3.
Answer bank

Sample answers to practice questions for the workbook From Transactions to Financial Statements.

Practice Question 3: From transactions to T-accounts to trial balance

Answer

Step 1: Analyse each transaction.

The owner invested CU 10,000 cash in the business.
- Cash increases; Debit Cash CU 10,000
- Capital increases; Credit Capital CU 10,000
The business purchased equipment for CU 4,000 cash.
- Equipment increases; Debit Equipment CU 4,000
- Cash decreases; Credit Cash CU 4,000
The business purchased inventory on credit for CU 2,500.
- Inventory increases; Debit Inventory CU 2,500
- Accounts payable increases; Credit Accounts payable CU 2,500
The business paid CU 600 rent in cash.
- Rent expense increases; Debit Rent expense CU 600
- Cash decreases; Credit Cash CU 600
The business sold goods for CU 1,200 cash.
- Cash increases; Debit Cash CU 1,200
- Sales revenue increases; Credit Sales revenue CU 1,200
The business paid CU 800 to suppliers.
- Accounts payable decreases; Debit Accounts payable CU 800
- Cash decreases; Credit Cash CU 800

Step 2: Prepare the T-accounts.

Cash account
Debit		Credit
Capital	10,000	Equipment	4,000
Sales revenue	1,200	Rent	600
		Accounts payable	800
		Carried down	5,800
Total	11,200	Total	11,200
Balance brought down 5,800 debit

1 Capital account
Debit		Credit
		Cash	10,000
Carried down	10,000
Total	10,000	Total	10,000
Balance brought down 10,000 credit

2 Equipment account
Debit		Credit
Cash	4,000	Carried down	4,000
Total	4,000	Total	4,000
Balance brought down 4,000 debit

3 Purchases account
Debit		Credit
Accounts payable	2,500	SoPL	2,500
Total	2,500	Total	2,500

6 Accounts payable account
Debit		Credit
Cash	800	Inventory	2,500
Carried down	1,700
Total	2,500	Total	2,500
Balance brought down 1,700 credit

5 Sales revenue account
Debit		Credit
SoPL	1,200	Cash	1,200
Total	1,200	Total	1,200

4 Rent expense account
Debit		Credit
Cash	600	SoPL	600
Total	600	Total	600

Step 3: Extract balances for the trial balance.

Account	Debit (CU)	Credit (CU)
Cash	5,800
Equipment	4,000
Purchases	2,500
Rent expense	600
Accounts payable		1,700
Capital		10,000
Sales revenue		1,200
Total	12,900	12,900

Practice Question 4: From completed T-accounts to trial balance

Answer

Step 1: Calculate the balance of each T-account.

Cash account
Debit		Credit
	12,000		2,500
	5,000		1,200
		Carried down	8,300
Total	17,000	Total	17,000
Balance brought down 8,300 debit

Equipment account
Debit		Credit
	5,000	Carried down	5,000
Total	5,000	Total	5,000
Balance brought down 5,000 debit

Accounts payable account
Debit		Credit
	1,200		3,000
Carried forward	1,800
Total	3,000	Total	3,000
Balance brought down 1,800 credit

Capital account
Debit		Credit
Carried forward	12,000		12,000
Total	12,000	Total	12,000
Balance brought down 12,000 credit

Sales revenue account
Debit		Credit
SoPL	5,000		5,000
Total	5,000	Total	5,000

Wages expense account
Debit		Credit
	2,500	SoPL	2,500
Total	2,500	Total	2,500

Purchases account
Debit		Credit
	3,000	SoPL	3,000
Total	3,000	Total	3,000

Step 2: Prepare the trial balance.

Account	Debit (CU)	Credit (CU)
Cash	8,300
Equipment	5,000
Purchases	3,000
Wages expense	2,500
Accounts payable		1,800
Capital		12,000
Sales revenue		5,000
Total	18,800	18,800

Practice Question 5: Trial balance from completed T-accounts (including drawings)

Answer

Step 1: Calculate the balance of each T-account.

Cash account
Debit		Credit
Capital	15,000	Drawings	2,000
Revenues	4,000	Rent	3,000
		Accounts payable	1,000
		Carried down	13,000
Total	19,000	Total	19,000
Balance brought down 13,000 debit

Purchases account
Debit		Credit
Accounts payable	2,500
		SoPL	2,500
Total	2,500	Total	2,500

Accounts payable account
Debit		Credit
Cash	1,00	Purchases	2,500
Carried down	1,500
Total	2,500	Total	2,500
Balance brought down 1,500 credit

Capital account
Debit		Credit
Carried down	15,000	Cash	15,000
Total	15,000	Total	15,000
Balance brought down 15,000 credit

Drawings account
Debit		Credit
Cash	2,000	Carried down	2,000
Total	2,000	Total	2,000
Balance brought down 2,000 debit

Sales revenue account
Debit		Credit
SoPL	4,000	Cash	4,000
Total	4,000	Total	4,000

Rent expense account
Debit		Credit
Cash	3,000	SoPL	3,000
Total	3,000	Total	3,000

Step 2: Prepare the trial balance.

Account	Debit (CU)	Credit (CU)
Cash	13,800
Purchases	2,500
Drawings	2,000
Rent expense	3,000
Accounts payable		1,500
Capital		15,000
Sales revenue		4,000
Total	20,500	20,500

Practice Question 6: A trial balance with a posting error

Answer

Step 1: Calculate the correct balances.

