On 4 January, Hewitt Tennis ordered racquets to be delivered to the club on 18 January. The goods were priced for sale at $5500 and were acquired from the supplier at a discounted price of $2130. Hewitt Tennis paid $3500 upon the delivery of goods and made the remaining payment on 5 February. In preparation of the order as well as the anticipated sales increase, Nick ordered premium tennis racquets with the latest design from the major brands on 4 January. There were no additional purchases of lower-priced racquets as these products were in abundance in the inventory. One batch of Babolat and Head racquets with a total cost of $7200 arrived on 5 January, the payments were due in three instalments of equal amounts over the next 60 days, the first instalment was made to the supplier on 24 January, the other two payments were made later in February. A separate batch of Wilson racquets were delivered to the store with an invoice of $1900 on 7 January. Ash & John A paid for this purchase in cash in full. As cash balance became critically low after the payment for Wilson racquets, Nick took out a short-term loan of $3000 under the name of Ash & John on 8 January to maintain a healthy cash position. In addition to this large order, Ash & John also earn a contract with Hewitt Tennis to offer on-site racquet stringing service at the club's biggest annual event, the Lleyton Cup, in February. $1200 cash was received for the contracted service when the contract was signed on 6 January. In preparation of this service provision, Nick made the business decision to increase Ash & John's service capacity by acquiring a second-hand stringing machine in good condition from one of the competing sports stores that recently filed bankruptcy. Nick agreed to a bargain price of $800 for the machine after much negotiation on 9 January before picking up the machine on 15 January and paying in cash in full. Other sales in early January include a $680 cash sale on 3 January of goods that cost $440, and a $950 credit sale on 11 January of goods that cost $680. In terms of service provision, Nick sold a prepaid package of 10 standard stringing services for $600 cash on 10 January, the customer used up two services on day. The package is valid for use within 180 days from the day of purchase. During this period, Ash & John also provided a large volume of stringing service to Queensland Tennis Centre. This service was booked and prepaid for in December last year. The discount bulk charge averaged $50 per service. On 31 January, the provision of a total of 133 services was accounted for. Mid to Late January 2021 - Another Period of Struggle Just as the sales began to increase, the reported cases of UK strain of COVID-19 sent the greater Brisbane area into a three-day lock down between 11 and 14 January 2021. The lock down along with the requirement of mandatory use of masks in certain public indoor spaces between 11 and 22 January caused the store sales to plummet. Very few customers visited the store since 11 January, and Nick only managed to make two small sales during this time: a credit sale of $80 goods that cost $50 on 19 January and another credit sale of $130 at cost $90 on 26 January. There was no purchase of stringing services in this period. The most difficult aspect of operating a physical store in this period is the fact that many expenses were unavoidable despite the low volume of business activities at the store. The weekly rent for the shopfront is $350, payable every four weeks in advance. The first rental payment of 2021 was made on 4 January to cover the four-week period starting 8 January. The staffing costs were also substantial. Nick was paid $40560 per annum, averaged $780 per week or $130 per day (6 days of work in a week; Wednesdays off). Nick received fortnightly salary payments on 14 and 28 January to cover the salary period from 1 to 28 January. The store's only sales assistant Bernard T. held a casual position and was paid at $25 per hour with a guaranteed minimum work allocation of 10 hours per week. Bernard received the minimum amount of his fortnightly wage payment $500 on 14 January with the sad news that Ash & John was no longer in the position to continue his employment. There was also depreciation and insurance premium. Both depreciation and store insurance expenses are recognised on a monthly basis at the month end. Ash & John last paid the insurance premium $7300 on 31 December to cover any loss of inventory and cases of staff injuries for the next 365 days. In terms of utility, the next electricity bill would not arrive before February. Depreciation of Machines & Vehicle As at 31 January 2021, Ash & John had three stringing machines. Details of these assets are presented in Exhibit 1 below. Exhibit 1 Machine 1 Machine 2 Machine 3 Date of acquisition 1 July 2019 1 January 2019 15 January 2021 Useful life in years 3 6 4 Cost $3800 $5200 $800 Residual value $200 $400 nil Expected total production* 7200 8000 3200 Production in January 2021** 50 85 0 * Total number of stringing services expected to be performed between the date of acquisition and the end of useful life. ** Total number of stringing services performed in the month. The demand of stringing services declined significantly since the outbreak of COVID-19. As a result, Ash & John was considering the following options: (1) changing the depreciation method regarding stringing machines from the straight-line method to the unit-of-production method, or (2) making no change to the depreciation method but re-evaluating the remaining useful life of each machine. Ash & John also owns a delivery van that is used to deliver shipment and transport the stringing machines to customer sites for on-site service provision. The van was given to the business by Mrs Stosur on 1 July 2018 with an estimated useful life of 10 years and a residual value of $9000. Depreciation of this vehicle is recognised using the straight-line depreciation method. Potential Business Diversification In August 2020, Mrs Stosur first expressed concern over the viability of her business after the business made a loss in the third consecutive month. Mrs Stosur asked Nick to help seek opportunities to diversify the business's income. Nick quickly thought of the idea of selling used tennis balls. Nick is a tennis lover and plays club tennis at Hewitt Centre. He became aware that the club has a policy of disposing of used tennis balls after holding competitive events like the Lleyton Cup. Many of the disposed balls were in good condition and could have been readily used for general practice or casual playing at the club. Nick contacted the management at Hewitt Tennis in September 2020 and was successful in reaching an agreement with the club for the supply of used tennis balls. However, Mrs Stosur was not fully confident of this venture and decided to acquire the used tennis balls as her personal asset first. The store started to trial the sale of the used balls in October 2020; all transactions concerning the used tennis balls were regarded as Mrs Stosur's personal transactions. The quantities of the monthly purchases of used tennis balls are detailed in Exhibit 2 below. Exhibit 2 Month Quantity Purchased 150 Purchase Price $1.30 120 $1.50 Oct 2020 Nov 2020 Dec 2020 Jan 2021 100 $1.80 $2.00 80 450 Total As the sales of tennis balls were not part of store's official operation, Nick did not keep the record of cost of sales of these transactions but only the quantity of used balls sold. From 1 October 2020 to 31 January 2021, 380 used balls were sold at the price $2.40 each. Changing Customer Behaviour At Ash & John, customers who spend more than $150 in a single transaction may elect to purchase on credit, payable in 60 days. Despite the option, most sales at Ash & John were cash transactions prior to March 2020. However, since the outbreak of COVID-19, more and more customers have opted for credit purchases. This change in customer's purchasing behaviour had added to the financial difficulties of the business, and Mr Stosur and Nick worried that Ash & John would report a loss for the ninth consecutive month in January 2021. Ash & John's Statement of Financial Position as at 31 December 2020 is overpage. Exhibit 3 Ash & John The Statement of Financial Position as at 31 December 2020 Assets $ Cash 2300 Accounts Receivables 9200 Inventory 42150 Prepaid Rent 350 Prepaid Insurance 7300 Total Current Assets 61300 Equipment - Stringing Machines 9000 Accumulated Depreciation - (3400) Equipment Vehicles - Delivery Van 33000 Accumulated Depreciation - Vehicle (6000) Total Non-Current Assets 32600 Total Assets 93900 Liabilities Accounts Payable Unearned Stringing Service Revenue Total Current Liabilities Long-term debts Total Non-Current Liabilities Total Liabilities Net Assets 760 7200 7960 35980 35980 43940 49960 Equity Capital Retained Earnings Total Equity 49000 960 49960 E (20 marks) Record the transactions that took place in January, including all month-end adjustments that are required to recognise income and expenses in the cells provided. Use negative sign but not thousand separator (e.g., -1300). Numbers only, no dollar sign ($) entered in the cell. Additional information: 1. Mrs Stosur decided for the business to recognise depreciation of stringing machines using the unit-of-production method from 1 January 2021. Depreciation of the vehicle continues to be accounted for using the straight-line depreciation method. Use a single transactional record to account for all depreciation. 