1 Magic Mufflers – Business Background

2 Accounting System

3 Business Transactions for June 2017

4 Adjustments for end of financial year 2017

5 Accounting Requirements and Instructions

6 Additional Information

ACC106 ATMC Task 2 Assignment

Business Scenario and Instructions

Introduction

Magic Mufflers is a proprietorship of Mr Innis Hornet who established this new business on 1^st June 2017. Magic Mufflers is a GST-registered muffler and exhaust business that specialises in a small range of high-performance mufflers and exhaust systems. The business sources its products from a number of suppliers and trade expos, and sells to car enthusiasts.

The business currently sells three types of mufflers: Sports SP, Retro RR, and Racer CC:

Innis Hornet, sole proprietor, has established a reputable and growing business with and has employed four staff members. Being an astute businessperson, Innis is using Microsoft EXCEL software to maintain the accounting records of the business transactions during the month of June 2017, which is the last month of the Australian financial year.

1.2 Accounting Policies

1.2.1 Magic Mufflers uses accrual accounting for recording transactions and adjustments.

1.2.2 Magic Mufflers uses a perpetual inventory system with weighted average.

1.2.3 Magic Mufflers prepares quarterly Business Activity Statements (BAS) and remits the net GST liability due to the ATO in the month following the end of each quarter. (Note: as this is a new business, Innis has not yet prepared a BAS and has no liability at the start of June.)

1.2.4 Magic Mufflers has the following depreciation policies:

Equipment and Tools: depreciated over 10 years using reducing balance method at rate of 28% ($1000 residual value and can be pooled together)
Technology and security systems: depreciated over 5 years using straight line method (can pool together; no residual value)
Motor vehicles: depreciated using reducing balance method at the rate of 35% over 8 years ($1000 residual value)

1.2.5 Magic Mufflers pays employee wages on a weekly basis. Wages are paid on the Wednesday for the previous week. The workshop manager and sales manager are full time, earn a weekly wage and work Monday to Friday. The payroll officer and trainee technician are employed on a casual basis and are paid hourly. All employees are paid employer superannuation contribution to their nominated superannuation funds at the rate of 9.5% of gross salary (before deductions). All employees are being paid into the same superannuation fund through an online portal (this means you can account for all superannuation together).

1.2.6 Magic Mufflers records a provision for doubtful debts that equates to 4% of Accounts Receivable balance at the end of the year.

1.2.7 Magic Mufflers records all prepaid expenses as assets (prepayments), and then expenses the portion used as end of year adjustments.

2.1 Journal and Ledgers

Magic Mufflers uses the following journals and ledgers:

Cash Receipts Journal – to record all cash receipts of the business including cash sales and cash received from debtors

Cash Payments Journal – to record all cash payments and cheques issued by the business including cash purchases, cash payments to creditors

Sales Journal – to record all credit sales of Inventory

Purchases Journal – to record all credit purchases of Inventory & other items

General Journal – to record all other transactions not recorded in other journals (eg adjusting entries & closing entries)

General Ledger – separate ledger accounts are maintained for each asset, liability, equity, revenue and expense account

Subsidiary Ledgers – maintained for accounts receivable and accounts payable, and for inventory, then reconciled against relevant general ledger accounts

2.2 The business prepares the following Financial Statements:

Balance Sheet – Assets, Liabilities, Owners’ Equity

Income Statement – Revenue, Expenses, Gross/Net profit or loss

Statement of Changes in Equity – Capital, Drawings

2.3 Chart of Accounts

Magic Mufflers Chart of Accounts is shown below.

