The Following Is The Unadjusted Trial Balance For James Trad

The Following Is the Unadjusted Trial Balance For James Trading Pty Lt

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: 1. Rent had been prepaid to the extent of 3 months on June 1st. The monthly rent is $1,000. 2. Interest income on a loan made to J Harris had not been taken into account. 3. Expenses of $20,000 for legal fees were estimated to be incurred but had not been invoiced by the solicitor. 4. A stock take was undertaken as at the close of June and $8,500 was the value of stock on hand. 5. The company received $20,000 for services which will be delivered over the next four months. The first services were provided in the current month of June. On the attached worksheet: a. Complete the entries to adjust the trial balance for the closing entries. b. Prepare a statement of income and statement of financial position.

Paper For Above instruction

Introduction

Financial statements are vital components of a company's financial reporting, providing stakeholders with insights into the company's financial health and operational performance. Accurate preparation of these statements depends on the proper adjustment of the unadjusted trial balance to account for accrued, deferred, and estimated items that have not yet been recorded. This paper focuses on the case of James Trading Pty Ltd, which, at the end of its fiscal year on June 30, 2011, requires adjustments to its trial balance to reflect the true financial position and results of operations for the period.

Adjustments to the Trial Balance

To accurately present James Trading's financial position, several adjusting entries are necessary based on the information provided. These adjustments include accounting for prepaid rent, accrued interest income, incurred legal expenses, inventory valuation, and unearned revenue.

Prepaid Rent Adjustment

The company prepaid three months' rent on June 1 at $1,000 per month. Since the fiscal year ends on June 30, only one month ($1,000) pertains to the current period. Therefore, the adjusting entry involves recognizing one month of rent expense and reducing the prepaid rent asset accordingly. The journal entry is:

Debit Rent Expense $1,000

Credit Prepaid Rent $1,000

This adjustment reflects the rent expense incurred during June and reduces the prepaid rent account to exclude the amount used up.

Interest Income on Loan

The interest earned on a loan to J Harris had not been accounted for. Assuming the interest income relates to the current fiscal year, the appropriate adjustment involves recording the accrued interest income. For example, if the interest rate and period are known, an estimate can be made; however, since these details are unspecified, a standard accrued interest entry can be made once the specific interest amount is known, say, $? (to be determined). An example journal entry, assuming an interest accrued amount, would be:

Debit Interest Receivable $X

Credit Interest Income $X

Without specific figures, this amount needs to be ascertained from loan details.

Legal Expenses

The legal fees of $20,000 are estimated but not yet invoiced. These expenses relate to the current period and must be recognized as accrued expenses. The entry is:

Debit Legal Expenses $20,000

Credit Accrued Expenses (Legal Fees Payable) $20,000

This ensures expenses are properly matched with the period they pertain to, even without an invoice.

Stock Valuation

The inventory valuation as at the end of June is $8,500. If the opening inventory figures are not available, the closing stock is adjusted directly, assuming a perpetual inventory system, with the journal entry to reflect inventory on hand:

Adjust Cost of Goods Sold and Inventory accordingly in financial statements.

This affects the gross profit calculation on the income statement as well as inventory balance on the balance sheet.

Unearned Revenue Recognition

The company received $20,000 for services to be delivered over four months, starting in June. For the current month, the revenue earned is one-fourth of the total, i.e., $5,000. The journal entry to recognize earned revenue in June is:

Debit Unearned Revenue $5,000

Credit Service Revenue $5,000

This adjusts the company's books to reflect the revenue earned in the current period and the remaining unearned portion as a liability.

Preparation of Financial Statements

After recording all adjustments, the income statement is prepared by summarizing revenues and expenses, including the adjusted legal and rent expenses, interest income, and service revenue. The net income is then calculated.

The statement of financial position (balance sheet) reflects adjusted asset, liability, and equity balances, including updated inventory, receivables, payables, and unearned revenue accounts.

Conclusion

Properly adjusting the unadjusted trial balance is essential for accurate financial reporting. In the case of James Trading Pty Ltd, adjustments for rent, interest income, legal expenses, inventory, and unearned revenue ensure that the financial statements accurately depict the company's financial status at year-end. These adjustments provide valuable insights to management, investors, and other stakeholders, facilitating informed decision-making and compliance with accounting standards.

References

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