2. The recognition and payment of salaries and wages should be combined into a single record where possible as both items are staffing expenses. 3. You should have five records dated 31/01, these have been labelled in order as 31/01-1, 31/01-2, 31/01-3 and so on for Date (first row in the worksheet). Details regarding each record are as follows: Date 31/01-1 31/01-2 Description of adjustment (e.g. recognition of monthly depreciation) Recognition of revenue from unearned revenue Recognition of rent expense Recognition of accrual salary expense Recognition of monthly depreciation Recognition of insurance expense 31/01-3 31/01-4 31/01-5 4. You should have 20 transactional records (20 columns) including 5 adjustments. 01/01 03/01 04/01 05/01 06/01 07/01 08/01 10/01 11/01 14/01 15/01 Date in January (e.g. 31/01) Cash Flow Statement Operating Cash Flows Investing Cash Flows Financing Cash Flows Balance Sheet Cash Accounts Receivables Inventory Prepaid Rent Prepaid Insurance Equipment - Stringing Machines Acc. Dep. - Equipment Vehicles - Delivery Van Acc. Dep. - Vehicle Total Assets 2,300 9,200 43,250 350 7,300 9,000 -3,400 34,000 -8,100 93,900 760 7,200 Accounts Payable Unearned Service Revenue Short-term loan Salary payable Long-term debts Capital Retained Earnings Total Liabilities and Equity 35,980 49,000 960 93,900 Income Statement Service Revenue Sales Revenue Cost of Goods Sold Other Expenses Profit (Loss) 18/01 19/01 24/01 26/01 28/01 31/01-1 31/01-2 31/01-3 31/01-4 31/01-5 Date in January (e.g. 31/01) Cash Flow Statement Operating Cash Flows Investing Cash Flows Financing Cash Flows Change in Cash Balance Sheet Cash Accounts Receivables Inventory Prepaid Rent Prepaid Insurance Equipment - Stringing Machines Acc. Dep. - Equipment Vehicles - Delivery Van Acc. Dep. - Vehicle Total Assets Accounts Payable Unearned Service Revenue Short-term loan Salary payable Long-term debts Capital Retained Earnings Total Liabilities and Equity Income Statement Service Revenue Sales Revenue Cost of Goods Sold Other Expenses Profit (Loss) On 4 January, Hewitt Tennis ordered racquets to be delivered to the club on 18 January. The goods were priced for sale at $5500 and were acquired from the supplier at a discounted price of $2130. Hewitt Tennis paid $3500 upon the delivery of goods and made the remaining payment on 5 February. In preparation of the order as well as the anticipated sales increase, Nick ordered premium tennis racquets with the latest design from the major brands on 4 January. There were no additional purchases of lower-priced racquets as these products were in abundance in the inventory. One batch of Babolat and Head racquets with a total cost of $7200 arrived on 5 January, the payments were due in three instalments of equal amounts over the next 60 days, the first instalment was made to the supplier on 24 January, the other two payments were made later in February. A separate batch of Wilson racquets were delivered to the store with an invoice of $1900 on 7 January. Ash & John A paid for this purchase in cash in full. As cash balance became critically low after the payment for Wilson racquets, Nick took out a short-term loan of $3000 under the name of Ash & John on 8 January to maintain a healthy cash position. In addition to this large order, Ash & John also earn a contract with Hewitt Tennis to offer on-site racquet stringing service at the club's biggest annual event, the Lleyton Cup, in February. $1200 cash was received for the contracted service when the contract was signed on 6 January. In preparation of this service provision, Nick made the business decision to increase Ash & John's service capacity by acquiring a second-hand stringing machine in good condition from one of the competing sports stores that recently filed bankruptcy. Nick agreed to a bargain price of $800 for the machine after much negotiation on 9 January before picking up the machine on 15 January and paying in cash in full. Other sales in early January include a $680 cash sale on 3 January of goods that cost $440, and a $950 credit sale on 11 January of goods that cost $680. In terms of service provision, Nick sold a prepaid package of 10 standard stringing services for $600 cash on 10 January, the customer used up two services on day. The package is valid for use within 180 days from the day of purchase. During this period, Ash & John also provided a large volume of stringing service to Queensland Tennis Centre. This service was booked and prepaid for in December last year. The discount bulk charge averaged $50 per service. On 31 January, the provision of a total of 133 services was accounted for. Mid to Late January 2021 - Another Period of Struggle Just as the sales began to increase, the reported cases of UK strain of COVID-19 sent the greater Brisbane area into a three-day lock down between 11 and 14 January 2021. The lock down along with the requirement of mandatory use of masks in certain public indoor spaces between 11 and 22 January caused the store sales to plummet. Very few customers visited the store since 11 January, and Nick only managed to make two small sales during this time: a credit sale of $80 goods that cost $50 on 19 January and another credit sale of $130 at cost $90 on 26 January. There was no purchase of stringing services in this period. The most difficult aspect of operating a physical store in this period is the fact that many expenses were unavoidable despite the low volume of business activities at the store. The weekly rent for the shopfront is $350, payable every four weeks in advance. The first rental payment of 2021 was made on 4 January to cover the four-week period starting 8 January. The staffing costs were also substantial. Nick was paid $40560 per annum, averaged $780 per week or $130 per day (6 days of work in a week; Wednesdays off). Nick received fortnightly salary payments on 14 and 28 January to cover the salary period from 1 to 28 January. The store's only sales assistant Bernard T. held a casual position and was paid at $25 per hour with a guaranteed minimum work allocation of 10 hours per week. Bernard received the minimum amount of his fortnightly wage payment $500 on 14 January with the sad news that Ash & John was no longer in the position to continue his employment. There was also depreciation and insurance premium. Both depreciation and store insurance expenses are recognised on a monthly basis at the month end. Ash & John last paid the insurance premium $7300 on 31 December to cover any loss of inventory and cases of staff injuries for the next 365 days. In terms of utility, the next electricity bill would not arrive before February. Depreciation of Machines & Vehicle As at 31 January 2021, Ash & John had three stringing machines. Details of these assets are presented in Exhibit 1 below. Exhibit 1 Machine 1 Machine 2 Machine 3 Date of acquisition 1 July 2019 1 January 2019 15 January 2021 Useful life in years 3 6 4 Cost $3800 $5200 $800 Residual value $200 $400 nil Expected total production* 7200 8000 3200 Production in January 2021** 50 85 0 * Total number of stringing services expected to be performed between the date of acquisition and the end of useful life. ** Total number of stringing services performed in the month. The demand of stringing services declined significantly since the outbreak of COVID-19. As a result, Ash & John was considering the following options: (1) changing the depreciation method regarding stringing machines from the straight-line method to the unit-of-production method, or (2) making no change to the depreciation method but re-evaluating the remaining useful life of each machine. Ash & John also owns a delivery van that is used to deliver shipment and transport the stringing machines to customer sites for on-site service provision. The van was given to the business by Mrs Stosur on 1 July 2018 with an estimated useful life of 10 years and a residual value of $9000. Depreciation of this vehicle is recognised using the straight-line depreciation method. Potential Business Diversification In August 2020, Mrs Stosur first expressed concern over the viability of her business after the business made a loss in the third consecutive month. Mrs Stosur asked Nick to help seek opportunities to diversify the business's income. Nick quickly thought of the idea of selling used tennis balls. Nick is a tennis lover and plays club tennis at Hewitt Centre. He became aware that the club has a policy of disposing of used tennis balls after holding competitive events like the Lleyton Cup. Many of the disposed balls were in good condition and could have been readily used for general practice or casual playing at the club. Nick contacted the management at Hewitt Tennis in September 2020 and was successful in reaching an agreement with the club for the supply of used tennis balls. However, Mrs Stosur was not fully confident of this venture and decided to acquire the used tennis balls as her personal asset first. The store started to