1 Year-end accrual accounting adjustments (22 Marks) You are part of the audit team for THE...

 

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1 Year-end accrual accounting adjustments (22 Marks) You are part of the audit team for THE DATA INCUBATOR, an emerging data storage company based in Melbourne. You have been involved in the audit for the year ended 30 June 2021 and have been told that the company has not correctly followed accounting rules in the preparation of the financial statements. Terry, your reporting partner, wants to prepare the journal entries that should be recorded to correct the problems the audit has uncovered. i. THE DATA INCUBATOR pays annual insurance of $18,000 every year on 1 April. The insurance premium, which has not increased since 2016, covers the period 1 May to 30 April. The 2020 audit files show that the correct insurance prepaid was shown in the balance sheet on 30 June 2020. However, on 30 June 2021, the income statement shows an insurance expense of $15,000 and the balance sheet shows prepaid insurance of $18,000. 2 Marks. ii. THE DATA INCUBATOR prepays rent every six months. The last payment of $24,000 was made and recorded on 1 February 2021 for the six-month period starting 1 March 2021. The audit uncovered that no adjustments have been recorded since 31 March 2021 when the monthly rental expense for March was correctly recorded. 2 Marks. iii. One of the cash receipts credited to revenue turned out to be a deposit for $5,000 made by a customer on an order that will be filled a week after the end of the year. The audit also uncovered that the receipt of cash from accounts receivable of $9,000 on 1 June 2020 was incorrectly credited to revenue. 2 Marks. iv. The audit uncovered several unrecorded transactions in relation to employee wages. On 30 June, the company paid wages of $20,000, $6,000 of which were owed for the month of May. $8,000 remained outstanding to employees at the end of June. None of these transactions were evident in the income statement or balance sheet. 3 Marks. v. The audit has uncovered unrecorded transactions relating to the payment and receipt of dividends. On 30 June 2021, The THE DATA INCUBATOR received dividends of $7,000 and paid dividends worth $30,000 to its shareholders. The balance sheet showed dividends receivable of $4,000 and dividends payable of $20,000 on 30 June 2021. Company management have informed the audit team that no dividends receivable or payable exist at 30 June 2021 3 Marks. vi. Before the adjustments for THE DATA INCUBATOR were recorded for i to v. above, the balance sheet showed a cash balance of $55,000 and the income statement reported a net profit of $150,000. You are required to calculate the updated amounts for cash and net profit that would be shown in the financial statements for THE DATA INCUBATOR. You should show all workings. 10 marks. You are required to complete your answers in the text box below. To answer questions i to v, we suggest you create a table by clicking on the Table icon in the text editor. The table should have 6 rows and 4 columns. You may need to manually adjust the column widths once the table is created. Use the headers below and fill in your answer in the table for each transaction. Question Number Account name Account name (e.g., cash) Account name (e.g., sales) Debit ($) Credit ($) i. Amount Amount You should also show all working in calculating answers to question vi. 1 Year-end accrual accounting adjustments (22 Marks) You are part of the audit team for THE DATA INCUBATOR, an emerging data storage company based in Melbourne. You have been involved in the audit for the year ended 30 June 2021 and have been told that the company has not correctly followed accounting rules in the preparation of the financial statements. Terry, your reporting partner, wants to prepare the journal entries that should be recorded to correct the problems the audit has uncovered. i. THE DATA INCUBATOR pays annual insurance of $18,000 every year on 1 April. The insurance premium, which has not increased since 2016, covers the period 1 May to 30 April. The 2020 audit files show that the correct insurance prepaid was shown in the balance sheet on 30 June 2020. However, on 30 June 2021, the income statement shows an insurance expense of $15,000 and the balance sheet shows prepaid insurance of $18,000. 2 Marks. ii. THE DATA INCUBATOR prepays rent every six months. The last payment of $24,000 was made and recorded on 1 February 2021 for the six-month period starting 1 March 2021. The audit uncovered that no adjustments have been recorded since 31 March 2021 when the monthly rental expense for March was correctly recorded. 2 Marks. iii. One of the cash receipts credited to revenue turned out to be a deposit for $5,000 made by a customer on an order that will be filled a week after the end of the year. The audit also uncovered that the receipt of cash from accounts receivable of $9,000 on 1 June 2020 was incorrectly credited to revenue. 2 Marks. iv. The audit uncovered several unrecorded transactions in relation to employee wages. On 30 June, the company paid wages of $20,000, $6,000 of which were owed for the month of May. $8,000 remained outstanding to employees at the end of June. None of these transactions were evident in the income statement or balance sheet. 3 Marks. v. The audit has uncovered unrecorded transactions relating to the payment and receipt of dividends. On 30 June 2021, The THE DATA INCUBATOR received dividends of $7,000 and paid dividends worth $30,000 to its shareholders. The balance sheet showed dividends receivable of $4,000 and dividends payable of $20,000 on 30 June 2021. Company management have informed the audit team that no dividends receivable or payable exist at 30 June 2021 3 Marks. vi. Before the adjustments for THE DATA INCUBATOR were recorded for i to v. above, the balance sheet showed a cash balance of $55,000 and the income statement reported a net profit of $150,000. You are required to calculate the updated amounts for cash and net profit that would be shown in the financial statements for THE DATA INCUBATOR. You should show all workings. 10 marks. You are required to complete your answers in the text box below. To answer questions i to v, we suggest you create a table by clicking on the Table icon in the text editor. The table should have 6 rows and 4 columns. You may need to manually adjust the column widths once the table is created. Use the headers below and fill in your answer in the table for each transaction. Question Number Account name Account name (e.g., cash) Account name (e.g., sales) Debit ($) Credit ($) i. Amount Amount You should also show all working in calculating answers to question vi.

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