drawings of capital from the business), statement of changes in equity Balance sheet and statement of cash flows (cash or cash equivalent balance). Balance sheet and statement of cash flows (Financing — for loan amount), (Investing — for purchase of building)

Page 4 of 23

Exercise 2.7

Assumptions and characteristics of information

Identify by letter the assumption or characteristic of information which best represents the situations given. A. - Accounting entity assumption B. - Accrual basis assumption C. - Going concern assumption D. - Period assumption E. - Relevance F. - Faithful representation G. - Materiality H. - Comparability

F. A.

1. The reporting of accounting information should be free from personal bias. 2. In a single proprietorship, the owner’s house and car are not recorded in the records of the business.

G. B. E.

3. The cost of stationery is not shown separately in the income statement. 4. Services provided by a business entity are recorded before the receipt of cash. 5. Machinery held by the business under a long-term lease arrangement is recorded by the business as its own asset. 6. An expense is recorded in the year in which an asset or benefit is consumed in the process of carrying on the entity’s business. 7. Assets are not recorded at liquidation prices. 8. Consistent accounting policies and methods are used in the preparation of financial statements from one year to another.

D. C. H.

Page 5 of 23

Exercise 2.14

Effects of transactions on financial statements

List the effect of each of the following transactions upon any or all of the four financial statements of a business. Apart from indicating the financial statement(s) involved, use appropriate phrases such as ‘increase total assets’, ‘decrease equity’, ‘increase income’, ‘decrease cash flow’ to describe the transaction concerned. 1. Purchase equipment for cash 2. Provide services to a client, with payment to be received within 40 days 3. Pay a liability 4. Invest additional cash into the business by the owner 5. Collect an account receivable in cash 6. Pay wages to employees 7. Receive the electricity bill in the mail, to be paid within 30 days 8. Sell a piece of equipment for cash 9. Withdraw cash by the owner for private usage. 10. Borrow money on a long-term basis from a bank 1.

In the balance sheet, increase an asset, equipment; decrease an asset, cash. In the statement of cash flows, decrease cash flow (from investing activities).

2.

In the balance sheet, increase an asset, receivables; increase equity. In the income statement, increase income. In the statement of changes in equity, increase equity.

3.

In the balance sheet, decrease an asset, cash; decrease a liability. In the statement of cash flows, decrease cash (probably from operating activities).

4.

In the balance sheet, increase an asset, cash; increase equity. In the statement of cash flows, increase cash (from financing activities). In the statement of changes in equity, equity is increased.

5.

In the balance sheet, increase an asset, cash; decrease an asset, accounts receivable. In the statement of cash flows, increase cash (from operating activities).

6.

In the balance sheet, decrease an asset, cash; decrease equity. In the income statement, increase expenses. In the statement of cash flows, decrease cash (from operating activities). In the statement of changes in equity, decrease equity.

7.

In the balance sheet, decrease equity; increase a liability, accounts payable. In the income statement, increase expenses. In the statement of changes in equity, decrease equity.

8.

In the balance sheet, increase an asset, cash; decrease an asset, equipment, increase equity (if a profit was made on the sale). In the income statement, increase income (if a profit was made on the sale). In the statement of cash flows, increase cash (from investing activities). In the statement of changes in equity, increase equity (if a profit was made on the sale).

9.

In the balance sheet, decrease equity, decrease an asset, cash. In the statement of cash flows, decrease cash (from financing activities). In the statement of changes in equity, decrease equity.

10.

In the balance sheet, increase an asset, cash; increase a liability, loan payable. In the statement of cash flows, increase cash (from financing activities).

Page 6 of 23

PROBLEM SOLUTIONS Problem 2.17

Preparing financial statements

Asset, liability, equity, income and expense amounts for Sadoka’s Interior Decorating at 30 June 2019 are presented below: Cash at bank Accounts receivable Supplies Equipment Accounts payable Sadoka Nato, Capital Decorating services income

$ 22 800 117 600 26 400 125 600 33 700 ? 386 000

Advertising expense Insurance expense Rent expense Supplies expense Telephone expense Electricity expense Wages expense

$ 36 000 8 000 33 000 12 600 12 200 17 000 111 000

Required a. b. c.

