Book Solution Accounting Principles Jerry J Weygandt Barbara Trenholm

ACCT5001 - Week 1 - Self Study Question Solutions.
(Reproduced from Trotman Solution Manual, Cengage Learning)
Chapter 1:
Introduction to financial accounting
Discussion questions
1 The basic purpose of financial accounting is to produce useful information which is
used in many and varied ways. People use the information generated by financial
accounting to improve their decision-making in allocating scarce resources.
11 Accrual accounting includes the impact of transactions on the financial statements
in the time periods where revenues and expenses occur rather than when the cash is
received or paid. This means when revenues are earned (not necessarily when cash is
received) and expenses when they are incurred in earning that revenue (not
necessarily when the cash is paid). Cash accounting only accounts for revenues and
expenses when cash is paid or received by the enterprise.
Problems
Problem 1.1
Revenue 60 000
Expenses
Interest (20 000 x 0.05) (1 000)
Wages (10 400 + 3000) (13 400)
Depreciation (6,000 ÷ 3) (2 000)
Other (12 300)
Profit $31 300
Problem 1.6
User Type of Information
Bankers The likelihood of the company meeting its interest payments on time
Company Management The profitability of each division of the company
ASIC Financial position and performance of a company issuing shares to the
public for the first time
Shareholders Prospects for future dividend payments
Suppliers Probability that the company will be able to pay for its purchases on time
Australian Taxation Office Profitability of company based on tax law
Trade Unions Profitability of company since last contract with employees was signed
1
Problem 1.9
$ $
Revenue 35,000
Less expenses
Interest (30,000 x 10/100 x 4/12) 1,000
Depreciation (8,100 x 4/36) 900
Wages 12,000
Advertising 500
Other expenses 20,000 34,400
Net profit 600
Problem 1.12
Item Asset Liability Shareholders’ Revenue Expense
Equity
Administrative expenses 
Cash at bank 
Marketing expenses 
Buildings 
Income taxes payable 
Loans from banks 
Accounts payable 
Retained profits 
Accounts receivable 
Income tax expense 
Cost of goods sold 
Sales Revenue 
Inventories 
Problem 1.14
1A
2R
3L
4E
5L
6A
7A
8L
9 SE
10 A
11 E
12 E
2
Problem 1.18
1 Liabilities = Assets – Owners’ equity

Pillow’s opening balance of liabilities = $80 000 – $50 000 = $30 000
Pillow’s closing balance of liabilities = $30 000 / 2 = $15 000
2 Closing balance of Owners’ equity = Opening balance of Owners’ equity + Net
profit
= (O/b assets – O/b liabilities) + Net profit
Buffalo Ltd’s closing bal. of Owners’ equity = ($60 000 – $25 000) + $43 000
= $78 000
3 Assets = Liabilities + Owners’ equity
Sparkle Industries closing balance of assets = $57 000 + $15 000 = $72 000
Sparkle Industries opening balance of assets = $72 000 ÷ 3 = $24 000
Problem 1.21
1
Bricks Ltd
Balance Sheet
as at 30 June 2016
Assets $
Cash 50,000
Accounts receivable 100,000
Inventory 150,000
Land and buildings 500,000
Total assets 800,000
Liabilities $
Liabilities
Accounts payable 60,000
Taxes payable 40,000
Bank loan 100,000
Total liabilities 200,000
Net assets 600,000
Shareholders’ equity
Share capital 400,000
Retained profits 200,000
Total shareholders’ equity 600,000
This balance sheet presents A – L = E.
As shown on the following page a balance sheet can also be presented to show A = L
+E
3
Bricks Ltd
Balance Sheet
as at 30 June 2016
Assets $
Cash 50,000
Inventory 150,000
Land and buildings 500,000
Liabilities $
Liabilities
Taxes payable 40,000
Bank loan 100,000
Total liabilities & shareholders’ equity 800,000
2 $200,000 – $120,000 = $80,000
Problem 1.22
Revenue (47,000 + 750) 47,750
Cost of Goods Sold (16,000)
Gross profit 31,750
Expenses
Salaries 14,00
0
Electricity 680 14,680
Net profit 17,070
4
Problem 1.25
Answer 1.25
Here are some ideas in response to the sentences. You may well think of several other
concepts/principles and probably will make additional points about some of them.
1 The concept/principle related to this is reliability. Some effects on financial

statements of this are: accountants are careful that all cash transactions and day-to-day
events such as credit sales and purchases are reflected in the financial statements;
considerable care is taken to minimise errors and omissions in the accounting system
that underlies the financial statements; and auditors ensure that important financial
statement data can be traced back to underlying events and evidence.
2 Three concepts/principles related to this are conservatism, reliability and matching.

Conservatism results (or should result) in financial statements that contain prudent,
not overly optimistic estimates of future cash inflows and outflows regarding present
assets and liabilities. Reliability has the effect of keeping conservatism in check so
that the financial statements are not pessimistic (which would be unfair to present
owners and managers). Matching says that estimates affecting revenues should be
done on comparable bases to those affecting expenses so that the net profit makes
sense, so it puts some bounds on conservatism too.
3 Three concepts/principles related to this are conformance with GAAP, consistency

and comparability. Conformance with GAAP ensures that the company’s information
is prepared in ways the user might expect, to permit meaningful analyses of its
performance. The objective of consistency over time results in highlighting
inconsistencies so that the user can consider their effects on the information. The goal
of comparability refers directly to the idea of ‘relative performance’ because if the
previous two principles are met, the company can be evaluated by comparison to
others like it, or to others the user might consider investing in or lending to.
4 Three concepts/principles related to this are disclosure, decision relevance and

understandability. Disclosure has the effect of helping users understand how the
accounting numbers were computed. This helps to make estimates of future effects.
Decision relevance is a reminder that the financial statements should be useful both in
past-oriented decisions (such as evaluating management’s performance or calculating
bonuses) and in future-oriented decisions (such as whether to invest in or lend to the
company). Understandability requires that reports be prepared so they are
comprehensible to the recipients.
5 Two concepts/principles related to this are reliability, and conformance with GAAP.
The goal of both is partly to minimise the effects of human error, biases and wishes on
the information by promoting objective, careful methods of preparing it and making it
possible (in principle) for anyone else who prepares it to come up with, and agree
with, the same information.
5
Optional Questions
Problem 1.27
1 a Relevance is one of the two primary decision-specific characteristics of useful
accounting information. Relevant information is capable of making a difference
in a decision. Relevant information helps users to make predictions about the
outcomes of past, present, and future events, or to confirm or correct prior
expectations. Information must also be timely in order to be considered relevant.
b Faithful representation is one of the two primary decision-specific
characteristics of useful accounting information. Faithfully represented
information can be depended upon to represent the conditions and events that
it is intended to represent. Verifiability provides assurance that the information
is free from bias.
c Understandability is a user-specific characteristic of information. Information
is understandable when it permits reasonably informed users to perceive its
significance. Understandability is a link between users, who vary widely in
their capacity to comprehend or utilise the information, and the decision-
specific qualities of information.
d Comparability means that information about enterprises has been prepared and
presented in a similar manner. Comparability enhances comparisons between
information about two different enterprises at a particular point in time.
2 There are a multitude of answers possible here. The suggestions below are intended
to serve as examples.
a Forecasts of future operating results and projections of future cash flows may
be highly relevant to some decision-makers. However, they would not be as
reliable as historical cost information about past transactions.
b Proposed new accounting methods may be more relevant to many decision-
makers than existing methods. However, if adopted, they would impair
consistency and make trend comparisons of an enterprise’s results over time
difficult or impossible.
c Occasionally, relevant information is exceedingly complex. Judgement is
required in determining the optimum trade-off between relevance and
understandability. Information about the impact of general and specific price
changes may be highly relevant but not understandable by all users.
3 Although trade-offs result in the sacrifice of some desirable quality of information,
the overall result should be information that is more useful for decision-making.
Answer 1.29
6
Employee lawsuit and chief accountant
Ethical issue: The chief accountant has a responsibility to the users of the financial
statements and to the company.
• Users of financial statements need information that is useful for decision-making. The
question that arises here is whether the potential effects of the lawsuit will affect the
decisions of users of the financial statements.
• The chief accountant also has a responsibility to the company. Will disclosure of the
lawsuit in financial statements affect the outcome of the lawsuit? Will disclosure result in
other lawsuits by previously dismissed employees?
• The chief accountant may also fear that disagreement with the general manager may
jeopardise his own employment with the firm.
What should the chief accountant do?

• Ensure that all of the facts are known.
Why does the general manager deny any impropriety?

• The general manager may have been advised by the enterprise’s lawyers that the lawsuit
was unlikely to be successful.
Why does the chief accountant personally feel the claim is justified? What is the
amount of the potential claim? Is it large enough to make a difference to the users of
the financial statements?
• Once the chief accountant has all of the facts, it may be desirable to discuss the issue
with the general manager again. He/she may also want to make the general manager
aware of the accounting rules governing disclosure of potential losses.
• During the course of the audit, bring the matter to the attention of the enterprise’s
auditors.
• Also note that the enterprise’s auditors are required to communicate with the
enterprise’s lawyers to determine whether there are any existing or potential lawsuits. The
information provided by the lawyers would include the amount and likelihood of any
gains or losses.
External auditor and possible cheating

Ethical issue: The auditor cannot apprise the other client that that client may be being
cheated because this would violate the first client’s confidentiality.
• If the enterprise is cheating one customer, it may be cheating others and may in general
be dishonest. Since auditors performing an audit rely in part on representations of
management, the potential dishonesty may jeopardise the effective conduct of the audit.
• Being associated with an enterprise whose management is dishonest may harm the
reputation of the auditor.
• On the other hand, if the auditor ends the involvement with the enterprise, this will
result in a loss of audit fees.
What should the auditor do?
• Get all of the facts.
• Determine whether the enterprise is actually cheating the customer.
• If the enterprise is actually cheating the customer, determine whether the cheating is the
result of an inadvertent error. If the enterprise is not purposely cheating the customer, the
auditor can bring the error to the attention of management and the problem will be solved.
• If the enterprise is purposely cheating the customer, determine what level of
management is involved. If top management is not involved and is unaware of the
7
circumstances the auditor can bring the matter to the attention of top management. At this
point, top management would (hopefully) do something to rectify the situation.
• If the enterprise is purposely cheating the customer and top management is involved, the
situation becomes more difficult. The auditor should do a number of things at this time,
including seeking advice and discussing the situation with top management. Further
action by the auditor is dependent on the response of management and whether the
incident is isolated or not.
• If discussions with management result in the feeling that management is dishonest, the
auditor should resign, by addressing a letter of resignation to the Board of Directors
setting out the reasons for resignation.
The general manager’s bonus

