Question

Gellibrand Ltd. is a business in a local suburb that makes and sells a range of equipment and accessories for recreational fishing across Australia. The company has approached you for some help in preparing its year-end financial reports. To you assist you, it has provided the following information:

Gellibrand Ltd Trial Balance for the period ending 31 December 2019 DR Account 136,560 3,600 594,600 11,600 1,377,440 845,342 112,400 553,200 12,900 35,000 39,500 Accounts payable GST payable Accum. Depreciation: Building (bal 30/6/2019) Cash and Cash equivalents Building (cost) Wages and Salaries Dividends (paid during the year) Equipment (cost) Sales retums Supplies on hand Interest on loan (incurred & paid during the year) Inventory Land Cost of Goods Sold Notes payable Accum. Depreciation: Equipment (bal 31/12/2018) Prepayments (current) Contributed equity ($1 per share) Rent expense Accounts receivable Retained earnings (bal 31/12/2018) Sales Other expenses Depreciation expense Building Provision for Doubtful debts 44,200 726,600 2,110,400 940,000 184,484 79,610 900,000 46,800 198,200 96,360 3,615,330 281,426 13,774 7,480,655 17,458 5,496,132

The company also provides some additional information. Some of that provided below has
been recorded in the above trial balance, while some has not. Also, be aware that there is
some reason to doubt the quality of the bookkeeper the company uses to prepare the trial
balance.
 Buildings are depreciated on a straight-line basis over a period of 45 years;
Equipment is depreciated at 25% annually using the reducing balance method over a
period of 10 years. The company has deemed the depreciable value of buildings was
90% of the cost.
 Three months’ interest on the (5%) note has been incurred and remains unrecorded
at year-end;
 Year-end count reveals that supplies on hand were valued at $36,411;
 The company tax rate is 30% of profit;
 The company estimates that a further $42,450 revenue has been earned but has not
yet been recorded and has not been billed;
 A count of inventory on hand revealed an amount of $41,975 at year-end;
 The business declared a final dividend of $32,000, but has not recorded this amount
as it will not be paid until March 2020 - in the form of additional shares;
 The notes payable are to be repaid in full at the end of the term of the loan (6 years);
 A current debtor who owes the company $8,950 has gone into liquidation and the
company concludes this amount will not be recovered. Further, the company advises
that they have completed an aged debtors analysis and based on this analysis, they
conclude that the year end balance of the provision for doubtful debts should be 7
per cent of the final balance of accounts receivable.
 The company has also spent $30,000 in researching and developing new products
during the year which it has recorded as a debit to other expenses. As yet none of
these products or the associated techniques used have been registered or
commercialized by the company in any way, although the CEO, Molly, believes this
money is well spent and has created significant possibilities for the company’s future.

REQUIRED:
(a) Use the above information and prepare properly labeled journal entries to record
ALL adjustments required in preparing the financial statements. In performing
any calculations, where appropriate round to the nearest dollar. Include brief
narrations.
(10 marks)

(b) Explain briefly your treatment of the research and development expenditure. In
doing so, support your treatment with reference to relevant accounting
guidance/concepts covered in the subject to date. If you feel that classifying this
item is difficult, identify any additional information you feel would assist you to be
absolutely certain about how to classify the expenditure in the financial reports.
(3 marks)

(c) Prepare an appropriately formatted Income Statement for the year ending
December 31 for Gellibrand Ltd. In doing so, include all information and elements
of formatting (including subheadings) you would typically see on the face of such
reports (no note disclosures are required).
(10 marks)

(d) Prepare an appropriately formatted Balance Sheet as at December 31 for
Gellibrand Ltd. In doing so, include all information and elements of formatting
(including subheadings) you would typically see on the face of such reports (no
note disclosures are required). (12 marks)
Cont. over

(e) In recent years the financial reporting function has come under challenge with
many arguing that the major financial reports do not contain some of the key
information that users require in order to make more informed decisions about a
business. Discuss the above statement. Your answer could include a critical
evaluation of the form and content of current financial reports and consideration
of any additional information that could be included in financial reports to
enhance decision making.
(15 marks)

Answer 1

Question 1 ALL adjustments required in preparing the financial statements. In performing
any calculations, where appropriate round to the nearest dollar. Include brief
narrations.

