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Solutions Manual

to accompany

Financial
Accounting:
Recording, Analysis
and Decision Making
Fifth Edition

Prepared by

Shirley Carlon

John Wiley & Sons Australia, Ltd 2016


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

CHAPTER 3 – ACCRUAL ACCOUNTING CONCEPTS

ASSIGNMENT CLASSIFICATION TABLE

Brief
Learning Objectives Exercises Exercises Problems
1. Differentiate between the cash basis 1 1,9 7A
and the accrual basis of accounting.

2. Explain criteria for revenue recognition 2,3,4


and expense recognition.

3. Explain why adjusting entries are 2 5,9, 10, 1A, 2A,10A,


needed and identify the major types of 11,13 1B,2B.10B
adjusting entries.

4. Prepare adjusting entries for 3, 4 5, 6, 7, 8,9, ALL


prepayments and accruals. 10,11,12,13 PROBLEMS

5. Describe the nature and purpose of the 5 9,10,11 ALL


adjusted trial balance. PROBLEMS

6. Explain the purpose of closing entries. 6 12 3A, 4A,5A,6A,


7A,8A, 9A,10A,
3B, 4B, 5B,6B,
7B,8B,9B,10B

7. Describe the required steps in the 6, 7 3A, 5A,6A,8A,


accounting cycle. 9A,10A,3B,5B,
6B,8B,9B,10B

8. Describe the purpose and the basic 13 9A,10A


form of a worksheet. 7B,9B,10B

© John Wiley and Sons Australia Ltd, 2016 3.1


Chapter 3: Accrual accounting concepts

CHAPTER 3 – ACCRUAL ACCOUNTING CONCEPTS

ANSWERS TO QUESTIONS

1. (a) Under the accounting period concept, an accountant is required to determine


the impact of each accounting transaction or event in specific accounting
periods.
(b) An accounting time period of one year in length is referred to as a financial
year.

2. The accounting principles and the qualitative characteristics, together with


accounting standards, are collectively referred to as Australian generally accepted
accounting principles (GAAP). Generally accepted accounting principles that pertain
to adjusting the accounts include (choose two):

The revenue recognition criteria which states that revenues should be recognised in
the time period in which it is probable that any future economic benefits associated
with the revenue will flow to the entity and the revenue can be reliably measured;

The accounting period concept which states that the life of a business can be divided
into artificial periods, such as one month, six month, 12 months, and that useful
financial statements give feedback on the profitability of the business;

The expense recognition criteria which states that expenses should be recognised
when the outflow of future economic benefits associated with the expense is
probable and the expense can be measured reliably.

© John Wiley and Sons Australia Ltd, 2016 3.2


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

3. The new accounting standard for revenue recognition IFRS 15 ‘Revenue from
Contracts with Customers’, is mandatory for reporting periods commencing 1
January 2017, but earlier adoption is permitted. The main principle in this new
standard is that revenue is to be recognised to depict the transfer of goods or
services to customers in amounts which reflect the payment (ie consideration) which
the business expects to receive.

IFRS 15 sets out a five step process. Essentially revenue can be recognised when
an entity satisfies a performance obligation.

The following conditions must be met:


o the contract has been approved by parties to the contract
o each parties rights in relation to the goods to be transferred has been
identified
o the payment terms have been identified
o the contract has commercial substance; and
o it is probable that the consideration to which the entity is entitled to in
exchange for the goods will be collected.

4. Assuming the law firm uses accrual accounting it should recognise the revenue in
April as this is when the contract obligation was performed. The revenue recognition
criterion states that revenue should be recognised in the accounting period in which it
is probable that any future economic benefits associated with the revenue will flow to
the entity and the revenue can be reliably measured. If the engagement has been
completed the amount of revenue would typically be able to be measured reliably.
Applying the new criteria under IRFS15 it is assumed both parties agreed to the
conditions of the contract, the payment terms were specified so the contract has
commercial substance. The timing of the recognition is when the right were
transferred and it is probable the law firm will receive the service revenue. That is in
April.

5. Expenses of $3600 should be deducted from the revenues in April in order to match
the revenue recognised in April.

6. The financial information in a trial balance may not be up-to-date because:


(1) Some events are not journalised daily because it is unnecessary and
inexpedient to do so.
(2) The expiration of some costs occurs with the reduction in an asset with the
passage of time.
(3) Some items may be unrecorded because the transaction data are not known.

© John Wiley and Sons Australia Ltd, 2016 3.3


Chapter 3: Accrual accounting concepts

7. The two categories of adjusting entries are prepayments and accruals. Prepayments
are either revenues received in advance or prepayments of amounts that provide
economic benefit for more than one period, e.g. prepaid rent. Accruals consist of
revenues and expenses earned or incurred but which have not been recorded
through daily recording of transactions.

In this text we teach you to recognise a transaction which affects more than 1
reporting [period as an asset. Therefore in a prepaid expense adjusting entry,
expenses are debited and assets are credited, to reflect the expiry of the asset. In a
revenue received in advance adjusting entry liabilities are debited and revenues are
credited.

8. Depreciation expense is an expense account whose normal balance is a debt. This


account shows the cost that has expired during the current accounting period.
Accumulated depreciation is a contra asset account whose normal balance is a
credit. The balance in this account is the depreciation that has been recognised from
the date of acquisition to the reporting date.

9. Liability and revenue. The revenue account is debited and liability account (Revenue
Received in Advance) is credited. This is the nature of the adjusting entry if the
original entry was to record the amount received as revenue.

10. An asset (Prepayments) is debited and an expense is credited by the adjusting entry.

11. (a) Prepaid expenses (if initially recorded as an expense)


or Accrued revenue.
(b) Revenues received in advance.
(c) Accrued expenses
or revenue received in advance (if initially recorded as revenue).
(d) Accrued expenses or prepaid expenses (if initially recorded as an asset).
(e) Prepaid expenses (if initially recorded as an asset).
(f) Accrued revenues or revenues received in advance (if initially recorded as a
liability).

12. A worksheet is a multi-columned form. The columns of the worksheet from left to
right are two columns each for the trial balance, adjustments, adjusted trial balance,
statement of profit or loss and other comprehensive income and statement of
financial position.

© John Wiley and Sons Australia Ltd, 2016 3.4


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 3.1

Cash Retained Earnings


$ $
(a) -120 0
(b) 0 -60
(c) 0 +1,200
(d) +960 0
(e) -3,000 0
(f) 0 -1,200
(g) 0 0

BRIEF EXERCISE 3.2


Riko Ltd
(1) (2)
Item Type of Adjustment Accounts Before Adjustment

(a) Prepaid Expense Asset Overstated


Expense Understated
(b) Accrued Revenue Asset Understated
Revenue Understated
(c) Accrued Expense Expense Understated
Liability Understated
(d) Revenue Received in Advance Liability Overstated
Revenue Understated.

BRIEF EXERCISE 3.3


Shah Ltd

June 30 Depreciation Expense - Equipment 3 000


Accumulated Depreciation – Equipment 3 ,000
(Depreciation for the year )

Depreciation Expense – Equipment


30/6 Accumulated Depreciation 3 000

Accumulated Depreciation – Equipment


30/6 Depreciation Expense 3 000
FINANCIALSTATEMENT PRESENTATION IS NET
Equipment 25 000
Less Accumulated depreciation (3 000)
$22 000

© John Wiley and Sons Australia Ltd, 2016 3.5


Chapter 3: Accrual accounting concepts

BRIEF EXERCISE 3.4


DeVoe Ltd
General Journal
G 15
Date Account name(narration) Debit $ Credit $
(a) June 30 Interest Expense 200
Interest Payable 200
(Accrual of interest on loan)
(b) June 30 Service Revenue Receivable 700
Service Revenue 700
(Accrual of revenue)
(c) June 30 Salaries Expense 350
Salaries Payable 350
(Accrual of salaries)

BRIEF EXERCISE 3.5


Hoi Ltd
(1) (2)
Item Account Type of Adjustment Related Account

(a) Accounts Receivable Accrued Revenue Service Revenue


(b) Prepaid Insurance Prepaid Expense Insurance Expense
(c) Equipment Depreciation refer item (d)
(d) Accum. Depreciation – Prepaid Expense Depreciation Expense
Equipment
(e) Bank Loan Accrue interest refer item (f)
(f) Interest Payable Accrued Expense Interest Expense
(g) Service Revenue Received in Revenue Received in Advance Service Revenue
Advance
(h) Interest Receivable Accrued revenue Interest Revenue
(i) Wages Payable Accrued expense Wages Expense

BRIEF EXERCISE 3.6


Khanna Ltd
Account Financial Statement Post Closing
Trial Balance
(a) Accumulated Depreciation Statement of financial position Yes
(b) Depreciation Expense Statement of profit or loss No
(c) Retained Earnings Statement of financial position (and Yes
statement of changes in equity)
(d) Dividends Statement of changes in equity No
(e) Service Revenue Statement of profit or loss No
(f) Supplies Statement of financial position Yes
(g) Accounts Payable Statement of financial position Yes

© John Wiley and Sons Australia Ltd, 2016 3.6


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

BRIEF EXERCISE 3.7

The proper sequencing of the required steps in the accounting cycle is as follows:

1. (e) Analyse business transactions.


2. (a) Journalise the transactions.
3. (b) Post to ledger accounts.
4. (i) Prepare a trial balance.
5. (g) Journalise and post adjusting entries.
6. (d) Prepare an adjusted trial balance.
7. (h) Prepare financial statements.
8. (f) Journalise and post closing entries.
9. (c) Prepare a post-closing balance.

© John Wiley and Sons Australia Ltd, 2016 3.7


Chapter 3: Accrual accounting concepts

SOLUTIONS TO EXERCISES

EXERCISE 3.1
Tang Pty Ltd
(a)
Cash Basis Accrual Basis
$ $
Service Revenue 66,000 78,000
- Operating Expenses 40,500 45,000
- Insurance Expense 6,500 -
Profit $19,000 $33,000

(b) Both accrual basis and cash basis provide useful information. However, it can be
argued that the accrual basis of accounting provides more useful information about
performance for decision makers because it recognises the impact of accounting
transactions or events on specific accounting periods. The cash basis of accounting
only recognises cash transactions. The accrual basis of accounting provides a more
comprehensive picture of the business activities in the records. For example, accrued
basis profit takes account of all revenues and expenses for a period whether or not
cash is received or paid (provided recognition criteria are met). It also takes account
of internal events, such as the consumption of supplies or the depreciation of plant
assets.

However, cash basis accounting is also useful. For example, the statement of cash
flows shows how much cash is generated from ordinary operating activities (which will
invariably be greater or less than accrual basis profit).

EXERCISE 3.2

(a) 6. Going concern principle.


(b) 1. Accounting entity concept.
(c) 5. Full disclosure principle.
(d) 8. Monetary principle.
(e) 7. Materiality.
(f) 2. Accounting period concept.
(g) 4. Expense recognition criteria.
(h) 3. Cost principle.

EXERCISE 3.3

(a) Revenue recognition criteria.


(b) Accounting period concept.
(c) No violation (not a violation of cost as the principle used for inventory is
measurement at the lower of cost and net realisable value).
(d) Going concern principle.
(e) Cost principle.
(f) Accounting entity concept.

© John Wiley and Sons Australia Ltd, 2016 3.8


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

EXERCISE 3.4
(a) 9. Materiality.
(b) 7. Expense recognition criteria.
(c) 3. Monetary principle.
(d) 4. Accounting period concept.
(e) 8. Cost principle.
(f) 1. Accounting entity concept.
(g) 5. Full disclosure principle.
(h) 6. Revenue recognition criteria.

EXERCISE 3.5
Zimbabwe Ltd

(1) (2) (b)


Item Type of Adjustment Accounts Before Effect on profit
Adjustment Overstated
/(understated)
(a) Accrued Revenue Asset Understated Understated
Revenue Understated

(b) Prepaid Expense Asset Overstated Overstated


Expense Understated

(c) Accrued Expense Expense Understated Overstated


Liabilities Understated

(d) Revenue Received in Advance Liability Overstated Understated


Revenue Understated

(e) Accrued Expense Expense Understated Overstated


Liability Understated

(f) Prepaid Expense Asset Overstated Overstated


Expense Understated

© John Wiley and Sons Australia Ltd, 2016 3.9


Chapter 3: Accrual accounting concepts

EXERCISE 3.6
Uniform Ltd
General Journal

Post $ $
Date Account name(narration) Ref. Debit Credit

1. June 30 Depreciation Expense 420 4 800


Accumulated Depreciation – Equipment 121 4 800
(Depreciation for the quarter ($1600 x 3))
2. 30 Revenue Received in Advance 210 12 090
Rent Revenue 300 12 090
(Rent Revenue April-Jun now earned($36270 /
9 x 3))
3. 30 Interest Expense 400 975
Interest Payable 220 975
(Accrued interest)
4. 30 Supplies Expense 440 5 600
Supplies 110 5 600
(supplies used $8400-$2800)
5. 30 Insurance Expense 430 3 510
Prepaid Insurance 100 3 510
(Interest expense for the 3 months to June
($1170 x 3))

NB. Adjusting entries are made quarterly (i.e. every 3 months).

© John Wiley and Sons Australia Ltd, 2016 3.10


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

EXERCISE 3.7
Con James Dental Practice
General Journal
$ $
Date Account name(narration) Debit Credit
2016
a Jan 31 Accounts Receivable 1 500
Service Revenue 1 500
(Service preformed January)
b 31 Electricity Expense 1 040
Electricity Payable 1 040
(Accrued electricity)
c 31 Depreciation Expense 1 600
Accumulated Dep’n – Dental Equipment 1 600
(Depreciation for the month)
31 Interest Expense 500
Interest Payable 500
(Accrued interest)
d 31 Insurance Expense 2 000
Prepaid Insurance 2 000
(January insurance exp $24000/12)
e 31 Supplies Expense 2 500
Supplies ($3200 - $700) 2 500
(Supplies used January)

© John Wiley and Sons Australia Ltd, 2016 3.11


Chapter 3: Accrual accounting concepts

EXERCISE 3.8

Wong Pty Ltd


General Journal
Date Account name (narration) Post $
ref Credit
2016
1. Oct. 31 Advertising Supplies Expense 505 900
Advertising Supplies ($2,500 - $1,600) 110 900
(Supplies used October )
2. 31 Insurance Expense 515 100
Prepaid Insurance 112 100
(Insurance expense October)
3. 31 Depreciation Expense 520 60
Accumulated Depreciation – Office Equipment 131 60
(Depreciation expense October)
4. 31 Service Revenue Received in Advance 213 300
Service Revenue 400 300
(Revenue now performed)
5. 31 Accounts Receivable 104 700
Service Revenue 400 700
(Accrued revenue)
6. 31 Interest Expense 518 80
Interest Payable 210 80
(Accrued interest)
7. 31 Salaries Expense 500 1 300
Salaries Payable 215 1 300
(Accrued salaries)

EXERCISE 3.9
Wolfmother Ltd
Statement of profit or loss
for the month ended 31 July 2017

Revenues: $ $
Service revenue ($5 500 + $800) 6 300
Expenses:
Wages expense ($2 300 + $300) 2 600
Supplies expense ($1 200 - $400) 800
Electricity expense 600
Insurance expense 300
Depreciation expense 150
Total expenses 4 450
Profit $1 850

© John Wiley and Sons Australia Ltd, 2016 3.12


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

EXERCISE 3.10
Darcy Designs Pty Ltd

Answer Calculation/Account Reconstruction

(a) Supplies balance 1/7= $1 400 Supplies expense $1220


Add: Supplies (31/7) 1500
Less: Supplies purchased (1320)
Supplies (1/7) $1400

Supplies
1/7* Bal. 1400 Expense 1220
Purchases 1320 31/7 Bal. 1500
2720 2720

(b) Total premium = $9 600 Total premium = Monthly premium x 12; $800 x 12 =$9 600

Purchase date = 1 Nov 2015 Purchase date: On 31 Julybalance is $2400 so there is 3


months coverage remaining ($800 x 3). Thus, the
purchase date was 9 months earlier on 1 November 2015.

(c) Salaries payable = $1 700 Cash paid $7500


Salaries payable (31/7 ) 1500
$9000
Less: Salaries expense 7300
Salaries payable (1/7 or 30/6) $1700

Salaries Payable
Salaries 7500 1/7 Bal 1700
paid
31/7 Bal 1500 Salaries exp. 7300
9000 9000
31/7 Bal 1500

(d) Service revenue = $1 725 Service revenue $3000


Amount received for July services 2400
Revenue received in Advance now recognised 600

Service Revenue Received in Advance


Services 600 1/7 Bal. 1725
Performed
31/7 Bal. 1125
1725 1150
31/7 Bal 1125

© John Wiley and Sons Australia Ltd, 2016 3.13


Chapter 3: Accrual accounting concepts

EXERCISE 3.11
Martin Pty Ltd

Answer Calculation/Account Reconstruction

(a) Supplies balance 1/3= $800 Supplies expense $950


Add: Supplies (31/3) 700
Less: Supplies purchased (850)
Supplies (1/3) $800

Supplies
1/3* Bal. 800 Expense 950
Purchases 850 31/3 Bal. 700
1650 1650

(b) Total premium = $4 800 Total premium = Monthly premium x 12; $400 x 12 =
$4,800 (2400:4800 = 50%)
At 31 March the prepaid amount is half the annual
premium so policy was purchased six months earlier on 1
October 2016
Purchase date = 1 Oct 2016

(c) Salaries payable = $1 500 Cash paid $2500


Salaries payable (31/3 ) 800
$3300
Less: Salaries expense 1800
Salaries payable (1/3) $1500

Salaries Payable
Salaries 2500 1/3 Bal 1500
paid
31/3 Bal 800 Salaries exp. 1800
3300 3300
31/3 Bal 800

(d) Service revenue = $1 150 Service revenue $2000


Amount received for March services 1600
Revenue received in Advance now recognised 400

Service Revenue Received in Advance


Services 400 1/3 Bal. 1150
Performed
31/3 Bal. 750
1150 1150
31/3 Bal 750

© John Wiley and Sons Australia Ltd, 2016 3.14


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

EXERCISE 3.12
Snowmass Ltd
General Journal

Date Account name (narration) $ $


Debit Credit
(a) July 10 Supplies 200
Cash 200

14 Cash 3 000
Service Revenue 3 000

15 Salaries Expense 1 200


Cash 1 200

20 Cash 700
Service Revenue Received in Advance 700

(b) July 31 Supplies Expense 500


Supplies 500

31 Salaries Expense 1 200


Salaries Payable 1 200

31 Service Revenue Receivable 500


Service Revenue 500

31 Service Revenue Received in Advance 900


Service Revenue 900

© John Wiley and Sons Australia Ltd, 2016 3.15


Chapter 3: Accrual accounting concepts

EXERCISE 3.13
Monkey Ltd
General Journal
Date Account name (narration) $ $
Debit Credit
2016
1. June 30 Insurance Expense 15 855
Insurance Payable 15 855
Calculations:
$33300 ÷ 3 yrs = $11 100 per annum, 1.5 yrs remain
$9510 ÷ 2 yrs= 4 755 per annum, 1 year remains
$15 855
Prepayment of B4564 at 30/6/16 is $16 650
Prepayment of A2958 at 30/6/16 is 4 755
$ 21 405
Pre adjustment balance $ 37 260
Adjustment required to expense $ 15 855

2. 30 Subscription Revenue Received in Advance 18 850


Subscription Revenue 18 850
Calculations:
Apr 200 x $130 x 3/12 = $6 500
May 300 x $130 x 2/12 = 6 500
Jun 540 x $130x 1/12 = 5 850
Subscriptions earned and to
be recognised as revenue $18 850

3. 30 Interest Expense 1 500


Interest Payable 1 500
Calculation:
$100,000 x 6% x 3/12 = $1 500

4. 30 Salaries Expense 3 300


Salaries Payable 3 300
Calculations:
4 x $1050 x 2/5 = $1 680
3 x $1350 x 2/5 = 1 620
$3 300

(b) Subscriptions are usually paid in advance and for revenue to be recognised it needs to
meet the revenue recognition criteria. The revenue is recognised as the work is performed
not when the cash is received.