Prepare an income statement for the business for the year ended 30 June 2019. Prepare a balance sheet in narrative format as at 30 June 2019. Explain succinctly the differences in the information conveyed by an income statement and a statement of cash flows.

a. SADOKA’S INTERIOR DECORATING Income Statement for the year ended 30 June 2019 INCOME Decorating services income EXPENSES Advertising expense Insurance expense Rent expense Supplies expense Telephone expense Electricity expense Wages expense PROFIT

$386 000

$36 000 8 000 33 000 12 600 12 200 17 000 111 000 229 800 $156 200

Page 7 of 23

b. SADOKA’S INTERIOR DECORATING Balance Sheet as at 30 June 2019 ASSETS Cash at bank Accounts receivable Supplies Equipment TOTAL ASSETS LIABILITIES Accounts payable TOTAL LIABILITIES NET ASSETS EQUITY Sadoka Nato, Capital TOTAL EQUITY

$22 800 117 600 26 400 125 600 $292 400 33 700 $33 700 $258 700 258 700 $258 700

c. An income statement reports the results of financial performance for a specific time period. It lists all income and expenses of the entity for the reporting period, and shows profit/loss for the period as the difference between the income and expenses. A statement of cash flows reports the cash inflows and outflows of an entity for a specified time period resulting from operating activities (e.g. paying wages, receiving money from customer), investing activities (e.g. purchasing equipment in cash), and financing activities (e.g. borrowing money from bank, owner’s drawing). There is an overlap between income statement and statement of cash flows, in the sense that all cash income and expenses will be recorded in the statement of cash flows under operating activities. However, the income statement also includes income earned on credit (i.e. not yet received from customers) and expenses incurred on credit (i.e. not yet paid by the entity), which will not be recorded in the statement of cash flows. The income statement is prepared on an accrual basis. The statement of cash flows also includes cash inflows and outflows from other transactions other than income and expense related transactions in addition to cash income and cash expenses, for instance paying for equipment purchased and cash withdrawn by owner for personal use. In summary, the income statement conveys information about the entity’s income and expenses for the period (both cash and credit), whereas the statement of cash flows conveys information about the entity’s cash inflows and outflows which include cash income, expenses, and other cash transactions.

Page 8 of 23

Problem 2.20

Preparation of financial statements

Dawson Industries began operations early in January 2020. On 31 December 2020, records showed the following asset, liability, equity, income and expense amounts: Accounts receivable Rent expense Cash at bank Supplies expense Accounts payable Service income Supplies Equipment

$ 25 600 13 500 10 250 5 250 9 500 147 500 11 000 48 000

Lila Dawson, Capital Electricity expense Telephone expense Advertising expense Insurance expense Wages expense Drawings

$

? 7 200 4 900 12 500 2 500 44 000 23 400

Required a. Prepare an income statement for Dawson Industries for the year ended 31 December 2020. b. Prepare a balance sheet as at 31 December 2020. c. Prepare a statement of changes in equity for 2020. d. Explain the difference between the items ‘supplies’ and ‘supplies expense’.

a. DAWSON INDUSTRIES Income Statement for the year ended 31 December 2020 INCOME Service income EXPENSES Advertising expense Insurance expense Rent expense Supplies expense Telephone expense Electricity expense Wages expense PROFIT

$147 500

$12 500 2 500 13 500 5 250 4 900 7 200 44 000 89 850 $57 650

Page 9 of 23

b. DAWSON INDUSTRIES Balance Sheet as at 31 December 2020 ASSETS Cash at bank Accounts receivable Supplies Equipment TOTAL ASSETS LIABILITIES Accounts payable TOTAL LIABILITIES NET ASSETS EQUITY Lila Dawson, Capital TOTAL EQUITY

$10 250 25 600 11 000 48 000 $94 850 9 500 $9 500 $85 350 85 350 $85 350

c. DAWSON INDUSTRIES Statement of Changes in Equity for the year ended 31 December 2020 Lila Dawson, Capital – 1 January 2020 Add: Capital contribution Profit for the year Less: Drawings during the year Lila Dawson, Capital – 31 December 2020

