hili..its an accepting question..i only want to understand how to solve transactions

2,3,4,5,6 plus how did he get delivery van- cost to be =12,000

i have answer i just need CLEAR EXPLANATION plz...if u can provide an equation ...or make it clear so i can follow solution.. because my exam is on sunday

thanks

Chapter 3 - ACCT 500 Net sales revenue= earned sales revenue - sales returns and allowances - sales discounts Sales Revenue earned in income statement = cash received - beginning AR + Ending AR + beginning unearned revenue - ending unearned revenue Cost of goods sold = Beginning balance of inventory +net cost of purchases- Ending balance of inventory Net cost of purchases = purchases of inventory + freight in (transportation in)- purchase returns and allowances - purchase discounts Purchases of inventory = cash paid - beginning Accounts payable + ending accounts payable Expense incurred in income statement = cash paid - expense payable at beginning of period + expense payable at end of period + prepaid expense at beginning of period - prepaid expense at end of period Straight line depreciation expense =( cost of plant asset- residual value) * 1/useful life in years * X/12 Beginning balance of RE+ NI after tx - dividends = ending balance of RE The depreciation expense will be recognized in the income statement while the accumulated depreciation will be added to any previous accumulated depreciation and will appear as a contra asset account deducted from plant assets in the balance sheet. Cost of plant asset - Accumulated deprecation Page When a plant asset is sold 1 = carrying value or book value of plant asset Question 3.6 in your book page 114 Delivery Van-cost 12000 AD (2500) Inventory = 65000 AR = 19600 Prepaid rent = 5000 Prepaid rates = 300 Cash = 750 (ii) Cash= 750-20,000 (iii) Cash = 750-2000015000 Prepaid rent = 5000-5000 Cash = 750-2000015000-1300 Prepaid rate = 300+25 (iv).I (iv). II Delivery van = 12000+13000 Cash = 750-2000015000-1300-13000 (v) AD = -2500 - 5000 (vi) Cash = 750-2000015000-1300-13000 -36700 Liabilities Equity AP = 22000 Accrued wages (wages payable) = 630 Share capital = 50,000 RE= 26900 Dividen ds Accrued electricity (electricity payable) = 620 Dividend s=20,00 0 Rent expense = 20,000 Rate expense = 1275 Depreciatio n expense = 2500+2500 Wages expense = 36930 Accrued wages (wages 2 (i) Expenses Page Assets Revenue payable) = 630+ 230 (vii). I Cash = 750-2000015000-1300-13000 -36700-1820 (vii). II Inventory = 65000+67000 Electricity expense = 1890 Accrued electricity (electricity payable) = 620+70 AP = 22000+6700 0 Inventory = 65000+67000+8000 Cash = 750-2000015000-1300-13000 -36700-1820-8000 Inventory = 65000+67000+8000 -89000 AR = 19600+179000 Cgs= 89000 Sales revenue = 179000 Sales revenue = 179000+54000 Cash = 750-2000015000-1300-13000 -36700-18208000+54000 Inventory = 65000+67000+8000 -89000-25000 Cash = 750-2000015000-1300-13000 -36700-18208000+54000+17800 0 Cgs = 25000 AP = 22000+6700 Page Cash = 750-2000015000-1300-13000 3 AR = 19600+179000178000 -36700-18208000+54000+17800 0 -71000 Cash = 750-2000015000-1300-13000 -36700-18208000+54000+17800 0 -71000-16200 0 -71000 Van expenses = 16200 Account balances Cash = 49730 AR = 20600 Inventory = 26000 AD = -7500 Delivery van = 25000 Prepaid rate = 325 Prepaid rent = 0 Rent expense = 20000 Rate expense = 1275 Depreciation expense = 5000 Wages expense = 36930 Electricity expense = 1890 Page 4 Cost of goods sold = 114000 Van expenses = 16200 AP = 18000 Electricity payable = 690 Wages payable = 860 Share capital = 50,000 Dividend = 20000 RE = 26900 Sales revenue = 233000 Rent expense = rent paid +prepaid rent at beginning of period - prepaid rent at end of period = 15,000+5000 - 0 = 20,000 Rate expense = expense paid + prepaid rate expense at beginning - prepaid rate at end of period = 1300+300-325=1275 Wages expense = wages paid - wages payable at beginning + wages payable at end = 36700630+860= 36930 Purchases = cash paid - beginning AP + ending AP 75000 = (8000+71000) - 22000 + ending AP Ending AP = 18000 Elecreicity expense = cash paid 1820 - electricity payable at beginning + electricity payable at end = 1820 -620+690 = 1890 Sales Revenue earned in income statement = cash received - beginning AR + Ending AR + beginning unearned revenue - ending unearned revenue 233000 = 232000 (178000+54000)- 19600 +Ending AR Ending AR = 20600 Depreciation expense = (13,000-3000)/4 *12/12 = 2500 Cost of goods sold = Beginning balance of inventory +net cost of purchases- Ending balance of inventory 114000 = 65000+75000- Ending balance of inventory Ending balance of inventory = 26000 Income statement for the year ended 31 December 2012 Sales revenue (+179,000 + 54,000) 233,000 Rent (5,000 + 15,000) Page Gross profit (114,000) 5 Cost of goods sold (+89,000 + 25,000) 119,000 (20,000) Rates (300 + 975) (1,275) Wages (630 + 36,700 + 860) (36,930) Electricity (620 + 1,820 + 690) (1,890) Van depreciation (2,500 + 2,500) (5,000) Van expenses (16,200) (16,200) Profit for the year 37,705 Statement of OE Beginning RE+ NI - dividends =ERE 26900+37705- 20000= 44605 TT and Co Statement of financial position as at 31 December 2012 ASSETS Non-current assets Property, plant and equipment Motor van at cost 25,000 Accumulated depreciation (7,500) 17,500 Current assets Inventories 26,000 Trade receivables 20,600 Prepaid expenses 325 Cash 49,730 Page Total assets 6 96,655 114,155 EQUITY AND LIABILITIES Equity (owner's capital) Share capital 50000 Ending RE 44605 Current liabilities Trade payables 18,000 Accrued expenses 1,550 19,550 114,155 Page 7 Total equity and liabilities The following is the statement of financial position of Al-Raya Company at the end of its first year of operations AL-Raya Company Comparative Balance Sheet, December 31, Assets 2009 Non-current assets Property, plant and equipment (cost) ............................................... $100,000 Accumulated Depreciation ................................................................ (9,500) 90,500 Current assets Prepaid rent .............................................................................................. 2,000 Inventory ........................................................................................... 60,000 Accounts receivable (net) .................................................................. 105,000 Cash ................................................................................................... 25,000 192,000 Total assets ....................................................................................... $ 282,500 Stockholders' equity and liabilities Equity 200,000 Retained earnings ............................................................................. 50,000 Page Current liabilities 8 Share capital ...................................................................................... 250,000 Accounts payable .............................................................................. 31,000 Electricity payable ....................................................................................... 500 Salary payable............................................................................................... 1,000 32,500 Total liabilities and stockholders' equity......................................... $ 282,500 During 2010 the following transactions took place: 1- A dividend of $ 10,000 was paid on ordinary shares. 2- Rent of $ 15,000 was paid during the year. At the end of the year the company had a balance of $1,000 in prepaid rent. 3- Salary expense for the year was $96,000. During the year salaries of 95,000 were paid to employees. 4- Electricity bills paid during the year totaled $7,000. At the end of the year the company had $200 of electricity incurred but not paid for. 5- The company paid $40,000 to acquire new property, plant and equipment at 1 July 2010. The new PPE has an estimated useful life of 10 years and a residual value of $2,000. The old PPE appearing in the opening balance sheet was acquired on 1 January 2009, has an estimated useful life of 10 years and a residual value of $5,000. The company uses the straight line method for depreciating non-current assets. 6- Inventories totaling $150,000 were bought on credit 7- Inventories totaling $70,000 were bought for cash 8- Sales revenue on credit totaled $210,000 (Cost $150,000) 9- Cash sales revenue totaled $140,000 (cost $100,000) 10- Receipts from accounts receivable totaled $290,000 11- Payments to accounts payable totaled $130,000 12- The company paid $2,500 for advertising and marketing during the year. Page 9 Required Page 10 1- Record the above transactions using the extended accounting equation template 2- Prepare the income statement and statement of owners' equity for Al-Raya Company for year ended 31 December 2010. 3- Prepare the classified statement of financial position for Al-Raya Company as at 31 December 2010. \fChapter 3 - ACCT 500 Net sales revenue= earned sales revenue - sales returns and allowances - sales discounts Sales Revenue earned in income statement = cash received - beginning AR + Ending AR + beginning unearned revenue - ending unearned revenue Cost of goods sold = Beginning balance of inventory +net cost of purchases- Ending balance of inventory Net cost of purchases = purchases of inventory + freight in (transportation in)- purchase returns and allowances - purchase discounts Purchases of inventory = cash paid - beginning Accounts payable + ending accounts payable Expense incurred in income statement = cash paid - expense payable at beginning of period + expense payable at end of period + prepaid expense at beginning of period - prepaid expense at end of period Straight line depreciation expense =( cost of plant asset- residual value) * 1/useful life in years * X/12 Beginning balance of RE+ NI after tx - dividends = ending balance of RE The depreciation expense will be recognized in the income statement while the accumulated depreciation will be added to any previous accumulated depreciation and will appear as a contra asset account deducted from plant assets in the balance sheet. Cost of plant asset - Accumulated deprecation Page When a plant asset is sold 1 = carrying value or book value of plant asset Question 3.6 in your book page 114 Delivery Van-cost 12000 AD (2500) Inventory = 65000 AR = 19600 Prepaid rent = 5000 Prepaid rates = 300 Cash = 750 (ii) Cash= 750-20,000 (iii) Cash = 750-2000015000 Prepaid rent = 5000-5000 Cash = 750-2000015000-1300 Prepaid rate = 300+25 (iv).I (iv). II Delivery van = 12000+13000 Cash = 750-2000015000-1300-13000 (v) AD = -2500 - 5000 (vi) Cash = 750-2000015000-1300-13000 -36700 Liabilities Equity AP = 22000 Accrued wages (wages payable) = 630 Share capital = 50,000 RE= 26900 Dividen ds Accrued electricity (electricity payable) = 620 Dividend s=20,00 0 Rent expense = 20,000 Rate expense = 1275 Depreciatio n expense = 2500+2500 Wages expense = 36930 Accrued wages (wages 2 (i) Expenses Page Assets Revenue payable) = 630+ 230 (vii). I Cash = 750-2000015000-1300-13000 -36700-1820 (vii). II Inventory = 65000+67000 Electricity expense = 1890 Accrued electricity (electricity payable) = 620+70 AP = 22000+6700 0 Inventory = 65000+67000+8000 Cash = 750-2000015000-1300-13000 -36700-1820-8000 Inventory = 65000+67000+8000 -89000 AR = 19600+179000 Cgs= 89000 Sales revenue = 179000 Sales revenue = 179000+54000 Cash = 750-2000015000-1300-13000 -36700-18208000+54000 Inventory = 65000+67000+8000 -89000-25000 Cash = 750-2000015000-1300-13000 -36700-18208000+54000+17800 0 Cgs = 25000 AP = 22000+6700 Page Cash = 750-2000015000-1300-13000 3 AR = 19600+179000178000 -36700-18208000+54000+17800 0 -71000 Cash = 750-2000015000-1300-13000 -36700-18208000+54000+17800 0 -71000-16200 0 -71000 Van expenses = 16200 Account balances Cash = 49730 AR = 20600 Inventory = 26000 AD = -7500 Delivery van = 25000 Prepaid rate = 325 Prepaid rent = 0 Rent expense = 20000 Rate expense = 1275 Depreciation expense = 5000 Wages expense = 36930 Electricity expense = 1890 Page 4 Cost of goods sold = 114000 Van expenses = 16200 AP = 18000 Electricity payable = 690 Wages payable = 860 Share capital = 50,000 Dividend = 20000 RE = 26900 Sales revenue = 233000 Rent expense = rent paid +prepaid rent at beginning of period - prepaid rent at end of period = 15,000+5000 - 0 = 20,000 Rate expense = expense paid + prepaid rate expense at beginning - prepaid rate at end of period = 1300+300-325=1275 Wages expense = wages paid - wages payable at beginning + wages payable at end = 36700630+860= 36930 Purchases = cash paid - beginning AP + ending AP 75000 = (8000+71000) - 22000 + ending AP Ending AP = 18000 Elecreicity expense = cash paid 1820 - electricity payable at beginning + electricity payable at end = 1820 -620+690 = 1890 Sales Revenue earned in income statement = cash received - beginning AR + Ending AR + beginning unearned revenue - ending unearned revenue 233000 = 232000 (178000+54000)- 19600 +Ending AR Ending AR = 20600 Depreciation expense = (13,000-3000)/4 *12/12 = 2500 Cost of goods sold = Beginning balance of inventory +net cost of purchases- Ending balance of inventory 114000 = 65000+75000- Ending balance of inventory Ending balance of inventory = 26000 Income statement for the year ended 31 December 2012 Sales revenue (+179,000 + 54,000) 233,000 Rent (5,000 + 15,000) Page Gross profit (114,000) 5 Cost of goods sold (+89,000 + 25,000) 119,000 (20,000) Rates (300 + 975) (1,275) Wages (630 + 36,700 + 860) (36,930) Electricity (620 + 1,820 + 690) (1,890) Van depreciation (2,500 + 2,500) (5,000) Van expenses (16,200) (16,200) Profit for the year 37,705 Statement of OE Beginning RE+ NI - dividends =ERE 26900+37705- 20000= 44605 TT and Co Statement of financial position as at 31 December 2012 ASSETS Non-current assets Property, plant and equipment Motor van at cost 25,000 Accumulated depreciation (7,500) 17,500 Current assets Inventories 26,000 Trade receivables 20,600 Prepaid expenses 325 Cash 49,730 Page Total assets 6 96,655 114,155 EQUITY AND LIABILITIES Equity (owner's capital) Share capital 50000 Ending RE 44605 Current liabilities Trade payables 18,000 Accrued expenses 1,550 19,550 114,155 Page 7 Total equity and liabilities The following is the statement of financial position of Al-Raya Company at the end of its first year of operations AL-Raya Company Comparative Balance Sheet, December 31, Assets 2009 Non-current assets Property, plant and equipment (cost) ............................................... $100,000 Accumulated Depreciation ................................................................ (9,500) 90,500 Current assets Prepaid rent .............................................................................................. 2,000 Inventory ........................................................................................... 60,000 Accounts receivable (net) .................................................................. 105,000 Cash ................................................................................................... 25,000 192,000 Total assets ....................................................................................... $ 282,500 Stockholders' equity and liabilities Equity 200,000 Retained earnings ............................................................................. 50,000 Page Current liabilities 8 Share capital ...................................................................................... 250,000 Accounts payable .............................................................................. 31,000 Electricity payable ....................................................................................... 500 Salary payable............................................................................................... 1,000 32,500 Total liabilities and stockholders' equity......................................... $ 282,500 During 2010 the following transactions took place: 1- A dividend of $ 10,000 was paid on ordinary shares. 2- Rent of $ 15,000 was paid during the year. At the end of the year the company had a balance of $1,000 in prepaid rent. 3- Salary expense for the year was $96,000. During the year salaries of 95,000 were paid to employees. 4- Electricity bills paid during the year totaled $7,000. At the end of the year the company had $200 of electricity incurred but not paid for. 5- The company paid $40,000 to acquire new property, plant and equipment at 1 July 2010. The new PPE has an estimated useful life of 10 years and a residual value of $2,000. The old PPE appearing in the opening balance sheet was acquired on 1 January 2009, has an estimated useful life of 10 years and a residual value of $5,000. The company uses the straight line method for depreciating non-current assets. 6- Inventories totaling $150,000 were bought on credit 7- Inventories totaling $70,000 were bought for cash 8- Sales revenue on credit totaled $210,000 (Cost $150,000) 9- Cash sales revenue totaled $140,000 (cost $100,000) 10- Receipts from accounts receivable totaled $290,000 11- Payments to accounts payable totaled $130,000 12- The company paid $2,500 for advertising and marketing during the year. Page 9 Required Page 10 1- Record the above transactions using the extended accounting equation template 2- Prepare the income statement and statement of owners' equity for Al-Raya Company for year ended 31 December 2010. 3- Prepare the classified statement of financial position for Al-Raya Company as at 31 December 2010. 2. Recognizing the annual rent on premises to be paid in the year Dr. Rent Expense 20,000 Cr. Rent Payable 20,000 In order to conform to the matching principle of accounting, all expenses should be recognized in the period they are incurred. Therefore, the rent expense account should be debited. Also, since the rent as so far not been paid, it will be recognized as a liability. All liabilities are credited if they increase and thus rent payable should be credited. Recording the payment of the rent expense on premises in cash Dr. Rent Payable 15,000 Cr. Cash 15,000 When a payment is made in cash, the cash account (asset account) reduces and should therefore be credited. In the previous journal entry, we had recognized the rent expense and a liability (rent payable). Since a payment has been made, the amount of this liability will reduce and therefore the rent payable account will be debited. 3. Prepaid rate will be equal to rate paid for Jan to Mar 2014 (3 months) after year end of 2013 Prepaid rate = 3/12 x 1,300 = $325 Rate expense = 1,300 - 325 = $975 Dr. Prepaid rate 325 Rate expense 975 Cr. Cash 1,300 In order to conform to the matching principle, expenses should be recognized and recorded only during the period in which revenue was generated i.e. during the accounting cycle period. In this scenario, the financial statements are prepared at the end of each year on 31 Dec. This means therefore that any amount in respect to any expense such as rates, rent, insurance etc. that are paid up to certain months in the following year should be recognized as prepayments. April 1 2013 9 mnths Dec 31 2013 Rate expense 3 mnths Prepaid rate Year end Mar 31 2014 Dec 31, 2013 is the year end and expenses should be recognized up to this point. Any amount paid beyond this point is a prepaid expense. For this case it was for three months (Jan to April). The amount reported as prepaid rate for the year is $325 which fully corresponds with the amount of prepaid rates calculated in your attachment. For clarity I have highlighted this amount $325 in yellow in the attachment you uploaded. Check that. Prepaid rate refers to the rate that has been paid in advance. It is a current asset to the company and should therefore be debited. The balance between the total amount of rates paid and the prepaid rate represent the rent expense which will be debited. Since cash was used to pay the rates, it will be credited. 