Corporate Accounting Exam Deferred Sem 3 2011 - SOLUTIONS Question One Part A

Classification of after reporting period events Assuming all events are material by reason of size and nature: Date 17 July 2010 Classification Non-Adjusting Justification The storm which caused the loss of the fishing fleet and the uninsured loss of profits occurred after the end of the reporting period and impacts on future conditions. The receipt and subsequent return of the fishing net provides new information about the assets owned by Camel Ltd as at the end of the reporting period. The lawsuit arose as a consequence of an after the end of the reporting period event ( the storm on 17 July) and it may have material effects on future cash flows or operations if the company has to pay the $4 million damages claim. The issue of the prospectus seeking to raise $100 000 from debentures does not relate to conditions existing at the end of the reporting period but will have a material impact on future cash flows.

19 July 2010

Adjusting

29 August 2010

Non-Adjusting

1 September 2010

Non-Adjusting

Part B

Prior period errors are omissions from and other misstatements of, the entitys financial statements for one or more previous reporting periods that are discovered in the current period. Errors can occur for a number of reasons, including mathematical mistakes, misinterpretation of information, mistakes in applying accounting policies, oversight or misinterpretation of facts, and fraud. If the error is material then AASB 108 requires that it be corrected in the period in which it was discovered by retrospective restatement of the financial statements affected by the error. In other words, the entity must change the prior year figures to reflect the figures that would have been reported had the error not occurred. This restatement may involve changing prior year comparative figures or restating the opening amounts of comparative figures depending on whether the error was in the prior year or further back. The aim is to present financial statements (restated) as if the error had never occurred by correcting the error in the comparative information for the previous period(s) in which it occurred. Extensive disclosures of the line by line effect of the error are also required in the year of correction.

page 1

Part C i) ABC Pty Ltd is a small proprietary company with two shareholders. In this case, management is not separated from economic interest as Mr and Mrs ABC are involved in the day-today operations. The only user appears to be The Bank, which receives management accounts and budgeted cash flow information. Providing The Bank does not advise that it is dependent upon GPFSs, and ABC Pty Ltd has no economic or political influence, ABC Pty Ltd does not appear to be a reporting entity. ii) Fulton Pty Ltd exhibits some characteristics of being a non-reporting entity. There are few shareholders and there appears to only be one banker who receives accounts. If the banks borrowing agreement requires GPFSs then whilst the company may not be a reporting entity, it will have to produce GPFSs. If the bank does not require GPFSs then consideration needs to be given to the fact that 200 staff are employed and it is one of only two companies involved in widget making in Australia. Does it have economic or political influence? If widgets are significant to the Australian economy then it may be considered to be a reporting entity. If they are not, it may not be (much judgement!). Are the suppliers also users of the financial statements? Are the 200 employees users of the financial statements? Providing the business is not significant to the economy, and that the creditors do not rely on the financial statements then, more than likely, the company is not a reporting entity. Part D
A

AASB116.16 specifies that the initial cost of the new machinery should include all costs necessary to acquire the machinery, and to bring the machinery to a location and condition necessary for use.

AASB116.16 specifies that the cost of the machinery includes: a) Purchase consideration, (after deducting trade discounts and rebates); b) Incidental costs, e.g. taxes, import duties, legal fees;

page 2

c) Costs directly attributable to bringing the machinery to a location and condition, necessary for the intended use of the machinery, e.g. delivery and handling costs, costs of site preparation, installation and assembly costs, modification costs, costs of employees, cost of initial testing. [AASB116.17]; and d) An estimate of the cost of dismantling and removing the machinery, and restoring the site where the machinery was located, where such an obligation is incurred, when the machinery was acquired or used. B Additional expenditures relating to the machinery, would be: Expensed, if the expenditures are expected to maintain the current level of economic benefits provided by the machinery, e.g. routine repairs and maintenance. [AASB116.12]; or Capitalised as an Asset, if the expenditures are expected to increase economic benefits provided by the machinery, in future periods, e.g. a major overhaul, extending the useful life of the machinery; modifications to the machinery, which improve the quality of the product produced by the machinery, increase the speed of production by the machinery, or enable the machinery to perform new functions. [AASB116.7, and 13].

page 3

QUESTION TWO

a) Kenwood Ltd. should classify the lease contract as finance lease because substantially all the risks and rewards of ownership of the equipment have been transferred to the lessee, Bulk Ltd., as: The lease contract is non-cancellable; and The Lease contract includes a bargain purchase option.

