Reference no: EM132111971
Part -1:
Chapter: Nature and regulation of companies
1. Distinguish between a proprietary company and a public company.
2. Distinguish between a large and a small proprietary company. What are the implications of being classified large rather than small?
3. What are replaceable rules and how do they differ from a constitution?
4. What are the main reasons for the development of accounting regulations?
5. Explain the difference between accounting standards, interpretations and the accounting framework.
6. What are the current arrangements for setting accounting standards in Australia?
7. Distinguish between the following organisations and their roles in the regulation of financial reporting in Australia:
- the Financial Reporting Council (FRC)
- the Australian Accounting Standards Board (AASB)
- the International Accounting Standards Board (IASB)
- the IFRS Interpretations Committee
- the Australian Securities and Investments Commission (ASIC)
- the Australian Securities Exchange (ASX)
- the Asian-Oceanic Standard Setters Group (AOSSG).
(LO7 and LO8)
Case study
Setting up a company
Visit the website of the Australian Securities and Investments Commission (www.asic.gov.au) and find the form(s) that you need complete to start a company, assuming that you wish to set up a small proprietary company to take over your current successful business, which has been operating as a partnership (with three partners) in the past.
Part -2:
Chapter: Financing company operations
Review questions
1. Explain the nature of a share. Distinguish between an ordinary share and a preference share.
2. If a share issue is oversubscribed, what action can be taken in relation to excess money received on application?
3. When can a company forfeit its shares? What happens to money already paid by the holder of those shares? (LO3)
4. How should a company account for the legal costs of formation? Should the accounting treatment be the same as that for underwriting and other share issue costs?
5. What is private placement of shares? What are the advantages and disadvantages of a private placement?
6. Why would a company wish to buy back its own shares? What conditions must be fulfilled before the company can do so? What types of share buy-backs are permissible under the Corporations Act 2001?
7. How should a company account for a share buy-back? How does it account for a buy-back premium? A buy-back discount? Discuss.
Case studies
Case study 1 - Public floats
Gleneagle Gold Ltd issued a prospectus on 25 July 2016 inviting applications for up to 160 000 000 shares at an issue price of $0.025 per share to raise a maximum of $4 000 000. A minimum subscription of $3 000 000 was specified, with share issue costs of $480 518 expected to be incurred if the minimum subscription was reached. Payment of the share price was required in full with applications.
Required
Question 1
(a) What is the rationale behind specifying a minimum subscription to be reached before a share issue can be made?
(b) Assume that the minimum subscription was reached, and that the offer closed on 4 October 2016, and that $3,000,000 in shares were issued on 10 October 2016 with share issue costs paid on that day. Prepare the journal entries required to be processed from 25 Julyto 10 Octoberinclusive.
Question 2
Undersubscription on share issue, money due on allotment
On 1 January 2020, Elm Ltd issued a prospectus inviting applications for 300 000 ordinary shares, at an issue price of $6, payable $4 on application, $2 on allotment. By 30 April, applications were received for 290 000 shares with $4 paid. As the minimum required subscription had been reached, on 1 May the directors allotted 290 000 shares. Share issue costs of $1200 were also paid on the same date. All of the allotment money was received by 1 June.
Required
Prepare journal entries to record the above transactions.
Question 3
Share issue, payment by instalments
On 1 July 2020, Pine Ltd issued a prospectus inviting applications for 600 000 ordinary shares, at an issue price of $7, payable $2.50 on application, $1.50 on allotment, and $3 on future call(s), dates to be determined by the directors. By 1 September, applications were received for 620 000 shares with $2.50 paid per share. On 6 September, the directors allotted 600 000 shares. Refunds were made to applicants for 20 000 shares. Share issue costs of $12 400 were also paid on the same date. All of the allotment money was received by 1 October. On 1 February 2021, a first and final call for $3 was made. All of the call money was received by 1 March 2021.
Required
Prepare journal entries to record the above transactions.
Question 4
Forfeiture of shares
The notice shown below appeared in the Financial News on 1 October 2020.
ARGAN NL
Notice of Sale of Forfeited Shares
All shares on which the call of fifty cents per share, due for payment on 1 September 2020, remains unpaid, will be sold by public auction on 1 November 2020, at 11 a.m. at the Australian Securities Exchange, Sydney, NSW.
