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Manual Accounting Practice Set

Disc-O-Tech, Australasian Edition 3

Overview
The information on this page will continue to be made available to you through a link on each subsequent page
of the practice set. However, it may be useful to print this page because you will be referring to it regularly.

Once you have read this page, click the Continue button below to receive further information that you will need
to complete the practice set.

Background
Assume it is currently 1 June 2020.

You are working for the temporary accounting employment agency known as
Temporight. Today you have been asked to work at Disc-O-Tech, a small music store
that operates in inner city Adelaide and is owned by Mark Lippmann. Your task here is
to complete the accounting cycle for Disc-O-Tech for the month of June 2020. To
assist you in this task, Mark tells you to read the company's accounting policies and
procedures. Note that you will be required to follow these policies and procedures
when completing the accounts for Disc-O-Tech.

Accounting policies
a. Business operations: Disc-O-Tech is set up as a private non-listed company based in Adelaide with
Mark Lippmann as the sole shareholder. The company derives its main source of revenue from retail sales of
music related goods.

To assist in selling the products, Mark rents a large showroom. Note that the business is required to pay for
the rent for this premises in advance.

The electricity and water expenses incurred during the month relate to the running of the showroom.
Additional expenses include an insurance policy to protect the business against inventory items being
damaged or lost during deliveries.

All costs associated with the showroom are classified as selling and distribution expenses.

All part-time employees in the business are sales staff who receive their wages on a weekly basis. Mark is
the only full-time employee and his role is to handle all administrative tasks. Mark's salary is paid once at
the end of each month.

b. Accounting cycle: The business adopts a monthly accounting cycle.

c. Purchases: Purchases are recorded when the business receives the goods. All items purchased are received
on the same day as recorded in the transaction list, except for purchase orders which are received at a later
date. Note that the business uses the gross method of recording purchases and receives trade discounts and
early payment discounts from some suppliers.

d. Revenue recognition: The business recognises revenue when goods sold are delivered to customers. All
items sold are delivered on the same day as recorded in the transaction list except for sales orders, which
are delivered at a later date as agreed with the customer. Note that the business uses the gross method of
recording sales and sometimes grants trade discounts to customers. Past experience has shown that offering
settlement discounts did not increase the likelihood of accounts receivable being paid promptly. Therefore,
settlement discounts are not normally offered to credit customers except in exceptional circumstances.

e. Sales returns: So that the business can easily track the level of sales returns in relation to overall sales, all
sales returns are recorded using a contra revenue account (Sales Returns and Allowances) rather than being

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recorded directly in the Sales Revenue account.

f. Goods and services tax (GST): Mark has advised you to ignore the effect of the Goods and Services Tax
(GST). [ASIDE: This is an assumption to make the practice set easier for you to complete. In the real world,
GST cannot be ignored.]

g. Cash: The business accepts cash and cheques and uses cheques to pay for the majority of its expenses. On
the day cheques are received, Mark deposits them at the bank. It may take a number of days for the
cheques to be cleared by the bank. The business holds its cheque account with EastPac Bank.

h. Inventories: The business uses the perpetual inventory system and applies the FIFO method to allocate
costs to inventory and cost of sales. Note that the business maintains a set of inventory cards with multiple
pairs of lines to keep track of changes in inventory. In each inventory card under the Balance column, items
with different unit costs are listed in separate lines with the items purchased earlier listed first in the pair of
lines provided.

i. Prepayments: The business has a policy of recording prepayments, including office supplies, as assets. At
the end of the month, adjustments are made to the relevant accounts to recognise the expense during the
accounting period.

j. Property, plant and equipment: Property, plant and equipment items are depreciated over their
estimated useful life using the straight line method to calculate the depreciation charge. Depreciation is
allocated on a monthly basis and the monthly depreciation charge is calculated as the yearly depreciation
expense divided by the number of months in a year.

k. Long term liabilities: The business obtained an interest only loan of $41,000 from BitiBank on 1 May 2020
at a simple interest rate of 6% per year. The first interest payment is due at the end of July 2020 and the
principal on the loan is due on 1 May 2024.

Accounting procedures
Disc-O-Tech adopts a manual accounting system and uses the general journal and special journals for the
recording of individual transactions. Mark Lippmann has tailored the design of those journals to meet the
specific needs of the business so the format of those journals may be slightly different to those you have seen
before. However, he advises you that the general principles of how to use special journals are followed in his
business.