Ethical issue: The general manager’s performance is evaluated based on performance of
the company.
• The proposed change will not change the total amount of depreciation expense charged
to income over the life of the relevant assets; it will only change the timing of the
recognition of those expenses. As a result, it will not change the amount of cash generated
from operations of the enterprise before considering the amount of the general manager’s
bonus. The proposed change will increase the amount of cash paid out to the general
manager by way of bonus. Should the general manager get a higher bonus, if nothing has
really changed?
• On the other hand, the proposed change to the depreciation method may result in
providing the users of financial statements with information which is useful. Perhaps the
new depreciation method results in better matching of expenses with revenues. Or,
perhaps the new depreciation method is similar to depreciation methods used by other
enterprises in the same industry. This would result in enhanced comparability between
enterprises and may be more useful to users of the financial statements.
What should the general manager do?
• The general manager should determine whether the proposed change results in
information which is more useful to users of the financial statements. If this is the case,
the accounting change should be implemented. If not, the change should not be
implemented.
• If the change is implemented, the general manager must decide whether to request that
the bonus calculation ignore the change. It may be the case that some aspect of the
general manager’s performance has resulted in the possibility of decreasing depreciation
expense. For example, if the general manager ensured that the relevant assets were well
maintained to the point that the useful life of the assets was extended, the general
manager should be rewarded for this performance and the bonus calculation should not
ignore the change. If the change in depreciation is unrelated to the general manager’s
performance, the general manager should request that the bonus calculation should ignore
the change.
• It is often the case that bonus plan parameters are such that changes of this nature are
taken into account in determining bonus amounts. If this is the case, the amount of the
general manager’s bonus won’t change with the implementation of new policy.
8
Case 1 A
Answer 1A
1 Indicators that Woolworths use accrual accounting:
Trade and Other Receivables
Trade and Other Payables
Provisions
Depreciation
Amortisation
Prepayments
Accruals
Unearned Revenue
Note 1
5 Accounting equation in dollar figures at 29 June 2014

A = L + OE
24 205.2m 13 679.8m + 10 525.4m
6 Net profit before tax = 3 515.1 m
7 Net profit after tax = 2 458.4 m
8 Largest cash inflow = Receipts from customers = 65 851.8 m

Largest cash outflow = Payments to suppliers and employees = 60 918.3 m
9 Cash flow from operations is a different figure to operating profit after tax because
the latter is calculated on an accrual basis and includes a number of items omitted
from the cash flow from operations including:
– revenue earned but received in other periods
– expenses incurred but paid for in other periods
– expenses not involving cash outlays including depreciation and bad debts.
In addition the cash flow from operations includes revenues and expenses relating to
prior or subsequent periods.
9
Chapter 2:
Measuring and Evaluating financial position and
performance
1
Define the following terms in your own words:
a revenue
b expense
c net profit
d dividend
e retained profits
f shareholders’ equity.
If you had trouble with any of the terms, the glossary will help you.
2
What is the difference between current and noncurrent assets? Assets are usually
separated into shorter-term ones (current assets) and longer-term ones (noncurrent
assets). Current assets are those that are expected to be used, sold, or collected within
the next year, and noncurrent assets therefore are expected to have benefits for more
than a year into the future
6
a A balance sheet can indicate whether a company is financially sound by a
comparison of the amount of finance raised by debt with the amount raised from
owners. The higher the proportion raised by the debt, the higher the risk to the
creditors.
b The working capital, i.e. current assets less current liabilities indicates a company’s
ability to pay its bills on time. This assumes that the current assets can be readily
turned into cash.
c To declare a dividend a company must have adequate cash (or overdraft facilities)
and adequate retained profits. The decision will be influenced by shareholder
expectations.
d The age of equipment can be ascertained by comparing cost of equipment to
accumulated depreciation.
10
Your explanations will have been in your own words, perhaps something like the
following:
a Net profit is part of shareholders’ equity because the increase in resources earned as
mentioned above belongs to the owners, who may withdraw it as dividends. Until they
do withdraw it, it is part of their ownership interest.
b Net profit could be reported on the balance sheet by just showing that shareholders’
equity has increased since the prior period. The income statement was developed to
1
provide an explanation of the details of the change in owners’ equity and to separate
that from any dividends withdrawn by the owners during the period.
c Companies earn profits when their revenues are greater than the expenses incurred
in earning those revenues. Dividends are a distribution of profit to shareholders, not
an expense of running a business.
20
Those that are current need to be repaid within one year or refinanced. This is where
the immediate pressure is.
Problem 2.3
Incob Ltd
Balance Sheet
As at 30 June 2016
Current assets $ $ Current liabilities $
Cash and cash equivalent 43 000 Accounts payable 61 000
Accounts receivable 68 000 Notes payable 30 000
Inventory 81 000 Income taxes payable 32 000
Prepayments 10 000 Current portion of long-term debt 25 000
202 000 148 000
Noncurrent assets Noncurrent liabilities
Long-term investments 110 000 Long-term debt 200 000
Property, plant and equipment 550 000 Provision for employee entitlements 34 000
Less accumulated depreciation 190 000 360 000 234 000
Patents and trademarks 55 000 Total liabilities 382 000
525 000 Shareholders’ equity
Share capital 161 000
Retained profits 184 000
345 000
727 000 727 000
Answer 2.9
1 Land is on the balance sheet because it is an asset – that is, a resource owned or
controlled and having economic value. Land carries the potential to produce revenues
for the company in the future, as do other assets.
2 Assets = $5 222 + $2 410 = $7 632.
3 Share capital is one of the sources of funds used to acquire the assets on the left side
of the balance sheet. Therefore, it is not an asset that can be used to purchase more
land, but a co-creator of the assets that now exist. Assets can only be used to buy other
assets. Therefore, you must use $3500 cash or another asset to buy a new asset. The
company did not have enough cash, since some had already been used to buy
inventory and land, so more cash had to be borrowed.
2
4 Retained profits is the accumulation of net profit minus dividends for each year of
the company’s history. It is the accumulated residual undistributed earnings of the
company and is on the balance sheet because it is a source of present assets (because
assets created in the process of earning profit were not all distributed to owners).
5 Ending retained profits were $1 222. Subtracting profit that had been added ($235)
and adding back dividends that had been deducted ($120) gives beginning retained
profits of $1107. To check this, going the other way gives $1 107 + $235 – $120 =
$1222.
6 Ending retained profits would be $1107 + $10 116 – $11 600 = ($377). There would
have been a net loss for the year of $1484, and that would have turned the retained
profit at the beginning into a deficit at the end of $377.
3
Answer 2.10
1
Century Cinemas
Income Statement
For the year ended 31 December 2016
$ $
Ticket revenue 81 700
Confectionery sales 12 300
Less Cost of confectionery sold (10 500)
Gross profit 83 500
Less operating expenses
Advertising expense 42 780
Rent expense 33 200
Electricity expense 5 090 (81 070)
Net profit 2 430
2
Century Cinemas
Statement of retained profits
For the year ended 31 December 2016
$
Retained profits, 1 January 2016 59 720
Net profit for 2016 2 430
Retained profits, 31 December 2016 62 150
3
Century Cinemas
Balance Sheet as at 31 December 2016
Current assets $ Current liabilities $

Cash 4 610 Accounts payable 13 910
Accounts receivable 13 450
Inventory 18 000 Noncurrent liabilities
36 060 Loan payable 35 000
Noncurrent assets Total liabilities 48 910
Furniture and fittings 34 000 Shareholders’ equity
Land and buildings 60 000 Share capital 60 000
Projection equipment 41 000 Retained profits 62 150
135 000 122 150
Total assets 171 060 Total liabilities and shareholders’ equity 171 060
4
Answer 2.11
Profit Cash
1 + 137 750 + 115 350
2 0 + 80 000
3 0 – 45 000
4 – 67 600 – 54 080
5 – 46 020 – 34 020
24 130 62 250
2.15
Shareholders’ Net profit before
Assets Liabilities equity tax
1 Increase 200 000 Increase 200,000 no effect no effect
2 Increase 30 000 Increase no effect no effect
Increase Assets
$20,000 (from an
Increase to A/c Rec
$50,00, and a
decrease to
3 inventory 30 000) N/E increase 20 000 f Increase 20 000
4 Increase 80 000 Increase 80 000 no effect no effect
5 Decrease 100 000 N/E Decease 100 000 Decrease 100,000
5
Answer 2:16
Asset Amount ($) Assumptions

The insurance policy is used evenly over the period. Have
1 Prepayment 17 500 used (expensed) 1.5 months, 10.5 months of insurance
remain.
It is probable that the benefits the patent gives to XYZ will
2 Intangible asset 15 000
provide future economic benefit.
3 No
If the land has recently been revalued (i.e. the carrying
amount of the land has been restated in the financial
4 Land 150 000 or 100 000 statements of XYZ), then it will be recorded at $150 000.
However, if the land has not been officially revalued, its
historical cost will remain, i.e. it will be valued at $100 000.
As the installation was necessary to the operation of

5 Machinery 1 400 000
themachine, then the cost of installation is added to the
purchase cost of the machine, to give its opening book value.
Answer 2.17
Liability
1 Tax payable
2 Wages payable
3 Provision for warranty claims
4 Revenue received in advance
5 No
Answer 2.18
Revenue for the month of February 2016
1 Sales – credit 100 000
2 Sales – cash 150 000
3 Rental revenue 5 000
4 –
5 –
Total revenue 255 000
Answer 2.21
6
1 $10 000
2 $1200
3 N/A
4 $6 000
5 N/A
Optional Questions
Problem 2.19
Revenue for the year