4. Record purchase of delivery van in cash Dr. Delivery van 13,000 Cr. Cash 13,000 A delivery van is a fixed asset (Non-current asset). If an asset is purchased, the amount of assets will increase and that means that the respective asset account will be debited. Since cash was used, the cash account will be reduced then and thus credited. 5. Record payment of wages in cash Dr. Wages expense 36,700 Cr. Cash 36,700 Wages are expenses. Any increase in an expense is debited and this is why the wages expense is debuted. Since cash was used, the cash account will be reduced then and thus credited. Recording the wages owed for the last one week of December 2013 Dr. Wages expense Cr. Wages payable 860 860 There are some wages which became due in the last quarter and were not paid for. This means the company will pay them in the future. As a result of this, a liability (wages payable) will be created. Since it is a liability, it will be credited. Also the wages expense will be recognized since the wages to be paid had been used to generate income during the year. The wages expense will be debited since it is an expense account. 6. To record electricity bills paid from the previous year in cash Dr. Electricity bills payable 620 Cr. Cash 620 Electricity bills which were not paid from the previous year are a liability to the company. These bills may be referred to as outstanding/accrued liabilities. Since they have been paid for they will reduce and therefore should be debited. Since cash was used, the cash account will be reduced then and thus credited. To record electricity bills accrued in the year and paid in cash Dr. Electricity bills expense (1,820 - 620) 1,200 Cr. Cash 1,200 Electricity bills accrued are those electricity units that have been consumed but have not been paid for. An expense account should be created since they were incurred during the year and debited. Since cash was used, the cash account will be reduced then and thus credited. To record electricity bills for the last quarter of 2013 that arrived before reporting date not paid for Dr. Electricity bills expense 690 Cr. Electricity bills payable 690 Since the electricity bills had been used during the year, they will be regarded as expenses because they were used to generate income during the year. This expense account will therefore be debited. Further, since the bills have not been paid for, they will be regarded as a liability and therefore credited to the Electricity bills payable (liability) account. General guide on how to journalize transactions Type of account Debit (Dr) Revenue e.g Sales, Rent revenue Expense account e.g Wages, Electricity, Water bills + Asset Account e.g Cash, Inventory, Prepayment, Van + Liability Account e.g Wages payable, Rent payable, Loan Capital Account e.g Owner's Equity, Retained Earnings Credit (Cr) + + + Note: - denotes decrease and + denotes increase The delivery van is a fixed asset and is therefore classified under the section of property, plant and equipment. From the balance sheet, the delivery van amount is $12,000. This is the beginning balance of the delivery van before any purchase was made and before any depreciation of the van is deducted. This beginning balance is what we are referring as the cost. Otherwise, if the depreciation of the van is deducted, the amount so obtained is referred to as the book value of the delivery van. Delivery van is part of property, plant and equipment. Property, plant and equipment (PPE) are those non-current assets both movables and immovable. They include land, machinery, buildings, trucks, tractors, delivery vans, office equipment such as lounge chairs etc. In clear words, this is how the balance sheet is Property, Plant and Equipment Delivery van 12,000 Less: Depreciation (2,500) Net Book Value 9,500 What this means is: The company has only a delivery van worth 12,000 as its PPE and therefore the $12,000 corresponds to the delivery van. It was a misalignment of values Chapter 3 - ACCT 500 Net sales revenue= earned sales revenue - sales returns and allowances - sales discounts Sales Revenue earned in income statement = cash received - beginning AR + Ending AR + beginning unearned revenue - ending unearned revenue Cost of goods sold = Beginning balance of inventory +net cost of purchases- Ending balance of inventory Net cost of purchases = purchases of inventory + freight