Cash account
Debit		Credit
Capital	20,000	Equipment	8,000
Sales	5,000	Utilities	3,000
		Accounts payable	2,000
		Carried down	12,000
Total	2,500	Total	25,000
Balance brought down 12,000 debit

Equipment account
Debit		Credit
Cash	8,000	Carried down	8,000
Total	8,000	Total	8,000
Balance brought down 8,000 debit

Purchases account
Debit		Credit
Accounts payable	3,000
		Carried down	3,000
Total	3,000	Total	3,000
Balance brought down 3,000 debit

Accounts payable
Debit		Credit
Cash	2,000	Purchases	3,000
Carried down	1,000
Total	3,000	Total	3,000
Balance brought down 1,000 credit

Capital account
Debit		Credit
Cash	20,000	Carried down	20,000
Total	20,000	Total	20,000
Balance brought down 20,000 credit

Sales revenue account
Debit		Credit
SoPL	5,000	Cash	5,000
Total	5,000	Total	5,000

Utilities expense account
Debit		Credit
Cash	3,000	SoPL	3,000
Total	3,000	Total	3,000
Balance brought down 3,000 debit

Step 2: Identify the error.

The purchases account has a debit balance of 3,000, but in the trial balance it was incorrectly placed on the credit side.

Step 3: Correct the trial balance.

Account	Debit (CU)	Credit (CU)
Cash	12,000
Equipment	8,000
Purchases	3,000
Utilities expense	3,000
Accounts payable		1,000
Capital		20,000
Sales revenue		5,000
Total	26,000	26,000

This exercise illustrates that errors can occur when transferring balances from the ledger to the trial balance.

A trial balance will not balance if:

a balance is entered on the wrong side (debit versus credit)
an account is omitted
a balance is copied incorrectly.

However, some errors will not be detected by a trial balance (for example, errors of principle or a complete omission of a transaction).

Practice Question 7: Basic adjustments (introductory)

Answer

Adjusting journal entries:

Closing inventory	Dr	Cr
Closing inventory (SoFP)	400
Closing inventory (cost of sales)		400

Accrued wages
Wage expense	250
Accrued wages		250

Adjusted trial balance:

	Trial balance		Adjustments		Adjusted trial balance
Account	Debit (CU)	Credit (CU)	Debit (CU)	Credit (CU)	Debit (CU)	Credit (CU)
Cash	8,200				8,200
Accounts receivable	3,100				3,100
Purchases	1,200				1,200
Equipment	6,000				6,000
Accounts payable		2,400				2,400
Capital		11,200				11,200
Sales revenue		10,200				10,200
Wages expense	3,800		250		4,050
Rent expense	1,500				1,500
Closing inventory (SoFP)			400		400
Closing inventory (cost of goods sold)				400		400
Accrued wages				250		250
Totals	23,800	23,800	650	650	24,450	24,450

SoPL and SoFP:

Statement of Profit and Loss for Sunny Stationery for the year ending 31 December 20x7
	CU
Revenue		10,200
Cost of sales
Opening inventory	0
Purchases	1,200
Closing inventory	(400)	(400)
Gross profit		9,400

Expenses
Wages	4,050
Rent	1,500	(5,550)
Operating profit		3,850
Interest		0
Profit after interest		3,850
Tax		−
Profit for the year		3,850

Statement of Financial Position of Sunny Stationery as at 31 December 20x7
		CU
Non-current assets
Equipment		6,000

Total current assets
Inventory		400
Accounts receivable		3,100
Cash		8,200
		11,700
Total assets		17,700

Equity and liabilities
Capital		15,050

Total current liabilities
Accounts payable		2,400
Accrued wages		250
		2,650
Total equity and liabilities		17,700

Practice Question 8: Accruals and prepayments (intermediate)

Answer

Adjusting journal entries:

Prepaid insurance	Dr	Cr
Insurance expense	600
Prepaid insurance		600

Accrued wages
Wage expense	400
Accrued wages		400

Accrued utility bills
Utility expense	150
Accrued utilities		150

Unearned revenue
Revenue	500
Unearned revenue		500

Adjusted trial balance:

	Trial balance		Adjustments		Adjusted trial balance
Account	Debit (CU)	Credit (CU)	Debit (CU)	Credit (CU)	Debit (CU)	Credit (CU)
Cash	5,400				5,400
Accounts receivable	4,600				4,600
Prepaid insurance	1,200			600	600
Equipment	10,000				10,000
Accounts payable		2,800				2,800
Bank loan		4,000				4,000
Capital		7,000				7,000
Service revenue		11,900	500			11,400
Salaries expense	3,600		400		4,000
Utilities expense	900		150		1,050
Insurance expense			600		600
Accured wages				400		400
Accrued utilities				150		150
Unearned revenue				500		500
Totals	25,700	25,700	1,650	1,650	26,250	26,250

SoPL and SoPF:

Statement of Profit and Loss for GreenTech Repairs for the year ending 31 March 20x6
	CU
Revenue		11,400

Expenses
Salaries	4,000
Utilities	1,050
Insurance	600	(5,650)

Operating profit		5,750
Interest		0

Profit after interest		5,750
Tax		−

Profit for the year		5,750

Statement of Financial Position of GreenTech Repairs as at 31 March 20x6
		CU
Non-current assets
Equipment		10,000

