ACCT6003 Financial Accounting Processes01

Answer:

Scenario – 1

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Date	Particulars		Amount($)		Amount($)
20.10.2018	Redeemable Preference Share Capital A/c	Dr.	1,20,000
	Premium on Redemption of Preference Shares	Dr.	6,000
	Preference Shareholders A/c			Cr.	1,26,000
	(Redemption amount of preference shares
	payable to preference shareholders)
20.10.2018	Retained Earnings A/c	Dr.	1,26,000
	Capital Redemption Reserve A/c			Cr.	1,26,000
	(Provision made for redemption from retained
	earnings)
25.10.2018	Preference Shareholders A/c	Dr.	1,26,000
	Bank A/c			Cr.	1,26,000
30.11.2018	Cash A/c	Dr.	1,94,560
	Receivable- Underwriter	Dr.	48,640
	Share Capital-Ordinary Class 1			Cr.	2,43,200
	(Issue of 51200 right shares @ 3.80 $ each and
	the balance shares underwritten by Underwriter)
Note :	1 for 5 shares were to be issued .
	hence no of shares issued = 320000*1/5= 64000
	shares availed= 256000*1/5= 51200 shares only

20.12.2018	Receivable -undewriter	Dr.	4,800
	Cash			Cr.	4,800
	(Underwriting Costs paid)
10.01.2019	Retained Earnings	Dr.	56,000
	General Reserve A/c			Cr.	56,000
	(amount transferred from retained earnings to
	General Reserve A/c)
28.02.2019	Cash A/c	Dr.	2,01,600
	Share Capital- Ordinary Class 3			Cr.	2,01,600
	(56000 shares issued against the options
	exercised- @ 3.60 $ per share)
31.05.2019	Bank A/c (228000 shares @ $ 1.60)	Dr	3,64,800
	Calls in Arrear (12000 shares @ $1.60)	Dr	19,200
	Share Allotment A/c			Cr	3,84,000
	(allotment money received except for 12000 shares)
18.06.2019	Share Capital A/c (12000 shares @ $4)	Dr	48,000
	Final Call on Shares (12000 shares @ $ 1.6)			Cr	19,200
	Share Forfeiture A/c (12000 shares @ $ 2.4)			Cr	28,800
	(being 12000 shares forfeited for non payment
	of final call)
26.06.2019	Cash A/c (12000 * 3.60 $)	Dr.	43,200
	Share Forfeiture A/c (12000* $ 0.40)	Dr.	4,800
	Share Capital A/c			Cr.	48,000
	(Re-issue of forfeited shares )
26.06.2019	Share Forfeiture A/c	Dr.	24,000
	Payable to Shareholders of forfeited shares			Cr	24,000
	(balance remaining in share forfeiture a/c to
	be paid to former holders of forfeited shares)
	($ 28800- $ 4800)
27.06.2019	Payable to Shareholders of forfeited shares	Dr	24,000
	Bank/ Cash A/c			Cr	24,000
	(amount paid)

Part – b

Equity section of ChiHerbal’s statement of Financial Position as at 30th june 2019
Particulars			Amount ($)
Ordinary Class 1 Shares
	320000 shares @ $ 4 fully paid	12,80,000
	51200 shares @ 3.80 $ fully paid	1,94,560	14,74,560
Ordinary Class 2 Shares
	228000 shares @ $ 4 fully paid		9,12,000
Ordinary Class 3 Shares
	12000 shares @ $ 4 fully paid		48,000
Retained Earnings		4,52,800
General Reserve		56,000

Scenario – 2

Part -a
Journal Entries for Revaluation of Assets :
The values of assets as at 30th June 2018 are given. Also the balances on this date for Revaluation
Surplus A/c are given .
Date	Particulars		Amount($)	Amount($)
30.06.2018	Residential Land A/c	Dr.	1,60,000
	Revaluation Surplus A/c			1,60,000
	(being land value increased due to revaluation
	and the increment of value credited to
	revaluation surplus a/c )
30.06.2018	Revaluation Surplus A/c	Dr.	3,20,000
	Factory Land A/c			3,20,000
	(being land value decreased due to revaluation
	and the downfall in value debited to
	revaluation surplus a/c )
30.06.2018	Building A/c	Dr.	3,20,000
	Revaluation Surplus A/c			3,20,000
	(being building value increased due to revaluation
	and the increment of value credited to
	revaluation surplus a/c )
	Calculation of Carrying Amount of Building
	Building at valuation 2014		12,80,000
	Less : Accumulated Depreciation		1,60,000
	Carrying Amount of Building		11,20,000
	New Fair Value		14,40,000
	Transfer to Revaluation Surplus		3,20,000
Part -b
Date	Particulars		Amount($)	Amount($)
01.07.2017	Truck A/c	Dr.	57,142
	Revaluation Surplus A/c			57,142
	(Difference between the Carrying Amount of
	Truck and Fair Value transferred to respective
	accounts)
01.07.2018	Disposal of Assets A/c	Dr.	3,33,333
	Truck A/c			3,33,333
	(carrying value of truck transferred to disposal
	account)
01.07.2018	Bank A/c or Cash A/c	Dr.	2,20,000
	Disposal of Assets A/c			2,20,000
	(amount received transferred to disposal a/c)
01.07.2018	Income Statement	Dr.	1,13,333
	Disposal of Assets A/c			1,13,333
	(loss arising due to difference in carrying value
	and sales proceeds transferred to Income
	statement)
01.07.2018	Revaluation Surplus A/c	Dr.	57,142
	Retained Earnings			57,142
	(balance of revalued surplus transferred to
	Retained Earnings)
Working Notes :
Note -1
Purchase Value of Truck as on 01st July 2015	$	4,80,000
Depreciation using Straight Line Method
(Value of truck- estimated residual value)
Expected Life Years
($ 480000- Nil)/ 7	$	68,571
Depreciation for 2nd year	$	68,571
Carrying Amount of Truck as on 1st July 2017	$	3,42,858
Note -2
New Fair Value of Truck as on 1st July 2017	$	4,00,000
Depreciation using Straight Line Method
(Value of truck- estimated residual value)
Expected Life Years
($ 400000- Nil)/ 6	$	66,667
Carrying Amount of Truck as on 1st July 2018	$	3,33,333

