Question 3

Question 3 (12 marks)

You have been presented with an extract of the management accounts (and in particular, the Balance Sheet) of Wine World Pty Ltd as at 30 June 2018.

Wine World Pty Ltd is a wholesaler/distributor of Australian wines. It is based in Brisbane and buys Australian wines from wine producers, based in the Hunter Valley (in New South Wales)  and  the  Margaret  River  (in  Western  Australia)  and  on‐sells  these  wines  to  bottle shop retailers in Queensland. It has recently started selling some wine to a Japanese‐based bottle shop located in Tokyo.

The  company  is  a  large  proprietary  company  and  is  considered  a  reporting  entity.  The company was incorporated on 9 May 2010. The company is in the process of preparing its external financial statements for the year ended 30 June 2018.

The company tax rate of 30% applies to Wine World Pty Ltd.

The managing director of the company, Billy Field, has drawn your attention to three assets which  appear  in  the  management  accounts  which  have  been  prepared  by  the  company’s management accountant, Peter Gabriel.

Neither Billy, nor Peter have any knowledge of IFRS, and as such, ask your group to prepare the notes to the accounts for inclusion in the company’s 2018 external financial statements.

An extract of the company’s 2018 management accounts is presented below:

Wine World Pty Ltd

Extract of the Balance Sheet

(taken from the management accounts)

as at 30 June 2018

Note                                            $ Assets:

Shares in CSR Limited, at cost                                                             1                                      100,000

Land, at cost                                                                                          2                                      560,000

Liabilities:

Provision for redundancies                                                                 3                                        65,000

Amount owing to NAB                                                                         2                                      375,000

Question 3 (Cont.)

Note 1:             Shares in CSR Limited ‐ $100,000

On  15  December  2017,  Wine  World  Pty  Ltd  purchased  4,000  fully‐paid  ordinary  shares  in

CSR Ltd at $25 per share (total investment = $100,000).

The  company  plans  to  hold  these  shares  as  a  long‐term  investment  and  has  made  an irrevocable election under AASB 9 to present gains and losses on this investment in other comprehensive income instead of recording the unrealised gains/(losses) through profit and loss.

As at 30 June 2018, the share price of CSR Ltd was $30 per share. No dividends were paid by

CSR Limited between 15 December 2017 and 30 June 2018.

Note 2:             Land ‐ $560,000 and NAB Loan $375,000

On  12  May  2012,  the  company  acquired  a  block  on  land  at  Rochedale  (6  acres)  with  the intention  of  building  a  warehouse  on.  The  land  cost  $560,000.  This  was  inclusive  of incidental  costs  such  as  legal  fees  and  stamp  duty.  This  is  the  only  block  of  land  that  the company owns.

The   company   borrowed   $450,000   from   National   Australia   Bank   (NAB)   to   fund   the acquisition of the land. The bank took a registered mortgage over the land as security. The term of the loan was 15 years.

On 12 June 2018, the directors of the company unanimously resolved to sell the land as they needed cash for working capital purposes. As at 30 June 2018, the land is currently in the hands of a local real estate agent.

Advertisements have been placed in local newspapers and the land is being advertised on the real estate agent’s website and on www.realestate.com.au. The land is being advertised for sale at $500,000. This has been based on an independent valuation by an experienced valuer.  Despite  intense  interest  and  several  offers,  the  land  has  not  yet  sold  by  30  June

2018.

However, the real estate agent (and the directors) are extremely confident that the land will sell for their asking price of $500,000 within the next 3‐4 weeks as there have been many interested buyers.

The  real  estate  agent’s  fees  and  advertising  costs  (as  well  as  other  incidental  costs,  such legal fees) will amount to a fixed $10,000 and is payable when the land is sold.

The company still owes NAB bank $375,000 at 30 June 2018. The company will pay out this loan once the land sells.

Note 3:             Provision for Redundancies ‐ $65,000

The  company  employs  18  employees  (before  the  proposed redundancy). Due to declining sales,  rising  costs  and  increased  competition  from  new  wine  distributors,  the  company  is faced with the prospect of terminating the employment of 5 workers (mainly sales staff and warehouse employees).

The  directors  unanimously  resolved  at  a  board  meeting  held  on  26  June  2018  that  the  5 employees (all full‐time) would be made redundant.

The  directors  were  presented  with  a  detailed  plan  involving  the  termination,  which  had been drawn up detailing the type of staff, number of employees to be terminated, the costs involved and the time when the termination will occur. The plan was discussed and adopted by the board of directors via unanimous resolution on 26 June 2018.

Each  employee  will  be  paid  out  $5,000  for  each  year  of  service.   Based  on  the  5  workers identified  to  be  made  redundant,  the  company  has  calculated  the  payout  to  be  $65,000, being 13 weeks x $5,000 (excluding leave entitlements).

All leave entitlements (such as annual leave, long service leave and superannuation) will be separately paid out. Hence, ignore these employee entitlements in the question.

By   30   June   2018,   the   company   had   not   held   discussions   with   employees,   their representatives  nor  has  made  any  public  announcement.  The  announcement  to  the  5 affected staff is expected to be made on the morning of 7 July 2018. The announcement to the other affected parties (eg. customers, suppliers etc) will be made later that afternoon.

It is proposed that the last day of work for the 5 employees will be 7 August 2018. This is when the $65,000 will be paid out.

There  are  no  pay  increases  planned  for  employees  between  now  and  7  August  2018.  In other words, the payouts are based on current rates, not planned increases.

Question 3 (Cont.)

Required:

For each of the three items detailed above, please prepare an extract of the notes to the

2018 external financial statements showing how each of these items will be measured and

disclosed in the notes to the financial statements.

This  will  include  relevant  disclosures  relating  to  the  Income  Statement,  Statement  of Comprehensive Income and Balance Sheet (but not disclosures relating to the Statement of Cash Flows).

Please  ensure  that  you  comply  with  the  relevant  AASB  Accounting  Standards  (including their disclosure requirements) when presenting the detailed notes to the accounts for each item.

Please do not provide journal entries in your answer or detailed explanations as to the relevant accounting treatment, as this is not what the question is asking and these journal entries will carry no marks.

The 10 marks are awarded exclusively based on the financial statement disclosures.

The financial statements are due to be signed off by the directors on 16 September 2018.

As previously mentioned, the company tax rate of 30% applies.

Note:       There  may  be  other  accounts  impacted  or  “triggered”  by  the  above  three items/transactions. If this is the case, then please include the relevant notes for  these  accounts  in  your  extract  of  the  external  financial  statements  for Wine World Pty Ltd. For example, if a revenue or expense account arises as a result  of  any  amendments/adjustments  you  make,  then  please  include  this note in your answer.

There is no need to prepare Note 1: Statement of Significant Accounting

Policies for Wine World Pty Ltd.

Total Marks for Question 3 = 12 marks