Reference no: EM131762

QUESTION 1

Timbatown Pty Ltd is a manufacturer of timber tables and chairs. The company mostly sells on a retail basis to household consumers, but occasionally receives large orders for tables and chairs from schools and businesses. Management uses the first-in-first-out inventory assumption, despite the inventory cost being fairly stable throughout the year. As each item is manufactured, it is stamped underneath with a batch number and cost code. Information about inventory for the past month is presented below:

In stock at 1 June 2012:

26 tables         Costs: Materials          $440* per table

                               Labour:            $197 per table

                               Overheads:       $66* per table

 

94 chairs         Costs:    Materials         $110* per chair

                                    Labour:        $112 per chair

                               Overheads:        $22* per chair

During June 2012, the following tables and chairs were produced:

 

35 tables         Costs:   Materials        $396* per table

                                    Labour:       $197 per table

                                Overheads:      $66* per table

 

116 chairs       Costs:   Materials        $99* per chair

                                    Labour:      $112 per chair

                               Overheads:      $22* per chair

 

*Costs associated with manufacture are GST inclusive.

The following sales were recorded during June 2012:

40 tables @ $990 each (GST inclusive)

120 chairs @ $330 each (GST inclusive)

A stock-take on 30 June 2012 revealed that two tables and eight chairs were scratched. Their selling price would need to be reduced to $660 and $165 respectively (GST inclusive).  All other items in stock would be sold at the retail price charged during June. The business has a special offer where free delivery is included with each sale. The standard delivery cost is $22 per item (GST inclusive).

Required:

(a)   Prepare a partial income statement for June (down to gross profit). Show all workings.

(b)   Prepare the general journal entry(ies) to record any inventory write down.

(c)    Determine the value of each type of inventory at 30 June 2012 in accordance with AASB 102 Inventories. Justify all parts of your answer and show calculations.

(d)   Timbatown Pty Ltd uses the first-in-first-out assumption for its inventory. Comment on whether you think the alternative approaches of specific identification or average cost could be used by Timbatown Pty Ltd instead of first-in-first-out.

QUESTION 2

Bickering Ltd Income Statement for the year ended 30 June 2012

  Sales (credit)                                                                           636,100

LESS Cost of sales                                                                   (411,500)

GROSS PROFIT                                                                          224,600

Inventory Loss                                                                             (2,200)

Adjusted Gross Profit                                                                222,400

LESS Operating expenses

            Depreciation of equipment                    50,000

            Depreciation of motor vehicles               35,000

            Doubtful debts                                     4,000

            Interest expense                                 11,500

            Wages expense                                   71,300

            Insurance expense                              12,000

            Other expenses                                     8,800            (192,600)

NET PROFIT BEFORE TAX                                                          29,800

LESS Company tax expense                                                      (8,940)

PROFIT AFTER TAX                                                                 $ 20,860

Bickering Ltd Balance Sheets as at:

Current Assets Cash Accounts Receivable Allowance for Doubtful Debts Inventory Prepaid Insurance	30/6/12 109,010 38,100 (2,500) 65,500 3,000 213,110	30/6/11 2,140 45,200 (2,000) 70,480 5,000 120,820
Non-current Assets Motor Vehicles Less Accumulated Depreciation Equipment Less Accumulated Depreciation Land	240,000 (70,000) 650,000 (230,000) 100,000 690,000	240,000 (35,000) 640,000 (200,000) 0 645,000
Total Assets	$ 903,110	$ 765,820
Current Liabilities Accounts Payable Accrued Interest Tax Payable Accrued Wages	35,600 8,000 8,940 880 53,420	22,700 0 7,350 1,940 31,990
Non-current Liabilities Loan Payable	105,000	110,000
Total Liabilities	158,420	141,990
Equity Share Capital Retained Earnings General Reserve	580,000 44,690 120,000 744,690	465,000 58,830 100,000 623,830
Total Liabilities and Equities	$ 903,110	$ 765,820

Other information:

Bad debts were written off during the year.

Equipment was sold for $10,000 cash.

New equipment was purchased for cash.

A loan repayment was made.

Additional shares were issued.

$20,000 was transferred to the general reserve from retained earnings.

Cash dividends were paid.

Tax was paid.

Required:

(a)   Prepare a statement of cash flows for the year ending 30 June 2012.

(b)   Prepare a reconciliation of profit to net cash flow from operating activities.

(c)    Comment on the cash flows of Bickering Ltd.

QUESTION 3

B & B Mechanical Repairs is a small, family owned partnership that specialises in the servicing and repair of motor vehicles. The business employs three qualified mechanics, while the partners (owners) spend around half of their time in the office in an administration role, and the other half working on vehicles.

The mechanics repair all makes and models of cars, and order parts from suppliers once a vehicle has been initially inspected. The business could receive as many as 10 deliveries per day of spare parts, each arriving on credit with 30 day terms being offered. Suppliers represent the major car manufacturers including Holden, Ford, Toyota, Mitsubishi, Kia, Subaru etc. At the end of each month, the business receives an invoice from each supplier with the total amount outstanding from the months' purchases. The invoices are always paid in full within the discount period (if offered).

Customers are required to pay by cash, eftpos, direct debit or cheque on collection of their vehicle, as no credit terms are offered. Other typical transactions include payment of rent each week, the cash purchase of kitchen and office supplies, and the quarterly utilities accounts. The employees are paid in cash weekly and the partners usually take cash drawings of between $900 and $1,200 per week, depending on the week's revenue.

At present, the business uses one general journal in conjunction with a general ledger to record all business transactions. The business is registered for GST.

Required:

(a)   Design templates of special journals that you recommend to be used by B & B Mechanical Repairs based on the information above.

(b)   Write a report explaining to the partners how the introduction and use of the special journals you designed in part (a), along with subsidiary ledgers and control accounts, could be used by the business to improve the recording process. Based on the templates you prepared in part (a), you should also explain in detail when and how posting to the ledgers is done. Use specific examples from the business described above.