Topic-5 Tutorial answers
UNIVERSITY OF ADELAIDE BUSINESS SCHOOL
MASTERS PROGRAMS
ACCTING 7019 ACCOUNTING CONCEPTS AND METHODS (M)
TUTORIAL - SOLUTIONS TO QUESTIONS
TOPIC 5: ADJUSTING THE ACCOUNTS, PREPARING FINANCIAL STATEMENTS AND COMPLETING THE ACCOUNTING CYCLE
5. ‘Why are adjusting entries necessary? Surely they cause too much delay in
preparing financial statements, and the financial effect of any entries made is immaterial in the long run.’ Respond to this cr iticism.
Under an accrual accounting system, adjusting entries are necessary in order to ensure that an entity’s assets, liabilities, income (including revenues) and expenses are recorded in the appropriate accounting period. Sometimes the size of these adjusting entries may be small, and have an immaterial effect on the entity’s profits and financial position; but on many occasions, particularly with adjusting entries for items such as depreciation, the size and effect of the adjusting entries may be significant. The volume of work for adjusting entries on balance date can be minimised, in that the accounts and the amount of certain adjusting entries are known prior to balance date, e.g. for depreciation, for prepayments. While these adjusting entries must be recorded on balance date, details to make these adjustments can be worked out prior to balance date. Computerisation of the adjusting entries in the accounting system can also reduce the lead-time in preparing financial statements.
WESTON CAR RENTAL
Required:
A. Prepare the necessary adjusting entries in general journal form.
B. Determine the effects of the adjustments on the financial statements by
completing the schedule presented.
C. 1. Did profit increase or decrease? By how much?
2. What was the effect of the adjusting entries on total assets? Total liabilities?
Total equity?
A.
WESTON CAR RENTAL
General Journal
Particulars Debit Credit
1. Wages Expense 3 100
Wages Payable 3 100 Wages owing to employees
2. Depreciation Expense - Vehicles 8 000
Accum. Depreciation - Vehicles 8 000 Depreciation on vehicles
3. Accounts Receivable 840
Rental Revenue 840 Rent revenue earned
4. Unearned Rental Revenue 550
Rental Revenue 550 Rent deposits in advance earned
WESTON CAR RENTAL
Financial Statements
C. 1. Profit decreased by $9 710 ($26 000 - $16 290).
2. Total assets decreased by $7 160 ($68 000 - $60 840).
Total liabilities increased by $2 550 ($34 550 - $32 000).
Total equity decreased by $9 710 ($36 000 - $26 290).
4. So far, we have heard of the existence of three trial balances – the unadjusted
trial balance, the adjusted trial balance and the post-closing trial balance.
Explain the purpose of each, and indicate the types of account balances which are contained in each.
?The unadjusted trial balance is prepared periodically to provide a preliminary check on the accuracy of the posting process (debits and credits) from the journals to the ledger accounts. This trial balance contains the balances of all general ledger accounts as at the date on which the trial balance is prepared.
?The adjusted trial balance is prepared only at the end of the accounting period and includes the balances of all general ledger accounts after the adjusting entries have been posted to the accounts. It provides a preliminary check of the accuracy of posting all adjusting entries.
?The post-closing trial balance is prepared at the end of the accounting period after all closing entries have been posted to the accounts and the account balances determined. Since all temporary accounts are closed as a result of closing entries, the post-closing trial balance contains the balances of all permanent accounts only. Hence, the only types of accounts appearing in this trial balance are the assets, the liabilities, and permanent equity accounts such as the capital accounts, or, in the case of a company, the share capital, reserve, and retained earnings accounts.
8. Different equity accounts are used depending on the type of organisational
structure of the business. Illustrate and explain.
?It is traditional for different equity accounts to be used for different types of entities. For example, in a sole trader busin ess, the owner’s capital contributions and all profits retained in the business are closed off to one account, Capital –J. Bloggs. Assets withdrawn from such a business are shown in the Drawings account.
?Partners in a partnership can have either (a) a Capital account which includes their capital contributions as well as their share of retained profits or (b) each partner has a separate Capital and Retained Earnings account. In both cases each partner has a Drawings account which is closed to either their Capital account (a) or their Retained Earnings account (b).