Scenario 3 – Leases

As nothing is specified in the question we are assuming the lease to be finance lease.
Also, the lease term is equal to the useful life, it can be considered as financial lease
Journal entries in books of lessor Easy Rental Ltd.
Date	Particulars	Amount($)	Amount($)
01.07.2018	Lease Receivable	1,04,526
	Motor Vehicle		1,04,526
	(Present Value of Lease Rentals of Six Years
	-Working Note-1)
Year 2019	Cash	24,000
	Lease Receivable ($ 24000- $ 2400)		21,600
	Finance Income ($ 24000 *10%)		2,400
	(Instalment received for 1st year)
	**Finance Income is 10% of the yearly lease rent
Year 2020	Cash	24,000
	Lease Receivable ($ 24000- $ 2160)		21,840
	Finance Income ($ 21600 *10%)		2,160
	(Instalment received for 2nd year)
	** Finance Income will now be calculated on reduced
	Lease Receivable

Working Note -1
Present Value of Lease Rentals of 6 years:
Year	Lease Rentals	PV factor
		@ 10%
1	24,000	0.909	21,818
2	24,000	0.826	19,835
3	24,000	0.751	18,032
4	24,000	0.683	16,392
5	24,000	0.621	14,902
6	24,000	0.564	13,547

There is zero unguaranteed residual value.

Journal entries in books of lessee ChiHerbal Ltd.
In case of finance lease, the lessee records both asset and liablity at the inception of lease tenure
of an amount equal to present value of lease rentals
Date	Particulars		Amount($)		Amount($)
01.07.2018	Lease Asset	Dr.	1,04,526
	Lease Liability			Cr.	1,04,526
	(Present Value of Lease Rentals of Six Years
	-Working Note-1)
Year 2019	Lease Liability ($ 24000- $ 2400)	Dr.	21,600
	Interest Expense ($ 24000 *10%)	Dr.	2,400
	Cash			Cr.	24,000
	(Instalment paid for 1st year)
	**Interest Expense is 10% of the yearly lease rent
Year 2020	Lease Liability ($ 24000- $ 2160)	Dr.	21,840
	Interest Expense ($ 21600 *10%)	Dr.	2,160
	Cash			Cr.	24,000
	(Instalment paid for 2nd year)
	** Interest expense will now be calculated on reduced
	Lease Liability
Entry of Depreciation is also done in books of lessee. The rate is not given
Entry is:	Depreciation A/c	Dr.
	Lease Asset A/c	Cr.

Scenario 4 – Intangible Assets

As per AASB 138, an intangible asset must be measured at cost which includes purchase price and all
the directly attributable costs for preparing of the assets for its use.
in the given question, the asset is an internally generated intangible asset which is developed in ‘
2 phases- the research phase and the development phase
Journal Entries
Date	Particulars		Amount($)		Amount($)
For Expense on Product Research
	Product Development Cost	Dr.	3,50,000
	Bank A/c			Cr.	3,50,000
	(The cost has been capitalised as it is assumed to
	create future economic benefits)
For Expense on Prototype development
	Prototype Development Cost	Dr.	5,28,000
	Bank A/c			Cr.	5,28,000
	(The cost has been capitalised as it is assumed to
	create future economic benefits)
For Expense on Legal Cost of Patent
	Patent Cost	Dr.	22,000
	Bank A/c			Cr.	22,000
	(The cost has been capitalised as it is assumed to
	create future economic benefits and it has a long
	life of 4 years)
For Expense on Marketing Campaign
	Cost on Marketing Cost	Dr.	6,50,000
	Bank A/c			Cr.	6,50,000
	(This cost shall be treated as a revenue expenditure
	as marketing shall continue even after the product
	has started genearted revenues)
For Recognition of Sales Revenue at present value
	Amount Receivable	Dr.	150,00,000
	Sales A/c			Cr.	150,00,000
	(being amount of sales booked at present value)
Total Cost of Intangible asset
Research Cost		3,50,000.00
Protype Cost			5,28,000.00
Legal Cost			22,000.00
Total Cost of Intangible Asset		9,00,000.00
For Amortization Expenses
	Amortization expenses	Dr.	2,25,000
	Intangible Asset			Cr.	2,25,000
	( Being Asset amortized over period of 4 years i.e 900000/4)
For transfer to Profit & Loss A/c.
	Profit & Loss A/c	Dr.	2,25,000
	To Amortization Expense			Cr.	2,25,000

References

Bodie, Z., Kane, A. and Marcus, A. J. (2014) Investments. McGraw Hill

Brigham, E. and Daves, P. (2012) Intermediate Financial Management. USA: Cengage Learning.

Davies, T. and Crawford, I. (2012) Financial accounting. Harlow, England: Pearson.

Parrino, R, Kidwell, D. and Bates, T. (2012) Fundamentals of corporate finance. Hoboken, NJ: Wiley

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