Tutorial Work With Solutions

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Tutorial work - with solutions
Financial Accounting (University of Western Australia)
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ACCT1101 Tutorial Solutions Week 3

Chapter 3
Exercise 3.1 Identifying account categories
P. KETTLE, UPHOLSTERER
Required:
A. Identify each of the ledger accounts as either an asset, a liability, an income or an expense
account. If you think that any of the accounts might fit into more than one of these categories,
explain why.
B. For each of the accounts listed, indicate (a) whether increases are recorded as debits or credits
and (b) whether the normal balance is a debit or a credit.
B.(b)
B.(a) Normal
A. Increases balance
1. Accounts Receivable Asset debit debit
2. If Interest Revenue Income credit credit
If Interest Expense Expense debit debit
3. Cash at Bank Asset debit debit
4. P. Kettle, Capital Equity credit credit
5. Accounts Payable Liability credit credit
6. Land (under mortgage) Asset debit debit
7. Inventory, Fabrics Asset debit debit
8. Investments Asset debit debit
9. Motor Vehicles Asset debit debit
10. If Rent Revenue Income credit credit
If Rent Expense Expense debit debit
11. Mortgage Payable Liability credit credit
12. Upholstering Revenue Income credit credit
13. Wages & Salaries Expense Expense debit debit
14. Workshop Tools Asset debit debit
15. Inventory, Other Materials Asset debit debit

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Exercise 3.5 Recording transactions in general journal and

analysis
LEMON SQUASH COURTS
Required:
A. Prepare the general journal entries to record the transactions (ignore GST).
A.
LEMON SQUASH COURTS
(ignoring GST)
Nov. 1 S. Ball, Drawings $1 500
Cash at Bank $1 500
S. Ball withdrew $1 500 for personal use.
5 Salaries Expense 970

Cash at Bank 970
Salaries paid.
9 Equipment 1 800
Cash at Bank 500
Accounts Payable 1 300
Purchased equipment for cash $500 and the balance
payable in 60 days.
14 Accounts Payable 470

Cash at Bank 470
Payment to suppliers.
18 Advertising Expense 510

Cash at Bank 510
Payment for newspaper advertisements.
22 Cash at Bank 210

Accounts Receivable 210
Cash receipts from credit customers.
30 Cash at Bank 900

Accounts Receivable 2 100
Court Fees Revenue 3 000
Court fees received and receivable.

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Problem 3.13 Journal entries, posting to running balance ledger accounts,

And trial balance
ANG MAJILD, BOAT HIRE
Required:
A. Journalise the transactions.
B. Post the entries from the general ledger to running balance general ledger accounts and enter the
posting references in the general journal.
C. Prepare a trial balance as at 30 November 2012.
A.
General Journal
2012
Nov 1 Cash at Bank 1-101 15 000
A. Majild, Capital 3-101 15 000
Cash invested by owner
3 Rent Expense 5-110 590

Cash at Bank 1-101 590
Rent paid
4 Equipment 1-120 7 000

Cash at Bank 1-101 3 000
Loan Payable 2-110 4 000
Equipment purchased for cash and
loan payable
5 Supplies 1-110 250

Accounts Payable 2-101 250
Supplies purchased
15 Cash at Bank 1-101 1 530

Accounts Receivable 1-102 70
Revenue 4-101 1 600
Revenue for first half of month
18 Accounts Payable 2-101 250

Payment for supplies
19 Insurance Expense 5-120 190

Cash paid for insurance

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24 Cash at Bank 1-101 40

Accounts Receivable 1-102 40
Receipt of payment from customers
27 Supplies 1-110 70
Accounts Payable 2-101 70
Supplies purchased
29 Cash at Bank 1-101 1 330

Account Receivable 1-102 60
Revenue 4-101 1 390
Revenue for second part of month
30 Telephone Expense 5-130 60

Telephone expense paid
B.
ACCOUNT: Cash at Bank Account No. 1-101
Date Explanation Post Debit Credit Balance
Ref
2012
1 11 A. Majild, Capital 15 000 15 000
3 11 Rent Expense 590 14 410
4 11 Equipment 3 000 11 410
15 11 Revenue 1 530 12 940
18 11 Accounts Payable 250 12 690
19 11 Insurance Expense 190 12 500
24 11 Accounts Receivable 40 12 540
29 11 Revenue 1 330 13 870
30 11 Telephone Expense 60 13 810
ACCOUNT: Accounts Receivable Account No. 1-102

Ref
15 11 Revenue 70 70
24 11 Cash at Bank 40 30
27 11 Revenue 60 90

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ACCOUNT: Supplies Account No. 1-110

Ref
5 11 Accounts Payable 250 250
27 11 Accounts Payable 70 320
ACCOUNT: Equipment Account No. 1-120

Ref
4 11 Cash and Loan Payable 7 000 7 000
ACCOUNT: Accounts Payable Account No. 2-101

Ref
5 11 Supplies 250 250
18 11 Cash at Bank 250 -
27 11 Supplies 70 70
ACCOUNT: Loan Payable Account No. 2-110

Ref
4 11 Equipment & GST Outlays 4 000 4 000
ACCOUNT: A. Majild, Capital Account No. 3-101

Ref
1 11 Cash at Bank 15 000 15 000
ACCOUNT: Revenue Account No. 4-101

Ref
15 11 Cash and Receivables 1 600 1 600
29 11 Cash & Receivables 1 390 2 990

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ACCOUNT: Rent Expense Account No. 5-110

Ref
ACCOUNT: Insurance Expense Account No. 5-120

Ref
19 11 Cash at Bank 190 190
ACCOUNT: Telephone Expense Account No. 5-130

Ref
C.
ANG MAJILD, BOAT HIRE
Trial Balance
as at 30 November 2012
Account Account Debit Credit
No.
Cash at bank 1-101 $13 810

Accounts receivable 1-102 90
Supplies 1-110 320
Equipment 1-120 7 000
Accounts payable 2-101 $70
Loan payable 2-110 4 000
A. Majild, Capital 3-101 15 000
Revenue 4-101 2 990
Rent expense 5-110 590
Insurance expense 5-120 190
Telephone expense 5-130 60
$22 060 $22 060

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Chapter 6
Exercise 6.3 Journal entries perpetual inventory system, GST
CELTIC LTD (plus GST)

Required:
Using the perpetual inventory system, record transactions (1) to (7) in exercise 6.2 in the general journal
assuming the business is registered for GST
1. Inventory (80 x $150) 12 000

GST Outlays (80 x $15) 1 200
Accounts Payable(80 x $165) 13 200
Purchase of inventory on credit.
2. Accounts Payable (9 x $165) 1 485

Inventory (9 x $150) 1 350
GST Outlays (9 x $15) 135
Return of merchandise
3. Accounts Receivable (25 x $264) 6 600

Sales (25 x $240) 6 000
GST Collections (25 x $24) 600
Sales on credit.
Cost of Sales (25 x $150) 3 750

Inventory 3 750
Cost of inventory sold.
4. Office Supplies 360

GST Outlays 36
Cash at Bank 396
Purchase of office supplies.
5. Sales Returns and Allowances (5 x $240) 1 200

Accounts Receivable (5 x $264) 1 320
Return of merchandise from customer.

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Inventory (5 x $150) 750

Cost of Sales 750
Returned merchandise put back into inventory.
6. Accounts Receivable (22 x $264) 5 808

Sales (22 x $240) 5 280
Sales on credit.
Cost of Sales (22 x $150) 3 300

Inventory 3 300
Cost of goods sold.
7. Inventory Shortage Expense (3 x $150) 450

Inventory 450
Missing units of inventory.

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Exercise 6.5 Journal entries periodic inventory system, GST
LABELS LTD (plus GST)

Required:
Using the periodic inventory system, prepare general journal entries to record transactions (1) to (7) in
exercise 6.4, assuming the business is registered for the GST.
1. Purchases 26 000
GST Outlays 2 600
Credit purchases of inventory.
2. Cash at Bank 9 240

Sales 15 870
GST Collections 1 587
Cash and credit sales.
3. Sales Returns and Allowances 820

GST Collections 82
Return of merchandise from customer.
4. Office Equipment 1 400

GST Outlays 140
Cash at Bank 1 540
Purchase of office computer.
5. Accounts Payable 517

Purchases Returns and Allowances 470
GST Outlays 47
Merchandise returned from customer.
6. Purchases (6 200 x 75%) 4 650

GST Outlays 465
Merchandise purchased at a trade discount.

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7. Accounts Receivable 3 740

Sales 3 400
GST Collections 340
Credit sales.
Problem 6.6 Journal entries involving discounts, closing entries, and

income statement perpetual inventory system
MONTANA LTD
Required:
A. Prepare general journal entries to record the transactions assuming that a perpetual inventory
system is used.
B. Assuming that Montana Ltd completes the closing process at the end of each month, prepare entries
to close the accounts.
C. Prepare an income statement for the month of April 2014.
A.
2014
April 1 Cash at Bank 500
Sales 500
10 games sold for cash.
Cost of Sales 300

Inventory 300
Cost of games sold.

Cash at Bank 600
Payment for games purchased on 6 March
4 Inventory 750
Accounts Payable 750
Purchase of games on credit
5 Sales Returns & Allowances 200

Cash at Bank 200
Refund for games returned.

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Inventory 120
Cost of Sales 120
Games returned to inventory.
April
8 Freight Inwards 30
Cash at Bank 30
Freight on April 4 purchase.

Inventory 150
Returned 5 games purchased on 4 April.
12 Accounts Receivable 1 000

Sales 1 000
Sold 20 games on credit.
Cost of Sales 600

Inventory 600
Cost of games sold.

Discount Received 12
Cash at Bank 588
(25 5 returned = 20)
Paid for 4 April purchase.
23 Sales Returns & Allowances 250

Games returned by customer.
Inventory 150
Cost of Sales 150
Games returned put back into inventory.
Cash at Bank 750

Cash received from customer.

