company accounting leo 8th solution Topic 3 Solution to study guide questions

company accounting leo 8th solution Topic 3 Solution to study guide questions Chapter 3: Company Operations REVIEW QUESTIONS 2. Foxy Ltd was going through some difficult trading times and was barely breaking even. In attempting to improve sales, the company spent $500 000 on an advertising campaign during the current year in the hope that sales would improve in the new year. Management decided that the cost of this campaign should be recorded as an asset in order that the small current profit for the firm would not become a loss. Discuss whether management’s decision is justified. Advertising costs may be treated as an asset only if they satisfy the definition of an asset. Do they have the essential characteristics of an asset? Do they provide controlled future economic benefits flowing to the entity from a past event or events? Do they satisfy the proposed definition of an asset put forward by the IASB and FASB? It is not sufficient to treat them as an asset merely to show a better profit figure. If advertising costs are not assets, then management‘s decision is not justified. If they are assets, then the decision to treat them as an asset in the records will only be justified if the advertising costs satisfy the recognition criteria, i.e. is it probable that the advertising expenditure will lead to future economic benefits flowing to the entity, and can the costs be measured reliability? Discuss the meaning of ―probable‖. Note that in this case, there is a cost which can be reliably measured. 4. What are the essential characteristics of equity? What proposals have been put forward to change the concept of equity? Equity is defined in the current Framework, paragraph 49, as ?the residual interest in the assets of the entity after deducting its liabilities‘. Equity as such is not a stand-alone concept but a ?residual‘, determined by subtracting recognised liabilities from recognised assets.. It is proposed, however, that this residual concept be pushed aside in favour of a ―stand-alone‖ concept of equity. See section 3.1.5 of the chapter. The FASB has described three approaches for distinguishing equity instruments from non-equity instruments—basic ownership, ownership-settlement and reassessed expected outcomes (REO); and has reached a preliminary view that the basic ownership approach is the appropriate approach for determining which instruments should be classified as equity. All three approaches use the definition of a basic ownership instrument. The characteristics of such an instrument are: (a) the holder has a claim to a share of the assets of the entity that is subordinate to all other claims if the issuer were to liquidate on the date the classification decision is being made, and (b) the holder is entitled to a percentage of the assets of the entity that remain after all higher priority claims have been satisfied. Some instruments that are redeemable (mandatorily or at the option of the holder) meet the definition of a basic ownership instrument. A basic ownership instrument would be classified as equity under all three approaches. Under the basic ownership approach, only basic ownership instruments would be classified as equity. The ownership-settlement approach would also classify as equity other perpetual financial instruments and some derivative financial instruments that are indexed to and settled with the entity‘s basic ownership instruments. The ownership- settlement approach would also classify a component of a financial instrument as equity if the instrument has multiple outcomes and one or more of those outcomes provides a return to the holder that has the same general profile as the return to the holder of a basic ownership instrument. The REO approach would also classify as equity those financial instruments whose fair value changes in the same direction as the fair value of a basic ownership instrument. Thus, depending on the approach adopted, the concept of equity will include only a few financial instruments or several financial instruments Another