CH-17 Presentation of Financial Statements – Accounting : Book Guide

Chapter 17: Presentation of Financial Statements Questions and solutions which have a GST version: • Exercise 17.3 • Problem 17.18 • Problem 17.19 • Problem 17.20 Discussion questions 1. What items must be included in a company’s annual financial report? An annual financial report is required to be prepared under the Corporations Act 2001 by all companies apart from most small proprietary companies. The annual financial report must contain the following financial statements: • a statement of profit or loss and other comprehensive income • a statement of financial position • a statement of cash flows • a statement of changes in equity • notes, comprising a summary of significant accounting policies and other explanatory information • a directors declaration • an annual directors report • an annual auditors report. 2. A financial report must include ‘comparative figures’. What does this mean and can a company change these comparative figures in the following year? Discuss. Comparative figures are required by IAS 1/AASB 101. The standard requires that disclosures be included in the financial statements and notes for the preceding reporting period to enable users to compare current performance and financial position with the previous year’s performance and position. If the entity has reclassified financial information in the report, comparative information must also be reclassified and the nature, amount of, and reason for the reclassification must be disclosed. 3. What is meant by the all-inclusive concept of profit? Does IAS 1/AASB 101 Presentation of Financial Statements follow this concept in presenting a statement of profit or loss and comprehensive income? Explain. The all-inclusive approach to the determination of a company’s profit/loss means that all income and all expenses must be included in the company’s Profit or Loss Summary account for the year. However, there are a number of exclusions which arise from application of accounting standards that affect equity accounts but not income or expense: • Changes in revaluation surplus (see AASB 116 Property Plant and Equipment and AASB 138 Intangible Assets). • Actuarial gains and losses on defined benefit plans recognised in accordance with paragraph 93A of AASB 119 Employee Benefits. • Gains and losses arising from translating the financial statements of a foreign operation (see AASB 121 The Effects of Changes in Foreign Exchange Rates). • Gains and losses on remeasuring available for sale financial assets (see AASB 139 Financial Instruments: Recognition and Measurement). • The effective position of gains and losses on hedging instruments in a cash flow hedge (see AASB 139). The suggested format for an income statement in AASB 101 shows that it is designed to reflect the all-inclusive approach as all income and expenses are incorporated above the line called ‘profit’. The items listed above should be included in other comprehensive income which is then added to profit to disclose ‘total comprehensive income‘ for the reporting period. 4. Comment on why you think the accounting standards now require companies to separately disclose other comprehensive income. Some unrealised gains or losses on assets have traditionally bypassed the profit or loss summary account and have been recorded on the statement of financial position as a change in equity. There has been concern that the growing number of these items means it is difficult for users of financial statements to meaningfully assess the company’s financial performance. The requirement to report separately other comprehensive income means that users are able to clearly identify these items. This helps users in the interpretation of financial statements. 5. What is the purpose of a statement of changes in equity? What is the connection between this statement and the other two financial statements discussed in this chapter? This statement provides information about the details of movements in share capital, reserves and retained earnings, including share capital raised and dividends paid. The statement of changes in equity provides a link between the statement of profit or loss and other comprehensive income and the statement of financial position because it provides details of changes in reserve account balances, dividends declared and paid which do not appear separately in the other two statements. 6. Why do you think the AASB has introduced the reduced disclosure requirements for some entities? AASB 1053 establishes a differential reporting regime for Australian companies. This means that certain categories of entities have reduced disclosure requirements. The regime allows for non-publicly accountable entities to produce less complex financial statements. The rationale for the introduction of this regime is to reduce the burden on these entities in terms of their compliance obligations. Underlying the differential reporting regime is an acknowledgement of the need to be cognisant of the cost–benefit context of financial reporting. 7. Given that disclosing entities are required to comply with the accounting standards why are the figures in financial statements sometimes disputed? Financial statements portray the financial effects of complex commercial transactions. Preparers of financial statement use professional judgment to determine the best way to present certain transactions. Accounting standards provide rules and guidance to help ensure that similar transactions are treated in a consistent manner. However, accounting standards cannot cover all situations so interpretation and judgment may be needed when applying the accounting standards. For example, judgment is often required to estimate how long an asset will remain useful for and this will have implications in terms of depreciation amounts recorded. 8. According to AASB 1039, in order to provide clear information to shareholders the concise financial report must disclose which of the following? (a) gross profit (b) dividends per share (c) earnings per share (d) sales revenue (e) changes in accounting policies. All except Gross Profit. 9. For each of the following items state which financial statement(s) it would appear in. (a) Property, plant and equipment (b) Retained earnings (c) Gains on property revaluation (d) Cost of sales (e) Issue of share capital. (a) Statement of financial position. (b) Statement of financial position and statement of changes in equity. (c) Statement of profit or loss and other comprehensive income (as part of other comprehensive income). (d) Statement of profit of loss and other comprehensive income. (e) Statement of changes in equity. 10. Are there any circumstances in which borrowing costs are permitted to be excluded from the statement of profit or loss and other comprehensive income? Explain. Under AASB 123, borrowing costs which are directly attributable to the acquisition, construction or production of a ‘qualifying asset‘ may be capitalised — treated as a cost of the asset. This means that these costs will not appear in the statement of profit or loss and other comprehensive income. Exercises Exercise 17.1 Statement of profit or loss and comprehensive income and statement of changes in equity. Determine whether the following transactions would appear in the statement of profit or loss and other comprehensive income. If so explain how they would be disclosed. (a) A gain on foreign currency translation of $83 000. (b) As a result of a fall in share prices in a recession, directors decided to write down the value of the company’s investment, Shares in Pluto Ltd, by $80 000. (c) Loss from discontinued business operations. (d) Dividend paid of $1 500 000 in total. (e) Inventory costing $120 000 is sold for $160 000. (f) A transfer of $500 000 is made to general reserve from retained earnings. (LO2 and LO4) (a) Yes. Disclosed as other comprehensive income. (b) Yes. Disclosed as an expense in the statement of profit or loss. (c) Yes. Disclosed as an expense in the statement of profit or loss. (d) No. Disclosed in statement of changes in equity. (e) Yes Disclosed as income in statement of profit or loss. (f) No. Disclosed in statement of changes in equity. Exercise 17.2 Reserves, dividends, statement of profit or loss and other comprehensive income, statement of changes in equity The following information relates to Dunadeal Ltd at 30 June 2020. Additional information During the year ended 30 June 2020: 1. directors declared and paid dividends of 5% on the preference shares and 10c per share interim on ordinary shares 2. assume the tax rate is 30% for estimating income tax expense. Required (a) Prepare a statement of profit or loss and other comprehensive income for the year ended 30 June 2020 in accordance with current accounting standards. (b) Prepare a statement of changes in equity for Dunadeal Ltd for the year ended 30 June 2020. (LO2 and LO4) (a) DUNADEAL LTD Statement of Profit or Loss and Other Comprehensive Income for the year ended 30 June 2020 Note 2020 2019 Revenue $ 1 550 000 $x Other income 105 000 Expenses excluding finance costs (1 410 000) (x) Finance costs (23 000) (x) Profit before income tax 222 000 x Income tax expense (66 600) (x) Profit for the period 155 400 X Other Comprehensive Income for the Period 0 X TOTAL COMPREHENSIVE INCOME FOR THE PERIOD $ 155 400 $X (b) DUNADEAL LTD Statement of Changes in Equity For the year ended 30 June 2020 Share Capital Preference Share Capital Ordinary Retained Earnings General Reserve Total Equity Balance at 1 July 2018 — — — — — Changes in equity for year Dividends Total comprehensive income for the year Balance at 30 June 2019 100 000 200 000 50 000 55 000 405 000 Changes in equity for the year Dividends Paid (25 000) (25 000) Total comprehensive profit for the year 155 400 155 400 Balance at 30 June 2020 100 000 200 000 180 400 55 000 535 400 Exercise 17.3 Statement of financial position Non-GST version The summarised balance sheet of Magic Cadre Ltd at 30 June 2020 for presentation to management is below. Required (a) Prepare the statement of financial position for external reporting purposes of Magic Cadre Ltd at 30 June 2020 in accordance with the format illustrated in figure 17.4. (LO3) (a) MAGIC CADRE LTD Statement of Financial Position as at 30 June 2020 Note 2020 2019 CURRENT ASSETS Cash and cash equivalents $158 000 x Trade and other receivables 50 000 x Inventories 85 000 x Assets held for sale 15 000 x TOTAL CURRENT ASSETS 308 000 x NON-CURRENT ASSETS Property, plant and equipment 435 000 x Goodwill 44 000 x TOTAL NON-CURRENT ASSETS 479 000 x TOTAL ASSETS $787 000 x CURRENT LIABILITIES Trade and other payables 51 000 x Current tax payable 5 000 x TOTAL CURRENT LIABILITIES 56 000 x NON-CURRENT LIABILITIES Long-term borrowings 10 000 x TOTAL NON-CURRENT LIABILITIES 10 000 x TOTAL LIABILITIES $ 66 000 NET ASSETS $721 000 x EQUITY Share capital 600 000 x Other reserves 68 000 x Retained earnings 53 000 x TOTAL EQUITY $721 000 x Exercise 17.3 Statement of financial position GST version The summarised balance sheet of Magic Cadre Ltd at 30 June 2020 for presentation to management is below. MAGIC CADRE LTD Balance Sheet as at 30 June 2020 CURRENT ASSETS CURRENT LIABILITIES Cash at bank $158 000 Accounts payable $45 000 Accounts receivable (net) 62 000 Dividends payable 6 000 Inventory 85 000 GST Payable 12 000 Assets held for sale 15 000 $320 000 Current tax liability 5 000 $68 000 NON-CURRENT ASSETS NON-CURRENT LIABILITY Property, Plant and Equipment 465 000 Mortgage payable 10 000 Accumulated depreciation (30 000) Goodwill 55 000 EQUITY Accumulated impairment (11 000) 479 000 Share capital 600 000 $799 000 General reserve 68 