Assessment item 3 Assignment 2 Value: 15% Due date: 28-Sep-2015 Return date: 19-Oct-2015 Submission method options Alternative submission method Task This assessment task consists of four (5) questions. A total of 75 marks are allocated to the questions below, which will then be converted to a mark out of 15%. All workings, when appropriate, must be shown to substantiate your answers. Question 1 [12 marks] Events after the reporting period Boots Ltd is finalising its financial statements for the reporting period ending 30 June 2015. On 20 September 2015, before the financial statements have been finalised and authorised for issue, the company’s directors became aware of the following situations: a) The company owns a factory in Sydney that was completely destroyed by a severe hail storm on 10 July 2015. The factory had a carrying amount in the draft financial statements of $600,000. The factory was insured for $600,000, and Boots Ltd expects to receive this money from the insurer in October 2015. b) On 12 July 2015, the financial cost of inventory shipped from overseas is determined. The inventory was received in June 2015 and the cost was estimated for accounting purposes. The revised cost is $200,000 lower than the prior estimate. c) On 15 July 2015, Smith Ltd, a major customer of Boots Ltd, indicated that it was bankrupt. At this date, Smith Ltd owed $45,000 to Boots Ltd. This amount was owed to Boots Ltd from a sale made to Smith Ltd in June 2015. d) It is discovered, on 18 July 2015, that a divisional manager has been under-depreciating plant and equipment. The motivation of the manager was to maximise the division’s profit figure in order to maximise his bonuses. The carrying amount of the relevant plant and equipment in Boots’ draft financial statements is $2,500,000. An investigation by the company’s internal audit division, presented to Boots’ directors on 25 July 2015, suggests that the plant and equipment has a recoverable amount of $1,500,000. Assume all amounts are material for financial statement purposes. Required: With reference to AASB 110, explain whether the above events will be classified as either adjusting or non-adjusting events after the end of the reporting period, providing reasons for your decision. State the appropriate accounting treatment for each event in Boots Ltd’s 2015 financial statements. Marking Guide - Question 1 Max. marks awarded Classification as adjusting or non-adjusting events 4 Discussion and reasons to support classification decision 4 Appropriate accounting treatment 4 Total 12 Question 2 [16 marks] Sugar Ltd was incorporated on 1 July 2014. The following transactions and events occurred during the year ended 30 June 2015: 1 Aug 2014: Sugar Ltd makes an offer to the public for investors to subscribe for 10,000,000 shares, at an issue price of $3.00 per share, with $1.50 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 $2,000. 31 Aug 2014: Applications close, with applications received for 9,500,000 shares. 2 Sep 2014: Shares are allotted, and the underwriter forwarded the application and allotment money due on the 500,000 shares less their commission. 2 Oct 2014: All allotment money is received. 30 Nov 2014: The call is made, with money due by 31 December 2014. 31 Dec 2014: All call money is received except for holders of 20,000 shares who fail to meet the call. 20 Jan 2015: The shares on which call money was not received are forfeited and sold as fully paid. An amount of $2.60 is received for each share sold. Costs of the forfeiture and reissue amount to $6,000, and are paid. The constitution does allow the refund of any balance in the forfeited shares account after reissue to former shareholders. Required: Prepare the journal entries to record the transactions of Sugar Ltd up to and including that which took place on 20 January 2015. Show all relevant dates, narrations and workings. Marking Guide - Question 2 Max. marks awarded Journal entries 13 Dates 1.5 Workings 1.5 Total 16 Question 3 [17 marks] Accounting for income tax Fresh Ltd commences operations on 1 July 2014 and presents its first statement of profit or loss and other comprehensive income and first statement of financial position on 30 June 2015. 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 2015 $ $ Gross profit 380,000 Other income: Interest revenue 2,000 Government grant (exempt from income tax) 10,000 Expenses: Administration expenses 145,000 Doubtful debts expense 6,000 Salaries 130,000 Rent 26,000 Annual leave 3,000 Entertainment expenses (not tax deductible) 5,000 Warranty expenses 12,000 Depreciation expense – plant 40,000 Insurance 10,000 (377,000) Accounting profit before tax 15,000 Assets and liabilities as disclosed in the Statement of Financial Position as at 30 June 2015 $ $ Assets: Cash 35,000 Inventory 120,000 Accounts receivable 50,000 Less Allowance for doubtful debts (5,000) 45,000 Interest receivable 1,000 Prepaid insurance 5,000 Plant – cost 200,000 Less Accumulated depreciation (40,000) 160,000 Total assets 366,000 Liabilities: Accounts payable 40,000 Provision for warranties 8,000 Rent payable 6,000 Loan payable 200,000 Provision for annual leave 2,000 Total liabilities 256,000 Net assets 110,000 Additional information: • All administration and salaries expenses incurred have been paid as at year end. • Tax deductions for annual leave, warranties, insurance and rent 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. • Interest income is taxed when amounts are received, and not as amounts are accrued. • The plant is depreciated over five years for accounting purposes, but over four years for taxation purposes. • The tax rate is 30%. Required: i) Determine the balance of any current and deferred tax assets and liabilities as at 30 June 2015, in accordance with AASB 112. Show all necessary workings. (14 marks) ii) Prepare the journal entries to record the current tax liability and deferred tax assets and liabilities. (3 marks) Marking Guide – Question 3 Max. marks awarded Determination of taxable income and current tax liability 6 Deferred tax worksheet 8 Journal entries 3 Total 17 Question 4 [15 marks] Property, plant and equipment Storm Ltd commences operations on 1 July 2013, and on this date, acquires two items of plant: Plant A: $120,000 Plant B: $350,000 Both assets are depreciated on a straight-line basis. Plant A has an estimated useful life of 10 years, and an estimated residual value of $20,000. Plant B has an estimated useful life of 5 years, and an estimated residual value of $0. At 30 June 2014, Storm Ltd decides to use the revaluation model for the plant. The fair value of