HI5001 Accounting for Business Decisions
Week 4 Tutorial Solution
This tutorial is based on Lecture 4: Adjusting Entries.
Question 4.1. [Cash versus accrual basis of accounting]. At the end of the first year of
operations, Arch Etec, owner of Architect Designs, engaged you to prepare yearly financial
statements for the year ended 30 June 2022, on both the cash basis and the accrual basis. The
following data are a summary of selected transactions that occurred during the year.
1. Fees of $125 000 were collected for services provided during the year.
2. There were $8000 in receivables at 30 June 2022 for services performed on credit.
3. Cash payments of $106 000 were made for salaries, rent, insurance and other expenses
incurred during the year.
4. Salaries are owing but not yet paid amount to $4000.
5. On 15 June 2022, a client paid $3000 in advance for services to be rendered during the
next financial year.
6. Expenses of $6000 were prepaid (not included in the $106 000) at 30 June.
Required:
(a) Calculate profit under both the cash basis and the accrual basis.
(b) Indicate how the following items would be reported in the business’s balance sheet
under the accrual basis:
i. the $8000 receivables
ii. the unpaid salaries of $4000
iii. the $3000 advance received on 15 June
iv. the cash payment of $6000 for prepaid expenses.
Answer:
(a)
ARCHITECT DESIGNS
Cash basis Accrual basis
Cash income (revenue) $125 000 $125 000
Revenue earned but not yet received 8 000
Revenue received in advance but not yet earned 3 000
TOTAL INCOME (REVENUE) $128 000 $133 000
Less Expenses
Salaries, rent & insurance 106 000 106 000
Salaries owed but not yet paid 4 000
Expenses prepaid but not yet incurred 6 000
TOTAL EXPENSES $112 000 $110 000
PROFIT $16 000 $23 000
(b)
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v. Accounts receivable $8000 – current asset
vi. Salaries payable $4000 – current liability
vii. Unearned design fees $3000 – current liability
viii. Prepaid expenses $6000 – current asset.
Question 4.2 [Recording transactions in journal entries and preparing adjusting entries].
Hui Yu, lawyer, had the following transactions related to the business during June.
June 1 Purchased office furniture for $36,000. The furniture will be depreciated over
a useful life of 10 years at which time it is expected to have a residual value of
$4,800.
1 Purchased a 12-month fire insurance policy for $3,000.
2 Borrowed $42,000 from the Eastern Bank on a short-term loan. The principal,
plus 8% annual interest, will be repaid in 3 months.
11 Purchased supplies for $450. On 30 June, supplies worth $230 remained on
hand.
15 Paid $1,200 for 1 month’s rent for the period 15 June to 15 July.
18 Received an electronic bank transfer from a client for $840 as an advance
payment for services to be performed. Only 20% of the work was completed
by 30 June.
28 Received an invoice for $410 for telephone and internet charges for the
month.
Required:
a) Prepare the journal entries to record each transaction.
b) prepare any adjusting entries as at 30 June, the end of the accounting year.
Answer:
HUI YU, LAWYER
General Journal (EXCLUDING GST)
Date Particulars Debit Credit
June 1 Office Furniture 36 000
Cash at Bank 36 000
Purchased office furniture
1 Prepaid Insurance 3 000
Cash at Bank 3 000
Purchased 12 month insurance policy
2 Cash at Bank 42 000
Loan Payable 42 000
Borrowed $42 000 from the bank at 8% due in 3
months
11 Supplies 450
Cash at Bank 450
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Purchased supplies
15 Prepaid rent 1 200
Cash at Bank 1 200
Paid rent for one month
18 Cash at Bank 840
Unearned Services Revenue 840
Received payment from customer in advance
28 Telecommunications Expense 410
Tele. Account Payable 410
Amount due for telephone and internet charges
Adjusting entries
30 Depreciation Expense 260
Accumulated Depreciation – Office Furniture 260
Calculation of depreciation expense
[($36 000 – $4 800)/10 × 1/12]
30 Insurance Expense 250
Prepaid Insurance 250
Insurance expired for one month on policy ($3000
× 1/12)
30 Interest Expense 280
Interest Payable 280
Interest payable on loan from bank
($42 000 × 8%) × 1/12
30 Supplies Expense 220
Supplies 220
Supplies used during the month
30 Rent Expense 600
Prepaid Rent 600
Rent not yet expired for the month
30 Unearned Services Revenue 168
Services Revenue 168
Revenue recorded on completed work
30 No adjusting entry required as telephone and
internet expense is recorded on 28 June.
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Question 4.3 [Preparing a Worksheet]. The trial balance of Stein Roofing at 30 June 2022 is
as follows:
STEIN ROOFING
Trial Balance
As at 30 June 2022
Account Debit ($) Credit ($)
Cash 2,300
Accounts Receivable 2,600
Prepaid insurance 2,000
Roofing Supplies 1,100
Equipment 6,000
Accumulated Depreciation - Equipment 1,200
Accounts Payable 1,100
Unearned Service Revenue 300
Stein Roofing, Capital 7,400
Drawings 1,000
Service Revenue 5,600
Salaries Expense 500
Miscellaneous Expense 100
Total $ 15,600 $ 15,600
Additional information for the period:
a. Insurance expired during the year $1,000
b. A physical count reveals only $520 of roofing supplies on hand
c. Equipment is depreciated of $1,200
d. Unearned service revenue amounted to $100 on 30 June
e. Accrued salaries are $850
f. Accrued service revenue, $800
Required:
1) Enter the trial balance on a worksheet and complete the worksheet.
