UNIVERSITY OF THE WEST INDIES DEPARTMENT OF MANAGEMENT STUDIES ACCT 1005 - FINANCIAL ACCOUNTING Worksheet 2 - Financial Accounting Cycle

Lecture Questions
Question 1 The trial balance of Rawna Gourde Financial Service does not balance. Rawna Gourde Financial Services Trial Balance as at December 31, 2006 Cash Accounts Receivable Supplies Office Furniture Land Accounts Payable Note Payable Rawna Gourde, Capital Rawna Gourde, Withdrawals Service Revenue Salary Expense Rent Expense Advertising Expense Utilities Expense Total $ 3,800 2,000 500 2,300 46,000 $ 2,800 18,300 29,500 3,700 4,900 1,300 600 400 200 60,800

_____ 55,500

The following errors were detected: i) The cash balance is understated by $400. ii) Rent expense of $200 was erroneously posted as a credit rather than a debit. iii) The balance of Advertising Expense is $300, but it is listed as $400 on the trial balance. iv) A $600 debit to Accounts Receivable was posted $ 60. v) The balance of Utilities Expense is understated by $60. vi) A $1 300 debit to the withdrawal account was posted as a debit to Rawna Gourdes, Capital. vii) A $100 purchase of supplies on account was neither journalized nor posted. viii) A $5 600 credit to Service Revenue was not posted. ix) Office Furniture should be listed in the amount of $1 300. Required: i) ii) iii) Prepare the necessary journal entries. Prepare the correct trial balance as at December 31, 2006. Determine whether a loss or a profit was made.

Department of Management Studies (DOMS), University of the West Indies at Mona.

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Question 2 Justin Park is a lawyer specializing in corporate tax law. He began his practice on January 1. A chart of accounts and trial balance taken on December 31, 20- are provided below. Justin Park Legal Services Chart of Accounts
Assets 101 142 145 181 181.1 187 187.1 Liabilities 201 202 219 Owners Equity 311 312 Cash Office Supplies Prepaid Insurance Office Equipment Accum. Dep. - Office Equip. Computer equipment Accum Dep. - Computer Equip Revenue 401 Expenses 511 521 523 525 533 535 541 542 Clients Fee

Notes Payable Accounts Payable Wages Payable

Wages expense Rent Expense Office Supplies Expense Telephone Expense Utilities Expense Insurance Expense Depreciation Exp - Office Equipment Depreciation Exp - Computer Equip.

Justin Park, Capital Justin Park, Drawing

Justin Park Legal Services Trial Balance December 31, 20Account Title Cash Office Supplies Prepaid Insurance Office Equipment Computer equipment Notes Payable Accounts Payable Justin park, Capital Justin Park, Drawing Client Fees Wages Expense Rent expense Telephone expense Utilities expense Information for year-end adjustments: a) b) c) Office supplies on hand at year end amounted to $3,000. On January 1, 20-, Park purchased office equipment costing 150,000 with an expected life of 5 years and no salvage value. Computer equipment costing $60,000 with an expected life of three years and no salvage value was purchased on July 1, 20-.
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Account # 101 142 145 181 187 201 202 311 312 401 511 521 525 533

Dr $70,000 8,000 12,000 150,000 60,000

Cr

$50,000 5,000 114,000 50,000 400,000 120,000 50,000 10,000 39,000 569,000

______ 569,000

Department of Management Studies (DOMS), University of the West Indies at Mona.

d) e) Required:

A premium of $12,000 for a 1-year insurance policy was paid on December 1, 20-. Wages earned by Parks part-time secretary, which have not yet been paid amount to $3,000. i) ii) iii) iv) v) vi) Journalize the adjusting entries Prepare the worksheet for the year ended December 31, 20- (See page 8). Prepare the Income Statement & the Statement of Owners Equity for the year ended December 31, 20Prepare the Balance Sheet for Justin Park Legal Services at December 31, 20Journalize the Closing entries Prepare a post closing trial balance

