John Phelps has run a small business for many years and has never kept adequate accounting records. However, a need to obtain a loan from the Bank of Make It Flow,  for  the  expansion  of  his  business  has  necessitated  the  preparation  of  final accounts.  As  such,  he  has  contracted  a  medium  size  accounting  firm,  WAD  & Associates  to  assist  him in  preparing  a  full  set  of  accounting  records.  You  were recently  employed  to  WAD  &  Associates  and  have  been  assigned  the  task  to prepare  the  final  accounts  for  John  Phelps.  You were  able  to  ascertain  the following information for the year ended December 31, 2020:


1.  John Phelps’ bank transactions for the year January 1 through December 31,
2020 were as follows:
Bank Account
Receipts                            $                     Payments                              $
Trade receivables                     430,100   Trade payables                            272,500
Debit card                                  40,000   Electricity                                        4,500
Rates and rent                                23,600
Loan principal                               25,000
Drawings                                         1,250
Computer equipment                   150,000
Overdraft interest                               750
Salaries & wages                           26,000
Accounting fee                                7,500


470,100                                                           511,100



2.  The bank account had a favourable balance on December 31, 2020 of $47,900 before considering Note 3(e) and Note 6 below. 3.  During the year:
a.  Discounts allowed by trade payables amounted to $1,350 and allowed to trade receivables amounted $1,840. b.  The financial year goods returned by trade receivables amounted to
$1,600 and goods returned to trade payables amounted to $6,900.
c.  The financial year a trade debt of $1,200 owed by Lottie Graham was off-set against the $2,000 owing to the same Lottie Graham a trade creditor. d.  A customer, Janet Hutton bought goods using a debit card. She returned
3  
goods amounting to $700 and was repaid from the Debit Card takings before applying the commission (see note No. 7). e.  John Phelps puts a further $135,000 into the bank account of the business to shore up working capital. This is not yet reflected in the bank balance. 4.  The closing trade receivables include $750 in respect of a bad debt that should be written off. 5.  The computer equipment was purchased on April 9, 2020. Depreciation should be calculated on the computer equipment on the straight line basis at a rate of 20% per annum on cost. It is the policy of the business to charge a full month’s
depreciation in the month of acquisition or disposal.
6.  On April 1, 2020 John Phelps’ received a loan of $75,000 from his mother.
Interest should be charged on the reducing balance at a rate of 10% per annum. The first interest payment is to be made on March 31, 2021. The principal is being paid in equal instalments of $25,000 commencing on September 30, 2020, September 30, 2021 and September 30, 2022. Interest on loan was outstanding at December 31, 2020. 7.  For some of the sales debit cards are accepted. John Phelps pays 2.5% debit card commission on gross debit card sales. 8.  The balances at the end of each year are as follows:
December 31, 2019    December 31, 2020
$                                  $
Inventory                                                    41,000                         48,500
Trade receivables                                        29,300                         35,750
Prepaid rent                                                     500                              600
Fixtures (net)                                              20,000                         19,000
Trade payables                                            19,500                         19,000
Debit card receivables                                  1,325                              750

Prepare the Debit Card Receivables Account
(7 marks)



(2.5 marks)



e.  Prepare the Income Statement for the year ended December 31, 2020.
(25 marks)