Question

In: Accounting

Based on the balance sheet below: Use your trial balance and the additional information below to...

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

Solutions

Expert Solution

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.

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