Accounts

ASSESSMENT 1

COMPANY ENVIRONMENT & FINANCIAL REPORTING

Question 1 Discussion Questions

a) What are the possible benefits to the company of having a share election scheme?

(

marks)

b) The Solvency Test must be satisfied by the company before the approval of dividend distribution to shareholders. Name and describe the two parts of the Solvency Test. Specify any special conditions that apply to the amounts that must be included when the test calculation are carried out.

(5marks)

c) Visit the website of a company listed on the NZX. Review the company’s corporate governance disclosures and determine whether the company complies with the New Zealand Security Commission’s listed principles of corporate governance.

(5marks)

d) Explain what you understand by the term GAAP. How is it possible for a NZ company to comply with the requirements of GAAP?

(4marks)

e) What is a constitution and it is a requirement under Companies Act 199

for companies to have a constitution? Discuss some of the benefits of having a constitution

(3 marks)

f) Explain some of the responsibilities and consequences of a breach of duties of a director under the provision of Companies Act 1993.

(4 marks)

Question

Company Formation

On 15 March 2

14, High Tech Co. Ltd was formed with a constitution that provided for the issue of preference shares.

On 17 March 2014, 20,000 preference shares and 1

0,000 ordinary shares were offered for subscription. Both classes of shares were fully payable on application. The fair values at this time were: preference

2 and ordinary

¢.

On 20 April 2014 subscription closed with applications having been received for

,000 preference shares and 1

50,000

ordinary shares.

On 30 April 2014, 20,000 preference shares and

150,000

ordinary shares were allotted. The application money on 5,000 preference shares was returned to the unsuccessful applicants.

On 30 May 2014 High Tec Ltd purchased the business of Carlos Smith as a going concern.

Assets

and

Liabilities

taken over were valued as follows:

Land

and

Building

s
$

49,000

Inventory

15,000

Plant

,000

Debtors

1,000

Credit

ors

31,000

The consideration for the purchase was $115,000 to be satisfied in part by the issue of 120,000 ordinary shares to Carlos Smith fully paid up, the balance payable in cash. The fair value of the ordinary shares was determined to be 50¢ per share at this time.

REQUIRED:

1. General Journal entries to record the above transactions. (Narrations are required)

(8marks)

2. The Statement of

Financial

Position Extract as at 30 May 2014.

(7marks)

Question 3 Share Distribution

Profitable Limited has recently made the following decisions regarding distributions to shareholders.

· A dividend of 30 cents per share was declared by Profitable Limited on 1 June 2014

· The directors give the shareholders the option of a cash dividend or a fully paid Bonus issue

· The strike price is $2.00

· By 1 August 2014, the directors are confident that 75% of the shareholders will elect the bonus issue

· The bonus issue is made from

Retained Earnings

and the cash dividend paid on 31 August 2014

· The balance sheet of Profitable Limited prior to the dividend payment is shown below.

Profitable Limited

Statement of Financial Position

as at 30 May 2014

50,000

$6,050,000

Issued and Paid Up Capital				$
2,000,000 shares issued and paid to $2.50	5,000,000
Reserves
General Reserve			50,000
	Revaluation Surplus
	Retained Earnings	950,000
	$6,050,000
This is represented by
Current Asset – Bank	600,000
Non current Assets Current Liabilities	5, 750,000 (300,000)

Required:

(a)
Prepare all journal entries (in general journal form, without narrations) for Profitable Limited relating to the dividend declaration, bonus issue and payment of dividends.

(6marks)

(b)
Prepare the Equity section of the Statement of Financial Position as at 31 August 2014 (including the number of shares issued).

(4 marks)

Question 4 Financial Statements

Following are the financial statements of Choice Ltd as at 31 March 2012.

31,000

35,000

Choice Limited
Statement of Comprehensive Income for the year ended 31 March 2012
		Sales	998,000
Less Cost of Goods Sold:
Opening Inventory	36,000
Plus Purchases	661,000
69 7,000
Less Closing Inventory				35 ,000	662,000
	Gross Profit					336,000
Plus Sundry Income	55,000
391,000
Less Expenses
Selling		49,000
Administration	225,000
Financial	305,000
Net Profit Before Taxation	86,000
Less Taxation	16,000
Profit After Taxation		70 ,000
Plus Retained Earnings Brought forward
Retained Earnings Carried Forward		105,000

