Business Background

Zennith's Musical Instruments Pty Ltd has been in business in Peth since July 2013. The Company was started by David Zennith and operates a shop which sells musical instruments on a wholesale basis to other businesses on credit and cash terms. The Company's share capital consists of 1,134,000 ordinary shares, issued at $1 each, that are owned by various members of the Zennith family. The company enjoys a combination of staff to operate the business. The company has a financial year end of 30 June and prepares adjusting entries at the end of the financial year.

The business is registered with the ATO for the goods and services tax (GST), and its Australian Business Number (ABN) is 78 303 238978. It reports and pays amounts owing for GST quarterly via the business activity statement (BAS). The business has elected to use the accrual basis of accounting for both accounting and GST purposes.

Accounting policies

BAD AND DOUBTFUL DEBTS

The business uses the direct write-off method when accounting for bad bets as they only occur infrequently.

INVENTORY

The business maintains a periodic inventory system.

PREPAYMENTS

Expenses paid in advance for their use, such as insurance, are initially recorded as assets. Any used portion at the end of period is entered into the journal as an expense.

PROPERTY, PLANT AND EQIUPMENT

The business has adopted the ATO rates of depreciation for all depreciated assets. These rates are based on the ATO's estimate of useful life. The straight-line method is used for the calculation of depreciation on these assets. Amounts calculated are rounded to the nearest dollar.

ACCOUNTING RECORDS

To ensure efficiency of its accounting procedures, the company uses the following special journals to maintain its accounting records.

General journal (GJ): to record all transactions that cannot be recorded in the special journals

Sales journal (SJ): to record all sales of goods or services on credit, and GST collected

Purchases journal (PJ): to record all credit purchases of goods for resale, and GST paid

Cash receipts journal (CRJ): to record all receipts of cash, including cash sales of goods or services.

Cash payments journal (CPJ): to record all payments made on the business's cheque account, including cash purchases of goods for resale.

Accounts receivable and accounts payable subsidiary ledgers; separate accounts are maintained for each customer and each supplier

General ledger: separate accounts are maintained for income, expense, asset, liability and equity accounts.

ACCOUNTING PROCEDURES

On a daily basis, all relevant source documents are collected and transactions recorded in the appropriate journals. Transactions recorded in the 'other accounts' columns and all entries relating to accounts or inventory items in the subsidiary ledgers are posted daily. On a monthly basis, special journals are totalled and posted after the bank statement has been received and any missing items have been recorded. A worksheet is then prepared from the general ledger and a monthly income statement and balance sheet are produced, together with schedules of accounts receivable and accounts payable. At the endof the year, adjusting and closing general journal entries are prepared and posted to the general ledger accounts.

The chart of accounts includes the following accounts: 151Accumulated depreciation - Showroom Fittings, 201Interest Payable, 202Utilities Payable, 203Wages Payable, 204Salaries Payable, 205 Income Tax Payable, 206 Dividends Payable, 302 Dividends Declared, 303 Profit or Loss Summary, 602 Depreciation Expense - Showroom Fittings, 603 Depreciation Expense - Equipment, 604 Supplies Expense, 605 Rent Expense, 606 Insurance Expense, 608 Interest Expense, 610 Income Tax Expense, 614 Bad Debts Expense.

An Unadjusted Trial Balance and Chart of Accounts at 31 May 2019 has the following account balances. All accounts have normal debit and credit balances.

UNADJUSTED TRIAL BALANCE

as at 31 May 2019

NO

ACCOUNT NAME

Debit ($)

Credit ($)

100

Cash at Bank

570,017.7

101

Accounts Receivable Control

261,954

102

Store Supplies

151,011

103

Inventory

781,200

104

Prepaid Store Rent (paid 1 March 2019)

739,620

105

Prepaid Insurance (paid 1 Nov 2018)

11,340

110

GST Paid

436,747.5

150

Showroom Fittings

510,300

160

Equipment

173,250

161

Accumulated Depreciation - Equipment

85,050

200

Accounts Payable Control

168,953.4

211

GST Collected

400,591.8

250

Mortgage Loan (due 31 July 2043)

606,942

300

Share Capital

1,134,000

NO

ACCOUNT NAME

Debit ($)

Credit ($)

301

Retained Profits

963,522

400

Sales Revenue

4,045,734

402

Sales Returns

8,757

405

Discount Received

24,192

500

Purchases

1,926,855

502

Purchase Returns

10,143

600

Freight-Out

2,898

601

Wages Expense - Sales Staff

968,121

607

Advertising Expense

43,848

609

Utilities Expense

58,464

611

Sundry Expenses

3,024

612

Salaries Expense - Office Staff

760,662

613

Discount Allowed

31,059

7,439,128.2

7,439,128.2

Schedule of Accounts Receivable

as at 31 May 2019

Note: Zennith's Musical Instruments offers all customers Credit Terms 2/10, n/30 unless otherwise stated.

