Reference no: EM133082090
ACCG224 Intermediate Financial Accounting - Macquarie University
Question One: Property, plant and equipment, including deferred taxes
Viborg Ltd purchased a new machine on 1 July 2012 for $79,600 cash. Transport and installation costs of $8,400 were paid on 5 July 2012. Useful life and residual value were estimated to be 10 years and $3,600, respectively. Viborg Ltd depreciates machines using the straight-line method to the nearest month, and reports annually on 30 June. The company tax rate is 30%.
On 30 June 2013, the company adopted the revaluation model to account for the machine. An expert valuation was obtained showing that the machine had a fair value of $76,000 at that date. Remaining useful life and residual value were estimated to be 8 years and $2,400, respectively.
On 30 June 2014, the machine's carrying amount was remeasured to its fair value of $72,000. Remaining useful life and residual value were estimated to be 8 years and $4,000, respectively.
On 30 September 2014, the machine was sold for $75,000 cash.
Required
1. Prepare general journal entries to record the transactions and events for the period 1 July 2012 to 30 September 2014 according to AASB 116, including the journal entries required to account for all future tax consequences (deferred taxes) according to AASB
112. Show the net gain/loss from of the sale of the machine. (Narrations are not required)
2. Why do you believe the standard setter requires companies to show revaluation gains under 'other comprehensive income' while revaluation losses must be part of 'profit or loss'? Discuss this question with reference to the different quality and potential use of 'profit' compared with that of 'other comprehensive income'.
Question Two: Impairment
Danske Møbler Ltd has determined that its 'Arne Jacobsen' chair manufacturing division is a cash-generating unit. The carrying amounts of the assets at 30 June 2013 are as follows (before allocation of corporate assets):
Inventory
|
$60,000
|
Land
|
150,000
|
Factory
|
210,000
|
Equipment
|
120,000
|
Goodwill
|
35,000
|
Following the trend to manufacture carbon neutrally, Danske Møbler Ltd has its own power plant which runs on renewable resources like sun and wind only. The power plant is carried at
$6,600,000 and produces on a long-term annual average 3,200 units of electricity of which the 'Arne Jacobsen' chair manufacturing division uses 80 units. The remaining units are used by other CGUs. The electricity consumption is considered a reasonable and consistent measure to allocate the carrying amount of the power plant (corporate asset) to the various CGUs.
Danske Møbler Ltd calculated the recoverable amount of the division to be $685,000.
Required
1. Provide the journal entry to account for the impairment loss of the division according to AASB 136, assuming that the fair value less costs to sell of the land is $148,000. Show all workings.
2. Discuss why the standard setter requires companies to test and account for impairment of assets. In your discussion, refer to the two fundamental qualitative characteristics of useful financial information (relevance and faithful representation) as defined in the Conceptual Framework.
Question Three: Leases
On 1 July 2013, Lang Ltd leased a truck from Odense Ltd. The truck cost Odense Ltd $166,250, considered to be its fair value on that same day. The finance lease agreement contained the following provisions:
The lease term is for 3 years, starting on 1 July 2013
The lease is non-cancellable.
|
Annual lease payment, payable on 30 June each year
|
57,000
|
Estimated useful life of the leased truck
|
4 years
|
Estimated residual value of the leased truck at end of lease term
|
30,000
|
Residual value guaranteed by Lang Ltd
|
10,000
|
Interest rate implicit in the lease
|
9%
|
In setting up the lease agreement Odense Ltd incurred $1,200 in legal and consultancy fees. Lang Ltd does not intend to buy the truck at the end of the lease term.
Required
1. Prepare the lease schedules for both the lessee and the lessor. Show all workings.
2. Prepare the journal entries in the records of the lessee only for the year ended 30 June 2014.
3. Do you believe that the different accounting treatment of operating and finance leases under AASB 117 is justified? When discussing this question refer in particular to the enhancing qualitative characteristic 'comparability' as defined in the Conceptual Framework.
Question Four: Employee benefits
Danske Cykelfabrikker Ltd was founded five years ago by a Danish immigrant and manu- factures high-end designer bicycles. The socially responsible company provides its employees with long service leave (LSL) entitlements of 8 weeks of paid leave for every 8 years of continuous service. As the company has only been operating for 5 years, no employees have become entitled to long service leave. However, the company recognises a provision for long service leave using the unit credit approach required by AASB 119. The following information is obtained from Danske Cykelfabrikker Ltd's payroll records and actuarial reports for its staff at 30 June 2013:
Years of service
|
Employees
|
Expected to become entitled
|
Average annual salary
|
Years until LSL vests
|
Yield on high quality corporate bonds
|
|
|
|
$
|
Years
|
$
|
1
|
10
|
20%
|
35,000
|
7
|
6%
|
2
|
6
|
40%
|
39,000
|
6
|
6%
|
3
|
4
|
60%
|
43,000
|
5
|
4%
|
4
|
3
|
80%
|
48,000
|
4
|
3%
|
Additional information
» The estimated annual increase in retail wages is 3% per annum for the next 8 years, reflecting Danske Cykelfabrikker Ltd's policy of increasing salaries for each year of additional experience.