000 Retained earnings 53 000 721 000 $799 000 Required (a) Prepare the statement of financial position for external reporting purposes of Magic Cadre Ltd at 30 June 2020 in accordance with the format illustrated in figure 17.4. (LO3) (a) MAGIC CADRE LTD Statement of Financial Position as at 30 June 2020 Note 2020 2019 CURRENT ASSETS Cash and cash equivalents $158 000 x Trade and other receivables 62 000 x Inventories 85 000 x Assets held for sale 15 000 x TOTAL CURRENT ASSETS 320 000 x NON-CURRENT ASSETS Property, plant and equipment 435 000 x Goodwill 44 000 x TOTAL NON-CURRENT ASSETS 479 000 x TOTAL ASSETS $799 000 x CURRENT LIABILITIES Trade and other payables 63 000 x Current tax payable 5 000 x TOTAL CURRENT LIABILITIES 68 000 x NON-CURRENT LIABILITIES Long-term borrowings 10 000 x TOTAL NON-CURRENT LIABILITIES 10 000 x TOTAL LIABILITIES $ 78 000 NET ASSETS $721 000 x EQUITY Share capital 600 000 x Other reserves 68 000 x Retained earnings 53 000 x TOTAL EQUITY $721 000 x Exercise 17.4 Statement of profit or loss and other comprehensive income, income and expenses classified by function The following information was obtained for Lisa’s Fashionista Ltd for the year ended 30 June 2020. Required (a) Prepare a statement of profit or loss and other comprehensive income for Lisa’s Fashionita Ltd for the year ended 30 June 2020 so as to comply with the requirements of IAS 1/AASB 101. (b) Prepare an appropriate note for the disclosure of income. (c) Prepare an appropriate note for expenses classified by function. (LO2) (a) Lisa’s Fashionista Ltd Statement of Profit or Loss and Other Comprehensive Income for the year ended 30 June 2020 Note 2020 2019 Revenue 1 $ 3 600 000 $x Other income 1 120 000 Expenses excluding finance costs* 2 (2 700 000) (x) Finance costs (0) (x) Profit before income tax 1 020 000 X Income tax expense (440 000) (x) Profit after income tax for the period 580 000 X Other Comprehensive Income for the Period Gains on asset revaluations $80 000 Losses on investments in available for sale financial assets $8 000 TOTAL COMPREHENSIVE INCOME FOR THE PERIOD $652 000 *$2 700 000 = 1 760 000 + 400 000 + 500 000 + 40 000. (b) Note 1 Income consists of: Sales revenue $3 600 000 Gain on sale of machinery 120 000 $3 720 000 (c) Note 2 Expenses (classified by function) include: Cost of sales $1 760 000 Selling and distribution expenses 500 000 Administrative expenses 400 000 Finance expenses 0 Total expenses 2 660 000 Expenses separately disclosed include: Depreciation of non-current assets not given Uninsured flood loss 40 000 Exercise 17.5 Statement of profit or loss and other comprehensive income and retained earnings account The information on the next page relates to Treasure Cove Ltd for the year ended 30 June 2020. Required (a) Prepare a statement of profit or loss and other comprehensive income for external reporting and prepare the Retained Earnings T account for the year ended 30 June 2020. (LO2 and LO4) (a) TREASURE COVE LTD Statement of Profit or Loss and Other Comprehensive Income for the year ended 30 June 2020 Note 2020 2019 Revenue 1 $1 920 000 $x Other income 1 0 Expenses excluding finance costs* 2 (1 508 000) (x) Finance costs (68 500) (x) Profit before income tax** 343 500 X Income tax expense (103 500) (x) Profit for the period 240 000 X Other Comprehensive Income for the Period TOTAL COMPREHENSIVE INCOME FOR THE PERIOD $240 000 X * Expenses (excluding finance costs) = $1 920 000 – $68 500 – $343 500. ** Profit before income tax = $435 000 – $68 500 – $23 000. Retained Earnings 30/6/2020 To general reserve 7 500 1/7/2019 Balance 26 250 30/6/2020 Interim dividends 54 000 30/6/2020 P or L Summary 240 000 30/6/2020 Final divs payable 84 000 30/6/2020 Balance c/d 120 750 266 250 266 250 Balance b/d 120 750 Exercise 17.6 Statement of profit or loss and other comprehensive income and note for income The ledger of Elena’s Crystals Ltd at 30 June 2020 contained the following information. (The finance expenses included $12 000 interest expense.) Assume a tax rate of 30%. You discover the following additional information, not reflected in the above figures. 1. No tax expense has yet been accounted for. Donations received are tax exempt. 2. One division of business for the company had been discontinued on 1 June 2020. The assets associated with this division were sold for $1 000 000, at a loss of $75 000 before income tax. 3. On 6 January 2020, certain items of company property were resumed by the government for upgrading of the interstate highway, which ran past the company’s warehouse. The government paid sufficient compensation for the company to realise a $100 000 before-tax profit on the deal. Required (a) Prepare a statement of profit or loss and other comprehensive income for the year ended 30 June 2020 to comply with the requirements of IAS 1/AASB 101. (b) Prepare an appropriate note for income in order to comply with accounting standards. (LO2) (a) ELENA’S CRYSTALS LTD Statement of Profit or Loss and Other Comprehensive Income for the year ended 30 June 2020 Note 2020 2019 Revenue 1 $1 555 000 $x Other income 1 130 000 Expenses excluding finance costs 2 (938 000) (x) Finance costs (12 000) (x) Profit before income tax 735 000 x Income tax expense (211 500) (x) Loss from discontinued operation**** 3 (52 500) (x) Profit for the period 471 000 x Other comprehensive income Gain on asset revaluation 50 000 x TOTAL COMPREHENSIVE INCOME FOR THE YEAR $ 521 000 x Calculations: Revenue = $1 500 000 + $55 000. Other Income = $30 000 (donation) + $100 000 (gain on sale of property, from government). Expenses (excluding finance costs) = $650 000 + $120 000 + $150 000 + ($30 000 – $12 000). Income tax expense = $735 000 – $30 000  0.3 = $211 500. Loss from discontinued operations is before tax $75000 * (1-0.3)=$52 500 after tax. (b) Note 1 Income consists of: Sales revenue $1 500 000 Interest revenue 55 000 Other income 30 000 Gain on sale of property 100 000 $1 685 000 Exercise 17.7 Dividends and statement of changes in equity On 1 July 2019, the equity of Terravista Ltd was as follows. During the year ended 30 June 2020, the following events affecting the company’s equity occurred. Required (a) Prepare journal entries (in general journal format) for the listed transactions and events for Terravista Ltd for the year ended 30 June 2020. (b) Prepare a statement of changes in equity for the year ended 30 June 2020 to comply with IAS 1/AASB 101. (LO4) (a) 2019 Aug 1 Retained Earnings 120 000 Dividends Payable 120 000 Declaration of 20c cash dividend Dividends Payable 120 000 Cash at Bank 120 000 Payment of 20c dividend. Oct 1 & 5 No entries necessary. 2020 Jan 3 Retained Earnings 120 000 Interim Dividend Payable 120 000 Interim dividend declared at 5c per share on 2 400 000 shares. Interim Dividend Payable 120 000 Cash at Bank 120 000 Interim dividend paid. June 30 Retained Earnings 192 000 Final Dividend Payable 192 000 Final dividend of 8c per share. 30 Profit or Loss Summary 300 000 Retained Earnings 300 000 Profit for the year. 30 Retained Earnings 10 000 General Reserve 10 000 Transfer to reserve. (b) Note that this presentation is still acceptable under IAS 101 / AASB 101. TERRAVISTA LTD Statement of Changes in Equity for the year ended 30 June 2020 2020 2019 Share capital: Ordinary: Balance at start of period 1 320 000 x Balance at end of period 1 320 000 x Other reserves: General: Balance at start of period 50 000 x Transfer from retained earnings 10 000 x Balance at end of period 60 000 x Retained earnings: Balance at start of period 500 000 x Total comprehensive income for the year 300 000 x Dividend paid (120 000) (x) Interim dividend paid (120 000) (x) Final dividend declared (192 000) (x) Transfer to general reserve (10 000) (x) Balance at end of period 358 000 x Exercise 17.8 Dividends The equity of Instrumental Issues Ltd at 30 June 2020 is as follows. Required Based on the above information, answer the following questions. (a) What is the issue price per share of the ordinary shares? (b) If the directors decide to declare a final dividend of 40c per share on the ordinary shares, what journal entry would be necessary on 30 June 2020, assuming no ratification of the dividend is required by shareholders? (c) If the total dividend to be paid on all shares is to equal $400 000, how much money would be paid to the preference shareholders and to the ordinary shareholders assuming (independent scenarios)? i. There are no accumulated dividends owing to preference shares and the preference shares are entitled to participate in additional dividends once the ordinary shareholders have received 30c per share. ii. There is 1 year of dividends in arrears on the preference shares and the preference shares are entitled to participate in additional dividends once the ordinary shareholders have received 30c per share. (d) What are the necessary journal entries to provide for the dividends in questions (c) i. and ii. respectively? (e) Assume that the market price of each ordinary share is currently $8. If a bonus dividend is to be provided out of the revaluation surplus to ordinary shareholders on the basis of 1 share for every 5 shares held, what is the journal entry required on 30 June 2020? (f) Assuming the existence of items in questions (c) i. and (e) and no other changes to issued capital for the year, and that the balance of retained earnings at the beginning of the year was $450 000, prepare a statement of changes in equity for the year ended 30 June 2020 for external reporting purposes to comply with current accounting standards. (LO1 and LO4) (a) $1 020 000 / 170 000 shares = $6 per share. (b) Journal entry necessary is: 2020 June 30 Retained Earnings 68 000 Dividends Payable 68 000 Declaration of 40c cash dividend (c) i. 10% preference dividend = 10% of $1 000 000 = $100 000 Ordinary dividend (30c) = $51 000 Remaining dividend = $400 000 – 100 000 – 51 000 = $249 000 No. of shares issued = 200 000 (pref) + 170 000 (ord) = 370 000 Participating cents per share = $249 000 / 370 000 = 67.2972c per share (rounded) Pref S/H’s share =200 000  67.2972c = $134 595 (rounded) Ord S/H’s share = 170 000  67.2972c = $114 405 Total amount to Pref S/Hs = $134 595 +$100 000 = $234 595 Total amount to Ord S/Hs = $114 405 + $51 000 = $165 405 ii. 10% preference dividend  2yrs = 10% of $1 000 000  2 = $200 000 Ordinary dividend (30c) = $51 000 Remaining dividend = $400 000 – 200 000 – 51 000 = $149 000 No. of shares issued = 200 000 (pref) + 170 000 (ord) = 370 000 Participating cents per share = $149 000 / 370 000 = 40.27c per share (rounded) Pref S/H’s share = 200 000  40.27c = $80 541 Ord S/H’s share = 170 000  40.27c = $68 459 Total amount to Pref S/Hs = $80 541 + $200 000 = $280 541 Total amount to Ord S/Hs = $68 549 + $51 000 = $119 459 (d) i. Retained Earnings 400 000 Final Dividend Payable – Ord 165 405 Final Dividend Payable – Pref 234 595 To record final dividend. ii. Retained Earnings 400 000 Final Dividend Payable – Ord 119 459 Final Dividend Payable – Pref 280 541 To record final dividend. (e) No. of ordinary shares to be issued = 170 000 / 5 = 34 000 shares Issue price of the shares = $8 Value of bonus issue = $8  34 000 = $272 000 June 30 Revaluation Surplus 272 000 Share Capital 272 000 To pay bonus issue. (f) INSTRUMENTAL ISSUES LTD Statement of Changes in Equity For the year ended 30 June 2020 Share Capital Ordinary Share Capital Preference Revaluation Surplus Retained Earnings Total Equity Balance at 1 July 2018 — — — — — Changes in equity for year Dividends Total comprehensive income for the year Balance at 30 June 2019 1 020 000 1 000 000 300 000 450 000 2 770 000 Changes in equity for the year Share issue 272 000 (272 000) Dividends declared (165 405) (165 405) Dividends declared (234 595) (234 595) Total comprehensive income for the year 600 000 600 000 Balance at 30 June 2020 1 292 000 1 000 000 28 000 650 000 2 970 000 Exercise 17.9 Reserves, dividends, statement of changes in equity The following was obtained from the ledger of Valediction Ltd as at 30 June 2020. End-of-year adjustments 1. Income tax expense of $15 400 is to be recognised. The company pays tax in one instalment annually. 