FINAL EXAMINATION
REVISION PACKAGE
QUESTIONS
SHAREHOLDERS’ EQUITY
1. Trans Ltd
2. Transformers Ltd
IMPAIRMENT
3. Fiery Ltd
4. Reacher Ltd
BUSINESS COMBINATIONS
5. Jade Ltd – Stone Ltd
6. Edam Ltd – Gouda Ltd – Colby Ltd
CONSOLIDATED FINANCIAL STATEMENTS
7. Huggy Ltd – Bear Ltd
8. Sparrow Ltd – Wren Ltd
9. Sophie Ltd – Marceau Ltd
10. Running Ltd – Bear Ltd
11. Aquarius Ltd – Virgo Ltd
LEASES
12. Concrete Constructions Ltd & Amazon Finance Ltd
QUESTION 1:
Trans Ltd’s equity as at 30 June 2008 was as follows:
120,000 ordinary A shares, issued @ $1.10, fully paid $132,000
150,000 ordinary B shares, issued @ $1.20, called to 70c 105,000
100,000 8% cumulative preference shares, issued @ $1, fully paid 100,000
Calls in advance (30,000 shares) 15,000
Share issue costs (11,200)
General reserve 160,000
Retained earnings 158,000
Total equity $658,800
The general journal is used for all entries, and the books are balanced 6-monthly (each 31 December and 30 June).
The following events occurred after 30 June 2008:
2008
30/09 The final 10c per share ordinary dividend and the preference dividend, both declared on 25 June 2008, were paid. Shareholder approval is not required for payment of dividends.
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31/10 A prospectus was issued inviting offers to acquire 1 option for every 2 ordinary A shares held at a price of 80c per option, payable by 30 November 2008. Each option entitles the holder to 1 ordinary A share at a price of 70c per share and are exercisable in November 2010. Any options not exercised by 30 November 2010 will lapse.
30/11 Offers and monies were received for 50,000 options, and these were issued.
2009
15/01 The final call on ordinary B shares was made, payable by 15 February 2009.
15/02 All call monies were received.
20/04 50,000 preference shares were repurchased at $1.10 per share. The repurchase was accounted for by writing down preference share capital by $50,000 and retained earnings by the balance.
30/06 The profit for the year was $44,000. The directors decided to transfer $20,000 from the general reserve to retained profits and declared a 10c per share dividend and the preference dividend, both payable on 30 Sep 2009.
30/09 The final ordinary and preference dividends declared on 30 June 2009 were paid.
15/12 A 5c/share interim ordinary dividend was declared and paid.
2010
31/01 The directors made a 1-for-5 renounceable rights offer to ordinary B shareholders at an issue price of $1.50 per share. The offer’s expiry date was 28 February 2010.
28/02 Holders of 120,000 shares accepted the rights offer. Shares were issued, with monies payable by 15 March 2010.
15/03 All monies were received.
30/06 Profit for the year was $56,000. The directors, in lieu of declaring a final dividend, made a 1-for-10 bonus issue from the general reserve to all shareholders. Ordinary A shares were valued at $1.20 each, ordinary B shares were valued at $1.60 each, and preference shares were valued at $1.15 each.
30/11 Holders of 40,000 options exercised their options, and 40,000 ordinary A shares were issued. Monies were payable by 20 Dec 2010.
20/12 All monies were received.
2011
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10/01 A 5c per share interim ordinary dividend was declared and paid.
30/06 Profit for the year was $48,000. The directors declared a 10c per share final dividend and the preference dividend, both payable on 30 September 2011.
REQUIRED
1. Prepare general journal entries and closing entries to record the above transactions and events.
2. Prepare the following general ledger accounts (T-format) for the period 30 June 2008 to 30 June 2011:
• Share capital (Ordinary A);
• Share capital (Ordinary B); and
• Share capital (Preference).
