Financial Accounting 2

ACG 27 – FA2 2014 Annual Report Assignment Case Study page 1 of 5
ACG 27 – Financial Accounting 2
Case Study for Annual Report Assignment
SP4 2014
The following details are taken from the accounting records of the company as at 30
June 2014:
Debit Credit
$’s $’s
Sales revenue 46,640,000
Services revenue 5,400,000
Sales returns 760,000
Other revenues/income 600,000
Cost of sales 29,850,000
Other expenses 19,750,000
Land (at cost) 7,450,000
Buildings (at cost net of
depreciation)
7,350,000
Vehicles (at cost net of
depreciation)
475,000
Goodwill (at cost – net of
impairment)
380,000
Accounts receivable 5,780,700
Allowance for doubtful
debts
175,000
Inventory (at lower of cost
& net realisable value)
6,805,000
Bank Overdraft 237,900
Provisions 4,050,000
Unearned revenue 600,000
Accounts payable 3,880,500
Loan (Rich Bank) 5,000,000
Dividends declared and
paid
210,000
General reserve 500,000
Share capital 11,077,500
Retained earnings (1 July
2013)
649,800
78,810,700 78,810,700ACG 27 – FA2 2014 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) Information about the company’s share issues is as follows:
• 23 September 2008 – At the commencement of business, the
company issued 2,500,000 ordinary shares at an issue price of $3.50
each, fully paid, incurring $30,000 in share issue costs.
• 1 August 2012 – The company issued bonus shares at 1 bonus share
(at an issue price of $2.00 each) for every 5 ordinary shares held.
• 31 March 2014 – To raise additional funds the company issued
500,000 ordinary shares at an issue price of $2.75 each, incurring
share issue costs of $17,500. $2.00 per share was due on application
and $0.75 per share was due in one future call. The future call for
$0.75 was made on 31 May 2014 with all monies received by 30 June
2014.
(b) Included in the amount of ‘Other Expenses’ in the trial balance above are:
• Employee benefits expenses of:
• $1,100,000 for salaries
• $6,500,000 for wages
• $703,000 for employee superannuation
• $445,000 long service leave expense (the opening balance [1 July
2013] of the long service leave provision was $830,000)
• $565,000 annual leave expense (the opening balance [1 July 2013]
of the annual leave provision was $1,100,000)
• $3,950,000 utilities costs (gas, electricity, and water)
• $435,000 telecommunications expenses (telephone and internet)
• $145,000 payment to auditors: This includes $100,000 for audit services
and $45,000 for business advisory services
• Interest expenses of:
• $125,000 for interest paid (i.e. in cash) on a loan. The loan is a
$5,000,000 loan from Rich Bank. The loan term began on
1 November 2013 and ends on 31 October 2018. The loan’s interest
rate is 5% per annum (1.25% simple interest on the outstanding
principal every quarter) and is payable every quarter.
(on 31 January, 30 April, 31 July, and 31 October each year). In
addition to this, a principal repayment of $1,000,000 is due each
year on 31 October (with the first payment of principal to be made on
31 October 2014).
• $2,500 for interest paid on bank overdraft for the month of May. The
company has had an overdraft for the last two months of the
financial year (i.e. May and June). Interest is calculated on the
overdraft based on the balance at the end of the month (i.e. at 31
May and 30 June). The interest is then paid on the first day of the
next month (i.e. on 1 June and 1 July). The interest accrued at the
30 June 2014 (that was paid on 1 July 2014) was $2,750 (this has
not been included in other expenses at 30 June: refer (g)). ACG 27 – FA2 2014 Annual Report Assignment Case Study page 3 of 5
• Depreciation Expenses of:
• $350,000 depreciation expenses for buildings. Note: Depreciation on
buildings has increased by 15%. This was due to a reassessment of
the residual value. The residual value of the buildings (expected
market value at the end of their useful life) was expected to be less
than originally estimated due to the discovery of asbestos in the
buildings.
• $95,000 depreciation expenses for vehicles.
• $250,000 for doubtful debts expense.
• $150,000 for warranties expense Note: Warranty expense had increased
by 50% due to higher returns of faulty product, which triggered a
reassessment of the required provision for warranties (the opening balance
[1 July 2013] of the warranty provision was $900,000)
• $500,000 extraordinary expense being cash payments made in period
relating to removal of asbestos in buildings which was causing immediate
danger to employees’ health (this work was performed in early June after
the local jurisdiction’s work place safety authority had taken action against
the company – refer to point (i).
• $850,000 for future public relations campaign. The company is concerned
that there may be negative publicity due to the action being taken in
relation to asbestos (see i). Given this the directors believe that, depending
on the outcome of the court case and the extent of publicity, it may be
necessary to undertake a publicity campaign in the future to improve the
company’s image. In case this occurs, and an extensive publicity
campaign, is needed the company has recognised this expense (and
related provision).
• $750 was spent on a commercial air filter for the CEO’s office to keep the
air in the CEO’s office free from airborne asbestos fibres.
• $500 was spent on flowers for a long standing employee who was sick in
hospital.
