Reference no: EM131377005

Financial Accounting

Study Period 4, 2016

Case Study for Annual Report Assignment

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

	Debit In $000's	Credit In $000's
Sales		80,609
Services revenue		39,600
Other revenues and income		5,322
Extraordinary income		50
Cost of sales	63,750
Other Expenses	43,763
Cash at bank	2,800
Vehicles (at cost net of depreciation)	654
Machinery (at cost net of depreciation)	8,642
Buildings (at cost net of depreciation)	5,280
Land (at cost)	7,433
Patents (at cost net of amortisation)	7,300
Accounts receivable	4,780
Allowance for doubtful debts		234
Prepaid services revenue		2,200
Inventory (at lower of cost and net realisable value)	14,380
Prepaid expenses	957
Other Provisions		275
Provision for annual leave		526
Provision for warranty		420
Accounts payable		718
Share capital		17,514
General reserve		350
Retained earnings (1 July 2015)		11,921
	159,739	159,739

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 30 June 2015 comprised:

• 2,000,000 ordinary shares issued and paid to $1.40 in 2010. Share issue costs of $42,000 were incurred in this issue.
• 4,000,000 ordinary shares issued and paid to $2.85 in March 2014. Share issue costs of $64,000 were incurred in this issue.

(b) On 10 December 2015 the directors made a bonus share issue of 1 ordinary share (issued and paid to $2.85) for every 5 shares held from the general reserve.

(c) Included in the amount of ‘Other Expenses' in the trial balance above are:

• $23,100,000 for wages and salaries.

• Annual leave expense of $1,400,000. The balance of the provision for annual leave as at 30 June 2015 was $790,000.

• Depreciation on machinery of $1,240,000.

• Depreciation on vehicles of $109,000

• Depreciation on buildings of $275,000. Buildings have been depreciated at 5% (i.e. over 20 years) since acquisition. However the company has now decided that these assets should be depreciated over 25 years. This has reduced depreciation by approximately $100,000 in current (and in future years).

• Amortisation on patent of $1,250,000

• Marketing expenses of $2,790,000.

• General operating expenses, including insurance and utilities $6,120,000

• $820,000 payment to auditors (of this amount $170,000 related to tax advice)

• Interest expense of $116,000. This interest relates to a loan previously held by the company. Prior to sale of land in January 2016 the company had a loan of $4,000,000 with MyBank. This loan was paid off in full on 1 February 2016.

• Warranty expense of $610,000. The company provides a 12 months warranty on its products. The balance of the provision for warranty as at 30 June 2015 was $1,400,000. In early July 2015 the directors noted that the warranty expense for some of its products had been increasing due to a greater percentage of products being returned for repair or replacement. To reduce these, new quality control procedures were introduced in August 2015. This involved a second quality check being undertaken on some products on a random basis. This has reduced the number of products being (and expected to be) returned for repair or replacement, under warranty substantially.

• $512,000 expense for bad and doubtful debts.

• Loss on sale of vehicle. To ensure that any chemicals would be transported correctly (see information later in this case study), after minor repairs were completed, the company sold the vehicle involved in the accident for $16,000. At the date of sale, 10 June 2016, the carrying amount (cost less accumulated depreciation to date of sale) was $27,000. On 1 June 2016 the company purchased a more suitable vehicle to transport the chemicals for $48,000.

• $350 for t-shirts provided to employees to promote winning of prize in annual report competition (see e below).

(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')

(d) Other revenues and income includes:

• Interest from bank of $42,000.
• Royalty revenue from a patent owned of $1,330,000.
• Gain on sale of non-current asset. In January 2016 the company sold an item of land for $6,800,000. At the time of the sale this land had a carrying amount (i.e. cost) of $2,850,000.

(e) The extraordinary income relates to an award won by the company. In August 2015 the company entered a competition for the best annual report. The competition was judged in December 2015 and the company won second prize of a trophy and $50,000 cash.

(f) Prepaid expenses relates to:

• Insurance of $730,000.
• Other expenses including marketing.

(g) The total of the other provisions included in the trial balance is comprised of:

• $25,000 relating to chemical spill (see k below).

• $250,000 provision for ongoing legal case that began in late 2013 relating to potential product liability. This matter is not expected to be finalised until late 2018.

(h) On 30 June 2015 the Directors declared a dividend of 8 cents per share from retained earnings (this was not subject to any further approval or authorisation). This dividend was paid on 12 August 2015. An interim dividend of 6 cents per share (from the general reserve) was declared and paid on 11 January 2016.

The following events/transactions are not reflected in the trial balance above.

You will need to make appropriate adjustments if required.

(i) On 30 June 2016 the directors:

• transferred $3,700,000 from retained earnings to the general reserve

• declared a final dividend of $576,000 from retained earnings. This was not subject to any further or authorisation and was paid on 14 August 2016.

(j) The trial balance had been prepared by the trainee accountant. On reviewing this in early July 2016, the Chief accountant noted the following:

• In addition to the revenue from royalties recognised in the trial balance, there are an additional $250,000 in royalties revenue that have been accrued/earned at 30 June 2016 but have not been recognised.

(k) In late May 2016 an employee was transporting chemicals (for cleaning machinery and building surfaces) from one of the company's premises to another company site. Unfortunately, when transporting these chemicals the employee was involved in a motor vehicle accident. During the accident the chemicals spilt and caused extensive damage to nearby properties. It has been determined that the required procedures for transporting these chemicals (which are legislated) were not followed. The company's insurance will cover the cost of damage to the vehicle (which was minimal) but will not cover any damage due to the chemical spill. In early June the company recognised a provision of $25,000 as this was the expected cost to remediate the damage caused by the spill (This amount is included in the total for other provisions in the trial balance). However the clean-up was not completed until 14 July 2016 and it was then that it was discovered that the actual cost of the clean-up was $142,000. This amount was paid to cleaning contractors on 21 July 2016. Further the company's lawyers have advised that the government authority responsible for monitoring compliance with the legislation (the legislation that specifies procedures for transportation of these chemicals) is beginning an investigation into the spill to consider if a fine should be imposed. The company's lawyers have advised that given that the company acted quickly to remediate the spill, they believe that there is a 75% probability that no fine would be imposed and that the company would only receive a warning. If a fine is imposed this is specified in the legislation as $100,000 for a first offence (and this is the company's first such incident).

(l) On 29 August 2016 the company advised that it would be undertaking a major expansion. This would result in increasing debt due to the need to borrow a substantial amount (estimated at $15 million). This will result in a substantial increase in finance costs, although it is anticipated that the dividend per share will be able to be maintained.

(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 16 August 2016.

Some questions to ask potential group members:

- Why do you want to do the assignment in a group?

- How are they finding the course so far? Are they up to date with the work in the course?

- What standard of work (grade) do they hope to achieve? How have they done in previous courses?

- What are they hoping to achieve from the group? Is it a better assignment or less work?

- What are their strengths and weaknesses?

- How do they work? Do they like to get things done early, or do they leave things until the last minute?

- What are their other commitments? How will this impact on their ability to undertake tasks on time or meet/contact other students?

- How do they expect the group to work? How often do they expect to meet /get together with group members and when and how? Does this fit with your expectations and schedule?

- Have they had any problems with group work in the past?

Attachment:- Annual_Report_Financial_Accounting.zip