ACCT1101AssignmentPartA-D

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Queensland University of Technology *

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Apr 3, 2024

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ACCT1101 Individual Assignment 1/11  Case Scenario Ash & John is a Brisbane-based sole-trader that operates at a retail shopfront. The store specialises in selling tennis racquets but also offers tennis racquet stringing services. The owner of the Ash & John, Mrs Stosur, does not manage the store herself, instead, a store manager, Nick K, was hired to manage the day-to-day business.

ACCT1101 Individual Assignment 2/11 Ash & John’s sales typically peak in January when the Australian Open tennis tournament takes place in mid-January and attracts new following to the sport. However, in 2021, the store’s January sales were uncharacteristically low, in fact, the business had suffered a severe decline in sales for months as a direct result of COVID-19 restrictions. The pandemic prohibited sports activities and, as a result, reduced in-store shopping. Early January 2021 - Business in Recovery Despite the financial difficulties in 2020, at the start of 2021, Nick was confident that the sales at the store would start to grow as life was slowly and steadily getting back to normal in Queensland thanks to the state government’s effective disease management. This optimistic view was reinforced by the arrival of a large order from the local tennis club, Hewitt Tennis, in early January. On 4 January, Hewitt Tennis ordered racquets to be delivered to the club on 18 January. The goods were priced for sale at $5500 and were acquired from the supplier at a discounted price of $2130. Hewitt Tennis paid $3500 upon the delivery of goods and made the remaining payment on 5 February. In preparation of the order as well as the anticipated sales increase, Nick ordered premium tennis racquets with the latest design from the major brands on 4 January. There were no additional purchases of lower-priced racquets as these products were in abundance in the inventory. One batch of Babolat and Head racquets with a total cost of $7200 arrived on 5 January, the payments were due in three instalments of equal amounts over the next 60 days, the first instalment was made to the supplier on 24 January, the other two payments were made later in February. A separate batch of Wilson racquets were delivered to the store with an invoice of $1900 on 7 January. Ash & John paid for this purchase in cash in full. As cash balance became critically low after the payment for Wilson racquets, Nick took out a short-term loan of $3000 under the name of Ash & John on 8 January to maintain a healthy cash position. In addition to this large order, Ash & John also earn a contract with Hewitt Tennis to offer on-site racquet stringing service at the club’s biggest annual event, the Lleyton Cup, in February. $1200 cash was received for the contracted service when the contract was signed on 6 January. In preparation of this service provision, Nick made the business decision to increase Ash & John’s service capacity by acquiring a second-hand stringing machine in good condition from one of the competing sports stores that recently filed bankruptcy. Nick agreed to a bargain price of $800 for the machine after much negotiation on 9 January before picking up the machine on 15 January and paying in cash in full. Other sales in early January include a $680 cash sale on 3 January of goods that cost $440, and a $950 credit sale on 11 January of goods that cost $680. In terms of service provision , Nick sold a prepaid package of 10 standard stringing services for $600 cash on 10 January, the customer used up two services on day. The package is valid for use within 180 days from the day of purchase. During this period, Ash & John also provided a large volume of stringing service to Queensland Tennis Centre. This service was booked and prepaid for in December last year. The discount bulk charge averaged $50 per service. On 31 January, the provision of a total of 133 services was accounted for. Mid to Late January 2021 - Another Period of Struggle Just as the sales began to increase, the reported cases of UK strain of COVID-19 sent the greater Brisbane area into a three-day lock down between 11 and 14 January 2021. The lock down along with the requirement of mandatory use of masks in certain public indoor spaces between 11 and 22 January caused the store sales to plummet. Very few customers visited the store since 11 January, and Nick only managed to make two small sales during this time: a credit sale of $80 goods that cost $50 on 19 January and another credit sale of $130 at cost $90 on 26 January . There was no purchase of stringing services in this period. The most difficult aspect of operating a physical store in this period is the fact that many expenses were unavoidable despite the low volume of business activities at the store . The weekly rent for the shopfront is $350, payable every four weeks in advance. The first rental payment of 2021 was made on 4 January to cover the four-week period starting 8 January. The staffing costs were also substantial. Nick was paid $40560 per annum, averaged $780 per week or $130 per day (6 days of work in a week; Wednesdays off). Nick received fortnightly salary payments on 14 and 28 January to cover the salary period from 1 to 28 January. The store’s only sales assistant Bernard T. held a casual position and was paid at $25 per hour with a guaranteed minimum work allocation of 10 hours per week. Bernard received the minimum amount of his fortnightly wage payment $500 on 14 January with the sad news that Ash & John was no longer in the position to continue his employment . There was also depreciation and insurance premium. Both depreciation and store insurance expenses are recognised on a monthly basis at the month end. Ash & John last paid the insurance premium $7300 on 31 December to cover any loss of inventory and cases of staff injuries for the next 365 days . In terms of utility, the next electricity bill would not arrive before February. Depreciation of Machines & Vehicle As at 31 January 2021, Ash & John had three stringing machines. Details of these assets are presented in Exhibit 1 below. Exhibit 1 Machine 1 Machine 2 Machine 3 Date of acquisition 1 July 2019 1 January 2019 15 January 2021 Useful life in years 3 6 4 Cost $3800 $5200 $800 Residual value $200 $400 nil Expected total production* 7200 8000 3200 Production in January 2021** 50 85 0 * Total number of stringing services expected to be performed between the date of acquisition and the end of useful life. ** Total number of stringing services performed in the month.

