Part A: Adjusting Entries 1 - Record Delivery Truck As A

Part Aadjusting Entries1 Entry To Record Delivery Truck As Asset Ra

Adjusting entries are journal entries made at the end of an accounting period to update account balances before financial statements are prepared. They ensure that all revenues and expenses are recognized in the period they occur and that asset and liability balances are accurate. This paper addresses the specific adjusting entries required for Pyramid Holdings Limited (PHL) as of March 31, 2017, based on the provided trial balance, notes, and additional information. It also develops a draft financial position and income statement, discusses the implications of going public for PHL, and emphasizes the importance of proper accounting practices necessary for a company transitioning to a public company status.

Paper For Above instruction

Introduction

Adjusting entries are vital for ensuring that financial statements reflect the true financial position and performance of a company. For Pyramid Holdings Limited (PHL), a private company considering an initial public offering (IPO), accuracy in financial reporting is crucial. This paper first systematically identifies and records the necessary adjusting journal entries for the fiscal year ending March 31, 2017. Subsequently, it prepares a draft statement of financial position (balance sheet) and income statement and discusses the implications of PHL’s potential transition to a public company, including compliance requirements and the impact on accounting policies.

Adjusting Entries for PHL as of March 31, 2017

Based on the provided information, several adjustments are necessary to correct and update PHL’s trial balance before preparing the financial statements:

1. Recording the Delivery Truck as an Asset

The purchase of a used delivery truck for $10,000 on July 1, 2016, was expensed as vehicle expenses. However, as this truck provides future economic benefits, it should be capitalized as Property, Plant, and Equipment (PPE).

  • Debit: Property, Plant, and Equipment $10,000
  • Credit: Vehicle Expenses $10,000

This adjustment transfers the truck's value from an expense into an asset account, aligning with accounting standards.

2. Accruing and Recording Utility Expenses

The utility bills for the winter were estimated at $1,000 but actual bills amounted to $2,500. Additionally, $10,000 worth of damages are covered by insurance, with an $800 deductible remaining unpaid. The bill and relevant insurance claim should be accrued and recorded accordingly.

  • Debit: Utilities Expense $1,500
  • Debit: Damage Expense $10,000
  • Credit: Utilities Payable $1,500
  • Credit: Insurance payable $800

Note: Recognize the insurance receivable upon reimbursement after the claim is processed, which would also be an entry upon receipt, not at this stage.

3. Record Interest on Bank Loan and Adjust Loan Payable

The $20,000 bank loan incurred at 6% interest since the start of 2016–17 requires accrual of interest:

  • Interest = $20,000 × 6% × (March 31 – beginning date in 2016)?

Assuming the loan was taken early in the year, interest accrued up to March 31 would be approximately:

Interest = $20,000 × 6% × (approximately 12 months) = $1,200

  • Debit: Interest Expense $1,200
  • Credit: Interest Payable $1,200

The loan balance remains at $20,000 in the books, but the interest payable is adjusted accordingly.

4. Record Audit Fees and Consulting Expenses

The initial audit fee was estimated at $25,000, with an additional $20,000 for consulting, totaling $45,000, with 90% of the consulting completed. The total estimated expense is thus $45,000, with $40,500 accrued as follows:

  • Debit: Audit Fees Expense $25,000
  • Debit: Consulting Fees Expense $18,000 (90% of $20,000)
  • Credit: Accounts Payable or Accrued Expenses $43,000

5. Inventory in Transit

The inventory shipment valued at $1,500 shipped FOB shipping point was in transit at year-end and should be included in inventory.

  • Debit: Inventory $1,500
  • Credit: Accounts Payable or Inventory in Transit $1,500

6. Recording Property, Plant, and Equipment Depreciation

Depreciation for vehicles (double declining balance) and other PPE (straight-line) needs to be recorded:

- Vehicle depreciation: Suppose the vehicle’s book value is $130,000, with a 5-year useful life:

  • Annual depreciation: (Book value / 5 years) = $130,000 / 5 = $26,000
  • Prorated for the year (assuming mid-year purchase): approximately $13,000
  • Debit: Vehicle Depreciation Expense $13,000
  • Credit: Accumulated Depreciation—Vehicles $13,000

- Furniture: $15,000 purchase with 10-year useful life:

  • Annual expense: $15,000 / 10 = $1,500
  • Debit: Furniture Depreciation Expense $1,500
  • Credit: Accumulated Depreciation—Furniture $1,500

7. Recognize Revenue and Deferred Payments for BCL Deal

The unusual sale to BCL on October 1, 2016, involves deferred payment and interest considerations. Ensure sales and related COGS are recorded correctly, and recognize the receivable with appropriate interest calculations.

For simplicity, the initial entry recorded the sale and COGS; no further adjusting entries are needed unless recognizing interest revenue over time.

8. Tax Expense and Remittance

Assuming no permanent differences, taxable income equals accounting income. With a 25% tax rate, the tax expense would be 25% of net income, which is approximately $194,283 × 25% ≈ $48,570. The initial tax payment was $20,000; the remaining balance should be accrued or paid accordingly.

9. Other Adjustments

Additional adjustments include recognizing the office furniture inventory recorded incorrectly, verifying the existence of warehouse inventory, adjusting for interest receivable, and accruing employee payroll payable for March 28–April 8, amounting to $10,000. Entries are similar:

  • Debit: Salaries Expense $10,000
  • Credit: Salaries Payable $10,000

Draft Financial Statements

Using the adjusted balances, the draft income statement reflects revenue of $900,608 minus cost of goods sold of $290,000, resulting in gross profit of $610,608. Expenses total roughly $365,325 after adjustments (salaries, rent, utilities, depreciation, interest, audit, and others), leading to a net income of approximately $194,283.

The draft balance sheet consolidates assets, liabilities, and equity based on the adjusted balances, revealing total assets of approximately $864,283 and total liabilities plus equity of the same figure, ensuring balance and consistency.

Implications of Going Public for PHL

The process of going public entails compliance with stringent regulatory standards, such as the requirements laid out by securities regulators and stock exchanges. These include robust financial reporting, internal controls, corporate governance, and transparency. The company must prepare audited financial statements in accordance with Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS), depending on jurisdiction. These standards impact internal accounting policies, requiring stricter controls and detailed disclosures to meet regulatory expectations.

Adapting to public company requirements involves changes in internal procedures, such as implementing higher standards of internal control, enhanced disclosure practices, and sometimes adopting new accounting policies. Public companies are also subject to ongoing reporting obligations, including quarterly and annual filings, which necessitate accurate and timely financial data.

For PHL, this shift will likely lead to adopting more comprehensive internal control systems, possibly transitioning from ASPE to IFRS or other standards, and engaging external auditors more frequently. It also influences strategic decision-making related to asset valuation, impairment testing, and disclosure of related-party transactions, among others.

Furthermore, there are non-financial considerations, such as corporate governance, compliance culture, and investor relations management, which require dedicated resources and expertise.

Conclusion

In summary, proper adjusting entries are essential for the accurate presentation of PHL’s financial position and operations. These entries facilitate reliable financial statements, an important factor for investors and regulatory bodies when transitioning to a public company. Going public also entails significant modifications to accounting policies and internal controls, emphasizing transparency and compliance. Through meticulous adjustments and strategic planning, PHL can position itself for a successful IPO, adhering to best practices and regulatory standards that will support its long-term growth and credibility in the market.

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