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# Chapter 6

## Introduction to the worksheet

Review questions
1 The answer should show an understanding that both sides of the balance sheet equation must
always be equal.
2 The difference between the balances of the two sides of the worksheet is exactly divisible by
nine..
3 a Decrease the bank column by \$200 and decrease the owners’ equity column by \$200.
b Reduce the bank column by \$27 500 and open up a new asset column for the new asset,
vehicle, and put \$27 500 in that column.
c No entry.
d Decrease the bank column by \$1760 and record a decrease in the profit and loss column
of \$1760.
e Decrease the bank column by \$1000 and record a decrease in the profit and loss column
of \$1000.
f Increase the liability account electricity payable by \$100 and charge \$100 as an expense
in the profit and loss column.
g No entry until the goods are delivered to the customer, as orders can be cancelled.
4 Is there a future benefit to be obtained or has the benefit expired? If there is a future benefit
then we have an asset; if the benefit has been used or consumed then we have an expense.
5 In situations where the answer to the question posed above is not clear cut, students should
re-examine the definition and recognition criteria for an asset. If it is not probable that future
economic benefits controlled by the entity do exist and can be reliably measured, then we
should record an expense.

## Problems for discussion and analysis

1 Students should raise the following:
a The depositing of \$2000 into the business’s bank account has created an asset of the
The right to use the owner’s car has created a future benefit for the business. The
value of the car to the business is the car’s replacement cost of \$9000, not its original
cost.
b This question raises the problem of when the earning process is complete; when do we
have a sale? Students should discuss the recognition principle as it applies to revenue.
c The point being demonstrated in this example is that in the first case, an expense (the
rebate) of \$200 is being incurred while in the second, the return of the goods amounts to a
reversal of a previous sale, the consequences of which are the exchange of one asset for
another and the loss of the profit.
In the matter of spending \$280 to rectify the faulty goods, students should consider
whether an additional future benefit is created. Discuss the concept of net realisable
value.
2 a Decrease asset cash \$769, increase asset desk and chair \$769.
b Decrease asset cash \$549, increase asset prepaid expenses \$549.
c No entry.
d Decrease asset cash \$4999, increase asset computer \$4999.

Chapter 6: Introduction to the worksheet 53

## Decrease asset computer \$4999, increase cash \$4999.

e Decrease asset cash \$100, decrease capital drawings \$100.
f No entry.
g Increase asset cash \$48 000, increase revenue sales \$48 000.

54 Contemporary Accounting Solutions Manual

3
Re-cover Upholstery Repairs worksheet
Cash + Office + Office + Vehicle + Sewing + Account + + Prepaid = Note + Account + Equity + Profit & Loss
equip. supp. machine receive. Rent Payable Payable
Jan 1 10 000 10 000
20 000 20 000
24 000 24 000
4 -350 350
4 –100 850 750
6 500 500
6 1000 1000
7 –1000 5 000 4 000
8 600 600
11 NO ENTRY
12 –200 –60 pe
–10 po
–130 el
13 700 700
13 1200 1200
14 –750 –750
15 –300 –300
16 300 300
17 700 700
18 –550 –550 w
21 400 1200 1600
23 1000 –1000
24 –70 –70 pe
25 –550 –550 w
28 100 500 600
31 –850 –850
Wages 471 –471

Total 10 130 + 20 000 + 300 + 24 000 + 5 000 + 2 900 + = – 4 000 771 53 700 3 859

Chapter 6: Introduction to the worksheet 55

## Re-cover Upholstery Repairs

Income statement for the period ending 31 January

\$ \$
Sales revenue 6900
Expenses
Electricity 130
Office supplies 850
Petrol 130
Postage 10
Rent 350
Wages 1571 3 041
Net profit \$3 859

## Re-cover Upholstery Repairs

Balance sheet as at 31 January

\$ \$ \$
Current assets
Cash 10 130
Office supplies 300
Account receivable 2 900
Total current assets 13 330

Non-current assets
Office equipment 20 000
Vehicle 24 000
Sewing machine 5 000
Total non-current assets 49 000
Total assets 62 330

Current liabilities
Account payable 771
Note payable 4 000
Total current liabilities 4 771
Total liabilities 4 771