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24 Inventory 900
Accounts Payable 900
30 games purchased on credit.
April
Cash at Bank 882
Paid for 24 April purchase.
Inventory shortage:
Physical Count 64 games @ $30
Records show 69 games @ $30 should be on hand.
Entry to record shortage 5 units @ $30.

Inventory Shortage Expense 150
Inventory 150
Inventory short by 5 games.
B. Closing entries
30 Profit or Loss Summary 1 260
Sales Returns & Allows 450
Cost of Sales 630
Inventory shortage 150
Freight Inwards 30
Close debit temporary
accounts
Sales 1 500
Profit or Loss Summary 1 530
Close credit temporary
accounts
Profit or Loss Summary 270

Retained Earnings 270
Transfer profit to retained
earnings.

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C. Perpetual
MONTANA LTD
Income Statement
for the month ended 30 April 2014
INCOME
Sales Revenue ($500 + $1 000) $1 500
Less: Sales returns and allowances ($200 + $250) 450
Net sales revenue 1 050
Cost of sales ($300 - $120 + $150 + $600 - $150) 660

Less: Discount received 30
630
GROSS PROFIT 420
Less: Expenses
Inventory shortage 150
PROFIT $270

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Decision Bookshop inventory records

Analysis
UNIBOOKS STORE
Required:
Explain the main differences between the two methods of accounting for inventory and how each method
works. Which method of inventory has Books for US been using? Which inventory method you
would recommend when the computerised accounting system is installed, and why?
The perpetual inventory system keeps a continuous (perpetual) record of inventory on hand and inventory sold year
to date. When inventory is purchased, it is recorded in an inventory control account in the general ledger
and a record is kept in a subsidiary account, such as the card system the bookshop has been using. When
inventory is sold, the inventory is then transferred from the inventory account to the cost of sales account
reported in the Income Statement and the subsidiary records are adjusted.
The periodic inventory system records inventory purchases directly reported in the purchases account in
the general ledger. At the end of the accounting period, a physical stock take of inventory is taken and
this is used to calculate the Cost of Sales to be shown in the Income Statement and also this balance of
inventory is shown in the Balance Sheet.
The advantages and disadvantages of each system are listed below:
Perpetual System
Advantages
Provides a current and continuous record Requires less clerical work
of inventory transactions
Provides more timely information to Most often used by a business that sells a
management for use in controlling and large number of items with low unit cost.
planning for inventory
Assists profit control as it enables
management to obtain interim profit
results without the need for a physical
stock take.
Periodic System
Disadvantages
More costly to operate (although with the Does not provide a record of goods sold or
advent of computerised inventory o hand throughout the year without
systems, this is not as significant as it undertaking a physical count or using one
once was. of the estimating methods available.
Unibooks Store has been using a perpetual inventory system as it keeps a separate card for each book title
in the store and every time a book is purchased or sold, the card is adjusted. When the computerised
accounting system is installed, it would be wise to keep the perpetual inventory system as
computerisation will make this even simpler to do and the advantages listed above are greater than for the
periodic inventory system.

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Chapter 7
Exercise 7.7 Recording Transactions in purchases and sales
journals
HALPIN LTD
Required:
A. Ignoring GST, enter the appropriate transactions into the purchases and sales journals for May,
and explain how each would be posted to accounts in the ledgers.
B. Assuming that the company is registered for the GST, enter the appropriate transactions into
suitably ruled purchases and sales journals, and explain how each would be posted to accounts
in the ledgers.
A.
Purchases Journal
Date Date of Account Terms Post Purchases

Inv. Ref.
2010
May 3 T Tallis 2/15,n/30 1 800
24 K Kelly 2/15,n/30 1 700
3 500
Sales Journal
Date Inv. No. Account Terms Post Sales

Ref.
2010
May11 236 M Lockyer 1 300
1 300
Postings are:
Purchases Journal the accounts of Tallis and Kelly in the accounts payable subsidiary ledger would be
credited with the individual purchases on May 3 and May 24 (i.e. the dates of the transactions). The total
of the journal would be debited to the Purchases account and credited to the Accounts Payable Control
account in the general ledger on 31 May.
Sales Journal - the account of Lockyer in the accounts receivable subsidiary ledger would be debited with
the individual sale on May 11 (i.e. the date of the transaction). The total of the journal would be debited to
the Accounts Receivable Control account and credited to the Sales accounts in the general ledger on 31
May.

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B.
Purchases Journal
Date Date of Account Terms Post Purchases GST Accounts

Inv. Ref. Outlays Payable
2010
May 3 T Tallis 2/15,n/30 1 800 180 1 980
24 K Kelly 2/15,n/30 1 700 170 1 870
3 500 350 3 850
Sales Journal
Date Inv. Account Terms Post Sales GST Accounts

No. Ref. Collections Receivable
2010
May11 236 M Lockyer 1 300 130 1 430
1 300 130 1 430
Postings are:
Purchases Journal the accounts of Tallis and Kelly in the accounts payable subsidiary ledger would be
credited with the individual purchases on May 3 and May 24 (i.e. the dates of the transactions). The
amounts posted to the individual accounts would include GST. The total of the journal would be posted
on 31 May to the following accounts in the general ledger - Purchases account debited with total of
Purchases column, GST Outlays debited with the total of the GST Outlays column, and Accounts Payable
Control Account credited with the total of the Accounts Payable column.
Sales Journal - the account of Lockyer in the accounts receivable subsidiary ledger would be debited with
the individual sale on May 11 (i.e. the date of the transaction). The amount posted to the individual
account would include GST. The totals of the journal would be posted on 31 May to the following
accounts in the general ledger - Sales account credited with total of Sales column, GST Collections
credited with the total of the GST Collections column, and Accounts Receivable debited with the total of
the Accounts Receivable column.

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Exercise 7.8 Journals, subsidiary ledgers and control accounts
BOSTON AND ASSOCIATES
Required:
A. Enter the opening balances of the control account and subsidiary ledger accounts and post the
April entries and totals in the three journals to the accounts (ignore GST).
B. Prepare a schedule of accounts receivable at 30 April and reconcile the total with the control
account in the general ledger.
A. General Ledger
Accounts Receivable Control A/c

Date Explanation Post Ref. Debit Credit Balance
Apr. 1 Balance 19 728
Sales return GJ 198 19 530
Sales SJ 7 704 27 234
Cash receipts CRJ 12 708 14 526
Accounts Receivable Subsidiary Ledger
Clark
Sale S 2 430 5 022
Cash receipt CR 2 232 2 790
Hayden

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Hussey

Sales return GJ 198 8 478
Sale S 1 440 9 918
CR 4 140 5 778
Johnson

Sale S 1 980 5 688
Ponting
Sale S 1 854 1 854

Cash receipt CR 738 1 116
B.
Schedule of Accounts Receivable
Clark $2 790
Hayden 1 512
Hussey 5 778
Johnson 3 330
Ponting 1 116
$14 526

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Problem 7.5 Accounting with sales, cash receipts and general journals
MYRTLE LTD
Required:
A. Record the June transactions in the appropriate journals. Make all postings to the appropriate
general ledger accounts and to the accounts receivable subsidiary ledgers.
B. Reconcile the subsidiary ledger with the Accounts Receivable Control account in the general
ledger.
A.
Sales Journal
p.1.
Date Invoice Account Post Amount
Ref.
3/6 324 R Dikes 2 880
10/6 325 R Robson 400
12/6 326 D Freward 640
27/6 327 S Samson 1 080
$5 000
(1-1200/
4-4100)
Cash Receipts Journal

p.1.
Date Account Post. Cash at Dis. Alld Sales Accts. Other
Ref. Bank Recble
8/6 S Samson 1 120 1 120
13/6 R Dikes 2 822 58 2 880
16/6 T Jennings 2 710 2 710
20/6 Bills Pay. 2 200 20 000 20 000
21/6 Cash Sales 440 440
23/6 Market Sec. 1 150 18 000 18 000
26/6 D Freward 6 580 6 580
30/6 S Samson 1 058 22 1 080
$52 730 $80 $440 $14 370 $38 000
(1-1100) (5-5200) (4-4100) (1-1200) (x)

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General Journal
Date Description Post Ref. Debit Credit

2/6 Sales Returns & Allowances 4-4150 260
Accts. Recble Control 1-1200/ 260
T Jennings
Return of defective goods
25/6 Bills Receivable 1-1300 5 350

Accts Recble Control
R Robson 1-1200/ 5 350
Receipt of promissory note.
General Ledger
Cash at Bank 1-1100

1/6 Balance 26 800
30/6 CRJ1 52 730
79 530
Marketable Securities 1-1150

1/6 Balance 45 500 23/6 CRJ1 18 000
Balance 27 500
45 500 45 500
27 500
Accounts Receivable Control 1-1200

1/6 Balance 19 732 2/6 GJ1 260
30/6 SJ1 5 000 25/6 GJ1 5 350
30/6 CRJ1 14 370
30/6 Balance c/d 4 752
24 732 24 732
30/6 Balance b/d 4 752
Bills Receivable 1-1300

25/6 GJ1 5 350
Bills Payable 2-2200

1/6 Balance 3 600
20/6 CRJ1 20 000
23 600

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Sales 4-4100
1/6 Balance 309 000
30/6 SJ1 5 000
30/6 CRJ1 440
314 440
Sales Returns and Allowances 4-4150

1/6 Balance 3 840
2/6 GJ1 260
4 100
Dividend Income 4-4200

1/6 Balance 1 500
Interest Income 4-4300

1/6 Balance 1 350
Gain on Sale of Marketable Securities 4-4400

1/6 Balance 420
Discount Allowed 5-5200

1/6 Balance 2 880
30/6 CRJ1 80
2 960

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Accounts Receivable Subsidiary Ledger
R Dikes
Date Post Ref Debit Credit Balance
3/6 SJ1 2 880 2 880
13/6 CRJ1 2 880 -
D Freward
31/5 5 940
12/6 SJ1 640 6 580
26/6 CRJ1 6 580 -
T Jennings
31/5 2 970
2/6 GJ1 260 2 710
16/6 CR1 2 710 -
R Robson
31/5 4 950
10/6 SJ1 400 5 350
25/6 GJ1 5 350 -
S Samson
31/5 1 120
8/6 CRJ1 1 120 -
27/6 SJ1 1 080 1 080
30/6 CRJ1 1 080 -
T Sheeny
31/5 4 752

