FINANCIAL ACCOUTNING HOMEWORK WEEK 6

3.8 Explain the differences between depreciation expense and accumulated depreciation.
Depreciation expense refers to the amount consumed of the asset in the current reporting period, in
which this amount is closed off to the profit and loss summary account at the end of the reporting
period. Accumulated depreciation on the other hand refers to the value of the asset that has been
consumed over it lifetime so far instead of simply within a reporting period, where this amount is
ongoing hence is balanced at the end of the reporting period.
3.9 An entity has recognised revenue for which the services have not been performed but the cash
has been received. Which of the following accounts are involved in the adjusting entry: (a) asset,
(b) liability, (c) revenue or (d) expense? For the accounts selected, indicate whether they would be
debited or credited in the entry.
Revenue will be debited and prepaid revenue credited by the amount in which has not yet been
earned.
3.10 An entity recognised some expenditure as an expense but the future benefits have not expired.
Indicate which of the following accounts is debited and which is credited in the adjusting entry:
(a) asset, (b) liability, (c) revenue or (d) expense

Prepaid expense will be debited and expense will be credited by the amount in which the expense
has not yet been incurred.

E3.1 Determine cash-basis and accrual-basis revenue. LO1

In its first year of operations, Tang Pty Ltd generated $78 000 for services provided, $12 000 of which
was on account and still outstanding at year-end. The remaining $66 000 was received in cash from
customers. The company incurred operating expenses of $45 000. Of these expenses, $40 500 were
paid in cash; $4500 was still on account at year-end. In addition, Tang Pty Ltd prepaid $6500 for
insurance coverage that would not commence until the second year of operations.
Required
(a) Calculate the first year’s profit under the cash basis of accounting, and calculate the first year’s
profit under the accrual basis of accounting.

(b) Which basis of accounting (cash or accrual) provides more useful information for decision
makers?
Under accrual accounting, in terms of calculating profit, this method provides a more accurate
representation of entity’s profit generated as it reflects when revenue is truly earned and expenses
are incurred, whereas cash accounting is more focussed on the cash flow of the business.
E3.7 Prepare adjusting entries. LO4
Con James commenced a dental practice on 1 January 2019. During the first month of operations the
following transactions occurred:
(a) Performed services for patients and, at 31 January, $1500 was earned for these services but not
yet billed to the patients.
(b) Electricity expense incurred and not paid or recorded prior to 31 January, $1040.
(c) Purchased dental equipment on 1 January 2019 for $160 000, paying $40 000 in cash and signing
a $120 000 interest-bearing note payable. (Interest is payable on 31 December 2019.)
The equipment depreciates at $1600 per month and interest on the note is $500 per month.
(d) Purchased a 1-year insurance policy on 1 January 2019 for $24 000.
(e) Purchased $3200 of dental supplies (recorded as an asset). On 31 January, $700 worth of
supplies was still on hand.
Required
Prepare the adjusting entries on 31 January 2019. Use these account names: Accumulated
depreciation—dental equipment, Depreciation expense, Service revenue, Accounts receivable,
Interest expense, Insurance expense, Salaries expense, Interest payable, Prepaid insurance and
Salaries payable.

PSA3.2 Prepare adjusting entries, post to ledger accounts, and prepare adjusted trial balance.
LO3, 4, 5
The unadjusted trial balance at 30 June 2020 for Maxi Services Ltd is as follows.
MAXI SERVICES LTD
Trial balance
as at 30 June 2020
No. Account name Debit Credit
100 Cash $ 54 800
104 Accounts receivable 15 000
112 Prepaid insurance 3 200
113 Supplies 1 500
130 Office equipment 30 000
131 Accumulated depreciation $ 20 000
200 Accounts payable 7 400
213 Service revenue received in advance 4 000
300 Share capital 60 000
310 Retained earnings 7 500
400 Service revenue 46 800
500 Salaries expense 34 000
510 Rent expense 2 000
515 Insurance expense 1 200
530 Electricity expense 4 000
$145 700 $145 700
The chart of accounts for Maxi Services Ltd contains the following accounts in addition to
those listed on the trial balance: 218 Electricity payable, 215 Salaries payable, 520 Depreciation
expense, and 505 Supplies expense.
Other data:
1. Supplies on hand at 30 June total $1000.
2. An electricity bill for $300 for June has not been recorded and will not be paid until next
month.
3. The balance of the prepaid insurance account is the annual premium for insurance commencing
1 January 2020.
4. Services were performed during the current period in relation to $3000 of revenue received
in advance.
5. Salaries of $4600 are owed at 30 June.
6. Depreciation expense for the year is $4000.
7. Invoices representing $4400 of services performed during the month have not been recorded
as of 30 June 2020.
Required
(a) Prepare the adjusting entries from the information provided.
(b) Using T accounts, enter the totals from the trial balance as beginning account balances and
then post the adjusting entries to the ledger accounts.
(c) Prepare an adjusted trial balance as at 30 June 2020.
(d) Calculate profit or loss for the year ended 30 June 2020.