• Carrying amounts from two separate/unrelated non-current asset sales of:
• $50,000 carrying amount (cost less accumulated depreciation) of
vehicles sold.
• $780,000 (cost less accumulated depreciation) carrying amount of
buildings sold.
(Note: This does not detail all expenses included in the total of ‘Other expenses’ in
the trial balance above –You should classify the remaining expenses as ‘other’ or
‘miscellaneous’)
(c) Other revenues/income comprised of the following:
• $75,000 proceeds from vehicles sold
• $525,000 proceeds from buildings sold
(d) The balance of provisions in the trial balance relates to long service leave,
annual leave, warranties, and provision for future public relations campaign.
The following information relates to these provisions:
• The company estimated that 10% of the long service leave provision will
be used within the next 12 months.
• The closing balance (30 June 2014) of the annual leave provision was
$1,550,000.ACG 27 – FA2 2014 Annual Report Assignment Case Study page 4 of 5
• The closing balance (30 June 2014) of the warranty provision was
$800,000. The company gives three year warranties on its products and
estimates that 30% of warranty claims will be made within 12 months with
the remaining 70% of warranty claims after 12 months.
• There was no opening balance for the provision for the future public
relations campaign. The balance at 30 June 2014 is $850,000.
(e) The unearned revenue amount is for payment in advance for services yet to
be provided by the company.
(f) The following information relates to dividends:
• 28 June 2013: Final dividend of $210,000 was recommended by the
directors (this was subject to further approval). This dividend was
approved and paid on 29 July 2013.
• 19 June 2014: Final dividend of $175,000 was recommended by the
directors (this was subject to further approval).
• NOTE: all of these dividends were from retained earnings.
Unless otherwise indicated the following events/transactions are not reflected in the
trial balance above. You will need to make appropriate adjustments if required.
(g) The company’s auditor reviewed the other expenses details and found the
following:
• Accruals (balance day adjustments) had not been processed for interest
expense.
• Within miscellaneous expenses a bad debt of $100,000 had been directly
written-off. This bad debt expense was accounted for on the 10 July 2014
by the assistant accountant when advised of the bankruptcy of a
customer. However, this debt had already been included in the current
year doubtful debts expense and therefore was already provided for in the
allowance for doubtful debts.
(h) On 30 June 2014, the Director’s transferred $150,000 from retained earnings
to the general reserve.
(i) On 15 May 2014 the local jurisdiction’s work place safety authority
commenced legal action against the company in the local jurisdiction’s
industrial court. This action related to the unsafe work environment caused
by the presence of asbestos. The work place safety authority was seeking
the imposition of a $2,000,000 penalty. At the initial court hearing on 30 May
2014 the judge was extremely upset to find out the CEO had made his own
work space safe by purchasing an air filter for his own office, however, he
had (at that time) not taken any action to make the remainder of the work
place safe. The company’s lawyers advised that it was very probable that the
company would be held liable. However, the lawyer estimated that if the
company took immediate action to remove the most dangerous asbestos the
penalty would be reduced to approximately $1,100,000. The company
followed the legal advice and did remove the most dangerous asbestos (at a
cost of $500,000 – already recognised in point (b)). The court hearing is
continuing and the case has yet to be decided.ACG 27 – FA2 2014 Annual Report Assignment Case Study page 5 of 5
(j) One of the company’s new employees had developed respiratory illnesses.
On 20 June 2014 this employee took legal action against the company
seeking $5,000,000 in compensation claiming that their illness was caused
by exposure to asbestos at the company’s buildings. The company’s lawyers
plan to argue that the employee was new and had not been with the
company long enough to develop any asbestos related illness. Equally, they
will argue that the respiratory illness was caused by the employee’s
pack-a-day smoking habit. The lawyers have advised the company that the
chance of the employee’s action succeeding is remote.
(k) On 15 July 2014 the company was advised that it had won a large
government tender to supply its products as a mandated government
supplier for the next three years. The company estimates that profit will
increase by 20% in each of the three following years.
(l) On 5 July 2014, the company discovered that a large portion of the
company’s inventory was contaminated with asbestos fibres. It is believed
that this contamination occurred when the initial removal of asbestos was
undertaken in June (refer b above). The inventory could not be
decontaminated. Consequently, inventory valued at $1,500,000 was
destroyed on 7 July 2014.
(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 that is a reporting entity and that you began
preparing this report at 30th August 2014 and that the date the annual report
(including the financial report) is authorised for issue is the 10th September 2014.

