One of the steps in the accounting cycle is to do adjusting entries. Explain what adjusting entries are and the reasons for preparing adjusting entries (5 marks)

The following items are from the unadjusted trial balance for Kafue Trading as at December 31st , 2020

Accounts payable..K 72,000

Accounts receivable. 44,000

Accumulated depreciationequipment112,000

Advertising expense. 84,000

Cash 60,000

Share capital-ordinary.168,000

Dividends 56,000

Depreciation expense.. 48,000

Equipment840,000

Insurance expense.12,000

Note payable 280,000

Prepaid insurance 24,000

Rent expense.68,000

Retained earnings (1/1/2020) 240,000

Salaries and wages expense.. 128,000

Revenue ........................................................................................ 532,000

Inventory (1/1/2020) 16,000

Purchases. 24,000

Additional information

a) The prepaid insurance is for the period 1 October 2020 to 30th September 2021 assume that insurance accrues evenly throughout the year.

b) December salaries for casual workers amounting to K10, 000 have not been paid yet; the accountant feels that this will only be recorded in January 2021 when they are expected to be paid.

c) Kafue sells its product to customers with an unconditional sales return if they are not satisfied. On December 15, 2020, a customer purchases K20, 000 of products (cost K15, 000). Based on prior experience, Kafue estimated that 25% of the products sold under these conditions are returned. The sales returns extends 60 days. The accountant has included the whole K20,000 as part of revenue.

d) After inventory count, it was confirmed that inventory amounting to K10,000 was on hand on 31 December 2020

ii)For each of the above additional information(a-d),advice the accountant on the correct accounting treatment and show the journal entries to update the records.

iii) Prepare the following financial statement for Kafue trading

a) Income statement

b) Statement of financial position