MASTER’S IN FINANCE

PREPARATORY ACCOUNTING

Exercises for session 2: The Income Statement

Introduction to Financial Accounting and Reporting
Question 0: Understanding accruals and deferrals
For each of the below items, use Nike’s Balance Sheet (see a copy on the next page) to
explain the relative timing of the transaction recorded versus cash collection/payment:
 Accounts receivable, net: Does the balance of 4,463 represent earned revenue? Yes
Was cash collected for these transactions? No
 Prepaid expenses: Does the balance of 1,498 represent expenses that are matched to
this period’s revenues? No Was cash paid in the amount of 1,498? yes
 Accounts payable: Does the balance of 2,836 represent the amount that has been paid
in cash by the end of the period? No it has to be paid
 What about accrued liabilities and income taxes payable? You have received cash for
accrued liabilities, you have not give cash with taxes payable

1
2
Question 1: Multiple choice

Run Ltd. uses the allowance method to account for bad debt, as required under IFRS. Which
of the following is true? (Ignore any income tax effects.)

a. When Run Ltd records a bad debt provision, it decreases bad debt expense. FALSE,
Bad debt increases
b. When Run Ltd records a bad debt provision, total liabilities increase. False no effect in
liabilities is a contra asset
c. When Run Ltd writes off bad debt, total current assets do not change. True, only if
write off is bigger than provision
d. When Run Ltd writes off bad debt, operating cash flows decrease. Flse
e. None of the above.

3
Question 2: Fowler Ltd. (Understanding accruals entries)

Fowler Ltd has a year-end of December 31. On October 31, 2019, it paid a rent of £27,000
(in cash) for the six months ending on April 30, 2020.

A. What amount should appear in the 2019 retained earnings account? 4.5*2= -9K What
amount should appear on the closing Balance Sheet for 2019? 18K for prepaid rent

B. Now suppose that the next two semi-annual rent payments are:
30 April 2020 £30,000
31 October 2020 £36,000

What amount should appear in the 2020 retained earnings account? What amount
should appear on the closing Balance Sheet for 2020?

C. Fill in the transaction worksheets for 2019 and 2020 in respect of the three payments
described in a) and b) above

Stockholders'
Assets Liabilities
Transaction   Equity
Prepaid
Cash Retained earnings
    assets
Year 2019          
Rent payment   -27,000 27,000
Expense for 2019   -9,000 -9,000
   
Closing balances   18,000
   
Year 2020  
Expense the prepayment (2019) -18,000 -18,000
Rent payment (April)   -30,000 30,000
Expense the prepayment (April) -30,000 -30,000
Rent payment (October)   -36,000 36,000
Expense the prepayment
-12,000 -12,000
(October)
   
Closing balances   24,000

4
Question 3: Goldberg Corp. (identifying account types)

The December 31, 2020 account balances prior to the preparation of closing entries for
Goldberg Corporation are as follows:
Change, $
Cash
Store supplies
Accrued service fees revenue +1,000
Retained earnings +100
Accounts payable
Dividends -400
Unearned service fees revenue +360
Wage expense -300
Store supplies expense -100

Based upon this information, after all closing entries have been made, what will be the
balance in Goldberg’s Retained Earnings account?

Retained earnings balance: Beginning earnings +.net income (revenue – expenses) -

dividends

Question 4: Roasters Inc. (accruals and deferrals)

Roasters, Inc. reviews its records at the end of December 2020 in anticipation of the end of
its fiscal year. This process reveals the following items that have not been accounted for yet:

 $2,000 of accounts receivable outstanding at the beginning of December has been

collected. No effect
 The December utility bill has not yet been paid. A phone call to the provider reveals that
the invoice will total $1,200 and will be mailed on January 4, 2021. Expense -1,200
 Services worth $25,000 have been completed for the month and billed to customers.
Revenue +25,000
 A customer has paid $500 for services to be provided next month.
 Services of $5,000 were completed on December 30, 2020, but billing will not be
rendered until January 3, 2021. Revenue +5,000

What will be the effect of accounting for the above items on Roasters Inc.’s revenues and
expenses for the month of December 2020?

