Assignment
Large Mart has previously attempted to develop a "study pillow" which would have allowed students to upload study material into their brain whilst sleeping. However, Large Mart has recently discovered that an American company called Bpple already holds a patent for this type of device. As a result, Large Mart has given up on its development attempts and decided to sell the Bpple product, which is called iSLEEP.
In order to sell the iSLEEP, Large Mart has rented a second store in Armidale. The renting contract is for a period of 6 month, with the possibility to extend the contract by a further 3 month. Large Mart signs the renting contract on the 1 May 201x. The rent for the store will be $10,000 per month, and rent payments will be made by bank transfer at the end of each month
. As soon as the renting contract for the new store is signed, Large Mart employs two UNE students (Chuck and Morgan) to get students interested in the iSLEEP by using it in the UNE library to study for their exams. Chuck and Morgan will later work for the store as shop assistants and they are payed $30 for each hour of work (this includes their work in the store and the time they spend using the iSLEEP in the library to study for their exams). In May 201x Chuck spends 60 hours studying for his exams and Morgan spends 100 hours studying for his exams. However, Chuck and Morgan will not be paid for their work until the end of June.
The interior of the new store is designed in China and manufactured in the United States of America. An important part of the store design is a big bed on which customers can lie to test the iSLEEP. The bed is delivered on the 1 June 201x. On that day, Large Mart also receives an invoice of $30,000 from the Chinese designers of the bed as well as an invoice of $5,000 from the American manufacturer. The truck driver who delivered the bed also left an invoice of $1,000 (which consists of $500 for transportation services and $500 for assembly of the bed). Large Mart pays all three invoices on the 10 June 201x through a bank transfer. As part of this payment Large Mart claims an early payment discount of $500 from the invoice of the manufacturer of the bed.
After the new store is completed, Large Mart orders 250 iSLEEPs from Bpple for a price of $700 per item, and these iSLEEPs arrive on 1 June 201x, and are paid via bank transfer on the same day.
After this initial purchase, the following purchase and sales transactions take place within the new store:
• On 2 June 201x UNE purchases 100 iSLEEPs for the library for a price of $3,000 per iSLEEP on credit. Two days later UNE notices that the Library does not have sufficient space for all 100 iSLEEPs and asks Large Mart to return 50 unused iSLEEPs. Large Mart allows UNE to return the 50 excess iSLEEPs and returns them to the Inventory of the store. UNE then pays the remaining iSLEEPs on the 6 June 201x, after deducting an early payment discount of 10% from the invoice.
• On 15 June 201x Large Mart receives a new shipment of 500 iSLEEPs for a price of $600 per iSLEEP. The invoice for the received iSLEEPs is paid (via bank transfer) 3 days after the iSLEEPs are received.
• On 18 June 201x, Large Mart starts an end of financial year sale. On the 19 June 201x Large Mart sells 100 iSLEEPs to the University of Western Sydney (UWS). UWS purchases the iSLEEPs on credit for a price of $2,500 per item (before any discounts). Because UWS is a very good customer of Large Mart, UWS receives a volume discount of $100 per iSLEEP at the time UWS pays for the purchased iSLEEPs. Payment is made via bank transfer 10 days after the purchase.
At the end of June 201x (which is also the end of the financial year), Large Mart finds out that Bpple will start to sell a new version of the iSLEEP (called the iSLEEP2) early in July 201x.As a result, Large Mart believes that all iSLEEPs that are currently in store can only be sold if the sales price is immediately reduced to $500 per iSLEEP .
On 1 July 201x, Large Mart leases a company car for the service department of the Bpple store (called the "Nerd Herd"). The duration of the lease is 8 years, and the car has an expected useful life of 9 years. The lease contract requires Large Mart to pay $5,000 at the time the lease is signed. This payment is made via a bank transfer. A further $8,000 must be paid (also via bank transfer) on the 30 June of each year, starting on the 30 June 201x+1. The lease contract states that Large Mart can cancel the lease at any time during the lease period, but that Large Mart must pay a fine equal to 85% of the remaining lease liability if the lease contract is cancelled. The interest rate implicit in the lease is 10%. Large Mart decided to enter into the lease agreement instead of purchasing the car because the purchase price would have been $47,800, and Large Mart did not have sufficient cash resources to make such a purchase at that time.
The car is depreciated using the same depreciation method that is used for all other Large Mart motor vehicles (see Large Mart Depreciation Schedule in Topic 2). Large Mart expects that the residual value of the car at the end of the useful life will be $500. The lease contract also includes a clause that allows Large Mart to purchase the car at the end of the lease term for a price of $400. At that time the fair value of the car is expected to be $1,000.