Assume the following:
- 1 000 000 shares were forfeited
- the forfeited shares were all paid to $1.50 per share
- all the shares were sold at the auction for $1.80 per share and will be credited to $2.00
- costs of forfeiture and reissue amounted to $4000
- the balance of the Forfeited Shares account will be refunded to the former shareholders.
Required
Discuss the benefits to a company from forfeiting and reissuing shares, and prepare journal entries to record the forfeiture and reissue above.
Question 5
Oversubscription, with excess money received onapplication
On 1 August 2021, Prunus Ltd issued a prospectus inviting applications for 800 000 ordinary shares to the public at an issue price of $12, payable as follows:
$4 on application (due by closing date of 1 November)
$5 on allotment (due 1 December)
$3 on future call/calls to be determined by the directors
By 1 November, applications had been received for 860 000 ordinary shares of which applicants for 100 000 shares forwarded the full $12 per share, applicants for 300 000 shares forwarded $9 per share and the remainder forwarded only the application money.
At a directors' meeting on 7 November, it was decided to allot shares in full to applicants who had paid the either $12 or $9 on application, to reject applications for 20 000 shares and to proportionally allocate shares to all remaining applicants. According to the company's constitution, all surplus money from application can be transferred to Allotment and/or Call accounts.
Share issue costs of $11 000 were also paid on 7 November. All outstanding allotment money was received by the due date.
A first call for $1.60 was made on 1 February 2022 with money due by 1 March. All money was received by the due date. A second and final call for $1.40 was made on 1 June with money due by 18 June. All money was received by the due date.
Required
Prepare the journal entries to record these transactions of Prunus Ltd. (Show all workings.)
Question 6
Oversubscription with pro rata allotment, and forfeiture
On 1 July 2020, Gum Ltd was registered and offered 1 000 000 ordinary shares to the public at an issue price of $6, payable as follows:
$3 on application (due 15 August)
$2 on allotment (due 15 September)
$1 on final call
The issue was underwritten at a commission of $8000. By 15 August, applications had been received for 1 200 000 ordinary shares of which applicants for 200 000 shares forwarded the full $6 per share, the remainder paying only the application money.
At a directors' meeting on 16 August, it was decided to allot shares in full to applicants who had paid the full amount and proportionally to all remaining applicants. According to the company's constitution, all surplus money from application can be transferred to Allotment and/or Call accounts.
The underwriting commission was paid on 28 August. Other share issue costs of $6000 were also paid on this date. All outstanding allotment money was received by the due date.
The final call was made on 1 November with money due by 30 November. All money was received on the due date except for the holder of 30 000 shares who failed to meet the final call. On 7 December, as provided for in the constitution, the directors decided to forfeit these shares. They were reissued, on 15 December, as paid to $6 for $5.60 cash. The balance of the Forfeited Shares account was returned to the former shareholder on 16 December.
Required
Prepare the journal entries to record the transactions of Gum Ltd up to and including that which took place on 16 December 2020. (Show all workings.)
Part -2
Chapter: Disclosure: Legal requirements and accounting policies
Review questions
1. The Corporations Act requires directors to ensure that financial reports give a true and fair view. What does the term ‘true and fair view' mean?
2. What is comparative information and why must it be disclosed in financial statements?
3. What should be included in the directors' report and the auditor's report?
4. What is concise reporting? Of what benefit is this form of reporting?
5. Which entities are required to provide a half-year financial report?
6. What disclosures are required by AASB 101/IAS 1 regarding accounting policies?
7. What is the difference between the two types of events occurring after the end of the reporting period? Is their accounting treatment identical?
Practice questions
Question 1
Events occurring after the end of the reporting period
In relation to the operations of Cat Ltd, the following events took place after the 30 June 2019 reporting period end:
- On 17 July 2019 Cat Ltd's main fishing fleet was sunk during a freak storm. Insurance will cover the replacement of the vessels but lost sales representing $550 000 in profits are not covered.
- On 19 July 2019 Cat Ltd took delivery of a fishing net for its prawn trawler. The net was purchased from a UK manufacturer on delivered duty paid shipping terms and was in transit at the end of the reporting period. An inspection of the net revealed significant structural flaws and the net was returned to the supplier on 28 July 2019. Cat Ltd is to receive a full refund of the $650 000 purchase price which had been paid in advance on 29 June 2019.
