Question

Question A1

Infinity Corporation is an eyewear store in Hong Kong. The Company sells eyeglasses, including sunglasses, the frames and lenses of these glasses. The Company adjusts its accounts monthly, closes its accounts annually on 31 December. The company uses a perpetual inventory system. The unadjusted trial balance of Infinity Corporation at 31 December 2019 was shown as follows:

   

Infinity Corporation Unadjusted Trial Balance 31 December 2019
	Debit $	Credit $
Optical Equipment	252,000
Accumulated Depreciation: Optical equipment		39,900
Inventory	142,500
Accounts Receivable	175,500
Prepaid Rent	49,000
Cash	298,200
Income Taxes Payable		10,500
Accounts Payable		57,500
Unearned Sales Revenue		42,000
5% Notes Payable		120,000
Ordinary Share of $2 each, fully paid		202,500
Retained Earnings		254,500
Share Premium		140,000
Sales Revenue		1,010,000
Cost of Goods Sold	679,500
Interest Expense	3,000
Salaries Expense	83,700
Depreciation expense: Optical equipment	14,700
Rent Expense	103,800
Insurance Expense	64,500
Income Taxes Expense	10,500
	1,876,900	1,876,900

Information on adjusting items:

(1) Estimated income taxes expense for the year amounted to $13,000, which will be paid in March 2020

(2) Optical equipment was depreciated by straight-line method over an estimated useful life of 10 years. Depreciation expense had been updated to end of July 2019.

(3) On 1 April 2019, the Company signs a new one-year rental agreement and paid the annual amount in advance. The rental agreement is effective on 1 May 2019.

(4) The company borrowed $120,000 by signing a 2-year notes payable on 1 May 2019. The half- yearly interest is due and paid on 1 November and 1 May each year. The first interest payment was made on 1 November 2019. No entries have been made since that payment.

(5) The Company received a notice that a lawsuit has been filed by a competitor against the Company for $3 million for the infringement of trademark. The amount of the Company’s liability, if any, cannot be reasonably estimated at this time.

(6) A customer had paid in advance for the purchase of sunglasses of $10,000 in October and the transaction was properly recorded. The Gross Profit Rate is 35%. He had collected the sunglasses on 29 December but no record was made.

(7) The Company purchased 20 lenses with the cost of $480 each on credit from the supplier on 30 December but the accountant wrongly recorded it as returns of inventory previously purchased on credit.

(8) A complete stocktake as at 31 December indicates goods costing $154,000 remains in stock.

Required:

1. (a) Prepare the necessary journal entries so as to bring the financial records of Infinity Corporation up-to-date as of 31 December 2019. If any of the items above does not require any necessary entry, state “No entry” and no explanation is required.

2. (b) Prepare the Income Statement of Infinity Corporation showing the captions with figures of gross profit, profit before tax and profit after tax for the year ended 31 December 2019.

3. (c) Calculate the difference (increase or decrease) of monthly rent expense under the new rental agreement compared with the old monthly rent expense during the year.

Answer 1

a.

Transaction	Account Titles	Debit	Credit
December 31, 2019		$	$
1	Income Tax Expense $ ( 13,000 - 10,500)	2,500
	Income Taxes Payable		2,500
2.	Depreciation Expense: Optical Equipment ( 252,000 / 10 ) x 5/12	10,500
	Accumulated Depreciation: Optical Equipment		10,500
3.	Rent Expense ( $ 49,000 / 5 )	9,800
	Prepaid Rent		9,800
4.	Interest Expense ( $ 120,000 x 5 % x 2/12 )	1,000
	Interest Payable		1,000
5.	No entry	0	0
6.a.	Unearned Sales Revenue	10,000
	Sales Revenue		10,000
6.b.	Cost of Goods Sold [ $ 10,000 x ( 1 - 0.35 ) ]	6,500
	Inventory		6,500
7.	Inventory ( 20 x $ 480 x 2 )	19,200
	Accounts Payable		19,200
8.	Cost of Goods Sold	1,200
	Inventory		1,200

b.

Infinity Corporation Income Statement For the year ended December 31, 2019
Sales Revenue		$ 1,020,000
Cost of Goods Sold		687,200
Gross Profit		332,800
Operating Expenses
Salaries Expense	83,700
Rent Expense	113,600
Insurance Expense	64,500
Depreciation Expense: Optical Equipment	25,200
Interest Expense	4,000	291,000
Profit before Tax		41,800
Income Tax Expense		13,000
Profit after Tax		$ 28,800

c.

New monthly rent = $ 49,000 / 5 = $ 9,800

Old monthly rent = $ ( 113,600 - 9,800 x 8) / 4 = $ 8,800

Increase in monthly rent = $ 9,800 - $ 8,800 = $ 1,000