Explain why the lease should be classified as a finance lease by both the lessor and lessee.
Prepare a schedule of lease payments and the journal entries for Rapid Creek Ltd in respect of the lease for the lease term.
UNIT CODE: ACT204
UNIT NAME: FINANCIAL ACCOUNTING
Assignment Information Semester 1 2016
Assessment 20% Submission Requirements.
This assignment is to be submitted before 11.59pm Friday 20th May in Week 11
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ASSIGNMENT INFORMATION
This Assignment is worth 20% of the total assessment for this unit. This assignment will be marked out of 200 and scaled down to being out of 20. The assignment has two parts. Part A contains 7 questions worth 120 marks and Part B contains 2 questions worth 80 marks.
PART A
Q1. Wanguri Ltd enters a lease agreement to lease equipment to Rapid Creek Ltd. The lease term is for 5 years and the equipment has a fair value at the start of the lease on 1st July 2016 of $45,236. The equipment is expected to have a useful life of 6.5 years at which time the estimated residual value will be $2,600. The residual value at the end of the lease term is $9,360 of which 50% is guaranteed.
The lease agreement requires annual lease payments of $10,400 starting on 30th June 2017. The interest rate implicit in the lease is 9%. Rapid Creek Ltd has the right to cancel the lease at any time. This is conditional upon a payment of 50% of the total lease payments being paid to Wanguri Ltd.
Rapid Creek Ltd will be returning the equipment to Wanguri Ltd at the end of the lease term. The legal and set up costs of the lease incurred by Wanguri Ltd amounted to $1,300. The equipment was purchased just before the start of the lease for $45,236.
Required
A. Explain why the lease should be classified as a finance lease by both the lessor and lessee.
B. Prepare a schedule of lease payments and the journal entries for Rapid Creek Ltd in respect of the lease for the lease term.
C. Prepare a schedule of lease receipts and the journal entries for Wanguri Ltd in respect of the lease for the lease term.
D. Prepare an appropriate note to the financial statements for both companies as at 30 June 2017.
(34 marks)
Q2. On 1 October 2015, Tenant Creek Exploration Ltd, an Australian company, entered a loan agreement with the Island of Mull Banking Corporation to borrow £3,500,000 for a period of 5 years. The interest on the borrowings is payable half-yearly in arrears at the fixed interest rate of 10% p.a. with interest payments of £175,000 (i.e. £3,500,000 × 10% × ½ year) due on 31 March and 30 September each year.
The functional currency of Tenant Creek Exploration Ltd is the Australian dollar. It has reporting periods ending on 31 December and 30 June. The relevant rates of exchange during the financial period ending 30 June 2016 were as follows:
1 October 2015 Aus$1 = £0.555
31 December 2015 Aus$1 = £0.537
31 March 2016 Aus$1 = £0.512
30 June 2016 Aus$1 = £0.485
Required
In accordance with AASB 121, prepare the entries of Tenant Creek Exploration Ltd to record the borrowing transaction, the borrowing costs expense, the borrowings costs paid and the
re-measurement of the borrowings at the end of the reporting period at 30th June 2016. (7 marks)
Q3. The following information has been extracted from the plant register of Aquifer Ltd. This class of plant is expected to depreciate on a straight line basis. A revaluation method has been adopted.
Machine 5921 Machine 5922 Machine 5923
1st July 2015
Cost $90,000 $54,000
Expected useful life 5 years 3 years
30th June 2016
Fair Value $75,600 $34,200
Expected useful life 4 years 2 years
1st January 2017
Cost $72,000
Expected useful life 4 years
30th June 2017
Fair Value $54,900 $61,650
Expected useful life 3 years 1.5 years
This additional information is relevant:
On 1st July 2015 Machines 5921 and 2922 were purchased for cash. On 1st January 2017 Machine
5922 was sold for $26,100 and Machine 5923 was purchased. Both were cash transactions. At this time Aquifer Ltd made a bonus issue of 9 000 shares at $1 per share, using $7200 from the general reserve and $1800 from the asset revaluation surplus created as a result of measuring Machine 5921 at fair value.
Aquifer has a reporting date of 30th June.
Required
Prepare the journal entries to reflect these events from 1st July 2015 to 30th June 2017. (ignore taxation)
(10 marks)
Q4. Whilst you have been assisting Berrimah Line Painting Ltd to produce the financial statements for the year ended 30th June 2016 you have discovered the following information about events that occurred after the end of the reporting period.
