Reference no: EM133645869
Accounting Processes
COMPANY BACKGROUND
• Scallion Ltd began business on 1 July 2022, specialising in the purchase and supply of packaging materials. An accounting system was designed and a chart of accounts was established. The business uses the periodic inventory system and is registered for GST at the rate of 10%.
• The company also employs two office staff who work a five-day week from Monday to Friday. One office staff member is responsible for overseeing the daily running of the business, including inventory ordering; the other maintains the company's accounting records.
ACCOUNTING SYSTEM
The company has a financial year-end 30 June and prepares adjusting entries only at the end of the year. The firm uses the following journals to maintain its accounting records:
• Sales Journal: to record all credit sales of inventory
• Purchases Journal: to record all credit purchases of inventory
• Cash Receipts Journal: to record all cash receipts
• Cash Payments Journal: to record all cash payments
• General Journal: to record all transactions other than the above
Scallion Ltd uses subsidiary ledgers for Accounts Receivable and Accounts Payable only.
The company maintains a general ledger to record the increases and decreases in each asset, liability, owner's equity, revenue and expense account. Subsidiary ledgers are used to record the separate details of Accounts Receivable and Accounts Payable. The company maintains a periodic system to account for its inventory.
GOODS AND SERVICES TAX (GST)
The company is registered for GST at the rate of 10% and is required to pay GST on its purchases and to collect GST when making sales. The company uses a GST paid account for GST on purchases and a GST collected account for GST on sales (for manual records).
YOUR ASSIGNMENT
The firm's in-house accountant has gone overseas for one month. You have been hired by Scallion Ltd to carry out the accounting duties in the accountant's absence. Thisassignment provides you with the unadjusted trial balance at the end of May and requires you to record typical transactions for a retail business for the last month of the financial year. Once these transactions have been recorded and posted, you are required to complete the accounting cycle by journalising and posting adjusting and closing entries and preparing financial statements.
UNADJUSTED TRIAL BALANCE
The unadjusted trial balance as at1 June 2023 is presented below:
|
ACCOUNT NAME
|
1 June Opening Balances
|
|
Cash
|
$ 70,785
|
|
Accounts Receivable
|
25,740
|
|
Allowance for doubtful debts
|
2,645
|
|
Inventory
|
32,400
|
|
Office Supplies
|
1,800
|
|
Prepaid General Insurance
|
3,600
|
|
GST Paid
|
6,300
|
|
Equipment
|
13,500
|
|
Machinery
|
65,000
|
|
Truck
|
46,100
|
|
Land
|
350,000
|
|
Accounts Payable
|
69,300
|
|
GST Collected
|
15,795
|
|
Share Capital
|
340,000
|
|
Discount received
|
13,200
|
|
Repairs and maintenance
|
7,400
|
|
Purchases
|
486,200
|
|
Purchases returns & allowances
|
7,040
|
|
Salaries expense
|
83,600
|
|
Sales
|
789,800
|
|
Sales returns & allowances
|
8,800
|
|
Electricity expense
|
12,100
|
|
Telephone expense
|
2,505
|
|
Office expenses
|
13,500
|
|
Discount allowed
|
8,450
|
SUBSIDIARY LEDGERS
The individual balances of Accounts receivable and Accounts payable as at1June 2023 are shown below. Amounts include GST.
Accounts Receivable Subsidiary Ledger
|
CUSTOMER
|
1 June Opening Balances
|
|
Croft Ltd
|
$ 2,970
|
|
M. Biller
|
14,850
|
|
O. Mowen
|
7,920
|
|
TOTAL
|
25,740
|
Accounts Payable Subsidiary Ledger
|
CREDITOR
|
1 June Opening Balances
|
|
Tumult Ltd
|
$ 17,820
|
|
Lynwood Ltd
|
29,700
|
|
Dyson Ltd
|
21,780
|
|
TOTAL
|
69,300
|
ACCOUNTING PROCEDURES
Transactions are recorded by the accountant on a daily basis in the appropriate journal. Transactions are posted daily from the General Journal and the Cash Receipts and Cash Payments Journal to the Accounts receivable and Accounts payable subsidiary ledgers. Totals of the special journals are posted to the appropriate accounts at the end of the month.
Note: Amounts are to be recorded as the exact amounts in the journals and ledgers but are to be rounded to the nearest dollar when preparing financial statements.
TRANSACTIONS
The following transactions occurred during June 2023 and are INCLUSIVEof GST where appropriate.
2023
June 1 Scallion Ltd shareholders invested $60,000 cash in the business.
