Assignment.Fundamental Accounting Equation
Unit Name: Financial Accounting
Anticipated writing time: TWO (2) HOURS
Maximum exam time: You must submit your exam response within THREE (3) hours. The additional hour includes 15 minutes reading time, and time to download and save the exam paper and upload the completed paper into CloudDeakin
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- This examination constitutes 50% of your assessment in this unit.
- This examination comprises 5 questions. You are required to answer ALL 5 questions.
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|Question Number||Possible Mark||Earned Mark|
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You are required to answer ALL questions.
Question 1 (7 marks)
On 30 June 2017 Sew Pty Ltd purchased equipment at a cost of $625,000 (GST Exclusive.) with an estimated useful life of 10 years and no residual value. On 30 June 2020, the equipment had a carrying amount of $437 500.
On 30 June 2020 the same item of equipment was determined as having a recoverable amount of $350 000 and a remaining useful life of 7 years.
On 30 June 2023, the equipment was assessed as having a recoverable amount of $260 000 and a remaining useful life of 3 years.
All equipment is carried under the cost model.
Prepare the general journal entries to record the impairment of equipment and depreciation under the cost model on 30 June 2020, 30 June 2023 and 30 June 2024. Please note the depreciation expense for the equipment has not been recorded for the year 2020.
Narrations are not required
Question 2 (11 marks)
A trial balance taken from GoFresh Pty Ltd’s accounting records at 30 September 2019, showed the following account balances:
GoFresh Pty Ltd
as at 30 September 2019
|Share capital (560 000 shares fully paid)||560,000|
|Property, plant and equipment (net)||712,640|
At a meeting of directors on 1 October, it was decided to issue additional shares to fund future operations. Accordingly a prospectus was issued on 10 October offering 200,000 ordinary shares at $3 each to the public, payable $2.50 per share on application and the remainder in one call when required.
By 30 November, applications were received from the public for 224,000 shares. On 3 December the application money paid on 24,000 shares was refunded to unsuccessful applicants. The rest of the shares were allotted to the successful applicants.
On 31 January 2020, an interim dividend of 8c per share was paid out of retained earnings on all fully paid equivalent shares pro rata.
On 20 February, the remaining call on the shares was made, and all cash was received on the call by 31st March, except for the holder of 6,000 shares.
a) Prepare the general journal entries to record the information above. (7 marks)
Narrations are NOT required.
b) Prepare a Statement of Changes of Equity as at 30 June 2020. (3 marks)
QUESTION 3 (12 marks)
The following comparative Balance sheets for the years ended June 30, 2019 and 2020 and income statement information for 2020 for Smile Clinic Pty Ltd are set out below:
|Account||June 30 2019||June 30 2020|
|Cash and cash equivalents||84,600||52,200|
|Plant and equipment||171,000||117,000|
|Accumulated depreciation – plant and equipment||-72,000||-63,000|
|Capital and reserves||194,400||167,400|
|Total liabilities and owners equity||345,600||266,400|
|Less: Cost of goods sold||162,000|
|Operating expenses (including depreciation)||99,000|
Note: 1. No plant and equipment was sold during the year.
2. Dividends of $27,000 in cash were paid during the year.
3. All sales are on credit.
Prepare a statement of cash flows for the year ended 30 June 2020 using the direct method.
Question 4 (This question has two parts: I and II) (7 + 7 = 14 marks)
Your Guitar Pty Ltd sells guitar machines and lessons on how to guitar. On 1 March 2020, Your Guitar Pty Ltd signs an agreement with Music Studio to provide 8 guitar lessons and 5 guitar machines. The contract price amounted to $6,160 (GST Inclusive), on credit terms n/30 for the guitar machines and guitar lessons. This amount also includes one free service for the guitar machines to be performed six months after the delivery of the guitar machines to Music Studio.
The stand-alone price for the 8 guitar lessons is $2,860 (GST Inclusive). The guitar lessons will start on 8 March 2020.
The stand-alone price of the guitar equipment is $5,720 (GST Inclusive). The six-month service fee for the guitar machines is usually $660 (GST Inclusive).
Music Studio paid the full amount on 26 March 2020 for the equipment and personal training lessons.
The equipment was delivered on 28 March 2020.
By 31 March 2020, 3 guitar lessons had been held.
- How should Your Guitar Ltd allocate the transaction price to the distinct performance obligations in this contract based on IFRS 15 / AASB 15 Revenue with Contracts from Customers? (3 marks)
- The owners of the business have asked you the Accountant to record all of the revenue from the contract in the statement of Financial Performance as at 31 March 2020. Discuss how recording all of the contract as revenue as at 301 March 2020 will influence the usefulness of financial information with reference to the fundamental qualitative characteristics of information prescribed by the Conceptual Framework for Financial Reporting. (4 marks)
Question 4, Part II
Classic Clocks Pty Ltd uses the allowance method to account for doubtful debts. The business allows for bad and doubtful debts at 3% of net credit sales.
At the 1 June 2020 the accounts receivable ledger balance of $56,000 debit and a credit balance in the allowance for doubtful debts ledger account of $5,000.
Credit sales for the month of June were $24,000 (GST Exclusive) and sales returns for the month were $5,000 (GST Exclusive) and these have been recorded in the journal
The business received notification from City Hall Pty Ltd on 8 June 2020 that, $3,630 (GST Inclusive) that had previously been written off as uncollectible in May 2020 would be paid in full in 2 weeks. The money was received on 22 June.
On 28 June Classic Clocks Pty Ltd was contacted by Vogue Homeware Pty Ltd to notify that the business had been declared bankrupt and that they would not be able to pay the $1,100 owing to Classic Clocks from a previous credit sale made to them in April 2020.
- Prepare journal entries for each of the above events. Narrations are not required. (4 marks)
- The owners recently purchased machinery to use in the business. All of the employees employed by Classic Clocks will be trained on how to use the features of the equipment. This will cost Classic Clocks a considerable amount of money. The manager has approached you and would like you to include the training costs as an asset in the Statement of Financial Position for 30 June 2020. Discuss whether the training costs should be treated as an asset in the Statement of Financial Position for the financial period ending 30 June 2020, with reference to the Conceptual Framework definition and recognition criteria of an asset. (3 marks)
Question 5(6 marks)
Hygiene4U Pty Ltd is a business that cleans and polishes walkways in hospitals around Australia. The accountant, Phuong, has sought your advice on the treatment of the following items in the financial statements as at 30 June 2020.
During June 2020, Hygiene4U Pty Ltd was involved in a court case. The plaintiff sought compensation for harm caused when visiting the hospital. They slipped and fell over on one of the walkways due to chemicals used to clean the floors being spilled and not cleaned up. The plaintiff received broken bones and loss of income as they were unable to work while injured. At present, Hygiene4U Pty Ltd has been found guilty, but the judge has yet to award damages. The damages that Hygiene4U Pty Ltd will need to pay are estimated to be from $200,000 to $800,000. Phuong would like to include the damages as a liability in balance sheet of Hygiene4U Pty Ltd for the 2020 financial year.
Discuss whether the damages should be recognised as a liability in the Statement of Financial Position. Alternatively, what would you recommend to the manager the item be recorded as? Justify your answer with reference to the Conceptual Framework definition and recognition criteria of a liability, and AASB 137 Provisions, Contingent Liabilities, and Contingent Assets.
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