Question:
1. Explain the regulatory framework that governs financial reporting in Australia with emphasis on the Conceptual
Framework for financial reporting
3. Apply accounting principles and standards when accounting for non-current assets, revenue and liabilities and recognise the judgements required in a range of diverse business contexts
5. Differentiate between shares and debentures and apply appropriate accounting procedures
assignment Part 2 Questions
Assume you were the accountant of ChiHerbal Ltd, address the requirements of the following independent scenarios for the company.
Scenario 1 Financing Company Operations
On 1 July 2017, ChiHerbal Ltd was registered and offered 500,000 ordinary shares to the public at an issue price of $7, payable as follows. As per the company’s constitution, all surplus money from application would be transferred to allotment and/or calls accounts.
$3 on application (due by 1 August 2017)
$2.5 on allotment (due by 30 August 2017)
$1.5 on Call 1 (due by 15 June 2018)
$1 on Call 2 (due by 30 July 2018)
Application has been closed and by 1 August 2017, 600,000 shares have been applied for of which applicants for 100,000 shares forwarded the full $8 per share, and the reminder paid application money only.On 15 August, directors decided to allot shares in full to applicants who had paid the full amount and to all remaining applications on a pro rata basis.The cost of publishing prospectus and stamp duty ($29,000) was also paid on 15 August. Other legal fees of $7,000 were paid on this date too.
All outstanding allotment money was received by the due date above.The Call 1 was made on 1 May 2018 with money due by 15 June. Subsequently Call 2 was made on 1 July 2018 with money due by 30 July 2018. All money was received on the due dates except for the holder of 15,000 shares who failed to meet both call 1 & 2. On 1 September 2018, as
provided for in the constitution, the directors decided to forfeit these shares. They were reissued, on 15 September 2018, as paid to $8 for $6 cash with a brokerage fee of $4,000. The balance of the forfeited shares account (after the reissuing share costs) was returned to the former shareholder on 30 September 2018.
cenario 2 Property, Plant and Equipment
The end of the reporting period for ChiHerbal Ltd is 30 June. The company depreciates all depreciable assets using the straight-line method.
Answer:
|
In the books of ChiHerbal Ltd.
|
|
Journal Entries
|
| |
|
|
|
Dr.
|
Cr.
|
|
Date
|
Particulars
|
L.F
|
Amount
|
Amount
|
| |
|
|
|
|
|
|
01-08-2017
|
Bank A/c.
|
Dr.
|
|
$23,00,000
|
|
|
|
To,
|
Share Application A/c.
|
|
|
$23,00,000
|
|
|
(Being application money received for 1,00,000 shares @$8.00 shares and for 5,00,000 shares @$3.00 per share)
|
|
|
|
|
|
|
|
|
|
|
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15-08-2017
|
Share Application A/c.
|
Dr.
|
|
$15,00,000
|
|
|
|
To,
|
Share Capital A/c.
|
|
|
$15,00,000
|
|
|
(Being application money for 5,00,000 shares @$3.00 shares transferred to share capital and balance amount alloted on pro-rata basis)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Stamp Duty A/c.
|
Dr.
|
|
$29,000
|
|
|
|
Legal Fees A/c.
|
Dr.
|
|
$7,000
|
|
|
|
To,
|
Bank A/c.
|
|
|
$36,000
|
|
|
(Being cost of stamp duty and legal fees paid)
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Allotment A/c.
|
Dr.
|
|
$12,50,000
|
|
|
|
To,
|
Share Capital A/c.
|
|
|
$12,50,000
|
|
|
(Being allotment money due for 5,00,000 shares @ $2.5 per share)
|
|
|
|
|
|
|
|
|
|
|
|
30-08-2017
|
Bank A/c.
|
Dr.
|
|
$7,00,000
|
|
|
|
Share Application A/c.
|
Dr.
|
|
$5,50,000
|
|
|
|
To,
|
Share Allotment A/c.
