SOLUTIONS

QUESTION 2 (from Tute 4)

Perpetual Inventory recording

McGee Pty. Ltd. sells bicycles. The following transactions occurred in the first
week of August 2014:
August
August
August
August
August
August
August

1st
2nd
3rd
4th
5th
6th
7th

Purchased 80 bicycles for $90 each plus GST on credit.

Returned 10 bicycles to the supplier.
Sold 30 bicycles for $150 each plus GST on credit.
A customer returned 5 of the bicycles sold in (3).
Sold 15 bicycles for $130 each plus GST on credit.
Paid $300 for freight costs on purchases of bicycles plus GST.
The physical inventory at the end of first week of August
consisted of 5 fewer bicycles than the inventory account
balance (cost price $90 each).

Required
1) Record general journal entries using the perpetual inventory method.
2) Prepare the Income Statement of McGee Pty. Ltd. for the week, up to the
gross profit (adjusted), after incorporating all of the above.
3) Explain the function of a physical stock-take under the perpetual inventory
method.
4) What affect has GST on the business in relation to the financial figures and
the accounting process?
5) Comment on the significance of the Inventory loss. What action is required?
SOLUTION Q/2
August
1st

Inventory
GST Paid

7 200
720

Accounts Payable

7
920

To record purchase of inventory on credit.

August
2nd

Accounts Payable
Inventory
GST Paid

990
900
90

To record return of merchandise.

August
3rd

Accounts Receivable (30 x $130 plus GST)

4290

Sales

3
900

GST Collected

390

To record sales on credit.

August
3rd

Cost of Goods Sold (30 x $90)

2 700

Inventory

2
700

To record cost of goods sold.

August
4th.

Sales Returns and Allowances (5 x $130

plus GST)
GST Collected

650
65

Accounts Receivable

715

To record return of merchandise from

customer.
Inventory (5 x $90)

450

Cost of Goods Sold

450

To place returned merchandise back into

inventory.
August
5th

Accounts Receivable (15 x $130 plus GST)

2 145

Sales

1
950

GST Collected

195

To record sales on credit.

Cost of Goods Sold (15 x $90)

1 350

Inventory

1
350

To record cost of goods sold.

August
6th

Freight Inwards
GST Paid

300
30

Bank

330

To record payment for freight.

August
7th

Inventory Loss Expense (5 x $90)

450

Inventory

450

To record missing units of inventory.

(2)
McGee Pty Ltd.
Income Statement for the week ended 7th August 2014
Revenue

Sales

5,850

Less: Sales Returns

650

Net Sales
Less Cost of Goods Sold
Gross Profit

5,200
3,600
1,600

Less Inventory Loss

Adjusted Gross Profit

450
1,150

Note: Freight in usually added as part of Cost of Goods Sold.

(3) Physical stock-take is used to verify the accuracy of the inventory records
and determine the loss or gain, if any, from theft, breakage and/or shrinkage or
inaccurate recording under the perpetual inventory method. The loss or gain
discovered during the stock-take should be recorded through a journal entry to
ensure accuracy and reliability of the accounting information.
(4) There would be no affect on the profits of the business unless sales
decreased due to a higher price because of GST although it would be expected
that competitors would also have to add GST to their sales price. If the business
pays GST on purchases or on expenses it may be claimed back from the ATO
(recorded as GST Paid Current Asset) or any GST charged on sales would be
remitted (paid) to the ATO (recorded as GST Collected Current Liability)

Balance Day Adjustments

Classwork

Tutorial 5 -

Question 1 Prepaid expenses

(a)
Martins Medical Centre purchases medical supplies in bulk. The last
purchase on 1 March 2014 was for $990 worth of bandages, dressings and
vaccinations which were recorded as an asset. A count of medical supplies
on 30 June 2014 revealed only $220 worth left in stock.
Required:
Prepare the adjusting entry required at 30 June 2014.
MEDICAL SUPPLIES
1 Mar Cash
30 Jun Supp.Exp.
990
770

Date

SUPPLIES EXPENSE
30 June Med.Supp
770

Details

30 Supplies Expense
June
Medical Supplies (A)

Debit

Credit

770
770

Adjusting entry for supplies consumed.

An adjusting entry is needed at 30 June to recognise that some of the
medical supplies have been consumed. The asset account, medical
supplies, must be reduced. The expense account, supplies expense must
be increased.
(b)
(a) ABC Company paid $12,000 for 12 months advertising in the Yellow
Pages on 1 March 2014. The amount was recorded as prepaid
advertising.
Required
Prepare the adjusting entry required at 30 June 2014.