$51 100 — 57 650 108 750 23 400 $85 350

d. The term ‘supplies’ refers to items purchased by an entity to be used as part of its operations (e.g. stationery). Supplies are usually purchased in bulk, and then are consumed or used during the period. At the time of purchase, supplies are recorded as assets to the entity because they have future economic benefits in the form of their use for the entity’s operation and they are controlled by the entity (i.e. the entity owns the supplies) as a result of past event (which is the purchase transaction). As an asset account, supplies is recorded on the balance sheet. ‘Supplies expense’ refers to supplies that have been used or consumed by the entity in their operation during the period. Whilst unused supplies are assets to the entity, used supplies are recorded as expense because they are decreases in economic benefits (from the consumption by the entity) in the form of decreases in assets (i.e. supplies account). Furthermore, these decreases in economic benefits result in decreases in equity, and they are not distributions to owners (i.e. the entity consumes the economic benefits, not the owners). As an expense account, supplies expense is recorded on the income statement.

Page 10 of 23

CHAPTER 3 RECORDING TRANSACTIONS DISCUSSION QUESTIONS SOLUTIONS 1.

Indicate whether each of the following events is an internal transaction, an external transaction, or a non-transaction event. Explain your answer in each case: (a) Receipt of money from a customer in payment of services to be provided early in the next accounting period. (b) Equipment is used to provide a service for a customer (c) The human resources department provided services to the customer service department. (d) A building owned by the business increased in value (e) Received payment from a customer on account for services provided in the previous accounting period. (f) A prospective employee is interviewed and hired for a job (g) Stationery supplies are used by an employee. (a)

(b)

(c) (d)

(e)

(f) (g)

3.

External, because an event has happened between the entity and an outside party. Even though no service has yet been provided the receipt of money means that the entity now has a liability to either provide the service in the future or return the money. This needs to be recorded immediately. External and Internal. Even though the equipment has been used in the performance of a service to an outside party (external), the usage and wearing out of the equipment is usually recorded as an internal adjustment by way of depreciation on the equipment. Internal, as there needs to be a record kept within the entity of the provision of services between departments so that the cost of running each department may be accurately determined. Non-transaction event. However, if it is the practice of an entity to revalue such assets to show the higher value of the building, it would be recorded as an internal transaction, as there is no outside party involved. External, as there is an external party directly involved. Even though the provision of services would have been recorded in the previous period along with accounts receivable, the receipt of cash affects the cash at bank and reduces accounts receivable in the current period. Non-transaction event, which is not recorded until an employee has begun work and has provided services to the entity Internal, as there is merely an adjustment inside the entity to reflect a change in value due to supplies being used. No external party is involved.

One often hears the statement: ‘Debits are bad and credits are good for the business.’ Do you agree? Why or why not? This statement is nonsense. The debits and credits are merely double-entry rules for recording transactions and events. Even though expenses may be ‘debit’, so too are assets. ‘Debit’ implies neither good or bad. Likewise for credits, which can be revenues or liabilities or equity.

Whether an account is debited or credited depends on the elements of financial statements that we are referring to. Element of financial Increase/Decrease Debit or Credit? Good or Bad? statements Asset Increase Debit Good Liability Increase Credit Bad Equity Increase Credit Good Income Increase Credit Good Expenses Increase Debit Bad Recap the Accounting Equation: ASSET = LIABILITY + EQUITY (Normal balance: Debit = Credit) Page 11 of 23

5.

Why are journals required as part of the recording process? Would not a set of ledger accounts be sufficient? Journals provide a chronological record of transactions and events affecting an entity. The general ledger does not, but classifies like transactions similarly. Hence, the purposes of the journal and ledger are different, but complement each other.

7.

Recently, a new student of accounting was overheard making the following remarks: ‘Why are we learning how to use the double-entry system of recording in the accounting cycle? Surely there are good computer packages available these days which can handle all of these details.’ Provide a suitable reply. Students must know the accounting cycle manually so that they can determine what a computer package is doing in the accounting cycle, and so that they can correct any intentional and unintentional discrepancies which can arise from time to time in computer packages. Furthermore, some packages have their limitations and it is wise for the student to know what a package can and cannot do for the entity concerned. Much of this knowledge can be gained by preparing a set of accounts both manually and on computer. Furthermore, in practice, some small clients still do not use computers to keep their accounting records. By learning how to prepare accounts manually students learn the relationship between transactions in an entity and how they impact on the financial statements. Although this may be possible with a computer package the relationship is not as obvious. An accountant with experience should be able to look at the financial statements produced by a computer and tell if they are reasonable given their knowledge of the business. Understanding the accounting process in the detail required to be able to prepare manual accounts assists in developing these decision making skills.