» At 30 June 2012, the provision for long service leave was $9,430.
Required
1. Prepare the journal entry to account for Danske Cykel Fabrikker Ltd's provision for long service leave at 30 June 2013. Show all workings.
2. Referring to the definitions of 'expense' and 'liability' from the Conceptual Framework, discuss if it is justified that Danske Cykel Fabrikker Ltd is required to recognise long service leave expense and a provision in the current financial year even if the first employees can take their long service leave only in 4 years' time.
Question Five: Revenue recognition and statement of comprehensive income
Part A (Revenue recognition)
Aarhus Ltd is an all-round office service provider. During the financial year 1 July 2012 - 30 June 2013, they entered into the following transactions regarding sale of goods and rendering of services:
1. On 15 May 2013, Aarhus Ltd delivered 10 coffee machines to Aalborg Ltd for a total of $6,350, including installation in their offices. The installation is minor and involves connecting the coffee machines to an electric socket and testing that the machines perform when connected. Aalborg Ltd pays on the 24 May 2013.
2. On 24 May 2013, Aarhus Ltd also sold 5 multi-function copiers to Aalborg Ltd for a total of $24,500. On the delivery date, 28 May 2013, Aarhus Ltd invoices Aalborg Ltd and is obliged to install the copiers. The installation is major because the copiers have to be set up and connected to the IT systems of Aalborg Ltd. This involves a few days' worth of work plus testing that the copiers perform when installed. On 3 June 2013, the installation and testing is completed and accepted by Aalborg Ltd. Aalborg Ltd pays on the 8 June 2013.
3. Aarhus Ltd also operates as a wholesaler. On 28 May 2013 they sell 20 office desks to Roskilde Pty Ltd for a total of $18,000. The agreement between the two parties states that Roskilde Pty Ltd will hold those desks on consignment and will only pay for them to the extent that they can on-sell the desks to third parties. On 15 June 2013, Aarhus Ltd is notified that 10 desks have been on-sold. A payment of $9,000 from Roskilde Pty Ltd is received on the 18 June 2013.
4. On 1 June 2013, Aarhus Ltd enters into a cleaning service contract with Aalborg Ltd. For a lump sum of $24,000 ($2,000 per month), Aarhus Ltd commit themselves to clean Aalborg Ltd's offices for the next twelve months, starting on 1 June 2013. In order to benefit from this special offer, Aalborg Ltd has to pay the whole amount in advance. The payment is received on 3 June 2013.
Required
For each case, state date and amount, if any, at which Aarhus Ltd will recognise revenue according to AASB 118 for the financial year 1 July 2012 - 30 June 2013. Ignore any taxes. Justify your answers.
Part B (Statement of comprehensive income)
The following extract from a trial balance for Funen Ltd at 30 June 2014 is provided:
|
DR
|
CR
|
$
|
$
|
Sales revenue
|
|
2,716,260
|
Discounts allowed
|
19,650
|
|
Cost of sales
|
1,362,600
|
|
Interest income
|
|
15,000
|
Dividend income
|
|
12,600
|
Distribution expenses
|
127,500
|
|
Administration expenses (before depreciation)
|
771,000
|
|
Income tax expense
|
59,550
|
|
a. The company tax rate is 30%.
b. Administration expenses for the year include interest expense of $63,000.
c. Plant and equipment with historical cost of $135,000 and accumulated depreciation of $36,000 were sold for $132,000 in cash.
d. Depreciation expense for buildings of $42,000 and for plant and equipment of $75,000 has not been recognised yet.
e. Management decided to switch to the revaluation method for land. Total gross increments of $60,000 were determined for the period. The related income tax is shown on the face of the statement.
f. As far as permitted by AASB 101, Funen Ltd combines non-material income and expense items on the face of the statement.
Required
Prepare a statement of profit or loss and other comprehensive income for Funen Ltd for the year ended 30 June 2014, according to the requirements of AASB 101. Classify expenses by function and show all workings.
