Accounting Business Reporting for Decision Making

250 Accounting: Business Reporting for Decision Making

Self-evaluation activities

6.1 S. Cloth operates a retail clothing store. In preparing the financial reports, his accountant has made

the following adjustments:

1. Reduced prepaid advertising by $3000.


2. Increased accumulated depreciation by $2400.


3. Reduced income received in advance by $4350.


4. Increased wages expense by $240.

Required

Given double entry accounting, for each of the adjustments explain the corresponding entry and the

rationale for the decision to make the adjustment.

SOLUTION TO 6.1

1. Reduced prepaid advertising by $3000. The corresponding entry for this adjustment is an increase
   in advertising expense by $3000. The adjustment recognises that some of the future economic
   benefits of advertising paid in advance, and therefore recorded as an asset, have been used up
   during the period. The adjustment reduces the asset account (Prepaid advertising) and increases
   the expense account (Advertising expense).


2. Increased accumulated depreciation by $2400. The corresponding entry for this adjustment is an
   increase in depreciation expense. Depreciation is the systematic allocation of the cost of an asset
   over its useful life. The depreciation expense recognises that some of the asset’s future economic
   benefits have been used up in the reporting period.


3. Reduced income received in advance by $4350. The corresponding entry for this adjustment is an
   increase in income. Income received in advance is a liability as it represents cash that has been
   received for services yet to be provided. If this liability account has been reduced, it is due to
   some of the income having been earned.


4. Increased wages payable by $240. The corresponding entry for this adjustment is an increase in
   wages expense. At the end of the reporting period, some wages have been incurred but have not
   been paid. The adjustment recognises the wages expense incurred in the period (increasing wages
   expense) but not yet paid (increasing a liability account — wages payable).

6.2 Coconut Plantations Pty Ltd is a manufacturer of coconut-based products that commenced

operations in August 2016. Refer back to chapter 3 for information relating to this private company

and its financial statements for the four months to 31 December 2016. Assume now that Coconut

Plantations Pty Ltd has been trading for a further year to 31 December 2017 and has the following

balances in various accounts. There have been no additional shares issued. Prepare a statement of

profit or loss and statement of changes in equity for Coconut Plantations Pty Ltd for the year ended

31 December 2017, classifying operating expenses by function. Also prepare a statement of changes

in equity for the year ended 31 December 2017.

Cash at bank

Receivables

Inventory (finished goods, raw materials)

Property, plant and equipment (net)

Accounts payable

Loan

Income tax payable

Sales revenue

Cost of sales

Interest income

Administration salaries

$ 37 200

93 010

175 000

334 500

42 500

131 000

98 400

1 550 000

902 500

1 000

95 000

Telephone expense

Advertising expense

Warehouse insurance expense

Warehouse rates expense

Utilities expense

Depreciation of warehouse

Sales salaries

Interest expense

Delivery costs and postage

Dividend

Income tax

5 000

59 000

15 000

21 000

9 500

12 000

72 000

14 000

18 000

130 000

98 400