in (transportation in)- purchase returns and allowances - purchase discounts Purchases of inventory = cash paid - beginning Accounts payable + ending accounts payable Expense incurred in income statement = cash paid - expense payable at beginning of period + expense payable at end of period + prepaid expense at beginning of period - prepaid expense at end of period Straight line depreciation expense =( cost of plant asset- residual value) * 1/useful life in years * X/12 Beginning balance of RE+ NI after tx - dividends = ending balance of RE The depreciation expense will be recognized in the income statement while the accumulated depreciation will be added to any previous accumulated depreciation and will appear as a contra asset account deducted from plant assets in the balance sheet. Cost of plant asset - Accumulated deprecation Page When a plant asset is sold 1 = carrying value or book value of plant asset Question 3.6 in your book page 114 Delivery Van-cost 12000 AD (2500) Inventory = 65000 AR = 19600 Prepaid rent = 5000 Prepaid rates = 300 Cash = 750 (ii) Cash= 750-20,000 (iii) Cash = 750-2000015000 Prepaid rent = 5000-5000 Cash = 750-2000015000-1300 Prepaid rate = 300+25 (iv).I (iv). II Delivery van = 12000+13000 Cash = 750-2000015000-1300-13000 (v) AD = -2500 - 5000 (vi) Cash = 750-2000015000-1300-13000 -36700 Liabilities Equity AP = 22000 Accrued wages (wages payable) = 630 Share capital = 50,000 RE= 26900 Dividen ds Accrued electricity (electricity payable) = 620 Dividend s=20,00 0 Rent expense = 20,000 Rate expense = 1275 Depreciatio n expense = 2500+2500 Wages expense = 36930 Accrued wages (wages 2 (i) Expenses Page Assets Revenue payable) = 630+ 230 (vii). I Cash = 750-2000015000-1300-13000 -36700-1820 (vii). II Inventory = 65000+67000 Electricity expense = 1890 Accrued electricity (electricity payable) = 620+70 AP = 22000+6700 0 Inventory = 65000+67000+8000 Cash = 750-2000015000-1300-13000 -36700-1820-8000 Inventory = 65000+67000+8000 -89000 AR = 19600+179000 Cgs= 89000 Sales revenue = 179000 Sales revenue = 179000+54000 Cash = 750-2000015000-1300-13000 -36700-18208000+54000 Inventory = 65000+67000+8000 -89000-25000 Cash = 750-2000015000-1300-13000 -36700-18208000+54000+17800 0 Cgs = 25000 AP = 22000+6700 Page Cash = 750-2000015000-1300-13000 3 AR = 19600+179000178000 -36700-18208000+54000+17800 0 -71000 Cash = 750-2000015000-1300-13000 -36700-18208000+54000+17800 0 -71000-16200 0 -71000 Van expenses = 16200 Account balances Cash = 49730 AR = 20600 Inventory = 26000 AD = -7500 Delivery van = 25000 Prepaid rate = 325 Prepaid rent = 0 Rent expense = 20000 Rate expense = 1275 Depreciation expense = 5000 Wages expense = 36930 Electricity expense = 1890 Page 4 Cost of goods sold = 114000 Van expenses = 16200 AP = 18000 Electricity payable = 690 Wages payable = 860 Share capital = 50,000 Dividend = 20000 RE = 26900 Sales revenue = 233000 Rent expense = rent paid +prepaid rent at beginning of period - prepaid rent at end of period = 15,000+5000 - 0 = 20,000 Rate expense = expense paid + prepaid rate expense at beginning - prepaid rate at end of period = 1300+300-325=1275 Wages expense = wages paid - wages payable at beginning + wages payable at end = 36700630+860= 36930 Purchases = cash paid - beginning AP + ending AP 75000 = (8000+71000) - 22000 + ending AP Ending AP = 18000 Elecreicity expense = cash paid 1820 - electricity payable at beginning + electricity payable at end = 1820 -620+690 = 1890 Sales Revenue earned in income statement = cash received - beginning AR + Ending AR + beginning unearned revenue - ending unearned revenue 233000 = 232000 (178000+54000)- 19600 +Ending AR Ending AR = 20600 Depreciation expense = (13,000-3000)/4 *12/12 = 2500 Cost of goods sold = Beginning balance of inventory +net cost of purchases- Ending balance of inventory 114000 = 65000+75000- Ending balance of inventory Ending balance of inventory = 26000 Income statement for the year ended 31 December 2012 Sales revenue (+179,000 + 54,000) 233,000 Rent (5,000 + 15,000) Page Gross profit (114,000) 5 Cost of goods sold (+89,000 + 25,000) 119,000 (20,000) Rates (300 + 975) (1,275) Wages (630 + 36,700 + 860) (36,930) Electricity (620 + 1,820 + 690) (1,890) Van depreciation (2,500 + 2,500) (5,000) Van expenses (16,200) (16,200) Profit for the year 37,705 Statement of OE Beginning RE+ NI - dividends =ERE 26900+37705- 20000= 44605 TT and Co Statement of financial position as at 31 December 2012 ASSETS Non-current assets Property, plant and equipment Motor van at cost 25,000 Accumulated depreciation (7,500) 17,500 Current assets Inventories 26,000 Trade receivables 20,600 Prepaid expenses 325 Cash 49,730 Page Total assets 6 96,655 114,155 EQUITY AND LIABILITIES Equity (owner's capital) Share capital 50000 Ending RE 44605 Current liabilities Trade payables 18,000 Accrued expenses 1,550 19,550 114,155 Page 7 Total equity and liabilities The following is the statement of financial position of Al-Raya Company at the end of its first year of operations AL-Raya Company Comparative Balance Sheet, December 31, Assets 2009 Non-current assets Property, plant and equipment (cost) ............................................... $100,000 Accumulated Depreciation ................................................................ (9,500) 90,500 Current assets Prepaid rent .............................................................................................. 2,000 Inventory ........................................................................................... 60,000 Accounts receivable (net) .................................................................. 105,000 Cash ................................................................................................... 25,000 192,000 Total assets ....................................................................................... $ 282,500 Stockholders' equity and liabilities Equity 200,000 Retained earnings ............................................................................. 50,000 Page Current liabilities 8 Share capital ...................................................................................... 250,000 Accounts payable .............................................................................. 31,000 Electricity payable ....................................................................................... 500 Salary payable............................................................................................... 1,000 32,500 Total liabilities and stockholders' equity......................................... $ 282,500 During 2010 the following transactions took place: 1- A dividend of $ 10,000 was paid on ordinary shares. 2- Rent of $ 15,000 was paid during the year. At the end of the year the company had a balance of $1,000 in prepaid rent. 3- Salary expense for the year was $96,000. During the year salaries of 95,000 were paid to employees. 4- Electricity bills paid during the year totaled $7,000. At the end of the year the company had $200 of electricity incurred but not paid for. 5- The company paid $40,000 to acquire new property, plant and equipment at 1 July 2010. The new PPE has an estimated useful life of 10 years and a residual value of $2,000. The old PPE appearing in the opening balance sheet was acquired on 1 January 2009, has an estimated useful life of 10 years and a residual value of $5,000. The company uses the straight line method for depreciating non-current assets. 6- Inventories totaling $150,000 were bought on credit 7- Inventories totaling $70,000 were bought for cash 8- Sales revenue on credit totaled $210,000 (Cost $150,000) 9- Cash sales revenue totaled $140,000 (cost $100,000) 10- Receipts from accounts receivable totaled $290,000 11- Payments to accounts payable totaled $130,000 12- The company paid $2,500 for advertising and marketing during the year. Page 9 Required Page 10 1- Record the above transactions using the extended accounting equation template 2- Prepare the income statement and statement of owners' equity for Al-Raya Company for year ended 31 December 2010. 3- Prepare the classified statement of financial position for Al-Raya Company as at 31 December 2010. 2. Recognizing the annual rent on premises to be paid in the year Dr. Rent Expense 20,000 Cr. Rent Payable 20,000 In order to conform to the matching principle of accounting, all expenses should be recognized in the period they are incurred. Therefore, the rent expense account should be debited. Also, since the rent as so far not been paid, it will be recognized as a liability. All liabilities are credited if they increase and thus rent payable should be credited. Recording the payment of the rent expense on premises in cash Dr. Rent Payable 15,000 Cr. Cash 15,000 When a payment is made in cash, the cash account (asset account) reduces and should therefore be credited. In the previous journal entry, we had recognized the rent expense and a liability (rent payable). Since a payment has been made, the amount of this liability will reduce and therefore the rent payable account will be debited. 