• Share Capital – Ordinary Shares A
30/06/08 Balance $132,000
30/06/09 General reserve 14,400
30/11/10 Option 32000
30/11/10 Share issue receivable 28000
Share Capital – Ordinary Shares B
30/06/08 Balance 105,000
15/01/09 Call 75,000
28/02/10 Share issue receivable 36,000
30/06/09 General reserve 27,840
Share Capital – Preference Shares
20/04/09 Cah 50,000 30/06/08 100,000
30/12/09 b/c 50,000 30/12/09 b/d 50,000
• 30/06/09 General reserve 57,500
QUESTION 2
On 30 June 2007 the equity of Formers Ltd was as follows:
50,000 5% cumulative preference shares, issued at $1.20, fully paid $60,000
100,000 ordinary shares, issued at $1.15, fully paid 115,000
Options (15,000 @ 50c) 7,500
Share issue costs (2,610)
General reserve 123,100
Retained earnings 136,340
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Introduction At the turn of the 20th century there were fewer than 8,000 automobiles in America, many of them powered by steam or electricity, others had gasoline engines. An unexpected turnout at the first New York Auto Show in 1900, showed the magnitude of the public’s fascination with the automobile. Over the next few years, hundreds of fledgling companies would try to meet the demands of a ...
Each option entitles the holder to acquire 1 ordinary share at a price of $1.10 per share, exercisable by 31 March 2008. Any options not exercised by this date will lapse. The books are balanced 6-monthly.
The following events occurred during the year ended 30 June 2008:
2007
15 Aug The final 8c per share ordinary dividend and the final preference dividend, both declared on 30 June 2007, were paid in cash. Shareholder approval is required for payment of dividends and was obtained at the annual general meeting of 2 August.
01 Oct A prospectus was issued offering 60,000 ordinary shares at an issue price of $1.20 per share, payable 35c on application, 35c on allotment, and 50c on a first and final call. The closing date for applications was 31 October 2007. The issue was underwritten at a commission of $1,500.
31 Oct Applications were received for 75,000 shares by this date.
02 Nov The directors allotted 4 shares for every 5 applied for, with allotment monies due by 30 November 2007. In accordance with the constitution, surplus application monies were kept as an advance on future calls and allotment monies. The underwriting commission was paid.
30 Nov All allotment monies owing were received by this date.
2008
05 Jan An interim 5c per share ordinary dividend was paid in cash.
31 Jan The first and final call was made, with monies due by 28 February 2008.
28 Feb $28,500 call monies were received by this date.
20 Mar The shares on which the call was unpaid were forfeited. The company is entitled to keep any balance arising from forfeiture of shares.
31 Mar 12,000 shares were allotted as a result of 12,000 options having been exercised, with allotment monies due by 30 April 2008.
30 Apr All allotment monies were received by this date.
31 May A 1-for-4 bonus issue was made from the general reserve, with the shares valued at $1.20 each.
30 Jun A 10c per share final dividend was declared, payable on 15 August 2008. Net profit for the year ended 30 June 2008 was $29,460.
REQUIRED (Round amounts to the nearest dollar)
1. Prepare general journal entries and closing entries to record the above transactions.
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2. Prepare the Options and Retained Earnings ledger accounts for the period 30 June 2007 to 30 June 2008.
QUESTION 3: IMPAIRMENT
Fiery Ltd is a company that is operated through two divisions, namely Green Ltd and Dragon Ltd. These divisions were regarded as separate cash-generating units. The assets of the two divisions at 30 June 2005 were as follows:
Green Unit Dragon Unit
Land $100 000 $64 000
Plant 280 000 145 000
Accumulated depreciation (60 000) (30 000)
Equipment 160 000 220 000
Accumulated depreciation (40 000) (20 000)
Inventory 60 000 36 000
Goodwill 20 000 15 000
$520 000 $430 000
Fiery Ltd had a corporate headquarters carried at an amount of $100 000. This asset could not be allocated on a reasonable basis to the cash generating units.
At 30 June 2005 there were indications that the assets of the company may be impaired. The company calculated the recoverable amounts to be as follows:
Fiery Ltd $973 000
Green Unit $478 000
Dragon Unit $420 000
The inventory had fair values less costs to sell greater than the current carrying amounts. The land held by Green Ltd had fair value less costs to sell of $97 000.
