Workbook Chapter 15 Flashcards
On 1 April 2016, Glendale Golf Gear paid $4 800 (plus $480 GST) to cover insurance for the next 12 months (Chq. 163). The business prepares its nancial reports on 30 June each year. Explain how the insurance would be reported in the Balance Sheet of Glendale Golf Gear as at 1 April 2016.
As a current asset – Prepaid Insurance $4 800: it is an economic resource controlled by the business from which future economic benefits are expected to flow within the next 12 months. It is paid for but is yet to be incurred/consumed.
On 1 April 2016, Glendale Golf Gear paid $4 800 (plus $480 GST) to cover insurance for the next 12 months (Chq. 163). The business prepares its nancial reports on 30 June each year. Referring to one Accounting Principle, explain why some of the insurance should be reported as an expense for the year ending 30 June 2016.
Reporting period. Three months of insurance has been incurred/consumed during the current reporting period (the year ended 30 June 2016).
Explain the difference between an expense and an asset.
An expense is an outflow or consumption of an economic benefit, whereas an asset is an economic resource that is controlled by the business and will provide a future economic benefit. (An expense is consumed; an asset is still able to provide an economic benefit.)
Referring to one Qualitative Characteristic, explain why balance day adjustments are necessary.
Relevance. To ensure the reports include all information that is useful for decision-making, so that profit is calculated accurately by comparing revenues earned against expenses incurred in the current reporting period
See Dee’s music shop has presented the following extract from its Balance Sheet as at 31 December 2015.
Current Assets: Prepaid Rent Expense $1 800
The yearly rent was paid in advance on 1 October 2015. The business prepares reports monthly, and the next balance day occurs on 31 January 2016.
Explain the effect of the adjustment for rent expense on the accounting equation of
See Dee’s.
Decreases Prepaid Rent Expense and thus assets by $200 and increases Rent Expense and so decreases Net Profit and owner’s equity by $200 (because this amount is incurred in the current reporting period).
On 18 August 2016, Keyboards @ Kyneton paid $3 300 (including GST) for advertising on Channel 31 (Ch. 65). The advertising campaign will run for four months, beginning in September 2016. Explain how the amount paid for advertising would be reported in the Balance Sheet of Keyboards @ Kyneton as at 31 August 2016.
As a current asset – Prepaid Advertising $3 000: it is an economic resource controlled by the business from which future economic benefits are expected to flow within the next 12 months. It is paid for but is yet to be incurred/consumed.
On 18 August 2016, Keyboards @ Kyneton paid $3 300 (including GST) for advertising on Channel 31 (Ch. 65). The advertising campaign will run for four months, beginning in September 2016. Explain the effect on Net Profit for September 2016 if the adjustment for advertising expense was not made.
Advertising expense will be understated by $750 (because the expense will not be recognised), so Net Profit will be overstated by $750.
During April 2016, Wilco Farm Gear paid $1 200 (plus $120 GST) for electricity, but as at 30 April 2016 a further $600 had been incurred but not yet paid. Referring to one Accounting Principle, explain why the electricity owing should be included in the electricity expense for April 2016.
Reporting Period. The electricity is owing because it has been incurred/consumed during the current reporting period (April 2016).
During November 2016, Hair Today employed two sales assistants, each of whom earns $600 for a six-day week. During November 2016, Hair Today paid wages of $2 400, but by balance day – 30 November 2016 – two days’ wages were still owing to each assistant. Referring to one Qualitative Characteristic, explain why the wages owing must be reported in the Balance Sheet for Hair Today as at 30 November 2016.
Relevance. They must be reported to ensure the reports include all information that is useful for decision-making, because the wages owing represent a present obligation, the settlement of which is expected to result in an outflow of economic benefits sometime in the next 12 months. The wages were incurred but are still owing.
During November 2016, Hair Today employed two sales assistants, each of whom earns $600 for a six-day week. During November 2016, Hair Today paid wages of $2 400, but by balance day – 30 November 2016 – two days’ wages were still owing to each assistant. Explain the effect of the adjustment for wages owing on the Net Pro t of Hair Today
for November 2016.
Wages expense will increase by $400 (the amount owing) so Net Profit will decrease by $400.
On 1 February 2016, Wilson Desks borrowed $30 000 to purchase a new delivery van. The interest-only loan charges interest at 6% p.a., with payments due at the end of April, July, October and January each year. Explain why there is a difference between interest expense and interest paid.
Only 3 months (Feb.–April) of interest have been paid but 5 months were incurred as interest expense in the current reporting period, i.e. interest expense includes 2 months worth of interest, which was accrued – incurred but not yet paid.
During March 2016, The Sporting Republic on High paid $3 190 (including GST) for advertising, but actually incurred an advertising expense of $3 400. Explain how Accrued Advertising would be reported in the Balance Sheet of The Sporting Republic on High as at 31 March 2016.
It would be reported as a current liability – Accrued Advertising $500 because the advertising owing represents a present obligation, the settlement of which is expected to result in an outflow of economic benefits sometime in the next 12 months. The advertising was incurred but is still owing.
Explain why residual value is deducted from the historical cost when calculating depreciation.
Because this amount part of the cost will not be incurred/consumed by the entity (business) that currently controls the asset (but by the next owner), so it must not be allocated as an expense of the current entity.
On 1 July 2015, Restoration Doors purchased a new photocopier for $6 000 (plus $600 GST). It is expected that the photocopier will have a useful life of four years, and will be disposed of at this time for $300. Explain the effect of depreciation of photocopier on the Net Profit of Restoration
Doors for the year ending 30 June 2016.
Depreciation of Photocopier is an expense that will decrease Net Profit by $1425.
Referring to one Accounting Principle, explain why it is necessary to depreciate non-current assets.
Reporting Period. Non-current assets assist to earn revenue over a number of reporting periods, so it is necessary to allocate their cost over their useful life in order to calculate the expense incurred in each reporting period and ensure profit can be calculated accurately.