ACCT1101 Individual Assignment 3/11 The demand of stringing services declined significantly since the outbreak of COVID-19. As a result , Ash & John was considering the following options: (1) changing the depreciation method regarding stringing machines from the straight-line method to the unit-of-production method, or (2) making no change to the depreciation method but re-evaluating the remaining useful life of each machine. Ash & John also owns a delivery van that is used to deliver shipment and transport the stringing machines to customer sites for on-site service provision . The van was given to the business by Mrs Stosur on 1 July 2018 with an estimated useful life of 10 years and a residual value of $9000. Depreciation of this vehicle is recognised using the straight-line depreciation method. Potential Business Diversification In August 2020, Mrs Stosur first expressed concern over the viability of her business after the business made a loss in the third consecutive month. Mrs Stosur asked Nick to help seek opportunities to diversify the business’s income. Nick quickly thought of the idea of selling used tennis balls. Nick is a tennis lover and plays club tennis at Hewitt Centre. He became aware that the club has a policy of disposing of used tennis balls after holding competitive events like the Lleyton Cup. Many of the disposed balls were in good condition and could have been readily used for general practice or casual playing at the club. Nick contacted the management at Hewitt Tennis in September 2020 and was successful in reaching an agreement with the club for the supply of used tennis balls. However, Mrs Stosur was not fully confident of this venture and decided to acquire the used tennis balls as her personal asset first. The store started to trial the sale of the used balls in October 2020; all transactions concerning the used tennis balls were regarded as Mrs Stosur’s personal transactions. The quantities of the monthly purchases of used tennis balls are detailed in Exhibit 2 below. Exhibit 2 Month Quantity Purchased Purchase Price Oct 2020 150 $1.30 Nov 2020 120 $1.50 Dec 2020 100 $1.80 Jan 2021 80 $2.00 Total - 450 - As the sales of tennis balls were not part of store’s official operation, Nick did not keep the record of cost of sales of these transactions but only the quantity of used balls sold. From 1 October 2020 to 31 January 2021, 380 used balls were sold at the price $2.40 each. Changing Customer Behaviour At Ash & John, customers who spend more than $150 in a single transaction may elect to purchase on credit, payable in 60 days. Despite the option, most sales at Ash & John were cash transactions prior to March 2020. However, since the outbreak of COVID-19, more and more customers have opted for credit purchases. This change in customer’s purchasing behaviour had added to the financial difficulties of the business, and Mr Stosur and Nick worried that Ash & John would report a loss for the ninth consecutive month in January 2021. Ash & John’s Statement of Financial Position as at 31 December 2020 is overpage. Exhibit 3 Ash & John The Statement of Financial Position as at 31 December 2020 Assets $ Cash 2300 Accounts Receivables 9200 Inventory 42150 Prepaid Rent 350 Prepaid Insurance 7300 Total Current Assets 61300 Equipment - Stringing Machines 9000 Accumulated Depreciation - Equipment (3400) Vehicles - Delivery Van 33000 Accumulated Depreciation - Vehicle (6000) Total Non-Current Assets 32600 Total Assets 93900 Liabilities Accounts Payable 760 Unearned Stringing Service Revenue 7200 Total Current Liabilities 7960 Long-term debts 35980 Total Non-Current Liabilities 35980 Total Liabilities 43940 Net Assets 49960 Equity