Page 12 of 23

EXERCISE SOLUTIONS Exercise 3.4

Normal balance and classification in financial statements

The accounts below appear in the chart of accounts of Brightspark Electrical Services. Show whether the normal balance is a debit or a credit. Indicate whether the account would appear in the balance sheet or in the income statement, and under what classification, e.g. liability, asset, equity, income or expense. 1.Service Vehicles 2. Repairs Expense 3. Prepaid Insurance 4. Accounts Payable 5. Unearned Service Fees 6. Telephone Expense 7. Accounts Receivable 8. Electrical Supplies

• •

9. B.A. Brightspark, Drawings 10. GST Payable 11. GST Receivable 12. Mortgage Payable 13. Interest Revenu 14. B. A. Brightspark, Capital 15. Electrical Services Revenue

Statement of Comprehensive Income (SOCI)/Income Statement is now known as Statement of profit or loss and other comprehensive income (SPLOCI). Balance Sheet is known referred to as Statement of Financial Position (SOFP). BRIGHTSPARK ELECTRICAL SERVICES Item

Normal Balance

Statement

1. Service Vehicles

Debit

Balance sheet/Statement of financial position (asset)

2. Repairs Expense

Debit

Income statement (expense)

3. Prepaid Insurance

Debit

Balance sheet/Statement of financial position (asset)

4. Accounts Payable

Credit

Balance sheet/Statement of financial position (liability)

5. Unearned Services Fees

Credit

Balance sheet/Statement of financial position (liability)

6. Telephone Expense

Debit

Income statement (expense)

7. Accounts Receivable

Debit

Balance sheet/Statement of financial position (asset)

8. Electrical Supplies

Debit

Balance sheet/Statement of financial position (asset)

9. B.A, Brightspark, Drawings

Debit

Balance sheet/Statement of financial position (deduction from equity)

10. GST Payable

Credit

Balance sheet/Statement of financial position (liability)

11. GST Receivable

Debit

Balance sheet/Statement of financial position (asset)

12. Mortgage Payable

Credit

Balance sheet/Statement of financial position (liability)

13. Interest Revenue

Credit

Income Statement (income)

14. B.A. Brightspark, Capital

Credit

Balance sheet/Statement of financial position (equity)

15. Electrical Services Revenue

Credit

Income Statement (income)

Page 13 of 23

Exercise 3.6

Account titles and type

Each of the following items describes aspects of the business of Lenny Linnehan, lawyer: 1. cash which Lenny Linnehan has withdrawn from the business for personal use 2. photocopiers, document binding machine and computers 3. amounts owing by the business to suppliers of an online legal database 4. amounts owing by customers for cases completed 5. tables, wall shelving and book cabinets for staff offices 6. GST charged to clients for legal services 7. money borrowed from a bank 8. lease rental on premises which should have been paid 1 month ago 9. supplies held for future document preparation 10. insurance premium paid in advance to cover the next 6 months. Required A. B.

Suggest an account title for each item described. Classify the item as an asset, liability, equity, income or expense.

1.

L. Linnehan, Drawings – Equity

2.

Office Equipment – Asset

3.

Accounts Payable – Liability

4.

Accounts Receivable – Asset

5.

Office Equipment – Asset

6.

GST Payable – Liability

7.

Bank Overdraft/Loan Payable – Liability

8.

Rent Payable – Liability

9.

Office Supplies – Asset

10.

