Scenario 1 Financing Company Operations
Scenario-1 (a)
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Share Issue Journal Entries: ChiHerbal Ltd |
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Date |
Account Title |
Debit |
Credit |
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15-Oct-14 |
Cash |
1,500,000.00 |
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Share Application |
1,500,000.00 |
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(Cash received on applications for 600,000 shares and allotment and final call also paid on 100,000 shares) |
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16-Oct-14 |
Share Application |
1,500,000.00 |
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Share capital |
1,300,000.00 |
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Cash |
200,000.00 |
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(Being shares allotted and the excess money received on application refunded) |
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30-Oct-14 |
Underwriting fee and Misc. Exp. |
8,000.00 |
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Cash |
8,000.00 |
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(Being underwriting fee and other expense of IPO paid) |
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15-Nov-14 |
Allotment |
800,000.00 |
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Share capital |
800,000.00 |
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(Being allotment money on 400,000 shares due) |
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15-Nov-14 |
Cash |
800,000.00 |
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Allotment |
800,000.00 |
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(Being allotment money received on 400,000 shares) |
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15-Dec-14 |
Share final call |
400,000.00 |
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Share capital |
400,000.00 |
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(First call on the shares made due on 400,000 shares) |
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15-Dec-14 |
Cash |
380,000.00 |
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Share final call |
380,000.00 |
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(First call received except on 20000 shares) |
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22-Dec-14 |
Share capital |
100,000.00 |
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Share forfeited |
80,000.00 |
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Share final call |
20,000.00 |
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(Being 20000 shares forfeited) |
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22-Dec-14 |
Capital reserve |
80,000.00 |
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Share forfeited |
80,000.00 |
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(Being balance of share forfeited account transferred to capital reserve) |
Scenario-1 (b)
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Shareholder’s Equity |
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480,000 equity shares fully paid up-issued at $5 |
2,400,000.00 |
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Capital reserve |
80,000.00 |
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Pre-incorporation expenses |
(8,000.00) |
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Total |
2,472,000.00 |
Scenario-2
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Date |
Account Title |
Debit |
Credit |
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2015-16 |
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31-Dec |
Machine A |
15,500.00 |
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Revaluation Reserve |
15,500.00 |
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(Being machine-A revalued-refer note below) |
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31-Dec |
Revaluation Reserve |
4,500.00 |
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Machine B |
4,500.00 |
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(Being machine-B revalued-refer note below) |
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30-Jun |
Depreciation Expense-Machine-A |
31,333.33 |
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Depreciation Expense-Machine-B |
27,000.00 |
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Accumulated Depreciation |
58,333.33 |
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(Being depreciation expense on machines charged |
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30-Jun |
Profit and Loss account |
58,333.33 |
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Depreciation Expense-Machine-A |
31,333.33 |
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Depreciation Expense-Machine-B |
27,000.00 |
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(Being depreciation charged to profit and loss account) |
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30-Jun |
Revaluation Reserve |
3,166.67 |
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Machine A |
1,166.67 |
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Machine B |
2,000.00 |
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(Machines revalued again on 30 June 2016) |
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Note: |
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Revaluation of machines as at 31st December 2015 |
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Machine-A |
Machine-B |
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Carrying amount of machine as at 30 June 2015 |
190,000.00 |
180,000.00 |
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Less: Depreciation for six months from 30 June 2015 to 31 Dec 2015 [Machine-A (310000/10*2) Machine-B (210000/10*2)] |
15,500.00 |
10,500.00 |
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A. Carrying amount of machine as at 31 Dec 2015 |
174,500.00 |
169,500.00 |
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B. Revalued figures |
190,000.00 |
165,000.00 |
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C. Revaluation reserve (B-A) |
15,500.00 |
(4,500.00) |
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Depreciation for the next six month of 2015-16 |
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Machine-A |
Machine-B |
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Revised carrying amount of machines as at 31 Dec 2015 |
190,000.00 |
165,000.00 |
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Revised useful life |
6 |
5 |
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Revised depreciation (SLM) per annum |
31,666.67 |
33,000.00 |
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Depreciation for six months |
15,833.33 |
16,500.00 |
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Revaluation of machines as at 30 June 2016 |
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Machine-A |
Machine-B |
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Carrying amount of machine as at 30 June 2016 |
190,000.00 |
165,000.00 |
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Less: Depreciation for six months from 31 Dec 2015 to 30 June 2016 |
15,833.33 |
16,500.00 |
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A. Carrying amount of machine as at 30 June 2016 |
174,166.67 |
148,500.00 |
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B. Revalued figures |
173,000.00 |
146,500.00 |
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C. Revaluation reserve (B-A) |
(1,166.67) |
(2,000.00) |
Scenario-3 (a)
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Part-a |
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Year |
Minimum lease payments |
Present value |
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1 |
66,000.00 |
0.8929 |
58,928.57 |
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2 |
66,000.00 |
0.7972 |
52,614.80 |
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3 |
66,000.00 |
0.7118 |
46,977.50 |
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4 |
66,000.00 |
0.6355 |
41,944.19 |
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4 |
15,000.00 |
0.6355 |
9,532.77 |
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Total |
209,997.83 |
The present value of minimum lease rentals arrived applying the discount rate of 12% is $209,997.83 which is equal to the fair value of the machine. This proves that the interest rate implicit in the lease is 12%.
