Week 12 Activity Questions (1)

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Page 1 of 15 ACC1AMD Week 12: Activity Questions Week 1 S1-17 Environmental and economic sustainability (LO 8) Southern Waste Australia is considering a new land-fill site. Contracts with the state government and local authorities will provide Southern Waste with revenues of $2 million per annum. Expenses, including depreciation, are estimated to be $1 million per annum. The land-fill site is expected to have a life of 30 years, when it will be closed with de-commissioning costs of $5 million at today’s prices. Concern has been expressed that toxic waste won’t be contained by the design of the land- fill site and that this will result in environmental pollution to marine and plants that will cost in the region of $50 million to remedy (again, at today’s prices). Requirement What issues of sustainability are suggested by this problem? Considerations of environmental and financial sustainability are suggested. The environmential expenses are difficult to quantify but arguably as significant as the financial ones. However, they are interconnected, as the severity of the environmental impact management directly affects the financial expenses for the restoration. The eventual expenses for rectifying waste contamination could surpass initial estimates, leading to concerns about the fairness between generations (the current generation transferring costs to future ones). Additionally, there is an element of uncertainty. It is possible that no environmental contamination will occur. If the likelihood of contamination is 50%, should the costs be assessed accordingly? Or is it prudent to adopt a cautious approach when evaluating potential outcomes that may result in severe environmental repercussions - for instance, by assuming the most unfavorable financial scenarios? The straightforward financial calculation, disregarding the time value of money, is as follows: The total earnings for the landfill initiative over 30 years amount to 30 x $(2 – 1)m – $5m = $25m. If the containment of the landfill is successful, this represents the net profit. In the case of a 50% chance of contamination, the average net financial gain will be zero ($25m – 50% x $50m). However, unless the contracts mandate Southern Waste to cover any contamination expenses, the company will still achieve a lifetime profit of $25m, while the burden of the same amount will fall on the taxpayer or ratepayer. The financial situation could worsen and potentially become more unfair if the costs of the environmental cleanup exceed projections. Issues 4. Identify the concepts or principles violated Beautiful Wedding Memorabilia Pty Ltd had a number of major business transactions and events during 2020. An extract is provided below. a. Merchandise inventory with a cost of $68 000 is reported at its net realisable value of $100 000 in the statement of financial position. b. The owner of Beautiful Wedding Memorabilia Pty Ltd, Ima McBride, used company funds to purchase a computer for personal use for $2500. She recorded it as a decrease in Cash and an increase in Office Equipment. c. The manager of Beautiful Wedding Memorabilia Pty Ltd wanted to make its 2020 profit look better, so she added in memorabilia sales that occurred on the first two days of 2021. d. The manager of Beautiful Wedding Memorabilia Pty Ltd wanted to make its 2020 profit look even better, so she did not record an interest payment of $15 000 incurred but not due to be paid until 1 January 2021. e. Beautiful Wedding Memorabilia Pty Ltd is currently being sued by a bride as she was injured when one of the company’s wedding snow globes shattered. It is expected that the company will have to pay damages; however, the amount is currently uncertain and so the accountant has decided not to include it anywhere in the financial statements.

Page 2 of 15 ACC1AMD Week 12: Activity Questions Required For each situation: a. Identify if any concept or principle has been violated. b. Discuss what should have been done and provide evidence for your answer. 5. Identify the violated concept, principle or criterion. Here are some accounting reporting situations: a. Bonilla Co. Ltd is in its fifth year of operation and has yet to issue financial statements. (Do not use the full disclosure principle.) b. Hospital Supply Co. Ltd reports only current assets and current liabilities on its statement of financial position. Property, plant and equipment and bills payable are reported as current assets and current liabilities, respectively. Property, plant and equipment is stated at the amount for which it could be sold at short notice. Liquidation of the entity is unlikely. c. Watts Ltd has inventory on hand that cost $400 000. Watts reports inventory on its statement of financial position at its current market value of $425 000. d. Steph Wolfson, manager of Classic Music Ltd, bought a computer for her personal use. She paid for the computer with company funds and debited the ‘computers’ account. Required For each situation, give the concept, principle, recognition criteria or constraint that has been violated, if any. Give only one answer for each situation.

