Task
This assessment task consists of five (5) questions. A total of 75 marks are allocated to the questions below, which will then be converted to a mark out of 15%.
All workings, when appropriate, must be shown to substantiate your answers.

Question 1 [14 marks]
Financial statement disclosures
You are the financial accountant for Rainyday Ltd, and are in the process of preparing its financial statements for the year ended 30 June 2016. Whilst preparing the financial statements, you become aware of the following situations:
a) On 1 July 2015 the directors made a decision, using information obtained over the last couple of years, to revise the useful life of an item of manufacturing equipment. The equipment was acquired on 1 July 2013 for $500,000, and has been depreciated on a straight-line basis, based on an estimated useful life of 10 years and a residual value of nil. Rainyday Ltd uses the cost model for manufacturing equipment. The directors estimate that as at 1 July 2015, the equipment has a remaining useful life of 6 years and a residual value of nil. No depreciation has been recorded as yet for the year ended 30 June 2016 as the directors were unsure how to account for the change in the 2016 financial statements, and are unsure whether the 2014 and 2015 financial statements will need to be revised as a result of the change.
b) In June 2016, the accounts payable officer discovered that an invoice for repairs to manufacturing equipment, with an amount due of $25,000, incurred in June 2015, had not been paid or provided for in the 2015 financial statements. The invoice was paid on 5 July 2016. The repairs are deductible for tax purposes. The accountant responsible for preparing the company’s income tax returns will amend the 2015 tax return, and the company will receive a tax refund of $7,500 as a result (30% x $25,000). Journal entries have not yet been done in the accounting records of Rainyday Ltd as the directors are unsure how to account for this situation, and what period adjustments need to be made in.
c) Rainyday Ltd holds shares in a listed public company, Bobsmith Ltd, which are valued in the draft 30 June 2016 financial statements at $800,000. A major fall in the stock market occurred on 10 July 2016 (prior to the 2016 financial statements being finalised), and the value of Rainyday’s shares in Bobsmith Ltd declined to $450,000.
d) One of Rainyday Ltd’s major debtors, Masterz Ltd, filed for bankruptcy on 20 July 2016. Rainyday Ltd’s draft financial statements have been prepared reflecting a 50% doubtful debts provision for this account ($900,000 debt, less $450,000 provision for doubtful debts). On 20 July 2016 (prior to the 2016 financial statements being finalised), it appears that no amount will be recovered from Masterz liquidator in respect of this debt.
Required:
State, for each situation, whether any adjustment to Rainyday Ltd’s financial statements is required (assuming that each amount is material). Provide explanations and references to relevant paragraphs in the accounting standards to support your answers. State the appropriate accounting treatment (including any journal entries needed) for each situation in the 2016 financial statements.
Marking Guide - Question 1 Max. marks awarded
Classification of each item 4
Discussion to support classification decision, including references 6
Appropriate accounting treatment, including journal entries where necessary 4

Question 2 [15 marks]
Accounting for share issues and options
Sunny Ltd is looking to expand its operations, and in order to do this, the company needs to increase equity.
On 1 January 2016, Sunny Ltd offered 6,000,000 ordinary shares to the public at an issue price of $4.00 per share, with $3.00 payable on application, and $1.00 due within one month of allotment. The closing date for applications was 31 January 2016. Sunny Ltd offered an additional incentive to investors: shareholders who acquired more than 25,000 shares were allowed to purchase options at 50 cents each. These options allowed investors to acquire shares in Sunny Ltd at $4.20 each on or before 30 June 2016.
By 31 January 2016, applications had been received for 6,300,000 shares and 60,000 options. On 12 February 2016, 6,000,000 shares were allotted on a pro-rata basis, and all 60,000 options applied for were allotted. Excess application money received was retained and used to go towards the allotment instalment due.
All allotment money is received by 12 March 2016, except for holders of 20,000 shares who fail to meet the instalment.
On 20 March 2016, the 20,000 shares were forfeited, and on 5 April 2016 they were auctioned as fully paid. An amount of $3.70 was received for each share sold. Share re-issue costs amounted to $3,600, and were paid. The constitution provided for any surplus on resale, after satisfaction of unpaid instalments and any costs, to be returned to shareholders whose shares were forfeited.
By 30 June 2016, the price of each of Sunny Ltd’s shares was $4.80. Holders of 50,000 options exercised their options in June 2016, with the remaining options lapsing.
Required:
Prepare the journal entries to account for the above entries. Show all relevant dates, narrations and workings.
Marking Guide - Question 2 Max. marks awarded
Journal entries 10
Dates 3
Workings 2

Question 3 [15 marks]

Accounting for income tax

Blaze Ltd commenced business on 1 July 2015, with share capital of $300,000. On 30 June 2016, the company presents its first Statement of Profit or Loss and Other Comprehensive Income, and first Statement of Financial Position. The statements are prepared before considering taxation. The following information is available:

Extract from statement of profit or loss and other comprehensive income for the year ended 30 June 2016

$ $
Revenue 750,000
Government grant (exempt from income tax) 30,000

Expenses:
Cost of sales 325,000
Annual leave 13,000
Depreciation - equipment 40,000
Depreciation - motor vehicles 15,000
Doubtful debts expense 6,000
Entertainment expenses (not tax deductible) 4,500
Insurance 10,000
Rent 26,000
Salaries 125,000
Warranty expenses 7,500
Other expenses 17,250 (589,250)
Accounting profit before tax 190,750

Assets and liabilities as disclosed in the Statement of Financial Position as at 30 June 2016

$
$
Assets:
Cash 20,000
Inventory 85,900
Accounts receivable 80,000
Less Allowance for doubtful debts (4,000) 76,000
Prepaid insurance 3,000
Equipment - cost 400,000
Less Accumulated depreciation (40,000) 360,000
Motor vehicles - cost 60,000
Less Accumulated depreciation (15,000) 45,000
Total assets 589,900

Liabilities:
Accounts payable 50,250
Loan 25,000
Provision for annual leave 11,000
Provision for warranties 6,900
Rent payable 6,000
Total liabilities 99,150
Net assets 490,750

Equity
Share capital 300,000
Retained earnings 190,750
490,750

Additional information:
• The company purchased equipment at a cost of $400,000 on 1 July 2015. The equipment is depreciated over ten years for accounting purposes (residual value of nil), using the straight-line basis of depreciation. The tax depreciation rate for this equipment is 15% per annum.
• The company purchased motor vehicles at a cost of $60,000 on 1 July 2015. The motor vehicles are depreciated over four years for accounting purposes (residual value of nil), using the straight-line basis of depreciation. The tax depreciation rate for these motor vehicles is 20% per annum.
• Tax deductions for annual leave, warranty and rent are available only when the amounts are paid, and not as they are accrued.
• Actual amounts paid for insurance are allowed as a tax deduction.
• Amounts received from sales, including those on credit terms, are taxed at the time the sale is made.
• The tax rate is 30%.
Required:
a) Determine the balance of any current and deferred tax assets and liabilities for Blaze Ltd as at 30 June 2016, in accordance with AASB 112. Show all necessary workings.
b) Prepare the journal entries to record the current tax liability and movements in deferred tax assets and liabilities.
Marking Guide – Question 3 Max. marks awarded
Determination of taxable income and current tax liability 6
Determination of deferred tax assets and liabilities using a deferred tax worksheet 7
Journal entries 2

Question 4 [15 marks]

Property, plant and equipment
Sunshine Ltd acquired an item of equipment on 1 July 2013 at a cost of $800,000. On 30 June 2014, Sunshine’s directors decide to continue using the cost model for equipment. They elect to depreciate the equipment acquired on 1 July 2013 using the straight-line method, over its useful life of five years. The estimated residual value is $40,000.
The directors then decide to adopt the revaluation model for equipment from 1 July 2014. They determine that the fair value of this item of equipment on this date is $730,000. The useful life is revised on this date – estimated to be six years from 1 July 2014. The estimated residual value remains unchanged.
On 30 June 2015, Sunshine’s directors estimate that the fair value of the item of equipment does not differ materially from its carrying amount.
On 30 June 2016, Sunshine’s directors estimate that the fair value of the item of equipment is $400,000.
The item of equipment is sold on 30 September 2016 for $390,000.
Assume a tax rate of 30%.
Required:
Prepare journal entries to account for all transactions that took place during the period 1 July 2013 to 30 September 2016, including entries for the acquisition of the equipment, depreciation, revaluations and its disposal. Show all relevant dates, narrations and workings.

Marking Guide - Question 4 Max. marks awarded
Journal entries 13.5
Workings 1.5

Question 5 [16 marks]

Impairment of assets

Movies Ltd has two separate cash generating units, ‘Cinema’ and ‘DVD Sales’. At 30 June 2016, the carrying amounts of the assets of the units, valued pursuant to the cost model, are as follows:

Cinema DVD Sales
Assets: $ $
Cash 5,000 12,000
Inventory 4,000 85,000
Furniture and fittings 250,000 35,000
Less: accumulated depreciation (45,000) (10,000)
Electrical equipment 165,000 25,000
Less: accumulated depreciation (55,000) (15,000)
Land and buildings 650,000 185,000
Less: Accumulated depreciation (buildings) (25,000) (6,000)
Licence 25,000 -
Goodwill 45,000 15,000
Carrying amount of cash generating unit 1,019,000 326,000

