Question

PART A

Shania Twain Ltd pays its annual insurance premium in cash on 1 September each year.  The latest payment of $9,000 was on 1 September 2020 which was $600 more than the previous year.  All transactions are recorded in the general journal. Shania Twain Ltd has a December 31st year end.

Required:

Assuming Shania Twain Ltd uses the Asset approach to record the payment, prepare general journal entries (narrations are NOT required) required at:

1. 1 September 2020
2. 31 December 2020 (adjusting entry only; i.e. closing entry not required)

PART B

Why do we prepare closing entries at year end?

PART C

Shania Twain Ltd had Accounts Receivable of $215,000 and an Allowance for Doubtful Debts of $520 (Credit) at 31 December 2020.  A review of outstanding accounts indicated the need to immediately write off $700 of bad debts and to make a provision for Doubtful Debts for next year based on 3% of Adjusted Accounts Receivable.

Prepare the necessary general journal entries for the above information (narrations are NOT required).

PART D

Shania Twain Ltd had purchased equipment on 1 January 2020 at a cost of $200,000. The equipment had a useful life of 6 years and an estimated residual of $35,000.  The company decided to use the reducing balance method of depreciation at 30% per annum.

Calculate the depreciation and prepare the necessary journal entry for the year ended 31 December 2021.

Answer 1

Part A –

Date	General Journal	Debit	Credit
Sept.1, 2020	Prepaid Insurance	$9,000
	Cash		$9,000
	(To record prepaid insurance paid in cash)
Dec.31, 2020	Insurance Expense (9,000 / 12 * 4)	$3,000
	Prepaid Expense		$3,000
	(To record adjusting entry for Insurance Expense)

Note - Under asset approach, a prepaid expense account is recorded or debited when the amount is paid.

Part B –

Closing Entries are the journal entries which are made by an organization at the end of an accounting period to close the temporary accounts for the year and to prepare the temporary accounts for the next period.

Temporary Account’s balance are transferred to Income Statement and temporary accounts consist Revenue and Expenses account and withdrawal in case of proprietorship and partnership business.

Part C –

To write off $700 immediately, we need to record following journal entry:

Date	General Journal	Debit	Credit
Dec.31, 2020	Allowance for Doubtful Debts	$700
	Accounts Receivable		$700
	(To write off the bad debts)

So the adjusted balance of following accounts at Dec 31, 2020 as below:

Adjusted Accounts Receivable balance at Dec 31, 2020 = $215,000 – Write off amount $700

= $214,300

Allowance for Doubtful Debts = $520 (Credit) + $700 (Debit) = $200 Debit

Estimated Uncollectible Amount = Adjusted Accounts Receivable balance $214,300 * 3%

= $6,429

Now, to record bad debt expenses for the year, we need to adjust the balance $200 Debit of Allowance for Doubtful Debts Account to $6,429 credit. Hence the following adjusting entry would be recorded:

Date	General Journal	Debit	Credit
Dec.31, 2020	Bad Debt Expense	$6,629
	Allowance for Doubtful Debts ($6,429 + $200)		$6,629
	(To record allowance for doubtful debt and bad debts expenses for the year)

Part D –

Reducing balance method is applied on the cost of asset not on depreciable value of asset.

Hence, the Depreciation Expenses for the year ended Dec 31, 2021 = Cost of Asset $200,000 * Rate of Depreciation 30%

= $60,000

Journal Entry would be:

Date	General Journal	Debit	Credit
Dec.31, 2021	Depreciation Expense	$60,000
	Accumulated Depreciation on Equipment		$60,000
	(To record depreciation expense for the year)

Hope the above calculations, working and explanations are clear to you and help you to understand the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you