Reference no: EM131206914

Task- This assessment task consists of five questions.

Question 1 - Financial statement disclosures

You are the financial accountant for Rainyday Ltd, and are in the process of preparing its financial statements for the year ended 30 June 2016. Whilst preparing the financial statements, you become aware of the following situations:

a) On 1 July 2015 the directors made a decision, using information obtained over the last couple of years, to revise the useful life of an item of manufacturing equipment. The equipment was acquired on 1 July 2013 for $500,000, and has been depreciated on a straight-line basis, based on an estimated useful life of 10 years and a residual value of nil. Rainyday Ltd uses the cost model for manufacturing equipment. The directors estimate that as at 1 July 2015, the equipment has a remaining useful life of 6 years and a residual value of nil. No depreciation has been recorded as yet for the year ended 30 June 2016 as the directors were unsure how to account for the change in the 2016 financial statements, and are unsure whether the 2014 and 2015 financial statements will need to be revised as a result of the change.

b) In June 2016, the accounts payable officer discovered that an invoice for repairs to manufacturing equipment, with an amount due of $25,000, incurred in June 2015, had not been paid or provided for in the 2015 financial statements. The invoice was paid on 5 July 2016. The repairs are deductible for tax purposes. The accountant responsible for preparing the company's income tax returns will amend the 2015 tax return, and the company will receive a tax refund of $7,500 as a result (30% x $25,000). Journal entries have not yet been done in the accounting records of Rainyday Ltd as the directors are unsure how to account for this situation, and what period adjustments need to be made in.

c) Rainyday Ltd holds shares in a listed public company, Bobsmith Ltd, which are valued in the draft 30 June 2016 financial statements at $800,000. A major fall in the stock market occurred on 10 July 2016 (prior to the 2016 financial statements being finalised), and the value of Rainyday's shares in Bobsmith Ltd declined to $450,000.

d) One of Rainyday Ltd's major debtors, Masterz Ltd, filed for bankruptcy on 20 July 2016. Rainyday Ltd's draft financial statements have been prepared reflecting a 50% doubtful debts provision for this account ($900,000 debt, less $450,000 provision for doubtful debts). On 20 July 2016 (prior to the 2016 financial statements being finalised), it appears that no amount will be recovered from Masterz liquidator in respect of this debt.

Required: State, for each situation, whether any adjustment to Rainyday Ltd's financial statements is required (assuming that each amount is material). Provide explanations and references to relevant paragraphs in the accounting standards to support your answers. State the appropriate accounting treatment (including any journal entries needed) for each situation in the 2016 financial statements.

Question 2 - Accounting for share issues and options

Sunny Ltd is looking to expand its operations, and in order to do this, the company needs to increase equity.

On 1 January 2016, Sunny Ltd offered 6,000,000 ordinary shares to the public at an issue price of $4.00 per share, with $3.00 payable on application, and $1.00 due within one month of allotment. The closing date for applications was 31 January 2016. Sunny Ltd offered an additional incentive to investors: shareholders who acquired more than 25,000 shares were allowed to purchase options at 50 cents each. These options allowed investors to acquire shares in Sunny Ltd at $4.20 each on or before 30 June 2016.

By 31 January 2016, applications had been received for 6,300,000 shares and 60,000 options. On 12 February 2016, 6,000,000 shares were allotted on a pro-rata basis, and all 60,000 options applied for were allotted. Excess application money received was retained and used to go towards the allotment instalment due.

All allotment money is received by 12 March 2016, except for holders of 20,000 shares who fail to meet the instalment.

On 20 March 2016, the 20,000 shares were forfeited, and on 5 April 2016 they were auctioned as fully paid. An amount of $3.70 was received for each share sold. Share re-issue costs amounted to $3,600, and were paid. The constitution provided for any surplus on resale, after satisfaction of unpaid instalments and any costs, to be returned to shareholders whose shares were forfeited.

By 30 June 2016, the price of each of Sunny Ltd's shares was $4.80. Holders of 50,000 options exercised their options in June 2016, with the remaining options lapsing.

Required: Prepare the journal entries to account for the above entries. Show all relevant dates, narrations and workings.

