QUESTION 1:

Favor Ltd pays its employees a total of $15 000 per month in wages. For the
year 2020 the business paid $210 000 in wages.
a. Prepare a statement showing the total wages for 2015 and whether there
is a prepayment or accrual at the end of the accounting period.
b. Prepare the necessary journal entries to close off the wages expense
account.

DEFERRALS (PREPAYMENTS) AND ACCRUALS (AMOUNTS

OWING, OUTSTANDING OR DUE) FOR REVENUES
Max Enterprises collects commission for the sale of cell phones. The monthly
revenue is $2 000. For the year 2015, $30 000 was received.
Required:
a. Prepare a statement showing the total commission revenue for 2015 and
whether there is a prepayment or accrual at the end of the accounting
period.
b. Prepare the necessary journal entries to close off the commission
revenue account.
SOLUTION
a. Commission revenue received $30 000
Commission revenue for the period ($2 000 x 12) $24 000
Commission revenue prepaid $ 6 000

Debit Credit
Date Details $ $
2015
Dec 31 Commission revenue 30 000
Income statement 24 000
Commission revenue prepaid 6 000
To close off the commission revenue account and record
prepayment

QUESTION 1:
 Busy Ltd collects revenue for subletting part of its building to Barber Cuts for
$1 500 per month. The business collected $21 000 from Barber Cuts in 2015.
a. Prepare a statement showing rent revenue for 2015 and whether there is
a prepayment or accrual at the end of the accounting period.
b. Prepare the necessary journal entries to close off the rent revenue
account.
EXAMPLE
Max Enterprises collects commission for the sale of cell phones. The monthly
revenue is $3 000. For the year 2015, $30 000 was received.
Required
a. Prepare a statement showing the total commission revenue for 2015 and
whether there is a prepayment or accrual at the end of the accounting
period.
b. Prepare the necessary journal entries to close off the commission
revenue account.
SOLUTION
a. Commission revenue received $30 000
Commission revenue for the period ($3 000 x 12) $36 000
Commission revenue accrued $ 6 000
b.
Debit Credit
Date Details $ $
2015
Dec 31 Commission revenue 30 000
Accrued commission revenue 6 000
Income statement 36 000
To close off commission revenue account and record
accrual

Question 1:
Mix Ltd collects revenue for subletting part of its building to Barber
Cuts for $2 400 per month. The business collected $21 000 from Barber
Cuts in 2015.
 Required
a. Prepare a statement showing how much rent revenue was for 2015
and whether there is a prepayment or accrual at the end of the
accounting period.
b. Prepare the necessary journal entries to close off the rent revenue
account.
RECORDING EQUITY
EQUITY is the residual interest in the assets of an entity after deducting all its
liabilities. (IFRS for SMEs 2009 Section 2.15 (c) )
Issue of common stock (ordinary shares)
There are 3 basic types for the issue of share:
1. General issue of shares: This is an issue (sale) of shares to the general
public of a public limited company, or to new shareholders of a limited
company. A general issue can be:
i. At par value
ii. At a value above par (premium)
iii. No-par value

i. At par value

EXAMPLE: Milan Ltd issues 20 000 shares of common stock at par

value $2.00 per share on 4 May 2020.
Required: Record the journal entry for this transaction.

SOLUTION
DATE DETAILS DEBIT $ CREDIT $
2020
May 04 Cash 40 000
Common stock 40 000
Issue of 20 000 shares at par $2.00

ii. At a value above par

 EXAMPLE: Harry Ltd issues 20 000 shares of common stock at
$5.00 each that have a par value of $2.00 per share on 5 June 2020.
Required: Record the journal entry for this transaction.

SOLUTION

DATE DETAILS DEBIT $ CREDIT $

2020
June O5 Cash 100 000
Common stock (20 000 x $2) 40 000
Paid-in-capital in excess of par 60 000
(share premium) (20 000 x $3)
Issue of 20 000 shares at $5.00 each
with par $2.00

iii. At no-par value

EXAMPLE: Wise Ltd issues 6 000 shares of common stock at no-

par value on 9 May 2020. The market price per share was $6.00.

Required
Record the journal for this transaction.

SOLUTION
DATE DETAILS DEBIT $ CREDIT $
2020
May 09 Cash 36 000
Common stock 36 000
Issue of 6 000 shares at no par value

2. Rights issue: This is an issue of shares to current shareholders. The

value of the share is usually above par but discounted to the market
value of the share. The shareholders are in no way duty-bound to
purchase these shares.
 EXAMPLE: Thomas Ltd issues 20 000 shares of common stock to its
existing shareholders with par value $4.00 per share and market value
of $6.00 on 4 May 2020. The company is offering a 10 per cent discount
on the market value to its current shareholders. The issue was fully
subscribed.

Required
Record the journal entry for this transaction

SOLUTION

DATE DETAILS DEBIT $ CREDIT $

2020
May 04 Cash (20 000 @ $6.00 x 90%) 108 000
Common stock (20 000 @ par 80 000
$4.00)
Paid-in-capital in excess of par 28 000
($108 000 - $80 000)
To record rights issue

3. Bonus issue: This is a gift of shares to current shareholders, usually

given to them in place of cash dividend.

EXAMPLE: Will Ltd has 20 000 shares of common stock at par value
$2.00 per share outstanding at 31 December 2020. The company gave a
bonus issue of one per every five stocks held on 31 December 2020 as
dividends for 2020.

Required
Record the journal entry for this bonus issue.

SOLUTION
DATE DETAILS DEBIT $ CREDIT $
2020
December 31 Retained earnings 8 000
(20 000 shares / 5) x $2.00
 Common stock 8 000
To record a bonus issue

QUESTION 1:

K. Gold Ltd is seeking to issue 10 000 shares of common stock on 01

May 2020. Record the journal for the following options:
a. shares issued at par $3.00
b. shares issued at market value of $5.00 with par value $3.00 per
share
c. shares issued at no-par value with a market value of $4.00 per
share
QUESTION 2:

Kirby Ltd has an authorized share capital of 45 000 shares on August

01, 2019. The firm issued 15 000 shares of common stock on August 01,
2019

at market value of $7.00 with a par value of par $5.00. On August 01,
2020 the firm issues a rights issue of one for every three held at $6.00
per share. On August 01, 2021, the firm made a bonus issue of one for
every two held. Record the journal entries for these three transactions.

TREASURY STOCK
Treasury stock, also known as treasury shares or reacquired stock,
refers to previously outstanding stock that is bought back from
stockholders by the issuing company. The result is that the total number
of outstanding shares on the open market decreases.

EXAMPLE
MAY/JUNE 2017 – QN. 1 (c.)