Financial statement disclosures
You are the financial accountant for Superstore Ltd, and are in the process of preparing its financial statements for the year ended 30 June 2018. Whilst preparing the financial statements, you become aware of the following situations:
- On 1 July 2017, 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 2015 for $800,000, and has been depreciated on a straight-line basis, based on an estimated useful life of 10 years and residual value of nil. Superstore Ltd uses the cost model for manufacturing equipment. The directors estimate that as at 1 July 2017, 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 2018 as the directors were unsure how to account for the change in the 2018 financial statements, and unsure whether the 2016 and 2017 financial statements will need to be revised as a result of the change.
- In June 2018, the accounts payable officer discovered that an invoice for repairs to equipment, with an amount due of $20,000, incurred in June 2017, had not been paid or provided for in the 2017 financial statements. The invoice was paid on 12 July 2018. The repairs are deductible for tax purposes. The accountant responsible for preparing the company’s income tax returns will amend the 2017 tax return, and the company will receive a tax refund of $6,000 as a result (30% x $20,000). No journal entries have been done as yet in the accounting records of Superstore Ltd, as the directors are unsure how to account for this situation, and what period adjustments need to be made in.
- Superstore Ltd holds shares in a listed public company, ABC Ltd, which are valued in the draft financial statements on 30 June 2018 at their market value on that date – $600,000. A major fall in the stock market occurred on 10 July 2018, and the value of Superstore’s shares in ABC Ltd declined to $250,000.
- On 21 July 2018, you discovered a cheque dated 20 April 2018 of $32,000 authorised by the company’s previous accountant, Max. The payment was for the purchase of a swimming pool at Max’s house. The payment had been recorded in the accounting system as an advertising expense. You advise the directors of this fraudulent activity, and they will investigate.
Assume that each event is material.
i) State the appropriate accounting treatment for each situation. Provide explanations and references to relevant paragraphs in the accounting standards to support your answers. Where adjustments to Superstore Ltd’s financial statements are required, explain which financial statements need to be adjusted (ie. 2016, 2017, 2018 or 2019).
ii) Prepare any note disclosures and adjusting journal entries that are needed in the 2018 financial statements for each situation.
|Marking Guide – Question 1||Max. marks awarded|
|Classification of each item||4|
|Discussion to support classification decision, including references||6|
|Note disclosures and journal entries where necessary||4|
Question 2 [14 marks]
Accounting for share capital
Rippa Ltd was incorporated on 1 July 2017. The following transactions and events occurred during the year ended 30 June 2018:
1 Jul 2017: Rippa Ltd makes an offer to the public for investors to subscribe for 5,000,000 shares, at an issue price of $4.00 per share, with $2.50 payable on application, $1.00 being payable within one month of allotment, and $0.50 payable on a call to be made at a later date. The issue is underwritten at a commission of $12,000.
31 Jul 2017: Applications close, with applications received for 6,000,000 shares.
10 Aug 2017: 5,000,000 shares are allotted in proportion to the number of shares for which applications had been made. The surplus application money is offset against the amount payable on allotment.
12 Aug 2017: The underwriter’s commission is paid.
10 Sep 2017: All allotment money is received.
1 Feb 2018: The call is made, with money due by 28 February 2018.
28 Feb 2018: All call money is received except for holders of 40,000 shares who fail to meet the call.
20 Mar 2018: The shares on which call money was not received are forfeited and sold as fully paid. An amount of $3.20 is received for each share sold. Costs of the forfeiture and reissue amount to $4,000, and are paid.
25 Mar 2018: The balance of the Forfeited Shares Account is returned to the former shareholders.
i) Prepare the journal entries to record the transactions of Rippa Ltd up to and including that which took place on 25 March 2018. Show all relevant dates and narrations.
ii) After returning money to the former shareholders on 25 March 2018, one of the former shareholders has contacted you in relation to the amount of money that he received. He tells you that he paid the application money and allotment money for the shares that he had, so he should get an amount back of $3.50 per share. Explain why the amount returned to the former shareholders was not $3.50 per share, and prepare workings to show how the refund per share was calculated.
|Marking Guide – Question 2||Max. marks awarded|
|Journal entries with narrations||9|
|Explanation of amount returned to former shareholders||3|
Question 3 [15 marks]
Accounting for income tax
Jackson Storm Ltd commenced business on 1 July 2017, with share capital of $300,000. On 30 June 2018, 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:
Statement of Profit or Loss and Other Comprehensive Income (Extract) for the year ended 30 June 2018
|Revenue||2 150 000|
|Government grant (exempt from income tax)||50 000|
|Cost of sales||925 000|
|Annual leave||25 000|
|Depreciation – equipment||70 000|
|Depreciation – motor vehicles||30 000|
|Doubtful debts expense||34 000|
|Entertainment (not tax deductible)||4 500|
|Warranty expenses||18 500|
|Other expenses||47 200||1 644 200|
|Accounting profit before tax||555 800|
Statement of Financial Position (Extract) as at 30 June 2018
|Accounts receivable||250 000|
|Less:allowance for doubtful debts||(32 000)||218 000|
|Prepaid insurance||7 000|
|Equipment – cost||700 000|
|Less: accumulated depreciation||(70 000)||630 000|
|Motor vehicles – cost||120 000|
|Less: accumulated depreciation||(30 000)||90 000|
|Total assets||1 147 900|
|Accounts payable||54 600|
|Provision for annual leave||21 000|
|Provision for warranties||16 500|
|Total liabilities||292 100|
|Net assets||855 800|
|Share capital||300 000|
|Retained earnings||555 800|
- The company purchased equipment at a cost of $700,000 on 1 July 2017. The equipment is depreciated over ten years for accounting purposes, and seven years for taxation purposes (using the straight-line basis of depreciation, and a residual value of nil).