Prepaid Insurance – Asset

Page 14 of 23

Exercise 3.7

Chart of accounts, posting to T accounts and trial balance

The general journal of Lenore Grunweld, Property Adviser, contained the entries below for the month of July 2016. GST is ignored. General Journal

Date 2016 July

1

9

16

22

31

Particulars

Post Ref

Cash at Bank Lenore Grunweld, Capital (Cash invested by owner) Cash at Bank Service Fees Revenue (Fees for services performed) Office Equipment Cash at Bank Accounts Payable (Office equipment for cash and on credit) Service Fees Receivable Service Fees Revenue (Services performed on credit) Cash at Bank Service Fees Receivable (Cash received from client)

Debit

Credit

150 000 150 000 15 000 15 000 32 000 3 200 28 800 25 000 25 000 10 000 10 000

Required a. Post the transactions to T accounts. The chart of accounts for the business included the following accounts: Cash at Bank 1 – 100 Service Fees Receivable 1 – 200 Office Equipment 1 – 300 Accounts Payable 2 – 100 Lenore Grunweld, Capital 3 – 100 Service Fees Revenue 4 – 100 b. Prepare a trial balance of the general ledger of Lenore Grunweld, Property Adviser as at 31 July 2016. a. Cash at Bank July 1

Lenore Grunweld, Capital

July 9

Service Fees

15 000 July 31

July 31

Service Fees Receivable

10 000

$150 000 July 16

175 000 July 31

Balance b/d

1-100 Office Equipment Balance c/d

$3 200 171 800

175 000

171 800

Page 15 of 23

Service Fees Receivable July 22

Service Fees Revenue

$25 000 July 31 July 31

1-200 Cash at Bank

$10 000

Balance c/d

15 000

25 000 July 31

Balance b/d

25 000

15 000 Office Equipment

July 16

Cash at Bank/Accounts Payable

1-300

$32 000

Accounts Payable July 16

2-100 Office Equipment

$28 800

Lenore Grunweld, Capital July 1

3-100 Cash at Bank

$150 000

Service Fees Revenue July 9 July 31

Profit & Loss Summary

40 000 July 22

4-100 Cash at Bank

$15 000

Serv. Fees Rec’ble

40 000

25 000 40 000

b.

Account

LENORE GRUNWELD, FINANCIAL ADVISER Trial Balance as at 31 July 2016 Account Debit No.

Credit

Cash at Bank

1-100

$171 800

Service Fees Receivable

1-200

15 000

Office Equipment

1-300

32 000

Accounts Payable Lenore Grunweld, Capital

2-100 3-100

$28 800 150 000

Service Fees Revenue

4-100

40 000 $218 800

$218 800

Page 16 of 23

Exercise 3.8

Recording transactions in general journal and analysis

The following accounts appear in the ledger of the Henrietta’s Huge Hair Hairdressers: Cash at Bank; Accounts Receivable; Hairdressing Equipment; Accounts Payable; Henrietta Bouffant, Drawings; Hairdressing Revenue; Salaries Expense; and Advertising Expense.

Required a. Prepare the general journal entries to record the transactions that occurred during December (ignore GST). b. Explain why you have made each of the journal entries to account for the transactions. Dec

1 3 8 14 19 23 30

Purchased hair drying equipment for $65 000. Paid $5000 deposit and agreed to pay the balance in 60 days. Henrietta withdrew $1200 from the business to buy herself a new dress for a friend’s wedding. Paid salaries of $6800. Paid $800 for advertisements in the local newspaper. Received $540 from customers to reduce the balance in their accounts. Paid $3700 to creditors for supplies that had been purchased on credit. Earned $57 600 in hairdressing revenue during the month. Of these, 80% of the fees were collected in cash and 20% will be paid within a month.

a.

Dec.

1

3

8

14

19

23

30

HENRIETTA’S HUGE HAIR HAIRDRESSERS (ignore GST) Hairdressing Equipment Cash at Bank Accounts Payable Purchased hair drying equipment for cash and on credit.

65 000 5 000 60 000

H. Bouffant, Drawings Cash at Bank Cash withdrawn by owner.

1 200

Salaries Expense Cash at Bank Salaries paid.

6 800

1 200

6 800

Advertising Expense Cash at Bank Cash paid for radio commercials.

800

Cash at Bank Accounts Receivable Cash received from credit customers

540

Accounts Payable Cash at Bank Cash paid to suppliers. Cash at Bank Accounts Receivable Hairdressing Revenue Memberships fees earned.

800

540

3 700 3 700

46 080 11 520 57 600

Page 17 of 23

b.

Dec.

