Question

Smart Travel Goods Pty Ltd was formed on 1 July 2014. On 30 June 2015, Mark Austin, the managing director and major shareholder, decided to prepare a statement of financial position, which appears as follows:

	Smart Travel Goods Pty Ltd Statement of financial position As at 30 June 2015
Assets		Liabilities and Equity
Cash	$30,000	Accounts payable	$30,000
Accounts receivable	23,000	Notes payable	12,000
Inventory	40,000	Bank loan	350,000
Villa	450,000	Equity	151,000

Mark is concerned that his statement of financial position might not be correct. He has provided you with the following additional information:

• The villa is on the Sunshine Coast and actually belongs to Mark, not to Smart Travel Goods Pty Ltd. However, because he thinks he might allow executives to use it sometimes, he decided to list it as an asset of the company. To be consistent he also listed as a liability of the company his personal loan that he took out at the bank to buy the villa (i.e., Bank loan: $350,000).
• The inventory was originally purchased for $15,000, but due to a surge in demand, Mark now thinks he could sell it for $40,000. He thought it would be best to record it at $40,000.
• Included in the accounts payable balance is $6,000 that mark owes for his personal telephone account. Mark included this in the accounts payable of Smart Travel Goods Pty Ltd because he will probably use a company cheque to pay for it.

Required:

Provide a corrected statement of financial position for Smart Travel Goods Pty Ltd. (Hint: To get the statement of financial position to balance, adjust equity.)

Answer 1

Calculation for adjusted balance of equity :

Given balance of equity	$151,000
Adjustment :
Such Bank loan doesn't associated with business, it is a personal loan of the owner, thus not recorded in the books. Elimination of liability increase capital.	$350,000
Villa is the personal assets of the owner, it doesn't belongs to the business. Elimination of assets reduce capital balance	$(450,000)
As per conservatism principle inventory are to be recorded in the accounts at a value, which is lower in between cost and market value. So, here inventory has to be reduced by $ [ 40,000 - $ 15,000] = $ 25,000 , which will reduce capital balance. Because reduction of assets makes reduction of capital if other aspects remain constant.	$(25,000)
Personal telephone bill Previously included in accounts payable rectified. Liability ( accounts payable ) would be decreased as well as equity balance increased if other aspects are remain constant .	$ 6,000
Adjusted balance of equity	$ 32,000

Revised Balance sheet

As on 30th June 2015

Assets	$	Liabilities and equity	$
Cash	30,000	Accounts payable [ 30,000 - 6,000]	24,000
Accounts receivable	23,000	Note payable	12,000
Inventory	15,000	Equity [Adjusted balance ]	32,000
Total	68,000	Total	68,000