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Topic 6 Questions Chapter five: Completing the Accounting Cycle – Closing Entries This topic will aid in the completion of DogStylez the case study. Please refer to the case study and complete the closing entries and post-closing trial balance.

Chapter five: discussion question 5.2  Compare and contrast the purposes of adjusting entries, closing entries and reversing entries.   Adjusting entries  are made on the last day of each financial/reporting period in order to account for any accruals and deferrals arising from acceptance of the period assumption and the accrual basis of accounting. These entries are necessary to measure correctly the entity’s profits/performance and financial position, as opposed to the entity’s cash performance and cash position.   Closing entries  are made on the last day of the financial period in order to close off all temporary equity accounts, so that these accounts are given zero balances for the beginning of the new financial period. Temporary equity accounts consist of income (revenue), expenses and drawings. These temporary accounts are used to determine the total value of such items for the current period. At the end of that period, they are closed into permanent equity accounts (capital or retained earnings) in preparation for the next period.   Reversing entries  which are made on the first day of the new accounting period, are not necessary in the accounting cycle; however, they are handy for reversing certain types of adjusting entries where cash is to be received or paid in relation to that adjustment in the next accounting period. The main types of adjustments which benefit from reversing entries are accruals, as, by making reversing entries in relation to accruals, the entries for cash receipts and cash payments in the new period are simplified. Reversing entries are also useful for deferral adjustments where the initial cash transactions are recorded in temporary accounts rather than in permanent accounts. See the discussion in this chapter of the text, under reversing entries, in relation to the handling of an insurance payment as an example where reversing entries can be used for deferrals.

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Chapter five: exercise 5.5 Closing entries and post-closing trial balance Michael Rau founded Michael’s Fishing Supplies on 1 July 2019. The adjusted trial balance at 30 June 2020 (the end of the financial year) is shown below. Required (a) Prepare closing entries to be made on 30 June 2019. (b) Prepare a post-closing trial balance as at 30 June 2019.

Account Cash at bank Accounts receivable GST receivable Fishing supplies Prepaid insurance Boat Accumulated depreciation – boat Accounts payable Salaries payable Interest payable Mortgage payable Unearned revenue GST payable Michael Rau, Capital Michael Rau, Drawings Sales Salaries expense Insurance expense Interest expense Depreciation expense Fishing supplies expense Rent expense

MICHAEL’S FISHING SUPPLIES Adjusted Trial Balance as at 30 June 2020 Debit $ 12 400 25 200 2 160 6 000 3 000 36 000

Credit

$ 18 000 6 000 2 040 3 120 7 800 6 720 3 600 18 000 14 400 60 640 14 040 1 080 600 4 200 2 040 4 800 $125 920

$125 920

(a) General Journal Closing entries 2020 June 30

June 30

Particulars Sales Profit or Loss Summary Close income accounts to Profit or Loss Summary

Debit $62 080

Profit or Loss Summary Salaries Expense Insurance Expense Interest Expense Depreciation Expense

26 760

Credit $62 080

14 040 1 080 600 4 200

Fishing Supplies Expense Rent Expense Close expense accounts to Profit or Loss Summary June 30

June 30

2 040 4 800

Profit or Loss Summary Michael Rau, Capital Close Profit or Loss Summary to Capital

35 320

Michael Rau, Capital Michael Rau, Drawings Close Drawings to Capital

14 400

35 320

14 400

(b) MICHAEL’S FISHING SUPPLIES Post Closing Trial Balance as at 30 June 2020 Account Cash at bank Accounts receivable

Dr

Cr $12 400 25 200

Fishing supplies

6 000

Prepaid insurance Boat

3 000 36 000

Accumulated depreciation – boat

$18 000

Accounts payable

6 000

Salaries payable

2 040

Interest payable

3 120

Mortgage payable

7 800

Unearned revenue

6 720

Michael Rau, Capital

38 920 $82 600

$82 600

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Chapter five: problem 5.20 Preparation of worksheet, financial statements and closing entries The ledger of P. Oodle, Veterinary Surgeon, contains the accounts and account balances shown below on 30 June 2019:

Account Cash at Bank Accounts Receivable Prepaid Insurance Land Building Accumulated Depreciation – Building Equipment Accumulated Depreciation – Equipment Accounts Payable Mortgage Payable P. Oodle, Capital P. Oodle, Drawings Fees Earned Rent Revenue Salaries Expense Telephone Expense Interest Expense Insurance Expense