Chart of Accounts

Account Name	Account Type	Usual Balanc e	Account Type
Cash at Bank	Asset	Debit	Current Asset
Accounts Receivable	Asset	Debit	Current Asset
Provision for Doubtful Debts	Contra -Asset	Credit	Contra – Current Asset
Supplies	Asset	Debit	Current Asset
Inventory	Asset	Debit	Current Asset
Prepaid Insurance	Asset	Debit	Current Asset
Prepaid Rent	Asset	Debit	Current Asset
GST Paid	Asset	Debit	Current Asset
Equipment & Tools	Asset	Debit	Non Current Asset
Accum Dep -Equip’t & Tools	Contra -Asset	Credit	Contra – Non Current Asset
Technology & Security	Asset	Debit	Non Current Asset
Accum Dep – Tech & Security	Contra -Asset	Credit	Contra – Non Current Asset
Vehicles	Asset	Debit	Non Current Asset
Accum Dep – Vehicles	Contra -Asset	Credit	Contra – Non Current Asset
Accounts Payable	Liability	Credit	Current Liability
GST Collected	Liability	Credit	Current Liability
PAYG Tax Payable	Liability	Credit	Current Liability
Superannuation Payable	Liability	Credit	Current Liability
Private health Payable	Liability	Credit	Current Liability
Wages Payable	Liability	Credit	Current Liability
I Hornet, Capital	Equity	Credit	Equity
I Hornet, Drawings	Equity	Debit	Equity
Sales Revenue	Revenue	Credit	Revenue
Discount Received	Revenue	Credit	Revenue
Interest Revenue	Revenue	Credit	Revenue
Cost of Sales	Expenses	Debit	Cost of Goods Sold
Electricity & Gas Expense	Expenses	Debit	Expenses
Bad Debts expense	Expenses	Debit	Expenses
Discount Allowed Expense	Expenses	Debit	Expenses
Salary & Wages Expense	Expenses	Debit	Expenses
Supplies Expense	Expenses	Debit	Expenses
Rent Expense	Expenses	Debit	Expenses
Insurance Expense	Expenses	Debit	Expenses
Depreciation Expense	Expenses	Debit	Expenses
Income Summary	Temporary only	N/A	Temporary only

2.4 Employee Payroll

The Schedule of Employees and their pay rates are shown below along with relevant deductions (eg private health and employer superannuation guarantee).

Staff ID	Staff Name	Position	Private Health	ESG	Weekly salary	Hourly rate
EMP001	F Spark	Workshop Manager	$22/wk	9.5%	$2,090
EMP002	L Hornet	Sales Manager	$17/wk	9.5%	$1,880
EMP003	B Heat	Payroll Officer	$0	9.5%		$28
EMP004	C McQueen	Trainee Technician	$0	9.5%		$22

Calendar of relevant months for calculating payroll:

Assume all employees claim the Tax-free threshold and use the calculator included in the EXCEL Student Templates file (Payroll calculator sheet) to calculate the withholding tax.

This can also be found on the ATO site: https://www.ato.gov.au/Rates/Weekly-tax-table/