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B.
Schedule of Accounts Receivable
as at 30 June 2013
R Dikes $ -
D Freward -
T Jennings -
R Robson -
S Samson -
S Sheeny 4 752
Total $4 752
Critical Using technology to improve business information

Thinking Case
Required:
A. What advice would you give Jenny regarding setting up an accounting system? In what ways would a
computerised accounting package help Jenny make better decisions about her business?
B. What source documents do you think Jenny should use as input into the new accounting system? What
sort of data should be captured on these source documents to improve the accuracy of the accounting
information produced?
A. Jenny could probably set up a spreadsheet based accounting system relatively easily, providing she
has skills in this area. The advantage of designing her own system (on a spreadsheet) is that she could
capture information which is useful specifically to her. The disadvantage is that it would be time-
consuming to set up and maintain the system, which may require frequent modifications. Also, it may
be more prone to errors in processing transactions (due, for example, to incorrect calculations,
formulae etc.). A computerised accounting software package is relatively cheap, is easy to install and
run, and is frequently supported by the software vendor (should she have any queries about the
system itself). Many off the shelf packages allow a reasonable degree of flexibility in the way the
system is set up, and in the way information is reported.
An integrated accounting package can assist by providing up-to-date information for all customer
accounts that are due. The accounts payable master file should provide details of all accounts that
must be paid in order to claim discounts and to pay when due. Computerisation enables all
transactions to be analysed via enquiries at any time to ensure all necessary payments are made and
monies received. Integrated packages can update the general ledger at the same time as the
transaction is recorded in the master files for receivables and payables.
By having readily available information about accounts receivable and accounts payable, Jenny will
be able to improve the cash position of the business. She will be able to follow up outstanding
amounts from customers before they become too long overdue (and potentially uncollectible), and
monitor cash payments (timings and amounts) to accounts payable, taking advantage of discounts
offered where this is shown to be financially worthwhile.
Jenny will also be able to keep a record of the time the graduates have charged to client work, and
how much she has to pay them for the time worked. She will also be able to set up separate accounts
for each of her clients and charge hours worked directly to their accounts, thereby maintaining
control of hours and charges.

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B. Source documents Jenny is likely to require will include:

a. Time sheets or time records for each graduate and herself, which indicate the dates, start
times and finish times worked on each clients account, and the total hours worked. Each
client should have a separate account so that time and other costs can be billed directly to
each customer.
b. Tax invoices these will be produced from the timesheets, plus any other incidental costs
incurred in connection with individual clients. The tax invoices should reflect the number of
hours charged, the charge-out rate per hour, and the GST charged on the total fee.
c. Suppliers invoices for any items or outsourced work which is billed to Jenny in connection
with her work where possible these should be allocated into the individual customer
accounts (where the expense is related to particular clients)
d. Bank statements from which Jenny can take the bank fees and other charges, record any
interest earned, and which should be reconciled to the cash book maintained for the business.
e. Credit card statements (if a credit card is used for business expenditure) which will be used in
a similar way to the bank statement described above.
f. Petty cash slips if Jenny maintains a small petty cash float for incidental expenses for the
office, she should document the nature and amount of the expenses in a petty cash book. If
some expenses relate to client work, these may be charged on to the customers.

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Chapter 4
Exercise 4.8 Adjusting entry for prepaid insurance
BEAUTIFUL BATHROOMS
Required:
A. Give the adjusting entry at 30 June for year ending 30 June 2014.
B. What amount should be reported in the 30 June 2014 statement of financial position for Prepaid
Insurance?
C. If no adjusting entry was made on 30 June, by how much would profit be overstated or
understated? Would assets be overstated or understated? Explain.
D. What would your adjusting entry in requirement A be if the premium of $5000 was recorded by
debiting Insurance Expense?
A. Insurance Expense 3 750

Prepaid Insurance 3 750
($3 750 = $5 000 x 9/12)
Insurance expired. Prepaid insurance recorded at
$5 000 initially.
B. Prepaid insurance $1 250 ($5 000 - $3 750)

current asset.
C. Profit would be overstated by $3 750, because

the expense for insurance that had not been
recorded. Assets would also be overstated as the
correct balance for prepaid insurance should be
$1 250 and it would have been left at $5 000.
Hence it would be overstated by $3 750.
D. Prepaid Insurance 1 250

Insurance Expense 1 250
Insurance prepaid (thus leaving $3 750 in
Insurance Expense).

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Exercise 4.9 Adjusting entry for unearned revenue
EVERYDAY RENTALS LTD
Required:
A. Give the adjusting entry at 30 June 2012.
B. What amount (if any) should be reported in the statement of financial position at 30 June 2012?
C. If no adjusting entry were made on 30 June, by how much would profit be overstated or
understated? Would liabilities be overstated or understated? Explain.
D. What would your adjusting entry be in requirement A if the amount of $9 600 had been credit to
Rental Revenue on 1 May 2012?
A. Unearned Revenue 3 200

Rental Revenue 3 200
Rent revenue earned
($9 600 x 2/6 = $3 200)
B. Unearned Revenue $6 400 current liability

in the statement of financial position
C. Profit understated by $3 200, because the

rental revenue of $3 200 would not have been
recognised. Liabilities overstated by $3 200
as the Unearned revenue account (a liability
representing revenue received in advance of
performance) would not have been reduced.
D. Rental Revenue 6 400

Unearned Revenue 6 400
Unearned rental revenue recognised.
$9 600 x 4/6 = $6 400

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Problem 4.12 Adjusting entries and financial statements
JASONS ELECTRICAL REPAIR SERVICE
Required
A. Journalise adjustments in the general journal of the entity.
B. Prepare an income statement and a statement of changes in equity for the year ended 31
December 2013.
C. Prepare a statement of financial position (properly classified in narrative form) as at 31
December 2013.
D. Present the Interest on Mortgage Expense account showing detailed entries for the year ended 31
December 2013 as it would appear after all adjustments have been made.
A.
General Journal
Date Particulars Debit Credit
Adjusting entries
2013
Dec 31 Advertising Supplies 1 700
Advertising Expense 1 700
Advertising supplies not yet used.
Stores Supplies 900

Sundry Expenses 900
Store supplies not yet used
Rent Revenue 900

Unearned Rent 900
Rent not yet earned (net of GST)
Depreciation Electrical Equipment 7 750

Accumulated Depreciation 7 750
- Electrical Equipment
Depreciation on equipment
($20 000/8 + $70 000/10 x 9/12)

Prepaid Insurance 1 250
Insurance expired
($1 500 x 1/2 + $1 000 x 6/12)

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Wages Expense 1 230

Wages Payable 1 230
Accrued wages
Interest Expense 150

Interest Payable 150
Interest accrued on mortgage since 1
November. ($900 x 2/12)
B.
Income Statement
for the year ended 31 December 2013
INCOME
Electrical repairs revenue $106 000
Rent revenue 900
$106 900
EXPENSES
Advertising expense $3 200
Other selling expenses 7 500
Electricity expense 5 000
Rent expense 4 800
Wages expense 39 230
Insurance expense 1 250
Depreciation of store equipment 7 750
Sundry expenses 8 650
Interest expense 900
78 280
PROFIT $28 620
EDWARDS ELECTRICAL REPAIR SERVICE

Statement of Changes in Equity
for the year ended 31 December 2013
J. Dunstan, Capital 1 January 2013 $62 500
Plus: Profit for the period 28 620
Less: J. Dunstan, Drawings (5 500)
J. Dunstan, Capital 31 December 2013 $85 620

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C.
Statement of Financial Position
as at 31 December 2013
CURRENT ASSETS
Cash at bank $9 200
Accounts receivable 48 500
Prepaid insurance 1 250
Advertising supplies 1 700
Store supplies 900
Marketable securities 18 600
TOTAL CURRENT ASSETS $80 150
NON-CURRENT ASSETS
Electrical equipment 90 000
Less: Accum. depreciation electrical equipment (20 250)
TOTAL NON-CURRENT ASSETS 69 750
TOTAL ASSETS $149 900
CURRENT LIABILITIES
Accounts payable $45 000
Wages payable 1 230
Interest payable 150
GST payable 2 000
Unearned rent 900
TOTAL CURRENT LIABILITIES $49 280
NON-CURRENT LIABILITIES
Mortgage payable 15 000
TOTAL LIABILITIES 64 280
NET ASSETS $85 620
EQUITY
J. Dunstan, Capital $85 620
TOTAL EQUITY $85 620
D.
Interest Expense
2013 2013
May 1 Cash 450 Jan 1 Interest payable 150
Nov 1 Cash 450 (reversing entry)
Dec 31 Interest payable 150 Dec 31 P & L Summary 900
$1 050 $1 050

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Ethical Issues The impact of a bonus incentive scheme on the

financial statements
Required:
A. Who are the stakeholders in this situation?
B. Why do you believe Freda asked Lucia to do this?
C. What are the ethical issues involved her?
D. Can Lucia defer revenues and accrue as many expenses as possible and still be ethical?
A. The stakeholders are:

The manager, Freda Chuse
The accountant, Lucia
The present and potential shareholders of the entity.
B. Freda may well be asking Lucia to reduce the reported profit in an attempt to avoid losing the
government grant for employing and training apprentice mechanics. It may also be that as Fredas
bonus is maximised when the firm earns $3m. there is no benefit to her in making $3.5m profit.
However, if Freda believes that the following accounting period is not likely to make as much
profit it is in her best interests to defer the recognition in excess of $3m. until the following
accounting period to maximise her bonus in that period while having no negative impact on her
current periods bonus.
C. It is acceptable for Lucia to ensure that all assets, liabilities, income and expenses are recorded in
the correct accounting period. It becomes unacceptable, and unethical, if Lucia recognises other
assets, liabilities which do not legitimately reflect the entitys performance and financial position
in the current period. Nevertheless, there are several techniques which Lucia could use to
manipulate (or massage) the profit figure e.g. changing the method of calculating depreciation,
or changing useful lives of assets. These changes in techniques may be generally acceptable, and
quite legal; but are they ethical? It becomes unethical if the manager places so much pressure on
Lucia to carry out adjustments that she believes should not be made, on the grounds that the
results for the period would become distorted.
D. Lucia can accrue all possible incomes and defer all possible expenses through adjusting entries,
but should not be involved in going so far as to distort the financial performance and financial
position of the entity so as to mislead present and potential shareholders. However, how does
Lucia assess that the entitys results are real or distorted and misleading to shareholders?
Discuss.