approach has also been proposed in a discussion paper prepared by the European Financial Reporting Advisory Group (EFRAG). That paper favours an approach called the loss absorption approach to determining equity. The loss absorption approach classifies instruments (or components of instruments) as equity if the instrument‘s claim on net assets is reduced if the entity incurs a loss. 5. As maintenance costs on equipment have been steadily rising every year, Scotch Ltd has been setting aside regularly a provision for plant maintenance at an increasing amount. The provision has been recorded as a liability, and as an expense. Discuss whether Scotch Ltd’s treatment is correct. The current Framework‘s definition of a liability provides that there must be a present obligation. Furthermore, a provision must firstly be a liability for it to exist. See Section 3.1.3 of the chapter. As the recording of future maintenance costs is merely a book entry involving a future self-sacrifice by Scotch Ltd itself, with no present obligation, no liability for maintenance costs exists under the Framework‘s definition of liabilities. Nor can there be an expense as there has been no outflow or depletion of assets or incurrence of a liability in Scotch Ltd. 6. Distinguish between current and non-current assets. Can property, plant and equipment be reported as a current asset? If so, when? The distinction between a current and a non-current asset can be found in paragraph 66 of AASB 101. Here a current asset is defined as an asset that (a) is expected to be realised in, or is intended to be sold or consumed in the entity‘s normal operating cycle (usually twelve months); or (b) is held primarily for trading purposes, or (c) is expected to be realised within twelve months after the reporting period; or (d) the asset is cash or a cash equivalent which is not restricted in its use beyond twelve months. If an asset doesn‘t satisfy this definition, then it will be classified as a non-current asset. See section 3.3.1 of the chapter. An example of an item of property, plant and equipment being reported as a current asset may be where a particular machine or group of such assets is no longer being used by the entity in its factory and is being held for sale, which is expected to take place in the next twelve months. For such non-current assets to be reclassified as current, it must satisfy the requirements of paragraph 3 of AASB5, Non-current Assets Held for Sale and Discontinued Operations, which states: Assets classified as non-current in accordance with AASB 101 Presentation of Financial Statements shall not be reclassified as current assets until they meet the criteria to be classified as held for sale in accordance with this Standard. Assets of a class that an entity would normally regard as non-current that are acquired exclusively with a view to resale shall not be classified as current unless they meet the criteria to be classified as held for sale in accordance with this Standard. 7. Distinguish between current and non-current liabilities. Can a liability, which satisfies the definition of a current liability, be reported, internally and/or externally, as a non-current liability? The distinction between a current and a non-current liability can be found in paragraph 69 of AASB 101. Here a current liability is defined as a liability that is (a) expected to be settled in the entity‘s normal operating cycle or (b) is held primarily for trading purposes, or (c) it is due to be settled within twelve months after the end of the reporting period, or (d) the entity does not have an unconditional right to defer the settlement of the liability for at least twelve months after the reporting period. If a liability doesn‘t satisfy this definition, then it will be classified as a non-current liability. See section 3.3.2 of the chapter. A long-term interest bearing liability that is due to be settled within twelve months would satisfy the definition of a current liability. However paragraph 73 of AASB 101 states that such liabilities must continue to be reported as a non-current