Task
Organic Wholefoods Limited Group - Financial Statements and Analysis
Background and Scope:
You are the group financial controller of Organic Wholefoods Limited.
One of your responsibilities is assisting the CFO in the drafting of the Group’s financial statements. You have been tasked with preparing the first draft of the financial statements for the year ended 31 December 2020.A summary of the corporate profile and discussion held between the CFO and the Finance Director is outlined below. The draft trial balance for Organic Wholefoods Limited and its’ subsidiary is included as Appendix A.
Corporate Profile:
The Organic Wholefoods Group provides certified organic and fresh ready-made meals and beverages. Organic Wholefoods Limited (‘the Company’) has 30 stores in locations across Australia’s eastern seaboard. The product range is locally sourced and prepared in Organic Wholefoods Limited’s company owned commercial kitchens. The meals are prepared daily using only fresh, natural, and organic produce.
Organic Wholefoods Limited acquired 100 per cent of Dragon’s Organic Beverages Pty Ltd (hereafter collectively referred to as “the Group”) on 1 January 2018. Dragon’s Organic Beverages produces and distributes fair trade coffee and specialised certified organic beverages through retailers and cafes in metropolitan centres.
Due diligence records related to the acquisition have been supplied by the accounting firm that assisted with the acquisition. These records identify Dragon’s Organic Beverages Pty Ltd had share capital of $135,000 and Retained Earnings of $1,375,000 as at the date of acquisition. The Finance Director has advised that the carrying value of assets and liabilities were consistent with fair value at the date of acquisition except for Land and the “Dragon” brand. The contract identifies that the fair value of the land at the time of acquisition was assessed as being $155,000 higher than the carrying value (original cost $550,000). The “Dragon” brand is not recognised in Dragon’s Organic Beverages Pty Ltd.’s financial information. The fair value of the brand has been assessed at $2,500,000. No contingent liabilities were identified when Dragon’s Organic Beverages Pty Ltd was acquired.
Financial Statements and Transactions:
The CFO of the Organic Wholefoods Group has provided the following information:
Organic Wholefoods Limited owns the property and building which house the commercial kitchens. The property is in Brisbane which serves as the distribution hub for delivery of products to the stores. The company generally leases the commercial premises in which the individual stores operate.
The most recent lease has been accounted for as an operating lease. The lease commenced on 1 September 2020 and is for a period of five years, with an additional five-year option. At this stage, the CFO believes it is unlikely the group will exercise the five-year option. The lease payments are $130 000 p.a, payable annually in arrears, with an implicit interest rate of 5.75%. The interest rate on the Group’s debt facilities incur interest at a rate of 3.75%. Upfront costs of $5,000 were incurred in negotiating the lease and expensed as an operating expense. These costs have been paid.
Organic Wholefoods Limited received rent concessions from lessors in relation to the majority of the leased stores as a direct consequence of the coronavirus pandemic.
The company’s policy is to book 100% of the sale of prepared meals and beverages as revenue. The company allows customers to return certain beverages for a refund within 10 days of purchase provided the beverages are undamaged, unopened, and proof of purchase is presented. These returns represent less than 1% of the relevant sales. Refunds are recognised in the accounting records as they occur.
Organic Wholefoods Limited sold some fixtures and fittings to Dragon’s Organic Beverages Pty Ltd on 30 June 2020 for $190,000. Organic Wholefoods Limited originally acquired the fixtures and fittings on 10 November 2017 for $260,000 and was depreciating the fixtures and fittings on a straight-line basis over eight years. The fixtures and fittings were removed from one of the stores when the store relocated in early June 2020. Dragon’s Organic Beverages Pty Ltd has assessed that the fixtures and fittings have a remaining useful life of five years. The Group has adopted the accounting policy of measuring property, plant and equipment using the ‘cost model’.
Quarterly administration fees of $15,000 are paid to Organic Wholefoods Limited by Dragon’s Organic Beverages Pty Ltd. The fees are paid on the last day of the quarter end.
Dragons Organic Beverages are proving to be very popular. During the year, the group received a request from an unrelated entity to acquire the Dragons Organic Brand at a price of $5,000,000. The Board declined the offer. However, as the offer is consistent with an independent valuation of the Brand obtained by the Company, the brand has been recognised in the accounting records of Organic Wholefoods Limited at $3,000,000 which the Board consider to be a conservative estimate as it reflects the lower end of the range determined by the independent valuation.
