| Notes: |
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| a. The purchase of supplies for $10,000 have been debited |
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| to supplies expense account out of which supplies of the |
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| value of $3,000 were unused. |
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| (i)When the supplies are purchased supplies (asset) have to be |
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| debited. At the year end the supplies expense is to be debited and the asset |
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| account is to be credited taking into acount the value of supplies left in stock. |
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| (ii) At the year end the supplies expense has to be debited with the supplies |
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| consumed , which in the present case is $7,000($10,000 – $3,000) |
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| (iii) For this transaction , the asset should have been shown at $3,000 and an expense |
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| of $7,000 should have been booked. Hence there is an understatement of asset |
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| by $3,000 and an understatement of income by $7,000. |
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| b.Receipt of $18,000 towards landscaping services to be rendered for 24 months |
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| beginning July 1 , has been credited to “Landscaping Revenue”. |
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| (i) When advance is received for service to be rendered to be rendered in future |
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| a liability account has to credited.At the end of the accounting period, the value |
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| of the service rendered is to be transferred to revenue account. |
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| (ii) In the present case originally $18,000 should have been credited to “Unearned Revenue” |
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| account(liability), At the year end the value of the services rendered during the year |
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| from July to December (6 moths out of 24 moths) should have been transferred to revenue account. |
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| (iii) Therefore the liability account is understated by $13,500(18,000*18/24) and the revenue account |
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| is overstated by the same amount ($18,000 – $24,000*6/24). |
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| c. The company’s fuel bill of $1,500 for December 2016 was received in January 2017. |
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| (i) When a bill for an expense is received after the end of the period, we need to make |
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| an adjustment entry for the expense by booking the expense and creating a liability. |
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| (ii) In the given instatnce, accrued expenses(liability) account should have been credited |
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| and fuel expense account should have been debited. |
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| (iii) Therefore there is an understatement of liability the extent of $1,500 and |
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| and an overstatement of income by $1,500. |
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| d. The company borrowed $100,000 at 12% interest per year on April 1, 2016 which is |
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| to be repaid on March 2017. |
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| (i) When there is a borrowing, the interest expense payable for the accountig period should be |
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| debitedand a liability account should be credited for making the payment. |
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| (ii) In this case, interest expense should be booked for 9 months(April to dEcember) for $9,000 |
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| ($100,000*12%*9/12) and a liability for $9,000 should be created. |
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| (iii) Hence, there is an overstatement of income by $9,000 and an understatement of liability by $9,000. |
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| e. Truck purchased for $65,000 and to last for 100,000 miles with no salvage value. |
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| The truck ran 5,000 miles during the year. |
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| (i) When an aset is purchased , depreciation on the asset is to be recorded for the acounting period. |
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| Depreciation (expense) account should be debited and a accumulated depreciation (adjustment to asset) |
| account is to be credited. |
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| (ii) In the present case, depreciation should have been debited for $3,250 (65,000/100,000*5000) |
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| and accumulated depreciation account should have been credited by $3,250. |
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| (iii) Hence, there is an overstatement of income by $3,250 and an overstatement of asset by $3,250. |