1

The Hairdressing Equipment account is increased to record the purchase by debiting the account. At the same time, Cash at Bank is decreased by crediting the account for the amount of the deposit paid, and a liability, Accounts Payable is increased by crediting the account for the amount of $60 000 payable in 60 days.

3

This transaction is a withdrawal of assets from the business by the owner and is not an expense related to the earning of income. A debit is made to the Drawings account to reflect the decrease in the owner’s investment in the business, and the decrease in the Cash at Bank account is recorded by a credit.

8

Salaries are an expense of the business to reflect the cost of services received by the business from its employees. The business pays its employees for the services they have rendered to the business by crediting the Cash at Bank account and debiting the Salaries Expense account.

14

Advertising costs are an expense of the business to reflect the cost of advertising services received as supplied by the newspaper. The business pays the newspaper for the services rendered to the business by crediting the Cash at Bank account and debiting the Advertising Expense account.

19

The receipt of cash from credit customers is recorded by a debit to the Cash at Bank account; and Accounts Receivable is credited to reduce the amount owing to the business by these customers. Services have previously been supplied to the customers by the business, and this transaction reflects the receipt of cash from these customers.

23

The supplies had been purchased on a previous occasion; hence, an Accounts Payable liability account would have been credited at that time. Now, the payment of the Accounts Payable is recorded by reducing the liability account (debit) and reducing the Cash at Bank account (credit) for the amount of $3700.

30

This is an income transaction reflecting the amount of hairdressing revenue earned (received or receivable) for the month of December. Hence, a revenue account, called Hairdressing Revenue, is credited and Cash at Bank is debited for the amount received from customers who paid in cash. For credit customers, an asset, Accounts Receivable, is debited to record the amount owing by these customers for services received by them from the business in December.

Page 18 of 23

Problem 3.19

Journal entries, entering beginning account balances, posting to T accounts, and trial balance

The 31 May 2020 trial balance of Amy Wait, Physiotherapist, is shown below. Ignore GST. AMY WAIT, PHYSIOTHERAPIST Trial Balance as at 31 May 2020

Account Cash at bank Accounts receivable Supplies Prepaid insurance Furniture and equipment Accounts payable Electricity account payable Unearned revenue A. Wait, Capital A. Wait, Drawings Services revenue Salary expense Electricity expense Rent expense

$

Debit 105 000 48 000 12 300 8 200 260 600

Credit

$

9 700 9 500 2 900 314 960

161 200 462 000

$

170 300 9 460 24 000 799 060

$

799 060

The following transactions were completed during June:

June

1 3 6 10 14 20 23 24 26 27 29 30

Purchased supplies on credit for $5800. Received $24 400 from patients as payment on account. Paid the electricity expense of $9500, previously recorded. Performed services for $2000 that was recorded previously as unearned revenue. Recorded revenue of $178 600 in cash and $13 650 on credit. Paid salaries of $65 880. Purchased furniture for $15 400 and paid by electronic transfer. Withdrew $60 000 from the business for personal use. Paid creditors $7000. Purchased insurance policy for $24 000 to cover business assets. Received $12 000 from patients as payment on account. Recorded revenue of $124 600 in cash and $25 000 on credit. Paid rent of $24 000.

Required a. Prepare journal entries to record each transaction. b. 1. Open T accounts for the accounts shown in the trial balance. 2. Enter the 31 May balance in each account. 3. Post the journal entries to the T accounts. c. Prepare a trial balance as at 30 June 2020.

Page 19 of 23

a. General Journal (GST ignored) June

1

3

6

10

14

14

20

23

24

26

27

29

30

Supplies Accounts Payable Purchase of supplies on credit. Cash at Bank Accounts Receivable Cash received from patients.

5 800 5 800

24 400 24 400

Electricity Account Payable Cash at Bank Payment of electricity account.

9 500

Unearned Revenue Services Revenue Revenue previously received.

2 000

Cash at Bank Accounts Receivable Services Revenue Revenue received and receivable.

9 500

2 000

178 600 13 650 192 250

Salary Expense Cash at Bank Salaries paid.

65 880

Furniture and Equipment Cash at Bank Furniture purchased for cash.