Plant A is $80,000, and the fair value of Plant B is $300,000. The remaining useful life and residual value of each item has not changed. At 30 June 2015, the fair value of Plant A is $75,000, and the fair value of Plant B is $200,000. Assume a tax rate of 30%. Required: Prepare journal entries for Storm Ltd at 1 July 2013, 30 June 2014 and 30 June 2015 to record the above. Show narrations and all relevant workings. Marking Guide - Question 4 Max. marks awarded Journal entries (including narrations) 12.5 Workings 2.5 Total 15 Question 5 [15 marks] Impairment of assets Rosie Ltd has a division that represents a separate cash generating unit. At 30 June 2014, the carrying amounts of the assets of the division, valued pursuant to the cost model, are as follows: Assets: $ Cash 5,000 Plant and equipment 200,000 Less: accumulated depreciation (60,000) Land 300,000 Inventory 30,000 Accounts receivable 35,000 Patents and trademarks 60,000 Goodwill 10,000 Carrying amount of cash generating unit 580,000 The receivables were regarded as collectable, and the inventory’s fair value less costs to sell was equal to its carrying amount. The patents and trademarks have a fair value less costs to sell of $50,000, and the land has a fair value less costs to sell of $280,000. The directors of Rosie estimate that, at 30 June 2014, the fair value less costs to sell of the division amounts to $520,000, while the value in use of the division is $530,000. As a result, management increased the depreciation of the plant and equipment from $30,000 p.a. to $40,000 for the year ended 30 June 2015. By 30 June 2015, the recoverable amount of the cash generating unit was calculated to be $28,000 greater than the carrying amount of the assets of the unit. Required: Determine how Rosie Ltd should account for the results of the impairment test at 30 June 2014 and 30 June 2015, and prepare any necessary journal entries. Provide explanations where appropriate to support your answer. Show all workings. Marking Guide - Question 5 Max. marks awarded Journal entries, calculations and workings for 2014 7.5 Journal entries, calculations and workings for 2015 7.5 Total 15 Rationale This assessment task is designed to assess your understanding of topics 3 to 7, and the following subject learning outcomes: • 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 The assessment rubric for this assessment task is provided below. The detailed allocation of marks for each question has been provided above for your information. Criteria HD D CR PS Question 1: Apply relevant accounting principles in accounting for events after the reporting period. Determine how events after reporting period are to be classified and accounted for without flaw. All key references to AASB 110 are provided. Explanations shown are exemplary and clear. Determine how events after reporting period are to be classified and accounted for, with minor flaws. Most of the key references to AASB 110 are provided. Explanations shown are clear and succinct. Determine how events after reporting period are to be classified and accounted for, with some errors. Many of the key references to AASB 110 are provided. Explanations shown are adequate. Determine how events after reporting period are to be classified and accounted for, with a number of errors. Some references to AASB 110 are provided. Explanations shown are basic. Question 2: Prepare journal entries to account for share issue transactions. All entries made are accurate Dates shown are correct for the transactions. Narrations are shown. Appropriate workings are shown. All entries made are accurate with some minor flaws. Dates shown are correct for the transactions. Narrations are shown. Appropriate workings are shown. Most of the entries made are correct. Dates shown are mostly correct for the transactions. Narrations are shown. Some workings are shown. Most of the entries made but contain errors. Dates shown are mostly correct for the transactions. Narrations are shown but lack detail or are unclear. Some workings are shown but lack detail or are unclear. Question 3: Apply relevant accounting principles in recognising and measuring income tax. Determine current and deferred tax balances without flaw Workings shown are logical and well presented. All journal entries made are accurate. Determine current and deferred tax balances with minor flaws. Workings shown are logical and well presented. All journal entries made are accurate / with minor flaws. Determine current and deferred tax balances with some errors. Workings shown are logical and well presented. Journal entries made contain some errors. Determine current and deferred tax balances with a number of errors made. Workings are shown but contain errors or lack detail. Journal entries made contain some errors. Question 4: Apply relevant accounting principles in accounting for property, plant and equipment. All entries made are accurate. Appropriate workings are shown and accurate. Narrations are shown. All entries made are accurate but with minor flaws. Appropriate workings are shown and accurate. Narrations are shown. All entries made are mostly correct with some errors. Appropriate workings are shown. Narrations are shown. Most entries are made but contain errors. Some workings are shown. Narrations are shown but lack detail or are unclear. Question 5: Apply relevant accounting principles for impairment of assets. Apply the requirements of AASB136 to calculate and account for the impairment of cash generating units, without flaw. All journal entries made are accurate. Explanations and workings presented show mastery of the topic. Apply the requirements of AASB136 to calculate and account for the impairment of cash generating units, with minor flaws. All journal entries made are accurate / with minor flaws. Explanations and workings presented show a thorough understanding of the topic. Apply the requirements of AASB136 to calculate and account for the impairment of cash generating units, with some errors / flaws. Journal entries made contain some errors. Explanations and workings presented shows adequate understanding of the topic. Apply the requirements of AASB136 to calculate and account for the impairment of cash generating units, with a number of errors / flaws. Journal entries made contain some errors. Explanations and workings presented shows a basic understanding of the topic. 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 practicing 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 are 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.
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