Accrual adjustments I

‘Autovalet’ is a successful chain of car cleaning centres. Some of the centres are owned by the company while others operate under a franchise arrangement – where Autovalet is the franchisor and the proprietor of the centre is the franchisee. During x5 Autovalet enters into the following transactions.

The company’s financial year ends on 31 December.

1 On 31 May, Autovalet loans 75,000 to a franchisee for two years at an annual interest rate of 8%.

Under the agreement, the franchisee is to pay interest every six months and to repay the principal of 75,000 on 31 May x7.

2 Autovalet buys supplies costing 11,000 during the year. It has supplies costing 2,000 in inventory at the end of x5. The year before (end x4), it had supplies costing 3,000 in inventory.

3 Autovalet receives 360,000 of advance fees from franchisees on 1 September x5, covering services it will render them in the year to 31 August x6. The services consist mainly of advertising and promoting the Autovalet brand and will be provided evenly over the year. The equivalent sum it received on 1 September x4, was 336,000.

4 As a result of expansion, Autovalet has to rent additional office space for its staff in x5. On 1 March x5, it enters into a contract with the owner of the office building and pays 135,000 for three years’

rent in advance.

Required Compute the following amounts Autovalet reports in its annual accounts for x5:

(a) interest income;

(b) supplies expense;

(c) unearned franchise fee revenue at 31 December;

(d) rent expense.

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