This assessment task consists of four (4) questions. A total of 60 marks are allocated to the questions below, which will then be converted to a mark out of 15%.
Rationale
This assessment task is designed to assess your understanding of topics 3 to 6.
Requirements
All workings, when appropriate, must be shown to substantiate your answers.
Question 1 [15 marks]
Events after the reporting period
Bob Ltd is finalising its financial statements for the reporting period ending 30 June 2014. On 21 July 2014, before the financial statements have been finalised and authorised for issue, the company’s directors became aware of the following situations:
a) 2 July 2014: The directors proposed a dividend of $10,000.
b) 3 July 2014: The directors approved the sale of an off-shore agency to another entity for a profit of $30,000.
c) 4 July 2014: The company received an invoice from a supplier for $85,000 for goods delivered in June; the goods were included in closing inventory at an estimated cost of $100,000.
d) 5 July 2014: The company executed a guarantee in favour of the banks for an outstanding loan of $1,000,000 that the bank made to X Ltd, the company’s major supplier, in January of that year; the guarantee was executed because the bank was demanding payment, which would have disrupted inventory supplies.
e) 6 July 2014: An agreement was signed to take over a production facility in Adelaide at a cost of $5,000,000, which will be paid for using a long-term finance lease.
f) 7 July 2014: The Australian Taxation Office waived fines for the inclusion of incorrect information in the company’s 2012 income tax return; the adjusted return was reflected in the company’s financial statements and the fine of $30,000 was recognised as an expense and liability at reporting date.
Required:
i) Given that financial statements are prepared for the financial period up to the reporting date, explain why there is a need for a standard that refers to events occurring after the reporting date.
(3 marks)
ii) Explain whether the above events will be classified as either adjusting or non-adjusting events after the end of the reporting period (assuming the amount is material), providing reasons for your decision. State the appropriate accounting treatment for each event in Bob Ltd’s 2014 financial statements.
(12 marks)
(Source: Adapted from Deegan, C. (2010). Australian financial accounting. (6th edition) Sydney: McGraw Hill.)
Marking Guide - Question 1
Max. marks awarded
i)
Discussion re the need for a standard that refers to events occurring after the reporting date.
3
ii)
Classification and justification/discussion of events
6
Stating the appropriate accounting treatment for each event
6
Total
15
Question 2 [15 marks]
Accounting for share capital
The constitution of Henrietta Sweeney Ltd indicated that the company could issue up to 5,000,000 ordinary shares and 1,000,000 preference shares. Prospectuses had been published offering 1,000,000 preference shares at $1.50 payable in full on application by 31 March 2014, and 2,000,000 ordinary shares at $1.20 with 50% due on application by 31 March 2014, 25% due on allotment, and 25% due on a call to be made by the directors at a later date.
By 31 March 2014, the company had received amounts due on 800,000 of the preference shares and on applications for 2,400,000 ordinary shares. On 15 April 2014, the ordinary and preference shares were allotted. The ordinary shares were allotted to applicants on a pro rata basis and the amounts received in excess of that due were to be credited against amounts due on allotment. The amount due on allotment of the ordinary shares was due by 15 May 2014 and this was received on all shares.
The directors made the call on the ordinary shares on 31 August 2014, with amounts due by 30 September. By this date, amounts due on 1,997,000 ordinary shares had been received. On 15 October 2014, the shares on which call money was not received were forfeited and sold as fully paid. An amount of $0.75 was received for each share sold. Costs of the forfeiture and reissue amounted to $800, and were paid. The constitution does not provide for refund of any balance in the forfeited shares account after reissue to former shareholders.
Required:
Prepare the journal entries to record the transactions of Henrietta Sweeney Ltd up to and including that which took place on 15 October 2014. Show all relevant dates, narrations and workings.
(Source: Adapted from Dagwell, R., Wines, G., Lambert, C. (2012). Corporate Accounting in Australia. (1st edition) Sydney: Pearson Australia.)
