FAA 2015.1 Discussion problems_ week 5

FAA 2015.1 Discussion problems_ week 5

1. Explain why the purchase of supplies is usually recorded in an asset account rather than in an expense account. If supplies were expensed when purchased, which accounts should be debited and which credited at the end of the period in order to reflect the amount of supplies on hand?

Supplies are usually recorded in an asset account because they are normally used in more than one accounting period. The cost of supplies will be transferred from the asset account to an expense account, Supplies Used, as they are gradually consumed in the current period If the supplies are charged directly to an expense when purchased, then an adjusting entry is necessary at the end of the reporting period to record as an asset the supplies still on hand. The entry for the supplies still on hand is:

Supplies DrSupplies ExpenseCr

Exercise 4.8Adjusting entry for prepaid insurance

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.

RequiredA.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 Expense3 000

Prepaid Insurance3 000

($3000 = $9000 4/12)

Insurance expired. Prepaid insurance recorded at $9000 initially.

B.Prepaid insurance $6000 ($9000 $3000) current asset.

C.Profit would be overstated by $3000, because the expense for insurance that had not been recorded. Assets would also be overstated as the correct balance for prepaid insurance should be $6000 and it would have been left at $9 000. Hence it would be overstated by $3000.

D.Prepaid Insurance6 000

Insurance Expense6 000

Insurance prepaid (thus leaving $3000 in Insurance Expense).

Exercise 4.12Adjusting entries

Selected accounts of Amandas Art Supplies are shown below at 30 June of the current year before any adjusting entries have been made.

DebitCredit

Prepaid InsuranceSuppliesShop ShelvingUnearned Rental FeesSalaries ExpenseRental Fees Revenue$4 50072024 000

32 600

$

4 800

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.

RequiredRecord in the general journal the necessary adjusting entries on 30 June.

AMANDAS ART SUPPLIESGeneral Journal

DateParticularsDebitCredit

June 30Insurance Expense1 125

Prepaid Insurance1 125

Insurance expired. ($4500 3/12)

Supplies Expense290

Supplies290

Supplies used. ($720 $430)

Depreciation Expense Shop Shelving1 100

Accumulated Depreciation Shop Shelving1 100

Depreciation on office equipment.($24 000 $2000)/10 6/12 = $1100)

Unearned Rental Fees1 200

Rental Fees Revenue1 200

Rental fees earned for one month.($4800 4)

Salaries Expense2 400

Salaries Payable2 400

Accrued salaries.

Problem 4.1Adjusting entries

Hui Yu, lawyer, had the following transactions related to the business during June. Ignore GST.

June1

12

111518

28Purchased 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.

RequiredA. 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. HUI YU, LAWYERGeneral Journal (EXCLUDING GST)

DateParticularsDebitCredit

June 1Office Furniture36 000

Cash at Bank36 000

Purchased office furniture

1Prepaid Insurance3 000

Cash at Bank3 000

Purchased 12 month insurance policy

2Cash at Bank42 000

Loan Payable42 000

Borrowed $42 000 from the bank at 8% due in 3 months

11Supplies450

Cash at Bank450

Purchased supplies

15Rent Expense1 200

Cash at Bank1 200

Paid rent for one month

18Cash at Bank840

Unearned Services Revenue840

Received payment from customer in advance

28Telecommunications Expense410

Tele. Account Payable410

Amount due for telephone and internet charges

Adjusting entries

30Depreciation Expense260

Accumulated Depreciation Office Furniture260

Calculation of depreciation expense[($36 000 $4 800)/10 1/12]

30Insurance Expense250

Prepaid Insurance250

Insurance expired for one month on policy ($3000 1/12)

30Interest Expense280

Interest Payable280

Interest payable on loan from bank

($42 000 8%) 1/12

30Supplies Expense220

Supplies220

Supplies used during the month

30Prepaid Rent600

Rent Expense600

Rent not yet expired for the month

30Unearned Services Revenue168

Services Revenue168

Revenue recorded on completed work

30No adjusting entry required as telephone and internet expense is recorded on 28 June.

Exercise 14.2Cost and annual depreciation

On 2 January 2015, Johnston Ltd purchased a machine with a list price of $234300 (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 $24000.

RequiredA.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 method2.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.Cost of machine = $213 000* + $5400 + $5280 = $223 680*$213 000 = $234 300 less GST of $21 300

Machinery223 680

GST Receivable22 368

Accounts Payable246 048

To record purchase of machine, plus freight, installation costs, and GST.

B.Year ended 31 December

Depreciation method2015201620172018Total

Straight-line149 92049 92049 92049 920199 680

Diminishing balance296 18254 82431 25017 424199 680

1. ($223 680 $24 000)/4 = $49 920 p.a.

2. Depreciation rate 1 = 0.43 or 43%

$223 680 0.43 = $96 182

$127 498 0.43 = $54 824

$72 674 0.43 = $31 250

$441 424 $24 000 = $17 424

C.Depreciation Expense Machinery96 182

Accumulated Depreciation Machinery96 182

Record depreciation expense for year ended 31 December 2015.

Exercise 14.4Depreciation methods

Nevertire Ltd purchased a delivery van costing $52000 net of GST. It is expected to have a residual value of $12000 at the end of its useful life of 4 years or 200000 kilometres.

RequiredA.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-line2.units of production (assume the van was driven 78 000 kilometres during the financial year).3.diminishing balanceB.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-line2.diminishing balance3.units of production (assume the van was driven 60 000 kilometres during the financial year).

A.1.Straight-line:($52 000 $12 000)/4=$10 000

2.Units-of-production:Expense per kilometre = ($52 000 $12 000)/200 000 = $0.20.2 78 000=$15 600

3.Diminishing balance:

1 = 31% (approx.)= 1 0.69 = 0.31

$52 000 0.31 = $16 120

B.1.Straight-line:($52 000 $12 000)/4 9/12 = $7 5002.Diminishing balance:($52 000 0.31) 9/12 = $12 0903.Units-of-production:$0.2 60 000 = $12 000

Exercise 14.9Depreciation methods

Edwards Ltd recently paid $290000 for manufacturing equipment, which is expected to have a useful life of 4 years and a residual value of $50000. 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.

RequiredPrepare a schedule and calculate the annual depreciation charge and end-of-year carrying amount for the expected life of the equipment.

Straight lineDiminishing balance

YearDepre-CarryingDepre-Carrying

ciationamountciationamount

Acquisition$290 000$290 000

1$60 000230 000$104 400185 600

260 000170 00066 816118 784

360 000110 00042 762.2476 021.76

460 00050 00026 021.7650 000

Diminishing balance rate =1 = 36% approx.