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ACCT1101 Individual Assignment 4/11 Capital 49000 Retained Earnings 960 Total Equity 49960 1 A-1 A-1 (1 mark) Is Mrs Stosur an internal or external user of Ash & John’s financial statements? Select one alternative: External Internal Maximum marks: 1 2 A-2 A-2 (1 mark) Is Nick K an internal or external user of Ash & John’s financial statements? Select one alternative: Internal External Maximum marks: 1 3 A-3 A-3 (1 mark) Would Mrs Stosur be personally responsible for Ash & John’s long-term debts if Ash & John suffered a severe business failure and went into bankruptcy? Select one alternative: Yes No Maximum marks: 1

ACCT1101 Individual Assignment 5/11 4 B-1 B-1 (9 marks) Complete the table below as an extension to Exhibit 1 to account for depreciation of the three stringing machines at Ash & John. Answer by stating your final answer for each cell and do not show workings. No marks are allocated to workings. When entering answers in this assignment, DO NOT use thousand separator. For example, the correct way to type “One Thousand” is “1000”, not “1,000” or “1.000”. Use negative sign (e.g., -1300). Numbers only, no dollar sign ($) entered in the cell. Machine 1 Machine 2 Machine 3 Date of acquisition 01/07/2019 01/01/2019 15/01/2021 Useful life in years 3 6 4 Cost $3800 $5200 $800 Residual value $200 $400 nil Expected total production 7200 8000 3200 Production in January 2021 50 85 0 Depreciable amount $ $ $ Annual depreciation under straight line method $ $ nil Useful life consumed in years as at 31/12/2020 nil Accumulated depreciation as at 31/12/2020 $ $ nil Depreciation expense for the month January 2021* $ $ $ Depreciation expense per unit of production** $ $ $ Depreciation expense for the month January 2021*** $ $ $ * Assume straight-line depreciation and allocate equal weighting to all months regardless of number of days in a month (i.e., every month is allocated 1/12 of the annual depreciation expense. Note : the equal weighting of each month is only applicable in this computation, do not assume such we ightin g in other computations in this ass ignment ). For this row only, round to the nearest whole number (e.g., $16.7 is rounded to $17). ** Do not apply rounding. *** Assume the unit-of-production depreciation method. Maximum marks: 9

ACCT1101 Individual Assignment 6/11 B-2 Scenario The case states that “ The demand of stringing services declined significantly since the outbreak of COVID-19, as a result, Ash & John was considering the following options: Option (1): making no change to the depreciation method but re-evaluating the remaining useful life of each machine, or Option (2): changing the depreciation method for stringing machines from the straight-line method to the unit-of-production method.” 5 B-2.1 B-2.1 (4 marks) Discuss how may Option (1) be more appropriate than the original practice (i.e., to recognise depreciation using the straight-line method). A complete response should include discussions on: (a) the reason(s) why the original practice may not be appropriate, and the outcome if Ash & John continued with the original policy, (b) how to implement Option (1) to more accurately account for depreciation, and the outcome of implementing Option (1) properly. Fill in your answer here: Format  Σ  Words: 0/250 Maximum marks: 4

