Financial Accounting

Module 2 Cases

Oktay Urcan
Question 1
Smith & Jones Sporting Goods Co. started operations on 1 October 2021, and
on 30 September 2023 had the following summarized balance sheet.
30 Sept 2023 30 Sept 2023

Fixed Assets Current Liabilities

Accounts Payable 18,891
PPE 17,000
Total Liabilities 18,891
Current Assets
Equity
Inventories 14,000
Common Stock 34,000
Cash 10,035
Retained Earnings 1,200
Accounts Receivable 13,056 Total Equity 35,200
Total Assets 54,091 Total Liabilities and Equity 54,091

Smith & Jones Sporting Goods Co. - Recording Transactions

Question 1
During the year ended 30 September 2024 (i.e., third year of
operation), the company engages in the following transactions:
1. Payment of $8,300 of accounts payable to suppliers
2. Collection of $4,500 of accounts receivable from customers
3. Sale of sporting goods merchandise originally costing
$5,300 for $8,950, of which 30% is on credit and the
remaining 70% is in cash

Smith & Jones Sporting Goods Co. - Recording Transactions

Question 1
During the year ended 30 September 2024 (i.e., third year of
operation), the company engages in the following transactions:
4. Payment of $3,500 for employee wages in cash
5. Purchase of sporting goods merchandise from suppliers on
credit for $1,900
6. Issue 500 shares of common stock in exchange for $2,000
in cash

Smith & Jones Sporting Goods Co. - Recording Transactions

Question 1
In addition, the company also engaged in the following two
transactions, which need to be recorded in the 2023–2024
accounts:
7. On 30 June 2024, the company prepaid an annual
insurance premium of $1,200. This policy covers 1 July
2024–30 June 2025.
8. On 31 October 2024, the company will pay a dividend of
$350.

Smith & Jones Sporting Goods Co. - Recording Transactions

Question 1

Required:
Please record these transactions in a worksheet and
prepare a balance sheet and income statement using the
templates on the following pages.

Smith & Jones Sporting Goods Co. - Recording Transactions

 Assets Liabilities Equity

Fixed Inven- Prepaid Accounts Dividends Common Income Retained

A/R Cash
Assets tories Insurance Payable Payable Stock Statement Earnings

OB 17,000 14,000 13,056 10,035 0 18,891 0 34,000 0 1,200

1. Payment to
(8,300) (8,300)
suppliers
2. Collection
(4,500) 4,500
from customers
3. Sales 2,685 6,265 8,950
3. Cost of sales (5,300) (5,300)
4. Wages (3,500) (3,500)
5. Purchase
1,900 1,900
merchandise
6. Issue stock 2,000 2,000
7. Insurance (1,200) 900 (300)
8. Dividends 350 (350)
9. Transfer RE 150 (150)
CB 17,000 10,600 11,241 9,800 900 12,491 350 36,000 0 700

Smith & Jones Sporting Goods Co. - Recording Transactions

Question 1: Balance Sheet
30 Sept 2023 30 Sept 2024
Fixed Assets
PPE 17,000 17,000
Current Assets
Inventories 14,000 10,600
Accounts Receivable 13,056 11,241
Cash 10,035 9,800
Prepaid Insurance - 900
Total Assets 54,091 49,541
Smith & Jones Sporting Goods Co. - Recording Transactions
Question 1: Balance Sheet
30 Sept 2023 30 Sept 2024
Current Liabilities
Accounts Payable 18,891 12,491
Dividends - 350
Total Liabilities 18,891 12,841
Equity
Common Stock 34,000 36,000
Retained Earnings 1,200 700
Total Equity 35,200 36,700

Total Liabilities and Equity 54,091 49,541

Smith & Jones Sporting Goods Co. - Recording Transactions

Question 1: Income Statement
30 Sept 2024
Sales 8,950
Cost of Sales 5,300
Gross Profit 3,650
Operating Expenses 3,800
Profit before Interest and Tax (150)
Interest 0
Profit before Tax (150)
Tax 0
Profit after Tax (150)

Smith & Jones Sporting Goods Co. - Recording Transactions

Question 2

In each of the following questions, you have transactions that

were either “missed” or made in error in the annual financial
statements ending on December 31.
Indicate the amounts involved and the effects on each of the
accounts listed, using the following notation:
overstated (O), understated (U), or no effect (NE)

Missing/Erroneous Transactions
Question 2

Each transaction is independent (i.e., the first transaction does

not affect the second, etc.).
For each question, be sure to show by what amounts the
financial statements are wrong before the corrections are made
for the forgotten or mistaken transactions. Ignore any effect of
taxes.

Missing/Erroneous Transactions
Question 2
1. Sparrow & Nightingale is a retailer that sells rare books and DVDs. On
September 25, 2024, Sparrow & Nightingale prepaid the next 12 months’
insurance policy (i.e., covering October 1, 2024–September 30, 2025) on their
shop for $18,000 in cash. Sparrow & Nightingale’s accountant did not record
the entry for prepayment of the insurance policy, nor did they make any other
entries during the year for the insurance policy.