© John Wiley and Sons Australia Ltd, 2016 3.16


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

SOLUTIONS TO PROBLEM
SET A

PROBLEM SET A 3.1


Ewok Ltd
General Journal
(a).
Post $ $
Date Account Titles (Narration) Ref. Debit Credit
2015
1. June 30 Supplies Expense 505 6 400
Supplies 113 6 400
(To adjust supplies account to reflect supplies used
($13600 - $7200))

2. 30 Electricity Expense 530 1 200


Electricity Payable 218 1 200
(Accrued electricity)

3. 30 Insurance Expense 515 1 600


Prepaid Insurance 112 1 600
(Prepaid insurance expired ($9600 ÷ 12 mth x 2)

4. 30 Service Revenue Received in Advance 213 3 000


Service Revenue 400 3 000
(Services performed in relation to revenue received
in advance)

5. 30 Salaries Expense 500 6 400


Salaries Payable 215 6 400
(Accrued salaries)

6. 30 Depreciation Expense 520 2 880


Accumulated Depreciation – Office 131 2 880
Equipment
(Record depreciation expense ($1440 x 2 ))

7. 30 Accounts Receivable 104 8000


Service Revenue 400 8 000
(Accrued revenue)

Students need to look and see what has been recorded in the ledgers to work out if one or two
months adjustments are required. For insurance and depreciation no expense had been
recorded to date.

© John Wiley and Sons Australia Ltd, 2016 3.17


Chapter 3: Accrual accounting concepts

(b) Ewok Ltd General ledger


Cash 100
30/6 Balance 34 560

Accounts Receivable 104


30/6 Balance 26 040 30/6 Balance 34 040
30/6 Service Revenue 8 000
34 040 34 040
1/7 Opening Balance 34 040

Prepaid Insurance 112


30/6 Balance 9 600 30/6 Insurance Expense 1 600
30/6 Closing Balance 8 000
9 600 9 600
1/7 Opening Balance 8 000

Supplies 113
30/6 Balance 13 600 30/6 Supplies Expense 6 400
30/6 Closing Balance 7 200
13 600 13 600
1/7 Opening Balance 7 200

Office Equipment 130


30/6 Balance 86 400

Accumulated Depreciation – Office Equipment 131


30/6 Depreciation Expense 2 880

Accounts Payable 200


30/6 Balance 19 800

Service Revenue Received in Advance 213


30/6 Service Revenue 3 000 30/6 Balance 4 800
30/6 Closing Balance 1 800
4 800 4 800
1/7 Opening Balance 1 800

© John Wiley and Sons Australia Ltd, 2016 3.18


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

Salaries Payable 215


30/6 Salaries Expense 6 400

Electricity Payable 218


30/6 Electricity Expense 1 200

Share Capital 300


30/6 Balance 100 000

Service Revenue 400


30/6 Balance 76 600
30/6 Service Rev in Adv 3 000
30/6 Closing Balance 87 600 30/6 Accounts Receivable 8 000
87 600 87 600
1/7 Opening Balance 87 600

Salaries Expense 500


30/6 Balance 23 800
30/6 Salaries Payable 6 400
30 200

Supplies Expense 505


30/6 Supplies 6 400

Rent Expense 510


30/6 Balance 7 200

Insurance Expense 515


30/6 Prepaid Insurance 1 600

Depreciation Expense 520


30/6 Accumulated Depreciation 2 880

Electricity Expense 530


30/6 Electricity Expense 1 200

© John Wiley and Sons Australia Ltd, 2016 3.19


Chapter 3: Accrual accounting concepts

(c)
Ewok Ltd
Adjusted Trial Balance
as at 30 June 2015

No. Account Name Debit Credit


$ $
100 Cash 34 560
104 Accounts Receivable 34 040
112 Prepaid Insurance 8 000
113 Supplies 7 200
130 Office Equipment 86 400
131 Accumulated Depreciation – Office Equipment 2 880
200 Accounts Payable 19 800
213 Service Revenue Received in Advance 1 800
215 Salaries Payable 6 400
218 Electricity Payable 1 200
300 Share Capital 100 000
400 Service Revenue 87 600
500 Salaries Expense 30 200
505 Supplies Expense 6 400
510 Rent Expense 7 200
515 Insurance Expense 1 600
520 Depreciation Expense 2 880
530 Electricity Expense 1 200
$219 680 $219 680

(d) Profit for the month


Revenues $87 600 less expenses ($30200+6400+7200+1600+2880+1200) = $38 120

(e) If the cost of the equipment was allocated over the two years then the annual
depreciation expense would be $43 200 ($86 400/2) instead of $17 280 which means
profit in the first 2 years would be $25 920 ($43 200-$17280) less than if the depreciation
was charged over the useful life and this would mean the profit in year 3 4 and 5 would
be $17 280 more as no depreciation would be charged.
Note over the 5 years total depreciation is the same is $86 400 either rate used.

© John Wiley and Sons Australia Ltd, 2016 3.20


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

PROBLEM SET A 3.2


(a)

Maxi Services Ltd


General Journal

Date Account Name (narration) Post $ $


Ref. Debit Credit
2017
1. June 30 Supplies Expense 505 500
Supplies 113 500
(Supplies used $1500-$1000)

2. 30 Electricity Expense 530 300


Electricity Payable 218 300
(Accrued expense)

3. 30 Insurance Expense 515 1 600


Prepaid Insurance 112 1 600
(Prepaid insurance expired)

4. 30 Revenue Received in Advance 213 3 000


Service Revenue 400 3 000

5. 30 Salaries Expense 500 4 600


Salaries Payable 215 4 600
(Accrued salaries)

6. 30 Depreciation Expense 520 4 000


Accumulated Depreciation 131 4 000
(Depreciation expense)

7. 30 Accounts Receivable 104 4 400


Service Revenue 400 4 400
(Accrued revenue)

© John Wiley and Sons Australia Ltd, 2016 3.21


Chapter 3: Accrual accounting concepts

(b) MAXI SERVICES LTD GENERAL LEDGER

Cash 100
30/6 Opening Balance 54 800

Accounts Receivable 104


30/6 Opening Balance 15 000
30/6 Service Revenue 4 400 30/6 Closing Balance 19 400
19 400 19 400
1/7 Opening Balance 19 400

Prepaid Insurance 112


30/6 Opening Balance 3 200 30/6 Insurance Expense 1 600
____ 30/6 Closing Balance 1 600
3 200 3 200
1/7 Opening Balance 1 600

Supplies 113
30/6 Opening Balance 1 500 30/6 Supplies Expense 500
____ 30/6 Closing Balance 1 000
1 500 1 500
1/7 Opening Balance 1 000

Office Equipment 130


30/6 Opening Balance 30 000

Accumulated Depreciation 131


30/6 Closing Balance 24 000 30/6 Opening Balance 20 000
30/6 Depreciation Expense 4 000
24 000 24 000
1/7 Opening Balance 24 000

Accounts Payable 200


30/6 Opening Balance 7 400

© John Wiley and Sons Australia Ltd, 2016 3.22


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

Service Revenue Received in Advance 213


30/6 Service Revenue 3 000 30/6 Opening Balance 4 000
30/6 Closing Balance 1 000 ........
4 000 4 000
1/7 Opening Balance 1 00
Salaries Payable 215
30/6 Salaries Expense 4 600

Electricity Payable 218


30/6 Electricity Expense 300

Share Capital 300


30/6 Opening Balance 60 000

Retained Earnings 310


30/6 Opening Balance 7 500

Service Revenue 400


30/6 Opening Balance 46 800
30/6 Serv. rev rec’d in advance 3 000
30/6 Accounts Receivable 4 400
54 200
Salaries Expense 500
30/6 Opening balance 34 000
30/6 Salaries Payable 4 600
38 600
Supplies Expense 505
30/6 Supplies 500

Rent Expense 510


30/6 Opening Balance 2 000

Insurance Expense 515


30/6 Opening Balance 1 200
30/6 Prepaid Insurance 1 600
2 800

© John Wiley and Sons Australia Ltd, 2016 3.23


Chapter 3: Accrual accounting concepts

Depreciation Expense 520


30/6 Accumulated Depreciation 4 000

Electricity Expense 530


30/6 Opening balance 4 000
30/6 Electricity Payable 300
4 300

(c)
Maxi Services Ltd
Adjusted Trial Balance
as at 30 June 2017

No. Account name Debit $ Credit $


100 Cash 54 800

104 Accounts Receivable 19 400

112 Prepaid Insurance 1 600

113 Supplies 1 000

130 Office Equipment 30 000

131 Accumulated Depreciation 24 000

200 Accounts Payable 7 400


Service Revenue Received in
213 1 000
Advance
215 Salaries Payable 4 600
218 Electricity Payable 300

300 Share Capital 60 000

310 Retained Earnings 7 500


400 Service Revenue 54 200

500 Salaries Expense 38 600

505 Supplies Expense 500

510 Rent Expense 2 000

515 Insurance Expense 2 800

520 Depreciation Expense 4 000

530 Electricity Expense 4 300 _______


$159 000 $159 000

© John Wiley and Sons Australia Ltd, 2016 3.24


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

(d) Profit for the year:


$ $
Service revenue 54 200
Less Expenses:
Salaries expense 38 600
Supplies expense 500
Rent expense 2 000
Insurance expense 2 800
Depreciation expense 4 000
Electricity expense 4 300 52 200
Profit $ 2 000

(e) To report a higher profit the expense adjustments would be avoided therefore adjustment
numbers 1, 2, 3, 5, and 6.

© John Wiley and Sons Australia Ltd, 2016 3.25


Chapter 3: Accrual accounting concepts

PROBLEM SET A 3.3


(a)
Auckland Consulting Ltd
General Journal
Date Account name (narration) Post Ref Debit $ Credit $
2016
Sept 30 Rent Expense 510 4 500
Prepaid Rent 120 4 500
(To record expired rent)

30 Supplies Expense 530 450


Supplies 130 450
(To record supplies consumed)

30 Depreciation Expense – Equipment 520 2 250


Accumulated Depreciation – Equipment 151 2 250
(To record depreciation expense)

30 Accounts Receivable 110 18 600


Commission Revenue 400 18 600
(To record commission revenue not yet received)

30 Interest Expense 550 300


Interest Payable 220 300
(To record interest accrued)

30 Rent Revenue Received in Advance 230 2 400


Rent Revenue 410 2 400
(To record services provided for revenue)

30 Salaries Expense 500 4 200


Salaries Payable 210 4 200
(To record accrued salaries)

© John Wiley and Sons Australia Ltd, 2016 3.26


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

(b)
Auckland Consulting Ltd
Statement of profit or loss
for the three months ended 30 September 2016

$ $
Revenues:
Rent revenue 32 400
Commission revenue 22 200
Total revenues 54 600
Expenses:
Salaries expense 28 200
Rent expense 19 500
Depreciation expense 2 250
Supplies expense 450
Electricity expense 1 530
Interest expense 300
Total expenses 52 230
Profit $ 2 370

Auckland Consulting Ltd


Calculation of retained earnings
for the three months ended 30 September 2016

Retained earnings, 1 July $ -


Add: Profit 2 370
2 370
Less: Dividends (1 800)
Retained earnings, 30 September $ 570

© John Wiley and Sons Australia Ltd, 2016 3.27


Chapter 3: Accrual accounting concepts

Auckland Consulting Ltd


Statement of financial position
as at 30 September 2016

$ $
Assets
Current assets
Cash 4 950
Accounts receivable 19 800
Supplies 900
Total current assets 25 650
Non-current assets
Equipment 45 000
Less: Accumulated depreciation – equipment (2 250) 42 750
Total assets 68 400

Liabilities
Accounts payable 4 530
Salaries payable 4 200
Interest payable 300
Rent revenue received in advance 1 800
Bank loan* 15 000
Total liabilities 25 830
Net Assets $42 570
Equity:
Share capital 42 000
Retained earnings 570
Total equity $42 570

* bank loan could also be classified as non-current

(c) The following accounts would be closed: Commission Revenue, Rent Revenue,
Salaries Expense, Rent Expense, Depreciation Expense, Supplies Expense, Electricity
Expense, Interest Expense, Dividends.

(d) 1 August 2016. Interest of 12% per year equals a monthly rate of 1%; monthly interest is
$150 ($15000 x 1%). Since total interest expense is $300, the loan has been
outstanding for two months.

© John Wiley and Sons Australia Ltd, 2016 3.28


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

PROBLEM SET A 3.4


(a)
Frog Ltd
General Journal
Date Account name (narration) Post Ref Debit $ Credit $
2015
June 30 Accounts Receivable 110 900
Revenue 400 900
(To record revenue not yet received)

30 Office Supplies Expense 510 2 400


Office Supplies 120 2 400
(To record supplies consumed)

30 Insurance expense 530 2 250


Prepaid Insurance 130 2 250
(To record insurance expense)

30 Depreciation Expense – Equipment 540 1 800


Accumulated Depreciation – Equipment 141 1 800
(To record depreciation expense)

30 Salaries Expense 500 1 650


Salaries Payable 210 1 650
(To record accrued salaries)

30 Rent Revenue Received in Advance 220 1 200


Rent Revenue 410 1 200
(To record services provided for revenue)

© John Wiley and Sons Australia Ltd, 2016 3.29


Chapter 3: Accrual accounting concepts

(b)
Frog Ltd
Statement of profit or loss
for the year ended 30 June 2015

$ $
Revenues:
Service revenue 51 900
Rent revenue 17 700
Total revenues 69 600
Expenses:
Salaries expense 27 150
Office Supplies expense 2 400
Rent expense 22 000
Insurance expense 2 250
Depreciation expense 1 800
Total expenses 55 600
Profit $14 000

Frog Ltd
Calculation of retained earnings
for the year ended 30 June 2015

Retained earnings, 1 July 5 600


Add: Profit 14 000
19 600
Less: Dividends (-)
Retained earnings, 30 September $19 600

© John Wiley and Sons Australia Ltd, 2016 3.30


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

Frog Ltd
Statement of financial position
as at 30 June 2015
$ $
Assets
Current assets
Cash 14 500
Accounts receivable 14 100
Office supplies 1 050
Prepaid insurance 3 750
Total current assets 33 400
Non-current assets
Equipment 18 000
Less: Accumulated depreciation – equipment (5 400)
Total non-current assets 12 600
Total assets 46 000
Liabilities
Accounts payable 8 700
Salaries payable 1 650
Rent revenue received in advance 1 050
Total liabilities 11 400
Net Assets $34 600
Equity
Share capital 15 000
Retained earnings 19 600
Total equity $34 600

© John Wiley and Sons Australia Ltd, 2016 3.31


Chapter 3: Accrual accounting concepts

(c)
Frog Ltd
General Journal
Date Account name (narration) Post Ref Debit $ Credit $
2015
June 30 Service Revenue 400 51 900
Rent revenue 410 17 700
Profit or loss summary 330 69 600
(To close revenue accounts)

30 Profit or loss summary 330 55 600


Salaries expense 500 27 150
Office Supplies expense 510 2 400
Rent expense 520 22 000
Insurance expense 530 2 250
Depreciation expense 540 1 800
(To close expense accounts)

30 Profit or loss summary 330 14 000


Retained earnings 310 14 000
(To close profit to retained earnings)

© John Wiley and Sons Australia Ltd, 2016 3.32


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

PROBLEM SET A 3.5


(a)
Nathan Ltd
General Journal

Date Account name (narration) Post Ref $ $


Debit Credit
2016
Sept 30 Accounts Receivable 110 7 500
Sales Revenue 400 7 500
(To record Sales revenue)

30 Rent Expense 510 7 500


Prepaid Rent 120 7 500
(To record expired rent )

30 Supplies Expense 530 4 500


Supplies 130 4 500
(To record supplies consumed)

30 Depreciation Expense – Equipment 520 6 000


Accumulated Depreciation – Equipment 151 6 000
(To record depreciation expense)

30 Salaries Expense 500 10 800


Salaries Payable 210 10 800
(To record accrued salaries)

30 Interest Expense 550 900


Interest Payable 220 900
(To record interest accrued)

30 Comm Revenue Received in Advance 230 6 600


Commission Revenue 410 6 600
(To record services provided for revenue)

© John Wiley and Sons Australia Ltd, 2016 3.33


Chapter 3: Accrual accounting concepts

(b)
Nathan Ltd
Statement of profit or loss
for the three months ended 30 September 2016

$ $
Revenues:
Sales revenue 85 200
Commission revenue 51 600
Total revenues 136 800
Expenses:
Salaries expense 65 100
Rent expense 22 500
Depreciation expense 6 000
Supplies expense 4 500
Electricity expense 5 250
Interest expense 900
Total expenses 104 250
Profit $32 550

Nathan Ltd
Calculation of retained earnings
for the three months ended 30 September 2016

Retained earnings, 1 July $ -


Add: Profit 32 550
32 550
Less: Dividends (3 000)
Retained earnings, 30 September $29 550

© John Wiley and Sons Australia Ltd, 2016 3.34


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

Nathan Ltd
Statement of financial position
as at 30 September 2016

$ $
Assets
Current assets
Cash 114 450
Accounts receivable 12 900
Prepaid Rent 15 000
Supplies 4 500
Total current assets 146 850
Non-current assets
Equipment 120 000
Less: Accumulated depreciation – equipment (6 000) 114 000
Total assets 260 850

Liabilities
Accounts payable 19 200
Salaries payable 10 800
Interest payable 900
Commission revenue received in advance 5 400
Bank loan* 90 000
Total liabilities 126 300
Net Assets $134 550
Equity
Share capital 105 000
Retained earnings 29 550
Total equity $134 550

* bank loan could also be classified as non-current

(c) The following accounts would be closed: Sales Revenue, Commission Revenue,
Salaries Expense, Rent Expense, Depreciation Expense, Supplies Expense, Electricity
Expense, Interest Expense, Dividends.

(d) 1 August 2016. Interest of 6% per year on loan $90 000 = $5 400. Monthly interest is
$450 ($5400/12) Since total interest expense is $900, the loan has been outstanding for
two months.

(e) Useful live-need to calculate the depreciation rate.


