assignment 1prepare solutions to the following


Assignment 1

prepare solutions to the following questions concerning topics covered in the first half of the course:

QUESTION ONE

Topic:  Construction Contracts

 Part One

Mandy Building Contractors Ltd signed a fixed-price contract to build a bridge for Nelly Ltd for $110 million on 1 July 2012.  Contract costs are estimated as follows:

Year ending 30 June

$

2013

25 000 000

2014

40 000 000

2015

35 000 000

TOTAL

100 000 000

Contract billings sent to Nelly Ltd each year are as follows:

Year ending 30 June

$

2013

20 000 000

2014

35 000 000

2015

55 000 000

TOTAL

110 000 000

Additional Information

(i)         Actual costs incurred each year coincide with expectations for each year.

(ii)         Cash collected each year from Nelly Ltd coincides with billings each year.

Required

(i)       Assuming Mandy Building Contractors Ltd adopts the percentage-of-completion method (cost basis) in accordance with AASB 111 (outcome of the contract can be reliably estimated):

(a)            Determine the percentage of completion for each of the three years and calculate the profit (loss) to be recognised for the year ending 30 June 2013 and 2014.

(b)      Calculate the total revenue to be brought to account for each of the three years.

(c)      Prepare the journal entry to record revenue only for the year ending 30 June 2014.

(ii)      Assuming the outcome of the contract cannot be reliably estimated:

(a)     How much profit (loss) (if any) should be brought to account for each of the three years?  Explain.

(b)     Determine the total revenue to be brought to account for each accounting period.  Explain.

(iii)     Assume that actual costs incurred for the year ending 30 June 2014 amounted to a total of $50 000 000 and that estimated costs for the year ending 30 June 2015 remained at a total of $35 000 000.  Determine how much profit (loss) is to be brought to account for the year ending 30 June 2014.  Explain your rationale.

Part Two

Samuel Construction Company engaged in a contract to construct a building on 1 July 2011 with completion of the contract by the 30 June 2014.  The contract price amounted to a total of $3 600 000.  Total estimated costs to build the building were $3 200 000 at the commencement of the contract.  The company has a June 30 year end.  The following information relates to construction during the period of the contract:

 

Year End

30 June 2012

$

Year End

30 June 2013

$

Year End

30 June 2014

$

Costs incurred during the year

800 000

1 000 000

1 700 000

Estimated costs to complete

2 400 000

1 600 000

      -

Progress billings during the year

720 000

1 920 000

960 000

Cash collected during the year

600 000

1 200 000

1 600 000

Required:

Assuming that the contract outcome can be reliably measured and as a result Samuel Construction Company adopts the percentage of completion (cost basis method):

(i)              Calculate the amount of gross profit that should be recognised for years ending 30 June 2012, 30 June 2013 and 30 June 2014.  Show all workings.

(ii)      Calculate the amount of revenue that should be recognised for years ending 30 June 2012, 30 June 2013 and 30 June 2014.  Show all workings.

(iii)     Prepare the necessary journal entries for the year ending 30 June 2013.

Note:      For the percentage-of-completion calculation, round to the second decimal place (eg 41.75%).  Round any currency calculations to the nearest whole dollar.

Part Three

Using a separate example, explain the accounting treatment to be adopted according to the relevant accounting standard, where in the second year of a three year construction contract, a loss is anticipated.

QUESTION TWO

Topic:  Accounting for Income Taxes (Chapter Eighteen)

Part One

Gustav Ltd commenced operations on 1 July 2011 and presents its first statement of comprehensive income for the year ending 30 June 2012 and first statement of financial position as at 30 June 2012 as follows:

Gustav Ltd

Statement of Comprehensive Income for the year ending 30 June 2012

 

       $

Gross Profit

949 000

Less

 

Insurance Expense

26 000

Depreciation Expense - Plant

104 000

Long Service Leave Expense

26 000

Administration Expenses

104 000

Warranty Expense

39 000

Salaries Expense

260 000

Accounting Profit Before Tax

390 000

Additional Information

  • The tax rate is 30%.
  • None of the long service leave expense has actually been paid and it is not deductible until it is paid.
  • Amounts received from sales, including those on credit terms, are taxed at the time the sale is made.
  • The plant is depreciated over ten years for accounting purposes and over five years for accounting purposes. The original cost of the plant is $1 040 000.
  • Insurance was actually prepaid to the amount of $39 000. As at 30 June 2012 the balance of the prepaid insurance in the balance sheet amounted to $13 000.
  • All administration and salaries expenses incurred for the year have been paid as at year end.
  • Actual payments of $13 000 for warranty expenses were paid in the year ending 30 June 2012. Warranty expenses accrued in the balance sheet as at 30 June 2012 amounted to a total of $26 000. Deductions are available only when the amounts are paid and not as they are accrued.

