Question Blake Ltd is finalizing its financial statements for the reporting period ending 30 June 2015.
A number of unrelated scenarios still need to be considered and accounted for before the financial statements are finalized:
a) The company has, in the past, always recognized a provision for warranties equal to 5% of sales made during the year. Due to increasing warranty costs and the number of goods returned under warranty, the directors would like to increase the provision to 8% of sales made during the year. The provision for warranties account currently has a balance of $12,000, which is the balance carried forward from 30 June 2014. Sales for the year ended 30 June 2015 amounted to $460,000.
b) During the verification process for accounts payable, it was discovered that an amount of $80,000, incurred in May 2015 and payable to a supplier for raw materials, was recorded in the accounting records as $8,000. The $80,000 owing at 30 June 2015 was paid in July 2015.
c) During the verification process for office equipment, it became apparent that an item of office equipment that was thought to be on hand at 30 June 2014 had actually been destroyed in April 2014. The item had a cost of $40,000 and accumulated depreciation of $24,000. No depreciation has been calculated or recorded as yet for the year ended 30 June 2015.
d) During the verification process for accounts receivable, it was discovered that the sales manager had undertaken fraudulent activity – raising fake sales invoices in June 2015. The motivation of the manager was to ensure that his sales targets were met, so that he was eligible for his performance bonus. The fake sales invoices amounted to $122,000, with this entire amount included in the accounts receivable balance at 30 June 2015.
e) On 1 July 2014, the directors revised the useful life of its building (acquired 2 years earlier on 1 July 2012 for $600,000, with an estimated useful life of 20 years and residual value of nil on this date). On 1 July 2014, the remaining useful life was estimated to be 30 years. The building has been depreciated using the straight-line method over its useful life. No depreciation has been calculated or recorded as yet for the year ended 30 June 2015. Assume all amounts are material for financial statement purposes.