Issues in Financial Reporting:

Question 1-

On 1 July 2013, Black Cabs Pty Ltd paid $270,000 to acquire a taxi licence that allows the holder to provide a taxi service in the Sydney metropolitan area. Included in the cost was $10,000 in Stamp Duty (a non-refundable tax) that was paid to the NSW Office of State Revenue. The taxi licence, which is valid for a period of ten years, can be renewed upon payment of a nominal fee. Black Cabs Pty Ltd assesses the useful life of the taxi licence as indefinite. Also on 1 July 2013, Black Cabs Pty Ltd paid $60,000 to acquire a motor vehicle to be used to provide taxi services. The motor vehicle has an estimated useful life of five years and a zero residual value. Black Cabs Pty Ltd uses the cost model to measure both the taxi licence and the motor vehicle and uses the straight-line method of depreciation for the motor vehicle.

In early 2015 a competitor entered the Sydney taxi market. The competitor's business model was based on hiring independent drivers who were connected with customers through a mobile phone app. Despite there being questions about the legality of the competitor's services, concerns were expressed that the taxi industry would be adversely affected. On 30 June 2015, Black Cabs Pty Ltd conducted an impairment test. As at this date, the following information was available:

However, in early 2016, it became clear that the competitor was struggling to attract sufficient customers to make their business viable and that the State government was about to introduce legislation that would impose severe restrictions on the competitor. On 30 June 2016, Black Cabs Pty Ltd conducted another impairment test. As at this date, the following information was available:

Required-

(a) Explain the terms 'fair value less costs of disposal' and 'value in use'.

(b) Prepare appropriate journal entries for Black Cabs Pty Ltd to record the events on 30 June 2015 and  30 June 2016.

Question 2-

Wilson Security Services Ltd was established in April 2015 to provide a range of security services (including patrol services, monitoring services and security consultancy services) for businesses and homes in the eastern suburbs of Sydney. According to the Security Industry Act 1997, businesses that engage in security services must hold a Master Licence which, for entities operating in NSW, is issued by NSW Police. In May 2015, Wilson Security Services Ltd submitted an application for a class MD Master Licence which is valid for five years from the date of issue and would permit Wilson Security Services Ltd to provide between 15 and 49 persons, on any one day, to carry on security activities. The fee for a new application for a class MD Master Licence for a corporation is $11,200 and this was paid by Wilson Security Services Ltd in May 2015. This fee is exempt from Goods and Services Tax.

On 1 July 2015, NSW Police issued the Master Licence to Wilson Security Services Ltd who then commenced operations. It is a condition of the Master Licence that it can only be used by Wilson Security Services Ltd and cannot be transferred to another party. The Master Licence can be renewed in five-year' time at a cost of $10,900 if it is renewed before the expiry date (on-time renewal) or $11,200 if it is renewed within 90 days of the expiry date (late renewal). Renewal of the Master Licence by NSW Police is not automatic and requires the applicant (in this case Wilson Security Services Pty Ltd) to satisfy the same conditions that had be satisfied when their first Master Licence was issued.

Required-

(a) Explain why the Master Licence satisfies the definition of an intangible asset in accordance with AASB 138 Intangible Assets. In particular, explain why the Master Licence satisfies the criterion of identifiability in the definition of an intangible asset.

(b) Explain how Wilson Security Services Ltd would measure the Master Licence subsequent to initial recognition?

(c) Apply the requirements of AASB 138 Intangible Assets and your own judgement to determine  whether the useful life of the Master Licence is finite or indefinite?

Question 3-

Drago Ltd enters into a three-year lease agreement with Ultra Finance Ltd on 1 June 2015 for an item of machinery. The lease term commences on 30 June 2015. According to the lease agreement, Drago Ltd must make three annual payments of $15,000 with the first payment being made on 30 June 2016. Drago Ltd incurs costs of $218 in negotiating the lease agreement and in preparing the lease documentation.

The item of machinery has an expected economic life of four years and a residual value at the end of the lease term of $5,000. Drago Ltd has guaranteed $4,000 of the residual value. Drago Ltd intends to return the item of machinery to Ultra Finance Ltd at the end of the lease term.

The terms of the lease agreement specify that Drago Ltd can only cancel the lease agreement with the written permission of Ultra Finance Ltd and must pay an amount equal to the remaining outstanding lease payments and the guaranteed portion of the residual value to Ultra Finance Ltd.

The policy of Drago Ltd is to depreciate items of machinery using the straight-line method.

The interest rate implicit in the lease cannot be determined by Drago Ltd as, at the inception of the lease, they cannot determine the fair value of the item of machinery. However, Drago Ltd's incremental borrowing rate is 4%.

Required-

(a) Explain how, in accordance with the requirements of AASB 117 Leases, Drago Ltd should classify this lease agreement.

(b) Prepare the lease payments schedule for Drago Ltd.

(c) Prepare the appropriate journal entries for Drago Ltd from 30 June 2015 to 30 June 2018. Assume that, at the end of the lease term on 30 June 2018, Ultra Finance Ltd estimates that the residual value of the item of machinery is $4,500.