Question 1

Tea Tree Bay Ltd acquires a Gizmo Machine from Jetsons Ltd for the following consideration:


Cash $20,000
Land In the books of Tea Tree Bay Ltd the land is recorded  at its cost of $100,000. It has a fair value of $140,000.
Equipment: In the books of Tea Tree Bay Ltd the equipment is recorded at a cost of $50,000. The equipment has an accumulated depreciation balance of $20,000.

The fair value of the equipment is $23,000


of liability

Tea Tree Bay Ltd also agrees to assume the liability of Jetsons Ltd’s bank loan of $30,000 as part of the Gizmo Machine acquisition.
Other associated costs Tea Tree Bay Ltd also spend $5,000 as the installation cost. Testing cost was $2,500.  Transportation cost for the machine was $700.

During first year of operation, the company paid $650 as the maintenance cost for the machine.



  1. Calculate the acquisition cost of the Gizmo Machine that will be used as the base for future depreciation charge.
  2. Provide the journal entries that would appear in Tea Tree Bay Ltd’s books to account for the acquisition of the Gizmo Machine.
  3. Will the maintenance cost be included in the acquisition cost of the machine? Justify your answer.


Question 2

  1. What factors should be considered in determining the issue price of a debenture. (2 marks)
  2. On 1 July 2018 Bombo Ltd issues $2 million in six-year debentures that pay interest each six months at a coupon rate of 8 per cent. At the time of issuing the securities, the market requires a rate of return of 6 per cent. Interest expense is determined using the effective-interest method. Required:
    1. Determine the issue price of the debenture.
    2. Provide the journal entries at: 1 July 2018, 30 June 2019, & 30 June 2020.


Question 3

RCK Ltd issues a prospectus inviting the public to subscribe for 90 million ordinary shares of $2.00 each. The terms of the issue are that $1.00 is to be paid on application and the remaining $1.00 within one month of allotment.

Applications are received for 108 million shares during July 2018. The directors allot 90 million shares on 15 August 2018. All applicants receive shares on a pro-rata basis. The amounts payable on allotment are due by 20 September 2018. By 20 September 2018 the holders of 18 million shares have failed to pay the amounts due on allotment. The directors forfeit the shares on 30 September 2018.

The shares are resold on 15 October 2018 as fully paid. An amount of $2.00 per share is received. The balance of forfeited shares is refunded on 20 October 2018.


Provide the journal entries necessary to account for the above transactions and events.


Question 4

Fool’s Paradise Ltd had cash and cash equivalents at 1 January 2019 of $400,000. The transactions of Fool’s Paradise Ltd for the year to 31 December 2019 are as follows:

  • Borrowed $850,000 with a 9-month loan payable
  • Received $6,340,000 cash for customer accounts
  • Sold for $360,000 cash a plant asset with a carrying amount of $180,000
  • Issued ordinary shares for $480,000 cash
  • Purchased a plant asset for $650,000; $237,500 in cash and $412,500 in loan
  • Exchanged 60,000 shares for land with a fair value of $1,000,000
  • Received a $350,000 dividend in cash
  • Received $25,000 interest from term deposit
  • Invested $500,000 cash on the short-term money market
  • Paid fixed-term loan principal of $900,000 and interest of $90,000
  • Cash payments for supplier’s accounts $6,300,000
  • Dividend paid during the period $200,000
  • Wages expense shown in the income statement is $75,000. At the end of the year the balance sheet shows prepaid Wages expense of $65,000. There was a prepaid Wages expense of $35,000 at the beginning of the year.


Prepare the statement of cash flows of Fool’s Paradise Ltd for the year to 31 December 2019.

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