On 1 December 2019 Organic Wholefoods Limited secured a patent over its commercialisation process. The cost of the patent was $100,720. The patent expires on 1 December 2024.
The Finance Director noted the following:
In December 2020, Organic Wholefoods Limited entered into an arrangement with Red Earth Wholefoods Grocers (“Red Earth”) to stock the Group’s product range from January 2021. In December 2020 Organic Wholefoods Limited received a large order and related payment for $200,000 which boosted the sales figures for the year. The products were prepared and shipped to Red Earth in early January 2021.
A strategic review has identified areas of the business where efficiencies can be improved. The company is currently discussing the implementation of a number of the proposed recommendations, including staff restructures. Consequently, a provision for $220,000 had been recognised by Organic Wholefoods Limited at 31 December 2020.
The company is currently a defendant in two debt collection proceedings. In each case the company is disputing the amounts claimed. The first case relates to the provision of consulting services. The total amount billed to the company was $200,000, however the company is disputing $30,000 in relation to this bill. The original contract was for a total amount of $150,000. The company has made an offer to settle the matter in full for $170,000. The original amount of $150,000 has been recorded in trade creditors. The second matter relates to an unfair dismissal claim. The former employee is claiming $250,000. The company’s disputes this claim in its entirety and intends to vigorously defend the matter. This amount has not been recorded in the accounting records.
The CFO has reviewed the value of Goodwill and is confident the carrying value in the trial balance is appropriate. The cash flow projections to 2030 support this position.
Organic Wholefoods Limited obtained a $4,000,000 loan on 1 June 2019. The loan is for five years and incurs an interest rate of 3.75% p.a. Loan payments are paid on the last day of each month. The first payment was paid on 30 June 2019.
Organic Wholefoods Limited recorded a $150,000 revaluation increment in relation to the warehouse as at 31 December 2020. Dragon’s Organic Beverages Pty Ltd also booked a $50,000 revaluation gain in relation to land owned in the same period.
Organic Wholefoods Limited lent Dragon’s Organic Beverages Pty Ltd $200,000 on 15 October 2020 to assist with cash flow shortages experienced by the company due to the impact of the coronavirus pandemic. Interest is charged at 4.25 per cent per annum and paid six monthly on 1 July and 1 January each year. The loan is repayable on 30 June 2021.
Dragon’s Organic Beverages Pty Ltd pays Organic Wholefoods Limited $220,000 rent for use of the commercial kitchens. The rent is payable on the last day of each month.
Organic Wholefoods Limited has 10,810, 861 shares on issue and paid an interim dividend of $0.05 cents a share in July 2020. The company intends to pay a final dividend for the year ended 31 December 2020 of $0.05 cents a share. The final amount will be confirmed and approved by the board of directors once the audited financial statements have been finalised.
Upon review of Dragon’s Organic Beverages the CFO noted that capital improvements undertaken in December 2019 were incorrectly expensed. The amount amounted to $44,000.
On 5 January 2021 Dragon’s Organic Beverages sold inventory to Organic Wholefoods Limited. The inventory cost $25,000, the sale price was $30,000.
There have been no share issues or capital transactions during the year.
The tax rate is 30%.
All amounts are expressed exclusive of GST. GST is not required to be incorporated into the transactions or adjustments for the purposes of this exercise.
Draft Financial Statements:
The Trial Balances for Organic Wholefoods Limited and Dragon’s Organic Beverages Pty Ltd are included at Appendix A & Appendix B.
Scope of Work:
The Scope of Work outlined below details the requirements of your role in relation to the preparation of the draft financial statements. The CFO has stipulated that as the business is family owned, general purpose financial statements are not required to be prepared. The report incorporating your findings and the draft financial statements are to be presented to the CFO.
SCOPE OF WORK:
PART A: Financial Statement Preparation
You are to prepare the following draft financial statements for your client (Organic Wholefoods Limited):
Consolidated Statement of Financial Position as at 31 December 2020;
Consolidated Statement of Profit and Loss and Other Comprehensive Income for the year ended 31 December 2020;
Consolidated Statement of Changes in Equity for the year ended 31 December 2020; and
Note disclosures supporting the balances included the consolidated financial statements prepared in (1) – (3) above.
