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