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ACC203 Financial Accounting

tag 0 Download 10 Pages / 2,433 Words tag 07-07-2021


This research question consists of a case study.

You are a graduate accountant working for McKenzie and Associates a public accounting firm. The address of the firm is 555 North Terrace, Melbourne VIC 3000.

The manager of your firm, Ms. Maria McKenzie has asked you to draft a letter in response to an email received from a client – Mr. Con Pewter, the managing director of Pewter Ltd, raising a number of issues regarding his company.
Re: Accounting Issues: Year Ending 30 June 2017
From: Con Pewter ([email protected])
Sent: Sunday, 2 April 2017
To: Maria McKenzie ([email protected])
Dear Maria

Thank you for your phone call this morning, as agreed I am emailing you regarding the accounting issues we briefly discussed. By the way to assist the accounting team in our decision-making process could you please make sure you reference any relevant sources relating to your advice, for example, AASBs, Corporations Act, and relevant websites.
1. The board is concerned with the frequent variances in the amount of warranty expense that was initially recognised compared to the actual cost of warranty the company paid/incurred to fix/replace the faulty products. Therefore, at the most recent board meeting it was agreed to stop recognising the warranty expense before the warranty cost is actually incurred. Instead expense will be recognised when we actually pay for these warranty repairs/replacements. This way we won’t have to deal with all these variances.

2. Our company has recently entered into a long-term and a radical agreement with several of our retailers in Australia. Under the new agreement, at the start of every quarter, we will ship a variety of our products (suitable for that state and that time of the year) to our retailers. All retailers have agreed to set aside a section in their stores to exclusively display our products including the display windows at the front of the store. In return we have agreed to pay a fee to each store on a monthly basis for allowing us the access to this window space and space on the shop floor to advertise and sell our products. The average fee is around $600 per square metre, per store per month. At the end of the quarter, the store will return all the unsold products to us and we will send out a new shipment to prepare for the next quarter. The stores will also transfer the revenue from total sales to us after deducting the display fee noted above. The board unanimously agreed to recognise the sales revenue at the start of the quarter (when the goods are shipped). At the end of the quarter when the excess inventory is returned to us by the stores, we can always make the necessary adjustments i.e. reverse both the sales revenue and cost of sales as well the amount owed by the stores and the incoming inventory. After all, the net effect would be the actual sales of the period. The board also agreed that the fee we pay to the stores should not be recorded separately because that is the cost of doing business. So we will only record the net amount
received as sales revenue. This should simplify matters, shouldn’t it? 
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