2. Declare a dividend on the preference shares for the current year. 3. Declare a final dividend on ordinary shares of $3000. No ratification is required at the annual meeting. 4. Transfer $5000 from the general reserve to retained earnings. Required (a) Prepare a statement of changes in equity for Valediction Ltd for the year ended 30 June 2020. (LO4) (a) VALEDICTION LTD Statement of Changes in Equity for the year ended 30 June 2018 2020 2019 Share capital: Ordinary: [incl calls in advance] Balance at start of period 76 000 x Balance at end of period 76 000 x Preference: Balance at start of period 60 000 x Balance at end of period 60 000 x Other reserves: General: Balance at start of period 20 000 x Transfer to retained earnings (5 000) x Balance at end of period 15 000 X Retained earnings: Balance at start of period 16 000 x Total comprehensive income for the year 39 600 x 55600 x Transfer from general reserve 5 000 x Interim dividend paid – ordinary (8 000) x Final dividend declared – ordinary (3 000) (x) Final dividend declared – preference (6 000) x Balance at end of period $43 600 X Exercise 17.10 Ledgers, statement of changes in equity The following information relating to the year ending 30 June 2020 for Megathink Ltd has been obtained from the company’s records. There were no shares issued during the year. The revaluation surplus related only to a block of land that had been previously revalued to a fair value of $120 000 from a cost of $100 000. It is now fair valued at $70 000. On 30 June 2020, the directors decided to: 1. declare a final dividend payment of 8c per share — this dividend does not have to be ratified by the annual meeting 2. write-off goodwill 3. increase general reserve by $10 000. Required (a) Record the above adjustments in the general ledger. (b) Prepare a statement of changes in equity complying with IAS 1/AASB 101 (ignore comparatives). (a) Income Tax Expense 30/6/20 Current Tax Liability 48 000 30/6/20 P/L Summary 48 000 Profit or Loss Summary 30/6/20 Goodwill 10 000 Profit before adjustments 175 000 30/6/20 Income tax exp. 48 000 30/6/20 Loss on Revaluation 30 000 30/6/20 Retained Earns. 87 000 175 000 175 000 Interim Dividends Paid Balance 20 000 30/6/20 Ret. Earns. 20 000 Retained Earnings 30/6/20 To general reserve 10 000 1/7/20 Balance 20 000 30/6/20 Interim dividends 20 000 P/L Summary 87 000 30/6/20 Final divs payable 4 000 Balance c/d 73 000 107 000 107 000 Balance b/d 73 000 Goodwill Balance 10 000 30/6/20 P/L Summary 10 000 Current Tax Liability Income Tax Exp. 16 000 Final Dividends Payable 30/6/20 Retained Earnings 4 000 Revaluation Surplus 30/6/20 Devaluation of Land 20 000 Balance 20 000 General Reserve Balance 6 000 30/6/20 Balance c/d 16 000 30/6/20 Retained earns 10 000 16 000 16 000 30/6 Balance b/d 16 000 Share Capital 30/6 Balance 50 000 (b) MEGATHINK LTD Statement of Changes in Equity For the year ended 30 June 2020 Share Capital Ordinary Retained Earnings Revaluation Surplus General Reserve Total Equity Balance at 1 July 2018 X x x x x Changes in equity for year Dividends Total comprehensive income for the year Balance at 30 June 2019 50 000 20 000 20 000 6 000 96 000 Changes in equity for the year Dividends Paid (20 000) (20 000) Dividends Declared* (4 000) (4 000) Total comprehensive income for the year 73 000 (20 000) 53 000 Transfer to General Reserve (10 000) 10 000 Balance at 30 June 2020 50 000 59 000 0 16 000 125 000 *Assumes directors do not need to seek shareholder approval. Exercise 17.11 Dividends, equity section of statement of financial position The equity of Kenselmac Ltd at 14 February 2020 consisted of the following. The following events occurred during 2020. Required (a) Prepare general journal entries for the above transactions. (b) Show the Retained Earnings account up to 31 August 2020. (c) Show the equity section of the statement of financial position as at 31 August 2020. (LO1 and LO4) (a) 2020 Feb. 15 Retained Earnings 110 000 Interim Dividend Payable 110 000 To declare interim dividend of 5c on 800 000 fully paid shares and equivalent 300 000 fully-paid shares. 15 Interim Dividend Payable 110 000 Cash at Bank 110 000 To pay interim dividend. April 2 Final Call 600 000 Share Capital 600 000 To record final call on shares. May 30 Cash at Bank 600 000 Final Call 600 000 To record receipt of final call. June 30 Income and Expenses 700 000 Profit or Loss Summary 700 000 Closing entry. 30 Income Tax Expense 250 000 Current Tax Liability 250 000 To record income tax for year. 30 Profit or Loss Summary 250 000 Income Tax Expense 250 000 Closing entry for income tax. 30 No entry to record final dividend of 5c as dividend is only recommended. 30 Retained Earnings 70 000 General Reserve 40 000 Plant Replacement Reserve 30 000 To record transfers to reserves. June 30 Properties 300 000 Gain on Revaluation 300 000 To revalue properties. Aug. 15 Retained Earnings 70 000 Final Dividend Payable 70 000 To declare 5c per share cash dividend. 16 Final Dividend Payable 70 000 Cash at Bank 70 000 To pay final dividend. 16 Revaluation Surplus 280 000 Share Capital 280 000 To pay bonus issue of 1 for 5 shares valued at $1 per share. 31 Profit or Loss Summary 450 000 Retained Earnings 450 000 Gain on Revaluation 300 000 Revaluation Surplus 300 000 (b) Retained Earnings 15/2/20 Interim dividends 110 000 14/2/20 Balance 125 000 30/6/20 General and plant reserve 70 000 31/8/20 P/L Summary 450 000 15/8/20 Final dividend 70 000 31/8/20 Balance c/d 325 000 575 000 575 000 31/8/20 Balance b/d 325 000 (c) KENSELMAC LTD Equity Section of Statement of Financial Position as at 31 August 2020 Note Share capital (1) $3 080 000 Other reserves (2) 240 000 Retained earnings 325 000 Total equity $3 645 000 Note 1 Share capital consists of: 1 680 000 shares fully paid at $2 $3 080 000 (1400 000 * $2)+ (1400 000/5 * $1)=2800 000 + 280 000=3080 000 Note 2 Other reserves consist of: Revaluation surplus $20 000 General reserve 140 000 Plant replacement reserve 80 000 $240 000 Details of movements in these reserves must be provided. Problems Problem 17.12 Statement of profit or loss and other comprehensive income In addition to the above information assume that Ruscello Ltd revalued its land and buildings upward by $80 000 resulting in an increase in its revaluation surplus. There was nil tax effect from this revaluation. Required (a) Prepare a statement of profit or loss and other comprehensive income for Ruscello Ltd in accordance with the requirements of IAS 1/AASB 101. (LO2) (a) RUSCELLO LTD Statement of Profit or Loss and Other Comprehensive Income For the year ended 30 June 2020 Note 2020 2019 Revenue* 8 000 500 $x Other income** 123 000 Expenses excluding finance costs (5 912 400) (x) Finance costs (1 087 000) (x) Profit before income tax 1 124 100 X Income tax expense (337 230) (x) Profit for the period 786 870 X Other comprehensive income for the period, net of tax 80 000 x TOTAL COMPREHENSIVE INCOME FOR THE YEAR $866 870 x * Revenue consists of: Sales revenue 8 000 500 ** Other income: Interest on investments 123 000 Problem 17.13 Statement Changes in Equity The following information relating to Mount Athos Ltd has been obtained from balance sheet as at 30 June 2019. In addition to the above, it is noted that during the year ended 30 June 2020: 1. 100 000 shares were issued at $1.5 per share 2. comprehensive income after taxation was $631 000 3. an interim dividend of $128 000 was paid together with a final dividend of $175 000 4. $85 000 was transferred from the retained earnings account to the general reserve. Required (a) Prepare a statement of changes in equity for Mount Athos Ltd for the reporting period ended 30 June 2020. (LO4) (a) Share Capital Ordinary Retained Earnings General Reserve Total Equity Balance at 1 July 2018 x x x x Changes in equity for year Dividends Total comprehensive income for the year Balance at 30 June 2019 1 600 000 880 000 492 000 2 972 000 Changes in equity for the year Issue Capital 150 000 150 000 Dividends Paid (303 000) (303 000) Total comprehensive income for the year 631 000 631 000 Transfer to General Reserve (85 000) 85 000 0 Balance at 30 June 2020 1 750 000 1 123 000 577 000 3 450 000 Problem 17.14 Reserves, dividends, statement of profit or loss and other comprehensive income, statement of changes in equity The equity of Fiorente Ltd at 30 June 2019 was as follows. Additional information During the year ended 30 June 2020, the following transactions occurred. In determining the profit before tax of $1 264 000 the following items were taken into account. Required (a) Prepare general journal entries for all dated transactions in the additional information. (b) Prepare a statement of profit or loss and other comprehensive income for the reporting period ended 30 June 2020 in accordance with current accounting standards. (c) Prepare a statement of changes in equity for Fiorente Ltd for the reporting period ended 30 June 2020. (d) Discuss the nature and purpose of the general reserve. (LO2 and LO4) (a) 2019 1 Oct Damages on Lawsuit Expense 125 000 Cash at Bank 125 000 To pay damages under lawsuit. General Reserve 350 000 Retained Earnings 350 000 To discontinue contingencies reserve. 1 Dec Retained Earnings 25 000 Cash at Bank 25 000 2020 1 Feb Retained Earnings 150 000 Ordinary Dividend Payable 150 000 (Ordinary = 15c per share on 1 000 000 shares) To declare dividends. Ordinary Dividend Payable 150 000 Cash at Bank 150 000 To pay dividends. 30 June Income Tax Expense 473 400 Current Tax Liability 473 400 To recognise current tax on profit of $1 578 000 Income and Expenses 1 104 600 Profit or Loss Summary 1 104 600 Closing entry. No entry for final dividend recommended on ordinary shares. * included damages on lawsuit expense (b) FIORENTE LTD Statement of Profit or Loss and Other Comprehensive Income For the year ended 30 June 2020 Note 2019 2018 Revenue* $7 510 000 $x Other income** 585 000 Expenses excluding finance costs (6 517 000) (x) Finance costs (0) (x) Profit before income tax 1 578 000 X Income tax expense (473 400) (x) Profit for the period 1 104 600 X Other comprehensive income for the period, net of tax 0 X TOTAL COMPREHENSIVE INCOME FOR THE YEAR $1 104 600 x *Revenue consists of: Sales Revenue $7 510 000 **Other income represents the gain on sale of government bonds 585 000 (c) FIORENTE LTD Statement of Changes in Equity For the year ended 30 June 2020 Share Capital Ordinary Share Capital Preference Retained Earnings General Reserve Total Equity Balance at 1 July 2018 X x x x X Changes in equity for year Dividends Total comprehensive income for the year Balance at 30 June 2019 500 000 2 000 000 (200 000) 350 000 2 650 000 Changes in equity for the year Dividends paid (175 000) (175 000) Total comprehensive income for the year 1 104 600 1 104 600 Transfer from general reserve 350 000 (350 000) 0 Balance at 30 June 2020 500 000 2 000 000 1 079 600 0 3 579 600 (d) The general reserve can be seen to represent a transfer from retained profits to retain funds within the business to meet losses from future uncertainties. It effectively quarantines retained earnings and signals to shareholders that this will not be paid out as dividends as it may be required to meet some other need. In Fiorente’s case this transfer appears to relate to the lawsuit. Problem 17.15 Dividends, reserves, financial statements Royal Empire Ltd commenced trading many years ago. Equity at 30 June 2019 comprised the following. During the financial year ended 30 June 2020, the following transactions with respect to capital and dividends took place. Required (a) Prepare entries in general journal format to record the above transactions. Ignore closing entries. (b) Prepare the statement of profit or loss and other comprehensive income for the reporting period ended 30 June 2020 to comply with IAS 1/AASB 101. (c) Prepare a statement of changes in equity for the year ended 30 June 2020. (LO2 and LO4) (a) 2019 31 Aug Retained Earnings 20 000 Final Dividend Payable 20 000 To record ratification of dividend. 