- On 29 August 2019 a lawsuit was lodged against the company by the families of crew members drowned in the 17 July storm, alleging negligence, and claiming $4 million in damages. No date has as yet been set for the court hearing.
- On 1 September 2019 the directors resolved to issue to the public 10 000 5% debentures of $10 each, payable $5 on application and $5 on allotment.
Required
Classify the above events into adjusting and non-adjusting events after the end of the reporting period, justifying your choice. (LO9)
Question 2
Events occurring after the end of the reporting period
Sable Ltd has provided the following information concerning events occurring after the end of the reporting period. This information is to be used for the preparation of the financial statements for the year ended 30 June 2020.On 17 July 2020, a firebomb destroyed four of the company's transport vehicles resulting in damages of $400 000. Insurance will cover $300 000 of the damages but payment of the insurance claim has been delayed by a police investigation. As a result of the loss of these vehicles, the company's delivery schedules have been severely disrupted.On 18 July 2020, the release of a far superior and cheaper product by a competitor caused a major decline in demand for product X made by Sable Ltd. In an effort to sell remaining stock of the product Sable Ltd has reduced its selling price to 50% of cost. Inventory on hand at 30 June 2020 was recorded at its cost of $153 000.
On 15 August 2020, the Department of Occupational Health and Safety charged the company over unsafe storage practices that resulted in the leakage of toxic materials into a local creek. The leakage occurred on 3 July 2020. If found to be negligent by the court, the company will have to pay a fine of $350 000 plus legal and clean-up costs in excess of $250 000.On 21 August 2020, the purchasing manager discovered that a batch of invoices relating to June inventory purchases had not been processed. The invoices totalled $37 650.On 30 August 2020, the company issued a prospectus offering 3000 10% debentures of $100 each for public subscription. The debentures are redeemable on 1 October 2023. Interest is payable annually in arrears. The debentures are secured by a floating charge over the company's assets.
Assume all events and transactions are material.
Required
(a) Classify the above events as either adjusting or non-adjusting events after the end of the reporting period. Justify your classification.
(b) Based on your answer to requirement A, prepare the necessary journal entries or note disclosures to comply with the requirements of AASB 110/IAS 10.
Question 3
Changes in accounting estimates
On 1 July 2013, Bird Ltd acquired a building for $2 500 000 with an estimated life of 25 years and a residual value of nil. Bird Ltd uses the straight-line method of depreciation. Based on expert advice provided to Bird Ltd in 2019, it was decided the building should be depreciated over a total period of 20 years.
At 1 July 2018, details for the building were as follows:
Required
Prepare the accounting policy note required by AASB 108/IAS 8 for this change in an accounting estimate by Bird Ltd for the year ended 30 June 2019. Show all workings.
Question 4
Accounting estimates and policies
Mouse Ltd traditionally estimated its allowance for doubtful debts as a percentage of net credit sales for the year. An analysis of the variance between the allowance amount and the actual bad debts written off for the past 5 years has shown significant unfavourable discrepancies. In the previous year (ended 30 June 2020) the allowance was estimated at $24 000 but bad debts written off during the current year were $11 200 more than allowed for. Consequently, the accountant has decided to change the method of estimation from a percentage of net credit sales to an analysis of the accounts receivable balances. This analysis estimated that the allowance for doubtful debts should be $35 600 as at 30 June 2021 (the current year).
Required
(a) Show the following for the year ended 30 June 2021:
1. the ledger account for the allowance for doubtful debts
2. the end of the reporting period adjusting journal entry.
(b) Justify your accounting treatment in requirement A by reference to the requirements of AASB 108/IAS 8.
(c) Explain how and why the change in method of estimation should be disclosed by Mouse Ltd.
Question 5
Accounting policies
At a meeting held on 16 June 2019, the directors of Alpaca Ltd decided to change the company's accounting policy in regard to research and development expenditure. In previous years, research and development expenditure has been capitalised and amortised over 3 years. In line with this policy, $75 000 was capitalised on 1 January 2018. The new policy is to write off all research and development to expense when incurred. During the year ended 30 June 2019, the company spent a further $62 000 on research and development which was capitalised on 1 January 2019. Research and development expenditure is allowable as a deduction for tax purposes when incurred.
