Question 1 (40 marks)

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

Trial balance for Hope Youssef as at 31 December 2020

	Debit	Credit
	_ .
Sales revenue		685,000
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	30,000
Motor expenses	15,300
Miscellaneous expenses	28,000
Receivables	110,000
Allowance for receivables		14,000
Payables		101,000
Cash	81,000
Bank loan		100,000
Capital		310,000
Total	1,230,000	1,230,000

Additional information is provided for use in preparing the companys adjustments:

1. The value of closing inventory is 102,500.
2. On November 1, Hope Company borrowed 100,000, at 6% annual interest, from the National Bank. Hope Company has 120 days before the first payment is required.
3. Hope 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. Hope 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. (7.2 Marks)
2. Prepare Hopes income statement for the year ended December 31, 2020. (7 Marks)
3. Prepare Hopes balance sheet as at December 31, 2020. (6.8 Marks)
4. How do the adjusting entries differ from other journal entries?? Explain why adjusting entries are needed. (5 Marks)

(26 marks)

B- The following transactions occurred in ABC Company:

1. The accountant recorded $900 Depreciation Expense on store equipment as follows:

Dr. Depreciation Expense 900

Cr. Accounts Payable 900

2. The accrued salaries at December 31,2020 amounted to $490, The accountant made an adjusting entry by debiting salaries expense $940 and crediting Cash $940.

Required:

Show the effect of each entry on the financial statements separately. (Correcting entries are not required). (8 marks)

C- The following information pertains to Nour Company:

1- Equipment was purchased on September 1, 2014 for $210,000. It is estimated salvage value is $30,000 and it is estimated useful life is 5 years. After the 5 years the equipment was sold for $30,000.

2- Building was purchased on January 1, 2018 for $300,000. It is useful life is 20 years and depreciated on a reducing balance rate of 10%.

3- Pioneer Advertising received $1,200 for future services on October 1, 2019 and credited the entire amount to Service Revenue. On December 31, 2019 Pioneer has performed only $800 of the services.

4- On December 31, 2019 the balance of Receivables was $165,000 and the balance of Allowance of irrecoverable receivables was $11,000. Before adjusting the accounts, Nour finds that receivables of $15,000 need to be written off as irrecoverable, and the allowance for receivables is to be set at ten percent of the remaining outstanding receivables as at 31 December 2019.

Required:

1- Prepare the necessary adjusting entries at December 31, 2019. Show your calculations.

2- Prepare a partial income statement and a partial balance sheet for the year ended December 31,2019 to show the effect of the adjusting entries on these statements (Show you computations and explanation). (6 marks)