TOPIC 4 Tutorials ACCT1101 (2)

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1101

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Accounting

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May 27, 2024

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04 TUTORIAL FOUR Statement of Profit & Loss, Accrual Accounting and Recording Transactions Part 3

Multiple Choice Questions 1. XYZ limited has supplies on hand of $2,000 at the start of the period. By the end of the period there were only $500 supplies left. There were no purchases of supplies in the period. Which of the following statements is true? a. Supplies expense for the period is $500. b. Supplies on hand are $1,500. c. Supplies expense for the period is $1,500. d. None of the above statements are true. 2. A client paid $2,000 in April to ABC Ltd. for services to be provided in May and June. ABC provided services of $1,500 in May and $500 in June. What is the correct adjustment for the month of June? a. Service revenue decreases by $1,500 and unearned revenue increases by $1,500 b. Service revenue increased by $500 and unearned revenue decreases by $500 c. Service revenue increased by $1,500 and unearned revenue decreases by $1,500 d. Service revenue decreases by $500 and unearned revenue decreases by $500 3. Howdie Ltd had a Prepaid asset account of $2,000 on 1 July 2020 which represented a payment of a two-year insurance premium. For the year ending 30 June 2022, what will be the closing balance of the prepaid account assuming no other prepayments were made since1 July 2020? a. $0 b. $1,000 c. $1,500 2

d. $2,000 3

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Practice Questions Question 1 Rental Pty Ltd commenced operations on 1 April 2022 and has already been recording transactions as they have occurred. The balances before any adjustments have been provided in the worksheet presented below. On 30 June 2022, Rental reviewed its records and realised that the following adjustments need to be made for the three (3) months April to June 2022: 1. The office equipment depreciates $325 per month. 2. The rent revenue received in advance was for 9 months commencing 1 April. 3. Interest of $650 is accrued on the bank loan. 4. Supplies on hand total $1,105. 5. The benefits of prepaid insurance expire at the rate of $390 per month. Required: Assuming that adjustments are made quarterly, use the worksheet below or use the template in Excel available under topic 4 to record the adjustments for the three-month period from 1 April to 30 June 2022. 4

Solution: Balances before adjustments 1 2 3 4 5 Balances after adjustments Balance Sheet ASSETS Current Assets Cash at bank 80,000 Inventory 70,000 Prepaid insurance 4,680 Supplies 2,800 Non-current Assets Equipment 90,410 Acc. depreciation - Equipment 0 Total Assets 247 , 890 EQUITY AND LIABILITIES Current Liabilities Rent received in advance 12,090 Interest payable 0 Non-current Liabilities Bank loan 31,000 Total Liabilities Equity Share capital 204,800 Retained earnings 0 Total Equity and Liabilities 247,890 Income Statement Revenue Depreciation expense Interest expense Insurance expense Other expense Profit / Loss 5

Practice Questions Question 2 Discuss the following assignment-style questions regarding recording transactions at a retailing business. A business rents a shopfront and pays rent every four weeks in advance. On 1 March 2023, the business paid $2,800 rent for the shopfront, covering a four-week period from 2 March to 29 March. On 15 March, the business owner negotiated with the landlord to have a one-off deviation from the rental agreement, and both parties agreed for the business to make the next rental payment in arrears. The business recognizes rent expense at every month end. Additional information: The opening balance of Prepaid rent is $100. Required: 1. What is the daily rental expense? 2800/28=100 2. What is the monthly rental expense for March? 2800 3. How do you record the event on 1 March 2023? Indicate which accounts from which financial statements are impacted, and for each account, state what type of change (an increase or decrease in balance) and the amount of change that would occur.  Prepaid Rent (Balance Sheet):  Type of Change: Decrease  Amount: $2,800  Rent Expense (Income Statement):  Type of Change: Increase  Amount: $2,800 4. How do you record the event on 15 March 2023? 6

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Since the business owner negotiated a change in the rental payment terms, there's no new transaction occurring on 15 March. The change in payment terms is a communication between parties and doesn't involve a financial transaction. 5. Is there any other transaction you should record in relation to rent in March? If your answer is yes, how would you record it? Solution: 7