Unit Test: The Accounting Cycle

Part A: Completing the Accounting Cycle

Alou Equipment Repair has a September 30 year end. The company adjusts and closes its
accounts on an annual basis. On August 31, 2020, the account balances of Alou Equipment
Repair were as follows:

Alou Equipment Repair

Trial Balance
August 31, 2020

Account Debit Credit

Cash $2,790
Accounts Receivable 7,910
Supplies 8,500
Equipment 9,000
Accumulated amortization – Equipment $1,800
Accounts Payable 3,100
Unearned Revenue 400
J. Alou, Capital 21,200
J. Alou, Drawings 15,600
Service Revenue 49,600
Rent Expense 5,500
Salaries Expense 24,570
Telephone Expense 2,230

Total $76,100 $76,100

During September, the following transactions were completed:

September 1 Borrowed $10,000 from the bank for a two-year term at 5% interest.
2 Paid September rent and October rent in advance. $500 for each month.
8 Received $1,500 cash from customers on account.
12 Received $5,700 cash for services performed in September.
17 Purchased supplies on account, $1,300.
20 Paid creditors $2,300 on account.
27 Billed customers for services provided, $900.
29 Received $550 from customers for services to be provided in October.
30 Paid J. Alou $800 cash for personal use.

Note regarding the bank loan:

The bank loan is to be repaid over a 2-year period; $5,000 in 2020 and $5,000 in 2021.
Adjustment data consists of the following:
1. Supplies on hand at September 30 cost $1,000.
2. Accrued salaries payable at September 30 total $630.
3. The equipment has an expected useful life of five years.
4. Unearned revenue of $200 is still not earned at September 30.
5. Interest on the bank loan is payable on the first of each month.

Instructions:
a) Enter the August 31 account balances into each account.
b) Journalize and post the September transactions.
c) Journalize and post the adjusting entries.
d) Calculate net income, prepare a statement of owner’s equity, and a classified balance
sheet.
e) Journalize and post the closing entries.

Knowledge /25 marks

Consists of parts a, b and e.

Thinking /15 marks

Consists of part c.

Application /20 marks

Consists of part d.

Part B: Communication

1. Below are independent situations. Identify how each should be classified in the
financial statements for Bell Mobility and explain your reasoning.

a) Bell Mobility has cellphones in inventory that cannot be sold due to safety issues.
(3 marks)
b) Bell Mobility has sold $3,000 worth of prepaid cell phone cards. The payments
represent a 2-month card for its customers. (3 marks)

2. The following data are taken from the financial statements of Dellmont Company.

Accounts payable $ 28,000 Service revenue $500,000

Accounts receivable 65,000 Other current liabilities 20,000
Cash 16,000 Salaries payable 7,000
Net income 50,000 Owner’s equity 169,000
Total assets 325,000
Instructions
a) Calculate Dellmont’s working capital and current ratio, and comment on the company’s
liquidity. (2 marks)
b) Provide an example of a particular user who would be interested in the liquidity of
Dellmont Company. Explain why they would be interested. (2 marks)
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