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Scallion Ltd Accounting Processes for Retail Business Transactions

Company Background

Scallion Ltd began business on 1 July 2019, specialising in the purchase and supply of packaging materials. An accounting system was designed and a chart of accounts was established.The business uses the periodic inventory system and is registered for GST at the rate of 10%.

The company also employs two office staff who work a five-day week from Monday to Friday. One office staff member is responsible for overseeing the daily running of the business, including inventory ordering; the other maintains the company’s accounting records. 

The company has a financial year-end 30 June and prepares adjusting entries only at the end of the year. The firm uses the following journals to maintain its accounting records:

Sales Journal: to record all credit sales of inventory

Purchases Journal: to record all credit purchases of inventory

Cash Receipts Journal: to record all cash receipts

Cash Payments Journal: to record all cash payments

General Journal: to record all transactions other than the above Scallion Ltd uses subsidiary ledgers for Accounts Receivable and Accounts Payable only. 

The company maintains a general ledger to record the increases and decreases in each asset, liability, owner’s equity, revenue and expense account. Subsidiary ledgers are used to record the separate details of Accounts Receivable and Accounts Payable. The company maintains a periodic system to account for its inventory.

The company is registered for GST at the rate of 10% and is required to pay GST on its purchases and to collect GST when making sales. The company uses a GST paid account for GST on purchases and a GST collected account for GST on sales (for manual records).

The firm’s in-house accountant has gone overseas for one month. You have been hired by Scallion Ltd to carry out the accounting duties in the accountant’s absence. This assignment provides you with the unadjusted trial balance at the end of May and requires you to record typical transactions for a retail business for the last month of the financial year. Once these transactions have been recorded and posted, you are required to complete the accounting cycle by journalising and posting adjusting and closing entries and preparing financial statements. 

Transactions are recorded by the accountant on a daily basis in the appropriate journal. Transactions are posted daily from the General Journal and the Cash Receipts and Cash Payments Journal to the Accounts receivable and Accounts payable subsidiary ledgers. Totals of the special journals are posted to the appropriate accounts at the end of the month.

Accounting System

Note: Amounts are to be recorded as the exact amounts in the journals and ledgers but are to be rounded to the nearest dollar when preparing financial statements.

The following transactions occurred during June 2020 and are INCLUSIVE of GST where appropriate.2020 June 1 Scallion Ltd shareholders invested $60,000 cash in the business.Purchased land and an existing retail store for $110,000 of which $77,000 is considered land cost. Paid $33,000 by cheque no. 98 for the retail store and signed a mortgage payable for the balance. The retails store is depreciated over its useful life of 10 years.2 Paid Lynwood Ltd $14,700 less a discount of $594 with cheque no. 99.Received cheque from M. Biller for $10,000 as part payment of his accountPurchased store furniture on credit terms from Corma Ltd for $7,480, terms n/60.

5 Purchased inventory on credit terms from Tumult Ltd $4,400; invoice date 6 June, terms 2/10, n/60.

6 Purchased a 3-year fire insurance policy for $792, cheque no. 100.

7 Sent cheque no. 101 to Tumult Ltd in full settlement of May invoice

8 Purchased inventory for $5,500, cheque no. 102. Paid Lynwood Ltd $15,000 cheque no. 103 for balance owing on May account.

9 Returned unsatisfactory goods to Tumult Ltd and received a credit note for $880.

10 Sold inventory to M. Biller on account, $9,020; invoice no. 210, terms 1/10, n/30.

11 O. Mowen paid his account in full. Paid Tumult Ltd amount due for June 6 invoice, cheque no.104.

12 Cash sales for period to 15 June were recorded today, $3,740.

13 Sold inventory to O. Mowen on account $5,170; invoice no. 211, terms 1/10, n/30. Paid salaries for period to 15 June totaling $2,650, cheque no. 105.

14 M. Biller paid the balance of his May invoice.

15 Purchased inventory on credit terms, from Lynwood Ltd, $5,390; invoice date 20 June, terms 1/10, n/30.Sent cheque, no. 106 to Dyson Ltd in full settlement of the account.

16 Received account for $143 from M. Parson for items chargeable to office expenses, terms n/30.

17 Received inventory returned by O.Mowen and issued a credit note for $2,200.Received a cheque from M. Biller for invoice no. 210.

