ACCY500 Accounting Measurement, Reporting and Control:

Module 2 Cases
Question 1: Smith & Jones Sporting Goods Co. - Recording
Transactions
Smith & Jones Sporting Goods Co. started operations on 1 October 2021 and on 30
September 2023 had the following summary:

30 Sept. 2023

Fixed Assets
PPE 17,000
Current Assets
Inventories 14,000
Cash 10,035
Accounts Receivable 13,056
Total Assets 54,091
Current Liabilities
Accounts Payable 18,891
Total Liabilities 18,891
Equity
Common Stock 34,000
Retained Earnings 1,200
Total Equity 35,200
Total Liabilities and Equity 54,091

During the year ended 30 September 2024 (i.e., third year of operation), the company engages
in the following transactions:

1. Payment of $8,300 of accounts payable to suppliers

2. Collection of $4,500 of accounts receivable from customers

3. Sale of sporting goods merchandise originally costing $5,300 for $8,950 of which
30% is on credit, the remaining 70% is in cash

4. Payment of $3,500 for employee wages in cash

5. Purchase of sporting goods merchandise from suppliers on credit for $1,900

 6. Issue 500 shares of common stock in exchange for $2,000 in cash

In addition, the company also engaged in the following two transactions which need to be
recorded in the 2023/2024 accounts:

7. On 30 June 2024, the company prepaid an annual insurance premium of $1,200. This
policy covers 1 July 2024 – 30 June 2025.

8. On 31 October 2024, the company will pay a dividend of $350.

Required:
Please record these transactions in a worksheet and prepare a Balance sheet and Income
statement using the templates on the following pages.

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 Assets Liabilities Equity
Fixed Inventories A/R Cash Prepaid Accounts Dividends Common Income Retained
Assets Insurance Payable Payable Stock Statement Earnings
OB
1. Payment to
Suppliers
2. Collection from
Customers

3. Sales

3. Cost of Sales

4. Wages

5. Purchase
Merchandise
6. Issue stock

7. Insurance

8. Dividends

9. Transfer R/E

CB

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Balance Sheet
30 Sept 2023 30 Sept 2024
Fixed Assets
PPE
Current Assets
Inventories
Accounts Receivable
Cash
Prepaid Insurance
Total Assets
Current Liabilities
Accounts Payable
Dividends
Total Liabilities
Equity
Common Stock
Retained Earnings
Total Equity
Total Liabilities and Equity

Income Statement
30 Sept 2024
Sales
Cost of Sales
Gross Profit
Administrative Expenses
Profit Before Interest & Tax
Interest
Profit Before Tax
Tax
Profit After Tax
Question 2: Missing/Erroneous Transactions
In each of the following questions, you have transactions that were either “missed” or made an
error in the annual financial statements ending on December 31.

Indicate the amounts involved and the effects on each of the accounts listed, using the following
notations:

• Overstated (O)

• Understated (U)

• No Effect (NE)

Each transaction is independent (i.e., the first transaction does not affect the second, etc).

For each question, be sure to show by what amounts the financial statements are wrong before
the corrections are made for the forgotten or mistaken transactions. Ignore any effect of taxes.

1. Sparrow & Nightingale is a retailer that sells rare books and DVDs. On September 25th,
2024, Sparrow & Nightingale prepaid the next 12 months’ insurance policy (i.e.
covering October 1, 2024 – September 30, 2025) on their shop for $18,000 in cash.
Sparrow & Nightingale’s accountant did not record the entry for prepayment of the
insurance policy, nor did it make any other entries during the year for the insurance
policy.

Current Assets Long-Term Assets

Current Liabilities Long-Term Liabilities
Capital Stock Retained Earnings
Net Income

2. On April 13th, 2024, YaHo, Inc. sold inventory, which originally cost $13,560 to
customers, for $21,000 on account. YaHo, Inc. did not record either of the entries
related to this sale.

Current Assets Long-Term Assets

Current Liabilities Long-Term Liabilities
Capital Stock Retained Earnings
Net Income

3. On May 13th, 2024, The Gathering Sound purchased merchandise worth $13,000 from
suppliers on account. On May 28th, 2024, The Gathering Sound paid $9,370 in cash to
these suppliers. Suppose the accountant at The Gathering Sound Ltd. forgot to record
both entries.

Current Assets Long-Term Assets

Current Liabilities Long-Term Liabilities
Capital Stock Retained Earnings
Net Income

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Question 3: Moving On Ltd. - Accrual vs. Cash Accounting
Moving On Ltd. started operations on 1 March 2023 and in each of its first two years prepaid
one year’s rent on the building used for operations. The end of Moving On Ltd.’s accounting
period is 31 December:

2023
1 March $24,000

2024
1 March $25,200

Making whatever assumptions you consider reasonable, use the template below and prepare the
relevant extracts from the transaction worksheets for 2023 and 2024.

Assets Shareholder’s Equity

Prepaid
Cash IS Retained Earnings
Rent

2023

Prepayment 1 March

Rent Mar. - Dec.

Transfer R/E

Closing Balance

2024

Opening Balance

Rent Jan. – Feb.

Prepayment 1 March

Rent Mar. – Dec.

Transfer R/E

Closing Balance