Question 1


Events after the reporting period


Grace Ltd is finalising its financial statements for the reporting period ending 30 June 2019.  On 29 August 2019, before the financial statements have been finalised and authorised for issue, the company’s directors became aware of the following situations:

  1. Grace Ltd’s cloud service provider breached its contract, when the service was down for 14 days in July 2019, causing major disruptions to Grace Ltd’s business operations.  Grace Ltd commenced legal action against the cloud service provider on 2 August 2019, seeking $300,000 in damages for lost profits.
  2. On 5 August 2019, the government announced a new airport for Western Sydney.  The flight path for plane’s landing and taking off is directly above one of Grace Ltd’s major investment properties, which Grace Ltd was planning to subdivide into residential blocks in the next 2 years.  The directors had the land valued on 20 August 2019, after the government announcement.  On 20 August 2019, the land was valued at $800,000 less than the value currently in the financial statements at 30 June 2019.
  3. On 25 August 2019, it was discovered that the one of the managers had undertaken fraudulent activity – using $38,000 of company funds to purchase a car in his personal name on 1st April 2019.  The car had been recognised as an asset on the company’s statement of financial position, and depreciation expense of $1,000 has currently been recognised in the 2019 financial statements.  The fraud was uncovered when the auditors were auditing the company’s assets.  The directors have met with the manager, and the manager has agreed to repay the company $38,000 by 30 September 2019.
  4. Grace Ltd owns shares in a listed public company, Slipp Ltd, which had a market value of $500,000 on 30 June 2019 (the shares are currently recorded at this value in the financial statements at 30 June 2019).  A major fall in the stock market occurred on 20 July 2019, and the value of Grace Ltd’s shares in Slipp Ltd declined to $250,000.

Ignore any GST or income tax effects.



State, for each situation, whether the event is an adjusting event or non-adjusting event (assuming the amount is material).  Provide explanations and references to relevant paragraphs in the accounting standards to justify your answers.  Prepare any journal entries or note disclosures needed for each situation in the 2019 financial statements.



Question 2

Accounting for share capital

On 1 February 2019, Sunshine Ltd was registered and issued a prospectus inviting applications for 2,000,000 shares, at an issue price of $3.00, payable as follows: $1.50 on application, $1.00 on allotment (payment due within 1 month of allotment), $0.50 on a call to be made at a later date.  The issue was underwritten at a commission of $12,000.

By 28 February 2019, applications had been received for 1,800,000 shares.  On 10 March, shares are allotted, and the underwriter forwarded the application and allotment money due on their shares, less their commission.  All remaining allotment money was received by 10 April.  Other share issue costs amounted to $5,000, and were paid on 15 April.

The call was made on 1 May 2019, with money due by 31 May 2019.  All money owing in relation to the call was received by the due date, except for the holders of 20,000 shares who did not pay the call.  On 10 June 2019, as provided in the company’s constitution, the directors forfeited these 20,000 shares.

On 20 June 2019, the forfeited shares were reissued as fully paid for a consideration of $2.70 per share.  Costs of forfeiture and reissue amounted to $4,000, and were paid.  The constitution allows for the refund of any balance in the forfeited shares account after reissue to former shareholders, so refunds were made on 25 June 2019.



Prepare the journal entries to record the transactions of Sunshine Ltd up to and including that which took place on 25 June 2019.  Show all relevant dates, narrations and workings (note: workings/calculations may be shown in the narrations).



Question 3

Accounting for income tax

Tulip Ltd commenced business on 1 July 2018, with share capital of $700,000.  The following information is available for the year ended 30 June 2019:


Calculation of profit for the year ended 30 June 2019
$ $



1 430 000

Royalty (exempt from income tax) 10 000
Cost of sales 725 000
Advertising expense 204 000
Annual leave expense 24 000
Depreciation – equipment 35 000
Depreciation – motor vehicles 20 000
Doubtful debts expense 14 000
Entertainment (not tax deductible) 2 000
Insurance expense 14 000
Interest expense 17 000
Motor vehicle expenses 3 000
Rent expense 87 000
Repairs and maintenance 6 000
Salaries and wages 298 000
Telephone 5 000
Warranty expenses 18 000
Other expenses    42 000  1 514 000
Accounting profit/(loss) before tax (74 000)




Assets and liabilities as at 30 June 2019
$ $
Cash 12 000
Inventory 146 000
Accounts receivable 193 000
Less: allowance for doubtful debts   (12 000) 181 000
Prepaid insurance 3 000
Equipment – cost 400 000
Less: accumulated depreciation   (35 000) 365 000
Motor vehicles – cost 150 000
Less: accumulated depreciation   (20 000)   130 000
Total assets 837 000
Accounts payable 4 000
Bank loan 170 000
Provision for annual leave 22 000
Provision for warranties    15 000
Total liabilities 211 000