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Chapter 5
Exercise 5.5 Closing entries and post-closing trial balance
ANTHONYS FRAMING SERVICES

Required:
A. Prepare closing entries to be made on 31 December 20103.
B. Prepare a post-closing trial balance as at 31 December 2013.
A.
General Journal
Closing entries
Particulars Debit Credit
Framing Revenue $62 400

Commission Revenue 1 800
Profit or Loss Summary $64 200
Close income accounts to Profit or Loss Summary

Salaries Expense 14 040
Depreciation Expense 4 200
Framing Supplies Expenses 2 040
Rent Expense 4 800
Close expense accounts to Profit or Loss
Summary

Anthony McIntosh, Capital 37 440
Close Profit or Loss Summary to Capital

Anthony McIntosh, Drawings 14 400
Close Drawings to Capital

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B.
ANTHONYS FRAMING SERVICES
Post Closing Trial Balance
as at 31 December 2013
Account Dr Cr
Cash at bank $15 960
GST outlays 2 160
Framing supplies 6 000
Prepaid insurance 3 000
Framing equipment 36 000
Accumulated depreciation framing equipment $18 000
Accounts payable 6 000
Salaries payable 2 040
Interest payable 3 120
Mortgage payable 7 800
Unearned framing revenue 6 720
GST collections 3 600
$88 320 $88 320

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Exercise 5.8 Reversing entries accrued expense
BOB THE MOWERMAN
Required:
A. Give the adjusting entry needed on 30 June 2014.

B. Give the closing entry.
C. Give the reversing entry that could be made on 1 July 2014 and the subsequent entry to record
the payment of 30 September 2014.
D. Assuming that no reversing entry was made, give the entry to record the interest payment on 30
September 2014.
General Journal
Date Particulars Debit Credit
2014
A. June 30 Interest Expense $240
Interest Payable $240
Accruals of interest
B. June 30 Profit or Loss Summary 240

Close interest expense account
C. July 1 Interest Payable 240

Reverse adjusting entry for accrual
Sept. 30 Interest Expense 900

Cash at Bank 900
Payment of interest
D. Sept. 30 Interest Payable 240

Cash at Bank 900
Payment for interest
(if no reversing entry).

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Problem 5.9 Adjusting and reversing entries
NORTHAM LTD
Required:
A. Prepare adjusting entries for items 1 to 7.
B. Prepare reversing entries where appropriate.
A.
General Journal
Adjusting Entries
1. Depreciation Expense 10 488

Accum. Depr. Office Equipment 10 488
Depreciation on office equipment
2. Wages Expense 1 656

Wages Payable 1 656
Wages accrued
3. Interest Expense 600

Interest Payable 600
Interest accrued on loan
4. Advertising Expense 2 240

Prepaid Advertising 2 240
Advertising used during financial year
5. Service Fees Receivable 6 528

Service Fees Revenue 6 528
Fees owed and not yet received.
6. Unearned Revenue 864

Service Fees Revenue 864
Service fees earned for two months.
7. Retained Earnings 15 000

Dividend Payable 15 000
Dividend declared.

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B.
General Journal
Reversing Entries
Note: Reversing entries apply mainly to adjusting entries which are accruals, i.e. adjusting entries which
involve a future receipt of cash (receivable) or a future payment of cash (payable).
Only adjusting entries may be reversed. Reversals do not apply to normal external transactions.
1. NO REVERSING ENTRY, NOT AN ACCRUAL
2. Wages Payable 1 656

Wages Expense 1 656
Reversing entry on wages accrued
3. Interest Payable 600

Reversing entry on interest accrued on loan
4. NO REVERSING ENTRY, NOT AN ACCRUAL, BUT A

DEFERRAL
5. Service Fees Revenue 6 528

Service Fees Receivable 6 528
Reversing entry for fees owed and not yet
received.
6. NO REVERSING ENTRY, NOT AN ACCRUAL, BUT A

DEFERRAL
7. NO REVERSING ENTRY NEEDED AS CASH PAYMNET WILL

EQUAL THE LIABILITY FOR DIVIDENDS.

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Problem 5.11 Adjusting entries, financial statements, closing

entries, reversing entries
DANIELLA FLOSS, DENTIST
Required:
A. Journalise the adjusting entries.
B. Journalise the closing entries.
C. Prepare an income statement, a statement of changes in equity and a balance sheet.
D. Journalise the reversing entries (if any).
A. Adjusting entries
30 June
1. Dental Supplies Expense 146 000
Dental Supplies 146 000
Dental supplies used.
Office Expenses 5 000

Office Supplies 5 000
Office supplies used.
2. Depreciation Expense Equipment 45 000

Accum. Depreciation Equipment 45 000
Depreciation of equipment
3. Prepaid Rent 4 500

Rent Expense 4 500
Rent paid in advance.
4. Wages Expense 1 500

Wages Payable 1 500
Wages owing to nurse.

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B. Closing entries
Fees Revenue 610 000


Dental Supplies Expense 146 000
Depreciation Expense - Equipment 45 000
Wages Expense 101 500
Rent Expense 45 500
Office Expenses 34 000
General Expenses 70 000

Daniella Floss, Capital 168 000
Daniella Floss, Capital 140 000

Daniella Floss, Drawings 140 000
C.
Income Statement
for the year ended 30 June 2013
INCOME
Dental fees revenue $610 000
EXPENSES
Dental supplies expense $146 000
Wages expense 101 500
Office expenses 34 000
Depreciation expense 45 000
Rent expense 45 500
General expense 70 0000 442 000
PROFIT $168 000

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Statement of Changes in Equity
Daniella Floss, Capital 1 July 2012 $190 000
Profit for the year 168 000
358 000
Drawings during the year (140 000)
Daniella Floss, Capital 30 June 2013 $218 000

Balance Sheet
as at 30 June 2013
CURRENT ASSETS
Cash at bank $7 000
Prepaid rent 4 500
Office Supplies 3 000
Dental Supplies 14 000
Total current assets $79 500
NON-CURRENT ASSETS
Dental equipment 300 000
Less: Accum. depn. dental equip. (140 000)
Total non-current assets 160 000
TOTAL ASSETS $239 500
CURRENT LIABILITIES
Accounts payable 20 000
Wages payable 1 500
TOTAL LIABILITIES 21 500
NET ASSETS $218 000
EQUITY
Daniella Floss, Capital $218 000
TOTAL EQUITY $218 000
D. Reversing Entries
3. Rent Expense 4 500

Prepaid Rent 4 500
Reversing entry for deferral recorded in expense.
4. Wages Payable 1 500

Wages Expense 1 500
Reversing entry for accrual.

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Chapter 10
Discussion Question 4
4. Briefly explain the nature of the conceptual framework for general purpose financial reporting
and discuss the perceived advantages and disadvantages of having a conceptual framework.
A conceptual framework of accounting theory should enable standard setters to develop standards
which are consistent and logically formulated, provide guidance to accountants in areas of
accounting where standards have not been established, and enable standard users to better
understand standards and proposed standards.
The IASB and FASB are currently undertaking a joint project to amend the conceptual
framework. The overall objective of this joint project is to develop a common conceptual
framework that is both complete and internally consistent. The Boards want to develop a
framework which will provide a sound foundation for developing future accounting standards that
are principles-based, internally consistent, internationally converged, and that lead to financial
reporting which provides the information needed for investment, credit, and similar decisions.
That framework, which will deal with a wide range of issues, will build on the existing IASB and
FASB frameworks.
Are there any disadvantages in having a conceptual framework? Consider the cost of developing
the framework versus the benefits. Also, since it is not compulsory for standard setters to follow
the conclusions of the CF, will it be ignored?

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Exercise 10.5 Revenue and revenue recognition
CRAFTERS LTD
Required:
Discuss fully how Crafters Ltd should account for the contract justifying your answer by reference to
relevant definitions and recognition criteria and relevant accounting standards.
The Framework defines income as:
increases in economic benefits during the accounting period in the form of inflows or
enhancements of assets or decreases of liabilities that result in increases in equity, other than
those relating to contributions from equity participants.
A liability is defined in the current Framework as a present obligation of the entity arising from past
events, the settlement of which is expected to result in an outflow from the entity of resources embodying
economic benefits.
A definition of revenue is contained in accounting standard IAS 18/AASB 118 Revenue as follows:
the gross inflow of economic benefits during the period arising in the course of the
ordinary activities of an entity when those inflows result in increases in equity, other
than increases relating to contributions from equity participants.
There is no doubt that Crafters Ltd has an increase in future economic benefits which appear to be income
(in the form of revenue) in that the increase is a result of ordinary activities; but there has also been an
increase in liabilities in that the entity is presently obliged to provide a service over time for the next 15
years.
IAS 18/AASB 118 requires that revenue from rendering of services is recognised as income only on the
satisfaction of four criteria:
(a) the amount of the revenue can be reliably measured
(b) it is probable that the economic benefits associated with the transaction will flow to the entity
(c) the stage of completion of the transaction at reporting date can be reliably measured
(d) the costs incurred for the transaction and the costs to complete the transaction can be
measured reliably.
Accordingly, as a result of items (c) and (d) in the recognition criteria for services, it is incorrect for
Crafters Ltd to recognise the full $200m as revenue as the standard requires revenue from services to be
related to a reliable measure of the stage of completion. At 30 June , no completion has occurred and
therefore there can be no revenue recognised.
See also in the chapter (learning objective 7) the IASBs proposals to amend the recognition of revenue
under contractual arrangements, especially the proposal to identify performance obligations and allocate
the transaction price across those performance obligations.