Purchased land and an existing retail store for $110,000 of which $77,000 is considered land cost. Paid $33,000 by cheque no. 98 for the retail store and signed a mortgage payable for the balance.The retails store is depreciated over its useful life of 10 years.
2 Paid Lynwood Ltd $14,700 less a discount of $594 with cheque no. 99.
Received cheque from M. Biller for $10,000 as part payment of his account
Purchased store furniture on credit terms from Corma Ltd for $7,480, terms n/60.
5 Purchased inventory on credit terms from Tumult Ltd $4,400; invoice date 6 June, terms 2/10, n/60.
6 Purchased a 3-year fire insurance policy for $792, cheque no. 100.
7 Sent cheque no. 101 to Tumult Ltd in full settlement of May invoice
8 Purchased inventory for $5,500, cheque no. 102.
Paid Lynwood Ltd $15,000 cheque no. 103 for balance owing on May account.
9 Returned unsatisfactory goods to Tumult Ltd and received a credit note for $880.
13 Sold inventory to M. Biller on account, $9,020; invoice no. 210, terms 1/10, n/30.
15 O. Mowen paid his account in full.
Paid Tumult Ltd amount due for June 6 invoice, cheque no.104.
Cash sales for period to 15 June were recorded today, $3,740.
16 Sold inventory to O. Mowen on account $5,170; invoice no. 211, terms 1/10, n/30.
Paid salaries for period to 15 June totaling $2,650, cheque no. 105.
17 M. Biller paid the balance of his May invoice.
20 Purchased inventory on credit terms, from Lynwood Ltd, $5,390; invoice date 20 June, terms 1/10, n/30.
Sent cheque, no. 106 to Dyson Ltd in full settlement of the account.
22 Received account for $143 from M. Parson for items chargeable to office expenses, terms n/30.
23 Received inventory returned by O.Mowen and issued a credit note for $2,200.
Received a cheque from M. Biller for invoice no. 210.
26 Received a cheque from O. Mowen for balance due on invoice no. 211
Purchased inventory from Dyson Ltd for $35,750, terms, 1/20, n/30.
29 Sold inventory worth $15,400 on credit to J. Rowls; invoice no. 212, terms 1/10, n/30.
Paid $220 for electricity expenses, cheque no. 107.
Paid Lynwood Ltd for the invoice dated 20 June, cheque no. 108.
30 Purchased inventory on account from Amcor Ltd $26,400, terms 2/10, n/30.
Cash sales from 16 June to 30 June were $2,145.
Paid salaries for period 16-30 June totaling $2,850, cheque no. 109.
Purchased office supplies for $330, cheque no. 110.
Received account from C. Bond for $110 for delivery expenses for the month.
Sold inventory on credit to O. Mowen for $17,600, invoice no. 213, terms 1/10, n/30.
Purchased printer for use in the business office at a cost of $825 using a short-term loan.
Required
a) Record the transactions in the special journals in the following order: sales journal, purchases journal, cash receipts, cash payments and general journal. You will need to use the general journal for more adjusting entries coming up, so make sure you leave room. The business uses sales and purchases journals for inventory transactions on credit only. Returns are processed through the general journal. (Remember that special journals replace the general journal, so transactions will be recorded in a special journal or the general journal but not both).
b) Prepare the accounts receivable control account as it would appear in the general ledger at the end of the reporting period, together with the related subsidiary ledger. Provide the accounts payable control account as per the general ledgerat the end of the financial year and the subsidiary ledger.
c) Prepare general journal entries to record the following information.
1. Office supplies on hand at 30 June total $900
2. The one-year general insurance policy expires on 31 October 2020
3. Equipment has a useful life of 4 years with no residual value. Store furniture and printer have useful life of 5 years with no residual value. Scallion Ltd uses straight-line depreciation for these assets.(Round all depreciation amounts upwards to nearest whole $).
4. Commission revenue of $39 600 has accrued during June
5. Inventory at 30 June is $28 800
Additional Information
At the end of the 2023 financial year, Scallion Ltd identified the following items that need to be resolved before financial statements are prepared. GST has been correctly accounted for on these non-current asset transactions.
1. On 1st July 2022, Scallion Ltd purchased a used machine for $65,000 cash. The cost was debited to the "Machinery" account in the ledger. Prior to use, additional expenses were incurred for installing and testing the machine. These costs amounted to $7,400 and were debited to the "repairs and maintenance expenses" account. The installation and testing was completed on 1st October 2022, and the machine was brought into use on that date. The machine has an estimated useful life of 5 years, with a residual value of $6,000. Scallion uses straight-line depreciation for machinery and records depreciation to the nearest month. No depreciation has yet been provided in respect of this asset in the current year.
