Adjustments Q2 - practice questions and answers PDF

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(27 MARKS)

ADJUSTMENTS QUESTION 2

AA Entity’s current reporting date is 31 December 20.7. The owner of AA Entity will probably approve the financial statements for distribution on 28 February 20.8. The following balances, amongst others, appeared in the accounting records of AA Entity on 31 December 20.7: Additional information

Office supplies – expense Insurance expense Rent expense Cost of sales Sales Inventories Office supplies on hand on 31 December 20.6 Insurance expense prepaid on 31 December 20.6 Bank loan

1 2 3 4

Dr

Cr

502 000 77 000 40 000 2 600 000 6 500 000

4 1 2 5

329 000 38 000 15 000 1 575 000

Additional information and detail in respect of transactions and events that still have to be recognised: 1

Office supplies on hand on 31 December 20.7 amounts to R45 000 and still has to be recognised. The necessary journal entry in respect of office supplies on hand on 31 December 20.6 also still has to be recognised.

2

Insurance premiums are paid at the beginning of each month, except for property insurance of which the premiums are paid annually on 1 July. The annual property insurance premium that was paid on 1 July 20.7 amounted to R36 000. The full premium was debited against the insurance expense for 20.7. The insurance premium prepaid on 31 December 20.7 still has to be recognised. The necessary journal entry in respect of the insurance expense prepaid on 31 December 20.6 also still has to be recognised.

3

On 1 November 20.7, AA Entity rented additional storage space. The lease agreement, which was signed on 24 October 20.7, inter alia stipulates that:   

The lease term is for eighteen months from 1 November 20.7 to 30 April 20.9. The rent payment amounts to R20 000 per month which is payable on the first day of every month. A rent deposit of R20 000 is payable with the first rent payment on 1 November 20.7. The rent deposit is repayable at the end of the lease term.

The rent deposit as well as the November rent payment was paid on 1 November 20.7 and both amounts were debited to the rent expense account for 20.7. The rent payment for December 20.7 was, due to an omission, only paid on 11 January 20.8. The rent payable for December still has to be recognised. Recognise any adjustment that you deem necessary. 4

The inventory system indicated that obsolete and damaged inventory items with a cost of R35 000 should be written off on 31 December 20.7. The write-off was approved by the owner and still has to be recognised.

5

5

On 1 July 20.6, AA Entity received an amount of R1 500 000 on loan from the bank. The written loan agreement with the bank inter alia stipulates that the interest rate is 10% per year and that the interest and the primary debt must be repaid in one amount on 30 June 20.8. The interest is added at the end of every six months and the interest schedule is as follows: Datum 1 Jul 20.6 31 Dec 20.6 30 Jun 20.7 31 Dec 20.7 30 Jun 20.8

Detail Primary debt Interest Interest Interest Interest

Interest at 10% per year 75 000 78 750 82 688 86 822 323 260

Amortised cost of the loan 1 500 000 1 575 000 1 653 750 1 736 438 1 823 260

The appropriate interest expense for 20.7 still has to be recognised. Required: a)

Recognise, by means of journal entries, the transactions and events in additional information (1) to (5) above that still have to be recognised in the records of AA Entity for the reporting period ended 31 December 20.7. (16) Note:

b)

The effect of a transaction/event on the accounting equation (A=L+E), as well as journal narrations are not required.

After accounting for the abovementioned journal entries, present the relevant balances in the statement of income of AA Entity for the reporting period ended 31 December 20.7. (8) Note:

Show all calculations clearly. (Informal T-accounts can be used as calculations.) The accounts as such are not required.

c)

After accounting for the abovementioned journal entries, present only the line item “Other current assets” in the statement of financial position of AA Entity for the reporting period ended 31 December 20.7. (3) Note:

Show all calculations clearly. (Informal T-accounts can be used as calculations.) The accounts as such are not required.

6

ADJUSTMENTS QUESTION 2 Solution

(27 MARKS)

a) Journal entries J1 20.7 31 Dec

Office supplies on hand (31/12/20.7) Office supplies-expense Recognise office supplies on hand on 31/12/20.7 by reclassifying a portion of the office supplies-expense for 20.7 as an asset.