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Exercise 10.9 Liabilities
NORWOOD LTD
Required:
Discuss how the items should be treated in the general purpose financial reports of Norwood Ltd if the
company were to comply with the provisions of the Framework. Ignore GST.
Note that a liability is defined in the current Framework as a present obligation of the entity arising from
past events, the settlement of which is expected to result in an outflow from the entity of resources
embodying economic benefits
(a) Provision for uninsured losses.

It is argued in a situation such as this that there is no present obligation for Norwood Ltd at the
end of the reporting period; hence no liability and no expense should be recognised. There is no
present obligation to any external party merely because the entity makes a book entry to
recognise insured losses and a provision liability for such losses. There is no liability and no
expense until losses from floods (or other such natural disaster) occurs.
(b) Norwood Ltds contract with Burnside Ltd, with a 10% deposit only paid.
Does Norwood Ltd have a liability? Is there a present obligation with a sacrifice requiring
settlement in the future that cannot be reasonably be avoided by Norwood Ltd? Apart from the
10% deposit of $100 000 paid by Norwood Ltd, which Norwood Ltd can debit to a plant and
equipment asset and credit to Cash at Bank, can Norwood Ltd record a further asset and liability
for plant yet to be delivered? It is possible that if the plant and equipment are being made to the
exact specification of Norwood Ltd, and the contract has been started by Burnside Ltd, indicating
an intention to complete, then a liability and asset could be recognised.
(c) Provision for plant maintenance.

It is argued in a situation such as this that there is no present obligation for Norwood Ltd at
reporting date; hence no liability and no expense should be recognised for plant maintenance at
the very least until a contract has been signed for the maintenance work to be performed.

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Problem 10.2 Conceptual framework
PARAFIELD LTD
Required:
For each item, determine which accounting concept(s) (if any) is violated, and explain why. For each
violation, indicate the correct treatment.
1. The qualitative characteristic of representation and the requirements of IAS 2/AASB 102 Inventories
have been violated. The value of the inventory should be measured by its net realisable value if
lower than cost. The financial report must provide a faithful representation of the transactions and
events which have occurred; hence, if the price of the inventory has fallen, the best representation of
the fair value of the inventory is net realisable value at reporting date. (But consider what to do if the
fair value is above cost.)
2. Parafield Ltd has not yet performed under the contract. At this point, Parafield Ltd has and should
record a liability for $7 500. There is no revenue, and revenue recognition should be deferred until
performance is carried out in the following year. The cash receipts should be recorded by a debit to
Cash at Bank for $7 500 and a credit to Unearned Revenue (a liability) for $7 500.
Is the accounting treatment different if the order placed with Parafield Ltd was for specialised
equipment, which only Parafield Ltd is licensed to make? Under IAS 18/AASB 118s revenue
recognition criteria, it could be argued that no violation has occurred in the recognition of the increase
in the asset via accounts receivable, as the inflow may pass the probability test and can be reliably
measured. The credit entry, however, would be to a liability rather than to revenue, as the contract is
executory in nature.
Note also the musings of the IASB/AASB to issue a standard on revenue recognition from contracts
with customers, as discussed under learning objective 7 in the chapter.
3. The principle of valuing assets at cost as per IAS 16/AASB 116, and the definition of income, have
been violated. Under the accounting standard, the machinery must be recorded (debit) at its actual
cost of $32 000 as measured by the amount of cash paid (credit) to acquire it.
4. No violation has occurred as the cost of the ignition security locks is probably immaterial. The costs
should be charged to expense during the current year.
5. The definition of an expense and the expense recognition criteria have been violated. Since the
building improvements are attached to the property, the future benefits of the improvements are
consumed over the life of the building, and should be depreciated over 15 years, which is shorter
than the overall useful life of the improvements. Thus, the depreciation expense on the building
improvements should be recorded at $8 000 per annum rather than $6 000.

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Chapter 11
Exercise 11.7 Bank reconciliation
SANDYS SANDWICHES
Required:
Prepare the bank reconciliation statement at 31 March, 2013.
SANDYS SANDWICHES
Bank Reconciliation Statement
as at 31 March 2013
Balance as per bank statement Cr $13 155.10

Add: Deposit not credited 1 270.30
14 425.40
Less: Cheques not presented
Cheque No. 41 $339.50
Cheque No. 43 262.64
Cheque No. 46 423.90
Cheque No. 51 195.10 1 221.14
Cash at Bank balance Dr $13 204.26

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Problem 11.4 Bank reconciliation
CAVANAGHS CHARTER TOURS

Required:
A. Set up cash receipts and cash payments journals with totals shown, and enter the necessary
adjustments, and complete the journals for June.
B. Post the journals in requirement A to the general ledger Cash at Bank account and balance the
account.
C. Prepare a bank reconciliation statement at 30 June.
D. What is the amount of cash that should be reported on the 30 June balance sheet?
A.
Cash Receipts Journal Cash Payments Journal
Date Particulars Cash at Date Particulars Cash at
Bank Bank
Jun 30 Progress, total $22 898 Jun 30 Progress, total $24 576
Vinko Ltd Bank fees 32
(dishon. cheque) (327) Adj. to Chq. 842 Error 9
Electronic transfer 680
Interest revenue 54
$23 305 $24 617
B.
Cash at Bank
1/6 Balance b./d $6 300 30/6 CPJ $24 617
30/6 CRJ 23 305 Balance c/d 4 988
$29 605 $29 605
30/6 Balance b/d $4 988
C.
CAVANAGHS CHARTER TOURS
Bank Reconciliation Statement
as at 30 June
Balance as per bank statement Cr $4 033
Add: Outstanding deposit 1 200
$5 233
Less: Unpresented cheques: no. 864 $60
no. 866 73
no. 870 112 245
Balance as per Cash at Bank account Dr $4 988
D. Cash at bank $4 988

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Chapter 18
Exercise 18.3 Net cash flow from operating activities, indirect
method
[Also an Excel file the solution to this exercise is also available]
BRUCES PAINTS
Required:
Prepare the net cash flows from operating activities for the year ended 30 June 2014 for Bruces Paints
using the indirect method.
BRUCES PAINTS
Statement of Cash Flows (Extract)
For year ended 30 June 2014
Inflows
(Outflows)
Cash flows from operating activities:
Profit $197 000
Adjustments for:
Depreciation expense 63 000
Changes in assets and liabilities:
Increase in accounts receivable (16 500)
Decrease in inventories 20 000
Increase in accounts payable 6 500
Decrease in wages payable (12 500) 60 500
Net cash from operating activities 257 500

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Exercise 18.4 Investing and financing activities
OCHRE LTD
Required:
A. Prepare the net cash flow used in investing activities section of the statement of cash flows using the
classification shown in Appendix A of IAS 7/AASB 107.
B. Prepare the net cash used in financing activities section of the statement of cash flows using the
classification shown in Appendix A of IAS 7/AASB 107.
A.
OCHRE LTD
Statement of Cash Flows (Extract)
Cash flows from investing activities:

Purchase of investments (7,9) $(390 000)
Purchase of property, plant and equipment (2,6) (510 000)
Proceeds from sale of equipment (4) 240 000
Proceeds from sale of investments (8) 80 000
Interest received (8) 6 000
Net cash used in investing activities $(574 000)
B.
Cash flows from financing activities:

Proceeds from issue of share capital (1) $500 000
Proceeds from long-term borrowings (10) 700 000
Repayments of borrowings (3) (180 000)
Dividends paid (5) (110 000)
Net cash from financing activities $910 000

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Ethics and Reeling in the bank

Governance
REEL ESTATE LTD
Required:
A. Who are the stakeholders in this situation?
B. Are there ethical issues involved here? If so, what are they?
C. What would you do if you were Natascha Nitschke?
A. Stakeholders in this situation are:

Bob Budgie who owns the company and is trying to manipulate the statement of cash flows so
that he can get a loan from the bank.
Natasha Nitschke who prepares the accounts for Reel Estate Ltd.
The bank from whom Bob wants to get a loan.
B. Major ethical issues arise in that Bob Budgie is using his position to try to influence Natasha to
undertake activities in order to try to gain finance from a bank, even though the cash flows from
operations suggest that the business may not be able to afford to repay the loan. Bob is
suggesting that the sale of the building be reclassified to cash flows from operations, but the
company is not in the business of selling its own office regularly. The office would have been a
non-current asset of the firm and not part of its inventory. He is not acting ethically in that he is
proposing to be dishonest and is not behaving in a professional manner. Natasha Nitschke is
being asked to falsify accounts and violate normal company practice. Her personal integrity, and
certainly her code of professional conduct as a professional accountant, is at stake if she were to
acquiesce to Bobs suggestions.
C. Natasha Nitschke should speak to Bob Budgie and explain that there was no scope to do
anything. Natasha should stress her obligations to conform with accounting standards in
classifying the sale of a non-current asset as a cash flow from investing activities. Natasha should
explain that what Bob Budgie is proposing is underhand and that she has an obligation to her
profession to prepare the accounts in accordance with the accounting standards. Natasha could
not afford to compromise her professional standards and would need to consider approaching the
ASIC if Bob persisted in his approach. Natasha needs to consider what will happen if she gives
in to Bob on this issue. In future it will be even more difficult to stand up to him.

