Question

Question 1:

Mihir Ltd is a retailer of widgets. A part-time bookkeeper prepared the following Balance Sheet as at 30 June 2017, the end of the financial year. The company’s Board of Directors suspects adjustments/corrections may be necessary.

Mihir Ltd Balance Sheet For the Year Ending June 30, 2017
Liabilities
Mortgage Payable		$380,000
Accounts Payable		23,000
Warranty Provision		13,200
Accrued Expenses Payable		15,000
Debentures Payable		103,000	$534,200
Equity
Share Capital		1,000,000
Retained Earnings		2,366,650
Revaluation Reserve		300,000	3,666,650
Total Equity
Total Liabilities & Equity			$4,200,850
Assets
Cash			6,000
Accounts Receivable			3,350
Office Supplies			1,500
Inventory			1,990,000
Investment Property			1,000,000
Land & Buildings			1,200,000
Total Assets			$4,200,850

Knowing that you are an experienced accountant, the Board of Directors asks you to review the Balance Sheet and other data. Your interviews disclose the following:

The mortgage is payable monthly for another ten years. A review of the amortisation schedule shows that the balance on 30 June 2018 will be $350,000.

The widgets come with a one-year warranty. The $13,200 provision shown on the balance sheet was calculated with the following facts:

Sales for the year ending 30 June 2017 were 100,000 units.

2% of total sales are estimated to require warranty work at an average cost of $3 per unit.

Actual repairs incurred for units sold in the year just ended were $1,800.

For the next financial year (beginning on 1 July 2017), the bookkeeper estimated sales to be 150,000 units with the same 2% defect rate and $3 repair cost per unit.

The 9% $100,000 face value debentures, due in four more years, were issued when the market interest rate was 6%. They pay interest semi-annually on 1 March and 1 September. The balance shown in the Balance Sheet is the correct balance after the 1 March payment. The bookkeeper, new to the job and unfamiliar with the effective interest rate method, failed to journalise an adjusting entry on 30 June 2017.

The $300,000 balance in Revaluation Reserve was calculated as follows:

In the unadjusted trial balance, the Revaluation Reserve account contained the correct balance (prior to revaluation) of $400,000.

Investment Property was revalued from $800,000 to $1,000,000.

Land & Buildings were revalued from $1,500,000 to $1,200,000.

The bookkeeper forgot to reconcile the bank account, so the $6,000 cash balance shown on the Balance Sheet is incorrect. The 30 June bank statement showed a $7,200 balance. Deposits in transit were $800 and outstanding cheques totalled $1,200. Also, the bank incorrectly recorded a $80 June deposit as $800.

Mihir Ltd accounts for inventory using FIFO under the periodic system. 25,000 widgets were on hand as at 30 June 2017. An additional 10,000 units had been purchased at $5 each, FOB shipping point, and were in transit on 30 June. The $1,990,000 balance for Inventory in the Balance Sheet was calculated as follows:

Beginning inventory (as at July 1, 2016) of 20,000 widgets at $2 each;

150,000 units purchased at $3 per unit during the first quarter of the year;

200,000 units purchased at $4 per unit during the second quarter of the year;

200,000 units purchased at $3 per unit during the third quarter of the year;

20,000 units purchased at $5 per unit during the fourth quarter of the year, including the in-transit items.

Required:

For 30 June 2017, prepare a correct Balance Sheet . Ignore GST. (Hint: The balance for Retained Earnings will be a plug, so there is no need to separately reconcile the retained earnings balance.)

Answer 1

Mihir Ltd.

Balance Sheet for the year ending 30 June 2017

Liabilities
Mortgage payable	$380000
Accounts payable	$23000
Warranty provision	$6000
Accrued expenses payable	$15000
Debentures payable	$101500	$525500
Equity
Share capital	$1000000
Retained earnings (bal. fig.)	$500340
Revaluation reserve	$300000	$1800430
Total liabilities and equity		$2325930
Assets
Cash		$6080
Accounts receivable		$3350
Office supplies		$1500
Inventory		$115000
Investment property		$1000000
Land and buildings		$1200000
Total assets		$2325930

Working Notes :

1. Bank balance = 7200 + 800 - 1200 - 720 = 6080.

2. Inventory as per FIFO = 5000 units @ $3/- and 20000 units @ $5/- = $115000

3. Debentures payable = 103000 less (interest upto June 2017) 1500 = 101500

4. Warranty provision = 2% of sales = 2000 units @ $3/unit = $6000

5. Revaluation reserve = 400000 + 200000 - 300000 = 300000

6. Retained earnings is the balancing figure.