Revaluation Surplus

Retained Earnings

105,000

35,000

185,000

18,000

41,000

435,000

Choice Ltd
Statement of Financial Position as at 31 March 2012
Share Capital & Reserves
Paid in Capital
100,000 Ordinary shares fully paid	250,000
Reserves
	80,000
	185,000
Total Equity		435,000
	Current Assets
Accounts Receivable (trade)	150,000
Inventories
Less Current Liabilities
Bank overdraft (secured)
Current long term liabilities (secured)	40 ,000
Accounts payable (trade)	30,000
Taxation Payable	7,000	95,000
90,000
Plus Non-current Assets
Fixed Assets	404,000
Investments in Companies	445,000
535,000
Less Non-current Liabilities
Long Term loans (secured)	100,000

(a) Sundry Income includes:

Dividends received

from Trinity Ltd
500

Sale of a piece of land for $35,000 to the Westmere Developers 20,000

(The book value of the land was $15,000)

(b) Selling Expenses include:

Loss on sale of plant
7,000

Sales manager’s salary
33,000

Advertising
3,000

Audit Fees (paid to DH Auditors)
3,000

Accounting Fees (paid to Y)
3,500

Directors Fees
13,000

Managing Directors Salary
75,000

Lease of Motor Vehicle
15,000

Goodwill written off in full

10,000

Interim Dividend paid
8,000

Administration Managers Salary
40,000

Sundry donations
2,300

Wages
58,300

(d) Financial Expenses include:

Discount Allowed
1,300

Interest on

Bank Overdraft

2,300

Interest on

Loan

and Debentures
20,500

Bad debts written off
4,000

(e) A sales invoice for $30,000 dated 28 March 2012 has not been processed.

(f) The company has the following property, plant and equipment as at 31 March 2012 (before adjustments for the current year).

Land:
This was revalued by $30,000 up to $150,000 on 4 August 2011 by M. K. Valuers (registered valuers)

Buildings:
Cost Price $

200

,000.

Accumulated

Depreciation

, $50,000. A contract has been entered into to extend the building. This work will be carried out during the next financial year and will cost $50,000.

Plant &

Equipment

:
Cost Price $300,000.

Accumulated Depreciation

, $196,000.

(g) On Balance Day the directors declared a final dividend of 12½¢ per share.

(h) During the year 20,000 shares were issued at a fair price of $3 per share.

(i) Provisional Tax paid during the year was $9,000.

REQUIRED:

Prepare the following financial statements in accordance with the requirements of NZ IFRS and the Companies Act 1993:

1. The Statement of Comprehensive Income for the year ended 31 March 2012 (10 marks)

2. The Statement of Changes in Equity for the year ended 31 March 2012, and (5 marks)

3. The Statement of Financial Position as at 31 March 2012, and (12marks)

4. Notes to the Financial Statements to accompany the above financial statements.(3 marks)

Question 5 Cash Flow Statement

Below is summarised Income Statement of Sticky Gums Ltd for the year ended 31 March 2013

Sales

Revenue
301,000
Profit on Sale of Plant	1,000	302,000
Expenses
Cost of goods sold	255,000
Other expenses	23,000
Loss on Sale of Equipment	200	278,200
Net Profit	23,800

Sticky Gums Ltd

Comparative Statement of Financial Position

Current Assets

Accumulated Depreciation

14,000

3,000

148,680

201,530

Plant

Equipment

31-Mar-12	31-Mar-13
	Inventory	56,000	71,130
	Accounts Receivable	45,080	57,800
Prepaid Insurance	3,800	8,000
Non Current Assets
	Land	15,000	20,800
		Plant	23,000	29,000
			Accumulated Depreciation	6,200	16,800	8,500	20,500
	Equipment	14,100	25,200
2,100	12,000	1,900	23,300
	148,680		201,530
Bank Overdraft		3,000	14,290
	Accounts Payable	77,900	101,000
Mortgage Payable		14,000
Accrued Expenses	2,500
Contributed Capital	50,000	60,000
Retained Profits	780	9,740
During the year following as been sold
Cost	Carrying Amount at the Time of Sale
4000	1000
2500	550

REQUIRED:

Prepare Cash Flow Statement for Sticky Gums Ltd for the year ended 31 March 2013 (show workings)

Question 6
ANALYSIS AND INTERPRETATION

CASE SCENARIO

Good People Ltd has registered with the objective of providing its shareholders with the maximum total return in New Zealand. They strongly believe in Environmental, Social and Economic Reporting as well. The Board of Directors is exploring the possibilities of investing a substantial sum of money in Briscoe

Group

Ltd. They have approached you with the task of analyzing the performance and prospects of the company. They expect you to make a recommendation to invest or not to invest in this company, along with the grounds for your recommendations.