|
|
|
$12,50,000
|
|
|
(Being the balance allotment money for all shares received duly and the balance transferred from share application fund)
|
|
|
|
|
|
|
|
|
|
|
|
01-05-2018
|
Share 1st Call A/c.
|
Dr.
|
|
$7,50,000
|
|
|
|
To,
|
Share Capital A/c.
|
|
|
$7,50,000
|
|
|
(Being 1st call money due for 5,00,000 shares @ $1.5 per share)
|
|
|
|
|
|
|
|
|
|
|
|
15-06-2018
|
Bank A/c.
|
Dr.
|
|
$5,77,500
|
|
|
|
Share Application A/c.
|
Dr.
|
|
$1,50,000
|
|
|
|
Calls-in-Arrear A/c.
|
Dr.
|
|
$22,500
|
|
|
|
To,
|
Share 1st Call A/c.
|
|
|
$7,50,000
|
|
|
(Being all the due call money received except 15,000 shares and the balance amount transferred from share application fund)
|
|
|
|
|
|
|
|
|
|
|
|
01-07-2018
|
Share 2nd Call A/c.
|
Dr.
|
|
$5,00,000
|
|
|
|
To,
|
Share Capital A/c.
|
|
|
$5,00,000
|
|
|
(Being 2nd call money due for 5,00,000 shares @ $1 per share)
|
|
|
|
|
|
|
|
|
|
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|
30-07-2018
|
Bank A/c.
|
Dr.
|
|
$3,85,000
|
|
|
|
Share Application A/c.
|
Dr.
|
|
$1,00,000
|
|
|
|
Calls-in-Arrear A/c.
|
Dr.
|
|
$15,000
|
|
|
|
To,
|
Share 2nd Call A/c.
|
|
|
$5,00,000
|
|
|
(Being all the due call money received except 15,000 shares and the balance amount transferred from share application fund)
|
|
|
|
|
|
|
|
|
|
|
|
01-09-2018
|
Share Capital A/c.
|
Dr.
|
|
$1,20,000
|
|
|
|
To,
|
Calls-in-Arrear A/c.
|
|
|
$37,500
|
|
|
To,
|
Share Forfeiture A/c.
|
|
|
$82,500
|
|
|
(Being 15,000 shares forfeited duly)
|
|
|
|
|
|
|
|
|
|
|
|
15-09-2018
|
Bank A/c.
|
Dr.
|
|
$90,000
|
|
|
|
Share Forfeiture A/c.
|
Dr.
|
|
$30,000
|
|
|
|
To,
|
Share Capital A/c.
|
|
|
$1,20,000
|
|
|
(Being 15,000 shares forfeited shares re-issued at $6 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
Brokerage Fees A/c.
|
Dr.
|
|
$4,000
|
|
|
|
To,
|
Bank A/c.
|
|
|
$4,000
|
|
|
(Being brokerage fees paid for reissue of shares)
|
|
|
|
|
|
|
|
|
|
|
|
30-09-2018
|
Share Forfeiture A/c.
|
Dr.
|
|
$52,500
|
|
|
|
To,
|
Brokerage Fees A/c.
|
|
|
$4,000
|
|
|
To,
|
Bank A/c.
|
|
|
$48,500
|
|
|
(Being the balance of forfeited shares returned to the former shareholders)
|
|
|
|
|
|
|
|
|
|
|
|
Particulars
|
Total
|
100000 shares
|
Balance Shares
|
|
|
|
|
|
|
Total Money Received on Application
|
$23,00,000
|
$8,00,000
|
$15,00,000
|
|
|
|
|
|
|
Share Application
|
$15,00,000
|
$3,00,000
|
$12,00,000
|
|
Share Allotment
|
$5,50,000
|
$2,50,000
|
$3,00,000
|
|
Share 1st Call
|
$1,50,000
|
$1,50,000
|
|
|
Share 2nd Call
|
$1,00,000
|
$1,00,000
|
|
|
|
|
|
|
|
Total Share Capital
|
$23,00,000
|
$8,00,000
|
$15,00,000
|
Part 2 Property, plant & equipment
| |
|
|
|
Dr.
