MAA310 Week 1 Seminar Activity Background: Zen Drop is an unlisted public company limited by shares. It operates in the Homewares, Retail and Wholesale sector in Melbourne. Zen Drop has 60 shareholders. It sells diffusers to retail shops. The company commenced business on 1 July 2020. The company's Balance Sheet as at 30 June 2021 follows: Balance Sheet Zen Drop As at 30 June 2021 30 JUN 2019 Assets Bank Cash at Bank 1,000,000.00 Total Bank 1,000,000.00 Current Assets Accounts Receivable 2,000,000.00 Allowance for Doubtful Debts (300,000.00) Inventory 300,000.00 Total Current Assets 2,000,000.00 Fixed Assets Land 3,000,000.00 Warehouse 5,000,000.00 Less Accumulated Depreciation on Warehouse (125,000.00) Office Equipment 290,000.00 Less Accumulated Depreciation on Office Equipment (28,000.00) Total Fixed Assets 8,137,090.00 Total Assets 11,137,000.00 Liabilities Current Liabilities Accounts Payable 82,500.00 Total Current Liabilities 82,500.00 Non-current Liabilities Loan 3,554,500.00 Total Non-current Liabilities 3,554,500.00 Total Liabilities 3,637,000.00 Net Assets 7,500,000.00 Equity Owner A Share Capital 7,000,000.00 Retained Earnings 500,000.00 Total Equity 7,500,000.00The closing inventory at 30 June 2021 comprises: Item code Item name Quantity Unit Cost Amount Unit selling price on Hand (excluding excluding GST including GST GST) D18 Diffuser 18 Paris 100,000 $3 $300,000 $20.00 The company uses a perpetual inventory system and applies weighted average cost assumption. . Schedule of Accounts Receivable at 30 June 2021 Debtor Amount (including GST] Transaction Details Harris Inc. $2,000,000 20 April 2021, n/30, 100,000 bottles of D18*$20 Schedule of Accounts Payable at 30 June 2021 Creditor Amount (including GST) Transaction Details Hassan Supplies $82,500 22 June 2021, n/30, 25,000 bottles of D18*$3.3 Considering that the US-China trade war will hit the Australian economy, the company set the balance of allowance of doubtful debt to $300,000 as at 30 June 2021. The land and warehouse were purchased on 1 July 2020 at a cost of $3,000,000 and $5,000,000, respectively. The warehouse is depreciated using the straight line method assuming a useful life of 40 years. Office equipment was purchased on 1 July 2020 at a cost of $290,000. It is depreciated using the straight line method assuming a useful life of 10 years and a residual value of $10,000. The existing loan is a 10-year interest-bearing loan. Zen Drop is required to submit half- year financial statements to Batai Bank and ensure compliance with the following covenants: o The company's debt-asset ratio must not exceed 50%. o The company must maintain a quick asset ratio of 3. O The company must maintain an interest coverage ratio of 3.70. O The company cannot pay annual cash dividends exceeding 60% of net earnings. O The company cannot borrow debt that is senior to this debt. If the company is in breach of the loan covenants, Batai Bank will demand immediate and full repayment of the loan. The following transactions or events occurred for the half year ending 31 December 2021. July 2021 1. On 1 July 2021, the company purchased a motor vehicle in cash from Park Street Motors for $22,000 (GST inclusive). Depreciation is to be charged on the Motor Vehicle at a rate of 10 per cent per annum using the reducing balance method. 2. On 5 July 2021, 20,000 bottles of D23 Tahitian diffusers were purchased from a local manufacturer Greg Ltd on terms n/30. The diffusers were delivered on the same day: 2Item Item name Quantity Unit Cost Gross Unit code Including GST Amount selling including price GST including GST D23 Diffuser 23 Tahitian 20,000 $4.40 $88,000 $28.00 3. On 14 July 2021, the company paid two weeks wages to employees. Gross wages were $20,000 inclusive of $4,000 withheld for PAYG. 4 On 15 July 2021, the company received a customer order from Cyan Therapy for 12,000 bottles of D23 and 3,000 bottles of D18. 5 On 16 July 2021, the company sent an invoice to Cyan Therapy based on 15 July order on terms n/30. The inventory was delivered to Cyan Therapy on the same day. 6. On 20 July 2021, the company returned Greg Led 1,000 faulty diffusers. 7. On 21 July 2021, the company paid Hassan Supplies in full settlement of the outstanding balance. 