The table below shows the journals used by the business and the types of transactions that can be recorded in
each of these journals:

Journal Code Transaction type

General journal GJ All transactions that are not able to be recorded in the
special journals below.

Sales journal SJ Credit sales of inventory

Purchases journal PJ Credit purchases of inventory

Cash receipts journal CRJ Cash inflows to the business

Cash payments journal CPJ Cash outflows from the business

To summarise the effects of transactions recorded in those journals, Mark maintains the general ledger and the
following ledgers:

accounts receivable subsidiary ledger,

accounts payable subsidiary ledger, and
inventory cards.

Mark then indicates that he is aware other businesses using a manual accounting system may post transactions
from journals to ledgers at different times (i.e. daily or monthly). Although the posting procedures used in his
business may be different to what you have seen before, he asks that you specifically follow his company's

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accounting procedures.

The information below explains when transactions are required to be posted from the journals to the appropriate
ledger accounts and inventory cards:

Posting of entries recorded in the general journal

All transactions that are entered in the general journal are posted on a daily basis. Note that if a transaction
recorded in the general journal involves both a control account and a subsidiary ledger account, that journal
entry will need to be posted to both ledgers.

Posting of entries recorded in the special journals

When a transaction is recorded in a special journal, part of the journal entry may need to be posted daily and
part of that entry is to be posted monthly.

a. Daily:

If a transaction affects a subsidiary ledger account, then the entry that involves a subsidiary ledger
account is to be posted to that subsidiary ledger on a daily basis. However, the same amount posted
to the subsidiary ledger account is not posted to the related control ledger account immediately. This
procedure allows the business to keep track of supplier and customer balances on a daily basis.
In the cash receipts journal or the cash payments journal, if a transaction is recorded in the Other
Accounts column, then the amount recorded in the Other Accounts column is to be posted to the
appropriate general ledger account daily.
If a transaction results in a change in the number of inventory items on hand, then the entry that
affects inventory is to be posted to the appropriate inventory card on a daily basis. In this way, the
business is able to track the balance of inventory on hand.

b. Monthly:

At the end of the month, the totals of each column in the special journals are manually calculated.
Those totals, with the exception of the totals of the Other Accounts columns in the cash journals, are
posted to the appropriate general ledger accounts at the end of the month.

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Transactions for June

You will use the following five weeks of transactions as you complete the books for June. Note that the
transactions are divided into five separate weeks. This is because you will not enter this whole list of
transactions on any one page. You will be given five separate pages in which to enter the transactions for each
of the five weeks.

Date Description

Week 1
1 Issued Cheque No. 729 for $8,300 to pay Barry White Real Estate for two month's worth of rent in advance.
3 Paid the full amount owing to Black label, Cheque No. 730.
4 Paid sales staff wages of $2,025 for the week up to and including yesterday, Cheque No. 731. Note that
$1,429 of this payment relates to the wages expense incurred during the last week of May.
5 Made payment of $791 to Integer Energy for 3 months of electricity up to and including 31 May, Cheque No.
732.
6 Issued Cheque No. 733 to Office Supplies Warehouse for the purchase of $538 worth of office supplies.
7 Mel O'Dius paid the full amount owing on their account.

Week 2
9 Purchased 16 boxes of Boony & the Noobs CDs from Black label for $360 each, terms net 30.
9 Brashs world records paid the full amount owing on their account. Since Brashs world records has been a
loyal customer from the day the business commenced, a 10% discount was given for this early repayment.
10 Paid the full amount owing to Promiscuous records, Cheque No. 734. Payment fell within discount period.
10 Sold 18 boxes of AC/BC T-shirts to D-Funkt Records for $387 each, Invoice No. 335.
11 Paid sales staff wages of $2,929 for the week up to and including yesterday, Cheque No. 735.
12 Paid the full amount owing to Phin records, Cheque No. 736.
13 Made cash sale of 46 boxes of Evan Handed and the Handymen CDs for $513 each.
14 Paid the full amount owing to Pony OMC records, Cheque No. 737.