Required

(i)              Calculate the taxable profit for the year ending 30 June 2012 showing all workings.

(ii)            Prepare the accounting for tax journal entry for the year ending 30 June 2012 to account for current tax consequences for the year.

Part Two

Prepare answers to each of the following questions.  Assume a tax rate of 30%.

(i)              Harry Ltd has a balance of prepaid rent in the balance sheet amounting to $100 000 as at 30 June 2012.

(a)       Using the appropriate formula, calculate the tax base of the prepaid rent.

(b)       Prepare the journal entry (if required) to account for the future tax consequences.

(c)       Assuming a temporary difference exists, explain the rationale for recording either a deferred tax asset or deferred tax liability as at 30 June 2012.

(ii)            Thomas Ltd has a balance of interest received in advance amounting to $15 000 in the balance sheet as at 30 June 2012.  Interest received is taxed on the cash basis.

(a)       Using the appropriate formula, calculate the tax base of the interest received in advance.

(b)       Prepare the journal entry (if required) to account for the future tax consequences.

(c)       Assuming a temporary difference exists, explain the rationale for recording either a deferred tax asset or deferred tax liability as at 30 June 2012.

(iii)     Can 'deferred tax assets' be offset against 'deferred tax liabilities'?  Explain making reference to the appropriate accounting standard.

Part Three

The following information is provided to you concerning Lydia Ltd as at 30 June 2012.  Assume a company tax rate of 30%.

(i)              The balance of rent received in advance in the balance sheet as at 30 June 2012 amounted to $3 500.

(ii)            Non current assets in the balance sheet as at 30 June 2012 included machinery with an original cost of $37 500 and accumulated depreciation amounting $10 000.  For taxation purposes the asset has a net value (after accumulated tax depreciation) of $22 500.

Required

For each of the above:

(i)              Using the appropriate formula per AASB 112, calculate the relevant tax base.

(ii)            Prepare the relevant journal entry to account for any future tax consequences assuming the carrying amount in the balance sheet is not the same as the tax base for the corresponding asset or liability

QUESTION THREE

Topic:  Segment Reporting (Chapter Twenty Four)

Part One

Juniper Ltd is a listed diversified company.  In preparing its financial statements in accordance with AASB 8, the chief operating officer has identified three operating segments: construction, retail and transport.  Details concerning each operating segment are provided in the tables below:

 

Total Sales

$

('000)

Profit before tax

$

('000)

Assets

$

('000)

Construction

75

   3

500

Retail

315

-20

3 125

Transport

375

35

2 500

Head Office

    0

  0

   125

 

 

 

Depreciation

$

('000)

Other Non

Cash Expenses

$

('000)

 

Liabilities

$

('000)

Capital

Acquisitions

$

('000)

Construction

      10

15

2 000

65

Retail

      30

20

1 250

125

Transport

      25

25

3 000

250

 Additional Information

  • Sales are primarily to external parties with the exception of $50 000 external sales made to Construction from the Transport segment. These sales generated a profit amounting to $10 000. All inter-segment liabilities have been paid and any materials sold between the segments have since been sold externally.
  • There are no investments in associates.
  • The income tax expense for the year is $10 000.
  • There are no extraordinary items.
  • Unallocated corporate assets total $75 000.
  • Unallocated corporate liabilities amounted to $150 000.
  • Unallocated corporate expenses amounted to $35 000.

Required

(i)       In accordance with the relevant accounting standard, identify the reportable business segments showing all calculations.

(ii)      What do you consider are the advantages of providing segment information to external users?

