ACG27 – Financial Accounting 2

ACG27 SP4 2018 Annual Report Assignment Case Study Page 1 of 5
ACG27 – Financial Accounting 2
SP4 2018
Case Study for Annual Report Assignment
The following details are taken from the accounting records of “the company” as at 30 June 2018:

Debit Credit
$’000 $’000
Sales revenue 85,417
Services revenue 32,305
Other revenues and income 6,616
Extraordinary expense 895
Expenses 105,460
Property, Plant & Equipment 31,660
Cash & Cash Equivalents 2,320
Accounts receivable 11,320
Allowance for doubtful debts 271
Inventory (at lower of cost or net realisable value) 3,640
Prepayments 1,020
Provision for annual leave 697
Provision for warranties 1,011
Provision for new app 250
Unearned revenue 2,786
Accounts payable 2,490
Accrued expenses 785
Share capital 13,088
Retained earnings (1 July 2017) 10,399
General reserve 200
156,315 156,315

ACG27 SP4 2018 Annual Report Assignment Case Study Page 2 of 5
Additional information: Note: Unless otherwise indicated the events and transactions
outlined below have already been accounted for in the balances above if required.

(a) Included in the amount of ‘Expenses’ in the trial balance provided are:





Cost of sales $53,210,000
$21,120,000 for salaries and wages.
General operating costs $11,230,000.
Insurance expense of $910,000.
Advertising and marketing expenses of $2,460,000.
Interest expense and early repayment fee. On 1 January 2015 the company
borrowed $8,000,000 from GBank. This was repayable in equal instalments of
$1,000,000 principal repayment, plus interest accrued on 31 December each year.
Interest was 6% per annum (simple interest). On 31 December 2017 the company

paid interest accrued to 31 December 2017 and also repaid the remaining balance
of the loan principal in full. In additional a fee of $1,000 was also paid (this fee was
imposed by GBank for early repayment of the loan).

$820 for retirement gift for employee who had been with the company since it
began.
Expense for annual leave of $1,698,000. The balance in the provision for annual
leave at 30 June 2017 was $743,000.
Warranties expense. The company provides a 24 month warranty on a range of its
products. It is anticipated that 75% of the balance of the warranty provision as at

30 June 2018 will be used by 30 June 2019. The balance in the provision for
warranties at 30 June 2017 was $1,210,000 and the company paid, in relation to
warranties, $1,789,000 during the period to 30 June 2018.


Depreciation expense for buildings of $2,728,000.
Depreciation expense for furniture and fittings of $2,980,000. Due to the review
(refer to part c below) the useful life of the majority of the existing shop fittings
(which are included in furniture and fittings) was reduced, from an average of 6

years to 1 year. This has increased this depreciation expense significantly in this
year (more than doubled).


Doubtful debts expense for the period of $980,000.
$950,000 payment to auditors (70% of this was for audit work undertaken and 30%
for taxation advice).

(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) Other revenues and income is comprised of:

Car parking revenue of $484,000 (from land previously owned- refer below).
$6,132,000 net gain from sale of non-current assets. These relate to 2 separate
and unrelated transactions/events detailed below:

1. In November 2017 the company sold an item of land that had cost
$1,102,000 for $7,400,000. This land had been purchased some time ago
and was adjacent to the company’s head office. For the last 12 years this
land had been used as a car park. However given the rise in property
prices, and as the company wished to reduce debt, this land was sold in
ACG27 SP4 2018 Annual Report Assignment Case Study Page 3 of 5
November 2017. On 31 December 2017 the company used these some of
these funds to pay off the loan from GBank.
2. In May 2018 the company sold a number of shop fittings for $16,000.
These had originally cost $365,000 and at the time of sale had a carrying
amount (after accumulated depreciation) of $182,000. It was decided to
sell these shop fittings and purchase new fittings as part of an upgrade to
some of the company’s retail shopfronts.
(c) The extraordinary expense relates to the following:
 In October 2017, due to falling sales (these had been falling over the last 3 years)
the company undertook a review by engaging a consultant, WeCanTellYou Ltd, to
survey potential customers and undertake focus groups and other research. The
report by WeCanTellYou Ltd was completed in January 2018 and the company
paid $420,000 for this review/report.

The review found that customers liked the company’s products/services but were
often deterred from purchasing (and purchased from competitors) because:

o shopfronts/stores were very dated and it was difficult to locate products
quickly
o there were often long queues at checkouts/service counters
o there were very few staff who could offer expert advice about products.

