Year-end clean-up at a wholesaler: four accrual cuts and one contaminated allowance base
Tatsumi Shosho closes its books once a year on 31 March and uses the tax-exclusive method for consumption tax with the provisional paid/received accounts. Its pre-adjustment trial balance at 31 March 20X5 contains the following. (1) Insurance expense ¥1,080,000: an 18-month fire policy paid on 1 December 20X4 and charged in full to expense. (2) Rent income ¥2,400,000: twelve months' rent received on 1 January 20X5 and credited in full to income. (3) Salaries are paid on the 25th of each month; the six days 26-31 March, totalling ¥3,300,000, remain unpaid at year-end. (4) Receivables: accounts receivable ¥48,000,000, of which ¥1,600,000 is owed by Onuki Trading, which has entered bankruptcy proceedings; notes receivable ¥12,000,000; electronically recorded claims ¥5,000,000. The allowance uses the difference-replenishment method (2% for general receivables, 100% for bankrupt claims) and the pre-adjustment credit balance is ¥600,000. (5) Consumption tax: output tax ¥8,400,000, input tax ¥6,100,000, and interim payments of ¥1,000,000 that were recorded in a suspense account.
1. Prepare the three adjusting entries for items (1) to (3), showing how each amount is derived.
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Insurance - a deferral, not an accrual. The policy runs 1 December 20X4 to 31 May 20X6, i.e. 18 months. By 31 March 20X5, 4 months (Dec-Mar) have expired, so 14 months are prepaid: 1,080,000 × 14/18 = ¥840,000. Because the whole premium was expensed on payment, the adjustment must pull the unexpired part back onto the balance sheet.
- (Dr) Prepaid expenses 840,000 / (Cr) Insurance expense 840,000
Rent - income received in advance. Three months (Jan-Mar) are earned and nine months belong to the next period: 2,400,000 × 9/12 = ¥1,800,000.
- (Dr) Rent income 1,800,000 / (Cr) Unearned income 1,800,000
Salaries - accrued expense. The pay period 26-31 March falls in this fiscal year although payment is made in April, so the obligation exists at year-end. The question gives the amount directly: ¥3,300,000.
- (Dr) Salaries 3,300,000 / (Cr) Accrued expenses 3,300,000
Note the asymmetry in reasoning: for the insurance and rent the cash has already moved and the question is how much belongs to the next period; for salaries the cash has not moved and the question is how much has been consumed. Misclassifying a deferral as an accrual reverses the direction of the entry.
2. Compute the allowance for doubtful debts and the charge for the year. Identify the base error a careless candidate would make.
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Separate the two categories before applying any rate.
- General receivables base: accounts receivable 48,000,000 less the Onuki balance 1,600,000 = 46,400,000; plus notes receivable 12,000,000; plus electronically recorded claims 5,000,000 = ¥63,400,000.
- General allowance: 63,400,000 × 2% = ¥1,268,000.
- Specific allowance: the Onuki claim is a bankruptcy claim, provided for at 100% = ¥1,600,000.
- Required balance: 1,268,000 + 1,600,000 = ¥2,868,000.
- Charge under the difference-replenishment method: 2,868,000 - 600,000 = ¥2,268,000.
- (Dr) Allowance for doubtful debts expense 2,268,000 / (Cr) Allowance for doubtful debts 2,268,000
The trap. If Onuki is left inside the 2% base the computation becomes (48,000,000 + 12,000,000 + 5,000,000) × 2% = 1,300,000, plus 1,600,000 = 2,900,000, and the charge is overstated by ¥32,000 - the same receivable is provided for twice, once at 2% and again at 100%. Electronically recorded claims are monetary claims and do belong in the general base; notes receivable do too. Only the specifically assessed claim is removed. Under the write-off-reversal method the balance would be reversed first and the full ¥2,868,000 charged, so the method choice, not the rate, drives the year's expense.
3. Complete the consumption tax adjustment and explain the presentation of the resulting account.
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Reclassify the interim payment first. The ¥1,000,000 recorded in a suspense account was an interim payment of consumption tax, so it must join the input tax side:
- (Dr) Consumption tax paid 1,000,000 / (Cr) Suspense account 1,000,000
Then net the provisional accounts. Total input side = 6,100,000 + 1,000,000 = ¥7,100,000 against output tax of ¥8,400,000:
- (Dr) Consumption tax received 8,400,000 / (Cr) Consumption tax paid 7,100,000
- (Cr) Consumption tax payable 1,300,000
The net ¥1,300,000 is the year-end obligation. Under the tax-exclusive method, consumption tax never touches profit or loss: sales and purchases were recorded net of tax, and the provisional accounts are merely settlement accounts. The balance is presented as a current liability, separately from income taxes payable; if the input side had exceeded the output side the residual would be a consumption tax refund receivable, a current asset. Do not clear the suspense account through profit or loss - that would double-count a cost already recorded net of tax. If the company used the tax-inclusive method the whole treatment would differ, since tax would be embedded in revenue and expense.