Question

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

(A)-1

Adjustment Entries on 31st December 2017-

Accounts and Explanation	Debit	Credit
(1). Inventory Closing	102500
COGS (Balancing fig)	628500
Purchases		625200
Inventory(Opening)		105800
(Being COGS recorded)(COGS= Oprning inventory+purchases-closing inventory)
(2)Interest Expenses	8000
Interest Payable		8000
(being interest expenses recorede =100000*8%)
(3)Prepaid Rent	6000
Rent		6000
(being 3 month prepaid rent recorded=2000*3month) for jan-march 2018)
(4) Depreciation Expenses	10000
Accumulated depreciation(Equipment)		10000
(depreciation for equioment recorded =100000/10 year = 10000 per year)
(5) Depreciation Expenses	5000
Accumulated depreciation(Motor Vehicle)		5000
(depreciation for motor vehicle recorded =(80000-30000)/10 year = 5000 per year)
(6) Allowances for receivable	10000
Accounts receivable		10000
(being bad debts are charged against allowances for receivables)
(7) Profit &loss	6000
Allowances for receivable		6000
(being allowances for receivables created)
(8)Heating and lighting expenses	1000
Expenses payable		1000
(accrued expenses charged)

working(Point-7)

Gross receivables as on 31 dec 2017 = 110000

bad debts=10000

Receivable after bad debt = 110000-10000= 100000

Allowances for receivables required = 100000*10% = 10000

Allowances already left after charging bad debt = 14000-10000 = 4000

allowances required to create = 10000-4000 = 6000

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(A)-2

Income statement Tracy Underhill For the year ended 31 december 2017
Sales	695000
Less-Expenses
COGS	628500
Employees expenses	40000
Administrative expenses
Rent	24000
insurance	14700
Heating & Lighting	11000
Motor Expenses	15300
Finance Cost
Interest Expenses	8000
Depreciation expenses	15000
Misc. Expenses	28500
Allowances for Receivables	6000
Net Income(loss)	-96000

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(A)-3

Balance sheet Tracy Underhill As on 31-12-2017
Assets
Current Assets
Cash	71000
inventory	102500
Accounts receivable (100000-10000)	90000
Prepaid Rent	6000
Non Current Assets
Equioment(100000-20000)	80000
Motor vehicle(80000-15000)	65000
Total Assets	414500
Liabilities
Current Liabilities
Payables	101500
Interest Payable	8000
Expenses payable	1000
Non current liabilities
Bank loan	100000
Capital(300000-96000)	204000
Total Liability and equity	414500

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(B)

If an accrued expenses is not recorded then,

1. Profit will be over stated

2. Current liability will be under stated

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(C)

1. Adjustment entry on 31 december

Prepaid Management service Expenses	7125
Management Service Expenses		7125

Working-

Total payment made for 24 months on june 30= $9500

Upto 31 December total expenses will be for 6 months ( JULY-DEC)

Hence balance 18 months expenses will be prepaid = $9500/24*18 = 7125

2.

-on income statement expenses will be less by 7125

-on balance sheet prepaid expenses will be shown under current asset = 7125

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