Required
Prepare any note disclosures required by AASB 108/IAS 8 in respect of the change in accounting policy. Show all workings.
Chapter: Disclosure: presentation of financial statements
Review questions
1. What constitutes a complete set of financial statements?
2. Is there a required or fixed format for the presentation of the statement of financial position?
3. All assets and liabilities are normally classified either as current or non-current in the statement of financial position. What other method of classification is permitted by AASB 101/IAS 1 and when should this other method be used?
4. Is there a required or fixed format for the presentation of the statement of profit or loss and other comprehensive income?
Question 1
Statement of profit or loss and other comprehensive income (classify expenses by function)
The following information has been extracted from the accounting records of Pluto Ltd for the year ended 30 June 2020:
Tax rate is 30%.
Required
Prepare a statement of profit or loss and other comprehensive income for Pluto Ltd, for the year ended 30 June 2020, to comply with AASB 101/IAS 1 (classify expenses by function). (LO4)
Question 2
Statement of financial position
The trial balance of Asteroid Ltd as at 30 June 2021 is as follows:
Required
Prepare the statement of financial position for Asteroid Ltd in accordance with AASB 101/IAS 1 as at 30 June 2021. (LO3)
Part -3
Chapter:Business combinations
Review questions
1. What is meant by a ‘business combination'?
2. How is an acquirer identified?
3. Explain the key steps in the acquisition method.
4. How is the consideration transferred calculated?
5. How is a gain on bargain purchase accounted for?
6. Why is it important to identify an acquirer in a business combination?
Case studies
Case study - Identifying the acquirer
White Ltd has been negotiating with Cloud Ltd for several months, and agreements have finally been reached for the two companies to combine. In considering the accounting for the combined entities, management realises that, in applying AASB 3/IFRS 3, an acquirer must be identified. However, there is debate among the accounting staff as to which entity is the acquirer.
Required
(a) What factors/indicators should management consider in determining which entity is the acquirer?
(b) Why is it necessary to identify an acquirer? In particular, what differences in accounting would arise if White Ltd or Cloud Ltd were identified as the acquirer?
Practice questions
Question 1
Accounting by the acquirer
The trial balance of Jackman Ltd at 1 January 2019 was as follows:
At this date, all the assets and liabilities of Jackman Ltd are sold to Hugh Ltd, with Jackman Ltd going into voluntary liquidation. The terms of acquisition are:
(a) Hugh Ltd is to take over all the assets of Jackman Ltd, as well as the accounts payable of Jackman Ltd.
(b) Costs of liquidation of $700 are to be paid by Jackman Ltd with funds supplied by Hugh Ltd.
(c) Preference shares in Jackman Ltd are to receive two fully paid shares in Hugh Ltd for every three shares held, or alternatively, $0.80 per share in cash payable at the acquisition date.
(d) Ordinary shareholders of Jackman Ltd are to receive two fully paid ordinary shares in Hugh Ltd for every share held or, alternatively, $2.50 in cash payable half at the acquisition date and half in one year's time.
(e) Debenture holders of Jackman Ltd are to be paid in cash out of funds provided by Hugh Ltd. The debentures have a fair value of $102 per $100 debenture.
(f) All shares issued by Hugh Ltd have a fair value of $1.20 per share.
(g) Costs of issuing and registering the shares issued by Hugh Ltd amount to $80 for the preference shares and $200 for the ordinary shares.
(h) Legal and accounting costs associated with the acquisition of Jackman Ltd amount to $2000.
The two parties agree on the terms of the arrangement, and holders of 6 000 preference shares and 10 000 ordinary shares elect to receive cash.
Hugh Ltd assesses the fair values of the identifiable assets and liabilities of Jackman Ltd to be as follows:
Hugh Ltd has an incremental borrowing rate of 10%.
Required
(a) Prepare the acquisition analysis in relation to the above acquisition by Hugh Ltd.
(b) Prepare the journal entries in the records of Hugh Ltd at the date of acquisition.
(c) Prepare the journal entry for the payment of the deferred consideration in one year's time.
