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ACCT2005 Financial Accounting

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Case Study for Annual Report Assignment

The following details are taken from the accounting records of the company as at 30 June 2017:






Sales revenue



Sales returns



Services revenue



Other revenues and income






Cash at bank



Shop furniture and fittings (at cost net of depreciation)



Equipment (at cost net of depreciation)



Buildings (at cost net of depreciation)



Land (at cost)



Accounts receivable



Allowance for doubtful debts



Inventory (at lower of cost or net realisable value)



Prepaid rent revenue



Loan from WBank



Provision for annual leave



Provision for warranty



Provision for legal case



Accounts payable



Accrued expenses



Dividend Paid



Share capital



Retained earnings (1 July 2016)



General reserve






Additional information: Note: Unless otherwise indicated the events and transactions outlined below have already been accounted for in the balances above if required.

a. Includedin the amount of ‘Expenses’ in the trial balance provided above are:

  • Costof sales $21,490,000
  • $9,430,000for employee  This includes annual leave expense of $783,000. The balance of the provision for annual leave at 30 June 2016 was $1,230,000.
  • Generaloperating expenses of $4,560,000.
  • Extraordinaryexpense of $2,400,000 for strategic  In July 2016 the directors decided that it would be useful to have external parties undertake a review of company operations, procedures and policies and to provide some suggestions to improve profitability. Under this strategic review:
    • $1,150,000 was paid to the company auditors to conduct an analysis ofvarious aspects of the 
    • $850,000 was paid to FutureInc Ltd to prepare a report on future trends inthe company’s 
    • $400,000was paid to LookForTomorrow Ltd to make suggestions on improvements to the company’s store fronts and store layouts to attract more customers and sales. 
  • Interestpaid of $267,000.
  • $1,500gift to an employee of the company who competed in the Olympic Games in Rio in 2016 to help with their travel 
  • Depreciationexpense for shop furniture and fittings $747,000.
  • Depreciationexpense for equipment $487,000.
  • Depreciation expensefor buildings of $340,000.
  • Warranty expense of $1,290,000. The balance of the provision for warranty at 30June 2016 was $690,000. Of the balance of this provision at 30 June 2017 65% is expected to be used by 30 June 
  • Doubtfuldebts expense for the period of $1,492,000.
  • $815,000payment to auditors for audit of company 
  • Thecarrying amount of the shop furniture and fittings sold in March 2017 of $740,000. (This is comprised of cost of $2,250,000 less accumulated depreciation to date of sale of $1,510,000).

(Note: This does not detail all expenses included in the total of ‘Expenses’ in the trial balance above. You should classify any remaining expenses as ‘other’ or ‘miscellaneous’) 

b. Thecompany borrowed $4,000,000 from WBank on 1 January  In taking out this loan fees of $2,500 were paid (these are included in the expenses amount in the trial balance). The principal amount of the loan of $4,000,000 is to be repaid at the end of 2 years. Interest payments are due every 3 months (on 1 April, 1 July, 1 October, 1 January). On 1 April 2017, the company paid $267,000 for interest. A further payment of $267,000 for interest is to be paid on 1 July 2017.
c. Otherrevenues and income is comprised of:
  • Interestearned during the period of $1,250 from cash held at  Interest is accrued and paid to the company on 31 December and 30 June each year.
  • Rentrevenue of $83,400 from building space rented out to other  The balance of prepaid rent in the trial balance relates to this.
  • Proceeds from the sale of non-current assets. On 1 March 2017 the companyreceived $865,000 from the sale of shop furniture and fittings that were replaced as part of the upgrade recommended by Look For Tomorrow 
d. In July 2016 the Directors asked their auditors to undertake an analysis of a numberof the aspects of the company as part of their strategic review. From this review the auditors noted that the sales returns had been increasing gradually over the last 5  As part of its strategy to gain initial market penetration the company had a policy of allowing customers to return a range of its products within 2 months of initial sale date, if the customer was not completely satisfied and with no questions asked (i.e. could return for any reason for a refund). The review noted that most sales returns related to products where this policy applied. It was decided that this policy would be revoked and, in relation to these products, from 1 September 2016 the following applied:
  • Customers could return within 1 week of purchase for a refund without anyreason – providing the returned product was in ‘new’
  • The warranty period for these products would be extended from 1 year to 2

This has resulted in a 500% reduction in sales returns but an increase of more than 20% in warranty expenses due to the extension of warranty period.

e. The balance of the legal provision in the trial balance relates to a case that originated in 2013 in relation to a product liability claim. The company had anticipated that it would be required to pay $250,000. However the company’s lawyers were able to settle this matter but for more than expected (i.e. $285,000) in November  The amount of $285,000 has been paid.
f. Directors had recommended a dividend of $412,500 from retained earnings on 30June 2016. This required approval at the Annual General Meeting. This approval was given and this dividend was paid on 30 August 
g. At1 July 2017 the share capital comprised:
  • 2,500,000 fully paid ordinary shares at an issue price of $1.10 issued on 1September  Share issue costs paid in relation to this issue were $23,000.
  • 1,500,000 fully paid ordinary shares at an issue price of $1.60 issued on 1January 2016. The terms of the issue required $1.00 to be paid on application, with the remaining $0.60 due when called. A first and final call was made on 10 September 2016. All call monies were received by 1 October. Share issue costs paid in relation to this issue were $16,000.

Unless otherwise indicated the following events/transactions are not reflected in the trial balance above. You will need to make appropriate adjustments if required. 

h. Areview by the chief accountant on 1 July 2017 revealed the following:
  • Nobalance date adjustment had been made in relation to interest accrued on the loan from WBank.
  • The company uses diminishing balance method to depreciate its equipment anddepreciation for previous periods has been calculated using diminishing balance  However the chief accountant has noticed that the depreciation expense for this year (i.e. for year ending 30 June 2017) in relation to equipment had been calculated by the assistant accountant at straight line on cost using an incorrect percentage/rate. This has resulted in the depreciation expense (included in the trial balance figures) in relation to equipment being overstated by $260,000.
i. On30 June 2017 the directors decided to transfer $4,600,000 from retained earnings to the general reserve.
j. Directorsrecommended a final dividend on the 3 July 2017 of 9 cents per  This requires approval at the Annual General Meeting to be held in early September 2017.
k. On 5 July 2017, the company was advised by its lawyers that a customer was suingthe company for  In late April the customer fell over some building supplies that had been left on the floor in one of the company’s shops. At the time the shop was being upgraded. The customer broke both his hips. Further, apart from being unable to work for some time, the customer will also not be able in the future to undertake a range of leisure activities that they previously enjoyed (such as synchronised swimming!). The company does have public liability insurance. However, as the accident occurred due to employee negligence (as the building supplies had been moved from a secure storage area into the shop incorrectly by the store manager) the insurance company has indicated that the company’s insurance policy will not cover any claims. The company’s lawyers have indicated that there is an 85% probability that the company will be liable to pay damages and estimated these at $540,000. The matter is expected to be decided in court in August 2018.
l. On25 August 2017 the directors successfully implemented one of the recommendations from the strategic review. The recommendation was to advertise via Adwords in  (This is Google's advertising system. Companies or advertisers bid for keywords in order for their linked ads to appear in Google's search results and then pay for each click). The cost is expected to be approximately $35,000 a month for the next year. The effectiveness of this will be reviewed every 6 months.
m. The company tax rate is 30%. Ignore tax-effect accounting. Tax expense should bebased on 30% of the accounting profit before tax. No tax expense has yet been

You should assume that the company is a reporting entity and that the date the annual report (including the financial report) is authorised for issue is the 21 August 2017.

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