31 Aug Final Dividend Payable 20 000 Cash at Bank 20 000 To record payment of dividend. 31 Oct Assets 500 000 Share Capital 500 000 To record acquisition of assets. 2020 31 Mar Retained Earnings 150 000 Interim Dividend Payable 150 000 To declare 50c interim dividend on 300 000 shares. 31 Mar Interim Dividend Payable 150 000 Cash at Bank 150 000 To pay 50c interim dividend. 30 June Income Tax Expense 174 000 Current Tax Liability 174 000 To record income tax for the year. Retained Earnings 20 000 General Reserve 20 000 To transfer to general reserve. Accumulated Depreciation – Plant 30 000 Plant 30 000 Write-off Accumulated Depreciation on Revalued Plant Plant 15 000 Gain on Asset Revaluation 15 000 Asset Revaluation Gain on Asset Revaluation 15 000 Revaluation Surplus 15 000 Transfer Gain on Asset Revaluation to Revaluation Surplus (b) ROYAL EMPIRE LTD Statement of Profit or Loss and Other Comprehensive Income For the year ended 30 June 2020 Note 2020 2019 Revenue $1 350 000 $x Other income 0 Expenses excluding finance costs (722 000) (x) Finance costs (48 000) (x) Profit before income tax 580 000 X Income tax expense (174 000) (x) Profit for the period 406 000 X Other Comprehensive Income: Gain on Asset Revaluation 15 000 x Income Tax Relating to components of other income 0 (x) Other comprehensive income for the period, net of tax 15 000 x TOTAL COMPREHENSIVE INCOME FOR THE PERIOD 421 000 x (c) ROYAL EMPIRE LTD Statement of Changes in Equity For the year ended 30 June 2020 Share Capital Ordinary Retained Earnings Revaluation Surplus General Reserve Total Equity Balance at 1 July 2018 x X x x x Changes in equity for year Dividends Total comprehensive income for the year Balance at 30 June 2019 1 000 000 171 500 0 335 000 1 506 500 Changes in equity for the year Issue of shares 500 000 500 000 Dividends Paid (170 000) (170 000) Dividends Declared Total comprehensive income for the year 421 000 15 000 436 000 Transfer to General Reserve (20 000) 20 000 Balance at 30 June 2020 1 500 000 402 500 15 000 355 000 2 272 500 Problem 17.16 Takeover of existing business, issue of ordinary shares, statement of financial position Dandino Ltd was formed on 1 March 2020 for the purpose of purchasing the business of Verama Ltd whose assets and liabilities at that date were as shown below. Additional information 1. Dandino Ltd agreed that the fair values of all assets and liabilities taken over were equal to carrying amounts with the exception of the following: - Freehold land was to be valued at $80 000, buildings to be valued at $120 000, accounts receivable to be taken over at $100 000 and inventory to be valued at $180 000. - The purchase price was $500 000 and, in satisfaction thereof, the vendors were to receive $400 000 in fully paid ordinary shares and the balance in cash. The fair value of each ordinary share is $2. 2. The company offered for public subscription 300 000 ordinary shares to be paid in full on 31 March. 3. Applications were received for 320 000 shares. All money due was received on application. 4. On April 30, the directors allotted 300 000 shares and any excess application money received was returned to unsuccessful applicants. 5. Verama Ltd was paid, according to the agreement, on 15 May 2020. Required (a) Record all the above transactions in general journal form in the accounts of Dandino Ltd up to 30 June 2020. (b) Prepare the statement of financial position for Dandino Ltd as at 30 June 2020 in accordance with the requirements of IAS 1/AASB 101. (LO3) (a) 2020 1 Mar Freehold Land 80 000 Buildings 120 000 Machinery 70 000 Supplies 45 000 Accounts Receivable 120 000 Inventory 180 000 Goodwill 60 000 Allowance for Doubtful Debts 20 000 Mortgage Payable 70 000 Accounts Payable 85 000 Payable to Verama Ltd 500 000 To record acquisition of net assets. 31 Mar Cash Trust 640 000 Application 640 000 (320 000  $2) Cash received. 30 Apr Application 600 000 Share Capital 600 000 To record allotment of shares. Application 40 000 Cash Trust 40 000 For refund of application money. Cash at Bank 600 000 Cash Trust 600 000 For transfer of cash held in trust. 15 May Payable to Verama Ltd 500 000 Share Capital 400 000 Cash at Bank 100 000 For payment to Verama of 200 000 shares plus cash. (b) DANDINO LTD Statement of Financial Position as at 30 June 2020 Note 2020 2019 CURRENT ASSETS Cash and cash equivalents $500 000 X Trade receivables 100 000 X Inventories 180 000 X Other current assets 45 000 X TOTAL CURRENT ASSETS 825 000 X NON-CURRENT ASSETS Property, plant and equipment 270 000 X Goodwill 60 000 X TOTAL NON-CURRENT ASSETS 330 000 X TOTAL ASSETS $1 155 000 X CURRENT LIABILITIES Trade and other payables 85 000 X TOTAL CURRENT LIABILITIES 85 000 X NON-CURRENT LIABILITIES Long-term borrowings 70 000 X TOTAL NON-CURRENT LIABILITIES 70 000 X TOTAL LIABILITIES 155 000 NET ASSETS $1 000 000 X EQUITY Share capital 1 000 000 X Other reserves 0 X Retained earnings 0 X TOTAL EQUITY $1 000 000 X Workings: *Cash and cash equivalents Cash trust (application money) 600 000 Paid to Verama Ltd (100 000) $500 000 Share capital 500 000 shares fully paid at $2 1 000 000 Total $1 000 000 Problem 17.17 Conversion of partnership into company, issue of shares, statement of financial position Munce and Cassidy, the proprietors of a consulting business, decided to convert their business into a limited company known as Hawkspur Ltd. The following was the balance sheet for internal purposes at the date of the proposed conversion, 1 July 2020. Hawkspur Ltd was registered on 1 July 2020. The purchase agreement provided that the assets other than cash at bank were to be taken over at the following fair values. Munce and Cassidy were to pay the accounts payable and discharge the mortgage payable. As consideration for the sale they were to receive $40 000 in cash 7 days after the allotment of shares issued to the public and on 31 August 60 000 fully paid ordinary shares and 40 000 fully paid 10% preference shares, valued at $1 per share. The company offered for public subscription 80 000 preference shares and 100 000 ordinary shares payable 50c per share on application, 25c per share on allotment and 25c per share 1 month after allotment. The subscription lists closed on 31 July and application money was received for 65 000 preference shares and 120 000 ordinary shares. On 4 August, the directors proceeded to allotment, and forwarded letters of regret enclosing refund of application money to unsuccessful applicants. By 31 August, all the allotment money was received except that due on 1400 ordinary shares. The purchase price was paid to Munce and Cassidy as per agreement. Share issue costs paid on 31 August amounted to $4500. The company purchased additional freehold property on 1 September 2020 for $195 000, satisfied by the issue of 150 000 fully paid ordinary shares, valued at $1 each, $30 000 on long-term loan, and the balance in cash. Required (a) Prepare journal entries (in general journal form) for Hawkspur Ltd up to and including 1 September 2020. (b) Show the statement of financial position of the company as at 1 September 2020. Follow the requirements of IAS 1/AASB 101. (LO3) (a) 2020 1 July Freehold Premises 60 000 Equipment 18 000 Fixtures and Fittings 10 000 Accounts Receivable 22 000 Inventory 25 000 Goodwill 7 200 Allowance for Doubtful Debts 2 200 Payable to Munce & Cassidy 140 000 For acquisition of business. 31 July Cash Trust 92 500 Application – Ordinary 60 000 Application – Preference 32 500 For cash received on application. 4 Aug Application – Ordinary 50 000 Application – Preference 32 500 Allotment – Ordinary 25 000 Allotment – Preference 16 250 Share Capital – Ordinary 75 000 Share Capital – Preference 48 750 For allotment of 100 000 ordinary and 65 000 preference shares. Application – Ordinary 10 000 Cash Trust 10 000 For refund of unsuccessful applicants. Cash at Bank 82 500 Cash Trust 82 500 Transfer of cash held in trust. 11 Aug Payable to Munce & Cassidy 40 000 Cash at Bank 40 000 For payment to Munce and Cassidy. 31 Aug Cash at Bank 40 900 Allotment – Ordinary (100000 – 1400)  0.25 24 650 Allotment – Preference 16 250 For cash received on allotment. Payable to Munce and Cassidy 100 000 Share Capital – Ordinary 60 000 Share Capital – Preference 40 000 For shares issued to Munce and Cassidy. Share Capital 4 500 Cash at Bank 4 500 To pay share issue costs. 1 Sept Freehold Property 195 000 Share Capital – Ordinary 150 000 Loan Payable 30 000 Cash at Bank 15 000 For acquisition of freehold property. (b) HAWKSPUR LTD Statement of Financial Position as at 1 September 2020 Note 2020 CURRENT ASSETS Cash and cash equivalents $63 900 Trade and other receivables 19 800 Inventories 25 000 TOTAL CURRENT ASSETS 108 700 NON-CURRENT ASSETS 63900 19800 25000 $108700 Property, plant and equipment* 283 000 Goodwill 7 200 TOTAL NON-CURRENT ASSETS 290 200 TOTAL ASSETS $398 900 NON-CURRENT LIABILITIES Long-term borrowings 30 000 TOTAL NON-CURRENT LIABILITIES 30 000 TOTAL LIABILITIES $30 000 Net Assets EQUITY $368,900 Share capital 368 900 TOTAL EQUITY $368 900 Workings: *Property, plant and equipment consists of: Freehold property $195 000 Freehold premises 60 000 Equipment 18 000 Fixtures and fittings 10 000 Total $283 000 **Share capital: 150 000 preference shares fully paid at $1 $150 000 65 000 preference shares fully paid to 75c 48 750 60 000 ordinary shares fully paid at $1 60 000 40 000 preference shares fully paid at $1 100 000 ordinary shares called to 75c 75 000 Less: Unpaid calls – 1400 ordinary shares @ 25c 350 74 650 373 400 Less: Share issue costs (4 500) Total share capital $368 900 Problem 17.18 Statement of profit or loss and other comprehensive income, statement of financial position and retained earnings Non-GST version The trial balance of Le Max Ltd at 30 June 2019 was as shown below. Additional information 1. General expenses for the year include the following items. 2. The company tax rate is 30%, to be applied to profit before tax. 3. The opening balance of the allowance for doubtful debts was $15 250. 4. All assets are carried at cost, except for land and buildings, which are carried at fair value. 5. During the year, 50 000 shares were issued at an issue price of $2 each, payable in full on application. 6. On 30 June 2019, the directors revalued land and buildings based on fair values. The carrying amounts of land and buildings before the revaluation were $195 000 and $350 000 respectively. 7. The mortgage loan is repayable in annual instalments of $50 000 starting on 1 March. 8. The debentures are to be redeemed on 31 March 2020. There is no plan to refinance these debentures in the future. 9. The employee benefits payable consist of the following. 10. No employee is eligible for long-service leave until 2023. 11. Goodwill is not considered to be impaired. 12. During the year, Le Max Ltd sold an item of plant for $38 000. The carrying amount of the plant at the date of sale was $48 000. 