Current assets
Inventory
Accounts receivable		4,600
Prepaid insurance		600
Cash		5,400
		10,600
Total assets		20,600

Equity and liabilities
Capital		12,750

Non-current liabilities
Bank loan		4,000

Current liabilities
Accounts payable		2,800
Accrued utilities		150
Unearned revenue		500
Accrued salaries		400
		3,850
Total equity and liabilities		20,600

Practice Question 9: Full adjustment set (more challenging)

Answer

Adjusting journal entries:

Closing inventory	Dr	Cr
Closing inventory (SoFP)	2,900
Closing inventory (cost of sales)		2,900

Depreciation
Depreciation expense	1,200
Depreciation (SoFP)		1,200

Accrued wages
Wage expense	350
Accrued wages		350

Prepaid rent
Rent prepayment	600
Rent expense		600

Adjusted trial balance:

	Trial balance		Adjustments		Adjusted trial balance
Account	Debit (CU)	Credit (CU)	Debit (CU)	Credit (CU)	Debit (CU)	Credit (CU)
Cash	7,500				7,500
Accounts receivable	2,700				2,700
Inventory (1 July 2025)	3,400				3,400
Equipment	12,000				12,000
Accounts payable		7,900				7,900
Bank loan		5,100				5,100
Capital		10,000				10,000
Sales revenue		18,600				18,600
Purchases	8,200				8,200
Rent expense	3,000			600	2,400
Wages expense	4,800		350		5,150
Closing inventory (SoFP)			2,900		2,900
Closing inventory (COS)				2,900		2,900
Depreciation expense			1,200		1,200
Depreciation (SoFP)				1,200		1,200
Accrued wages				350		350
Rent prepayment			600		600
Totals	41,600	41,600	5,050	5,050	46,050	46,050

SoPL and SoFP:

Statement of Profit and Loss for Stream Cafe for the year ending 30 June 20x9
	CU
Revenue		18,600
Cost of sales
Opening inventory	3,400
Purchases	8,200
Closing inventory	(2,900)	(8,700)

Gross profit		9,900

Expenses
Rent	2,400
Depreciation	1,200
Wages	5,150	(8,750)
Operating profit		1,150
Interest		0

Profit after interest		1,150
Tax		0

Profit for the year		1,150

Statement of Financial Position of Stream Cafe as at 30 June 20x9
		CU
Non-current assets
Equipment		12,000
Depreciation		(1,200)
Net book value		10,800

Current assets
Inventory		2,900
Accounts receivable		2,700
Prepaid rent		600
Cash		7,500
		13,700
Total assets		24,500

Equity and liabilities
Capital		11,150

Non-current liabilities
Bank loan		5,100

Current liabilities
Accounts payable		7,900
Accrued wages		350
		8,250
Total equity and liabilities		24,500

Explanations:
1. Adjustments need to be made so that the expenses are matched to the income generated in the accounting period in question.
2. The functions are as follows:
  - Accruals: These are expenses incurred in the period that have not been settled at year end, and are shown as current liabilities.
  - Prepayments: These are expenses paid, but relate to future accounting periods. They are shown as current assets.
  - Non-cash adjustments: These relate to items such as depreciation that seek to apply the matching concept, but do not result in a cash movement.
  - Inventory adjustments: Under a periodic inventory system, a year-end adjustment is made following an inventory count. This ensures that the inventory in the SoFP is accurate and that the cost of sales can be calculated.

Practice Question 10: Extended adjustment set (more challenging)

Answer

Journal adjusting entries:

Depreciation	Dr	Cr
Depreciation expense	3,000
Depreciation (SoFP)		3,000

Accrued loan interest
Interest expense	300
Accrued interest		300

Bad debt write-off
Bad debt expense	800
Accounts receivable		800

Allowance for credit losses (doubtful debts)
Expected credit losses (doubtful debts)	520
Loss allowance (doubtful debts)		520

Accounts receivable prior to write-off: CU 16,000 Bad debt written off: CU 800 Closing Accounts receivable: CU 15,200 Loss allowance = 10% × 15,200 Existing allowance (from trial balance): CU 1,000 Therefore, increase required = CU 520

Provision for legal case
Legal expense	2,400
Provision for legal claim		2,400

Closing inventory
Closing inventory (SoFP)	11,500
Closing inventory (COS)		11,500

Adjusted trial balance:

	Trial balance		Adjustments		Adjusted trial balance
Account	Debit (CU)	Credit (CU)	Debit (CU)	Credit (CU)	Debit (CU)	Credit (CU)
Purchases	70,000				70,000
Opening inventory	9,000				9,000
Wages	18,000				18,000
Rent	6,000				6,000
General administrative expenses	4,500				4,500
Accounts receivable	16,000			800	15,200
Bank	11,500				11,500
Machinery at cost	30,000				30,000
Drawings	15,000				15,000
Sales revenue		120,000				120,000
Capital		13,000				13,000
Bank loan		20,000				20,000
Accounts payable		14,000				14,000
Loss allowance		1,000		520		1,520
Accumulated depreciation – machinery		12,000		3,000		15,000
Depreciation expense			3,000		3,000
Interest expense			300		300
Interest payable				300		300
Bad debts expense			800		800
Expected credit loss expense			520		520
Legal expense			2,400		2,400
Provision for legal claim				2,400		2,400
Closing inventory			11,500		11,500
Inventory adjustment				11,500		11,500
Totals	180,000	180,000	18,520	18,520	197,720	197,720