Acc No.

Account

Invoice date

Amount ($)

101-1

Bach Cellos

27 May

104,781.60

101-2

Mozart Guitars

16 May

52,945.20

101-3

Brahms Pianos

23 April

71,656.20

101-4

Beethoven Trumpets

11 May

32,571

261,954

Schedule of Accounts Payable

as at 31 May 2019

Acc No.

Account

Invoice date

Terms

Amount ($)

200-1

Strauss Synthesisers

29 May

2/10, n/60

47,817

200-2

Vivaldi Violins

22 May

1/10, n/45

121,136.40

168,953.40

The following transactions occurred during June 2019and are inclusive of GST where relevant

Week 1

1- Bach Cellos paid the entire balance of its account that was still outstanding.

- Delivered goods to Mozart Guitars for $75,121.20 and issued invoice #910. Issued Cheque #153 to pay $8,316 for delivery costs of inventory to their premises.

3 - Paid the amount owing to Strauss Synthesisers. Cheque #154 was sent.

4 - Total cash sales for the week were $21,205.80.

Week 2

8 - Brahms Pianos paid $30,076.20 toward the amount it owes us.

9 - Made a purchase from Vivaldi Violins for $64,449 for boutique lighting. The date of invoice was 8 June. Invoice No. VV08.

9 - The firm issued Cheque #155 for the purchase of store supplies amounting to $6,098.40.

10 - Bach Cellos purchased inventory of $75,675.60. Invoice #911 was issued.

11 - Some of the boutique light fittings purchased on 7 June from Vivaldi Violins were the wrong design. Returned inventory in exchange for a Credit Note of $20,790.

12 - Total cash sales for the week were $28,967.40.

Week 3

15 - Purchased inventory from Strauss Synthesisers for $106,029. The invoice was dated 14 June. Invoice No. SS14.

15 - Paid office staff salaries of $73,458. Cheque #157 was issued for payment. Cheque #158 was issued to pay sales staff wages, $62,370.

16 - Sold inventory to Brahms Pianos for $136,798.20 on invoice #912. Issued Cheque #156 to pay for delivery costs of $10,395.

16 -18 - The company issued Cheque #159 to pay the amount still owing to Vivaldi Violins.

19 - Total cash sales for the week were $27,512.10.

Week 4

22 - Brahms Pianos returned $25,918.20 of inventory purchased on 14 June. Issued a Credit Note for the transaction.

23 - Issued Cheque #160 $12,600 to pay for the annual gift the Company donates to the Smith Foundation Charity Fund. The gift is to be recorded as a sundry expense in the accounts.

24 - Purchased inventory from Vivaldi Violins worth $103,257. The date of the invoice was 22 June. Invoice No. VV09.

25 - Received the total amount owing from Brahms Pianos.

26 - Total cash sales for the week were $43,243.20.

Week 5

28 - Mozart Guitars paid the entire balance of its still outstanding account.

29 - Reduced $83,160 of the amount owing to Vivaldi Violins and Cheque #161 was issued.

29 - A dividend of $177,100 was declared to the Company shareholders. However, the dividend will not be paid until September 30, 2019. Paid sales staff wages, $62,370 and Cheque #162 was issued to meet the payment.

30 - Issued additional shares to the owners of the Company for cash, and $126,000 was received and banked. Total cash sales for the week were $25,779.60.

INSTRUCTIONS

You are required to create your own accounting records to record this information. You can useWord or Excel. If you have any doubts about how to set up any accounting records, please refer to your textbook. Chapter 6 of your textbook is relevant for special journals and control accounts. Please ensure that your final submission is in a suitable format for printing.List general ledger accounts underneath each other rather than across the page so that if your assignment needs to be printed for marking, it does not have to be reformatted. You may be penalised if your assignment has to be reformatted for printing.