Three months depreciation was $6 000 or $24 000 annually.
Useful life = cost/annual depreciation = $120 000/$24 000= Five years

© John Wiley and Sons Australia Ltd, 2016 3.35


Chapter 3: Accrual accounting concepts

PROBLEM SET A 3.6


(a)
Characters Ltd
General Journal

Date Account name (narration) Post Ref Debit $ Credit $


2017
June 30 Insurance Expense 505 950
Prepaid Insurance 120 950
(To record expired insurance)

30 Supplies Expense 530 3 800


Supplies 130 3 800
(To record supplies consumed)

30 Depreciation Expense – Equipment 520 7 840


Accumulated Depreciation – Equipment 151 7 840
(To record depreciation expense)

30 Accounts Receivable 110 1 680


Revenue 400 1 680
(To record commission revenue not yet received)

30 Interest Expense 510 120


Interest Payable 220 120
(To record interest accrued)

30 Revenue Received in Advance 230 1 570


Revenue 400 1 570
(To record services provided for revenue)

30 Salaries Expense 500 1 400


Salaries Payable 240 1 400
(To record accrued salaries)

© John Wiley and Sons Australia Ltd, 2016 3.36


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

(b)
Characters Ltd
Statement of profit or loss
for the year ended 30 June 2017

$ $
:
Revenue 68 880
Expenses:
Salaries expense 12 600
Insurance expense 950
Interest expense 720
Depreciation expense 7 840
Supplies expense 3 800
Rent expense 4 480
Total expenses 30 390
Profit $38 490

Characters Ltd
Calculation of retained earnings
for the year ended 30 June 2017

Retained earnings, 1 July 2016 $6 160


Add: Profit 38 490
44 650
Less: Dividends (13 440)
Retained earnings, 30 June 2017 $31 210

© John Wiley and Sons Australia Ltd, 2016 3.37


Chapter 3: Accrual accounting concepts

Characters Ltd
Statement of financial position
as at 30 June 2017
$ $
Assets
Current assets
Cash 24 520
Accounts receivable 24 080
Supplies 5 600
Prepaid Insurance 2 800
Total current assets 57 000
Non-current assets
Equipment 67 200
Less: Accumulated depreciation (39 200)
Total non-current assets 28 000
Total assets 85 000
Liabilities
Current liabilities
Accounts payable 5 600
Salaries payable 1 400
Interest payable 120
Revenue received in advance 6 270
Total current liabilities 13 390
Non-current liabilities
Bank loan 18 000
Total liabilities 31 390
Net Assets $53 610
Equity
Share capital 22 400
Retained earnings 31 210
Total equity $53 610

(c) The following accounts would be closed: Revenue, Salaries Exp, Insurance Exp, Interest
Exp, Depreciation Exp, Supplies Exp, Rent Exp, and Dividends.

(d) The total interest expense for the six months is $720. So annually the interest is $1440.
Rate is $1 440 ÷ $18 000 = 8%.

(e) O/B? + exp$12 600 –Paid $13 400 = C/B $1 400


Opening balance 30 June 2016 = $2 200

(f) The effect on profit was to reduce profit by $10 860 ( $950+3800+7840 - 1680 +120 –
1570 + 1400).

© John Wiley and Sons Australia Ltd, 2016 3.38


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

(g) Information concerning the future forecast for the next year. What has been budgeted for
sales and expenses? Any new markets for the business? Who are the major
competitors? and what are the general economic conditions?

© John Wiley and Sons Australia Ltd, 2016 3.39


Chapter 3: Accrual accounting concepts

PROBLEM SET A 3.7


Smart Rentals Ltd
Worksheet as at 30 June 2017
(a)
Trial Balance Adjustments Adjusted Trial Statement of Statement of financial
Balance. profit or loss position
No. Account names Dr $ Cr $ Dr $ Cr $ Dr $ C $r Dr $ Cr $ Dr $ Cr $
100 Cash 15 000 15 000 15 000
112 Prepaid Insurance 10 800 2 700 1 8 100 8 100
113 Supplies 11 400 4 200 2 7 200 7 200
120 Land 90 000 90 000 90 000
122 Building 420 000 420 000 420 000
123 Acc’d Depn – Building 5 400 3 5 400 5 400
130 Furniture 100 800 100 800 100 800
131 Acc’d Depn –Furniture 4 500 3 4 500 4 500
200 Accounts Payable 28 200 28 200 28 200
212 Rent Rev Rec’d in Adv 21 600 9 000 5 12 600 12 600
214 Salaries Payable 1 800 6 1 800 1 800
215 Interest Payable 3 150 4 3 150 3 150
220 Mortgage Payable 210 000 210 000 210 000
300 Share Capital 360 000 360 000 360 000
400 Rent Revenue 55 200 9 000 5 64 200 64 200
505 Advertising Expense 3 000 3 000 3 000
506 Depreciation Expense 9 900 3 9 900 9 900
510 Electricity Expense 6 000 6 000 6 000
512 Insurance Expense 2 700 1 2 700 2 700
515 Interest Expense 3150 4 3 150 3 150
525 Salaries Expense 18 000 1 800 6 19 800 19 800
530 Supplies Expense 4 200 2 4 200 4 200
$675 000 $675 000 $30 750 $30 750 $689 850 $689 850
Profit 15 450 15 450
$64 200 $64 200 $641 100 $641 100

© John Wiley and Sons Australia Ltd, 2016 3.40


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

(b)
Smart Rentals Ltd
General Journal

Date Account name (narration) Post Ref Debit $ Credit $


2017
1 June 30 Insurance expense 512 2 700
Prepaid Insurance 112 2 700
(To record expired insurance)

2 30 Supplies Expense 530 4 200


Supplies 113 4 200
(To record supplies consumed)

3 30 Depreciation Expense 506 9 900


Accumulated Depreciation – Building 123 5 400
Accumulated Depreciation – Furniture 131 4 500
(To record depreciation expense for 3 months)

4 30 Interest Expense 512 3 150


Interest Payable 215 3 150
(To record interest accrued ($210,000 x6%)x3/12)

5 30 Rent Revenue Received in Advance 212 9 000


Rent Revenue 400 9 000
(To record June rent)

6 30 Salaries Expense 525 1 800


Salaries Payable 214 1 800
(To record accrued salaries)

© John Wiley and Sons Australia Ltd, 2016 3.41


Chapter 3: Accrual accounting concepts

(c) Smart Rentals Ltd General Ledger


Cash 100
30/6 Balance 15 000

Prepaid Insurance 112


30/6 Balance 10 800 30/6 Insurance Expense 2 700
30/6 Closing Balance 8 100
10 800 10 800
1/7 Opening Balance 8 100

Supplies 113
30/6 Balance 11 400 30/6 Supplies Expense 4 200
30/6 Closing Balance 7 200
11 400 11 400
1/7 Opening Balance 7 200

Land 120
30/6 Balance 90 000

Building 122
30/6 Balance 420 000

Accumulated Depreciation – Building 123


30/6 Depreciation Expense 5 400

Furniture 130
30/6 Balance 100 800

Accumulated Depreciation – Furniture 131


30/6 Depreciation Expense 4 500

Accounts Payable 200


30/6 Balance 28 200
Rent Revenue Received in Advance 212
30/6 Rent Revenue 9 000 30/6 Balance 21 600
30/6 Closing Balance 12 600
21 600 21 600
1/7 Opening Balance 12 600
© John Wiley and Sons Australia Ltd, 2016 3.42
Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

Salaries Payable 214


30/6 Salaries Expense 1 800

Interest Payable 215


30/6 Interest Expense 3 150

Mortgage Payable 220


30/6 Balance 210 000

Share Capital 300


30/6 Balance 360 000

Rent Revenue 400


30/6 Balance 55 200
30/6 Rent Revenue in Advance 9 000
64 200
Advertising Expense 505
30/6 Balance 3 000
Depreciation Expense 506
30/6 Accumulated Depreciation 9 900
Electricity Expense 510
30/6 Balance 6 000
512
Insurance Expense
30/6 Prepaid Insurance 2 700
515
Interest Expense
30/6 Interest Payable 3 150
525
Salaries Expense
30/6 Balance 18 000
30/6 Salaries Payable 1 800
19 800
Supplies Expense 530
30/6 Supplies 4 200

© John Wiley and Sons Australia Ltd, 2016 3.43


Chapter 3: Accrual accounting concepts

(d) Smart Rentals Ltd


Adjusted Trial Balance
as at 30 June 2017
No. Account names Debit $ Credit $
100 Cash 15 000
112 Prepaid Insurance 8 100
113 Supplies 7 200
120 Land 90 000
122 Building 420 000
123 Accumulated Depreciation – Building 5 400
130 Furniture 100 800
131 Accumulated Depreciation – Furniture 4 500
200 Accounts Payable 28 200
212 Rent Revenue Received in Advance 12 600
214 Salaries Payable 1 800
215 Interest Payable 3 150
220 Mortgage Payable 210 000
300 Share Capital 360 000
400 Rent Revenue 64 200
505 Advertising Expense 3 000
506 Depreciation Expense 9 900
510 Electricity Expense 6 000
512 Insurance Expense 2 700
515 Interest Expense 3 150
525 Salaries Expense 19 800
530 Supplies 4 200
$689 850 $689 850

© John Wiley and Sons Australia Ltd, 2016 3.44


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

(e)
Smart Rentals Ltd
Statement of profit or loss
for the three months ended 30 June 2017

$ $
Revenues:
Rent revenue 64 200
Expenses:
Advertising expense 3 000
Depreciation expense 9 900
Electricity expense 6 000
Insurance expense 2 700
Interest expense 3 150
Salaries expense 19 800
Supplies expense 4 200
Total expenses 48 750
Profit $ 15 450

Smart Rentals Ltd


Calculation of retained earnings
for the three months ended 30 June 2017

Retained earnings, 1 April $ -


Add: Profit 15 450
Retained earnings, 30 June 2017 $15 450

© John Wiley and Sons Australia Ltd, 2016 3.45


Chapter 3: Accrual accounting concepts

Smart Rentals Ltd


Statement of financial position
as at 30 June 2017

$ $
Assets
Current Assets
Cash 15 000
Prepaid Insurance 8 100
Supplies 7 200
Total current assets 30 300
Non-current assets
Land 90 000
Building 420 000
Less: Accumulated depreciation (5 400) 414 600
Furniture 100 800
Less: Accumulated depreciation (4 500) 96 300
Total non-current assets 600 900
Total assets 631 200

Liabilities
Current Liabilities
Accounts payable 28 200
Rent revenue received in advance 12 600
Salaries payable 1 800
Interest payable 3 150
Total current liabilities 45 750
Non-current Liabilities
Mortgage Payable 210 000
Total liabilities 255 750
Net Assets $375 450
Equity
Share capital 360 000
Retained earnings 15 450
Total equity $375 450

(f) The following accounts would be closed: Rent Revenue, Advertising expense,
Depreciation Expense, Electricity Expense, Insurance Expense, Interest Expense,
Salaries Expense, Supplies Expense.

© John Wiley and Sons Australia Ltd, 2016 3.46


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

PROBLEM SET A 3.8


(a)
Central Cleaning Ltd
General Journal
Date Account name (narration) Post Debit $ Credit $
Ref
2016
July 1 Cash 100 60 000
Share Capital 300 60 000
(Issued shares for cash)

1 Truck 170 48 000


Cash 100 15 000
Accounts Payable 200 33 000
(Purchased truck)

3 Cleaning Supplies 120 3 600


Accounts Payable 200 3 600
(Purchased cleaning supplies)

5 Prepaid Insurance 130 14 400


Cash 100 14 400
(Paid insurance annual policy July 1)

12 Accounts Receivable 110 15 720


Service Revenue 400 15 720
(Invoiced customers)

18 Accounts Payable 200 11 400


Cash 100 11 400
(Paid accounts payable)

20 Salaries Expense 540 9 600


Cash 100 9 600
(Paid salaries)

21 Cash 100 12 000


Accounts Receivable 110 12 000
(Collected cash from customers on account)

25 Accounts Receivable 110 10 800


Service Revenue 400 10 800
(Invoiced customers)
31 Petrol & Oil Expense 500 1 200
Cash 100 1 200
(Paid for petrol and oil)
31 Dividends 315 2 250
Cash 100 2 250
(Paid cash dividend)

© John Wiley and Sons Australia Ltd, 2016 3.47


Chapter 3: Accrual accounting concepts

(b), (e) & (h)

Cash 100
1/7 Share Capital 60 000 1/7 Motor Vehicles 15 000
21/7 Accounts Receivable 12 000 5/7 Prepaid Insurance 14 400
18/7 Accounts Payable 11 400
20/7 Salaries Expense 9 600
31/7 Petrol & Oil 1 200
Expense
31/7 Dividends 2 250
31/7 Closing Balance 18 150
72 000 72 000
1/8 Opening Balance 18 150

Accounts Receivable 110


12/7 Service Revenue 15 720 21/7 Cash 12 000
25/7 Service Revenue 10 800
31/7 Service Revenue* 6 000 31/7 Closing Balance 20 520
32 520 32 520
1/8 Opening Balance 20 520
* (e) adjusting entry, balance was $14520 dr before adjusting entry

Cleaning Supplies 120


3/7 Accounts Payable 3 600 31/7 Cleaning Supplies Expense* 2 400
31/7 Closing Balance 1 200
3 600 3 600
1/8 Opening Balance 1 200
* (e) adjusting entry, balance was $3600 dr before adjusting entry

Prepaid Insurance 130


5/7 Cash 14 400 31/7 Insurance Expense* 1 200
31/7 Closing Balance 13 200
14 400 14 400
1/8 Opening Balance 13 200
* (e) adjusting entry, balance was $14 400 dr before adjusting entry

Truck 170
1/7 Cash/Accounts 48 000
Payable

Accumulated Depreciation – Trucks 171


31/7 Depreciation Expense* 750
* (e) adjusting entry, nil balance before adjusting entry

© John Wiley and Sons Australia Ltd, 2016 3.48


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

Accounts Payable 200


18/7 Cash 11 400 1/7 Motor Vehicles 33 000
31/7 Closing Balance 25 200 3/7 Cleaning Supplies 3 600
36 600 36 600
1/8 Opening Balance 25 200

Salaries Payable 210


31/7 Salaries Expense* 900

* (e) adjusting entry, nil balance before adjusting entry

Share Capital 300


1/7 Cash 60 000

Retained Earnings 310


31/7 Dividends 2 250 31/7 Profit or loss summary 16 470
31/7 Closing Balance 14 220
16 470 16 470
1/8 Opening Balance 14 220

Dividends 315
31/7 Cash 2 250 31/7 Retained Earnings 2 250

Profit or loss summary 320


31/7 Expenses 16 050 31/7 Revenue 32 520
31/7 Retained Earnings 16 470
35 520 35 520
Entries to this account are closing entries. It has a nil balance before and after closing entries
because the balance, profit, is closed to retained earnings,

Service Revenue 400


31/7 Profit or loss summary 32 520 12/7 Accounts Receivable 15 720
25/7 Accounts Receivable 10 800
31/7 Accounts Rec’ble* 6 000
32 520 32 520
* (e) Adjusting entry,$26 520 cr balance before adjusting entry, $32 520 cr after adjustment,
before closing

Petrol & Oil Expense 500


31/7 Cash 1 200 31/7 Profit or loss summary 1 200

© John Wiley and Sons Australia Ltd, 2016 3.49


Chapter 3: Accrual accounting concepts

Cleaning Supplies Expense 510


31/7 Cleaning Supplies* 2 400 31/7 Profit or loss summary 2 400

* (e) Adjusting entry, nil balance before adjusting entry, $2400 dr after adjustment, before
closing

6
Depreciation Expense 520
31/7 Accumulated Depreciation* 750 31/7 Profit or loss summary 750

* (e) adjusting entry, nil balance before adjusting entry

Insurance Expense 530


31/7 Prepaid Insurance* 1 200 31/7 Profit or loss summary 1 200

* (e) Adjusting entry, nil balance before adjusting entry, $1200 dr after adjustment, before
closing

Salaries Expense 540


20/7 Cash 9 600 31/7 Profit or loss summary 10 500
31/7 Salaries Payable* 900
10 500 10 500
* (e) adjusting entry, $9600 dr balance before adjusting entry, $10 500 dr after adjusting entry
before closing.

© John Wiley and Sons Australia Ltd, 2016 3.50


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

(c) & (f)


Central Cleaning Ltd
Trial Balance
as at 31 July 2016
(c) Unadjusted (f) Adjusted
No. Account name Debit $ Credit $ Debit $ Credit $
100 Cash 18 150 18 150
110 Accounts Receivable 14 520 20 520
120 Cleaning Supplies 3 600 1 200
130 Prepaid Insurance 14 400 13 200
170 Trucks 48 000 48 000
171 Accumulated Depreciation – Trucks 750
200 Accounts Payable 25 200 25 200
210 Salaries Payable 900
300 Share Capital 60 000 60 000
310 Dividends 2 250 2 250
400 Service Revenue 26 520 32 520
500 Petrol & Oil Expense 1 200 1 200
510 Cleaning Supplies Expense 2 400
520 Depreciation Expense 750
530 Insurance Expense 1 200
540 Salaries Expense 9 600 10 500
$111 720 $111 720 $119 370 $119 370

(d) Central Cleaning Ltd


General Journal
Date Account name (narration) Post Ref. Debit $ Credit $
1. July 31 Accounts Receivable 110 6 000
Service Revenue 400 6 000
(Accrued revenue)
2. 31 Depreciation Expense 520 750
Accumulated Depreciation 172 750
(Depreciation expense)
3. 31 Insurance Expense 530 1 200
Prepaid Insurance 130 1 200
(Prepaid insurance expired)
4. 31 Cleaning Supplies Expense 510 2 400
Cleaning Supplies 120 2 400
(Supplies used)
5. 31 Salaries Expense 540 900
Salaries Payable 210 900
(Accrued salaries)

© John Wiley and Sons Australia Ltd, 2016 3.51


Chapter 3: Accrual accounting concepts

(g)
Central Cleaning Ltd
Statement of profit or loss
for the month ended 31 July 2016
$ $
Revenues:
Service revenue 32 520
Expenses:
Salaries expense 10 500
Cleaning supplies expense 2 400
Depreciation expense 750
Petrol & Oil expense 1 200
Insurance expense 1 200
Total expenses 16 050
Profit $16 470

Central Cleaning Ltd


Calculation of retained earnings
for the month ended 31 July 2016

Retained earnings 1 July $ -


Add: Profit 16 470
16 470
Less: Dividends (2 250)
Retained earnings 31 July $14 220

© John Wiley and Sons Australia Ltd, 2016 3.52


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

Central Cleaning Ltd


Statement of financial position
as at 31 July 2016
$ $
ASSETS
Current assets
Cash 18 150
Accounts receivable 20 520
Cleaning supplies 1 200
Prepaid insurance 13 200
Total current assets 53 070
Non-current assets
Property, plant and equipment:
Motor Vehicles 48 000
Less: Accumulated depreciation (750)
Total non-current assets 47 250
Total assets 100 320
LIABILITIES
Current liabilities
Accounts payable 25 200
Salaries payable 900
Total liabilities 26 100
NET ASSETS $74 220
EQUITY
Share capital 60 000
Retained earnings 14 220
TOTAL EQUITY $74 220

© John Wiley and Sons Australia Ltd, 2016 3.53


Chapter 3: Accrual accounting concepts

(h) Central Cleaning Ltd


General Journal

Date Account name (narration) Post Debit $ Credit $


Ref
July 31 Service Revenue 400 32 520
Profit or loss summary 320 32 520
(Close revenue accounts)

31 Profit or loss summary 320 16 050


Petrol & Oil Expense 500 1 200
Cleaning Supplies Expense 510 2 400
Depreciation Expense 520 750
Insurance Expense 530 1 200
Salaries Expense 540 10 500
(Close expense accounts)

31 Profit or loss summary 320 16 470


Retained Earnings 310 16 470
(Close Profit or loss summary account)

31 Retained Earnings 310 2 250


Dividends 315 2 250
(Close dividends account)

(i)
Central Cleaning Ltd
Post-Closing Trial Balance
as at 31 July 2016
No. Account name Debit $ Credit $
100 Cash 18 150
110 Accounts Receivable 20 520
120 Cleaning Supplies 1 200
130 Prepaid Insurance 13 200
170 Trucks 48 000
171 Accumulated Depreciation – Trucks 750
200 Accounts Payable 25 200
210 Salaries Payable 900
300 Share Capital 60 000
310 Retained Earnings 14 220
$101 070 $101 070

© John Wiley and Sons Australia Ltd, 2016 3.54


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

(j) Today’s society is aware of their social responsibility and as such business’s can only
operate successfully if they meet society’s expectations and as such are willing to take
actions which is socially responsible. This means using environmentally friendly
resources even though it may not be the cheapest. Triple bottom line reporting means
measuring success not only the economic return but also the environment and the social
dimensions.

