Case Study: Mr TW Lau
TW Lau, a sole trader, is in the business of manufacturing sunglasses for sale in the South East Asian countries. The following unadjusted trial balance has been extracted from his books at the close of business on 31 March 2017:
|
Account title
|
Debit ($)
|
Credit ($)
|
|
TW Lau, Capital
|
|
101,940
|
|
Office equipment
|
100,000
|
|
|
Accumulated depreciation - Office equipment
|
|
1,500
|
|
Machinery
|
24,470
|
|
|
Accumulated depreciation - Machinery
|
|
3,350
|
|
TW Lau, Withdrawals
|
408
|
|
|
Accounts receivable
|
3,355
|
|
|
Accounts payable
|
|
2,233
|
|
Bank loan (repayable in March 2020)
|
|
10,000
|
|
Cash at bank
|
17,500
|
|
|
Inventory as at 1 April 2016
|
2,300
|
|
|
Interest revenue
|
|
60
|
|
Sales
|
|
50,500
|
|
Sales returns and allowance
|
2,000
|
|
|
Purchases
|
12,300
|
|
|
Utilities expense
|
550
|
|
|
Office supplies expense
|
3,330
|
|
|
Insurance expense
|
600
|
|
|
Rent expense
|
1,200
|
|
|
Interest expense
|
70
|
|
|
Salaries expense
|
1,500
|
|
|
Total
|
169,583
|
169,583
|
Additional information:
i. The company debits office supplies expense when office supplies are purchased. Supplies on hand at the yearend cost $1,200.
ii. Salary of $500 for March 2017 is to be accrued at the year end.
iii. TW Lau withdrew goods costing $800 during the year, but the transaction had not been recorded in the books.
iv. The company recorded advance payment of $3,000 paid by a customer for goods to be sold in April 2017 as sales.
v. The insurance expense of $600 covered the one-year period from 1 July 2016 to 30 June 2017.
vi. The office equipment is depreciated by using the straight-line method over a useful life of eight years with no residual value. The machinery is depreciated by using the double declining balance method over a useful life of five years with no residual value. There was no addition and disposal of office equipment and machinery during the year.
vii. Inventory as at 31 March 2017 had a cost of $3,800.
Required:
a. Prepare journal entries (if necessary) for the above year-end adjustments (i) to (vii). Include narratives.
b. Prepare the income statement for the year ended 31 March 2017.
c. Prepare the statement of changes in owner's equity for the year ended 31 March 2017.
d. Prepare the statement of financial position (balance sheet) as at 31 March 2017 (in vertical form).
e. TW Lau commented that a bank reconciliation may not be necessary as he regularly reviews the online bank statements for any unusual items and errors. Discuss whether a bank reconciliation and an online review (or reading) of the bank statement may or may not be equivalent. Identify one error/fraud that would be uncovered through a bank reconciliation that would not be uncovered through an online review of the bank statement.