liability where the entity has discretion to refinance or roll over its obligations for at least twelve months after the reporting date. 8. Discuss the nature of income and revenue. When can revenue be recognised? What further restrictions are placed on the recognition of revenue by AASB 118? How is revenue to be measured? Income is defined at paragraph 70 of the current Framework as meaning increases of economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants. Income is subclassified into revenue and gains. Revenue is defined in AASB 118 as the gross inflow of economic benefits during the period arising in the course of ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants. Gains are simply income which arise from activities which are ―not from ordinary activities‖. Gains are reported on a net basis, unlike revenue. Paragraph 83 of the current Framework states that income should only be recognised when it is probable these inflows or savings in outflows will occur and the amount can be reliably measured. AASB 118 places further restrictions on the recognition of revenue in that it requires a control test and a cost test to be applied. The control test requires the entity to transfer the significant risks and rewards of ownership of the goods, and not to retain continuing management involvement associated with effective control over the goods. The cost test requires that all costs incurred or to be incurred in respect of the sale to be measured reliably. For revenue from services, a stage of completion test is also required. The standard also provides requirements for the recognition of revenue from dividends, interest and royalties. See section 3.2.1 for further discussion, and AASB 118 paragraphs 14-34. Paragraph 9 of AASB 118 states that revenue must be measured at the fair value of the consideration or contributions received or receivable. Discuss the meaning of fair value. Note though that revenues arising from biological assets, as per paragraphs 26 and 28 of AASB 141, are measured as the increase in fair values (less costs to sell) of those assets in the current period. 9. What is the nature of an expense, and when are expenses to be recognised? How can expenses be classified in the preparation of financial statements for internal reporting purposes? Expenses are defined at paragraph 70 of the current Framework as decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants. Paragraph 83 states that expenses should only be recognised when it is probable that the future economic benefits will flow from the entity and the amount can be reliably measured. See section 3.2.2 of the chapter for a brief discussion of the recognition of different types of expenses. Expenses are usually classified in general-purpose financial statements by their nature such as employee expenses or depreciation, or their function such as distribution and administrative expenses. However, for internal reporting purposes, expenses can be classified in a way that best suits the user of the financial statement e.g. variable v fixed, controllable v non-controllable. See also Section 3.3.5 of the chapter. 12. Indicate reasons for the declaration of a bonus share issue, and discuss the legal arrangements behind such an issue. There are a number of reasons for the declaration of bonus shares that can be found at 3.4.5 of the text, namely: , to provide a return to shareholders without any cash outlays, thus protecting the company‘s current liquidity , to capitalise the long-term reserves of a company by converting reserves such as asset revaluation into share capital , to capitalise the profits of the company under s. 254S , to signal to the capital market that the company expects good future profitability levels for cash dividends , as a defence when the company is the subject of a takeover bid. The issue of bonus shares in this situation commonly follows the revaluation of the company‘s assets, and the bonus shares are issued by capitalising the revaluation surplus/reserve so created. A few years ago, BHP Billiton issued a 1:1 bonus share issue. This effectively reduced the share price in half whilst not diluting shareholder‘s capital wealth. A bonus issue should not be referred to as a dividend unless it is being declared out of profits, as the Corporations Act states that a dividend may only be paid out of profits of the company. 