Kenwood Ltd has entered a Manufacturer/ Dealer Type Finance Lease as the Fair Value of the equipment ($4,606150) differs from the Carrying Amount of the heavy duty equipment ($3,800,000) at the inception of the Lease. Additional Explanation Whenever a lease contract includes a bargain purchase option, or a fully guaranteed residual, Present Value of the Minimum Lease Payments must be equal to 100% of the Fair Value of the Leased Asset, at the inception of the lease. PV = (4.622880* 840,000) + (1,147,200*0.630170) = 4,606,150 Present Value of the Minimum Lease Payments* = 100% of the Fair Value of 4,606,150 Additional Evidence about the transfer of risks and rewards Bulk Ltd. is responsible for paying for the maintenance and insurance of the hydraulic equipment. Bulk Ltd bears the risks of unsatisfactory performance of the hydraulic equipment, unused idle capacity of the hydraulic equipment, obsolescence of the hydraulic equipment. Bulk Transport Ltd obtains the benefit of increases in the residual value, and bears the risk of decreases in residual value.

b) Prepare the journal entries relating to the lease contract for Kenwood Ltd for the year ended 30 June 2009, in accordance with AASB117. Prior to entering the Lease Contract, the manufacturing equipment was included in Kenwood Ltd.s inventory at the cost of manufacture, $3,800,000. 1 Recognising the Manufacturer/ Dealer Type Finance Lease at the inception of the Lease DR Lease Receivable DR Cost of Goods Sold CR Inventory 3,800,000 CR Sales Revenue 4,606,150 4,606150 3,800,000

1/7/2009

page 4

Allocating Lease Payments between Interest Revenue and Principle Reduction Date of Payment 1/7/2009 31/12/2009 840,000 368492 471508 Minimum Payment Lease Interest Revenue Principal Reduction Outstanding Principal 4,606150 4,134,642

2 Allocating first reduction 31/12/2009 DR CR CR CR

Lease Payment into Executory Costs, Interest Revenue, and Lease Receivable Cash at Bank Revenue - Reimbursement of Executory Costs Interest Revenue Lease Receivable 920,000 80,000 368,492 471508

page 5

QUESTION THREE Determine the amount of research and development expenditure, which Universal Ltd should recognise as an expense and/or as an asset, in the year ending 30 June 2009, in accordance with AASB138. Justify your answer by referring to the requirements of AASB138. Comprehensive solution Expense the $30,000 Research costs incurred on the turnip disease project because AASB138.54 requires research costs to be expensed when incurred Expense the $20,000 Development costs incurred on the turnip disease project because Universal Ltd cannot demonstrate the technical feasibility of successfully developing a cure for the turnip disease [AASB138.57] because trials of the prototype had been unsuccessful OR because the turnip disease project is not expected to generate probable economic benefits [AASB138.57] because trials of the prototype had been unsuccessful Comprehensive Answer Expense the $00,000 Research costs incurred on the turnip disease project because AASB138.54 requires research costs to be expensed when incurred Capitalise as an Asset, the $70,000 Development costs incurred on the turnip disease project because at 30 June 2010, Universal Ltd can demonstrate, (in accordance with AASB138.57): (i) the technical feasibility of successfully developing a cure for the turnip disease, because: Universal Ltd has successfully developed a cure for the common turnip disease; (ii) that the cure for the turnip disease will generate probable future economic benefits, because: Universal Ltd is very confident that the costs incurred on the turnip disease project will be fully recoverable from future sales revenue; and (iii) the expenditure attributable to developing a cure for the turnip disease can be reliably measured, at $70,000 (iv) its intention to complete the development of the cure for the common turnip disease and sell it because Universal Ltd has successfully developed a cure for the common turnip disease (v) the availability of the technical, financial and other resources required to complete the development of the cure for the common turnip disease, and to sell the cure, because Universal Ltd has successfully developed a cure for the common turnip disease (vi) its ability to sell the cure for the common turnip disease) AASB138.71 prohibits development costs expensed in a previous year, from being reinstated /recognised as part of the cost of an asset, in a subsequent year

page 6

c)

Prepare journal entries to record the amortisation of deferred research and development expenditure, for the years ending 30 June 2011, and 30 June 2012, assuming that actual revenues match with Universal Ltds expectations. 7,000* 7,000*

1 Amortisation of Deferred Development Costs for 2010-2011 Financial Year 30 June 2011 DR Amortisation Expense Deferred Development Costs CR Accumulated Amortisation Deferred Development Costs * [70,000 x 10%] 2 Amortisation of Deferred Development Costs for 2011-2012 Financial Year 30 June 2012 DR Amortisation Expense Deferred Development Costs CR Accumulated Amortisation Deferred Development Costs * [70,000 x 30%]

21,000* 21,000*

QUESTION FOUR QUESTION ONE a) Determine the recoverable amount of the land for each reporting date. Justify your answer. The recoverable amount is the higher of the net selling price (fair value less costs to sell) and value in use (1 mark). Reporting Date 30 June 2008 30 June 2009 30 June 2010 Net Selling Price $ 1,050,000 930,000 920,000 Value in Use $ 1,100,000 890,000 1,010,000 Recoverable Amount $ 1,100,000 930,000 1,010,000

b)

Assume that Misia Ltd values the land using the revaluation model. Determine the carrying amount of the land at each reporting date, in accordance with AASB accounting standards. Provide journal entries necessary to account for adjustments to the carrying amount of the land.

