In Part B, students are required to account for a range of transactions undertaken by ChiHerbal Ltd.
Assignment Part B Questions
Assume you were the accountant of ChiHerbal Ltd, address the requirements of the following independent scenarios for the company.
|Scenario 1 Financing Company Operations||(30 marks)|
|The equity of ChiHerbal Ltd as at 30 June 2018 comprises the following:|
|320 000 ordinary Class 1 shares, issued at $4, fully paid||$1 280 000|
|240 000 ordinary Class 2 shares, issued at $4, called to $2.40||576 000|
|40 000 6% redeemable preference shares, issued at $3.00, fully paid||120 000|
|Share issue costs||(4 272)|
|Calls in advance (at $1.60)||25 600|
|Share options (issued at $1.20, fully paid)||38 400|
|Retained earnings||508 800|
The options are exercisable by 28 February 2019. Each option entitles the holder to acquire two ordinary Class 3 shares at a price of $3.60 per share, payable by 28 February 2019.
The following transactions occurred during the financial year ending 30 June 2019:
Oct. 20 The preference shares were redeemed out of Retained earnings at a 5% premium.
25 Cheques were issued to the preference shareholders.
Nov. 1 A 1-for-5 renounceable rights offer was made to ordinary Class 1 shareholders at an issue price of $3.80 per share. The offer’s expiry date is 30 November 2018. The rights issue is underwritten at a commission of $4 800.
30 Holders of 256 000 shares accept the rights offer, with other rights being renounced to the underwriter. Ordinary Class 1 shares are issued and money received.
Dec. 20 The underwriting commission is paid.
Jan. 10 The directors transfer $56 000 from Retained earnings to a General reserve account.
Feb. 28 As a result of options being exercised, 56 000 ordinary Class 3 shares are issued.
April 30 Unexercised options lapse.
May 31 The final call, due by 31 May 2019, is made on the partly paid shares. All call money is received by this date, except for that due on 12 000 shares.
June 18 The shares on which the final call was unpaid are forfeited.
26 The forfeited shares are reissued, credited as paid to $4, for $3.60 cash per share. The balance of the Forfeited Shares account will be refunded to the former shareholders on 27 June.
27 Pay refund to former holders of forfeited shares.
a) Prepare general journal entries to record the above transactions. (25 marks)
Note: Show all your workings. Journal narrations are required.
b) Prepare the equity section of ChiHerbal’s statement of financial position as at 30 June 2019 once the above transactions have been recorded. (5 marks)
Scenario 2 Property, Plant and Equipment (25 marks)
a) The extracted financial statements of ChiHerbal shows the following land and buildings at 30 June 2018:
|Residential land, at cost||1 600 000|
|Factory land, at valuation 2015||1 440 000|
|Buildings, at valuation 2014||1 280 000|
|Accumulated depreciation||(160 000)|
At 30 June 2018, the balance of Revaluation Surplus is $640 000, of which $480 000 relates to Factory land and $160 000 relates to Buildings. On 30 June 2018, independent valuations of the land and building are obtained. The assessed fair values of the above assets as at 30 June 2018 are:
|Residential land, previously recorded at cost||1 760 000|
|Factory land, previously revalued in 2015||1 120 000|
|Buildings, previously revalued in 2014||1 440 000|
ChiHerbal Ltd classifies Residential land and Factory land as different classes of assets.
Prepare general journal entries to account for the revaluation of the above assets on 30 June 2018.
Note: Show all your workings. Journal narrations are required. (10 marks)
b) ChiHerbal acquired a delivery truck on 1 July 2015 for $480 000. The truck is expected to have a useful life of seven years, and is depreciated using the straight-line method.
On 1 July 2017 the truck was revalued to $400 000. On this same date, its useful life is reassessed, according to which the truck is expected to have a remaining useful life of six years.
On 1 July 2018, the truck is unexpectedly sold for $220 000.
Prepare general journal entries to account for the revaluation of the truck on 1 July 2017 and the subsequent sale on 1 July 2018.
Note: Show all your workings. Journal narrations are required. (15 marks)
Scenario 3 Leases (30 marks)
ChiHerbal Ltd leases a motor vehicle from Easy Rental Ltd, a dealer/manufacturer lessor.
The lease terms are as follows:
- Lease term is six years, commencing on 1 July 2018.
- The motor vehicle has a useful life of six years, after which it will have no residual value.
- Annual lease payments are $24 000, commencing on 1 July 2018.
- The interest rate implicit in the lease is 10 per cent.
- The motor vehicle has zero unguaranteed residual value.
- The motor vehicle has a normal selling price, i.e. fair value, of $115 200.
- The cost of motor vehicle in the book of Easy Rental Ltd is $83 200.
- Prepare general journal entries to account for the lease transaction in the book of the lessor, Easy Rental Ltd, for two financial years ending 30 June 2019 and 30 June (16 marks)
- Prepare general journal entries to account for the lease transaction in the book of the lessee, ChiHerbal Ltd, for two financial years ending 30 June 2019 and 30 June (14 marks)
Note: Show all your workings. Journal narrations are required.
Scenario 4 Intangible Assets (15 marks)
In 2016, ChiHerbal decided to develop a new type of lavender sales bags, which were made from a new material. The material to be used was more like plastics and thus more resistant to damage than the traditional material used to make sales bags. In 2016, ChiHerbal spent $350 000 on research to gain knowledge of different plastics. ChiHerbal believed this knowledge could be utilised to bring significant future economic benefits.
In 2017, ChiHerbal developed a prototype of new sales bags and asked a number of experts on plastics materials for their opinions regarding the durability of new bags. The company incurred total costs of $528 000 in developing the prototype in 2017. The experts’ comments were positive. Some other companies even put in orders to buy new bags. Anticipating a substantial market demand, ChiHerbal spent $22 000 on legal costs to register a patent for new bags. The patent has a life of 4 years, after which time other producers may copy the bag design.
In 2018, ChiHerbal conducted a large-scale marketing campaign for new bags at total costs of $650 000. The marketing campaign indicated a huge demand for new bags. Within four months, total orders for over $2 million worth of bags were received.
ChiHerbal employed an accounting firm to estimate the present value of revenues from new bags at $15 million. The company’s Chief Financial Officer decided that he would like to have this present value of the bags recognised in the company’s financial statements at its fair value. While the accounting company determined the present value at $15 million, a major competitor of ChiHerbal made a legally binding offer to buy the patent for new bags at a price of $12 million.
Describe how to account for the events and costs incurred each year. Provide appropriate journal entries.
Note: You are expected to refer to the relevant sections and paragraphs in AASB 138 Intangible Assets in your responses to Scenario 4, where applicable.
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