Question

The accountant of Chelsea Traders has resigned. The owner Roman Abramovich, wants to know the results for the second year of operation for the year ended 31 December 2018. You are provided with the list of adjustments that the accountant was working on before he resigned.

1. Chelsea Traders has negotiated a loan of $1,000,000 from the National Bank. The funds were made available as from 1 November 2018. Simple interest (as yet unpaid) is charged at the rate of 12 per cent per annum.

2. In 2018, a major account customer declared bankruptcy. Chelsea Traders wrote-off the $200,000 owing as a bad debt using the allowance method.

3. Prior to the write-off of bad debts in part 2 above, Chelsea Traders had accounts receivable of $1,800,000 and an allowance for doubtful debts of $160,000 Cr. After examining the balance of accounts receivable, it was decided to increase the allowance for doubtful debts to 2% of adjusted accounts receivable.

4. On 1 July 2018, new delivery vehicles were purchased for $160,000. It is estimated that the delivery vehicles will have a useful life of five years and a residual value of $40,570. So far, no depreciation has been charged for these vehicles. Chelsea Traders uses reducing balance depreciation and a rate of 24%.

Required:

Using the template on the following page, prepare general journal entries for the above adjustments to enable the preparation of financial statements for the year ended 31 December 2018 (ignore GST, and narrations are not required). Show ALL workings.

Answer 1

Date	Account	Debit	Credit
December 31, 2018	Interest Expense	$   20,000			1,000,000 X 12% X 2 / 12
	Interest Payable		$   20,000
December 31, 2018	Allowance for Doubtful Debts	$ 200,000
	Accounts Receivable		$ 200,000
December 31, 2018	Bad Debt Expense	$   72,000			(1,600,000 X 2%) + 200,000 - 160,000
	Allowance for Doubtful Debts		$   72,000
December 31, 2018	Depreciation Expense	$   14,332			(160,000 - 40,570) X 24% X 6 / 12
	Accumulated Depreciation - Vehicle		$   14,332