​​ 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 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: 5  $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     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.   ii)        Prepare the journal entries to record the current tax liability and movement in the deferred tax assets and deferred tax liabilities.   Marking Guide – Question 3 Max. marks awarded Determination of taxable income and current tax liability 6 2015 $ 2014 $ (13 marks) (2 marks) Determination of deferred tax assets and liabilities using a deferred tax worksheet 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. 7 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 D CR PS Question 1: Apply relevant accounting principles in accounting for changes in accounting estimates and errors. Question 2: Prepare journal entries to account for share   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.   All entries made are accurate Dates shown are   Determine how each scenario is to be classified and accounted for, with minor flaws; Most of the key references to AASB 108 are provided; Explanations shown are clear and succinct.   All entries made are accurate with some minor flaws.   Determine how each scenario is to be classified and accounted for, with some errors; Many of the key references to AASB 108 are provided; Explanations shown are adequate.   Most of the entries made are correct. Dates shown are   Determine how each scenario is to be classified and accounted for, with a number of errors; Some references to AASB 108 are provided; Explanations shown are basic.   Most of the entries made but contain errors. issue transactions. correct for the transactions. Narrations are shown. Appropriate workings are shown. Dates shown are correct for the transactions. Narrations are shown. Appropriate workings are shown. mostly correct for the transactions. Narrations are shown. Some workings are shown. Question 3: Apply relevant accounting principles in recognising and Determine current and deferred tax balances without flaw Determine current and deferred tax balances with minor flaws. Calculations shown Determine current and deferred tax balances with some errors. Calculations shown are Dates shown are mostly correct for the transactions. Narrations are shown but lack detail or are unclear. Some workings are shown but lack detail or are unclear. Determine current and deferred tax balances with a number of errors made.