As a result the company decided that:
o An extensive upgrade of the company’s retail outlets/shopfronts would

be undertaken. This would include identical layouts for each store and
providing for a self-service checkout that customers could use (to avoid
queues). It was estimated that this upgrade would be undertaken over a
12 month period. As these upgrades are undertaken the old shop fittings
and furniture will be sold.
o As the company has a high turnover of staff in its retail stores, rather than
extensive training of all staff, the company decided:
 1 key staff member at each store would be provided with
extensive training (to provide expert advice to customers). This
was undertaken in June 2018 at a cost of $225,000. Further, to
encourage these staff to remain with the company, these staff
would receive a bonus of 40% of their existing salary (beginning
from 1 July 2018). This is expected to increase salaries expense by
around $1,030,000 in 2018-2019.
 To develop a new app (software application) that would allow
potential customers to easily find information about products and
compare products. As the company does not have the expertise
in house to develop this the company has requested quotes from
software engineers to develop a suitable app. The closing date for
these quotes is 1 August 2018. It is estimated that this will cost
around $250,000. The assistant accountant has recognised this
$250,000 as an expense (and created a related provision).
(d) Property, plant and equipment is comprised of:

Land (at cost)
Buildings (at cost net of depreciation)
$9,470,000
$15,410,000

ACG27 SP4 2018 Annual Report Assignment Case Study Page 4 of 5
Furniture & Fittings (at cost net of depreciation) $6,780,000

(e) Prepayments include:
$600,000 deposit paid on 1 June 2018 to secure inventory order (refer to part
h below).
$420,000 for prepaid insurance.

Unearned revenue relates to payments in advance for services.
Accrued expenses includes $404,000 for accrued salaries/wages. The remaining
accrued expenses relate to general operating expenses.
(f) Directors had declared a dividend of $525,000 from retained earnings on 28 June
2017. This required no further approval or authorisation and was subsequently paid
on 24 September 2017.

(g) At 30 June 2017 the share capital of the company comprised the following:
4,500,000 ordinary shares at an issue price of $1.50 issued on 1 July 2000. These
are fully paid. In relation to this issue $74,000 share issue costs were
incurred/paid.
3,000,000 ordinary shares at an issue price of $2.00 issued on 1 April 2015.

These are fully paid. In relation to this issue $38,000 share issue costs were
incurred/paid.
In this current period, the company made a bonus share issue, in lieu of an interim
dividend, on 15 January 2018, under the following terms:

1 ordinary share, issued and paid to $3.00, was issued for every 50 shares held.
This bonus share issue was made from the general reserve.

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) On reviewing the trial balance (which had been prepared by the assistant
accountant) the chief accountant noted:
Inventory costing $2,100,000 had been delivered to (and accepted by) the

company on 29 June 2018. However due to staff shortages at this time, the
details of this transaction/event were not processed until 14 July 2018 and
hence this has not been accounted for in the trial balance. This inventory had
been ordered on 1 June 2018 and an amount of $600,000 was paid in advance
to secure the order. The amount remaining was required to be paid within 2
weeks of date of delivery of the inventory and was paid by the company on 10
July 2018.
 Concern that the provision for the new app (and related expense) were not
appropriate. (HINT: Consider definitions of items. You will need to consider
whether how this was accounted for in the trial balance is correct- refer part c
above – and if not make the necessary adjustments).
ACG27 SP4 2018 Annual Report Assignment Case Study Page 5 of 5
(i) Directors declared a final dividend on 30 June 2018 of 7 cents per share from retained
earnings. This requires no further authorisation or approval and is expected to be
paid following the AGM on 18 September 2018. Further, on 30 June 2018 the
directors decided to transfer $3,300,000 from retained earnings to the general
reserve.
(j) On 1 July 2018 the company’s lawyers advised that the company was being sued for
damages of $1,200,000. In late May 2018, while one of the retail shops of the
company was being renovated, a customer was injured. The injury was caused due
to the customer stepping on a mental spike that had not been cleared away. At the
time of the injury the company’s staff arranged (and paid) for the customer to be
seen by a doctor. Initially the injury seemed minor and it was not expected that there
would be any claim from the customer. However the injury did not heal as expected
and due to an inflection in June the customer’s foot has been amputated. Legal
advice suggests that the company will be liable to pay the damages claimed. It is
anticipated that the case will take some time to be heard in court and will not be
decided until December 2019.
(k) On 9 September 2018 the directors advised that they had entered into a contract
with WeBuildBig Ltd to construct a new Head Office for the company (on land the
company already owns). Construction is to begin in October 2018 and is expected to
be finalised by October 2019 at a cost of $5,000,000. As the directors wish to avoid
borrowings, this will be financed in part from the sale (and leaseback) of the
company’s current Head Office site and from a reduction in cash dividends for a 2
year period.
(l) On 1 October 2018 one of the company’s key suppliers of inventory advised that from
1 December 2018 it would no longer be able to supply its products to the company
as it had entered into a contract with one of the company’s competitors (Them Ltd)
to supply its products exclusively to Them Ltd. The company will need to find
alternative products or suppliers. This is expected to take some time and could
potentially reduce the company’s profits by up to 20% in the short term.
(m) The company tax rate is 30%. Ignore tax-effect accounting. Tax expense should be
based on 30% of the accounting profit before tax. No tax expense has yet been
recorded.
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
21st September 2018.

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