18 Received a cheque from O. Mowen for balance due on invoice no. 211Purchased inventory from Dyson Ltd for $35,750, terms, 1/20, n/30.

19 Sold inventory worth $15,400 on credit to J. Rowls; invoice no. 212, terms 1/10, n/30.Paid $220 for electricity expenses, cheque no. 107.Paid Lynwood Ltd for the invoice dated 20 June, cheque no. 108.

Goods and Services Tax (GST)

20 Purchased inventory on account from Amcor Ltd $26,400, terms 2/10, n/30.

21 Cash sales from 16 June to 30 June were $2,145.

22 Paid salaries for period 16-30 June totaling $2,850, cheque no. 109.

23 Purchased office supplies for $330, cheque no. 110.

24 Received account from C. Bond for $110 for delivery expenses for the month.

25 Sold inventory on credit to O. Mowen for $17,600, invoice no. 213, terms 1/10, n/30.

26 Purchased printer for use in the business office at a cost of $825 using a short-term loan.

At the end of the 2020 financial year, Scallion Ltd identified the following items that need to be resolved before financial statements are prepared. GST has been correctly accounted for on these non-current asset transactions.

1. On 1st July 2019, Scallion Ltd purchased a used machine for $65,000 cash. The cost was debited to the “Machinery” account in the ledger. Prior to use, additional expenses were incurred for installing and testing the machine. These costs amounted to $7,400 and were debited to the “repairs and maintenance expenses” account. The installation and testing was completed on 1st October 2019, and the machine was brought into use on that date. The machine has an estimated useful life of 5 years, with a residual value of $6,000. Scallion uses straight-line depreciation for machinery and records depreciation to the nearest month. No depreciation has yet been provided in respect of this asset in the current year.

2. On 2nd July 2019, a small building and land were purchased for $350,000. The purchase price was determined by appraisers based on a fair value of $250,000 for the land, and $100,000 for the building. The total purchase consideration of $350,000 was debited to the “land” account. The building has an estimated useful life of 10 years with no residual. Scallion uses straight line depreciation for buildings. No depreciation has yet been provided for the building in the current year. On 1 June 2020, Scallion decided to adopt the revaluation model to measure its land at fair value. A valuation was carried out on 30 June 2020, and the land was valued at $295,000. No journal entry has been made in relation to this valuation. The fair value of the land and retail store acquired on 2nd June 2020 has not changed.

3. A new truck was purchased on 31st March 2020. Scallion Ltd paid cash of $46,100. The truck has an estimated useful life of 4 years with a residual value of $13,300 and is to be depreciated using the reducing balance method (using a rate of 1.5 times the straight-line rate). No depreciation has yet been provided in respect of this asset in the current year.

4. Prepare general journal entries to record the following information.Office supplies on hand at 30 June total $900 The one-year general insurance policy expires on 31 October 2020.Equipment has a useful life of 4 years with no residual value. Store furniture and printer have useful life of 5 years with no residual value. Scallion Ltd uses straight-line depreciation for these assets. (Round all depreciation amounts upwards to nearest whole $).Commission revenue of $39 600 has accrued during June Inventory at 30 June is $28 800.

1. a) Record the transactions in the special journals in the following order: sales journal, purchases journal, cash receipts, cash payments and general journal. You will need to use the general journal for more adjusting entries coming up, so make sure you leave room. The business uses sales and purchases journals for inventory transactions on credit only. Returns are processed through the general journal. (Remember that special journals replace the general journal, so transactions will be recorded in a special journal or the general journal but not both).

In the sales journal, you will need a column for Sales, GST Collected and Accounts Receivable. In the purchases journal, you will need columns for Purchases, GST Paid and Accounts Payable. The Cash Receipts and Cash Payments are multiple-column journals and require columns relevant to this particular business. An example of a suitable format for these journals is provided on pages 379 & 384 of your text.  

2. Prepare the accounts receivable control account as it would appear in the general ledger at the end of the reporting period, together with the related subsidiary ledger. Ensure that the individual customer balances agree with the total of the control account. Provide the accounts payable control account as per the general ledger at the end of the financial year and the subsidiary ledger and ensure that the individual supplier balances agree with the total of the control account.

3. Prepare any adjusting or correcting entries required as at 30 June 2020 in relation to the additional information provided above.

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