REQUIRED
Prepare the journal entries at 30 June 2005 to record the accounting for the impairment losses.
QUESTION 4: IMPAIRMENT
At 30 June 2005, Reacher Ltd reported the following assets:
Land $50 000
Plant 250 000
Accumulated depreciation (50 000)
Goodwill 8 000
Inventory 40 000
Cash 2 000
All assets are measured using the cost model.
At 30 June 2005, the recoverable amount of the entity, considered to be a single cash-generating unit, was $272 000.
For the period ending 30 June 2006, the depreciation charge on plant was $18 400. If the plant had not been impaired the charge would have been $25 000.
At 30 June 2006, the recoverable amount of the entity was calculated to be $13 000 greater than the carrying amount of the assets of the entity. As a result, Reacher Ltd recognised a reversal of the previous year’s impairment loss.
Required
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Prepare the journal entries relating to impairment at 30 June 2005 and 2006.
QUESTION 5: BUSINESS COMBINATIONS
On 1 July 2003, Jade Ltd acquired the assets and liabilities of Stone Ltd. The assets and liabilities of Stone Ltd consisted of:
Carrying Fair
amount value
Plant A (cost $420 000) $310 000 $300 000
Plant B (cost $340 000) 181 000 180 000
Furniture 62 000 60 000
Land 100 000 160 000
Provisions (60 000) (60 000)
Payables (80 000) (80 000)
In exchange for the business of Stone Ltd, Jade Ltd provided the following to Stone Ltd:
• 200 000 shares in Jade Ltd, these having a fair value of $2.00 per share,
• cash of $55 000, and
• vehicles that were carried at $120 000 (original cost of $140 000), and having a fair value of $130 000.
The incidental costs associated with the acquisition amounted to $5 000, while the costs of issuing the shares were $4 000. Both costs were paid in cash.
Having recorded the acquisition of the assets, the management of Jade Ltd decided to measure the plant at fair value, both assets being in the same class, and to measure the furniture at cost. The plant was considered to have a further 10-year life with benefits being received evenly over that period, while the furniture had an expected life of 5 years.
At 30 June 2004, Jade Ltd assessed the fair values of its assets:
• Plant A was valued at $276 000, with an expected remaining useful life of 8 years.
• Plant B was valued at $160 000, with an expected remaining useful life of 8 years.
At 30 June 2004, the furniture’s recoverable amount was assessed to be $45 000, with an expected useful life of 4 years.
Required
Prepare the journal entries in the records of Jade Ltd for the year ending 30 June 2004.
QUESTION 6: BUSINESS COMBINATIONS
On 1 July 2003, three companies – Edam Ltd, Gouda Ltd and Colby Ltd – sign an agreement whereby the operations of Gouda Ltd and Colby Ltd are to be taken over by Edam Ltd. Gouda Ltd is to liquidate after the transfer is complete, but Colby Ltd will continue to operate after the takeover. The balance sheets of the three companies on that day showed the following information:
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Edam Ltd Gouda Ltd Colby Ltd
Cash $50 000 $8 000 $20 000
Accounts receivable 75 000 50 000 46 000
Inventory 56 000 32 000 29 000
Property, plant & equipment (net) 120 000 75 000 127 000
Shares in Listed Companies 22 500 6 000 37 000
Loan receivable – Mozzarella Ltd – 25 000 –
323 500 196 000 259 000
Accounts payable 62 000 13 000 31 000
Mortgage loan 25 000 10 000 –
7% Debentures – nominal value 100 000 – 80 000
Share capital – issued at $1 each 120 000 100 000 90 000
Retained earnings 16 500 73 000 58 000
323 500 196 000 259 000
The details of the acquisition agreements are as follows:
Gouda Ltd
Edam Ltd is to acquire all of the assets (except for Cash) and all of the liabilities of Gouda Ltd. In exchange, the shareholders of Gouda Ltd are to receive three (3) shares in Edam Ltd and $1 in cash for every five (5) shares held in Gouda Ltd. The agreed value of each Edam Ltd share is $3.20. The cash retained by Gouda Ltd is to be used as part of the purchase consideration. The assets of Gouda Ltd are recorded at their fair values except for:
Carrying Amount Fair Value
Inventory $32 000 $36 000
Property, Plant & Equipment 75 000 85 000
Shares in Listed Companies 6 000 6 600
Colby Ltd
Edam Ltd is to acquire the issued shares of Colby Ltd. In exchange, the shareholders of Colby Ltd are to receive 35 000 7% $5.00 debentures in Edam Ltd, redeemable at nominal value on 1 July 2007
Additional information
Edam Ltd is to pay expenses of $7 000 to transfer the assets of Gouda Ltd to its premises. Costs to issue shares to Gouda Ltd are $800. Costs of issuing debentures to the shareholders of Colby Ltd are $700.
