Question 1 Holiday Travel Australasia commenced business on 1 April 2021. Alice Adare is a good manager but a poor accou
Posted: Sat Feb 26, 2022 9:03 am
Question 1
Holiday Travel Australasia commenced business on 1 April 2021.
Alice Adare is a good manager but a poor accountant. From the trial
balance prepared by a part-time bookkeeper, Alice prepared the
following statement of profit or loss for the year ended 31 March
2022. Alice knew something was wrong with the statement because
profit up to February had not exceeded $40 000 (approximately
$3,600 per month). Knowing that you are an experienced accountant,
she asks you to review the statement of profit or loss and other
data.
You first look at the trial balance. In addition to the account
balances reported in the statement of profit or loss, the general
ledger contains these selected balances at 31 March 2022.
Advertising supplies on
hand
$10 000
Prepaid
insurance
31 180
Bank
loan
50 000
Building
85 000
Office
Equipment
62 000
Motor
Vehicle
58 000
Salaries
payable
Nil
Subscription Revenue in
Advance
53 900
HOLIDAY TRAVEL AUSTRALASIA
Statement of profit or loss
for the year ended 31 March 2022
REVENUES
Service
revenue
$130 000
OPERATING EXPENSES
Advertising
$6 100
Wages
42 200
Electricity
3 900
Depreciation
1 200
Repairs
4 000
Total operating expenses
57 400
Profit
$62 600
You then make enquiries and discover the following.
1. Service revenues
include advanced money for holidays after March, $12 000.
2. There was only
$2 300 of advertising supplies on hand at 31 March.
3. Holiday Travel
Australasia has separate insurance policies on its buildings, motor
vehicles and its general insurance. Policy B4564 on the building
was purchased on 1 June 2021 for $9 900. The policy has a term of 3
years. Policy A2958 on the vehicles was purchased on 1 August 2021
for $5 280. This policy has a term of 2 years. The general
insurance policy was a 1-year policy of $1 600 paid on 1 July
2021.
4. The following
invoices had not been paid or recorded: advertising for week of 24
March, $2 200; repairs made 10 March, $2 000; and electricity
expense, $800.
5. The business
took out the loan on 1 October 2021 at an annual interest rate of
3%.
6. Subscription
revenue received in advance $53 900: the entity began selling
magazine subscriptions on 1 January 2022 on an annual basis. The
selling price of a subscription is $55. A review of subscription
contracts reveals the following:
Subscription start
date
Number of subscriptions
1
January
200
1
February
300
1
March
480
980
The annual subscription is for 12
monthly issues. The March magazine for all of the subscriptions had
been delivered to the subscribers at 31 March 2022.
7. There are seven
salaried employees. Salaries are paid every Friday for the current
week. Four employees receive a salary of $1 050 each per week, and
three employees earn $1 350 each per week. 31 March is a Thursday.
Employees do not work on weekends. All employees worked the last
week of March.
8. Alice made up
the depreciation expense of $1,200 because she was not sure how to
calculate it. The building is to be depreciated using the
straight-line method with residual value of $25,000 and useful life
of 40 years. The building was purchased on 1 November 2021. Office
equipment is also to be depreciated using the straight-line method
with residual value of $14,000 and a useful life of 10 years. The
motor vehicle is to be depreciated using the reducing balance
method. The motor vehicle is to be depreciated at a rate of 12% and
was purchased on 1 January 2022. The motor vehicle has an estimated
residual value of $7,500.
Required
(a) Prepare the adjusting
journal entries as at 31 March 2022. Provide brief narrations.
(b) Prepare a correct
statement of profit or loss for the year ended 31 March 2022.
(c) Explain to Alice the
generally accepted accounting principles that she did not follow in
preparing her statement of profit or loss and their effect on her
results.
Holiday Travel Australasia commenced business on 1 April 2021.
Alice Adare is a good manager but a poor accountant. From the trial
balance prepared by a part-time bookkeeper, Alice prepared the
following statement of profit or loss for the year ended 31 March
2022. Alice knew something was wrong with the statement because
profit up to February had not exceeded $40 000 (approximately
$3,600 per month). Knowing that you are an experienced accountant,
she asks you to review the statement of profit or loss and other
data.
You first look at the trial balance. In addition to the account
balances reported in the statement of profit or loss, the general
ledger contains these selected balances at 31 March 2022.
Advertising supplies on
hand
$10 000
Prepaid
insurance
31 180
Bank
loan
50 000
Building
85 000
Office
Equipment
62 000
Motor
Vehicle
58 000
Salaries
payable
Nil
Subscription Revenue in
Advance
53 900
HOLIDAY TRAVEL AUSTRALASIA
Statement of profit or loss
for the year ended 31 March 2022
REVENUES
Service
revenue
$130 000
OPERATING EXPENSES
Advertising
$6 100
Wages
42 200
Electricity
3 900
Depreciation
1 200
Repairs
4 000
Total operating expenses
57 400
Profit
$62 600
You then make enquiries and discover the following.
1. Service revenues
include advanced money for holidays after March, $12 000.
2. There was only
$2 300 of advertising supplies on hand at 31 March.
3. Holiday Travel
Australasia has separate insurance policies on its buildings, motor
vehicles and its general insurance. Policy B4564 on the building
was purchased on 1 June 2021 for $9 900. The policy has a term of 3
years. Policy A2958 on the vehicles was purchased on 1 August 2021
for $5 280. This policy has a term of 2 years. The general
insurance policy was a 1-year policy of $1 600 paid on 1 July
2021.
4. The following
invoices had not been paid or recorded: advertising for week of 24
March, $2 200; repairs made 10 March, $2 000; and electricity
expense, $800.
5. The business
took out the loan on 1 October 2021 at an annual interest rate of
3%.
6. Subscription
revenue received in advance $53 900: the entity began selling
magazine subscriptions on 1 January 2022 on an annual basis. The
selling price of a subscription is $55. A review of subscription
contracts reveals the following:
Subscription start
date
Number of subscriptions
1
January
200
1
February
300
1
March
480
980
The annual subscription is for 12
monthly issues. The March magazine for all of the subscriptions had
been delivered to the subscribers at 31 March 2022.
7. There are seven
salaried employees. Salaries are paid every Friday for the current
week. Four employees receive a salary of $1 050 each per week, and
three employees earn $1 350 each per week. 31 March is a Thursday.
Employees do not work on weekends. All employees worked the last
week of March.
8. Alice made up
the depreciation expense of $1,200 because she was not sure how to
calculate it. The building is to be depreciated using the
straight-line method with residual value of $25,000 and useful life
of 40 years. The building was purchased on 1 November 2021. Office
equipment is also to be depreciated using the straight-line method
with residual value of $14,000 and a useful life of 10 years. The
motor vehicle is to be depreciated using the reducing balance
method. The motor vehicle is to be depreciated at a rate of 12% and
was purchased on 1 January 2022. The motor vehicle has an estimated
residual value of $7,500.
Required
(a) Prepare the adjusting
journal entries as at 31 March 2022. Provide brief narrations.
(b) Prepare a correct
statement of profit or loss for the year ended 31 March 2022.
(c) Explain to Alice the
generally accepted accounting principles that she did not follow in
preparing her statement of profit or loss and their effect on her
results.