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Exercise 4.8
Dr
Cr
Kreative Kitchens purchased a 1-year insurance policy on 1 March 2017. The entire premium of
$9000 was recorded by debiting Prepaid Insurance. Ignore GST.
Required
A.
Give the adjusting entry at 30 June for year ending 30 June 2017.
B.
What amount should be reported in the 30 June 2017 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 $9000 was recorded
by debiting Insurance Expense?
A.
Insurance Expense
3 000
Prepaid Insurance
3 000
C.
D.
Prepaid Insurance
Insurance Expense
Insurance prepaid (thus leaving $3000 in
6 000
6 000
Exercise 4.12
Adjusting entries
Selected accounts of Amandas Art Supplies are shown below at 30 June of the current year before
any adjusting entries have been made.
Prepaid Insurance
Supplies
Shop Shelving
Unearned Rental Fees
Salaries Expense
Rental Fees Revenue
Debit
$
Credit
4 500
720
24 000
$
4 800
32 600
13
200
Additional information
(a) Prepaid insurance represents premiums for 1 year paid on 1 April.
(b) Supplies of $430 were on hand at 30 June.
(c) Shop shelving, which had been purchased on 1 January, is expected to last 10 years and have a residual
value of $2000.
(d) Amanda collected 4 months rent in advance on 1 June from a number of tenants.
(e) Accrued salaries not recorded as at 30 June are $2400.
Required
Record in the general journal the necessary adjusting entries on 30 June.
AMANDAS ART SUPPLIES
General Journal
Date
June 30
Particulars
Insurance Expense
Debit
Credit
1 125
Prepaid Insurance
1 125
290
Supplies
290
1 100
Accumulated Depreciation
Shop Shelving
Depreciation on office equipment.
($24 000 $2000)/10 6/12 = $1100)
1 100
1 200
1 200
2 400
2 400
Accrued salaries.
Problem 4.1
Adjusting entries
Hui Yu, lawyer, had the following transactions related to the business during June. Ignore GST.
June
Purchased office furniture for $36 000. The furniture will be depreciated
over a useful life of 10 years at which time it is expected to have a
residual value of $4800.
Purchased a 12-month fire insurance policy for $3000.
Borrowed $42 000 from the Eastern Bank on a short-term loan. The
principal, plus 8% annual interest, will be repaid in 3 months.
Purchased supplies for $450. On 30 June, supplies worth $230 remained
on hand.
Paid $1200 for 1 months rent for the period 15 June to 15 July.
Received an electronic bank transfer from a client for $840 as an advance
payment for services to be performed. Only 20% of the work was
completed by 30 June.
Received an invoice for $410 for telephone and internet charges for the
month.
1
2
11
15
18
28
Required
A.
Prepare the journal entries to record each transaction and prepare any adjusting entries as at
30 June, the end of the accounting year. Ignore GST.
A.
Particulars
1
Office Furniture
Debit
Credit
36 000
Cash at Bank
36 000
Prepaid Insurance
3 000
Cash at Bank
3 000
Cash at Bank
42 000
Loan Payable
42 000
Supplies
Cash at Bank
Purchased supplies
450
450
Rent Expense
1 200
Cash at Bank
1 200
18
Cash at Bank
840
840
Telecommunications Expense
410
410
Adjusting entries
30
Depreciation Expense
260
Accumulated Depreciation
Office Furniture
Calculation of depreciation expense
[($36 000 $4 800)/10 1/12]
30
Insurance Expense
260
250
Prepaid Insurance
250
Interest Expense
280
Interest Payable
280
Supplies Expense
220
Supplies
220
Prepaid Rent
Rent Expense
Rent not yet expired for the month
600
600
168
30
Services Revenue
Revenue recorded on completed work
30
168
Exercise
14.2
On 2 January 2015, Johnston Ltd purchased a machine with a list price of $234 300 (including GST)
and credit terms of 2/10, n/30. Payment was made within the discount period. Freight costs of $5400
plus GST and installation costs of $5280 plus GST were also paid. The machine has a useful life of 4
years and a residual value at the end of its useful life of $24 000.
Required
A.
Determine the amount that should be debited to the machinery account
and prepare a general journal entry to record the purchase, assuming a
financial year ending 31 December.
B.
Determine the amount of depreciation expense for each of the 4 years
ending 31 December assuming use of:
1.
the straight-line depreciation method
2.
the diminishing balance method of depreciation.
C.
Prepare a journal entry to record depreciation expense for the year ending
31 December 2015 under the diminishing balance method.
A.
223 680
22 368
246 048
B.
Year ended 31 December
Depreciation method 2015 2016 2017
2018
Total
1
Straight-line
49 920 49 920 49 920
49
199
9
6
2
8
0
0
2
Diminishing balance
96 182 54 824 31 250
17
199
4
6
2
8
4
0
1. ($223 680 $24 000)/4 = $49
920 p.a.
4
$24 000
$223 680
2. Depreciation rate 1
or 43%
$223 680 0.43 = $96 182
$127 498 0.43 = $54 824
1 0.57
= 0.43
96 182
96 182
Depreciation methods
Nevertire Ltd purchased a delivery van costing $52 000 net of GST. It is expected to have a residual
value of $12 000 at the end of its useful life of 4 years or 200 000 kilometres.
Required
A.
Assume the van was purchased on 2 July 2015 and that the accounting period
ends on 30 June. Calculate the depreciation expense for the year 201516 using
each of the following depreciation methods:
1. straight-line
2. units of production (assume the van was driven 78 000 kilometres during the
financial year).
3. diminishing balance
B.
Assume the van was purchased on 1 October 2015 and that the accounting
period ends on 30 June. Calculate the depreciation expense for the year 201516
using each of the following depreciation methods:
1. straight-line
2. diminishing balance
3. units of production (assume the van was driven 60 000 kilometres during the
financial year).
A.
1. Straight-line:
=
2.
Units-of-production:
Expense per kilometre = ($52 000 $12 000)/200 000 =
$0.2
0.2 78 000
$15 600
3.
Diminishing balance:
$12 000
$52 000
= 31% (approx.)
= 1 0.69 = 0.31
$52 000 0.31
$16 120
B.
1.
Straight-line:
= $7 500
Depreciation methods
Edwards Ltd recently paid $290 000 for manufacturing equipment, which is expected to have a useful
life of 4 years and a residual value of $50 000. The manager of Edwards Ltd wants information about
the effect that various depreciation methods will have on profit and asks you to prepare a schedule
comparing the straight-line and diminishing balance methods of depreciation. Ignore GST.
Required
Prepare a schedule and calculate the annual depreciation charge and end-ofyear carrying amount for the expected life of the equipment.
Year
Acquisition
1
2
3
4
Straight line
DepreCarrying
ciation
amount
$290 000
$60 000
230 000
60 000
170 000
60 000
110 000
60 000
50 000
4
Diminishing balance
DepreCarrying
ciation
amount
$290 000
$104 400
185 600
66 816
118 784
42 762.24
76 021.76
26 021.76
50 000
$50 000
$290 000
= 36% approx.