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Part 1 Question 1 [15 marks] Accounting policies, changes in accounting estimates and errors Blake Ltd is finalising its financial statements for the reporting period ending 30 June 2015. A number of unrelated scenarios still need to be considered and accounted for before the financial statements are finalised: a) The company has, in the past, always recognised a provision for warranties equal to 5% of sales made during the year. Due to increasing warranty costs and the number of goods returned under warranty, the directors would like to increase the provision to 8% of sales made during the year. The provision for warranties account currently has a balance of $12,000, which is the balance carried forward from 30 June 2014. Sales for the year ended 30 June 2015 amounted to $460,000. b) During the verification process for accounts payable, it was discovered that an amount of $80,000, incurred in May 2015 and payable to a supplier for raw materials, was recorded in the accounting records as $8,000. The $80,000 owing at 30 June 2015 was paid in July 2015. c) During the verification process for office equipment, it became apparent that an item of office equipment that was thought to be on hand at 30 June 2014 had actually been destroyed in April 2014. The item had a cost of $40,000 and accumulated depreciation of $24,000. No depreciation has been calculated or recorded as yet for the year ended 30 June 2015. d) During the verification process for accounts receivable, it was discovered that the sales manager had undertaken fraudulent activity – raising fake sales invoices in June 2015. The motivation of the manager was to ensure that his sales targets were met, so that he was eligible for his performance bonus. The fake sales invoices amounted to $122,000, with this entire amount included in the accounts receivable balance at 30 June 2015. e) On 1 July 2014, the directors revised the useful life of its building (acquired 2 years earlier on 1 July 2012 for $600,000, with an estimated useful life of 20 years and residual value of nil on this date). On 1 July 2014, the remaining useful life was estimated to be 30 years. The building has been depreciated using the straight-line method over its useful life. No depreciation has been calculated or recorded as yet for the year ended 30 June 2015. Assume all amounts are material for financial statement purposes. Required: With reference to AASB 108, explain whether each of the above scenarios is a change in accounting estimate or an error. State the appropriate accounting treatment (including any journal entries needed) for each scenario in the 2015 financial statements. Marking Guide - Question 1 Max. marks awarded Classification as change in accounting estimate or error 5 Discussion to support classification decision, including references to AASB 108 5 Appropriate accounting treatment and journal entries 5 Question 2 [15 marks] Accounting for share capital On 1 April 2015, Sage Ltd was registered and issued a prospectus inviting applications for 2,000,000 shares, at an issue price of $3.50, payable as follows: • $1.00 on application • $1.50 on allotment • $0.50 on first call • $0.50 on final call By 30 April, applications had been received for 2,100,000 shares. At the directors’ meeting on 3 May, it was decided to allot shares to the applicants in proportion to the number of shares for which applications had been made. The surplus application money was offset against the amount payable on allotment. All outstanding allotment money was received by 10 May. Legal costs re company formation were $7,000 and were paid on 11 May. Share issue costs of $3,000 were also paid on the same date. The first call was made on 1 September 2015, with money due by 30 September 2015. The final call was made on 2 January 2016, with money due by 31 January 2016. All money owing in relation to the two calls was received by the due dates except for the holders of 100,000 shares who did not pay either call, and the holder of another 20,000 shares who did not pay the second call. On 10 March 2016, as provided in the company’s constitution, the directors forfeited these 120,000 shares. On 25 March 2016, the forfeited shares were reissued as fully paid for a consideration of $2.80 per share. Costs of forfeiture and reissue amounted to $4,000, and were paid. The constitution allowed for the refund of any balance in the forfeited shares account after reissue to former shareholders, so refunds were made on 28 March 2016. Required: Prepare the journal entries to record the transactions of Sage Ltd up to and including that which took place on 28 March 2016. Show all relevant dates, narrations and workings. Marking Guide - Question 2 Max. marks awarded Journal entries 11 Dates 2 Narrations and workings 2 Question 3 [15 marks] Accounting for income tax Frog Ltd has prepared its draft statement of profit or loss and other comprehensive income and statement of financial position on 30 June 2015. The statements are prepared before considering taxation. The following information is available: Extract from statement of profit or loss and other comprehensive income for the year ended 30 June 2015 $ $ Gross profit 758,000 Other income: Rent revenue 14,000 Royalty revenue (exempt from income tax) 5,000 Proceeds from sale of plant 29,000 Expenses: Administration expenses 116,500 Doubtful debts expense 4,000 Salaries 270,200 Rent 26,000 Annual leave 13,500 Entertainment expenses (not tax deductible) 2,000 Warranty expenses 12,000 Carrying amount of plant sold 40,000 Depreciation expense - plant 14,000 Depreciation expense - motor vehicles 8,000 Insurance 10,400 (516,600) Accounting profit before tax 289,400 Assets and liabilities as disclosed in the Statement of Financial Position as at 30 June 2015 2015 $ 2014 $ Assets: Cash 196,500 7,000 Inventory 210,000 85,000 Accounts receivable 76,000 34,000 Less Allowance for doubtful debts (8,600) (5,000) Rent receivable 2,000 3,000 Prepaid insurance 1,200 500 Plant - cost 70,000 120,000 Less Accumulated depreciation (46,000) (42,000) Motor vehicles - cost 32,000 32,000 Less Accumulated depreciation (20,500) (12,500) Deferred tax asset ? 