PSB3.9 Journalise transactions and follow through accounting cycle to preparation of financial
statements and a worksheet. LO3, 4, 5, 6, 7, 8
On 1 November 2019, the following were the account balances of Naboo Equipment Ltd.
Debits
Cash $ 3 348
Accounts receivable 3 012
Supplies 1 200
Store equipment 12 000
$19 560

Credits
Accumulated depreciation $ 600
Accounts payable 2 520
Service revenue received in advance 480
Salaries payable 600
Share capital 12 000
Retained earnings 3 360
$ 19 560
During November the following summary transactions were completed:
Nov. 8 Paid $1320 for salaries due to employees, of which $720 was for November and $600 was for
October.
10 Received $1440 cash from customers on account.
12 Received $1680 cash for services performed in November.
15 Purchased store equipment on account $3600.
17 Purchased supplies on account $1800.
20 Paid creditors on account $3000.
22 Paid November rent $360.
25 Paid salaries $1200.
27 Performed services on account and invoiced customers for services provided $1080.
29 Received $660 from customers for future service.
Other data:
1. Supplies on hand are valued at $1920.
2. Accrued salaries payable are $600.
3. Depreciation for the month is $144.
4. Services have been performed in relation to $360 recorded in service revenue received in
advance.
Required
(a) Prepare a chart of accounts. (Hint: Refer to Wong Pty Ltd in chapter 2 of this text.)
(b) Enter the 1 July balances in the ledger accounts (use T accounts).
(c) Journalise the November transactions.
(d) Post to the ledger accounts you prepared for part (c) above. Use service revenue, depreciation
expense, supplies expense, salaries expense, and rent expense.
(e) Prepare a trial balance at 30 November before adjusting entries.
(f) Journalise and post adjusting entries.
(g) Prepare an adjusted trial balance.
(h) Prepare a statement of profit or loss and a calculation of retained earnings for November,
and prepare a statement of financial position as at 30 November 2019.
(i) Optional: Using the information in this problem starting at part (e), prepare a worksheet
using the format in figure 3.25.

7.10 Soo Eng cannot understand why the net amount of accounts receivable does not decrease
when an uncollectable account is written off under the allowance method. Clarify this point for Soo
Eng.
The allowance method does not result to a direct credit of the accounts receivable account but
instead a contra asset account (Allowance for doubtful debts) as it is unsure of which costumers (or
how much) will actually not pay. The credit balance in the allowance account will absorb the write-
off as they occur and at the end of the reporting period, where the statement of financial position is
prepared, the deduction of the allowance for doubtful debts from the account receivable account
will then take place.
BE7.7 Prepare entry using allowance method. LO8
Massey Ltd uses the allowance method to record bad debts expense and concludes, using the
ageing of accounts receivable method, that 1% of accounts receivable will become uncollectable.
Accounts receivable are $500 000 at the end of the year, and the allowance for doubtful debts
has a credit balance of $3000.
(a) Prepare the adjusting journal entry to record bad debts expense for the year.
(b) If the allowance for doubtful debts had a debit balance of $800 instead of a credit balance
of $3000, determine the amount to be reported for bad debts expense.

E7.7 Determine bad debts expense, and prepare the adjusting entry. LO8
Marc Pty Ltd has accounts receivable of $92 500 at 31 March 2019. An analysis of the accounts
shows these amounts:
Balance, 31 March
Month of sale 2019 2018
March $65 000 $75 000
February 12 600 8 000
December and January 8 500 2 400
November and October 6 400 1 100
$92 500 $86 500

Credit terms are 2/7, n/30. At 31 March 2019 there is a $1600 credit balance in allowance
for doubtful debts before adjustment. The entity uses the ageing of accounts receivable
basis for estimating uncollectable accounts. Marc Pty Ltd’s estimates of bad debts are as
follows:
Age of accounts Estimated percentage uncollectable
Current 2.0%
1–30 days past due 5.0
31–90 days past due 30.0
Over 90 days 50.0
Required
(a) Determine the total estimated uncollectables.

(b) Prepare the adjusting entry at 31 March 2019 to record bad debts expense.
(c) Discuss the implications of the changes in the ageing schedule from 2018 to 2019.

BE8.2 Calculate straight-line depreciation. LO4

Brianna Ltd acquires a delivery truck at a cost of $96 600 (GST exclusive) on 1 January 2019,
the beginning of the company’s financial year. The truck is expected to have a residual value of
$4000 at the end of its 5-year useful life. Calculate annual depreciation for the first and second
years using the straight-line method.
BE8.3 Calculate diminishing-balance depreciation. LO4
Depreciation information for Brianna Ltd is given in BE8.2. Assuming the diminishing-balance
depreciation rate is one-and-a-half times the straight-line rate, calculate annual depreciation for
the first and second years under the diminishing-balance method.