© John Wiley and Sons Australia Ltd, 2016 3.55


Chapter 3: Accrual accounting concepts

PROBLEM SET A 3.9

(a) Chart of accounts: students may have different account numbers as long as they are
grouped to sections of the ledger.

100 Cash
110 Accounts receivable
120 Supplies
130 Prepaid rent
150 Store equipment
151 Accumulated Depreciation
200 Accounts Payable
210 Service Revenue Received in Advance
215 Salaries Payable
300 Share Capital
310 Retained earnings
400 Service Revenue
510 Depreciation Expense
515 Supplies Expense
520 Salaries Expense
525 Rent Expense

(b), (d) and (f)


Bulwara Ltd
General Ledger

Cash 100
1/7 Opening Balance 5 000 8/7 Salaries Expense/Payable 3 000
10/7 Accounts Receivable 2 000 24/7 Accounts Payable 2 000
12/7 Service Revenue 800 24/7 Rent Expense/prepaid 800
27/7 Revenue Rec’d in Advance 1 300 25/7 Salaries Expense 3 000
31/7 Closing Balance 300
9 100 9 100
1/8 Opening Balance 300

Accounts Receivable 110


1/7 Opening Balance 5 600 10/7 Cash 2 000
27/7 Service Revenue 2 300 31/7 Closing Balance 5 900
7 900 7 900
1/8 Opening Balance 5 900

© John Wiley and Sons Australia Ltd, 2016 3.56


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

Supplies 120
1/7 Opening Balance 2 000 31/7 Supplies Expense 2 200
17/7 Accounts Payable 3 400 31/7 Closing Balance 3 200
5 400 5 400
1/8 Opening Balance 3 200
Balance before adjusting entry $2000 + $3400 = $5400
Prepaid rent 130
24/7 Cash 400

Store Equipment 150


1/7 Opening Balance 20 000 31/7 Closing Balance 28 000
15/7 Accounts Payable 8 000
28 000 28 000
1/8 Opening Balance 28 000

Accumulated Depreciation – Store Equipment 151


31/7 Closing Balance 1/7 Opening Balance 1 000
31/7 Depreciation Expense 240
1 240 1 240
1/8 Opening Balance 1 240
Balance before adjusting entry $1000

Accounts Payable 200


24/7 Cash 2 000 1/7 Opening Balance 4 200
15/7 Store Equipment 8 000
31/7 Closing Balance 13 600 17/7 Supplies 3 400
15 600 15 600
1/8 Opening Balance 13 600

Service Revenue Received in Advance 210


31/7 Service Revenue 600 1/7 Opening Balance 800
31/7 Closing Balance 1 500 27/7 Cash 1 300
3 100 3 100
1/8 Opening Balance 1 500
Balance before adjusting entry $800 + $1300 = $2100

© John Wiley and Sons Australia Ltd, 2016 3.57


Chapter 3: Accrual accounting concepts

Salaries Payable 215


8/7 Cash 1 000 1/7 Opening Balance 1 000
31/7 Closing Balance 1 000 31/7 Salaries Expense 1 000
1 000 1 000
1/8 Opening Balance 1 000
Balance before adjusting entry, $1000 - $100 = $0
Share Capital 300
1/7 Opening Balance 20 000

Retained Earnings 310


1/7 Opening Balance 5 600

Service Revenue 400


12/7 Cash 800
27/7 Accounts Receivable 2 300
31/7 Service Revenue in Advance 600
3 700
Balance before adjusting entry $800+ $2300 = $3100

Depreciation Expense 510


31/7 Accumulated Depreciation 240
Nil balance before adjusting entry

Supplies Expense 515


31/7 Supplies 2 200
Nil balance before adjusting entry
Salaries Expense 520
8/7 Cash 2 000
25/7 Cash 3 000
31/7 Salaries Payable 1 000
6 000
Balance before adjusting entry $2000 + $3000 = $5000

Rent Expense 525


24/7 Cash 400

© John Wiley and Sons Australia Ltd, 2016 3.58


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

(c) Bulwara Ltd General Journal


Date Account name (narration) Post Debit $ Credit $
Ref
2016
July 8 Salaries Payable 215 1 000
Salaries Expense 520 2 000
Cash 100 3 000
(Payment of salaries for June and July)

10 Cash 100 2 000


Accounts Receivable 110 2 000
(Cash received from customers on account)

12 Cash 100 800


Service Revenue 400 800
(To record service revenue)

15 Store Equipment 150 8 000


Accounts Payable 8 000
(Purchased store equipment on account)

17 Supplies 120 3 400


Accounts Payable 200 3 400
(Purchased supplies on account)

24 Accounts Payable 200 2 000


Cash 100 2 000
(Paid creditors on account)

24 Rent Expense 525 400


Prepaid rent 130 400
Cash 100 800
(Paid July/August rent)

25 Salaries Expense 520 3 000


Cash 100 3 000
(Paid salaries)

July 27 Accounts Receivable 110 2 300


Service Revenue 400 2 300
(To record service revenue)

27 Cash 100 1 300


Service Revenue Received in Advance 210 1 300
(Received cash from customers in advance)

© John Wiley and Sons Australia Ltd, 2016 3.59


Chapter 3: Accrual accounting concepts

(e) and (g)


Bulwara Ltd
Trial Balance
as at 31 July 2016

Unadjusted Adjusted
No Account names Debit $ Credit $ Debit $ Credit4
100 Cash 300 300
110 Accounts Receivable 5 900 5 900
120 Supplies 5 400 3 200
130 Prepaid Rent 400 400
150 Store Equipment 28 000 28 000
151 Accumulated Depreciation 1 000 1 240
200 Accounts Payable 13 600 13 600
210 Service Revenue Received in Advance 2 100 1 500
215 Salaries Payable 1 000
300 Share Capital 20 000 20 000
310 Retained Earnings 5 600 5 600
400 Service Revenue 3 100 3 700
510 Depreciation Expense 240
515 Supplies Expense 2 200
520 Salaries Expense 5 000 6 000
525 Rent Expense 400 400
$45 400 $45 400 $46 640 $46 640

© John Wiley and Sons Australia Ltd, 2016 3.60


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

(f) Bulwara Ltd


General Journal

Date Account names (narration) Post Debit Credit


Ref $ $
1. July 31 Supplies Expense 515 2 200
Store Supplies ($5400 - $3200) 120 2 200
(To record supplies used)

2. 31 Salaries Expense 520 1 000


Salaries Payable 215 1 000
(To record accrued salaries)

3. 31 Depreciation Expense 510 240


Accumulated Depr. – Store Equipment 151 240
(To record one month’s depreciation expense)

4. 30 Service Revenue Received in Advance 210 600


Service Revenue 400 600
(To record revenue)

(h)
Bulwara Ltd
Statement of profit or loss
for the month ended 31 July 2016

Revenues: $ $
Service revenue 3 700
Expenses:
Salaries expense 6 000
Supplies expense 2 200
Rent expense 400
Depreciation expense 240
Total expenses 8 840
Loss ($5 140)

Bulwara Ltd
Calculation of retained earnings
for the month ended 31 July 2016
$
Retained earnings 1 July 5 600
Less: Loss (5140)
Retained earnings 31 July $ 460

© John Wiley and Sons Australia Ltd, 2016 3.61


Chapter 3: Accrual accounting concepts

Bulwara Ltd
Statement of financial position
as at 31 July 2016
$ $
ASSETS
Current Assets
Cash 300
Accounts receivable 5 900
Supplies 3 200
Prepaid Rent 400
Total current assets 9 800
Non-current assets
Store equipment 28 000
Less: Accumulated depreciation (1 240)
Total non-current assets 26 760
Total assets 36 560

LIABILITIES
Accounts payable 13 600
Salaries payable 1 000
Service revenue received in advance 1 500
Total liabilities 16 100

NET ASSETS $20 460


EQUITY
Share capital 20 000
Retained earnings 460
TOTAL EQUITY $20 460

© John Wiley and Sons Australia Ltd, 2016 3.62


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

PROBLEM SET A 3.9 (i)


Bulwara Ltd
Worksheet as at 31 July 2016
.
Trial Balance Adjustments Adjusted Statement of profit Statement of Financial
Trial Balance. or loss Position
No. Account names Dr $ Cr $ Dr $ Cr $ Dr $ Cr $ Dr $ Cr $ Dr $ Cr $
100 Cash 300 300 300
110 Accounts 5 900 5 900 5 900
receivable
120 Supplies 5 400 2 200 3 200 3 200
130 Prepaid rent 400 400 400
150 Store equipment 28 000 28 000 28 000
151 Accumulated 1 000 240 1 240 1 240
Depreciation
200 Accounts Payable 13 600 13 600 13 600
210 Service Rev Rec’d 2 100 600 1 500 1 500
in Advance
215 Salaries Payable 1 000 1 000 1 000
300 Share Capital 20 000 20 000 20 000
310 Retained earnings 5 600 5 600 5 600
400 Service Revenue 3 100 600 3 700 3 700
510 Depreciation Exp 240 240 240
515 Supplies Expense 2 200 2 200 2 200
520 Salaries Expense 5 000 1 000 6 000 6 000
525 Rent Expense 400 400 400

Loss 5 140 5 140


_______ _______ _______ _______ _______ _______ ______ ______ _______ ______
Totals $45 400 $45 400 $4 040 $4 040 $46 640 $46 640 $8 840 $8 840 $42 940 $42 940

© John Wiley and Sons Australia Ltd, 2016 3.63


Chapter 3: Accrual accounting concepts

PROBLEM SET A 3.10


(a) Willard Cleaning Ltd
General Journal
Date Account name (narration) Post Debit $ Credit $
Ref.
2017
April 1 Cash 100 37 500
Share Capital 300 37 500
(Issued shares for cash)

1 Motor Vehicles 171 22 500


Cash 100 12 500
Accounts Payable 200 10 000
(Purchased truck)

5 Cleaning Supplies 120 4 875


Accounts Payable 200 4 875
(Purchased cleaning supplies)

7 Prepaid Insurance 130 5 820


Cash 100 5 820
(Paid insurance annual policy July 1)

14 Accounts Receivable 110 6 850


Service Revenue 400 6 850
(Invoiced customers)

21 Accounts Payable 200 12 125


Cash 100 12 125
(Paid accounts payable)

21 Salaries Expense 540 3 400


Cash 100 3 400
(Paid salaries)

23 Cash 100 2 750


Accounts Receivable 110 2 750
(Collected cash from customers on account)

25 Accounts Receivable 110 5 975


Service Revenue 400 5 975
(Invoiced customers)

30 Petrol & Oil Expense 500 432


Cash 100 432
(Paid for petrol and oil)
30 Dividends 315 600
Cash 100 600
(Paid cash dividend)
© John Wiley and Sons Australia Ltd, 2016 3.64
Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

(b), (e) & (h)


Willard Cleaning Ltd General Ledger

Cash 100
1/4 Share Capital 37 500 1/4 Motor Vehicles 12 500
23/4 Accounts Receivable 2 750 7/4 Prepaid Insurance 5 820
21/4 Accounts Payable 12 125
21/4 Salaries Expense 3 400
30/4 Petrol & Oil Exp 432
30/4 Dividends 600
30/4 Closing Balance 5 373
40 250 40 250
1/5 Opening Balance 5 373

Accounts Receivable 110


14/4 Service Revenue 6 850 23/4 Cash 2 750
25/4 Service Revenue 5 975
30/4 Service Revenue* 1 150 30/4 Closing Balance 11 225
13 975 13 975
1/8 Opening Balance 11 225
* (e) adjusting entry, balance was $10 075 dr before adjusting entry

Cleaning Supplies 120


5/4 Accounts Payable 4 875 30/4 Cleaning Supplies Exp* 4 125
30/4 Closing Balance 750
4 875 4 875
1/8 Opening Balance 750
* (e) adjusting entry, balance was $4 875 dr before adjusting entry

Prepaid Insurance 130


7/4 Cash 5 820 30/4 Insurance Expense* 485
30/4 Closing Balance 5 335
5 820 5 820
1/8 Opening Balance 5 335
* (e) adjusting entry, balance was $5 820 dr before adjusting entry

Motor vehicle 171


1/4 Cash/Accounts 22 500
Payable

Accumulated Depreciation – Trucks 172


30/4 Depreciation Expense* 375
* (e) adjusting entry, nil balance before adjusting entry

© John Wiley and Sons Australia Ltd, 2016 3.65


Chapter 3: Accrual accounting concepts

Accounts Payable 200


21/4 Cash 12 125 1/4 Motor Vehicles 10 000
30/4 Closing Balance 2 750 5/4 Cleaning Supplies 4 875
14 875 14 875
1/8 Opening Balance 2 750

Salaries Payable 210


30/4 Salaries Expense* 1 200

* (e) adjusting entry, nil balance before adjusting entry

Share Capital 300


1/4 Cash 37 500

Retained Earnings 310


30/4 Dividends 600 30/4 Profit or loss summary 3 958
30/4 Closing Balance 3 358
3 958 3 958
1/8 Opening Balance 3 358

Dividends 315
30/4 Cash 600 30/4 Retained Earnings 600

Profit or loss summary 320


30/4 Expenses 10 017 30/4 Revenue 13 975
30/4 Retained Earnings 3 958
13 975 13 975
Entries to this account are closing entries. It has a nil balance before and after closing entries
because the balance, profit, is closed to retained earnings,

Service Revenue 400


30/4 Profit or loss summary 13 975 14/4 Accounts Receivable 6 850
25/4 Accounts Receivable 5 975
30/4 Accounts Rec’ble* 1 150
13 975 13 975
* (e) Adjusting entry,$12825 cr balance before adjusting entry, $13975 cr after adjustment,
before closing

Petrol & Oil Expense 500


30/4 Cash 432 30/4 Profit or loss summary 432

© John Wiley and Sons Australia Ltd, 2016 3.66


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

Cleaning Supplies Expense 510


30/4 Cleaning Supplies* 4 125 30/4 Profit or loss summary 4 125

* (e) Adjusting entry, nil balance before adjusting entry, $4 125 dr after adjustment, before
closing

Depreciation Expense 520


30/4 Accumulated Depreciation* 375 30/4 Profit or loss summary 375

* (e) adjusting entry, nil balance before adjusting entry

Insurance Expense 530


30/4 Prepaid Insurance* 4850 30/4 Profit or loss summary 485

* (e) Adjusting entry, nil balance before adjusting entry, $485 dr after adjustment, before closing

Salaries Expense 540


21/4 Cash 3 400 30/4 Profit or loss summary 4 600
30/4 Salaries Payable* 1 200
4 600 4 600
* (e) adjusting entry, $3400 dr balance before adjusting entry, $4600 dr after adjusting entry
before closing.

© John Wiley and Sons Australia Ltd, 2016 3.67


Chapter 3: Accrual accounting concepts

(c) & (f)


Willard Cleaning Ltd
Trial Balance
as at 30 April 2017
(c) Unadjusted (f) Adjusted
No. Account name Debit $ Credit $ Debit $ Credit $
100 Cash 5 373 5 373
110 Accounts Receivable 10 075 11 225
120 Cleaning Supplies 4 875 750
130 Prepaid Insurance 5 820 5 335
171 Motor Vehicles 22 500 22 500
172 Accumulated Depreciation – Motor 375
vehicles
200 Accounts Payable 2 750 2 750
210 Salaries Payable 1 200
300 Share Capital 37 500 37 500
310 Dividends 600 600
400 Service Revenue 12 825 13 975
500 Petrol & Oil Expense 432 432
510 Cleaning Supplies Expense 4 125
520 Depreciation Expense 375
530 Insurance Expense 485
540 Salaries Expense 3 400 4 600
$53 075 $53 075 $55 800 $55 800

© John Wiley and Sons Australia Ltd, 2016 3.68


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

(d) Willard Cleaning Ltd


General Journal
Date Account name (narration) Post ref. Debit $ Credit $
1. April 30 Accounts Receivable 110 1 150
Service Revenue 400 1 150
(Accrued revenue)
2. 30 Depreciation Expense 520 375
Accumulated Depreciation 172 375
(Depreciation expense)
3. 30 Insurance Expense 530 485
Prepaid Insurance 130 485
(Prepaid insurance expired)
4. 30 Cleaning Supplies Expense 510 4 125
Cleaning Supplies 120 4 125
(Supplies used)
5. 30 Salaries Expense 540 1 200
Salaries Payable 210 1 200
(Accrued salaries)

© John Wiley and Sons Australia Ltd, 2016 3.69


Chapter 3: Accrual accounting concepts

(g)
Willard Cleaning Ltd
Statement of profit or loss
for the month ended 30 April 2017
$ $
Revenues:
Service revenue 13 975
Expenses:
Salaries expense 4 600
Cleaning supplies expense 4 125
Depreciation expense 375
Petrol & Oil expense 432
Insurance expense 485
Total expenses 10 017
Profit $3 958

Willard Cleaning Ltd


Calculation of retained earnings
for the month ended 30 April 2017

Retained earnings 1 April $ -


Add: Profit 3 958
3 958
Less: Dividends ( 600)
Retained earnings 30 April $3 358

© John Wiley and Sons Australia Ltd, 2016 3.70


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

Willard Cleaning Ltd


Statement of financial position
as at 30 April 2017

$ $
ASSETS
Current assets
Cash 5 373
Accounts receivable 11 225
Cleaning supplies 750
Prepaid insurance 5 335
Total current assets 22 683
Non-current assets
Motor Vehicles 22 500
Less: Accumulated depreciation (375)
Total non-current assets 22 125
Total assets 44 808
LIABILITIES
Current liabilities
Accounts payable 2 750
Salaries payable 1 200
Total liabilities 3 950
NET ASSETS $40 858
EQUITY
Share capital 37 500
Retained earnings 3 358
TOTAL EQUITY $40 858

© John Wiley and Sons Australia Ltd, 2016 3.71


Chapter 3: Accrual accounting concepts

(h) Willard Cleaning Ltd


General Journal

Date Account name (narration) Post Debit $ Credit $


Ref
July 31 Service Revenue 400 13 975
Profit or loss summary 320 13 975
(Close revenue accounts)

31 Profit or loss summary 320 10 017


Petrol & Oil Expense 500 432
Cleaning Supplies Expense 510 4 125
Depreciation Expense 520 375
Insurance Expense 530 485
Salaries Expense 540 4 600
(Close expense accounts)

31 Profit or loss summary 320 3 958


Retained Earnings 310 3 958
(Close Profit or loss summary account)

31 Retained Earnings 310 600


Dividends 315 600
(Close dividends account)

(i)
Willard Cleaning Ltd
Post-Closing Trial Balance
as at 30 April 2017
No. Account name Debit $ Credit $
100 Cash 5 373
110 Accounts Receivable 11 225
120 Cleaning Supplies 750
130 Prepaid Insurance 5 335
171 Motor vehicles 22 500
172 Accumulated Depreciation – MV 375
200 Accounts Payable 2 750
210 Salaries Payable 1 200
300 Share Capital 37 500
310 Retained Earnings 3 358
$45 183 $45 183

© John Wiley and Sons Australia Ltd, 2016 3.72


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

PROBLEM SET A 3.10 (j)