Adjustment Number 1 Depreciation on Building

Buildings are depreciated on a straight-line basis over a period of 45 years. The company has deemed the depreciable value of buildings was 90% of the cost.

	$
Original Cost of Building	1,377,400
Depreciable value (90%) of original cost	1,239,696
Useful life	45 years
Annual Depreciation	27,459
Already provided in the TB	13,774
Additional Depreciation required	13,775

Entry number 1	DR $	CR$
DR. Depreciation Expense Building	13,775
Accumulated Depreciation Building		13,775
Being additional depreciation booked on Building using estimated life of 45 year

Adjustment Number 2 Equipment is depreciated at 25% annually using the reducing balance method over a period of 10 years.

	$
Equipment (Cost)	553,200
Less: Accumulated Depreciation (31 Dec 2018)	(184,484)
Net Equipment balance 31 Dec 2018	368,716
Annual Depreciation @25% of net equipment balance ((reducing balance method)	92,179

Entry Number 2	DR $	CR$
DR. Depreciation Expense Equipment	92,179
Accumulated Depreciation Equipment		92,179
Being depreciation on Equipment booked on reducing balance method @25%

Adjustment number 3 Three months’ interest on the (5%) note has been incurred and remains unrecorded at year-end;

	$
Notes Payable value	940,000
Rate of Interest	5%
Interest for 3 months (940,000*5%*3/12)	11,750

Entry Number 3	DR $	CR$
DR. Interest Expense	11,750
CR. Interest Payable		11,750
Being unpaid Interest expense booked for 3 months @5%

Entry number 4 Year-end count reveals that supplies on hand were valued at $36,411

	$
Value of Supplies of hand in Books per Trial Balance	35,000
Value of Supplies as per physical Stock	36,411
Excess value of supplies in Hand	1,411

Entry Number 4	DR $	CR$
DR. Supplies on Hand	1,411
CR. Other Expense		1,411
Being Excess of supplies on Hand per physical count booked. (assumed that the cost of supplies is booked in Other expense)

Entry number 5

The company estimates that a further $42,450 revenue has been earned but has not
yet been recorded and has not been billed

Entry Number 5	DR $	CR$
DR. Unbilled Revenue	42,450
CR. Sales		42,250
Being year revenue earned but not billed as at December 31, 2019 booked. As billing has not been completed, this is recorded as a separate asset and not as Accounts Receivable

Entry number 6

A count of inventory on hand revealed an amount of $41,975 at year-end

	$
Value of inventory of hand in Books per Trial Balance	44,200
Value of Inventory as per physical Stock	41,975
Shortage of Inventory value	2,225

Entry Number 6	DR $	CR$
DR. Cost of Goods sold	2,225
CR, Inventory		2,225
Being shortage of Inventory as per physical count booked. (assumed that the cost of Inventory is booked in Cost of goods sold)

Entry number 7

The business declared a final dividend of $32,000, but has not recorded this amount
as it will not be paid until March 2020 - in the form of additional shares;

Entry Number 7	DR $	CR$
DR. Proposed Dividend	32,000
CR, Dividend payable		32,000
Being final dividend declared recorded. As new shares are not yet issued, these are recorded as payable.

Entry number 8

A current debtor who owes the company $8,950 has gone into liquidation and the
company concludes this amount will not be recovered

Entry Number 8	DR $	CR$
DR. Provision for bad debt	8,950
CR, Accounts Receivable		8,950
Being a debtor who has gone into liquidation and hence the balance has been written

Entry number 9

Further, the company advises that they have completed an aged debtors analysis and based on this analysis, they conclude that the year end balance of the provision for doubtful debts should be 7
per cent of the final balance of accounts receivable.