Record the transactions in the appropriate journals for the month of June 2019. The special journals should have the following headings as a minimum: Sales journal -> Date, Account, Invoice No., Sales, GST Collected, Accounts Receivable. Purchases Journal -> Date, Account, Purchases, GST Paid, Accounts Payable. Cash Receipts Journal -> Date, Account, Ref., Cash, Discount Allowed, GST Collected, Accounts Receivable, Sales, Other Accounts, GST Collected. Cash Payments Journal -> Date, Account, Ref, Cash, Discount Received, GST Paid, Accounts Payable, Office Supplies, Other Accounts, GST Paid.

Total all special journal columns and post to the appropriate General and Subsidiary ledger accounts at the end of the month. Use T accounts for the General Ledger and Running Balances for the Subsidiary Ledger (see Textbook pg. 366). The General Ledger accounts should follow the numbering system and order of the Chart of Accounts. Any new accounts should be in line with the Chart of Accounts information (See pg. 3).

Prepare the unadjusted Trial Balance as at 30 June using a worksheet. The worksheet should include the following columns -> Account No. Account Name, Trial Balance, Adjustments, Adjusted Trial Balance, Statement of Profit or Loss, Statement of Financial Position.

Prepare the adjusting entries for the information provided below and post to the relevant ledger accounts. Then enter the adjustments in the relevant worksheet columns and prepare an adjusted Trial Balance.

A stocktake on 30 June 2019 indicates that the balance of closing inventory is $1,416,492. Use this information to complete the remaining columns of the worksheet.

Prepare a classified Income Statement (Statement of financial performance) and Balance Sheet (Statement of financial position) for the year ended 30 June 2019. Round all amounts to whole $ in the financial statements.

Prepare a Schedule of Accounts Receivable and Schedule of Accounts Payable. Ensure the balances agree with the totals in the control accounts.

Prepare closing entries and post to the relevant general ledger accounts.

Prepare a post-closing Trial Balance as at July 2019.

Additional Information

a)The Showroom Fittings were installed on 1 July 2018. They have a useful life of 9 years and no salvage value.

b)The Equipment was installed on 1 July 2013. They have a useful life of 10 years and estimated salvage value of $3,150.

c)Twelve months of store rent was prepaid on 1 March. Of the original prepaid amount, $246,537 worth of store rent has now expired.

d)A count of store supplies indicates that $85,365 remain on hand at year end.

e)A one-year insurance policy was purchased on 1 November 2018 for $11,340.

f)Interest on the ANZ Bank Loan is charged at 7% per annum and is paid annually on 1 August. The ANZ Bank Loan was originally taken out on 1 August 2018.

g)The Company has been informed that Beethoven Trumpets has been declared bankrupt and the Company has agreed to write off the amount owing as uncollectible.

h)A telephone bill for $7,068.60 for June was received on 4 July 2019. The amount has not yet been recorded. The Company records this type of expense as utilities expense.

i)Office staff are paid $73,458 once per month. The office staff were last paid on 15 June. Exactly half of one month. Office staff wages are still owing.

j)Sales staff are paid fortnightly and work 7 days per week. The sales staff were last paid on the 29^th June, one days of the wages bill is still owed to the sales staff.

k)The estimated tax payable for the year ended 30 June 2019 is $86,400. The amount is to be paid on 31 October 2019.

ANALYSIS

After you have prepared the financial statements for Zennith's Musical Instruments Pty Ltd, you are required to prepare a written report to management commenting on the following:

Comment on the financial performance for the year highlighting the Company's strengths.

Comment on the financial position at year end focussing on the positive signs.

Identify any areas of concern that you feel should be highlighted.

Advise Zennith's about future actions.

Include the following ratios in your analysis:

oProfitability (Gross profit margin)

oReturn on ordinary shareholders' equity (opening balance of Equity $2,145,204)

oCurrent Ratio

oAverage collection period (opening balance of Accounts Receivable $66,254)

oDebt to total assets ratio

To calculate the required ratios, use the formula from the textbook (pages 766-776). Use the table provided below to calculate the ratios (show workings). Your report to management must be word processed, should be appropriately referenced and should not exceed 500 words.

The following industry averages have been provided to help you with your analysis:

Industry Average

Gross profit margin70%

Return on ordinary shareholders' equity8%

Current ratio2.5

Average collection period8.5 days

Debts to total assets35%

RATIO

Zennith's

Industry

Gross profit margin

Return on ordinary shareholders' equity

Current ratio

Average collection period

Debt to total assets ratio