FAA 2015.

1 Discussion problems_ week 4

1.

Explain why the purchase of supplies is usually recorded in an asset

account rather than in an expense account. If supplies were expensed when purchased, which
accounts should be debited and which credited at the end of the period in order to reflect the
amount of supplies on hand?
Supplies are usually recorded in an asset account because they are normally used in more than
one accounting period. The cost of supplies will be transferred from the asset account to an
expense account, Supplies Used, as they are gradually consumed in the current period
If the supplies are charged directly to an expense when purchased, then an adjusting entry is
necessary at the end of the reporting period to record as an asset the supplies still on hand.
The entry for the supplies still on hand is:
Supplies
Supplies Expense

Exercise 4.8

Dr
Cr

Adjusting entry for prepaid insurance

Kreative Kitchens purchased a 1-year insurance policy on 1 March 2017. The entire premium of
$9000 was recorded by debiting Prepaid Insurance. Ignore GST.
Required
A.
Give the adjusting entry at 30 June for year ending 30 June 2017.
B.
What amount should be reported in the 30 June 2017 statement of financial position for
Prepaid Insurance?
C.
If no adjusting entry was made on 30 June, by how much would profit be overstated or
understated? Would assets be overstated or understated? Explain.
D.
What would your adjusting entry in requirement A be if the premium of $9000 was recorded
by debiting Insurance Expense?
A.

Insurance Expense

3 000

Prepaid Insurance

3 000

($3000 = $9000 4/12)

Insurance expired. Prepaid insurance recorded at
$9000 initially.
B.

Prepaid insurance $6000 ($9000 $3000)

current asset.

C.

Profit would be overstated by $3000, because the

expense for insurance that had not been recorded.
Assets would also be overstated as the correct
balance for prepaid insurance should be $6000
and it would have been left at $9 000. Hence it
would be overstated by $3000.

D.

Prepaid Insurance
Insurance Expense
Insurance prepaid (thus leaving $3000 in

6 000
6 000

FAA 2015.1 Discussion problems_ week 4

Insurance Expense).

Exercise 4.12

Adjusting entries

Selected accounts of Amandas Art Supplies are shown below at 30 June of the current year before
any adjusting entries have been made.
Prepaid Insurance
Supplies
Shop Shelving
Unearned Rental Fees
Salaries Expense
Rental Fees Revenue

Debit
$

Credit
4 500
720
24 000
$

4 800

32 600
13
200

Additional information
(a) Prepaid insurance represents premiums for 1 year paid on 1 April.
(b) Supplies of $430 were on hand at 30 June.
(c) Shop shelving, which had been purchased on 1 January, is expected to last 10 years and have a residual
value of $2000.
(d) Amanda collected 4 months rent in advance on 1 June from a number of tenants.
(e) Accrued salaries not recorded as at 30 June are $2400.

Required
Record in the general journal the necessary adjusting entries on 30 June.
AMANDAS ART SUPPLIES
General Journal

Date
June 30

Particulars
Insurance Expense

Debit

Credit

1 125

Prepaid Insurance

1 125

Insurance expired. ($4500 3/12)

Supplies Expense

290

Supplies

290

Supplies used. ($720 $430)

Depreciation Expense Shop Shelving

1 100

Accumulated Depreciation
Shop Shelving
Depreciation on office equipment.
($24 000 $2000)/10 6/12 = $1100)

Unearned Rental Fees

1 100

1 200

Rental Fees Revenue

1 200

Rental fees earned for one month.

($4800 4)
Salaries Expense

2 400

FAA 2015.1 Discussion problems_ week 4

Salaries Payable

2 400

Accrued salaries.

Problem 4.1

Adjusting entries

Hui Yu, lawyer, had the following transactions related to the business during June. Ignore GST.
June

Purchased office furniture for $36 000. The furniture will be depreciated
over a useful life of 10 years at which time it is expected to have a
residual value of $4800.
Purchased a 12-month fire insurance policy for $3000.
Borrowed $42 000 from the Eastern Bank on a short-term loan. The
principal, plus 8% annual interest, will be repaid in 3 months.
Purchased supplies for $450. On 30 June, supplies worth $230 remained
on hand.
Paid $1200 for 1 months rent for the period 15 June to 15 July.
Received an electronic bank transfer from a client for $840 as an advance
payment for services to be performed. Only 20% of the work was
completed by 30 June.
Received an invoice for $410 for telephone and internet charges for the
month.

1
2
11
15
18
28

Required
A.
Prepare the journal entries to record each transaction and prepare any adjusting entries as at
30 June, the end of the accounting year. Ignore GST.
A.

