ACCY500 Accounting Measurement,
Reporting and Control:
High Engagement Week 2
Question 1: Live Bait Retail Company- Recording
Transactions
The Live Bait Retail Company Limited started trading on 1 July 2013 and at 30 June 2014
had the following summary.
30 June 2014
Fixed Assets
PPE 900
Current Assets
Inventories 200
Cash 400
Total Assets 1,500
Long-term Liabilities
Bank Loan 500
Total Liabilities 500
Equity
Common Stock 750
Retained Earnings 250
Total Equity 1,000
Total Liabilities and Equity 1,500
During the year ended 30 June 2015 (i.e., second year of operation), the company engages in
the following transactions:
1. Purchase of bait on credit for $700
2. Sale of bait originally costing $600 for $1,200 of which $800 is on credit, the
remainder is in cash
3. Payment of salaries to office staff ($85) and van driver ($75), both in cash
4. Payment of interest on bank loan of $100.
5. Increase bank loan by $500
6. Payment of 80% of accounts payable, collection of 80% of accounts receivables.
In addition, as a result of these transactions, the company will engage in the following two
transactions which need to be recorded in the 2014/15 accounts:
7. Tax (at a rate of 33%) is payable on the company’s profit before tax and is due on 31
March 2016
8. On 30 September 2015, the company will pay a dividend of $100
Required:
Please record these transactions in a worksheet and prepare a Balance sheet and Income
statement using the templates on the following pages
2
Assets Liabilities Equity
Fixed Inven- AR Cash Bank AP Tax Dividends Common Income Retained
assets tories Loan Stock Statement Earnings
OB 900 200 400 500 750 250
1. Purchase of bait 700 700
2. Sales 800 400 1200
2. Cost of Sales -600 -600
3. Salaries (office) -85 -85
3. Salaries (driver) -75 -75
4. Interest -100 -100
5. Increase Loan 500 500
6. Payment of
-560 -560
Creditors
6. Collection of
-640 640
Debtors
7. Tax 112 -112
8. Dividends 100 -100
9. Transfer R/E -228 228
CB 900 300 160 1120 1000 140 112 100 750 0 378
3
Balance Sheet
30 June 2014 30 June 2015
Fixed Assets
PPE 900 900
Current Assets
Inventories 200 300
Accounts Receivable 160
Cash 400 1120
Total Assets 1500 2480
Current Liabilities
Accounts Payable 140
Tax Payable 112
Dividends 100
Long-term Liabilities
Bank Loan 500 1000
Total Liabilities 1352
Equity
Common Stock 750 750
Retained Earnings 250 378
Total Equity 1000 1128
Total Liabilities and Equity 1500 2480
Income Statement
30 June 2015
Sales 1200
Cost of Sales 600
Gross Profit 600
Distribution Costs -75
Administrative Expenses -85
Profit before interest and tax 440
Interest -100
Profit before tax 340
Tax -112
Profit after tax 228
Question 2: Past Exam Questions
In each of the following questions, you have transactions that were either “missed” or made
an error in the annual financial statements ending on December 31.
4
Indicate the amounts involved and the effects on each of the accounts listed, using the
following notation:
overstated (O), understated (U) or no effect (NE)
Each transaction is independent (i.e., the first transaction does not affect the second, etc…).
For each question, be sure to show by what amounts the financial statements are wrong before
the corrections are made for the forgotten or mistaken transactions. Ignore any effect of
taxes.
1. On December 31, Farmington Security took out a $150,000 long-term loan and
purchased a piece of land worth $80,000 and a building worth $70,000. The entry
was never recorded.
Current Assets ____________ Long-term assets __$150K
(U)__
Current Liabilities ____________ Long-term liabilities __$150K ((U)__
Capital Stock ____________ Retained Earnings ___________
Net Income ____________
2. The Board of Directors of Lemonhead plc declares a dividend of $1,500 on
December 31, 2004. The dividend will be paid on January 15, 2005. Lemonhead plc
neglects to record the dividend declaration.
Current Assets ___________ Long-term assets ____________
Current Liabilities __$1500 (U)__ Long-term liabilities ____________
Capital Stock ____________ Retained Earnings __$1500 (O)____
Net Income ____________
3. On January 1st, 2001, Lou Frost’s Magical Dating Service borrowed $100,000 from
Bigioni’s bank at 10% interest. The loan and all interest are due to be paid back in
one year on January 1st, 2002. Lou’s accountant did not record the entry for
borrowing the funds, nor did it make any other entries during the year for the loan.
How are the accounts misstated as of December 31st, 2001?
Current Assets __$100k (U)_ Long-term assets ____________
Current Liabilities __$110k (U)__ Long-term liabilities ___________
Capital Stock ____________ Retained Earnings __10K (O)__
Net Income ___$10K (O)__
Question 3: James Ltd. - Accrual vs. Cash Accounting
James Ltd started trading on 1 January 2013 and, in its first two years, received and paid
the following electricity bills:
5
2013
30 April $ 8,000
31 October $13,200
2014
30 April $10,000
31 October $12,000
James Ltd uses the same number of units of electricity every month and so any changes in
the average monthly cost reflect changes in the per unit cost. Making whatever
assumptions you consider reasonable, and using the template below, prepare the relevant
extracts from the transaction worksheets for 2013 and 2014.
Assets Liabilities Shareholder’s Equity
Retained
Cash Accruals IS
Earnings
2013 s
Bill 30 April -8000 -8000
Bill 31 October -13200 -13200
Accrual
4400 -4400
(nov&dec)
Transfer R/E -25600 -25,600
Closing Balance -21200 4400 -25600
2014
Opening
-21200 4400 -25600
Balance
Bill 30 April -10000 -4400 -5600
Bill 31 October -12000 -12000
Accrual
4000 -4000
(nov&dec)
Transfer R/E -26000 -51600
Closing Balance -43200 4000 -51600
