Question 2
Accounting for share capital
Rippa Ltd was incorporated on 1 July 2017. The following transactions and events occurred during the year ended 30 June 2018:
1 Jul 2017: Rippa 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 $2.50 payable on application, $1.00 being payable within one month of allotment, and $0.50 payable on a call to be made at a later date. The issue is underwritten at a commission of $12,000.
31 Jul 2017: Applications close, with applications received for 6,000,000 shares.
10 Aug 2017: 5,000,000 shares are allotted in proportion to the number of shares for which applications had been made. The surplus application money is offset against the amount payable on allotment.
12 Aug 2017: The underwriter’s commission is paid.
10 Sep 2017: All allotment money is received.
1 Feb 2018: The call is made, with money due by 28 February 2018.
28 Feb 2018: All call money is received except for holders of 40,000 shares who fail to meet the call.
20 Mar 2018: The shares on which call moneywas not received are forfeited and sold as fully paid. An amount of $3.20 is received for each share sold. Costs of the forfeiture and reissue amount to $4,000, and are paid.
25 Mar 2018: The balance of the Forfeited Shares Account is returned to the former shareholders.
Required:
- Prepare the journal entries to record the transactions of Rippa Ltd up to and including that which took place on 25 March 2018. Show all relevant dates and narrations.
- After returning money to the former shareholders on 25 March 2018, one of the former shareholders has contacted you in relation to the amount of money that he received. He tells you that he paid the application money and allotment money for the shares that he had, so he should get an amount back of $3.50 per share. Explain why the amount returned to the former shareholders was not $3.50 per share, and prepare workings to show how the refund per share was calculated.
Question 3
Accounting for income tax
Jackson Storm Ltd commenced business on 1 July 2017, with share capital of $300,000. On 30
June 2018, the company presents its first Statement of Profit or Loss and Other Comprehensive Income, and first Statement of Financial Position. The statements are prepared before considering taxation. The following information is available:
Statement of Profit or Loss and Other Comprehensive Income (Extract) for the year
ended 30 June 2018
|
Revenue |
$
|
$
2,150,000 |
| Government grant (exempt from income tax) |
|
50 000 |
| Expenses | ||
| Cost of sales | 925 000 | |
| Advertising | 59 000 | |
| Annual leave | 25 000 | |
| Depreciation – equipment | 70 000 | |
| Depreciation – motor vehicles | 30 000 | |
| Doubtful debts expense | 34 000 | |
| Entertainment (not tax deductible) | 4 500 | |
| Insurance | 18 000 | |
| Rent | 78 000 | |
| Salaries | 335 000 | |
| Warranty expenses | 18500 | |
| Other expenses | 47200 | 1644200 |
| Accounting profit before tax | 555 800 |
| Statement of Financial Position (Extract) as at 30 June 2018 | |||
| $ | $ | ||
| Assets | |||
| Cash | 40 000 | ||
| Inventory | 162 900 | ||
| Accounts receivable | 250 000 | ||
| Less: allowance for doubtful debts | (32 000) | 218 000 | |
| Prepaid insurance | 7 000 | ||
| Equipment – cost | 700 000 | ||
| Less: accumulated depreciation | (70 000) | 630 000 | |
| Motor vehicles – cost | 120 000 | ||
| Less: accumulated depreciation | (30 000) | 90 000 | |
| Total assets | 1 147 900 | ||
| Liabilities | |||
| Accounts payable | 54 600 | ||
| Loan | 200 000 | ||
| Provision for annual leave | 21 000 | ||
| Provision for warranties | 16 500 | ||
| Total liabilities | 292 100 | ||
| Net assets | 855 800 | ||
| Equity | |||
| Share capital | 300 000 | ||
| Retained earnings | 555 800 | ||
| 855 800 | |||
Additional information:
- The company purchased equipment at a cost of $700,000 on 1 July 2017. The equipment is depreciated over ten years for accounting purposes, and seven years for taxation purposes (using the straight-line basis of depreciation, and a residual value of nil).
- The company purchased motor vehicles at a cost of $120,000 on 1 July 2017. The motor vehicles are depreciated over four years for accounting purposes, and six years for taxation purposes (using the straight-line basis of depreciation, and a residual value of nil).
- Tax deductions for annual leave, warranties, insurance are available when the amounts are paid, and not as amounts are accrued.
- Amounts received from sales, including those on credit terms, are taxed at the time the sale is made.
