Classification of Items
- Accounting for share capital
Work note 1
Table for shares
Applied, Allocated, Cash received related to application & Excess cash received.
|
Applied |
Allocated |
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|
6,000,000 |
5,000,000 |
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|
No. Of shares |
No. Of shares allocated (B) |
Total cash received (C) |
Cash received that related to application |
Excess cash received from application |
|
(A) |
(B) |
(A*2.5) = C |
(B*2.5) = D |
Related to allotment (C-D) |
|
6,000,000 |
5,000,000 |
6,000,000*2.5 = 15,000,000 |
5,000,000*2.5 = 12,500,000 |
15,000,000-12,500,000 = 2,500,000 |
Journal entries in the books of Rippa Ltd.
|
DATE |
Account title and explaination |
Debit |
Credit |
|
10-Aug |
Cash A/c |
$ 15,000,000.00 |
|
|
To share Application A/c |
$ 15,000,000.00 |
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|
(being recording of application money received) |
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|
10-Aug |
Share application (6,000,000*2.5) |
$ 15,000,000.00 |
|
|
To share capital (5,000,000*2.5) A/c |
$ 12,500,000.00 |
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|
To share Allocation (15,000,000*12,500,000)A/c |
$ 2,500,000.00 |
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|
12-Aug |
Underwriting commission A/c |
$ 12,000.00 |
|
|
To cash A/c |
$ 12,000.00 |
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|
(being recording underwriting commission paid) |
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|
10-Sep |
share allotment (5,000,000*1) A/c |
$ 5,000,000.00 |
|
|
To share capital A/c |
$ 5,000,000.00 |
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|
(being recording of share allotment money become due) |
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|
10-Sep |
Cash (5,000,000-2,500,000) A/c |
$ 2,500,000.00 |
|
|
share Application (15,000,000-12,500,000) A/c |
$ 2,500,000.00 |
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|
To share Allotment A/c |
$ 5,000,000.00 |
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|
(being recording receipt of allotment money) |
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|
1-Feb-18 |
share 1st call (5,000,000*0.50) A/c |
$ 25,000,000.00 |
|
|
To share capital A/c |
$ 25,000,000.00 |
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|
(being recording 1st call money become due) |
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|
28-Feb |
Cash (25,000,000-20,000) A/c |
$ 24,980,000.00 |
|
|
Calls in arrears (40,000*0.5) A/c |
$ 20,000.00 |
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|
To share 1st call (50,000,000*0.50) A/c |
$ 25,000,000.00 |
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|
(being recording receipt of money from 990,000 shares) |
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|
20-Mar |
Share capital (40,000*4) A/c |
$ 160,000.00 |
|
|
To share Forfeiture(40,000*3.5) |
$ 140,000.00 |
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|
To calls in Arrears |
$ 20,000.00 |
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|
(being recording of forfeiture of shares) |
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|
25-Mar |
Cash (40,000*3.2) A/c |
$ 128,000.00 |
|
|
Share Forfeiture (40,000* (4-3.2) |
$ 32,000.00 |
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|
To share capital (40,000*4) |
$ 160,000.00 |
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|
(being recording reissue of shares) |
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|
25-Mar |
Share reissue Cost A/c |
$ 4,000.00 |
|
|
To cash A/c |
$ 4,000.00 |
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|
(being recording of reissue cost) |
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|
25-Mar |
Share Forfeiture (140,000-32,000) A/c |
$ 108,000.00 |
|
|
To share reissue cost A/c |
$ 4,000.00 |
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|
To shareholders A/c |
$ 104,000.00 |
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|
(being record of amount that is to be refunded to shareholders) |
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|
Shareholders A/c |
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|
To cash A/c |
$ 104,000.00 |
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|
(being record of amount refunded) |
Explaining why the amount returned to the former shareholders was not $3.50 per share.
