Goodlife is a health shop in Camps Bay selling natural products that are believed to enhance the body and mind through increased energy and vitality. Goodlife has a mark-up of 25% on cost on all products and uses the perpetual method when recording inventory. Mrs Fanatic is employed by Mr Vibrance to advise customers on health issues and ensure the smooth running of the store. Included in Mrs Fanatic’s tasks is the preparation of the accounting records of Goodlife up to and including the pre-adjustment trial balance. Mr Vibrance has realised that Mrs Fanatic knows more about health and less about accounting. You have been working for Mr Vibrance each Saturday morning for the past year to earn extra money. He is aware that you study financial accounting at university and he has asked you to check Mrs Fanatic’s work. The business has a year-end of 30 September. Mr Vibrance provides you with the following information:
PRE-ADJUSTMENT TRIAL BALANCE OF GOODLIFE AT 30 SEPTEMBER 2000:
|Loan: Business Bank 18%||40 000|
|Accumulated depreciation: Vehicles||24 000|
|Trade payables||6 200|
|Trade receivables||13 440|
|Accrued commission income receivable (1/10/1999)||680|
|Accrued interest payable (1/10/1999)||750|
|Sales income||271 950|
|Sales returns||1 970|
|Cost of sales expense||170 154|
|Interest on loan||8 100|
|Bad debts expense||700|
|Commission income||6 080|
|Advertising expense||13 200|
|Rent expense||52 000|
|Water and electricity||5 960|
|Stationery expense||1 360|
|Bank charges||2 200|
|Salaries and wages||34 250|
|478 040||478 040|
You have identified that NO REVERSALS were processed as at 1 October 1999
- The loan had been obtained from Business Bank on 1 March 1999. The loan agreement stipulates that the loan will be repaid in equal instalments over five years commencing on
1 March 2000. Interest is paid in arrears every three months. The first interest payment was due on 31 May 1999.
- Mr Vibrance took inventory with a selling price of R1 200 for his personal use. Mrs Fanatic thought it intrusive to keep track of the owner’s actions with regard to the running of the business and did not feel it necessary to record the transaction.
- During the year inventory with a selling price of R400 was donated to a local gym to be used as a prize in a fitness competition. This was recorded in the sales journal as credit sales.
- A debtor Mr Unfit, was declared insolvent. He owed Goodlife an amount of R450. A final dividend of ten cents in the rand was received from the insolvent estate. The remainder of the debt was to be written off. Mrs Fanatic was unsure how to record the information so she banked the money but she has left the entire transaction out of the records and marked it for your attention.
- Camps Bay is notorious for high rentals. Mr Vibrance is fortunate enough to have his wife working in the real estate business and he managed to rent his store from 1 October 1999 at a reasonable rental per month. Rent is paid in advance at the end of each month. All payments had been made on time.
- On 10 September 2000, Mr Vibrance came to an agreement with Berry Bush Advertising Agency to launch an intensive advertising campaign from 3 October 2000 to promote the store and products. A deposit of R1 500 was paid in respect of the campaign and debited to the advertising expense account.
- Vehicles have an estimated useful life of five years after which they will have no salvage value. A second delivery vehicle was purchased on 1 August 2000 for R15 000 and put to use immediately. Mrs Fanatic recorded the purchase of the vehicle in the accounting records.
- Stationery is recorded as an expense when purchased. There was no stationery on hand at the beginning of the year. According to a physical count, stationary on hand at 30 September 2000 amounted to R210.
- Goodlife earns commission of 5% on goods that are sold on a consignment basis. Total goods sold on consignment during the financial year amounted to R120 000. All commission received during the year is credited to the commission income account.
- On comparing the bank statement from September 2000 with the bank account in the general ledger and the bank reconciliation statement for August 2000 you identified the following additional information (see point 4 above):
10.1 Included in the debits on the September bank statement is a cheque from a debtor amounting to R1 760 returned by the bank marked “insufficient funds”. The bank’s charges for this transaction amounted to R50. The debtor is charged for the bank charges.
10.2 Outstanding deposits on 31 August and 30 September amount to R9 300 and R4 800 respectively.
10.3 Outstanding cheques at 31 August 2000 amount to R6 200. Of these, cheques amounting to R5 000 were presented for payment during September 2000. Cheque 441 for R700 (sent to a creditor on 3 April 2000) and Cheque 852 for R500 (stationery purchased on 3 July 2000) were still outstanding as at 30 September. Cheques amounting to R5 150 that were issued during September 2000 had, as yet, not been presented for payment.
10.4 Mr Vibrance has sub-let part of his office at a monthly rental of R700 as of 1 September 2000. A direct deposit of R700 for rent had been received directly by the bank on 1 September and again on 30 September.
10.5 Mrs Fanatic incorrectly entered a cheque for wages amounting to R427 as R472 in the cash payments journal on 18 September 2000.
10.6 The credits on the September bank statement include a correction in respect of a deposit of R350 that had been entered on the incorrect side of the August bank statement.
10.7 Bank charges amounting to R350 (over and above the amount charged in point 10.1 above) and interest income of R150 appeared on the bank statement.
YOU ARE REQUIRED TO:
1. Prepare, in general journal format, the necessary adjusting or correcting journal entries for points 3, 5, 6, 7 and 9, as at the 30 September 2000.
Dates and narrations are not required. (18)
2. Prepare the Interest Expense account in the general ledger of Goodlife for the year ended 30 September 2000 after taking into account all of the above information (4)
3. Prepare the income statement for Goodlife as at 30 September 2000.
4. Prepare the Equity and Liabilities section of the Statement of Financial Position of Goodlife as at 30 September 2000.
5. Indicate what amount would appear on the Statement of Financial Position for the following assets:
- Bank (9)
- Trade receivables (3)
- Inventory (2)