FINANCIAL ACCOUNTING
shahew
CaseData-GymLifePtyLtd1.docxMAA261 FINANCIAL ACCOUNTING
T3 2017
CASE DATA FOR GYM LIFE PTY LTD
Gym Life Pty Ltd is a business with that manufactures and sells gym equipment to gyms across Australia. The business was established in 2011 and is a large proprietary company with two directors, Rebecca Puggles and David Rossi. The business operates from a factory in Sunshine, is registered for Goods and Services Tax (GST) and has a financial year ending 30 June. When commencing the business 2 January 2011, Gym Life Pty Ltd purchased the following assets for $800,000 (plus GST):
|
|
Fair value of |
|
|
assets |
|
Land |
$540,000 |
|
Building |
$320,000 |
|
Machinery |
$100,000 |
|
|
$960,000 |
The purchase of the assets comprised $300,000 cash and a loan for the remaining amount. Gym Life Pty Ltd also had additional costs relating to the purchase: legal fees for the land purchase $2,500 (plus GST), installation costs of the machinery $3,300 (plus GST), renovating costs to make the building suitable for intended use $10,000 (plus GST), training of employees on how to use the machinery’s additional features $1,200 (plus GST), shipping of the machinery $700 (plus GST) and trade discount of 10% of the GST inclusive amount for the machine.
The building is expected to have a useful life of ten years and a residual value of $50,000. The machinery is expected to have a useful life of eight years and no residual value. Gym Life Pty Ltd adopts the straight-line depreciation method for the building and diminishing balance method (20%) for the machine.
Gym Life Pty Ltd adopts the revaluation model for valuing the land and building and the cost model for valuing the machinery. On 30 June 2014, Rebecca and David decide to obtain an independent valuation of the land and buildings as they have heard that the property market has been performing well in Melbourne. The independent valuation indicates that the land’s fair value is $500,000 and the building’s fair value is $350,000. The valuation report also states that the building residual value is now $80,000 and is expected to last an additional five years.
Two years later on 30 June 2016, Rebecca and David are meeting to discuss the end of financial year accounts when they receive a phone call from the local fire station in Sunshine. They are informed that a short circuit has caused a fire in the building and has caused severe damage to the building and machinery. As a result of the damage to these non-current assets, Rebecca and David need to revise the recorded values of the building and machinery. The building is revalued downwards to $150,000 and the machinery has a fair value of $14,104, disposal costs of $1,052 and value in use of $12,300.
Page 2 of 4
After the fire damage in June 2016, insurance pays for the damages to the building and machinery to be repaired. Following this, Rebecca and David decide to cease Gym Life’s manufacturing operations as the business was not performing well in any case. They exchange the machinery on 1 September 2016 for new gym equipment for a $13,000 trade-in allowance and $6,000 cash (plus GST). The company retains the building and rents it out as the building can be used to secure a new loan for a new business venture. Rather than deregistering the company, Rebecca and David decide to rebrand Gym Life Pty Ltd as a gym and yoga services provider for new mothers. The proceeds of the new loan are used to open the company’s first gym in Camberwell, Melbourne in June 2017.
Gym Life Pty Ltd offers annual gym membership to members under the following terms and conditions:
· A once-off non-refundable joining fee of $600 (plus GST) when the member initially signs a new gym contract. The joining fee is used to cover the administrative costs of enrolling a new member.
· A monthly membership fee of $80 (plus GST) a month which is payable in advance.
· A maximum membership period of 24 months, after which anyone who wants to continue their membership needs to roll-over their membership and sign new contract with Gym Pty Ltd. The non-refundable joining fee is waivered for customers who have been previous members of the gym.
On 1 June 2017, 40 new members sign a contract with Gym Life Pty Ltd for gym membership.
Page 3 of 4
Rebecca and David have notified the consultants that they are unsure about whether their treatment of non-current assets and revenue in the prior and current financial years has been correct. They would like guidance from professionals to ensure that they do not make similar mistakes in their new business venture.
Page 4 of 4