|
Cr.
|
|
Date
|
Particulars
|
L.F
|
Amount
|
Amount
|
|
|
|
|
|
|
|
|
01-04-2017
|
Truck A A/c.
|
|
|
$90,000
|
|
|
|
|
Cash A/c.
|
|
|
$90,000
|
|
|
(Being Truck A purchased on cash)
|
|
|
|
|
|
|
|
|
|
|
|
30-06-2017
|
Depreciation A/c.
|
|
|
$4,000
|
|
|
|
|
Accum. Dep. - Truck A A/c.
|
|
|
$4,000
|
|
|
(Being depreciation charged on Truck A)
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment A/c.
|
|
|
$1,40,000
|
|
|
|
|
Cash A/c.
|
|
|
$1,40,000
|
|
|
(Being equipment purchased on cash)
|
|
|
|
|
|
|
|
|
|
|
|
31-08-2017
|
Motor Vehicle Expenses A/c.
|
|
|
2500
|
|
|
|
|
Cash A/c.
|
|
|
2500
|
|
|
(Being cash paid for truck A's transmission reapirs and oil change)
|
|
|
|
|
|
|
|
|
|
|
|
01-09-2017
|
Depreciation A/c.
|
|
|
$2,333
|
|
|
|
|
Accum. Dep. - Equipment A/c.
|
|
|
$2,333
|
|
|
(Being depreciation charged on equipment)
|
|
|
|
|
|
|
|
|
|
|
|
|
Accum. Dep. - Equipment A/c.
|
|
|
$2,333
|
|
|
|
|
Equipment A/c.
|
|
|
$2,333
|
|
|
(Being accumulated depreciation depreciation written off)
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on Revaluation (OCI) A/c.
|
|
|
$22,667
|
|
|
|
|
Equipment A/c.
|
|
|
$22,667
|
|
|
(Being value of equipment decreased)
|
|
|
|
|
|
|
|
|
|
|
|
01-03-2018
|
Depreciation A/c.
|
|
|
$10,667
|
|
|
|
|
Accum. Dep. - Truck A A/c.
|
|
|
$10,667
|
|
|
(Being depreciation charged on Truck A)
|
|
|
|
|
|
|
|
|
|
|
|
|
Accum. Dep. - Truck A A/c.
|
|
|
$14,667
|
|
|
|
|
Truck A A/c.
|
|
|
$14,667
|
|
|
(Being accumulated depreciation on truck A written off)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash A/c.
|
|
|
59000
|
|
|
|
Loss on Sale of Asset A/c.
|
|
|
$16,333
|
|
|
|
|
Truck A A/c.
|
|
|
$75,333
|
|
|
(Being truck A sold for cash)
|
|
|
|
|
|
|
|
|
|
|
|
30-06-2018
|
Depreciation A/c.
|
|
|
$11,979
|
|
|
|
|
Accum. Dep. - Equipment A/c.
|
|
|
$11,979
|
|
|
(Being depreciation charged on equipment)
|
|
|
|
|
|
|
|
|
|
|
|
|
Accum. Dep. - Equipment A/c.
|
|
|
$11,979
|
|
|
|
|
Equipment A/c.
|
|
|
$11,979
|
|
|
(Being accumulated depreciation depreciation written off)
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment A/c.
|
|
|
$16,979
|
|
|
|
|
Gain on Revaluation (OCI) A/c.
|
|
|
$16,979
|
|
|
(Being value of equipment increased)
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Revaluation Surplus A/c.
|
|
|
$5,687
|
|
|
|
|
OCI Summary A/c.
|
|
|
$5,687
|
|
|
(Being net loss on revaluation transferred to equity reserve)
|
|
|
|
|
Depreciation Schedule for Truck A:
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Date
|
Opening Value
|
Useful Life
|
Residual Value
|
Depreciation p.a.
|
Period p.a.
