Australian

School of Business
ACCT1501 Accounting and Financial Management 1A
Session 1 2013

TUTORIAL WEEK 6 Solutions to Tutorial Questions

Tutorial Questions:
v Discussion Questions 5.5, 5.8; Problems 5.10, 5.13, 5.17, Case 5A
Discussion Questions
5.5
In a cash accounting system an occurrence is recognised as a transaction only if it involves an immediate
cash inflow or outflow. In a system employing accrual accounting the basis of recognition is extended to
include a variety of non-cash transactions. These usually involve credit extended to or by the entity.
Cash flows are easy to recognise but do not provide a satisfactory measure of the performance of most
enterprises. Accrual accounting employs wider criteria to decide whether revenue has been realised or
expense has been incurred. This provides more information results, which are more useful to those using
accounting reports. As tests other than cash flows are less easy to define precisely, some certainty and
objectivity is lost.
5.8
The purpose of accrual accounting adjustments is to make the financial statements as reliable as
possible. The intention is to identify with each accounting period the revenue earned in that period and
to determine the expenses associated with generating the periods revenue. The difference between the
revenue and expense for the period then represents the profit or loss for the period. Thus the adjustments
augment the cash-based figures to implement accrual accounting.
Problem 5.10
1

Insurance expense

Wage expense

= $52,000,000 + 70,000,000 50,800,000

= $71,200,000
= $500,000,000 + 306,700,000 297,100,000
= $509,600,000

3
Opening balance
Cash

Insurance expense

Prepayment and Other Assets

34,400,000
Expense
30,000,000
Closing balance
64,400,000

X
36,200,000
64,400,000

= 34,400,000 + 30,000,000 36,200,000

= 28,200,000

Problem 5.13
1

2
3
4

Dr

Dr
Dr

Bad debt expense

$2,400
Cr
Accounts receivable

$2,400

Depreciation expense
$13,000
Cr
Accumulated depreciation

$13,000

Accounts receivable
Cr
Revenue

$11,200

Dr

COGS
Cr

5
6
7

Dr

$4,600
Inventory

Interest expense
Cr
Interest payable

Dr
Cr

Bonus expense
$5,000
Bonus payable

Cr

Income tax expense

Income tax payable

Dr

$11,200

$4,600
$900
$900
$5,000
$2,700
$2,700

Problem 5.13 (continued)

2

LEDGER
Cash
Balance

25,600
Accounts receivable
88,200
Bad debts expense
11,200
Balance
99,400
97,000

2,400
97,000
99,400

4,600
112,300
116,900

Balance

Inventory
116,900
COGS
Balance
116,900
112,300

Balance

Land
100,000

Balance
Revenue
Balance
Balance

Balance

Buildings and equipment

236,100
Accumulated depreciation
Depreciation expense

13,000

Accounts payable
Balance

74,900

Employee deductions due

Balance

2,500

Sales tax (GST) due

Balance

3,220

Interest payable
Interest expense
Bonus payable
Bonus expense
Income tax payable
Income tax expense
Mortgage debt
Balance

900
5,000
2,700
185,780

Share capital
Balance
Retained earnings
Profit and loss summary

275,000
8,000

Profit and loss summary

Balance
Inventory

Revenue
360,800
Balance

349,600

_______
360 800

11,200
360,800

Accounts receivable

Cost of goods sold

142,500
Profit and loss summary
4,600
147,100

147,100
_______
147,100

Operating expenses
181,700
Profit and loss summary

181,700

Bad debts expense

2,400
Profit and loss summary

2,400

Depreciation expense
13,000
Profit and loss summary

13,000

Interest payable

Interest expense
900
Profit and loss summary

900

Bonus payable

Bonus expense
5,000
Profit and loss summary

5,000

Income tax payable

Income tax expense

2,700
Profit and loss summary

2,700

Balance

Accounts receivable

Accumulated depreciation

Sundry expenses
Retained earnings

Profit and loss summary

352,800
Revenue
8,000
360,800

360,800
_______
360,800

Problem 5.13 (continued)

3
Trial balance
Dr
25,600
97,000
112,300
100,000
236,100

Cash
Accounts receivable
Inventory
Land
Building and equipment
Accumulated depreciation
Accounts payable
Employee deductions due
Sales tax due
Interest payable
Bonus payable
Income tax payable
Mortgage debt
Share capital
Revenue
Cost of goods sold
Operating expenses
Bad debts expense
Depreciation expense
Interest expense
Bonus expense
Income tax expense

Cr

13,000
74,900
2,500
3,220
900
5,000
2,700
185,780
275,000
360,800
147,100
181,700
2,400
13,000
900
5,000
2,700

_______

$923,800

$923,800

4
Journal
Revenue

Dr
360,800

Profit and loss summary

Profit and loss summary

Cr
360,800

352,800

Cost of goods sold

147,100

Operating expenses

181,700

Bad debts expense

Depreciation expense
Interest expense
Bonus expense

2,400
13,000
900
5,000

Income tax expense

Profit and loss summary
Retained earnings
Net profit transferred
5
Net profit after tax

2,700
8,000

= $8,000

Working capital

= current assets current liabilities

= 234,900 89,220
= $145,680

Shareholders equity

= share capital + retained earnings

= 275,000 + 8,000
= $283,000

8,000

Problem 5.17
1
2
3
4

$
Commission receivable
2,000
Commission revenue
Wages expense
1,200
Wages payable (accrued salaries)
Interest receivable (Accrued interest revenue) 2,000
Interest revenue
Office supplies expense
8,100
Office supplies inventory

$
2,000
1,200
2,000
8,100

Case 5A
1

Indication in the accounts

a Prepayments Yes Note 8.
b Unearned revenue Yes Note 12
c Accrued expenses Yes Note 12
d Accrued revenues No (but would be included in other receivables in Note 5)

Post-closing trial balance would be similar to balance sheet with separate items for accounts
detailed in the notes. Contra accounts would be included as credit balances and related assets would
be shown at gross figures.

Woolworths Limited use 26 June 2011 because this is exactly 52 weeks after the fiscal year end for
2010. This enables the results of each year to be compared with those for previous years.

4
a
b
5

Net book value of land and buildings

Net book value of plant and equipment

Trade debtors
285.2
Trade receivables are presented net of impairment allowance (Note 8)

6
Amounts provided for bad and doubtful debts
7

$million
1,547.2 (Note 10)
4,231.8 (Note 10)
5,779.0

Journal entry to record bad debt:

Dr Allowance for doubtful debts
Cr
Accounts receivable

Journal entry to increase provision:

2011
14.9

2010
13.7

Dr Bad debts expense

Cr
Allowance for doubtful debts
8

Indicators that Woolworths uses accrual accounting:

Trade and Other Receivables
Trade and Other Payables
Provisions
Depreciation
Amortisation
Prepayments
Accruals
Unearned Revenue
Note 1

Interest expense is $300.0 million whereas interest paid is $332.1 million. The difference is due to
interest paid includes the expense relating to prior periods.