PART A: ANALYSIS

(20 marks)

Using the current year’s financial report from Briscoe Group Ltd and information researched from other sources, you are required to undertake an analysis of the cash flow, financial performance and financial position of the company.

A copy of Briscoe Group Ltd’s annual report for the year ending 30 January 2011, is available on the web page of the company:

http://www.briscoegroup.co.nz

Present a table analyzing the data of Briscoe Group Ltd. You are NOT required to do any interpretation at this stage. Where possible your calculations are to be prepared over three (3) years so trends can be identified. You must show all formulas used and workings. Ensure you label your calculations carefully. You are required to group your calculations into the following headings, and must incorporate segment data where possible.

i. Financial Stability (Liquidity and Leverage)

6 marks

ii. Profitability

10 marks

iii. Asset Utilization

2 marks

iv. Investment

2 marks

PART B: INTERPRETATION

In this part of the assignment you are required to prepare a report for Good People Ltd recommending whether the Good People Limited or any investor should invest in Briscoe Group Ltd or not and why. You have to interpret your ratio calculations of the annual reports of Briscoe Group Ltd.

Also you are also required to research information relevant to this company using the calculations and evidence completed in Part 1 and the information provided in the company annual report.

Look for non-financial reporting measures also. For the environmental and social accounting section a comparison should be made with other similar companies that are possibly more active in this area such as The Warehouse.

Strengths or weaknesses of the company should be identified under each area of analysis. Any opportunities or threats to the company should also be identified. Your recommendation must fully explain why you have made this decision.

Your report should include the following:

i. Executive summary

(2 marks)

ii. Introduction

(3 marks)

A short introduction to the company, its main economic activities and the purpose of the report briefly

iii. Finding and Discussion

(25 marks)

· You should interpret financial and non financial data from the findings in Part A and your research.

· This should tell the story behind figures which should include the following;

· activities the company has been involved in during the year that produced the financial results;

· causes for the trends in the financial results;

· evidence that the company is or is not profitable, well managed, and financially stable;

· evidence that the company is or is not able to contribute to the community/committed to a sustainable future/likely to provide stable employment opportunities/will provide a good return for shareholders

iv. Conclusion & Recommendation

(5 marks)

· Make a statement about the recommended investment decision. Include sufficient evidence to support this recommendation

v. References

(2 marks)

· In APA format

vi. Presentation

(3 marks)

USEFUL RESOURCES

1. Annual Report for Briscoe Group Ltd (year ended 30 January 2011)

A copy of the current Annual report along with other information may be downloaded from the company’s website:

http://www.briscoegroup.co.nz/

2. Internet addresses that could prove useful:

NZ Business Herald

http://www.nzherald.co.nz/

NZ Stock Exchange

http://www.nzx.com/

NZ Institute of Chartered Accountants

http://www.nzica.com/

NZ search page:

http://www.searchnz.co.nz/

3. The New Zealand Company Register contains all company listings and key information for comparison purposes.

http://www.companies.govt.nz/

Question 7
FINANCIAL REPORTING AND BUSINESS COMBINATION

Current Assets – Inventories
9 marks

Comfort Wear Ltd holds three lines of inventory. The total production costs of each type of inventory on hand at the 31 March 2012 are shown in the table below. Apart from production costs, estimates of future packaging costs and transportation costs, both reported as selling costs, are also provided.

Product Line	Production Costs $(000)	Transport Costs $(000)	Packaging Costs $(000)	Sales Proceeds $(000)
Comfort – baby	40	4	6	70
Comfort – youth	60		8	72
Comfort – uni	25	2	3	35

REQUIRED

a) Determine the closing value of inventory for Comfort Wear Ltd at 31 March 2012

(3 marks)

b) Explain how the financial reporting standards have been applied in determining the closing value of inventory. Support you answer with references to the appropriate financial reporting standard.