3. Prepaid rate will be equal to rate paid for Jan to Mar 2014 (3 months) after year end of 2013 Prepaid rate = 3/12 x 1,300 = $325 Rate expense = 1,300 - 325 = $975 Dr. Prepaid rate 325 Rate expense 975 Cr. Cash 1,300 In order to conform to the matching principle, expenses should be recognized and recorded only during the period in which revenue was generated i.e. during the accounting cycle period. In this scenario, the financial statements are prepared at the end of each year on 31 Dec. This means therefore that any amount in respect to any expense such as rates, rent, insurance etc. that are paid up to certain months in the following year should be recognized as prepayments. April 1 2013 9 mnths Dec 31 2013 Rate expense 3 mnths Prepaid rate Year end Mar 31 2014 Dec 31, 2013 is the year end and expenses should be recognized up to this point. Any amount paid beyond this point is a prepaid expense. For this case it was for three months (Jan to April). The amount reported as prepaid rate for the year is $325 which fully corresponds with the amount of prepaid rates calculated in your attachment. For clarity I have highlighted this amount $325 in yellow in the attachment you uploaded. Check that. Prepaid rate refers to the rate that has been paid in advance. It is a current asset to the company and should therefore be debited. The balance between the total amount of rates paid and the prepaid rate represent the rent expense which will be debited. Since cash was used to pay the rates, it will be credited. 4. Record purchase of delivery van in cash Dr. Delivery van 13,000 Cr. Cash 13,000 A delivery van is a fixed asset (Non-current asset). If an asset is purchased, the amount of assets will increase and that means that the respective asset account will be debited. Since cash was used, the cash account will be reduced then and thus credited. 5. Record payment of wages in cash Dr. Wages expense 36,700 Cr. Cash 36,700 Wages are expenses. Any increase in an expense is debited and this is why the wages expense is debuted. Since cash was used, the cash account will be reduced then and thus credited. Recording the wages owed for the last one week of December 2013 Dr. Wages expense Cr. Wages payable 860 860 There are some wages which became due in the last quarter and were not paid for. This means the company will pay them in the future. As a result of this, a liability (wages payable) will be created. Since it is a liability, it will be credited. Also the wages expense will be recognized since the wages to be paid had been used to generate income during the year. The wages expense will be debited since it is an expense account. 6. To record electricity bills paid from the previous year in cash Dr. Electricity bills payable 620 Cr. Cash 620 Electricity bills which were not paid from the previous year are a liability to the company. These bills may be referred to as outstanding/accrued liabilities. Since they have been paid for they will reduce and therefore should be debited. Since cash was used, the cash account will be reduced then and thus credited. To record electricity bills accrued in the year and paid in cash Dr. Electricity bills expense (1,820 - 620) 1,200 Cr. Cash 1,200 Electricity bills accrued are those electricity units that have been consumed but have not been paid for. An expense account should be created since they were incurred during the year and debited. Since cash was used, the cash account will be reduced then and thus credited. To record electricity bills for the last quarter of 2013 that arrived before reporting date not paid for Dr. Electricity bills expense 690 Cr. Electricity bills payable 690 Since the electricity bills had been used during the year, they will be regarded as expenses because they were used to generate income during the year. This expense account will therefore be debited. Further, since the bills have not been paid for, they will be regarded as a liability and therefore credited to the Electricity bills payable (liability) account. General guide on how to journalize transactions Type of account Debit (Dr) Revenue e.g Sales, Rent revenue Expense account e.g Wages, Electricity, Water bills + Asset Account e.g Cash, Inventory, Prepayment, Van + Liability Account e.g Wages payable, Rent payable, Loan Capital Account e.g Owner's Equity, Retained Earnings Credit (Cr) + + + Note: - denotes decrease and + denotes increase The delivery van is a fixed asset and is therefore classified under the section of property, plant and equipment. From the balance sheet, the delivery van amount is $12,000. This is the beginning balance of the delivery van before any purchase was made and before any depreciation of the van is deducted. This beginning balance is what we are referring as the cost. Otherwise, if the depreciation of the van is deducted, the amount so obtained is referred to as the book value of the delivery van. Delivery van is part of property, plant and equipment. Property, plant and equipment (PPE) are those non-current assets both movables and immovable. They include land, machinery, buildings, trucks, tractors, delivery vans, office equipment such as lounge chairs etc. In clear words, this is how the balance sheet is Property, Plant and Equipment Delivery van 12,000 Less: Depreciation (2,500) Net Book Value 9,500 What this means is: The company has only a delivery van worth 12,000 as its PPE and therefore the $12,000 corresponds to the delivery van. It was a misalignment of values