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Chapter 12
Exercise 12.4 Doubtful Debts Net Credit Sales Method
ALYAS AGRICULTURAL SUPPLIES LTD
Required:
A. Record the transactions in general journal form.
B. What is the balance in the Allowance for Doubtful Debts accounts and the Bad Debts Recovered
account? Where are these accounts shown on the financial statements?
A
June 5 Allowance for Doubtful Debts $1 125
Accounts Receivable Z Sufiya $1 125
(Wrote of Z Sufiya as uncollectable)
June 15 Accounts Receivable Z Sufiya 875
Bad Debts Recovered 875
(Z Sufiya recovered debt in part)
Cash at Bank 875
Accounts Receivable Z Sufiya 875
(Collected part payment in cash)
June 30 Bad Debts Expense 12 000
Allowance for Doubtful Debts 12 000
B. Allowance for Doubtful Debts = Contra current asset Balance Sheet balance
$2 100 1 125 + 12 000 = $12 975 (shown as a deduction from accounts receivable)
Bad Debts Recovered $875 = Income Income Statement

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Exercise 12.6 Doubtful debts ageing method
SANYAM SOLICITOR
Required :
A. Prepare the appropriate general journal entries.
B. Prepare and balance the Allowance for Doubtful Debts account at 30 June 2013.
C. Show the amount(s) to be charged as bad debts expense for the year.
A.
June 30 Bad Debts Expense $10 600

Allowance for Doubtful Debts $10 600
(Required Allowance is $23 500 Opening
Allowance $21 500 + Bad Debts $8 600)
Allowance for Doubtful Debts 8 600

(Wrote off bad debts)
B.
Allowance for Doubtful Debts
2013 2012
30/6 Accounts Receivable $8 600 1/7 Balance $21 500
2013
Balance 23 500 30/6 Bad Debts Expense 10 600
$32 100 $32 100
1/7 Balance $23 500
C. Bad Debts Expenses - $10 600

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Problem 12.8 Ageing of accounts receivable and adjustment of

allowance
MYNNS MOVING PTY LTD
Required:
A. Use the Ageing Analysis of Accounts Receivable to estimate the bad debts amount
B. Prepare the general journal adjusting entry to record estimated bad debts on 30 June 2013.
C. Give the entry to write off the account of Cathy in August 2013, $12 353.
D. Do you have any comments or observations on Mynns Moving Pty Ltds credit policies?
A.
Current $43,021.00 1% $430.21

30 60 4%
days
outstanding
$3,245.00 $129.80
61 90 $9,746.00 10%
days
outstanding
$974.60
90 180 $12,353.00 25%
days
outstanding
$3,088.25
180+ days $2,596.00 60%
outstanding
$1,557.60
Estimated Bad Debts (inc GST): $6,180.46
Estimated Bad Debts (ex. GST): $5,618.60
B.
June 30 Bad Debts Expense $4 468

Allowance for Doubtful Debts $4 468
Record allowance for doubtful debts.

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C.
2013
Sept. Allowance for Doubtful Debts $11 230
GST Collections 1 123
Accounts Receivable Cathy $12 353
Write-off Cathy account.
D. There appears to be a problem with the estimation of the allowance for doubtful debts. The write-
off of Cathys account has wiped out the allowance for doubtful debts and given a significant debit
balance. While this will be addressed when the account is replenished at the end of the period it represents
an under-provision in the previous period and and over estimation of profit. Mynn would be well advised
to review large outstanding accounts. Of particular concern is Derek who has been extended additional
credit while owing money from 6 months previously, this is poor credit control.

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Chapter 13
Discussion Questions
1. What costs should be included in the cost of an item of inventory?
According to IAS 2/AASB 102, cost in relation to inventories comprises all costs of purchase,
costs of conversion, and other costs incurred in bringing the inventories to their present location
and condition. The cost of inventory therefore represents the sum of all direct and indirect costs
incurred to bring the merchandise to a saleable condition and to its existing location. Cost
includes the purchase price, import duties and taxes (other than those subsequently recoverable
from tax authorities, such as GST), transport, handling charges such as insurance on the goods
while in transit, and other costs directly incurred in acquiring the goods and bringing them to their
present location and condition. Any trade discounts or rebates, or settlement discounts received,
must be deducted to arrive at cost.
For a manufacturer, the cost of inventories under IAS 2/AASB 102 also includes the cost of
conversion, which comprises all costs directly related to the units of production. Hence, the costs
of direct labour, plus a systematic allocation of the entitys fixed and variable factory overhead
costs incurred in converting raw materials into finished goods, are included in the cost of
conversion. However, the following costs are excluded from the cost of inventories:
the abnormal cost of wasted materials, labour and overhead
storage costs, unless those costs are necessary before a further production stage
administrative overhead costs that do not contribute to bringing the inventories to their
present location and condition
selling and distribution costs.
8. Why is the lower of cost and net realisable value rule required by accounting standards?
Is it permissible to revalue inventories upwards? If so, when? Are there any limits to
revaluation?
The lower of cost and net realisable value rule is used in order to ensure that inventory is not
overvalued. Based on the qualitative characteristic of faithful representation, it is considered
suitable that if inventory cost is below net realisable value, the most faithfully representative
valuation is cost, and if net realisable value is less than cost, the most faithfully representative
valuation is net realisable value. Inventory cannot be valued at more that the entity would obtain
from its sale.
It is not permissible to revalue inventory upwards, above cost. For inventory valued at net
realisable value, if this value rises and the circumstances for the original write-down no longer
exist, the standard permits a reversal of the write-down, but only if the reversal does not exceed
the original cost. Cost is the maximum value permitted to be placed on inventories. See IAS
2/AASB 102, as discussed in learning objective 5 of this chapter of the text.

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Exercise 13.6 FIFO and average cost flow methods periodic and perpetual inventory systems
POWER LTD
Required:
A. Using a periodic system and the weighted average method, calculate the cost of the 11
items in inventory on 30 June and the cost of sales for the year.
B. Using a perpetual system and the moving average method, calculate the cost of the year-
end inventory and the cost of sales.
C. Using a periodic system and the FIFO method, determine the cost of the 11 items in
inventory on 30 June and the cost of sales for the year.
D. Using a perpetual system and the FIFO method, determine the cost of the year-end
inventory and the cost of sales.
E. Compare the results obtained under requirements A, B, C and D above.
A. Weighted average method: Periodic

Ending inventory = 11 x average cost $38.47 = $423.17
$280 + $418 + $400 + $210

Average cost = = $38.47
34 units
Cost of sales = 23 units x $38.47 = $884.81
B. Moving average method: Perpetual
Purchases Sales Balance

Date Explanation Units Unit Total Units Unit Total Units Unit Total
Cost Cost Cost Cost Cost Cost
1/7 Beg. invent. 8 $35.00 $280.00
14/8 Purchases 11 $38 $418 19 $36.74 $698.00
25/9 Sales 9 $36.74 $330.66 10 $36.74 $367.34
8/1 Purchases 10 $40 $400 20 $38.37 $767.34
3/3 Purchases 5 $42 $210 25 $39.09 $977.34
13/4 Sales 11 $39.09 $429.99 14 $39.09 $547.35
10/6 Sales 3 $39.09 $117.27 11 $39.09 $430.08
$877.92
Ending inventory $430.08 Cost of sales $877.92

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C. FIFO: Periodic
Ending inventory:
5 units @ $42.00 $210.00
6 units @ $40.00 $240.00
11 units $450.00
Cost of sales = $1 308 - $450 = $858

8 units @ $35.00 $280.00
11 units @ $38.00 $418.00
4 units @ $40.00 $160.00
23 units $858.00
Cost of goods available for sale:

$280 + $418 + $400 + $210 = $1 308
D. FIFO: Perpetual
Purchases Sales Balance
Date Explanation Units Unit Total Units Unit Total Cost Units Unit Total
Cost Cost Cost Cost Cost
1/7 Beg. invent. 8 $35.00 $280
14/8 Purchases 11 $38 $418 8 $35.00
11 $38.00 $698
25/9 Sales 8 $35.00 $280.00
1 $38.00 $38.00 10 $38.00 $380
8/1 Purchases 10 $40 $400 10 $38.00
10 $40.00 $780
3/3 Purchases 5 $42 $210 10 $38.00
10 $40.00
5 $42.00 $990
13/4 Sales 10 $38.00 $380.00 9 $40.00
1 $40.00 $40.00 5 $42.00 $570
10/6 Sales 3 $40.00 $120.00 6 $40.00
5 $42.00 $450
$858.00
Ending inventory $450.00 Cost of sales $858.00

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E. FIFO reported the same ending inventory balance and cost of sales under the periodic and
perpetual system. The reported ending inventory balance and cost of sales for all options only
resulted in slight variations. The highest ending inventory balance was recorded using FIFO.
The lowest inventory balance was recorded using the weighted average method (periodic). In all
cases, the cost of sales is inversely related to ending inventory, i.e. the highest inventory balance
corresponds with the lowest reported cost of sales and the lowest ending inventory balance
corresponds with the highest cost of sales calculation.

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Chapter 14
Exercise 14.8 Overhauls, repairs and revision of depreciation
BRILLIANT LTD
Required:
Prepare general journal entries to record:
1. the purchase of the machine on 2 January 2013
2. the day-to-day repairs on the machine in 2016
3. the overhaul of the machine on 3 January 2017
4. depreciation expense on the machine on 31 December 2017.
Annual depreciation (first four years) = ($36 000 - $6 000)/5 = $6 000 per year.
1. General journal entry on 2 January 2013:

Machine $36 000
GST Outlays 3 600
Cash at Bank $39 600
Purchase of machine.
2. General journal entry to record repairs during 2016:

Repairs and Maintenance Expense 900
GST Outlays 90
Cash at Bank 990
Minor repairs to machine.
3. General journal entry to record overhaul on 3 January 2017:

Accumulated Depreciation (4 x $6 000) 24 000
Machine 24 000
Reverse accumulated depreciation.
Machine 9 600
GST Outlays 960
Cash at Bank 10 560
Overhaul of machine.
Expense on Parts Scrapped 400

Machine 400
Carrying amount expense of parts scrapped
4. General journal entry to record depreciation expense for year ended 31

December 2017:
Depreciation Expense Machine 4 300
Accumulated Depreciation Machine 4 300
Depreciation expense for year.