5
Question 5: GoGo Enterprises (calculations and entries for accruals and deferrals)

The following parts describe transactions of GoGo Enterprises during 2020. Treat each of the
following parts independently from the others.

A. GoGo sold 10 subscriptions on October 1, 2020 for magazines to be delivered over the
next six months. As a result, $600 was collected in advance from customers. Prepare the
transaction entry GoGo should have recorded at October 1, 2020 to account for these
transactions. Cash +600 // Unearned revenues +600

B. GoGo signed a two-year rental agreement on October 1, 2020, for $9,600. The
agreement covers its building for the next two years. Prepare the transaction entry
GoGo should record on December 31, 2020 related to the rent. (Assume the company
recorded prepaid rent for $9,600 on October 1, 2020.) Prepaid rent 9,600 - 400 = 9,200

Ret Earnings -400

C. GoGo begins a TV advertising campaign for $120,000 on November 1, 2020. The

company intends to pay the broadcaster for the campaign on January 15, 2021. One half
of the commercials run during November, and the remaining half run evenly in
December and January. How much expense associated with this campaign will be
reported on the annual income statement ending in December?

-90,000 expense

D. At the beginning of 2020, GoGo had $3,600 in the Supplies asset account. During 2020,
it purchased $1,400 of additional items, further increasing the balance of Supplies asset
account. At the end of 2020, GoGo determined that only $1,200 of supplies were still
on hand. What entry should GoGo make on December 31, 2020 to ensure its accounts
are properly stated?
COGS= -3,800

6
Question 6: Junk Company (entries and calculations related to bad debt)

Junk Company has the following data from the financial statements. The company uses the
allowance method to recognize bad debt provisions. Prepare a transaction worksheet to
record revenues, the recognition of bad debt expense, the write-off of actual uncollectible
accounts, and the collection of cash from customers for 2019 and 2020. Ignore costs of sales
and assume zero opening balances for cash and retained profit for 2018. (Hint: Sometimes
you don’t want to work strictly top-to-bottom to solve a problem.)

2020 2019 2018

Balance Sheet
Accounts receivable, Gross £ 468,387 £ 455,517 £ 382,692
Provision for Doubtful Accounts 10,673 8,341 13,441
447,176 369,251

Income Statement
Revenues (assume 100% on credit) 1,775,274 1,687,380
Bad Debt Expense 3,152 2,999

Ending Ac./Rec. = Beginning Ac./Rec. + New credit sales – Cash collections – Write-offs
Ending Provisions = Beginning Provisions + Bad debt expense – Write-offs
           
Liab Shareholder's
Transaction Assets . Equity
  Provision for
Accounts Retained
Cash doubtful
receivable earnings
  debts  
Year 2019          
Opening balances:          
Sales 1,606,456        1,687,380 
Establish provision          2,999
Cash collection          
Write-off          
           
Transfer retained profits          
Closing balances:          
           
Year 2020          
Opening balances:          
Sales          
Establish provision          
Cash collection          
Write-off          
           
Transfer retained profits          
Closing balances:          

7
Question 7: Walpole Co. (entries and calculations related to bad debt)

Walpole Co. has performed the following year-end analysis of its accounts receivable:

Due for Due for Due for Due for over

Total 1-30 days 31-60 days 61-90 days 90 days
£36,000 £22,500 £7,000 £4,000 £2,500

During the year the company had sales of £425,000, one-fifth of which were in cash (i.e.,
80% were on credit). The opening balance in Allowance for Uncollectible Accounts was
£700.
A. Suppose the company believes that 0.5% of total credit sales need to be set aside as bad
debt expense. Record the appropriate transaction entry to recognize the bad debt
expense.

Cash: +85,000 Acc receivable: 340 -17K Bad debt expense: 1,700

B. Suppose instead that Walpole calculates bad debt expense by first estimating what the
ending balance of the Allowance for Uncollectible Accounts should be. To this end, the
company believes that 10% of accounts receivable due for over 90 days are unlikely to
be paid, 7% of accounts receivable due for 61-90 days are unlikely to be paid, 4% of
accounts receivable due for 31-60 days are unlikely to be paid, and 2% of accounts
receivable due for 1-30 days are unlikely to be paid. Assuming that the write-offs for
the year amounted to £300, how much bad debt expense should the firm record for the
period?