- Tax deductions are not available for doubtful debts. Tax deductions are only available when bad debts are written off.
- The tax rate is 30%.
Required:
- Determine the balance of any current tax liability and deferred tax assets and deferred tax liabilities for Jackson Storm Ltd as at 30 June 2018, in accordance with AASB 112. Use appropriate worksheets and show all necessary workings.
- Prepare the journal entries to record the current tax liability and deferred tax assets and deferred tax liabilities.
Question 4
Revaluation of property, plant and equipment
You are the accountant for Superstar Ltd, and you are required to account for the company’s equipment for the years ended 30 June 2017 and 30 June 2018, which are measured using the revaluation model. The directors elect to depreciate equipment on a straight-line basis.
Equipment 1:
The first equipment has a carrying amount as follows, prior to any depreciation or revaluation being recognised for the year ended 30 June 2017:
| Revalued amount (as at 30 June 2016): | $60,000
|
| Less: accumulated depreciation – | – |
| Carrying amount | $60,000 |
- This equipment was revalued for the first time on 30 June 2016, from $70,000 to $60,000. The directors determined that as at 30 June 2016, this equipment 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 equipment on 30 June 2017 is $55,000. At 30 June 2017, this equipment 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 equipment on 30 June 2018 is $44,000.
Equipment 2:
The second equipment at has a carrying amount as follows, prior to any depreciation or revaluation being recognised for the year ended 30 June 2017:
| Revalued amount (as at 30 June
2016): |
$20,000 |
| Less: accumulated depreciation – | – |
| Carrying amount
|
$20,000 |
- This equipment has been revalued a number of times, with revaluation decrements amounting to $1,000 being previously recognised in profit or loss. The directors determined that as at 30 June
- 2016, this equipment had an estimated remaining useful life of 4 years, and an estimated residual value of $4,000.
- The directors have determined that the fair value of this equipment on 30 June 2017 is $18,000. At 30 June 2017, this equipment had an estimated remaining useful life of 3 years, and the residual value has been revised to $6,000.
- This equipment is sold on 31 December 2017 for $13,000.
Required:
Prepare the necessary journal entries to account for each of the above equipment for the years ended 30 June 2017 and 30 June 2018 (including entries for depreciation, revaluations, and any disposals). Show all relevant workings. Note: you are not required to account for income tax associated with revaluations.
(You should apply the requirements in AASB 116 to account for property, plant and equipment in a reporting entity’s general purpose financial reports, without flaw).
Question 5
Impairment of assets
Foodie Ltd has two separate cash generating units, ‘Fizzy Drinks’ and ‘Ice creamery’. At 30 June
2018, the carrying amounts of the assets of the units, valued pursuant to the cost model, are as follows:
| Fizzy Drinks | Ice creamery | |
| $ | $ | |
| cash | 18,000 | 14,000 |
| Inventory | 34,000 | 25,000
|
| Fixtures and fittings | 25,000 | 35,000
|
| Accumulated depreciation – fixtures and fittings
|
(5,000) | (10,000)
|
| Equipment | 165,000 | 25,000
|
| Accumulated depreciation –
equipment |
(55,000) | (15,000)
|
| Land and buildings | 650,000 | 185,000
|
| Accumulated depreciation – buildings | (25,000) | (6,000)
|
| Patent | 25,000 | – |
| Goodwill | 40,000 | 15,000
|
| Total | 872,000 | 268,000
|
- The inventory is recorded at the lower of cost and net realisable value. The patent has a fair value less costs to sell of $20,000. The land and buildings of ‘Fizzy Drinks’ have a fair value less costs to sell of $620,000, and the land and buildings of ‘Ice creamery’ have a fair value less costs to sell of $175,000.
- On 30 June 2018, the directors of Foodie Ltd estimate that the fair value less cost to sell for ‘Fizzy Drinks’ and ‘Ice creamery’ amount to $750,000 and $260,000 respectively. The value in use of ‘Fizzy Drinks’ and ‘Ice creamery’ are estimated at $810,000 and $240,000 respectively.
Required:
Determine the impairment loss (if any) to be recognized by Foodie Ltd for each of its cash generating units as at 30 June 2018, and determine how the impairment loss (if any) is to be allocated. Prepare the journal entries to account for the impairment loss/losses (if any). Show all workings and provide references to the relevant accounting standard to support your answer.
(You should Demonstrate a comprehensive understanding of the requirements in AASB 136 to account for impairment of assets in a reporting entity’s general purpose financial reports ).
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