	$
Value of Accounts Receivable per trial balance	198,200
Less: Bad debt written off (Entry 8)	8,950
Corrected Balance	189,250
Provision for Doubtful debt required @7%	13,248
Provision for doubtful debt per Trial balance	17,458
Bad deb write off (Entry 8)	8,950
Balance after write-off	8,508
Additional provision required (13,248-8508)	4,740

Entry Number 9	DR $	CR$
DR. Bad Debt expense	4,740
CR, Provision for bad debt		4,740
Being provision for bad debts recorded to arrive at 7% provision

Entry number 10

Tax Entry

To arrive at the Tax Entry, first we need to correct the Trial balance in the question as it is not balance. Further we need to factor these adjustment (Entry 1 to 10). The Trial Balance corrected and with adjustment is below.

Corrected Trial Balance DR ($) CR ($) 136,560 3,600 940,000 726,600 1,377,440 594,600 11,600 553,200 184,484 35,000 44,200 198,200 Account Accounts Payable GST Payable Notes Payable Interest Payable Dividend payable Land Building (Cost) Accumulated Depreciation Building (30th June 2019) Cash and Cash Equivalents Equipment's (Cost) Accumulated Depreciation Equipment's (31/12/2018) Supplies on Hand Inventory Accounts Receivable Provision for doubtful debts Unbilled Revenue Prepayments (Current) Contributed Equity ($1 per share) Retained earnings (Balance 31/12/2018) Dividends (paid during the year) Proposed Dividend Sales Sales Returns Cost of Goods sold Wages and Salaries Bad Debt Expense Interest on Loan (incurred and paid during the year) Other Expenses Depreciation Expense building Depreciation expense Equipment Rent Expense 17,458 Adjustment Recorded Corrected Trial Balance DR ($) CR ($) DR ($) CR ($) 136,560 3,600 940,000 11,750 11,750 32,000 32,000 726,600 1,377,440 13,775 608,375 11,600 553,200 92,179 276,663 1,411 36,411 2,225 41,975 8,950 | 189,250 8,950 4,740 13,248 42,250 42,250 79,610 900,000 96,360 112,400 32,000 32,000 42,250 3,657,580 12,900 2,225 2,112,625 845,342 4,740 4,740 11,750 51,250 1,411 280,015 13,775 27,549 92,179 92,179 46,800 209,280 209,280 6,676,136 6,676,136 16 ESE E BEEN MET 79,610 900,000 96,360 112,400 3,615,330 12,900 2,110,400 845,342 39,500 281,426 13,774 46,800 6,488,392 6,488,392

Income Tax Calculation From new TB

Sales		3,657,580
Sales Returns		-           12,900
Net Sales		3,644,680
Cost of Goods sold	2,112,625
Wages and Salaries	845,342
Bad Debt Expense	4,740
Interest on Loan (incurred and paid during the year)	51,250
Other Expenses	280,015
Depreciation Expense building	27,549
Depreciation expense Equipment	92,179
Rent Expense	46,800
Total Expenses		3,460,500
Income before Tax		184,180
Tax @30%		55,254

Entry Number 10	DR $	CR$
DR. Tax Expense	55,254
CR, Tax Payable		55,254
Being provision for Tax @30%

Please note that based on tax treatment some of the tax needs to be split between current and deferred tax. However due to lack of data, all tax assumed to be current

(b) Explain briefly your treatment of the research and development expenditure. In doing so, support your treatment with reference to relevant accounting guidance/concepts covered in the subject to date. If you feel that classifying this item is difficult, identify any additional information you feel would assist you to be
absolutely certain about how to classify the expenditure in the financial reports.

Under IFRS all Research Expense need to be written off.

Examples of research activities are:

(a)   activities aimed at obtaining new knowledge;

(b)   the search for, evaluation and final selection of, applications of research findings or other knowledge;

(c)   the search for alternatives for materials, devices, products, processes, systems or services; and

(d)   the formulation, design, evaluation and final selection of possible alternatives for new or improved materials, devices, products, processes, systems or services.