ACG 27 – Financial Accounting 2

Case Study for Annual Report Assignment

SP4 2014

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

June 2014:

Debit Credit

$’s $’s

Sales revenue 46,640,000

Services revenue 5,400,000

Sales returns 760,000

Other revenues/income 600,000

Cost of sales 29,850,000

Other expenses 19,750,000

Land (at cost) 7,450,000

Buildings (at cost net of

depreciation)

7,350,000

Vehicles (at cost net of

depreciation)

475,000

Goodwill (at cost – net of

impairment)

380,000

Accounts receivable 5,780,700

Allowance for doubtful

debts

175,000

Inventory (at lower of cost

& net realisable value)

6,805,000

Bank Overdraft 237,900

Provisions 4,050,000

Unearned revenue 600,000

Accounts payable 3,880,500

Loan (Rich Bank) 5,000,000

Dividends declared and

paid

210,000

General reserve 500,000

Share capital 11,077,500

Retained earnings (1 July

2013)

649,800

78,810,700 78,810,700ACG 27 – FA2 2014 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) Information about the company’s share issues is as follows:

• 23 September 2008 – At the commencement of business, the

company issued 2,500,000 ordinary shares at an issue price of $3.50

each, fully paid, incurring $30,000 in share issue costs.

• 1 August 2012 – The company issued bonus shares at 1 bonus share

(at an issue price of $2.00 each) for every 5 ordinary shares held.

• 31 March 2014 – To raise additional funds the company issued

500,000 ordinary shares at an issue price of $2.75 each, incurring

share issue costs of $17,500. $2.00 per share was due on application

and $0.75 per share was due in one future call. The future call for

$0.75 was made on 31 May 2014 with all monies received by 30 June

2014.

(b) Included in the amount of ‘Other Expenses’ in the trial balance above are:

• Employee benefits expenses of:
• $1,100,000 for salaries
• $6,500,000 for wages
• $703,000 for employee superannuation
• $445,000 long service leave expense (the opening balance [1 July

2013] of the long service leave provision was $830,000)

• $565,000 annual leave expense (the opening balance [1 July 2013]

of the annual leave provision was $1,100,000)

• $3,950,000 utilities costs (gas, electricity, and water)
• $435,000 telecommunications expenses (telephone and internet)
• $145,000 payment to auditors: This includes $100,000 for audit services

and $45,000 for business advisory services

• Interest expenses of:
• $125,000 for interest paid (i.e. in cash) on a loan. The loan is a

$5,000,000 loan from Rich Bank. The loan term began on

1 November 2013 and ends on 31 October 2018. The loan’s interest

rate is 5% per annum (1.25% simple interest on the outstanding

principal every quarter) and is payable every quarter.

(on 31 January, 30 April, 31 July, and 31 October each year). In

addition to this, a principal repayment of $1,000,000 is due each

year on 31 October (with the first payment of principal to be made on

31 October 2014).

• $2,500 for interest paid on bank overdraft for the month of May. The

company has had an overdraft for the last two months of the

financial year (i.e. May and June). Interest is calculated on the

overdraft based on the balance at the end of the month (i.e. at 31

May and 30 June). The interest is then paid on the first day of the

next month (i.e. on 1 June and 1 July). The interest accrued at the

30 June 2014 (that was paid on 1 July 2014) was $2,750 (this has

not been included in other expenses at 30 June: refer (g)). ACG 27 – FA2 2014 Annual Report Assignment Case Study page 3 of 5

• Depreciation Expenses of:
• $350,000 depreciation expenses for buildings. Note: Depreciation on

buildings has increased by 15%. This was due to a reassessment of

the residual value. The residual value of the buildings (expected

market value at the end of their useful life) was expected to be less

than originally estimated due to the discovery of asbestos in the

buildings.

• $95,000 depreciation expenses for vehicles.
• $250,000 for doubtful debts expense.
• $150,000 for warranties expense Note: Warranty expense had increased

by 50% due to higher returns of faulty product, which triggered a

reassessment of the required provision for warranties (the opening balance

[1 July 2013] of the warranty provision was $900,000)

• $500,000 extraordinary expense being cash payments made in period

relating to removal of asbestos in buildings which was causing immediate

danger to employees’ health (this work was performed in early June after

the local jurisdiction’s work place safety authority had taken action against

the company – refer to point (i).

• $850,000 for future public relations campaign. The company is concerned

that there may be negative publicity due to the action being taken in

relation to asbestos (see i). Given this the directors believe that, depending

on the outcome of the court case and the extent of publicity, it may be

necessary to undertake a publicity campaign in the future to improve the

company’s image. In case this occurs, and an extensive publicity

campaign, is needed the company has recognised this expense (and

related provision).