1 Sales – credit, $20 000
2 Nil Motor vehicle will be recognised at a cost of $31 200
The ink cartridges are not delivered. The sales have nottaken
3 Nil place yet
4 Sales – credit, $18 000
Money received from shares issuing will be recognised as share
5 Nil capital instead of revenue
The remaining $3300 will be recognised as Unearned Revenue
6 Sales – cash, $300 and will be realised when the product is delivered in the future
Answer 2A
1 Point of time at which the balance sheet is drawn up – 29 June 2014.
3 The 2014 balance sheet of Woolworths Limited balances as follows:

Assets (24 205.2m) = Liabilities (13 679.8m) + Shareholders’ Equity (10 525.4m)
4 The assets of 24 205.2m were financed by current liabilities 7 558.2m, noncurrent

liabilities 6 121.6m and shareholders’ equity 10 525.4m (including the issued capital 4
850.1m and retained profits 5 423.1m).
12 As you would expect the two figures are different. The net profit after income tax
is $2 458.4 million, whereas the cash balance has increased from $849.2 million in
2013 to $922.6 million in 2014. Note that this figure includes the net change in cash
from operations and all investing and financing activities. As you will discover in
chapter 14, companies are required to reconcile the cash flow from operating activities
to net profit after tax.
7
Chapter 3
The double-entry system
1 • Another asset may have decreased
• A liability may have increased and/or
• Shareholders’ equity may have increased
3 • Revenues increase profit, and profit increases retained profits, which is a part of
shareholders’ equity.
• It is likely that revenues (sales) also increase an asset, such as cash, or accounts
receivable.
4 • Expenses decrease profit. A decrease in profit results in a decrease in retained profits,

which is a category of shareholders equity, therefore, a decrease in expenses, decreases
shareholders’ equity.
• The other parts of the accounting equation likely to be affected will either be an
increase in liabilities (for example an increase in a payable when an expense is
incurred) or a decrease in an asset (for example, when cash is paid out upon
occurrence of an expense).
7
Transaction Resource effect Source effect
(increases are debits) (increases are credits)
1 Goods are purchased for The resource (asset) is an The source (liability) is that
resale. increase in the inventory of an obligation is created to
unsold products. pay the supplier.
2 Money is borrowed from The resource (asset) is an The source (liability) is that
a finance company. increase in the amount of an obligation is created to
cash on hand. repay the bank.
3 A customer sends a The resource (asset) is an The source (liability) is that
cheque for goods to be increase in the amount of an obligation is created to
manufactured. cash on hand. supply the goods.
4 Machinery is purchased The resource (asset) is an The source (liability) is that
on credit. increase in machinery. an obligation is created to
pay the supplier.
5 Additional shares are The resource (asset) is an Share capital, an equity, is
issued. increase in cash. increased, so this is a credit.
1
Problems
Problem 3.2
1
ASSETS = LIABILITIES + SHAREHOLDERS’ EQUITY
Cash Accounts Inventory Office Accounts Expenses Other Share Revenue Expenses
receivable Equipment payable Payable Payable Capital
$ $ $ $ $ $ $ $ $ $
1 +200,000 +200,000
2 -20,000 +20,000
3 -4,000 -4,000
4 +30,000 +30,000
5 +1,000 -1,000
6 +90,000 -40,000 +90,000 -40,000
7 -25,000 -25,000
8 +30,000 -30,000
9 -15,000 -15,000
10 -900 -900
11 -3,000 +6,000 +3,000
12 +2,000 -2,000
Total 162,100 60,000 10,000 6,000 5,000 3,000 3,000 200,000 90,000 -62,900
238,100 = 238,100
NB. Increases in expenses have been entered as minus figures.
2
Hoad Ltd
Income statement
for the month ended 30 November 2016
$ $
Sales 90,000
Less Cost of goods sold 40,000
Gross profit 50,000
Less Operating Expenses
Rent 4,000
Advertising 1,000
Wages 17,000
Sales Commission 900 22,900
Net Profit 27,100
Hoad Ltd
Balance sheet
as at 30 November 2016
Current Assets $
Cash 162,100
Accounts Receivable 60,000
Inventory 10,000
Total current assets 232,100
Noncurrent Assets
Office Equipment 6,000
Total non-current assets 6,000
Total Assets 238,100
Current Liabilities
2
Accounts Payable 5,000

Expenses Payable 3,000
Total current liabilities 8,000
Non-current Liabilities
Other Payable 3,000
Total non-current liabilities 3,000
Total Liabilities 11,000
Share Capital 200,000
Retained Profits 27,100*
Total Shareholders’ equity 227,100
Total Liabilities and Equity 238,100
* 90,000 – 62,900 = 27,100
Problem 3.2 (continued)

3
1 DR Cash 200,000
CR Share Capital 200,000
2 DR Inventory 20,000
CR Cash 20,000
3 DR Rent Expense 4,000

CR Cash 4,000
CR Accounts Payable 30,000
5 DR Advertising Expense 1,000

CR Expenses Payable 1,000
6 DR Accounts Receivable 90,000

CR Sales Revenue 90,000
DR Cost of goods sold 40,000

CR Inventory 40,000
7 DR Accounts Payable 25,000

CR Cash 25,000
8 DR Cash 30,000
CR Accounts Receivable 30,000
9 DR Wages Expense 15,000

CR Cash 15,000
10 DR Sales commission expense 900

CR Cash 900
3
11 DR Office Equipment 6,000

CR Cash 3,000
CR Accounts Payable 3,000
12 DR Wages Expense 2,000

CR Expenses Payable 2,000
Balances for each account can be determined from the answer to part 1.

4
Net Profit Total Assets
1 No effect Increase
2 No effect No effect
3 Decrease Decrease
5 Decrease No effect
6 Increase Increase
7 No effect Decrease
8 No effect No effect
9 Decrease Decrease
10 Decrease Decrease
12 Decrease No effect
Problem 3.5
1 Assets – Liabilities = Shareholders’ equity
500,000 – 150,000 = 350,000
Opening retained profits + Net profit = Closing retained profits
10,000 + 20,000 = 30,000
Shareholders’ equity – Closing retained profits = Share capital
350,000 – 30,000 = $320,000
500,000 – 150,000 = 350,000
Shareholders’ equity – Share capital = Closing retained profits
350,000 – 300,000 = 50,000
Closing retained profits – Opening retained profits = Net profit
50,000 – 20,000 = 30,000
Revenue – Net profit = Expense
100,000 – 30,000 = $70,000
3 As for 1 & 2 Shareholders’ equity = 350,000

As for 2 Closing retained profits = 50,000
4
Closing retained profits – Opening retained profits = Net profit

50,000 – 80,000 = (30,000)
Revenue + Net loss = Expense
90,000 + 30,000 = $120,000

4 Opening retained profits + Net profit = Closing retained profits
100,000 + 30,000 = 130,000
Share capital + Closing retained profits = Shareholders’ equity
500,000 + 130,000 = 630,000
Shareholders’ equity + Liabilities = Total assets
630,000 + 150,000 = 780,000
Total assets – Non-current assets = Current assets
780,000 – 500,000 = $280,000
500,000 – 150,000 = $350,000
350,000 – 300,000 = 50,000
Opening retained profits + Net profit – Closing retained profits = Dividend
20,000 + 50,000 – 50,000 = $20,000
600,000 – 150,000 = 450,000
450,000 – 300,000 = 150,000
Closing retained profits + Dividend – Net profit = Opening retained profits
150,000 + 20,000 – 50,000 = $120,000
Problem 3.6
Retained profits 30/6/16 = Retained profits 1/7/15 + Net profit –Dividends
= 200 + 150 – 50
= 300
Liabilities 1/7/15 = Assets – (Share capital + Retained profits)
= 600 – (180 + 200)
= 220
Assets 30/6/16 = Liabilities + (Share capital + Retained profits)
= 300 + (190 + 300) = 790
5
Problem 3.10
Assets = Liabilities + shareholders’ equity
Cash Accounts Inventory Interest Machinery Accumulated Accounts payable Advertising Wages Revenue Loan Revenue Expense Share capital
receivable receivable depreciation payable payable received in payable
advance
1 +250,000 +250,000
2 +43,000 +43,000
3 –8,000 –8,000
4 +110,000 –45,000 +110,000 –45,000
5 +2,000 –2,000
6 –27,000 +27,000
7 –30,000 –30,000
8 –24,000 –24,000
9 +45,000 –45,000
10 –1,100 –1,100
11 –4,000 +9,000 +5,000
12 +3,500 –3,500
13 –1,000 –1,000
14 +6,000 +6,000
15 +8,000 +8,000
208,900 65,000 25,000 6,000 9,000 –1,000 13,000 2,000 3,500 8,000 5,000 116,000 –84,600 250,000
6
Problem 3.17
1 • Debits: $14,300, $102,100, $2,500, $37,900, $48,000, $6,200, $29,600, $1,400, $18,700,
total $260,700.
• Credits: $63,700, $21,200, $600, $71,000, $21,900, $47,500, $25,000, $8,000, $1,800,
total $260,700.
Note that in order to answer this, reasonable assumptions may have to be made about some
accounts.
2
BML Products Ltd
Balance sheet
as at 30 June 2016
Assets
$
Current assets
Cash on hand 2,500
Bank account balance1 14,300
Owing from customers 6,200
Unused office supplied 1,400
Inventories:
Unsold finished products 29,600
Unused product raw materials 18,700
Non-current assets
Land 48,000
Building 102,100
Fixtures and equipment 37,900
Less accumulated depreciation -63,700 124,300
Liabilities and equity

Current liabilities
Owing to suppliers 21,900
Unpaid employee wage 1,800
Employee’s tax not yet remitted 600
Short term part of mortgage 8,000
Non-current liabilities
Bank loan 21,200
Long-term part of mortgage 71,000
Share capital issued 25,000
Retained earnings 47,500
Total shareholders equity 72,500
Total liabilites & shareholders’ equity 197,000
7
Note that reasonable assumptions are also necessary here. For example, most bank loans are shown
as current liabilities because they are due more or less on demand, but this one may not be and
could be a long-term (noncurrent) loan. It is also assumed that all amounts due from customers
and to suppliers are current, but again for a particular company this may not be true. A valid
balance sheet for any company cannot be prepared without some (often a great deal of) knowledge
beyond the titles and amounts of the accounts.
The account names used in this part (2) are not generally used in financial statements, part (3)
reflects a more accurate portrayal.