Required
Prepare the acquisition analyses and journal entries in the records of Edam Ltd to record the acquisition agreements.
QUESTION 7: CONSOLIDATED FINANCIAL STATEMENTS
On 1 July 2004 Huggy Ltd acquired (cum div) all the issued shares of Bear Ltd for $225 000. At acquisition date the recorded equity of Bear Ltd was:
Share capital $120 000
General reserve 30 000
Retained earnings 40 000
At this date Bear Ltd had not recorded any goodwill, dividends payable were $10 000, and all identifiable assets and liabilities were recorded at fair value except for:
Carrying Amount Fair Value
Inventory $25 000 $30 000
Machinery (cost $55 000) 35 000 41 000
Land 50 000 60 000
The machinery had a remaining useful life of three years. The inventory on hand at 1 July 2004 was sold by 30 June 2005. Bear Ltd had not recorded an internally generated brand name that was considered to have a fair value at acquisition date of $30 000. It was considered to have an indefinite life. At acquisition date Bear Ltd had reported a contingent liability of $25 000 relating to potential damages from a court case. The court case was settled in January 2007 with Bear Ltd paying damages of $28 000.
Any adjustments for differences between carrying amounts and fair values of assets on hand at acquisition date are made on consolidation. When such assets are either fully consumed or sold, any amounts in the asset business combination valuation reserve are transferred to retained earnings. The company income tax rate is 30%.
The following information was supplied by Bear Ltd in relation to the years ended 30 June 2005 to 30 June 2007:
30 June 30 June 30 June
2005 2006 2007
$ $ $
Profit for the period 75 000 80 000 66 000
Retained earnings at beginning of year 40 000 102 000 137 000
115 000 182 000 203 000
Interim dividends paid *8 000 20 000 *12 000
Final dividends declared 5 000 *25 000 30 000
Retained earnings at end of year 102 000 137 000 161 000
* These dividends were made from pre-acquisition profits.
In June 2006 a dividend of 20 000 $1.00 bonus shares was made from the general reserve.
In May 2007, Bear Ltd sold inventory which cost $60 000 to Huggy Ltd for $75 000. Two-thirds of this inventory was sold to external parties by 30 June 2007 for $57 000.
Required
A. Prepare the consolidation worksheet journal entries for the year ended 30 June 2007.
B. Explain the rationale for the adjustment made in relation to the intragroup transfer of inventory.
QUESTION 8: CONSOLIDATED FINANCIAL STATEMENTS
Sparrow Ltd owns all the issued shares of Wren Ltd, having acquired its ownership interest on 1 August 2000. The accountant, Ms Maggie Pie, is preparing the consolidated financial statements at 30 June 2004, and, as a part of preparing the consolidation worksheet for Sparrow Ltd, is analysing the intragroup transactions between the parent and its subsidiary.
The intragroup transactions under analysis are as follows (assume a tax rate of 30%):
a) On 1 February 2004, Wren Ltd sold inventory to Sparrow Ltd for $15 000, recording a before-tax profit of $3 000. By 30 June 2004, Sparrow Ltd has sold one third of these to other entities for $6 000.
b) On 1 January 2003, Sparrow Ltd sold an item of machinery to Wren Ltd that Wren Ltd classified as inventory. At the date of sale, Sparrow Ltd had recorded the asset at a carrying amount of $150 000 (net of $20 000 depreciation, calculated using a 10 per cent per annum straight-line method).
