ACCT2005 – Financial Accounting 2

ACCT2005 SP2 2020 Annual Report Assignment Case Study Page 1 of 4
ACCT2005 – Financial Accounting 2
SP2 2020
Case Study for Annual Report Assignment
The following details are taken from the accounting records of the company as at 30 June 2020:

Debit $	Credit $
Revenues	91,796,420
Sales returns	16,780
Extraordinary Loss/es	1,820,000
Cost of sales	10,794,530
Other Expenses	73,940,100
Plant & Equipment (at cost net of depreciation)	8,491,400
Vehicles (at cost net of depreciation)	9,945,300
Buildings (at cost net of depreciation)	1,732,400
Land (at cost)	1,245,000
Accounts receivable	3,690,270
Allowance for doubtful debts	197,000
Inventory (at lower of cost and net realisable value)	4,863,400
Cash at bank	3,596,400
Prepayments	1,976,400
Unearned revenue	4,858,989
Provision for annual leave	847,600
Provision for warranty	319,700
Legal Provision	1,250,000
Accounts payable	987,600
Share capital	17,587,000
General Reserve	487,000
Retained earnings (1 July 2019)	3,780,671
122,111,980	122,111,980

ACCT2005 SP2 2020 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) The amount of revenues in the trial balance is comprised of:

  

$71,621,900 from providing services $19,940,600 from sale of goods $233,920 from interest received/earned on cash held during the period.

(b) There was previously concerns from shareholders that the company was too reliant on
debt. In response to these concerns, the Directors undertook a number of actions
including:
 In August 2019 undertaking a non-renounceable rights issue offering 1
ordinary share at an issue price of $2.40 for every 4 shares held, with the full
amount payable on application. As a result, the company received
applications for and issued 1,550,000 ordinary shares on 20 September 2019.
Costs associated with this issue totalled $34,000.
 On 1 October 2019 the company sold three items of land to Opportunity Ltd
for a total of $5,435,000 in cash. The original cost for these three items was:
Land A $2,150,000, Land B $3,210,000 and Land C $1, 895,000. The
extraordinary loss relates to the sale of these items of land.
Part of the cash received was used to pay off a loan from EBank.

(c)	Included in the amount of ‘Other Expenses’ in the trial balance are:
	Employee expenses of $41,839,000 comprising salaries and wages of

$35,340,860, commissions of $3,874,040 and annual leave expense of
$2,624,100. The balance of the provision for annual leave at 30 June 2019 was
$1,112,600. Employees are required to take annual leave within 12 months of
accrual.

	General operating expenses of $8,740,380. This includes building maintenance, insurance, power and utility expenses and other operating expenses. Vehicle expenses (excluding depreciation) of $3,470,000 (these include


government fees, parking fees, insurance, fuel and maintenance costs). These
increased substantially (by almost 25%) as the Directors decided to increase the
number of mobile service staff (and so a number of additional vehicles were
purchased).
 $1,200 prize paid to employee for best suggestion of the year. The company has a
suggestion box where employees can offer suggestions to improve any aspect of
the company’s operations. This year the prize was won by Justine Aider who
suggested that the company arrange for free flu vaccinations for staff to reduce
illness and staff absences. The free flu vaccinations initiative for staff was
implemented in May 2020.

    

Marketing expenses $7,845,230. Depreciation expense for plant & equipment $2,340,200. Depreciation expense for vehicles of $1,873,100. Depreciation expense for buildings of $86,400. Warranty expense of $598,400. The company provides a 12 month warranty on a range of its products and services.

ACCT2005 SP2 2020 Annual Report Assignment Case Study Page 3 of 4

	Expenses relating to previous loan from EBank that was repaid in October 2019. These comprised interest expense of $415,000 and an early termination fee of

$5,000. This early termination fee was paid by the company to Ebank for early
settlement of loan (original loan term ended in October 2022).

	$1,940,000 payment to auditors ($1,750,000 of this was for the audit of the company. The remainder was for advice regarding alternative ways of reducing debt). $1,300,000 legal expenses (refer e below). Doubtful/bad debts expense of $1,140,000.
 

(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’)

(d)	At 30 June 2020 the share capital comprised:
	5,000,000 fully paid ordinary shares at an issue price of $1.80 issued in 2001. Share issue costs paid in relation to this issue were $112,000. 2,000,000 fully paid ordinary shares at an issue price of $2.60 issued in 2012. Share issue costs paid in relation to this issue were $187,000. 1,550,000 fully paid ordinary shares at issue price of $2.40 on 20 September 2019. Costs associated with this issue totalled $34,000.



(e) The balance of the Legal Provision in the trial balance relates to a claim made in early
June 2020 from an employee. The employee was given the flu vaccination as part of
the company’s new free flu vaccination initiative. However, the staff member had a
severe allergic reaction to the vaccination and is expected to have continuing health
issues as a result. As the company’s flu vaccination program is voluntary (staff are
not required to have the vaccination) and all staff are required to sign a permission
form that explains the potential risks associated with the vaccination, legal advice
has indicated that there is only a 25% chance that the company will be liable for any
payment. The case is expected to be decided in court in December 2021. The
assistant accountant has included this provision to ensure that the company’s
liabilities are not understated.
At the beginning of the period (1 July 2019) the balance of the legal provision was
$350,000. This related to a claim against the company for alleged underpayment to
a supplier in 2018. This case was settled in January 2020 and the company paid
$400,000 to the supplier. This amount was paid in February 2020.
(f) The unearned revenue relates to payments in advance by customers for services to
be provided by the company. The prepayments relates to insurance and certain
marketing expenses.
(g) Directors had declared a dividend of $770,000 from retained earnings on 29 June
2019. This required no further authorisation or approval and was paid on 18 August
2019.
ACCT2005 SP2 2020 Annual Report Assignment Case Study Page 4 of 4
An interim dividend, of 6c per share was declared and paid on 10 January 2020
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.

(h)	A review by the chief accountant on 3 July 2020 revealed that as at 30 June 2020 there were accrued expenses of $478,000 (these related to amounts owed for

utilities, rates and maintenance) that had not been accounted for at all in the trial
balance.
(i) Directors declared a final dividend (from retained earnings) on 30 June 2020 of 17
cents per share. This requires no further approval and/or authorisation and is
expected to be paid in mid-August 2020.
(j) On 14 August 2020 the Directors announced that a sponsorship contract had been
signed with the Team Australia cricket team. This will mean that the company’s logo
will appear on all of the cricketers’ uniforms and other equipment. This is expected
to increase the awareness of the company’s brands and services/products in the
market and result in significant increases in revenues. The sponsorship contract will
cost $10,000,000 over 4 years.
(k) On 20 September 2020 the company signed a contract to sell an item of land. The
council of the area where the company owned one item of land advised of new
zoning requirements. Previously the land was zoned for commercial use only.
However, the land will now be able to be used for high density residential
development. This has increased the market value substantially. In September 2020
the Directors have been offered $3,000,000 for this property by Develo Corp Ltd and
have signed a contract to sell the land to Develo Corp Ltd for that amount. This land
was originally purchased by the company in 2001 for $400,000.
(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.
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
24 August 2020.

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