Practice Question 13: GreenPea Retail

Answer

Journal entries

1 Owner investment	Dr	Cr
Cash	50,000
Share capital		50,000

2 Credit purchases
Purchases	12,000
Accounts payable		12,000

3 Equipment purchase
Shop equipment	8,000
Cash		8,000

4 Rent paid
Rent expense	2,400
Cash		2,400

5 Cash sales
Cash	9,000
Sales		9,000

6 Credit sales
Accounts receivable	6,000
Sales		6,000

7 Cash received from customers
Cash	3,000
Accounts receivable		3,000

8 Cash payment to suppliers
Accounts payable	4,000
Cash		4,000

9 Salaries expense paid
Salaries expense	2,200
Cash		2,200

10 Utilities expense paid
Utilities expense	500
Cash		500

Trial balance

Account	Debit (CU)	Credit (CU)
Cash	44,900
Accounts receivable	3,000
Purchases	12,000
Rent expense	2,400
Shop equipment	8,000
Accounts payable		8,000
Share capital		50,000
Sales revenue		15,000
Salaries expense	2,200
Utilities expense	500
Total	73,000	73,000

Adjusting journal entries

Rent expense: prepayment adjustment	Dr	Cr
Prepaid rent	2,000
Rent expense		2,000

Accrued utilities
Utility expense	150
Accrued utilities		150

Depreciation on equipment
Depreciation expense	200
Accumulated depreciation		200

Closing inventory
Closing inventory (SoFP)	2,800
Closing inventory		2,800

Inventory write-down to net realisable value
Inventory write-down expense	200
Closing inventory (SoFP)		200

Adjusted trial balance

	Trial balance		Adjustments		Adjusted trial balance
Account	Debit (CU)	Credit (CU)	Debit (CU)	Credit (CU)	Debit (CU)	Credit (CU)
Cash	44,900				44,900
Accounts receivable	3,000				3,000
Purchases	12,000				12,000
Rent expense	2,400			2,000	400
Shop equipment	8,000				8,000
Accounts payable		8,000				8,000
Share capital		50,000				50,000
Sales revenue		15,000				15,000
Salaries expense	2,200				2,200
Utilities expense	500		150		650
Prepaid rent			2,000		2,000
Accrued utilities				150		150
Depreciation expense			200		200
Depreciation (SoFP)				200		200
Closing inventory (SoFP)			2,800	200	2,600
Closing inventory (CoGS)				2,800		2,800
Inventory write-down expense			200		200
Total	73,000	73,000	5,350	5,350	76,150	76,150

SoPL

GreenPea Retail Ltd
Statement of Profit and Loss for the month ended 31 January 20x5
		CU
Sales		15,000
Cost of goods sold:
Opening inventory	0
Purchases	12,000
Closing inventory	(2,800)	(9,200)
Gross profit		5,800
Operating expenses:
Salaries expense	2,200
Rent expense	400
Utilities expense	650
Depreciation expense	200
Inventory write-down expense	200	(3,650)
Operating profit		2,150
Interest		0
Profit after interest		2,150
Tax		0
Profit for the year		2,150

SoFP

GreenPea Retail Ltd
Statement of Financial Position as at 31 January 20x5
	CU
Non-current assets
Shop equipment	8,000
Less: Accumulated depreciation	(200)
Net book value	7,800

Current assets
Cash	44,900
Accounts receivable	3,00
Inventory	2,600
Prepaid rent	2,000
	52,500
Total assets	60,300

Equity and liabilities
Share capital	50,000
Retained earnings	2,150
	52,150

Non-current liabilities	−

Current liabilities
Accounts payable	8,000
Utilities payable	150
	8,150
Total equity and liabilities	60,300

Practice Question 14: Apex Consulting

Answer

Journal entries

1 Owner investment	Dr ('000)	Cr ('000)
Cash	100
Share capital		100

2 Bank loan received
Cash	40
Bank loan		40

3 Equipment purchase
Office equipment	25
Cash		25

4 Rent paid
Rent expense	36
Cash		36

5 Service revenue - cash
Cash	120
Revenue		120

6 Service revenue - credit
Accounts receivable	60
Revenue		60

7 Cash received from clients
Cash	40
Accounts receivable		40

8 Consulting staff salaries paid
Cost of services (consulting salaries)	50
Cash		50

9 Admin salaries paid
Administrative salaries expense	20
Cash		20

10 Insurance paid
Insurance expenses	6
Cash		6

Trial balance

Account	Debit (CU '000)	Credit (CU '000)
Cash	163
Accounts receivable	20
Office equipment	25
Rent expense	36
Insurance expense	6
Cost of services (consulting salaries)	50
Administrative salaries expense	20
Bank loan		40
Share capital		100
Revenue		180
Total	320	320

Adjusting entries

Rent expense: prepayment adjustment	Dr ('000)	Cr ('000)
Prepaid rent	24
Rent expense		24

Rent paid = 36,000 for three years Annual expense = 36,000/3 = 12,000 Therefore, prepayment/overstated expenses = 36,000 − 12,000 = 24,000

Insurance expense – prepayment adjustment
Prepaid insurance	4
Insurance expense		4

Insurance paid = 6,000 for three years Annual expense = 6,000/3 = 2,000 Therefore, prepayment/overstated expense = 6,000 − 2,000 = 4,000