Wren Ltd recorded the asset at $160 000. Wren sold it to the Bird Society on 15 August 2003 for $100 000, being prepared to make a loss as the Society is a charitable institution.
c) Sparrow Ltd supplies motor vehicles to its executives, and the managing director is supplied with a new Ferrari every two years. On 1 January 2002, as the managing director of Sparrow Ltd wanted a new car, the company sold the Ferrari to Wren Ltd to be used by the newly appointed accounting graduate. At the date of sale, the car had a carrying amount of $240 000, and was sold to Wren Ltd for $260 000. The vehicle is depreciated at 20 per cent per annum straight-line by Wren Ltd, and is still being used by the accounting graduate.
d) Sparrow Ltd installed new computing systems at a cost of $825 000 on 1 September 2003. These are depreciated evenly over a five year period. To assist in the installation and training, Wren Ltd sent one of its young computer experts to Sparrow Ltd for a six-month period, charging the company $100 000 for the services provided.
Required
A. Prepare the consolidation worksheet entries at 30 June 2004 to adjust for the effects of the above intragroup transactions.
B. Ms Pie is concerned that the auditors may require her to explain the adjustments she has made. Provide suitable explanations for transactions (a) and (b) above.
QUESTION 9: CONSOLIDATED FINANCIAL STATEMENTS
On 1 July 2005, Sophie Ltd acquired for $142 200 all the issued shares of Marceau Ltd. At that date, relevant balances in the records of Marceau Ltd were:
Share capital $80 000
Asset revaluation surplus – land 16 000
Retained earnings 21 000
All the identifiable net assets of Marceau Ltd were recorded at fair values except for the following:
Carrying amount Fair value
Inventory $50 000 $56 000
Motor vehicles (cost $18 000) 15 000 16 000
Furniture and fittings (cost $30 000) 24 000 32 000
Land 18 480 24 480
The inventory and land on hand in Marceau Ltd at 1 July 2005 were sold during the following 12 months. The motor vehicles, which at acquisition date were estimated to have a 4-year life, were sold on 1 January 2007. Except for land, valuation adjustments are made on consolidation. When assets are sold or fully consumed, any related valuation reserves are transferred to retained earnings. The furniture and fittings were estimated to have a further 8-year life, and were expected to be used up over that life. At 1 July 2005, Marceau Ltd had not recorded any goodwill.
The following trial balances were prepared for the companies at 30 June 2007:
Sophie Ltd Marceau Ltd
Share capital $170 000 $80 000
Asset revaluation surplus 41 000 22 000
Retained earnings (1/7/06) 16 000 29 500
Debentures 120 000 –
Dividend payable 10 000 3 000
Current tax liabilities 8 000 2 500
Other payables 34 800 10 100
Advance from Sophie Ltd – 10 000
Sales revenue 85 000 65 000
Other revenue 23 000 22 000
Accumulated depreciation
– motor vehicles 4 000 2 000
– furniture & fittings 2 000 6 000
$513 800 $252 100
Cost of sales $65 000 $53 500
Other expenses 22 000 27 000
Shares in Marceau Ltd 137 200 –
Land – 24 480
Motor vehicles 28 000 22 000
Furniture & fittings 34 000 37 300
Inventory 171 580 70 320
Other assets 8 620 3 100
Income tax expense 7 200 2 000
Interim dividend paid 4 000 2 000
Final dividend declared 10 000 3 000
Deferred tax assets 16 200 7 400
Advance to Marceau Ltd 10 000 ____-
$513 800 $252 100
Additional information
a) All dividends have been from post-acquisition profits except for part of the dividend provided for by Marceau Ltd in June 2006. The $10 000 dividend included $5 000 from profits earned prior to 1 July 2005. The dividend was paid in September 2006.
b) Intragroup transfers of inventory consisted of:
1/7/05 to 30/6/06:
Sales from Sophie Ltd to Marceau Ltd $12 000
Profit in inventory on hand at 30/6/06 200
1/7/06 to 30/6/07:
Sales from Sophie Ltd to Marceau Ltd $15 000
Profit in inventory on hand at 30/6/07 1 000
c) On 1 January 2006, Marceau Ltd sold furniture and fittings to Sophie Ltd for $8 000. This had originally cost Marceau Ltd $12 000 and had a carrying amount at time of sale of $7 000. Both entities charge depreciation at the rate of 10% per annum.
d) The tax rate is 30%.