Willard Cleaning Ltd
Worksheet as at 30 April 2017
Prepare +adjusting entries and adjusted trial balance using a worksheet.
Trial Balance Adjustments Adjusted Statement of Statement of
Trial Balance. profit or loss Financial Position
No. Account names Dr $ Cr $ Dr $ Cr $ Dr $ Cr $ Dr $ Cr $ Dr $ Cr $
100 Cash 5 373 5 373 5 373
110 Accounts receivable 10 075 1 150 11 225 11 225
120 Cleaning Supplies 4 875 4 125 750 750
130 Prepaid insurance 5 820 485 5 335 5 335
171 Motor vehicles 22 500 22 500 22 500
172 Accumulated Depreciation 375 375 375
200 Accounts Payable 2 750 2 750 2 750
210 Salaries Payable 1 200 1 200 1 200
300 Share Capital 37 500 37 500 37 500
310 Retained earnings
315 Dividends 600 600 600
320 Profit or loss summary
400 Service Revenue 12 825 1 150 13 975 13 975
500 Petrol & oil expense 432 432 432
510 Cleaning Supplies Expense 4 125 4 125 4 125
520 Depreciation Expense 375 375 375
530 Insurance Expense 485 485 485
540 Salaries Expense 3 400 1 200 4 600 4 600

Profit 3 958 3 958

Totals $53 075 $53 075 $7 335 $7 335 $55 800 $55 800 $13 975 $13 975 $45 783 $45 783

© John Wiley and Sons Australia Ltd, 2016 3.73


Chapter 3: Accrual accounting concepts

SOLUTIONS TO PROBLEM
SET B

PROBLEM SET B 3.1


(a).
Solo Ltd
General Journal
Post $ $
Date Account name (narration) Ref. Debit Credit
2016
1. June 30 Supplies Expense 505 700
Supplies ($2000 - $1300) 113 700
(To adjust supplies account to reflect supplies
used)

2. 30 Electricity Expense 530 150


Electricity Payable 218 150
(Accrued electricity)

3. 30 Insurance Expense 515 200


Prepaid Insurance 112 200
(Prepaid insurance ($2400 ÷ 12 months)

4. 30 Service Revenue Received in Advance 213 2 500


Service Revenue 400 2 500
(Services performed in relation to revenue received
in advance)

5. 30 Salaries Expense 500 1 500


Salaries Payable 215 1 500
(Accrued salaries)

6. 30 Depreciation Expense 520 250


Accumulated Depreciation – Office 131 250
Equipment ($15,000 ÷ 60 months)
(Record depreciation expense for month)

7. 30 Service revenue Receivable 104 3 000


Service Revenue 400 3 000
(Accrued revenue)

© John Wiley and Sons Australia Ltd, 2016 3.74


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

(b) General Ledger Solo Ltd


Cash 100
30/6 Balance 7 750

Accounts Receivable 104


30/6 Balance 6 000 30/6 Balance 9 000
30/6 Service Revenue 3 000
9 000 9 000
1/7 Opening Balance 9 000

Prepaid Insurance 112


30/6 Balance 2 400 30/6 Insurance Expense 200
30/6 Closing Balance 2 200
2 400 2 400
1/7 Opening Balance 2 200

Supplies 113
30/6 Balance 2 000 30/6 Supplies Expense 700
30/6 Closing Balance 1 300
2 000 2 000
1/7 Opening Balance 1 300

Office Equipment 130


30/6 Balance 15 000

Accumulated Depreciation – Office Equipment 131


30/6 Depreciation Expense 250

Accounts Payable 200


30/6 Balance 4 500

Service Revenue Received in Advance 213


30/6 Service Revenue 2 500 30/6 Balance 4 000
30/6 Closing Balance 1 500
4 000 4 000
1/7 Opening Balance 1 500

Salaries Payable 215


30/6 Salaries Expense 1 500

© John Wiley and Sons Australia Ltd, 2016 3.75


Chapter 3: Accrual accounting concepts

Electricity Payable 218


30/6 Electricity Expense 150

Share Capital 300


30/6 Balance 21 750

Service Revenue 400


30/6 Balance 7 900
30/6 Accounts Receivable 3 000
30/6 Service Revenue in Advance 2 500
13 400

Salaries Expense 500


30/6 Balance 4 000
30/6 Salaries Payable 1 500
5 500

Supplies Expense 505


30/6 Supplies 700

Rent Expense 510


30/6 Balance 1 000

Insurance Expense 515


30/6 Prepaid Insurance 200

Depreciation Expense 520


30/6 Accumulated Depreciation 250

Electricity Expense 530


30/6 Electricity Expense 150

© John Wiley and Sons Australia Ltd, 2016 3.76


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

(c)
Solo Ltd
Adjusted Trial Balance
as at 30 June 2016

No. Account name Debit Credit


$ $
100 Cash 7 750
104 Accounts Receivable 9 000
112 Prepaid Insurance 2 200
113 Supplies 1 300
130 Office Equipment 15 000
131 Accumulated Depreciation – Office Equipment 250
200 Accounts Payable 4 500
213 Service Revenue Received in Advance 1 500
215 Salaries Payable 1 500
218 Electricity Payable 150
300 Share Capital 21 750
400 Service Revenue 13 400
500 Salaries Expense 5 500
505 Supplies Expense 700
510 Rent Expense 1 000
515 Insurance Expense 200
520 Depreciation Expense 250
530 Electricity Expense 150
$43 050 $43 050

(d) Profit for the month


Revenues $13 400 less expenses ($5500 +$700 +$10500+ $200+ $250 + $150) =
$5 600

(e) If the cost of the equipment was allocated over the two years then the annual
depreciation expense would be $7 500 ($15000/2) instead of $3 000 which means
profit in the first 2 years would be $4 500 ($7500-$3000 ) less than if the depreciation
was charged over the useful life and this would mean the profit in year 3 4 and 5
would be $4 500 more as no depreciation would be charged.
Note over the 5 years total depreciation is the same is $15 000 either rate used.

© John Wiley and Sons Australia Ltd, 2016 3.77


Chapter 3: Accrual accounting concepts

PROBLEM SET B 3.2


(a).
Brothers Ltd
General Journal
Post $ $
Date Account name (narration) Ref. Debit Credit
2016
1. June 30 Supplies Expense 505 1 860
Supplies ($2350 - $490) 113 1 860
(To adjust supplies account to reflect supplies
used)

2. 30 Electricity Expense 530 110


Electricity Payable 218 110
(Accrued electricity)

3. 30 Insurance Expense 515 1 050


Prepaid Insurance 112 1 050
(Prepaid insurance( ($2520 ÷ 12 months)x 5
months))

4. 30 Service Revenue Received in Advance 213 800


Service Revenue 400 800
(Services performed in relation to revenue
received in advance)

5. 30 Salaries Expense 500 770


Salaries Payable 215 770
(Accrued salaries)

6. 30 Depreciation Expense 520 1 875


Accumulated Depreciation – Office 131 1 875
Equipment ($22500 ÷ 60 months x 5)
(Record depreciation expense)

7. 30 Accounts Receivable 104 1 500


Service Revenue 400 1 500
(Accrued revenue)

© John Wiley and Sons Australia Ltd, 2016 3.78


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

(b) Brothers Ltd General Ledger

Cash 100
30/6 Balance 9 480

Accounts Receivable 104


30/6 Balance 3 150 30/6 Balance 4 650
30/6 Service Revenue 1 500
4 650 4 650
1/7 Opening Balance 4 650

Prepaid Insurance 112


30/6 Balance 2 520 30/6 Insurance Expense 1 050
30/6 Closing Balance 1 470
2 520 2 520
1/7 Opening Balance 1 470

Supplies 113
30/6 Balance 2 350 30/6 Supplies Expense 1 860
30/6 Closing Balance 490
2 350 2 350
1/7 Opening Balance 490

Office Equipment 130


30/6 Balance 22 500

Accumulated Depreciation – Office Equipment 131


30/6 Depreciation Expense 1 875

Accounts Payable 200


30/6 Balance 1 550

Service Revenue Received in Advance 213


30/6 Service Revenue 800 30/6 Balance 1 500
30/6 Closing Balance 700
1 500 1 500
1/7 Opening Balance 700

Salaries Payable 215


30/6 Salaries Expense 770

© John Wiley and Sons Australia Ltd, 2016 3.79


Chapter 3: Accrual accounting concepts

Electricity Payable 218


30/6 Electricity Expense 110

Share Capital 300


30/6 Balance 20 000

Service Revenue 400


30/6 Balance 25 495
30/6 Accounts Receivable 1 500
30/6 Service Revenue in
Advance 800
27 795

Salaries Expense 500


30/6 Balance 3 295
30/6 Salaries Payable 770
4 065

Supplies Expense 505


30/6 Supplies 1 860

Rent Expense 510


30/6 Balance 5 250

Insurance Expense 515


30/6 Prepaid Insurance 1 050

Depreciation Expense 520


30/6 Accumulated Depreciation 1 875

Electricity Expense 530


30/6 Electricity Expense 110

© John Wiley and Sons Australia Ltd, 2016 3.80


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

(c)
Brothers Ltd
Adjusted Trial Balance
as at 30 June 2016

No. Account name Debit Credit


$ $
100 Cash 9 480
104 Accounts Receivable 4 650
112 Prepaid Insurance 1 470
113 Supplies 490
130 Office Equipment 22 500
131 Accumulated Depreciation – Office Equipment 1 875
200 Accounts Payable 1 550
213 Service Revenue Received in Advance 700
215 Salaries Payable 770
218 Electricity Payable 110
300 Share Capital 20 000
400 Service Revenue 27 795
500 Salaries Expense 4 065
505 Supplies Expense 1 860
510 Rent Expense 5 250
515 Insurance Expense 1 050
520 Depreciation Expense 1 875
530 Electricity Expense 110
$52 800 $52 800

(d) To report the higher profit the adjustments to accrue expense and not write down
assets would be avoided hence depreciation, writing down supplies and the prepaid
insurance, recognising salaries and electricity expense. The shareholders old and
potential new shareholders and the creditors would be affected as they would make
incorrect assumptions about the profitability and liquidity of the business

© John Wiley and Sons Australia Ltd, 2016 3.81


Chapter 3: Accrual accounting concepts

PROBLEM SET B 3.3


(a)
Matrix Ltd
General Journal

Date Account name (narration) Post Debit $ Credit $


Ref.
2016
Sept. 30 Commission Receivable 110 780
Commission Revenue 400 780
(To record accrued commission revenue)

30 Rent Expense 510 780


Prepaid Rent 120 780
(To record expired prepaid rent)

30 Supplies Expense 530 260


Supplies 130 260
(To record supplies used)

30 Depreciation Expense 520 455


Accumulated Depreciation – 151 455
Equipment
(To record depreciation expense)

30 Salaries Expense 500 520


Salaries Payable 210 520
(To record accrued salaries)

30 Interest Expense 550 65


Interest Payable 220 65
(To record accrued interest)

30 Rent Revenue Received in Advance 230 390


Rent Revenue 410 390
(To record revenue)

© John Wiley and Sons Australia Ltd, 2016 3.82


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

(b)
Matrix Ltd
Statement of profit or loss
for the quarter ended 30 September 2016

$ $
Revenues:
Commission revenue 18 980
Rent revenue 910
Total revenues 19,890
Expenses:
Salaries expense 12 220
Rent expense 1 950
Depreciation expense 455
Supplies expense 260
Electricity expense 663
Interest expense 65
Total expenses 15 613
Profit $4 277

Matrix Ltd
Calculation of retained earnings
for the quarter ended 30 September 2016

$
Retained earnings 1 July 0
Add: Profit 4 277
4 277
Less: Dividends (780)
Retained earnings 30 September $3 497

© John Wiley and Sons Australia Ltd, 2016 3.83


Chapter 3: Accrual accounting concepts

Matrix Ltd
Statement of financial position
as at 30 September 2016

$ $
ASSETS
Current assets
Cash 8 710
Accounts receivable 1 300
Prepaid rent 1 170
Supplies 1 300
Total Current assets 12 480
Non-current assets
Equipment 19 500
Less: Accumulated depreciation – equipment (455) 19 045
Total assets 31 525
LIABILITIES
Liabilities:
Accounts payable 1 963
Salaries payable 520
Interest payable 65
Rent revenue received in advance 780
Bank loan 6 500
Total liabilities 9 828
NET ASSETS $21 697

EQUITY
Share capital 18 200
Retained earnings 3 497
TOTAL EQUITY $21 697

*bank loan could also be classified as non-current

(c) The following accounts would be closed: Commission Revenue, Rent Revenue,
Salaries Expense, Rent Expense, Depreciation Expense, Supplies Expense,
Electricity Expense, Interest Expense, Dividends.

(d) 31 August 2016. Interest of 12% per year equals a monthly rate of 1%; monthly
interest is $65 ($6,500 x 1%). Since total interest expense is $65, the loan has been
outstanding one month.

OR

Monthly interest is [$6,500 x .12) x 1/12] = $65

Since the total interest expense is $65, the company must have taken out the loan
one month ago on 31 August 2016. (Alternatively, 1 September 2016)

© John Wiley and Sons Australia Ltd, 2016 3.84


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

PROBLEM SET B 3.4


(a)
Aurora Pty Ltd
General Journal
Date Account name (narration) Ref $ $
# Debit Credit

June 30 Accounts Receivable 110 300


Service Revenue 400 300
(To accrue revenue)
30 Office Supplies Expense 510 800
Office Supplies 120 800
(Record use of supplies)
30 Insurance Expense 530 750
Prepaid Insurance 130 750
(to write down prepaid insurance)
30 Depreciation Expense 540 600
Accumulated Depreciation – Office Equipment 141 600
( To record depreciation)
30 Salaries Expense 500 550
Salaries Payable 210 550
(to accrue salaries)
30 Rent Revenue Received in Advance 220 400
Rent Revenue 410 400
(to record rent revenue now earned)
(b)
Aurora Pty Ltd
Statement of profit or loss
for the year ended June 30 2017
$ $
Revenues:
Service revenue 17 300
Rent revenue 5 900
Total revenue 23 200

Expenses:
Salaries expense 9 050
Office supplies expense 800
Rent expense 7 500
Insurance expense 750
Depreciation expense 600
Total expenses 18 700
Profit $4 500

© John Wiley and Sons Australia Ltd, 2016 3.85


Chapter 3: Accrual accounting concepts

Aurora Pty Ltd


Calculation of Retained Earnings
for the year ended June 30 2017
$
Retained earnings, 1 July 2016 2 800
Add: Profit 4 500
Retained earnings, 30 June 2017 $ 7 300

Aurora Pty Ltd


Statement of financial position
as at 30 June 2017
$ $
ASSETS
Current Assets
Cash 5 200
Service revenue receivable 4 700
Office supplies 350
Prepaid insurance 1 250
Total current assets 11 500
Non-Current Assets
Office equipment 7 000
Less: Accumulated depreciation – office equipment (2 400) 4 600
Total assets 16 100

LIABILITIES
Accounts payable 2 900
Salaries payable 550
Rent received in advance 350
Total liabilities 3 800
NET ASSETS $12 300

EQUITY
Share capital 5 000
Retained earnings 7 300
TOTAL EQUITY $12 300

© John Wiley and Sons Australia Ltd, 2016 3.86


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

(c)
Aurora Pty Ltd
General Journal
Date Account name (narration) Ref Debit $ Credit $
#
June 30 Service Revenue 17 300
Rent Revenue 5 900
Profit or loss summary 23 200
(Closing entry)
30 Profit or loss summary 18 700
Salaries Expense 9 050
Office Supplies Expense 800
Rent Expense 7 500
Insurance Expense 750
Depreciation Expense 600
(Closing entry )
30 Profit or loss summary 4 500
Retained Earnings 4 500
(Closing Entry)

© John Wiley and Sons Australia Ltd, 2016 3.87


Chapter 3: Accrual accounting concepts

PROBLEM SET B 3.5


(a)
McPherson Ltd
General Journal

Date Account name (narration) Post Ref Debit Credit


2015
Mar 31 Accounts Receivable 110 5 500
Sales Revenue 400 5 500
(Accrues revenue)
31 Supplies Expense 530 900
Supplies 4,760
(Supplies used)
31 Rent Expense 510 2 000
Prepaid Rent 120 2 000
(Rent now expensed)
31 Depreciation Expense 520 1 750
Acc’d Depreciation - Equipment 151 1 750
(to record depreciation)
31 Interest Expense 550 250
Interest Payable 220 250
(Interest accrued)
31 Rent Revenue Received in Advance 230 500
Rent Revenue 410 1,960
(Rent revenue now earned)
31 Salaries Expense 500 1 800
Salaries Payable 210 1 800
(Accrued salaries)

(b)
McPherson Ltd
Statement of profit or loss
for the 3 months ended 31 March 2015
$ $
Revenues:
Sales revenue 18 600
Rent revenue 12 000
30 600
Expenses:
Salaries expense 11 340
Rent expense 6 000
Depreciation expense 1 750
Supplies expense 900
Electricity expense 750
Interest expense 250
Total expenses 20 990
Profit $ 9 610

© John Wiley and Sons Australia Ltd, 2016 3.88


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

McPherson Ltd
Calculation of Retained Earnings
for the 3 months ended 31 March 2015

Retained earnings, 1 January $ -


Add: Profit 9 610
9 610
Less: Dividends (600)
Retained earnings, 31 December $9 010

McPherson Ltd
Statement of financial position
as at 31 March 2015
$ $
ASSETS
Current Assets
Cash 15 750
Accounts receivable 6 800
Supplies 600
Total Current Assets 23 150

Non-Current Assets
Equipment 32 000
Less: Accumulated Depreciation (1 750)
Total Non-Current Assets 30 250
Total Assets 53 400
LIABILITIES
Current Liabilities
Accounts Payable 1 840
Interest Payable 250
Salaries Payable 1 800
Rent Revenue Received in Advance 500
Total Current Liabilities 4 390

Non-Current Liabilities
Bank Loan 15 000
Total Non-Current Liabilities 15 000
Total Liabilities 19 390
NET ASSETS $34 010

EQUITY
Share Capital 25 000
Retained Earnings 9 010
TOTAL EQUITY $34 010

© John Wiley and Sons Australia Ltd, 2016 3.89


Chapter 3: Accrual accounting concepts

(c) Accounts to be closed:


Sales Revenue and Rent Revenue, Salaries Expense, Rent Expense, Depreciation
Expense, Supplies Expense, Electricity Expense, Interest Expense,

(d) Loan was taken out 31 January 2015 or 1 February 2015.


Bank loan $15 000 x 10%= $1,500 annually or $125 monthly. Interest expense is
$250 so the loan was taken out 2 months before reporting date.