3
BML Products Ltd
Balance sheet as at 30 June 2016
Current assets $
Cash on hand 2,500
Cash in bank 14,300
Inventory 49,700
Non-current assets
Land 48,000
Building 102,100
Fixtures and equipment 37,900
188,000
Less accumulated depreciation 63,700
Current liabilities
Bank loan 21,200
Wages payable 1,800
Tax payable 600
Mortgage (current portion) 8,000
Non-current liabilities
Mortgage (non-current portion) 71,000
Total liabilities and shareholders’ equity 197,000
8
Note: In practice, comparative figures for the previous year would be provided as well as
footnotes furnishing details of inventory, accumulated depreciation on various categories
of assets, due date for repayment of mortgage loan, etc.
4 Here are two brief comments. First, the company has more current assets than current
liabilities, $72,700 to $53,500, so it has $19,200 of working capital and a working capital
ratio of 1.36 ($72,700/$53,500). It appears able to pay its bills as they come due, but if the
bank and the suppliers were to demand payment, the company would have to sell its
inventory before it could pay. (Maybe children’s toys products would be easy to sell quickly,
maybe not.)
Second, the company is financed more by debt than equity. Its balance sheet equation
(A = L + E) is $197,000 = $124,500 + $72,500, giving it a debt/equity ratio of 1.72
($124,500/$72,500). This indicates that the creditors are taking some risk in that they have
more to lose should the company go under than the owners do, but there is no indication
from the balance sheet that any financial problems are imminent.
Problem 3.8
1 The journal entries are shown below:
$ $
1 DR Accounts payable 8,000
CR Cash 8,000
2 DR Cash 13,280
CR Accounts receivable 13,280
CR Accounts payable 8,000
4 DR Cash 50,000
CR Share capital 50,000
5 DR Mortgage 50,000
CR Cash 50,000
6 DR Land 54,000
CR Cash 14,000
CR Mortgage 40,000
7 DR Equipment 33,900
CR Other payable (current) 13,900
CR Other payable (non-current) 20,000
9
Problem 3.8 continued)
Current Assets Noncurrent Assets Current Liabilities Noncurrent Liabilities Equity
Transactio Accts Inventorie Equipmen Acc Accts Equip. Taxes Wages Other Employee Share Retained
n Cash Rec s Land t Dep'n Payable payable payable payable payable Mortgage entitlements capital profits
Op
Balance 20,000 70,000 110,000 200,000 400,000 -100,000 80,000 20,000 10,000 200,000 100,000 200,000 90,000
1 -8,000 -8,000
2 13,280 -13,280
3 8,000 8,000
4 50,000 50,000
5 -50,000 -50,000
6 -14,000 54,000 40,000
7 33,900 13,900 20,000
Cl Balance 11,280 56,720 118,000 254,000 433,900 -100,000 80,000 13,900 20,000 10,000 20,000 190,000 100,000 250,000 90,000
10
Problem 3.20
Dragons Ltd
Journal entries
1 Credit sales
Dr Accounts receivable 200,000
Cr Sales revenue 200,000
2 Cash sales
Dr Cash 6,000
Cr Sales revenue 6,000
3 Collection from customers

Dr Cash 150,000
Cr Accounts receivable 150,000
4 Purchase of inventory
Dr Inventory 70,000
Cr Accounts payable 70,000
5 Payments of accounts payable

Dr Accounts payable 50,000
Cr Cash 50,000
6 Cost of goods sold

Dr COGS 80,000
Cr Inventory 80,000
7 Wages expense
Dr Wages expense 90,000
Cr Wages payable 90,000
8 Wages paid
Dr Wages payable 22,000
Cr Cash 22,000
9 Income tax payable

Dr Tax payable 6,000
Cr Cash 6,000
10 Cash dividends declared, and paid

Dr Dividends declared (or Retained 20,000
Profits)
Cr Dividends payable 20,000
Dr Dividends payable 20,000

Cr Cash 20,000
11
Dragons Ltd
Income Statement
for the year ended 30 June 2016
$
Sales 206,000
Cost of goods sold 80,000
Gross margin 126,000
Operating expenses:
Wages expense 90,000
Net profit before tax 36,000
Income tax expense 0
Net profit after tax 36,000
Dragons Ltd
Statement of changes to retained profits
for the year ended 30 June 2016
$
Retained profits, 1 July 2015 34,000
70,000
Dividends declared 20,000
Retained profits, 30 June 2016 50,000
12

Dragons Ltd
Balance Sheet as at
30 June 2016
$
Current assets
Cash 72,000
Inventory 32,000
Current liabilities
Income tax payable 0
Wages payable 68,000
Net assets 90,000
Problem 3.22
$
Sales revenue 2,111,480
Investment revenue 23,570
2,135,050
Less operating expenses 1,703,470
Net profit before income tax 431,580
Income tax expense 145,210
Note for statement in retained

profits
Retained profits, beginning of 354,290
year
Add net profit after tax 286,370
640,660
Less dividend declared (87,000)
Retained profits, end of the year $553,660
Optional Questions
13
Discussion Questions
8 Accounting accumulates information about activities and the financial statements are
prepared from the accounts that are produced as the information is accumulated. The
balance sheet and the income statement fit together or articulate because they are
both based on the double-entry accounting system. A set of accounts is created
which is in balance. From these accounts are produced:
– The income statement, the bottom line net profit after tax being transferred to
– The statement of retained profits, with end balance being transferred to
– The balance sheet, which summarises all the accounts
Thus activities affecting profit affect the balance sheet through the double-entry
system. In particular recognition of revenue and expense relies on the fact that a
revenue causes a change in the balance sheet, as does an expense.
Problem 3.23
1 Cash in the bank as at the end of 2016:
$12 430 + $1000 + $68 990 – $1480 – $36 910 = $44 030.
2 Accrual accounting profit for 2016:
$68 990 + $850 – $36 910 – $2650 – $3740 = $26 540.
Note: in the textbook the sixth item should read: Payable to suppliers as at the end of
2015 (paid in 2016).
Problem 3.24
Cash profit 67,450
Add revenue receivable (included in accrual profit) 18,730
Deduct bills payable (included as expenses payable in accrual profit) (24,880)
Add back expenses for next year (these relate to next year’s accrual profit) 2,300
Deduct depreciation expense (this affects accrual profit, not cash profit) (13,740)
Accrual profit 49,860
Problem 3.26
1 Income statement accounts:
– Salaries expense
– Income tax expense
– Employee benefits expense
– Credit sales revenue
– Cash sales revenue
– Interest revenue
– Depreciation expense
– Miscellaneous expenses
– Cost of goods sold
– Interest expense
– Insurance expense
– Office expenses
14
2 Net profit, based on part 1, is:

Sales: $ $
Credit 346,200
Cash 21,600
Expenses (other than income tax): 367,800 Cr
Salaries 71,000
Depreciation 26,700
Insurance 11,200
Miscellaneous 8,200
Employee benefits 13,100
Office 31,100
Interest* 16,800 (339,700)Dr
Profit before interest revenue and 28,100 Cr
tax
Interest revenue 1,700 Cr
Income tax expense (6,900)Dr
Net profit 22,900 Cr
3 Ending retained profits

$
Beginning retained profits 92,800 Cr
Add net profit (above) 22,900 Cr
Deduct dividends declared (11,000)Dr
Ending retained profits 104,700 Cr
4 a Geewhiz Productions
Income Statement
for the year ended 30 November 2016
$
Revenue 367,800
Operating expenses* 322,900
Operating profit 44,900
Interest expense, net of interest 15,100
revenue
Profit before income tax 29,800
Income tax expense 6,900
Net profit for the year 22,900
* All expenses are aggregated here. It would be quite acceptable to list them all
though most companies do not because such a list clutters the statement and gives
information to competitors. The amount of depreciation expense and certain other
expenses are required to be disclosed.
b Geewhiz Productions
15
Statement of changes in Retained Profits

for the year ended 30 November 2016
$
Retained profits, beginning of year 92,800
Add net profit for the year 22,900
115,700
Deduct dividends declared 11,000
Retained profits, end of year 104,700
16
c
Geewhiz Productions
Balance sheet
as at 30 November 2016
Assets
Current assets $
Cash 18,000
Inventory 68,000
Prepaid insurance 2,400
Noncurrent assets
Land 63,000
Building 243,000
Trucks and equipment 182,500
488,500
Less accumulated
94,000
depreciation
Total non-current
394,500
assets
Liabilities and equity

Current liabilities
Bank loan* 21,800
Other payables** 17,800
Total current
80,600
liabilities
Noncurrent liabilities
Mortgage payable* 114,000
Total non-current
194,600
liabilities
Total shareholders’
304,700
equity
Total liabilities and
499,300
equity
* Bank loan assumed all current, mortgage assumed all noncurrent.