8. On 28 July 2021, the company paid two weeks wages to employees. Gross wages were $20,000 inclusive of $4,000 withheld for PAYG. 9. On 31 July 2021, the company paid Batai Bank monthly loan instalment of $30,000 (Principal $23,000 and interest $7,000). 10. On 31 July 2021, the company paid Ori Led $550 for electricity (GST inclusive). August 2021 1 . On 1 August 2021, the company made a one-year advanced advertising payment to Kura Ltd. Monthly advertising is $2,200 (GST inclusive). 2. On 4 August 2021, the company paid Greg Led in full settlement. 3. On 11 August 2021, the company paid two weeks wages to employees. Gross wages were $20,000 inclusive of $4,000 withheld for PAYG. 4. On 13 August 2021, the company received the full payment from Cyan Therapy. 5 . On 25 August 2021, the company paid two weeks wages to employees. Gross wages were $20,000 inclusive of $4,000 withheld for PAYG. 6. On 31 August 2021, the company paid Batai Bank monthly loan instalment of $30,000 (Principal $23,045.29 and interest $6,954.71). 7. On 31 August 2021, the company paid Ori Ltd $440 for electricity (GST inclusive). September 2021 1. On 8 Sep 2021, the company paid two weeks wages to employees. Gross wages were $20,000 inclusive of $4,000 withheld for PAYG. 2. On 22 Sep 2021, the company paid two weeks wages to employees. Gross wages were $20,000 inclusive of $4,000 withheld for PAYG. 3. On 30 September 2021, the company paid Batai Bank monthly loan instalment of $30,000 (Principal $23,090.68 and interest $6,909.32). 4. On 30 September 2021, the company paid Ori Led $330 for electricity (GST inclusive). 5. Due to fierce competition, and a poor review of D18 (as the fragrance did not last and the product was accused of containing a cancerous mixture by environmentalists), sales have been slow and stagnant. The company has not generated any sales since August. The CEO felt the exigency to transform the business. To distinguish the company from the competitors and ensure sustainability of the business, in early September, the CEO of the company decided to invent a diffuser that can eliminate in-house radiation - Radio. 3Throughout September 2021, the company has incurred the following expenditures for the project exploring Radio diffuser: A survey was conducted to understand what the market thinks about Radio. The cost for this survey was $22,000 (GST inclusive). Consulting fees of $66,000 (GST inclusive) were paid to the scientist to obtain an understanding on the mixture of the diffuser, and to the engineer to understand how a specialised machine can be developed to produce Radio. The company received a favourable market survey of Radio and believes that it is feasible to produce Radio based on various specialists' advice. It has decided to channel enormous efforts and resources to develop Radi0 over the next few years. October 2021 1. On 3 October 2021, the company lodged the third quarter Business Activity Statement (BAS) with the Australian Taxation Office (ATO) and paid the GST and PAYG withholding amounts to the ATO. 2. On 6 Oct 2021, the company paid two weeks wages to employees. Gross wages were $20,000 inclusive of $4,000 withheld for PAYG. 3. On 20 Oct 2021, the company paid two weeks wages to employees. Gross wages were $20,000 inclusive of $4,000 withheld for PAYG. 4. On 31 October 2021, the company paid Batai Bank monthly loan instalment of $30,000 (Principal $23,136.15 and interest $6,863.85). 5. On 31 October 2021, the company paid Ori Ltd $385 for electricity (GST inclusive). November 2021 1. On 3 Nov 2021, the company paid two weeks wages to employees. Gross wages were $20,000 inclusive of $4,000 withheld for PAYG. 2. On 17 Nov 2021, the company paid two weeks wages to employees. Gross wages were $20,000 inclusive of $4,000 withheld for PAYG. 3. On 30 November, the company paid Batai Bank monthly loan instalment of $30,000 [Principal $23,181.71 and interest $6,818.29). 