Part Two

Vincent Ltd operates solely in Western Australia and the chief operating decision maker has identified five operating segments: Mining, Insurance, Retailing, Manufacturing and Transport.  The following information is provided to you for the year ending 30 June 2012:

 

Segment

Revenue

($000)

Segment

Result

($000)

Segment

Assets

($000)

Mining

11 100

2 835

18 000

Insurance

4 950

-7 800

7 500

Retailing

2 100

750

3 000

Manufacturing

600

240

9 000

Transport

6 960

 3 525

7 500

Additional Information

Thirty per cent of the revenue earnt by the Transport segment was generated from intersegment sales from the Mining segment.

Required

Determine which of the five operating segments are reportable using the guidelines provided in the relevant accounting standard and offer any explanations as required.  Show all workings.

QUESTION FOUR

Topic:  Cash Flow Statements (Chapter Nineteen)

The balance sheet and income statement for Bingle Ltd is presented to you as follows:

Balance Sheet Extract as at 30 June 2012 with comparatives

 

 

30 June 2011

$

30 June 2012

$

Current Assets

 

 

Cash

88 000

121 500

Accounts Receivable

110 000

140 000

Provision for Doubtful Debts

-15 000

-20 000

Inventory

  45 000

  50 000

 

228 000

291 500

Non Current Assets

 

 

Land

50 000

125 000

Buildings

200 000

200 000

Accumulated Depn - Buildings

-20 000

-30 000

Plant and Equipment

200 000

210 000

Accumulated Depn - Plant and Equip

 -20 000

 -20 000

 

410 000

485 000

TOTAL ASSETS

638 000

776 500

 

 

 

Current Liabilities

 

 

Trade Creditors

37 000

30 000

Electricity Payable

3 000

5 000

Wages Payable

5 000

10 000

Income Tax Payable

38 000

44 000

 

83 000

89 000

Non Current Liabilities

 

 

Long Term Loans

50 000

65 000

TOTAL LIABILITIES

133 000

154 000

The income statement for the year ending 30 June 2012

 

 

  $

Sales (all on credit)

 

442 500

Less Cost of Goods Sold

 

120 000

Gross Profit

 

322 500

Less Expenses Incurred

 

 

Wages

135 000

 

Interest

5 500

 

Electricity

22 500

 

Doubtful Debts

20 000

 

Depreciation Buildings

10 000

 

Depreciation - Plant and Equip

35 000

228 000

Operating Profit before Tax

 

94 500

Less Taxation Expense

 

42 000

Operating Profit after tax

 

52 500

Required

(i)              Reconstructing all relevant ledger accounts, prepare the operating cash flows section of the cash flow statement to determine operating cash flows for the year ending 30 June 2012.  Show each individual cash flow item separately.

(ii)            Prepare a reconciliation of operating profit (after tax) to cash received from operating activities for the year ending 30 June 2012.

Submission information - Assignment One

Weighting:       This assignment accounts for 20% of the assessment for this unit.

Working in Pairs: (refer Instructions below)

Date/Week: To be received by your tutor, Tricia Ong no later than Friday 5th April 2013

How to submit this assignment:  Please email directly to your tutor, Tricia Ong - DO NOT USE DROP BOX

Format:            Typed and sent electronically

Instructions

This assignment requires submission in partnership with another student.  Both students will be working together to submit ONE assignment only.  The final grade for the assignment will be allocated equally between both students.  For example, a grade overall of 18/20 means that each student will obtain a final grade for the assignment of 18/20.  Students will be assigned partners for the purposes of Assignment One early in the semester (refer 'Announcements' in Blackboard for details).  New partners will be assigned for the submission of the second assignment.  As this assignment is to be completed in pairs, it is essential that students work co-operatively towards achieving a common goal.  The specific allocation of responsibilities and meeting of time constraints etc rests with each of the partners.  Under no circumstances is an individual assignment to be submitted.

Learning outcomes

Completing this assignment will help you to achieve the following learning outcomes associated with this unit:

Practical application of the relevant accounting standards encompassing-

  • AASB 111 'Construction Contracts'
  • AASB 112 'Income Taxes'
  • AASB 6 'Segment Reporting'
  • AASB 107 'Cash Flow Statements'

This collaborative assignment addresses key graduate attributes and employability skills identified in:

1.  ECU Learning Outcomes and Graduate Attributes/ Undergraduate Curriculum Framework (core employability and professional attributes)

2.  CPA and ICAA Professional Accreditation Guidelines for Australian Accounting Degrees (2012)

3.  Australian Qualifications Framework

Preparation

Before starting this assignment you should have:

  • read the relevant notes provided for each topic and the associated chapters of the textbook (Deegan, 7th ed 2012)
  • reviewed the relevant accounting standards linked to both the topic notes and textbook chapters
  • completed and reviewed the topic exercises and related solutions as provided
  • completed the relevant end-of-chapter exercises and reviewed suggested solutions as provided to external students

Resources

CPA Australia and ICAA (2013). Accounting Handbook, Melbourne, Victoria: Pearson Prentice Hall.

