SMU Classification: Restricted
PERMISSION REQUIRED FROM PROF TRACEY ZHANG AND LOW LAY CHIN FOR USE/ REPRODUCTION
ACCT224 Financial Reporting Analysis
Prof Tracey Chunqi Zhang
FA Refresher 1 (Statement Preparation) – Questions
QUESTION 1 (adjust entries and financial statement preparation)
Nelson Ltd. provides advisory services. The company performs adjusting entries on its accounts
monthly at the end of each month, but performs closing entries annually on 31 December.
The firm's unadjusted trial balance dated 31 Dec 2015, is shown below.
NELSON LTD.
Unadjusted Trial Balance
31 Dec 2015
Dr. $
Cash
Cr. $
44,855
Accounts receivable
2,230
Office supplies
205
Prepaid rent
1,200
Unexpired insurance
270
Office equipment
54,000
Accumulated depreciation: Office equipment
35,250
Accounts payable
2,190
Interest payable
360
Income tax payable
1,750
Notes payable
9,000
Unearned consulting services revenue
3,500
Share capital
31,230
Retained earnings
8,000
Dividends
1,000
Consulting services revenue
60,230
Office supplies expense
605
Depreciation expense: Office equipment
8,250
Rent expense
3,525
Insurance expense
1,010
Salaries expense
27,100
Interest expense
360
Income tax expense
6,900
Total
151,510
1
151,510
SMU Classification: Restricted
PERMISSION REQUIRED FROM PROF TRACEY ZHANG AND LOW LAY CHIN FOR USE/ REPRODUCTION
The following items have not yet been adjusted for in the accounts above:
1.
Office supplies on hand at 31 Dec 2015 total $85.
2.
The company determined that $1,200 of previously unearned consulting services revenue had
been earned at 31 Dec 2015.
3.
Accrued but unrecorded and uncollected consulting services revenue totals $1,500 at 31 Dec
2015.
4.
The company purchased all of its equipment when it first began operations. At that time, the
estimated useful life of the equipment was six years (72 months). The company adopts straightline depreciation with zero salvage value.
5.
The company prepaid its six-month rent agreement on 1 Oct 2015.
6.
The company prepaid its 12-month insurance policy on 1 Mar 2015.
7.
Accrued but unpaid salaries total $1,900 at 31 Dec 2015.
8.
On 1 Jun 2015, the company borrowed $9,000 by signing a nine-month, 8 percent note payable.
The entire amount, plus interest, is due on 1 Mar 2016.
9.
The company's accountant estimates that income tax expense for the entire year is $7,500. The
unpaid portion of this amount is due in early 2016.
10. The debit balance of $1,000 under Dividends in the trial balance above represents dividends
declared and approved during the year. Of this amount, $750 had already been paid while $250
remained payable at 31 Dec 2015. However, on 31 Dec 2015, it was discovered that an earlier
payment of $250 for accounts payable was erroneously recorded by debiting dividends payable
(instead of debiting accounts payable).
11. It was discovered that client billings of $1,200 on account were recorded by debiting Consulting
Service Revenue and crediting Account Receivable.
Required:
Show all relevant workings.
a.
For each of the items above, prepare all necessary adjusting journal entries on 31 Dec 2015 to
recognize the item. Provide a brief narrative to each set of journal entries.
b.
Prepare all necessary year-end closing entries on 31 Dec 2015. Provide a brief narrative to
each set of journal entries.
c.
Prepare a formal set of financial statements comprising:
•
•
Statement of Financial Position
Income Statement
of Nelson Ltd. for the year ended 31 Dec 2015.
Use the same classification of items as in the trial balance above, except where new items are
required.
[Note: You may use the working sheet provided to facilitate your workings and computations if you
wish, but the work sheet itself will not be graded in exam.]
2
SMU Classification: Restricted
PERMISSION REQUIRED FROM PROF TRACEY ZHANG AND LOW LAY CHIN FOR USE/ REPRODUCTION
NELSON LTD.
Working Sheet for year ended 31 Dec 2015
$
Unadjusted Trial Balance
Dr.
Cash
Cr.
44,855
Accounts receivable
2,230
Office supplies
205
Prepaid rent
1,200
Unexpired insurance
270
Office equipment
54,000
Accumulated depreciation: Office equipment
35,250
Accounts payable
2,190
Interest payable
360
Income tax payable
1,750
Notes payable
9,000
Unearned consulting services revenue
3,500
Share capital
31,230
Retained earnings
8,000
Dividends
1,000
Consulting services revenue
60,230
Office supplies expense
605
Depreciation expense: Office equipment
8,250
Rent expense
3,525
Insurance expense
1,010
Salaries expense
27,100
Interest expense
360
Income tax expense
6,900
Totals
151,510
3
151,510
Adjustments
Dr.
Adjusted Trial Balance
Cr.
Dr.
Cr.
SMU Classification: Restricted
PERMISSION REQUIRED FROM PROF TRACEY ZHANG AND LOW LAY CHIN FOR USE/ REPRODUCTION
QUESTION 2 (adjust entries and financial statement preparation)
BMM Ltd provides IT consulting services. The company performs adjusting entries on its accounts
monthly at the end of each month, but performs closing entries annually on 31 December.