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ACCT1101 Individual Assignment 7/11 6 B-2.2 B-2.2 (5 marks) Discuss how may Option (2) be more appropriate than both the original practice (i.e., to recognise depreciation using the straight-line method) and Option (1) given the circumstances regarding the business. Cite specific information in the case to support your discussion where appropriate. A complete response should include discussions on: (a) the reason(s) why both the original practice and Option (1) may not be appropriate to account for depreciation under the business’s current circumstances (provide reference to case information), (b) the reason(s) why Option (2) may be more appropriate. Fill in your answer here: Format   Σ  Words: 0/300 Maximum marks: 5

ACCT1101 Individual Assignment 8/11 7 B-3 B-3 (6 marks) Would Ash & John report less depreciation expense (compared to the straight-line depreciation method) for machine 2 in January 2021 if depreciation were always accounted for using the diminishing-balance method since the start of the asset’s useful life? Include qualitative discussion on: (a) patterns of cost allocation under each depreciation method, (b) the reason(s) why (if your answer is Yes) or why not (if your answer is No). You should cite case information where appropriate. Do not compute depreciations under the two methods in tables . Fill in your answer here: Format   Σ  Words: 0/250 Maximum marks: 6

ACCT1101 Individual Assignment 8 C-1 9/11 C-1 (10 marks) Compute the cost of goods sold for the sale of used tennis balls in the period 1 October 2020 to 31 January 2021 using FIFO. Enter your answers in the table below using the information from Exhibit 2. Use negative sign but not thousand separator (e.g., -1300). Numbers only, no dollar sign ($) entered in the cell. Quantity Purchased Purchase Price Quantity Assumed to Have Been Sold under FIFO COGS 150 $1.30 $ 120 $1.50 $ 100 $1.80 $ 80 $2.00 $ Total 450 - $ Compute the cost of goods sold for the sale of used tennis balls in the period 1 October 2020 to 31 January 2021 using LIFO. Enter your answers in the table below using the information from Exhibit 2. Use negative sign but not thousand separator (e.g., -1300). Numbers only, no dollar sign ($) entered in the cell. Quan Purc tity h Purchase Price ased Quantity Assumed to Have Been Sold under LIFO COGS 150 $1.30 $ 120 $1.50 $ 100 $1.80 $ 80 $2.00 $ Total 450 - $ Maximum marks: 10

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ACCT1101 Individual Assignment 10/14 9 C-2 C-2 (4 marks) Would it be appropriate to use the cost flow assumptions of weighted-average costs to account for the costs of sales of tennis racquets? Include discussion on: why or why not with reference to the case information (you need to mention specific information in the case to support your reason(s) for why or why not); outcome if Ash & John was to adopt the particular cost flow assumption (weighted-average costs). Fill in your answer here: Format   Σ  Words: 0/200 Maximum marks: 4 10 C-3 C-3 (3 marks) What would be the impacts on the Balance Sheet and Income Statement accounts if weighted- average cost method was adopted to account for the costs of sales of tennis racquets in January 2021. Assume all racquets sold during the month were premium products. Fill in your answer here: Format   Σ  Words: 0/150 Maximum marks: 3

11 D D (6 marks) Customers at Ash & John had developed a preference for credit purchases. Discuss the reason(s) why "this change in customer behaviour had added to the financial difficulties of the business". A complete response should: (a) clearly identify the existing financial difficulties, and (b) for each issue that you identify as a financial difficulty, explain the reason(s) why the particular change in customer behaviour “had added to the financial difficulties” (i.e., making it worse). You should cite case information where appropriate. Fill in your answer here: Format   Σ  Words: 0/300 Maximum marks: 6