ACCT6003 Financial Accounting Processes


Scenario 1 Financing Company Operations (20 marks)

On 1 July 2012, ChiHerbal Ltd was incorporated and on the same day the company issued a prospectus inviting applications for 97 000 ordinary shares. These shares had an issue price of $11 per share, payable $5.50 on application, $2.80 on allotment and $1.35 on each of two calls to be made at intervals of 4 months after the date of allotment.
By 31 July, the company received applications for 114 000 shares. On 3 August, the Board of directors allotted 97 000 ordinary shares to the applicants in proportion to the number of shares for which applications had been made. The directors decided to offset the surplus application money against the amount payable on allotment. All the remaining balance of the allotment money was received by 10 August. The company incurred $1 100 being the legal costs in forming the company, which were paid on 11 August. On the same date, share issue costs of $780 were also paid.
The company made two calls on the dates stated in the prospectus. However, the holders of 11 000 shares did not pay either call. Furthermore, a holder of another 5 200 shares did not pay the second or final call.
On 10 June 2013, as provided by the company’s constitution, the directors forfeited the 16 200 shares on which calls were unpaid.
On 25 June 2013, the company reissued the forfeited shares as fully paid for a consideration of $10 per share, incurring $300 as costs of forfeiture and reissue. The constitution does not provide for refund of any balance in the forfeited shares account after reissue to former shareholders.
a) Prepare the journal entries to record the above transactions of ChiHerbal Ltd.


Scenario 2 Property, Plant and Equipment (20 marks)

ChiHerbal Ltd commenced operations on 1 July 2012. The company’s end of the reporting period is 30 June. The company depreciates all depreciable assets using the straight-line method.

The following events occurred during the year 2015-2016 and 2016-2017:


August 01 Paid $126 000 cash for a second-hand motor vehicle (MV 1). ChiHerbal estimated the motor vehicle’s useful life and residual value at 5 years and $18 000.
Paid $1 250 cash to recondition MV 1’s engine.
October 30 Paid $34 000 cash for equipment. ChiHerbal estimated the equipment’s useful life and residual value at 10 years and $1 250.
December 31 Paid $900 cash for MV 1’s transmission repairs and oil change.
June 30 Recorded depreciation on MV 1 and equipment.
July 13 Paid $340 cash to replace a damaged bumper bar on MV 1.
December 01 Traded in MV 1 for a new motor vehicle (MV 2) that cost $272 000. The dealer granted a trade-in allowance of $102 000 on MV 1, and the balance was paid in cash. ChiHerbal estimated MV 2’s useful life and residual value at 7 years and $34 000.
June 30 Recorded depreciation on MV 2 and the equipment. ChiHerbal decided to change the basis of measuring equipment to the revaluation model. The company assessed the equipment’s fair value at 30 June 2017 at $30 662.

Prepare general journal entries to record the above events.


Scenario 3 Leases (40 marks)

On the 1 July 2015, ChiHerbal Ltd entered into a lease agreement with Darlington Ltd to lease a specialised machine that is used in filtering water. Four annual payments will be made in advance on the 1 July each year. Balance date is 30 June.

The machine had a fair value of $250 000 at the inception of the lease. The machine is expected to have a residual value of $15 000 at the end of the lease term when it is returned to Darlington Ltd, at which time it is sold for $10 000. ChiHerbal agrees to pay 50% of any shortfall in expected residual value.

Darlington Ltd incurred costs of $2 750 to draw up the lease contracts.

In addition to the minimum lease payments, ChiHerbal Ltd is required to pay Darlington Ltd $6 000 each year to cover insurance and maintenance of the machine.

ChiHerbal Ltd can cancel the lease but will incur a penalty of $50 000 if the company discontinues the lease before the end of the lease term.

Darlington Ltd requires a return of 10% on the investment in the leased asset.


  1. a) Assuming this is classified as a finance lease. Determine the amount of the minimum lease payments and annual payments.
  2. b) Prepare the general journal entries in the books of ChiHerbal Ltd, i.e. the lessee, to account for the lease from the inception of the lease until the leased asset is returned to the lessor.
  3. c) Explain why the above lease would be classified as a finance lease.

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