SECTION 1- Focus on Ethics
1. Identify the stakeholders affected.
2. Outline the ethical issues.
3. What would you do if you were Cain Velazquez the chief accountant.
SECTION 2 - Decision Case: Analysing accounting numbers
Edward and Bella saved all their married life to open a bed and breakfast (B&B) named Cullen Bay Getaway. They invested $100 000 of their own money. The business then received a $100 000 bank loan to make up the $200 000 needed to get the business started. The business bought a run-down old colonial home in Cullen Bay for $80 000. It cost another $50 000 to renovate. They found most of the furniture at antique shops and flea markets; the total cost was $20 000. Kitchen equipment cost $10 000 and a computer cost $2 000 (to help them keep accounting records).
Prior to their grand opening, the banker requests a report on their activities to date. Cullen Bay Getaway's bank account statement shows a cash balance of $38 000. Edward and Bella believe that the $38 000 represents profit for the period and they feel pretty good about the results of their business. To better understand how well they are doing, they prepare the following income statement for presentation to the bank.
Cullen Bay Getaway Income Statement for the year ended 30 June 2016
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INCOME
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Investment by owner
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$100 000
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Bank loan
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100 000
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Total Income (revenue)
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200 000
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EXPENSES
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Cost of the house
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$80 000
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Renovation to the house
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50 000
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Furniture expense
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20 000
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Kitchen equipment expense
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10 000
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Computer expense
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2 000
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Total Expenses
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162 000
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PROFIT
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$38 000
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Required:
1. Suppose you are the banker and they have given you this income statement. Would you congratulate them on their profit? If so, explain why. If not, how would you advice them to measure the profit of the business? Does the amount of cash in the bank measure profit? Explain. Provide at least three reasons.
2. Prepare Cullen Bay Getaway's balance sheet from their data. Is there any profit or loss? Explain.
SECTION 3- Challenge: Adjusting entries, Worksheet, adjusted trial balance and financial statements
Koulkat Consulting has the following information for the financial year ending 30 June 2016:
KOULKAT CONSULTING Unadjusted trial balance As at 30 June 2016
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Account title
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Debit
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Credit
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Cash at Bank
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$131 000
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Account receivable
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104 000
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Supplies
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4 000
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Prepaid rent
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27 000
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Land
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45 000
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Building
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300 000
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Accumulated depreciation - building
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155 000
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Accounts payable
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159 000
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Unearned service revenue
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40 000
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Kat, capital 1 July 2015
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102 000
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Kat drawings
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7 000
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Service revenue
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450 000
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Salary expense
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255 000
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Rent expense
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25 000
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Other expenses
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8 000
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Total
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$906 000
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$906 000
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Koulkat Consulting must make adjusting entries for the following items:
a. Supplies on hand at year-end, $1 000.
b. Nine months of rent ($27 000) paid in advance on 1 April 2016.
c. Depreciation expense on the building of $12 000 has not been recorded.
d. Salary of $1 000 is now owed on 30 June 2016.
e. Service revenue of $15 000 must be accrued.
f. Koulkat received $40 000 in advance for consulting services to be provided evenly from 1 January 2016 to 31 August 2016. None of the revenue from this client has been recorded.
Required:
A. Open the T-accounts with their unadjusted balances.
B. Journalise KoulKat's adjusting entries at 30 June 2016 and post the entries to the T-accounts (Hint: return to the T-accounts in Part A to complete Part B).
C. Total all the T-accounts in the ledger. (Hint: find the Balance c/d and Balance b/d)
D. Write the Trial Balance on a worksheet, enter the adjusting entries and prepare an adjusted trial balance.
E. Prepare the Income Statement, the Statement of Changes in Equity and the Balance Sheet.