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Prepare Financial Report 3rd
Prepare Financial Report 3rd
MODULE HANDOUT
Example
Consider the following cost in relation to particular equipment purchased by the company purchase prices of
equipment Br 120,000 for cash.
Additional cost:- -Transportation change 5,000
-Value added tax (Vat) 18,000
-Assembling costs 3,000
-Installation and testing cost 2,000
In additional to the above, cost Br 500 was incurred to reinstall the equipment b/c an error was made the
mechanic the initial installation.
Required:-determine the original cost of the equipment and show Journal entry necessary to record its
acquisition.
Original cost of equipment
Purchase price of equipment ----------------Br 120,000
Add: Related cost.
Transportation change ---------------------------5,000
Value added tax (VAT) -------------------------18,000
Assembling costs ---------------------------------3,000
Installation and testing cost----------------------2,000
Total original /acquisition\ cost of equipment Br 148,000
Journal Entry
Equipment -----------Br 148,000
Cash --------------------------148,000
To record acquisition of equipment
Operating expense --------------500
DC Rate DE A.D BV
OC-SV 100/Eul DC-SV/EUL or Same of Dep. OC - AD
DC x Rate
2. Unit of Production Method: - The unit of production method yields, a depreciation charge that varies with
the amount of assets usage to apply this method the length of the life of an asset is expressed in terms of
production capacity such as hours, miles or number of operation.
Formula: Unit of production method
The machine was in operation for 1,600 hours during a year, the depreciation for that year would be $ 3171.2
($1.98 * 1,600 hours)
- Record the adjustment is made to transfer the used portion from asset to an expense.
- Prepaid expense include such items as prepaid insurance, prepaid rent, prepaid
advertising, and prepaid interest, various kinds of suppliers and even the cost of long
term assets.
Relationship with prepayments and Adjusting entries
Prepaid expense
Asset Expense
Example Assume that on Nov 1 , 1994 a business rented its building for a period of one year and received Br
12,000 representing payment for the next 12 months where the fiscal period ends on Dec 31.
Advance collection initially recorded as liability
1994
Nov 1 cash ----------------------------12,000
Un earned rent------------------------12,000
Adjusting entry for earned amount of the two months (November and December)
Ins. Abdulhakim M Page 5
ie 2/12 x 12000 = 2000)
1994
Dec 1 unearned rent -------------------2000
Rent income ---------------------2000
3. Accrued expense
An accord expense is an expense incurred but that has been paid Accrued expenses are also called accrued
liability. Because to the extent of the expense accumulated there will be an obligation to pay the company for
example interest payable, taxes payable and salaries payable can be accrued expense.
Accrued expense
Expense liability
Debit Credit
Adjusting Adjusting
Entry (+) Entry (+)
Example:- Assume that Yalew Company salary to be paid in January 5, 1999Br 15,000 for employeeswho
worked on December 30, 1998.
Hence the following adjustment shall be mad1998
Dec 31 Salary Expense --------------15000
Salary payable -----------------------15000
The journal entry to record the payment will be as follows
1999
Jan 5 Salary Payable ---------15,000
Cash --------------------------------15,000
(To record the payment of salary)
. Accrued Revenue
Accrued revenues are revenues earned but that have not yet been received examples of accrued revenues
include interest revenue to be received with the note receivables, fees receivable on professionally service etc.
Accrued Revenue
Asset Revenue
Debit Credit
Adjusting Adjusting
Entry (+) Entry(+)
Example: - assume that peachewAudit firm records fees revenue when collecting cash from costumers after
performing from customers. During the current year cash of Br 39,000 has been collected from customers and
on December 31, 1992, fees of birr 10,000 are earned but not collected. The Adjustment to be recorded is 1992
Dec 31 fees receivable --------------------10,000
Fees earned ----------------------10,000
Assume that on January 25, 1993 cash of Birr 10, 000has been collected from clients
1993
Jan 25 Cash -------------------10,000
Fees income -------------------10,000
(To record collection fees earned)
Other balance day entries
Sales $600,000
Cost of Goods Sold 360,000
Gross Profit $240,000
Operating Expenses
Supplies Expense $13,000
Wages Expense 131,000
insurance Expense 15,000
Rent Expense 24,000
Uncollectible Accounts Expense 12,000
Total Operating Expenses $195,000
Operating Income $45,000
Other Revenues and (Expenses) 1,000
Income Before Taxes $46,000
Income Taxes Expense 16,000
Net Income $30,000