Reporting Date 30 June 2008 30 June 2009 30 June 2010

Carrying Amount brought forward $ 1,000,000 1,060,000 950,000

Market Value $ 1,060,000 950,000 950,000

Carrying Amount at Reporting Date $ 1,060,000 950,000 950,000

1 Revaluation of Land 30 June 2008 DR Land [1,060,000 1,000,000] CR Revaluation Surplus 2 Revaluation of Land 30 June 2009 DR Revaluation Surplus DR Loss on Asset Devaluation Expense [110,000 60,000] CR Land [1,060,000 950,000]

60,000 60,000 60,000 50,000 110,000

page 7

Question FIVE Prepare the journal entry for Unitech Ltd, to record income tax for the year ending 30 June 2008, in accordance with AASB112. Show all workings. Carrying Amount a) Equipment 1,600,000 1,600,000 [1,600,000/8 x 2] [1,600,000 x 0.20 x 2] 400,000 640,000 1,200,000 960,000 1,600,000 1,600,000 [1,600,000/8x 3] [1,600,000 x 0.20 x 3] 600,000 960,000 1,000,000 640,000 increase b) Long Service Leave 30/6/2009 Long Service Leave During 2009-2010 LSL Expense Incurred Long Service Leave Paid 30/6/2010 Long Service Leave Decreases 120,000 (190,000) 1,270,000 0 1,270,000 381,000 DTA 30/6/2009 Cost Accum. Depreciation Written Down Value 30/6/2010 Cost Accum. Depreciation Written Down Value Tax Base Temporary Difference Deferred Tax Balance

240,000

72,000 DTL

360,000

108,000 DTL 36,000

1,200,000

1,200,000

360,000 DTA 21,000

c)

Interest Receivable

31/12/2009 Interest Receivable 450,000 DTL 0 450,000 135,000

31/12/2010

page 8

Interest Receivable

250,000 DTL

250,000

75,000

60,000 decrease

Taxable Income for year ended 30 June 2010 Accounting Profit before Income Tax 2,100,000

Interest received Depreciation Expense Equipment Long Service Leave Expense Entertainment Expense Depreciation Expense Equipment Long Service Leave Paid Taxable Income Current Tax Expense/ Income Tax Payable Journal Entry 30 June 2009

+200,000 + 200,000 + 120,000 + 260,000 - 320,000 - 190,000 2,370,000 711,000

DR DR CR

Income Tax Expense Deferred Tax Liability Deferred Tax Asset

708,000 24,000 21,000

CR

Income Tax Payable

711,000

page 9

QUESTION SIX (a) Consolidation Worksheet Journal Entries 1 Revalue Moment Ltds Land to Fair Value DR Land [1,300,000 1,000,000] CR Revaluation Surplus Tax Effect: Revalue Moment Ltds Land to Fair Value DR Revaluation Surplus CR Deferred Tax Liability [300,000 x .3]

300,000 300,000

90,000 90,000

3 Eliminate Investment in Moment Ltd against Creation Ltds share of Moment Ltds Owners Equity at Acquisition Date DR Share Capital [400,000 x .7] 280,000 DR General Reserve [80,000 x .7] 56,000 DR Revaluation Surplus [(280,000 + 300,000 90,000) x .7] 343,000 DR Retained Profits 1/7/08 [30,000 x .7] 21,000 DR Goodwill 50,000 CR Investment in Sun Ltd 750,000 4 Impairment of Goodwill DR Impairment Loss - Goodwill [50,000 35,000 (current year expense)] CR Accumulated Impairment Losses - Goodwill

15,000 15,000

Elimination of intra-group Rental Revenue and Rental Expense (relating to Office Building) DR Rental Revenue 60,000 CR Other Expenses (Rental Expense) Elimination of intra-group Sales DR Sales Revenue CR Cost of Goods Sold Elimination of Unrealised Profit in Closing Inventory (earned by Moment Ltd) DR Cost of Goods Sold [(580,000 430,000) x .70] CR Inventory (B/S) Tax Effect: Elimination of Unrealised Profit in Closing Inventory DR Deferred Tax Asset [105,000 x .3] CR Income Tax Expense

60,000

580,000 580,000

105,000 105,000

31,500 31,5000

9 Elimination of intra-group Accounts Payable on Inventory Purchases DR Accounts Payable CR Accounts Receivable

70,000 70,000

10 Elimination of Unrealised Profit in Opening Inventory (earned by Moment Ltd) DR Retained Profits 1/7/08[105,000 - 65,000] CR Cost of Goods Sold

40,000 40,000

page 10

11 Tax Effect: Elimination of Unrealised Profit in Opening Inventory DR Income Tax Expense [40,000 x .3] CR Retained Profits 1/7/08 12 Elimination of Interim Dividend paid by Moment Ltd to Creation Ltd DR CR Dividend Revenue [25,000 x.7] Interim Dividend (P + L Appropriation)

12,000 12,000

17,500 17,500

13 Elimination of Final Dividend declared by Moment Ltd to Creation Ltd DR CR Dividend Revenue [30,000 x .7] Final Dividend (P + L Appropriation) 21,000 21,000

14 Elimination of intra-group Debt: Creation Ltds share of Moment Ltds declared Final Dividend DR CR Dividend Payable [30,000 x .7] Dividend Receivable 21,000 21,000

page 11