13. During the year, an interim dividend of $20 000 was paid, and a final dividend of $10 000 was declared. $25 000 was also transferred to the general reserve. Required (a) Prepare a statement of profit or loss and other comprehensive income for Le Max Ltd for the year ended 30 June 2019, according to the requirements of IAS 1/AASB 101. (b) Prepare a statement of financial position at 30 June 2019 to comply with IAS 1/AASB 101. (c) Prepare the Retained Earnings account for the year ended 30 June 2019. (LO2, LO3 and LO4) (a) LE MAX LTD Statement of Profit or Loss and Other Comprehensive Income For the year ended 30 June 2019 Note 2019 2018 Revenue* $831 000 $x Other income 0 Expenses excluding finance costs** (696 300) (x) Finance costs (28 700) (x) Profit before income tax 106 000 X Income tax expense (31 800) (x) Profit for the period 74 200 X Other comprehensive income for the period, net of tax 0 x TOTAL COMPREHENSIVE INCOME FOR THE YEAR $74 200 x Workings: *Revenue is calculated as: Sales revenue $825 000 Dividends 3 500 Interest 2 500 Total revenue $831 000 **Expenses excluding finance costs: General expenses $265 000 Less: Interest (28 700) Cost of sales 450 000 Loss on sale of plant 10 000 $696 300 (b) LE MAX LTD Statement of Financial Position as at 30 June 2019 Note 2019 2018 CURRENT ASSETS Cash and cash equivalents $500 x Trade receivables 55 000 x Inventories 87 700 x Other current assets 7 000 x TOTAL CURRENT ASSETS 150 200 x NON-CURRENT ASSETS Other financial assets 55 000 Property, plant and equipment* 780 000 x Goodwill 40 000 x TOTAL NON-CURRENT ASSETS 875 000 x TOTAL ASSETS $1 025 200 x CURRENT LIABILITIES Trade and other payables** 119 100 x Short-term borrowings 70 900 Current tax payable 31 800 x Current portion of long-term debt 130 000 TOTAL CURRENT LIABILITIES 351 800 x NON-CURRENT LIABILITIES Long-term borrowings 200 000 x Other non-current liabilities [long service leave] 15 800 TOTAL NON-CURRENT LIABILITIES 215 800 x TOTAL LIABILITIES 567 600 NET ASSETS 457 600 x EQUITY Share capital 200 000 x Other reserves 110 000 x Retained earnings 147 600 x TOTAL EQUITY $457 600 x Workings: *Property, Plant and Equipment is calculated as: Land $220 000 Buildings 380 000 Plant and equipment $222 500 Less: Accumulated depreciation (42 500) 180 000 Total property, plant and equipment $780 000 ** Trade and other payables: Accounts payable $87 900 Interest payable 2 800 Dividend payable 10 000 Annual leave payable 18 400 $119 100 Other workings: Trade receivables ($67 800 – $12 800) = 55 000 Other financial assets ($35 000 + $20 000) = 55 000 Goodwill ($50 000 – $10 000) = 40 000 Current portion of long-term debt [$50 000 + $80 000] = 130 000 Other reserves ($85 000 + $25 000) = 110 000 (c) Retained Earnings Interim Dividend $20 000 Beginning Balance*** $128 400 Final Dividend Declared 10 000 Profit 74 200 Transfer to General Reserve 25 000 Ending Balance c/d 147 600 $202 600 $202 600 Balance b/d 147 600 ***Retained earnings beginning balance is calculated as follows. Figure given in trial balance 73 400 Plus interim dividend deducted during year 20 000 Plus final dividend declared 10 000 Transfer to general reserve 25 000 128 400 Problem 17.18 Statement of profit or loss and other comprehensive income, statement of financial position and retained earnings GST version The trial balance of Le Max Ltd at 30 June 2019 was as shown below. LE MAX LTD Trial Balance as at 30 June 2019 Debit Credit Share capital (ordinary shares issued at $2, fully paid) $200 000 General surplus 25 000 Retained earnings 73 400 Revaluation surplus 85 000 Mortgage loan (secured over land and buildings) 250 000 Bank overdraft (at call) 70 900 7% debentures 80 000 Interest payable 2 800 Accounts payable 69 500 Dividend payable 10 000 Employee benefits payable 34 200 GST payable 18 400 Allowance for doubtful debts 12 800 Accumulated depreciation – plant and equipment 42 500 Accumulated impairment losses – goodwill 10 000 Cash at bank $500 Accounts receivable 67 800 Inventory 87 700 Prepaid insurance 7 000 Plant and equipment 222 500 Land 220 000 Buildings 380 000 Goodwill 50 000 Government bonds (long-term) 35 000 Shares in Carncotton Ltd 20 000 Sales revenue 825 000 Cost of sales 450 000 General expenses 265 000 Loss on sale of plant 10 000 Interest received 2 500 Dividends received 3 500 $1 815 500 $1 815 500 Additional information 1. General expenses for the year include the following items. 2. The company tax rate is 30%, to be applied to profit before tax. 3. The opening balance of the allowance for doubtful debts was $15 250. 4. All assets are carried at cost, except for land and buildings, which are carried at fair value. 5. During the year, 50 000 shares were issued at an issue price of $2 each, payable in full on application. 6. On 30 June 2019, the directors revalued land and buildings based on fair values. The carrying amounts of land and buildings before the revaluation were $195 000 and $350 000 respectively. 7. The mortgage loan is repayable in annual instalments of $50 000 starting on 1 March. 8. The debentures are to be redeemed on 31 March 2020. There is no plan to refinance these debentures in the future. 9. The employee benefits payable consist of the following. 10. No employee is eligible for long-service leave until 2023. 11. Goodwill is not considered to be impaired. 12. During the year, Le Max Ltd sold an item of plant for $38 000. The carrying amount of the plant at the date of sale was $48 000. 13. During the year, an interim dividend of $20 000 was paid, and a final dividend of $10 000 was declared. $25 000 was also transferred to the general reserve. Required (d) Prepare a statement of profit or loss and other comprehensive income for Le Max Ltd for the year ended 30 June 2019, according to the requirements of IAS 1/AASB 101. (e) Prepare a statement of financial position at 30 June 2019 to comply with IAS 1/AASB 101. (f) Prepare the Retained Earnings account for the year ended 30 June 2019. (LO2, LO3 and LO4) (a) LE MAX LTD Statement of Profit or Loss and Other Comprehensive Income For the year ended 30 June 2019 Note 2019 2018 Revenue* $831 000 $x Other income 0 Expenses excluding finance costs** (696 300) (x) Finance costs (28 700) (x) Profit before income tax 106 000 X Income tax expense (31 800) (x) Profit for the period 74 200 X Other comprehensive income for the period, net of tax 0 x TOTAL COMPREHENSIVE INCOME FOR THE YEAR $74 200 x Workings: *Revenue is calculated as: Sales revenue $825 000 Dividends 3 500 Interest 2 500 Total revenue $831 000 **Expenses excluding finance costs: General expenses $265 000 Less: Interest (28 700) Cost of sales 450 000 Loss on sale of plant 10 000 $696 300 (b) LE MAX LTD Statement of Financial Position as at 30 June 2019 Note 2019 2018 CURRENT ASSETS Cash and cash equivalents $500 x Trade receivables 55 000 x Inventories 87 700 x Other current assets 7 000 x TOTAL CURRENT ASSETS 150 200 x NON-CURRENT ASSETS Other financial assets 55 000 Property, plant and equipment* 780 000 x Goodwill 40 000 x TOTAL NON-CURRENT ASSETS 875 000 x TOTAL ASSETS $1 025 200 x CURRENT LIABILITIES Trade and other payables** 119 100 x Short-term borrowings 70 900 Current tax payable 31 800 x Current portion of long-term debt 130 000 TOTAL CURRENT LIABILITIES 351 800 x NON-CURRENT LIABILITIES Long-term borrowings 200 000 x Other non-current liabilities [long service leave] 15 800 TOTAL NON-CURRENT LIABILITIES 215 800 x TOTAL LIABILITIES 567 600 NET ASSETS 457 600 x EQUITY Share capital 200 000 x Other reserves 110 000 x Retained earnings 147 600 x TOTAL EQUITY $457 600 x Workings: *Property, Plant and Equipment is calculated as: Land $220 000 Buildings 380 000 Plant and equipment $222 500 Less: Accumulated depreciation (42 500) 180 000 Total property, plant and equipment $780 000 **Trade and other payables: Accounts payable $69 500 Interest payable 2 800 Dividend payable 10 000 GST payable 18 400 Annual leave payable 18 400 $119 100 Other workings: Trade receivables ($67 800 – $12 800) = 55 000 Other financial assets ($35 000 + $20 000) = 55 000 Goodwill ($50 000 – $10 000) = 40 000 Current portion of long-term debt [$50 000 + $80 000] = 130 000 Other reserves ($85 000 + $25 000) = 110 000 (c) Retained Earnings Interim Dividend $20 000 Beginning Balance*** $128 400 Final Dividend Declared 10 000 Profit 74 200 Transfer to General Reserve 25 000 Ending Balance c/d 147 600 $202 600 $202 600 Balance b/d 147 600 ***Retained earnings beginning balance is calculated as follows: Figure given in trial balance 73 400 Plus interim dividend deducted during year 20 000 Plus final dividend declared 10 000 Transfer to general reserve 25 000 128 400 Problem 17.19 Comprehensive problem Non-GST version The ledger balances of Outback Grande Ltd as at 30 June 2020 are shown below. The following adjustments are yet to be taken into the accounts. 1. Inventory on hand at 30 June 2020 valued at $94 250. 2. Allowance for doubtful debts to be increased to $1625, which was the balance of the account on 1 July 2019. 3. It was discovered that $780 for office equipment had been charged in error to the purchases account on 1 July 2019. 4. Depreciation of delivery vehicles and office equipment for the current year to be at the rate of 20% p.a. on cost, and on buildings at 5% on cost. 5. Interest expense accrued $325. 6. Unexpired insurance, $130. 7. Declare a dividend to shareholders of $22 750 for the current year. 8. Transfer $6500 to general reserve and reduce goodwill by $13 000 because of impairment. Required (a) Prepare the statement of profit or loss and other comprehensive income for the year ended 30 June 2020 in accordance with the requirements of IAS 1/AASB 101. (b) Prepare the statement of financial position as at 30 June 2020 in accordance with the requirements of IAS 1/AASB 101. (LO2 and LO3) (a) OUTBACK GRANDE LTD Statement of Profit or Loss and Other Comprehensive Income For the year ended 30 June 2020 Note 2020 2019 Revenue $227 500 $x Other income 5 000 Expenses excluding finance costs* (184 331) (x) Finance costs (3 445) (x) Profit before income tax 44 724 X Income tax expense (27 650) (x) Profit for the period 17 074 X Other comprehensive income for the period, net of tax 0 x TOTAL COMPREHENSIVE INCOME FOR THE YEAR $17 074 x Workings: Cost of sales Beginning inventory $74 750 Purchases 124 090 198 840 Ending inventory 94 250 104 590 *Expenses excluding finance costs [interest]: Cost of sales $104 590 Advertising expense 4 875 Stationery expense 585 Directors’ fees 8 125 Discount allowed 3 250 General expenses 5 070 Insurance expense ($625 – $130) 495 Electricity 1 075 Maintenance Expense 4 375 Salaries – Administrative 11 245 Salaries – Selling 15 015 Bad Debts Expense ($1625 – $975) 650 Impairment of goodwill 13 000 Depn – Delivery Vehicles (20%  $30 875) 6 175 Depn – Office Equip. (20%  [$3250 + $780]) 806 Depn – Buildings 5 000 184 331 (b) OUTBACK GRANDE LTD Statement of Financial Position as at 30 June 2020 Note 2020 2019 CURRENT ASSETS Cash and cash equivalents $130 X Trade receivables 2 85 800 X Inventories 94 250 X Other current assets 130 X TOTAL CURRENT ASSETS 180 310 X NON-CURRENT ASSETS Other financial assets 104 000 Property, plant and equipment 1 139 174 X Goodwill 26 000 X TOTAL NON-CURRENT ASSETS 269 174 X TOTAL ASSETS $449 484 X LIABILITIES CURRENT LIABILITIES Trade and other payables** 63 775 X Short-term borrowings 10 650 Current tax payable 27 650 X TOTAL CURRENT LIABILITIES 102 075 X TOTAL LIABILITIES 102 075 NET ASSETS EQUITY 347 409 Share capital 3 318 500 X Other reserves 6 500 X Retained earnings 4 22 409 X TOTAL EQUITY $347 409 X ** Trade and other payables: Accounts Payable $40700 Interest payable $325 Dividend payable $22 750 $22 750 Total $63 775 Note 1 Property, plant and equipment consists of: Land $26 650 Buildings $100 000 Accumulated depreciation 9 550 90 450 Delivery vehicles 30 875 Accumulated depreciation 12 025 18 850 Office equipment ($3250 + $780) 4 030 Accumulated depreciation 806 3 224 $139 174 Note 2 Receivables consist of: Accounts receivable $81 250 Allowance for doubtful debts 1 625 $79 625 Bills receivable 6 175 $85 800 Note 3 Share Capital $325 000 Less: Unpaid calls 26 000 shares at 25c 6 500 $318 500 Note 4 Calculation of Retained Earnings: Retained earnings at 1/7/19 $34 585 Profit for the year 17 074 Dividends declared (22 750) Transfer to general reserve (6 500) Retained earnings at 30/6/20 $22 409 Problem 17.19 Comprehensive problem GST version The ledger balances of Outback Grande Ltd as at 30 June 2020 are shown below. The following adjustments are yet to be taken into the accounts. 