Date	Transaction Details
01-Jun	Innis Hornet deposits $225000 into the business bank account
02-Jun	Purchase of workshop equipment and tools (non-current assets) on credit from Tools R Us: total amount for $29000 (i nd GST), estimate residual value of $1000
02-Jun	Purchased mufflers (Inventory) on credit from Pro Power:
02-Jun	7x Sports SP ($675/unit) and 2x Racer CC ($999/unit) (not ind GST)
04-Jun	Purchase of following non-current a ssets on credit from Digital Sys:
04-Jun	Computer systems for $12 500; Security for $18 990 (all ind GST), no residual value
04-Jun	Purchased utility vehicle from Toyota (non-current asset) on crecit for $35 480 (ind GST), $1000 residual value
05-Jun	Paid $2 200( ind GST) cash for works hop supplies from RevCo
06-Jun	Purchased mufflers (Inventory) with cash from RevHeads Expo
06-Jun	3x Sports SP ($590/unit) and 2x Retro RR($875/unit) (not ind GST)
07-Jun	Sold a Sports SP and a Racer CC for $5820 cash (ind GST)
07-Jun	Purchased mufflers (Inventory) on credit from ProPower: 3x RacerCCs ($1050/unit) (not ind GST)
07-Jun	Made the f irst of four partial payments to Toyota for utility: $8870
07-Jun	Paid wages: Weekly salary for L Hornet & F Spark; 12hours f or B Heat Ohours for C McQueen. (Total wages can be recorded in single entry.)
07-Jun	Paid ForSure Insurance invoice for $9100 i nd GST effective for 12 months from 7 June 2017 (prepaid).
08-Jun	Sold a Racer CC for $2 200cash (ind GST)
09-Jun	Sold 3 Sports SP’sfor$4290cash (ind GST)
12-Jun	Paid Pro Power for purchases made on 21 une. Pro Power’s payment terms are 3/15, n/45
12-Jun	Purchased mufflers (Inventory) with cash from Panorama 1: 5x Retro RR’s ($860/unit) (not ind GST)
13-Jun	Made second partial payment to Toyota for utility: $8870
13-Jun	Received $7870 (ind GST) for the sale of 2xCCs and 2xSP’s.
14-Jun	Paid rent in advance for period spanningiune 15-Sept 15 of $6 600 (ind GST) cash
14-Jun	Paid wages:Weekly salary for L Hornet & F Spark; Uhours for B Heat 9hours for C McQueen. (Total wages can be recorded in single entry.)
17-Jun	Sold 2x Sports SP’s to Hot Rod’s Club for $2850 (ind GST), on credit. Discount terms:1/10, n/30
19-Jun	Purchased mufflers (Inventory) on credit from ProPower
19-Jun	5x Sports SP’s ($690/unit) & 5x RacerCCs ($1120/unit) (not ind GST)
20-Jun	Sold 2x Retro RR’s for $3 790 cash (inc I GST)
21-Jun	Sold 4x Sports SP’s and Ix RR to Rob’s Classic Cars for $7 800( ind GST), on credit
21-Jun	Paid wages:Weekly salary for L Hornet & F Spark, 3hours for B Heat; 28hours for C McQueen. (Total wages can be recorded in single entry.)
22-Jun	Sold 2x Racer CC’s for $2420 each (ind GST) to Hot Rod’s on credit
23-Jun	Purchased 4 Racer CC’ ss for $1165 ea (not ind GST) on crecit from Pro Power
26-Jun	Received payment in full (less discount) from Hot Rod’s Club
26-Jun	Sold 2x Racers CCs & 2x Retro RR’s for cash of $8600 (incl GST)
28-Jun	Paid wages:Weekly salary for L Hornet & F Spark; 3hours for B Heat 3Ihours for C McQueen. (Total wages can be recorded in single entry.)
29-Jun	Paid gas & electricity invoice fortune of $290( incl GST)
29-Jun	Bank statement shows the business bank acct earned $1307 interest. (Interest income is G ST f ree)
30-Jun	Owner withdrew $920 to purchase plane tickets for Singapore

4.1 A physical stocktake of supplies revealed supplies on hand at 30 June totalling $1380.

4.2 Calculate and record the adjusting entry for rent for the end of the month given that June rent (2weeks) has been used up.

4.3 Calculate the amounts for depreciation expense for each of the three types of non-current Assets: equipment & tools; technology & security; vehicles (Estimate expense as though assets held for whole of month of June.)

4.4 Calculate and record the adjusting entry for insurance for the end of the month given that the June portion has been used up. (Estimate by weeks.)

4.5 Calculate and record the adjusting entry for wages payable for employee earnings not yet paid as at 30 June. Apportion weekly salary earners by day; B Heat & C McQueen both worked 5 hours each between Mon 26/6 and Fri 30/6.

4.6 Calculate the Provision for Doubtful Debts based on 4% of accounts receivable at the end of the year and make the necessary adjusting entry.

