Reference no: EM133644163

Accounting Processes

Instructions
This assignment is designed to give accounting students the opportunity to prepare a set of accounts manually. It is important that each one works on this assignment on their own. Collusion between students is not permitted. The assignment will be marked on effort and not only on the correct answer. It is expected that students will get different answers because of the assumptions made. Make sure the work you submit is your own work and not copied or taken from another student. Any evidence of collusion or copying will be treated very seriously and reported as academic misconduct This assignment is designed to illustrate how the accounting process works, so use it as a learning tool rather than worrying about what others are doing.

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. This assignment 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 at 1 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 at 1 June 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 INCLUSIVE of 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 ledger at 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.

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.

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 1 June 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 Ltd paid 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:

Question 1: Prepare any adjusting or correcting entries required as at 30 June 2023 in relation to the additional information provided above.

Question 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

Question 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 30 June 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.

Question 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.

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).

Prepare the Bank Reconciliation Statement for Scallion Ltd at June 2023.

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:

You were required to write off the balance of a customer's account

You had to estimate bad debts expense using the allowance method for the year end accounts

Does Scallion Ltd account for income tax in their financial reports for the year ended 30 June 2023? If so, why?