Assignment Problem: The WHOLESOME Company buys and sells organic food items. It has a retail store and sells online. The business is privately owned by two partners who together invested $475,000 to start the business last year.
The Company has the following assets and liabilities at August 31:
Delivery Trucks $50,000 Supplies $75,000
Accounts Receivable $45,000 Bank/Cash $75,000
Accounts Payable $35,000 Bank Loan $10,000
Required:
1) On November 1, the WHOLESOME Company paid a $6,000 insurance policy (for six months) by company check for their retail store. What did they purchase - prepaid expense (asset), unearned revenue, accrued revenue or accrued expense? What is the debit and credit for the initial $6,000 payment, remembering they paid on company check?
2) In December, what is the accounting transaction to record two month's use of the insurance cover?
3) In December, the WHOLESOME Company wins a contract to provide Jamba Juice with packets of organic fruits and nuts. Their first sale to Jamba Juice is for $20,000 worth of product (which WHOLESOME have provided), but Jamba Juice pays their bills in 60 days. Assuming that WHOLESOME Company follows the accrual based accounting system (i) should WHOLESOME record anything at all in their December records and why/why not (ii) if so, what is the debit and what is the credit and (iii) is this transaction a prepaid expense (asset), unearned revenue, accrued revenue or accrued expense?
4) Also in December, the accountant for the WHOLESOME Company records the annual depreciation of the company's delivery vehicles. What is depreciation; why is it a good example of the accrual concept and what is the debit and what is the credit assuming a depreciation charge of $5,000? This transaction impacts the Balance Sheet and the Income Statement - true/false, explain your answer.
5) Explain the accounting period concept - using the WHOLESOME Company as an example.
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