4 On 30 November 2021, the company paid Ori Ltd $462 for electricity (GST inclusive). December 2021 1. On 1 Dec 2021, the company paid two weeks wages to employees. Gross wages were $20,000 inclusive of $4,000 withheld for PAYG. 2. On 8 December 2021, the company received a legal letter from a law firm representing, Ben, one of the company's employees, who suffered an injury in the warehouse when unloading inventory. Zen Drop's solicitor advised that the litigation can take more than a year to dispute and the company could face a fine and damages up to $500,000 under the existing law if Zen Drop is in breach of occupational health and safety regulation. The trial is scheduled on 15 April 2022. 3. On 15 Dec 2021, the company paid two weeks wages to employees. Gross wages were $20,000 inclusive of $4,000 withheld for PAYG. 4. On 18 Dec 2021, 8,000 units of D23 are purchased from Greg Ltd at $4.4 per unit (GST inclusive) on credit terms 1/15, n/30. Inventory is delivered on the same day.5. On 27 December 2021, the company received an order of 7,000 units for D23 from a new client Nisha Led operating in Darwin. The company did not perform a credit check on Nisha Ltd but decided to grant it credit to boost sales. Due to Christmas and New Year closure, the inventory will be shipped to Nisha Led on 5 January 2022 when business resumes. In fact, Nisha Ltd is in financial distress and it received a going concern audit opinion for the past financial year. 6. On 29 Dec 2021, the company paid two weeks wages to employees. Gross wages were $20,000 inclusive of $4,000 withheld for PAYG. 7. On 31 December 2021, the company paid Batai Bank monthly loan instalment of $30,000 (Principal $23,227.37 and interest $6,772.63). 8. On 31 December 2021, the company paid Ori Led $220 for electricity (GST inclusive). The company decided to adopt the revaluation model for its land and warehouse which reflects more relevant value of the PPE. Two independent appraisals both suggest that the fair value of the land and the warehouse are $3,300,000 and $5,250,000, respectively. Others . The company engaged a debt collector to chase the outstanding amount owed by Harris Inc. The company also heard the news that Harris' premises was severely damaged by fire a week ago. The company's closing inventory as at 31 December 2021 is detailed as follow: Product Quantity on Quantity on Cost Net realisable hand per hand per value accounting stock take record D18 97,000 97,000 $3 $2.6 D23 8,000 15,000 $4 $23.5 On 10 January 2022, the board of directors declared a 20c per share dividend on 300,000 ordinary shares. Zen Drop's financial statements were previously prepared by Rachel, an experienced practising accountant. However, Rachel was on maternity leave from 1 June 2021. Zen Drop recruited Jay to temporarily replace Rachel, without realising that Jay's accounting qualification was forged. Jay accounted for these transactions/events per Appendix 1 Journal Report. All the source documents are provided in Appendix 2. Appendix 3 provides the profit and loss statement and the balance sheet of the company for the period ended 31 December 2021 finalised by Jay on 21 January 2022. Due to high staff turnover and cost savings, Zen Drop expected Jay to multi-task, where he also made and authorised the payment for these transactions via the company's bank account, and reconciled the bank statement with the accounting records. Required: Part A In a team of 4-5, discuss the following questions: [1) Is Zen Drop a disclosing entity? Is it required to lodge a half year financial report with the ASIC? (2) Is Zen Drop required to lodge an annual financial report with the ASIC? 5Part B On 1 February 2022, a whistle-blower of the company sent an anonymous email to the CEO of Zen Drop questioning Jay's qualification and accusing Jay of conducting accounting fraud. Upon receiving this email, the CEO immediately suspended Jay's access to the company's bank account and accounting system. Jay was placed on leave. Your team comprising 4-5 forensic accountants is recruited by Zen Drop to review the accounting records and semi-annual financial statements for the period ended 31 December 2021 prepared by Jay. Identify and explain any irregular or inappropriate accounting treatment of transactions/events in this case, with reference to the Conceptual Framework, relevant accounting standards, and/or general accounting principles/practice. Further discuss any concerns related to the internal control of Zen Drop