Accounting Principle and These Problems

Questions: Problem 1: Income Statement The financial controller for Red Rider Sports Ltd was stranded in the Philippines because of a recent typhoon. Their new financial accountant had to prepare financial statements for the fiscal year ending 30 June 2014 for management. Below is a draft of the income statement prepared by the financial accountant. Red Rider Sports Ltd Income Statement Sales 2,550,500 Expenditures and Costs Cost of Goods Sold 1,020,200 Advertising Expense 127,000 Bank Service charges 2,200 Auto Truck Expense 6,200 Salaries Wages Expense 850,000 Credit Card Discount Expense 49,000 Depreciation Expense 10,000 Dividends Paid 25,000 Telephone Expense 7,200 Travel Expense 5,500 Utilities Expense 16,800 Office Expense 7,800 General Liability Insurance 14,200 Purchase Discounts 40,800 Rent Expense 60,000 Repairs Maintenance 4,800 Supplies Expense 2,400 Sales Returns 76,000 Sales Discounts 100,500 Total Expenses and Costs 2,425,600 Profit from Operations 124,900 The individual amounts above are correct; however, some of the amounts are not reported correctly. The income statement was not acceptable per management and they sent the draft to you for editing. Required:a. Prepare an appropriate income statement for the year ending 30 June 2014. Include percentages for each line item based on gross sale.b. Compare your income statement with the draft and explain the differences to management.c. If Red Rider Sports Ltd credit card fee is normally 2.2% credit card sales, what were the dollar amounts of their (1) cash sales and (2) their credit card sales? Problem 2. Depreciation Tong Manufacturing Ltd. started in Jan 2011, and has a fiscal year end of 30 June. The new CFO of Tong Manufacturing needs an updated depreciation schedule following the format show below. The information is needed in this format to compare with old depreciation software and to input your data into the new software. The format and the list of depreciable assets are on the following page. Your calculations will also be used as supporting schedules for the year-end financial audit beginning in July of 2014 for fiscal year ending 30 June 2014. Tong Manufacturing Ltd purchased machine Model 502 on 1 October 2012. The machine was not ready for full production until 1 January 2013. Information that may be needed for your depreciation calculations is as follows: Machinery 502: Purchase Price 90,000 Shipping in 7,500 GST 9,000 Set up Preparation 2,600 Set up Costs 12,000 Trial run costs 3,500 Interest cost during set up 400 Residual value 10,000 Repair damage during installation 3,500 Estimated useful life: 8 years or 50,000 units Units of production Year: Jan-June 2013 3500 units Units of production 2013-14 8500 units Residual value: $ 10,000 Machinery 501: Estimated useful life: 8 years or 24,000 units Units of production 2011 2,000 units 2011-12 4,000 units 2012-13 3,500 units 2013-14 3,500 Residual value: $ 3,000 Required:a. Prepare a worksheet in good form showing the capitalised cost of Machine 502 and explanations for any amounts you did not use.b. Prepare a supporting worksheet with your calculations for each asset on the depreciation schedule to show the CFO how your calculations were prepared. Show the