The amount discounted was not equivalent to 3.50 as requested by one investor since when he neglected to pay the sum his offers are forfeited and the organization has likewise to bring about additional cost 4,000 for reissuing it. At the point when the organization has reissued these offers it will get just 3.20 and not 4.
Subsequently the organization needs to endure lost 0.80 = (4-3.20) and furthermore needs to acquire re-issue cost of 0.10 = (4,000/40,000).
Subsequently, total misfortune end up 0.90 = (0.80+0.10) and this misfortune must be conceived by the investors.
In this manner, investor will not get $3.50 per share rather they will get just $2.60 per share.
Question 4
Experiment 1:
For 30 June 2017
Carrying amount is 60,000
Calculating depreciation (Straight line method):
60,000-10,000 (Residual value) = 50,000
The equipment can be used for 4 more years, so 50,000/4 years = 12,500 per year
Journal entry:
Depreciation entry:
Depreciation A/c Dr. 12,500
To Equipment 1 A/c Cr. 12,500
So the Depreciated value as on 30 June 2017 is 60,000 – 12,500 = 47,500
The decrease of an asset’s carrying value is recognized in the P&L. Also the revaluation surplus of the same asset the decrease will be recognized in the other comprehensive income.
Note: When the first revaluation was done, from 70,000 to 60,000, the question does not indicate that there was any difference between the depreciation value (Carrying value as on 30th June 2015 depreciation for that year) and the revalued amount, or the difference was charged to the profit & loss A/c. So, we will directly credit the current year difference to revaluation surplus.
Fair value (Revalued) as on 30th June 2017 is 55,000. Difference = 55,000-47,500 (depreciated value) = 7500. This is for what we have to pass the entries:
Equipment 1 A/c Dr. 7,500
To revaluation Cr. 7,500
(To record the increment in the asset value as per the prudence concept)
For June 2018:
Calculation of depreciation:
Carrying value on 30th June 2017 = 55,000 – 10,000 (Residual value) = 45,000/3 years life = 15,000
Journal entries:
Depreciation A/c Dr. 15,000
Accounting for Share Capital
To equipment 1 A/c Cr. 15,000
Depreciated value of the asset 55,000 – 15,000 = 45,000
Fair value (Revalued) as on 30th June 2018 is 44,000
The difference to be adjusted: 45,000 – 44,000 = 1,000 to be debited to the revaluation surplus as we have earlier made an increasing revaluation and credited the revaluation surplus, so we will reverse it to the amount of difference.
Revaluation surplus Dr. 1,000
To equipment 1 Cr. 1,000
(This way decreasing the value of the asset against the revaluation surplus).
Equipment 2
For 30th June 2017
Calculating Depreciation:
20,000 (carrying value) – 4,000 (Residual amount) =16,000/4 years estimated life = 4,000
Journal entry:
Depreciation A/c Dr. 4,000
To equipment 2 A/c Cr. 4,000
So the depreciated value as on 30th June 2017 is 20,000 – 4,000 = 16,000
Fair value (Revalued) on 30th June 2017 is 18,000
Difference: 18,000 – 16,000 = 2,000
(Increment) which is to be adjusted.
Note: Here the asset was revalued multiple times and decrements amounting to 1,000 being previously recognized in profit & loss A/c. We shall reverse it up to 1,000 and rest shall be credited to revaluation surplus.
Equipment 2 Dr. 2,000
To profit & loss A/c Cr. 1,000
To revaluation surplus Cr. 1,000
(Being increment in the value of asset adjusted)
For 31 December 2017:
Calculating depreciation:
18,000 -6,000 (revised residual value) = 12,000/3 years life =4,000 x 6months/12 month as it has been sold on 31th December 2017 =2,000.