** $2,800 + $5,400 + $4,100 + $5,500 = $17,800.
17
CASE 3A
1 Period covered by the profit and loss statement – 52 weeks ended 26 June 2011.
2 Main types of revenues
i sales revenue 54,142.9
ii operating revenue from third parties 136.6
iii other revenue 226.2
3 Larger expenses incurred in earning revenue – expenses not provided in detail – of
the disclosed expenses larger items were:
i Cost of sales 40,186.3
ii Employee benefits 6,268.3
iii Lease expenses 1,541.2
iv Depreciation and amortisation 857.9
v Income tax 874.6
7 See page 728 of the text.
11 Debit for inventories, receivables and intangibles; credit for accounts payable and
retained profit.
Answer 3A
1 Period covered by the profit and loss statement – 52 weeks ended 29 June 2014.
2 Main types of revenues
i Revenue from the sale of goods 60 772.8m
ii Other operating revenue 179.4m
iii other revenue 242.7m
3 Larger expenses incurred in earning revenue – expenses not provided in detail
(below are some examples of the disclosed expenses):
i Cost of sales 44 474.6m
ii Employee benefits (note 2) 7 293.8m
iii Lease expenses (note 2) 1 898.7m
iv Depreciation and amortisation (note 2) 996.3m
v Income tax (note 5) 1 056.7m
7. Retained profits increase from 4 661.1m in 2013 to 5 423.1m in 2014, the
main changes resulted from net profit from the period less dividends
declared.
11. Debit for inventories, receivables and intangibles; credit for accounts payable
and retained profit.
18
ACCT5001 - Week 4 - Self Study Question Solutions. ACCT5001 - Week 4 - Self Study Question Solutions.
(Reproduced from Trotman Solution Manual, Cengage Learning) (Reproduced from Trotman Solution Manual, Cengage Learning)
Problems
Chapter 4:
Problem 4.3
Record-keeping 1 No transaction so no entry.
$ $
Discussion questions 2 DR Advertising expense 200
CR Advertising payable 200
3 A chart of accounts is a listing of the titles of all the accounts of an entity. Each (Entry is not recorded until 30 June as there is no eco exchange until the ad is run.)
account is assigned a number. $ $
5 Journal entries provide in chronological order a record of all transactions recorded by 3 DR Cash at Bank 20,000
CR Bank loan 20,000
an organisation. Ledgers categorise transactions according to the account they affect, The interest expense will be recorded periodically during the two years.
and therefore split the journal entries up amongst the different ledgers. By having a
journal, every debit and credit of a specific transaction is recorded in the one place. 4 No transaction yet so no entry.
6 A trial balance is a standard bookkeeping procedure to check whether certain errors $ $
5 DR Cash at Bank 300
have been made in posting the journal entries to the ledger. It is a test to see whether CR Unearned Revenue 300
total debits equal total credits.
7 Closing entries formally transfer the balances of the revenue and expense accounts to $ $
a profit and loss summary and then to retained profits. Closing entries also reset the 6 DR Prepaid insurance 600
CR Cash at Bank 600
revenue and expense account balances to zero to begin recording these items for the Assumption: that the insurance is consumed equally over the twelve months.
next accounting period.
13. It is essential that an accurate source document be prepared for every transaction Problem 4.6
because the source documents provide the input into the accounting system. Failure 1 Lightning Courier Service
to prepare a source document for a transaction or preparation of an inaccurate Chart of accounts
document results in introducing errors into the system, which in turn, will lead to Shareholders’ equity (01 to 05) Revenue (40 to 49)
incorrect output from the system, i.e. the financial statements. 01 Share Capital 40 Delivery revenue
In addition, source documents furnish evidence of transactions and in the absence of an 02 Retained profits 42 Discount revenue
accurate source document a business would be at a disadvantage in establishing what has Liabilities (06 to 19) Expense (50 to 69)
occurred for auditors or in the event of disagreement with an outside party such as a 06 Accounts payable 50 Advertising
debtor. 07 Bank overdraft 51 Motor van expense
10 Loan on mortgage 52 Van drivers’ wages
12 Other payables 53 Electricity
13 Provisions 54 Garage rental
55 Office rent
56 Office salaries
Assets (20 to 39) 57 Printing and stationery
20 Cash at Bank 58 Postage and telephone
21 Accounts receivable 59 Rates and taxes
22 Stock – spare parts for vans 60 Interest
26 Office equipment 61 Discount expense
28 Motor vans
30 Office equipment
2 Information available to owner
i Shareholders’ equity in enterprise
Please note, for consistency with the use of accounts receivable and accounts payable ii Nature and extent of obligations due to or from third parties
only being used for the purchase of inventory and sale of inventory on credit, iii Details of financial position of business
respectively for a retailer. We have ignored the chart of account in some of the self- iv Profitability of enterprise with details of each type of revenue and expense
study questions. v Liability for taxation based on business and other income
vi Income statement and balance sheet to support application for loan
vii Information useful in setting of price policies.
1 2
Problem 4.8 ( completed as an in-class demonstration problem) Opening balance 10,000

3 RST Ltd
1. RST Ltd
Trial balance
General journal
As at ##/##/##
(a) Dr Accounts Receivable 80,000 $ $
Cr Sales Revenue 80,000 Cash at Bank 10,000
(b) Dr Cash at Bank 60,000 Electricity payable 5,000
Cr Accounts Receivable 60,000 Share capital 10,000
Sales Revenue 80,000
(c) Dr Wages Expense 50,000 Wages expenses 50,000
Dr Other Expenses 10,000 Electricity expenses 5,000
Cr Cash at Bank 60,000 Other expenses 10,000
95,000 95,000
(d) Dr Electricity Expenses 5,000
Cr Electricity Payable 5,000 4 Preparing closing entries
$ $
2 Posting to the ledger accounts Dr Sales Revenue 80,000
Cr Profit and loss summary 80,000
Cash at Bank
Dr Profit and loss summary 65,000
Opening balance 10,000 (c) Wages Expense 50,000
Cr Wages expenses 50,000
(b) Accounts Receivable 60,000 (c) Other Expenses 10,000 Electricity expense 10,000
Balance c/d 10,000 Other expense 5,000
70,000 70,000
Balance b/d 10,000 Dr Profit and loss summary 15,000
CR Retained profits 15,000
Accounts receivable
5
(a) Sales Revenue 80,000 (b) Cash at Bank 60,000 RST Ltd
Balance c/d 20,000 Income Statement
80,000 80,000 for the year ended ##/##/##
Balance b/d 20,000 $ $
Operating expenses
Sales Revenue Wages expenses 50,000
(a) Accounts Receivable 80,000 Electricity expenses 10,000
Other expenses 5,000 65,000
Wages Expense Net Profit 15,000
(c) Cash at Bank 50,000 RST Ltd
Balance Sheet
as at ##/##/## $
Other Expenses
Assets
(c) Cash at Bank 10,000 Cash at Bank 10,000
Accounts Receivable 20,000
Electricity Expenses Total assets 30,000
(d) Accounts Payable 5,000
Liabilities
Electricity Payable 5,000
Electricity payable
(d) Electricity Expense 5,000 Shareholders’ Equity
Share Capital 10,000
Share capital Retained Profits 15,000
3 4
Total Liabilities and Shareholders’ Equity 30,000 Problem 4.17

Problem 4.9 ( 1) Closing journal entries:
1 Dr Sales Revenue 320,000

General journal Cr Profit and loss summary 320,000
Cleaner Pools Ltd
Date Description Posting Debits Credits Dr Profit and loss summary 255,000
2011 reference $ $ Cr COGS 190,000
July 1 Rent expense 52 800 Cr Depreciation expense 2,000
Prepayments 04 1,600 Cr Rent expense 10,000
Cash at Bank 01 2,400 Cr Salaries expense 37,000
July 5 Accounts receivable 02 1,400 Cr Insurance expense 5,000
Consulting revenue 41 1,400 Cr Telephone expense 5,000
July 6 Cash at Bank 01 100 Cr Electricity expense 6,000
Repairs revenue 42 100
July 8 Furniture and fittings 11 2,400 Dr Profit and loss summary 65,000
Other payables 22 2,100 Cr Retained profits 65,000
Cash at Bank 01 300
July 11 Cash at Bank 01 2,700
Sales Revenue 40 2,700
Cost of goods sold 50 1,600 Problem 4.18
Inventory 03 1,600
July 13 Accounts payable 20 3,500 1
Cash at Bank 01 3,500 Morilla Ltd
July 15 Cash at Bank 01 4,000 General journal
Accounts receivable 02 4,000 $ $
July 16 Furniture and fittings 11 3,000 1 Dr Inventory 8,250
Cash at Bank 01 3,000 Cr Accounts Payable 8,250
July 18 Advertising expense 56 400
Other payables 22 400 2 Dr Accounts Receivable 11,000
July 19 Photocopier rental expense 57 400 Cr Sales Revenue 11,000
Cash at Bank 01 400 Dr COGS 7,700
July 23 Motor vehicle expenses 53 50 Cr Inventory 7,700
Cash at Bank 01 50
July 24 Stationery expense 54 100 3 Dr Cash at Bank 19,000
Cash at Bank 01 100 Cr Accounts Receivable 19,000
July 28 Other payables 22 400
Cash at Bank 01 400 4 Dr Accounts Payable 11,000
July 29 Salaries expense 51 2,200 Cr Cash at Bank 11,000
Cash at Bank 01 2,000
Other payables 22 200 5 Dr Misc. Expenses* 1,500
July 29 Cash at Bank 01 1,400 Cr Cash at Bank 1,500
Accounts receivable 02 1,400
July 31 Depreciation expense – Furniture and fittings 55 100 6 Dr Salaries Expense 2,600
Accum. depreciation – Furniture & fittings 12 100 Cr Cash at Bank 2,600
7 Dr Depreciation Expense 200

Cr Accumulated Depreciation 200
8 Dr Long-term loan 800

Cr Cash at Bank 800
* Ideally, each separate expense should have a ledger account, however this question does not provide sufficient information
to record separate amounts to electricity expense, petrol expense and telephone expense
5 6
2 Posting to the ledger accounts Sales Revenue

Cash at Bank
1/2/12 Opening balance 21,000 Accounts payable 11,000

Accounts receivable 19,000 Misc. expenses 1,500
COGS
Salaries expense 2,600
Long-term loan 800 Inventory 7,700
28/2/12 Bal c/d 24,100 Misc. expenses
40,000 40,000
Cash at Bank 1,500
28/2/12 Bal b/d 24,100
Salaries expense
Accounts receivable Cash at Bank 2,600
1/2/12 Opening balance 25,000 Cash at Bank 19,000
Sales Revenue 11,000 28/2/12 Bal c/d 17,000 Depreciation expense
40,000 40,000 Accumulated depreciation 200
3
28/2/12 Bal b/d 17,000 Morilla Ltd
Trial balance
Inventory as at 28 February 2012
$ $
1/2/12 Opening balance 36,000 COGS 7,700 Cash at Bank 24,100
Accounts payable 8,250 28/2/12 Bal c/d 36,550 Accounts receivable 17,000
44,250 44,250 Inventory 36,550
Equipment 24,000
28/2/12 Bal b/d 36,550
Accumulated depreciation 3,200
Equipment Accounts payable 10,250
1/2/12 Opening balance 24,000 Long-term loan 48,200
Accumulated depreciation
1/2/12 Opening balance 3,000 COGS 7,700
Depreciation expense 200 Misc. expenses 1,500
28/2/12 Bal b/d 3,200 Salaries expense 2,600
Depreciation expense 200
Accounts payable
113,650 113,650
Cash at Bank 11,000 1/2/12 Opening balance 13,000 4 Preparing closing entries
28/2/12 Bal c/d 10,250 Inventory 8,250 $ $
21,250 21,250 Dr Sales Revenue 11,000
Cr Profit and loss summary 11,000
28/2/12 Bal b/d 10,250
Long-term loan Dr Profit and loss summary 12,000
Cash at Bank 800 1/2/12 Opening balance 49,000 COGS 7,700
28/2/12 Bal c/d 48,200 Misc. expenses 1,500
49,000 49,000 Salaries expense 2,600
Depreciation expense 200
28/2/12 Bal b/d 48,200
Dr Retained profits 1,000
Share capital CR Profit and loss summary 1,000
1/2/12 Opening balance 30,000
Retained profits
1/2/12 Opening balance 11,000
7 8
Problem 4.18 ( continued) Optional Questions