14. Discuss the nature of a reserve. What reasons may there be for no definitions being given for a reserve in the legislation, accounting standards and the Framework? The term reserve is not defined in any accounting standard or the Corporations Act. AASB 101 describes the equity of a company as consisting of issued capital and reserves (para.54(r)). In addition to retained earnings, the most common type of reserves are general, revaluation and foreign currency translation reserves, all of which can be considered as ?direct adjustments to equity‘. There appears to be no clear reason as to why the term ?reserve‘ is not defined in the legislation, standards, or the Framework. ?Retained earnings‘ is one category of reserves, according to AASB 101. CASE STUDIES Case Study 1: Footballers as assets Required Discuss whether the Liverchester club is justified in its action to treat players as assets, by reference to appropriate accounting regulations. Assets are defined in the current Framework para. 49 as ?a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity‘. According to paras 53–59 of the Framework, an asset has three essential characteristics: 1. An asset contains future economic benefits in the form of a potential to contribute, directly or indirectly, to the flow of cash and cash equivalents to the entity. 2. The future benefits must be controlled by the entity. This means that an asset does not have to be legally owned. Control is not defined in the Framework; nevertheless, in para. 57, an ability of the entity to deny or regulate access to those benefits is implied. 3. Assets must have come into existence as a result of past events. Future economic benefits which are not currently controlled by the entity are not assets. A past event must have occurred. Hence, inventories expected to be acquired by the company next month are not assets to the entity at present. Once these three essential characteristics are satisfied, an asset exists. Under the Framework, the existence of an asset is not dependent on factors such as whether it has been purchased at a cost, is ?tangible‘ or has a physical existence, has a legally enforceable claim over it, or is exchangeable in the marketplace for cash or other assets Does the Liverchester club have future economic benefits? Yes. In the form of ticket sales, promotional and sponsorship benefits Does Liverchester control the future economic benefits? As control means the capacity to deny or regulate the access of others to those benefits, Liverchester would appear to have control. Substantial transfer fees are required if a player wants to go to another club. Has there been a past event? Yes, there is a contract signed with each player. Can the players be recognised as assets? Recognition criteria could be discussed if it is agreed that the players are assets. But how do you obtain a reliable measure of your asset? And what about other officials e.g. coaching staff, management? Are they not assets as well? Does the IASB and FASB proposed definition of an asset change your opinion? The proposed definition is as follows: An asset of an entity is a present economic resource to which, through an enforceable right or other means, the entity has access or can limit the access of others. Case Study 5: Assets and expenses Required Evaluate Southern Breweries Limited's treatment of the beer advertising expenditure. Advertising expenditure may be treated as an asset only if it satisfies the definition of an asset. An asset should be defined and the essential characteristics of an asset discussed; namely controlled future economic benefits flowing to the entity from a past event or events. The challenge for Southern Breweries is to show how the future benefits flowing from Lite Lager are controlled by them. It is not sufficient to treat the costs as an