Question

Based on the balance sheet below:

Use your trial balance and the additional information below to prepare:

a. the statement of profit or loss for the two months ended on 31 December

2018 (in a vertical format).

b. the statement of financial position as at 31 December 2018 (classify assets

and liabilities into non-current and current).

Additional information at the year-end requiring adjustments in the financial

statements:

a)Depreciation on office equipment is recorded on the straight-line basis and

calculated per month. The equipment is estimated to have the residual value of

€6,000. The useful life is 3 years. Consider November as a full month.

b)) Salaries owed to employees for December are €8,500.

c) The bank loan has an interest rate of 6% per annum. No interest has been paid

yet.

d) Closing inventory as at 31 December is €7,000.

e) Show rent expense incurred by and rent prepayment as at 31 December.

(The average gross profit margin in the given

industry is 37%). What recommendations would you give to Rob Rowan, the

owner of the business for the future?

Working - Journal Entries:
Date	Account	Debit	Credit
Nov 1	Cash and Bank	£          60,000
Nov 1	R.Rowan - Capital		£        60,000
Nov 2	Rent Expense	£            4,000		(12000/6*2)
Nov 2	Prepaid Rent	£            8,000
Nov 2	Cash and Bank		£        12,000
Nov 3	Office Equipment	£          24,000
Nov 3	Cash and Bank		£        24,000
Nov 5	Purchases/Inventory	£          15,000
Nov 5	Trade Payable		£        15,000
Nov 10	Trade Receivable	£          14,000
Nov 10	Sales Revenue		£        14,000
Nov 15	Purchases/Inventory	£          10,400
Nov 15	Trade Payable		£        10,400
Nov 18	Trade Payable	£          15,000
Nov 18	Cash and Bank		£        15,000
Nov 19	Cash and Bank	£          14,000
Nov 19	Trade Receivable		£        14,000
Nov 30	Cash and Bank	£          30,000
Nov 30	Bank Loan Payable		£        30,000
Dec 1	Trade Receivable	£          18,000
Dec 1	Sales Revenue		£        18,000
Dec 5	Salaries Expense	£            7,000
Dec 5	Cash and Bank		£          7,000
Dec 7	Trade Payable	£            5,200		10400/2
Dec 7	Cash and Bank		£          5,200
Dec 16	R.Rowan - Drawing	£          15,000
Dec 16	Cash and Bank		£        15,000
Dec 30	Utility Expense	£                800
Dec 30	Cash and Bank		£              800

Part a and b:

Cash and Bank
Debit		Credit
Nov 1	£    60,000	Nov 2	£        12,000
Nov 19	£    14,000	Nov 3	£        24,000
Nov 30	£    30,000	Nov 18	£        15,000
		Dec 5	£          7,000
		Dec 7	£          5,200
		Dec 16	£        15,000
		Dec 30	£              800
Ending	£    25,000
Trade Receivable
Debit		Credit
Nov 10	£    14,000	Nov 19	£        14,000
Dec 1	£    18,000
Ending	£    18,000
Purchases/Inventory
Debit		Credit
Nov 5	£    15,000
Nov 15	£    10,400
Ending	£    25,400
Office Equipment
Debit		Credit
Nov 3	£    24,000
Ending	£    24,000
Bank Loan Payable
Debit		Credit
		Nov 30	£        30,000
		Ending	£        30,000
Trade Payable
Debit		Credit
Nov 18	£    15,000	Nov 15	£        10,400
Dec 7	£      5,200	Nov 5	£        15,000
		Ending	£          5,200

R Rowan Capital
Debit		Credit
Nov 1	£ 60,000
Ending	£ 60,000
R Rowan Drawing
Debit		Credit
		Dec 16	£ 15,000
		Ending	£ 15,000
Sales Revenue
Debit		Credit
		Nov 10	£ 14,000
		Dec 1	£ 18,000
		to Income Summary	£ 32,000
Salaries Expense
Debit		Credit
Dec 5	£    7,000
to Income Summary	£    7,000
Rent Expense
Debit		Credit
Nov 2	£    4,000
to Income Summary	£    4,000
Prepaid Rent
Debit		Credit
Nov 2	£    8,000
Ending	£    8,000
Utilities Expense
Debit		Credit
Dec 30	£        800
to Income Summary	£        800

Part c

Accounts	Debit	Credit
Cash and Bank	£          25,000
Trade Receivable	£          18,000
Prepaid Rent	£            8,000
Purchases/Inventory	£          25,400
Office Equipment	£          24,000
Trade Payable		£              5,200
Bank Loan Payable		£           30,000
R.Rowan - Capital		£           60,000
R.Rowan - Drawing	£          15,000
Rent Expense	£            4,000
Salaries Expense	£            7,000
Sales Revenue		£           32,000
Utility Expense	£                800
Total	£       127,200	£         127,200

Answer 1

Answer :-

B/s as on 31st DEc 2018
Liabilities			Assets
Equity & Reserves			Non Current Asset
			Tangilbe Assets
R.Rowan Capital	60000		Office Equipment	24000
Less : Drawing	15000		Less: Dep	1000	23000
Less : Net Loss	12000	33000
Non Current Liabilities
Bank Loan	30000		Current Assets
Interest on loan	300	30300
			Prepaid Rent		4000
Current Liabilities & Provision
			Inventory		7000
Trade Payable		5200
			Trade Receivable		18000
Salaries Payable		8500
			Cash & Bank Balance		25000
		77000			77000

P&L as on 31st Dec 2018
Expense		$	Income		$
Purchase		25400	Sales		32000
			Closing inventory		7000
Gross Profit		13600
		39000			39000
Indirect Exp			By Gross profit B/d		13600
Rent Exp		8000
Salaries Exp		15500
Interest on Bank loan		300
Utility Exp		800
Depriciation on Equipment		1000
			By Net Loss		12000
		25600			25600

Calculations

1) Depriciation for the year = (24,000-6000)/3

For 2 months =

2) Salaries payable for Dec of 8500 added in Salaries Exp and Created Salary payable Liability a/c

3) Bank Loan is 6% P.A. Interest for the whole year = 30,000*6% = 1800

Interest for 2 months = 1800*2/12 = 300. Interest payable is added in Loan

4) Rent A/c Dr by 4000 and prpaid A/c credited by 4000 for Dec Rent

b) The business Carried on by Rob is incurring huge losses for the 2 months. Either the business should be shut or Alternative business should be carried on by Rob as Loss % on the Investment is coming to around 20% for the 2 months.