Question
Question 1: Mihir Ltd is a retailer of widgets. A part-time bookkeeper prepared the following Balance Sheet as at 30 June 2017, the end of
Question 1:
Mihir Ltd is a retailer of widgets. A part-time bookkeeper prepared the following Balance Sheet as at 30 June 2017, the end of the financial year. The companys Board of Directors suspects adjustments/corrections may be necessary.
Mihir Ltd Balance Sheet For the Year Ending June 30, 2017 | |||
Liabilities |
|
|
|
Mortgage Payable |
| $380,000 |
|
Accounts Payable |
| 23,000 |
|
Warranty Provision |
| 13,200 |
|
Accrued Expenses Payable |
| 15,000 |
|
Debentures Payable |
| 103,000 | $534,200 |
Equity |
|
|
|
Share Capital |
| 1,000,000 |
|
Retained Earnings |
| 2,366,650 |
|
Revaluation Reserve |
| 300,000 | 3,666,650 |
Total Equity |
|
|
|
Total Liabilities & Equity |
|
| $4,200,850 |
Assets |
|
|
|
Cash |
|
| 6,000 |
Accounts Receivable |
|
| 3,350 |
Office Supplies |
|
| 1,500 |
Inventory |
|
| 1,990,000 |
Investment Property |
|
| 1,000,000 |
Land & Buildings |
|
| 1,200,000 |
Total Assets |
|
| $4,200,850 |
Knowing that you are an experienced accountant, the Board of Directors asks you to review the Balance Sheet and other data. Your interviews disclose the following:
The mortgage is payable monthly for another ten years. A review of the amortisation schedule shows that the balance on 30 June 2018 will be $350,000.
The widgets come with a one-year warranty. The $13,200 provision shown on the balance sheet was calculated with the following facts:
Sales for the year ending 30 June 2017 were 100,000 units.
2% of total sales are estimated to require warranty work at an average cost of $3 per unit.
Actual repairs incurred for units sold in the year just ended were $1,800.
For the next financial year (beginning on 1 July 2017), the bookkeeper estimated sales to be 150,000 units with the same 2% defect rate and $3 repair cost per unit.
The 9% $100,000 face value debentures, due in four more years, were issued when the market interest rate was 6%. They pay interest semi-annually on 1 March and 1 September. The balance shown in the Balance Sheet is the correct balance after the 1 March payment. The bookkeeper, new to the job and unfamiliar with the effective interest rate method, failed to journalise an adjusting entry on 30 June 2017.
The $300,000 balance in Revaluation Reserve was calculated as follows:
In the unadjusted trial balance, the Revaluation Reserve account contained the correct balance (prior to revaluation) of $400,000.
Investment Property was revalued from $800,000 to $1,000,000.
Land & Buildings were revalued from $1,500,000 to $1,200,000.
The bookkeeper forgot to reconcile the bank account, so the $6,000 cash balance shown on the Balance Sheet is incorrect. The 30 June bank statement showed a $7,200 balance. Deposits in transit were $800 and outstanding cheques totalled $1,200. Also, the bank incorrectly recorded a $80 June deposit as $800.
Mihir Ltd accounts for inventory using FIFO under the periodic system. 25,000 widgets were on hand as at 30 June 2017. An additional 10,000 units had been purchased at $5 each, FOB shipping point, and were in transit on 30 June. The $1,990,000 balance for Inventory in the Balance Sheet was calculated as follows:
Beginning inventory (as at July 1, 2016) of 20,000 widgets at $2 each;
150,000 units purchased at $3 per unit during the first quarter of the year;
200,000 units purchased at $4 per unit during the second quarter of the year;
200,000 units purchased at $3 per unit during the third quarter of the year;
20,000 units purchased at $5 per unit during the fourth quarter of the year, including the in-transit items.
Required:
For 30 June 2017, prepare a correct Balance Sheet . Ignore GST. (Hint: The balance for Retained Earnings will be a plug, so there is no need to separately reconcile the retained earnings balance.)
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