ACC514 FINANCIAL ACCOUNTING

Task

You are to complete all 4 problem-solving questions. A total of 60 marks are allocated to the

questions below, which will then be converted to a mark out of 20%.

Rationale

This assessment task covers topics 4 - 8. More specifically it seeks to assess your ability to:

• prepare journal entries for transactions involving share issues, over/under subscription

of shares, forfeiture and reissue of shares;

• account for income tax in accordance with AASB 112;

• discuss appropriate accounting treatment for intangible assets;

• account for property, plant and equipment using the revaluation model.

Marking criteria

Essay/discussion questions

In the awarding of marks for essay/discussion questions, consideration will be given to:

• evidence of understanding of the key issues identified in the question;

• active analysis of identified elements as appropriate;

• clear indication of reading of the texts, readings and other relevant references as

appropriate;

• clear and logical written expression;

• appropriate structure and layout as required;

• appropriate referencing; and

• observation of the word limit, if any.

Numerical questions

In the awarding of marks for numerical questions, consideration will be given to:

• correctness of answers;

• appropriate formatting and headings;

• relevant workings;

• approach taken to solve the problem; and

• completeness of answers.

Presentation

Physical presentation of assignments

It is essential that presentation of assignments adheres to accepted standards in relation to

neatness and layout, as you are practising to present material in a work situation. Correct

formatting and referencing procedures of material should be strictly adhered to for essays.

You should submit a proper reference list (using APA referencing style) for all essay type

assignments. A reference list contains only those works cited or quoted from in your essay. A

bibliography is acceptable for practical-type assignments.

For practical questions:

• all journal entries must include narrations unless otherwise specified;

• any ledger accounts should preferably be shown in 'T' account format and dates and

descriptions be included;

• journal entries and ledger accounts must reflect the strict order of sequence of events;

• financial statements (including extracts) should include proper headings and accord

with presentation standards.

Penalties will be incurred if material is not correctly referenced and if presentation is not of

an acceptable standard.

Please also note the following:

• Journal entries, ledger accounts, worksheets and financial statements should always

balance. If you have to submit a piece of work that does not balance because you

cannot detect your error please include some comment about the source of your

problem so the marker can provide appropriate feedback.

• Include workings where appropriate. Partial marks can be allocated for workings

where the final answer is incorrect.

Requirements

All workings, when appropriate, must be shown to substantiate your answers.

Question 1 [15 marks]

Accounting for share capital

The constitution of Hill Ltd indicated that the company could issue up to 5,000,000 ordinary

shares and 1,000,000 preference shares. Prospectuses had been published offering 1,000,000

preference shares at $1.50 payable in full on application by 31 March 2013, and 2,000,000

ordinary shares at $1.20 with 50% due on application by 31 March 2013, 25% due on

allotment, and 25% due on a call to be made by the directors at a later date.

By 31 March 2013, the company had received amounts due on 800,000 of the preference

shares and on applications for 2,400,000 ordinary shares. The directors met on 10 April 2013

and resolved to issue the preference and ordinary shares.

The ordinary shares were allotted to applicants on a pro rata basis and the amounts received

in excess of that due were to be credited against amounts due on allotment. The amount due

on the allotment of the ordinary shares was payable by 15 May 2013 and this was received on

all shares.

The directors made the call on the ordinary shares on 31 August 2013, with amounts payable

by 30 September 2013. By this date, amounts due on 1,997,000 shares had been received.

On 5 October 2013, as provided by the company's constitution, the directors forfeited the

shares on which calls were unpaid.

On 25 October 2013, the forfeited shares were reissued as fully paid for a consideration of $1

per share. Costs of reissue amounted to $700. The constitution provided for any surplus on

resale, after satisfaction of unpaid calls and costs, to be returned to shareholders whose shares

were forfeited.

Required:

Provide the journal entries to account for the above entries. Show all relevant dates,

narrations and workings.