Page 3 of 15 ACC1AMD Week 12: Activity Questions Week 2 S1-6 Using the accounting equation to analyse transactions (LO 3) Elaine’s Inflatables earns service revenue by providing party planning services and inflatable playscapes. Elaine’s Inflatables is owned and operated by Elaine Gibson. During the past month, Elaine’s Inflatables had the following nine transactions: a. Gibson contributed $10 000 to the business in exchange for capital. (This is transaction a .) b. Purchased equipment for $5 000 on credit. c. Paid $400 for office supplies. d. Earned and received $2 500 cash for service revenue. e. Paid $400 in wages to employees. f. Gibson withdrew $1 000 cash. g. Earned $1 000 for services provided. Customer has not yet paid. h. Paid $1 000 for rent. i. Received a bill for $250 for the monthly electricity supply. The bill has not yet been paid. Requirement Indicate the effects of the business transactions on the accounting equation for Elaine’s Inflatables. Transaction a is answered as a guide: Increase asset (Cash); Increase equity (Gibson, capital) P1-2 Using the accounting equation for transaction analysis (LO 3) Cameron Turnbull started a new business, Turnbull Gymnastics, and completed the following transactions during December: Dec 1 Cameron contributed $21 000 cash as capital. 2 Received $2 400 cash from customers for services performed. 5 Paid $350 cash for office supplies. 9 Performed services for a customer and billed the customer for services rendered, $1 500. 10 Received $100 invoice for gas due in two weeks. 15 Paid for advertising in the local paper, $300. 20 Paid gas invoice received on 10 December. 25 Collected cash in full from customer billed on 9 December. 28 Paid rent for the month, $2 800. 28 Paid $1 100 to assistant for wages. 30 Received $2 800 cash from customers for services performed. 31 Cameron withdrew $4 500. Requirement Analyse the effects of the transactions on the accounting equation of Turnbull Gymnastics.

Page 4 of 15 ACC1AMD Week 12: Activity Questions Week 3 E2-8 Posting journal entries to T-accounts (LO 4) Open the following T-accounts for London Engineering: Cash; Accounts receivable; Office supplies; Equipment; Accounts payable; Loans payable; London, capital; London, withdrawals; Service revenue; Electricity and gas expense. Post the journal entries to the T-accounts. Also transfer the dates to the T-accounts. Calculate the 31 July balance for each account. Use the following information to answer Exercise E2-9 . The following transactions occurred for Wilson Technology Solutions: May 1 The business received a capital contribution in cash of $85 000 from the owner, Zack Wilson. 2 Purchased office supplies on credit, $550. 4 Paid $57 000 cash for building and land. The building had a fair market value of $48 000. 6 Performed services for customers and received cash, $3 600. 9 Paid $450 on accounts payable. 17 Performed services for customers on credit, $3 400. 19 Paid rent expense for the month, $1 400. 20 Received $1 300 from customers for services to be performed next month. 21 Paid $300 for advertising in next month’s IT Technology magazine. 23 Received $2 600 cash on account from a customer. 31 Incurred and paid salaries, $1 200.

Page 5 of 15 ACC1AMD Week 12: Activity Questions CE-2 Journalising transactions, posting to T-accounts and preparing a trial balance (LO 2, 3, 4, 5) Exercise CE-2 continues with the garden maintenance business of Lawlor Lawn Service begun in Exercise CE-1 in Chapter 1. Here, you will account for Lawlor Lawn Service’s transactions as it is actually done in practice. Lawlor Lawn Service completed the following transactions during May: May 1 Received $1 700 investment by Lawlor. Opened bank account titled ‘Lawlor Lawn Service’. 3 Purchased on credit a mower, $1 200, and weedkiller, $240. The equipment is expected to remain in service for four years. 5 Purchased $30 of petrol. Wrote cheque no. 1 from the new bank account. 6 Performed lawn services for client on credit, $150. 8 Purchased $150 of fertiliser supplies from the lawn store that will be used on future jobs. Wrote cheque no. 2 from the new bank account. 17 Completed landscaping job for client; received cash $800. 31 Received $100 on account from 6 May sale. Requirements Open T-accounts: Cash; Accounts receivable; Lawn supplies; Equipment; Accounts payable; Lawlor, capital; Lawlor, drawings; Service revenue; Fuel expense. Journalise the transactions. Explanations aren’t required. Post to the T-accounts. Key all items by date and denote an account balance as Bal. Formal posting references are not required. Prepare a trial balance as at 31 May 2021.

Page 6 of 15 ACC1AMD Week 12: Activity Questions Week 5 S3-3 Applying the accrual principle (LO 1) South Shore Magazine sells subscriptions for $60 for 12 issues. The company collects cash in advance and then mails the magazines to subscribers each month. Apply the revenue recognition principle to determine: • when South Shore Magazine should record revenue for this situation. • the amount of revenue South Shore Magazine should record for eight issues. P3-3 Journalising and posting adjustments to T-accounts and preparing an adjusted trial balance (LO 3, 4) The unadjusted trial balance of Aurora Air Purification Systems at 30 June 2021 and the data needed for the adjustments follow. AURORA AIR PURIFICATION SYSTEMS Unadjusted trial balance as at 30 June 2021 $ $ Balance Account Debit Credit Cash 7 800 Accounts receivable 19 800 Prepaid rent 2 600 Office supplies 1 100 Equipment 19 900 Accumulated depreciation—equipment 4 100 Accounts payable 3 000 Salaries payable Unearned revenue 2 800 Aurora, capital 39 600 Aurora, withdrawals 9 300 Service revenue 15 400 Salaries expense 3 100 Rent expense Depreciation expense—equipment Advertising expense 1 300 Supplies expense Total 64 900 64 900

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