Question

Prepare the adjusting entry on December 31 for Apricot Co.

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.

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.

Answer 1

Prepare the adjusting entry on December 31 for Apricot Co.

1) 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.

Prepaid expense	4750
To. Management service Expense A/c		4750
(Being half of the payment related to next year)

Prepare the adjusting entry on December 31 for Tracy Underhill.

The value of closing inventory is £102,500.

No entry required

Interest is payable on the bank loan at eight percent per annum. The annual amount due as at 31 December 2017 had not yet been paid.
Interest A/c    Dr.	8,000.00
To. Interest Payable		8,000.00

Interest = 100000*8% = £8000

Tracy has paid her rent until 31 March 2018. Her annual rent is £24,000.
Rent prepaid A/c Dr.	6000
To. Rent Paid		6000

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.
Depreciation A/c Dr.	10000
To Accumulated depreciation		10000

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%.
Depreciation A/c Dr.	5000
To Accumulated depreciation		5000

Tracy finds that receivables of £10,000 need to be written off as irrecoverable.
Allowance for receivables	10000
To Receivable		10000

The allowance for receivables is to be set at ten per cent of the remaining outstanding receivables as at 31 December 2017.
Bad debt	6000
To Allowance for receivables		6000

The heating bill will arrive on 5 January and about £1,000 is expected to relate to the period until 31 December.
Heating and lighting	1000
Heating bill payable		1000

Adjusted Trial Balance:

	Debit	Credit
	£                    _ .	£
Sales revenue		695000
Inventory (as at 1 January 2017)	105800
Purchases	625200
Non-current assets at cost:
Equipment	100000
Motor vehicle	80000
Accumulated depreciation:
Equipment		10000
Motor vehicle		10000
Insurance	14700
Rent	30000
Heating and lighting	10000
Salaries and wages	40000
Motor expenses	15300
Miscellaneous expenses	28500
Baddebt	6000
Receivables	100000
Allowance for receivables		10000
Payables		101500
Cash	71000
Bank loan		100000
Capital		300000
Total	1226500	1226500

Profit and loss Account:

Purchases	6,25,200	Sales revenue	6,95,000
Inventory Opening	1,05,800	Closing	1,02,500
Gross profit	66,500
	7,97,500		7,97,500
Insurance	14,700	Gross profit	66,500
Rent	24,000
Heating and lighting	11,000
Salaries and wages	40,000
Motor expenses	15,300
Miscellaneous expenses	28,500	Net loss	96,000
Interest	8,000
Depreciation
Office equipment	10,000
Motor vehicle	5,000
Allowance for receivables	6,000
	1,62,500		1,62,500

Balancesheet

Capital	3,00,000	Non-current assets at cost:
Less: Net Loss	(96,000)	Equipment	1,00,000
		Motor vehicle	80,000
Bank loan	1,00,000
Allowance for receivables	10,000	Receivables	1,00,000
Payables	1,01,500	Prepaid rent	6,000
Interest payable	8,000	Cash	71,000
Heating bill payable	1,000
Accumulated depreciation:		Inventory	1,02,500
Equipment	20,000
Motor vehicle	15,000
	4,59,500		4,59,500

Receivable Account

Opening balance	1,10,000	Allowance for receivable	10,000
		Closing Balance	1,00,000
	1,10,000		1,10,000

Allowance for receivable Account

Receivable account	10,000	Opening balance	14,000
Closing Balance	10,000	Bad debt	6,000
	20,000		20,000

Bad debt Account

Allowance for receivable Account	6,000
		Closing	6,000
	6,000		6,000