Reference no: EM13492770

Question 1

Research and development 

Eradication Laboratories Ltd is undertaking a number of research and development projects, one of which is described below.

During 2009: Eradication established a new research project concerned with identifying radically different poisons, useful for controlling pests. At the time the research project was established, it was not focused on developing any particular chemical form of poison, nor was in concerned with controlling any particular type of pest. During 2009 experiments were conducted, using a variety of chemical compositions, on a variety of pests. Costs incurred in 2009 were $1 million.

During 2010: The experiments conducted established that a particular chemical composition was lethal to mice. In some rural areas of Australia, mice plagues are a severe problem. Eradication's management believe that a large potential market existed for an effective mouse poison that was chemically different from those currently available. Eradication's management decided that a project team should concentrate its efforts on the new mouse poison. While experiments established that the poison was lethal to mice, a large quantity of it (in its present form) was required to kill significant mouse populations. Thus, the poison was not a commercially viable product in its present form. Eradication undertook additional research to find a more concentrated form of the new poison. Costs incurred in 2010 were $3.5 million.

During 2011: Additional research resulted in a more concentrated form of the new poison and experiments confirmed that it was lethal to mice. However, as the new poison had a radically different chemical composition, it was necessary for the research team to undertake additional work to determine how to produce the new poison economically. Production might require modifications to the chemical composition of the new poison. Market research confirmed that there was a large market for a chemically different mouse poison. Costs incurred in 2011 were $6 million.

During 2012: The research devised a means of mass producing the new poison economically. The costs incurred in 2012 on this task were $2 million. Eradication constructed production facilities for the new poison at a cost of $10 million. Production began in 2012. The amount expected to be recouped from future operations is $500 million.

Required:

a)    Distinguish between research and development, and classify the various phases of the mouse poison project into research or development.

b)    Determine the total amount of research and development costs that should be recognised as an internally developed intangible asset, in accordance with AASB 138, at the end of each year (2009, 2010, 2011 and 2012). Justify your answer.

(Source: Henderson, S., Peirson, G., & Herbohn, K. (2011). Issues in financial accounting (14th ed.) (pp. 348-349). Sydney: Pearson Education Australia.)

 

Question 2

Impairment, two Cash-Generating Units 

Aloe Ltd has two divisions, Angelica and Ambrosia. Each of these is regarded as a separate cash-generating unit.

At 31 December 2011, the carrying amount of the assets of the two divisions were:

 

	Angelica	Ambrosia
	$	$
Plant	1,500	1,200
Accumulated depreciation	(650)	(375)
Patent	240	-
Inventory	54	75
Receivables	75	82
Goodwill	25	20

 

The receivables were regarded as collectable, and the inventory's fair value less costs to sell was equal to its carrying amount. The patent had a fair value less costs to sell of $220. The plant at Angelica was depreciated at $300 p.a., and that at Ambrosia was depreciated at $250 p.a.

Aloe Ltd undertook impairment testing at 31 December 2011, and determined the value in use of the two divisions to be:

• Angelica      $1,044
• Ambrosia       $990

As a result, management increased the depreciation of the Angelica plant from $300 to $350 p.a. for the year 2012.

 

By 31 December 2012, the performance in both divisions had improved, and the carrying amounts of the assets of both divisions and their recoverable amounts were as follows:

 

	Angelica	Ambrosia
Carrying amount	$1,322	$1,433
Recoverable amount	$1,502	$1,520

 

Required:

Determine how Aloe Ltd should account for the results of the impairment tests at both 31 December 2011 and 31 December 2012, and prepare any necessary journal entries. Show all workings.

(Source: Picker, R., Leo, K., Alfredson, K., Radford, J., Pacter, P., & Wise, V. (2009). Australian accounting standards. (2nd edition) (pp. 533-534). Brisbane: John Wiley & Sons.)

Question 3

Leases

On 1 July 2010, Otago Ltd leased a plastic-moulding machine from Nelson Ltd. The machine cost Nelson $130,000 to manufacture and had a fair value of $154,109 on 1 July 2010. The lease agreement contained the following provisions:

 

Lease term	4 years
Annual rental payment, in advance on 1 July each year	$41,500
Residual value at the end of the lease term	$15,000
Residual guaranteed by the lessee	Nil
Interest rate implicit in the lease	8%
The lease is cancellable only with the permission of the lessor.

 

The expected useful life of the machine is 6 years. Otago Ltd intends to return the machine to the lessor at the end of the lease term. Included in the annual rental payment is an amount of $1,500 to cover the costs of maintenance and insurance paid for by the lessor. The machinery is to be depreciated using the straight-line method.

Required:

a)         Classify the lease as a finance lease or operating lease, and justify your answer.

b)         Prepare the lease schedule for the lessee. Round all figures to the nearest dollar.

c)         Prepare the lease schedule for the lessor. Round all figures to the nearest dollar.

d)         Prepare all relevant journal entries for the Otago Ltd and Nelson Ltd for the year ended 30 June 2011. 

Note: Show all workings where necessary.

(Source: Picker, R., Leo, K., Alfredson, K., Radford, J., Pacter, P., & Wise, V. (2009). Australian accounting standards. (2nd edition) (p. 585). Brisbane: John Wiley & Sons.)