Deegan, C. (2012). Australian Financial Accounting (7th ed.). North Ryde, NSW: McGraw-Hill Australia Pty Ltd.

ACC2700 Financial Reporting Standards:

  • Lecture Notes/Lecture Exercises as prepared by unit co-ordinator
  • Suggested Solutions to selected 'end-of-chapter' exercises/review questions

Marking criteria

As provided.

Assignment 2

Please prepare solutions to the following questions concerning topics covered in the second half of the course:

QUESTION ONE

Topic:  Earnings per Share (Chapter Twenty Six)

Part One

Daisy Ltd has a net profit after tax of $3 400 000 for the year ending 30 June 2012.  For the entire financial year Daisy Ltd had two million $1.00 cumulative preference shares on issue which provide dividends at a rate of 10% per year.  The preference share dividends were not treated as part of interest expense.

At 1 July 2011 Daisy Ltd had 1 800 000 fully paid up shares on issue.  On 1 October 2011 a further 200 000 fully paid ordinary shares were issued at an issue price of $5 per share.  On 1 May 2012 Daisy Ltd made a 1 for 4 bonus issue of ordinary shares.  The last sale price of an ordinary share before the bonus issue was $5.50.  The basic earnings per share for the year ending 30 June 2011 was $2 per share.

Required

(i)            Calculate the earnings per share for the year ending 30 June 2012.  Round number of shares to the nearest whole number and show all calculations.

(ii)          What is the comparative earnings per share for the previous year to be reported in the 2012 financial reports?  Show workings.

(iii)        Explain briefly how your answer to this question would differ had there been a rights issue as opposed to a bonus issue of shares.

Note:

The formula for the adjustment factor is as follows:

 

Adjustment factor =

Px

 

 

Po

 

 

where: Px = theoretical ex rights price =

(Po x No) + Pr

 

 

No + 1

 

 

Where Po =

last sale price or, if higher, the last bid price cum rights.

 

No =

the number of ordinary shares required for one right.

 

Pr =

the subscription price of the right (or the present value of the subscription payable price in instalments) plus the present value of dividends forgone in respect of ordinary shares required for  one right not presently participating in dividends.

Part Two

What are 'potential' ordinary shares?  In your answer provide three examples to support your explanation.  Briefly outline the process (steps) to determine whether 'potential' ordinary shares are in fact, 'dilutive'.

Part Three

The following information relates to Russell Ltd for the year ending 30 June 2012:

Profit after tax for the Year Ending 30 June 2012

$2 100 000

Dividends on 200 000 convertible cumulative preference shares

$100 000

The preference shares have been disclosed as equity in the statement of financial position.  There were 250 000 fully paid ordinary shares as at 1 July 2011.  There were no additional shares issued during the year.

Additional Information

During the year ending 30 June 2012:

  • Russell Ltd had issued $500 000 in convertible debentures which paid interest at a rate of 5% per annum. They could be converted into 100 000 ordinary shares at the option of the debenture holders.
  • 250 000 share options had been issued, exercisable at $2.50 per option. The holder of each option has the right to purchase one share. The average share price in respect of ordinary shares for the year ending 30 June 2012 was $2.75 per share.
  • 200 000 convertible cumulative preference shares had been issued and are convertible into 80 000 ordinary shares at the option of the preference shareholders.
  • The company tax rate is 30% per annum.

Required

Calculate the following showing all steps applied and workings:

(i) Basic earnings per share for the year ending 30 June 2012.

(ii)The diluted earnings per share for the year ending 30 June 2012.  Show all workings for each step involved in determining which potential ordinary share is in fact, dilutive.