Tutorial Questions Question 1 a) b) c) d) Do accountants have to use two records, a journal and a ledger? How would you record $500 revenue earned on account? What is done after the accounts of a business are posted? On October 7 2006, Pryanka Leol opened Pryankas Research Service. She will be the owner of the proprietorship. During the entitys first ten days of operations, the business completes these transactions: i) To begin operations, Pryanka deposits $40 000 of personal funds in a bank account entitled Pryankas Research Service. The business receives the cash. ii) Pryanka pays $ 30 000 cash for a small building to be used as an office for the business. iii) Pryanka purchases office supplies for $500 on account. iv) She pays cash of $6 000 for office furniture v) $150 is paid on the account payable she created in iii above. vi) Pryanka withdraws $1 000 for personal use.

Required: 1. Journalize these transactions. Key the journal entries by letter. 2. Post the entries to the ledger. 3. Prepare the trial balance of Pryanka Research Services at October 7 2006. Question 2 Kaman Saddiqi has trouble keeping his debits and credits equal. During the recent month, the made the following errors: a. In journalizing a receipt of cash for service revenue, Saddiqi debited Cash for $80 instead of the correct amount of $800. Saddiqi credited Service Revenue for $80, the incorrect amount. b. Saddiqi recorded a $120 purchase of supplies on account by debiting Supplies $210 and crediting Accounts Payable for $210. c. In preparing the trial balance, Saddiqi omitted a $50,000 note payable. d. Saddiqi posted a $700 utility expense as $70. The credit posting to cash was correct. e. In recording a $400 payment on account, Saddiqi debited Supplies and credited Accounts Payable.
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Required: i) For each of these errors, state whether total debits equal total credits on the trial balance. ii) Identify each account with an incorrect balance, and indicate the amount and direction of the error (such as Accounts Receivable $500 too high). iii) Show the journal entries necessary to correct the errors made by Saddiqi. Question 3 Patella Art Studio provides quality instruction to aspiring artists. The business adjusts its accounts monthly, but performs closing entries annually on December 31. This is the studios unadjusted trial balance dated December 31, 2002. PATELLA ART STUDIO Unadjusted Trial Balance December 31, 2002 Accounts Debits Credits $ $ Cash $22,380 Client fees receivable 71,250 Supplies 6,000 Prepaid studio rent 2,500 Studio equipment 96,000 Accumulated depreciation: studio equipment Accounts payable 52,000 Notes payable 11,420 Interest payable 24,000 Unearned client fees 480 Pat Patella, capital 8,000 Pat Patella, withdrawals 5,000 70,000 Client fees earned 82,310 Supply expenses 4,000 Salary expense 17,250 Interest expense 480 Studio rent expense 11,250 Utilities expense 3,300 Depreciation expense: studio equipment 8,800 _______ Total $248,210 $248,210 Other Data: i) Supplies on hand at December 31, 2002, total $1,000. ii) The studio pays rent quarterly (every three months) in advance. The last payment was made November 1, 2002. The next payment will be made in February 2003. iii) Studio equipment is being depreciated over 120 months (10 years). iv) On October 1, 2002, the Patella borrowed $24,000 by signing a 12-month, 12% note payable. The entire amount, plus interest, is due on September 30, 2003. v) At December 31, 2002, $3,000 of previously unearned client fees had been earned. vi) Accrued, but unrecorded and uncollected client fees earned total $690 at December 31, 2002 vii) Accrued, but unrecorded and unpaid salary expense totals $750 at December 31, 2002.

Department of Management Studies (DOMS), University of the West Indies at Mona.

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Required: a. b. Prepare the necessary adjusting journal entries on December 13, 2002. Prepare the accountants worksheet dated December 31, 2002 (See page 9) From the adjusted trial balance, prepare an income statement and statement of owners equity for the year ended December 31, 2002. Also prepare the entitys classified balance sheet dated December 31, 2002. Prepare the necessary year-end closing entries. Prepare a post-closing trial balance.

c. d.