1. Inventory on hand at 30 June 2020 valued at $94 250. 2. Allowance for doubtful debts to be increased to $1625, which was the balance of the account on 1 July 2019. 3. It was discovered that $780 for office equipment had been charged in error to the purchases account on 1 July 2019. 4. Depreciation of delivery vehicles and office equipment for the current year to be at the rate of 20% p.a. on cost, and on buildings at 5% on cost. 5. Interest expense accrued $325. 6. Unexpired insurance, $130. 7. Declare a dividend to shareholders of $22 750 for the current year. 8. Transfer $6500 to general reserve and reduce goodwill by $13 000 because of impairment. OUTBACK GRANDE LTD Trial Balance as at 30 June 2020 Debit Credit Accounts receivable $81 250 Accounts payable $40 700 Advertising expense 4 875 Stationery expenses 585 Share capital 325 000 Bills receivable 6 175 Bank overdraft 10 650 Delivery vehicles (at cost) 30 875 Directors’ fees 8 125 Discount allowed 3 250 First call (25c per share) 6 500 General expenses 5 070 Goodwill (at cost) 39 000 Income from investments 5 000 Insurance expense 625 Interest expense 3 120 Investments (at cost) 104 000 Land (at cost) 26 650 Buildings (at cost) 100 000 Electricity expense 1 075 Maintenance of vehicles expense 4 375 Office equipment (at cost) 3 250 Petty cash advance 130 Retained earnings (1/7/19) 34 585 Accumulated depreciation – delivery vehicles 5 850 – buildings 4 550 Allowance for doubtful debts 975 Current tax liability 27 650 Purchases 134 870 Sales 227 500 GST Payable 10 000 Income tax expense 27 650 Salaries expense – administrative 11 245 Salaries expense – selling 15 015 Inventory (1/7/19) 74 750 $692 460 $692 460 Required (a) Prepare the statement of profit or loss and other comprehensive income for the year ended 30 June 2020 in accordance with the requirements of IAS 1/AASB 101. (b) Prepare the statement of financial position as at 30 June 2020 in accordance with the requirements of IAS 1/AASB 101. (LO2 and LO3) (a) OUTBACK GRANDE LTD Statement of Profit or Loss and Other Comprehensive Income For the year ended 30 June 2020 Note 2020 2019 Revenue $227 500 $x Other income 5 000 Expenses excluding finance costs* (194 331) (x) Finance costs (3 445) (x) Profit before income tax 34 724 X Income tax expense (27 650) (x) Profit for the period 7 074 X Other comprehensive income for the period, net of tax 0 x TOTAL COMPREHENSIVE INCOME FOR THE YEAR $7 074 x Workings: Cost of sales Beginning inventory $74 750 Purchases 134 090 208 840 Ending inventory 94 250 114 590 *Expenses excluding finance costs [interest]: Cost of sales $104 590 Advertising expense 4 875 Stationery expense 585 Directors’ fees 8 125 Discount allowed 3 250 General expenses 5 070 Insurance expense ($625 – $130) 495 Electricity 1 075 Maintenance Expense 4 375 Salaries – Administrative 11 245 Salaries – Selling 15 015 Bad Debts Expense ($1625 – $975) 650 Impairment of goodwill 13 000 Depn – Delivery Vehicles (20%  $30 875) 6 175 Depn – Office Equip. (20%  [$3250 + $780]) 806 Depn – Buildings 5 000 194 331 (b) OUTBACK GRANDE LTD Statement of Financial Position as at 30 June 2020 Note 2020 2019 CURRENT ASSETS Cash and cash equivalents $130 X Trade receivables 2 85 800 X Inventories 94 250 X Other current assets 130 X TOTAL CURRENT ASSETS 180 310 X NON-CURRENT ASSETS Other financial assets 104 000 Property, plant and equipment 1 139 174 X Goodwill 26 000 X TOTAL NON-CURRENT ASSETS 269 174 X TOTAL ASSETS $449 484 X LIABILITIES CURRENT LIABILITIES Trade and other payables** 73 775 X Short-term borrowings 10 650 Current tax payable 27 650 X TOTAL CURRENT LIABILITIES 112 075 X TOTAL LIABILITIES 112 075 NET ASSETS EQUITY 337 409 Share capital 3 318 500 X Other reserves 6 500 X Retained earnings 4 12 409 X TOTAL EQUITY $337 409 X ** Trade and other payables: Accounts payable $40700 Interest payable $325 GST payable $10 000 Dividend payable $22 750 Total $73 775 Note 1 Property, plant and equipment consists of: Land $26 650 Buildings $100 000 Accumulated depreciation 9 550 90 450 Delivery vehicles 30 875 Accumulated depreciation 12 025 18 850 Office equipment ($3250 + $780) 4 030 Accumulated depreciation 806 3 224 $139 174 Note 2 Receivables consist of: Accounts receivable $81 250 Allowance for doubtful debts 1 625 $79 625 Bills receivable 6 175 $85 800 Note 3 Share Capital $325 000 Less: Unpaid calls 26 000 shares at 25c 6 500 $318 500 Note 4 Calculation of Retained Earnings: Retained earnings at 1/7/19 $34 585 Profit for the year 7 074 Dividends declared (22 750) Transfer to general reserve (6 500) Retained earnings at 30/6/20 $12 409 Problem 17.20 Comprehensive problem Non-GST version The following unadjusted trial balance is for the year ended 30 June 2020. Additional information 1. Billy Goat Ltd is involved in the computer services industry. Leased vehicles are used mainly for delivery and service of computers. The company’s head office, which houses its administrative staff, is located on a prime piece of real estate in the local township. 2. There have been no share issues during the year. 3. The following adjustments are required before preparation of Billy Goat Ltd’s financial statements for the year: - Depreciation to be provided on a straight-line basis on buildings at 5% p.a. and on office furniture and equipment at 10% p.a. The sale of office furniture occurred at the beginning of the current financial year. - Goodwill is considered to have fallen in value through impairment by 10% of its original cost. - Management was informed that a particular debtor was bankrupt and the full account of $12 000 needs to be written off. - The Allowance for Doubtful Debts account needs to be adjusted to 8% of accounts receivable, after considering the adjustment in (3) above. - Current income tax expense (and tax liability) for the year is estimated to be $8000. - Accrued wages to staff: sales $1500, administrative $2000. - Vehicle rental paid in advance at 30 June 2020 amounted to $30 000. - A dividend of 3c per share is to be declared on shares. - Land is to be revalued to its fair value of $250 000. - Transfer $10 000 from the general reserve to retained earnings. Required (a) Prepare the journal entries (in general journal form) required by items 1–10 above. (b) Prepare the adjusted trial balance as at 30 June 2020. (c) Prepare the statement of profit or loss and other comprehensive income, with expenses classified by function, for Billy Goat Ltd for the year ended 30 June 2020 in accordance with the requirements of IAS 1/ AASB 101. (d) Prepare the statement of changes in equity for the year ended 30 June 2020 in accordance with the requirements of IAS 1/AASB 101. (e) Prepare the company’s classified statement of financial position as at 30 June 2020 in accordance with the requirements of IAS 1/AASB 101, using the current/non-current classification. (LO2, LO3 and LO4) (a) General Journal 2020 June 30 Depreciation Expense – Buildings 50 000 Accumulated Depreciation – Buildings 50 000 Depreciation at 5% per annum 30 Depreciation Expense – Furniture & Equip. 12 700 Accumulated Depreciation – F & E 12 700 Depreciation at 10% per annum 30 Impairment Expense – Goodwill 3 000 Accumulated Impairment – Goodwill 3 000 Impairment of goodwill by 10% 30 Allowance for Doubtful Debts 12 000 Accounts Receivable 12 000 Bad debts written off 30 Bad Debts Expense 14 372 Allowance for Doubtful Debts 14 372 Recognition of allowance at 8% of receivables = 8% x (225 400 – 12 000) – (14 700 – 12 000) 30 Income Tax Expense 8 000 Current Tax Liability 8 000 To record income tax expense 30 Salaries Expense – Sales Staff 1 500 Wages & Salaries Payable 1 500 Accrued salaries of sales staff 30 Administrative Wages Expense 2 000 Wages & Salaries Payable 2 000 Accrued wages of admin. staff 30 Prepaid Rent 30 000 Vehicle Rental Expense 30 000 Rent prepaid 30 Retained Earnings 34 200 Dividend Payable 34 200 Dividend declared of 3c on 1 140 000 shares June 30 Land 20 000 Gain on Asset Revaluation 20 000 Revaluation of land June 30 Gain on Asset Revaluation 20 000 Revaluation Surplus 20 000 Revaluation of land 30 General Reserve 10 000 Retained Earnings 10 000 Transfer from general reserve (b) BILLY GOAT LTD Adjusted Trial Balance as at 30 June 2020 DEBIT CREDIT Bank overdraft $178 050 Vehicle rental expenses $42 000 Cash at bank 7 500 Investment in government bonds 150 000 Goodwill 30 000 Interest revenue 4 800 Insurance expense 3 000 Land 250 000 Buildings 1 000 000 Office furniture & equipment 127 000 Retained earnings 64 800 Revaluation surplus 35 000 Accumulated depreciation – office furn & equip 35 700 Accumulated depreciation – buildings 150 000 Accumulated impairment losses – goodwill 9 000 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 (paid to $1 per share) 1 140 000 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 72 620 Interest expense on mortgage 4 500 Depreciation expense – buildings 50 000 Depreciation expense – furniture & equipment 12 700 Impairment expense – goodwill 3 000 Bad debts expense 14 372 Income tax expense 8 000 Current tax liability 8 000 Wages & salaries payable 3 500 Prepaid rent 30 000 Dividend payable 34 200 $2 432 292 $2 432 292 (c) BILLY GOAT LTD Statement of Profit or Loss and Other Comprehensive Income For the year ended 30 June 2020 Note 2020 2019 Revenue 1 $503 370 $x Other income 1 8 000 Expenses excluding finance costs 2 (480 892) (x) Finance costs (15 800) (x) Profit before income tax 14 678 X Income tax expense (8 000) (x) Profit for the period $6 678 X Other comprehensive income: Gain on asset revaluation 20 000 x Income tax relating to components of other income 0 (x) Other comprehensive income for the period, net of tax 20 000 x TOTAL COMPREHENSIVE INCOME FOR THE YEAR $26 678 x Note 1 Revenue Sales (net) $469 420 Fees revenue 17 900 Discount received 11 250 Interest revenue 4 800 $503 370 Other income Gain on sale of non-current assets 8 000 Note 2 Expenses (classified by function) include: Cost of sales $197 400 Selling and distribution expenses 115 800 Administrative expenses 141 320 Finance expenses 26 372 Total expenses (excluding interest) $480 892 Many expenses would then require separate disclosure under accounting standards, beyond the scope of this text. Workings: Expenses: Cost of sales $197 400 Selling and distribution expenses Advertising 12 300 Vehicle rent 42 000 Sales staff salaries 61 500 Total selling and distribution expenses 115 800 Administrative expenses Insurance expense 3 000 Administrative wages 72 620 Depreciation of furniture & equipment 12 700 Depreciation of buildings 50 000 Impairment expense – goodwill 3 000 Total administrative expenses 141 320 Finance expenses (excluding interest) Discount allowed 12 000 Bad debts 14 372 Total financial expenses 26 372 Total expenses (excluding interest) 480 892 Interest: Interest expense on overdraft 11 300 Interest expense on mortgage 4 500 15 800 Retained Earnings 30/6/20 Dividend payable 34 200 1/7/19 Balance 89 000 30/6/20 Profit 6 678 30/6/20 Transfer from gen res 10 000 30/6/20 Balance 71 478 105 678 105 678 BILLY GOAT LTD Statement of Changes in Equity For the year ended 30 June 2020 Share Capital Ordinary Retained Earnings Revaluation Surplus General Reserve Total Equity Balance at 1 July 2018 x x x x x Changes in equity for year Dividends Total comprehensive income for the year Balance at 30 June 2019 1 140 000 89 000 15 000 18 000 1 262 000 Changes in equity for the year Dividends declared (34 200) (34 200) Total comprehensive income for the year 6 678 20 000 26 678 Transfer from general reserve 10 000 (10 000) Balance at 30 June 2020 1 140 000 71 478 35 000 8 000 1 254 478 (d) (e) BILLY GOAT LTD Statement of Financial Position as at 30 June 2020 Note 2020 2019 CURRENT ASSETS Cash and cash equivalents $7 500 X Trade receivables 2 196 328 X Inventories 106 000 X Other current assets 30 000 X TOTAL CURRENT ASSETS 339 828 X NON-CURRENT ASSETS Other financial assets 150 000 X Property, plant and equipment 1 1 191 300 X Goodwill 21 000 X TOTAL NON-CURRENT ASSETS 1 362 300 X TOTAL ASSETS LIABILITIES $1 702 128 X LIABILITIES CURRENT LIABILITIES Trade and other payables* 171 600 X Short-term borrowings 178 050 Current tax payable 8 000 X TOTAL CURRENT LIABILITIES 357 650 X NON-CURRENT LIABILITIES Long-term borrowings 90 000 TOTAL NON-CURRENT LIABILITIES 90 000 X TOTAL LIABILITIES 90 000 90 000 $447 650 Net Assets $ 1254 478 EQUITY Share capital 1 140 000 X Other reserves 43 000 X Retained earnings 71 478 X TOTAL EQUITY $1 254 478 X Note 1 Property, plant and equipment consists of: 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 $1 191 300 Note 2 Receivables consist of: Accounts receivable $213 400 Allowance for doubtful debts (17 072) $196 328 Workings: *Trade and other payables: Accounts payable $133 900 Wages and salaries payable 3 500 Dividend payable 34 200 $171 600 Problem 17.20 Comprehensive problem GST version The following unadjusted trial balance is for the year ended 30 June 2020: BILLY GOAT LTD Unadjusted Trial Balance as at 30 June 2020 Debit Credit Bank overdraft $178 050 Vehicle rental expenses $72 000 Cash at bank 7 500 Investment in government bonds 150 000 Goodwill 30 000 Interest revenue 4 800 Insurance expense 3 000 Land 230 000 Buildings 1 000 000 Office furniture and equipment 127 000 Retained earnings (1/7/19) 89 000 Revaluation surplus 15 000 Accumulated depreciation – office furniture and equipment 23 000 Accumulated depreciation – buildings 100 000 Accumulated impairment losses – goodwill 6 000 Allowance for doubtful debts 14 700 Cost of sales 197 400 Advertising expense 12 300 Sales returns and allowances 8 700 Sales 478 120 Mortgage payable 90 000 GST payable 15 000 Inventory 106 000 Share capital (issued and paid to $1 per share) 1 140 000 General reserve 18 000 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 118 900 Accounts receivable 225 400 Salaries of sales staff 60 000 Administrative wages 70 620 Interest expense on mortgage 4 500 $2 332 720 $2 332 720 Additional information 1. Billy Goat Ltd is involved in the computer services industry. Leased vehicles are used mainly for delivery and service of computers. The company’s head office, which houses its administrative staff, is located on a prime piece of real estate in the local township. 2. There have been no share issues during the year. 3. The following adjustments are required before preparation of Billy Goat Ltd’s financial statements for the year. - Depreciation to be provided on a straight-line basis on buildings at 5% p.a. and on office furniture and equipment at 10% p.a. The sale of office furniture occurred at the beginning of the current financial year. - Goodwill is considered to have fallen in value through impairment by 10% of its original cost. - Management was informed that a particular debtor was bankrupt and the full account of $12 000 needs to be written off. - The Allowance for Doubtful Debts account needs to be adjusted to 8% of accounts receivable, after considering the adjustment in (3) above. - Current income tax expense (and tax liability) for the year is estimated to be $8000. - Accrued wages to staff: sales $1500, administrative $2000. - Vehicle rental paid in advance at 30 June 2020 amounted to $30 000. - A dividend of 3c per share is to be declared on shares. - Land is to be revalued to its fair value of $250 000. - Transfer $10 000 from the general reserve to retained earnings. Required (a) Prepare the journal entries (in general journal form) required by items 1–10 above. (b) Prepare the adjusted trial balance as at 30 June 2020. (c) Prepare the statement of profit or loss and other comprehensive income, with expenses classified by function, for Billy Goat Ltd for the year ended 30 June 2020 in accordance with the requirements of IAS 1/ AASB 101. (d) Prepare the statement of changes in equity for the year ended 30 June 2020 in accordance with the requirements of IAS 1/AASB 101. (e) Prepare the company’s classified statement of financial position as at 30 June 2020 in accordance with the requirements of IAS 1/AASB 101, using the current/non-current classification. (LO2, LO3 and LO4) (a) General Journal 2020 June 30 Depreciation Expense – Buildings 50 000 Accumulated Depreciation – Buildings 50 000 Depreciation at 5% per annum 30 Depreciation Expense – Furniture & Equip. 12 700 Accumulated Depreciation – F & E 12 700 Depreciation at 10% per annum 30 Impairment Expense – Goodwill 3 000 Accumulated Impairment – Goodwill 3 000 Impairment of goodwill by 10% 30 Allowance for Doubtful Debts 12 000 Accounts Receivable 12 000 Bad debts written off 30 Bad Debts Expense 14 372 Allowance for Doubtful Debts 14 372 Recognition of allowance at 8% of receivables = 8% x (225 400 – 12 000) – (14 700 – 12 000) 30 Income Tax Expense 8 000 Current Tax Liability 8 000 To record income tax expense 30 Salaries Expense – Sales Staff 1 500 Wages & Salaries Payable 1 500 Accrued salaries of sales staff 30 Administrative Wages Expense 2 000 Wages & Salaries Payable 2 000 Accrued wages of admin. staff 30 Prepaid Rent 30 000 Vehicle Rental Expense 30 000 Rent prepaid 30 Retained Earnings 34 200 Dividend Payable 34 200 Dividend declared of 3c on 1 140 000 shares June 30 Land 20 000 Gain on Asset Revaluation 20 000 Revaluation of land June 30 Gain on Asset Revaluation 20 000 Revaluation Surplus 20 000 Revaluation of land 30 General Reserve 10 000 Retained Earnings 10 000 Transfer from general reserve (b) BILLY GOAT LTD Adjusted Trial Balance as at 30 June 2020 DEBIT CREDIT Bank overdraft $178 050 Vehicle rental expenses $42 000 Cash at bank 7 500 Investment in government bonds 150 000 Goodwill 30 000 Interest revenue 4 800 Insurance expense 3 000 Land 250 000 Buildings 1 000 000 Office furniture & equipment 127 000 Retained earnings 64 800 Revaluation surplus 35 000 Accumulated depreciation – office furn & equip 35 700 Accumulated depreciation – buildings 150 000 Accumulated impairment losses – goodwill 9 000 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 GST payable 15 000 Inventory 106 000 Share capital (paid to $1 per share) 1 140 000 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 118 900 Accounts receivable 213 400 Salaries of sales staff 61 500 Administrative wages 72 620 Interest expense on mortgage 4 500 Depreciation expense – buildings 50 000 Depreciation expense – furniture & equipment 12 700 Impairment expense – goodwill 3 000 Bad debts expense 14 372 Income tax expense 8 000 Current tax liability 8 000 Wages & salaries payable 3 500 Prepaid rent 30 000 Dividend payable 34 200 $2 432 292 $2 432 292 (c) BILLY GOAT LTD Statement of Profit or Loss and Other Comprehensive Income For the year ended 30 June 2020 Note 2020 2019 Revenue 1 $503 370 $x Other income 1 8 000 Expenses excluding finance costs 2 (480 892) (x) Finance costs (15 800) (x) Profit before income tax 14 678 X Income tax expense (8 000) (x) Profit for the period $6 678 X Other comprehensive income: Gain on asset revaluation 20 000 x Income tax relating to components of other income 0 (x) Other comprehensive income for the period, net of tax 20 000 x TOTAL COMPREHENSIVE INCOME FOR THE YEAR $26 678 x Note 1 Revenue Sales (net) $469 420 Fees revenue 17 900 Discount received 11 250 Interest revenue 4 800 $503 370 Other income Gain on sale of non-current assets 8 000 Note 2 Expenses (classified by function) include: Cost of sales $197 400 Selling and distribution expenses 115 800 Administrative expenses 141 320 Finance expenses 26 372 Total expenses (excluding interest) $480 892 Many expenses would then require separate disclosure under accounting standards, beyond the scope of this text. Workings: Expenses: Cost of sales $197 400 Selling and distribution expenses Advertising 12 300 Vehicle rent 42 000 Sales staff salaries 61 500 Total selling and distribution expenses 115 800 Administrative expenses Insurance expense 3 000 Administrative wages 72 620 Depreciation of furniture & equipment 12 700 Depreciation of buildings 50 000 Impairment expense – goodwill 3 000 Total administrative expenses 141 320 Finance expenses (excluding interest) Discount allowed 12 000 Bad debts 14 372 Total financial expenses 26 372 Total expenses (excluding interest) 480 892 Interest: Interest expense on overdraft 11 300 Interest expense on mortgage 4 500 15 800 Retained Earnings 30/6/20 Dividend payable 34 200 1/7/19 Balance 89 000 30/6/20 Profit 6 678 30/6/20 Transfer from gen res 10 000 30/6/20 Balance 71 478 105 678 105 678 BILLY GOAT LTD Statement of Changes in Equity For the year ended 30 June 2020 Share Capital Ordinary Retained Earnings Revaluation Surplus General Reserve Total Equity Balance at 1 July 2018 x x x x x Changes in equity for year Dividends Total comprehensive income for the year Balance at 30 June 2019 1 140 000 89 000 15 000 18 000 1 262 000 Changes in equity for the year Dividends declared (34 200) (34 200) Total comprehensive income for the year 6 678 20 000 26 678 Transfer from general reserve 10 000 (10 000) Balance at 30 June 2020 1 140 000 71 478 35 000 8 000 1 254 478 (d) (e) BILLY GOAT LTD Statement of Financial Position as at 30 June 2020 Note 2020 2019 CURRENT ASSETS Cash and cash equivalents $7 500 X Trade receivables 2 196 328 X Inventories 106 000 X Other current assets 30 000 X TOTAL CURRENT ASSETS 339 828 X NON-CURRENT ASSETS Other financial assets 150 000 X Property, plant and equipment 1 1 191 300 X Goodwill 21 000 X TOTAL NON-CURRENT ASSETS 1 362 300 X TOTAL ASSETS $1 702 128 X LIABILITIES CURRENT LIABILITIES Trade and other payables* 171 600 X Short-term borrowings 178 050 Current tax payable 8 000 X TOTAL CURRENT LIABILITIES 357 650 X NON-CURRENT LIABILITIES Long-term borrowings 90 000 TOTAL NON-CURRENT LIABILITIES 90 000 X TOTAL LIABILITIES 90 000 90 000 $447 650 Net Assets $1254 478 EQUITY Share capital 1 140 000 X Other reserves 43 000 X Retained earnings 71 478 X TOTAL EQUITY $1 254 478 X Property, plant and equipment consists of: 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 $1 191 300 Note 2 Receivables consist of: Accounts receivable $213 400 Allowance for doubtful debts (17 072) $196 328 Workings: *Trade and other payables: Accounts payable $118 900 Wages and salaries payable 3 500 GST payable 15 000 Dividend payable 34 200 $171 600 Case studies Decision analysis Treatment of events for a construction company Terrific Town Houses Ltd is a large company registered in South Australia for the purpose of constructing blocks of home units and town houses. The company conducts its activities in all states. The managing director, Richard Townsend, who is keen to show favourable profit figures, especially profit from operations, is confronted with a number of doubtful issues. He has asked you, the accountant, to clarify the accounting treatment for each of these issues in order to finalise the accounts for the year ended 30 June 2020. 