Scenario-3 (b)
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Schedule of Lease Payments |
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Year |
Opening balance |
Minimum lease payment |
Finance charge |
Reduction in outstanding |
Closing balance |
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1 |
208,409.03 |
66,000.00 |
25,009.08 |
40,990.92 |
167,418.12 |
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2 |
167,418.12 |
66,000.00 |
20,090.17 |
45,909.83 |
121,508.29 |
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3 |
121,508.29 |
66,000.00 |
14,580.99 |
51,419.01 |
70,089.29 |
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4 |
70,089.29 |
66,000.00 |
8,410.71 |
57,589.29 |
12,500.00 |
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Date |
Account Title |
Debit |
Credit |
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Year-1 |
Machine on lease |
208,409.03 |
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|
Darlington Ltd |
208,409.03 |
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(Machine on lease recorded) |
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Depreciation expense |
52,102.26 |
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Accumulated depreciation |
52,102.26 |
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(Being depreciation expense recorded) |
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Darlington Ltd |
40,990.92 |
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Finance charge |
25,009.08 |
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Cash |
66,000.00 |
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(Being lease rent for year 2015-16 paid) |
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Profit and loss |
77,111.34 |
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Finance charge |
25,009.08 |
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Depreciation expense |
52,102.26 |
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(Finance charge and depreciation expense charged to profit and loss statement) |
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Year-2 |
Depreciation expense |
52,102.26 |
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Accumulated depreciation |
52,102.26 |
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(Being depreciation expense recorded for year-2) |
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Darlington Ltd |
45,909.83 |
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Finance charge |
20,090.17 |
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Cash |
66,000.00 |
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(Lease rent for year-2 paid) |
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Profit and loss |
72,192.43 |
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Finance charge |
20,090.17 |
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Depreciation expense |
52,102.26 |
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(Finance charge and depreciation expense for year-2 charged to profit and loss statement) |
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Year-3 |
Depreciation expense |
52,102.26 |
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Accumulated depreciation |
52,102.26 |
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(Being depreciation expense recorded for year-3) |
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Darlington Ltd |
51,419.01 |
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Finance charge |
14,580.99 |
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Cash |
66,000.00 |
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(Lease rent for year-3 paid) |
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Profit and loss |
66,683.25 |
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Finance charge |
14,580.99 |
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Depreciation expense |
52,102.26 |
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(Finance charge and depreciation expense for year-3 charged to profit and loss statement) |
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Year-4 |
Depreciation expense |
52,102.26 |
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Accumulated depreciation |
52,102.26 |
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(Being depreciation expense recorded for year-4) |
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Darlington Ltd |
57,589.29 |
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Finance charge |
8,410.71 |
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Cash |
66,000.00 |
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(Lease rent for year-4 paid) |
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Profit and loss |
60,512.97 |
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Finance charge |
8,410.71 |
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Depreciation expense |
52,102.26 |
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(Finance charge and depreciation expense for year-4 charged to profit and loss statement) |
Scenario-3 (c)
Schedule of lease receipts and the journal entries for Darlington Ltd
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Net investment computation |
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Year |
Lease rent |
Present value |
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1 |
66,000.00 |
0.8929 |
58,928.57 |
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2 |
66,000.00 |
0.7972 |
52,614.80 |
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3 |
66,000.00 |
0.7118 |
46,977.50 |
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4 |
66,000.00 |
0.6355 |
41,944.19 |
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4 |
15,000.00 |
0.6355 |
9,532.77 |
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Total |
279,000.00 |
209,997.83 |
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Schedule of lease receipts |
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Year |
Opening balance |
Minimum lease payment |
Finance income |
Reduction in outstanding |
Closing balance |
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1 |
209,997.83 |
66,000.00 |
25,199.74 |
40,800.26 |
169,197.57 |
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2 |
169,197.57 |
66,000.00 |
20,303.71 |
45,696.29 |
123,501.28 |
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3 |
