According to the Portfolio assessment scenario, your friend has asked for your advice regarding different business propositions. At present your friend earns $80,000 per annum and their partner has a part-time job in which they earn $20,000 per annum. Your friend also enjoys running a small hobby business selling gemstones, hand-made jewellery, and lapidary supplies at local markets.

With the introduction of Covid restrictions, your friend had to move their micro hobby business online via the new 'Buy Something Tasmanian' website, where it is free to list your business. In that short time, the high level of interest in their products online has taken them by surprise. Your friend explains that one business option would be to expand the hobby business and employ their 20-year-old son, who is currently a third-year apprentice plumber and still lives at home, to work in the business full time. The son contributes $50 per week towards household expenses but your friend suggests that he needs to understand that his contribution to the household budget is not adequate. If he were to work in the business at a reduced wage, this would benefit the business by not having to employ an assistant, and the savings in wages would go some way to compensate for the short-fall in room and board.

1. Your friend has put together a list of transactions from the bank account records of the hobby business and other events for the past financial year. From this and other information provided below:

a. Use an Excel spreadsheet to draw up a worksheet (based on the accounting equation) and enter the transactions for the year.

2. What would your advice be regarding the expansion of the Hobby business (based on the accounting information provided below)? What other factors need to be considered if this course of action is taken?

Important information about the Hobby business:

a. As you know, your friend does not have an accounting background, and therefore has not kept adequate records. They argued that they did not make enough to be considered a business. It was only a hobby and the money they made at the markets was only enough to cover the costs of purchasing supplies and equipment and the costs of excursions and field trips to go fossicking. Nevertheless, they kept a separate bank account for the Hobby business, the balance of the bank account at the beginning of the 2020 financial year was $3,270. Your friend had put $2,000 cash into the account when they opened itthree years ago. Other cash was held in petty cash. A float of $200 cash is always kept in the petty cash tin to use each weekend at the markets.

1. On 1 July 2017 after joining the local Lapidary club, your friend loved the fossicking trips so much they purchased a 1986 Bundera Landcruiser 4x4 to be used only for that purpose. The price when new was $22,230, however your friend paid $2,500 given its age and condition. One of the wealthy club members offered a $5,000 interest free loan to your friend to purchase the vehicle, pay the registration transfer fee of $100 and to make improvements by adding a bullbar, which cost $1,500 and a recovery winch for $850. Your friend gratefully accepted the loan and promised to pay it back as soon as possible. At the start of the current financial year the loan was still outstanding. When you asked about depreciation and explained the concept, your friend suggested that the most appropriate method of depreciation for the motor vehicle would be the reducing balance method with a rate that was 1.5 times the straight-line rate. The vehicle is expected to be useful for 10 years, after which time the residual value would be nil.
2. Two years ago, on 1 July 2018, your friend used personal savings to purchase a converted shipping container shed for $ 14,350. The shed is used to store supplies, tools, and equipment. It also provides a dedicated space for your friend to work on their hobby. They expect to sell the shed for $5,000 after using it for 5 years. The benefits from using the shed would be the same across all years. After 5 years they will consider building a permanent structure on their land, depending on business needs at the time and what decisions they make in relation to the business propositions they are currently considering.

The following instructions are provided:

Follow proper accrual principles and round all amounts to the nearest dollar.

Use the relevant information below and the important information noted above, to

calculate the opening balances on the accounts in the worksheet.

Note that all figures given are for a full year and your friend withdraws amounts

periodically from the petty cash tin to buy lunch while at the markets. They have estimated lunch normally costs about $20 per day. They attended the markets every Saturday for 6 months of the year from October to March inclusive.

Include an opening balance in the prepayments column for $84 contents insurance on the shed that was paid on 28 May 2019 for the period 1 June to 1 December 2019.

Includes an opening balance in the accrual column relating to wages of $130 owing to

the son for working at the market stall in June 2020.

Jewellery making supplies on hand at 1 July 2019 totalled $480; the equipment

including a home-made tumbler, cutting saw, faceting machine and polisher was valued at $1,500. Your friend did not want to depreciate the lapidary equipment as the residual value was estimated to be the same as the current value. Lapidary supplies held for sale were valued at $1,690.

There were no amounts owing to them at the start of the year, however they had an outstanding account payable with a supplier that amounted to $1,800.

1. 1Paid cash for jewellery making supplies purchased. The supplies cost of $1,750.
2. 2Paid accrued expenses from previous year.
3. 3Purchased lapidary supplies on credit for $840. These supplies are held for re-sale.
4. 4A new credit card arrived. With a credit limit of $5,000, the credit card is to be used
5. exclusively for the hobby business.
6. 5Using the new credit card, premium cabbing equipment was purchased on 5 September
7. 2019 for $3,950. This equipment was to be depreciated using the units of production method. Its useful life is expected to be around 5 years or 5000 hours with a residual value of $550. At 30 June 2020 the cabbing machine had been used for 600 hours.
8. 6On 31 October 2019, $500 was paid in cash for a regular advertisement in the bi-monthly Lapidary magazine. The first advertisement would appear in the December edition and continue for 12 months.
9. 7On 1 January 2020 paid the insurance premium. The insurance company offered a discount to pay a full year premium, so your friend decided to pay the $150 for a full year.
10. 8Credit sales for the year totalled $4,000, while cash sales totalled $13,000. The lapidary supplies sold had cost $2,500. Gemstones that had been dug out of the ground, cleaned, cut and polished, accounted for the majority of the turnover.
11. 9Wages totalling $ 700 were paid during the year. At the end of the year, $160 of wages for the last week of the year was owed to a cousin who had helped at the market stall.
12. 10Paid cash to creditors for $2,500.
13. 11Received an online order for an original design amethyst necklace. The customer paid
14. the quoted price of $ 900 up-front when they placed the order on 28 May 2020. It was
15. expected to take 6 weeks to complete the job.
16. 12Received $2 800 from debtors and paid $2,000 off the credit card and repaid $3000
17. owing on the loan from the fellow club member.
18. 13During the year paid $1 650 cash for vehicle running expenses and $710 for electricity
19. to the shed.
20. 14Jewellery supplies on hand at 30 June 2020 were $230.
21. 15On 30 June 2020, applied for a 5-year prospecting and fossicking licence and paid the
22. application fee of $32.40. The licence will permit fossicking activities outside of the declared fossicking areas that your friend had been limited to previously.