Case Study for Annual Report Assignment ACG 27

Annual Report Assignment ACG 27


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ACG 27, Study Period 2, 2014
The following details are taken from the accounting records of the company as at 30 June 2014:
Other income
Extraordinary loss
Plant & Equipment (at cost net of depreciation)
Land (at cost net of depreciation)
Buildings (at cost net of depreciation)
Accounts receivable
Allowance for doubtful debts
Inventory (at lower of cost & net realisable value)
Accrued revenue
Prepaid expenses
Legal Provision
Annual Leave Provision
Warranty Provision
Accounts payable
Loan (Finance Ltd)
Dividend Paid
General reserve
Share capital
Retained earnings (1 July 2013)
– FA2 2014 SP2 OUA Annual Report Assignment Case Study page 2 of 4
Additional information: Note: Unless otherwise indicated the events and transactions outlined below have already been accounted for in the balances above if required.
(a) Share capital at 1 July 2013 comprised the following:
• 300,000 ordinary shares at $2.50 each, fully paid, issued in 2004. The issue incurred $6,000 in share issue costs.
• 2,200,000 ordinary shares at $3.20 each, fully paid, issued in 2008. The issue incurred $19,000 in share issue costs.
• 1,000,000 ordinary shares, issued in January 2013 at an issue price of $3.50 each. The issue incurred $16,000 in share issue costs. The terms of this offering required shareholders to pay $2.50 on application and the remaining issue price in instalments (calls) as requested.
(b) Of the Revenues in the trial balance above 75% is sales revenue and the remaining balance is services revenue.
(c) In November 2013 the company made a first and final call of $1.00 on the shares issued in January 2013. All call money was received by the 1 January 2014.
(d) The extraordinary loss is the amount paid in compensation to Masterpiece Gallery Ltd. In January 2014 the company, at an advertising function to launch a new product, organised to rent a number of famous pieces of artwork to display at this function. It was hoped that this would attract more interest in the function. However during the function one of these artworks was stolen. The company’s insurance did not cover these artworks. The company was required to pay Masterpiece Gallery Ltd $1,400,000 to compensate for the lost artwork. This was paid in March 2014.
(e) Other income includes the following:
• $14,000 earned from interest (from cash at bank during the period).
• $1,340,000 earned from commissions. In September 2013 the company entered into an agreement with Like Ltd. This agreement allowed Like Ltd to sell a number of its products through retail outlets of the company and the company would receive a commission of 15% on all Like Ltd products sold through these retail outlets. The accrued revenue in the trial balance relates to commissions earned but not yet received by the company.
(f) Included in the amount of ‘Expenses’ in the trial balance above are:
• Cost of sales of $73,140,000
• Staff related expenses of:
• $49,600,000 for wages and salaries
• Annual leave expense of $3,980,000. The opening balance of the provision for annual leave [at 1 July 2013] was $1,020,000 and employees are required to take all annual leave accrued within 12 months.
– FA2 2014 SP2 OUA Annual Report Assignment Case Study page 3 of 4
• $18,700,200 general operating costs (including electricity, rates, consumables, insurance). The prepaid expenses in the trial balance relate to insurance.
• $4,100,000 payment to auditors (this includes $2,000,000 for consulting services).
• Interest on a loan for the period. A loan of $5,000,000 was taken out on 1 July 2010 with the loan term of 5 years ending on 30 June 2015. Interest on the loan is 3% (simple interest) per annum and is paid every year in arrears (on 30 June each year). In addition a principal amount of $1,000,000 is payable each year on 30 June.
• Depreciation expenses as follows:
• $260,000 for land.
• $1,760,000 for buildings.
• $1,802,000 for plant and equipment. This has increased as following a review the useful life of plant and equipment was reassessed and on average was decreased from 12 years to 8 years.
• $2,123,000 for doubtful debts expense.
• $80 payment for disco ball for staff party.
• Warranty expense of $7,300,000. During this period the company decided to extend the warranty period on a range of its products (from one year to 3 years) to maintain sales as competitors had extended warranty terms. This has increased this expense by 15% compared to previous years. Of the balance of the provision at the 30 June 2014 75% is expected to be used within the next 12 months. The opening balance of the warranty provision [at 1 July 2013] was $3,009,000.
• Net loss on sale of non-current asset. This relates to sale of an item of land that had cost $1,320,000. This was sold for $1,010,000 in February 2014.
(Note: This does not detail all expenses included in the total of ‘Expenses’ in the trial balance above –You should classify the remaining expenses as ‘other’ or ‘miscellaneous’)
(g) The balance of the legal provision in the trial balance relates to a case where the company was being sued by a customer for damages in 2011. Legal advice had estimated that the company would be liable to pay $450,000. However the court case was decided in January 2014 and the company was required to pay $960,000. This amount was paid on 1 February 2014. On payment the accountant has debited the provision and credited cash by $960,000.
(h) A dividend of $385,000 had been recommended on 29 June 2013 (this was subject to further approval at the Annual General Meeting) from retained earnings. This dividend was paid on 30 August 2013 following approval at the Annual General Meeting.
(i) On 1 February 2014 in lieu of an interim dividend a bonus share issue of 1 ordinary share issued and fully paid to $3.50 for every 35 shares held was made from the general reserve.

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