QUESTION 1

Topic: Accounting for Extractive Industries

Henry Mining Company commenced operations on 1 July 2010. During the year ending 30 June 2011, two areas were explored and the following exploration and evaluation costs were incurred:

    Exploration and Evaluation Expenditure Incurred
              Year Ending 30 June 2011
                             ($)
Site One            4 800 000
Site Two          10 200 000
TOTAL             15 000 000

Additional Information

1. During the Year Ending 30 June 2012

• Site Two is abandoned.
• Oil is discovered in Site One. Of the $4 800 000 incurred for the year ending 30 June 2011, $3 000 000 relates to tangible assets and $1 800 000 relates to intangible assets. Additional development costs of $12 000 000 are also incurred which will be depreciated/amortised on a production output basis once production commences. The development costs consists of $7 200 000 in property, plant and equipment and $4 800 000 in intangibles.

2. During the Year Ending 30 June 2013

• Production commences in Site One.
• Estimated reserves are 3 200 000 barrels of oil.
• A total of 100 000 barrels were sold during the year at $60 per barrel.
• A total of 500 000 barrels of oil were extracted with a direct costs of production amounting to $300 000.

Required

Provide the necessary journal entries using the area-of-interest method. Show all calculations and provide brief narrations for each journal entry.

QUESTION 2

Topic: Accounting for Group Structures - Consolidations

Part One

Newton Ltd owns 100% of the shares in Olivier Ltd. The shares in Olivier Ltd were acquired on 1 July 2011 for $1 700 000 when the equity section of the balance sheet of Olivier Ltd included the following account balances:

Paid-up Ordinary Capital    $1 200 000
Retained Earnings             $400 000
                                    $1 600 000

During the year ending 30 June 2012 the following transactions took place:

(a) Olivier Ltd declared a final dividend of $70 000 from current year profits on 30 June 2012.
(b) Consulting fees amounting to $5 000 were incurred by Olivier Ltd to Newton Ltd but remain unpaid as at 30 June 2012.
(c) Interest paid on a loan provided by Newton Ltd to Olivier Ltd amounted to $4 000. The balance of the loan outstanding at 30 June 2012 is $100 000.
(d) Newton Ltd purchased inventory at a cost of $40 000 from Olivier Ltd. The inventory cost Olivier Ltd $10 000 to produce. As at 30 June 2012, 35% percent of the inventory remains unsold by Newton Ltd.
(e) Olivier Ltd also purchased inventory at a cost of $25 000 from Newton Ltd. The inventory cost Newton Ltd $5 000 to produce and as at 30 June 2012, 15% of the inventory remains unsold by Olivier Ltd.
(i) On 1 January 2012, Newton Ltd sold machinery to Olivier Ltd for $120 000. The machinery had cost Newton Ltd $200 000 and was 5 years old with accumulated depreciation of $100 000 at the date of sale. The remaining useful life of the machinery at 1 January 2012 is 5 years.
(ii) The directors of Newton Ltd believe that during the year the value of goodwill has been impaired by $5 000.

Additional Information

• The company rate of income tax is assumed to be 30%.
• Both entities adopt the perpetual method of accounting for inventory.
• All the assets of Olivier Ltd were fairly stated at acquisition date.

Required

Prepare all consolidation general journal entries for the year ending 30 June 2012 (include brief narrations for each entry). Show all calculations.

Part Two

Franco Ltd owns 100% of the shares in Gary Ltd. The shares in Gary Ltd were acquired on 1 July 2010 for a total of $875 000 when the equity section of the balance sheet of Gary Ltd included the following equity account balances:

Paid-up Ordinary Capital   750 000
Retained Earnings            100 000

During the year ending 30 June 2012 the following transactions took place:
• Gary Ltd declared a final dividend of $12 000 on 30 June 2012.
• Gary Ltd purchased inventory at a cost of $24 000 from Franco Ltd. The cost to Franco Ltd of the goods sold was $18 000 and as at 30 June 2012, twenty percent of the inventory remains unsold by Gary Ltd.
• Franco Ltd also bought inventory at a cost of $10 000 from Gary Ltd. The cost to Gary Ltd of the goods sold amounted to $8 000. As at 30 June 2012 ten percent of the goods remain unsold by Franco Ltd.
• Opening inventory for Gary Ltd as at 1 July 2011 includes inventory purchased in the previous period from Franco Ltd which cost Gary Ltd a total of $8 000. The cost to Franco Ltd of the goods sold to Gary Ltd was only $6 000.
• Consulting fees of $4 000 were charged by Franco Ltd to Gary Ltd during the year. They remain unpaid as at 30 June 2012
• Interest accrued on a loan from Franco Ltd to Gary Ltd amounted to $3 000 as at 30 June 2012. The balance of the loan outstanding as at 30 June 2012 amounted to $60 000.
• On 1 July 2011, Franco Ltd sold an item of plant to Gary Ltd for $78 000. The plant had cost Franco Ltd $100 000, was four years old at the time of sale and had accumulated depreciation amounting to $40 000. The remaining useful life of the asset was considered to be six years.

Additional Information

(a) The company tax rate is assumed to be 30%.
(b) All the assets of Gary Ltd were fairly stated as at the date of acquisition.
(c) As at 30 June 2012 the directors of Franco Ltd believe that goodwill is impaired by a total of $5 000 for the current year only. The amount of impairment of goodwill for the year ending 30 June 2011 amounted to $10 000.

Required

Prepare all consolidation journal entries. Provide brief narrations for each entry and where necessary, all relevant calculations.

QUESTION 3

Topic: Revenue Recognition

Part One

On 28 June 2013 Nancy Ltd sells plant at a cost of $5 million to Olive Ltd. Included in the sale was a put option that gives Olive Ltd the right to require Nancy Ltd to buy back the plant on 1 August 2013 for $5.2 million. Under what circumstances should Nancy Ltd recognise the sale on 28 June 2013? Explain.

Part Two

A company sells 50 products for $50 each. Sales are made for cash rather than on credit terms. The customary business practice of the company is to allow a customer to return any unused product within 30 days and receive a full refund. The cost of each product is $30. To determine the transaction price, the company decides that the approach that is most predictive of the amount of consideration to which the entity will be entitled is the most likely amount. Using the most likely amount, the company estimates that six products will be returned. The company's experience is predictive of the amount of consideration to which the entity will be entitled. The cost of recovering the products is considered to be immaterial and it is expected that the returned products will be later resold at a profit.

Required

Provide the following journal entries (brief narrations required) to account for:
(a) initial sale
(b) transfer of inventory to the customer
(c) refund provided to customer when the goods are ultimately returned
(d) placement of returned goods back into inventory