Debit $ 12 600 11 800 1 800 180 200 196 000

Credit

$86 900 32 300 8 800 16 400 64 000 236 950 86 500 262 430 14 400 124 600 4 520 3 080 36 480

$689 880

$689 880

The following account titles are included in the chart of accounts:       

Interest Payable Salaries Payable Rates Payable Unearned Fees Depreciation Expense – Building Depreciation Expense – Equipment Rates Expense

The following information has not yet been recorded: 1. Rates owing at 30 June, $4820. 2. Depreciation on the equipment is $3680. Depreciation on the building is $9600. 3. An advance fee payment of $600 for minor surgery to be performed in July 2019 was credited to Fees Earned. 4. The mortgage contract provides for a monthly payment of $1000 plus accrued interest. The June payment was not made. Interest of $260 is accrued on the mortgage. 5. Prepaid insurance of $1340 has expired. 6. Salaries earned but not paid amount to $2360. Required (a) Prepare a 10-column worksheet for the year ended 30 June 2019. (b) Prepare an income statement, a statement of changes in equity and a balance sheet. (c) Journalise the closing entries.

(a) Worksheet: for the year ended 30 June 2019 Unadjusted trial balance Account title

Debit

Adjustments Credit

Debit

Adjusted Trial balance Credit

Debit

ncome Statement

Credit

Debit

Balance sheet

Credit

Debit

Credit

Cash at Bank

12 600

12 600

12 600

Accounts Receivable

11 800

11 800

11 800

460

460

Prepaid Insurance

1 800

(5) 1 340

Land

180 200

180 200

180 200

Building

196 000

196 000

196 000

Acc. Depn – Building Equipment

86 900

(2) 9 600

32 300

Acc. Depr. – Equipment

96 500

96 500

32 300 8 800

(2) 3 680

32 300 12 480

12 480

Accounts Payable

16 400

16 400

16 400

Mortgage Payable

64 000

64 000

64 000

P. Oodle, Capital

236 950

236 950

236 950

P. Oodle, Drawings Fees Earned

86 500

86 500 262 430

(3)

600

86 500 261 830

261 830

Rent Revenue Salaries Expense

14 400 124 600

14 400 126 960

126 960

4 520

4 520

260

3 340

3 340

(5) 1 340

37 820

37 820

Depr. Exp – Building

(2) 9 600

9 600

9 600

Depr. Exp. – Equipment

(2) 3 680

3 680

3 680

Telephone Expense

4 520

Interest Expense

3 080

Insurance Expense

(6) 2 360

14 400

(4)

36 480 $689 880

$689 880

Interest Payable

(4)

260

260

260

Salaries Payable

(6) 2 360

2 360

2 360

Rates Payable

(1) 4 820

4 820

4 820

Unearned Fees

(3)

600

600

Rates Expense

(1) 4 820 22 660

Profit for the year

600 4 820 22 660

710 600

4 820 710 600

190 740

276 230

519 860

85 490 276 230

434 370 85 490

276 230

519 860

519 860

(b) P. OODLE, VETERINARY SURGEON Income Statement for the year ended 30 June 2019 INCOME Fees earned

$261 830

Rent income

14 400 276 330

EXPENSES Salaries expense

$126 960

Depreciation expense – building

9 600

Depreciation expense – equipment

3 680

Telephone expense

4 520

Interest expense

3 340

Insurance expense

37 820

Rates expense

4 820 190 740

PROFIT

$85 490

P. OODLE, VETERINARY SURGEON Statement of Changes in Equity for the year ended 30 June 2019 P. Oodle, Capital – 1 July 2018

Add: Profit for the year

$236 950

85 490 $322 440

Less: Drawings during the year P. Oodle, Capital – 30 June 2019

(86 500) $235 940

P.OODLE, VETERINARY SURGEON Balance Sheet as at 30 June 2019 CURRENT ASSETS Cash at bank

$12 600

Accounts receivable

11 800

Prepaid insurance

460

Total current assets

$24 860

NON-CURRENT ASSETS Equipment

$32 300

Less Accumulated depreciation

(12 480)

Land

19 820 180 200

Building

196 000

Less Accumulated depreciation

(96 500)

99 500

Total non-current assets

299 520

TOTAL ASSETS

$324 380

CURRENT LIABILITIES Accounts payable Interest payable Salaries payable Rates payable Current portion of mortgage payable* Unearned fees