On 10th July 2016, a fire in a neighbouring property spread to the paint store and destroyed inventory and two line painting machines. The damage was estimated at $320,000. The insurance company has agreed to pay $240,000 but because the serious crimes squad is investigating the fire, the insurance payment has been delayed. The loss of the inventory and the machines has had a serious impact upon the business’s ability to service its existing contracts.
On 12th July 2016, a major competitor introduced a new method for line printing using new and improved paints and applicators. To maintain Berrimah Line Painting Ltd’s share of the market severe discounting has had to be implemented. This has resulted in the selling price of its paints being reduced to 50% of cost. The inventory in stock at 30th June 2016 had been recorded at a cost of $122,400.
On 12th August 2016, the Environmental Protection Agency gave notice to the company that, due to a leakage that had been traced to a paint store at the Bark Hut depôt, toxic material had seeped into a local watering hole. The leakage happened on 8th July 2016. An infringement notice had been issued and the matter was due to be heard in the local court. If the company is found to be negligent legal advice has suggested that the company will have to pay a fine of $280,000 together with legal fees and clean-up costs which could amount to $200,000.
On 13 August 2017, you discovered that inventory purchase invoices, totalling $30,120, relating to purchases made in June had not been entered onto the system.
On 30 August 2017, the company issued a prospectus offering 2,400 10% debentures of $100 each for public subscription. The debentures are redeemable on 1 October 2025. Interest is payable annually in arrears. The debentures are secured by a floating charge over the company’s assets.
Assume all events and transactions are material.
Required
A. Examine the above events and identify which should be treated as adjusting events and which are non-adjusting events. You should provide a detailed justification for your classification.
B. Having determined the course of action that you would take based upon your classification prepare the necessary journal entries or note disclosures to comply with the requirements of AASB 110.
(8 marks)
Q5. Dragons R Us Ltd runs a dragon fruit plantation in Howard Springs. In June 2015 the CFO predicted that its assets may be impaired due to a change in policy by the Northern Territory government when granting water licences. This could impact the income streams from the export and local markets by reducing Dragons R Us Ltd’s ability to service those markets.
Dragons R Us Ltd values land at fair value. At 30 June 2015 and independent valuer assessed the land to have a fair value of $222,000. A previous revaluation had increased the land value by $37,000. As a result of its impairment testing, Dragons R Us Ltd calculated that the recoverable amount of the entity’s assets was $2,693,600.
The carrying amounts of the assets of Dragons R Us Ltd prior to adjusting for the impairment test and the revaluation of the land were as follows:
Non-current assets
Production shed and farm shop 1572500 Accumulated depreciation -358900 Land (at fair value 1/7/14) 236800 Harvesting equipment 2689900 Accumulated depreciation -1387500
Goodwill 111000
Accumulated impairment losses -81400 Dragons R Us Brand Name and Logo 148000
Current assets
Cash 12950 Trade Receivables 16650
Required
A. Complete the journal entries to reflect the changes in valuation at 30th June 2015.
B. After the apportionment of the impairment loss, the harvesting equipment was written down to
$ 1,184,000. The fair value less costs of disposal of the harvesting equipment was valued at $ 1,110,000. What adjustments, if any, that would need to be made to the journal entries in part A of this question, and explain why the adjustments are or are not required.
(8 marks)
Q6. Glitterati Ltd
Trial Balances as at 30 June
2015 2016
Dr $ Cr$ Dr $ Cr$
Cash 65 65
Accounts receivable 16996 28535
Allowance for doubtful debts 1300 2600
Inventory 47471 78751
Plant and machinery 64740 101920
Accumulated depn – p & m 7137 14482
Fixtures and fittings 13000 10140
Accumulated depn – f&f 3770 3900
Accounts payable 16258 15382
Bank overdraft 3614 21923
Current tax liability 7800 10400
Share capital 78000 117000
General reserve 13000 19500
Retained earnings (opening) 9290 11393
Sales revenue 221000 260000
Gain on sale of machinery 130
Cost of sales 78000 91000
Salaries and wages expenses 123035 129852
Doubtful debts expense 3900 4420
Depreciation expense 6630 7995
Income tax expense 7332 7132
Dividend declared and paid 10400
Transfer to general reserve 6500
361169 361169 476710 476710
Additional information
1)Fixtures and fittings which had cost $2860 and with accumulated depreciation of $520 were sold during the year in a cash sale.