PREPAID ADVERTISING
1 Mar Cash
30 Jun Adv Exp
12,000
4,000

Date

ADVERTISING EXPENSE
30 Jun Prep Adv
4,000

Details

Debit

30 Advertising Expense
June

Credit

4,000

Prepaid Advertising

4,000

Adjusting entry for 4 months advertising

consumed.
An adjusting entry is needed at 30 June to recognise that some of the prepaid
advertising has been consumed. The asset account, prepaid advertising, must
be reduced. The expense account, advertising, must be increased.
(c)
A business has a motor vehicle which cost $25,000 on 1 January 2014 with an
estimated residual value of $5,000. It has an expected useful life of 5 years.
Required:
Calculate depreciation for the half year ended 30 th June 2014 using the straight
line method.
DEPRECIATION EXPENSE - VEHICLE
30 Jun Acc. Dep.
2,000

Date

ACCUMULATED DEPRECIATION - VEHICLE

30 Jun Dep. Exp.
2,000

Details

30 Depreciation Expense Vehicle

June
Accumulated Depreciation - Vehicle

Debit

Credit

2,000
2,000

Adjusting entry for depreciation of vehicle.

An adjusting entry is needed at 30 June to recognise that some of the asset has
been consumed.
The expense account, depreciation expense, must be increased. The negative
asset account, accumulated depreciation, must be increased (to reflect the
overall reduction in benefits.)

Question 2 Unearned Revenue

(a)
A customer paid a $1,000 in advance on 1 May 2014 for a computer to be
supplied on 15 June 2014, which was recorded as a liability. The computer was
supplied as planned.
Required:
Prepare the adjusting entry to record the revenue earned at 30 June 2014.
UNEARNED REVENUE
30 Jun Sales Rev
1 May Cash
1,000
1,000

Date

Details

30 Unearned Revenue
June
Sales Revenue

SALES REVENUE
30 Jun Unearned
Rev 1,000

Debit

Credit

1,000
1,000

Adjusting entry for revenue earned.

An adjusting entry is needed at 30 June to recognise that the liability has been
reduced as income has been earned for the month ending 30 June. The liability
account, unearned income, must be reduced.
The income account, sales revenue, must be increased.
(b)
Several customers paid deposits on 3 June to secure a copy of a soon to be
released paperback novel. Total deposits were $450. By the 30 June (balance
day), books had been supplied to half of the customers who had pre-ordered.
Required:
Prepare the adjusting entry to record the revenue earned.
UNEARNED REVENUE

SALES REVENUE

30 Jun Sales Rev.

225

3 June Cash

Date

450

Details

30 Unearned Revenue
June

30 Jun Une. Rev .

225

Debit

Credit

225

Sales Revenue

225

Adjusting entry for revenue earned.

An adjusting entry is needed at 30 June to recognise that some of the liability
has been reduced as income has been earned. The liability account, unearned
income, must be reduced. The income account, sales, must be increased.
Question 3 Accrued revenue
A business has invested in shares to earn extra income through dividends. For
the period just ended 30 June 2014, dividends of $8,500 are due but have not
been received.
Required:
Prepare the entry required to record the accrued revenue.
DIVIDENDS RECEIVABLE
30 Jun Div. Rev.
8,500

Date

Details

30 Dividends Receivable
June
Dividend Revenue

DIVIDEND REVENUE
30 Jun Div.
Recei.8,500

Debit

Credit

8,500
8,500

Adjusting entry for revenue accrued.

An adjusting entry is needed at 30 June to recognise that income has been
earned and an asset is created. The asset account, dividends receivable, must
be increased. The income account, dividend income, must be increased.
Question 4 Accrued expenses
A company received and paid its electricity and gas accounts in May, for the
three months of February, March and April. The consumption was $330 per
month.

Required:
Estimate and record the amount owing at 30 June 2014.

UTILITIES EXPENSE
30 Jun Util. Pay.
660

Date

Details

UTILITIES PAYABLE
30 Jun Util.Exp.
660

Debit

30 Utilities Expense
June

Credit

660

Utilities Payable

660

Adjusting entry for expense accrued.