5
Discussion Question
Morilla Ltd
Income Statement
for the month ended 28 February 2012 15. Given the equality of debits and credits in a trial balance, the following errors may
$ $ still remain in a set of accounting records:
Sales Revenue i an inaccuracy in the amount of the initial recording;
Cost of goods sold 11,000 ii a case of incorrect analysis of transaction;
Gross profit 7,700 iii posting the correct amount to the wrong ledger account;
Operating expenses 3,300 iv failure to post both the debit and credit sides of one or more entries;
Salaries expense 2,600 v a compensating error, i.e., where a mistake in one transaction is exactly offset by a
Misc. expenses 1,500 second error in another transaction in such a way that equality of debits and credits
Depreciation expense 200 4,300 in the system as a whole is maintained; and
Net loss (1,000) vi recording a fictitious transaction.
These errors should be guarded against by supervision or systematic checking, e.g.
i checking journal entries and ledger posting;
Opening retained profits 11,000 ii perusing items in the trial balance;
Minus Loss (1,000) iii comparing amounts in the current trial balance with the figures in the trial balance
Closing retained profits 10,000 for the previous period; and
iv checking that all entries are based on authorised source documents. It is essential that
an accurate source document be prepared for every transaction because the source
Morilla Ltd
Balance Sheet
documents provide the input into the accounting system. Failure to prepare a
as at 28 February 2012 source document for a transaction or preparation of an inaccurate document results
$ in introducing errors into the system, which in turn, will lead to incorrect output
Assets from the system, i.e. the financial statements.
Current assets In addition, source documents furnish evidence of transactions and in the absence of
Cash at Bank 24,100 an accurate source document a business would be at a disadvantage in establishing
Accounts receivable 17,000 what has occurred for auditors or in the event of disagreement with an outside party
Inventory 36,550 such as a debtor.
Noncurrent assets
Equipment 24.000
Accumulated depreciation (3,200) 20,800
Total noncurrent assets 20,000
Total assets 98,450
Liabilities and shareholders’ equity

Current liabilities
Noncurrent liabilities
Long-term loan 48,200
Total shareholders equity 40,000
9 10
Problem 4.9 ( 2-4) Retained profits 31

July 1 Opening Balance 2,000
2 Ledger
Cash at Bank 01 Sales Revenue 40
July 1 Opening Balance 3,000 July 1 Rent expense 800 July 11 Cash at Bank 2,700
6 Repairs revenue 100 Prepayments 1,600
11 Sales Revenue 2,700 8 Furniture and fittings 300 Consulting revenue 41
15 Accounts receivable 4,000 13 Accounts payable 3,500 July 5 Accounts receivable 1,400
29 Accounts receivable 1,400 16 Furniture and fittings 3,000
19 Photocopier rental exp. 400 Repairs revenue 42
23 Motor vehicle expenses 50 July 6 Cash at Bank 100
24 Stationery expense 100
28 Accounts payable 400 Cost of goods sold 50
29 Salaries expense 2,000
July 11 Inventory 1,600
31 Bal c/d 950
12,150 12,150 Salaries expense 51
21 Bal b/d 950 July 29 Cash at Bank 2,000
Accounts receivable 02 Other payables 200
July 1 Opening Balance 4,000 July 15 Cash at Bank 4,000 31 Bal 2,200
5 Consulting revenue 1,400 29 Cash at Bank 1,400 Rent expense 52
31 Bal c/d 0
July 1 Cash at Bank 800
5,400 5,400
31 Bal c/d 0 Motor vehicle expense 53
Inventory 03 July 23 Cash at Bank 50
July 1 Opening Balance 4,500 July 11 Cost of goods sold 1,600 Stationery expense 54
31 Bal c/d 2,900 July 24 Cash at Bank 100
4,500 4,500
31 Bal b/d 2,900 Depreciation expense – Furniture and fittings 55
July 31 Accumulated depreciation 100
Prepayments 04
July 1 Cash at Bank 1,600 Advertising expense 56
July 18 Accounts payable 400
Furniture and fittings 11
Photocopier rental expense 57
July 8 Accounts payable 2,100
July 19 Cash at Bank 400
8 Cash at Bank 300
16 Cash at Bank 3,000
31 5,400
Accumulated depreciation – Furniture and fittings 12
July 31 Depreciation expense 100
Accounts payable 20
July 1 Cash at Bank 3,500
Other payables 22
July 28 Cash at Bank 400 July 8 Furniture and fittings 2,100
18 Advertising expense 400
31 Bal c/d 2,300 29 Salaries expense 200
2,700 2,700
31 Bal b/d 2,300
Share capital 30
July 1 Opening Balance 6,000
11 12
3 Problem 4.9
Cleaner Pools Ltd
Trial balance
as at 31 July 2016 Cleaner Pools Ltd.
Balance sheet
No. Account Debit Credit
as at 31 July 2016
$ $
$ $
01 Cash at Bank 950
Current assets
03 Inventory 2,900
Inventory 2,900
04 Prepayments 1,600
Prepayments 1,600
11 Furniture and fittings 5,400
4,500
12 Accumulated depreciation – furniture and fittings 100
20 Accounts payable 0 Noncurrent assets
Furniture and fittings 5,400
22 Other payables 2,300
Less accumulated depreciation 100 5,300
30 Share capital 6,000
Total Assets 9,800
31 Retained profits 2,000
40 Sales Revenue 2,700
Current liabilities
41 Consulting revenue 1,400
Bank overdraft 950
42 Repairs revenue 100
50 Cost of goods sold 1,600
Other payables 200
51 Salaries expense 2,200
Total Liabilities 3,250
52 Rent expense 800
53 Motor vehicle expense 50
54 Stationery expense 100 Shareholders’ equity
Share capital 6,000
55 Depreciation expense – furniture and fittings 100
Retained profits 550
56 Advertising expense 400
Total Shareholders’ equity 6,550
57 Photocopier rental expense 400
Total Liabilities & SE 9,800
15,550 15,550
4
Cleaner Pools Ltd.
Income Statement
for the month ended 31 July 2016
$ $
Sales revenue 2,700
Less cost of goods sold 1,600
Gross profit 1,100
Consulting revenue 1,400
Repairs revenue 100
2,600
Less operating expenses
Salaries expense 2,200
Rent expense 800
Motor vehicle expense 50
Stationery expense 100
Depreciation expense – furniture and fittings 100
Advertising expense 400
Photocopier rental expense 400 4,050
Net loss (1,450)
13 14
Problem 4.10 Problem 4.10 (continued)

1
2 Ledger of Carlson Ltd
General journal
Share capital A/c 1
Dr Cr
Date Particulars 2016
$ $
April 1 Cash at Bank at Bank 150,000
2016
Profit and loss summary A/c 9
Opening capital received from Carlson
2 Delivery truck 80,000
Loan from Finance Co. 80,000
Truck bought from Finance Co. to become
long-term loan
4 Inventories 200,000 Accounts Payable A/c 10
Accounts Payable 200,000
2016 2016
Goods bought on credit for resale
April 29 Cash at Bank at Bank G 100,000 April 4 Inventories 200,000
7 Delivery truck expenses 4,800
30 Bal c/d 100,000 ______
Cash at Bank at Bank 4,800 200,000 200,000
Paid delivery truck expenses April 30 Bal b/d 100,000
10 Cash at Bank at Bank 50,000
Sales 50,000 Loan from Finance Co. A/c 15
2016
Inventories 30,000
April 2 Delivery truck 80,000
Sales made for Cash at Bank
15 Accounts Receivable 120,000
Sales 120,000 Sales A/c 20
2016
Inventories 70,000
Sales made to credit customers 15 A/c Rec. 120,000
25 Salary – Shop assistants 8,000 170,000
Cash at Bank at Bank 8,000
Paid shop assistant’s salary for month Cash at Bank A/c 30
27 Office expenses 26,000 2016 2016
Cash at Bank at Bank 26,000 April 1 Share capital 150,000 April 7 Delivery truck exp 4,800
Paid office expenses 10 Sales 50,000 25 Salary – Shop assistant 8,000
29 Cash at Bank at Bank 90,000 29 A/c Rec. 90,000 27 Office expenses 26,000
Accounts Receivable 90,000 29 A/c Pay 100,000
Cash at Bank receipts from credit customers 29 Interest expense 800
29 Accounts Payable 100,000 ______ 30 Bal c/d 150,400
Cash at Bank at Bank 100,000 290,000 290,000
Paid sundry creditors April 30 Bal b/d 150,400
29 Interest expense 800
Cash at Bank at Bank 800 Accounts Receivable A/c 31
Paid interest on loan from finance company 2016 2016
April 15 Sales Revenue 120,000 April 29 Cash at Bank at Bank 90,000
The textbook uses the following terms: ______ 30 Bal c/d 30,000
Sundry creditors = Accounts Payable 120,000 120,000
Sundry debtors = Accounts Receivable April 30 Ba;l b/d 30,000
For consistency with terminology in ACCT5001, we have changed the name of
the ledger accounts
15 16
3
Inventories A/c 32 Carison Ltd
2016 2016 Trial Balance
April 4 A/c Pay 200,000 April 10 Cost of goods sold 30,000 as at 30 April 2016
15 Cost of goods sold 70,000 Dr Cr
______ 30 Bal c/d 100,000 1 Share capital 150,000
200,000 200,000 9 Profit and loss summary
April 30 Bal b/d 100,000 10 Accounts payable 100,000
15 Loan from Finance Co. 80,000
Delivery truck A/c 35 20 Sales Revenue 170,000
2016 30 Cash at Bank at Bank 150,400
April 2 Loan from Finance Co. 80,000 31 Accounts receivable 30,000
32 Inventories 100,000
Cost of goods sold A/c 40 35 Delivery truck 80,000
2016 40 Cost of goods sold 100,000
April 10 Inventories 30,000 42 Salary – Shop assistants 8,000
15 Inventories 70,000 45 Delivery truck expenses 4,800
100,000 47 Office expenses 26,000
49 Interest expense 800
Salary – Shop assistants A/c 42 500,000 500,000
2016 4 Closing entries
April 25 Cash at Bank at Bank 8,000 General journal
Dr Cr
Date Particulars
$ $
Delivery truck expenses A/c 45 2016
2016 April 30 Sales Revenue 170,000
April 7 Cash at Bank at Bank 4,800 Profit and loss summary 170,000
Transfer of closing balance
Profit and loss summary 139,600
Office expenses A/c 47 Cost of goods sold 100,000
2016 Salary – Shop assistants 8,000
April 27 Cash at Bank at Bank 26,000 Depreciation on delivery truck 4,800
Delivery truck expenses 26,000
Office expenses 800
Interest expense A/c 49 Interest expense
2016 Transfer of closing balances
April 29 Cash at Bank at Bank 800 Profit and loss summary 30,400
Transfer of net profit for April 2012
5
Carlson Ltd
Income Statement
for month ended 30 April 2016
$ $
Less: Cost of goods sold 100,000
Gross profit 70,000
Less: Operating expenses
Salary – Shop assistants 8,000
Delivery truck expenses 4,800
Office expenses 26,000
Interest expense 800 39,600
Net profit 30,400
17 18
Problem 4.10 Accounts Receivable A/c 31

