Reference no: EM132997452

Question 1: Burt Ltd enters into a non-cancellable 7-years lease agreement with Earnie Ltd on 1 July 2023. The lease is for an item of machinery that, at the inception of the lease, has a fair value of $1,858,114.

The machinery is expected to have an economic life of 9 years, after which time it will have an expected residual value of $ 280,000. There is a bargain purchase option that Burt Ltd will be able to exercise at the end of the 7th year for $250,000.

There are to be 7 annual payments of $450,000, the first being made on 30 June 2024. Included within the $450,000 lease payments is an amount of $40,000 representing payment to the lessor for the insurance and maintenance of the equipment. The equipment is to be depreciated on a straight-line basis.

Question 2: Bear Island Ltd has a weekly payroll of $450,000. The employees receive entitlements to 3 weeks' sick leave per year. The sick-leave entitlements are classified as non-vesting. Past experience, and experience within the industry, suggest that 65 percent of employees will use their full 3 weeks' entitlement each year; 10 percent of employees will take 1 weeks' sick leave each year, and 15 percent of employees will take 3 day's sick leave each year.

Required:

a) Calculate the expected annual sick leave expense for Bear Island Ltd (on the basis of average salaries).

b) Provide the journal entries necessary each week to recognise the sick-leave entitlement expense as it accrues.

Question 3: Pacifica Fitness Ltd is marketing a 'fitness package' in which, for $440, it provides customers with a 6-month gym membership (which retails separately for $500, a gym bag (which retails separately for $32) and five free zumba classes (which retail separately for 66). You are required to determine:

a) Separate performance obligations and how much of the transaction price to allocate to each performance obligation.

b) Pacifica Fitness Ltd sold 17 packages advance and receive first payment on 30 May 2023. The reporting period is 30 June 2023. Provide the accounting entries to record the receipt of the cash and the subsequent reporting date adjustment.

c) What is the balance of revenue and liability account impacted by the above transaction (item b) at 30 August 2023.

Question 4: A company believes that it is subject to scrutiny by particular interest groups such as employee unions because it is earning excessive profits.

Do you think that this might influence whether the company prefers to recognise revenue over time for its construction contracts, or whether it would prefer to defer profit recognition until the completion of the project?

Using this case, discuss whether it be appropriate to recognise revenue at completion of production rather than at the point of sale?