2) Prepare the adjusting journal entries.
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Adjusted Trial
Trial Balance Adjustments Financial Performance Financial Position
Account Names Balance
Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
Cash 2300 2300 2300
Accounts 2600 800 (f) 3400 3400
Receivable
Prepaid insurance 2000 1000 (a) 1000 1000
Roofing Supplies 1100 580 (b) 520 520
Equipment 6000 6000 6000
Acc. Dep. - 1200 1200 (c) 2400 2400
Equipment
Accounts Payable 1100 1100 1100
Unearned Revenue 300 200 (d) 100 100
Capital 7400 7400 7400
Drawings 1000 1000 1000
5600 200 (d) 6600 6600
Service Revenue
800 (f)
Salaries Expense 500 850 (e) 1350 1350
Miscellaneous 100 100 100
Expense
Insurance expense 1000 (a) 1000 1000
Supplies expense 580 (b) 580 580
Depreciation 1200 (c) 1200 1200
expense
Accrued salaries 850 (e) 850 850
Total 18450 18450 4230 6600 14220 11850
2370 2370
6600 6600 14220 14220
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June Adjusting entries in General Journal Dr Cr
a 30 Insurance Expense 1,000
Prepaid Insurance 1,000
Adjust insurance expired during the year
b 30 Supplies Expense 580
Roofing Supplies 580
Adjust roofing supplies used
c 30 Depreciation Expense 1,200
Accumulated Depreciation - equipment 1,200
Adjust depreciation expense for the period
d 30 Unearned Revenue 200
Service Revenue 200
Adjust service revenue that has been earned
e 30 Salaries expense 850
Accrued salaries 850
Adjust the salaries expense for the period
f 30 Accrued service revenue 800
Services Revenue 800
Adjust the service revenue that has been earned
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Question 4.4 [Preparing a Worksheet]. JetSki Hire runs a business on the Murray River
hiring out jet skis to holiday makers, tour operators and for corporate training sessions. The
unadjusted trial balance of JetSki Hire is shown below.
JETSKI HIRE
Unadjusted trial balance
As at 30 June 2022
Account Title Debit Credit
Cash at Bank 19 690
Accounts Receivable 15 200
Prepaid Insurance 12 500
Jet skis 267 300
Accum. Depr. Jet skis 105 600
Office Equipment 6 930
Accum. Depr. Office Equip. 2 940
Accounts Payable 19 600
Loan Payable 82 500
Unearned Rental Revenue 2 770
J. Jetson, Capital 111 580
J. Jetson, Drawings 27 390
Rental Revenue 119 690
Salaries Expense 50 160
Rent Expense 8 680
Repairs/Maint. Expense 9 770
Marine Supplies Expense 22 440
Telephone Expense 4 620
$444 680 $444 680
The following additional information is available at the end of June.
a) Repairs on one jet skis done in June for $1870 have not yet been paid for or recorded. An
invoice has been issued by the repairer.
b) Expired insurance amounted to $11 000.
c) Depreciation on the jet ski fleet for 1 year is $28 500. Depreciation on the office
equipment is $1320.
d) Salaries earned but not paid amounted to $3780.
e) The balance in the Unearned Rental Revenue account includes $560 received for services
rendered on 27 June.
f) The June telephone costs of $600 have not been paid for or recorded at 30 June 2022. A
tax invoice has been received.
g) Accrued interest on the loan payable is $7800.
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Required: Prepare a partial worksheet that includes unadjusted trial balance, adjustments
and adjusted trial balance.
Answer:
Unadjusted trial balance Adjustments Adjusted trial balance
Account Title Debit Credit Debit Credit Debit Credit
Cash at Bank 19 690 19 690
Accounts Receivable 15 200 15 200
Prepaid Insurance 12 500 (b) 11 000 1 500
Jet skis 267 300 267 300
Accum. Depr. Jet skis 105 600 (c) 28 500 134 100
Office Equipment 6 930 6 930
Accum. Depr. Office Equip. 2 940 (c) 1 320 4 260
Accounts Payable 19 600 19 600
Loan Payable 82 500 82 500
Unearned Rental Revenue 2 770 (e) 560 2 210
J. Jetson, Capital 111 580 111 580
J. Jetson, Drawings 27 390 27 390
Rental Revenue 119 690 (e) 560 120 250
Salaries Expense 50 160 (d) 3 780 53 940
Rent Expense 8 680 8 680
Repairs/Maint. Expense 9 770 (a)1 870 11 640
Marine Supplies Expense 22 440 22 440
Telephone Expense 4 620 (f) 600 5 220
$444 680 $444 680
Repairs/Maint. Exp. Payable (a) 1 870 1 870
Insurance Expense (b) 11 000 11 000
Depr. Exp. – jet skis (c) 28 500 28 500
Depr. Exp. – Off. Equip. (c) 1 320 1 320
Salaries Payable (d) 3 780 3 780
Telephone Expense Payable (f) 600 600
Interest Payable (g) 7 800 7 800
Interest Expense (g) 7 800 7 800
55 430 55 430 488 550 488 550
Loss for the year
THE END
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