2. On 2nd July 2022, a small building and land were purchased for $350,000. The purchase price was determined by appraisers based on a fair value of $250,000 for the land, and $100,000 for the building. The total purchase consideration of $350,000 was debited to the "land" account. The building has an estimated useful life of 10 years with no residual. Scallion uses straight line depreciation for buildings. No depreciation has yet been provided for the building in the current year. On 1June 2023, Scallion decided to adopt the revaluation model and to measure its land and buildings at fair value in the balance sheet. A valuation was carried out on 30 June 2023, and the land was valued at $295,000, and the building was valued at $120,000. No entries have yet been passed in relation to these fair values. The fair value of the land and retail store acquired on 2nd June 2020 had not changed.
3. A new truck was purchased on 31st March 2023. Scallion Ltdpaid cash of $46,100. The truck has an estimated useful life of 4 years with a residual value of $13,300 and is to be depreciated using the reducing balance method (using a rate of 1.5 times the straight-line rate). No depreciation has yet been provided in respect of this asset in the current year.
REQUIRED:
1. Prepare any adjusting or correcting entries required as at 30 June 2023 in relation to the additional information provided above.
2. Any entries necessary in respect of depreciation for each class of non-current assets discussed in the information given for the year ended 30 June 2023
3. Scallion Ltd uses the allowance method of accounting for bad debts. One percent of net credit sales is estimated to be uncollectable for the year ended 30June 2023 (round amount upward to nearest whole $). On 30 June, Scallion Ltd was notified by the lawyers of Croft Ltd that they had been declared bankrupt and were unable to pay the amount owing. This debt was subsequently written off.
4. Scallion Ltd received the June 2023 bank statement from First State Bank, as shown below:
Scallion Ltd
STATEMENT OF ACCOUNT-FIRST STATE BANK
Date Particulars Debit Credit Balance
$ $ $
1 Jun Balance brought forward 71,135 CR
2 Jun Deposit 2,000 73,135 CR
2 Jun Cheque 96 550 72,585 CR
4 Jun Cheque 98 33,000 39,585 CR
5 Jun Deposit 60,000 99,585 CR
6 Jun Cheque 99 14,106 85,479 CR
7 Jun EFT-Collection of Rent 2,000 87,479 CR
8 Jun Cheque 100 792 86,687 CR
8 Jun Deposit 10,000 96,687 CR
9 Jun Interest on account 500 97,187 CR
9 Jun Cheque 101 17,820 79,367 CR
17 Jun Cheque 104 3,449.60 75,917.40 CR
17 Jun Bank Charges 110 75,807.40 CR
17 Jun Cheque 103 15,000 60,807.40CR
17 Jun Deposit 11,660 72,467.40CR
18 Jun Deposit 4,850 77,317.40CR
19 Jun Cheque 105 2,650 74,667.40CR
21 Jun Cheque 106 21,780 52,887.40CR
30 Jun Deposit 2,145 55,032.40CR
30 Jun Cheque 110 330 54,702.40CR
30 Jun Bank Charges 150 54,552.40CR
The previous bank reconciliation performed at 31 May 2023 is provided below:
Bank Statement Balance 31May 2023 $71,135CR
Plus : Outstanding Deposits 2,000
Less;
Unpresented Cheques;
96 $ 550
97 1,800 2,350
Balance per Cash at Bank Account 70,785
Additional Information:
*EFT stands for Electronic Funds Transfer. Scallion Ltd does not have any rental properties. For any differences between the records of the bank and the entity, assume the business records are correct.
a. Using the information provided, prepare the Cash at Bank account at 30 June 2023 using a "T" account (any required adjustments as a result of the bank reconciliation, should be made through the cash journals).
b. Prepare the Bank Reconciliation Statement for Scallion Ltd at 30 June 2023.
5. Prepare a fully classified profit or loss statement for the year ended 30 June 2023 and a balance sheet at 30 June 2023 showing all assets, liabilities and equity items for Scallion Ltd. Also show how the sales account would appear in the general ledger at the end of the accounting period and the GST paid account (T accounts are preferred).
In the following section, you are required to provide written explanations to the following two questions. This section is to be no more than 500 words in total and your answers are required to be properly referenced. No marks will be given for these two questions if your answers are taken from online sources without proper referencing.
6. Provide an explanation for the accounting treatment of GST and accounting for bad debts that is recommended according to generally accepted accounting principles (GAAP), if:
i) You were required to write off the balance of a customer's account
ii) You had to estimate bad debts expense using the allowance method for the year end accounts
7. Does Scallion Ltd account for income tax in their financial reports for the year ended 30 June 2023? If so, why?
Attachment:- Accounting Processes.rar