Exercise 17.6 oeGatt proprietor of Gatt\'s Gifts, invested 16 000 ina four-year

Question

Exercise 17.6 oeGatt proprietor of Gatt's Gifts, invested 16 000 ina four-year term deposit at75% per annum. The investment was made on 1 November 2004 and the business closes its books on 30 June each year. Interest on the investment is paid twice a year, on 30 April and 31 October. a Prepare the relevant general ledger accounts to show all transactions relating to the invest- ment from 1 November 2004 to 31 October 2005. Your entries should include all cash trans- b Prepare the adjusting and closing entries that would be made in the general journal on c State, and explain, the effect on the firm's reports if the balance-day adjustment was not actions, as well as adjusting and closing entries. 30 June 2005. recorded on 30 June 2005.

Explanation / Answer

(a).

(b)

(c)

If the balance-day adjustment regarding interest revenue is not recorded , the firm's revenue will be short reorted by $200 thereby reducing the net income of the firm by $200.

  

GATT'S GIFTS Journal entries relating to term deposit Date Account title Debit Credit Nov.1, 2004 Term deposit 16000 Cash 16000 (To record investment in Term Deposit) April.30, 2005 Cash 600 Interest revenue 600 (To record interest revenue on term deposit) June.30, 2005 Interest receivable 200 Interest revenue 200 (To record interest revenue for May and June 2005) June.30, 2005 Interest revenue 200 Income statement 200 (To record closing of interest revenue) Oct.31, 2005 Cash 600 Interest receivable 200 Interest revenue 400 (To record interest venue received on Oct.31)

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