Question 2
Accounting at acquisition date by the acquirer
On 1 July 2019, Brad Ltd acquired all of the assets and liabilities of Pitt Ltd. In exchange for these assets and liabilities, Brad Ltd issued 100 000 shares that at date of issue had a fair value of $5.20 per share. Costs of issuing these shares amounted to $1000. Legal costs associated with the acquisition of Pitt Ltd amounted to $1200.
The asset and liabilities of Pitt Ltd at 1 July 2019 were as follows:
Required
(a) Prepare the acquisition analysis at 1 July 2019 for the acquisition of Pitt Ltd by Brad Ltd.
(b) Prepare the journal entries in the records of Brad Ltd at 1 July 2019.
(c) Prepare the journal entries in the records of Brad Ltd assuming that the shares issued by Brad Ltd had a fair value of $4.80.
Question 3
Accounting by acquirer
On 1 July 2019, Angelina Ltd took control of the assets and liabilities of Jolie Ltd. At this date the statement of financial position of Jolie Ltd was as follows:
Required
Prepare the journal entries in the records of Angelina Ltd at 1 July 2019 in each of the following situations, assuming the costs of issuing the shares by Angelina Ltd cost $1600.
(a) Angelina Ltd issued 80 000 shares having a fair value of $2.40 per share in exchange for the net assets of Jolie Ltd
(b) Angelina Ltd issued 80 000 shares having a fair value of $2.00 per share in exchange for the net assets of Jolie Ltd.
(c) Angelina Ltd acquired the shares of Jolie Ltd. The agreement was that Angelina Ltd would pay the shareholders of Jolie Ltd one share in Angelina Ltd for every two shares held in Jolie Ltd plus $1 in cash for each share held in Jolie Ltd. Shares in Angelina Ltd have a fair value of $1.80 per share.
Question 4
Accounting by acquirer
On 1 July 2019, the financial position of Thurman Ltd was as follows:
Uma Ltd acquired all the assets and assumed all the liabilities of Thurman Ltd on 1 July 2019. In exchange, Uma Ltd agreed to:
- issue 5 Uma Ltd shares for every Thurman Ltd share held. Uma Ltd shares were assessed to have a fair value of $8 per share. Costs of share issue were $600.
- transfer a patent to the former shareholders of Thurman Ltd; the patent had been internally generated by Uma Ltd and was carried at $400 000. It was considered to have a fair value of $1 200 000.
- pay cash of $2.00 per share to the former shareholders of Thurman Ltd for each share held in Thurman Ltd.
At 30 June 2019, Thurman Ltd had reported a contingent liability relating to a guarantee given by that company to another entity. Thurman Ltd did not record the guarantee as a liability because of the difficulty of measuring the liability. The fair value of this contingent liability was assessed as $20 000.
Uma Ltd incurred $9000 in costs in relation to accounting and legal fees in relation to its acquisition of Thurman Ltd.
Required
Prepare the journal entries in the records of Uma Ltd in relation to its acquisition of Thurman Ltd at 1 July 2019.
Question 5
Accounting for an acquirer, liquidation of acquire
The statement of financial position of Biel Ltd at 1 July 2019 was as follows:
Jessica Ltd acquired all the assets except cash of Biel Ltd on 1 July 2019. Jessica Ltd determined the fair values of all the identifiable assets and liabilities at acquisition date and determined that the only identifiable items that were not recorded at amounts equal to fair values were:
Jessica Ltd also determined that Biel Ltd had not recorded the accrued interest on the loans, amounting to $2200.
In exchange for the assets of Biel Ltd, Jessica Ltd agreed to provide sufficient additional cash to enable Biel Ltd to pay off its debts as well as liquidation costs of $2000. In addition, Jessica Ltd would pay two fully paid shares in Jessica Ltd for every three shares held in Biel Ltd. The fair value of each Jessica Ltd share was agreed to be $2.50. Costs of issuing the shares amounted to $1000.
Required
(a) Prepare the journal entries in the records of Jessica Ltd to record its acquisition of the assets of Biel Ltd at 1 July 2019.
(b) Prepare the Liquidation, Liquidator's Cash and Shareholders' Distribution accounts of Biel Ltd.
Attachment:- Topics.rar