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ACCT10002 Tutorial 3 in-class Exercises_Solutions

The document provides suggested solutions for in-class exercises related to accounting principles, including materiality, expense recognition, and the going concern concept. It outlines the requirements for preparing financial statements, adjusting entries, and specific calculations for various accounts such as supplies, insurance, and salaries. Additionally, it emphasizes the importance of recognizing revenue when earned rather than when received.

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3 views

ACCT10002 Tutorial 3 in-class Exercises_Solutions

The document provides suggested solutions for in-class exercises related to accounting principles, including materiality, expense recognition, and the going concern concept. It outlines the requirements for preparing financial statements, adjusting entries, and specific calculations for various accounts such as supplies, insurance, and salaries. Additionally, it emphasizes the importance of recognizing revenue when earned rather than when received.

Uploaded by

d2701home
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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ACCT10002: Tutorial 3 In-class Exercises SUGGESTED SOLUTIONS

1. (E 3.4)

(a) 9. Materiality.
(b) 7. Expense recognition criteria.
(c) 3. Monetary principle.
(d) 4. Accounting period concept.
(e) 8. Cost principle.
(f) 1. Accounting entity concept.
(g) 5. Full disclosure principle.
(h) 6. Revenue recognition criteria.

2. AASB101 Para 25

When preparing financial statements, management shall make an assessment of an entity’s


ability to continue as a going concern. An entity shall prepare financial statements on a going
concern basis unless management either intends to liquidate the entity or to cease trading, or
has no realistic alternative but to do so. When management is aware, in making its
assessment, of material uncertainties related to events or conditions that may cast significant
doubt upon the entity’s ability to continue as a going concern, the entity shall disclose those
uncertainties. When an entity does not prepare financial statements on a going concern basis,
it shall disclose that fact, together with the basis on which it prepared the financial statements
and the reason why the entity is not regarded as a going concern.

3. (Question 3.1.)
(a) Under the accounting period concept, an accountant is required to determine the
impact of each accounting transaction or event in specific accounting periods.

The revenue recognition criteria states that revenues should be recognised in the time
period in which it is probable that any future economic benefits associated with the
revenue will flow to the entity and the revenue can be reliably measured.

The expense recognition criteria states that expenses should be recognised when the
outflow of future economic benefits associated with the expense is probable and the
expense can be measured reliably.

Not all the revenue and expenses fall perfectly under one accounting period, and
that’s why adjusting entries are required to make sure the profit for a certain
accounting period is faithfully represented.

(b) An accounting time period of one year in length is referred to as a financial year.

4. (Question 3.7)

The two categories of adjusting entries are prepayments and accruals. Prepayments are either
revenues received in advance or prepayments of amounts that provide economic benefit for
more than one period, e.g. prepaid rent. Accruals consist of revenues and expenses earned or
incurred but which have not been recorded through daily recording of transactions.

5. (E 3.10)
Darcy Designs Pty Ltd

Answer Calculation/Account Reconstruction

(a) Supplies balance 1/7= $1 400 Supplies expense $1220


Add: Supplies (31/7) 1500
Less: Supplies purchased (1320)
Supplies (1/7) $1400

Supplies
1/7* Bal. 1400 Expense 1220
Purchases 1320 31/7 Bal. 1500
2720 2720

(b) Note: the monthly expense is


$800 for a 1 year insurance
policy.

Total premium = $9 600 Total premium =


Monthly premium x 12; $800 x 12 =$9 600

The task: Prepaid Insurance at 31 July Balance $2,400 plus insurance expense $800
beginning of month: Equals $3,200 at 1 July 2016

Amount of insurance already Cost at beginning $9,600 – prepaid $3,200 at 1 July 2016
expensed: = $6,400. Divide by 800 = 8 months already expired.
So, 8 months before July = 1 November, 2015.

Purchase date = 1 Nov 2015 Purchase date: On 31 July balance is $2400 so there is 3
months coverage remaining ($800 x 3). Thus, the purchase
date was 9 months earlier on 1 November 2015.

(c) Salaries payable = $1 700 Cash paid $7500


Salaries payable (31/7 ) 1500
$9000
Less: Salaries expense 7300
Salaries payable (1/7 or 30/6) $1700

Salaries Payable
Salaries 7500 1/7 Bal 1700
paid
31/7 Bal 1500 Salaries exp. 7300
9000 9000
(d) Service revenue = $1 725 Service revenue $3000
Amount received for July services 2400
Revenue received in Advance now recognised 600

Service Revenue Received in Advance


Services 600 1/7 Bal. 1725
Performed
31/7 Bal. 1125
1725 1725

6. (E 3.13)

Monkey Ltd
General Journal
Date Account name (narration) $ $
Debit Credit
2016
1. June 30 Insurance Expense 15 855
Prepaid Insurance 15 855

Calculations: (*See T accounts below)

$33300 ÷ 3 yrs = $11 100 per annum, 1.5 yrs remain


$9510 ÷ 2 yrs= 4 755 per annum, 1 year remains
$15 855
Prepayment of B4564 at 30/6/16 is $16 650
Prepayment of A2958 at 30/6/16 is 4 755
$ 21 405
Pre adjustment balance $ 37 260
Adjustment required to expense $ 15 855

2. 30 Subscription Revenue Received in Advance 18 850


Subscription Revenue 18 850
Calculations:
Apr 200 x $130 x 3/12 = $6 500
May 300 x $130 x 2/12 =6 500
Jun 540 x $130x 1/12 = 5 850
Subscriptions earned and to
be recognised as revenue $18 850

3. 30 Interest Expense 1 500


Interest Payable 1 500
Calculation:
$100,000 x 6% x 3/12 = $1 500

4. 30 Salaries Expense 3 300


Salaries Payable 3 300
Calculations:
4 x $1050 x 2/5 = $1 680
3 x $1350 x 2/5 = 1 620
$3 300

Item 1: expressed in terms of T accounts:

Prepaid Insurance B4564 112


1/1/15 Cash 33 300 30/6/15 Insurance Expense 5 550
Closing Balance 27,750
33 000 33 300
1/7/15 Opening Balance 27 750 30/6/16 Insurance expense 11 100
Closing Balance 16 650
27 750 27 750

Prepaid Insurance A2958 112


1/7/15 Cash 9 510 30/6/1 Insurance Expense 4 755
6
30/6/1 Closing Balance 4 755
6
9 510 9 510

Combined insurance expense for year ended 30 June 2016 is $11 100 + 4 755 = $15 855.
Note the starting date of the prepaid insurance for B4564.

(b) Subscriptions are usually paid in advance and for revenue to be recognised it needs to
meet the revenue recognition criteria. The revenue is recognised as the work is performed not
when the cash is received.

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