## Net assets 57 559

Owners’ equity
I. Cover, Capital 54 000
Profit 3 859 57 859

## Less I. Cover, Drawings 300

Total owners’ equity 57 559

Chapter 6: Introduction to the worksheet 56

4 a
Boat worksheet
Day Cash + Boats + Rent + Furniture = Loans + Equity + Profit & Ref
(Stock) Loss
1 10 000 10 000
2 20 000 20 000
3 –500 500
4 –7400 7400
5 –2 900 2900
6 No entry
9 5500 5500 sales
10 3200 3200 sales
11 –15 000 15 000
12 –20 –20 clean
18 –500 500
19 No entry
20 1200 1200 sales
22 19 000 19 000 sales
23 –8 000 8 000
24 -180 -180 Clean
26 -3 000 -3 000 Repay
loan
27 No entry
29 –900 –900 rep.
30 9300 9300 sales
31 –180 – 180 elect
Adj Rent -1000 – 1000 rent
Adj Boats -30 400 –30 400
Bal. 27 920 + nil + nil + 2900 = 17 000 + 10 000 + 3820

Chapter 6: Introduction to the worksheet 57

b
Joe’s Boats
Income statement for the period ending 31 March 20XX

\$ \$
Sales revenue 38 200
Cost of boats sold 30 400
Gross profit 7800
Expenses 1700
Cleaning 180
Electricity 1000
Rent 900
Repairs 4020
Net profit \$3820

c
Joe’s Boats
Balance sheet as at 31 March 20XX

\$ \$ \$
Current assets
Cash 27 920
Total current assets 27 920

Non-current assets
Furniture 2900
Total non-current assets 2900
Total assets 30 820

Current liabilities
Loan 17 000
Total current liabilities 17 000
Total liabilities 17 000

## Net assets 13 820

Owners’ equity
Capital 10 000
Profit 3820
Total owners’ equity 13 820

58 Contemporary Accounting Solutions Manual

5 a
Assets = Liabilities s + Equity
Day Transaction Cash + Shop Office + Prepaids + + Inventory Creditors = Profit & Loss + Owners’
fittings equip. \$ \$ \$ equity
\$ \$ \$
June1 Equity 150 000 150 000
Rent –600 600
June 2 Shop fittings 27 000 27 000
Stock –30 000 58 000 28 000
June 3 No entry
June 4 Telstra –1250 500 –750
June 5 Office equip. 5600 5600
June 6 Caterers –3100 –3100
June 7 Wages –300 –300
June 7–12 Sales 3456 3456
June 12 No entry
June 12 Cash –5600 –5600
June 12 Cash –500 –500
June 12 Wages –1000 –1000
June 14 Cash refund –375 –375
June 14–19 Sales 6320 6320
June 15 Wages –200 –200
June 16 Creditors –28 000 –28 000
June 21–26 Sales 5321 5321
June 21 Wages –775 –775
June 23 Stock 23 000 23 000
June 28–29 Sales 1289 1289
June 28 Insurance –1200 1200
June 28 Wages –950 –950
Balances 92 536 + 27 000 5600 + 2300 + + 81 000 = 50 000 8436 + 150 000
Rent –600 –600
Goods sold 16 300 –16 300
Balance 92 536 + 27 000 5600 + 1200 + 64 700 = 50 000 –8964 150 000

Chapter 6: Introduction to the worksheet 59

b
Income statement for month ending 30 June

\$ \$

## Sales revenue 16 011

Cost of goods sold 16 300
Gross profit –289

Expenses:
Catering 3100
Rent 600
Telephone 750
Wages 3225 _____
Total Expenses 8675

## Balance sheet as at 30 June

\$ \$
Assets
Current Assets
Cash 92 536
Inventory 64 700
Prepaids 1200
Total current assets 158 436

Non-current assets
Shop fittings 27 000
Office equipment 5600
Total non-current Assets 32 600
Total assets 191 036

Liabilities
Creditors 50 000
Total current liabilities 50 000
Total liabilities 50 000