asset merely to show a better profit figure. If advertising costs are not assets, then management‘s decision is not justified. If they are assets, then the decision to treat them as an asset in the records will only be justified if the advertising costs satisfy the recognition criteria, i.e. is it probable that the advertising expenditure will lead to future economic benefits flowing to the entity, and can the costs be measured reliability? Discuss the meaning of ―probable‖. In this case we would need to assess whether Southern Breweries‘ Lite Lager is going to create significant future economic benefits for the company. Note that in this case, there is a cost which can be reliably measured. PRACTICE QUESTIONS ,QUESTION 3.1 Dividends and reserve transfers Prepare general journal entries to record the following unrelated transactions of a limited company: 1. Payment of an interim dividend of $200 000 (in cash). 2. Declaration of a final dividend of $420 000. 3. Transfer of $65 000 from the revaluation reserve to a general reserve. 4. Transfer of $120 000 to the general reserve from retained earnings. 5. Payment of 300 000 bonus shares, fully paid at $1 per share from a general reserve. 1. Retained Earnings/Interim Dividend Dr 200 000 Cash Cr 200 000 (Payment of interim dividend) 2. Retained Earnings/ Dividend Declared Dr 420 000 Dividend Payable Cr 420 000 (Declaration of a final dividend) 3. Revaluation Reserve Dr 65 000 General Reserve Cr 65 000 (Transfer from revaluation reserve to general reserve) 4. Retained Earnings/ T‘fer to Reserve Dr 120 000 General Reserve Cr 120 000 (Transfer to general reserve) 5. General Reserve Dr 300 000 Share Capital Cr 300 000 (Being bonus dividend out of general reserve) , QUESTION 3.3 Equity movements and statement of changes in equity Required A. Prepare journal entries to record the transactions. B. Prepare a statement of changes in equity for the year ended 30 June 2012. ROSE LTD General Journal A. 2011 Sept 1 Retained Earnings/Dividend Paid Dr 80 000 Cash Cr 80 000 (Payment of dividend confirmed at the AGM) Dec 31 General Reserve Dr 176 000 Share Capital Cr 176 000 (Payment of 1-for 5 bonus issue @$2.20 out of general reserve) 2012 June 30 Accumulated Depreciation - Building Dr 180 000 Land and Buildings Dr 100 000 Revaluation Reserve Cr 280 000 (Revaluation increment on land and buildings) Profit and Loss Summary Dr 330 000 Retained Earnings Cr 330 000 (Profit for the year closing entry) No entry for dividends as, from part 1 of the question, directors must ratify the dividend at the annual general meeting. There is no liability at this stage. B. ROSE LTD Statement of Changes in Equity for the year ended 30 June 2012 Total comprehensive income for the year* $610 000 Retained earnings: Balance at 1 July 2011 $40 000 Profit for the period 330 000 Dividend paid during year (80 000) Balance at 30 June 2012 $290 000 Share capital: Balance at 1 July 2011 $800 000 Bonus share issue during the period 176 000 Balance at 30 June 2012 $976 000 Other reserves: General Balance at 1 July 2011 $350 000 Bonus share issue during the period 176 000 Balance at 1 July 2012 $174 000 Revaluation reserve Balance at 1 July 2011 $ 0 Revaluation of land and buildings 280 000 Balance at 30 June 2012 $280 000 * Comprehensive income = $330 000 profit + $280 000 revaluation reserve/surplus. ,, QUESTION 3.4 Adjustments and preparation of financial statements Required A. Prepare general journal entries to record the adjustments necessary. B. Prepare the statement of comprehensive income for Aster Ltd for the year ended 30 June 2010. C. Prepare the statement of changes in equity for Aster Ltd. D. Prepare the statement of financial position for Aster Ltd as at 30 June 2010. ASTER LTD General Journal A. 2010 June 30 Depreciation - Plant & Machinery Dr 30 000 Accum. Depn - Plant & Mach Cr 30 000 (Depreciation at 20% per annum) Depreciation - Buildings Dr 4 000 Accum. Depn - Bldgs Cr 4 000 (Depreciation at 5% per annum) Income Tax Expense Dr 4 800 Current Lax Liability Cr 4 800 (Tax of 30% on profit of $16 000 as calculated below) Retained