Balance Day Adjustments

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
Trial Balance
As at 30 June 2019
Accounts Receivable48,960
Inventory (1 July 2018)58,480
Prepaid Rent2,448
Delivery Van21,760
Accumulated Dep’n Delivery Van4,352
Vacuum Packing Equipment5,440
Accumulated Dep’n Vacuum Packing Equipment2,720
Accounts Payable43,860
L Lace, Capital (1 July 2018)78,880
L Lace, Drawings17,000
Sales Returns & Allowances3,060
Discount Allowed544
Interest Revenue1,224
Electricity Expense2,924
Water Expense1,632
Sales Staff Wages32,640
Local Government Rates Expense1,088
Insurance Expense4,760
Advertising Expense5,100
Rent Expense8,976

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.

  1. The prepaid rent was paid on 1 April 2019 and was Shop/Office rent for the four months ending 31 July 2019.
  2. 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
  3. A physical stocktake of inventory at 30 June 2019 revealed $57,930 on hand.
  4. $1,300 of the recorded sales represents receipts for goods which will not be delivered until 2 July 2019.
  5. It is estimated that 5% of the 30 June 2019 balance of Accounts Receivable is unlikely to be received.
  6. 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.
  7. 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.
  8. 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 ($)Credit ($)
Accrued Rent1,200
Allowance for Doubtful Debts404
Shop Shelving56,456
Interest Expense2,705
Depreciation Exp – Motor vehicle1,200
Inventory (1 July 2018)31,440
Prepaid Insurance1,598
Accumulated Dep’n Shop Shelving17,400
Rent Expense27,400
Office Furniture and Fittings19,200
Delivery Expense1,080
Accounts Receivable17,341
Insurance Expense720
Motor Vehicle24,000
Accounts Payable10,860
Doubtful Debts Expense404
Loan (repayable 1 Oct 2026)27,600
F. Wright, Capital (1 July 2018)131,730
Depreciation Exp – Off. Furn. & Fittings1,920
F. Wright, Drawings21,600
Advertising Expense3,695
Sales Returns & Allowances570
Depreciation Exp – Shop Shelving3,000
Discount Allowed690
Discount Received1,200
Freight Inwards Expense1,615
Accumulated Dep’n Motor vehicle1,200
Accumulated Dep’n Office Furniture & Fittings5,700
Office Operating Expense51,600
Cash at Bank19,121

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:

Current Assets
Cash on Hand$1 200$4 000
Cash at Bank15 1921 009
Accounts Receivable (net)33 2004 500
Inventory28 00018 000
Prepaid Expenses   1 650$79 242650$28 159
Non Current Assets
Plant & Equipment83 50064 000
less Acc. Depreciation(23 000)60 500(17 600)46 400
Land***80 000180 000
Total Assets219 742254559
Current Liabilities
Bank Overdraft6 402
Accounts Payable4 5782 800
Expenses Payable780790
Tax Payable   2 40114 1611 2004 790
Non Current Liabilities
Bank Loan20 00020 000
Total Liabilities34 16124 790
Net Assets$185 581$229 769
Capital185 581229 769
$185 581$229 769
Net Sales$159 000
Cost of Sales45 200
Discount Received280
Gross Profit:114 080
Other Revenue:
Interest Revenue6464
114 144
Selling & Admin Expense20 754
Doubtful Debts Expense354
Depreciation Expense5 400
Interest Expense3 80030 308
Profit before tax83 836
Income tax expense4 889
Profit$78 947

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