Practice Questions Question 1 i) ii) iii) iv) v) vi) vii) viii) Describe the relationship among the income statement, statement of owners equity and the balance sheet. What are the three categories commonly found in the statement of cash flows and what is included in each category? How are ledgers and accounts related? What is the accounting treatment for prepaid expenses? How is an accrued liability treated in the books? Why is a double entry system preferable to a single entry system? Using examples, explain the four steps in the journalizing process. Explain the concepts of transaction analysis, journalizing and posting to the accounts.

Question 2 a) What is the difference between accrued revenue and unearned revenue? b) Explain the significance of the adjusting process and the notes to the financial statements. c) When prepaid rent expires, how is it treated? What are the major categories of adjusting entries? d) Explain carefully the following; i. Depreciation as a non cash expense. ii. Accrual basis accounting versus the cash basis of accounting. iii. The adjusted trial balance. iv. The effect of an accrued liability adjustment on the balance sheet. v. Accumulated depreciation as a contra account.

Department of Management Studies (DOMS), University of the West Indies at Mona.

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Question 3 The trial balance of Lanes Interiors at May 31, 20X8, follows. Lanes Interiors Trial Balance May 31, 20X8 Cash Notes Receivable Interest receivable Supplies Prepaid insurance Furniture Accumulated depreciation furniture Building Accumulated depreciation building Land Accounts payable Interest payable Salary payable Unearned service revenue Note payable, long-term K. Lane, capital K. Lane, withdrawals Service revenue Interest revenue Depreciation expense furniture Depreciation expense building Salary expense Insurance expense Interest expense Utilities expense Advertising expense Supplies expense Total Additional data at May 31, 20X8: a. b. c. d. e. f. g. h. Depreciation: furniture, $500; building, $400. Accrued salary expense, $600 Supplies on hand, $400. Prepaid insurance expired, $300. Accrued interest expense, $200. Unearned service revenue earned during May, $4,400. Accrued advertising expense, $100 (credit Accounts Payable). Accrued interest revenue, $200. $ 4,300 10,300 500 1,700 27,400 $ 53,900 34,500 18,700 14,700 1,400

8,800 18,700 29,900 3,800 16,800

2,100

1,100 1,000 _______ $124,800

________ $124,800

Required: Complete the Lanes work sheet for May. Key adjusting entries by letter (See page 10).

Department of Management Studies (DOMS), University of the West Indies at Mona.

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Question 4 Selected accounts of Noteworthy Communications at December 31, 20X6, follow: Accounts payable Accounts receivable Accumulated depreciation - equipment Accumulated depreciation- computers Equipment Cash Service revenue Computers Interest payable $15,100 6,600 37,800 11,600 114,400 16,500 93,500 22,700 600 Lori Stone, capital Note payable, long-term Other assets Other current liabilities Prepaid insurance Prepaid rent Salary expense Salary payable Supplies Unearned service revenue $67,100 27,800 3,600 4,700 1,100 6,600 24,600 3,900 2,500 5,400