© John Wiley and Sons Australia Ltd, 2016 3.90


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

PROBLEM SET B 3.6


(a)
Lou’s Advertising Agency Pty Ltd
General Journal

Date Account name (narration) Post Ref Debit $ Credit $


2017
Dec 31 Accounts Receivable 110 4 200
Advertising Revenue 400 4 200
(accrue revenue)
31 Art Supplies Expense 530 9 520
Art Supplies 130 9 520
(supplies used)
31 Insurance Expense 505 2 380
Prepaid Insurance 140 2 380
(insurance expired)
31 Depreciation Expense 520 19 600
Acc’d Depreciation - Equipment 151 19 600
(depreciation for year)
31 Interest Expense 510 420
Interest Payable 220 420
(Interest expense accrued)
31 Advertising Revenue Received in Advance 230 3 920
Advertising Revenue 400 3 920
(Revenue now earned)
31 Salaries Expense 500 3 640
Salaries Payable 240 3 640
(Salaries accrued)

(b)
Lou’s Advertising Agency Pty Ltd
Statement of profit or loss
for the year ended 31 December 2017

$ $
Revenues:
Advertising revenue 172 200
Expenses:
Salaries expense 31 640
Depreciation expense 19 600
Rent expense 11 200
Art supplies expense 9 520
Insurance expense 2 380
Interest expense 1 400
Total expenses 75 740
Profit $96 460

© John Wiley and Sons Australia Ltd, 2016 3.91


Chapter 3: Accrual accounting concepts

Lou’s Advertising Agency Pty Ltd


Calculation of Retained Earnings
for the year ended 31 December 2017

Retained earnings, 1 January $ 15 400


Add: Profit 96 460
111 860
Less: Dividends (33 600)
Retained earnings, 31 December $78 260

Lou’s Advertising Agency Pty Ltd


Statement of financial position
as at 31 December 2017
ASSETS $ $ $
Current Assets
Cash 30 800
Accounts receivable 60 200
Art supplies 14 000
Prepaid Insurance 7 000
Total Current Assets 112 000

Non-Current Assets
Printing Equipment $168 000
Less: Accumulated Depreciation (98 000)
Total Non-Current Assets 70 000
Total Assets 182 000
LIABILITIES
Current Liabilities
Accounts Payable 14 000
Interest Payable 420
Salaries Payable 3 640
Advertising Revenue Received in Advance 15 680
Total Current Liabilities 33 740

Non-Current Liabilities
Bank Loan 14 000
Total Non-Current Liabilities 14 000
Total Liabilities 47 740
NET ASSETS $134 260

EQUITY
Share Capital $56 000
Retained Earnings 78 260
TOTAL EQUITY $134 260

© John Wiley and Sons Australia Ltd, 2016 3.92


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

(c) Accounts to be closed:


Advertising Revenue, Salaries Expense, Depreciation Expense, Rent Expense, Art
Supplies Expense, Insurance Expense, Interest Expense, Dividends

(d) Annual Interest Rate on Bank Loan:

Interest Expense for 10 months = $1 400


Interest Expense for 12 months = $1 680
Interest Rate =1 680 ÷ 14,000
Interest Rate = 12%

(e) Salaries Payable on 31 December 2016:

Salaries paid in 2017 $31 200


Salaries Payable 31 December 2017 3 640
34 840
Salaries Expense for 2017 (31 640)
Salaries Payable 31 December 2016 $ 3 200

(f) The effect of profit from the adjustments is a net decrease of $ 27 440.

© John Wiley and Sons Australia Ltd, 2016 3.93


Chapter 3: Accrual accounting concepts

PROBLEM SET B 3.7


(a)
Palpatine Hotel Ltd
Worksheet for month ended 31 May 2016
Trial Balance Adjustments Adjusted Trial Statement of Statement of financial
Balance. profit or loss position
No. Account names Dr $ Cr $ Dr $ Cr $ Dr $ C $r Dr $ Cr $ Dr $ Cr $
100 Cash 4 500 4 500 4 500
112 Prepaid Insurance 2 520 210 1 2 310 2 310
113 Supplies 2 660 980 2 1 680 1 680
120 Land 21 000 21 000 21 000
122 Building 98 000 98 000 98 000
123 Acc’d Depn – Building 420 3 420 420
130 Furniture 23 520 23 520 23 520
131 Acc’d Depn –Furniture 350 3 350 350
200 Accounts Payable 6 580 6 580 6 580
212 Rent Rev Rec’d in Adv 5 040 2 100 5 2 940 2 940
214 Salaries Payable 420 6 420 420
215 Interest Payable 500 4 500 500
220 Mortgage Payable 50 000 50 000 50 000
300 Share Capital 84 000 84 000 84 000
400 Rent Revenue 12 880 2 100 5 14 980 14 980
505 Advertising Expense 700 700 700
506 Depreciation Expense 770 3 770 770
510 Electricity Expense 1 400 1 400 1 400
512 Insurance Expense 210 1 210 210
515 Interest Expense 500 4 500 500
525 Salaries Expense 4 200 420 6 4 620 4 620
530 Supplies Expense 980 2 980 980
$158 500 $158 500 $4 980 $4 980 $160 190 $160 190
Profit 5 800 5 800
$14 980 $14 980 $151 010 $151 010

© John Wiley and Sons Australia Ltd, 2016 3.94


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

PROBLEM SET B 3.7 CONTINUED


(b)
The Palpatine Hotel Ltd
General Journal
Date Account Name (narration) Post Debit $ Credit
ref $
2016
1. May 31 Insurance Expense 512 210
Prepaid Insurance 112 210
(To record expired insurance)

2. 31 Supplies Expense 530 980


Supplies 113 980
(To record supplies consumed)

3. 31 Depreciation Expense 506 770


Accumulated Depreciation – Building 123 420
Accumulated Depreciation –Furniture 131 350
(To record monthly depreciation expense)

4. 31 Interest Expense 515 500


Interest Payable [($50,000 x 12%) x 215 500
1/12]
(To record interest accrued)

5. 31 Rent Revenue Received in Advance 212 2 100


Rent Revenue 400 2 100
(To record services provided for revenue)

6. 31 Salaries Expense 525 420


Salaries Payable 214 420
(To record accrued salaries)

(c) General ledger

Cash 100
31/5 Balance 4 500

Prepaid Insurance 112


31/5 Balance 2 520 31/5 Insurance Expense 210
31/5 Closing Balance 2 310
2,520 2 520
1/6 Opening Balance 2 310

© John Wiley and Sons Australia Ltd, 2016 3.95


Chapter 3: Accrual accounting concepts

Supplies 113
31/5 Balance 2 660 31/5 Supplies Expense 980
31/5 Closing Balance 1 680
2 660 2 660
1/6 Opening Balance 1 680

Land 120
31/5 Balance 21 000

Building 122
31/5 Balance 98 000

Accumulated Depreciation – Building 123


31/5 Depreciation Expense 420

Furniture 130
31/5 Balance 23 520

Accumulated Depreciation – Furniture 131


31/5 Depreciation Expense 350

Accounts Payable 200


31/5 Balance 6 580

Rent Revenue Received in Advance 212


31/5 Rent Revenue 2 100 31/5 Balance 5 040
31/5 Closing Balance 2 940
5 040 5 040
1/6 Opening Balance 2 940

Salaries Payable 214


31/5 Salaries Expense 420

Interest Payable 215


31/5 Interest Expense 500

Mortgage Payable 220


31/5 Balance 50 000

© John Wiley and Sons Australia Ltd, 2016 3.96


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

Share Capital 300


31/5 Balance 84 000

Rent Revenue 400


31/5 Balance 12 880
31/5 Rent Revenue in Advance 2 100
14 980

Advertising Expense 505


31/5 Balance 700

Depreciation Expense 506


31/5 Accumulated Depreciation 770

Electricity Expense 510


31/5 Balance 1 400

Insurance Expense 512


31/5 Prepaid Insurance 210

Interest Expense 515


31/5 Interest Payable 500

Salaries Expense 525


31/5 Balance 4,200
31/5 Salaries Payable 420
4 620

Supplies Expense 530


31/5 Supplies 980

© John Wiley and Sons Australia Ltd, 2016 3.97


Chapter 3: Accrual accounting concepts

(d)
The Palpatine Hotel Ltd
Adjusted Trial Balance
as at 31 May 2016

No. Account name Debit $ Credit $


$ $
100 Cash 4 500
112 Prepaid Insurance 2 310
113 Supplies 1 680
120 Land 21 000
122 Building 98 000
123 Accumulated Depreciation – Building 420
130 Furniture 23 520
131 Accumulated Depreciation – Furniture 350
200 Accounts Payable 6 580
212 Rent Revenue Received in Advance 2 940
214 Salaries Payable 420
215 Interest Payable 500
220 Mortgage Payable 50 000
300 Share Capital 84 000
400 Rent Revenue 14 980
505 Advertising Expense 700
506 Depreciation Expense 770
510 Electricity Expense 1 400
512 Insurance Expense 210
515 Interest Expense 500
525 Salaries Expense 4 620
530 Supplies Expense 980
$160 190 $160 180

© John Wiley and Sons Australia Ltd, 2016 3.98


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

(e)
The Palpatine Hotel Ltd
Statement of profit or loss
for the month ended 31 May 2016

$ $
Revenues:
Rent revenue $14 980
Expenses:
Salaries expense 4 620
Electricity expense 1 400
Supplies expense 980
Advertising expense 700
Interest expense 500
Insurance expense 210
Depreciation expense 770
Total expenses 9 180
Profit $5 800

The Palpatine Hotel Ltd


Calculation of retained earnings
for the month ended 31 May 2016

$
Retained earnings, 1 May 2016 0
Add: Profit 5 800
Retained earnings, 31 May 2016 $5 800

© John Wiley and Sons Australia Ltd, 2016 3.99


Chapter 3: Accrual accounting concepts

The Palpatine Hotel Ltd


Statement of financial position
as at 31 May 2016

$ $
ASSETS
Current assets
Cash 4 500
Prepaid insurance 2 310
Supplies 1 680
Total current assets 8 490
Non-current assets
Land 21 000
Buildings 98 000
Less: Accumulated depreciation – building (420) 97 580
Furniture 23 520
Less: Accumulated depreciation – furniture (350) 23 170
Total non-current 141 750
Total assets 150 240
LIABILITIES
Current Liabilities
Accounts payable 6 580
Rent revenue received in advance 2 940
Salaries payable 420
Interest payable 500
Total current liabilities 10 440
Non-current liabilities
Mortgage payable 50 000 50 000
Total liabilities 60 440
NET ASSETS $89 800
EQUITY
Share capital 84 000
Retained earnings 5 800
TOTAL EQUITY $89,800

(f) The following accounts would be closed:

Rent Revenue, Salaries Expense, Electricity Expense, Advertising Expense, Interest


Expense, Insurance Expense, Supplies Expense, Depreciation Expense

© John Wiley and Sons Australia Ltd, 2016 3.100


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

PROBLEM SET B 3.8


(a)
Contract Cleaning Pty Ltd
General Journal
Date Account name (narration) Post $ $
Ref. Debit Credit
2015
July 1 Cash 100 27 000
Share Capital 300 27 000
(Issued shares for cash)

1 Motor Vehicles 171 18 000


Cash 100 9 000
Accounts Payable 200 9 000
(Purchased truck)

3 Cleaning Supplies 120 2 700


Accounts Payable 200 2 700
(Purchased cleaning supplies)

5 Prepaid Insurance 130 3 600


Cash 100 3 600
(Paid insurance)

12 Accounts Receivable 110 7 500


Service Revenue 400 7 500
(Invoiced customers)

18 Accounts Payable 200 4 500


Cash 100 4 500
(Paid accounts payable)

20 Salaries Expense 540 3 600


Cash 100 3 600
(Paid salaries)

21 Cash 100 4 200


Accounts Receivable 110 4 200
(Collected cash from customers on account)

25 Accounts Receivable 110 6 000


Service Revenue 400 6 000
(Invoiced customers)

31 Petrol & Oil Expense 500 600


Cash 100 600
(Paid for petrol and oil)

31 Dividends 315 1 800


Cash 100 1 800
(Paid cash dividend)

© John Wiley and Sons Australia Ltd, 2016 3.101


Chapter 3: Accrual accounting concepts

(b), (e) & (h)

Cash 100
1/7 Share Capital 27 000 1/7 Motor Vehicles 9 000
21/7 Accounts Receivable 4 200 5/7 Prepaid Insurance 3 600
18/7 Accounts Payable 4 500
20/7 Salaries Expense 3 600
31/7 Petrol & Oil Expense 600
31/7 Dividends 1 800
31/7 Closing Balance 8 100
31 200 31 200
1/8 Opening Balance 8 100

Accounts Receivable 110


12/7 Service Revenue 7 500 21/7 Cash 4 200
25/7 Service Revenue 6 000
31/7 Service Revenue* 3 300 31/7 Closing Balance 12 600
16 16 800
800
1/8 Opening Balance 12
600
* (e) adjusting entry, balance was $9 300 dr before adjusting entry

Cleaning Supplies 120


3/7 Accounts Payable 2 700 31/7 Cleaning Supplies Expense* 900
31/7 Closing Balance 1
800
2 700 2
700
1/8 Opening Balance 1 800
* (e) adjusting entry, balance was $2 700 dr before adjusting entry

Prepaid Insurance 130


5/7 Cash 3 600 31/7 Insurance Expense* 300
31/7 Closing Balance 3 300
3 600 3 600
1/8 Opening Balance 3 300
* (e) adjusting entry, balance was $3 600 dr before adjusting entry
Motor Vehicles 171
1/7 Cash/Accounts 18 000
Payable

Accumulated Depreciation – Motor Vehicles 172


31/7 Depreciation Expense* 600
* (e) adjusting entry, nil balance before adjusting entry

© John Wiley and Sons Australia Ltd, 2016 3.102


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

Accounts Payable 200


18/7 Cash 4 500 1/7 Motor Vehicles 9 000
31/7 Closing Balance 7 200 3/7 Cleaning Supplies 2 700
11 700 11 700
1/8 Opening Balance 7 200

Salaries Payable 210


31/7 Salaries Expense* 1 200

* (e) adjusting entry, nil balance before adjusting entry


Share Capital 300
1/7 Cash 27 000

Retained Earnings 310


31/7 Dividends 1 800 31/7 Profit or loss summary 9 600
31/7 Closing Balance 7 800
9 600 9 600
1/8 Opening Balance 7 800

Dividends 315
31/7 Cash 1 800 31/7 Retained Earnings 1 800

Profit or loss summary 320


31/7 Expenses 7 200 31/7 Revenue 16 800
31/7 Retained Earnings 9
600
16 16 800
800
Entries to this account are closing entries. It has a nil balance before and after closing
entries because the balance, profit, is closed to retained earnings,
Service Revenue 400
31/7 P & L Summary 16 800 12/7 Accounts Receivable 7 500
25/7 Accounts Receivable 6 000
31/7 Accounts Receivable* 3 300
16 800 16 800
* (e) Adjusting entry,$13 500 cr balance before adjusting entry, $16 800 cr after adjustment,
before closing

Petrol & Oil Expense 500


31/7 Cash 600 31/7 P & L Summary 600

© John Wiley and Sons Australia Ltd, 2016 3.103


Chapter 3: Accrual accounting concepts

Cleaning Supplies Expense 510


31/7 Cleaning Supplies* 900 31/7 P & L Summary 900

* (e) Adjusting entry, nil balance before adjusting entry, $450 dr after adjustment, before
closing

Depreciation Expense 520


31/7 Accumulated 600 31/7 P & L Summary 600
Depreciation*

* (e) adjusting entry, nil balance before adjusting entry


Insurance Expense 530
31/7 Prepaid Insurance* 300 31/7 P & L Summary 300

* (e) Adjusting entry, nil balance before adjusting entry, $300 dr after adjustment, before
closing
Salaries Expense 540
20/7 Cash 3 600 31/7 P & L Summary 4 800
31/7 Salaries Payable* 1 200
4 800 4 800
* (e) adjusting entry $3 600 dr balance before adjusting entry, $4 800 dr after adjusting entry
before closing

(c) & (f)


Contract Cleaning Pty Ltd
Trial Balance
as at 31 July 2015

(c) Unadjusted (f) Adjusted


No. Account name Debit $ Credit $ Debit $ Credit $
100 Cash 8 100 8 100
110 Accounts Receivable 9 300 12 600
120 Cleaning Supplies 2 700 1 800
130 Prepaid Insurance 3 600 3 300
171 Motor Vehicles 18 000 18 000
172 Acc’ed Depreciation – M. Vehicles 600
200 Accounts Payable 7 200 7 200
210 Salaries Payable 1 200
300 Share Capital 27 000 27 000
310 Dividends 1 800 1 800
400 Service Revenue 13 500 16 800
500 Petrol & Oil Expense 600 600
510 Cleaning Supplies Expense 900
520 Depreciation Expense 600
530 Insurance Expense 300
540 Salaries Expense 3 600 4 800
$47 700 $47 700 $52 800 $52 800

© John Wiley and Sons Australia Ltd, 2016 3.104


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

(d)
General Journal Contract Cleaning Pty Ltd
Date Account name (narration) Post Debit Credit
Ref.
1. July 31 Accounts Receivable 110 3 300
Service Revenue 400 3 300
(Accrued revenue)

2. 31 Depreciation Expense 520 600


Accumulated Depreciation 172 600
(Depreciation expense)

3. 31 Insurance Expense 530 300


Prepaid Insurance 130 300
(Prepaid insurance expired)

4. 31 Cleaning Supplies Expense 510 900


Cleaning Supplies 120 900
(Supplies used)

5. 31 Salaries Expense 540 1 200


Salaries Payable 210 1 200
(Accrued salaries)

(g)
Contract Cleaning Pty Ltd
Statement of profit or loss
for the month ended 31 July 2015
$ $
Revenues:
Service revenue 16 800
Expenses:
Salaries expense 4 800
Cleaning supplies expense 900
Depreciation expense 600
Petrol & Oil expense 600
Insurance expense 300
Total expenses 7 200
Profit $9 600

Contract Cleaning Pty Ltd


Calculation of retained earnings
for the month ended 31 July 2015

Retained earnings 1 July $-


Add: Profit 9 600
9 600
Less: Dividends (1 800)
Retained earnings 31 July $7 800

© John Wiley and Sons Australia Ltd, 2016 3.105


Chapter 3: Accrual accounting concepts

Contract Cleaning Pty Ltd


Statement of financial position
as at 31 July 2015

$ $
ASSETS
Current assets
Cash 8 100
Accounts receivable 12 600
Cleaning supplies 1 800
Prepaid insurance 3 300
Total current assets 25 800
Non-current assets:
Motor Vehicles 18 000
Less: Accumulated depreciation (600)
Total non-current assets 17 400
Total assets 43 200
LIABILITIES
Current liabilities:
Accounts payable 7 200
Salaries payable 1 200
Total current liabilities 8 400
NET ASSETS $34 800

EQUITY:
Share capital 27 000
Retained earnings 7 800
TOTAL EQUITY $34 800

© John Wiley and Sons Australia Ltd, 2016 3.106


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

(h)
Contract Cleaning Pty Ltd
General Journal closing entries

Date Account name (narration) Post Debit Credit


Ref
July 31 Service Revenue 400 16 800
Profit or loss summary 320 16 800
(Close revenue accounts)

31 Profit or loss summary 320 7 200


Petrol & Oil Expense 500 600
Cleaning Supplies Expense 510 900
Depreciation Expense 520 600
Insurance Expense 530 300
Salaries Expense 540 4 800
(Close expense accounts)

31 Profit or loss summary 320 9 600


Retained Earnings 310 9 600
(Close Profit or loss summary account)

31 Retained Earnings 310 1 800


Dividends 315 1 800
(Close dividends account)

(i)
Contract Cleaning Pty Ltd
Post-Closing Trial Balance
as at 31 July 2015

No. Account name Debit $ Credit


$
100 Cash 8 100
110 Accounts Receivable 12 600
120 Cleaning Supplies 1 800
130 Prepaid Insurance 3 300
150 Motor Vehicles 18 000
151 Accumulated Depreciation – Motor Vehicles 600
200 Accounts Payable 7 200
210 Salaries Payable 1 200
300 Share Capital 27 000
310 Retained Earnings 7 800
$43 800 $43 800

(j) After the adjusting entries reported profit increased by $300.