Required
Prepare the consolidation worksheet entries at 30 June 2007.
QUESTION 10: CONSOLIDATED FINANCIAL STATEMENTS
At 1 January 2002, Running Ltd acquired all of the share capital of Bear Ltd. Running Ltd paid $250 600 for these shares. At this date the shareholders’ equity of Bear Ltd consisted of:
Share capital $150 000
General reserve 30 000
Retained earnings 20 000
All the identifiable assets, liabilities and contingent liabilities of Bear Ltd were recorded at fair value at the acquisition date except for the following:
Carrying amount Fair value
Plant & machinery $150 000 $158 000
(cost $180 000)
Land 160 000 190 000
Inventory 30 000 50 000
The inventory on hand at the acquisition date was all sold by 30 June 2003. The plant & machinery had a further 4-year life. Revaluations of non-current assets on hand at the acquisition date are made on consolidation, with a transfer being made from valuation reserves to retained earnings when the revalued assets are sold or fully consumed. The tax rate is 30%.
In June 2005, Running Ltd and Bear Ltd declared dividends of $20 000 and $15 000 respectively. In August 2003, Bear Ltd transferred $20 000 from general reserve to retained earnings.
The following financial information about the two companies at 30 June 2006 was provided:
Running Bear
Ltd Ltd
Revenues $368 000 $254 000
Expenses 226 000 166 000
Profit before income tax $142 000 $88 000
Income tax expense 45 000 34 000
Profit 97 000 54 000
Retained earnings as at 30 June 2005 164 000 78 000
261 000 132 000
Dividend paid 25 000 20 000
Final dividend declared 15 000 12 000
Transfer to general reserve _____ 10 000
40 000 42 000
Retained earnings as at 30 June 2006 $221 000 $90 000
Balance Sheets
Running Bear
Ltd Ltd
Current Assets
Inventory $50 000 $40 000
Receivables 30 000 25 000
Total Current Assets 80 000 65 000
Non-current Assets
Land & buildings 548 640 225 000
Shares in Bear Ltd 154 360
Plant and machinery 242 000 234 000
Accumulated depreciation (235 000) (128 000)
Total Non-current Assets 710 000 331 000
Total Assets 790 000 396 000
Liabilities 219 000 136 000
Net Assets $571 000 $260 000
Equity
Share capital $300 000 $150 000
General reserve 50 000 20 000
Retained earnings 221 000 90 000
Total Equity $571 000 $260 000
Required
Prepare the consolidation worksheet entries at 30 June 2006.
QUESTION 11: CONSOLIDATED FINANCIAL STATEMENTS
On 1 July 2006, Aquarius Ltd acquired (cum div.) 100% of the issued capital of Virgo Ltd for $171 300. At this date, the equity of Virgo Ltd consisted of:
Share capital $100 000
General reserve 40 000
Retained earnings 20 000
At this date, a comparison of the carrying amounts and the fair values of the assets of Virgo Ltd, other than goodwill, showed:
Carrying Amount Fair Value
Plant & equipment – cost $180 000 $100 000 $104 000
Vehicle – cost $20 000 6 000 7 000
Fittings – cost $25 000 20 000 20 000
Land 50 000 60 000
Inventory 20 000 24 000
Other current assets 10 000 10 000
Plant & equipment has a further 5-year life, the vehicle a 4-year life and the fittings a further 10-year life. Virgo Ltd has recorded goodwill of $5 000 at 1 July 2006. Any revaluations are made on consolidation. When assets are sold or derecognized, any related valuation reserves are transferred to retained earnings.