Accrued consulting salaries
Cost of services (consulting salaries)	5
Salaries payable		5

Depreciation
Depreciation expense	5
Accumulated depreciation		5

Cost of equipment = 25,000; useful life = five years Annual straight-line depreciation = (25,000 − 0)/5 = 5,000

Accrued interest
Interest expense	2.4
Interest payable		2.4

Loan = 40,000; interest rate = 6% Annual interest = 40,000 × 6% = 2,400

Income tax
Tax expense	15
Tax payable		15

Adjusted trial balance

	Trial balance		Adjustments		Adjusted trial balance
Account	Debit (CU)	Credit (CU)	Debit (CU)	Credit (CU)	Debit (CU)	Credit (CU)
Cash	163				163
Accounts receivable	20				20
Office equipment	25				25
Accumulated depreciation (SoFP)				5		5
Depreciation expense			5		5
Prepaid rent			24		24
Rent expense	36			24	23
Prepaid insurance			4		4
Insurance expenses	6			4	2
Cost of services (consulting salaries)	50		5		55
Salaries payable				5		5
Administrative salaries expense	20				20
Interest expense			2.4		2.4
Interest payable				2.4		2.4
Tax expense			15		15	2.4
Tax payable				15		15
Bank loan		40				40
Share capital		100				100
Revenue		180				180
Total	320	320	55.4	55.4	347.4	347.4

SoPL

Apex Consulting Pty Ltd Statement of Profit and Loss for the year ended 31 December 20x8
		CU '000
Revenue		180
Operating expenses:
Cost of services (consulting salaries)	55
Administrative salaries	20
Rent expense	12
Insurance expense	2
Depreciation expense	5	(94)
Operating profit		86
Interest		(2.4)
Profit after interest		83.6
Tax		(15)
Profit for the year		68.6

SoFP

Apex Consulting Pty Ltd Statement of Financial Position as at 31 December 20x8
	CU '000
Non-current assets
Office equipment	25
Less: Accumulated depreciation	(5)
Net book value	20

Current assets
Cash	163
Accounts receivable	20
Prepaid rent	24
Prepaid insurance	4
	211
Total assets	231

Equity and liabilities
Share capital	100
Retained earnings	68.6
	168.6

Non-current liabilities
Bank loan	40

Current liabilities
Salaries payable	5
Interest payable	2.4
Tax payable	15
	22.4
Total equity and liabilities	231

Practice Question 15: Jones

Answer

Journal entries

1 Capital introduced	Dr	Cr
Cash	100,000
Capital		100,000

2 Credit purchases
Purchases	70,000
Accounts payable		70,000

3 Payment to suppliers
Accounts payable	50,000
Cash		50,000

4 Credit sales
Accounts receivable	120,000
Sales		120,000

5 Cash received from customers
Cash	90,000
Accounts receivable		90,000

6 Wages paid
Wages expenses	30,000
Cash		30,000

7 Rent paid
Rent expenses	12,000
Cash		12,000

8 Drawings
Drawings	13,000
Cash		13,000

9 Loan received
Cash	20,000
Bank loan		20,000

10 Equipment purchases
Equipment	15,000
Cash		15,000

Trial balance

Account	Debit (CU)	Credit (CU)
Cash*	93,000
Accounts receivable	30,000
Opening inventory	12,000
Equipment	15,000
Purchases	70,000
Wages expense	30,000
Rent expense	12,000
Drawings	13,000
Accounts payable		20,000
Bank loan		20,000
Capital**		115,000
Sales		120,000
Total	275,000	275,000

* Includes opening cash balance of 3,000.
** Includes opening capital of 15,000 and capital introduced during the year, 100,000.

Adjusting entries

Closing inventory	Dr	Cr
Closing inventory (SoFP)	20,000
Closing inventory (CoGS)		20,000

Bad debt
Bad debt expense	3,000
Accounts receivable		3,000

Expected credit losses
Expected credit loss expense (SoPL)	1,350
Loss allowance (SoFP)		1,350

Remaining receivables after write-off = 30,000 − 3,000 = 27,000 Allowance required = 5% Therefore, allowance to be created = 27,000 × 5% = 1,350

Depreciation
Depreciation expense	3,000
Accumulated depreciation		3,000

Cost = 15,000; rate = 20% Depreciation for the year = 15,000 × 20% = 3,000

Interest on loan
Interest expense	1,000
Interest payable		1,000

Loan = 20,000; rate = 5% Interest for the year = 20,000 × 5% = 1,000

Tax for the year
Tax expense	6,000
Tax payable		6,000

Provision for warranty
Warranty expense	2,000
Provision for warranty		2,000

Adjusted trial balance

	Trial balance		Adjustments		Adjusted trial balance
Account	Debit (CU)	Credit (CU)	Debit (CU)	Credit (CU)	Debit (CU)	Credit (CU)
Cash	93,000				93,000
Accounts receivable	30,000			3,000	27,000
Loss allowance				1,350		1,350
Equipment	15,000				15,000
Accumulated depreciation (SoFP)				3,000		3,000
Opening inventory	12,000				12,000
Purchases	70,000				70,000
Closing inventory (SoFP)			20,000		20,000
Closing inventory (CoGS)				20,000		20,000
Bad debt expense			3,000		3,000
Expected credit loss expense			1,350		1,350
Depreciation expense			3,000		3,000
Interest expense			1,000		1,000
Tax expense			6,000		6,000
Tax payable				6,000		6,000
Warranty expense			2,000		2,000
Provision for warranty				2,000		2,000
Wages expense	30,000				30,000
Rent expense	12,000				12,000
Drawings	13,000				13,000
Accounts payable		20,000				20,000
Bank loan		20,000				20,000
Capital		115,000				115,000
Sales		120,000			120,000
Total	275,000	275,000	36,350	36,350	308,350	308,350

