Vital Health Ltd is a vitamin shop that commenced business on 1 April 2016. Wang Jinkang is

Vital Health Ltd is a vitamin shop that commenced business on 1 April 2016. Wang Jiànkang is a health fanatic and a good manager but a poor accountant. From the trial balance prepared by a part-time bookkeeper, Wang prepared a statement of profit or loss for the year ended 31 March 2017. Wang knew something was wrong with the statement because profit up to February had not exceeded $28 000. Knowing that you are an experienced accountant, he asks you to review the statement of profit or loss and other data. You first look at the trial balance. In addition to the account balances reported in the statement of profit or loss, the general ledger contains the following selected balances at 31 March 2017.

Advertising supplies on hand            $14 000

Prepaid insurance                                  22 400

Bank loan                                                28 000

You then make further enquiries and discover the following:

1. Service revenues include advanced money for vitamins to be delivered after March, $16 800.

2. There was $3220 of advertising supplies on hand at 31 March 2017.

3. Prepaid insurance resulted from the payment of a 1-year policy on 1 October 2016.

4. The following invoices have not been paid: advertising for week of 24 March 2017, $3500; repairs made on 10 March 2017, $2800; and electricity expense, $1120.

5. At 31 March 2017, two days’ wages had not been paid, amounting to $560.

6. The business took out the loan on 1 January 2017 at an annual interest rate of 10%.

Required

With the class divided into groups, answer the following.

(a) Prepare a correct statement of profit or loss for the year ended 31 March 2017.

(b) Explain to Wang the generally accepted accounting principles that he did not follow in preparing the statement of profit or loss and the effect on the results.

Transcribed Image Text:

Revenues Service revenue Operating expenses Advertising Wages Electricity Depreciation VITAL HEALTH LTD Statement of profit or loss for the year ended 31 March 2017 Repairs Total operating expenses Profit $ 8540 59 080 5460 1680 5600 $168 000 80 360 $ 87640