E8.2 Calculate straight-line, diminishing-balance and units-of-production depreciation. LO4

Tops Ltd purchased a new machine on 1 October 2018 at a cost of $228 000. The entity estimated
that the machine has a residual value of $28 000. The machine is expected to be used for
40 000 working hours during its 10-year life. Assume a 31 December year-end.
Required
Calculate the depreciation expense using the following methods in the year indicated:
(a) the straight-line method for 2018 and 2019.
(b) the diminishing-balance method using double the straight-line rate for 2018 and 2019.
(c) the units-of-production method for 2018, assuming the machine usage was 1800 hours.

Additional Problem 8
Pumpkin Patch Ltd retails children’s clothing. It’s Trial Balance as at 31 December 2015 was as
follows:

Additional Information:
1. Insurance was renewed on 1 October 2015 for $140,000.
2. Advertising was paid on 1 August 2015 for a 6 month television campaign.
3. Rent was received by Pumpkin Patch on 1 Dec 2015 for 3 months.
4. Goods paid for but not delivered at 31 December 2015 totalled $25,000.
5. Interest earned on the term deposit totalled $5,000. It will be paid on 31 Jan 2016.
6. Wages not yet paid at 31 Dec 2015 totalled $150,000.
7. Vehicles are depreciated using 20% reducing balance.
8. Buildings are depreciated using 5% straight line.
9. Bad debts to be written off amount to $90,000.
10. Allowance for Doubtful Debts is to be raised to 3% of Accounts Receivable as at 31 Dec 2015.

Required: Prepare any necessary balance day adjustment general journal entries as at 31 Dec 2015.
Additional Problem 9
Deadpool Ltd. pays its annual insurance premium in cash on 1 September each year. The latest
payment of $9,000 was on 1 September 2018. All transactions are recorded in the general journal.
Deadpool Ltd. has a December 31st year end.
Required:
(a) Assuming Deadpool Ltd. uses the expense approach to record the payment, prepare general
journal entries required at:

(i) 1 September 2018

(ii) 31 December 2018 (adjusting entry)

(b) Assuming Deadpool Ltd. uses the asset approach to record the payment, prepare general journal
entries required at:

(i) 1 September 2018

(ii) 31 December 2018 (adjusting entry)

(c) Deadpool Ltd. uses the periodic inventory method. The opening inventory on 1 January 2018 was
$100,000. Purchases for the year were $600,000 but $50,000 of inventory was returned. A stocktake
on December 31st 2018 found $200,000 of inventory on hand.

Prepare the four necessary general journal entries to update the inventory account and calculate
Cost of Goods Sold for the year.

Additional Problem 33
Answer each of the following five parts assuming a balance date of 30 June, 2018 showing all
workings. Journal narrations are not required.
(a) Turnbull Ltd entered into a loan of $10,000 on 1 February 2018 and was being charged interest at
6% simple per annum.
Prepare any required general journal adjusting entry for the financial year assuming no payment of
interest has been made.

(b) Bishop Ltd had accounts receivable at 30 June 2018 totaling $76,100 Dr. The doubtful debts
allowance at the same time was $2,310 Cr, but it was decided by the accountant to increase the
allowance for doubtful debts to 2% of accounts receivable after writing off $3,100 in uncollectable
accounts.
Prepare the necessary general journal entries to record both the bad debt and the balance day
adjustment to increase the allowance for doubtful debts.

(c) Shorten Ltd, a small Australian service company, has 10 employees. The current annual payroll
for these employees is $375,000. The employees are entitled to four weeks of annual leave and a
leave loading of an additional 17.5%. Calculate the annual cost of the leave and provide a general
journal entry to record the weekly accrual of annual leave.

(d) Gillard Ltd purchased machinery for $380,000 on 1 March 2018. It is estimated that the
machinery will have a working life of 10 years but the company believes it will only use the
machinery for 6 years and then sell it for an estimated $20,000. The company uses the straight-line
method of depreciation for the machinery.
The company purchased a computer on 1 July 2016 for $10,000. The company believes it will use the
computer for ten years and can sell it at the end of that period for $500. The company uses the
reducing balance method of depreciation and a depreciation rate of 26% p.a.
Prepare the necessary general journal entries to record the depreciation of the two assets for the
financial year ending 30 June 2018.

(e) Dutton Ltd paid $4,200 for 6 months advertising on the 1st January 2018. The transaction was
initially recorded as an expense.

Prepare any required adjusting entry for the financial year ending 30 June 2018. Justify your answer.