SoPL

Jones Enterprises Statement of Profit and Loss for the month ended 31 January 20x6
		CU
Sales		120,000
Cost of goods sold:
Opening inventory	12,000
Purchases	70,000
Closing inventory	(20,000)	(62,000)
Gross profit		58,000
Operating expenses:
Wages expense	30,000
Rent expense	12,000
Bad debt expense	3,000
Expected credit loss	1,350
Depreciation expense	3,000
Warranty expense	2,000	(51,350)
Operating profit		6,650
Interest		(1,000)
Profit after interest		5,650
Tax		(6,000)
Loss for the year		(350)

SoFP

Jones Enterprises Statement of Financial Position as at 31 January 20x6
		CU
Non-current assets
Shop equipment		15,000
Less: Accumulated depreciation		(3,000)
Net book value		12,000

Current assets
Cash		93,000
Accounts receivable		27,000
Less: Loss allowance		(1,350)
Net receivables		25,650
Inventory		20,000
		138,650
Total assets		150,650

Equity and liabilities
Capital		115,000
Less: Drawings		(13,000)
Less: Loss for the year		(350)
		101,650

Non-current liabilities
Bank loan		20,000

Current liabilities
Accounts payable		20,000
Interest payable		1,000
Tax payable		6,000
Provision for warranty		2,000
		29,000
Total equity and liabilities		150,650

Practice Question 16: FitLife

Answer

Journal entries

1 Owner investment	Dr	Cr
Cash	80,000
Share capital		80,000

2 Bank loan received
Cash	30,000
Bank loan		30,000

3 Equipment purchase
Equipment	20,000
Cash		20,000

4 Rent paid
Rent expense	24,000
Cash		24,000

5 Cash received in advance (recognised as deferred income, a liability)
Cash	48,000
Deferred income		48,000

6 Cash revenue earned
Cash	60,000
Revenue		60,000

7 Credit revenue
Accounts receivable	20,000
Revenue		20,000

8 Cash received from customers
Cash	15,000
Accounts receivable		15,000

9 Salaries (fitness instructors)
Salaries expense	35,000
Cash		35,000

10 Administrative salaries
Administrative salaries expense	12,000
Cash		12,000

11 Insurance paid
Insurance expense	3,600
Cash		3,600

12 Dividends paid
Dividends	10,000
Cash		10,000

Trial balance

Account	Debit (CU)	Credit (CU)
Cash	128,400
Accounts receivable	5,000
Equipment	20,000
Rent expense	24,000
Insurance expense	3,600
Salaries expense	35,000
Administrative salaries expense	12,000
Dividends	10,000
Deferred income		48,000
Bank loan		30,000
Share capital		80,000
Revenue		80,000
Total	238,000	238,000

Adjusting entries

Rent – no adjustment required	Dr	Cr
Rent relates to 12-month period, fully within the year

Insurance (prepayment adjustment)
Prepaid insurance	2,400
Insurance expense		2,400

Insurance paid = 3,600 for three years Annual expense = 3,600/3 = 1,200 Therefore, prepayment/overstated expense = 3,600 − 1,200 = 2,400

Deferred income (revenue recognition)
Deferred income (revenue recognition)	36,000
Revenue		36,000

Cash received in advance = 48,000 Revenue earned = 36,000; Therefore, remaining liability = 12,000

Accrued salaries
Salaries expense	4,000
Salaries payable		4,000

Depreciation
Depreciation expense	4,000
Accumulated depreciation		4,000

Cost of equipment = 20,000; useful life = five years Annual straight-line depreciation = (20,000 − 0)/5 = 4,000

Accrued interest
Interest expense	1,500
Interest payable		1,500

Loan = 30,000; interest rate = 5% Annual interest = 30,000 × 5% = 1,500

Income tax
Tax expense	6,000
Tax payable		6,000

Adjusted trial balance

	Trial balance		Adjustments		Adjusted trial balance
Account	Debit (CU)	Credit (CU)	Debit (CU)	Credit (CU)	Debit (CU)	Credit (CU)
Cash	128,400				128,400
Accounts receivable	5,000				5,000
Equipment	20,000				20,000
Accumulated depreciation (SoFP)				4,000		4,000
Depreciation expense			4,000		4,000
Rent expense	24,000				24,000
Prepaid insurance			2,400		2,400
Insurance expense	3,600			2,400	1,200
Salaries expense	35,000		4,000		39,000
Salaries payable				4,000		4,000
Administrative salaries expense	12,000				12,000
Interest expense			1,500		1,500
Interest payable				1,500		1,500
Tax expense			6,000		6,000
Tax payable				6,000		6,000
Deferred income		48,000	36,000			12,000
Bank loan		30,000				30,000
Share capital		80,000				80,000
Dividends	10,000				10,000
Revenue		80,000		36,000		116,000
Total	238,000	238,000	53,900	53,900	253,500	253,500

