Semester 2 2017
Hopeful limited leased a portable sound recording studio from Lessor Limited. Lessor Limited has no material initial direct costs. Hopeful Limited does not plan to acquire the portable studio at the end of the lease because it expects that, by then, it will ne//ed a larger studio. The terms of the lease are as follows:
– Date of entering lease: 1 July 2011
– Duration of lease: 4 years
– Life of leased asset: 5 years
– Lease payments: $50,000 at the beginning of each financial year
– First lease payment: 1 July 2011
– Lease expires: 1 July 2015
– Interest rate implicit in the lease: 8%
– Guaranteed residual: $40,000
a) Determine the fair value of the portable sound recording studio at 1 July 2011.
b) Prepare a schedule for the lease payments incorporating accrues interest expense
c) Prepare the journal entries to account for the lease in the books of Hopeful Limited at 1 July 2011, 30 June 2012 and 1 July 2012.
d) At the termination of the lease Hopeful Limited returns the portable sound recording studio to Lessor Limited but its fair value at that time is $25,000. What must Hopeful Limited do to comply with the terms of the lease? Prepare the journal entries in the books of Hopeful Limited for return of the asset to Lessor Limited and the settlement of all obligations under the lease on 1 July 2015./
Alexandra Bay Ltd has five employees. According to their particular employment award, long service leave can be taken after 12 years, at which time the employee is entitled to 10 weeks’ leave. If an employee were to leave before completion of 12 years’ service, no entitlement would be paid.
|Name of employee||Current salary ($)||Years of service||Years until LSL vests|
High quality corporate bond rates exist with periods to maturity that exactly match the various periods that must still be served by the employee before LSL entitlements vest with them.
|Corporate bond – Period to Maturity (in years)||Bond rate|
The projected probabilities that employees will stay long enough for the LSL to vest –that is, for a total of 12 years – are as follows:
|Name of employee||Probability (%) that LSL will vest|
(a) Calculate Alexandra Bay’s current obligation for long service leave.
(b) If the carrying amount of the provision for long service leave is $12,500, provide the journal entry to record Alexandra Bay’s long service leave expense for the year.
T Pty Ltd is a manufacturer of tennis equipment and fashion wear. The statement of financial position as at 30 June 2020 and details of expenses and revenues for the year ending 30 June 2020 are as follows:
|Statement of financial position as at 30 June 2020|
|Inventory||2 774||2 486|
|Accounts receivable||2 897||2 654|
|Allowance for doubtful debts||(150)||(120)|
|Total current assets||5 771||5 294|
|Investment—associated company||1 050||0|
|Land||1 500||1 750|
|Plant and equipment||1 025||768|
|Accumulated depreciation—plant and equipment||(100)||(548)|
|Deferred tax asset||312||302|
|Total non-current assets||5 603||3 860|
|Total assets||11 374||9 154|
|Accounts payable||1 637||1 483|
|Accruals||1 575||1 110|
|Income tax payable||243||83|
|Provision for employee entitlements||205||298|
|Provision for deferred payment (relating to investment in Squash Pty Ltd)||50||0|
|Provision for warranty||314||0|
|Total current liabilities||4 029||2 974|
|Deferred tax liability||240||75|
|Borrowings||3 500||3 800|
|Total non-current liabilities||3 755||3 875|
|Total liabilities||7 784||6 849|
|Net assets||3 590||2 305|
|Share capital||2 750||2 000|
|Total shareholders’ equity||3 590||2 305|
Statement of profit or loss and other comprehensive income for the year ending 30 June 2020
|Sales||31 394||27 346|
|Cost of sales||(28 205)||(24 611)|
|Warranty expenses (taken to provision for warranty)||(314)||0|
|– Plant and equipment||(100)||(60)|
|Salaries and wages||(1 324)||(1 231)|
|Profit before tax||365||218|
|Profit after tax||150||128|
|Other comprehensive income|
|Reduction in revaluation surplus as a result of reduction in fair value of land||(175)||–|
|Increase in revaluation surplus as a result of increase in fair value of plant and|
|Total comprehensive income||535||128|
|Statement of changes in equity for the year ending 30 June 2020|
|Opening balance 1 July 2019||2 000||130||175||2 305|
|Statement of profit and loss and other comprehensive income||–||150||385||535|
|Issue of shares as part consideration for acquisition of associated|
|Balance 30 June 2020||2 750||280||560||3 590|
- An additional investment of $80 000 is acquired for consideration of tennis equipment costing $80 000.