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Chapter 3: Accrual accounting concepts

PROBLEM SET B 3.9

(a) Chart of accounts: students may have different account numbers as long as they are
grouped to sections of the ledger.

100 Cash
110 Accounts receivable
120 Supplies
150 Store equipment
151 Accumulated Depreciation
200 Accounts Payable
210 Service Revenue Received in Advance
215 Salaries Payable
300 Share Capital
310 Retained earnings
400 Service Revenue
510 Depreciation Expense
515 Supplies Expense
520 Salaries Expense
525 Rent Expense

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Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

Naboo Equipment Ltd


General Ledger
(b), (d) and (f)
Cash 100
1/11 Opening Balance 3 348 8/11 Salaries Expense/Payable 1 320
10/11 Accounts Receivable 1 440 20/11 Accounts Payable 3 000
12/11 Service Revenue 1 680 22/11 Rent Expense 360
29/11 Revenue Rec’d in 660 25/11 Salaries Expense 1 200
Advance
30/11 Closing Balance 1 248
7,128 7,128
1/12 Opening Balance 1 248

Accounts Receivable 110


1/11 Opening Balance 3 012 10/11 Cash 1 440
27/11 Service Revenue 1 080 30/11 Closing Balance 2 652
4,092 4 092
1/12 Opening Balance 2 652

Supplies 120
1/11 Opening Balance 1 200 30/11 Supplies Expense 1 080
17/11 Accounts Payable 1 800 30/11 Closing Balance 1 920
3 000 3 000
1/12 Opening Balance 1 920

Store Equipment 150


1/11 Opening Balance 12 000 30/11 Closing Balance 15 600
15/11 Accounts Payable 3 600
15 600 15 600
1/12 Opening Balance 15 600

Accumulated Depreciation 151


30/11 Closing Balance 744 1/11 Opening Balance 600
30/11 Depreciation Expense 144
744 744
1/12 Opening Balance 744
Accounts Payable 200
20/11 Cash 3 000 1/11 Opening Balance 2 520
15/11 Store Equipment 3 600
30/11 Closing Balance 4 920 17/11 Supplies 1 800
7 920 7 920
1/12 Opening Balance 4 920

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Chapter 3: Accrual accounting concepts

Service Revenue Received in Advance 210


30/11 Service Revenue 360 1/11 Opening Balance 480
30/11 Closing Balance 780 29/11 Cash 660
1 140 1 140
1/12 Opening Balance 780

Salaries Payable 215


8/11 Cash 600 1/11 Opening Balance 600
30/11 Closing Balance 600 30/11 Salaries Expense 600
1,200 1,200
1/12 Opening Balance 600

Share Capital 300


1/11 Opening Balance 12 000

Retained Earnings 310


1/11 Opening Balance 3 360

Service Revenue 400


12/11 Cash 1 680
27/11 Accounts Receivable 1 080
30/11 Service Revenue in Advance* 360
3 120
 Adjusting entry balance before adjusting entry $ 2 760

Depreciation Expense 510


30/11 Accumulated Depreciation 144

Supplies Expense 515


30/11 Supplies 1 080

Salaries Expense 520


8/11 Cash 720
25/11 Cash 1 200
30/11 Salaries Payable 600
2 520
*balance before adjusting entry $ 1 920
Rent Expense 525
22/11 Cash 360

(c)
© John Wiley and Sons Australia Ltd, 2016 3.110
Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

Naboo Equipment Ltd


General Journal

Date Account name (narration) Post Debit $ Credit $


ref
2015
Nov 8 Salaries Payable 215 600
Salaries Expense 520 720
Cash 100 1 320
(Payment of salaries for October &
November)

10 Cash 100 1 440


Accounts Receivable 110 1 440
(Cash received from customers on account)

12 Cash 100 1 680


Service Revenue 400 1 680
(To record service revenue)

15 Store Equipment 150 3 600


Accounts Payable 200 3 600
(Purchased store equipment on account)
17 Supplies 120 1 800
Accounts Payable 200 1 00
(Purchased supplies on account)

20 Accounts Payable 200 3 000


Cash 100 3 000
(Paid creditors on account)

22 Rent Expense 525 360


Cash 100 360
(Paid November rent)

25 Salaries Expense 520 1 200


Cash 100 1 00
(Paid salaries)

27 Accounts Receivable 110 1 080


Service Revenue 400 1 080
(To record service revenue)

29 Cash 100 660


Service Revenue Rec’d in Advance 210 660
(Received cash from customers for future
services)

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Chapter 3: Accrual accounting concepts

(e) & (g)


Naboo Equipment Ltd
Trial Balance
as at 30 November 2015

Unadjusted Adjusted
Account name s Debit Credit Debit Credit

Cash $1 248 $1 248


Accounts Receivable 2 652 2 652
Supplies 3 000 1 920
Store Equipment 15 600 15 600
Accumulated Depreciation $ 600 $ 744
Accounts Payable 4 920 4 920
Service Revenue Received in Advance 1 140 780
Salaries Payable 600
Share Capital 12,000 12 000
Retained Earnings 3 360 3 360
Service Revenue 2 760 3 120
Depreciation Expense 144
Supplies Expense 1 080
Salaries Expense 1 920 2 520
Rent Expense 360 360
$24 780 $24 780 $25 524 $25 524

(f)
Naboo Equipment Ltd
General Journal

Date Account name (narration) Post ref Debit $ Credit $


2015
1. Nov. 30 Supplies Expense 515 1 080
Supplies ($3,000 - $1,920) 120 1 080
(To record supplies used)

2. 30 Salaries Expense 520 600


Salaries Payable 215 600
(To record accrued salaries)

3. 30 Depreciation Expense 510 144


Accum Depreciation. 151 144
(To record one month’s depreciation
expense)

4. 30 Service Revenue Received in Advance 210 360


Service Revenue 400 360
(To record revenue)

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Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

(g)
Naboo Equipment Ltd
Statement of profit or loss
for the month ended 30 November 2015
Revenues:
Service revenue $3 120
Expenses:
Salaries expense $2 520
Supplies expense 1 080
Rent expense 360
Depreciation expense 144
Total expenses 4 104
Loss ($ 984)

Naboo Equipment Ltd


Calculation of retained earnings
For the month ended 30 November 2015

Retained earnings 1 November $3 360


Less: Loss (984)
Retained earnings 30 November $2 376

Naboo Equipment Ltd


Statement of financial position
as at 30 November 2015
ASSETS $ $
Current Assets
Cash 1 248
Accounts receivable 2 652
Supplies 1 920
Total Current assets 5 820
Non-current assets
Store equipment 15 600
Less: Accumulated depreciation (744) 14 856
Total assets 20 676

LIABILITIES
Accounts payable 4 920
Salaries payable 600
Service revenue received in advance 780
Total liabilities 6 300
NET ASSETS $14 376

EQUITY
Share capital 12 000
Retained earnings 2 376
TOTAL EQUITY $14 376

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Chapter 3: Accrual accounting concepts

PROBLEM SET B 3.9 (i)


Naboo Equipment Ltd
Worksheet as at 30 November 2015

Trial Balance Adjustments Adjusted Statement of Statement of


Trial Balance. profit or loss Financial
Position
No. Account names Dr $ Cr $ Dr $ Cr $ Dr $ Cr $ Dr $ Cr $ Dr $ Cr $
100 Cash 1 248 1 248 1 248
110 Accounts receivable 2 652 2 652 2 652
120 Supplies 3000 1 080 1 920 1 920
150 Store equipment 15 600 15 600 15 600
151 Acc’d Depreciation 600 144 744 744
200 Accounts Payable 4 920 4 920 4 920
210 Service revenue rec’d in 1 140 360 780 780
advance
215 Salaries Payable 600 600 600
300 Share Capital 12 000 12 000 12 000
310 Retained earnings 3 360 3 360 3 360
400 Service Revenue 2 760 360 3 120 3 120
510 Depreciation Expense 144 144 144
515 Supplies Expense 1 080 750 750
520 Salaries Expense 1 920 600 2 520 2 520
525 Rent Expense 360 9 200 9 200

Loss 984 984

Totals $24 780 $24 780 $2 184 $2 184 $25 524 $25 524 $4 104 $4 104 $22 404 $22 404

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Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

PROBLEM SET B 3.10


On Call Services Ltd
General Journal
Date Account name (narration) Post Debit $ Credit $
Ref.
2015
Sept 1 Cash 100 150 000
300 150 000
(Issued shares for cash)

1 Motor Vehicles 171 90 000


Cash 100 45 000
Accounts Payable 200 45 000
(Purchased truck)

5 Cleaning Supplies 120 18 600


Accounts Payable 200 18 600
(Purchased cleaning supplies)

7 Prepaid Insurance 130 27 000


Cash 100 27 000
(Paid insurance annual policy Sept1)

14 Accounts Receivable 110 26 700


Service Revenue 400 26 700
(Invoiced customers)

21 Accounts Payable 200 55 500


Cash 100 55 500
(Paid accounts payable)

21 Salaries Expense 540 15 300


Cash 100 15 300
(Paid salaries)

23 Cash 100 18 000


Accounts Receivable 110 18 000
(Collected cash from customers on account)

25 Accounts Receivable 110 28 500


Service Revenue 400 28 500
(Invoiced customers)

30 Petrol & Oil Expense 500 1980


Cash 100 1980
(Paid for petrol and oil)
30 Dividends 315 900
Cash 100 900
(Paid cash dividend)

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Chapter 3: Accrual accounting concepts

(b), (e) & (h)


On Call Services Ltd
General Ledger

Cash 100
1/9 Share Capital 150 000 1/9 Motor Vehicles 45 000
23/9 Accounts Receivable 18 000 7/9 Prepaid Insurance 27 000
21/9 Accounts Payable 55 500
21/9 Salaries Expense 15 300
30/9 Petrol & Oil Exp 1 980
30/9 Dividends 900
30/9 Closing Balance 22 320
168 000 168 000
1/10 Opening Balance 22 320

Accounts Receivable 110


14/9 Service Revenue 26 700 23/9 Cash 18 000
25/9 Service Revenue 28 500
30/9 Service Revenue* 5 400 30/9 Closing Balance 42 600
60 600 60 600
1/10 Opening Balance 42 600
* (e) adjusting entry, balance was $37 200 dr before adjusting entry

Cleaning Supplies 120


5/9 Accounts Payable 18600 30/9 Cleaning Supplies Exp* 15 000
30/9 Closing Balance 3 600
18 600 18 600
1/8 Opening Balance 3 600
* (e) adjusting entry, balance was $18600 dr before adjusting entry

Prepaid Insurance 130


7/9 Cash 27 000 30/9 Insurance Expense* 2 250
30/9 Closing Balance 24 750
27 000 27 000
1/8 Opening Balance 24 750
* (e) adjusting entry, balance was $27000 dr before adjusting entry

Motor vehicle 171


1/9 Cash/Accounts 90 000
Payable

Accumulated Depreciation – Trucks 172


30/9 Depreciation Expense* 1 500
* (e) adjusting entry, nil balance before adjusting entry

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Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

Accounts Payable 200


21/9 Cash 55 500 1/9 Motor Vehicles 45 000
30/9 Closing Balance 8 100 5/9 Cleaning Supplies 18 600
63 600 63 600
1/10 Opening Balance 8 100

Salaries Payable 210


30/9 Salaries Expense* 5 400

* (e) adjusting entry, nil balance before adjusting entry

Share Capital 300


1/9 Cash 150 000

Retained Earnings 310


30/9 Dividends 900 30/9 Profit or loss summary 19 170
30/9 Closing Balance 18 270
19 170 19 170
1/10 Opening Balance

Dividends 315
30/9 Cash 900 30/9 Retained Earnings 900

Profit or loss summary 320


30/9 Expenses 41 430 30/9 Revenue 60 600
30/9 Retained Earnings 19 170
60 600 60 600
Entries to this account are closing entries. It has a nil balance before and after closing entries
because the balance, profit, is closed to retained earnings,

Service Revenue 400


30/9 Profit or loss summary 60 600 14/9 Accounts Receivable 26 700
25/9 Accounts Receivable 28 500
30/9 Accounts Rec’ble* 5 400
60 600 60 600
* (e) Adjusting entry,$55 200 cr balance before adjusting entry, $20200 cr after adjustment,
before closing

Petrol & Oil Expense 500


30/9 Cash 1 980 30/9 Profit or loss summary 1 980

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Chapter 3: Accrual accounting concepts

Cleaning Supplies Expense 510


30/9 Cleaning Supplies* 15 000 30/9 Profit or loss summary 15 000

* (e) Adjusting entry, nil balance before adjusting entry, $15000 dr after adjustment, before
closing

Depreciation Expense 520


30/9 Accumulated Depreciation* 1 500 30/9 Profit or loss summary 1 500

* (e) adjusting entry, nil balance before adjusting entry

Insurance Expense 530


30/9 Prepaid Insurance* 2 250 30/9 Profit or loss summary 2 250

* (e) Adjusting entry, nil balance before adjusting entry, $750 dr after adjustment, before closing

Salaries Expense 540


21/9 Cash 15 300 30/9 Profit or loss summary 20 700
30/9 Salaries Payable* 5 400
20 700 20 700
* (e) adjusting entry, $15 30 dr balance before adjusting entry, $20 700 dr after adjusting entry
before closing.

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Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

(c) & (f)


On Call Services Ltd
Trial Balance
as at 30 September 2015
(c) Unadjusted (f) Adjusted
No. Account name Debit $ Credit $ Debit $ Credit $
100 Cash 22 320 22 320
110 Accounts Receivable 37 200 42 600
120 Cleaning Supplies 18 600 3 600
130 Prepaid Insurance 27 000 24 750
171 Motor Vehicles 90 000 90 000
172 Accumulated Depreciation – Motor 1 500
vehicles
200 Accounts Payable 8 100 8 100
210 Salaries Payable 5 400
300 Share Capital 150 000 150 000
310 Dividends 900 900
400 Service Revenue 55 200 60 600
500 Petrol & Oil Expense 1 980 1 980
510 Cleaning Supplies Expense 15 000
520 Depreciation Expense 1 500
530 Insurance Expense 2 250
540 Salaries Expense 15 300 20 700
$213 300 $213 300 $225 600 $225 600

(d) General Journal


Date Account name (narration) Post $ $
Ref. Debit Credit
1. Sept 30 Accounts Receivable 110 5 400
Service Revenue 400 5 400
(Accrued revenue)
2. 30 Depreciation Expense 520 1 500
Accumulated Depreciation 172 1 500
(Depreciation expense)
3. 30 Insurance Expense 530 2 250
Prepaid Insurance 130 2 250
(Prepaid insurance expired)
4. 30 Cleaning Supplies Expense 510 15 000
Cleaning Supplies 120 15 000
(Supplies used)
5. 30 Salaries Expense 540 5 400
Salaries Payable 210 5 400
(Accrued salaries)

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Chapter 3: Accrual accounting concepts

(g)
On Call Services Ltd
Statement of profit or loss
for the month ended 30 September 2015
$ $
Revenues:
Service revenue 60 600
Expenses:
Salaries expense 20 700
Cleaning supplies expense 15 000
Depreciation expense 1 500
Petrol & Oil expense 19 800
Insurance expense 2 250
Total expenses 41 430
Profit $19 170

On Call Services Ltd


Calculation of retained earnings
for the month ended 30 September 2015

Retained earnings 1 September $-


Add: Profit 19 170
19 170
Less: Dividends ( 900)
Retained earnings 30 September $18 270

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Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

On Call Services Ltd


Statement of financial position
as at 30 September 2015

$ $
ASSETS
Current assets:
Cash 22 320
Accounts receivable 42 600
Cleaning supplies 3 600
Prepaid insurance 24 750
Total current assets 93 270
Non-current assets:
Motor Vehicles 90 000
Less: Accumulated depreciation (1 500)
Total non-current assets 88 500
Total assets 181 770
LIABILITIES
Current liabilities:
Accounts payable 8 100
Salaries payable 5 400
Total liabilities 13 500
NET ASSETS $168 270
EQUITY
Share capital 150 000
Retained earnings 18 270
TOTAL EQUITY $168 270

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Chapter 3: Accrual accounting concepts

(h) On Call Services Ltd


General Journal
Date Account name (narration) Post Debit Credit
Ref
July 31 Service Revenue 400 60 600
Profit or loss summary 320 60 600
(Close revenue accounts)

31 Profit or loss summary 320 41 430


Petrol & Oil Expense 500 1 980
Cleaning Supplies Expense 510 15 000
Depreciation Expense 520 1 500
Insurance Expense 530 2 250
Salaries Expense 540 20 700
(Close expense accounts)

31 Profit or loss summary 320 19 170


Retained Earnings 310 19 170
(Close Profit or loss summary account)

31 Retained Earnings 310 900


Dividends 315 300
(Close dividends account)

(i)
On Call Services Ltd
Post-Closing Trial Balance
as at 30 September 2015
No. Account name Debit $ Credit $
100 Cash 22 320
110 Accounts Receivable 42 600
120 Cleaning Supplies 3 600
130 Prepaid Insurance 24 750
171 Motor vehicles 90 000
172 Accumulated Depreciation – MV 1 500
200 Accounts Payable 8 100
210 Salaries Payable 5 400
300 Share Capital 150 000
310 Retained Earnings 18 270
$183 270 $183 270

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Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

PROBLEM SET B 3.10 (j)


On Call Services Ltd
Worksheet as at 30 September 2015
Trial Balance Adjustments Adjusted Statement of profit Statement of
Trial Balance. or loss Financial Position
No. Account names Dr $ Cr $ Dr $ Cr $ Dr $ Cr $ Dr $ Cr $ Dr $ Cr $
100 Cash 22 320 22 320 22 320
110 Accounts receivable 37 200 5 400 42 600 42 600
120 Cleaning Supplies 18 600 15 000 3 600 3 600
130 Prepaid insurance 27 000 2 250 24 750 24 750
171 Motor vehicles 90 000 90 000 90 000
172 Accumulated 1 500 1 500 1 500
Depreciation
200 Accounts Payable 8 100 8 100 8 100
210 Salaries Payable 5 400 5 400 5 400
300 Share Capital 150 000 150 000 150 000
310 Retained earnings
315 Dividends 900 900 900
320 Profit or loss summary
400 Service Revenue 55 200 5 400 60 600 60 600
500 Petrol & oil expense 1 980 1 980 1 980
510 Cleaning Supplies Exp 15 000 15 000 15 000
520 Depreciation Expense 1 500 1 500 1 500
530 Insurance Expense 2 250 2 250 2 250
540 Salaries Expense 15 300 5 400 20 700 20 700

Profit 19 170 19 170

Totals $213 300 $213 300 $29 550 $29 550 $225 600 $225 600 $60 600 $60 600 $61 390 $61 390

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Chapter 3: Accrual accounting concepts

BUILDING BUSINESS SKILLS

FINANCIAL REPORTING AND ANALYSIS

BUILDING BUSINESS SKILLS 3.1 FINANCIAL REPORTING PROBLEM

Domino’s Pizza Enterprises Ltd

(a) Items that may have resulted in adjusting entries for accruals are:

 Franchise income (accrued, note 3.8.2)


 Royalties (accrued, note 3.8.4)
 Interest revenue (accrued, note 3.8.5)
 Income tax expense (accrued note 3.10 but explanation is somewhat obscure for
introductory students)
 Employee benefits(Wages, salaries and annual leave) (accrued, note 3.21)
 Provisions (accrued, note 3.22)

(b) The employee benefits provision was $3,383,000. The split between current and non-
current is unclear .Other provisions of $167,000 are included and of total provisions
$3,550,000 ($3,383,000 +$167,000) -- $3,109,000 is classified as current and $441,000
as non-current.
There is also a note stating that $2,715,000 of the current employee benefit provisions
relates to annual leave and long service leave which is not expected to be paid out
within the next twelve months ( that is it is technically current but Dominos do not expect
all employees to claim their leave entitlements within the next year.).

