Boots Ltd is finalising its financial statements for the reporting period ending 30 June 2015. On 20 September 2015, before the financial statements have been finalised and authorised for issue, the company's directors became aware of the following situations: a) The company owns a factory in Sydney that was completely destroyed by a severe hail storm on 10 July 2015. The factory had a carrying amount in the draft financial statements of $600,000. The factory was insured for $600,000, and Boots Ltd expects to receive this money from the insurer in October 2015. b) On 12 July 2015, the financial cost of inventory shipped from overseas is determined. The inventory was received in June 2015 and the cost was estimated for accounting purposes. The revised cost is $200,000 lower than the prior estimate. c) On 15 July 2015, Smith Ltd, a major customer of Boots Ltd, indicated that it was bankrupt. At this date, Smith Ltd owed $45,000 to Boots Ltd. This amount was owed to Boots Ltd from a sale made to Smith Ltd in June 2015. d) It is discovered, on 18 July 2015, that a divisional manager has been under-depreciating plant and equipment. The motivation of the manager was to maximise the division's profit figure in order to maximise his bonuses. The carrying amount of the relevant plant and equipment in Boots' draft financial statements is $2,500,000. An investigation by the company's internal audit division, presented to Boots' directors on 25 July 2015, suggests that the plant and equipment has a recoverable amount of $1,500,000. Assume all amounts are material for financial statement purposes. Required: With reference to AASB 110, explain whether the above events will be classified as either adjusting or non-adjusting events after the end of the reporting period, providing reasons for your decision. State the appropriate accounting treatment for each event in Boots Ltd's 2015 financial statements. Marking Guide - Question 1 Max. marks awarded Classification as adjusting or non-adjusting events 4 Discussion and reasons to support classification decision 4 Appropriate accounting treatment 4 Total 12 Question 2 [16 marks] Sugar Ltd was incorporated on 1 July 2014. The following transactions and events occurred during the year ended 30 June 2015: 1 Aug 2014: Sugar Ltd makes an offer to the public for investors to subscribe for 10,000,000 shares, at an issue price of $3.00 per share, with $1.50 payable on application, $1.00 being payable within one month of allotment, and $0.50 payable on a call to be made at a later date. The issue is underwritten at a commission of $2,000. 31 Aug 2014: Applications close, with applications received for 9,500,000 shares. 2 Sep 2014: Shares are allotted, and the underwriter forwarded the application and allotment money due on the 500,000 shares less their commission. 2 Oct 2014: All allotment money is received. 30 Nov 2014: The call is made, with money due by 31 December 2014. 31 Dec 2014: All call money is received except for holders of 20,000 shares who fail to meet the call. 20 Jan 2015: The shares on which call money was not received are forfeited and sold as fully paid. An amount of $2.60 is received for each share sold. Costs of the forfeiture and reissue amount to $6,000, and are paid. The constitution does allow the refund of any balance in the forfeited shares account after reissue to former shareholders. Required: Prepare the journal entries to record the transactions of Sugar Ltd up to and including that which took place on 20 January 2015. Show all relevant dates, narrations and workings. Marking Guide - Question 2 Max. marks awarded Journal entries 13 Dates 1.5 Workings 1.5 Total 16 Question 3 [17 marks] Accounting for income tax Fresh Ltd commences operations on 1 July 2014 and presents its first statement of profit or loss and other comprehensive income and first 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 380,000 Other income: Interest revenue 2,000 Government grant (exempt from income tax) 10,000 Expenses: Administration expenses 145,000 Doubtful debts expense 6,000 Salaries 130,000 Rent 26,000 Annual leave 3,000 Entertainment expenses (not tax deductible) 5,000 Warranty expenses 12,000 Depreciation expense – plant 40,000 Insurance 10,000 (377,000) Accounting profit before tax 15,000 Assets and liabilities as disclosed in the Statement of Financial Position as at 30 June 2015 $ $ Assets: Cash 35,000 Inventory 120,000 Accounts receivable 50,000 Less Allowance for doubtful debts (5,000) 45,000 Interest receivable 1,000 Prepaid insurance 5,000 Plant – cost 200,000 Less Accumulated depreciation (40,000) 160,000 Total assets 366,000 Liabilities: Accounts payable 40,000 Provision for warranties 8,000 Rent payable 6,000 Loan payable 200,000 Provision for annual leave 2,000 Total liabilities 256,000 Net assets 110,000 Additional information: All administration 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. Interest income is taxed when amounts are received, and not as amounts are accrued. The plant is depreciated over five years for accounting purposes, but over four years for taxation purposes. 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. Show all necessary workings. (14 marks) ii) Prepare the journal entries to record the current tax liability and deferred tax assets and liabilities. (3 marks) Marking Guide – Question 3 Max. marks awarded Determination of taxable income and current tax liability 6 Deferred tax worksheet 8 Journal entries 3 Total 17 Question 4 [15 marks] Property, plant and equipment Storm Ltd commences operations on 1 July 2013, and on this date, acquires two items of plant: Plant A: $120,000 Plant B: $350,000 Both assets are depreciated on a straight-line basis. Plant A has an estimated useful life of 10 years, and an estimated residual value of $20,000. Plant B has an estimated useful life of 5 years, and an estimated residual value of $0.