15 400

A. Wait, Drawings Cash at Bank Drawings by owner.

60 000

Accounts Payable Cash at Bank Payment to creditors.

7 000

65 880

15 400

60 000

7 000

Prepaid Insurance Cash at Bank Purchase of insurance policy.

24 000

Cash at Bank Accounts Receivable Payment received from debtors.

12 000

Cash at Bank Accounts Receivable Services Revenue Revenue received and on account. Rent Expense Cash at Bank Payment of rent.

24 000

12 000

124 600 25 000 149 600

24 000 24 000

Page 20 of 23

b. Cash at Bank 31/5

Balance b/d

105 000 6/6

3/6

Accounts Receivable

14/6

Services Revenue

27/6

Accounts Receivable

29/6

Services Revenue

24 400 14/6

Electricity Account Payable Salary Expense

65 880

Furniture & Equipment

15 400

12 000 23/6

A. Wait, Drawings

60 000

124 600 24/6

Accounts Payable

7 000

26/6

Prepaid Insurance

24 000

30/6

Rent Expense

24 000

30/6

Balance c/d

178 600 20/6

$444 600 30/6

Balance b/d

9 500

238 820 $444 600

238 820 Accounts Receivable

31/5

Balance b/d

$48 000 3/6

14/6

Services Revenue

29/6

Services Revenue

Cash at Bank

24 400

13 650 27/6

Cash at Bank

12 000

25 000 30/6

Balance c/d

50 250

$86 650 30/6

Balance b/d

$86 650

50 250

Supplies 31/5

Balance b/d

12 300 30/6

1/6

Accounts Payable

Balance c/d

5 800 18 100

30/6

Balance b/d

18 100 18 100

18 100 Prepaid Insurance

31/5

Balance b/d

$8 200 30/6

26/6

Cash at Bank

24 000

Balance c/d

32 200 30/6

Balance b/d

32 200 32 200

32 200 Furniture and Equipment

31/5

Balance b/d

20/6

Cash at Bank

$260 600 30/6

Balance b/d

276 000

15 400 276 000

30/6

Balance c/d

276 000

276 000

Page 21 of 23

Accounts Payable 24/6

Cash at Bank

7 000 31/5

Balance b/d

9 700

30/6

Balance c/d

8 500 1/6

Supplies

5 800

15 500

15 500 30/6

Balance b/d

8 500

Electricity Account Payable 6/6

Cash at Bank

9 500 31/5

Balance b/d

9 500

Balance b/d

2 900

Unearned Revenue 10/6

Services Revenue

30/6

Balance c/d

2 000 31/5 900 2 900

2 900 30/6

Balance b/d

900

Balance b/d

314 960

Balance c/d

221 200

A. Wait, Capital 30/6

Balance c/d

314 960 31/5 A. Wait, Drawings

31/5

Balance b/d

23/6

Cash at Bank

161 200 30/6 60 000 221 200

30/6

Balance b/d

221 200

221 200 Services Revenue

30/6

Profit & Loss Summary

805 850 31/5

Balance b/d

462 000

10/6

Unearned Revenue

14/6

Cash at Bank/AR

192 250

29/6

Cash at Bank/AR

149 600

805 850

2 000

805 850

Salary Expense 31/5

Balance b/d

14/6

Cash at Bank

170 300 30/6

Profit & Loss Summary

236 180

65 880 236 180

236 180

Page 22 of 23

Electricity Expense 31/5

Balance b/d

9 460 30/6

Profit & Loss Summary

9 460

9 460

9 460

Rent Expense 31/5

Balance b/d

24 000 30/6

30/6

Cash at Bank

24 000

Profit & Loss Summary

48 000

48 000 48 000

c.

Cash at Bank

AMY WAIT, PHYSIOTHERAPIST Trial Balance as at 30 June 2020 Debit $238 820

Accounts Receivable

50 250

Supplies

18 100

Prepaid Insurance

32 200

Furniture and Equipment

Credit

276 000

Accounts Payable

$8 500

Unearned Revenue A. Wait, Capital

900 314 960

A. Wait, Drawings

221 200

Services Revenue Salary Expense Electricity Expense Rent Expense

805 850 236 180 9 460 48 000 $1 130 210

$1 130 210

Page 23 of 23