Question 1 - 10 Marks: The Following Is The Unadjusted Trial
Question 1 - 10 Marks The following is the unadjusted trial balance for James Trading Pty Ltd as at the close of the financial year ended 30 June 2011. In addition the following entries had not been applied to the general ledger.
The task involves adjusting the unadjusted trial balance for James Trading Pty Ltd at the year-end, based on provided information, and then preparing the financial statements. Specifically, the assignment requires two major components: first, recording the necessary adjusting journal entries; second, preparing an income statement and a statement of financial position based on the adjusted figures.
Paper For Above instruction
James Trading Pty Ltd, at the close of its financial year ended 30 June 2011, presented an unadjusted trial balance that required relevant adjustments to accurately reflect the company's financial position and performance. The adjustments involve accounting for prepayments, accrued income, estimated expenses, stock valuation, and deferred income. This paper discusses each adjustment, illustrates the necessary journal entries, and presents the resultant financial statements.
Adjustments and Journal Entries
1. Prepaid Rent Adjustment: The company paid rent in advance covering three months on June 1st, with a monthly rent of $1,000. Since one month (June) is included in the current period, the remaining two months ($2,000) should be recognized as a prepaid expense.
Debit: Prepaid Rent $2,000
Credit: Rent Expense $2,000
This adjustment reduces rent expense and increases prepaid rent asset, accordingly.
2. Accrued Interest Income: Interest earned on a loan to J Harris has not been accounted for. Assuming the interest accrues proportionally over the period, the company needs to accrue interest income for the relevant period. For illustration, if the loan yields monthly interest of $XXX, an adjusting entry would record accrued interest (exact amount depends on the loan details, which are not specified here). For simplicity, assume interest income accrued is $1,200.
Debit: Interest Receivable $1,200
Credit: Interest Income $1,200
3. Estimated Legal Expenses
The company expects to incur legal fees of $20,000, which have not yet been invoiced. The expense should be recognized in the current period, with a liability set up if payment is outstanding.
Debit: Legal Expenses $20,000
Credit: Accrued Expenses / Legal Payable $20,000
4. Stock Valuation Adjustment
The physical stock count indicates closing stock worth $8,500. The exact accounting treatment depends on the previous recording of inventory. Assuming inventory was previously understated or not adjusted, the closing stock needs to be adjusted accordingly. An adjusting entry involves updating inventory and cost of goods sold (COGS).
No journal entry is needed here if inventory was correctly recorded, but if adjustments are required, the entry would be:
Debit: Inventory $8,500
Credit: COGS / Stock Adjustment $8,500
5. Unearned Revenue Recognition
The company received $20,000 for services to be delivered over four months, with the first service provided in June. Since services were provided in June, revenue of $5,000 ($20,000 / 4 months) should be recognized for the current month.
Debit: Unearned Revenue $15,000
Credit: Service Revenue $15,000
(Alternatively, if only the amount for June is recognized, then:
Debit: Unearned Revenue $15,000
Credit: Service Revenue $15,000
as the $5,000 corresponds to the current month’s service provision).
Preparation of Financial Statements
After recording the above adjustments, the adjusted trial balance can be prepared, incorporating all the adjusted figures. Using this, the income statement would show the company's revenues and expenses, culminating in net profit or loss.
The statement of financial position would then be prepared, listing assets, liabilities, and equity, reflecting the adjustments such as increased inventory, prepaid expenses, accrued income, and accrued expenses.
These financial statements provide a more accurate reflection of James Trading Pty Ltd’s financial health at year-end.
Conclusion
Proper adjustment of the trial balance is essential for accurate financial reporting. Each adjustment ensures that revenues are recognized when earned and expenses when incurred, assets are not overstated, and liabilities not understated. This process supports reliable decision-making by stakeholders, including investors, creditors, and management.
References
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