(c) The statement of cash flows reports income taxes paid in 2013 of $11,796,000. The
consolidated statement of profit or loss and other comprehensive income reports income
tax expense of $12,108,000.

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Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

BUILDING BUSINESS SKILLS 3.2 FINANCIAL REPORTING PROBLEM

Domino’s Pizza Enterprises Ltd

(a) The different forms of revenue recorded by Domino’s are:

Extract from Note 3.8 Revenue recognition of the 2013 Domino’s financial report:

“3.8 REVENUE RECOGNITION

Revenue is measured at the fair value of the consideration received or receivable.

3.8.1 Sale of goods


Revenue from the sale of goods is recognised when the Consolidated entity has
transferred to the buyer the significant risks and rewards of ownership of the goods.

3.8.2 Franchise income


Franchise income is recognised on an accrual basis in accordance with the substance of
the relevant agreement.

3.8.3 Rendering of services


Service revenue relates primarily to store building services and is recognised by
reference to the stage of completion of the contract.

3.8.4 Royalties
Royalty revenue is recognised on an accrual basis in accordance with the substance of
the relevant agreement (provided that it is probable that the economic benefits will flow
to the Consolidated entity and the amount of revenue can be measured reliably).
Royalties determined on a time basis are recognised on a straight-line basis over the
period of the agreement. Royalty arrangements that are based on sales and other
measures are recognised by reference to the underlying arrangement.

3.8.5 Dividend and interest revenue


Dividend revenue from investments is recognised when the shareholder’s right to
receive payment has been established (provided that it is probable that the economic
benefits will flow to the Consolidated entity and the amount of revenue can be reliably
measured).

Interest revenue is recognised when it is probable that the economic benefits will flow to
the Consolidated entity and the amount of revenue can be measured reliably. Interest
revenue is accrued on a time basis, by reference to the principal outstanding and at the
effective interest rate applicable, which is the rate that exactly discounts estimated future
cash receipts through the expected life of the financial asset to that asset’s net carrying
amount on initial recognition.”

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Chapter 3: Accrual accounting concepts

(b) The recognition of revenue for the sale of goods is consistent with the principles of
recognition discussed in the chapter.

As stated in the chapter:


IAS 18 ‘Revenue’ prescribes principles for the recognition of revenue for the sale of
goods. Revenue is recognised on the sale of goods when all of the following conditions
are satisfied:

(a) the entity has transferred to the buyer the significant risks and rewards of
ownership of the goods;

(b) the entity retains neither continuing managerial involvement to the degree usually
associated with ownership nor effective control over the goods sold;

(c) the amount of revenue can be recognised reliably;

(d) it is probable that the economic benefits of the revenue will flow to the entity; and

(e) the costs incurred or to be incurred in respect of the transaction can measured
reliably.’

Students should notice that the wording in the Dominos accounts are similar to the
accounting standard applicable at the date the accounts were prepared. .

Note the new accounting standard for revenue recognition was released in May 2014
and is IFRS 15 ‘Revenue from Contracts with Customers’ which is effective from
reporting periods 1 January 2017 but may be adopted earlier. In the new standard a five
step model framework is used. Essentially revenue is recognised when an entity satisfies
a performance obligation.

The following conditions must be met:


o the contract has been approved by parties to the contract
o each parties rights in relation to the goods to be transferred has been identified
o the payment terms have been identified
o the contract has commercial substance; and
o it is probable that the consideration to which the entity is entitled to in exchange
for the goods will be collected.

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Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

(c) The distinction between revenue and other income flows from the source. In Chapter 1
the textbook explains the definition from the conceptual Framework. Income
encompasses both revenue and other gains. Revenue arises in the course of the
ordinary activities of an entity and is referred to by a variety of different names including
sales, fees, interest, dividends, royalties and rent. You examined the definition and
recognition criteria for these items in your answer to part (a) .

Gains represent other items that meet the definition of income and may, or may not,
arise in the course of the ordinary activities of an entity. Gains represent increases in
economic benefits and as such are no different in nature from revenue. Hence, they are
not regarded as constituting a separate element in this Framework. Gains include, for
example, those arising on the disposal of non-current assets. See Note 8 of the
Domino’s financial statements.

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Chapter 3: Accrual accounting concepts

BUILDING BUSINESS SKILLS 3.3 INTERPRETING FINANCIAL STATEMENTS

Micro Ltd
General Journal
(a) (Amounts in millions)

Account name (narration) Debit $ Credit $


$M $M
1. Depreciation Expense 50
Accumulated Depreciation 50
(Depreciation for the year)
2. Office Supplies Expense 2
Office Supplies 2
(To record office supplies used)
3. Administrative Salaries Expense 15
R&D salaries Expense 15
Salaries Payable 30
(To accrue salaries)
4. Insurance Expense 4
Prepaid Insurance 4
(balance of Prepaid Insurance now expired))

5. Rent Expense 12
Prepaid Rent 12
(Prepaid rent now expensed)
6. Interest Expense 20
Interest Payable 20
(To accrue interest expense)

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Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

(b) The accounts are considered in the order of the journal entries:

General Ledger Account Statement of profit or loss Item Increased


(Decreased)
Depreciation Expense Selling general and administrative Increased
Accumulated Depreciation N/A (statement of financial position)
Office Supplies Expense Selling, general and administrative Increased
Office Supplies N/A (statement of financial position)
Administrative Salaries Selling, general and administrative Increased
Expense
R&D Salaries Expense Research and development Increased
Salaries Payable N/A (statement of financial position)
Insurance Expense Selling, general and administrative Increased
Prepaid Insurance N/A (statement of financial position)
Rent Expense Selling, general and administrative Increased
Prepaid Rent N/A (statement of financial position)
Interest Expense Interest expense Increased
Interest Payable N/A (statement of financial position)

(c) Micro Ltd


Statement of profit or loss (partial)
For the year ended 30June 2016
Revenues:
Net sales $8607
Interest revenue and other 418
9025

Expenses:
Cost of sales 7050
Selling, general and administrative 1204 (1)
Research and development 351 (2)
Interest expense 380 (3)
8985

Profit before income tax $40

(1) Original figure $1121 million + 50, depreciation, + 2, office supplies, +


15, salaries, +4, insurance expense, + 12, rent expense, = $1204 million.

(2) Original figure $336 million + $15, salaries, = $351 million

(3) Original figure $360 million + $20 million not recorded = $380 million.

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Chapter 3: Accrual accounting concepts

(d) Useful information to disclose would be the basis of accounting for the items. For
example: when is revenue recognised? The statement of profit or loss has categories of
expenses which are classified according to areas within the business. It may be useful to
further split the expense between administrative and selling. The accounts are usually
prepared using last year as a comparative.

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Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

BUILDING BUSINESS SKILLS 3.4 FINANCIAL ANALYSIS ON THE WEB

Fairfax Media Limited

This solution is based on the 2014 Annual Report of Fairfax Media Limited

See p79 part note 1 to the financial statements

“G REVENUE RECOGNITION
Revenue is recognised to the extent that it is probable that the economic benefits will flow to the
Group and the amount of the revenue can be reliably measured. Revenue from advertising,
circulation, subscription, online services, radio broadcasting and printing is recognised when
control of the right to be compensated has been obtained and the stage of completion of the
contract can be reliably measured. For newspapers, magazines and other publications the right
to be compensated is on the publication date. Revenue from the provision of online advertising
on websites is recognised in the period the advertisements are placed or the impression occurs.

Amounts disclosed as revenue are net of commissions, rebates, discounts, returns, trade
allowances, duties and taxes paid.

Dividend revenue is recognised when the Group’s right to receive the payment is established,
which is generally when the dividend has been declared.

Interest revenue is recognised as it accrues, based on the effective yield of the financial asset. “

(b)Which items referred to in the revenue recognition policy require accrual adjustments and
which items require adjustments for prepaid revenue?
Items which need accrual would be the interest and the dividend revenue.

Items which would need adjustment for prepaid revenue could be if advertising is paid ahead of
the publication or the online impression. It is assumed here revenue is before Fairfax completes
the contract. For example it may be a twelve month subscription to a publication. So Fairfax
would recognise the revenue when they meet their obligation under the contract ie when the
monthly publication is produced and send to the customer.

(c) Is the way that Fairfax Media recognises revenue consistent with the revenue recognition
criteria discussed in the chapter?

The revenue recognition is consistent with the conceptual framework in that the revenue amount
must be reliably measured and it is probable that the economic benefits will flow to the group. It
is also consistent with old IAS 18 Revenue, where Fairfax states it will only recognise when
control of the right to be compensated has been obtained and the stage of completion of the
contract can be reliably measured.

Although the new recognition criteria uses different wording, I do not expect any change to the
method of revenue recognition at Fairfax.

The five step process would be in place:


1. the parties to the contract are committed to perform the respective obligation
2. Fairfax can identify each party’s rights
3. the payment terms can be identified
4. the contracts have commercial substance (ie Fairfax expects to receive the revenue) and
5. it is probable Fairfax will receive the consideration.

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CRITICAL THINKING

BUILDING BUSINESS SKILLS 3.5 GROUP DECISION CASE

(a)
Holiday Travel Australasia
Statement of profit or loss
for the year ended 31 March 2017

$ $
Revenues:
Service revenue ($150000 - $16000) 134 000
Expenses:
Advertising expense
(8700 +15000 – 5200+3200) 18 800
Wages expense ($56400 + $300) 56 700
Electricity expense ($4600 + $320) 4 920
Depreciation expense 1 200
Repair expense ($4000 + $2000) 6 000
Insurance expense ($21000 x 9/12) 15 750
Interest expense ($20000 x 10%x 3/12) 500
Total expenses 115 670
Profit $19 330

(b) Accrual accounting was not followed with respect to several items of revenue and
expense. Revenue recognition criteria had not been followed as revenue of $16,000 had
been recognised for services not yet performed.

Similarly, expense recognition principles were not followed. Expenses were not recorded
even though a decrease in economic benefits had occurred (consumption of supplies,
expiry of insurance) and they could be measured reliably.

Likewise not recording the advertising, electricity and repair expenses (and
corresponding liabilities), was inconsistent with the expense and recognition criteria; it is
probable that an outflow will occur because the parties who have invoiced Holiday Travel
Australasia have a valid and enforceable claim, and the amount can be recognised
reliably as the invoice has been received. Similarly, the expense recognition criteria were
not followed with respect to wages expense and interest expense. While these amounts
were not invoiced they could be measured reliably by calculating the unpaid wages and
interest.

© John Wiley and Sons Australia Ltd, 2016 3.132


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

BUILDING BUSINESS SKILLS 3.6 COMMUNICATION ACTIVITY

Sam Portafello

(a) – (d)

Report on Comparison of Cash-Based and Accrual Accounting

Executive Summary

This report examines two alternative forms of accounting: cash-based and accrual accounting.
Adoption of accrual accounting is recommended because it provides more information about the
financial position of the business, in particular, assets and liabilities, and results in a more
inclusive measure of profit that reflects increases and decreases in all assets and liabilities, and
not only movements in cash.

Detailed Report

Accrual accounting records the events in the periods in which the events occur, rather than in
the periods in which the entity receives or pays cash. This report presents an argument in
favour of the use of accrual accounting for business reporting.

Cash-based accounting records transactions when cash is paid or received. Thus some items
that may be relevant to assessing how the business has performed during the period may be
omitted because the resulting cash is received or paid in a different period. For example, wages
and other expenses, such as telephone and electricity expenses, are omitted to the extent that
they are unpaid at the end of the period. Further, revenues for which the customer has not yet
paid are omitted by cash-based accounting.

Some items are included as revenues and expenses under cash-based accounting that would
be separately identified as assets and liabilities under accrual accounting. For example, a
receipt for rent revenue in advance is accounted for as revenue under cash-based accounting.
Under accrual accounting only that portion of the rental receipt that pertains to the current
reporting period is recognised as revenue; and the amount of the rental payment received for a
rental period that has not expired at the reporting date, is recognised as a liability (rent received
in advance). Examples of omitted assets include prepaid insurance and prepaid rent. Under
cash-based accounting, all insurance premiums and rental paid are treated as expenses even
though the periods covered by the premiums and rentals may not have expired.

Another omitted item under cash-based accounting is depreciation. Accrual accounting


allocates the cost of long-lived assets over their useful life. Under cash-based accounting the
asset is expensed in the period in which it is paid for. Depreciation spreads the cost of the asset
over the periods in which the economic benefits are consumed. In doing so, it provides better
performance measurement because the consumption of economic benefits is spread over the
periods in which the benefits are realised through using the asset.

The differences between accrual accounting and cash-based accounting are more pronounced
when non-current assets are involved. Non-current assets involve large payments and benefits
which extend over more reporting periods than other forms of prepayments (such as insurance
premiums). Accordingly, the acquisition of non-current assets causes greater distortion of profit

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Chapter 3: Accrual accounting concepts

in a single period, thus making the use of accrual accounting more appropriate for the
measurement of profitability.

Information presented on an accrual basis is useful because it reveals relationships that are
likely to be important in predicting future results. Conversely, under cash basis accounting,
revenue is recorded only when cash is received, and an expense is recognised only when cash
is paid. This results in the omission of assets and liabilities. As a result, the cash basis of
accounting often leads to misleading financial statements. Accordingly, accrual accounting is
recommended for your business to provide more comprehensive information about its financial
position and financial performance to assist decision makers.

© John Wiley and Sons Australia Ltd, 2016 3.134


Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

BUILDING BUSINESS SKILLS 3.7 ETHICS CASE

Wellcovered Insurance Ltd

(a) The stakeholders in this situation include anyone who relies on the press release.

(b) Ed’s application of the timeliness constraint is inappropriate. The constraint refers to
situations where delaying the reporting of information until all aspects of a transaction or
event are known may cause loss of relevance. Thus it may be necessary to report
information before all aspects of a transaction are known. In the case of Wellcovered
Insurance, Ed Honcho is suggesting that the information be reported before ANY
aspects of the relevant transactions are known.

(c) Ed’s actions are inconsistent with reliability, which is one of the principal qualitative
characteristics identified in the Framework for the Preparation and Presentation of
Financial Statements. One aspect of reliability is that the information is free of material
error. Ed and Ben are unable to determine the reliability of the information due to the
effects of the computer virus. Accordingly the estimated numbers may be very
misleading,

(d) It would be unethical to report the financial results without full disclosure that they are
estimates, and that actual figures are unavailable due to the computer virus. Users
relying on the information should be aware of its inherent uncertainty and the associated
risks.

(e) A significant overestimation of profit is likely to increase the share price. However, this
would be a temporary gain because the share price would fall when the actual information
is disclosed. Shareholders who sold while the price was high would make a gain at the
expense of those who purchased them. More long-term damage to the company (in the
form of share price and reputation) may occur when shareholders and investors observe
that the company disclosed information that was subsequently found to be materially in
error; they may have less confidence in information provided by the company in future.

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BUILDING BUSINESS SKILLS 3.8 COMMUNICATION ACTIVITY

Woolworths Limited Sustainability Report

Note to instructor the response will depend on which sustainability report the student accesses.
You can vary the question depending on what you wish to student to concentrate their research
on.

Woolworths: http://www.woolworthslimited.com.au/

Students were asked to outline Woolworths the priority of the environmental sustainability
issues. This is contained on pp 10 and 11 of the report.

Priority issues for Woolworths Limited

1. Climate change:

 Use of energy and greenhouse gas emissions.

 Use of fuel and associated greenhouse gas and other emissions in our distribution
network (trucks) and our company cars/business travel.

2. Direct use of water and the effect of drought.

3. Sourcing of our private label products and ingredients as well as other products and services.

4. Packaging – including consumer packaging in our private label products and distribution
packaging.

5. Waste generation from all our stores.

6. Store development (design, construction, equipment and materials specification).

The students were then required to access the latest annual sustainability report and
summarise the achievements in contribution to the community and environmental
stewardship.

It would be expected that the students would then list the goal and how it was measured and
how the achievement in that area was measured.

The following is the link to the 2103 CR report:


http://www.woolworthslimited.com.au/CRReport/2013/downloads/Woolworths_Limited_Corporat
e_Responsibility_Report_2013.pdf

Page 52 outlines the approach which refers to the strategic document given in the questions.

“Woolworths has set targets and made commitments to be a responsible and sustainable
business; this can only be achieved with the support of our people at all levels of our business.

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Solutions manual to accompany Financial accounting: recording, analysis and decision making 5e

As any business should, Woolworths gives priority to issues that are material to the business
and which align with our strategic pillars.

The Destination Zero safety strategy and the Sustainability Strategy 2007–2015 provide the
direction and focus for practices, policies and investment.”

CONTRIBUTION TO THE COMMUNITY

Woolworths target was the equivalent of 1% of pre-tax profit going towards supporting
communities in which it operates.

In 2013 Woolworth’s invested the equivalent $63.6 Million to support community partners
programs such as the Salvation Army Legacy, plus various other charities in Australia. In New
Zealand the Countdown supermarkets contributed by running the Countdown kids hospital
appeal , Countdown food Rescue programs and giving in other local programs.

The $63,3 M was comprised of $33.2 m in cash donation; $19.6 raised by staff and customers;
$1.6m in kind; and $9.2m in staff and management’s time.

Under the heading of ENVIRONMENTAL STEWARDSHIP, the company reported (p34)


The priority was to minimise the carbon footprint Woolworth used aa a baseline the 2007
financial year and the reduction targets are reductions from projected growth based on
a business-as-usual model.

Based on that the 2013 performance was “Woolworths’ total carbon emissions in Australia and
New Zealand were 4.33 Mt, a 5.8% increase from the previous year. Emissions from our
buildings totalled 3.6 Mt, which was a 7.8% increase in emissions.

The report continued with more positive achievements: “Despite this, our carbon emissions are
still 570,000 tonnes lower than they would have been without our investment in energy efficient
and low carbon technology.

Our positive results extend to:


– 13.7% reduction in carbon emissions in 2013 (compared to projected emissions from
business-as-usual growth).
– $141.7 million in estimated operational cost savings by 2015,from $87 million invested
in energy efficiency since 2009.
– 25% reduction in carbon emissions generated per square metre of floor space for new
supermarkets built in Australia in 2013.
– 20.2% reduction in carbon emissions per carton delivered in 2013.

We implemented 22 new projects in 2013, which reduced electricity usage by 16,022 MWh and
reduced carbon emissions by 14,580 tonnes during the year.

Photovoltaic systems at Petrol sites in Hume and Belconnen in the Australian Capital Territory
generated 86,641 kWh, reducing carbon emissions by 92 tonnes – the equivalent of taking 21
cars off the road.

Most of Woolworths’ company car fleet comply with the high environmental standards set for
fuel efficiency and emissions. Annual car emissions have been reduced by 6,438 tonnes
compared to 2007, which is equivalent to taking almost 1,500 vehicles off the road.”

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Other points noted were:


 Water usage and wastage and use of recycled water had improved.
 Reviewed packaging used on 1,349 Own Brand products in Supermarkets, using an
estimated 24,460 tonnes of material; and
 Prevented 9,340 tonnes of unsold food from going to landfill through donations to food
relief organisations, and diverting food waste to composting and waste to energy.

© John Wiley and Sons Australia Ltd, 2016 3.138