QUESTION TWO

Topic:  Translating the Financial Statements of Foreign Operations (Chapter Thirty Four)

Part One

On 1 July 2011 Abacus Ltd, an Australian company acquired all the issued shares in Bassinger Ltd, a company incorporated overseas.  The exchange rates for the year ending 30 June 2012 are as follows:

1 July 2011                                                       FC$1 = AUS$1.04

Average Rate for the Year                                   FC$1 = AUS$1.08

30 June 2012                                                     FC$1 = AUS$1.10

The Statement of Financial Performance for the year ending 30 June 2012 and Statement for Financial Position as at 30 June 2012 for Bassinger Ltd are provided as follows in FC (Foreign Currency) dollars.

Bassinger Ltd

Statement of Financial Performance

For the year ending 30 June 2012

 

$FC

Sales

5 500 000

Less Cost of Goods Sold

 

Inventory (1 July 2011)

500 000

Add Purchases

3 500 000

 

4 000 000

Less Closing Inventory (30 June 2012)

1 000 000

Cost of Goods Sold

3 000 000

Gross Profit

2 500 000

 

 

Less Expenses

 

Administration

175 000

Depreciation

250 000

Total Expenses

425 000

Operating Profit

2075 000

Less Tax

   500 000

Net Operating Profit (after tax)

1 575 000

Add Opening Retained Earnings (1 July 2011)

   150 000

Closing Retained Earnings (30 June 2012)

1 725 000

 Bassinger Ltd

Statement of Financial Position

As at 30 June 2012

 

$FC

$FC

 

30 June 2011

30 June 2012

Current Assets

 

 

Cash and Debtors

350 000

1 750 000

Inventory

500 000

1 000 000

 

 

 

Non Current Assets

 

 

Plant and Equipment

3 050 000

3 725 000

Total Assets

3 900 000

6 475 000

 

 

 

Current Liabilities

 

 

Trade Creditors

-

1 000 000

 

 

 

Non Current Liabilities

 

 

Bank Loan

2 500 000

2 500 000

Total Liabilities

2 500 000

3 500 000

 

 

 

Net Assets

1 400 000

2 975 000

 

 

 

Equity and Reserves

 

 

Share Capital

1 250 000

1 250 000

Retained Earnings

150 000

1 725 000

Total Equity and Reserves

1 400 000

2 975 000

 

Required

(i)       Prepare the translation of the income statement from FC dollars into Australian dollars in accordance with AASB 121.

(ii)      Calculate the gain or loss on translation into Australian dollars.  Do not translate the balance sheet.

(iii)     Does the translation result in a gain or loss?  Explain.

Part Two

On 1 July 2011 Peter Ltd, an Australian company, acquired all the issued shares in Quando Ltd, a company incorporated overseas.  Exchange rates for the year ending 30 June 2012 are as follows:

1 July 2011                                                                   FC1.00 = AUS$1.20

Average Rate for the year                                               FC1.00 = AUS$1.25

30 June 2012                                                                 FC1.00 = AUS$1.30

(FC = foreign currency)

You are provided with the statement of comprehensive income for the year ending 30 June 2012 and statement of financial position as at 30 June for Quando Ltd in the respective foreign currency.

Abbreviated Statement of Comprehensive Income

for Quando Ltd for the year ending 30 June 2012

 

FC

Sales

250 000

Less Cost of Goods Sold

 

Opening inventory 1 July 2011

60 000

Add Purchases

200 000

Less Closing inventory 30 June 2012

-44 800

Cost of Goods Sold

215 200

Gross Profit

34 800

Less Expenses

 

Administration expenses

7 600

Depreciation expense

9 600

Total Expenses

17 200

Operating Profit (before tax)

17 600

Income Tax Expense

5 200

Operating profit (after tax)

12 400

Retained Profits 1 July 2011

15 200

Retained Profits 30 June 2012

27 600

 Quando Ltd

Statement of Financial Position as at 30 June 2012 (with comparatives)

 

30 June

2011

(FC)

30 June

2012

(FC)

 

 

 

Assets

 

 

Cash and Debtors

10 000

80 000

Inventory

60 000

44 800

Plant and Equipment

104 000

96 000

Total Assets

174 000

220 800

 

 

 

Liabilities

 

 

Trade Creditors

     -

34 400

Bank Loan

100 000

100 000

Total Liabilities

100 000

134 400

 

 

 

Net Assets

74 000

86 400

 

 

 

Represented by:

 

 

Shareholders' Funds

 

 

Share capital

58 800

58 800

Retained Profits

15 200

27 600

Total Equity

74 000

86 400

Required

(i)       Translate the income statement of Quando Ltd into Australian dollars in accordance with the provisions of the relevant accounting standard.  Show all workings

(ii)      Calculate the amount to be transferred to the foreign currency translation reserve.  Show all workings.