The inventory is recorded at the lower of cost and net realisable value. The licence has a fair value less costs to sell of $24,000. The land and buildings of ‘Cinema’ have a fair value less costs to sell of $550,000, and the land and buildings of ‘DVD Sales’ have a fair value less costs to sell of $175,000.
On 30 June 2016, the directors of Movies Ltd estimate that the fair value less cost to sell for ‘Cinema’ and ‘DVD Sales’ amount to $780,000 and $318,000 respectively. The value in use of ‘Cinema’ and ‘DVD Sales’ are estimated at $900,000 and $290,000 respectively.
Required:
Determine the impairment loss (if any) to be recognised by Movies Ltd for each of its cash generating units as at 30 June 2016, and determine how the impairment loss (if any) is to be allocated. Prepare the journal entries to account for the impairment loss/losses (if any). Show all workings and provide references to the relevant accounting standard to support your answer.

Marking Guide - Question 5 Max. marks awarded
Application of the impairment test and allocation of impairment losses where necessary 12
Journal entries 4

Rationale
This assessment task is designed to assess your understanding of topics 3 to 7, and your progress towards being able to:
• prepare basic financial statements for reporting entities;
• explain the form and content of financial statements;
• interpret and apply generally accepted accounting principles and specific financial reporting standards relating to concepts of recognition, measurement, disclosure, revaluation and impairment of key financial statement elements.
Marking criteria
The marking guide for this assessment task is provided below. The detailed allocation of marks for each question has been provided above for your information.
Criteria High Distinction Distinction Credit Pass
Question 1:
Apply relevant accounting principles in accounting for financial statement disclosures. [14 marks] Determines how each scenario is to be classified and accounted for without flaw.
All key references to accounting standards are provided.
Explanations shown are correct, well justified and clear.
Determines how each scenario is to be classified and accounted for, with minor flaws.
Almost all of the key references to accounting standards are provided.
Explanations shown are clear and succinct.
Determines how each scenario is to be classified and accounted for, with some minor errors.
Most of the key references to accounting standards are provided.
Explanations shown are adequate.
Determines how each scenario is to be classified and accounted for, with a number of errors.
Some references to accounting standards are provided.
Explanations shown are basic.

Question 2:
Apply relevant accounting principles in accounting for share issue transactions. [15 marks] All entries are made and are accurate.
Dates shown are correct for all of the transactions.
Appropriate workings are shown in all instances, and are accurate.
All entries made are accurate with some minor flaws.
Dates shown are correct for almost all of the transactions.
Appropriate workings are shown in almost all instances, and are accurate.
Most of the entries are made and are correct.
Dates shown are mostly correct for the transactions.
Appropriate workings are shown in most instances, and are accurate.
Most of the entries are made but contain errors.
Dates shown are correct for some of the transactions.
Some workings are shown but lack detail or are unclear, and/or contain errors.

Question 3:
Apply relevant accounting principles in recognising and measuring income tax. [15 marks] Determines current and deferred tax balances without flaw.
Appropriate calculations and workings are shown, and are logical and well presented.
All journal entries are made and are accurate. Determines current and deferred tax balances with minor flaws.
Calculations and workings shown are appropriate, with minor flaw.
All journal entries are made, with minor flaw. Determines current and deferred tax balances with some minor errors.
Calculations and workings shown are appropriate, with some minor errors.
All journal entries are made, but contain some minor errors. Determines current and deferred tax balances with a number of errors made.
Calculations and workings are shown but contain errors or lack detail, and/or contain errors.
Journal entries made contain some errors.
Question 4:
Apply relevant accounting principles in accounting for property, plant and equipment. [15 marks] All entries are made and are accurate.
Appropriate workings are shown and are accurate. All entries are made, with minor flaw.
Appropriate workings are shown in almost all instances, and are accurate. Almost all entries made, with some errors.
Appropriate workings are shown in most instances, and are accurate. Most entries are made but contain errors.
Some workings are shown and/or workings contain errors.
Question 5:
Apply relevant accounting principles for impairment of assets. [16 marks] Applies the requirements of AASB 136 to calculate and account for the impairment of cash generating units, without flaw.
All journal entries made are accurate.
Explanations and workings presented show mastery of the topic. Applies the requirements of AASB 136 to calculate and account for the impairment of cash generating units, with minor flaw.
All journal entries made are accurate / with minor flaw.
Explanations and workings presented show a thorough understanding of the topic. Applies the requirements of AASB 136 to calculate and account for the impairment of cash generating units, with some minor errors.
Journal entries made contain some minor errors.
Explanations and workings presented shows an adequate understanding of the topic. Applies the requirements of AASB 136 to calculate and account for the impairment of cash generating units, with a number of errors.
Journal entries made contain some errors.
Explanations and workings presented shows a basic understanding of the topic