A-Farah Youssef operates as a sole trader. Below is a trial balance extracted from her books as at 31 December 2020.

Trial balance for Farah Youssef as at 31 December 2020

	Debit	Credit
	£ _ .	£
Sales revenue		695,000
Inventory (as at 1 January 2020)	105,800
Purchases	625,200
Non-current assets at cost:
Equipment	100,000
Motor vehicle	80,000
Accumulated depreciation:
Equipment		10,000
Motor vehicle		10,000
Insurance	14,700
Rent	30,000
Heating and lighting	10,000
Salaries and wages	40,000
Motor expenses	15,300
Miscellaneous expenses	28,500
Receivables	110,000
Allowance for receivables		4,000
Payables		101,500
Cash	71,000
Bank loan		100,000
Capital		310,000
Total	1,230,500	1,230,500

Additional information is provided for use in preparing the company’s adjustments:

1. The value of closing inventory is £102,500.
2. On December 1, Farah Company borrowed £100,000, at 6% annual interest, from the National Bank. Farah Company has 120 days before the first payment is required.
3. Farah has paid her rent until 31 March 2021. Her annual rent is £24,000.
4. Office equipment has a useful life of ten years and a residual value of £0. It is to be depreciated on a straight-line basis.
5. The motor vehicle with a useful life of ten years and an estimated residual value of £30,000 is to be depreciated on a straight-line basis at a rate of 10%.
6. Farah finds that receivables of £10,000 need to be written off as irrecoverable.
7. The allowance for receivables is to be set at ten per cent of the remaining outstanding receivables as at 31 December 2020.
8. The heating bill will arrive on 5 January and about £1,000 is expected to relate to the period until 31 December.

Required:

1. Make the end-of-period adjustments entries.     
2. Prepare Farah’s income statement for the year ended December 31, 2020.
3. Prepare Farah’s balance sheet as at December 31, 2020.
4. How do the adjusting entries differ from other journal entries?? Explain why adjusting entries are needed.     

Answer rating: 100% (QA)

all workings are in pounds Adjustment entries Debit credit Prepaid rent 6000 Income statement ... View the full answer