17,160 Liabilities: Accounts payable 17,300 12,800 Provision for annual leave 16,200 23,000 Provision for warranties 21,500 18,700 Current tax liability ? 32,600 Deferred tax liability ? 2,925 Loan payable 20,000 30,000 Additional information: • All administration, rent and salaries expenses incurred have been paid as at year end. • Tax deductions for annual leave, warranties, insurance and rent are available when the amounts are paid, and not as amounts are accrued. • Amounts received from sales, including those on credit terms, are taxed at the time the sale is made. • Rent income is taxed when amounts are received, and not as amounts are accrued. • The company can claim a tax deduction of $10,500 for depreciation on plant, and $12,000 for depreciation on motor vehicles. Accumulated depreciation for tax purposes at 30 June 2014 was $31,500 for plant, and $18,750 for motor vehicles. • The plant sold during the year (sold on 1 July 2014) had been purchased for $50,000 on 1 July 2013. For taxation purposes, the plant was depreciated at 15% p.a. • The tax rate is 30%. Required: i) Determine the balance of any current and deferred tax assets and liabilities as at 30 June 2015, in accordance with AASB 112. (13 marks) ii) Prepare the journal entries to record the current tax liability and movement in the deferred tax assets and deferred tax liabilities. (2 marks) Marking Guide – Question 3 Max. marks awarded Determination of taxable income and current tax liability 6 Determination of deferred tax assets and liabilities using a deferred tax worksheet 7 Journal entries 2 Question 4 [15 marks] Property, plant and equipment Walkie Ltd acquires a new motor vehicle on 1 July 2013 for $90,000. The motor vehicle is expected to have a useful life of six years, and has an estimated residual value of $10,000. The straight-line method of depreciation is used. On 1 July 2014, the directors of Walkie Ltd decide to adopt the revaluation model for motor vehicles. The motor vehicle is revalued to $85,000 and its useful life is reassessed: it is expected, at that date, to have a remaining useful life of nine years. The estimated residual value remains unchanged at $10,000. On 30 June 2015, the motor vehicle is revalued to $52,000. On this date, the directors determine that the useful life and residual value does not need to be reassessed. On 30 June 2016, it is determined that the fair value of the motor vehicle does not differ materially from its carrying amount. It is also determined that the useful life and residual value does not need to be reassessed. On 1 January 2017 it is unexpectedly sold for $45,000. Required: Prepare journal entries for Walkie Ltd between 1 July 2013 and 1 January 2017 to record the above. Show narrations and all relevant workings. Assume a tax rate of 30%. Marking Guide - Question 4 Max. marks awarded Journal entries 14 Workings 1 Question 5 [15 marks] Impairment of assets Jack Ltd has a division that represents a separate cash generating unit. At 30 June 2015, the carrying amounts of the assets of the division, valued pursuant to the cost model, are as follows: Assets: $ Cash 42,000 Plant and equipment 600,000 Less: accumulated depreciation (120,000) Land 800,000 Inventory 90,000 Accounts receivable 27,000 Patent 150,000 Goodwill 10,000 Carrying amount of cash generating unit 1,599,000 The receivables were regarded as collectable, and the inventory’s fair value less costs to sell was equal to its carrying amount. The patent has a fair value less costs to sell of $140,000, and the land has a fair value less costs to sell of $825,000. The directors of Jack estimate that, at 30 June 2015, the fair value less costs to sell of the division amounts to $1,500,000, while the value in use of the division is $1,560,000. As a result, management increased the depreciation of the plant and equipment from $40,000 p.a. to $45,000 for the year ended 30 June 2016. By 30 June 2016, the recoverable amount of the cash generating unit was calculated to be $55,000 greater than the carrying amount of the assets of the unit. Required: Determine how Jack Ltd should account for the results of the impairment test at 30 June 2015 and 30 June 2016, and prepare any necessary journal entries. Show all workings and provide references to the relevant accounting standard to support your answer. Marking Guide - Question 5 Max. marks awarded Journal entries, calculations and workings for 2015 7.5 Journal entries, calculations and workings for 2016 7.5 Rationale This assessment task is designed to assess your understanding of topics 3 to 7, and the following subject learning outcomes: • be able to prepare basic financial statements for reporting entities; • be able to discuss critically and comprehensively the statutory and professional requirements upon which published financial statements are based; • be able to explain the form and content of financial statements; • be able to interpret and apply generally accepted accounting principles and specific financial reporting standards relating to concepts of recognition, measurement, disclosure, revaluation and impairment of key financial statement elements. Marking criteria The marking guide for this assessment task is provided below. The detailed allocation of marks for each