Adjusting entries and financial statements

Accruals

January 2024

Seven Star Limited deals in pest control. Its owner, Mr. Shah, employs a team of eight who were paid BDT
12,000 per annum each in the year to 31 December 2020. At the start of 2021 he raised salaries by
10% to BDT 13,200 per annum each. On 1 July 2021, he hired an intern at a salary of BDT 8,400 per
annum. He pays his work force on the first working day of every month, one month in arrears, so that
his employees receive their salary for January on the first working day in February.
Required:
(i) Calculate the cost of salaries charged in the income statement for the year ended 31 December
2021.
(ii) Calculate the amount actually paid in salaries during the year.
(iii) State the amount of accrued salaries in the statement of financial position as at 31 December
2021.
Solution:
(i) Salaries cost in the income statement
Cost of 8 employees for a full year at 13,200 each 105,600
Cost of trainee for a half year 4,200
109,800

(ii) Salaries actually paid in 2021

December 2020 salaries paid in January (8 employees - 1,000 per month) 8,000
Salaries of 8 employees for January – November 2021 paid in
February – December (8 employees × 1,100 per month × 11 months) 96,800

Salary of trainee (for July – November paid in August – December

2021: 5 months × $700 per month) 3,500

Salaries actually paid 108,300

(iii) Accrued salaries costs as at 31 December 2021

8 employees x 1 month x 1,100 per month 8,800
1 trainee x 1 month x 700 per month 700
9,500
 January 2024
ABC Co. was organized on July 01’2022. Quarterly financial statements are prepared. The unadjusted and
adjusted trial balances as of September 30 are shown below.

ABC Co
Trial Balance
September 30’2022
Figure in Tk.
Unadjusted Adjusted
Particulars Dr. Cr. Dr. Cr.
Cash 8,700 8,700
Accounts Receivable 10,400 11,500
Supplies 1,500 650
Prepaid Rent 2,200 500
Equipment 18,000 18,000
Accumulated Depreciation--Equipment 0 700
Notes Payable 10,000 10,000
Accounts Payable 2,500 2,500
Salaries and Wages Payable 0 725
Interest Payable 0 100
Unearned Rent Revenue 1,900 450
Owner's Capital 22,000 22,000
Owner's Drawings 1,600 1,600
Service Revenue 16,000 17,100
Rent Revenue 1,410 2,860
Salaries and Wages Expense 8,000 8,725
Rent Expense 1,900 3,600
Depreciation Expense 700
Supplies Expense 850
Utilities Expense 1,510 1,510
Interest Expense 100
Total 53,810 53,810 56,435 56,435

Required:
(i) Journalize the adjusting entries that were made.
(ii) Prepare an income statement and an owner's equity statement for the 3 months ending September
30 and a balance sheet at September 30.
(iii) If the note bears interest at 12%, how many months has it been outstanding?
Solution:
(i) Adjusting Entries
Debit Credit
Service Revenue 6,900
Unearned Service Revenue 6,900

Accounts Receivable 4,900

Service Revenue 4,900

Bad Debt Expense 1,430

Allowance for Doubtful Accounts 1,430

Insurance Expense 480

Unexpired Insurance 480

Depreciation Expenses – Furniture and Equipment 3,125

Accumulated Depreciation – Furniture and Equipment 3,125
(25,000X0.125)

Interest Expense 60
Interest Payable (7,200X0.1X30/360) 60

Prepaid Rent 750

Rent Expense 750

Office Salaries Expense 2,510

Salaries Payable 2,510

(ii)

SEL Engineering
Income Statement
For the year ended December 31, 2021
Service Revenue (100,000 - 6,900 + 4,900) 98,000
(-) Expenses
Office Salaries Expenses (28,500 + 2,510) 31,010
Utilities 1,080
Rent (9,750 – 750) 9,000
Insurance Expense 480
Bad Debt Expense 1,430
Depreciation Expense 3,125
Miscellaneous Office Expense 720
Interest Expense 60
46,905
Net Income 51,095

