Question

Question #14 (45 Marks) You are the Finance Manager of Halifax Inc., an electronics retailer. Your staff member has prepared draft financial statements as at/for the year ended December 31, 2019. (le all entries are done except for any corrections you propose.) On review of the statements you note the following relating to events occurring in 2019: A Halifax signed a one-year lease in December 2019 for rental of a facility starting January 1, 2020, Upon signing the lease, Halifax paid the January 2020 rent of $10,000 and a damage deposit of $8,000, both of which the accountant recorded as rent expense in 2019. B. During Bankrupt Ltd.'s liquidation sales in December 2019, Halifax purchased electronics inventory, valued at $15,000, for $9,500. The accountant recorded the inventory at $15,000 and recorded the 55,500 difference between the amount paid and the value as a gain in the 2019 statements. The inventory has not yet been sold. C. Halifax paid $8,000 for fancy stereo equipment for their store on Jan 1, 2019. The stereo is being depreciated straight line over 4 years. The majority shareholder of Halifax liked the stereo so much that she decided to take it home to use with her family. D. Halifax also provides a service where it will go to customers' homes/businesses to set up their purchases. A customer purchased electronics on December 20, 2019 and paid an additional $400 for this set-up service. As the item was a holiday gift, the customer hadn't yet called by year end to book the set-up appointment. Halifax recorded the $400 revenue for the set-up as it is non refundable E. Halifax was served with a lawsuit during 2019 for faulty product. The claim is $250,000 and Halifax's lawyer estimates that it is highly likely/probable they will have to pay $50,000 for this claim. Halifax did not record any amount in the financial statements related to the lawsuit as it will not go to court until December 2020. Required (State any assumptions needed): For each letter item above, prepare the following: 0 Prepare any necessary lournal entries for 2019 for Halifax to correct any of the above treatments. If no adjustment is necessary, you must indicate "No Entry". (Always show any calculations.) W EXPLAIN why you made the adjustment for no adjustment) in using and applying at least one FOUNDATIONAL principle or ELEMENT characteristic from the conceptual framework to the situation as support.

Answer 1

Correction entries to be passed alongwith reason for same are listed below :

Particulars

Dr. ($)

Cr. ($)

A)

Security Deposit a/c ..Dr

8,000

Prepaid Rent a/c ..Dr

10,000

To Rent a/c

18,000

Reason : Rent paid belongs to period of January 2020 and does not belong to the current period, hence the same is to be recorded as prepaid rent.

Also, damage deposit paid is in the form of security deposit to be refunded at the end of the contract, hence recorded as security deposit.

B)

Profit and loss a/c ..Dr

5,500

To Inventory a/c

5,500

Reason : Inventory is recorded at cost or NRV, whichever is lower. Since cost i.e. 9,500 $ is lower in the current scenario, Inventory should be reduced to 9500 $ from 15,000 $.

C)

Asset given on loan / Partner's a/c ..Dr

8,000

To Stereo a/c

8,000

Reason : Since asset is not being used for business purpose, it should either be counted as drawings and reduced from partner's account and if it's for a specific period, it should be asset given on loan.

D)

Revenue a/c ..Dr

400

To Deferred Revenue a/c

400

Reason : Revenue is recognised only when services have been delivered. Since in the current case services have not been delivered but the consideration has been received, the same should be recorded as deferred revenue.

E)

Legal expense a/c ..Dr

50,000

To Provision for Legal expense a/c

50,000

Reason : Since lawyer has estimated that it is probable that 50,000 $ liability will be incurred, the same shall be recorded as a provision in the books of accounts.