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Group Assignment (15% of unit mark) – PIBT – Trimester 3, 2010

SCHOOL OF ACCOUNTING FINANCE AND ECONOMICS


ACC1100 ACCOUNTING I

Introduction:
This is a group-based assignment. Each group, which consists of 3 students, must
answer the questions in the two cases and submit them to your lecturer by the due
date.

Due date: Week 11

Guidelines:
• Group formations must be finalised by Week 9 of the semester, and each
group must submit the details of its members to the lecturer.
• The final answers are to be submitted to your lecturer on or before Week 11
of the semester. The answers must be type-written, with double spacing, on
one side of the page only, using a size-12 font, and figures to at least 2
decimal places. Any groups unable to meet the group project submission
date must apply (prior to the submission date) for an extension of time. The
application must be in writing setting out the grounds for which deferral is
sought. The application must be made to the unit coordinator. Where group
projects are submitted after the due date (without approval), normal penalties
apply.
• Remember that the University regards academic misconduct as a very
serious matter. You are forbidden to submit as your own any work that is in
whole or part the work of other people.
Case 1 (7 marks)

Andrew Jentai, the COO of Dhalshun Ltd, has recently reviewed the operations of the
company, and concerned about the continued weak profit performance of the
company. The company board has constantly stressed the need for the company to
improve its profits. Otherwise, the company will not be able to sustain the confidence
of its shareholders and creditors. It is now a couple weeks before the end of the year,
and hence it is almost certain that the company will record another low profit at the
end of the year. Andrew knows that as a consequence of this low profit performance
the company will have difficulty in refinancing some loans and will be pushed to pay
higher interest rates. This will increase the financial burden of the company.

Andrew realises that it is way too late for operations to increase profits for the year.
However, he has come up with a plan, which in his opinion, will enable the company
to increase the reported profit for that year. He mentions the fact that the prices of
inventory have been failing in recent weeks, and thus he suggests for the company to
purchase large amounts of inventory in the remaining two weeks of the year, and uses
the LIFO methods for valuing and reporting inventories for that year.

As the junior but talented junior accountant, you are asked by the CEO, Ayawae
Boongaya, about Andrew’s suggestion. Ayawae particularly wants to know:
(a) whether Andrew’s plan will enable the company to report higher profit for the
year;
(b) the positive and negative consequences of the proposed plan for the company
and shareholders; and
(c) whether the plan complies with accounting standards.

Required:

Analyse and prepare a written discussion for Ayawae Boongaya on the above three
issues.

(a) 1.75 marks


(b) 3.50 marks
(c) 1.75 marks
Case 2 (8 marks)

Panta and Holly Kamp are cousins. They are planning to open women’s clothing
shops in Gold Coast and Perth. Their plan is to buy two stores (one in Gold Coast, one
in Perth) currently owned by the same owner and currently used as chemist stores. The
owner asks for the same price for both stores. Both buildings have the same residual
value and useful life. Panta and Holly also want to use the same fixtures and
equipments in both shops.

The following schedule provides details of the assets:

Cost of each ($) Residual value Useful life of each


Building 310,500 8,000 25
Fixtures 29,500 2,000 5
Equipment 38,000 2,000 8

Additionally, each building will need to be renovated at a cost of $35,000, and it is


expected that the renovation will increase the useful life of the building by 2 years.
The projected income statements for the first year for the two shops have been
separately determine by each cousin and are shown in the schedule below.

Panta Kamp - GOLD COAST shop Holly Kamp - PERTH shop


Projected income statement Projected income statement
for year ended 31 December 2xxx for year ended 31 December 2xxx
$ $ $ $
Sales 367,500 Sales 367,500
Cost of Goods 188,000 Cost of Goods 188,000
GROSS PROFIT 179,500 GROSS PROFIT 179,500
Operating Operating
Salaries 80,000 Salaries 80,000
Building 35,000 Other expenses 10,100
Other expenses 10,100
Depreciation Depreciation
Building 24,840 Building 12,500
Fixtures 11,800 Fixtures 5,500
Equipment 9,500 Equipment 4,500
TOTAL 171,240 TOTAL 112,600
NET PROFIT 8,260 NET PROFIT 66,900

Panta does not understand why her projected net profit can be so much lower than
Holly’s when they both are projecting the same sales, planning to employ the same
number of people and spending the same salaries expenses, and estimating the same
amount for other expenses.

Required:

a. Which depreciation method has each cousin elected to use for their buildings,
fixtures, and equipment? Provide the calculation of depreciation for each of
the assets.
4.5 marks
b. How did each cousin account for the $35,000 cost of renovation? Which one
do you think is correct and why?
2 marks

c. Based on the projected income statements, which shop would you invest in or
lend money to? Provide explanation for your selection.
1.5 marks

--- End of group assignment ---