SoPL

FitLife Ltd Statement of Profit and Loss for the year ended 31 March 20x6
		CU
Revenue		116,000
Operating expenses:
Salaries expense	39,000
Administrative salaries	12,000
Rent expense	24,000
Insurance expense	1,200
Depreciation expense	4,000	(80,200)
Operating profit		35,800
Interest		(1,500)
Profit after interest		34,300
Tax		(6,000)
Profit for the year		28,300

SoFP

FitLife Ltd Statement of Financial Position as at 31 March 20x6
	CU
Non-current assets
Equipment	20,000
Less: Accumulated depreciation	(4,000)
Net book value	16,000

Current assets
Cash	128,400
Accounts receivable	5,000
Prepaid insurance	2,400
	135,800
Total assets	151,800

Equity and liabilities
Share capital	80,000
Retained earnings (28,300 – 10,000 dividends)	18,300
	98,300

Non-current liabilities
Bank loan	30,000

Current liabilities
Deferred income	12,000
Salaries payable	4,000
Interest payable	1,500
Tax payable	6,000
	23,500
Total equity and liabilities	151,800

Practice Question 17: FreshMart

Answer

Journal entries

1 Owner investment	Dr	Cr
Cash	120,000
Share capital		120,000

2 Inventory purchases on credit
Purchases	80,000
Accounts payable		80,000

3 Payment to suppliers
Accounts payable	50,000
Cash		50,000

4 Cash sales
Cash	190,000
Sales		190,000

5 Wages paid
Wages expense	45,000
Cash		45,000

6 Rent paid
Rent expense	24,000
Cash		24,000

7 Utilities paid
Utilities expense	6,000
Cash		6,000

8 Gift cards sold (recognised as deferred income, a liability)
Cash	10,000
Deferred income		10,000

Trial balance

Account	Debit (CU)	Credit (CU)
Cash	195,000
Purchases	80,000
Wages expense	45,000
Rent expense	24,000
Utilities expense	6,000
Accounts payable		30,000
Deferred income		10,000
Share capital		120,000
Sales		190,000
Total	350,000	350,000

Adjusting entries

Closing inventory	Dr	Cr
Closing inventory (SoFP)	25,000
Closing inventory (CoGS)		25,000

Supplier discount
Accounts payable	2,000
Purchases		2,000

Inventory write-down
Inventory write-down expense	800
Inventory (SoFP)		800

Cost = 2,000; NRV = 1,200 Therefore, 2,000 − 1,200 = 800 must be written down

Gift cards (deferred income)
Deferred income	4,000
Sales		4,000

Gift cards sold = 10,000; Unredeemed = 6,000 Therefore, revenue earned = 10,000 − 6,000 = 4,000

Tax adjustments
i. Current year's tax
Tax expense	8,000
Tax payable		8,000

i. Last year's correction
Tax payable	1,000
Tax expense		1,000

Adjusted trial balance

	Trial balance		Adjustments		Adjusted trial balance
Account	Debit (CU)	Credit (CU)	Debit (CU)	Credit (CU)	Debit (CU)	Credit (CU)
Cash	195,000				195,000
Purchases	80,000			2,000	78,000
Inventory write-down expense			800		800
Closing inventory (SoFP)			25,000	800	24,200
Closing inventory (CoGS)				25,000		25,000
Wages expense	45,000				45,000
Rent expense	24,000				24,000
Utilities expense	6,000				6,000
Accounts payable		30,000	2,000			28,000
Deferred income		10,000	4,000			6,000
Tax expense			8,000	1,000	7,000
Tax payable			1,000	8,000		7,000
Share capital		120,000				120,000
Sales		190,000		4,000		194,000
Total	350,000	350,000	40,800	40,800	380,000	380,000

SoPL

FreshMart Ltd Statement of Profit and Loss for the year ended 31 December 20x9
		CU
Sales		194,000
Cost of goods sold:
Opening inventory	0
Purchases	78,000
Closing inventory	(25,000)	(53,000)
Gross profit		141,000
Operating expenses:
Wages expense	45,000
Rent expense	24,000
Utilities expense	6,000
Inventory write-down expense	800	(75,800)
Operating profit		65,200
Interest		0
Profit after interest		65,200
Tax		(7,000)
Profit for the year		58,200

SoFP

FreshMart Ltd Statement of Financial Position as at 31 January 20x9
	CU

Non-current assets	−

Current assets
Cash	195,000
Inventory	24,200
	219,200
Total assets	219,200

Equity and liabilities
Share capital	120,000
Retained earnings	58,200
	178,200

Non-current liabilities	−

Current liabilities
Accounts payable	28,000
Deferred income	6,000
Tax payable	7,000
	41,000
Total equity and liabilities	219,200