## Net assets 141 036

Owners’ equity
Capital 150 000
Loss (8964)
Total owners’ equity 141 036

60 Contemporary Accounting Solutions Manual

6 a

## Mandy Plover worksheet

ASSETS = LIABILITIES + OWNERS EQUITY
Date Bank Prepaid Fixtures & Computer Supplies Accounts Prepaid Accounts Payable Capital Profit & Loss
Rent Fittings Receivable Lease =
Rent
July 1 30 000 30 000
–3000 3000
–275 –275
–50 –50
–475 –475
2 –1000 1000
3 17 500 17 500
4 –1380 1380
15 2750 2750
15 No entry
15 –750 –750
16 225 –225
16 –2000 2000
18 –17 500 –17 500
22 300 300
23 –780 –780
29 –750 –750
29 300 300
31 340 3110 3450
Balance 3985 3000 1000 17 500 1380 4855 2000 = 0 30 000 3720
Rent –1000 –1000
Lease –1000 –1000
Supplies* -115 –115
Adjusted 3985 2000 1000 17 500 1265 4855 1000 = 0 30 000 1605
Balance
*Assumed to last for one year, therefore 1380 x 1/12 = 11

Chapter 6: Introduction to the worksheet 61

b
Mandy Plover
Income statement for month ending 31 July

\$ \$
Revenue 6800
Less Expenses
Wages 1500
Rent 1000
Motor Vehicle Lease 1000
Telephone 275
Electricity Fee 50
Office Equipment 475
Rent 780
Supplies
Net Profit 1605

Mandy Plover
Balance sheet as at 31 July

## Assets \$ \$ Liabilities and owners’ \$

equity
Current assets Owners’ equity
Bank 3985 Capital 30 000
Accounts receivable 4855 Retained earnings 1605
Supplies 1265
Prepaid rent 2000
Prepaid lease rent 1000 13 105

Non-current assets
Fixtures and fittings 1 000
Computer 17 500 18 500

## Total assets 31 605 31 605

c For the month of July, Mandy has made a profit of \$1605. However, this figure is
overstated for the following reasons:
• No expense recorded for electricity or telephone as no account has been received
as at 31 July
• No depreciation recorded for the computer or the signs
• Based on the investment of \$30 000, Mandy is receiving the following return:
1,605 x12
x 100
30,000
= 64.2 per cent per annum
The other issue Mandy must consider is whether her wages of \$750 per fortnight
represent what she could earn elsewhere. If in fact her wages are understated at \$750 per
fortnight or \$20 000 per annum, then her return on investment is overstated.

Chapter 6: Introduction to the worksheet 64

Finally the effect of the lease of the BMW must be considered. For July the impact
on profit has only been \$1000 but in future months the impact will be \$2000 per month.
If Mandy continues to earn the same profit each month then the following figures show
the impact of the BMW:

## Net profit for July \$1605

Add back BMW lease cost 1000
\$2605

## x 12 for full year x 12

31 260
Less full year cost of BMW –24 000
7260

Return on investment:
30,000
x 100
7,260

## = 24.2 per cent

In summary then, Mandy’s business looks very promising. However, further analysis
is required after a few more months of business to enable a more accurate assessment of
the financials. Perhaps Mandy could earn a higher return by investing her money in
shares and working for someone else but then she loses her independence and perhaps
the BMW car. Even if she continues in her own business she could improve the return
on her investment by choosing to lease a less expensive motor vehicle.
7 a Alternative treatments raised by students may include:
• Rent – at this stage there is a future benefit so set up an asset and review at end
of month. Alternatively as the accounts are being done at the end of the month at
that point in time the benefit is used up so the rent could be charged to the profit
and loss account directly. (Charged directly to profit and loss in the worksheet
below.)
• Advertising – students may argue that advertising creates a future benefit,
however, the future benefit is too uncertain to treat it as an asset.
• Wages – the area of contention is whether this is a business expense or a
principle.)
• Purchases of stock – this can be put under an inventory column, and each sale
can reduce the inventory figure with a corresponding expense figure.
Alternatively the total cost of goods sold can be calculated at the end of the
period. This is the approach taken in the suggested solution