?However, in a company, the capital contributed by owners (shareholders) is recorded separately in the Share Capital account, and profits retained in the company and distributions of those profits to owners (dividends) are recorded in a separate Retained Earnings account. Such a separation of contributed capital and retained earnings is possible even for a sole trader, or for a partnership, if so desired.
?Other types of organisations use different names for the equity accounts. As a further example, a not-for-profit club or society records the initial entrance fees of members on a Members Fees or Accumulated Surplus account, which is equivalent to the capital contributed by members to the club.
BRENTWOOD PTY LTD
Required:
A. Prepare closing entries.
B. Show the Retained Earnings account at the end of 2013.
C. Calculate the total equity of the company at the end of 2013.
A.
General Journal
Particulars Debit Credit 2010
31 Dec
Revenues $840 000
Profit & Loss Summary $840 000 To close revenue account
Profit & Loss Summary 637 000
Expenses 637 000 To close expense account
Profit & Loss Summary 203 000
Retained Earnings 203 000 To transfer profit to retained earnings
B.
C. Total Equity
Share capital $550 000 Add: Retained earnings $431 000 Total equity $981 000
SHORELINE RECREATION CLUB
Required:
A. What amount should be reported in the 2010 income statement for membership
fees?
B. What amount should be reported in the 31 December 2010 balance sheet for
unearned membership fees?
C. Prepare the adjusting entry needed at 31 December 2010.
D. What reversing entry, if any, would you make on 1 January 2011?
E. The record keeper could have recorded the receipt of cash initially in a revenue
account. Prepare the adjusting entry assuming that the Membership Fees
Revenue account contains a credit balance of $170 000 at 31 December.
F. Compare the balances in the Unearned Membership Fees account and the
Membership Fees Revenue account derived in requirement E with those
calculated in requirements A and B.
G. What reversing entry, if any, would you make on 1 January 2011 to reverse the
adjusting entry made in requirement E?
A. $170 000 - $52 100 = $117 900
B. $52 100
C. Unearned Membership Fees 117 900
Membership Fees Revenue 117 900 Fees revenue earned
D. No entry necessary
E. Membership Fees Revenue 52 100
Unearned Membership Fees 52 100 Fees revenue adjusted
F. Unearned Membership Fees (E) $52 100 (B) $52 100
Membership Fees Revenue (E) $117 900 (A) $117 900 G. No reversing entry as all the revenue has been received. Reversing
entries required for accruals and not normally for deferrals. However,
since the entity has chosen to record precollected revenues in a revenue
account, it may also choose to reverse the adjusting entry as follows:
Unearned Membership Fees 52 100
Membership Fees Revenue 52 100
Required:
A. Consider carefully the types of information that you would need to provide to
management in order to satisfy their needs for accountability in relation to the activities of the organisation.
B. What advantages (if any) would be provided by the use of worksheets in the
preparation of this information?
As a guide to discussion, consideration of the following points is suggested:
A. Since World Vision is a not-for-profit organisation, profit motives are not
important. Nevertheless, management is accountable for its actions. Control
over cash resources (and other assets) is extremely important. In order to carry out its functions, management would need to know:
?the amounts of money donated/raised for each special program and campaign, as well as for general funds;
?the amounts of money which have been spent on each special program and project;
?the amount of funds spent on advertising for such projects and campaigns;
?the amounts spent on wages to staff as well as other expenses, such as rental of buildings, and machinery, and emergency supplies of food and equipment;
?the amount of money potentially wasted through spending on superfluous activities;
?the amount spent on training/education programs in order to help develop skilled workforces in assisted countries;
?the amounts received from government to assist each program, and how the government assistance was spent;
?details of pledges in order to follow up on monies promised to the organisation; ?billing mechanism in order to send out accounts to those who have undertaken to assist in the child sponsorship program;
?the current state of repair of all non-current assets used by World Vision;
?control over levels of inventory of emergency supplies in cases of relief work;
?cash flow budgets for each program would help in controlling expenditure.
B. Monthly worksheets (or spreadsheets), as illustrated in this chapter, would be of
limited usefulness in that monthly profit levels do not need to be calculated. A detailed monthly statement of cash flows would be of more use to management.
Nevertheless, if World Vision (and similar organisations) use a form of accrual accounting, worksheets will be of more use in helping to analyse cash flow for the organisation. Reporting of cash flows would assist in providing information about gross inflows and outflows.