depreciation calculations for each asset for each fiscal year. (You must show how you calculated the reclining balance rates.)c. Create and complete the depreciation schedule with the numbers from your supporting worksheets. Tong Manufacturing Ltd Depreciation schedule for fiscal year 2013-2014 Cost Prior Prior Year Deprec. Deprec Current Yr Asset Description Date Basis Residual Accum. Book Value Life Yrs Method Deprec. Value Deprec. Carry Amt or unit Expense Building 1 Jan 2011 550,000 100,000 20 SL Land 1 Jan 2011 190,000 5 desks 1 Jan 2011 7,500 - 20 SL 5 computers/monitors 1 Jan 2011 6,000 900 6 RB 1 computer server 1 Jul 2011 2,500 375 6 RB Server Cabinet 1 Jul 2011 1,500 - 10 SL Machinery 501 1 Jan 2011 45,000 3,000 24,000 UOP 3 desks 1 Jul 2012 4,800 - 20 SL 5 chairs 1 Jul 2012 1,250 - 10 SL 3 computers 1 Jul 2012 3,600 540 6 RB Reception Desk 1 Jul 2012 4,500 - 10 SL 2012 Nissan delivery Van 1 Jul 2012 46,750 5,000 6 RL Machinery 502 10,000 UOP Totals 863,400 119,815 SL = straight line; RB = reducing balance; UOP = units of production Problem 3. Loan Amortisation WXYZ Ltd has purchased a 2014 Nissan delivery truck. The accounting department needs to record the monthly principal payments and interest expense. The fiscal year end for WXYZ Ltd is 30 June. Information from the dealers sales ticket: Base Price: 65,000 Rear Tow bar: 400 Heavy Duty Front bumper: 1,500 Company Name printed on the side 600 Navigation System Stereo 935 Alarm System 235 GST 6,867 Total 75,537 Months 60 Interest rate: 5% annually Interest calc: monthly Monthly Payment Purchase date: 1 September 2014 First Payment due: 1 October 2014 Final Payment: 1 September 2019 Fiscal year end: 30 June Down Paymen $ 10,000 Amount Financed Required:a. Calculate the amount needs to be capitalised?b. Calculate the amount that needs to be financed?c. Prepare the journal entry to record the purchase of the truck.d. Create an amortisation schedule that shows each monthly payment. Include the principal and the interest portions of each payment and the ending balance of the loan after each payment. Also, include the amount of principal, interest, total payments for each fiscal year. e. Create the monthly depreciation entry using reducing-balance method so your staff can record depreciation expense each month. Expected residual value of the truck is $7,000 and has an expected useful life is 8 years. Show your complete calculation and round to the nearest whole dollar. Answers: Problem 1. Part a Red Rider Sports Limited Income Statement for the Year Ended 30 June, 2014 Particulars Amount Percentage Gross Sales $25,50,500 100.00% Sales Returns -$76,000 -2.98% $24,74,500 97.02% Cost of Goods Sold: Cost of Goods Sold $10,20,200 40.00% Purchase Discounts -$40,800 -1.60% Salary Wages Expense $8,50,000 33.33% Utilities Expense $16,800 0.66% $18,46,200 72.39% Gross Profit $6,28,300 24.63% General Admin Expenses: Rent $60,000 2.35% Auto Truck Expense $6,200 0.24% Telephone Expense $7,200 0.28% Travel Expense $5,500 0.22% Office Expense $7,800 0.31% General Liability Insurance $14,200 0.56% Repair Maintenance $4,800 0.19% Supplies Expense $2,400 0.09% Depreciation $10,000 0.39% $1,18,100 4.63% Selling Distribution Expenses: Advertising $1,27,000 4.98% Sales Discounts $1,00,500 