question has been provided above for your information. Criteria HD Question 1: Apply relevant accounting principles in accounting for changes in accounting estimates and errors. Determine how each scenario is to be classified and accounted for without flaw; All key references to AASB 108 are provided; Explanations shown are correct, well justified and clear. Question 2: Prepare journal entries to account for share issue transactions. All entries made are accurate Dates shown are correct for the transactions. Narrations are shown. Appropriate workings are shown. Question 3: Apply relevant accounting principles in recognising and measuring income tax. Determine current and deferred tax balances without flaw Calculations shown are logical and well presented. All journal entries made are accurate. Question 4: Apply relevant accounting principles in accounting for property, plant and equipment. All entries made are accurate. Appropriate workings are shown and accurate. Question 5: Apply relevant accounting principles for impairment of assets. Apply the requirements of AASB136 to calculate and account for the impairment of cash generating units, without flaw. All journal entries made are accurate. Explanations and workings presented show mastery of the topic. Presentation Physical presentation of assignments: It is essential that presentation of assignments adheres to accepted standards in relation to neatness and layout, as you are practicing to present material in a work situation. You should submit a bibliography (using APA referencing style) with your assignment. For practical questions: • All journal entries must include narrations unless otherwise specified; • Any ledger accounts should preferably be shown in ``T`` account format and dates and descriptions are included; • Journal entries and ledger accounts must reflect the strict order of sequence of events; financial statements (including extracts) should include proper headings and accord with presentation standards. Penalties will be incurred if material is not correctly referenced and if presentation is not of an acceptable standard. Part 2 Task Pacific Energy Limited (ASX: PEA) is an ASX-listed energy supply business. The businesses deliver low-cost ‘off-grid’ power supply to the Australian resource sector and ‘grid-connected’ renewable hydropower. PEA owns and operates 22 power stations with a total power generation capacity approaching 237MW. These power stations utilise either gas, diesel, dual fuel or water to generate electricity for our long-term customers. The Company’s core business division Kalgoorlie Power Systems (KPS) has been delivering its resource sector clients, including some of the world’s biggest mining companies, ‘off-grid’ power supply solutions for in excess of 25 years. i) Being part of the treasury team of Pacific Energy Limited, your first exercise is to categorize Pacific Energy’s capital structure into debt and equity capital. Begin by going to the website http://www.asx.com.au/asx/research/company.do#!/PEA to obtain Pacific Energy Limited’s 2015 Annual Report. ii) Calculate after-tax Weighted Average Cost of Capital. iii) Assuming Pacific Energy Limited’s credit rating is AAA, what alternative capital structure would you recommend lowering the cost of capital to the company? Show all your calculation and limit your report to 1,000 words. Guidelines: • You are to calculate cost of debt and cost of equity to work out Weighted Average Cost of Capital. • To lower the cost of capital of the company, you could suggest an alternative debt and equity capital mix taking into account the company is AAA rated. Rationale This will provide an opportunity to apply the concepts in an authentic scenario that you may encounter in the workplace and also: • be able to evaluate and explain the congruence of accounting, finance and treasury functions. Marking criteria Where necessary, state any assumptions you have made. Assignments should show all workings and students will be penalized for failing to do this. Use the following rubric as guidance: High Distinction Problem types/criteria (HD) 85% to 100% Quantitative problems HD Be able to identify and determine individual cost of capital and compute weighted cost of capital. Identify and determine all the cost of capital and be able to compute the cost of capital correctly with no flaws. Conceptual problems HD Be able to analyse the elements in the business environment that at a particular time cause the cost of the individual source of capital to be high or low. Explicit and detailed analysis of all elements in business environment that cause cost of the individual source of capital to be high or low. Analysis of elements demonstrates a very broad and deep knowledge of the topic Financial technology HD Use appropriate financial technology to gather information and conduct financial analysis. Data used skilfully and demonstrates explicit integration into the analysis. The correct answers are derived using multiple relevant sources and the results are presented in a clear and professional manner. Analyze business situations HD Reach reasonable conclusion and recommendations on an alternative capital structure to lower cost of capital. Quantitative and qualitative analysis persuasively and explicitly supports the conclusion and recommendations incorporating all factors determining cost of capital. Financial research HD Use of literature/market research/evidence of reading. Has developed and justified own ideas based on a wide range of sources which has been thoroughly analysed, applied and discussed. Reference list of an extensive rant of resources used, correctly formatted using APA style.

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