1. Last year, the company acquired land at Kalamunda on the Darling Ranges behind Perth, and had begun construction of 15 town houses on this land. The construction work was three-quarters finished when a bushfire swept through the area on the weekend of 24–25 March 2020. The company had a policy of self-insurance, and estimated that the loss incurred was approximately $2.5 million. Fire danger in the locality of Kalamunda is extremely high during the late summer months every year. 2. Many years ago, the company purchased a large tract of land at Nambucca Heads in New South Wales for $1.5 million, for the purpose of erecting home units. Because of a recession, construction work was delayed. Last November, the company received an offer for the land for $3 million. The offer was considered too good to refuse, and the land was sold at this price on 30 November 2019. 3. The company also holds land at Ipswich in Queensland, which it had purchased some years ago for $600 000. Unfortunately, part of the land subsided because of old coalmines, which were unrecorded by the government as the mines were closed before records were kept. Consequently, the land was regarded as unsuitable for building purposes. The company believes that the land is worth only $300 000 at the end of the reporting period, and it intends to revalue the land down to this recoverable amount. However, in the Mount Lofty Ranges behind Adelaide, other land held by the company has jumped considerably in value from cost of $800 000 to an estimated $1.2 million. Townsend intends to revalue this land to offset the loss on the downward valuation of the land at Ipswich. 4. Land costing $200 000 was purchased some years ago at Anglesea in Victoria. An application to have the land rezoned for the purpose of constructing town houses was unsuccessful, and the company sold the land for $350 000 on 16 April 2020. 5. The company had acquired, for $2.5 million, a piece of land for construction of an international hotel and casino on the banks of the Tamar River. At that time (2016), the local council was enthusiastically pro-development and the company was given all necessary approvals to commence construction. Construction began in 2017, and costs of $3 million had already been incurred when lobbying by conservationists caused the state government to halt the company’s work on the project in May 2017. The subsequent court case did not favour the company’s arguments for continuation of the project, and the project had to be abandoned in February 2020. The company lost $4 million in sunk costs and legal fees. Townsend suggested that the loss should be written off against retained earnings on the grounds that it was really a loss incurred in the previous financial year when work ceased. Required (a) Advise Townsend on the most appropriate treatment in the financial statements for each of the above circumstances. (a) Note: particularly the definitions of income, revenue, gains, and expenses and losses contained either in the Framework or in IAS 18/AASB 118 Revenue. It is assumed that the company is large enough to be required by the Corporations Act to present an annual financial report to the ASIC. 1. The $2.5 million is reported as a ‘loss’ from the bushfire. Since bushfires occur regularly in the Darling Ranges behind Perth around the locality of Kalamunda every summer, it could be argued by some that the loss is not unexpected, particularly in situations of self-insurance as is the case with Terrific Town Houses Ltd. It is best treated as a loss from ordinary activities and disclosed separately if considered to have a large enough impact on the company’s profits. 2. Is the sale of the land (without home units) part of the ordinary activities of the entity? If not, the gain on sale of the land at Nambucca Heads may be treated as ‘other income’ rather than revenue in the income statement. This too may not please Richard Townsend, the managing director, in his quest for showing favourable profits from ordinary activities. 3. Is the land in Ipswich and in the Mount Lofty Ranges treated by the company as ‘inventory’ for sale or as property for use? If inventory, the land at Ipswich must be revalued downwards to lower of cost and net realisable value, as per IAS 2/AASB 102, and the land in the Mount Lofty Ranges cannot be revalued above cost by Townsend. Such a loss on revaluation of land in Ipswich may be treated by the company as a loss due to subsidence and not part of profits from ordinary activities. If, however, the land is treated as a non-current asset called ‘property’, the revaluation of the class of assets is required as per IAS 16/AASB 116. Hence, if land is revalued at Ipswich, it must also be revalued in Mount Lofty, and the revaluation increase in Mount Lofty will appear as a revaluation surplus, whereas the revaluation decrease on the land at Ipswich will be reported as a loss, unless it is offsetting previous revaluation increases on that land. It should be noted that IFRS 5/AASB 5, requires that land (if treated as a non-current asset) held for sale, be now treated and disclosed under IAS 1/AASB 101 as a current asset. The land is then to be valued at the lower of its carrying amount and fair value less costs to sell (IFRS5/AASB 5 para. 15). 4. The gain on sale of the land at Anglesea, $150 000, is treated as part of ‘other income’ under IAS1/AASB 101. However, the land may be regarded as inventory if the company regularly purchase tracts of land in the hope of rezoning for town houses. Are applications for rezoning regularly refused? If this activity is an ordinary activity of the company, then it could be argued that the gross proceeds on sale of the land ($350 000), as a sale of inventory, should be reported as revenue under IAS 18/AASB 118. 5. The $4 million loss cannot be written off against retained earnings under IAS 1/AASB 101. It must be recognised as a loss in the current period if not previously written off. Communication and leadership The changing face of corporate reporting This chapter has focused on Australian financial reporting as legislated by the Corporations Act. However, companies are increasingly prepared to disclose additional information beyond that required by legislation. These types of voluntary disclosures may include information about environmental actions, sustainability, employee initiatives and community impacts. Like financial reporting, there is a significant cost attached to the preparation and dissemination of these reports. It is likely, therefore, that companies provide this information because they believe that there may be long term benefits in doing so. Required (a) Work in groups of three and search the internet for Australian companies that provide corporate citizenship reports (e.g. Exxon Mobil Australia, KPMG, Telstra Corporation). Each group should work with a report from a different company. Each group should prepare and present a report addressing the following. (b) Discuss the relationship between corporate citizenship report and the financial statements. (c) Identify the key achievements that each company has chosen to highlight. Why do you think they have chosen these elements? Compare and contrast with the other groups. (d) Who do you think the report is aimed at? What benefits does the company expect to reap from preparing this report? Is this the same for each company? Discuss. (a) To be determined in class. (b) The corporate citizenship report is a voluntary disclosure that is independent of the financial statements. It provides non-financial information about the entities’ practices and outcomes that are not portrayed in the financial statements. Often the types of activities reported are not be related to the entity’s core business focus but may encompass aspects such as sustainability or community and environmental issues. (c) These may include items such as volunteer contributions, charitable initiatives, sustainability measures, human resource policies, indigenous issues, accessibility, social impacts etc. Groups should consider why these aspects have been chosen for each entity and compare their findings with other groups. (d) The Australian Centre for Corporate Social Responsibility states that this type of reporting is ‘increasingly viewed as vital for good risk management, corporate governance and decision making capabilities’. In addition the ACCSR indicates that markets may respond positively to companies that report on the corporate responsibilities. Groups may discuss the following issues: • Are the reports primarily for the benefit of shareholders or other parties? Why would companies choose not to prepare these reports? Could this translate to a negative market reaction? Are there any other downsides of choosing not to prepare these reports? • The types of costs associated with preparing this information – financial and proprietary. Reference: http://www.accsr.com.au/html/reporting.html. Ethics and governance Corporate governance in action The Australian Securities and Investment Commissions is the government body charged with administering the legal requirements of Australian financial reporting legislation. Visit the website for ASIC, www.asic.gov.au, and find out more about the roles and rights of ASIC in regards to financial reporting in Australia. The answer to this question can be found on the ASIC website. Financial analysis Refer to the latest consolidated financial statements of JB Hi-Fi Ltd on its website, www.jbhifi.com.au, and answer the following questions. 1. Provide details of the consolidated entity’s income, major expense and profit after tax for the current year. In percentage terms, how much have these items changed from the previous period? 2. Do the consolidated financial statements follow the suggested formats, as illustrated in figures 17.1 and 17.4 of this chapter? If not, how and why do they differ? 3. What items of other comprehensive income are reported by JB Hi-Fi Ltd? What percentage of total comprehensive income do these represent? 4. In the last two years how much has JB Hi-Fi Ltd paid out to shareholders in the form of the dividends? Note: all figures provided in 000s. 1. 2016 2015 % Change (approx.) Total Income $3 954 467 $3 652 136 8.278% COS $3 089 059 $2 853 883 8.24% Gross Profit $865 408 $798 253 8.413% 2. The Statement of Profit or Loss and Other Comprehensive Income: • JB Hi-Fi Ltd in 2016 has followed the current standard and chosen to split the statement into two parts, and income statement and a statement of comprehensive income. The Statement of Financial Position • JB Hi-Fi Ltd in 2016 has retained the old title ‘Balance Sheet’ and the traditional presentation of the accounting equation A – L = E. This is allowed under the standard, but it will be interesting to see if they change their presentation in coming years. The Statement of Changes in Equity: • JB Hi-Fi Ltd in 2016 has adopted the horizontal presentation. 3. JB Hi-Fi Ltd has reported two items of other comprehensive income: • Changes in the fair value of cash flow hedges. • Exchange differences on translation of foreign operations. 4. Since 2014, JB Hi-Fi Ltd has paid out or provided for $180 379 of dividends. Solution Manual for Accounting John Hoggett, John Medlin, Claire Beattie, Keryn Chalmers, Andreas Hellmann, Jodie Maxfield 9780730344568