Hence any expense falling in these buckets are typically expensed as incurred. Development expense can be capitalised. But to meet this requirement, the following criteria need to be considered

7. An intangible asset arising from development (or from the development phase of an internal project) shall be recognised if, and only if, an entity can demonstrate all of the following:

(a)   the technical feasibility of completing the intangible asset so that it will be available for use or sale.

(b)   its intention to complete the intangible asset and use or sell it.

(c)   its ability to use or sell the intangible asset.

(d)   how the intangible asset will generate probable future economic benefits. Among other things, the entity can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset.

(e)   the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset.

(f)   its ability to measure reliably the expenditure attributable to the intangible asset during its development.

If an entity cannot distinguish the research phase from the development phase of an internal project to create an intangible asset, the entity treats the expenditure on that project as if it were incurred in the research phase only. In view of the lack of data available, write -off the costs seems to be the most appropriate treatment. If they need to be capitalised, additional information will be required per the six conditions above to support the treatment of development phase

Question 3

Prepare an appropriately formatted Income Statement for the year ending December 31 for Gellibrand Ltd. In doing so, include all information and elements of formatting (including subheadings) you would typically see on the face of such reports (no note disclosures are required).

Gellibrand Limited
Statement of Income
For the year ended 31 December 2019
	US$
Sales	3,657,580
Less: Sales Returns	-            12,900
Net Sales	3,644,680
Cost of Goods sold	2,112,625
Gross Profit	1,532,055
Wages and Salaries	845,342
Bad Debt Expense	4,740
Interest on Loan (incurred and paid during the year)	51,250
Other Expenses	280,015
Depreciation Expense building	27,549
Depreciation expense Equipment	92,179
Rent Expense	46,800
Total Operating Expense	1,347,875
Profit before tax	184,180
Tax	55,254
Net Income	128,926
Earning Per share ($ cent per share)	0.14

Prepare an appropriately formatted Balance Sheet as at December 31 for
Gellibrand Ltd. In doing so, include all information and elements of formatting
(including subheadings) you would typically see on the face of such reports (no
note disclosures are required). (12 marks)

Gellibrand Limited
Statement of Financial Position
As at 31 December 2019
	US$
Assets
Non-Current asset
Land	726,600
Building (Net of accumulated Depreciation of $608,735)	769,065
Equipment ((Net of accumulated Depreciation of $276,663)	276,537
Total Non current assets	1,772,202
Current Assets
Cash and Cash Equivalents	11,600
Supplies on Hand	36,411
Inventory	41,975
Accounts Receivable (Net of provision for doubtful debts of $13,248)	176,002
Unbilled Revenue	42,250
Prepayments (Current)	79,610
Total Current Assets	387,848
Total Assets	2,160,050
Non current liabilities
Notes Payable	940,000
Total Non current liabilities	940,000
Current liabilities
Accounts Payable	136,560
GST Payable	3,600
Interest Payable	11,750
Tax Payable	55,254
Dividend payable	32,000
Total Current liabilities	239,164
Total liabilities	1,179,164
Equity
Contributed Equity ($1 per share)	900,000
Retained earnings	225,286
Dividends (Including Proposed dividend)	-         144,400
Proposed Dividend
Total Equity	980,886
Total liabilities and Equity	2,160,050

e) In recent years the financial reporting function has come under challenge with many arguing that the major financial reports do not contain some of the key information that users require in order to make more informed decisions about a business. Discuss the above statement. Your answer could include a critical evaluation of the form and content of current financial reports and consideration of any additional information that could be included in financial reports to enhance decision making.

There are significant challenges in the financial reporting which has also resulted in amendments to IFRS to make reporting more transparent. However, challenges still exist around the overall reporting framework

hey could rely on the numbers to make intelligent estimates of the magnitude, timing, and uncertainty of future cash flows and to judge whether the resulting estimate of value was fairly represented in the current stock price. And they could make wise decisions about whether to invest in or acquire a company, thus promoting the efficient allocation of capital.

Some of the challenges include:

i) Use of estimate requiring judgement

ii) Lack of consistent accounting framework that create challenges around comparison of financial performance

iii) Management pressure on financial performance resulting in aggressive judgement

The other challenge stems