Required: i) Prepare Note worthys classified balance sheet in report form at December 31, 20X6. Show totals for total assets, total liabilities and total liabilities and owners equity. ii) Compute Note worthys current ratio and debt ratio at December 31, 20X6. At December 31, 20X5, the current ratio was 1.52 and debt ratio was 0.39. Did the companys ability to pay improve or deteriorate during 20X6? Question 5 Linblad Company provides the following information about its first year of operation: Linblad provides fly-fishing lessons. During the year, 6,000 hours of instruction at $8.00 per hour were offered to clients. Half of the amounts had been collected by the end of the period; the remaining balance is still outstanding. Linblad provides clients with a packet of fishing supplies. During the year, 800 packets were purchased at $10.00 per packet. All of the packets have been distributed, and payment has been made for 90% of the packets. The remaining unpaid amounts are to be paid in the following year. Linblad paid employees, advertising, and other similar operating costs of $17,000 during the year. In addition, another $2,000 of operating costs were incurred but not yet paid. a. Compute Linblad's accrual basis net income for the year. b. Compute Linblad's cash basis net income for the year. Question 6 Winding Trail Race Car Company purchased a new automobile on January 1, 20X1. The automobile cost $420,000 and had a three-year life. Winding Trail uses straight-line depreciation. Calculate depreciation expense for each of the three years, demonstrate the proper adjusting entry for each year, and show how the automobile would appear on the firm's balance sheet at the end of each of the three years.

Department of Management Studies (DOMS), University of the West Indies at Mona.

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Justin Park Legal Services Accounting Worksheet for the year ended December 31, 20Account Title Unadjusted Trial Balance Dr Cr $ $ 70,000 8,000 12,000 150,000 60,000 50,000 5,000 114,000 50,000 400,000 120,000 50,000 10,000 39,000 Adjustments Dr $ Cr $ Adjusted Trial Balance Dr Cr $ $ Income Statement Dr $ Cr $ Balance Sheet Dr $ Cr $

Accounts Cash Office Supplies Prepaid Insurance Office Equipment

Accumulated Dep. - Office Equipment

Computer Equipment
Accumulated Dep.- Computer Equipment

Notes Payable Accounts Payable Wages Payable Justin Park, Capital Justin park, Drawings Client Fees Wages Expenses Rent Expense Office Supplies Expense Telephone Expense Utilities Expense Insurance Expense Depreciation Expense - Office Equip. Depreciation Expense Computer Equip. TOTAL Net Income

______ 569,000

______ 569,000

Department of Management Studies (DOMS), University of the West Indies at Mona.

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PAT PATELLA ACCOUNTING WORKSHEET FOR THE YEAR ENDED DECEMBER 31 2002 Account Title Accounts Cash Client Fees Receivable Supplies Prepaid Studio Rent Studio Equipment (SE) Accumulated Dep.: SE Accounts Payable Notes Payable Interest Payable Unearned Client Fees Pat Patella, Capital Pat Patella, Withdrawals Client Fees Earned Supply Expenses Salary Expense Interest Expense Studio Rent Expense Utilities Expense Depreciation Expense; Se Salary Payable Net Income Unadjusted Trial Balance Dr Cr $ $ 22 380 71 250 6 000 2 500 96 000 52 000 11 420 24 000 480 8 000 70 000 5 000 82 310 4000 17 250 480 11 250 3 300 8 800 248 210 248 210 Adjustments Dr $ Cr $ Adjusted Trial Balance Dr Cr $ $ Income Statement Dr Cr $ $ Balance Sheet Dr $ Cr $

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Lane Interiors Accounting Worksheet for the year ended May 31, 20Account Title Accounts Cash Notes receivable Interest receivable Supplies Prepaid insurance Furniture Accum. Dep. Furniture Building
Accumulated Dep. Building

Unadjusted Trial Balance Dr Cr $ $ 4 300 10 300 500 1 700 27 400 1 400 53 900 34 500 18 700 14 700

Adjustments Dr $ Cr $

Adjusted Trial Balance Dr Cr $ $

Income Statement Dr Cr $ $

Balance Sheet Dr $ Cr $

Land Accounts payable Interest payable Salary payable Unearned service revenue Note payable, long-term K. Lane, capital K. Lane, withdrawals Service revenue Interest revenue Dep. expense Furniture Dep. expense Building Salary expense Insurance expense Interest expense Utilities expense Advertising expense Supplies expense Total Net Income

8 800 18 700 29 900 3 800 16 800

2 100

1 100 1 000 124 800 124 800

Department of Management Studies (DOMS), University of the West Indies at Mona.

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