Earnings/Dividend Declared Dr 9 600 Dividend Payable Cr 9 600 (Final dividend of 8c per share on 120 000 shares declared) [assuming no further ratification is required, otherwise no entry] Contingencies Reserve Dr 10 000 Retained Earnings/Transfer from reserve Cr 10 000 (Being transfer from this reserve) B. ASTER LTD Statement of Comprehensive Income for the year ended 30 June 2010 Income: Sales $882 680 Dividend revenue 10 000 Interest revenue 1 320 Total revenues 894 000 Expenses: Selling expenses Cost of sales $694 000 Other selling expenses 82 000 Total selling expenses 776 000 Administrative expenses Administrative expenses 51 000 Depreciation of plant & machinery 30 000 Depreciation of buildings 4 000 Total administrative expenses 85 000 Financial expenses Financial expenses 17 000 Total financial expenses 17 000 Total expenses 878 000 Profit before income tax 16 000 Income tax expense (30%) 4 800 Profit for the year $11 200 Other comprehensive income 0 Total comprehensive income for the year $11 200 C. ASTER LTD Statement of Changes in Equity for the year ended 30 June 2010 Total comprehensive income for the year $11 200 Retained earnings: Balance at 1 July 2009 $13 000 Profit for the period 11 200 Dividend declared (9 600) Transfer from contingencies reserve 10 000 Balance at 30 June 2010 $24 600 Share capital: Balance at 1 July 2009 $240 000 Balance at 30 June 2010 $240 000 Other reserves: Contingencies Balance at 1 July 2009 $16 000 Transfer to retained earnings (10 000) Balance at 30 June 2010 $6 000 D. ASTER LTD Statement of financial Position as at 30 June 2010 Current assets Accounts receivable $54 000 Allowance for doubtful debts 8 000 $46 000 Inventories 46 000 Total current assets 92 000 Non-current assets Government bonds 22 000 Shares in other companies 75 000 Freehold land 40 000 Buildings 80 000 Accumulated depreciation (34 000) 46 000 Plant and machinery 150 000 Accumulated depreciation (100 000) 50 000 Goodwill 30 000 Total non-current assets 263 000 Total assets 355 000 Current liabilities Accounts payable 30 000 Current tax liability 4 800 Dividend payable 9 600 Total current liabilities 44 400 Non-current liabilities Bank loan payable 24 000 Mortgage payable 16 000 Total non-current liabilities 40 000 Total liabilities 84 400 Net assets $270 600 Equity Share capital 120 000 ordinary shares issued and paid to $2 240 000 Contingencies reserve 6 000 Retained earnings 24 600 Total equity $270 600 ,, QUESTION 3.5 Ledger accounts for equity adjustments Required Prepare ledger accounts to reflect the transactions. POPPY LTD General Ledger Share Capital - Ordinary 30/6/12 Balance 132 400 30/6/11 Balance 50 000 9/7/11 Final call 50 000 22/10/11 Reval reserve 32 400 132 400 132 400 30/6/12 Balance 132 400 Share Capital - Preference 30/6/11 Balance 400 000 General Reserve 30/6/12 Balance 43 000 30/6/11 Balance 40 000 30/6/12 Retained earnings 3 000 43 000 43 000 30/6/12 Balance 43 000 Retained Earnings (extract) 10/1/12 Int ord div 7 800 30/6/11 Balance 860 000 30/6/12 Pref div payable 40 000 30/6/12 Ord div payable 7 800 30/6/12 General reserve 3 000 Final Call 9/7/11 Ord share capital 50 000 19/7/11 Cash 50 000 Cash (extract) 19/7/11 Final call 50 000 5/9/11 Ord div payable 7 000 5/9/11 Pref div payable 40 000 10/1/12 Retained earnings (int 7 800 ord div) Ordinary Dividend Payable 5/9/11 Cash 7 000 30/6/11 Balance 7 000 30/6/12 Retained earnings 7 000 Preference Dividend Payable 5/9/11 Cash 40 000 30/6/11 Balance 40 000 30/6/12 Retained earnings 40 000 Revaluation Reserve 21/10/11 Share capital 32 400 21/10/11 Land and Buildings 50 000 Land and Buildings (extract) 21/10/11 Revaluation reserve 50 000 ,, QUESTION 3.8 Share issues, options, dividends and reserves Required Prepare general journal entries to record the transactions. GERALDTON WAX LTD GENERAL JOURNAL 2011 Sept 15 Dividend Payable– Ordinary Dr 92 800 Dividend Payable– Preference Dr 4 500 Cash 97 300 (Payment of ordinary dividend [400 000 x 16c +300 000 x 16c x 3/5 = $92 800] and preference dividend [$75 000 x 6%]) Oct 20 Share Capital – Preference Dr 75 000 Retained Earnings/Redemption