ACCY111 – Week 7 Solutions
Chapter 4: Adjusting the accounts and preparing the
financial statements
Discussion questions
1. How is profit determined under (a) the cash basis of accounting and (b) the
accrual basis of accounting?
(a) Under the cash basis, profit is the excess of cash inflows from revenues over cash
outflows for expenses.
(b) Under accrual accounting, profit is the excess of recognised revenues over
recognised expenses.
2. Explain why the purchase of supplies is usually recorded in an asset account
rather than in an expense account. If supplies were expensed when
purchased, which accounts should be debited and which credited at the end
of the period in order to reflect the amount of supplies on hand?
Supplies are usually recorded in an asset account because they are normally used in
more than one accounting period. The cost of supplies will be transferred from the
asset account to an expense account, Supplies Used, as they are gradually consumed
in the current period
If the supplies are charged directly to an expense when purchased, then an adjusting
entry is necessary at the end of the reporting period to record as an asset the supplies
still on hand. The entry for the supplies still on hand is:
Supplies Dr
Supplies Expense Cr
Exercises
Exercise 4.1
1. (c)
2. (f)
3. (a)
4. (d)
5. (e)
6. (b)
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ACCY111 – Week 7 Solutions
Exercise 4.5
(a)
CALVIN’S CLEANING
General Journal
Date Particulars Debit Credit
30 June
1. Unearned Cleaning Services Revenue 3 200
Cleaning Services Revenue 3 200
Precollected revenue now earned.
2. Depreciation Expense 12 000
Accumulated Depreciation 12 000
Depreciation expense for the period.
3. Salary Expense 6 400
Salaries Payable 6 400
Salaries incurred but not yet paid.
4. Insurance Expense 1 200
Prepaid Insurance 1 200
Prepaid insurance expired.
5. Interest Receivable 1 600
Interest Revenue 1 600
Interest revenue accrued.
(b) Profit would have been overstated as a result of expenses not being recorded ($12
000 + $6400 + $1200 = $19 600) and understated as a result of total revenues not
being recorded ($3200 + $1600 = $4800). The net overstatement of profit is therefore
$19 600 – $4800 = $14 800.
Exercise 4.14
Adjusting entries
Required
(a) Journalise the necessary adjusting entries. (LO3)
(a)
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ACCY111 – Week 7 Solutions
INVESTMENT GURU
General Journal
Date Particulars Debit Credit
2019
June 30 Advertising Expense 1 000
Prepaid Advertising 1 000
Advertising expense for 10 months:
10/12 × $1200.
Rent Expense 1 750
Rent Payable 1 750
Additional rent owing based on fees
earned: 0.5% × $350 000
Prepaid Subscription 1 020
Computer Database Expense 1 020
Prepaid Database subscription: $12
240/12
Wages Expense 1 800
Wages Payable 1 800
Wages owing at 30 June: 1/5 × $9000
Electricity Expense 1 250
Electricity Account Payable 1 250
Electricity owing for June.
Problem 4.26
Adjusting entries and justifications
Required
(a) Prepare the end-of-period adjusting entries required on 30 June 2019. Show
clearly your calculations.
(b) Provide reasons for your answers to items 2, 4 and 8 above.
(LO4 and LO5)
(a)
MIRANDA’S MOTOR MECHANICS
General Journal
Date Particulars Debit Credit
Adjusting entries
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ACCY111 – Week 7 Solutions
2019
30 June
1. Salaries Expense 2 480
Salaries Payable 2 480
Accrued salaries payable
2. Rent Expense 3 200
Prepaid Rent 3 200
Rent expense for June
3. Depreciation Expense – Equipment 13 600
Accumulated Depreciation – Equipment 13
600
Depreciation on equipment for the year
($142 000 – $6000) × 10%
4. Depreciation Expense – Motor Vehicle 7 000
Accumulated Depreciation – Motor Vehicle 7 000
Depreciation on vehicle for the year
5. Insurance Expense 1 759
Prepaid Insurance 1 759
Insurance prepaid now expired
(11/12 × $876 + 7/24 × $2019 + 4/6 × $552)
6. Office Supplies Expense 2 030
Office Supplies 2 030
Office supplies used
7. Advertising Expense 6 750
Prepaid Advertising 6 750
Advertising prepaid now expired
8. Interest Expense 800
Interest Payable 800
Accrued interest on loan payable
($40 000 × 8% × 3/12)
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ACCY111 – Week 7 Solutions
9. Motor Mechanic Services Revenue 3 280
Unearned Revenue 3 280
Fees revenue received, not yet earned
10. Rates Expense 4 200
Rates Payable 4 200
Council rates for the year
(b)
Item 2
Rent Expense 3 200
Prepaid Rent 3 200
Rent expense for June
The business is in the habit of initially recording insurance paid in advance in the
Prepaid Rent account. At the end of the year, the balance of this account was $4800,
but only $1600 represents prepayments for the next financial year. Hence, $3200 of
rent services have expired and therefore must be transferred out of the asset account
into an expense account.
Item 4
9. Depreciation Expense – Motor Vehicle 7 000
Accumulated Depreciation – Motor Vehicle 7 000
Depreciation on vehicle for the year
As the vehicle was purchased on 1 January 2019, the entity has only used it for 6
months and therefore depreciation expense should be for only 6 months. The
estimated useful life is 5 years, and the vehicle is expected to have a residual value of
$10 000 at the end of its useful life. Hence, the total amount to be depreciated on the
vehicle over 5 years is $80 000 – $10 000 = $70 000. Assuming that the vehicle is
used evenly over its life, it can be argued that the depreciation expense should reflect
an equal amount of usage per year. As the vehicle was purchased on 1 January,
depreciation up to 30 June 2019 is therefore calculated as:
$70 000 × 1/5 × ½ = $7000
Item 8
Interest Expense 800
Interest Payable 800
Accrued interest on loan payable
The outstanding loan of $40 000 requires interest to be paid at the rate of 8% p.a. As
interest is paid half-yearly, and the last interest payment was on 1 April 2019, there is
interest expense accrued on the loan for the months of April, May and June. The
interest liability at 30 June 2019 is therefore equal to 8% × $40 000 × 3/12 = $800