SEL Engineering
Balance Sheet
December 31, 2021
Assets
Current Assets
Cash 31,500
Account Receivable (49,600+4,900) 54,500
(-) Allowance for doubtful account (2,180) 2,320
Engineering Supplies Inventory 1,960
Unexpired Insurance (1,000-480) 620
Prepaid Rent 750
 Total Current Assets 87,150
Furniture and Equipment 25,000
(-) Accumulated Depreciation (9,375) 15,625
Total Assets 102,775
Liabilities and Owner’s Equity
Current Liabilities
Unearned Service Revenue 6,900
Interest Payable 60
Salaries Payable 2,510
Notes Payable 7,200 16,670
Capital, Mr. Alex (35,010 + 51,095) 86,105
Total Liabilities and Capital 102,775

SEL Engineering
Statement of Owner’s Equity
For the year ended December 31, 2021
Capital, Mr. Alex as of 31 January 2021 52,010
(+) Net Income 51,095
(-) Withdrawals (17,000)
Capital, Mr. Alex as of 31 December 2021 86,105

May 2023

Maryam Incorporation collected BDT 108,000 from customers in 2022. Of the amount collected, BDT
25,000 was for services performed in 2021. In addition, Maryam performed services worth BDT
36,000 in 2022, which will not be collected until 2023.
Maryam Incorporation also paid BDT 72,000 for expenses in 2022. Of the amount paid, BDT 30,000
was for expenses incurred on account in 2021. In addition,Maryam incurred BDT 42,000 of expenses
in 2022, which will not be paid until 2023.
You are requiring to compute
(i) Cash basis net income for 2022
(ii) Accrual basis net income for 2022
Solution:
i)
Cash received from revenue : BDT 108,000
Cash paid for expenses : (BDT 72,000)
Cash basis net income : BDT 36,000

ii) Revenue: [BDT (108,000-25,000) +36,000] = BDT 119,000

Expenses: [BDT (72,000-30,000)+42,000] = (BDT 84,000)
Accrual basis net income = BDT 35,000

May 2023

ZYX company accumulated the following adjustment data at December 31, 2022.
(i) Services performed but not recorded total BDT 10,000.
 (ii) Supplies of BDT 3,000 have been used.
(iii) Utility expenses of BDT 2,250 are unpaid.
(iv) Services related to unearned service revenue of BDT 2,600 were performed.
(v) Salaries of BDT 8,000 are unpaid.
Required:
For each of the above items indicate the following.
(a) The type of adjustment (Prepaid expenses, unearned revenue, accrued revenue or accrued
expenses)
(b) The status of accounts before adjustment (overstatement or understatement)

Solution:

Item Type of adjustment Accounts before adjustment

1 Accrued Revenues Assets understated & Revenues understated
2 Prepaid Expenses Assets overstated &Expenses understated
3 Accrued Expenses Expenses understated &Liability understated
4 Unearned Revenues Liability overstated & Revenue understated
5 Accrued Expenses Expenses understated &Liability understated
 May 2023

ABC Limited opened for business few years ago. Its trial balance on June 30, 2022 is as follow:
ABC Limited
Trial Balance as on 30-06-2022
Account Title Debit (Tk.) Credit (Tk.)
Cash 160,000.00
Accounts Receivable 110,000.00
Inventory (01.07.2021) 90,000.00
Supplies 40,000.00
Prepaid Insurance 55,000.00
Land 510,000.00
Buildings 810,000.00
Accumulated Depreciation – Buildings 450,000.00
Equipment 610,000.00
Accumulated Depreciation – Equipment 340,000.00
Accounts Payable 80,000.00
Notes Payable 90,000.00
10% Bank Loan (long-term) 310,000.00
Owner’s Capital 810,000.00
Owner’s Drawings 90,000.00
Sales Revenue 1,010,000.00
Investment Income 40,000.00
Purchases 510,000.00
Advertising Expense 40,000.00
Salaries & Wages Expense 90,000.00
Utilities Expense 15,000.00
Total 3,130,000.00 3,130,000.00
Other information:
(i) Ending inventory was valued at Tk. 80,000.
(ii) Prepaid insurance of Tk. 20,000 has been expired during the year.
(iii) Supplies of Tk. 10,000 were used during the year.
(iv) Depreciation on buildings and equipment is charged @10% on cost per year.
(v) 10% of accounts receivable is to be made an allowance for doubtful debt.
(vi) Salaries of Tk. 25,000 were still unpaid.
Required:
Prepare a multiple-step income statement for the year ended 30 June 2022 and a classified balance
sheet as at 30 June 2022.