Premium Dr 3 750 (75 000 x 5%) Shareholders‘ Redemption Cr 78 750 (Redemption of preference shares out of profits) Note: dividends do not accrue on the preference shares Retained Earnings/Transfer to Share Capital Dr 75 000 Share Capital – Ordinary Cr 75 000 (Retained earnings transferred to capital. NOTE: no dividends will be paid on this share capital) Shareholders‘ Redemption Dr 78 750 Cash Cr 78,750 (Payment of cash to redeem preference shares) Nov 30 Cash Dr 152 000 Share Capital – Ordinary ?A‘ Cr 152 000 (Renounceable rights issue) [400 000/5 = 80 000 x 1.90] Dec 20 Share Issue Costs (Share Capital) Dr 3 000 Cash Cr 3 000 (Payment of share issue costs) 2012 Jan 10 Retained Earnings/Transfer to reserve Dr 35 000 General Reserve Cr 35 000 (Transfer to general reserve) Feb 28 Cash Dr 126 000 Share Capital – Ordinary ?C‘ Cr 126 000 (Issue of shares to options holders) [70 000 x $1.80] Share Options Dr 24 000 Share Capital – Ord ?C‘ Cr 21 000 Lapsed Options Reserve Cr 3 000 (Transfer of options account, 35 000 exercised and 5 000 lapsed) [70 000/2 = 35 000 x 60c = 21 000] April 30 Call – Ordinary ?B‘ Dr 240 000 Share Capital – Ordinary ?B‘ Cr 240 000 Call of 80c per share on Ordinary B shares) Calls in Advance (20 000 x 80c) Dr 16 000 Call – Ord ?B‘ Cr 16 000 (Transfer of calls in advance) May 31 Cash Dr 212 000 Call – Ord ?B‘ Cr 212 000 (Cash received on call) [(300 000 – 20 000 – 15 000) x 80c] June 18 Share Capital – Ordinary ?B‘ Dr 30 000 Call – Ordinary ?B‘ Cr 12 000 Forfeited Shares Liability Cr 18 000 (Forfeiture of 15 000 Ordinary B shares) 26 Cash Dr 27 000 Forfeited Shares Liability Dr 3 000 Share Capital – Ordinary ?B‘ Cr 30 000 (Reissue of 15 000 shares paid to $2 for payment of $1.80) 27 Forfeited Shares Liability Dr 15 000 Cash Cr 15 000 (Refund to former shareholders) June 28 Retained Earnings/Dividend Declared Dr 170 000 Dividend Payable Cr 170 000 (Dividend declared) [Workings from the entries above: 400 000 + 300 000 + 80 000 + 70 000 – 15 000 + 15 000= 850 000 x 20c] ,,, QUESTION 3.12 Adjustments and financial statements Required A. Prepare the journal entries (in general journal form) required by items 1 to 11. B. Prepare the adjusted trial balance as at 30 June 2011. C. Prepare the statement of comprehensive income with expenses classified by function for Banksia Ltd for the year ended 30 June 2011. D. Prepare the Retained Earnings account and the statement of changes in equity for the year. E. Prepare the company’s statement of financial position as at 30 June 2011. A. BANKSIA LTD General Journal 2011 June 30 Depreciation Expense – Buildings Dr 50 000 Accumulated Depreciation – Buildings Cr 50 000 (Depreciation at 5% per annum) 30 Depreciation Expense – Furniture & Equip. Dr 12 700 Accumulated Depreciation – F & E Cr 12 700 (Depreciation at 10% per annum) 30 Allowance for Doubtful Debts Dr 12 000 Accounts Receivable Cr 12 000 (Bad debts written off) 30 Bad Debts Expense Dr 14 372 Allowance for Doubtful Debts Cr 14 372 (Recognition of allowance at 8% of receivables) 8% x (225 400 – 12 000) – (14 700 – 12 000) 30 Income Tax Expense Dr 8 000 Current Tax Liability Cr 8 000 (Income tax expense) 30 Salaries Expense – Sales Staff Dr 1 500 Wages & Salaries Payable Cr 1 500 (Accrued salaries of sales staff) 30 Administrative Wages Expense Dr 2 000 Wages & Salaries Payable Cr 2 000 (Accrued wages of admin. staff) 30 Prepaid Rent Dr 30 000 Vehicle Rental Expense Cr 30 000 (Rent prepaid) 30 Share Capital Dr 8 000 Call Cr 2 000 Forfeited Shares Reserve Cr 6 000 (Forfeiture of 8 000 shares) 30 Retained Earnings/Dividend Declared Dr 33 960 Dividend Payable Cr 33 960 (Dividend of 3c on 1 132 000 shares) June 30 Land Dr 20 000 Revaluation Reserve Cr 20 000 (Revaluation of land) 30 General Reserve Dr 10 000 Retained Earnings/Transfer from Reserve Cr 10 000 (Transfer from general reserve) B. BANKSIA LTD Adjusted Trial Balance as at 30 June 2011 DEBIT CREDIT $ $ Bank overdraft 178 050 Vehicle rental expenses 42 000 Cash at bank 7 500 Investment in government bonds 150 000 Goodwill 24 000 Interest revenue 4 800 Insurance expense 3 000 