RE-MODIFIED SOLUTIONS TO THE VCAA SAMPLE EXAM SOLUTIONS
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c. Explain the impact of Memo 44 on the accounting reports for the year ended 30 June 2012.
The inclusion of the $1100 as an advertising expense means it impacts the income statement through an increase in expenses hence decreasing net profit by $1100. This then impacts the businesses balance sheet through the owners equity section decrease ( Net profit) and decrease in Assets (debtors control) by $ 1100.
Correction - Question 9C - Effect of Memo 44GST must be debited as it was not recorded. Advertising Expense remains to be $1000. Advertising Expense cannot be $1100 (1000+100GST*) because the GST of $100 is not an expense.
Therefore:
DR Advertising 1000
DR GST Clearing 100
CR Debtors Control 1100
Hence expenses will increase by $1000, decreasing net profit by $1000. Debtors control (Asset) will decrease by $1100.GST Clearing as an asset(Balance was 3250 DR#) will increase by $100, as a debit entry of $100 must be made to GST Clearing.
Effect on reports: Income statement: Net Profit decrease by $1000; Balance sheet: Assets decrease $1000 (Debtors Control decrease $1100, GST Clearing increase $100), Owners Equity decrease $1000 (Net Profit). No effect on liabilities, hence accounting equation remains in balance.
* Memo 44 explicitly states $1100 is inclusive of GST
# GST Clearing Account has a balance of 3250 DR (Current Asset) - hence Assets increase $100, not Liabilities decrease $100
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