3.94% $2,27,500 8.92% Finance expenses: Bank Service Charges $2,200 0.09% Credit Card Discount $49,000 1.92% $51,200 2.01% Total Expenses $3,96,800 15.56% Net Profit $2,31,500 9.08% Dividend Paid $25,000 0.98% Retained Earnings $2,06,500 8% Part b The net profit as per draft income statement is $124,900 whereas it is $231,500 as per correct income statement. The Junior Accountant has treated purchase returns and Dividend as expenses. Purchase return is required to be deducted from cost of goods sold and dividend is appropriation of income and not expense. Therefore, these items cannot be treated as expense. Moreover, the junior accountant has not classified expenses according to function. It is necessary for better understanding of the financial results of the company. Part C Credit Card Discount is $49,000 Credit Card Fees 2.20% Credit Card Sales (i) $22,27,273 Total Sales $24,74,500 Cash Sales (ii) $2,47,227 Problem 2 Part a Tong Manufacturing Ltd Calculation of Capitalized Cost of Machine 502 Particulars Amount Remarks Purchase Price $90,000 Basic Purchase Price Shipping $7,500 Cost of Asset to bring its intended use GST $9,000 Part of Purchase Price Setup Preparation $2,600 Cost of Asset to bring its intended use Setup Costs $12,000 Cost of Asset to bring its intended use Trial Run cost $3,500 Cost of Asset to bring its intended use Interest cost $400 Cost of Asset to bring its intended use Repairing $0 not related to capitalization Capitalized Cost $1,25,000 Part B Depreciation schedule for fiscal year 2010-2011 Asset Description Date Cost Basis Residual Value Prior Accum. Depreciation Prior BookValue Carry Amount Depreciable LifeYrs or Units Depreciation Method Current Year Depreciation Expense Building 01-Jan-11 $5,50,000 $1,00,000 $0 $0 20 SL $11,250.00 Land 01-Jan-11 $1,90,000 $0 $0 $0 0 0 $0.00 5desks 01-Jan-11 $7,500 - $0 $0 20 SL $187.50 5 computers/ monitors 01-Jan-11 $6,000 $900 $0 $0 6 RB $813.00 Machinery 501 01-Jan-11 $45,000 $3,000 $0 $0 24,000 UOP $3,500 Totals $7,98,500 $1,03,900 $0 $0 $15,751 Depreciation schedule for fiscal year 2011-2012 Asset Description Date Cost Basis Residual Value Prior Accum. Depreciation Prior BookValue Carry Amount Depreciable LifeYrs or Units Depreciation Method Current Year Depreciation Expense Building 01-Jan-11 $5,50,000 $1,00,000 $11,250 $5,38,750 20 SL $22,500.00 Land 01-Jan-11 $1,90,000 $0 $0 $1,90,000 0 0 $0.00 5desks 01-Jan-11 $7,500 $0 $188 $7,313 20 SL $375.00 5computers/ monitors 01-Jan-11 $6,000 $900 $813 $5,187 6 RB $1,405.68 1computerserver 01-Jul-11 $2,500 $375 $0 $2,500 6 RB $677.50 Server Cabinet 01-Jul-11 $1,500 $0 $0 $1,500 10 SL $150.00 Machinery 501 01-Jan-11 $45,000 $3,000 $3,500 $41,500 24,000 UOP $7,000 Totals $8,02,500 $1,04,275 $15,751 $7,86,750 $32,108 Depreciation schedule for fiscal year 2012-2013 Asset Description Date Cost Basis Residual Value Prior Accum. Depreciation Prior BookValue Carry Amount Depreciable LifeYrs or Units Depreciation Method Current Year Depreciation Expense Building 01-Jan-11 $5,50,000 $1,00,000 $33,750 $5,16,250 20 SL $22,500.00 Land 01-Jan-11 $1,90,000 $0 $0 $1,90,000 0 0 $0.00 5desks 01-Jan-11 $7,500 $0 $563 $6,938 20 SL $375.00 5computers/monitors 01-Jan-11 $6,000 $900 $2,219 $3,781 6 RB $1,024.74 1computerserver 