Good Food Company is a local manufacturer of instant noodles. Established in 2005, their business has been growing steadily. Their products, which are available in 3 flavors, are sold in Singapore under the "Good Food" brand. However, since the start of 2010, their sales began to slow down. One key reason is the entry of new competitors who are able to provide new products at lower prices. The new competitors provide a wider range of instant noodles with unique flavors to suit the different tastes and preferences of the Singapore market. During 2010, the company's costs also increased quite significantly driven by the higher cost of raw materials and staff costs. To save costs, the company switched to hiring a part-time accountant, Andrew, in November 2010. Andrew was happy in the beginning as he enjoyed working part-time and spending more time with his family. However, after some weeks with the company, he was having sleepless nights. He thus requested for a meeting with Grace, the CEO of the company. Below is an extract of the conversation between Andrew and Grace on 30 December 2010: Andrew: "I understand that the company has a tradition of paying its employees a 13th month bonus. The bonus will be paid in January the following year." Grace: "Yes, that's right." Andrew: "We should record the bonus. The bonus amount for all eligible employees is $30,000." Grace: "No, we should not. The employment contracts with the employees do not cover bonus. Hence, there was no need to provide for the bonus."
Andrew: "In October 2010, the company advertised in major newspapers and magazines. The entire amount of $25,000 was recorded as prepaid advertising."
Grace: "That's correct. We are seeing some signs of better business due to advertising. We expect the benefits of advertising to continue and sustain through next year."
Andrew: "On 1 April 2010, the company bought and paid $10,000 for a 2-year fire insurance. Thus was recorded as prepaid insurance and there were no further entries."
Grace: "There was no need for further entries because the fire insurance is still in force."
Andrew: "On 31 March 2010, the company purchased a new machine, which has a useful life of 5 years and a residual value of $20,000."
The following information relates to purchase and installation of the machine:
List price $90,000
Discount given $10,000
Delivery charge $7,000
Installation cost $5,000
Repair cost* $2,000
* One of the Good Food Company employees accidentally damaged the machine during installation.
The former accountant has recorded all the above expenditures as capital expenditures. No depreciation was provided for this machine.
Andrew went on to examine the trial balance:
After examining the trial balance, Andrew discovered the following additional information:
- On 29 October 2010, one of the customers ordered $80,000 worth of instant noodles to be delivered in January 2011. No down-payment was made. Grace has requested the former accountant (before he left the company) to record as:
Dr Accounts receivable $80,000
Cr Sales $80,000
- The net realisable value of the ending inventories is $100,000.
Discuss the accounting principles and concepts that were violated in the case. Explain the appropriate accounting treatments that should be used.
From the violations identified in Question 1 and the additional information gathered, prepare all the necessary adjusting journal entries.
(a) Prepare a statement of comprehensive income for the year ended 31 December 2010.
(b) Prepare a statement of financial position as at 31 December 2010.
Critically discuss the ethical behaviour of Grace.