An adjusting entry is needed at 30 June to recognise that an expense has been
incurred and to create a liability. The expense account, utilities, must be
increased. The liability account, utilities payable, must be increased.
Question 5 Adjustments from a Trial Balance
(1) General Journal entries
30 Sep
09

Salaries Expense

450

Accrued Salaries
(salaries owing at balance day)
30 Sep
09

Inventory Loss

450
600

Inventory
(inventory loss$ 82,600 82,000)
30 Sep
09

Depreciation of Machinery

600
5,250

Accumulated Depn. of Machinery

(depreciation for three months)
30 Sep
09

Insurance Expense

5,250
840

Prepaid Insurance
(insurance consumed)
30 Sep
09

Stationery Expense
Stationery Supplies

840
300
300

(recording stationery used)

30 Sep
09

Unearned Revenue

400

Sales
(recognising revenue that has been
earned)

400

(2) Adjusted Trial Balance of Zahra & Co. for the three months ended 30
September 2014

Petty cash
Accounts receivable
Inventory
Prepaid insurance
Stationery supplies on hand
Machinery
Accumulated depreciation - machinery
Accounts payable
GST/VAT collected
Bank overdraft
Unearned Revenue
Loan
Contributed capital, Zahra
Drawings, Zahra
Sales
Sales returns
Cost of goods sold
Rent expense
Salaries expense
Telephone
Insurance expense
Utility expense
Interest expense
Stationery expense
Depreciation of machinery
Inventory loss
Salaries payable
Total

Debit ($)
280
62,500
82,000
1,960
200
112,000

Credit ($)

26,250
60,000
7,900
6,300
400
41,500
112,000
11,200
145,900
1,120
87,500
4,900
21,450
1,400
840
3,500
3,700
300
5,250
600
450
400,700

400,700

(3)

Sales less returns = 145,900 1,120 = net sales $144,780 less COS
$87,500 = Gross profit $57,280 less expenses $41,940 = Net profit
$15,340
(Expenses = 4,900+21,450+1,400+840+3,500+3,700+300+5,250+600)
(4) Statement of changes in Equity
$112,000 + 15,340 11,200 = $116,140

`
Zahra & Co
Statement of Financial Position as at 30 September 2014
Current Assets
Petty Cash
A/c Receivable
Inventory
Stationery
Prepaid Ins
146,940
Non Current Assets
Machinery
Less Acc Depn
85,750

280
62,500
82,000
200
1,960

112,000
(26,250)

Current Liabilities
A/c Payable
60,000
Bank Overdraft
6,300
GST Collected
7,900
Salaries Payable
450
Unearned Income
400
75,050
Non Current Liabilities
Loan
41,500
Total Liabilities
116,550
Owners Equity
Capital
116,140

Totals
$232,690

Totals
$232,690

(6)
Adjusting entries improve the relevance and faithful representation of the
financial statements as the information becomes more complete and allows
users of the information to make more informed decisions. It also ensures that
the financial statements are more faithfully represents the financial performance
and position of the entity.

10

Question 6

Transactions in the books of Handy Andy Ltd.

(a) Handy Andy paid rent of $ 18,000 for the twelve month period from 1
March 2014 to 28 Feb 2015 and recorded the amount in the Prepaid Rent
account. An adjustment entry is to be made at balance day, 30 June 2014.
30/06/2014
Dr. Rent expense (E)
$6,000
Cr. Prepaid Rent (A)
$6,000
th
(Entry to record the rent expenses for the period up to 30 June)
(b) Handy Andy buys stationery for office use from wholesalers, and accounts
for all purchases as Stationery supplies on hand. There was an opening
stock of supplies worth $600 as on 1 July 2013. Subsequently there were
two further purchases of supplies of $650 and $ 865 during the year, to
replace supplies used up. On 30th June 2014, the closing stock of supplies
amounted to $ 570. Prepare the journal entry for 30 th June 2014.
30/06/2014
Dr
Stationery expenses (E)
$1,545
Cr
Stationery supplies on hand (A)
$1,545
(Entry to record stationery used up during the period up to 30 th
June)
(c) Handy Andy bought a welding machine to be used for repair jobs for
clients, on 1 Feb 2014. The machine was brand new and cost $ 22,000.
The estimated useful life of the machine was 10 years with a residual
value of $ 2,000. Prepare the depreciation entry for the year ended 30
June 2014, using the straight line method.
30/06/2014
Dr
Depreciation (Exp)
$833
Cr
Accumulated Depreciation Machinery (A)
$833
(Depreciation for the year on Machinery)
(d) Handy Andy had received an amount of $15,000 on 25 th June 2014, for
work expected to be commenced and completed in July 2014. The
accountant has treated this cash inflow as unearned fees income. Provide
the necessary balance day journal entry for 31 July 2014, assuming the
work was completed.
31/07/2014
Dr.
Unearned Fees income (L)
$15,000
Cr
Fees Income(R)
$15,000
(Entry to record income on completion of work on 31/07/14)
(e) Handy Andys previous balance sheet as on 30 th June 2013 shows a
computer (non-current asset) with original cost of $ 6000, and

