QUESTION 3 (25 marks) LuLu Limited is a merchandizing company of computer printers. Weighted average cost method and perpetual inventory system are adopted in the accounting for its inventory valuation. LuLu prepares its financial statements, adjusting entries and closing entries on December 31 each year. Below was the adjusted trial balance on December 31, 2020 which was prepared by an inexperienced accountant of the company. Credit (S) LuLu Limited Adjusted Trial Balance As at December 31, 2020 Debit (S) Cash 700,000 Inventory 350,000 Accounts receivable 241,000 Land and building 10,000,000 Accumulative depreciation: building Allowance for impairment (January 1, 2020) Accounts payable 5% Notes payable (due December 31, 2020) Ordinary shares (300,000 shares, $10 par value) Share premium: Ordinary shares Retained earnings (January 1, 2020) Treasury shares (5,000 ordinary shares at cost) 55.000 Dividends 60,000 Sales revenue Cost of goods sold 2,902,000 Operating expense 1,000,000 Salaries expense 120,000 Depreciation expense: building 50,000 15,478,000 200,000 48,000 160,000 60,000 3,000,000 1,500,000 565,000 9,945,000 15,478,000 Other information: On October 1, 2020, LuLu Limited borrowed $60,000 from East Bank and signed a 5%, three-month note payable, all due at December 31, 2020. You were the auditor of LuLu Limited. After reviewing the financial statement prepared by the inexperienced accountant, you discovered that the following transactions were not recorded by the company for the financial year ended December 31, 2020. Date Descriptions Item No. (i) Nov. 1 The company reissued 2,000 shares of treasury shares for cash of $40,000. Nov 2 Sold 80 units of computer printers for $400 each to Shen Limited on account. The cost of each computer was $150. (iii) Nov 15 A check for $2,000 was received from the customer, Samson Chan, whose account receivable was written off as uncollectible on March 31, 2020. (iv) Dec 31 The $60,000 note payable to East Bank matured on December 31, 2020. LuLu paid all the accrued interest and $20,000 of the principal on this note. A new two-month, 6% note payable was issued to replace the balance of the principal that matured. (v) Dec Lul bank reconciliation at December 31, 2020 showed that check #224 for the payment of an account payable (Susan Fong) was correctly written on the check for $3,657 but was mistakenly recorded in the accounting records as $3,675. (vi) Dec 31 Based on an aging schedule of accounts receivable prepared on December 31, 2020, $65,000 of accounts receivable were estimated to be uncollectible. Assume LuLu Limited uses the statement of financial position approach to estimate the credit losses. Required: a. Prepare the journal entries to capture the unrecorded transactions from items (i) to (vi) and information listed above so as to bring the financial records of LuLu Limited up-to-date. If a transaction does not require any entry, state "No entry is required". (Explanation for each journal entry is NOT required.) (19 marks) b. Prepare the Income Statement of LuLu Limited based on the up-to-date financial records for the year ended December 31, 2020. (6 marks)
