Question 1: Balance Day Adjustments
Louise Lace owns and operates a successful textile business specialising in cushions and quilt covers. The business also sells a memory foam pillow that is made only for The Best Sleep Ever Company that has recently featured in a number of health and well being magazines. As a result of the recent positive media coverage of the excellent products sold by The Best Sleep Ever Company,Louise is too busy to undertake any record keeping for the company and has handed the record keeping over to the accounting practice where you work as a graduate accountant.
|The Best Sleep Ever Co|
|As at 30 June 2019|
|Inventory (1 July 2018)||58,480|
|Accumulated Dep’n Delivery Van||4,352|
|Vacuum Packing Equipment||5,440|
|Accumulated Dep’n Vacuum Packing Equipment||2,720|
|L Lace, Capital (1 July 2018)||78,880|
|L Lace, Drawings||17,000|
|Sales Returns & Allowances||3,060|
|Sales Staff Wages||32,640|
|Local Government Rates Expense||1,088|
Louise has emailed you the following list of account information related to the year ended 30 June 2019:
It is now the end of the financial year and Louise requires you to undertake the following:
Prepare the Balance Day Adjustment Journals for The Best Sleep Ever Company where required, in the proforma provided on the next page. Include narration (explanation) for each journal entry.
- The prepaid rent was paid on 1 April 2019 and was Shop/Office rent for the four months ending 31 July 2019.
- Both the Delivery Van and VacuumPacking Equipment are expected to be
used evenly over their useful lives. The expected total useful lives
and residual values of both assets is as follows:
Useful life Residual Value Delivery Van 10 years – Vacuum Packing Equipment 3 years $40
- A physical stocktake of inventory at 30 June 2019 revealed $57,930 on hand.
- $1,300 of the recorded sales represents receipts for goods which will not be delivered until 2 July 2019.
- It is estimated that 5% of the 30 June 2019 balance of Accounts Receivable is unlikely to be received.
- Upon receipt of the business’s bank statement, Louise realised that the business bank account had earned $51 interest on 30 June 2019 which had been directly paid into the bank account by the bank on that day. The accounting records need to be updated for this transaction.
- Louise had relied on word of mouth to promote her business to date however on 1 February 12019, Louise decided to use an advertising company to advertise her business and products and paid for the advertising campaign on that date. The advertising costs are $850 per month for a six month period.
- Sales staff wages owing but not paid as at balance day equals $842.
Question 2: Financial Statement
Mr Wright owns Magnificent Interiors, a well known and highly regarded business by many interior designers. He is also a very good friend of Louise Lace and often stocks items from The Best Sleep Ever in his shop. The following Trial Balance for Magnificent Interiors has been prepared at year end by Mr Wright who likes to keep a hand in the bookkeeping side of the business.
|AS AT 30 JUNE 2019|
|Debit ($)||Credit ($)|
|Allowance for Doubtful Debts||404|
|Depreciation Exp – Motor vehicle||1,200|
|Inventory (1 July 2018)||31,440|
|Accumulated Dep’n Shop Shelving||17,400|
|Office Furniture and Fittings||19,200|
|Doubtful Debts Expense||404|
|Loan (repayable 1 Oct 2026)||27,600|
|F. Wright, Capital (1 July 2018)||131,730|
|Depreciation Exp – Off. Furn. & Fittings||1,920|
|F. Wright, Drawings||21,600|
|Sales Returns & Allowances||570|
|Depreciation Exp – Shop Shelving||3,000|
|Freight Inwards Expense||1,615|
|Accumulated Dep’n Motor vehicle||1,200|
|Accumulated Dep’n Office Furniture & Fittings||5,700|
|Office Operating Expense||51,600|
|Cash at Bank||19,121|
The stock take performed at 30 June 2019 recorded an ending inventory balance of $49,900. The profit for the year ended 30 June 2019 was $13,122.
Prepare a fully classified Balance Sheet and a separate Statement of Changes in Equity for the year ending 30 June 2019.
Question 3: Accounting Concepts
You are a graduate accountant working for EPK Chartered Accountants. One of the new clients to EPK Chartered Accountants is Miss Lace, who owns and operates The Best Sleep Ever Co. The Best Sleep ever Co specialises in cushions, quilt covers and a memory foam pillow manufactured specifically for her business.
Miss Lace has had a meeting with the Managing Partner of EPK today, and you were invited to attend the meeting. Miss Laceis extremely pleased with how The Best Sleep Ever Co is performing, and has decided to open up another shop interstate. She would like some advice regarding accounting for the significant amount of stock the business has.Miss Lace has decided that the interstate shop should hold inventory of each product to minimise freight costs, however she would like to know what is being held at each shop so that if a customer wants a product that is out of stock in one shop it can be transferred to the other shop.
The Managing Partner suggested that given the proposed expansion of the business interstate, it may be time to consider moving the inventory system from a periodic system to a perpetual system.
After the meeting, the Managing Partner tells you she is extremely busy with a number of clients at the moment and asks you to prepare a letter to Miss Lace which covers the points listed below. When you have completed the letter, the Managing Partner has asked that you send it to her for review and from there it will be sent to the client.
Please write a letter in your own words addressed to Miss Lace explaining the following:
- Identify, compare and explain three key differences between the periodic and perpetual inventory systems.
- Identify and explain three key benefits that Miss Lace will derive from implementing a perpetual system for The Best Sleep Ever.
- Explain to Miss Lace three things the business will have to spend money on in order to implement the perpetual system for the business.
Question 4: Cash Flow Statement
You are provided with the following financial information for Styled Flooring Co:
|STYLED FLOORING CO|
|COMPARATIVE BALANCE SHEETS|
|AS AT JUNE 30|
|Cash on Hand||$1 200||$4 000|
|Cash at Bank||15 192||1 009|
|Accounts Receivable (net)||33 200||4 500|
|Inventory||28 000||18 000|
|Prepaid Expenses||1 650||$79 242||650||$28 159|
|Non Current Assets|
|Plant & Equipment||83 500||64 000|
|less Acc. Depreciation||(23 000)||60 500||(17 600)||46 400|
|Land***||80 000||180 000|
|Total Assets||219 742||254559|
|Bank Overdraft||6 402||–|
|Accounts Payable||4 578||2 800|
|Tax Payable||2 401||14 161||1 200||4 790|
|Non Current Liabilities|
|Bank Loan||20 000||20 000|
|Total Liabilities||34 161||24 790|
|Net Assets||$185 581||$229 769|
|Capital||185 581||229 769|
|$185 581||$229 769|
|STYLED FLOORING CO|
|FOR THE YEAR ENDED JUNE 30 2019|
|Net Sales||$159 000|
|Cost of Sales||45 200|
|Gross Profit:||114 080|
|Selling & Admin Expense||20 754|
|Doubtful Debts Expense||354|
|Depreciation Expense||5 400|
|Interest Expense||3 800||30 308|
|Profit before tax||83 836|
|Income tax expense||4 889|