11

accumulated depreciation of $1, 800. Reducing balance depreciation

method is applied for computers and the rate is 30% per year. Prepare the
necessary journal entry to account for depreciation for the period ended
30 June 2014.
30/06/2014
Dr
Depreciation (Exp)
$1,260
Cr
Accumulated Depreciation Computers (A)
$1,260
(Depreciation for the year on Machinery)
(f) On 1 January 2014, Handy Andy deposited $40,000 into a 12 month fixed
deposit account with the National Bank, at an annual interest rate of
6.00%, with the interest and principal payable on 31 December 2014. Are
there any entries required to be passed on 30 th June 2014 for this
transaction? If so, what entry should be made in the general journal?
30/06/2014
Dr Interest Receivable (A)
$1,200
Cr
Interest Income(R)
$1,200
(To record interest accrued on term deposit)
(g) The salaries of administrative staff are paid by Handy Andy on the 1 st of
each month, for the previous month. The salaries unpaid for the month of
June 2014 amounted to $20,000, and this was paid on 1 July 2014. Record
the necessary entry to record unpaid salaries as on 30 th June 2014
30/06/2014
Dr
Salaries (E)
$20,000
Cr
Accrued Salaries & Wages (L)
$20,000
(To record wages payable for the month)
Question 7 (Solution)
Trial balance of Office Enterprises as at 30 June 2013
Dr

Bank
Accounts receivable
Drawings
Prepaid insurance
Inventory
Plant and equipment
Accumulated depreciation of plant and
equipment
Accounts payable
Revenue received in advance
Capital
Sales
Cost of goods sold
Salaries
Rent
Telephone
Sundry expenses

Cr

3,000
100,000
300
12,000
50,000
100,000
30,000
75,000
2,000
114,300
500,000
330,000
70,000
36,000
5,000
15,000

12

721,300

721,300

(b)
General Journal of Office Enterprises
Date
Details
2013
June 30 Depreciation of plant and equipment (E)
Accumulated depreciation of plant and
equipment (-NCA)
(depreciation for P&E is recognized)
30 Insurance expense (E)
Prepaid insurance (CA)
(The expired insurance expense for 8 months
is recorded)
30 Salaries Expense(E)
Salaries Payable (CL)
(Unpaid salaried for Fri, Mon and Tue are
recorded)
30 Revenue received in advance (CL)
Accounts receivable (CA)
Sales (R)
(recognized revenue earned)

Debit

Credit

21,000
21,000
8,000
8,000
1,200
1,200
2,000
18,000
20,000

(c)
All of the adjustments affect both expenses and income, profit would be
overstated by $10,200 calculated as follows:
Additional Income
Less additional expenses
Depreciation
21,000
Insurance
8,000
Salaries
1,200
Expenses exceed sales
if the adjustments are not recorded

Question 8

$20,000

30,200
10,200 profit would be overstated

Balance Day adjustments

13

The following unadjusted trial balance has been prepared for Gippsland Trailer
Services (proprietor M. Chang) as at 31 May 2014:

Petty cash
Bank
Accounts receivable
Prepaid rent
Office supplies on hand (1 May,
2010)
Equipment
Accounts payable
Fees received in advance
Bank loan (due 31 December 2012)
Capital M. Chang
Drawings
Fees earned
Wages expense
Advertising
Totals

Debit($)
150
6,660
15,100
1,800
320

Credit ($)

11,520
1,000
1,900
5,700
23,000
700
8,400
3,150
600
$40,000

$40,000

Additional information:
(i)

Four months rent was paid in advance on 1 May 2014.

(ii)

A physical count of supplies on 31 May disclosed office supplies on hand of

$250.

(iii) Equipment was purchased on 1 Jan 2014. The useful life was estimated to
be six years, and its residual value was estimated to be $1,080. Gippsland
Trailers uses the straight line method of depreciation
(iv)

An amount of $1,300 had been earned at 31 May 2014 for the fees
previously paid in advance.

(v)

The Bank loan was borrowed on 1 March 2014, at an interest rate of 8.0%
per annum with the first interest payment due on 31 August 2014.

(vi)

Wages earned by employees for May but not paid amounted to $560.

REQUIRED:
Prepare general journal entries to record the above adjustments at 31 May 2014.
(Narrations are not required)

Solution

14

2014
May

$
31

Rent Expense

450

Prepaid Rent
31

Supplies expenses

450
70

Supplies on Hand
31

Depreciation of equipment

70
725

Accumulated depreciation
equipment
31

Fees Received in Advance

725
1 300

Fees earned
31

Interest expense

1 300
114

Interest payable
31

Wages expense
Wages payable

114
560
560

15