Solution:
ABC Limited
Income Statement
For the year ended June 30, 2022

Particular Taka Taka

Sales Revenue 1,010,000.00
(-) Cost of Goods Sold:
Beginning inventory 90,000.00
 (+) Purchases 510,000.00
(-) Ending Inventory (80,000.00) (520,000.00)
Gross Profit 490,000.00
(-) Operating Expenses:
Advertising Expense 40,000.00
Salaries & Wages Expense (90,000+25,000) 115,000.00
Utilities Expense 15,000.00
Insurance Expense 20,000.00
Supplies Expense 10,000.00
Depreciation Expense – Buildings 81,000.00
Depreciation Expense – Equipment 61,000.00
Bad Debt Expense 11,000.00 (353,000.00)
Profit from 137,000.00
Operations
(+) Other Revenues: Investment Income 40,000.00
(-) Other Expenses: Interest Expense (31,000.00) 9,000.00
(310,000×10%)
Net Profit 146,000.00

ABC Limited
Classified Balance Sheet
As at June 30, 2022

Particulars Tk. Tk. Tk.

ASSETS:
Current Assets:
Cash 160,000.00
Accounts Receivable 110,000.00
(-) Allowance for Doubtful Debt (11,000.00) 99,000.00
Inventory 80,000.00
Supplies (40,000-10,000) 30,000.00
Prepaid Insurance (55,000-20,000) 35,000.00 404,000.00
Non-Current Assets:
Land 510,000.00
Buildings 810,000.00
Acc. Dep. – Buildings (450,000+81,000) (531,000.00) 279,000.00
Equipment 610,000.00
Acc. Dep. – Equipment 209,000.00 998,000.00
(340,000+61,000) (401,000.00)
Total Assets 1,402,000.00
LIABILITIES & OWNER’S EQUITY:
Current Liabilities:
Accounts Payable 80,000.00
Notes Payable 90,000.00
Salaries & Wages Payable 25,000.00
Interest payable 31,000.00 226,000.00
Non-Current Liabilities:
10% Bank Loan 310,000.00
Owner’s Equity:
Owner’s Capital 810,000.00
(+)Net Profit 146,000.00
(-)Owner’s Drawings (90,000.00) 866,000.00
Total Liabilities & Owner’s Equity 1,402,000.00
 September 2023

ABC Co. was organized on July 01’2022. Quarterly financial statements are prepared. The unadjusted
and adjusted trial balances as of September 30 are shown below.

Unadjusted Adjusted
Particulars Dr. Cr. Dr. Cr.
Cash 8,700 8,700
Accounts Receivable 10,400 11,500
Supplies 1,500 650
Prepaid Rent 2,200 500
Equipment 18,000 18,000
Accumulated Depreciation--Equipment 0 700
Notes Payable 10,000 10,00
0
Accounts Payable 2,500 2,500
Salaries and Wages Payable 0 725
Interest Payable 0 100
Unearned Rent Revenue 1,900 450
Owner's Capital 22,000 22,00
0
Owner's Drawings 1,600 1,600
Service Revenue 16,000 17,10
0
Rent Revenue 1,410 2,860
Salaries and Wages Expense 8,000 8,725
Rent Expense 1,900 3,600
Depreciation Expense 700
Supplies Expense 850
Utilities Expense 1,510 1,510
Interest Expense 100
Total 53,810 53,810 56,435 56,43
5

Required:
(i) Journalize the adjusting entries that were made.
(ii) Prepare an income statement and an owner's equity statement for the 3 months ending
September 30 and a balance sheet at September 30.
(iii) If the note bears interest at 12%, how many months has it been outstanding?