(iii)     Does the amount to be transferred to the foreign currency translation reserve represent a gain or a loss?  Explain.

QUESTION THREE

Topic:  Accounting for Interests in Joint Arrangements

On 1 July 2011, Alpha Ltd, Beta Ltd and Gamma Ltd decide to contractually form a joint operation to fund mineral exploration and eventual production.  Land is acquired and mining is expected to continue for at least ten years.  The companies contractually commit themselves to contribute the following amounts to the joint venture:

Alpha Ltd

$6 000 000

50%

Beta Ltd

$3 600 000

30%

Gamma Ltd

$2 400 000

20%

Additional Information

  • Machinery is initially acquired at a cost of $6 million, and some land at a cost of $3.6 million - these assets are acquired on 1 July 2011.
  • The assets are held by the joint operators in common in proportion to their agreed contributions.
  • The balance of the contracted contribution representing $2.4 million will be called upon by the joint operation's manager as required.
  • To finance their contributions, Beta Ltd and Gamma Ltd will have to borrow $1 million and $500 000 respectively.

Required

Prepare the journal entries that would appear in each of the joint operators' own journals to record the establishment of the joint operation on 1 July 2011.

QUESTION FOUR

Topic:  Accounting for Extractive Industries

 Henry Mining Company commenced operations on 1 July 2010.  During the year ending 30 June 2011, two areas were explored and the following exploration and evaluation costs were incurred:

 

Exploration and Evaluation Expenditure Incurred

Year Ending 30 June 2011

($)

Site One

4 800 000

Site Two

10 200 000

TOTAL

15 000 000

Additional Information

1.              During the Year Ending 30 June 2012

  • Site Two is abandoned.
  • Oil is discovered in Site One. Of the $4 800 000 incurred for the year ending 30 June 2011, $3 000 000 relates to tangible assets and $1 800 000 relates to intangible assets. Additional development costs of $12 000 000 are also incurred which will be depreciated/amortised on a production output basis once production commences. The development costs consists of $7 200 000 in property, plant and equipment and $4 800 000 in intangibles.

2.       During the Year Ending 30 June 2013

  • Production commences in Site One.
  • Estimated reserves are 3 200 000 barrels of oil.
  • A total of 100 000 barrels were sold during the year at $60 per barrel.
  • A total of 500 000 barrels of oil were extracted with a direct costs of production amounting to $300 000.

Required

Provide the necessary journal entries using the area-of-interest method.  Show all calculations and provide brief narrations for each journal entry.

QUESTION FIVE

Topic:  Accounting for Group Structures - Consolidations (Chapters Twenty Seven and Twenty Eight)

Part One

Newton Ltd owns 100% of the shares in Olivier Ltd.  The shares in Olivier Ltd were acquired on 1 July 2011 for $1 700 000 when the equity section of the balance sheet of Olivier Ltd included the following account balances:

Paid-up Ordinary Capital             $1 200 000

Retained Earnings                        $400 000

                                             $1 600 000

During the year ending 30 June 2012 the following transactions took place:

(a)Olivier Ltd declared a final dividend of $70 000 from current year profits on 30 June 2012.

(b)Consulting fees amounting to $5 000 were incurred by Olivier Ltd to Newton Ltd but remain unpaid as at 30 June 2012.

(c)Interest paid on a loan provided by Newton Ltd to Olivier Ltd amounted to $4 000.  The balance of the loan outstanding at 30 June 2012 is $100 000.

(d)Newton Ltd purchased inventory at a cost of $40 000 from Olivier Ltd.  The inventory cost Olivier Ltd $10 000 to produce.  As at 30 June 2012, 35% percent of the inventory remains unsold by Newton Ltd.

(e)Olivier Ltd also purchased inventory at a cost of $25 000 from Newton Ltd.  The inventory cost Newton Ltd $5 000 to produce and as at 30 June 2012, 15% of the inventory remains unsold by Olivier Ltd.