- The company purchased motor vehicles at a cost of $120,000 on 1 July 2017. The motor vehicles are depreciated over four years for accounting purposes, and six years for taxation purposes (using the straight-line basis of depreciation, and a residual value of nil).
- 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 Jackson Storm Ltd as at 30 June 2018, 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.
|Marking Guide – Question 3||Max. marks awarded|
|Determination of taxable income and current tax liability||6|
|Determination of deferred tax assets and liabilities in deferred tax worksheet||7|
Question 4 [16 marks]
Revaluation of property, plant and equipment
You are the accountant for Superstar Ltd, and you are required to account for the company’s equipment for the years ended 30 June 2017 and 30 June 2018, which are measured using the revaluation model. The directors elect to depreciate equipment on a straight-line basis.
The first equipment has a carrying amount as follows, prior to any depreciation or revaluation being recognised for the year ended 30 June 2017:
|Revalued amount (as at 30 June 2016):||$60,000|
|Less: accumulated depreciation||–|
This equipment was revalued for the first time on 30 June 2016, from $70,000 to $60,000. The directors determined that as at 30 June 2016, this equipment had an estimated remaining useful life of 4 years, and an estimated residual value of $10,000.
The directors have determined that the fair value of this equipment on 30 June 2017 is $55,000. At 30 June 2017, this equipment had an estimated remaining useful life of 3 years, and the residual value remains unchanged at $10,000.
The directors have determined that the fair value of this equipment on 30 June 2018 is $44,000.
The second equipment at has a carrying amount as follows, prior to any depreciation or revaluation being recognised for the year ended 30 June 2017:
|Revalued amount (as at 30 June 2016):||$20,000|
|Less: accumulated depreciation||–|
This equipment has been revalued a number of times, with revaluation decrements amounting to $1,000 being previously recognised in profit or loss. The directors determined that as at 30 June 2016, this equipment had an estimated remaining useful life of 4 years, and an estimated residual value of $4,000.
The directors have determined that the fair value of this equipment on 30 June 2017 is $18,000. At 30 June 2017, this equipment had an estimated remaining useful life of 3 years, and the residual value has been revised to $6,000.
This equipment is sold on 31 December 2017 for $13,000.
Prepare the necessary journal entries to account for each of the above equipment for the years ended 30 June 2017 and 30 June 2018 (including entries for depreciation, revaluations, and any disposals). Show all relevant workings. Note: you are not required to account for income tax associated with revaluations.
|Marking Guide – Question 4||Max. marks awarded|
Question 5 [16 marks]
Impairment of assets
Foodie Ltd has two separate cash generating units, ‘Fizzy Drinks’ and ‘Ice creamery’. At 30 June 2018, the carrying amounts of the assets of the units, valued pursuant to the cost model, are as follows:
|Fizzy Drinks||Ice creamery|
|Fixtures and fittings||25,000||35,000|
|Accumulated depreciation – fixtures and fittings||(5,000)||(10,000)|
|Accumulated depreciation – equipment||(55,000)||(15,000)|
|Land and buildings||650,000||185,000|
|Accumulated depreciation – buildings||(25,000)||(6,000)|
The inventory is recorded at the lower of cost and net realisable value. The patent has a fair value less costs to sell of $20,000. The land and buildings of ‘Fizzy Drinks’ have a fair value less costs to sell of $620,000, and the land and buildings of ‘Ice creamery’ have a fair value less costs to sell of $175,000.
On 30 June 2018, the directors of Foodie Ltd estimate that the fair value less cost to sell for ‘Fizzy Drinks’ and ‘Ice creamery’ amount to $750,000 and $260,000 respectively. The value in use of ‘Fizzy Drinks’ and ‘Ice creamery’ are estimated at $810,000 and $240,000 respectively.
Determine the impairment loss (if any) to be recognised by Foodie Ltd for each of its cash generating units as at 30 June 2018, 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.
|Marking Guide – Question 5||Max. marks awarded|
|Application of the impairment test and allocation of impairment losses where necessary, with explanations, workings and references||12|
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This assessment task will assess the following learning outcome/s:
- be able to prepare basic financial statements for reporting entities.
- be able to discuss critically and comprehensively the statutory and professional requirements upon which published financial statements are based.
- be able to explain the form and content of financial statements.
- be able to interpret and apply generally accepted accounting principles and specific financial reporting standards relating to concepts of recognition, measurement, disclosure, revaluation and impairment of key financial statement elements.
Marking criteria and standards
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The marking guide for this assessment task is provided below. The detailed allocation of marks for each question has been provided above for yo