The firm's unadjusted trial balance dated 31 Dec 2015, is shown below.
BMM Ltd
Unadjusted Trial Balance
31-Dec-15
31-Dec-15
Dr. $
Cash
Accounts receivable
Office Supplies
Prepaid Salaries
Prepaid insurance
Equipment, at cost
Accumulated depreciation – Equipment
Accounts Payable
Dividends Payable
Interest payable
Unearned revenue
Income tax Payable
Note payable
Share capital
Retained earnings
Dividends
Service revenue
Salaries expense
Rent expense
Depreciation expense
Interest expense
Office Supplies expense
Insurance expense
Utility expense
Income tax expense
95,100
47,803
3,500
2,400
1,944
102,000
TOTAL
383,100
Cr. $
47,600
22,250
4,000
250
10,500
2,500
50,000
70,000
27,500
6,000
148,500
58,550
25,800
18,700
1,375
8,100
2,408
5,520
3,900
4
383,100
SMU Classification: Restricted
PERMISSION REQUIRED FROM PROF TRACEY ZHANG AND LOW LAY CHIN FOR USE/ REPRODUCTION
The following items have not yet been adjusted in the accounts above:
1. The company purchased all of its equipment when it first began operations. The estimated useful life
for equipment is 5 years. The company adopts straight-line depreciation with zero salvage value.
2. The company prepaid its 12-month insurance policy on 1 Sep 2015 for coverage starting from 1 Sep
2015.
3. $10,000 unrecorded consulting service performed by BMM Ltd needs to accrued at 31 Dec 2015
4. It was discovered that $2200 office supplies purchased by cash on Dec 10, 2015 was erroneously
recorded as Utilities expense. Office supplies of $1200 remained on hand at Dec 31, 2015.
5. On Dec 1, 2015, the company signed a new rental agreement and paid three months’ rent in advance
at a rate of $2,000 per month. This advance payment was debited to Rent Expense account on Dec
1, 2015 with no prepayment recognized.
6. At 31 Dec 2015, $320 utility expense needs to be accrued and this amount will be paid to SP Services
Limited in early Jan 2016.
7. Note payable of $50,000 relates to a two-year, 3% loan that the company obtained from the bank on
30 Sep 2014. Interest on the note is to be paid semi-annually on 31 Mar and 30 Sep. The principal of
the note is due on 30 Sep 2016.
8. One client (AAA Ltd) paid cash in advance to the BMM Ltd for a consulting project. This is the only
client that paid cash in advance. BMM Ltd determined that one third of the consulting project for AAA
Ltd has been performed at 31 Dec 2015.
9. Of $6000 dividends which has been declared, $3000 remained payable at 31 Dec 2015. However, on
31 Dec 2015, it was discovered that an earlier payment of $1000 of dividends payable was
erroneously recorded by debiting share capital (instead of debiting dividends payable).
10. The company's accountant estimates that income tax expense for the entire year is $4,200. No
payment is due until early January 2016.
11. Salaries for Dec 2015 amounting to $2,400 were paid on 15 Dec, but with the entire amount debited to
prepaid salaries.
Required:
a. For each of the items above, prepare all necessary adjusting journal entries on 31 Dec 2015 to
recognize the item. Narratives to journal entries are NOT required.
Where appropriate, you should provide brief but relevant workings to show how the amounts in
your journal entries are determined.
b.
Prepare all necessary year-end closing entries on 31 Dec 2015. Narratives to journal entries are
NOT required
c.
Prepare a formal set of financial statements comprising:
•
•
Statement of Financial Position
Income Statement
of BMM Ltd. for the year ended 31 Dec 2015
Use the same classification of items as in the trial balance above, except where new items are required.
[Note: You may use the working sheet provided to facilitate your workings and computations if you wish,
but the work sheet itself will not be graded in exam.]
5
SMU Classification: Restricted
PERMISSION REQUIRED FROM PROF TRACEY ZHANG AND LOW LAY CHIN FOR USE/ REPRODUCTION
Working Sheet for BMM Ltd for year ended 31-Dec-15
Adjustments
Unadjusted Trial Balance
$
Dr. $
Cash
95,100
Accounts receivable
47,803
Office Supplies
3,500
Prepaid Salaries
2,400
Prepaid insurance
1,944
Equipment, at cost
102,000
Cr. $
Accumulated depreciation - Equipment
47,600
Accounts Payable
22,250
Dividends Payable
4,000
Interest payable
250
Unearned revenue
10,500
Income tax Payable
2,500
Note payable
50,000
Share capital
70,000
Retained earnings
27,500
Dividends
6,000
Service revenue
148,500
Salaries expense
58,550
Rent expense
25,800
Depreciation expense
18,700
Interest expense
1,375
Office Supplies expense
8,100
Insurance expense
2,408
Utility expense
5,520
Income tax expense
3,900
TOTAL
383,100
6
383,100
Dr.
Adjusted Trial Balance
Cr.
Dr.
Cr.