(3 marks)

c) Comfort Wear Ltd is required to disclose the cost of inventories that it sells during the period. Provide two references from the financial reporting standards that support this requirement.
(3 marks)

Question 8

Events after the reporting period

A. Explain the difference between an adjusting and non adjusting events. Give 3 examples of this.

(3 marks)

B. The 31 March 2012 financial statements of Remix Limited have been prepared in draft form. The statements are due to be approved by the directors by 20 June 2012 and have an authorisation date of 30 June 2012. Subsequent to the end of the reporting period the following events occur.

i) A judgment is handed down in the New Zealand High Court on 2 April 2012 in relation to a 2007 product liability case bought by a customer against Remix Limited. This judgment rendered the company liable for court costs of $250,000 and compensation totaling $300,000.

ii) On 4 April 2012 the government enacted legislation altering the company tax rate from 39cents in the dollar to 43 cents in the dollar for all tax returns from 1 July 2012.

iii) On 20 April 2012 a major customer is lost. No amount was owed at the end of the reporting period,

iv) On 1 May , the company entered into a contract to purchase 25 per cent of the issued capital of a competitor for $950,000

v) On 20 June 2012 the company’s one of the stores was destroyed by earthquake in Christchurch. The total carrying value of this store, was $

350,000

. This store was uninsured.

vi) On 21 June 2012, the final cost of inventory shipped from overseas was determined. The inventory was received on 22 May 2012 and the cost had been estimated for recording purposes. The revised cost was $1,00,000 greater than prior estimate

vii) A major error amounting to $

70,000

was discovered in the closing stock figure for the year ending on 30 June 2012

viii) A contingent liability for $135,000 for holiday pay accrued by employees at balance date, payable sometime in the future is included in the Notes to Financial Statements.

REQUIRED

Discuss the appropriate accounting treatment for the above situations in the 31 March 2012 financial statements, making reference to the appropriate accounting standards.

Question 9
Intangibles, Provisions and Contingencies

Part A

Amazing Carpets Ltd has been conducting research to develop an innovative method of carpet weaving. By 30 September 2012 (balance date) the company had spent $40,000 on salaries and materials to conduct the early research. The company has developed a product which it believes is marketable and is currently being tested. The testing cost $20,000. Another $14,000 was paid for a market research company to determine the extent of the market for the new carpet. Both these amounts were paid by 30 September 2012. The company has set aside sufficient finance to continue with the process through to a product launch some time in the new year.

REQUIRED

Making reference to the appropriate accounting standards,

a. Advise Amazing Carpets Ltd how the above costs should be treated in the 2012 financial statements. Make reference to relevant sections in NZIAS 38.
(6 marks)

b. Explain how any proposed research and development costs in the 2013 year will impact on the 2013 profits of the company.
(2 marks)

Part B

iCar Manufactures is a manufacturer of cars and gives warranties at the time of sale to purchasers of the cars. Under the terms of the warranty, iCar Manufacturers undertakes to make good, by repair or replacement, manufacturing defects that become apparent within a period of three years.

REQUIRED:

Explain whether a liability in the form of a provision should be recorded.

(2 marks)

Question 10 Sustainable Development Reporting

a) Briefly explain the meaning of Sustainability in relation to corporate responsibility.

(2 marks)

b) Discuss what is triple bottom line reporting.

(4 marks)

c) Give four examples of the types of items that might be reported in a Sustainable Development Report for an entity like School of Business and Government.

(4 marks)

d) Outline two factors that might motivate businesses to report on Sustainable Development.

(2 marks)

Question 11 Property, Plant And Equipment

All figures in this question are considered to be GST exclusive unless otherwise stated.

Part A – Revision of Depreciation

A printing machine was purchased on 1 April 2010 for $150,000 by Eric Printery. It had an estimated residual value of $30,000 and an economic life of five years. The machine was depreciated using the straight line method. On 1 April 2012 the machine was upgraded at a cost of $22,000. The upgrade enabled production to increase by 50%. The machine’s economic life was not expected to change but the residual value was expected to increase to $40,000. The firm has a monthly depreciation policy and balances its accounts on 31 March 2013.

REQUIRED

Calculate the accumulated depreciation on the machine at the end of the first three years of its business life. Show your working.

(4 marks)

Part B – Disposal of Assets

On 1 July 2010, Cool Traders purchased a copying machine for $13,500 (including GST).

The firm applied a 20% depreciation rate based on diminishing value.

On 1 July 2012, management decided that it was no longer adequate and a new machine is required.

The new copying machine was purchased on 1 October 2012 for $21,375 (including GST) and the old machine was accepted as a trade in at a value of $4,000 (excluding GST) on the same day. The balance was paid in cash on 31 October 2012.

The same depreciation policy was applied to the new system as to the old system. The firm balances it accounts on 30 June each year.

REQUIRED

a) Prepare General Journal entries to record the purchase of the new copying machine and the disposal of the old copying machine. Show your working.

