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2023 - Question 19 Study Guide

The document outlines a financial accounting exercise for George's Generators, detailing the company's loan from Permanent Trust and the necessary calculations and journal entries required for the year ended 30 June 2021. It includes tasks such as calculating the total loan amount, preparing loan and interest expense accounts, and indicating balances on trial balances. Additionally, it emphasizes the importance of adjusting journal entries in the accounting process.

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40 views2 pages

2023 - Question 19 Study Guide

The document outlines a financial accounting exercise for George's Generators, detailing the company's loan from Permanent Trust and the necessary calculations and journal entries required for the year ended 30 June 2021. It includes tasks such as calculating the total loan amount, preparing loan and interest expense accounts, and indicating balances on trial balances. Additionally, it emphasizes the importance of adjusting journal entries in the accounting process.

Uploaded by

masondombongeni256
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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ACC1006F/1106F FINANCIAL ACCOUNTING

QUESTION 19 – GUIDE
George’s Generators is a business based in Epping in Cape Town that buys and sells generators.
The business was started with an initial capital contribution of R300 000 and has a year-end of
30 June. The bookkeeper records cash receipts as income and cash payments as expenses. The
accountant makes the necessary adjusting journal entries at the end of each financial year. All
appropriate reversing entries were correctly processed on 1 July 2020. Don’t let this bother
There is not a lot in the above introductory paragraph that’s helpful. you: it’s got nothing to
The year-end, maybe? But you should always read this para, because do with the loan
sometimes it gives you info you cannot answer the question without!

George’s Generators: Pre-adjustment trial balance (extract)


as at 30 June 2021
DR CR
Loan R300 000

Remember, even though this is the pre-adjustment TB, the repayment of the loan this year will
have affected this balance, because all of the bookkeeper’s entries during the year are processed
before the pre-adj TB is extracted, and of course the bookkeeper would have recorded the loan
repayment.

Additional information

George’s Generators took out a loan from Permanent Trust on 1 February 2018. The terms of the
loan stated that the initial amount is repayable over 5 years, in equal annual instalments, starting
on 31 January 2019. Interest at 12% per annum is payable annually on 31 January. All interest
and capital payments have been made as required.
“In arrears” means at the end of the period, and is the opposite of “in
advance”. So, the payment on 31 January will be for the 12 months starting
You are required to 1 February 2021 and ending 31 January 2022.

1. Calculate the total amount that George’s Generators borrowed from Permanent Trust on
1 February 2018.
Usually, the best way to work with the loans is (1) to draw a timeline which fits all of the loan
repayments on it, and then (2) to work out how many repayments remain after this year. You can
then divide that number of years into the loan balance extracted from the TB to work out the
amount of one repayment. From, there’s easy to work out how much the business borrowed
initially.

2. Prepare the Loan account as it would appear in the general ledger of George’s Generators for
the year ended 30 June 2021. The account must be properly closed off and must show dates
and contra accounts.

You’re just required to show the loan account for one year, so it’s just going to need an opening
balance, a repayment entry, and a closing balance.
3. Prepare the Interest expense account as it would appear in the general ledger of George’s
Generators for the year ended 30 June 2021. The account must be properly closed off and must
show dates and contra accounts.

Don’t forget the full accounting process below....

… this means that you’re going to need to think about (1) reversing entries on Day 1, (2)
bookkeeper’s entries during the year, (3) adjusting entries at the year-end, and (4) closing entries at
the year-end.
But before you even start drawing up the account, make sure that you draw yourself a second
timeline, focused just on the current year, and the three or so months on either side of it. Don’t
give into temptation, and try to use the timeline you created earlier for the loan – it’s scale will be
too small!

4. Indicate what would appear on the pre-adjustment, post-adjustment and post-closing trial
balance on 30 June 2021, by copying out and completing the following table. Use “DR” or “CR”
to indicate a debit or credit balance. Where there is a nil balance in a trial balance for an account,
insert a zero (“0”).

Pre-adj TB Post-adj TB Post-closing TB


Interest expense
Accrued interest expense

This is a classic type of question in Accounting! You’ve done all the hard work already, because
basically all the numbers you need are in the Interest Expense account you created to answer
Required 3. Yet in tests, so many students running out of time just stop here and move onto the
next question. Don’t do that! Practise answering this kind of required, which allows you to get easy
marks by simply pulling through your answers to earlier questions. We’ll even give you marks for
bringing through incorrect figures, so long as you are doing the right thing with them!
Of course, you do need to understand how to put together a Trial Balance table. It’s not difficult:
just think about what would be on each of the trial balances, based on the process flow diagram
above, and then use the table to efficiently put three tables into one!

5. Briefly explain the purpose of adjusting journal entries.

For this one, you’re on your own! If you haven’t picked up the answer yet, go back and watch the
lecture videos again. 😊

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