(i) Adjusting Entries

Date Particulars Debit TK Credit Tk

Sep 30’2022 Accounts Receivable 1100
Service Revenue 1100
Sep 30’2022 Rent Expenses 1700
Prepaid Rent 1700
Sep 30’2022 Supplies Expenses 850
Supplies 850
 Sep 30’2022 Depreciation Expenses 700
Accumulated Depreciation-Equipment 700
Sep 30’2022 Interest Expenses 100
Interest Payable 100
Sep 30’2022 Unearned Rent Revenue 1450
Rent Revenue 1450
Sep 30’2022 Salary and wages expenses 725
Salary and wages Payable 725

(ii)
ABC Co
Income Statement
For the Quarter Ended September 30’2022
Revenue:
Service Revenue 17,100
Rent Revenue 2,860 19,960
Total Revenue

Expenses:

Salaries and Wages 8725

Rent Expense 3600
Utilities Expense 1510
Supplies Expense 850
Depreciation Expenses 700
Interest Expense 100
Total expenses 15,485

Net income
4,475

ABC Co
Owner's Equity statement
For the Quarter Ended September 30’2022
Owner’s Capital:
July 01’2022 22,000
Add: Net Income 4,475
Less: Drawings (1,600)
Owner’s Capital: September 30’2022 24,875
ABC Co
Balance Sheet
September 30’2022
Assets:
Cash 8,700
AR 11,500
Supplies 650
Prepaid Rent 500
 Equipment 18,000
Less: Dep 700 17,300

Total Assets: 38,650

Liabilities & Owners Equities:

Note Payable 10,000

Accounts Payable 2,500
Salaries & wages payable 725
Unearned Rent Revenue 450
Interest Payable 100
Total Liabilities 13,775
Owner’s Equity (Closing) 24,875
Liabilities & Owners Equities 38,650

(iii) Interest of 12% per year equals a monthly rate of 1%; monthly interest is Tk. 100 (10,000Χ1%).
Since total interest expenses payable is Tk. 100, the note has been outstanding one month.
 September 2022

The Independent Book Shop Ltd. was formed on April 1, 2021. It is a small private corporation, run by
Joanna Kay. On March 31, 2022, Joanna prepared the following income statement:

INDEPENDENT BOOK SHOP LTD.

Income Statement
Year Ended March 31, 2022
Revenues
Accounts receivable Tk. 23,000
Service revenue 41,000
Total revenues Tk. 64,000
Expenses
Rent expense Tk. 12,000
Office expense 5,000
Vacation expense 4,000
Total expenses 21,000
Profit before income tax 85,000
Income tax expense 5,000
Profit Tk. 90,000

Joanna admits that her knowledge of accounting is somewhat limited and is concerned that her income
statement might not be correct. She gives you the following additional information:
(i) Included in the Service Revenue account is Tk. 3,000 of revenue that the company expects to
earn in April 2022. Joanna included it in this year’s statement so she wouldn’t forget about it.
(ii) Joanna operates her business in a converted carriage house attached to her parents’ downtown
home. They do not charge her anything for the use of this building, but she thinks that if she paid
rent, it would have cost her about Tk. 12,000 a year. She included this amount in the income
statement as Rent Expense because of the “opportunity cost.”
(iii) To reward herself after a year of hard work, Joanna took a vacation to Greece. She used personal
funds to pay for the trip, but she reported it as an expense on the income statement since it was
her job that made her need the vacation.
Required:
(1) Identify any corrections that should be made to the income statement and explain why.
(2) Prepare a corrected income statement.
(3) What other financial statements should the Independent Book Shop prepare, assuming it follows
Accounting Standards for Private Enterprises?