The following financial information about Aquarius Ltd and Virgo Ltd at 30 June 2007 was provided:
Aquarius Ltd Virgo Ltd
Revenues $121 000 $98 000
Expenses 76 000 63 000
Profit before income tax 45 000 35 000
Income tax expense 15 000 12 000
Profit 30 000 23 000
Retained earnings as at 1 July 2006 60 000 20 000
90 000 43 000
Transfer to general reserve 10 000 10 000
Dividend paid 10 000 6 000
Dividend declared 12 000 4 000
32 000 20 000
Retained earnings as at 30 June 2007 58 000 23 000
Information in relation to the 2006-07 year is as follows:
1. In August 2006, Virgo Ltd paid a dividend of $6 000 that had been declared by that company in June 2006.
2. The dividends paid by Virgo Ltd in the 2006-07 period were half from the retained earnings on hand at 1 July 2006.
3. The entire inventory held by Virgo Ltd at 1 July 2006 was sold by 30 June 2007.
4. On 1 May 2007, Virgo Ltd sold inventory to Aquarius Ltd for $24 000. This had a 20% mark-up on cost to Virgo Ltd. Half of this inventory was sold by Aquarius Ltd to Leo Ltd for $15 000 by 30 June 2007.
5. On 1 January 2007, Virgo Ltd sold an item of plant to Aquarius Ltd for $60 000. The plant had originally cost Virgo Ltd $50 000. The plant has a further 5-year life.
6. On 1 January 2007, Aquarius Ltd lent $10 000 to Virgo Ltd at an annual interest rate of 10%, payable half-yearly on 30 June and 31 December.
7. The tax rate is 30%.
The following financial information about Aquarius Ltd and Virgo Ltd for the period ending 30 June 2008 was provided:
Aquarius Ltd Virgo Ltd
Revenues $154 000 $95 000
Expenses 89 000 55 000
Profit before income tax 65 000 40 000
Income tax expense 20 000 16 000
Profit 45 000 24 000
Retained earnings as at 1 July 2007 58 000 23 000
Transfer from general reserve 10 000 5 000
113 000 52 000
Dividend paid 10 000 5 000
Dividend declared 8 000 5 000
18 000 10 000
Retained earnings as at 30 June 2008 95 000 42 000
Information in relation to the 2007-08 financial period is as follows:
1. The transfer from general reserve by Virgo Ltd was regarded as being from the reserve on hand at 1 July 2006.
2. The land held by Virgo Ltd at 1 July 2006 was sold for $65 000 in November 2007.
3. The vehicles on hand at 1 July 2006 were sold by Virgo Ltd on 1 January 2008.
4. At 30 June 2008, of the $10 000 inventory which had been sold by Virgo Ltd to Aquarius Ltd during the current period, inventory sold at a profit of $500 was still on hand.
Required
A. Prepare the consolidation worksheet entries at 30 June 2007 and 30 June 2008.
QUESTION 12: LEASES
On 1 July 2005, Concrete Constructions Ltd leased a crane from Amazon Finance Ltd. The crane cost Amazon Finance Ltd $117 970, considered to be its fair value, on that same day. The finance lease agreement, which cost Amazon Finance Ltd $2 337 to have drawn up, contained the following clauses:
Lease term: 3 years
The lease was non-cancellable.
Annual rental payment, in arrears: (commencing 30/6/06) $40 000
Residual value at end of the lease term: $22 000
Residual guaranteed by Concrete Constructions Ltd: $16 000
Interest rate implicit in lease: 7%
The remaining expected useful life of the crane was 4 years. At the end of the lease term, the crane was returned to the lessor who sold it for $11 000 on 30 June 2008. Included in the annual rental payment was an amount of $1 000 to cover the costs of maintenance and insurance paid for by the lessor. For the year ended 30 June 2006, the actual maintenance and insurance costs incurred by Amazon Finance Ltd amounted to $1 200.
REQUIRED
A. Classify the lease for both lessee and lessor based on the criteria specified by IAS 17. Justify your answer.
B. Prepare:
(i) The lease schedules for both the lessee and the lessor.
(ii) The journal entries in the record of both the lessee and the lessor for the year ended 30 June 2006. Narrations are not required.