(7 marks)

Depreciation schedule:

b) Prepare the ledger account for the Accumulated Depreciation on the Copying Machine (both old and new machines) as it would appear in the General Ledger for the year ended 30 June 2013.
(4 marks)

Question 12
Accounting for Business Combination

(i) Parent Limited acquired 100% interest in

Subby Limited

on 1 April 2009. The payment for the interest in Subby Limited represented the fair value of the consideration transferred. At that date the contributed equity and reserves of Subby Limited were:

Contributed equity

400,000

Retained earnings

260,000

$660,000

At the date of acquisition all assets were considered to be fairly valued.

Details of the transactions between the Parent Limited and Subby Limited for the year ended 31 March 2013 are as follows:

(ii) Parent expects goodwill on acquisition to be impaired evenly over 5 years. However the management of Parent Limited believes that goodwill acquired was impaired by $5,000 in the current reporting period.

(iii) On 1 August 2010 Parent Limited lent Subby Limited $15,000 at an interest rate of 6% per annum. Interest is paid on the last day of each month. At 31 March 2013, no principal has been repaid and there is no interest in arrears.

(iv) On 1 June 2012, Parent Limited sold Subby Limited an item of plant for $120,000 when its carrying value in Parent Limited’s financial statement was $100,000 (cost $140,000, accumulated depreciation $40,000). The plant is assessed as having a remaining useful life of six years from the date of sale. Both firms use the straight line method of depreciation.

(v) The opening inventory of Parent Limited as at 1 April 2012 included inventory acquired from Subby Limited for $95,000 that had cost Subby Limited $81,000 to produce.

(vi) During the year Subby Limited sold $101,000 in inventory to Parent Limited. The closing inventory of Parent Limited includes inventory acquired form Subby Limited for $

68,400

. This had cost Subby Limited $53,200 to produce.

(vii) Subby Limited paid a dividend of $

177,000

during the financial period.

(viii) Subby Limited paid $

71,000

in management fees to Parent Limited.

REQUIRED

a) Prepare the Group General Journal entries (with dates and narrations) for (i) – (viii) above the year ended 31 March 2013 only. Assume -tax rate of 30%.

(20marks)

b) Complete the consolidation worksheet below so the consolidated financial statements for the group for the year ended 31 March 2013 can be prepared.

(15marks)

Sales

Gross Profit

50,000

10,000

70,000

49,000

35,000

71,000

177,000

Parent Limited

Subby Limited

Debit

Credit

Group

Accounts Receivable

Inventory

15,000

Land

Plant

Accumulated Depreciation

Accounts Payable

50,000

80,000

15,000

400,000

Retained earnings

601,000

469,000

2,035,800

1,326,800

Elimination Entries
	Parent Limited		Subby Limited		Debit	Credit	Group
1,430,000	1,260,000
Less Cost of goods sold	-1,028,000	-576,000
402,000	684,000

Other income:
Interest received
Dividends received		177,000					0
Management Fee Revenue		71,000
Gain on Sale Plant
770,000	694,000
LESS Expenses:
Depreciation	113,600
Interest Expense	60,000
Other Expenses	203,200	145,000
Admin Expenses	97,800	68,400
Management Fee Expense
Total Expenses	410,000	433,000
Net Profit Before Tax	360,000	261,000
LESS Tax Paid	123,000	84,400
Net Profit after Tax	237,000	176,600
Less Dividend	274,800
Opening Balance Retained Earnings	638,800	469,400
Closing Balance Retained Earnings		601,000		4 69,000
(7 marks)
Assets
Bank	119,000	47,000
108,600	124,800
195,000	69,000
Investment in Subby Ltd	722,000
Loan to Subby Ltd
448,000	652,000
369,700	361,600
-111,500	-1 82,600
Building	230,000	350,000
-60,000	-95,000
Total Assets		2,035,800		1,326,800
Liabilities
175,200	144,800
Tax Payable	82,600
Mortgage	26,000
Loan from Parent Limited
Loan	347,000	222,000
Owner’s Equity
Contributed Equity	750,000

(8marks)

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Accounts

Profitable Limited

Statement of Financial Position

(6marks)

(4 marks)

Question 7 FINANCIAL REPORTING AND BUSINESS COMBINATION Current Assets – Inventories 9 marks

Question 9 Intangibles, Provisions and Contingencies

Question 10 Sustainable Development Reporting

All figures in this question are considered to be GST exclusive unless otherwise stated.

Question 7
FINANCIAL REPORTING AND BUSINESS COMBINATION

Current Assets – Inventories
9 marks

Question 9
Intangibles, Provisions and Contingencies