Chapter 6: Introduction to the worksheet 63

b
Jill’s Office Chairs worksheet
Assets = Liabilities + Equity
Day Transaction Cash + Car + Rent + Furniture + Inventory = Profit & Loss + Owners’ equity
\$ \$ \$ \$
\$ \$ \$
1 Equity 10 000 10 000
Car 4000 4000
Rent –240 240
Equipment –1600 1600
2 Chairs –7000 7000
9 Sales 1200 1 200
Delivery –144 –144
11 Sales 5400 5400
Delivery –600 –600
14 Wages –300 –300
16 Chairs –1400 1400
21 Repairs –300 –300
23 Sales 1800 1800
Delivery -80 –80
27 Sales 1350 1350
Sales 700 700
Delivery –200 –200
28 Wages –300 –300
Sales +500 +500
Telephone –60 –60
Electricity –80 –80
Balances 7846 + 4000 + 240 + 1600 + 8400 = 8 086 + 14 000
Rent –240 –240
Chairs Sold –8400 –8400
Balance 7846 + 4000 + + 1600 = –554 14 000

64 Contemporary Accounting Solutions Manual

c
Jill’s Office Chairs
Balance sheet at the end of the period

\$ \$
Assets
Current assets
Cash 7846
Total current assets 7846

Non-current assets
Car 4000
Furniture 1600
Total non-current assets 5600
Total assets 13 446

Liabilities

## Net assets 13 446

Owners’ equity
Capital 14 000
Loss (554)
Total owners’ equity 13 446

## Jills Office Chairs

Income statement for the period

\$ \$

## Sales revenue 10 950

Cost of goods sold 8400
Gross profit 2550

Expenses:
Car repairs 300
Delivery 1024
Electricity 80
Rent 240
Telephone 60
Wages 600 _____
Total expenses 3104

## 7 d Comments on the performance of the business should include:

Profitability:
• The investment of \$14 000 has yielded a loss of \$544 in the first month of
operations

Chapter 6: Introduction to the worksheet 65

• The gross margin is very low especially when the cost of delivery of \$1024 is
considered
• Both wages and advertising are comparatively high
• Depreciation has yet to be charged on the car and furniture
Cash position:
• The cash position has deteriorated during the month
• The cash resources of the business are marginal – on day five the closing cash
balance was only \$760
• There is no stock on hand at the end of the period; its replacement will strain
cash resources

## Ethics case study

Facts
– Sam is a junior accountant preparing the financial statements worksheet
– Sam notices that a sale has been incorrectly recorded as \$54 000 instead of \$45 000.
– the sale transaction was to one of Sam’s friends
– Sam (and other employees) would receive a higher bonus if the error is not corrected
– Sam is leaving next week to go on an extended working holiday in Europe
Stakeholders
– Sam’s friend
– company’s employees
– company’s shareholders and creditors
Problem
– should Sam correct the sales error in the worksheet?
Values and principles
– professional principles at issue here include integrity (CPC B2), objectivity (CPC B3),
independence (CPC B4), competence and due care (CPC B7). There is also an issue of
loyalty to Sam’s friend. These principles would all imply that Sam should be honest, ignore
the potential self-gain, and correct the error
– however, in contrast, are the interests of Sam and the other employees who would all gain a
larger bonus if the error is not corrected
Two possible courses of action
– action one: do not correct the error
– action two: correct the error
Evaluation
Action one:
– breaches the ethical principles above
– at a minimum, it involves his friend in what may be an unpleasant dispute when the
company seeks payment from the friend
– given the short timeframe, Sam is likely to receive the bigger bonus and be gone by the time
the error is discovered
– Sam may get a bad reputation but he is unlikely to suffer the consequences of this if he has
‘disappeared’ overseas (except, perhaps, the loss of a friend)
– employees may have to have some of their bonuses reversed when the error is discovered

Chapter 6: Introduction to the worksheet 65

## – shareholders/creditors could be misled as to the profitability of the company

Action two:
– Sam is honest and complies with the ethical principles
– does not impose costs on his friend
– Sam and other employees will receive a smaller bonus
– less financial support for Sam’s travels
– shareholders/creditors are not misled
Choose a plan of action
– take a poll of the class but emphasise the requirement that class members present a plan of
action and that they properly justify that plan by reference to principles and consequences. It
is often helpful to ask students if they would be comfortable having their actions publicly
disclosed on television or before the courts