5.1 Spreadsheet software

The file on the course Blackboard site (ACC106 Task 2 Student Templates) contains a series of worksheets that you should use to complete the requirements below. Make changes as required including formulas and links.

5.2 Completing the Accounting Cycle

5.2.1 Record all the business transactions from section 3 above in the relevant special journals and post the Account totals to the relevant ledgers using EXCEL linking function. Use the accounts listed in the Chart of Accounts and enter names of the ledger accounts as required. In the ledgers, use formulas to create running totals. DO NOT POST ADJUSTMENTS yet.

5.2.2 Prepare an ‘Unadjusted’ Trial Balance as at 30 June 2017 by linking balances in the ledger accounts to the Trial Balance. It will be a ‘Live’ Trial Balance but at this point it is unadjusted as the Adjustments have not yet been posted. When completed, check the debit and credit columns are equal in the Trial Balance. Then copy and special paste (as values only) the Trial Balance into the Worksheet columns ‘Unadj Trial Balance’. These should not change now as they are raw figures. (Tip: Use Paste Special to paste in as values.)

5.2.3 Record the end of year Adjustments, listed above at section 4, in the Worksheet and complete the Worksheet by calculating balances in the Adjusted Trial Balance columns. Then complete the Income Statement and Balance Sheet columns in the Worksheet.

5.2.4 Record the Adjustments in the General Journal and post these adjustments to the General Ledger using new accounts as necessary. (This will change the figures in your Trial Balance which should now match the Adjusted Trial Balance figures in the Worksheet.)

5.2.5 Prepare the closing entries in the General Journal, and post these to the General Ledger. (As with adjustments, this will change your Trial Balance figures if you have linked correctly. NOW, your Adjusted Trial Balance figures in the Worksheet will NOT match the Trial Balance figures for the Revenue and Expense accounts and totals.)

Remember: for closing, close revenue and expense accounts to the P&L Closing Account, then close P&L Closing Account to the Capital account and finally, close drawings to the Capital account.

5.2.6 Finally, prepare the Financial Statements for 30 June 2017 by copying or linking the appropriate figures into your Financial Statements. Refer to your textbook or course Learning Materials for guidance on the format of these Statements. For Balance Sheet, use the Classified Balance Sheet in report form as demonstrated on p.184 of the text; and Income Statement and Statement of Changes in Equity as demonstrated on p.240 of the text. (Note, for the Income Statement, there will be three revenue streams including discount received.)

Jun-17 Mon

6.1 Number formats

All amounts should be rounded/truncated to two decimal places. Amounts can be displayed without $ sign. (Use $ sign for Financial Statements only).

6.2 Journals and Ledgers

Adjustment & closing entries should be posted from the General Journal to the respective General Ledger accounts at the end of the financial year (June 30)

Total columns in the special journals should be posted to the respective General Ledger accounts at June 30.

Note: In the special journals, all entries that do not belong in one of the account columns as listed in the template, should be included in the “Other Accounts” columns. These should then be posted on an individual basis to the respective ledger accounts. (Hint: the journal templates contain all the account columns as required for this business. However, not all accounts have been included in the general ledger template – please add as required.)

Remember: When special journals are used, do NOT also use the General Journal for the same transaction. Also, the subledgers for inventory, AR and AP are not linked to the General ledger but the balances should be checked.

6.3 Inventory

Record Inventory purchases and sales in the Subsidiary Ledger Inventory AS THEY OCCUR. As well, record purchases and sales in the relevant journals (using figures in the Inventory record) and post the Inventory totals from these journals to the General Ledger Inventory account at June 30.

6.4 Wages

There are two payroll worksheets that can be used to calculate wages. The payroll calculator from the ATO should be used to estimate weekly PAYG withholding tax for each employee. Use the table in the payroll template to relevant amounts for each employee each week.

6.5 Depreciation

There is a depreciation worksheet with a table that can be used to calculate depreciation for the non-current assets. (Tip: depreciation expense is based on the net cost of the asset.)

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