Marking Guide - Question 2
Max. marks awarded
Journal entries
11.5
Dates
1
Narrations
1
Workings
1.5
Total
15
Question 3 [15 marks]
Accounting for income tax
Twinkle Ltd commences operations on 1 July 2013 and presents its first Statement of Profit or Loss and Other Comprehensive Income, and first Statement of Financial Position on 30 June 2014. The statements are prepared before considering taxation. The following information is available:
Statement of Profit or Loss and Other Comprehensive Income for the year ended 30 June 2014
$
$
Gross profit
420,000
Royalty revenue (exempt income)
30,000
Expenses:
Administration expenses
75,000
Salaries
150,000
Long service leave
15,000
Warranty expenses
20,000
Depreciation expense - plant
80,000
Insurance
30,000
370,000
Accounting profit before tax
80,000
Assets and liabilities as disclosed in the Statement of Financial Position as at 30 June 2014
$
$
Assets
Cash
10,000
Inventory
110,000
Accounts receivable
40,000
Prepaid insurance
15,000
Goodwill
20,000
Plant – cost
400,000
Less: accumulated depreciation
80,000
320,000
Total assets
515,000
Liabilities
Accounts payable
35,000
Provision for warranty expenses
10,000
Loan payable
225,000
Provision for long service leave
15,000
Total liabilities
285,000
Net assets
230,000
Other information:
All administration and salaries expenses incurred have been paid as at year end.
None of the long service leave expense has actually been paid. It is not deductible until it is actually paid.
Warranty expenses were accrued and, at year end, actual payments of $10,000 had been made. Deductions 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 plant is depreciated over five years for accounting purposes, but over four years for taxation purposes.
The tax rate is 30%.
Required:
i) Determine the balance of any current and deferred tax assets and liabilities (using appropriate worksheets) as at 30 June 2014, in accordance with AASB 112. Show all necessary workings.
(9 marks)
ii) Prepare the journal entries to record the current tax liability and movements in deferred tax assets and liabilities.
(2 marks)
iii) What would your answer for part (a) if the following items on the statement of profit or loss and other comprehensive income were changed: ‘Gross profit’ was $360,000 (instead of $420,000) and the ‘Royalty revenue (exempt income)’ was $90,000 (instead of $30,000). Show all calculations and necessary workings.
(4 marks)
(Source:Adapted from Deegan, C. (2010). Australian financial accounting. (6th edition) Sydney: McGraw Hill.)
Marking Guide - Question 3
Max. marks awarded
i)
Determination of taxable income and current tax liability, and workings
4
Determination of deferred tax balances
5
ii)
Journal entries
2
iii)
Determination of impact on current and deferred tax balances, and workings
4
Total
15
Question 4 [15 marks]
Property, plant and equipment
Petersen Ltd has the following land and buildings in its accounts as at 30 June 2014:
$
Residential land, at cost
1,000,000
Factory land, at valuation 2011
900,000
Buildings, at valuation 2010
800,000
Accumulated depreciation
(100,000)
At 30 June 2014, the balance of the revaluation surplus is $200,000, of which $100,000 relates to the factory land and $100,000 to the buildings. On this same date, independent valuations of the land and building are obtained. In relation to the above assets, the assessed fair values at 30 June 2014 are:
$
Residential land, previously recorded at cost
1,100,000
Factory land, previously revalued in 2011
700,000
Buildings, previously revalued in 2010
900,000
The company has adopted fair value for the valuation of non-current assets.
The company tax rate is 30%.
Required:
i) Prepare journal entries to record the revaluations on 30 June 2014. Petersen Ltd classifies the residential land and factory land as different classes of assets.
(12 marks)
ii) The directors of Petersen Ltd are now concerned about the impact of reporting the decline in the fair value of the factory land in the company’s financial statements. They have now asked you (the company accountant) to use the 2011 valuation for the 2014 financial statements, stating that the decline in value of the factory land is only temporary and will increase again in the near future, after a nearby multi-million dollar development is approved. You need to prepare a response to the directors’ request. Provide references to AASB 116 to support your answer. (Word limit: 200 words)
(3 marks)
(Source: Adapted from Deegan, C. (2010). Australian financial accounting. (6th edition) Sydney: McGraw Hill.)
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