123,501.28 |
66,000.00 |
14,820.15 |
51,179.85 |
72,321.43 |
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4 |
72,321.43 |
66,000.00 |
8,678.57 |
57,321.43 |
15,000.00 |
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Date |
Account Title |
Debit |
Credit |
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Year-1 |
Lease receivables |
209,997.83 |
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Machine on lease |
209,997.83 |
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(Machine given on lease) |
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Cash |
66,000.00 |
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Lease receivables |
40,800.26 |
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Finance income |
25,199.74 |
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(Being lease rent received) |
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Finance income |
25,199.74 |
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Profit and loss |
25,199.74 |
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(Being finance income charged to profit and loss) |
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Year-2 |
Cash |
66,000.00 |
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Lease receivables |
45,696.29 |
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Finance income |
20,303.71 |
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(Being lease rent received) |
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Finance income |
20,303.71 |
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Profit and loss |
20,303.71 |
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(Being finance income charged to profit and loss) |
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Year-3 |
Cash |
66,000.00 |
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Lease receivables |
51,179.85 |
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Finance income |
14,820.15 |
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(Being lease rent received) |
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Finance income |
14,820.15 |
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Profit and loss |
14,820.15 |
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(Being finance income charged to profit and loss) |
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Year-4 |
Cash |
66,000.00 |
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Lease receivables |
57,321.43 |
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Finance income |
8,678.57 |
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(Being lease rent received) |
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Finance income |
8,678.57 |
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Profit and loss |
8,678.57 |
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(Being finance income charged to profit and loss) |
Scenario-4
The accounting treatment in respect of the intangible assets is prescribed in the AASB 138 (AASB 138, 2009). As per the provisions contained in AASB 138, an entity is not allowed to capitalize in the books the expense incurred on creating goodwill, brand, or mastheads. Therefore, the expenses incurred on creating goodwill, brand, and mastheads should be charged to the profit and loss statement in the period in which these are incurred. However, the expenses incurred on the intangible assets like copyright, trademark, or formulas could be capitalized but there are certain conditions to be fulfilled in this regards. As per the accounting standard, the expenses incurred on creating a formula, trademark, or copyright are classified in two phases such as research phase and development phase (AASB 138, 2009).
The standard prescribes that the expenses of the research phase are to be charged to the statement of profit and loss in the period in which these are incurred. However, the expense of the development phase can be capitalized. An entity should ensure that the following conditions are met before deciding for capitalization of the development phase expenditure:
- The measurement of the expenditure should first be clear. This implies that there must not be any ambiguity in regards to measurement of the development phase expenditure (AASB 138, 2009).
- The technically feasibility of the project should be demonstrated beyond all doubts. This implies that the product or the process for which formula or copyright is to be registered appears to be technically possible (AASB 138, 2009).
- The entity should demonstrate that it will reap out the advantages of the intangible asset (copyright, trademark, or formula) (AASB 138, 2009).
Referring to the above provisions, the accounting treatment in respect of intangible (product formula) of ChiHerbal Ltd for different years is prescribed below:
Year 2013:
This was the initial year when the company undertook the research activities. Since, the activities of development phase have yet to start thus; the conditions for capitalization of the expense are not met. The expense of $1 million incurred in 2013 should be expensed in the statement of income (AASB 138, 2009).
Year 2014:
In the year 2014, the progress on the research phase furthered but still there were no indication of future economic benefits from the development of intangible asset, therefore, the expense incurred in 2014 also to be charged to the statement of profit and loss. The expense of $2 million is to be debited to the statement of profit and loss in the year 2014 (AASB 138, 2009).
Year 2015:
In the year 2015, it was established that the company would receive the future economic benefits from the use of formula. Further, the product was also substantially ready which demonstrated strong feasible of its use by the company. The sales department confirmed existence of market and company also found the alternative use of the product. Thus, the expense incurred in the year 2015 should be capitalized in the books recognizing intangible asset (AASB 138, 2009).
References
AASB 117. 2009. Leases. [Online]. Available at: https://www.aasb.gov.au/admin/file/content102/c3/AASB117_07-04_ERDRjun10_07-09.pdf [Accessed on: 24 March 2017].
AASB 138. 2009. Intangible Assets. [Online]. Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB138_08-15_COMPoct15_01-18.pdf [Accessed on: 24 March 2017].
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