Question Six: Statement of cash flows
The following preliminary financial statements were prepared for Hillerød Ltd for the financial year ended 30 June 2013.
HILLERØD LTD
Statement of Financial Position as at 30 June
2012 2013
ASSETS $ $
Current assets
Petty cash/cash at bank 10,000 7,950
Deposits at call/bank bills 9,500 4,500
Accounts receivable 125,000 209,180
Allowance for doubtful debts (12,500) (17,540)
Inventories 120,000 150,000
Interest receivable 9,500 10,000
Prepayments 1,100 1,810
|
|
Total current assets
|
262,600
|
365,900
|
Non-current assets
Land Buildings
Accumulated depreciation Plant and equipment Accumulated depreciation Deferred tax assets
|
150,000
240,000
(32,500)
200,000
(35,000)
2,500
|
170,000
360,000
(46,500)
155,000
(48,000)
6,300
|
Total non-current assets
|
525,000
|
596,800
|
Total assets
|
787,600
|
962,700
|
LIABILITIES
Current liabilities Accounts payable Interest payable Dividends payable
Income tax payable
|
147,720
5,500
4,500
14,780
|
98,005
7,500
8,000
17,000
|
Total current liabilities
|
172,500
|
130,505
|
Non-current liabilities
Borrowings
Long-term provisions Deferred tax liability
|
389,300
150,800
7,500
|
450,000
175,575
23,450
|
Total non-current liabilities
|
547,600
|
649,025
|
Total liabilities
|
720,100
|
779,530
|
NET ASSETS
|
67,500
|
183,170
|
EQUITY
Share capital Retained earnings General reserve
Asset revaluation surplus
|
42,500
25,000
-
-
|
58,600
85,570
25,000
14,000
|
TOTAL EQUITY
|
67,500
|
183,170
|
HILLERØD LTD
Statement of Comprehensive Income for the year ended 30 June 2013
$
Sales 905,420
Discounts allowed (6,550)
Cost of sales (454,200)
|
|
Gross profit 444,670
Interest income 9,200
Gain on sale of plant and equipment 11,000
Distribution and other expenses (42,500)
Administration expenses (275,000)
Interest expense (21,000)
|
Profit before income tax 126,370
Income tax expense (19,850)
|
Profit for the year 106,520
Other comprehensive income
Items that will not be reclassified to profit or loss
Revaluation of land 20,000
Income tax relating to other comprehensive income (6,000)
|
Other comprehensive income for the year 14,000
Total comprehensive income for the year 120,520
|
|
HILLERØD LTD
Statement of Changes in Equity
for the year ended 30 June 2013
|
|
Share capital
|
Retained earnings
|
General Reserve
|
Asset revaluation
surplus
|
Total
|
|
|
|
|
PPE
|
|
Balances at 30 June 2012
|
42,500
|
25,000
|
-
|
-
|
67,500
|
Comprehensive income for
the period
|
|
106,520
|
25,000
|
14,000
|
120,520
|
Dividend paid
|
|
(7,950)
|
|
(7,950)
|
Dividends declared
|
|
(8,000)
|
|
(8,000)
|
Issue of shares for cash
|
11,100
|
|
|
11,100
|
Issue of bonus shares
|
5,000
|
(5,000)
|
|
|
Transfers
|
|
(25,000)
|
|
|
Balances at 30 June 2013
|
58,600
|
85,570
|
25,000
|
14,000
|
183,170
|
The following additional information for the financial year ended 30 June 2013 is also available:
a. Management decided to display interest paid under 'operating', interest received under 'investing', and dividends paid under 'financing activities'.
b. The income tax rate is 30%.
c. Management decided to include petty cash/cash at bank and deposits at call/bank bills in 'cash and cash equivalents'.
d. Doubtful debt expense for the period was $9,870.
e. Management decided to switch to the revaluation method for land. Total gross increments of $20,000 were determined for the period.
f. Building depreciation expense for the period is $14,000. Additional buildings were purchased for $120,000 of which $100,000 were directly financed through a long-term mortgage.
g. Plant and equipment depreciation expense for the period is $25,000. Plant and equipment with historical cost of $45,000 and accumulated depreciation of $12,000 were sold for a gain of $11,000.
Required:
1. Prepare a statement of cash flows in accordance with AASB 107 using the direct method of presenting the cash from operating activities, for the financial year ended 30 June 2013. The preparation of notes to the statement of cash flows is not required. Show all workings.
2. Referring to the objectives of financial information from the Conceptual Framework, do you believe a statement of cash flow is necessary to achieve these objectives? Discuss!
Attachment:- Intermediate Financial Accounting.rar