Question

Question 1:

Mihir Ltd is a retailer of widgets. A part-time bookkeeper prepared the following Balance Sheet as at 30 June 2017, the end of the financial year. The company’s Board of Directors suspects adjustments/corrections may be necessary.

Mihir Ltd Balance Sheet For the Year Ending June 30, 2017
Liabilities
Mortgage Payable		$380,000
Accounts Payable		23,000
Warranty Provision		13,200
Accrued Expenses Payable		15,000
Debentures Payable		103,000	$534,200
Equity
Share Capital		1,000,000
Retained Earnings		2,366,650
Revaluation Reserve		300,000	3,666,650
Total Equity
Total Liabilities & Equity			$4,200,850
Assets
Cash			6,000
Accounts Receivable			3,350
Office Supplies			1,500
Inventory			1,990,000
Investment Property			1,000,000
Land & Buildings			1,200,000
Total Assets			$4,200,850

Knowing that you are an experienced accountant, the Board of Directors asks you to review the Balance Sheet and other data. Your interviews disclose the following:

The mortgage is payable monthly for another ten years. A review of the amortisation schedule shows that the balance on 30 June 2018 will be $350,000.

The widgets come with a one-year warranty. The $13,200 provision shown on the balance sheet was calculated with the following facts:

Sales for the year ending 30 June 2017 were 100,000 units.

2% of total sales are estimated to require warranty work at an average cost of $3 per unit.

Actual repairs incurred for units sold in the year just ended were $1,800.

For the next financial year (beginning on 1 July 2017), the bookkeeper estimated sales to be 150,000 units with the same 2% defect rate and $3 repair cost per unit.

The 9% $100,000 face value debentures, due in four more years, were issued when the market interest rate was 6%. They pay interest semi-annually on 1 March and 1 September. The balance shown in the Balance Sheet is the correct balance after the 1 March payment. The bookkeeper, new to the job and unfamiliar with the effective interest rate method, failed to journalise an adjusting entry on 30 June 2017.

The $300,000 balance in Revaluation Reserve was calculated as follows:

In the unadjusted trial balance, the Revaluation Reserve account contained the correct balance (prior to revaluation) of $400,000.

Investment Property was revalued from $800,000 to $1,000,000.

Land & Buildings were revalued from $1,500,000 to $1,200,000.

The bookkeeper forgot to reconcile the bank account, so the $6,000 cash balance shown on the Balance Sheet is incorrect. The 30 June bank statement showed a $7,200 balance. Deposits in transit were $800 and outstanding cheques totalled $1,200. Also, the bank incorrectly recorded a $80 June deposit as $800.

Mihir Ltd accounts for inventory using FIFO under the periodic system. 25,000 widgets were on hand as at 30 June 2017. An additional 10,000 units had been purchased at $5 each, FOB shipping point, and were in transit on 30 June. The $1,990,000 balance for Inventory in the Balance Sheet was calculated as follows:

Beginning inventory (as at July 1, 2016) of 20,000 widgets at $2 each;

150,000 units purchased at $3 per unit during the first quarter of the year;

200,000 units purchased at $4 per unit during the second quarter of the year;

200,000 units purchased at $3 per unit during the third quarter of the year;

20,000 units purchased at $5 per unit during the fourth quarter of the year, including the in-transit items.

Required:

For 30 June 2017, prepare a correct Balance Sheet . Ignore GST. (Hint: The balance for Retained Earnings will be a plug, so there is no need to separately reconcile the retained earnings balance.)

Answer 1

Mihir Ltd				Adjustments	Working Number	Corrected Balances
Balance Sheet
For the Year Ending June 30, 2017
Liabilities
Mortgage Payable		$380,000		-80000	(i)	$300,000
Accounts Payable		23,000				$23,000
Warranty Provision		13,200		-11400	(ii)	$1,800
Accrued Expenses Payable		15,000				$15,000
Debentures Payable		103,000	$534,200			$103,000
Equity
Share Capital		1,000,000				$1,000,000
Retained Earnings		2,366,650		-188600		$2,178,050
Revaluation Reserve		300,000	3,666,650	0	(iii)	$300,000
Total Equity
Total Liabilities & Equity			$4,200,850			$3,920,850
Assets
Cash			6,000	2400	(iv)	$8420
Accounts Receivable			3,350	-2400		$950
Office Supplies			1,500			$1,500
Inventory			1,990,000	-280000	(v)	$1,710,000
Investment Property			1,000,000			$1,000,000
Land & Buildings			1,200,000			$1,200,000
Total Assets			$4,200,850			$3,920,850

(i) The mortagage is payable for next 10 yrs and expenditure amortised for Year ending 30th June 2018 is $30,000. Hence considered that same amount will be amortised over period of 10 years. Hence initial expense provision and balance as at 30th June 206 will be $ 300000.

(ii)warranty provision to be provided for sale of units made in year ending 30th June 2016. As we have actual expense amount incurred for sales made during current year , provision will be made for actual amount incurred as we have exact numbers before finalisation of books of accounts. Hence extra provision made reversed. Also provision for expense to be incurred for sales in next year will be made as at end of next year.

(iii)Revaluation reserve is correctly valued at $300,000 . Hence no adjustment required.

(iv)Cash balance adjusted to reconcile with bank balance and rectification errors.

(v)Inventory amount reversed for units of sale made during the year 30th June 2016. Another effect given in retained earnings. Sales made units amount = 20,000*2 + 80000*3 = $ 280000