You are to complete all 4 problem-solving questions below. A total of 100 marks are allocated to the questions, which will then be converted to a mark out of 20%.
Question 1
Preparation of a statement of financial position
You are the chief accountant of Wisdom, a big accounting firm in town. You requested one of your trainee accountants, Matthew to prepare the balance sheet for one of your clients, DL Vision Ltd which is a manufacturing company. Matthew later presented you with the following balance sheet of DL Vision Ltd for the year ended 30 June 2016, which you are not very happy with.
|
DL Vision Ltd
Statement of financial position for the year ending 30 June 2016
|
|
Assets
|
$
|
|
Liabilities and Capital
|
$
|
|
Cash at bank
|
5,000
|
|
Allowance for doubtful debts
|
6,000
|
|
Cash on deposits, at call
|
37,500
|
|
Acc. depreciation - machinery
|
15,250
|
|
Trade debtors
|
185,000
|
|
Acc. depreciation - land and building
|
235,000
|
|
Other debtors
|
38,500
|
|
Bank loans
|
27,750
|
|
Loan to employee
|
65,000
|
|
Other loans
|
202,500
|
|
Raw materials inventory
|
13,250
|
|
Trade creditors
|
205,000
|
|
Finished goods inventory
|
297,500
|
|
Provision for employee benefits
|
38,250
|
|
Investment in associates
|
108,750
|
|
Provision for restructuring
|
15,500
|
|
Machinery
|
106,500
|
|
Current and deferred tax liabilities
|
32,500
|
|
Land and building
|
525,000
|
|
Provision for warranty
|
10,000
|
|
Goodwill
|
362,500
|
|
Share capital
|
730,000
|
|
Dividends paid
|
37,500
|
|
Retained earnings, 1 July 2015
|
190,000
|
|
|
|
|
Revaluation reserve
|
3,750
|
|
|
|
|
Profit for the year
|
70,500
|
|
|
1,782,000
|
|
|
1,782,000
|
Additional information related to DL Vision Ltd:
- Current tax payable is $7,500 and deferred tax liability amounted to $25,000.
- Provision for warranty is in respect of a 6-month warranty on certain goods sold.
- $6,250 of bank loans is repayable within 1 year.
- $100,000 of other loans is repayable within 1 year.
- Loan to employee includes $12,500 receivable within 1 year.
- Provision for employee benefits includes $27,500 payable within 1 year.
- The planned restructuring is intended to be fully implemented within 1 year.
Required:
Write a memo to Matthew outlining the key problems with the statement of financial position prepared, with references made clearly to requirements of AASB101 where appropriate. Show the corrected version of the statement of financial position of DL Vision Ltd for the year ended 30 June 2016 and attach it at the end of the memo. Your corrected statement of financial position should be prepared in accordance with AASB101, using the captions that a listed company is likely to use. At this stage, you would not worry about the notes to the accounts.
Question 2
Company formation - share issue by instalments, oversubscription, forfeiture and reissue T. Padroni Ltd was incorporated on 2 April 2016 and the following events took place during the financial year ended 31 December 2016.
|
1 May
|
Issued a prospectus inviting the public to subscribe for 2,000,000 ordinary shares of $4.80 each, with $2.40 due on application, $1.20 within one month of allotment and the balance to be paid by 1 October.
|
|
1 June
|
Applications closed with the share issue being oversubscribed by 400,000 shares.
|
|
15 June
|
Directors allotted the 2,000,000 shares on a pro rata basis and the amounts received in excess are credited against amounts due on allotment.
|
|
15 July
|
All outstanding allotment monies were received.
|
|
1 October
|
All monies were received for the final call except for the holders of 100,000 shares.
|
|
10 October
|
The directors decided to forfeit the 100,000 shares of the defaulting shareholders.
|
|
20 October
|
The forfeited shares were resold for $4.00 per share as fully paid. Share reissue costs amounted to $10,000. The defaulting shareholders bear all costs of the reissue and any surplus is refunded to them.
|
Required:
Provide the journal entries necessary to account for the above transactions and events for the year ended 31 December 2016 for T. Padroni Ltd. Show all relevant dates and narrations.
Question 3
Accounting for depreciation and revaluation of assets
The following information is provided for the motor vehicles of Lan Zen Ltd (LZ Ltd). The directors of LZ Ltd decided to account for the vehicles using revaluation model and to depreciate these assets using straight-line method.
1953 Rolls Royce Silver Dawn LHD:
This car had a revalued amount as at 31 December 2015 of $120,000, prior to any depreciation or revaluation being recognised for the year ended 31 December 2016.
This car was revalued for the first time on 31 December 2015, from $130,000 to $120,000. The directors determined that as at 31 December 2015, the car had an estimated remaining useful life of 4 years, and an estimated residual value of $20,000.
The directors have determined that the fair value of this car on 31 December 2016 is $116,000.
Ford F-450 Platinum Truck:
This truck had a revalued amount as at 31 December 2015 of $40,000, prior to any depreciation or revaluation being recognised for the year ended 31 December 2016.
This truck has been revalued a number of times, with revaluation decrements amounting to $24,000 being previously recognised in statement of profit or loss and other comprehensive income. The directors determined that as at 31 December 2015, the truck had an estimated remaining useful life of 2 years, and an estimated residual value of $8,000.
The directors have determined that the fair value of the truck on 31 December 2016 is $18,000.
Assume a tax rate of 30%.
Required:
(i) Prepare the necessary journal entries to record depreciation and the revaluation entries for each vehicle of LZ Ltd for the year ended 31 December 2016. Show all relevant workings.
(ii) In accounting for a depreciable asset, how does a revaluation increment affect an entity's reported profits in subsequent periods? Explain your answers by using an example.
Question 4
Accounting for impairment of assets
On 1 January 2016 Bright Ltd (Bright) acquired all the assets of Star Ltd (Star). It was decided that Star is a Cash Generating Unit in its own right.
At 31 December 2016, the carrying amounts of the assets for Star, including the goodwill that was recognised upon acquisition, were as follows:
|
|
$
|
|
Buildings
|
1,200,000
|
|
Accumulated depreciation - buildings
|
(320,000)
|
|
Machinery
|
800,000
|
|
Accumulated depreciation - machinery
|
(200,000)
|
|
Inventory
|
320,000
|
|
Cash
|
200,000
|
|
Goodwill
|
80,000
|
Bright undertook impairment testing at 31 December 2016 and determined that the value in use of Star to be $1,920,000. The inventory is recorded at lower of cost and net realisable value. The buildings had a fair value less costs to sell of $836,000.
Required:
Provide the journal entries to account for the impairment loss for Star for the year ended 31 December 2016. It is essential to show all your workings and explain your answers where necessary.