IMPORTANT NOTE: Large Mart has decided to use the exemption rules outlined in AASB 16, paragraphs 5-8 for leased items to which these exemptions apply.
Answer the following questions about the scenario outlined above:
Question 1) Provide all journal entries that are necessary in the books of Large Mart to account for the signing of the renting contract (if any) and the payment of rent for the month of May 201x, and provide a detailed explanation why you have chosen the accounting treatment that you have used.
Question 2) Calculate the cost of the bed and provide all journal entries that are necessary in the books of Large Mart to account for the receipt and payment of the invoices for design, manufacture and delivery/assembly of the bed, and provide an outline and explanation for all necessary calculations.
Question 3) Provide all journal entries that are necessary in the books of Large Mart to account for all purchase and sales transactions (including the payment and receipt of funds) of the new store, assuming that Large Mart uses a perpetual inventory system on a first-in-first-out basis.
Question 4) Calculate Cost-of-Goods-Sold and the closing balance of the Inventory - Trade/Sales account for the year ended 30 June 201x of the new Large Mart Store (based on the information provided in this assignment ONLY), determine if the release of the iSLEEP2 will have any impact on the closing balance of the Inventory - Trade/Sales account, explain your decision, and provide all journal entries that are necessary in the books of Large Mart to account of this impact (if any exists).
Question 5) Determine whether the lessor of the company car will be required to apply the accounting regulations for operating leases or finance leases AND PROVIDE A DETAILED EXPLANATION FOR YOUR DECISION.
Question 6) Provide all journal entries that are necessary in the books of Large Mart to record the inception of the lease for the car, the lease payments made at the end of the first year of the lease term (30 June 201x+1), and the depreciation of the leased car for the month ended 31 July 201x (if any depreciation is required).
Remember that you MUST use the account names and numbers in the Large Mart Chart of Accounts when answering.
Large Mart Chart of Accounts
Use this chart of accounts for ALL question, exercises and assignments in AFM211
Assets (100-199)
Number Account Name
Current Assets
101 Cash at Bank
102 Accounts Receivable
103 Lease Receivable
110 Bank Trust
120 Inventory - Trade/Sales
120.1 Freight in (Trade/Sales)
120.2 Trade Discounts Received (Trade/Sales)
121 Inventory - Components
121.1 Freight in (Components)
121.2 Trade Discounts Received (Components)
130 Office Supplies
131 Prepaid Rent (current)
Non-Current Assets
150 Deferred Tax Asset
161 Prepaid Rent (non-current)
163 Motor Vehicles
163.1 Acc. Dep. Motor Vehicles
164 Machinery/Equipment
164.1 Acc. Dep. Machinery/Equipment
165 Buildings
165.1 Acc. Dep. Buildings
166 Warehouse Shelving
166.1 Acc. Dep. Warehouse Shelving
167 Computers
167.1 Acc. Dep. Computers
170 Distribution Rights
170.1 Acc. Amort. Distribution Rights
190 Land
Liabilities (200 - 299)
Number Account Name
Current Liabilites
202 Accounts Payable
204 Wages Payable
205 Rent Payable
206 Interest Payable
207 Dividends Payable
208 Taxes Payable
215 Share Applications
216 Debenture Applications
Non-Current Liabilities
230 Provision for Warranty
235 Provision for Remediation
250 Deferred Tax Liability
260 Lease Liability
270 Bank Loan
280 Debenture Liability
Owners Equity (300 - 399)
Number Account Name
300 Share Capital
320 Retained Earnings
320.1 Dividends
330 General Reserve
350 Income Summary
360 Revaluation Surplus
390 Forfeited Shares
Revenue (400 - 499)
Number Account Name
401 Sales Revenue
401.1 Sales Returns/Allowances
420 Lease Revenue
423 Interest Revenue
425 Executory Expense Recoupment
441 Discount Received - Payment
450 Reversal of Loss on Revaluation
455 Reversal of Impairment Loss
460 Gain on Sale
490 Income Tax Revenue
Cost of Good Sold (500 - 599)
Number Account Name
500 Cost of Goods Sold
Expenses (600 - 699)
Number Account Name
611 Depreciation Expense
612 Amortisation Expense
615 Inventory Write Down Expense
620 Lease Expense
621 Rent Expense
622 Office Supplies Expense
623 Interest Expense
624 Wage Expense
625 Executory Expenses
630 Warranty Expense
641 Discount Given - Payment
650 Loss on Revaluation
655 Impairment Loss
660 Loss on Sale
690 Income Tax Expense.