Question 1 Financial statement disclosures You are the financial accountant for Rainyday Ltd, and are in the process of preparing its financial statements for the year ended 30 June 2016. Whilst preparing the financial statements, you become aware of the following situations: a) On 1 July 2015 the directors made a decision, using information obtained over the last couple of years, to revise the useful life of an item of manufacturing equipment. The equipment was acquired on 1 July 2013 for $500,000, and has been depreciated on a straight-line basis, based on an estimated useful life of 10 years and a residual value of nil. Rainyday Ltd uses the cost model for manufacturing equipment. The directors estimate that as at 1 July 2015, the equipment has a remaining useful life of 6 years and a residual value of nil. No depreciation has been recorded as yet for the year ended 30 June 2016 as the directors were unsure how to account for the change in the 2016 financial statements, and are unsure whether the 2014 and 2015 financial statements will need to be revised as a result of the change. b) In June 2016, the accounts payable officer discovered that an invoice for repairs to manufacturing equipment, with an amount due of $25,000, incurred in June 2015, had not been paid or provided for in the 2015 financial statements. The invoice was paid on 5 July 2016. The repairs are deductible for tax purposes. The accountant responsible for preparing the company's income tax returns will amend the 2015 tax return, and the company will receive a tax refund of $7,500 as a result (30% x $25,000). Journal entries have not yet been done in the accounting records of Rainyday Ltd as the directors are unsure how to account for this situation, and what period adjustments need to be made in. c) Rainyday Ltd holds shares in a listed public company, Bobsmith Ltd, which are valued in the draft 30 June 2016 financial statements at $800,000. A major fall in the stock market occurred on 10 July 2016 (prior to the 2016 financial statements being finalised), and the value of Rainyday's shares in Bobsmith Ltd declined to $450,000. d) One of Rainyday Ltd's major debtors, Masterz Ltd, filed for bankruptcy on 20 July 2016. Rainyday Ltd's draft financial statements have been prepared reflecting a 50% doubtful debts provision for this account ($900,000 debt, less $450,000 provision for doubtful debts). On 20 July 2016 (prior to the 2016 financial statements being finalised), it appears that no amount will be recovered from Masterz liquidator in respect of this debt. Required: State, for each situation, whether any adjustment to Rainyday Ltd's financial statements is required (assuming that each amount is material). Provide explanations and references to relevant paragraphs in the accounting standards to support your answers. State the appropriate accounting treatment (including any journal entries needed) for each situation in the 2016 financial statements. Question 4 Property, plant and equipment Sunshine Ltd acquired an item of equipment on 1 July 2013 at a cost of $800,000. On 30 June 2014, Sunshine's directors decide to continue using the cost model for equipment. They elect to depreciate the equipment acquired on 1 July 2013 using the straight-line method, over its useful life of five years. The estimated residual value is $40,000. The directors then decide to adopt the revaluation model for equipment from 1 July 2014. They determine that the fair value of this item of equipment on this date is $730,000. The useful life is revised on this date – estimated to be six years from 1 July 2014. The estimated residual value remains unchanged. On 30 June 2015, Sunshine's directors estimate that the fair value of the item of equipment does not differ materially from its carrying amount. On 30 June 2016, Sunshine's directors estimate that the fair value of the item of equipment is $400,000. The item of equipment is sold on 30 September 2016 for $390,000. Assume a tax rate of 30%. Required: Prepare journal entries to account for all transactions that took place during the period 1 July 2013 to 30 September 2016, including entries for the acquisition of the equipment, depreciation, revaluations and its disposal. Show all relevant dates, narrations and workings.