Depreciation A/c Dr. 2,000
To equipment 2 A/c Cr. 2,000
So, the depreciated value on 30th June 2018 is 18,000 – 2,000 = 16,000
Different: 16,000 – 13,000 = 3,000
Asset sold for 13,000, its entry shall be
Cash/Bank A/c Dr. 13,000
Revaluation surplus Dr. 1,000
Profit & loss A/c Dr. 2,000
To Equipment 2 Cr. 16,000
Sales of the equipment recorded, and as there is loss the revaluation surplus shall be reversed to the extent of credit balance and rest be charged to P&L A/c.
If there is gain on sale of revalued (increment) asset, the balance of revaluation surplus shall be credited to profit & loss A/c and rest if any shall be directly credited to the same.
Question 5
When carrying value exceeds the recoverable amount that is when an asset is impaired and this is according to the IFRS. The recoverable amount is greater of its fair value less any selling expenses and its value in use.
Accounting for Income Tax
Impairment loss if any is allocated to first intangible asset with indefinite lives. Hence, Impairment loss will be first allocated to goodwill.
Remaining impairment loss will be allocated in ratio of fair value of assets.
Journal entry
Impairment loss Dr. 70,000
To Goodwill ice creamery Cr. 8,000
To Goodwill Fizzy drinks Cr. 40,000
To Furniture & Fixture Fizzy drinks Cr. 571
To Equipment Fizzy drinks Cr.3,143
To Land and building fizzy drinks Cr. 17,714
To Patents fizzy drinks Cr. 572
(Being impairment loss recorded)
Question 3
I (a) Calculation of current Tax liability.
II (b) Calculation of deferred tax asset and deferred tax liability.
Balance as on 30th June 2018
Current Tax liability (A) …………………………..156,240
Deferred Tax Asset (B) …………………………….12,450
Deferred Tax Liability (B)………………………… (9,600)
- Journal entries
- Tax Expenses Dr. 156,240
Current tax liability Cr. 156,240
(To record current tax liability)
- Deferred tax expenses Dr. 600
Deferred tax liability Cr 600
(To record deferred tax liability on temporary difference between carrying value and tax base of accounts receivable)
- Deferred tax expenses Dr. 9,000
Deferred tax liability Cr. 9,000
(To record deferred tax liability on temporary difference between carrying value and tax base of equipment)
- Deferred tax asset Dr. 3,000
Deferred tax income Cr. 3,000
(To record deferred tax liability on temporary difference between carrying value and tax base of motor vehicle)
- Deferred tax asset Dr. 5,100
Deferred tax income Cr. 5,100
(To record deferred tax liability on temporary difference between carrying value and tax base of provision for leave.)
- Deferred tax asset Dr. 4,350
Deferred tax income Cr. 4,350
(To record deferred tax liability on temporary difference between carrying value and tax base of provision for warranties)
Question 1
Calculating depreciation
Depreciation for 8 years =160,000
800,000-160,0000= 640,000
640,000/6years = 106,667
Adjusted depreciation as 30th June2018 is 106,667
Journal entry
Depreciation A/c Dr. 106,667
To accumulated depreciation A/c Cr. 106,667
- ii) Repairs for 2017 should be charged in the same year and not in 2018 so the journal will be adjusted as follows:
Repairs A/c Dr. 20,000
To accumulated repairs A/c Cr. 20,000
iii) Adjustment also must be done on the company’s shares where the different will be indicated in the P&L.
Past shares 600,000 – 250,000 the current share = 350,000
Journal entries
Revenue/profit & Loss A/c Dr. 350,000
To investment A/c Cr. 350,000
Reference
Beaver, W. H. (1981). Financial reporting: an accounting revolution. Prentice Hall.
Deegan, C. (2013). Financial accounting theory. McGraw-Hill Education Australia.
Financial Accounting Standards Board. (2003). Statement of Financial Accounting Standards (No. 123). Financial Accounting Standards Board.
Scott, W. R. (1997). Financial accounting theory (Vol. 3, pp. 335-360). Upper Saddle River, NJ: Prentice Hall.
Scott, W. R. (2003). Financial accounting theory. Prentice Hall.
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