Additional information:

  • The directors have advised that they did spend a significant amount of money on advertising and salaries and wages during 2019, as Tulip Ltd sought to market the business and its products to consumers.  The directors expect to see significant profits in the next financial year given the success of their advertising campaigns.
  • The company purchased equipment at a cost of $400,000 on 1 July 2018.  The equipment is depreciated over eight years for accounting purposes, and five years for taxation purposes (using the straight-line basis of depreciation, and a residual value of $120,000).
  • The company purchased motor vehicles at a cost of $150,000 on 1 July 2018.  The motor vehicles are depreciated over six years for accounting purposes, and eight years for taxation purposes (using the straight-line basis of depreciation, and a residual value of $30,000).
  • 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%.


i)          Determine the balance of any current tax liability and deferred tax assets and deferred tax liabilities for Tulip Ltd as at 30 June 2019, in accordance with AASB 112.  Use appropriate worksheets and show all necessary workings.

ii)         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

Property, plant and equipment


Star Freight Ltd is a local freight company with a fleet of three trucks, and you are employed as the financial accountant. The company has always used the cost model to account for its trucks, and elects to depreciate its trucks using the straight-line method.


At 30 June 2018, the Star Freight Ltd has the following the following amounts recognised in its financial statements for the trucks:

Truck 1 Truck 2 Truck 3
Original cost $180,000 $220,000 $300,000
Less: accumulated depreciation (50,000) (40,000) (60,000)
Carrying amount 130,000 180,000 240,000


The directors have heard the term ‘revaluation model’ used before, and would like to consider using the revaluation model for the trucks from 1 July 2018, so that the amounts recognised in the financial statements better reflect the market values of the trucks.  You ask the directors for the following information: the fair value of each truck, the remaining useful life of each truck, and the estimated residual value of each truck.

The directors provide you with the following information:


Truck 1 Truck 2 Truck 3
Fair value as at 1 July 2018 $140,000 $200,000 $210,000
Remaining useful life as at 1 July 2018 8 years 10 years 12 years
Estimated residual value 20,000 30,000 30,000


Prepare journal entries that would be required for the revaluations on 1 July 2018.  Show narrations.  Note: you are not required to account for income tax associated with revaluations.


Assume that the fair values of the trucks at 30 June 2019 are: $110,000 for truck 1, $175,000 for truck 2, and $220,000 for truck 3.  Prepare journal entries that would be required for depreciation and the revaluations on 30 June 2019.  Show narrations and workings for depreciation and revaluations.  Note: you are not required to account for income tax associated with revaluations.



Question 5

Impairment of assets

Fresh Ltd has two retail businesses that represent separate cash generating units, ‘Fresh Juice Bar’ and ‘Fresh Salads’.  At 30 June 2019, the carrying amounts of the assets of the units, valued pursuant to the cost model, are as follows:

Fresh Juice Bar Fresh Salads
$ $
Cash 18,000 14,000
Inventory 4,000 3,000
Fixtures and fittings 50,000 65,000
Accumulated depreciation – fixtures and fittings (45,000) (15,000)
Equipment 65,000 90,000
Accumulated depreciation – equipment (30,000) (30,000)
Motor vehicles 25,000 26,000
Accumulated depreciation – motor vehicles (13,000) (8,000)
Goodwill   10,000   20,000
Total 84,000 165,000



The inventory is recorded at the lower of cost and net realisable value. The motor vehicles of ‘Fresh Juice Bar’  have a fair value less costs to sell of $11,000, and motor vehicles of ‘Fresh Salads’ have a fair value less costs to sell of $14,000.


On 30 June 2019, the directors of Fresh Ltd estimate that the fair value less cost to sell for ‘Fresh Juice Bar’ and ‘Fresh Salads’ amount to $50,000 and $140,000 respectively. The value in use of ‘Fresh Juice Bar’ and ‘Fresh Salads’ are estimated at $58,000 and $180,000 respectively.



Calculate the impairment loss to be recognised by Fresh Ltd for each of its cash generating units as at 30 June 2019, and determine how the impairment loss is to be allocated.  Provide explanations throughout your calculations and workings, so that the directors understand how you are applying the requirements of AASB 136.  Prepare the journal entries to recognise any impairment losses.

The directors believe that the fair value of both businesses is going to increase significantly in the next two years, as the shopping mall that the two outlets are in is expanding, which will attract a lot more business in the long run.  Can any/all of the impairment losses recognised on 30 June 2019 be reversed in the future?  Explain, with reference to key paragraphs in AASB 136.

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