- Land is devalued against a previous increment in the revaluation reserve. The previous increment is fully reversed.
- Plant and equipment with a cost of $700 000 and accumulated depreciation of $500 000 are revalued to $1 000 000 during the year.
- Plant and equipment with a fair value of $25 000 are acquired under a finance lease. The residual is guaranteed by the lessee.
- Plant and equipment are sold for $20 000 cash. Cost is $68 000 and no profit or loss is made on the sale.
- During the year, one line of wooden tennis racquets is scrapped at a loss of $50 000, as there is little demand for this range.
- During the year, an investment is made in an associated company, Squash Pty Ltd. Consideration is $1 000 000, funded by cash of $250 000 and the balance by the issue of 500 000 shares at $1.50 per share. The purchase agreement includes a clause stating that if profits exceed $110 000 in the first financial year after purchase, additional amounts are payable. Using the formula, an extra $50 000 is provided.
- Provision for warranty is based on 1 per cent of sales.
- Rent expense of $600 000 is accrued within ‘Accruals’.
- Interest expense is paid during the year and dividends are received.
- Salaries and wages expense includes the expense for employee entitlements.
- The tax rate is 30 per cent.
Prepare the statement of cash flows in accordance with AASB 107 for the year ending 30 June 2020. Comparatives are not required
You are the finance director of ME Ltd. The company specialises in importing classic foreign vehicles from overseas countries and then selling these vehicles cheaply on the open market. The company’s financial year ends on 30 June 2018. The company enters into the following transactions during the year:
- The company purchases inventories from Hong Kong for HK$300 000. The order is placed on 22 April 2018, with delivery due by 30 April 2018. Under the conditions of the contract, title to the goods passes to the company on delivery. Payment in respect of these inventories is due in equal instalments on 30 May 2018, 30 June 2018 and a final payment on 31 July 2018. The following exchange rates are applicable:
|22-Apr-18||HK$8.00 = A$1.00|
|30-Apr-18||HK$8.50 = A$1.00|
|31-May-18||HK$8.56 = A$1.00|
|30-Jun-18||HK$8.59 = A$1.00|
|31-Jul-18||HK$8.94 = A$1.00|
- The company enters into a long-term construction contract with a Japanese company. Under the terms of the contract the Japanese firm will manufacture an engine diagnosis machine, which can be used on all classic cars. The contract is entered into on 30 April 2017 for a fixed price of ¥5 million. The equipment is delivered on 31 May 2018, subject to a two-month credit period after the date of delivery to ensure that the company is satisfied with the equipment. Payment falls due on 31 July 2018. The following exchange rates are applicable:
|30-Apr-17||¥160 = A$1.00|
|30-Jun-17||¥160 = A$1.00|
|31-May-18||¥240 = A$1.00|
|30-Jun-18||¥245 = A$1.00|
|31-Jul-18||¥260 = A$1.00|
|(c)||The company arranges a US-dollar interest-only loan on 1 January 2018 for US$20 million. The loan is for a 10-year|
|period at an interest rate of 11.5 per cent per annum. Interest is payable annually. Concerned about the volatility|
|of the Australian dollar against the US dollar, the company takes out a hedge contract on the loan, payable on 1|
|January 2018. The hedge contract covers the first two years’ interest payments. The hedge rate is set at A$1.00 =|
|US$0.65. The following exchange rates are applicable:|
|Date||Spot rate||Forward rate|
|(d)||The company has agreed to purchase 10 new handmade sports cars from an English supplier. The official order for|
|the vehicles is placed on 31 January 2018. The contract price is established at £350 000 and delivery takes place|
|on 30 May 2018, as agreed. Payment is due in respect of these vehicles on 31 August 2018. In anticipation of the|
|contract on 31 January 2018, the company enters into a foreign currency contract to receive £350 000 at a forward|
|rate of £0.46 = A$1.00. The following exchange rates are applicable:|
|Date||Spot rate||Forward rate|
|31-Jan-18||£0.49 = A$1.00||£0.46 = A$1.00|
|31-May-18||£0.47 = A$1.00||£0.44 = A$1.00|
|30-Jun-18||£0.43 = A$1.00||£0.40 = A$1.00|
|31-Aug-18||£0.40 = A$1.00||£0.40 = A$1.00|
Prepare the journal entries to reflect the effects of the above transactions in accordance with AASB 121, AASB 123 and AASB 9. Explain the treatment adopted in respect of each of the above transactions
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