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(36 000 24 000 + 9 600 - 400) -= 21 200 carrying amount

Depreciation = (21 200-4 000)/4 = 4 300
Exercise 14.15 Depreciation and overhauls
DASHING LTD
Required:
A. Prepare general journal entries (narrations are not required, but show all workings) to record the
transactions and to record depreciation adjustments necessary for the year ended 30 June 2014.
B. Justify the value you recognised as the cost of the second-hand truck purchased on 22 September
2013 by reference to the requirements of IAS 16/AASB 116.
A.
05/07/13 Printing Machine (35 000 + 1 200 36 200

GST Outlays 3 620
Cash at Bank 1 320
01/08/13 Accounts Payable 19 250

Cash at Bank 19 250
22/09/13 Truck 28 400

GST Outlays 2 770
Cash at Bank 31 170
01/10/13 Accounts Payable 19 250

Cash 19 250
01/03/14 Depreciation expense Printing Machine 4 427

Accumulated Depreciation Printing Machine 4 427
(36 200 3 000/5 = 6 640 x 8/12 = $4 427)

Printing Machine 4 427

GST Outlays 1 823
Cash at Bank 20 053
Expense of Parts Replaced 14 000

(New carrying amt = 36 200 4 427 = 31 773 + 18 230
- 14 000 = $36 003)
30/06/14 Depreciation expense Printing Machine 1 778

(36 003 4 000/6 = 5 334 x 4/12 = 1 778)

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Depreciation expense Truck 5080

Accumulated depreciation Truck 5080
(28 400 3000/5 = 5080)
B. IAS 16/AASB 116 requires assets to be recognised at their cost on acquisition date. According to
the standard, the cost of an item of property, plant and equipment comprises:
(a) its purchase price, including import duties and non-refundable purchase taxes, after
deducting trade discounts and rebates;
(b) any costs directly attributable to bringing the asset to the location and condition necessary
for it to be capable of operating in the manner intended by management; and
(c) the initial estimate of the costs of dismantling and removing the item and restoring the
site on which it is located, the obligation for which an entity incurs either when the item
is acquired or as a consequence of having used the item during a particular period for
purposes other than to produce inventories during that period.
In the case of the truck the purchase price was $26 000 and directly attributable costs included the
transfer costs (stamp duty), new tyres and sign writing. Thus, the total cost of the truck is $28
400.

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Chapter 15
Discussion Question
4. Discuss whether internally generated intangible assets should be treated in the same way as
acquired intangible assets.
Under IAS 38/AASB 138, an intangible asset is an identifiable non-monetary asset without physical
substance. They are usually held for use in the production or supply of goods or services, for rental to
others, or for administrative purposes. IAS 38/AASB 138 requires an intangible asset, whether
acquired externally or generated internally, to be recognised only if the cost can be measured with a
faithfully representative measure. It is argued in the standard that certain intangibles generated
internally will never satisfy the recognition test and should not be recorded in the accounts. Such
intangibles are brand names, mastheads, publishing titles, customer lists and items similar in
substance. Nevertheless IAS 38 does allow recognition of internally generated patents and copyrights
once they have gone beyond the research phase and reached the development phase (see the text).
Once in the development phase, internally generated intangibles such as patents and copyrights, can
be recognised as an asset only if the entity can demonstrate all of the following:
- the technical feasibility of completing the asset so that it will be available for use or sale
- its intention to complete the asset and use or sell it
- its ability to use or sell the asset
- how the asset will generate future economic benefits, including a demonstration that a market
exists for the asset or its products
- the availability of adequate resources to complete the development and to use or sell the asset
- the ability to measure the expenditure on the asset with a faithfully representative
measure.
It is expected that under IAS 38/AASB 138, very few internally generated intangible assets will be
recognised.

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Exercise 15.1 Revaluations (increase and decrease)
COOGEE LTD
Required:
Prepare general journal entries to record the revaluations, including any closing entries at the end of the
reporting period.
2013
1 July Accumulated Depreciation Machinery 100
000
Expense on Revaluation of Machinery 15 000
(P/L)
Machinery 115 000
Revaluation decrease on machinery
1 July Accumulated Depreciation Buildings 120

000
Buildings 100 000
Gain on Revaluation Buildings 20 000
(OCI)
Revaluation increase on buildings
Closing entries (extract)
2014
30 June Gain on Revaluation Buildings (OCI) 20 000
Other Comprehensive Income Summary 20 000
Transfer of OCI gain
30 June Other Comprehensive Income Summary 20 000

Revaluation Surplus 20 000
Transfer of OCI to revaluation surplus
30 June Profit or Loss Summary 15 000

Expense on Revaluation of Machinery 15 000
(P/L)
Transfer of expense
30 June Retained Earnings 15 000

Transfer of revaluation decrease

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Exercise 15.4 Non-current asset derecognition
GRANVILLE LTD
Required:
Prepare the journal entries for each of the following events:
1. Sell the tractor for cash of $60 000 after 2 years of use
2. Trade in the tractor for a $50 000 allowance after 4 years on another tractor with a cash
price of $110 000.
3. Scrap the tractor after 7 years of use. The tractor was given to a scrap dealer who pays $500
to remove it.
Depreciation calculations:
Sum of years digits = n(n+1)/2 = (8 x 9)/2 = 36

Assuming sum-of-years-digits depreciation, depreciation for the first year would be:
($100 000 - $20 000) x 8/36 = $17 778.
For the second year, depreciation = ($100 000 - $20 000) x 7/36 = $ 15 556.
Hence, total accumulated depreciation after 2 years = $33 334
For the third year, depreciation = ($100 000 - $20 000) x 6/36 = $13 333
For the fourth year, depreciation = ($100 000 - $20 000) x 5/36 = $11 111
Hence total accumulated depreciation after 4 years = $57 778
For the fifth year, depreciation = ($100 000 - $20 000) x 4/36 = $8 889
For the sixth year, depreciation = ($100 000 - $20 000) x 3/36 = $6 667
For the seventh year, depreciation = ($100 000 - $20 000) x 2/36 = $4 444
Hence total accumulated depreciation after 7 years = $77 778.
1.
Cash at Bank 60 000

Proceeds on Sale of Tractor 60 000
Sale of tractor
Carrying Amount of Tractor Sold 66 666

Accumulated Depreciation Tractor 33 334
Tractor 100 000
Carrying amount on disposal, resulting in
a loss of $6 666.

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2.
Tractor (new) 110
000
Cash at Bank 60 000
Proceeds on Sale of Tractor 50 000
Trade-in of old tractor for new
.
Carrying Amount of Tractor Sold 42 222
Tractor 100 000
Carrying amount on disposal.
3.
Expense on Disposal of Tractor 22 222
Tractor 100 000
Expense on scrapping of tractor.
The $500 cost of removal was paid by the

scrap dealer, not by Granville Ltd; hence no
entry.

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Chapter 16
Exercise 16.4 Annual leave payable
JET PLANE LTD
Required:
A. Calculate the annual leave payable liability for Jet Plane Ltd as at 30 June 2014 based on a 52-
week year.
B. The balance of the annual leave payable liability before the above calculation was $4310. Show
the general journal entry to record the appropriate balance in the Annual Leave Payable
account.
A.
Employee Annual Salary Weeks Leave
Leave Payable
Outstanding
Don $120,120.00 6 $13,860
Jenver
Alicia $ 83,200.00 4 $6,400
Mae
Palao $ 71,760.00 3 $4,140
Marx
Vanessa $ 67,600.00 4 $5,200
Michael
George $ 56,160.00 1 $1,080
Moore
Richard $ 52,000.00 5 $5,000
Nutini
Total Leave Payable $35,680
B.
2011
30 June Annual Leave Expense 31 370
Annual Leave Payable 31 370
To record year end annual leave liability
($35 680 - $4 310)

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Exercise 16.6 Warranties
PEACEMAKER LTD
Required:
A. Prepare the general journal entry at 30 June 2014 to adjust the Provision for Warranties to the
required level.
B. Record the payment of the warranty claim on 6 October 2014 in general journal format.
A.
2014
30 June Warranty Expense 19 000
Provision for Warranties 19 000
To provide for warranty expense related to sales
made in the year ended 30 June.
($1 600 000 * 4%) - $45 000 = $6 000
B.
2014
6 Oct Provision for Warranties 600
Cash at Bank 600
To record warranty costs incurred.

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Exercise 16.7 Issue of debentures
COOPER LTD
Required:
A. Record the issue of the debentures in general journal entry form, assuming allotment of all
debentures on 1 July.
B. Record interest payments for 31 December and 30 June in the first financial year of issue.
A.
1 July Cash Trust 1 000 000

Application Debentures 1 000 000
To record money received on application.
1 July Cash at Bank 1 000 000

Cash Trust 1 000 000
To record transfer of cash on allotment.
Application Debentures 1 000 000

Debentures 1 000 000
To record allotment of debentures.
B.
31 Dec. Debenture Interest Expense 40 000

Cash at Bank 40 000
To record half-yearly interest on 8% debentures
30 June Debenture Interest Expense 40 000

Cash at Bank 40 000
To record half-yearly interest on 8% debentures.

