Reference no: EM131033868

Case Study for Annual Report Assignment

The following details are taken from the accounting records of the company as at 30 June 2016:

	Debit $000's	Credit $000's
Sales revenue (net of returns)		82,450
Other revenues and income		56,490
Cost of sales	45,300
Other expenses	35,900
Cash at bank	7,900
Office Furniture & Equipment (at cost net of depreciation)	3,750
Machinery (at cost net of depreciation)	19,700
Buildings (at cost net of depreciation)	44,400
Land (at cost)	19,750
Accounts receivable	12,640
Allowance for doubtful debts		443
Inventory (at lower of cost or net realisable value)	16,833
Loan from BankX		1,600
Provision for employee entitlements		1,300
Provisions for warranty		1,550
Accounts payable		10,630
Prepaid expenses	3,230
Share capital		28,410
Retained earnings (1 July 2015)		25,210
General reserve		1,320
	209,403	209,403

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 ‘Other Expenses' in the trial balance provided above are:
• $10,400,000 for salaries and wages.
• General operating expenses of $6,300,000.
• Insurance expense of $730,000.
• Advertising expenses of $1,230,000.
• Interest expense of $640,000. In 2013 the company borrowed significantly from BankX. The terms of the loan require interest and principal repayments to be made each 6 months (on 31 December and 30 June each year). During the year ending 30

June 2016 the company made additional repayments of principal and so the principal balance at 30 June 2016 is $1,600,000. Of this principal $1,000,000 is expected to be repaid by 30 June 2017. All interest accrued for the year ending 30 June 2016 in relation to this loan has been paid by the company.
• $2,000 paid as contribution to subsidise employees Christmas celebrations.
• $620,000 paid for leasing machinery.
• Annual leave expense of $612,000. The provision for employee entitlements relates to annual leave only. The balance of the provision for annual leave at 30 June 2015 was $4,300,000. In August 2015 the directors reviewed the provision for annual leave. The review revealed that this provision was high as a number of employees were not taking this leave annually (but accumulating a number of years leave). The directors decided to change the company policy in relation to annual leave and limit the amount of leave that could be accrued to a maximum of 4 weeks. This resulted in a number of employees taking ‘extra' leave (i.e. more than 4 weeks) in the year ending 30 June 2016 to reduce the balance of their accrued leave to 4 weeks.
• Depreciation expense for buildings of $2,100,000.
• Depreciation expense for office furniture and equipment of $620,000. The directors reviewed the residual value of these items and determined that from the 1 July 2015 the expected residual values of these items should be reduced. Previously the estimated residual values had averaged 20% of original cost. However many of these items will have minimal residual value as these will only be able to be sold for scrap value. This change has increased the depreciation expense by approximately $120,000 in the year ending 30 June 2016 (compared to previous years).
• Warranty expense of $4,050,000. The balance of the provision for warranty at 30 June 2015 was $2,140,000. Of the balance of this provision at 30 June 2016 45% is expected to be used by 30 June 2017.
• Depreciation expense for machinery of $1,970,000.
• Doubtful debts expense for the period of $2,360,000.
• $610,000 payment to auditors ($90,000 of this related to non-audit work undertaken).
• Net loss of $400,000 from sale of non-current assets during the period.
• On 2 August 2015 the company sold an item of machinery for $3,000,000. At the date of sale the carrying amount (ie. Cost less accumulated depreciation) of the machinery was $2,400,000.
• On 25 December 2015 the company received $10,000,000 from the sale of an item of undeveloped land. The land had originally cost the company
$11,000,000. The proceeds were used to reduce the loan payable to BankX.

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

(b) Sales revenue for the period, before sales returns, was $88,490,000.

(c) Other revenues and income is comprised of:
• Services revenue of $52,600,000
• Interest earned during the period of $390,000 from cash held at bank. Interest is paid to the company on 31 December and 30 June each year.
• Reversal of legal provision of $3,500,000. At 1 July 2015 the company had recorded a provision of $3,500,000. This related to a claim made against the company for the alleged unfair dismissal of a former chief executive officer. Legal advice had initially indicated that there was a 65% probability that the company would be found liable and be required to pay damages. However the court case was decided in January 2016 and the company was found not liable and no amounts were payable.

(d) Prepaid expenses in the trial balance comprise:
• $730,000 for insurance policy (the policy expires on 1 January 2017).
• $2,500,000 for advertising services. The company entered into a contract on 1 January 2016 with Promo Ltd and paid $3,000,000 for 3 years of advertising services. This includes advertising for 3 years at major sporting events.

(e) Directors had declared a dividend of $880,000 from retained earnings on 30 June 2015. This required no further approval or authorisation and was paid on 2 September 2015.

(f) At 1 July 2015 the share capital comprised:
• 2,000,000 fully paid ordinary shares at an issue price of $1.50 issued on 10 October 2008. Share issue costs paid in relation to this issue were $60,000.
• 6,000,000 fully paid ordinary shares at an issue price of $3.20 issued on 1 January 2013. Share issue costs paid in relation to this issue were $130,000.

On 10 January 2016, in lieu of an interim dividend, the company made a bonus share issue of 1 ordinary share fully paid for each 4 shares held (at an issue price of
$3.20) 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.

(g) A review by the chief accountant on 1 July 2016 revealed that no balance date adjustment had been made in relation to lease of the machinery. The company paid
$620,000 on 1 January 2016 to lease the machinery for one year (i.e. until 31 December 2016). This is an operating lease (i.e. expense recognised as accrued).

(h) On 30 June 2016 the directors decided to transfer $8,000,000 from retained earnings to the general reserve.

(i) Directors declared a final dividend on the 30 June 2016 of 11 cents per share. This required no further approval or authorisation and was expected to be paid on 10 September 2016.

(j) On 5 July 2016, the Australian Competition and Consumer Commission (ACCC) notified the company that they were investigating a number of complaints from customers. During the second half of the year ending 30 June 2016, as part of a new marketing strategy, the company had held a number of ‘supersale' events where a range of products were marked down by 80% for a short period (often for 24 hours only). However many customers had complained to the ACCC that when they tried to purchase the products at the discounted price, they were told no ‘sale' stock was available, and purchased the products at the regular (i.e. undiscounted) price. The company's lawyers have advised that they believe that the company will be directed by the ACCC to compensate/refund all customers who purchased at the regular price during the periods of these ‘supersale' events (this is expected to cost the company
$480,000). Further, there is a 60% probability that the company will also be fined by the ACCC. It is estimated the fine imposed would approximate $85,000. The ACCC's investigation is expected to be completed in October 2016.

(k) On 10 August 2016 there was a flood that damaged one of the company's buildings and also the inventory/stock stored in that building. The estimated cost of repairing the building is $870,000. The cost of stock damaged (which needed to be destroyed) was $1,200,000. The company's insurers have advised that the current insurance policy does not cover damage from flood. Given this, on 30 August 2016, the Directors reviewed the company's insurance coverage and increased the insurance cover to include flood damage. This will increase insurance expenses by 12% in the year ending 30 June 2017.

(l) 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.