Question 1 [15 marks]
Events after the reporting period
Snapper Ltd is finalising its financial statements for the reporting period ending 30 June 2016. On 26 August 2016, before the financial statements have been finalised and authorised for issue, the company’s directors became aware of the following situations:
a) The company owns a night club that was completely destroyed by fire on 25 August 2016. The night club had a carrying amount in the draft financial statements of $1,750,000 at 30 June 2016 (which was equal to its fair value), and was insured for $1,500,000. The company has adequate business interruption insurance.
b) Snapper held 1,000,000 shares in Prawn Ltd, representing 10% of that company’s share capital, at 30 June 2016. These shares had a carrying amount of $500,000, reflecting a cost of $0.50 per share. On 1 August 2016, Snapper entered into a contract to purchase a further 5,000,000 shares in Prawn (50% of the company’s share capital) for $5,000,000, reflecting the current market value at that date of $1 per share.
c) On 5 August 2016, the directors of Snapper Ltd approved the sale of its fishing business in Tasmania. The sale will result in a profit of $79,000 being made by Snapper Ltd.
d) On 8 August 2016, Snapper Ltd 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.
e) On 10 June 2016, Snapper Ltd was fined $55,000 by the Australian Taxation Office for not lodging its 2015 income tax return by the due date. The fine has been recognised in Snapper Ltd’s draft financial statements at 30 June 2016 (with an expense of $55,000 recognised, and a payable of $55,000 recognised). On 12 August 2016, after weeks of correspondence and pleading with the Taxation Office, the Taxation Office reduced the fine from $55,000 to $5,000.
State, for each situation, whether the event is an adjusting event or non-adjusting event (assuming the 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 as adjusting or non-adjusting event 5
Discussion to support classification decision, including references 5
Appropriate accounting treatment, including journal entries where necessary 5
Question 2 [16 marks]
Accounting for share issues
Ketchup Ltd was incorporated on 1 July 2015. The following transactions and events occurred during the year ended 30 June 2016:
1 Jul 2015: Ketchup Ltd makes an offer to the public for investors to subscribe for 5,000,000 shares, at an issue price of $4.00 per share, with $1.50 payable on application, $1.20 being payable within one month of allotment, and $1.30 payable on a call to be made at a later date. The issue is underwritten at a commission of $15,000.
20 Aug 2015: Applications close, with applications received for 4,800,000 shares.
31 Aug 2015: Shares are allotted, and the underwriter forwarded the application and allotment money due on the 200,000 shares less their commission.
30 Sep 2015: All allotment money is received.
31 Oct 2015: The call is made, with money due by 30 November 2015.
30 Nov 2015: All call money is received except for holders of 100,000 shares who fail to meet the call.
15 Dec 2015: The shares on which call money was not received are forfeited and sold as fully paid. An amount of $3.60 is received for each share sold. Costs of the forfeiture and reissue amount to $2,000, and are paid. The constitution does not provide for refund of any balance in the forfeited shares account after reissue to former shareholders.
Prepare the journal entries to record the transactions of Ketchup Ltd up to and including that which took place on 15 December 2015. Show all relevant dates, narrations and workings.
Marking Guide - Question 2 Max. marks awarded
Journal entries 12.5
Question 3 [17 marks]
Accounting for income tax
The accounting profit before tax for the year ended 30 June 2016 for Maxx Ltd amounted to $324,000. It included the following income and expense items:
Extract from statement of profit or loss and other comprehensive income for the year ended 30 June 2016
Royalties (exempt from income tax) 7,500 CR
Interest revenue 16,000 CR
Annual leave expense 6,000 DR
Doubtful debts expense 2,800 DR
Depreciation - plant (15% per year, straight-line) 47,250 DR
Depreciation - motor vehicles (20% per year, straight-line) 20,000 DR
Insurance expense 5,000 DR
Rent expense 42,000 DR
Warranty expense 7,400 DR
Entertainment expense (not tax deductible) 3,500 DR
The draft statement of financial position at 30 June 2016 contained the following assets and liabilities:
Cash 16,000 12,500
Accounts receivable 95,000 45,800
Less Allowance for doubtful debts (4,000) (2,200)
Inventory 67,100 54,300
Interest receivable 1,500 1,000
Prepaid insurance 3,000 1,000
Plant - cost 315,000 315,000
Less Accumulated depreciation (113,250) (66,000)
Motor vehicles - cost 100,000 100,000
Less Accumulated depreciation (70,000) (50,000)
Deferred tax asset ? 17,490
Accounts payable 36,200 23,600
Provision for annual leave 15,600 12,000
Provision for warranties 13,100 11,600
Bank loan 130,000 150,000
Deferred tax liability ? 7,200
• The tax depreciation rate for plant is 20% per year, and motor vehicles is 15% per year, using the straight-line method.