|
Total Depreciation
|
Closing Balance
|
Fair Value/Selling Price
|
Gain/Loss
|
|
|
|
|
|
|
(in months)
|
|
|
|
|
|
01-04-2017
|
$90,000
|
5
|
$10,000
|
$16,000
|
0
|
$0
|
$90,000
|
$0
|
|
|
30-06-2017
|
$90,000
|
5
|
$10,000
|
$16,000
|
3
|
$4,000
|
$86,000
|
$0
|
|
|
01-03-2018
|
$86,000
|
5
|
$10,000
|
$16,000
|
8
|
$10,667
|
$75,333
|
$59,000
|
-$16,333
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Depreciation Schedule for Equipment:
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Date
|
Opening Value
|
Useful Life
|
Residual Value
|
Depreciation p.a.
|
Period p.a.
|
Total Depreciation
|
Closing Balance
|
Fair Value/Selling Price
|
Gain/Loss on Revaluation
|
|
|
|
|
|
|
(in months)
|
|
|
|
|
|
30-06-2017
|
$1,40,000
|
10
|
$0
|
$14,000
|
0
|
$0
|
$1,40,000
|
$0
|
$0
|
|
01-09-2017
|
$1,40,000
|
10
|
$0
|
$14,000
|
2
|
$2,333
|
$1,37,667
|
$1,15,000
|
-$22,667
|
|
30-06-2018
|
$1,15,000
|
8
|
$0
|
$14,375
|
10
|
$11,979
|
$1,03,021
|
$1,20,000
|
$16,979
|
Part 3: LeaseRequirement a:
|
Date
|
Annual Payment
|
Interest Expense
|
Liability Reduction
|
Liability Balance
|
|
|
|
|
|
|
|
01-07-2017
|
|
|
|
$32,521
|
|
01-07-2017
|
$8,000
|
|
$8,000
|
$24,521
|
|
01-07-2018
|
$8,000
|
$2,206.92
|
$5,793.08
|
$18,728.31
|
|
01-07-2019
|
$8,000
|
$1,685.55
|
$6,314.45
|
$12,413.86
|
|
01-07-2020
|
$8,000
|
$1,117.25
|
$6,882.75
|
$5,531.10
|
|
01-07-2021
|
$6,029
|
$497.80
|
$5,531.10
|
$0.00
|
|
In the books of Chi Herbal Ltd.
|
|
Journal Entries
|
|
|
|
|
|
Dr.
|
Cr.
|
|
Date
|
Particulars
|
L.F
|
Amount
|
Amount
|
|
|
|
|
|
|
|
|
01-07-2017
|
Lease Liability A/c.
|
Dr.
|
|
$8,000
|
|
|
|
To,
|
Cash A/c.
|
|
|
$8,000
|
|
|
|
|
|
|
|
|
30-06-2018
|
Depreciation Expense A/c.
|
Dr.
|
|
$6,072
|
|
|
|
To,
|
Accum. Depreciation A/c.
|
|
|
$6,072
|
|
|
|
|
|
|
|
|
01-07-2018
|
Lease Liability A/c.
|
Dr.
|
|
$5,793
|
|
|
|
Interest Expense A/c.
|
Dr.
|
|
$2,207
|
|
|
|
To,
|
Cash A/c.
|
|
|
$8,000
|
|
|
|
|
|
|
|
|
30-06-2019
|
Depreciation Expense A/c.
|
Dr.
|
|
$6,072
|
|
|
|
To,
|
Accum. Depreciation A/c.
|
|
|
$6,072
|
|
Date
|
Annual Payment
|
Interest Income
|
Asset Reduction
|
Asset Balance
|
|
|
|
|
|
|
|
01-07-2017
|
|
|
|
$35,322
|
|
01-07-2017
|
$8,000
|
|
$8,000
|
$27,322
|
|
01-07-2018
|
$8,000
|
$2,458.98
|
$5,541.02
|
$21,780.98
|
|
01-07-2019
|
$8,000
|
$1,960.29
|
$6,039.71
|
$15,741.27
|
|
01-07-2020
|
$8,000
|
$1,416.71
|
$6,583.29
|
$9,157.98
|
|
01-07-2021
|
$9,982
|
$824.22
|
$9,157.98
|
$0.00
|
|
In the books of Cessnock Ltd.
