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ACCT6003 Financial Accounting Processes

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Questions:

Scenario 1 Financing Company Operations

Applications were received for 600 000 shares by 15 October, of which the full issue price of $5 was paid for by 100 000 prospective investors.

On 16 October, the surplus application money, i.e. $2 per share, was returned to 100 000 unsuccessful applicants who only paid the application money as stated in the company’sconstitution. Shares were allotted in full to those applicants who paid the full amount and on a usual basis to the other applicants. The underwriting fee and other share issue costs of $8 000 were paid on 30 October. All outstanding allotment money was received by the due date. On 1 December, the final call was made payable on 15 December. All money was received by the due date except for 20 000 applicants who fail to pay. The Directors decided to forfeit these shares on 22 December with the balance of Forfeited Share Liability account being returned to the original applications on 22 December.

Required:

  1. Prepare the journal entries to record the above transactions of ChiHerbal Ltd.
  2. Prepare the equity section of ChiHerbal’s statement of financial position once the above transactions have been recorded.

Scenario 2 Property, Plant and Equipment

On 31 December 2015, the company’s directors decided to change the basis of measuring the equipment from the cost model to the revaluation model. Machine A was revalued to $190 000 with an expected useful life of 6 years, and Machine B was revalued to $165 000 with an expected useful life of 5 years.

At 30 June 2016, Machine A was assessed to have a fair value of $173 000 with an expected useful life of 5 years, and Machine B’s fair value was $146 500 with an expected useful life of 4 years.

Required:

Prepare general journal entries to record the above transactions.

Scenario 3 Leases

On the 1 July 2015, ChiHerbal Ltd entered into a lease agreement with Darlington Ltd to lease a specialised machine for four years. The machine was used in filtering water. The lease was classified as a finance lease. Darlington Ltd incurred costs of $3 643 to draw up the lease contract.

The machine had a fair value of $210 000 at the inception of the lease. The machine was expected to have a residual value of $15 000 at the end of the lease term when it was returned to Darlington Ltd, at which time it was sold for $10 000. ChiHerbal agreed to pay 50% of any shortfall in the residual value.

Four annual payments would be made on the 1 July each year, each of which was $66 000 per annum. This amount included $6 000 that ChiHerbal Ltd was required to pay Darlington Ltd to cover the annual insurance and maintenance costs of the machine. Darlington Ltd requires a return of 12% on the investment in the leased asset. Balance date for both companies is 30 June.

Required:

  1. Show calculations to prove that the interest rate implicit in the lease is 12%.
  2. Prepare the schedule of lease payment and the general journal entries in the books of ChiHerbal Ltd, i.e. the lessee, to account for the lease from the inception of the lease until the leased asset was returned to the lessor.
  3. Prepare the schedule of lease receipt and the general journal entries in the books of Darlington Ltd, i.e. the lessor, to account for the lease from the inception of the lease until the leased asset was returned to the lessor.

Scenario 4 Intangible Assets

ChiHerbal Ltd planed to develop a product that protects its lavender farms from weeds, pests and fungal diseases. The product could also be manufactured and sold by the company should there be market demand. In 2012, the company conducted preliminary search and anticipated a potential product that may require synthesising a combination of specific chemicals.

During 2015, ChiHerbal developed a formula to synthesise three chemicals in a concentrated form, which would make the new product both suitable for use on its lavender farms and commercially viable for an external market. The sales department also confirmed the existence of a market for the new product. ChiHerbal planned to start production in 2016. The costs incurred in 2015 totalled $3 million.

Required:

Explain how ChiHerbal should account for the costs in 2013, 2014, and 2015. Journal entries are required.

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