• Tax deductions for annual leave, warranties, insurance are available when the amounts are paid, and not as amounts are accrued.
• Tax deductions are not available for doubtful debts. Tax deductions are only available when bad debts are written off.
• Amounts received from sales, including those on credit terms, are taxed at the time the sale is made.
• Interest revenue is only taxable when amounts are actually received, and not as amounts are accrued.
• The deferred tax asset (DTA) balance at 30 June 2015 comprised:
o DTA’s relating to temporary differences: $11,490
o DTA’s relating to carried forward tax losses: $6,000
• Taxation legislation allows tax losses to be offset against future taxable profit.
• The tax rate is 30%.
i) Determine the balance of any current tax liability and deferred tax assets and liabilities as at 30 June 2016, in accordance with AASB 112. Show all necessary workings.
ii) 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 7
Determination of deferred tax assets and liabilities in deferred tax worksheet 7
Journal entries 3
Question 4 [16 marks]
Revaluation of property, plant and equipment
You are the accountant for Luigi Ltd, and you are required to account for the company’s motor vehicles for the years ended 30th June 2016 and 30th June 2017, which are measured using the revaluation model. The directors elect to depreciate motor vehicles on a straight-line basis.
Motor vehicle 1:
The first motor vehicle has a carrying amount as follows, prior to any depreciation or revaluation being recognised for the year ended 30 June 2016:
Revalued amount (as at 30 June 2015): $60,000
Less: accumulated depreciation -
Carrying amount $60,000
This motor vehicle was revalued for the first time on 30 June 2015, from $65,000 to $60,000. The directors determined that as at 30 June 2015, this motor vehicle had an estimated remaining useful life of 4 years, and an estimated residual value of $10,000.
The directors have determined that the fair value of this motor vehicle on 30 June 2016 is $58,000. At 30 June 2016, this motor vehicle had an estimated remaining useful life of 3 years, and the residual value remains unchanged at $10,000.
The directors have determined that the fair value of this motor vehicle on 30 June 2017 is $40,000.
Motor vehicle 2:
The second motor vehicle at has a carrying amount as follows, prior to any depreciation or revaluation being recognised for the year ended 30 June 2016:
Revalued amount (as at 30 June 2015): $20,000
Less: accumulated depreciation -
Carrying amount $20,000
This motor vehicle has been revalued a number of times, with revaluation decrements amounting to $6,000 being previously recognised in profit or loss. The directors determined that as at 30 June 2015, this motor vehicle had an estimated remaining useful life of 2 years, and an estimated residual value of $4,000.
The directors have determined that the fair value of this motor vehicle on 30 June 2016 is $17,000. At 30 June 2016, this motor vehicle had an estimated remaining useful life of 1 year, and the residual value has been revised to $7,000.
This motor vehicle is sold on 31 December 2016 for $13,000.
Assume a tax rate of 30%.
Prepare the necessary journal entries to account for each of the above motor vehicles for the years ended 30th June 2016 and 30th June 2017. Show all relevant workings.
Marking Guide - Question 4 Max. marks awarded
Journal entries 12
Question 5 [11 marks]
Impairment of assets
Marty Ltd has a number of business operations that represent separate cash-generating units. At 30 June 2016, Marty Ltd has determined that one of the cash-generating units may be impaired.
The carrying amounts of the assets of this cash-generating unit, valued pursuant to the cost model, are as follows:
Plant and equipment 750,000
Less: accumulated depreciation (150,000)
Carrying amount of cash generating unit 873,000
The directors of Marty Ltd estimate that, at 30 June 2016, the fair value less costs to sell of the cash-generating unit amounts to $720,000, while the value in use is $810,000. The inventory is recorded at lower of cost and net realisable value. The land has a fair value less costs to sell of $190,000.
Calculate the impairment loss that Marty Ltd needs to recognise for this cash-generating unit as at 30 June 2016, and determine how the loss is to be allocated between the assets of the cash-generating unit. Prepare any necessary journal entries to recognise the impairment loss. Show all workings and provide explanations to support your answer where necessary.
Marking Guide - Question 5 Max. marks awarded
Application of the impairment test and allocation of impairment losses where necessary 9
Journal entries 2
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