HUI YU, LAWYER

General Journal (EXCLUDING GST)
Date
June

Particulars
1

Office Furniture

Debit

Credit

36 000

Cash at Bank

36 000

Purchased office furniture

1

Prepaid Insurance

3 000

Cash at Bank

3 000

Purchased 12 month insurance policy

2

Cash at Bank

42 000

Loan Payable

42 000

Borrowed $42 000 from the bank at 8%

due in 3 months
11

Supplies
Cash at Bank
Purchased supplies

450
450

FAA 2015.1 Discussion problems_ week 4

15

Rent Expense

1 200

Cash at Bank

1 200

Paid rent for one month

18

Cash at Bank

840

Unearned Services Revenue

840

Received payment from customer in

advance
28

Telecommunications Expense

410

Tele. Account Payable

410

Amount due for telephone and internet

charges

Adjusting entries
30

Depreciation Expense

260

Accumulated Depreciation
Office Furniture
Calculation of depreciation expense
[($36 000 $4 800)/10 1/12]
30

Insurance Expense

260

250

Prepaid Insurance

250

Insurance expired for one month on

policy ($3000 1/12)
30

Interest Expense

280

Interest Payable

280

Interest payable on loan from bank

($42 000 8%) 1/12
30

Supplies Expense

220

Supplies

220

Supplies used during the month

30

Prepaid Rent
Rent Expense
Rent not yet expired for the month

600
600

FAA 2015.1 Discussion problems_ week 4

Unearned Services Revenue

168

30
Services Revenue
Revenue recorded on completed work
30

No adjusting entry required as

telephone and internet expense is
recorded on 28 June.

168

FAA 2015.1 Discussion problems_ week 4

Exercise
14.2

Cost and annual depreciation

On 2 January 2015, Johnston Ltd purchased a machine with a list price of $234 300 (including GST)
and credit terms of 2/10, n/30. Payment was made within the discount period. Freight costs of $5400
plus GST and installation costs of $5280 plus GST were also paid. The machine has a useful life of 4
years and a residual value at the end of its useful life of $24 000.
Required
A.
Determine the amount that should be debited to the machinery account
and prepare a general journal entry to record the purchase, assuming a
financial year ending 31 December.
B.
Determine the amount of depreciation expense for each of the 4 years
ending 31 December assuming use of:
1.
the straight-line depreciation method
2.
the diminishing balance method of depreciation.
C.
Prepare a journal entry to record depreciation expense for the year ending
31 December 2015 under the diminishing balance method.
A.

Cost of machine = $213 000* + $5400 + $5280 = $223 680

*$213 000 = $234 300 less GST of $21 300
Machinery
GST Receivable
Accounts Payable
To record purchase of machine, plus freight,
installation costs, and GST.

223 680
22 368
246 048

B.
Year ended 31 December
Depreciation method 2015 2016 2017
2018
Total
1
Straight-line
49 920 49 920 49 920
49
199
9
6
2
8
0
0
2
Diminishing balance
96 182 54 824 31 250
17
199
4
6
2
8
4
0
1. ($223 680 $24 000)/4 = $49
920 p.a.
4

$24 000
$223 680

2. Depreciation rate 1
or 43%
$223 680 0.43 = $96 182
$127 498 0.43 = $54 824

1 0.57
= 0.43

FAA 2015.1 Discussion problems_ week 4

$72 674 0.43 = $31 250
$441 424 $24 000 = $17 424
C.
Depreciation Expense Machinery
Accumulated Depreciation Machinery
Record depreciation expense for year ended 31
December 2015.

96 182
96 182

FAA 2015.1 Discussion problems_ week 4

Exercise
14.4

Depreciation methods

Nevertire Ltd purchased a delivery van costing $52 000 net of GST. It is expected to have a residual
value of $12 000 at the end of its useful life of 4 years or 200 000 kilometres.
Required
A.

Assume the van was purchased on 2 July 2015 and that the accounting period
ends on 30 June. Calculate the depreciation expense for the year 201516 using
each of the following depreciation methods:
1. straight-line
2. units of production (assume the van was driven 78 000 kilometres during the
financial year).
3. diminishing balance

B.

Assume the van was purchased on 1 October 2015 and that the accounting
period ends on 30 June. Calculate the depreciation expense for the year 201516
using each of the following depreciation methods:
1. straight-line
2. diminishing balance
3. units of production (assume the van was driven 60 000 kilometres during the
financial year).

A.

1. Straight-line:
=

2.

($52 000 $12 000)/4

$10 000

Units-of-production:
Expense per kilometre = ($52 000 $12 000)/200 000 =

$0.2
0.2 78 000
$15 600
3.

Diminishing balance:

$12 000
$52 000

= 31% (approx.)

= 1 0.69 = 0.31
$52 000 0.31
$16 120
B.

1.

Straight-line:

($52 000 $12 000)/4 9/12

= $7 500

FAA 2015.1 Discussion problems_ week 4

Diminishing balance:
($52 000 0.31) 9/12
$12 090
3.
Units-of-production: $0.2 60 000
= $12 000
2.

FAA 2015.1 Discussion problems_ week 4

Exercise
14.9

Depreciation methods

Edwards Ltd recently paid $290 000 for manufacturing equipment, which is expected to have a useful
life of 4 years and a residual value of $50 000. The manager of Edwards Ltd wants information about
the effect that various depreciation methods will have on profit and asks you to prepare a schedule
comparing the straight-line and diminishing balance methods of depreciation. Ignore GST.
Required

Prepare a schedule and calculate the annual depreciation charge and end-ofyear carrying amount for the expected life of the equipment.
Year
Acquisition
1
2
3
4

Straight line
DepreCarrying
ciation
amount
$290 000
$60 000
230 000
60 000
170 000
60 000
110 000
60 000
50 000
4

Diminishing balance rate = 1

Diminishing balance
DepreCarrying
ciation
amount
$290 000
$104 400
185 600
66 816
118 784
42 762.24
76 021.76
26 021.76
50 000

$50 000
$290 000
= 36% approx.