You are also required to provide a copy of your work papers. The work papers should include (i) a final trial balance for the consolidated group and the parent entity, (ii) adjusting journal entries required to be processed (excel / word) and (iii) any related workings / calculations. These work papers should also include sufficient notes explaining workings / calculations and adjusting journal entries. The work papers should clearly identify the entity the adjustments relate to (i.e. Organic Wholefoods Limited, Dragon’s Organic Beverages Pty Ltd, and Consolidation Entries).
The draft consolidated financial statements should portray the Group’s financial results and the Parent entity’s financial results for the year ended 31 December 2020.
Note: Taxation entries are only required to the extent the adjusting journal entries affect taxation balances recorded in the financial statements. A detailed tax calculation is not required.
PART B: ANALYSIS and REPORT
You are required to present the draft Financial Statements and work papers, together with your report covering the following matters:
Your report should outline key issues the Group should consider and their impact / potential impact on the financial statements. These key issues should include discussion of relevant matters you identify during your review of the Group’s operations and preparation of the Group’s draft financial statements for the year ended 31 December 2020. The report may include discussion of areas / transactions where more information or clarification is required in order to finalise the draft financial statements; and
Your report should include a draft of the following accounting policy:
Revenue (the accounting policy should comply with AASB 15).
Appendix A: Organic Wholefoods Limited - Trial Balance for the year ended 31 December 2020
Dr |
Cr |
|
$ |
$ |
|
Revenue |
|
34,973,123 |
Administration Fees |
|
60,000 |
Other Income |
|
77,495 |
Rental Income |
|
220,000 |
Interest Received |
|
26,721 |
Finance Income |
|
1,816 |
Dividends Received |
|
250,000 |
Gain on revaluation |
|
150,000 |
Gain on sale of PPE |
|
15,880 |
Cost of Goods Sold |
11,191,399 |
|
Employee Benefits |
9,306,111 |
|
Depreciation and Amortisation Expenses |
2,451,627 |
|
Marketing Expenses |
596,855 |
|
Strategic Review Implementation |
370,000 |
|
Operating Expense |
623,695 |
|
Occupancy Expenses |
6,961,417 |
|
Administration Expenses |
250,360 |
|
Finance Expenses |
120,979 |
|
Directors Fees |
55,000 |
|
Other Expenses |
165,985 |
|
Tax Expense |
1,099,718 |
|
Cash and cash equivalents |
890,685 |
|
Trade Receivables |
326,858 |
|
Other Receivables |
1,816 |
|
Raw Materials |
1,535,161 |
|
Finished Goods |
107,145 |
|
Prepayments |
127,620 |
|
Deferred Tax Assets |
20,520 |
|
Land |
2,000,000 |
|
Buildings (Warehouse) |
2,225,500 |
|
Accumulated Depreciation |
|
445,100 |
Fixtures and Fittings |
9,404,315 |
|
Accumulated Depreciation |
|
140,750 |
Plant and Equipment |
7,271,375 |
|
Accumulated Depreciation |
|
2,668,367 |
Motor Vehicles |
1,338,152 |
|
Accumulated Depreciation |
|
516,341 |
Leased Assets |
555,635 |
|
Accumulated Depreciation |
|
61,120 |
Investment in Dragon's Organic Beverages |
3,950,750 |
|
Loan Receivable - Dragon's Organic Beverages |
200,000 |
|
Brands |
3,000,000 |
|
Patents |
100,720 |
|
Trade Creditors |
|
2,343,074 |
Accrued Expenses |
|
2,315,947 |
Current Tax Liabilities |
|
1,099,718 |
Accrued Long Service Leave |
|
112,120 |
Accrued Annual Leave |
|
250,790 |
Provision - Strategic Review |
|
220,000 |
Provision - Lease Make Good |
|
403,579 |
Borrowings - loan |
|
2,813,375 |
Lease Liability |
|
873,756 |
Share Capital |
|
10,810,861 |
Retained Earnings - opening |
|
2,940,008 |
Dividends Paid |
540,543 |
|
Revaluation Surplus - Brand |
|
3,000,000 |
66,789,941 |
66,789,941 |
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