2) Plant which cost $13000 was purchased in exchange for the issue of 13000 shares at a price of $1 each.
3) The bank overdraft is to be included in cash equivalents.
Required
Prepare a Statement of Cash Flows for Glitterati Ltd for the year ended 30th June 2016 using the direct method. The Statement should be accompanied by all the relevant notes including the indirect method.
(32 marks)
Q7. Georgetown Ltd is a company that is based in Penang, Malaysia. It purchased the issued shares of Darwin Ltd, an Australian company on 1st July 2015 for $800,000. The trial balances at the 30 June 2016 for the two companies are found below:
Georgetown Ltd Darwin Ltd
Malaysian Ringit MYR Australian Dollar Aus$
Cash 128940 42000
Accounts receivable 203420 161000
Inventory 154000 112000 Shares in Darwin Ltd 470400 0 Buildings (net) 117600 308000 Machinery 588000 560000
Accumulated depreciation – machinery 294000 224000
Provisions 63000 42000 Payables 19600 56000
Share capital 784000 490000
Retained earnings as at 1/7/15 462000 238000
Sales 868000 434000 Dividend revenue 0 8960 0
Cost of sales 546000 168000
Depreciation – machinery 119000 56000
Tax expense 32200 21000
Other expenses 70000 14000 Dividend paid 28000 14000 Dividend provided 42000 28000
2499560 2499560 1484000 1484000
The following information is also provided:
1. Sales,cost of sales and expenses were incurred evenly throughout the year to 30th June 2016. The dividend was paid by Darwin Ltd on 1st January 2016, and the final dividend was declared on 30th June 2016.
2. Aus$ 140,000 was spent on new machinery by Darwin Ltd on 1st January 2016. Aus$ 11,200 was Included in the year’s depreciation expense for this additional machinery.
3. The functional currency of Darwin Ltd is the Australian Dollar.
4. The relevant rates of exchange during the financial period ending 30 June 2016 were as follows:
1 July 2015 Aus$1 = MYR3.26
1 December 2015 Aus$1 = MYR3.45
1 January 2016 Aus$1 = MYR3.50
30 June 2016 Aus$1 = MYR3.60
Average for the year
ended 30th June 2016 Aus$1 = MYR3.43
Required
A Translate the balances of Darwin Ltd into Malaysian Ringit so that they can be included in the consolidated financial statements of Georgetown Ltd.
B Verify the translation adjustment.
(21 marks)
PART B
Q8. From the following link download the annual report for 2015 http://www.api.net.au/investor/annual-reports/
Look at the Notes to the Financial Statements for Intangible Assets.
Required
A Using AASB 138 and AASB3 explain how the brand names were recognised and measured as assets.
B What can you deduce from the fact that the values are the same in both years? (20 marks)
Q9. From the following link download Woolworths Limited’s annual report for 2015
http://www.woolworthslimited.com.au/icms_docs/182381_Annual_Report_2015.pdf
Go to page 58 where you will find the financial statements
In the 2014 annual report the financial statements can be found on page 96
http://www.woolworthslimited.com.au/annualreport/2014/ebook/#96
You will need the 2014 results when calculating average inventory and average receivables for the 2014 efficiency ratios.
You can access the closing market price of Woolworth’s shares at
https://au.finance.yahoo.com/q/hp?s=WOW.AX
When downloading the annual reports it’s good not to print the whole report as they can be over 100 pages long.
Required
A Calculate the following ratios for 2015 and 2014:
Current and Acid Test ratios
Inventory turnover and days in inventory
Gross profit percentage, accounts receivable turnover and days sales in receivables
Debt ratio and debt to equity ratio
Rate of return on net sales ratio and rate of return on total assets ratio Asset turnover ratio and the rate of return on ordinary shareholders equity Dividend yield and dividend payout.
B Using the ratios calculated in Part A and information gathered from elsewhere in the Annual Reports write a report to a potential investor with your recommendations as to whether Woolworths Limited would make a good investment.
C As a rule of thumb the Current Ratio for businesses should be 2:1 and the Acid Test between1.5 to 1:1 How would you explain these ratios for Woolworths Limited when compared to this rule?
Your report should be written as a business report with an executive summary, an introduction, the main findings, a conclusion and references. Marks will be awarded to reflect presentation, business English, content and referencing. (60 marks)
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