QUESTION TWO Selected accounts of Hans Ltd and their balances for the financial
ID: 2587064 • Letter: Q
Question
QUESTION TWO Selected accounts of Hans Ltd and their balances for the financial year ending 31December 2014 are provided below Debit $ Credit S 234,000 80,000 Sales Revenue Accounts Payable Accounts Receivable 75,000 Cost of goods sold 85,000 50,600 148,000 Salaries Payable Cash at Bank Share Capital (15,000 shares) Inventory Prepaid Insurance Revenue Received in Advance Rent expense Provision for long service leave Salaries expense 15,000 150,000 28,500 70,000 38,000 10,600 5,500 Additional information (not included in the figures above) a delivery truck on 1 December 2014 for $18,000, paying $8,000 cash and signing a 2-month note payable for the remaining balance. Interest rate on the i) The market value less costs to sell of the inventory on hand at 31 December 2014 is iv Hans Ltd took out a loan of $80,000 at an annual interest rate of 10% from Mercantile note is 12% per annum. The truck is expected to depreciate $3,000 each year $149,500 ii) Cost of insurance that has expired during the financial year amounted to $20,000. Bank on 31 December 2014. The loan is repayable over 5 years with $12,000 of the loan is payable within 12 months. No interest is accrued on 31 December 2014. REQUIRED (a) Using the additional information provided above for Hans Ltd, prepare the adjust journal entries f.e. balance day adjustments) at 31 December 2014. (Narrations are not required) (b) Prepare the fully classified 'Assets' and 'Liabilities' sections of the Statement of Financial Position of Hans Ltd as at 31December 2014. [4 + 8 = 12 marks]Explanation / Answer
Answer (a)
Hans Ltd.
Adjusting journal entries
S.no
Date
Account Name
Debit ($)
Credit ($)
i)
December 1 ,2014
Truck
18000
Cash
8,000
Notes Payable
10,000
Truck purchased through partial payment, notes payable generated
Adjusting entries
December 31 ,2014
Depreciation*
250
Truck
250
Depreciation charged on truck for 1 month (from 1 Dec. to 31 Dec)
December 31 ,2014
Interest Expense**
100
Interest payable or accrued
100
Interest of 1 month on notes payable accrued
ii)
December 31 ,2014
No entry required as inventory is to be recorded at “Market Value-$ 149,500” or “Cost value-$ 148,000” whichever is less. And inventory is already recorded at less value which is $ 148,000.
0
0
iii)
December 31 ,2014
Insurance expenses
20,000
Prepaid insurance
20,000
Cost of insurance expired during the year
iv)
December 31 ,2014
Cash
Mercantile Bank
80,000
80,000
Raised loan from mercantile bank
(No entry required for interest as interest is not accrued at December 1 ,2014)
Working Note:
*Depreciation on truck: As the truck is purchased on December 1 2014, depreciation will be charged for only one month in this financial year.
Depreciation on truck= $ 3,000 per year (Given)
1 month depreciation on truck = $ 3,000 /12 = $ 250
**Interest expense: Amount of 2 month notes payable generated on December 1 2014, due to purchase of truck is $ 10,000. This will be matured in next financial year. As nothing is mentioned regarding payment of interest, it is assume that total interest will be paid on maturity.
But, one month interest (That is from 1 Dec. to 31 Dec) is payable or accrued on December 31, 2014, as this belongs to current financial year.
Interest payable (1 month) = $ 10,000 X 12/100 X 1/12 = $ 100
Answer (b)
Hans Ltd.
Statement of financial position
As on December 31, 2014
Assets
Amount ($)
Amount ($)
Current Assets:
Cash
122,600*
Accounts Receivable
75,000
Inventory
148,000
Prepaid insurance ($ 28,500 -20,000)
8500
Total Current assets
354,100
Long term Investment
-
-
Fixed assets
Truck : $ 18,000
Less: Depreciation : $ 250
17,750
Total Fixed assets
17,750
Intangible assets
-
-
Miscellaneous expenditure
-
-
Total Assets
371,850
Liabilities and Stockholders’ Equity
Current Liabilities and provisions:
Accounts Payable
80,000
Notes payable
10,000
Interest Payable
100
Salary Payable
15,000
Revenue received in advance
10,600
Provision for long service leave
5,500
Total Current Liabilities and provisions
121,200
Long term liabilities:
Loan from Mercantile Bank
80,000
Total long term Liabilities
80,000
Total Liabilities
201,200
Stockholders’ Equity
Common stock
150,000
Net Income
20,650**
Total Stockholders’ Equity
170,650
Total Liabilities and Stockholders’ Equity
371,850
Working Notes:
*Cash = Balance – Paid for truck purchase + Loan raised
= $ 50,600 - $ 8,000 + $ 80,000
= $ 122,600
** Calculation of Net Income:
Particulars
Amount ($)
Sales revenue
2,34,000
Less: Cost of goods sold
85,000
Gross profit
149,000
Less: Non Operating Expenses
Interest payable
100
Insurance expense
20,000
Rent expense
70,000
Salaries expense
38,000
Depreciation on truck
250
Net Income
20,650
S.no
Date
Account Name
Debit ($)
Credit ($)
i)
December 1 ,2014
Truck
18000
Cash
8,000
Notes Payable
10,000
Truck purchased through partial payment, notes payable generated
Adjusting entries
December 31 ,2014
Depreciation*
250
Truck
250
Depreciation charged on truck for 1 month (from 1 Dec. to 31 Dec)
December 31 ,2014
Interest Expense**
100
Interest payable or accrued
100
Interest of 1 month on notes payable accrued
ii)
December 31 ,2014
No entry required as inventory is to be recorded at “Market Value-$ 149,500” or “Cost value-$ 148,000” whichever is less. And inventory is already recorded at less value which is $ 148,000.
0
0
iii)
December 31 ,2014
Insurance expenses
20,000
Prepaid insurance
20,000
Cost of insurance expired during the year
iv)
December 31 ,2014
Cash
Mercantile Bank
80,000
80,000
Raised loan from mercantile bank
(No entry required for interest as interest is not accrued at December 1 ,2014)