ACCT2005 SP2 2017 Annual Report Assignment Case Study Page 1 of 4
ACCT2005 – Financial Accounting 2
Case Study for Annual Report Assignment
The following details are taken from the accounting records of the company as at 30 June 2017:
|Other revenues and income||949,650|
|Cash at bank||490,000|
|Shop furniture and fittings (at cost net of depreciation)||5,980,000|
|Equipment (at cost net of depreciation)||2,024,000|
|Buildings (at cost net of depreciation)||4,950,000|
|Land (at cost)||6,320,400|
|Allowance for doubtful debts||297,000|
|Inventory (at lower of cost or net realisable value)||2,348,420|
|Prepaid rent revenue||13,900|
|Loan from WBank||4,000,000|
|Provision for annual leave||490,000|
|Provision for warranty||986,000|
|Provision for legal case||35,000|
|Retained earnings (1 July 2016)||9,101,050|
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 above are:
Cost of sales $21,490,000
ACCT2005 SP2 2017 Annual Report Assignment Case Study Page 2 of 4
$9,430,000 for employee expenses. This includes annual leave expense of
$783,000. The balance of the provision for annual leave at 30 June 2016 was
General operating expenses of $4,560,000.
Extraordinary expense of $2,400,000 for strategic review. 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 of
various aspects of the company.
$850,000 was paid to FutureInc Ltd to prepare a report on future trends in
the company’s markets.
$400,000 was paid to LookForTomorrow Ltd to make suggestions on
improvements to the company’s store fronts and store layouts to attract
more customers and sales.
Interest paid of $267,000.
$1,500 gift to an employee of the company who competed in the Olympic Games
in Rio in 2016 to help with their travel expenses.
Depreciation expense for shop furniture and fittings $747,000.
Depreciation expense for equipment $487,000.
Depreciation expense for buildings of $340,000.
Warranty expense of $1,290,000. The balance of the provision for warranty at 30
June 2016 was $690,000. Of the balance of this provision at 30 June 2017 65% is
expected to be used by 30 June 2018.
Doubtful debts expense for the period of $1,492,000.
$815,000 payment to auditors for audit of company accounts.
The carrying 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) The company borrowed $4,000,000 from WBank on 1 January 2017. 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) Other revenues and income is comprised of:
Interest earned during the period of $1,250 from cash held at bank. Interest is
accrued and paid to the company on 31 December and 30 June each year.
Rent revenue of $83,400 from building space rented out to other companies. The
balance of prepaid rent in the trial balance relates to this.
ACCT2005 SP2 2017 Annual Report Assignment Case Study Page 3 of 4
Proceeds from the sale of non-current assets. On 1 March 2017 the company
received $865,000 from the sale of shop furniture and fittings that were replaced
as part of the upgrade recommended by LookForTomorrow Ltd.
(d) In July 2016 the Directors asked their auditors to undertake an analysis of a number
of 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
years. 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
Customers could return within 1 week of purchase for a refund without any
reason – providing the returned product was in ‘new’ condition.
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 2016. The
amount of $285,000 has been paid.
(f) Directors had recommended a dividend of $412,500 from retained earnings on 30
June 2016. This required approval at the Annual General Meeting. This approval
was given and this dividend was paid on 30 August 2016.
(g) At 1 July 2017 the share capital comprised:
2,500,000 fully paid ordinary shares at an issue price of $1.10 issued on 1
September 2009. 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 1
January 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) A review by the chief accountant on 1 July 2017 revealed the following:
No balance date adjustment had been made in relation to interest accrued on the
loan from WBank.
ACCT2005 SP2 2017 Annual Report Assignment Case Study Page 4 of 4
The company uses diminishing balance method to depreciate its equipment and
depreciation for previous periods has been calculated using diminishing balance
method. 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
(i) On 30 June 2017 the directors decided to transfer $4,600,000 from retained earnings
to the general reserve.
(j) Directors recommended a final dividend on the 3 July 2017 of 9 cents per share. 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 suing
the company for damages. 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) On 25 August 2017 the directors successfully implemented one of the
recommendations from the strategic review. The recommendation was to advertise
via Adwords in Google. (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 be
based 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.