Question

Question 1

A- Tracy Underhill operates as a sole trader. Below is a trial balance extracted from her books as at

     31 December 2017.

Trial balance for Tracy Underhill as at 31 December 2017

	Debit	Credit
	£                    _ .	£
Sales revenue		695,000
Inventory (as at 1 January 2017)	105,800
Purchases	625,200
Non-current assets at cost:
Equipment	100,000
Motor vehicle	80,000
Accumulated depreciation:
Equipment		10,000
Motor vehicle		10,000
Insurance	14,700
Rent	30,000
Heating and lighting	10,000
Salaries and wages	40,000
Motor expenses	15,300
Miscellaneous expenses	28,500
Receivables	110,000
Allowance for receivables		14,000
Payables		101,500
Cash	71,000
Bank loan		100,000
Capital		300,000
Total	1,230,500	1,230,500

Additional information is provided for use in preparing the company’s adjustments:

1. The value of closing inventory is £102,500.
2. Interest is payable on the bank loan at eight per cent per annum. The annual amount due as at 31 December 2017 had not yet been paid.
3. Tracy has paid her rent until 31 March 2018. Her annual rent is £24,000.
4. Office equipment has a useful life of ten years and a residual value of £0. It is to be depreciated on a straight-line basis.
5. The motor vehicle with a useful life of ten years and an estimated residual value of £30,000 is to be depreciated on a straight-line basis at a rate of 10%.
6. Tracy finds that receivables of £10,000 need to be written off as irrecoverable.
7. The allowance for receivables is to be set at ten per cent of the remaining outstanding receivables as at 31 December 2017.
8. The heating bill will arrive on 5 January and about £1,000 is expected to relate to the period until 31 December.

Required:

1. Make the end-of-period adjustments entries                                                               
2. Prepare Tracy’s income statement for the year ended December 31, 2017.                 
3. Prepare Tracy’s balance sheet as at December 31, 2017.                                           

B- What will be the effect on financial statements if an accrued expense is not recorded at the end of the year?                                                                                                                                

C- On June 30 of the current calendar year, Apricot Co. paid $9,500 cash for management services to be performed over a two-year period. Apricot follows a policy of recording all prepaid expenses to expense accounts at the time of cash payment.

Required:

1- Prepare the adjusting entry on December 31 for Apricot Co.

2- Show the effect of the adjusting entry on Income statement and balance sheet at the end of the

    Current calendar year         

Answer 1

INCOME STATEMENT
PARTICULARS	NOTES	AMOUNT	AMOUNT
SALES			695000
PREPAID EXPENSES
RENT		6000
HEATING EXPENSES		9000
BAD DEBT PROVISIONS		4000	19000
INCOME			714000
COST OF GOODS SOLD	1		628500
INSURANCE		14700
RENT		24000
HEATING AND LIGHTING		1000
SALARIES AND WAGES		40000
MOTOR EXPENSES		15300
MISC EXPENSES		28500
INTEREST ON LOAN		8000
BAD DEBTS WRITTEN OFF		20000
OTHER EXPENSES			151500
NET LOSS			-66000

BALANCE SHEET
ASSETS
NON CURRENT ASSETS
EQUIPMENT		100000
MOTOR VEHICLE		80000
NET LOSS		66000
NON CURRENT ASSETS (A)			246000
CURRENT ASSETS
CLOSING STOCK		102500
RECEIVABLES		100000
CASH		63000
PREPAID EXPENSE
RENT		6000
HEATING EXPENSES		9000
CURRENT ASSETS (B)			280500
ASSETS (A+B)			526500
LIABILITIES
CAPITAL		300000
BANK LOAN		100000
LIABILITIES (A)			400000
CURRENT LIABILITES
ALLOWANCE TO RECEIVABLES		10000
PAYABLES		101500
ACCUMULATED DEPRECIATION
EQUIPMENT		10000
MOTOR VEHICLE	2	5000
CURRENT LIABILITIES (B)			126500
LIABILITIES (A+B)			526500

NOTES-
1. COST OF GOODS SOLD
OPENING STOCK	105800
PURCHASE	625200
CLOSING STOCK	102500
COGS	628500
2. DEPRECIATION
EQUIPMENT	100000
USEFUL LIFE	10
DEPRECIATION= 100000/10	10000
MOTOR VEHICLE	80000
USEFUL LIFE	10
RESIDUAL VALUE	30000
DEPRECIATION	10%
(80000-30000) *10 %	5000