Assets +45 000

J2 20.7 1 Jan

+ +

Equity +45 000

= =

Liabilities 0

+ +

Equity - 38 000

= =

Liabilities 0

+ +

Equity +18 000

Insurance expense (20.7) Insurance expense prepaid (31/12/20.6) Recognise closing off of insurance expense prepaid (20.6) against the insurance expense (20.7)

Assets - 15 000

= =

Liabilities 0

+ +

Equity - 15 000

6

Cr 45 000

 

Classification Retained earnings – Expense Office supplies (decreased)

Dr 38 000

Cr 38 000

 

Classification Retained earnings – Expense Office supplies

Insurance expense prepaid (31/12/20.7) Insurance expense Recognise insurance expense prepaid on 31 Dec 20.7

Assets +18 000

J4 20.7 1 Jan

Liabilities 0

Office supplies – expense (20.7) Office supplies on hand (31/12/20.6) Recognise closing off of office supplies on hand (20.6) against the office supplies-expense (20.7)

Assets - 38 000

J3 20.7 31 Dec

= =

Dr 45 000

Dr 18 000

Cr 18 000

 

Classification Retained earnings – Expense Insurance expense (decreased)

Dr 15 000

Cr 15 000

Classification Retained earnings – Expense Insurance expense

 

J5 20.7 31 Dec or 1 Nov

Rent deposit Rent expense Correction – rent deposit erroneously debited to the rent expense account.

Assets +20 000

J6 20.7 31 Dec

+ +

Equity +20 000

= =

Liabilities +20 000

+ +

Equity - 20 000

Cost of sales Inventories Recognise damaged inventories as expense

Assets - 35 000

J8 20.7 31 Dec

Liabilities 0

Rent expense Rent expense in arrears/payable Recognise rent expense payable for December 20.7

Assets 0

J7 20.7 31 Dec

= =

= =

Liabilities 0

+ +

Equity - 35 000

= =

Liabilities +161 438

+ +

Cr 20 000

Dr 20 000

Cr 20 000

 

Classification Retained earnings – Expense Rent expense

Dr 35 000

Cr 35 000

 

Classification Retained earnings – Expense Cost of sales

Cr 161 438

Equity - 161 438

 

Classification Retained earnings – Expense Rent expense (decreased)

Dr 161 438

Interest-expense (on loan) Bank loan (78 750 + 82 688) Recognise interest expense for 20.7

Assets 0

Dr 20 000

 

Classification Retained earnings – Expense Interest-expense [16]

7

b) Presentation of balances in the statement of income AA ENTITY STATEMENT OF INCOME FOR THE YEAR ENDED 31 DECEMBER 20.7 Sales Cost of sales (2 600 000 + 35 000) Gross profit Office supplies (38 000 + 502 0000 – 45 000) Insurance expense (15 000 + 77 000 – 18 000) Rent expense ((40 000 – 20 000) + 20 000) Finance costs (78 750 + 82 688)  // PROFIT FOR THE YEAR

R  6 500 000 (2 635 000) 3 865 000 (495 000) (74 000) (40 000) (161 438) XXX Max [8] of 9

c) Presentation of other current assets AA ENTITY STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.7 R ASSETS Current assets Other current assets (45 000 + 18 000 + 20 000)

83 000 [3]

Calculations: Informal T-accounts Dr 20.6 Balance

Office supplies on hand (asset – 20.6) 20.7 Office supplies expense 38 000 1 Jan

Dr 20.7

Office supplies – expense (20.7) 20.7 502 000 31 Dec Office supplies on hand 38 000 Balance 540 000 495 000 Retained earnings

Balance

Balance Dr 20.7 31 Dec

Office supplies on hand (asset – 20.7) Office supplies expense

Dr 20.6 Balance

Cr 38 000 Cr 45 000 495 000 540 000 495 000 Cr

45 000

Insurance expense prepaid (asset – 20.6) 20.7 15 000 1 Jan Insurance expense

8

Cr 15 000

Dr 20.7

Insurance expense (20.7) 20.7 77 000 31 Dec Insurance expense prepaid 15 000 Balance 92 000 74 000 Retained earnings

Balance

Balance Dr 20.7 31 Dec

Insurance expense prepaid (asset – 20.7) Insurance expense

Dr 20.7 Balance

Dr 20.7 Balance

Dr 20.7

Dr 20.7

Inventories 20.7 329 000 31 Dec 329 000 294 000

Dr 20.7 30 Jun 31 Dec

Bank loan Bank loan

35 000 294 000 329 000

Cost of sales 20.7 2 600 000 31 Dec 35 000 2 635 000

Cr

Sales 20.7 31 Dec

Cr

20.7 30 Jun Interest expense 31 Dec Interest expense

Bank loan

Cr

Cr

Bank loan 20.6 1 Jul Bank 31 Dec Interest expense

Dr 20.7

18 000 74 000 92 000 74 000

18 000

Balance Balance

Cr

Interest-expense (20.6) 20.7 75 000 31 Dec Retained earnings

Interest-expense (20.7) 20.7 78 750 31 Dec 82 688 161 438

9

6 500 000

Cr 1 500 000 75 000 1 575 000 78 750 82 688 1 736 438 Cr 75 000

Cr...