2016 2016
(6) Complete Ledger from step (2) of Carlson Ltd April 15 Sales Revenue 120,000 April 29 Cash at Bank 90,000
30 Closing
Share capital A/c 1 Balance 30,000
2016 120,000 120,000
April 1 Cash at Bank 150,000 April 30 Opening Balance 30,000
Inventories A/c 32
2016 2016
Retained profits A/c 2 April 4 A/c Pay April 10 Cost of
30,000
2016 200,000 goods sold
April 30 Profit and loss 30,400 15 Cost of
goods sold 70,000
30 Closing
Balance 100,000
Profit and loss summary A/c 9 200,000 200,000
2016 2016 April 30 Opening Balance 100,000
April 30 Sundry expenses 139,600 April 30 Sales 170,000
170,000 170,000 Delivery truck A/c 35
2016
April 2 Loan 80,000 April 30 Closing bal. 80,000
Accounts Payable A/c 10 80,000 80,000
2016 2016 April 30 Opening bal. 80,000
April 29 Cash at Bank 100,000 April 4 Inventories 200,000
30 Bal c/d 100,000
200,000 200,000 Cost of goods sold A/c 40
April 30 Bal b/d 100,000 2016 2016
April 10 Inventories 30,000 April 30 Profit and loss 100,000
Loan from Finance Co. A/c 15 15 Inventories 70,000
2016 100,000 100,000
April 2 Delivery truck 80,000
Sales Revenue A/c 20 Salary – Shop assistants A/c 42

2016 2016 2016 2016
April 30 Profit and loss 170,000 April 10 Cash at Bank 50,000 April 25 Cash at Bank 8,000 April 30 Profit and loss 8,000
15 A/c Rec 120,000 8,000 8,000
170,000 170,000
Cash at Bank A/c 30 Delivery truck expenses A/c 45

2016 2016 2016 2016
April 1 Share Capital 150,000 April 7 Delivery truck Exp 4,800 April 7 Cash at Bank at Bank 4,800 April 30 Profit and loss 4,800
10 Sales 50,000 25 Salary – Shop as. 8,000
29 A/c Rec 90,000 27 Office expenses 26,000 Office expenses A/c 47
29 A/c Pay 100,000 2016 2016
Interest expenses 800 April 27 Cash at Bank 26,000 April 30 Profit and loss 26,000
30 Bal c/d 150,400
290,000 290,000
April 30 Bal b/d 150,400 Interest expense A/c 49
2016 2016
April 29 Cash at Bank 800 April 30 Profit and loss 800
800 800
19 20
6
Post-closing entry trial balance
as at 30 April 2016
$ $
1 Share capital 150,000
2 Retained profits 30,400
10 Accounts payable 100,000
15 Loan from Finance Co. 80,000
30 Cash at Bank at Bank 150,400
31 Accounts receivable 30,000
32 Inventories 100,000
35 Delivery truck 80,000
360,400 360,400
Carlson Ltd
Balance sheet
as at 30 April 2016
Assets $
Current assets
Cash at Bank at Bank 150,400
Inventories 100,000
280,400
Non-current assets
Delivery truck 80,000
360,400
Liabilities
Current liabilities
Long-term liabilities
Loan 80,000
180,000
180,400
21
Problems
Chapter 5 Problem 5.1
Accrual accounting adjustments 1 Operating receipts (9100 – 1600) 7 500
Operating expenditures (2 200 + 3 500 + 1 300 + 900) 7 900
Discussion questions Cash profit for this year (400)
2 Revenue 9 100
5 In a cash accounting system an occurrence is recognised as a transaction only if it involves
less COGS (3500‐1200) (2 300)
an immediate cash inflow or outflow. In a system employing accrual accounting the basis of
6 800
recognition is extended to include a variety of non-cash transactions. These usually involve
credit extended to or by the entity. Expenses:
Rent 1 100
Cash flows are easy to recognise but do not provide a satisfactory measure of the
Wages 1 300
performance of most enterprises. Accrual accounting employs wider criteria to decide
whether revenue has been realised or expense has been incurred within the accounting Administrative costs 900
period. This provides more information results, which are more useful to those using Advertising 1 100
accounting reports. As tests other than cash flows are less easy to define precisely, some Utilities 385 4 785
certainty and objectivity is lost. Operating profit 2 015
Problem 5.7
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 Revenues Expenses Assets Liabilities
that period and to determine the expenses associated with generating the period’s revenue. 1 NE NE + 400 000 NE
The difference between the revenue and expense for the period then represents the profit or 2 NE NE + 70 000 +70 000
loss for the period. Thus the adjustments augment the cash-based figures to implement 3 + 190 000 + 60 000 + 130 000 NE
4 NE NE NE NE
accrual accounting.
5 NE NE - 40 000 NE
6 NE NE - 32 000 -32 000
9 Expiration of assets: Prepaid expenses are assets that arise because an expenditure has been 7 NE + 100 000 - 90 000 +10 000
made, but there is still value extending into the future. If they have been treated as assets at 8 NE NE + 70 000 +70 000
the time of expenditure, an adjustment is necessary at balance date to reduce the amount of 9 NE + 15 000 NE +15 000
the asset and to treat the expired portion of the asset as an expense, reducing profit for the 10 NE + 3 200 + 800 +4 000
period. 11 NE + 18 000 - 18 000 NE
• Unearned revenues: These are future revenues where cash has been received in
advance of earning revenue. They are treated as liabilities at the time of receipt. At
balance date any revenue earned must be recognised (i.e. increase profits) and the
liability reduced.
• Accrued expenses/Other payables: These are expenses which have been incurred
during the current period but will not be paid until the following period. At balance
date expenses must be increased reducing profit and a liability recorded in the balance
sheet.
• Accrued revenue/Other receivables: This arises when a service has been provided but
cash will not be received until the following period. At period end an adjustment must
be made increasing an asset as well as revenue.
Problem 5.8
1 (Insurance) expense causes SE to Asset decreases (prepaid insurance)
decrease)
b Asset increases (dividend receivable) Dividend Revenue causes SE to increase)
Problem 5.20
c Commission Expenses causes SE to Liabilities increase (commission payable)
decrease Computations
d Sales Revenue to be corrected and Liabilities increase (customer $ $
decrease which will cause SE to deposits/unearned revenue) 1 Accounts receivable 2,700 Given
decrease (+A)
e Assets increase (supplies) Office supplies expenses decrease causes ...........................................................................
SE to increase Service revenue (+R, 2,700
+SE)
...........................................................................
2
a DR Insurance expense $4 000 2 Advertising expense (+E, 900 $1,200 x 9/12 =
CR Prepaid insurance $4 000 SE)
b DR Dividend receivable$5 000 ...........................................................................
CR Dividend revenue $5 000 Prepaid advertising 900 $900 used
c DR Commission expense $5 760 (A)
CR Commission payable $5 760 ...........................................................................
d DR Sales $570
CR Unearned revenue $570 3 Interest expense (+E, 5,000 $250,000 x .12
e DR Supplies $490 SE)
CR Office supplies expense $490 ...........................................................................
Interest payable 5,000 x 2/12 (since last
(+L) payment) = $5,000
Problem 5.12 ........................................................................... incurred
1 a DR Wages expense $92,000 4 Unearned storage revenue 264.71 $4,500 x 1/17 =

CR Wages payable $92,000 (L)
b Net profit will be overstated. Liabilities will be understated. ...........................................................................
c DR Wages payable $92,000 Storage revenue (+R, 264.71 $264.71 earned*
DR Wages expense $23,000 +SE)
...........................................................................
CR Cash $115,000
2 a DR Interest expense $6,000 5 Depreciation expense (+E, 22,000 Given
CR Interest payable $6,000 SE)
b Net profit will be overstated. Liabilities will be understated. ...........................................................................
c DR Interest expense $6,000 Accumulated depreciation (+XA, A) 22,000
DR Interest payable $6,000
CR Cash $12,000 6 Supplies expense (+E, 50,100 $16,500 +
SE)
...........................................................................
Supplies 50,100 $46,000 – $12,400
(A)
...........................................................................
= $50,100 used
7 Wages expense (+E, 3,800 Given

SE)
...........................................................................
Wages payable 3,800

(+L)
...........................................................................
Problem 5.21
$ $
1 a Accounts receivable 295 000
Prepaid expenses 20 000
Inventory 200 000
Cash 60 000
Accrued revenue 20 000
Total current assets 595 000

b Accounts payable 120 000
Income tax payable 40 000
Revenue received in advance 10 000
Accrued wages 25 000
Total current liabilities 195 000

c Property, plant and equipment 1 000 000
Less: Accumulated depreciation 400 000
Total noncurrent assets 600 000
Problem 5.23

d Sales 800 000 1 Depreciation expense ........................................................ 3,000
Less: Cost of goods sold 500 000 Accumulated depreciation .................................... 3,000
Depreciation expense 20 000
Other operating expenses 150 000 2 Insurance expense ........................................................... 450
Income tax expense 80 000 750 000 Prepaid insurance ................................................. 450
Net profit after tax 50 000
3 Wages expense ................................................................. 2,100

Wages payable ....................................................... 2,100
Add: Opening balance of retained profit 150 000
Closing balance of retained profit 200 000 4 Supplies expense ............................................................. 500
Supplies .................................................................. 500
2 Balance accumulated depreciation
31 December 2016 400 000 5 Income tax expense ......................................................... 3,150
Less: Depreciation expense 2016 20 000 Income tax payable .............................................. 3,150
Balance 31 December 2015 380 000
2. SRP LTD *$10,300 + $5,900 = $16,200.