Current assets Long-term assets

Current liabilities Long-term liabilities
Capital stock Retained earnings
Net income

Missing/Erroneous Transactions
Question 2
1. Sparrow & Nightingale is a retailer that sells rare books and DVDs. On
September 25, 2024, Sparrow & Nightingale prepaid the next 12 months’
insurance policy (i.e., covering October 1, 2024–September 30, 2025) on their
shop for $18,000 in cash. Sparrow & Nightingale’s accountant did not record
the entry for prepayment of the insurance policy, nor did they make any other
entries during the year for the insurance policy.
Assets Liabilities Shareholders’ Equity
Current Long-Term Current Long-Term Capital Retained Income
Asset Asset Liability Liability Stock Earnings Statement
Sept. 25, 2024 (18,000)
+18,000
Dec. 31, 2024 (4,500) (4,500)
Dec. 31, 2024 (4,500) 4,500
End Balance (4,500) (4,500)
Missing/Erroneous Transactions
Question 2
1. Sparrow & Nightingale is a retailer that sells rare books and DVDs. On
September 25, 2024, Sparrow & Nightingale prepaid the next 12 months’
insurance policy (i.e., covering October 1, 2024–September 30, 2025) on their
shop for $18,000 in cash. Sparrow & Nightingale’s accountant did not record
the entry for prepayment of the insurance policy, nor did they make any other
entries during the year for the insurance policy.

Current assets (O) 4,500 Long-term assets NE

Current liabilities NE Long-term liabilities NE
Capital stock NE Retained earnings (O) 4,500
Net income (O) 4,500

Missing/Erroneous Transactions
Question 2
2. On April 13, 2024, YaHo, Inc., sold inventory, which originally cost $13,560,
to customers for $21,000 on account. YaHo, Inc., did not record either of the
entries related to this sale.

Current assets Long-term assets

Current liabilities Long-term liabilities
Capital stock Retained earnings
Net income

Missing/Erroneous Transactions
Question 2
2. On April 13, 2024, YaHo, Inc., sold inventory, which originally cost $13,560,
to customers for $21,000 on account. YaHo, Inc., did not record either of the
entries related to this sale.

Assets Liabilities Shareholders’ Equity

Current Long-Term Current Long-Term Capital Retained Income
Asset Asset Liability Liability Stock Earnings Statement
Sale 21,000 21,000
Cost of sale (13,560) (13,560)
Dec. 31, 2024 7,440 (7,440)
End Balance 7,440 7,440

Missing/Erroneous Transactions
Question 2
2. On April 13, 2024, YaHo, Inc., sold inventory, which originally cost $13,560,
to customers for $21,000 on account. YaHo, Inc., did not record either of the
entries related to this sale.

Current assets (U) 7,440 Long-term assets NE

Current liabilities NE Long-term liabilities NE
Capital stock NE Retained earnings (U) 7,440
Net income (U) 7,440

Missing/Erroneous Transactions
Question 2
3. On May 13, 2024, The Gathering Sound purchased merchandise worth
$13,000 from suppliers on account. On May 28, 2024, The Gathering Sound
paid $9,370 in cash to these suppliers. Suppose the accountant at The
Gathering Sound Ltd. forgot to record both of these entries.

Current assets Long-term assets

Current liabilities Long-term liabilities
Capital stock Retained earnings
Net income

Missing/Erroneous Transactions
Question 2
3. On May 13, 2024, The Gathering Sound purchased merchandise worth
$13,000 from suppliers on account. On May 28, 2024, The Gathering Sound
paid $9,370 in cash to these suppliers. Suppose the accountant at The
Gathering Sound Ltd. forgot to record both of these entries.
Assets Liabilities Shareholders’ Equity
Current Long-Term Current Long-Term Capital Retained Income
Asset Asset Liability Liability Stock Earnings Statement
Purchase 13,000 13,000
Payment (9,370) (9,370)
End Balance 3,630 3,630

Missing/Erroneous Transactions
Question 2
3. On May 13, 2024, The Gathering Sound purchased merchandise worth
$13,000 from suppliers on account. On May 28, 2024, The Gathering Sound
paid $9,370 in cash to these suppliers. Suppose the accountant at The
Gathering Sound Ltd. forgot to record both of these entries.

Current assets (U) 3,630 Long-term assets NE

Current liabilities (U) 3,630 Long-term liabilities NE
Capital stock NE Retained earnings NE
Net income NE

Missing/Erroneous Transactions
Question 3
Moving On Ltd. started operations on 1 March 2023, and, in each of its first two
years, prepaid one year’s rent on the building it uses for operations. The end of
Moving On Ltd.’s accounting period is 31 December:

2023
1 March $24,000
2024
1 March $25,200

Moving On Ltd. - Accrual vs. Cash Accounting

Question 3

Making whatever assumptions you consider reasonable, and

using the template below, prepare the relevant extracts from
the transaction worksheets for 2023 and 2024.

Moving On Ltd. - Accrual vs. Cash Accounting

Question 3
Assets Shareholders’ Equity

Cash Prepaid Rent IS Retained Earnings

2023

Prepayment 1 March (24,000) 24,000

Rent March–December (20,000) (20,000)

Transfer RE 20,000 (20,000)

Closing Balance (24,000) 4,000 0 (20,000)

Moving On Ltd. - Accrual vs. Cash Accounting

Question 3
Assets Shareholders’ Equity

Cash Prepaid Rent IS Retained Earnings

2024

Opening Balance (24,000) 4,000 0 (20,000)

Rent January–February (4,000) (4,000)

Prepayment 1 March (25,200) 25,200

Rent March–December (21,000) (21,000)

Transfer RE 25,000 (25,000)

Closing Balance (49,200) 4,200 0 (45,000)

Moving On Ltd. - Accrual vs. Cash Accounting