John Phelps has run a small business for many years and has never kept adequate accounting records. However, a need to obtain a loan from the Bank of Make It Flow, for the expansion of his business has necessitated the preparation of final accounts. As such, he has contracted a medium size accountin
John Phelps has run a small business for many years and has never kept adequate accounting records. However, a need to obtain a loan from the Bank of Make It Flow, for the expansion of his business has necessitated the preparation of
1. John Phelps’ bank transactions for the year January 1 through December 31,
2020 were as follows:
Bank Account
Receipts $ Payments $
Trade receivables 430,100 Trade payables 272,500
Debit card 40,000 Electricity 4,500
Rates and rent 23,600
Loan principal 25,000
Drawings 1,250
Computer equipment 150,000
Overdraft interest 750
Salaries & wages 26,000
Accounting fee 7,500
470,100 511,100
2. The bank account had a favourable balance on December 31, 2020 of $47,900 before considering Note 3(e) and Note 6 below. 3. During the year:
a. Discounts allowed by trade payables amounted to $1,350 and allowed to trade receivables amounted $1,840. b. The financial year goods returned by trade receivables amounted to
$1,600 and goods returned to trade payables amounted to $6,900.
c. The financial year a trade debt of $1,200 owed by Lottie Graham was off-set against the $2,000 owing to the same Lottie Graham a trade creditor. d. A customer, Janet Hutton bought goods using a debit card. She returned
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goods amounting to $700 and was repaid from the Debit Card takings before applying the commission (see note No. 7). e. John Phelps puts a further $135,000 into the bank account of the business to shore up
depreciation in the month of acquisition or disposal.
6. On April 1, 2020 John Phelps’ received a loan of $75,000 from his mother.
Interest should be charged on the reducing balance at a rate of 10% per annum. The first interest payment is to be made on March 31, 2021. The principal is being paid in equal instalments of $25,000 commencing on September 30, 2020, September 30, 2021 and September 30, 2022. Interest on loan was outstanding at December 31, 2020. 7. For some of the sales debit cards are accepted. John Phelps pays 2.5% debit card commission on gross debit card sales. 8. The balances at the end of each year are as follows:
December 31, 2019 December 31, 2020
$ $
Inventory 41,000 48,500
Trade receivables 29,300 35,750
Prepaid rent 500 600
Fixtures (net) 20,000 19,000
Trade payables 19,500 19,000
Debit card receivables 1,325 750
Prepare the Debit Card Receivables Account
e. Prepare the Income Statement for the year ended December 31, 2020.
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