Assignment
ChallengeMe Pty Ltd is a manufacturer of tennis equipment and fashion wear. The statement
of financial position as at 30 June 2020 and details of expenses and revenues for the year ending 30 June 2020 are as follows:
Statement of financial position as at 30 June 2020
|
2020
|
2019
|
|
$000
|
$000
|
|
Current assets
|
|
|
|
Cash
|
135
|
274
|
|
Inventory
|
2,774
|
2,486
|
|
Prepayments
|
115
|
-
|
|
Accounts receivable
|
2,897
|
2,654
|
|
Allowance of doublful debts
|
(150)
|
(120)
|
|
Total current assets
|
5,771
|
5,294
|
|
Non-current assets
|
|
|
|
Investment - associated company
|
1,050
|
-
|
|
Investments
|
1,216
|
948
|
|
Land
|
1,500
|
1,750
|
|
Buildings
|
800
|
800
|
|
Accumulated depreciation - buildings
|
(200)
|
(160)
|
|
Plant and equipment
|
1,025
|
768
|
|
Accumulated depreciation - plant and equipment
|
(100)
|
(548)
|
|
Deferred tax asset
|
312
|
302
|
|
Total non-current assets
|
5,603
|
3,860
|
|
Total assets
|
11,374
|
9,154
|
|
Current liabilities
|
|
|
|
Accounts payable
|
1,637
|
1,483
|
|
Accruals
|
1,575
|
1,110
|
|
Lease liability
|
5
|
-
|
|
Income tax payable
|
243
|
83
|
|
Provision for employee entitlements
|
205
|
298
|
|
Provision for deferred payments (relating to
|
|
|
|
investment in Squash Pty Ltd)
|
50
|
-
|
|
Provision for warranty
|
314
|
-
|
|
Total current liabilities
|
4,029
|
2,974
|
|
Non-current liabilities
|
|
|
|
Lease liability
|
15
|
-
|
|
Deferred tax liability
|
240
|
75
|
|
Borrowings
|
3,500
|
3,800
|
|
Total non-current liabilities
|
3,755
|
3,875
|
|
Total liabilities
|
7,784
|
6,849
|
|
Net assets
|
3,590
|
2,305
|
|
Shareholders' equity
|
|
|
|
Share capital
|
2,750
|
2,000
|
|
Retained earnings
|
280
|
130
|
|
Revaluation surplus
|
560
|
175
|
|
Total shareholders' equity
|
3,590
|
2,305
|
Statement of profit or loss and other comprehensive income for the year ending 30 June 2020
|
|
2020
|
2019
|
|
$000
|
$000
|
|
Income
|
|
|
|
Sales
|
31,394
|
27,346
|
|
Dividends income
|
51
|
47
|
|
Expenses
|
|
|
|
Bad debts
|
(90)
|
(85)
|
|
Cost of sales
|
(28,205)
|
(24,611)
|
|
Doubtful debts
|
(35)
|
(40)
|
|
Inventory write-off
|
(50)
|
0
|
|
Warranty expenses (taken to provision for warranty)
|
(314)
|
0
|
|
Depreciation
|
|
|
|
- Building
|
(40)
|
(40)
|
|
- Plant and equipment
|
(100)
|
(60)
|
|
Interest
|
(315)
|
(418)
|
|
Rent
|
(600)
|
(600)
|
|
Salaries and wages
|
(1,324)
|
(1,231)
|
|
Finance charges
|
(7)
|
(90)
|
|
Profit before tax
|
365
|
218
|
|
Income tax
|
(215)
|
-
|
|
Profit after tax
|
150
|
218
|
|
Other comprehensive income
|
|
|
|
Reduction in revaluation surplus as a result of reduction
|
|
|
|
in value of land
|
(175)
|
-
|
|
Increase in revaluation surplus as a result of increase
|
|
|
|
in value of plant and equipment
|
560
|
-
|
|
Total comprehensive income
|
535
|
218
|
Statement of changes in equity for the year ending 30 June 2020
|
Share capital
|
Retained earnings
|
Revaluation surplus
|
Total
|
|
$000
|
$000
|
$000
|
$000
|
|
Opening balance 1 July 2019
|
2,000
|
130
|
175
|
2,305
|
|
Statement of profit and loss and other
|
|
|
|
|
|
comprehensive income
|
-
|
150
|
385
|
535
|
|
Issue of shares as part consideration for
|
|
|
|
|
|
acquisition of associated company
|
750
|
-
|
-
|
750
|
|
Balance 30 June 2020
|
2,750
|
280
|
560
|
3,590
|
Additional information
• An additional investment of $80 000 is acquired for consideration of tennis equipment costing $80 000.
• Land is devalued against a previous increment in the revaluation reserve. The previous increment is fully reversed.
• Plant and equipment with a cost of $700 000 and accumulated depreciation of $500 000 are revalued to $1 000 000 during the year
• Plant and equipment with a fair value of $25 000 are acquired under a finance lease. The residual is guaranteed by the lessee.
• Plant and equipment are sold for $20 000 cash. Cost is $68 000 and no profit or loss is made on the sale.
• During the year, one line of wooden tennis racquets is scrapped at a loss of $50 000, as there is a little demand for the range.
• During the year, an investment is made in an associated company, Squash Pty Ltd. Consideration is $1 000 000, funded by cash of $250 000 and the balance by the issue of 500 000 shares at $1.50 per share. The purchase agreement includes a clause stating that if profits exceed $110 000 in the first financial year after purchase, additional amounts are payable. Using the formula, an extra $50 000 is provided.
• Provision for warranty is based on 1 per cent of sales
• Rent expense of $600 000 is accrued within ‘Accruals'.
• Interest expense is paid during the year and dividends are received.
• Salaries and wages expense includes the expense for employee entitlements.
• Tax rate is 30 per cent.
Required
Prepare the statement of cash flows in accordance with AASB 107 for ChallengeMe Pty Ltd for the year ending 30 June 2020. Comparatives are not required. Show necessary workings.
Question 1:
MyNextProblem Ltd has acquired a new building called Next in Line Building for $2,000,000. It has incurred incidental costs of $30 000 in the acquisition process for legal fees, real estate agent's fees and stamp duties. At the quarterly Board meeting, the management believes that these costs should be expensed because they have not increased the value of the building and, if the building was immediately resold, these amounts would not be recouped. In other words, the fair value of the building is considered to still be $2,000,000.
Required: Discuss how these costs should be accounted for in the books of MyNextProblem Ltd. Maximum 200 words.
Question 2:
A recent annual report of the City of Darwin Council did not include library books on the statement of financial position, notwithstanding the existence of a substantial library collection. The City of Darwin Council's accounting policy for library books is to expense them at the time of acquisition. A note in the annual report reveals that in applying this policy the council considered the following factors:
• As soon as the book is purchased its fair value is minimal compared with its cost.
• The acquisition costs of individual books are below the council's capitalization policy.
• The useful life of a book is variable and indeterminable, making depreciation difficult.
Required
Critically evaluate the council's accounting policy for its library collection. Suggest an alternative accounting policy or supplemental information that could be reported, if appropriate. Maximum 400 words.