WEEK 4 TUTORIAL QUESTIONS

Chapter 4: Adjusting the accounts and preparing the

David (the shareholder/director) really does not understand much about accounting so he
assumed that all expenses should be accounted for as an expense when paid, and therefore he
could not understand when you, as his accountant, explained that the insurance premium should
be recorded as a prepaid expense.
Required
(a) Explain to David the necessity of making adjusting entries at the end of an accounting
period. Include in your discussion some of the accounting concepts involved and why
they are important.
(b) What would have been the effect on profit if these adjusting entries had not been made,
and would the reports have been useful for decision making without the necessary
adjustments?

Exercise 4.8
Adjusting entry for prepaid insurance
Kreative Kitchens purchased a 1-year insurance policy on 1 March 2020. The entire premium of
$18 000 was recorded by debiting Prepaid Insurance. Ignore GST.

Required
(a) Give the adjusting entry at 30 June for year ending 30 June 2020.
(b) What amount should be reported in the 30 June 2020 statement of financial position for
Prepaid Insurance?
(c) If no adjusting entry was made on 30 June, by how much would profit be overstated or
understated? Would assets be overstated or understated? Explain.
(d) What would your adjusting entry in requirement A be if the premium of $18 000 was
recorded by debiting Insurance Expense?

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Exercise 4.9
Adjusting entry for unearned revenue
Easy Rentals Ltd received 4 months’ rent in advance from tenants on 1 April 2022. The entire
amount of $12 800 was credited to the Unearned Revenue account at this date. Ignore GST.

Required
(a) Give the adjusting entry at 30 June 2022.
(b) What amount (if any) should be reported in the statement of financial position at 30 June
2022?
(c) If no adjusting entry were made on 30 June, by how much would profit be overstated or
understated? Would liabilities be overstated or understated? Explain.
(d) What would your adjusting entry be in requirement A if the amount of $12 800 had been
credit to Rental Revenue on 1 April 2022?

Exercise 4.14
Adjusting entries
Stan Livingstone provides investment advice to customers for fees. On 30 June 2022, it
completed its first year of operations. Some of the ledger account balances of the business,
before any year-end adjustments, are given below:

No adjusting entries have been made to these accounts at any time during the year. An
analysis of the business records reveals the following.

1. The balance in Advertising Prepaid represents the amount paid for an advertisement in an
investment magazine for 1 year. The agreement with the publisher stipulates the same
amount of space each month and covers the period 1 September 2021 to 31 August 2022.
2. The firm’s lease in respect of the premises stipulates a rent of $1440 per month payable on
the first day of each month, plus an annual amount equal to 0.5% of the annual fees earned.
The extra rental is payable within 15 days of the end of the reporting period.
3. The computer database expense relates to an annual subscription to web based data on the
share market and other investments. The subscription was taken out on 1 August 2021.
4. The wages are paid every Friday for a 5-day working week ending on the preceding
Wednesday. In 2022, 30 June falls on a Thursday and the wages for the week ended 6 July

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 2022 amount to $12 000. No overtime was worked and all employees worked the normal
office hours during the 5-day week.
5. The Electricity Expense ledger balance does not include the amount for June 2022. The
account was received during July and amounted to $890.

Required
(a) Journalise the necessary adjusting entries.

Problem 4.30
Preparing a worksheet and financial statements
Non-GST version
The unadjusted trial balance of Helena’s Hire Cars is shown below (ignore GST).

Additional information
1. Petrol purchased on credit for $680 and used during the last week in June has not been
paid for or recorded.

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2. A physical count showed office supplies totalling $340 were still on hand at 30 June.
3. Depreciation for 1 year on the hire cars is $12 400. Depreciation on the office equipment
is $980.
4. The balance in the Advertising Expense account includes $600 prepayment for an
advertising campaign beginning in July.
5. The balance in the Unearned Hire Fees account includes $1800 received in May for hire
services completed in June.
6. The June insurance premium of $700 is overdue and has not been recorded. A tax
invoice has not been received.
7. Wages earned but not paid amounted to $1150.

Required
Prepare a 10-column worksheet for the year ended 30 June 2022.

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 Unadjusted trial balance Adjustments Adjusted trial balance Income statement Balance sheet
Account Title Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
Cash at Bank 8 140
Accounts Receivable 12 860
Office Supplies 640
Hire Cars 93 600
Accum. Depr. Hire Cars 39 400
Office Equipment 6 200
Accum. Depr. Office Equip. 3 500
Accounts Payable 10 800
Unearned Hire Fees 2 260
H. Savva, Capital 68 340
H. Savva, Drawings 20 600
Removal Fees Revenue 98 700
Insurance Expense 8 180
Wages Expense 50 620
Advertising Expense 3 880
Maintenance Expense 7 600
Fuel and Oil Expense 10 680
$223 000 $223 000