Banks Beer PLC (BBP), manufacturer, wholesaler and retailer of beers, made the following property, plant and equipment acquisitions during the year 2019. The following journal entries were presented to you by the new and inexperienced Accounts Clerk under your supervision for review. Jan 20: BBP built a warehouse for $600,000. It could have purchased a warehouse building for $740,000. The entry made was: Building $740,000 Cash $600,000 Profit on Construction 140,000 Mar 1: BBP purchased office equipment for $20,000, terms 2/10, n/30. Because BBP intended to take the discount, it made no entry until it paid for the acquisition. The entry made was: Equipment $20,000 Cash $19,600 Purchase Discounts 400 Apr 4: BBP purchased store equipment by making a $2,000 cash down payment and signing a 1-year $23,000, 10% note payable. The acquisition was recorded as follows: Equipment $27,300 Cash $ 2,000 Note Payable 23,000 Interest Payable 2,300 Jun 12: BBP acquired land, buildings and equipment from Corona Ltd, a bankrupt company, for a lump-sum amount of $680,000. At the time of the purchase, Corona’s assets had the following book and appraisal values. Book Values Appraisal Values Land $200,000 $150,000 Buildings 230,000 350,000 Equipment 300,000 300,000 To be conservative, the Accounts Clerk decided to take the lower of the two values for each asset acquired. The following entry was made: Land $150,000 Buildings 230,000 Equipment 300,000 Cash $680,000 Required: Review all of the accounting entries made by your junior staff and make any necessary correction to reflect the entry that should have been made at the date of each acquisition.
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
Banks Beer PLC (BBP), manufacturer, wholesaler and retailer of beers, made the following property, plant and equipment acquisitions during the year 2019. The following
Jan 20: BBP built a warehouse for $600,000. It could have purchased a warehouse building for $740,000. The entry made was:
Building $740,000
Cash $600,000
Profit on Construction 140,000
Mar 1: BBP purchased office equipment for $20,000, terms 2/10, n/30. Because BBP intended to take the discount, it made no entry until it paid for the acquisition. The entry made was:
Equipment $20,000
Cash $19,600
Purchase Discounts 400
Apr 4: BBP purchased store equipment by making a $2,000 cash down payment and signing a 1-year $23,000, 10% note payable. The acquisition was recorded as follows:
Equipment $27,300
Cash $ 2,000
Note Payable 23,000
Interest Payable 2,300
Jun 12: BBP acquired land, buildings and equipment from Corona Ltd, a bankrupt company, for a lump-sum amount of $680,000. At the time of the purchase, Corona’s assets had the following book and appraisal values.
Book Values Appraisal Values
Land $200,000 $150,000
Buildings 230,000 350,000
Equipment 300,000 300,000
To be conservative, the Accounts Clerk decided to take the lower of the two values for each asset acquired. The following entry was made:
Land $150,000
Buildings 230,000
Equipment 300,000
Cash $680,000
Required:
Review all of the accounting entries made by your junior staff and make any necessary correction to reflect the entry that should have been made at the date of each acquisition.
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