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QUESTION 1: Balance Day Adjustments (20 marks)
Rose Lief owns and operates “The Heavenly Scent”, a successful Aromatherapy business specialising in the sale of aromatherapy essential oils. The business also runs aromatherapy courses, sells bamboo diffusers and a variety of aromatherapy books. The bamboo diffusers are made exclusively for The Heavenly Scent and they have recently featured in several health and alternative therapy magazines as a very effective diffuser of aromatherapy oils. As a result of the recent positive media coverage, the business has been growing and Rose has been too busy to undertake any record keeping for the company. As a result, she has handed the record keeping over to the accounting practice where you work as a graduate accountant.
Rose has emailed you the following account information related to the year ended 30 June 2019:
The Heavenly Scent
Trial Balance
30 June 2019
Account Name
Debit ($)
Credit ($)
Cash
12,240
Accounts Receivable
73,440
Inventory (1 July 2018)
87,720
Prepaid Rent
3,672
Shop Shelving
32,640
Accum. Depreciation - Shop Shelving
6,528
Oil Decanting Equipment
8,160
Accum. Depreciation - Oil Decanting Equipment
4,080
Loan
30,000
Accounts Payable
20,790
Unearned Sales
15,000
R Lief, Capital (1 July 2018)
118,320
R Lief, Drawings
25,500
Sales
423,912
Sales Returns & Allowances
4,590
Discount Allowed
816
Purchases
286,008
Interest
1,836
Electricity Expense
4,386
Water Expense
2,448
Aromatherapist Wages Expense
48,960
Local Government Rates Expense
1,632
Insurance Expense
7,140
Advertising Expense
7,650
Rent Expense
13,464
Totals
620,466
620,466
(Continued next page)
REQUIRED:
It is now the end of the financial year, and based on the information she has provided below, Rose has asked you to prepare any necessary balance day adjusting journals.
Use the General Journal document provided to record the co
ectly formatted journal entries required and include a na
ation (explanation) for each entry. (20 marks)
i. $10,000 of the balance in Unearned Sales represent payments for an aromatherapy course that was held in the shop on 21 June 2019.
ii. Upon receipt of the business’s bank statement, Rose realised that the business had earned $53 interest up to 30 June 2019. This amount was deposited directly into the bank account. The accounting records need to be updated to record this transaction.
iii. The Prepaid Rent was paid on 1 May 2019 and was for shop rent paid in advance for the three months ending 31 July 2019.
iv. Both the Shop Shelving and Oil Decanting Equipment are expected to be used evenly over their useful lives. The Shop Shelving is expected to have a residual value of $1,000 and a useful life of 7 years, while the Oil Decanting Equipment is expected to have no residual value and a useful life of 10 years.
v. Rose realised she had forgotten to obtain business insurance, so she took out a 12-month insurance policy commencing on 1 April 2019. Rose recorded the full amount of the policy as an expense when it was paid.
vi. It is estimated that 5% of the 30 June 2019 balance of Accounts Receivable is unlikely to be received.
vii. A physical stocktake at 30 June 2019 revealed $89,000 of inventory on hand.
viii. Rose last paid an electricity bill on 31 May 2019, and based on previous bills she has estimated that her power usage from then until 30 June 2019 was $780
General Journal
Date
Details
Debit ($)
Credit ($)
QUESTION 4: Cash Flow Statement (17 marks)
You are provided with the following financial information for Caddy Shack Pty Ltd, a golf equipment and apparel retailer:
CADDY SHACK PTY LTD
COMPARATIVE BALANCE SHEETS
AS AT 30 JUNE
2019 XXXXXXXXXX
Cu
ent Assets
Cash on Hand
$2 000
$4 000
Cash at Bank
1 400
-
Accounts Receivable (net)
4 800
4 950
Inventory
18 500
20 100
Prepaid Expenses
XXXXXXXXXX
$28 180
890
$29 940
Non-Cu
ent Assets
Plant & Equipment
75 000
72 000
less Acc. Depreciation
(25 700)
49 300
(19 700)
52 300
Total Assets
77 480
82 240
Cu
ent Liabilities
Bank Overdraft
-
2 400
Accounts Payable
3 800
4 250
Accrued Expenses
920
850
Tax Payable
980
5 700
1 340
8 840
Non-Cu
ent Liabilities
Mortgage
18 000
20 000
Total Liabilities
23 700
28 840
Net Assets
$53 780
$53 400
Equity
Share Capital
35 000
29 000
Retained Earnings
18 780
24 400
$53 780
$53 400
(continued .........)
CADDY SHACK PTY LTD
INCOME STATEMENT
FOR THE YEAR ENDED 30 JUNE 2019
Net Sales
$104 000
Cost of Sales
61 800
Gross Profit
42 200
Other Revenue:
Discount Received
XXXXXXXXXX
42 650
Expenses:
Selling & Admin Expense
$26 160
Doubtful Debts Expense
430
Interest Expense
2 680
29 270
Profit before Tax
13 380
Income Tax Expense
4 000
Profit
$ 9 380
Additional Information
· All asset purchases were made in cash.
· The Selling & Admin Expenses includes Depreciation expense of $6,000.
· During the year 12,000 shares were issued at 50c per share.
ANSWER THIS QUESTION USING THE PRO FORMA PROVIDED
REQUIRED:
a) Prepare a Statement of Cash Flows using the pro forma provided on the following page. You must show all calculations (answers without supporting calculations will receive zero marks). (14 marks)
) The owner of Caddy Shack (Juan Wood) thinks you have done a te
ible job and cannot understand why his reported profit was so much higher than his increase in cash.
Explain to Juan at least two factors that may be causing this apparent discrepancy. (3 marks)
CADDH SHACK PTY LTD
Cash Flow Statement
for the year ended 30 June 2019
$
$
Cash Flows from Operating Activities
Receipts from customers
Payments to suppliers & employees
Cash generated by operations
Interest received
Interest paid
Income tax paid
Cash Flows from Investing Activities
Payment for Plant & Equipment
Cash Flows from Financing Activities
Payment of Mortgage
Proceeds from share issue
Dividends paid
Net increase / decrease in cash held
Cash at the beginning of the yea
Cash at the end of the yea
ALL WORKINGS MUST BE PROVIDED ON THE FOLLOWING PAGE(S), OR THE CASH FLOW STATEMENT WILL RECEIVE NO MARKS
(Insert any additional pages as required)
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