(iii)On 1 January 2012, Newton Ltd sold machinery to Olivier Ltd for $120 000.  The machinery had cost Newton Ltd $200 000 and was 5 years old with accumulated depreciation of $100 000 at the date of sale.  The remaining useful life of the machinery at 1 January 2012 is 5 years.

(iv)The directors of Newton Ltd believe that during the year the value of goodwill has been impaired by $5 000.

Additional Information

  • The company rate of income tax is assumed to be 30%.
  • Both entities adopt the perpetual method of accounting for inventory.
  • All the assets of Olivier Ltd were fairly stated at acquisition date.

 Required

Prepare all consolidation general journal entries for the year ending 30 June 2012.  Show all calculations.

Part Two

Franco Ltd owns 100% of the shares in Gary Ltd.  The shares in Gary Ltd were acquired on 1 July 2010 for a total of $875 000 when the equity section of the balance sheet of Gary Ltd included the following equity account balances:

Paid-up Ordinary Capital

750 000

Retained Earnings

100 000

During the year ending 30 June 2012 the following transactions took place:

  • Gary Ltd declared a final dividend of $12 000 on 30 June 2012.
  • Gary Ltd purchased inventory at a cost of $24 000 from Franco Ltd. The cost to Franco Ltd of the goods sold was $18 000 and as at 30 June 2012, twenty percent of the inventory remains unsold by Gary Ltd.
  • Franco Ltd also bought inventory at a cost of $10 000 from Gary Ltd. The cost to Gary Ltd of the goods sold amounted to $8 000. As at 30 June 2012 ten percent of the goods remain unsold by Franco Ltd.
  • Opening inventory for Gary Ltd as at 1 July 2011 includes inventory purchased in the previous period from Franco Ltd which cost Gary Ltd a total of $8 000. The cost to Franco Ltd of the goods sold to Gary Ltd was only $6 000.
  • Consulting fees of $4 000 were charged by Franco Ltd to Gary Ltd during the year. They remain unpaid as at 30 June 2012
  • Interest accrued on a loan from Franco Ltd to Gary Ltd amounted to $3 000 as at 30 June 2012. The balance of the loan outstanding as at 30 June 2012 amounted to $60 000.
  • On 1 July 2011, Franco Ltd sold an item of plant to Gary Ltd for $78 000. The plant had cost Franco Ltd $100 000, was four years old at the time of sale and had accumulated depreciation amounting to $40 000. The remaining useful life of the asset was considered to be six years.

Additional Information

(a)   The company tax rate is assumed to be 30%.

(b)   All the assets of Gary Ltd were fairly stated as at the date of acquisition.

(c)   As at 30 June 2012 the directors of Franco Ltd believe that goodwill is impaired by a total of $5 000 for the current year only.  The amount of impairment of goodwill for the year ending 30 June 2011 amounted to $10 000.

Required

Prepare all consolidation journal entries.  Provide brief narrations for each entry and where necessary, all relevant calculations.

QUESTION SIX

Topic:  Revenue Recognition

 Part One

On 28 June 2013 Nancy Ltd sells plant at a cost of $5 million to Olive Ltd.  Included in the sale was a put option that gives Olive Ltd the right to require Nancy Ltd to buy back the plant on 1 August 2013 for $5.2 million.  Under what circumstances should Nancy Ltd recognise the sale on 28 June 2013?  Explain.

Part Two

A company sells 50 products for $50 each.  Sales are made for cash rather than on credit terms.  The customary business practice of the company is to allow a customer to return any unused product within 30 days and receive a full refund.  The cost of each product is $30.  To determine the transaction price, the company decides that the approach that is most predictive of the amount of consideration to which the entity will be entitled is the most likely amount.  Using the most likely amount, the company estimates that six products will be returned.  The company's experience is predictive of the amount of consideration to which the entity will be entitled.  The cost of recovering the products is considered to be immaterial and it is expected that the returned products will be later resold at a profit. 

Required

Provide the following journal entries (brief narrations required) to account for:

(a)  initial sale

(b)  transfer of inventory to the customer

(c)  refund provided to customer when the goods are ultimately returned

(d)  placement of returned goods back into inventory

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Accounting Basics: assignment 1prepare solutions to the following
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