[adapted from: Dagwell, R., Wines, G. & Lambert, C. (2012). Corporate accounting in

Australia: Pearson Australia]

Question 2 [15 marks]

Accounting for income tax

Bright Ltd commences operations on 1 July 2012 and presents its first Statement of Profit or

Loss and Other Comprehensive Income, and first Statement of Financial Position on 30 June

2013. The statements are prepared before considering taxation. The following information is

available:

Statement of Profit or Loss and Other Comprehensive

Income for the year ended 30 June 2013

$ $

Gross profit 530,000

Expenses

Administration expenses 115,000

Salaries 180,000

Long service leave 5,000

Warranty expenses 30,000

Depreciation expense - plant 80,000

Insurance 20,000 430,000

Accounting profit before tax 100,000

Assets and liabilities as disclosed in the Statement of

Financial Position as at 30 June 2013

$ $

Assets

Cash 20,000

Inventory 100,000

Accounts receivable 100,000

Prepaid insurance 10,000

Plant – cost 400,000

Less: accumulated depreciation 80,000 320,000

Total assets 550,000

Liabilities

Accounts payable 95,000

Provision for warranty expenses 20,000

Loan payable 200,000

Provision for long service leave 5,000

Total liabilities 320,000

Net assets 230,000

Other information:

• All administration and salaries expenses incurred have been paid as at year end.

• None of the long service leave expense has actually been paid. It is not deductible

until it is actually paid.

• Warranty expenses were accrued and, at year end, actual payments of $10,000 had

been made (leaving an accrued balance of $20,000). Deductions are available only

when the amounts are paid and not as they are accrued.

• Insurance was initially prepaid to the amount of $30,000. At year end, the unused

component of the prepaid insurance amounted to $10,000. Actual amounts paid 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 plant is depreciated over five years for accounting purposes, but over four years

for taxation purposes.

• The tax rate is 30%.

Required:

a) Determine the balance of any current and deferred tax assets and liabilities as at 30

June 2013, 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.

[adapted from: Deegan, C. (2010). Australian financial accounting (7th ed.). Sydney: McGraw

Hill]

Question 3 [15 marks]

Intangible assets

Scooters Ltd was incorporated five years ago on 1 July 2008. In the five years since then, the

company has been developing a design for a new four-wheel motorised scooter for elderly

persons. The company has patents pending for the design and production of the scooter.

By 30 June 2011, the company’s work on the scooter design was sufficiently advanced for it

to consider that the design was technically feasible and would results in a far superior product

to any other motorised scooter available at that time. The company concluded at that time that

it possessed sufficient resources to complete the development of the scooter’s design.

The company has incurred the following expenditure in developing its scooter design over

the past five years:

Year ended Expenditure $

30 June 2009 Research on initial scooter design 125,000

Professional fees for initial patent 30,000

30 June 2010 Further refining of the scooter’s design 140,000

30 June 2011 Evaluation and final selection of the design, production materials

and processes

145,000

30 June 2012 Design of tooling and jigs for production of the scooter 150,000

30 June 2013 Production and testing of a pre-production prototype 85,000

Further development of the scooter’s design 50,000

Expenditure on staff training to operate the scooter 30,000

Development of a customer list of potential producers and

retailers for the scooter

25,000

Legal and professional fees to register a final patent 35,000

Required:

Discuss the accounting treatments for the expenditure incurred by Scooter Ltd in the last five

years in accordance with AASB138. Provide relevant paragraph numbers from the standard to

support your answer.

[adapted from: Dagwell, R., Wines, G. & Lambert, C. (2012). Corporate accounting in

Australia: Pearson Australia]

Question 4 [15 marks]

Property, plant and equipment

Gardiner Ltd acquired a machine on 1 July 2011 at a cost of $300,000. At the date of

acquisition, Gardiner’s directors determine to depreciate the machine on a straight-line basis

over a period of six years. The machine has an estimated residual value of nil. The company

elects to adopt the revaluation model subsequent to acquisition.

The directors of Gardiner estimated the fair values for the machine to be $265,000 and

$190,000 on 30 June 2012 and 30 June 2013 respectively. There are no changes in the

originally estimated useful life and residual value for the machine.

Assume a tax rate of 30%.

Required:

Prepare journal entries to account for the above transactions for the years ended 2012 and 2013.

[adapted from: Dagwell, R., Wines, G. & Lambert, C. (2012). Corporate accounting in

Australia: Pearson Australia]