16 400 260 2 360 4 820 13 000 600

Total current liabilities

37 440

NON-CURRENT LIABILITIES Mortgage payable Total non-current liabilities TOTAL LIABILITIES NET ASSETS

51 000 51 000 88 440 $235 940

EQUITY P. Oodle, Capital

* Current portion of mortgage payable = 13 months  $1 000 per month

$235 940

(c) General Journal Closing Entries

2019 June

30

Fees Earned

261 830

Rent Revenue

14 400

Profit or Loss Summary

276 330

Close income a/cs to Profit or Loss Summary

June

30

Profit or Loss Summary

190 740

Salaries Expense

126 960

Telephone Expense

4 520

Interest Expense

3 340

Insurance Expense

37 820

Depreciation Expense – Building

9 600

Depreciation Expense – Equipment

3 680

Rates Expense

4 820

Close expense a/cs to Profit or Loss Summary

June

30

Profit or Loss Summary

85 490

P. Oodle, Capital

85 490

Close Profit or Loss Summary to Capital

June

30

P. Oodle, Capital P. Oodle, Drawings Close Drawings to Capital

86 500 86 500

Chapter five: problem 5.26 Adjusting entries, financial statements, closing entries, reversing entries The trial balance shown below summarises the year’s activities for Nova Caine’s dental surgery.

The following additional information should be considered. 1. Inventory of dental supplies on hand at 30 June is $16 400; $2400 office supplies are on hand. 2. Depreciate equipment at the rate of 15% p.a. on cost ($520 000). 3. Rent of $5000 has been paid in advance and has been debited to rent expense. 4. Wages earned by the dental assistants but unpaid, $1620. Required (a) Journalise the adjusting entries. (b) Journalise the closing entries. (c) Prepare an income statement, a statement of changes in equity and a balance sheet. (d) Journalise the reversing entries (if any).

(a) General Journal Adjusting Entries 2019 1

Dental Supplies Expense Dental Supplies Dental supplies used.

125 600 125 600

Office Expenses

5 600

Office Supplies

5 600

Office supplies used.

2

Depreciation Expense – Equipment

78 000 78 000

Accum. Depreciation – Equipment Depreciation of equipment

3

Prepaid Rent

5 000

Rent Expense

5 000

Rent paid in advance.

4

Wages Expense

1 620

Wages Payable

1 620

Wages owing to nurse.

(b) General Journal Closing Entries 2019 Fees Revenue

610 000

Profit or Loss Summary

Profit or Loss Summary Dental Supplies Expense Depreciation Expense – Equipment Wages Expense

610 000

506 820 125 600 78 000 143 620

Rent Expense

60 000

Office Expenses

32 600

General Expenses

67 000

Profit or Loss Summary

103 180 103 180

Nova Caine, Capital

Nova Caine, Capital

120 000

Nova Caine, Drawings

120 000

Fees Revenue

610 000

Profit or Loss Summary

610 000

Nova Caine, Dentist Income Statement for the year ended 30 June 2019 INCOME Dental fees revenue

$610 000

EXPENSES Dental supplies expense

$125 600

Wages expense

143 620

Office expenses

32 600

Depreciation expense

78 000

Rent expense

60 000

General expense

67 000

PROFIT

506 820 $103 180

Nova Caine, Dentist Statement of Changes in Equity for the year ended 30 June 2019 Nova Caine, Capital – 1 July 2018 Add: Profit for the year

$357 600 103 180 460 780

Less: Drawings during the year

(120 000)

Nova Caine, Capital – 30 June 2019

$340 780

Nova Caine, Dentist Balance Sheet as at 30 June 2019 CURRENT ASSETS Cash at bank

$5 600

Accounts receivable

56 000

Prepaid rent

5 000

Office Supplies

2 400

Dental Supplies

16 400

Total current assets

$85 400

NON-CURRENT ASSETS Dental equipment

520 000

Less: Accum. depn. – dental equip.

(243 000)

Total non-current assets

277 000

TOTAL ASSETS

$362 400

CURRENT LIABILITIES Accounts payable

20 000

Wages payable

1 620

TOTAL LIABILITIES

21 620

NET ASSETS

$340 780

EQUITY Nova Caine, Capital

$340 780

TOTAL EQUITY

$340 780

(d) General Journal Reversing Entries 2019 1

Rent Expense

5 000

Prepaid Rent

5 000

Reversing entry for deferral recorded in expense.

2

Wages Payable Wages Expense Reversing entry for accrual.

1 620 1 620...