01-Jul-11 $2,500 $375 $678 $1,823 6 RB $493.90 Server Cabinet 01-Jul-11 $1,500 $0 $150 $1,350 10 SL $150.00 Machinery501 01-Jan-11 $45,000 $3,000 $10,500 $34,500 24,000 UOP $6,125 3desks 01-Jul-12 $4,800 $0 $0 $4,800 20 SL $240.00 5chairs 01-Jul-12 $1,250 $0 $0 $1,250 10 SL $125.00 3computers 01-Jul-12 $3,600 $540 $0 $3,600 6 RB $975.60 Reception Desk 01-Jul-12 $4,500 $0 $0 $4,500 10 SL $450.00 2012 Nissan delivery Van 01-Jul-12 $46,750 $5,000 $0 $46,750 6 RL $14,539.25 Machinery502 01-Jan-13 $1,25,000 $10,000 $0 $1,25,000 50000 UOP $8,050 Totals $9,88,400 $1,19,815 $47,859 $9,40,541 $55,048 Part C Depreciation schedule for fiscal year 2013-2014 Asset Description Date Cost Basis Residual Value Prior Accum. Depreciation Prior BookValue Carry Amount Depreciable LifeYrs or Units Depreciation Method Current Year Depreciation Expense Building 01-Jan-11 $5,50,000 $1,00,000 $56,250 $4,93,750 20 SL $22,500.00 Land 01-Jan-11 $1,90,000 $0 $0 $1,90,000 0 0 $0.00 5desks 01-Jan-11 $7,500 $0 $938 $6,563 20 SL $375.00 5computers/monitors 01-Jan-11 $6,000 $900 $3,243 $2,757 6 RB $747.03 1computerserver 01-Jul-11 $2,500 $375 $1,171 $1,329 6 RB $360.05 Server Cabinet 01-Jul-11 $1,500 $0 $300 $1,200 10 SL $150.00 Machinery501 01-Jan-11 $45,000 $3,000 $16,625 $28,375 24,000 UOP $6,125 3desks 01-Jul-12 $4,800 $0 $240 $4,560 20 SL $240.00 5chairs 01-Jul-12 $1,250 $0 $125 $1,125 10 SL $125.00 3computers 01-Jul-12 $3,600 $540 $976 $2,624 6 RB $711.21 Reception Desk 01-Jul-12 $4,500 $0 $450 $4,050 10 SL $450.00 2012 Nissan delivery Van 01-Jul-12 $46,750 $5,000 $14,539 $32,211 6 RL $10,017.54 Machinery502 01-Jan-13 $1,25,000 $10,000 $8,050 $1,16,950 50000 UOP $19,550 Totals $9,88,400 $1,19,815 $1,02,907 $8,85,493 $61,351 Problem 3 Part a calculation of capitalization amount Particulars Amount Remarks Base Price $65,000 Purchase Price Rear Toolbar $400 Accessories - Part of Truck Heavy Duty Front Bumper $1,500 Accessories - Part of Truck Company Name Plate $0 not required Navigation System $935 Accessories - Part of Truck Alarm System $235 Accessories - Part of Truck GST $6,867 Tax Capitalization Amount $74,937 Part b Calculation of Finance Amount Total Costs $75,537 Down Payment $10,000 Finance Amount $65,537 Part c Delivery Truck A/c Dr $74,937 Delivery Truck Maintenance A/c Dr $600 To Accounts Payable $75,537 (Being Delivery Truck Purchased) Part d Finance Amount $65,537 Finance Months 60 Interest Per Month 0.42% Monthly Installment $1,237.00 Repayment Schedule Month Opening Balance Interest Instalment Amount Principal Repayment Closing Balance Oct-14 $65,537 $273 $1,237 $964 $64,573 Nov-14 $64,573 $269 $1,237 $968 $63,605 Dec-14 $63,605 $265 $1,237 $972 $62,633 Jan-15 $62,633 $261 $1,237 $976 $61,657 Feb-15 $61,657 $257 $1,237 $980 $60,677 Mar-15 $60,677 $253 $1,237 $984 $59,693 Apr-15 $59,693 $249 $1,237 $988 $58,705 May-15 $58,705 $245 $1,237 $992 $57,713 Jun-15 $57,713 $240 $1,237 $997 $56,716 F.Y. 2014-15 $2,312 $11,133 $8,821 Jul-15 $56,716 $236 $1,237 $1,001 $55,715 Aug-15 $55,715 $232 $1,237 $1,005 $54,710 Sep-15 $54,710 $228 $1,237 $1,009 $53,701 Oct-15 $53,701 $224 $1,237 $1,013 $52,688 Nov-15 $52,688 $220 $1,237 $1,017 $51,671 Dec-15 $51,671 $215 $1,237 $1,022 $50,649 Jan-16 $50,649 $211 $1,237 $1,026 $49,623 Feb-16 $49,623 $207 $1,237 $1,030 $48,593 Mar-16 $48,593 $202 $1,237 $1,035 $47,558 Apr-16 $47,558 $198 $1,237 $1,039 $46,519 May-16 $46,519 $194 $1,237 $1,043 $45,476 Jun-16 $45,476 $189 $1,237 $1,048 $44,428 F.Y. 2015-16 $2,556 $14,844 $12,288 Jul-16 $44,428 $185 $1,237 $1,052 $43,376 Aug-16 $43,376 $181 $1,237 $1,056 $42,320 Sep-16 $42,320 $176 $1,237 $1,061 $41,259 Oct-16 $41,259 $172 $1,237 $1,065 $40,194 Nov-16 $40,194 $167 $1,237 $1,070 $39,124 Dec-16 $39,124 $163 $1,237 $1,074 $38,050 Jan-17 $38,050 $159 $1,237 $1,078 $36,972 Feb-17 $36,972 $154 $1,237 $1,083 $35,889 Mar-17 $35,889 $150 $1,237 $1,087 $34,802 Apr-17 $34,802 $145 $1,237 $1,092 $33,710 May-17 $33,710 $140 $1,237 $1,097 $32,613 Jun-17 $32,613 $136 $1,237 $1,101 $31,512 F.Y. 2016-17 $1,928 $14,844 $12,916 Jul-17 $31,512 $131 $1,237 $1,106 $30,406 Aug-17 $30,406 $127 $1,237 $1,110 $29,296 Sep-17 $29,296 $122 $1,237 $1,115 $28,181 Oct-17 $28,181 $117 $1,237 $1,120 $27,061 Nov-17 $27,061 $113 $1,237 $1,124 $25,937 Dec-17 $25,937 $108 $1,237 $1,129 $24,808 Jan-18 $24,808 $103 $1,237 $1,134 $23,674 Feb-18 $23,674 $99 $1,237 $1,138 $22,536 Mar-18 $22,536 $94 $1,237 $1,143 $21,393 Apr-18 $21,393 $89 $1,237 $1,148 $20,245 May-18 $20,245 $84 $1,237 $1,153 $19,092 Jun-18 $19,092 $80 $1,237 $1,157 $17,935 F.Y. 2017-18 $1,267 $14,844 $13,577 Jul-18 $17,935 $75 $1,237 $1,162 $16,773 Aug-18 $16,773 $70 $1,237 $1,167 $15,606 Sep-18 $15,606 $65 $1,237 $1,172 $14,434 Oct-18 $14,434 $60 $1,237 $1,177 $13,257 Nov-18 $13,257 $55 $1,237 $1,182 $12,075 Dec-18 $12,075 $50 $1,237 $1,187 $10,888 Jan-19 $10,888 $45 $1,237 $1,192 $9,696 Feb-19 $9,696 $40 $1,237 $1,197 $8,499 Mar-19 $8,499 $35 $1,237 $1,202 $7,297 Apr-19 $7,297 $30 $1,237 $1,207 $6,090 May-19 $6,090 $25 $1,237 $1,212 $4,878 Jun-19 $4,878 $20 $1,237 $1,217 $3,661 F.Y. 2018-19 $570 $14,844 $14,274 Jul-19 $3,661 $15 $1,237 $1,222 $2,439 Aug-19 $2,439 $10 $1,237 $1,227 $1,212 Sep-19 $1,212 $5 $1,237 $1,212 $0 F.Y. 2019-20 $30 $3,711 $3,661 Grand Total $8,663 $74,220 $65,537 Part e Cost of Truck $74,937 Residue Value $7,000 Useful Life 8 Purchase Date 01-09-2014 Year End Jun-30 Depreciation for FY 2014-15 $15,987 Depreciation for FY 2015-16 $15,091 Depreciation for FY 2016-17 $11,228 Depreciation for FY 2017-18 $8,354 Depreciation for FY 2018-19 $6,215 Depreciation for FY 2019-20 $4,624 Depreciation for FY 2020-21 $3,440 Depreciation for FY 2021-22 $2,560 Year Particulars Debit Credit 2014-15 Depreciation Expense $15,987 To Accumulated Depreciation $15,987 (Being Depreciation Expense recorded) 2015-16 Depreciation Expense $15,091 To Accumulated Depreciation $15,091 (Being Depreciation Expense recorded) 2016-17 Depreciation Expense $11,228 To Accumulated Depreciation $11,228 (Being Depreciation Expense recorded) 2017-18 Depreciation Expense $8,354 To Accumulated Depreciation $8,354 (Being Depreciation Expense recorded) 2018-19 Depreciation Expense $6,215 To Accumulated Depreciation $6,215 (Being Depreciation Expense recorded) 2019-20 Depreciation Expense $4,624 To Accumulated Depreciation $4,624 (Being Depreciation Expense recorded) 2020-21 Depreciation Expense $3,440 To Accumulated Depreciation $3,440 (Being Depreciation Expense recorded) 2021-22 Depreciation Expense $2,560 To Accumulated Depreciation $2,560 (Being Depreciation Expense recorded)