Income Statement
for the Year Ended 31 December 2016
Operating Revenue:
Sales revenue $48,000 3
Less COGS 32,900
Gross Profit 15,100 Service revenue ............................................................................. 48,000
Operating Expenses: P & L Summary ...................................................... 48,000
Depreciation expense 3,000
P&L Summary ............................................................................... 42,100
Insurance expense 450 COGS .................................................................... 32,900
Wages expense 2,100 Depreciation expense ............................................. 3,000
Supplies expense ($1,300 – $800) 500 Insurance expense ................................................ 450
Total expenses 6,050 Wages expense .................................................... 2,100
Net profit before tax 9,050 Supplies expense ................................................... 500
Income tax expense 3,150 Income tax expense ............................................... 3,150
Net profit after tax $5,900
This question states the revenue is service revenue, however it includes COGS, we have assumed this P&L Summary ............................................................................... 5,900
is a mistake in the textbook and the revenue would be sales revenue. P & L Summary ...................................................... 5,900
SRP Ltd
Balance Sheet
as at 31 December 2016
Assets
Current Assets
Cash $19,600
Supplies 800
Prepaid insurance 450
Non-current Assets
Equipment 27,000
Accumulated depreciation (15,000) 12,000
Other assets (not detailed) 5,100
Total assets $44,950
Liabilities
Current Liabilities:
Accounts payable $7,500
Wages payable 2,100
Income tax payable 3,150
Shareholders' Equity
Retained earnings* 16,200
Total shareholders' equity 32,200
Total liabilities and
shareholders' equity $44,950
Scanlon Ltd Worksheet

Problem 5.24
Adjusted
Scanlon Ltd Worksheet Trial Balance Adjustments Trial Balance Profit and Loss Balance Sheet
Adjusted
Acc.
Trial Balance Adjustments Trial Balance Profit and Loss Balance Sheet
No. Account Name Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
Acc. $8,702,000 $8,702,000 $188,680 $188,680 $8,740,680 $8,740,680 $3,757,000 $3,757,000
No. Account Name Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit NET PROFIT (LOSS) $1,921,320
A1 Cash 1,430,000 1,430,000 1,430,000
A2 Accounts receivable 892,000 892,000 892,000
A3 Interest receivable 0 5,000 5,000 5,000
A4 Inventory 300,000 300,000 300,000
A5 Prepaid insurance 100,000 30,000 70,000 70,000
A6 Prepaid rent 80,000 20,000 60,000 60,000
A7 Equipment 1,000,000 1,000,000 1,000,000
A7.1 Accumulated depreciation 200,000 10,000 210,000 210,000
A2.1 Allowance for doubtful debts 12,000 23,680 35,680 35,680
L1 Accounts payable 300,000 300,000 300,000
L2 Revenue received in advance 100,000 100,000 0 0
L3 Income tax payable 0 0 0 0
L4 Loan 570,000 570,000 570,000
OE1 Share capital 400,000 400,000 400,000
OE2 Retained profits 320,000 320,000 2,241,320
PL Profit and Loss summary
R1 Sales 6,800,000 6,800,000 6,800,000
R2 Service fee revenue 0 100,000 100,000 100,000
R3 Interest revenue 0 5,000 5,000 5,000
E1 Cost of goods sold 3,000,000 3,000,000 3,000,000
E2 Commission expense 600,000 600,000 600,000
E3 Insurance expense 0 30,000 30,000 30,000
E4 Depreciation expense 0 10,000 10,000 10,000
E5 Bad debts expense 0 23,680 23,680 23,680
E6 Rent expense 0 20,000 20,000 20,000
E7 Salaries expense 1,200,000 1,200,000 1,200,000
E8 Other expenses 100,000 100,000 100,000
Optional Questions Problem 5.22
Discussion Question:
13 Depreciation is the allocation of the cost of a noncurrent asset to expense over the life of the
asset to recognise the consumption of the asset’s economic value.
Accumulated depreciation is a ledger account that accumulates total depreciation
expense over a number of years. The account balance is deducted from the asset’s cost to
arrive at the asset’s carrying amount or book value (not not market value).
20 Timing is at the centre of accrual accounting because in accrual accounting an attempt is

made to recognise revenue earned in the current period and to recognise expenses required to
generate that revenue in the same period. Cash flow accounting depends only on the timing of
cash receipts and cash payments. Since revenue is not necessarily earned at the time cash is
received, nor expenses paid for in cash at the time they are matched to revenues, accrual profit
will be different in most periods from cash flow profit. Over the life of a business total accrual
profit will be equal to cash profit.
b Revenue is often recognised at a point different from the associated cash receipts. The revenue
recognition note will give you an indication of the timing of recognition when this differs from
the timing of cash receipt. Examples of some timing differences are:
• Revenue recognition at completion of production. Here revenue is recognised prior to sales to
customers because the earnings process is complete.
• When sales are granted on credit, revenue may be recognised at the point of sale which will be
prior to the receipt of cash.
• If there are major uncertainties related to collection of cash at point of sale, revenue recognition
may be deferred until cash is received.
• If cash is received before goods are provided or services are performed, revenue is recognised
after the cash is received, at the time when goods are provided or services are performed.
c Over time cash revenue will equal accrual revenue. Customers granted credit may default or fail
to make payments. Estimates are made in each period of the amount of possible defaults by
customers. Because these are estimates, the amounts may not be 100% correct in any one period.
However, over time estimated defaults by customers will equal actual defaults by customers.
d When expenses are matched to revenues the timing of payment of the expenses often differs
from the timing of recognition of expenses. This can affect the balance sheet in a number of
ways. Some examples are as follows:
• An interest obligation occurs over time, therefore prior to payment we recognise the expense
and record a liability.
• Assets are paid for at the time of purchase, prior to the use of the asset to provide a benefit. We
match the cost of the asset to the benefit generated by the use of the asset over time. Thus an
expense is recognised in the appropriate period and the net value of the asset is reduced on the
balance sheet.
• We often pay for services prior to using those services. An example is rent paid in advance. This
is recorded as an asset on the balance sheet until such a time as we obtain the benefit of the rented
premises.
• We often must make estimates of future obligations such as warranties. To the extent that the cost
of the warranty is associated with the generation of current period revenues we recognise the
estimated cost of the warranty as an expense of the current period and increase our liabilities by
recording a liability for warranties. We will not pay for the costs associated with the warranty until a
future period.

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ACCT5001 - Week 1 - Self Study Question Solutions.

(Reproduced from Trotman Solution Manual, Cengage Learning)

1 Liabilities = Assets – Owners’ equity

Sparkle Industries opening balance of assets = $72 000 ÷ 3 = $24 000

Net assets 600,000

This balance sheet presents A – L = E.

Total liabilities & shareholders’ equity 800,000

2 $200,000 – $120,000 = $80,000

1 The concept/principle related to this is reliability. Some effects on financial

2 Three concepts/principles related to this are conservatism, reliability and matching.

3 Three concepts/principles related to this are conformance with GAAP, consistency

4 Three concepts/principles related to this are disclosure, decision relevance and

Employee lawsuit and chief accountant

What should the chief accountant do?

Why does the general manager deny any impropriety?

External auditor and possible cheating

The general manager’s bonus

5 Accounting equation in dollar figures at 29 June 2014

6 Net profit before tax = 3 515.1 m

7 Net profit after tax = 2 458.4 m

8 Largest cash inflow = Receipts from customers = 65 851.8 m

2 Assets = $5 222 + $2 410 = $7 632.

Retained profits, 31 December 2016 62 150

Current assets $ Current liabilities $

2 Increase 30 000 Increase no effect no effect

4 Increase 80 000 Increase 80 000 no effect no effect

5 Decrease 100 000 N/E Decease 100 000 Decrease 100,000

Asset Amount ($) Assumptions

As the installation was necessary to the operation of

Revenue for the year

3 The 2014 balance sheet of Woolworths Limited balances as follows:

4 The assets of 24 205.2m were financed by current liabilities 7 558.2m, noncurrent

4 • Expenses decrease profit. A decrease in profit results in a decrease in retained profits,

Accounts Payable 5,000

* 90,000 – 62,900 = 27,100

Problem 3.2 (continued)

3 DR Rent Expense 4,000

5 DR Advertising Expense 1,000

6 DR Accounts Receivable 90,000

DR Cost of goods sold 40,000

7 DR Accounts Payable 25,000

9 DR Wages Expense 15,000

10 DR Sales commission expense 900

11 DR Office Equipment 6,000

12 DR Wages Expense 2,000

Problem 3.2 (continued)

3 As for 1 & 2 Shareholders’ equity = 350,000

Closing retained profits – Opening retained profits = Net profit

Problem 3.5 (continued)

Liabilities and equity

Problem 3.17 (continued)

Problem 3.8 continued)

Current Assets Noncurrent Assets Current Liabilities Noncurrent Liabilities Equity

3 Collection from customers

5 Payments of accounts payable

6 Cost of goods sold

9 Income tax payable

10 Cash dividends declared, and paid