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The following details are taken from the accounting records of the company as at 30 June 2010: Debit
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Credit
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Sales revenue
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49,950,000
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Sales returns
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420,000
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Other revenues/income
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6,700,000
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Cost of sales
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19,600,000
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Other expenses
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23,950,000
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Bank overdraft
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3,490,000
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Equipment (at cost net of depreciation)
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22,600,000
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Land (at cost)
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8,400,000
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Buildings (at cost net of depreciation)
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14,275,000
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Vehicles (at cost net of depreciation)
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750,000
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Accounts receivable
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5,450,000
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Allowance for doubtful debts
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650,000
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Inventory (at lower of cost & net realisable value)
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11,450,000
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Investments (at cost)
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9,400,000
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Loan from bank
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10,000,000
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Provision for annual leave
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1,850,000
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Provision for long service leave
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1,750,000
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Revenue received in advance
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2,100,000
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Accounts payable
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6,195,000
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Prepaid expenses
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355,000
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Accrued expenses
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1,050,000
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Share capital
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16,600,000
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Retained earnings (1 July 2009)
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12,605,000
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General reserve
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6,350,000
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Call
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600,000
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Dividends Paid
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2,040,000
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119,290,000
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119,290,000
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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 above are:
$7,480,000 for salaries and wages.
Repairs and maintenance expenses of $1,100,000.
Printing and postage expenses of $455,000.
Insurance expense of $670,000.
Advertising and marketing expenses of $980,000.
Utilities expenses (Power and gas) of $265,000
Interest expense. The company borrowed $10,000,000 on the 1 January 2009 for the purpose of providing for new office and showroom space. The principal of $10,000,000 is repayable in full on 31 December 2018 with interest at 8% per annum, payable yearly on 31 December each year. Accrued interest on this loan is included in accrued expenses in the trial balance. In addition, a further $195,000 in interest expense was accrued and paid in relation to the bank overdraft. All interest accrued for the year ending 30 June 2010 for the bank overdraft has been paid by the company.
$5,000 in donations paid to the Animal Welfare League.
Annual leave expense. The provision for Annual leave at 30 June 2009 was $2,250,000 and $1,950,000 was paid in Annual leave in this current reporting period.
Long service leave expense for the year of $320,000. It was anticipated that no long service leave would be payable for 2 years. The provision for Long service leave at 30 June 2009 was $1,430,000
Depreciation expense for buildings of $950,000. The directors reviewed the useful life of buildings and decided that from the 1 July 2009 the useful life of these items would be extended from 12 years to 18 years. This has reduced the depreciation expense by approximately $280,000 in this financial year (compared to previous years).
Depreciation expense for vehicles. The vehicles were purchased on 1 July 2009 for a total cost of $970,000. These have been depreciated 25% per annum and have a residual value at the end of their useful life of $90,000. Until 30 June 2009 the company had rented its vehicles. However, as rental costs were increasing, it was decided that from 1 July 2009 the company would purchase all vehicles it required.
Depreciation expense for equipment of $4,600,000.
Doubtful debts expense for the period of $650,000.
$390,000 payment to auditors for audit (not consulting) work undertaken.
The carrying amount of excess land not required that was sold during this period. This land had cost the company $2,400,000.
Consulting expenses of $220,000.
(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')
(b) Other revenues/income is comprised of:
Rent revenue of $1,850,000 from renting excess space in buildings owned.
$1,250,000 in dividends received on shares in other (unrelated) companies that are held for long term gain.
$3,600,000 proceeds from the sale of land.
(c) The consulting expenses relate to the following:
In October 2009 the company contracted for its auditors to undertake consulting work to provide an assessment of the financial viability of an investment that the company was considering. The cost of this consultancy was $40,000 and revealed problems and so the investment was not undertaken.
$180,000 of the consulting expenses relates to a review of marketing strategies that the company had undertaken in January and February 2010 by an independent consultant.
(d) Prepaid expenses in the trial balance relate to an amount of $155,000 for Printing and $200,000 for Insurance.
(e) Directors had previously proposed a dividend of $1,320,000 from retained earnings on 30 June 2009 and this was subject to authorisation at the Annual General Meeting. This was approved at the AGM on 1 October 2009 and subsequently paid on 4 October 2009. An interim dividend of $720,000 was declared and paid from retained earnings on 15 January 2010.
(f) Prior to 1 July 2009 the company had 2 issues of shares. These were:
5,000,000 ordinary shares at an issue price of $2.00 issued on 1 July 2004. These are fully paid. In relation to this issue $54,000 share issue costs were incurred and these were paid by the company in September 2004.
1,000,000 ordinary shares at an issue price of $2.50 issued on 1 February 2008. These are fully paid. In relation to this issue $18,000 share issue costs were incurred and these were paid by the company in March 2008.
In this current period, the company issued the following ordinary shares: 1,200,000 ordinary shares at an issue price of $3.50 issued on 1 February 2010. These were called and paid to $3.00 as of allotment on 31 March 2010. In relation to this issue $28,000 share issue costs were incurred and these were paid by the company in February 2010. On 30 June 2010 the company made a first and final call for the remaining uncalled/unpaid portion of the share issue price for the shares issued on 1 February 2010. All call money was received by the 28 August 2010. 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 stocktake was undertaken on 5 July 2010 and as a result of this there was found to be a discrepancy between the perpetual inventory records and the physical stocktake. Upon further investigation it was revealed that the sales manager had not recorded sales returns which related to June 2010. These sales had been on credit. His reasons for doing so were that he was concerned that his department would not achieve their target budget for sales for 2010. He subsequently withheld these sales returns and so these returns had not been recorded (i.e. These have not been adjusted in accounts receivable, inventory, cost of sales or in sales returns accounts. Note: no adjustment is required to the allowance for doubtful debts). These returns had a sales amount of $600,000, and were sold at a mark up on cost of 20%. The sales manager has since had his employment terminated.
(h) On 30 June 2010 the directors decided to transfer $2,000,000 from retained earnings to the general reserve account.
(j) Directors proposed a final dividend on the 30 June 2010 for $1,728,000 and believed this will be authorised and hence paid at the upcoming AGM on 1 October 2010.
(k) On 5 July 2010, lawyers notified the company that a law suit had been lodged in June 2010 claiming that as a result of defective products sold to one of their major customers in May 2010, damage had been caused to a building under construction and the customer was seeking damages for $3,250,000. Lawyers have suggested that there is a 40% probability that this case will be awarded against the company. However, if the case was lost, damages expected to be awarded would amount to $2,750,000.
(l) On 1 August 2010 the directors decided, as interest rates were expected to increase, that to reduce debt levels, they expected to reduce future cash dividends paid to shareholders over the next 2 years to around half of current dividend payments.
(m) On 1 October 2009 the company was advised that they had been awarded the sole distributorship of a new product that would enhance their existing product range. This product would be sold with a 12 month warrantee. This would be effective from 1 January 2010 and as a result of this, the company would now need to recognise a provision for warrantees for this product. It was estimated sales of this product would contribute 9% to revenues annually, approximately $4,500,000 for a full year, and warranty expense is estimated to be 0.5% of sales. Sales for this product for the year ended 30 June 2010 included in the total for sales revenues were $2,100,000. On 1 September 2010, when preparing the accounts it was discovered that:
o No provision for warranty (or related expense) had been accounted for in the trial balance.
o Some customers had already claimed against their warranty for this product, and in relation to these claims $35,000 had been recorded in other expenses.
(n) 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 15th September 2010.