2020 NAS 3E POA EOY P2 Q2

2020 NAS 3E POA EOY P2 Q2

2 Justice Trading owns two shop houses which it leased out to earn rental income. The business provided the following balances relating to rental income

 

31 December 2018

31 December 2019

Rental income receivable

$ 8 200

Rental income received in advance

$ 5 600

During the year, Justice Trading collected a total of $123 000 from its tenants by cheques.

REQUIRED

a. Prepare journal entries to record rental income for the year ended 31 December 2019, including the closing entry. Narrations are not required.

[4]

b. Using a relevant accounting theory, explain how Justice Trading accounts for its income.

[2]

Justice Trading also runs a retail pharmacy. Recently, there has been a surge in demand for face masks and many customers are looking for disposable 3-ply surgical masks. As such, the business decided to bring in some surgical masks to sell and started to source for a supplier. For a start, the business plans to buy 500 boxes from the supplier. After some research, he found two suppliers who have a ready stock of good quality surgical masks.

Superman Enterprise is a local conglomerate established in 1990. It is well-known for providing quality goods and services in various industries. It started manufacturing surgical masks locally 10 years ago and have been supplying them to a few hospitals. 

Batman Supplies is based overseas and had just started its business operations with an online store a year ago. Many of the online reviews included “prompt delivery”, “quick response to enquiries”, “good quality surgical masks” and “comfortable to wear”. 

Quotations received from both suppliers are as follows:

 

Superman Enterprise

Batman Supplies

Cost per box

$13

$9

Delivery charge

Free delivery with minimum order of 200 boxes

$10 for every 100 boxes

Return policy

Due to hygiene reasons, all surgical masks sold cannot be returned or exchanged.

Surgical masks can be returned/exchanged within 14 days. Buyer will have to pay for the shipping costs of returning/exchanging the masks. Refunds will be processed within 30 days.

Credit terms

90 days 

30 days 1% cash discount for full payment within 7 days

REQUIRED

c. Advise Justice Trading which supplier it should choose. Justify your decision with three reasons.

[7]

[TOTAL 13]

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Justice Trading complied with the revenue recognition theory ✔✔ whereby income is recognised when services have been provided. ✔✔

 

Justice Trading complied with the accrual basis of accounting ✔✔ whereby income is recognised when earned and not when payment is received. ✔✔

 

Decision

Superman Enterprise ✔✔

Batman Supplies ✔✔

Evidence

Superman Enterprise is based in Singapore and produces their surgical masks locally. ✔✔

The total cost of buying 500 boxes of surgical masks with delivery from Batman Supplies is $4 550, which is lower than Superman Enterprise’s total cost of $6 500. ✔✔

Support

Hence, Justice Trading should be able to receive the masks faster compared to buying from an overseas supplier, since it does not need time for shipping and clearing customs. There is also a lower risk of goods being lost in transit. ✔✔

Hence, it is cheaper to buy the surgical masks from Batman Supplies and Justice Trading can either earn more profits or sell them at a lower price to attract more customers. ✔✔

   

Evidence

A few hospitals have been using Superman Enterprise’s surgical masks. ✔✔

Batman Supplies allows for return and exchange of masks within 14 days while Superman Enterprise does not allow returns or exchanges. ✔✔

Support

Justice Trading can be assured of the quality of the surgical masks supplied since hospitals are using them too. ✔✔

Should there be any issues with the masks upon receipt, Justice Trading will be able to get a refund for the returned masks or exchange them for new ones. ✔✔

   

Evidence

Superman Enterprise has been in business for 30 years and producing surgical masks for the last 10 years whereas Batman just started operations last year. ✔✔

Batman Supplies’ surgical masks received many positive reviews online with regards to the quality and comfort as well as quick delivery and good service provided by them. ✔✔

Support

Thus, Superman Enterprise should be more stable and less likely to close down. There is a lower risk of Superman Enterprise not being able to continue supplying Justice Trading with surgical masks. ✔✔

Hence, Justice Trading can be assured of the quality of the surgical masks supplied by them. ✔✔

   

Evidence

Superman Enterprise offers a longer credit period of 90 days compared to Batman Supplies’ of 30 days. ✔✔

Batman Supplies offers a cash discount of 1% for early payment. ✔✔

Support

The longer credit period provides greater flexibility as Justice Trading can use the cash for other operations of the business and pay the supplier after money has been received for masks sold to customers. ✔✔ 

Hence, Justice Trading will be able to earn more profits as the discount received will increase other income.  ✔✔

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