Week 3
16 Purchased 11 boxes of Evan Handed and the Handymen CDs from Pony OMC records for $315 each, terms
net 30.
17 Purchased 10 boxes of Boony & the Noobs CDs from Phin records for $432 each, terms 2/10, n/30.
18 Sold 4 boxes of The Oblique References CDs to Mel O'Dius for $369 each, Invoice No. 336.
18 KB Lo-Fi paid $2,400 in partial payment of their account.
18 Paid sales staff wages of $2,661 for the week up to and including yesterday, Cheque No. 738.
19 Received a purchase order from KB Lo-Fi. Created a corresponding sales order to deliver 56 boxes of The
Oblique References CDs to this customer for $369 each, Invoice No. 338.
20 Made cash sale of 99 boxes of Fate's Offspring CDs for a list price of $576 each. A trade discount of 25%
applies.
21 D-Funkt Records returned 2 boxes of AC/BC T-shirts that were originally sold for $387 each on 10 June.
These items cost $234 each and were not faulty or damaged. Issued a Credit Note for $774.

Week 4
22 Paid the full amount owing to Phin records, Cheque No. 739. This payment relates to the credit purchase
that was made in the previous week.
23 Sold 150 boxes of Boony & the Noobs CDs to Mel O'Dius for $594 each, Invoice No. 337.
23 D-Funkt Records paid the full amount owing on their account.

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25 Paid sales staff wages of $2,732 for the week up to and including yesterday, Cheque No. 740.
26 Ordered 10 boxes of Boony & the Noobs CDs from Mapster records for $432 each. Agreed terms with
Mapster records are 2/10, n/30.
27 Made cash sale of 81 boxes of AC/BC T-shirts for $387 each.
28 Delivered 56 boxes of The Oblique References CDs to KB Lo-Fi for $369 each, Invoice No. 338. These items
were ordered on the 19th.
28 Returned 5 faulty boxes of Evan Handed and the Handymen CDs, originally purchased for $315 each, to
Pony OMC records. Received a Credit Note for $1,575.

Week 5
29 Made cash sale of 52 boxes of Evan Handed and the Handymen CDs for $513 each.
29 Purchased 20 boxes of Fate's Offspring CDs with cash for a list price of $352 each. A trade discount of 25%
applies, Cheque No. 741.
30 Received 10 boxes of Boony & the Noobs CDs for $432 each, which were ordered on the 26th. Agreed terms
with Mapster records are 2/10, n/30.
30 Carrie O'Key paid the full amount owing on their account.
30 Paid monthly salary of $4,400 to Mark Lippmann, Cheque No. 742.

Adjusting entries information

Using the following information, you will record end of month adjustments:

Cash Registers owned by the business: original purchase price was $9,000, estimated useful life was 6
years, and estimated residual value was $1,500 at the end of the useful life. Depreciation is calculated on
a monthly basis using the straight line method. The monthly depreciation charge is calculated as the
yearly depreciation expense divided by the number of months in a year.
Store Fixtures owned by the business: original purchase price was $37,000, estimated useful life was 11
years, and estimated residual value was $4,000 at the end of the useful life. Depreciation is calculated on
a monthly basis using the straight line method. The monthly depreciation charge is calculated as the
yearly depreciation expense divided by the number of months in a year.
The water usage for the month of June is estimated to be $113.
The estimated electricity payable as at the end of June is $273.
Sales staff work every single day during the week including weekends and are paid on a weekly basis.
Wages were last paid up to and including 24 June. Wages incurred after that day (from 25 June to 30
June inclusive) are estimated to have been $380 per day.
Interest expense incurred during the month of June but not yet paid to BitiBank for the bank loan is
$205.
Office supplies totalling $691 are still on hand at 30 June.
One month of prepaid rent expired during June. Remember that at the beginning of June, the business
paid two month's worth of rent in advance.
3 months of advertising remained pre-paid at the start of June.
5 months of insurance remained pre-paid at the start of June.

When calculating the portion of prepayments that expire during the month of June, you are asked to assume
that an equal amount of expense is incurred per month.

A stocktake revealed that the balance of inventory on hand as at 30 June is equal to the closing balance of the
Inventory account. This means there is no adjusting entry required for inventory shrinkage.

Manual Accounting Practice Set

Disc-O-Tech, Australasian Edition 3 (VSA3q)
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