• $750 was spent on a commercial air filter for the CEO’s office to keep the

air in the CEO’s office free from airborne asbestos fibres.

• $500 was spent on flowers for a long standing employee who was sick in

hospital.

• Carrying amounts from two separate/unrelated non-current asset sales of:
• $50,000 carrying amount (cost less accumulated depreciation) of

vehicles sold.

• $780,000 (cost less accumulated depreciation) carrying amount of

buildings sold.

(Note: This does not detail all expenses included in the total of ‘Other expenses’ in

the trial balance above –You should classify the remaining expenses as ‘other’ or

‘miscellaneous’)

(c) Other revenues/income comprised of the following:

• $75,000 proceeds from vehicles sold
• $525,000 proceeds from buildings sold

(d) The balance of provisions in the trial balance relates to long service leave,

annual leave, warranties, and provision for future public relations campaign.

The following information relates to these provisions:

• The company estimated that 10% of the long service leave provision will

be used within the next 12 months.

• The closing balance (30 June 2014) of the annual leave provision was

$1,550,000.ACG 27 – FA2 2014 Annual Report Assignment Case Study page 4 of 5

• The closing balance (30 June 2014) of the warranty provision was

$800,000. The company gives three year warranties on its products and

estimates that 30% of warranty claims will be made within 12 months with

the remaining 70% of warranty claims after 12 months.

• There was no opening balance for the provision for the future public

relations campaign. The balance at 30 June 2014 is $850,000.

(e) The unearned revenue amount is for payment in advance for services yet to

be provided by the company.

(f) The following information relates to dividends:

• 28 June 2013: Final dividend of $210,000 was recommended by the

directors (this was subject to further approval). This dividend was

approved and paid on 29 July 2013.

• 19 June 2014: Final dividend of $175,000 was recommended by the

directors (this was subject to further approval).

• NOTE: all of these dividends were from retained earnings.

Unless otherwise indicated the following events/transactions are not reflected in the

trial balance above. You will need to make appropriate adjustments if required.

(g) The company’s auditor reviewed the other expenses details and found the

following:

• Accruals (balance day adjustments) had not been processed for interest

expense.

• Within miscellaneous expenses a bad debt of $100,000 had been directly

written-off. This bad debt expense was accounted for on the 10 July 2014

by the assistant accountant when advised of the bankruptcy of a

customer. However, this debt had already been included in the current

year doubtful debts expense and therefore was already provided for in the

allowance for doubtful debts.

(h) On 30 June 2014, the Director’s transferred $150,000 from retained earnings

to the general reserve.

(i) On 15 May 2014 the local jurisdiction’s work place safety authority

commenced legal action against the company in the local jurisdiction’s

industrial court. This action related to the unsafe work environment caused

by the presence of asbestos. The work place safety authority was seeking

the imposition of a $2,000,000 penalty. At the initial court hearing on 30 May

2014 the judge was extremely upset to find out the CEO had made his own

work space safe by purchasing an air filter for his own office, however, he

had (at that time) not taken any action to make the remainder of the work

place safe. The company’s lawyers advised that it was very probable that the

company would be held liable. However, the lawyer estimated that if the

company took immediate action to remove the most dangerous asbestos the

penalty would be reduced to approximately $1,100,000. The company

followed the legal advice and did remove the most dangerous asbestos (at a

cost of $500,000 – already recognised in point (b)). The court hearing is

continuing and the case has yet to be decided.ACG 27 – FA2 2014 Annual Report Assignment Case Study page 5 of 5

(j) One of the company’s new employees had developed respiratory illnesses.

On 20 June 2014 this employee took legal action against the company

seeking $5,000,000 in compensation claiming that their illness was caused

by exposure to asbestos at the company’s buildings. The company’s lawyers

plan to argue that the employee was new and had not been with the

company long enough to develop any asbestos related illness. Equally, they

will argue that the respiratory illness was caused by the employee’s

pack-a-day smoking habit. The lawyers have advised the company that the

chance of the employee’s action succeeding is remote.

(k) On 15 July 2014 the company was advised that it had won a large

government tender to supply its products as a mandated government

supplier for the next three years. The company estimates that profit will

increase by 20% in each of the three following years.

(l) On 5 July 2014, the company discovered that a large portion of the

company’s inventory was contaminated with asbestos fibres. It is believed

that this contamination occurred when the initial removal of asbestos was

undertaken in June (refer b above). The inventory could not be

decontaminated. Consequently, inventory valued at $1,500,000 was

destroyed on 7 July 2014.

(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 that is a reporting entity and that you began

preparing this report at 30th August 2014 and that the date the annual report

(including the financial report) is authorised for issue is the 10th September 2014.