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Chapter 17
Discussion Questions
2. Distinguish between an annual financial report, a concise report and an interim financial report.
Discuss the reason for having each.
An annual financial report is required to be prepared under the Corporations Act 2001 by all
companies apart from most small proprietary companies. The annual financial report must
contain the following financial statements:
A profit and loss statement (Statement of Comprehensive Income)
A balance sheet (Statement of Financial Position)
A statement of cash flows
Consolidated financial statements if required.
as well as notes to these financial statements, and a directors declaration. Attached to the
annual financial report must also be a directors report, and an auditors report. Comparative
figures for each report must be presented if applicable.
A statement of changes in equity must also be provided as required by IAS 1/AASB 101
Presentation of financial Statements
The full annual report is meant to satisfy users needs for a General Purpose Report to satisfy
their informational needs about the organisation.
As a means of saving resources, the Act permits a company to provide shareholders with a
concise report instead of the full annual report. However, if any shareholder wishes to see the
full report, then the company must supply the full report to that shareholder. A concise report
must contain the same financial statements as does the annual report, (including the statement of
changes in equity) but there is no need to supply all of the additional notes to the financial
statements. As an alternative to detailed notes, directors are required to supply some discussion
and analysis to help shareholders understand the message contained in the statements. See the
text for suggested contents of this discussion. Accompanying the concise report must be a
statement by the auditor that the accounts have been audited and a copy of any qualification in the
auditors report, a statement that the report is a concise report and that a full report will be sent
free of charge if requested. The contents of the concise report are specified in AASB 1039
Concise Financial Reports.
An interim financial report, which is a report prepared in the middle of the financial year, must be
provided by each disclosing entity, (see the glossary in the text). It must contain, as a minimum,
- a condensed statement of comprehensive income,
- condensed statement of financial position,
- condensed statement of cash flows
- condensed statement of changes in equity and
- selected explanatory notes.
The requirements for the contents of half-yearly financial reports are contained in IAS 34/AASB
134.
The interim financial report provides information on a more regular basis without all the
disclosure requirements and associated administrative time and cost burden.

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3. A financial statement must include comparative figures. What does this mean, why are they
useful and can a company change these comparative figures in the following year?
Comparative figures are required by IAS 1/AASB 101. The standard requires that disclosures be
included in the financial statements and notes for the preceding reporting period to enable users to
quickly and accurately compare current performance and financial position with the previous
years performance and position. If the entity has reclassified financial information in the report,
comparative information must also be reclassified and the nature, amount of, and reason for the
reclassification must be disclosed.

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Chapter 19
Discussion Question
3. In analysing the financial statements of an entity, the following ratios were calculated:
2013 2014
Current ratio 2:1 1.3:1
Quick ratio 1:1 0.7:1
Receivables turnover 30 days 45 days
Inventory turnover 3 times 4 times
Profit margin 10% 7%
Discuss any potential weaknesses that these ratios may reveal in the overall performance of the
entity, and comment on possible causes for these results.
These ratios indicate that the entity is taking longer to collect its receivables (significant
fall in receivables turnover) but there is a fall in the entitys inventory levels (rising
inventory turnover) from 2013 to 2014. Since profit margins have fallen, this indicates
either a fall in gross margins on sales (which is likely to attract more sales on credit, and
hence larger receivables balances, and to increase inventory turnover, which appears to be
the situation here) or an increase in operating expense levels, e.g. wages, depreciation.
The increase in expenses may also have caused an increase in current borrowings which
has caused the quick and current ratios to fall significantly.
The entity appears to be on shaky ground, especially with liquidity levels which may not
be recoverable unless profit margins improve and debt collection is improved. It appears
that the entity may have cut prices in the hope of increasing sales and turnover of
inventory, but if the debt collection policy is not improved, and other expenses are not
reined in, the entitys liquidity will worsen and current debt providers may press for
payment.

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Exercise 19.1 Trend analysis
PRESTON LIMITED
Required:
A. Prepare a trend analysis of the data using 2010 as the base year.
B. Do the trends signify a favourable or unfavourable situation? Explain.
A.
2010 2011 2012 2013 2014
Income 100 103 106 109 110
Gross profit 100 104 106 109 112
Other expenses 100 103 104 108 109
B. These trends show a favourable trading situation. Income is increasing. Gross profit is
increasing but at a faster rate than income, which means that cost of sales is not
increasing as much as income. Other expenses are increasing at a slower rate than sales,
which shows that profit is rising at a faster rate in relation to income. Industry
comparisons are necessary to draw more meaningful conclusions.
Exercise 19.3 Common size income statements
RUBY LIMITED
Required:
Prepare common size statements for the company for both years.
Per cent of sales

2012 2013
Sales 100.0% 100.0%
Cost of sales 61.7% 53.3%
Gross profit 38.3% 46.7%
Expenses (including tax) 25.5% 31.1%
Profit 12.8% 15.7%

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Problem 19.5 Ratio analysis
KIM LEE LIMITED
Required:
A. Name the ratios that a financial analyst might calculate to give some indication of the following:
1. a companys earning power
2. the extent to which internal sources have been used to finance acquisitions of assets.
3. rapidity with which trade account receivable are collected
4. the ability of a business to meet quickly unexpected demands for working capital
5. the ability of the entitys earnings to cover its interest commitments
6. the length of time taken by the business to sell its inventories.
B. Calculate and briefly discuss the suitability of the ratios mentioned for each of the above cases.
A.
1. Rate of return on assets, and rate of return on ordinary equity.
2. Equity ratio, as well as comparative statement analysis, especially horizontal and

vertical analysis.
3. Average collection period for receivables.
4. Quick ratio.
5. Times interest earned.
6. Inventory turnover, or average days per turnover.
B.
189000 + 126 000 + 12600
1. Rate of return on assets = = 20.9%
(1619100 + 1512 000) / 2
This ratio measures the return earned by management through use of the assets in the
firms operations, i.e. before financing and tax costs are considered. The ratio depends
heavily on the accuracy of the figures used, and the method of measurement, e.g.
fluctuations may occur depending on the accounting methods used for inventory,
depreciation, etc. Trends across time should be considered.
The rate of return to ordinary equity, although subject to the same problems of
measurement, shows the net return that the company is earning for its ordinary
shareholders after consideration of tax, interest and preference dividends.

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Rate of return on ordinary shareholders equity

189000 7560
= = 26.8%
(742140 + 611100) / 2
(Ordinary equity at beginning $737 100 - $126 000 = $305 550)
Comparison of the two ratios indicates that Kim Lee Ltd has favourable leverage or gearing.
868140
2. Equity ratio = = 53.6%
1619100
This ratio is limited in that it shows the percentage of total assets being financed by total
equity including preference and ordinary shareholders equity. A vertical analysis
(common size statements) will reveal the percentage of assets financed by internal
sources, viz. retained earnings.
Total assets = $1 619 100 = 100%

Retained earnings = $238 140 = 14.7%
Horizontal analysis and vertical analysis across time will show whether purchases of
assets and increases in retained earnings are changing in proportion to each other.
(560700 + 577300) / 2 x 365

3. Average collection period = = 122 days
1701000
This ratio assumes that all sales were made on credit and is therefore limited by the
assumption. It further assumes that average receivables (net) can be determined using a
simple average for the year. If gross receivables are used in the calculation (which
provides a better measure of turnover), the average collection period
(598500 + 630 000) / 2 x 365

= =132 days
1701000
Comparisons with the firms stated collection policy, trends over time, and comparisons
with industry averages are desirable.
75600 + 560700
4. Quick ratio = = 1.02 : 1
624960
The quick ratio measures the firms ability to cover its short-term commitments. The
ratio may be influenced by management which can cause its value to rise near the end of

lOMoARcPSD|1698288
the period, .e.g. by paying short term creditors, or giving short term creditors a long term
bill in settlement of their accounts.
189000 + 126 000 + 12600

5. Times interest earned = = 26 times
12600
This ratio is a general guide to the long-term stability of the company in that it indicates
how many times earnings for the year have covered interest commitments. The size of
the ratio over time is important information. The ratio depends on accounting methods
assumed in calculating operating profit.
365 days
6. Average turnover period =
Inventory turnover
1134 000
= 365
(504 000 + 441000 ) / 2
= 152 days
The ratio varies depending on the inventory method used. The ratio should be
determined on a consistent basis over time to examine trends.

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Tutorial work - with solutions

Financial Accounting (University of Western Australia)

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ACCT1101 Tutorial Solutions Week 3

Exercise 3.1 Identifying account categories

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Exercise 3.5 Recording transactions in general journal and

LEMON SQUASH COURTS

5 Salaries Expense 970

14 Accounts Payable 470

18 Advertising Expense 510

22 Cash at Bank 210

30 Cash at Bank 900

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Problem 3.13 Journal entries, posting to running balance ledger accounts,

ANG MAJILD, BOAT HIRE

3 Rent Expense 5-110 590

4 Equipment 1-120 7 000

5 Supplies 1-110 250

15 Cash at Bank 1-101 1 530

18 Accounts Payable 2-101 250

19 Insurance Expense 5-120 190

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24 Cash at Bank 1-101 40

29 Cash at Bank 1-101 1 330

30 Telephone Expense 5-130 60

ACCOUNT: Accounts Receivable Account No. 1-102

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ACCOUNT: Supplies Account No. 1-110

ACCOUNT: Equipment Account No. 1-120

ACCOUNT: Accounts Payable Account No. 2-101

ACCOUNT: Loan Payable Account No. 2-110

ACCOUNT: A. Majild, Capital Account No. 3-101

ACCOUNT: Revenue Account No. 4-101

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ACCOUNT: Rent Expense Account No. 5-110

ACCOUNT: Insurance Expense Account No. 5-120

ACCOUNT: Telephone Expense Account No. 5-130

Cash at bank 1-101 $13 810

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ACCT1101 Tutorial Solutions Week 4

CELTIC LTD (plus GST)

1. Inventory (80 x $150) 12 000

2. Accounts Payable (9 x $165) 1 485

3. Accounts Receivable (25 x $264) 6 600

Cost of Sales (25 x $150) 3 750

4. Office Supplies 360

5. Sales Returns and Allowances (5 x $240) 1 200

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Inventory (5 x $150) 750

6. Accounts Receivable (22 x $264) 5 808

Cost of Sales (22 x $150) 3 300

7. Inventory Shortage Expense (3 x $150) 450

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Exercise 6.5 Journal entries periodic inventory system, GST

LABELS LTD (plus GST)

2. Cash at Bank 9 240

3. Sales Returns and Allowances 820

4. Office Equipment 1 400

5. Accounts Payable 517

6. Purchases (6 200 x 75%) 4 650

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7. Accounts Receivable 3 740