Question 3 - Accounting for income tax

Blaze Ltd commenced business on 1 July 2015, with share capital of $300,000. On 30 June 2016, the company presents its first Statement of Profit or Loss and Other Comprehensive Income, and first Statement of Financial Position. The statements are prepared before considering taxation. The following information is available:

 Extract from statement of profit or loss and other comprehensive income for the year ended 30 June 2016

	$	$
Revenue		750,000
Government grant (exempt from income tax)		30,000
Expenses:
Cost of sales	325,000
Annual leave	13,000
Depreciation - equipment	40,000
Depreciation - motor vehicles	15,000
Doubtful debts expense	6,000
Entertainment expenses (not tax deductible)	4,500
Insurance	10,000
Rent	26,000
Salaries	125,000
Warranty expenses	7,500
Other expenses	17,250	(589,250)
Accounting profit before tax		190,750

Assets and liabilities as disclosed in the Statement of Financial Position as at 30 June 2016

	$	$
Assets:
Cash		20,000
Inventory		85,900
Accounts receivable	80,000
Less Allowance for doubtful debts	(4,000)	76,000
Prepaid insurance		3,000
Equipment - cost	400,000
Less Accumulated depreciation	(40,000)	360,000
Motor vehicles - cost	60,000
Less Accumulated depreciation	(15,000)	45,000
Total assets		589,900
Liabilities:
Accounts payable		50,250
Loan		25,000
Provision for annual leave		11,000
Provision for warranties		6,900
Rent payable		6,000
Total liabilities		99,150
Net assets		490,750
Equity
Share capital		300,000
Retained earnings		190,750
		490,750

Additional information:

• The company purchased equipment at a cost of $400,000 on 1 July 2015. The equipment is depreciated over ten years for accounting purposes (residual value of nil), using the straight-line basis of depreciation. The tax depreciation rate for this equipment is 15% per annum.
• The company purchased motor vehicles at a cost of $60,000 on 1 July 2015. The motor vehicles are depreciated over four years for accounting purposes (residual value of nil), using the straight-line basis of depreciation. The tax depreciation rate for these motor vehicles is 20% per annum.
• Tax deductions for annual leave, warranty and rent are available only when the amounts are paid, and not as they are accrued.
• Actual amounts paid for insurance are allowed as a tax deduction.
• Amounts received from sales, including those on credit terms, are taxed at the time the sale is made.
• The tax rate is 30%.

Required:

a) Determine the balance of any current and deferred tax assets and liabilities for Blaze Ltd as at 30 June 2016, in accordance with AASB 112. Show all necessary workings.

b) Prepare the journal entries to record the current tax liability and movements in deferred tax assets and liabilities.

Question 4 - Property, plant and equipment

Sunshine Ltd acquired an item of equipment on 1 July 2013 at a cost of $800,000. On 30 June 2014, Sunshine's directors decide to continue using the cost model for equipment. They elect to depreciate the equipment acquired on 1 July 2013 using the straight-line method, over its useful life of five years. The estimated residual value is $40,000.

The directors then decide to adopt the revaluation model for equipment from 1 July 2014. They determine that the fair value of this item of equipment on this date is $730,000. The useful life is revised on this date - estimated to be six years from 1 July 2014. The estimated residual value remains unchanged.

On 30 June 2015, Sunshine's directors estimate that the fair value of the item of equipment does not differ materially from its carrying amount.

On 30 June 2016, Sunshine's directors estimate that the fair value of the item of equipment is $400,000.

The item of equipment is sold on 30 September 2016 for $390,000.

Assume a tax rate of 30%.

Required: Prepare journal entries to account for all transactions that took place during the period 1 July 2013 to 30 September 2016, including entries for the acquisition of the equipment, depreciation, revaluations and its disposal. Show all relevant dates, narrations and workings.

Question 5 - Impairment of assets

Movies Ltd has two separate cash generating units, 'Cinema' and 'DVD Sales'. At 30 June 2016, the carrying amounts of the assets of the units, valued pursuant to the cost model, are as follows:

	Cinema	DVD Sales
Assets:	$	$
Cash	5,000	12,000
Inventory	4,000	85,000
Furniture and fittings	250,000	35,000
Less: accumulated depreciation	(45,000)	(10,000)
Electrical equipment	165,000	25,000
Less: accumulated depreciation	(55,000)	(15,000)
Land and buildings	650,000	185,000
Less: Accumulated depreciation (buildings)	(25,000)	(6,000)
Licence	25,000	-
Goodwill	45,000	15,000
Carrying amount of cash generating unit	1,019,000	326,000

The inventory is recorded at the lower of cost and net realisable value. The licence has a fair value less costs to sell of $24,000. The land and buildings of 'Cinema' have a fair value less costs to sell of $550,000, and the land and buildings of 'DVD Sales' have a fair value less costs to sell of $175,000.

On 30 June 2016, the directors of Movies Ltd estimate that the fair value less cost to sell for 'Cinema' and 'DVD Sales' amount to $780,000 and $318,000 respectively. The value in use of 'Cinema' and 'DVD Sales' are estimated at $900,000 and $290,000 respectively.

Required: Determine the impairment loss (if any) to be recognised by Movies Ltd for each of its cash generating units as at 30 June 2016, and determine how the impairment loss (if any) is to be allocated. Prepare the journal entries to account for the impairment loss/losses (if any). Show all workings and provide references to the relevant accounting standard to support your answer.