Practice Question 18: Derma Ltd

Answer

Journal entries

1 Credit sales	Dr (m CU)	Cr (m CU)
Accounts receivable	95
Sales		95

2 Cash sales
Cash	25
Sales		25

3 Cash received from customers
Cash	92
Accounts receivable		92

4 Credit purchases
Purchases	60
Accounts payable		60

5 Payment to suppliers
Accounts payable	58
Cash		58

6 Wages paid
Wages expense	20
Cash		20

7 Insurance paid
Insurance expense	8
Cash		8

8 Administrative expenses paid
Administrative expenses	6
Cash		6

9 Interest paid
Interest expense	2
Cash		2

10 Income tax payment
Tax payable	5
Cash		5

11 Dividends paid
Retained earnings	4
Cash		4

Trial balance

Account	Debit (m)	Credit (m)
Equipment	80
Accumulated depreciation		24
Opening inventory	18
Accounts receivable	19
Loss allowance		1
Cash	34
Prepaid insurance	2
Share capital		70
Retained earnings		6
Bank loan		10
Accounts payable		11
Wages payable		3
Interest payable		1
Tax payable		1
Provision for product returns		2
Sales		120
Purchases	60
Wages expense	20
Insurance expense	8
Administrative expenses	6
Interest expense	2
Total	249	249

Adjusting entries

Inventory write-down	Dr (m)	Cr (m)
Inventory write-down expense	2
Inventory (SoFP)		2

Insurance expense – prepayment adjustment
Prepaid insurance	1
Insurance expense		1
Opening balance = 2; Paid in the year = 8; Closing balance = 3 Insurance expense for the year = 2 + 8 − 3 = 7 Therefore, reduce expense by 1

Accrued wages
Wages expense	1
Wages payable		1
Opening balance = 3; Paid in the year = 20; Closing balance = 4 Wages expense for the year = 20 − 3 + 4 = 21 Therefore, increase expense by 1

Depreciation
Depreciation expense	8
Accumulated depreciation		8

Bad debt
Bad debt expense	1
Accounts receivable		1

Expected credit losses
Loss allowance (SoFP)	0.1
Expected credit loss expense (SoPL)		0.1
Receivables balance after write-off = 19 − 1 = 18 Required allowance = 18 × 5% = 0.9 Therefore, reduce allowance by 0.1

Increase in provision
Provision expense	1
Provision for product return		1

Interest payable adjustment
Interest expense	1
Interest payable		1
Opening balance = 1; paid during the year = 2; Closing balance = 2 Interest expense for the year = 2 − 1 + 2 = 3 Therefore, increase interest expense by 1

Income tax adjustment
Tax expense	7
Tax payable		7

Adjusted trial balance

	Trial balance		Adjustments		Adjusted trial balance
Account	Debit (m)	Credit (m)	Debit (m)	Credit (m)	Debit (m)	Credit (m)
Equipment	80				80
Accumulated depreciation		24		8		32
Opening inventory	18				18
Accounts receivable	19			1	18
Bad debt expense			1		1
Loss allowance		1	0.1			0.9
Expected credit loss expense				0.1		0.1
Cash	34				34
Prepaid insurance	2		1		3
Accounts payable		11				11
Wages payable		3		1		4
Interest payable		1		1		2
Tax payable		1		7		8
Provision for product returns		2		1		2
Bank loan		10				10
Share capital		70				70
Retained earnings		6				6
Sales		120				120
Purchases	60				60
Wages expenses	20		1		21
Insurance expense	8			1	7
Administrative expenses	6				6
Interest expense	2		1		3
Inventory write-down expense			2		2
Depreciation expense			8		8
Provision expense			1		1
Tax expense			7		7
Closing inventory (SoFP)			15	2	13
Closing inventory (CoGS)				15		15
Total	249	249	37	37	282	282

SoPL

Derma Ltd Statement of Profit and Loss for the year ended 31 December Year 4
		CU (m)
Sales		120
Cost of goods sold:
Opening inventory	18
Purchases	60
Closing inventory	(15)	(63)
Gross profit		57
Operating expenses:
Wages expense	21
Insurance expense	7
Administrative expense	6
Inventory write-down expense	2
Depreciation expense	8
Bad debt expense	1
Loss allowance (reduction in allowance)	(0.1)
Provision expense	1	(45.9)
Operating profit		11.1
Interest		(3)
Profit after interest		8
Tax		(7)
Profit for the year		1.1

SoFP

Derma Ltd Statement of Financial Position as at 31 December Year 4
		CU (m)
Non-current assets
Equipment	80
Less: Accumulated depreciation		(32)
Net book value		48

Current assets
Inventory		13
Accounts receivable	18
Less: Loss allowance		(0.9)
Net receivables		17.1
Prepaid insurance		3
Cash		34
		67.1
Total assets		115.1

Equity and liabilities
Share capital		70
Retained earnings (6 + 1.1)		7.1
		77.1

Non-current liabilities
Bank loan		10

Current liabilities
Accounts payable		11
Wages payable		4
Interest payable		2
Tax payable		8
Provision for product returns		3
		28
Total equity and liabilities		115.1

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3. Answer bank

Practice Question 3: From transactions to T-accounts to trial balance

Answer

Practice Question 4: From completed T-accounts to trial balance

Answer

Practice Question 5: Trial balance from completed T-accounts (including drawings)

Answer

Practice Question 6: A trial balance with a posting error

Answer

Practice Question 7: Basic adjustments (introductory)

Answer

Practice Question 8: Accruals and prepayments (intermediate)

Answer

Practice Question 9: Full adjustment set (more challenging)

Answer

Practice Question 10: Extended adjustment set (more challenging)

Answer

Practice Question 13: GreenPea Retail

Answer

Practice Question 14: Apex Consulting

Answer

Practice Question 15: Jones

Answer

Practice Question 16: FitLife

Answer

Practice Question 17: FreshMart

Answer

Practice Question 18: Derma Ltd

Answer

3.
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