trial the sale of the used balls in October 2020; all transactions concerning the used tennis balls were regarded as Mrs Stosur's personal transactions. The quantities of the monthly purchases of used tennis balls are detailed in Exhibit 2 below. Exhibit 2 Month Quantity Purchased 150 Purchase Price $1.30 120 $1.50 Oct 2020 Nov 2020 Dec 2020 Jan 2021 100 $1.80 $2.00 80 450 Total As the sales of tennis balls were not part of store's official operation, Nick did not keep the record of cost of sales of these transactions but only the quantity of used balls sold. From 1 October 2020 to 31 January 2021, 380 used balls were sold at the price $2.40 each. Changing Customer Behaviour At Ash & John, customers who spend more than $150 in a single transaction may elect to purchase on credit, payable in 60 days. Despite the option, most sales at Ash & John were cash transactions prior to March 2020. However, since the outbreak of COVID-19, more and more customers have opted for credit purchases. This change in customer's purchasing behaviour had added to the financial difficulties of the business, and Mr Stosur and Nick worried that Ash & John would report a loss for the ninth consecutive month in January 2021. Ash & John's Statement of Financial Position as at 31 December 2020 is overpage. Exhibit 3 Ash & John The Statement of Financial Position as at 31 December 2020 Assets $ Cash 2300 Accounts Receivables 9200 Inventory 42150 Prepaid Rent 350 Prepaid Insurance 7300 Total Current Assets 61300 Equipment - Stringing Machines 9000 Accumulated Depreciation - (3400) Equipment Vehicles - Delivery Van 33000 Accumulated Depreciation - Vehicle (6000) Total Non-Current Assets 32600 Total Assets 93900 Liabilities Accounts Payable Unearned Stringing Service Revenue Total Current Liabilities Long-term debts Total Non-Current Liabilities Total Liabilities Net Assets 760 7200 7960 35980 35980 43940 49960 Equity Capital Retained Earnings Total Equity 49000 960 49960 E (20 marks) Record the transactions that took place in January, including all month-end adjustments that are required to recognise income and expenses in the cells provided. Use negative sign but not thousand separator (e.g., -1300). Numbers only, no dollar sign ($) entered in the cell. Additional information: 1. Mrs Stosur decided for the business to recognise depreciation of stringing machines using the unit-of-production method from 1 January 2021. Depreciation of the vehicle continues to be accounted for using the straight-line depreciation method. Use a single transactional record to account for all depreciation. 2. The recognition and payment of salaries and wages should be combined into a single record where possible as both items are staffing expenses. 3. You should have five records dated 31/01, these have been labelled in order as 31/01-1, 31/01-2, 31/01-3 and so on for Date (first row in the worksheet). Details regarding each record are as follows: Date 31/01-1 31/01-2 Description of adjustment (e.g. recognition of monthly depreciation) Recognition of revenue from unearned revenue Recognition of rent expense Recognition of accrual salary expense Recognition of monthly depreciation Recognition of insurance expense 31/01-3 31/01-4 31/01-5 4. You should have 20 transactional records (20 columns) including 5 adjustments. 01/01 03/01 04/01 05/01 06/01 07/01 08/01 10/01 11/01 14/01 15/01 Date in January (e.g. 31/01) Cash Flow Statement Operating Cash Flows Investing Cash Flows Financing Cash Flows Balance Sheet Cash Accounts Receivables Inventory Prepaid Rent Prepaid Insurance Equipment - Stringing Machines Acc. Dep. - Equipment Vehicles - Delivery Van Acc. Dep. - Vehicle Total Assets 2,300 9,200 43,250 350 7,300 9,000 -3,400 34,000 -8,100 93,900 760 7,200 Accounts Payable Unearned Service Revenue Short-term loan Salary payable Long-term debts Capital Retained Earnings Total Liabilities and Equity 35,980 49,000 960 93,900 Income Statement Service Revenue Sales Revenue Cost of Goods Sold Other Expenses Profit (Loss) 18/01 19/01 24/01 26/01 28/01 31/01-1 31/01-2 31/01-3 31/01-4 31/01-5 Date in January (e.g. 31/01) Cash Flow Statement Operating Cash Flows Investing Cash Flows Financing Cash Flows Change in Cash Balance Sheet Cash Accounts Receivables Inventory Prepaid Rent Prepaid Insurance Equipment - Stringing Machines Acc. Dep. - Equipment Vehicles - Delivery Van Acc. Dep. - Vehicle Total Assets Accounts Payable Unearned Service Revenue Short-term loan Salary payable Long-term debts Capital Retained Earnings Total Liabilities and Equity Income Statement Service Revenue Sales Revenue Cost of Goods Sold Other Expenses Profit (Loss)