Land 250 000 Buildings 1 000 000 Office furniture & equipment 127 000 Retained earnings 59 040 Revaluation reserve 35 000 Accumulated depreciation – office furn & equip 35 700 Accumulated depreciation- buildings 150 000 Allowance for doubtful debts 17 072 Cost of sales 197 400 Advertising expense 12 300 Sales returns and allowances 8 700 Sales 478 120 Mortgage payable 90 000 Inventory 106 000 Share capital (called to $1 per share) 1 132 000 General reserve 8 000 Interest expense on overdraft 11 300 Discount received 11 250 Discount allowed 12 000 Fees revenue 17 900 Proceeds on sale of furniture 13 000 Carrying amount of furniture sold 5 000 Accounts payable 133 900 Accounts receivable 213 400 Salaries of sales staff 61 500 Administrative wages 70 620 Calls in advance (25 cents per share) 6 000 Interest expense on mortgage 4 500 Depreciation expense – buildings 50 000 Depreciation expense - furniture & equipment 12 700 Bad debts expense 14 372 Income tax expense 8 000 Current tax liability 8 000 Wages & salaries payable 3 500 Prepaid rent 30 000 Forfeited shares reserve 6 000 Dividend payable 33 960 2 421 292 2 421 292 C. BANKSIA LTD Statement of Comprehensive Income for the year ended 30 June 2011 Income: Sales $478 120 Less sales returns 8 700 $469 420 Fees revenue 17 900 Proceeds on sale of furniture 13 000 Discount received 11 250 Interest revenue 4 800 Total income 516 370 Expenses: Selling expenses Cost of sales 197 400 Advertising 12 300 Vehicle rent 42 000 Sales staff salaries 61 500 Total selling expenses 313 200 Administrative expenses Insurance expense 3 000 Carrying amount of furniture sold 5 000 Administrative wages 70 620 Depreciation of furniture & equipment 12 700 Depreciation of buildings 50 000 Total administrative expenses 141 320 Financial expenses Interest expense on overdraft 11 300 Interest expense on mortgage 4 500 Discount allowed 12 000 Bad debts 14 372 Total financial expenses 42 172 Total expenses 496 692 Net profit before income tax 19 678 Income tax expense 8 000 Profit for the year $11 678 Other comprehensive income 20 000 Total comprehensive income for the year $31 678 D. Retained earnings 30/6/11 Dividend payable 33 960 1/7/10 Balance 83 000 30/6/11 Net profit 11 678 30/6/11 Transfer from gen res 10 000 30/6/11 Balance 70 718 104 678 104 678 BANKSIA LTD Statement of Changes in Equity for the year ended 30 June 2011 Total comprehensive income for the year $31 678 Retained earnings: Balance at 1 July 2010 $83 000 Profit 11 678 Dividend declared - final (33 960) Transfer from general reserve 10 000 Balance at 30 June 2011 $70 718 Share capital: Balance at 1 July 2010 $1 144 000 Shares forfeited 6 000 Balance at 30 June 2011 $1 138 000 Other reserves: General Balance at 1 July 2010 $18 000 Transfer to retained earnings (10 000) Balance at 30 June 2011 $8 000 Revaluation Balance at 1 July 2010 $ 15 000 Revaluation of land 20 000 Balance at 30 June 2011 $35 000 Forfeited shares Balance at 1 July 2010 $ 0 Forfieture of shares 6 000 Balance at 30 June 2011 $6 000 E. BANKSIA LTD Statement of Financial Position as at 30 June 2011 Current assets Cash at bank $7 500 Accounts receivable $213 400 Allowance for doubtful debts (17 072) 196 328 Inventory 106 000 Prepaid rent 30 000 Total current assets 339 828 Non-current assets Government bonds 150 000 Land 250 000 Buildings 1 000 000 Accumulated depreciation (150 000) 850 000 Office furniture and equipment 127 000 Accumulated depreciation (35 700) 91 300 Goodwill 24 000 Total non-current assets 1 365 300 Total assets 1 705 128 Current liabilities Bank overdraft 178 050 Accounts payable 133 900 Wages and salaries payable 3 500 Current tax liability 8 000 Dividend payable 33 960 Total current liabilities 357 410 Non-current liabilities Mortgage payable 90 000 Total non-current liabilities 90 000 Total liabilities 447 410 Net assets $1 257 718 Equity Share capital 1 132 000 ordinary shares issued and paid to $1 1 132 000 Plus, calls in advance 6 000 1 138 000 General reserve 8 000 Revaluation reserve 35 000 Forfeited shares reserve 6 000 Retained earnings 70 718 Total equity $1 257 718