|
|
Journal Entries
|
| |
|
|
|
Dr.
|
Cr.
|
|
Date
|
Particulars
|
L.F
|
Amount
|
Amount
|
|
|
|
|
|
|
|
|
01-07-2017
|
Cash A/c.
|
Dr.
|
|
$8,000
|
|
|
|
To,
|
Lease Asset A/c.
|
|
|
$8,000
|
|
|
|
|
|
|
|
|
30-06-2018
|
Depreciation Expense A/c.
|
Dr.
|
|
$4,617
|
|
|
|
To,
|
Accum. Depreciation A/c.
|
|
|
$4,617
|
|
|
|
|
|
|
|
|
01-07-2018
|
Cash A/c.
|
Dr.
|
|
$8,000
|
|
|
|
To,
|
Interest Income A/c.
|
|
|
$2,459
|
|
|
To,
|
Lease Asset A/c.
|
|
|
$5,541
|
|
|
|
|
|
|
|
|
30-06-2019
|
Depreciation Expense A/c.
|
Dr.
|
|
$4,617
|
|
|
|
To,
|
Accum. Depreciation A/c.
|
|
|
$4,617
|
|
|
|
|
|
|
|
Part 4: Intangible Assets
Introduction
The assessment is based on the business of ChiHerbal Ltd which in engaged in business of trading of goods with the customers and specializes in online sales of the product. The business has developed an online sales teams which can facilitate holographic images of the products which the customers are interest to purchase. The project has been delayed a bit due to some errors detected and is again at its testing stage. The requirement of the assessment is to analyze the provisions of AASB 138 Intangible assets and apply the same for identifying the intangible assets and expenses portion from the development which is undertaken by the business of ChiHerbals ltd.
Discussion
As per the provisions of AASB138, intangible assets are identified on the basis of two criteria which is the assets should be separate from the entity and the same is capable of being sold, rented and leased. The other condition is that the asset should arise due to contractual or some legal right. In the case of ChiHerbals ltd, the business has developed software for improving the sales of the business and also thereby the profitability of the business.
Moreover, assets should be recognized if the economic benefits which are associated with the assets is probable and can be accurately measured. As per para 8 of AASB 138, Development can be defined as the application of research findings, knowledge or plan for the production of new or sustainable improved materials before the start of the use for the asset (Crema & Nosella, 2014). The management of ChiHerbals ltd has developed a technology which includes software development expenses, consultant’s fees and computer equipment.
The provisions of AASB 138 states that Selective Capitalization approach is considered by this standard for the purpose of initial recognition of the development costs of the business. As per this approach a part of the expenditure which is undertaken by the business are to be treated as intangible assets and another part of the expenses can be treated as expenses of the business (Su & Wells, 2015). As per the case which is provided on ChiHerbals ltd, the software expenses which are undertaken by the management is to be capitalized or treated as intangible assets of the business whereas the consultant’s fee which is undertaken by the business is to be treated as an expense of the business and the same is to be disclosed in the annual reports of the business as per the disclosure requirements of AASB 138.
Conclusion
Thus, from the above discussion it is clear that the developmental expenditure which is undertaken by the business of ChiHerbals Ltd related to software expenses is to be capitalized or treated as intangible assets of the business. The consultant’s fees is to be considered as a part of expenditure of the business and the same should be shown in statement of profit and loss account of the business.
Reference
Crema, M., & Nosella, A. (2014). Intangible assets management and evaluation: evidence from SMEs. Engineering Management Journal, 26(1), 8-20.
Su, W. H., & Wells, P. (2015). The association of identifiable intangible assets acquired and recognised in business acquisitions with postacquisition firm performance. Accounting & Finance, 55(4), 1171-1199.
