The Highway Store Limited has prepared its accounts for the year ended 31st Dece

Question

The Highway Store Limited has prepared its accounts for the year ended 31st December 2016 and is seeking your advice in dealing with the following problems: 1) Interest on a bank loan in the amount of €100,000 at the rate of 8% per annum is to be provided for the three months 1st October 2016 to 31st December 2016 2) 25,000 Ordinary shares (nominal value 1 each) were issued during the year at a 3) A receipt of 5,000 from a trade receivable (Smyth Limited) was incorrectly recorded 4) A payment of rent on 1stNovember 2016 in the amount of 9,000 covering the three price of 1.40 each.The transaction was not recorded in the books as cash sales months period ending 31st January 2017 has not been recorded in the books 5) The proceeds of the sale of a machine in the amount of 2,000 was credited to repairs.The machine had originally cost 9,000 and was fully depreciated 6) Jones is both a trade receivable and a trade payable of the company .He has asked that a balance of 1,750 on his trade payable account be offset against the balance on his trade receivable account 7) The purchase of a new machine costing 4,500 was debited to repairs You are required to: a) Draft the journal entries to incorporate the foregoing in the accounts (15 marks) b) Assuming the net profit as already calculated was 38,000 you are requested to prepare a statement of adjusted profit taking into account the foregoing adjustments (10 marks)

Explanation / Answer

a) Entries in the books of Highway Store Limited (all figures in €) 1 31-Dec-16 Interest expense Dr. 2000 To interest payable 2000 { being interest on bank loan of 100000€ @ 8% pa for 1st Oct to 31st Dec 2016} 2 31-Dec-16 Bank a/c Dr 35000 To ordinary shares a/c 25000 To share premium a/c 10000 {being 25000 ordinary shares of 1€ issued at 1.40€ } 3 31-Dec-16 sales a/c Dr. 5000 To Smyth Limited 5000 {being rectification of trade receivable incorrectly recorded as cash sales} 4 31-Dec-16 Prepaid rent a/c dr 3000 rent a/c Dr 6000 To bank 9000 { being rent paid for 1st Nov to 31st Dec 16 expensed out and rent for Jan 17 recorded as prepaid rent} 5 31-Dec-16 Repairs a/c Dr 2000 Banka/c 2000 {being the incorrect entry reversed} Accumulated Depreciation a/c Dr 9000 Banka/c 2000 To Machinery a/c 9000 To Profit on sale of machinery a/c 2000 {being machinery and accumulated depreciation reversed on sale of machinery and profit on sale booked} 6 31-Dec-16 Jones payable a/c Dr 1750 To Jones receivable a/c 1750 {being trade payable ofset against balance in trade receivablea/c} 7 31-Dec-16 Banka/c Dr. 4500 To repairs a/c 4500 { being incorrect entry reversed} Machinery a/c Dr. 4500 To bank a/c 4500 { being purchase of machinery } b) Statement of adjusted profit Net Profit before adjustments 38000 Cr Less: Interest expense 2000 (entry 1) rent expense 6000 (entry 4) repairs 2000 (entry 5) sales 5000 (entry 3) 15000 Dr Add: Profit on sale of machinery 2000 (entry 5) Repairs 4500 (entry 7) 6500 Cr Net Profit after adjustments 29500 Cr

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