QUESTION 1

Willy Wonker Ltd acquired the net assets listed below from Chikko Pty Ltd in exchange for a block of land and 150,000 shares in Willy Wonker Ltd. At the date of the transaction the shares of Willy Wonker had a par value of $1.00 and a market value of $1.25. The block of land had an original cost of $150,000 and a market value at the date of the transaction of $120,000. Willy Wonker also incurred $22,500 legal fees in relation to the transaction.

Management considers that these net assets constitute a business.

Required:

Prepare the journal entries to record the acquisition of assets by Willy Wonker Ltd.

QUESTION 2

On 1 July 2014, Bangles Ltd leased a specialised piece of machinery from Reliability Finance Corporation Ltd. The conditions of the lease were as follows:

Lease term of six years; initial lease payment on 1 July 2014 of $228,000; six annual lease payments of $180,000 each, the first payable on 30 June 2015; interest rate implicit in the lease of 18 per cent p.a; the lessee is responsiblefor repairs and maintenance; Residual Value Guarantee of $238,726; the present value of the minimum lease payments is $946,000 (including the initial payment and guaranteed residual value); the fair value of the asset is $950,000; lease is non-cancelable and the lessee will buy the asset at the end of the lease term at the guaranteed residual value.

The machinery has an estimated useful life of ten years, with a scrap value of $80,000. Bangles Ltd normally applies straight-line depreciation to this machinery.

Required:

Prepare all relevant journal entries for Bangles Ltd in relation to the lease transaction for the year ended 30 June 2015 (first year of lease) and for the year ended 30 June 2020 (end of lease term).

QUESTION 3

On 1 January 2016, BMB Ltd purchases a debt instrument with a 5-year term for its fair value of $1800 million (including transaction costs). The instrument has a principal amount of $2200 million (the amount payable on redemption) and carries a fixed interest rate of 5.5% paid annually in arrears on 31 December. The annual cash interest income is thus $121 million ($2200 million x 5.5% rounded to nearest million). The effective interest rate is 10.34%. The debt instrument is classified as subsequently measured at amortised cost.

Required

Prepare journal entries in the books of BMB Ltd for the year from 31 December 2018 to derecognition of the financial asset.

QUESTION 4

A telecommunications operator sells standard mobile phones for $360 each. It also provides network services for $35 a month, with no mobile phone included. If a customer purchases a mobile phone and a 24 month service plan, then the customer only pays $25 a month and receives the mobile phone forfree.

A customer, Zhang, enters into a contract with the telecommunications operator on 1 January 2016 where he receives the mobile phone for free and enters into a 24 month plan for $25 a month.

Part A

Prepare the journal entries to record the above contract in the books of the telecommunications operator on  1 January 2016 and at the end of the first month of the contract, 31 January 2016.

Part B

AASB15 Revenue from customers requires that a promised good or service must be distinct or consist of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer. A promised good or service is distinct ifthe customer can benefit from the goods or services on its own or in conjunction with readily available resources and the entity’s promise to transfer the goods or services to the customer is separately identifiable from other promises in the contract.

Discuss the factors that indicate an entity’s promise to transfer a goods or services is separately identifiable.

QUESTION 5

Razer Ltd commences operations on  1 July 2001. Two years later, on 30 June 2003, the entity prepares  the following information, showing the carrying amounts for accounting purposes of its assets and liabilities

Other information

•   After adjustments are made for differences between tax rules and accounting rules, it is determined that the Taxable Income of Razer Ltd is$400,000.

•   There is a Doubtful Debt Provision of $5,000.

•   An item of plant is purchased at a cost of $200,000 on 1 July 2002. For accounting purposes it is expected to have a life of 5 years; however, for taxation purposes it can be depreciated over 4 years. It is not expected to have any residual value.

•   None of the amounts accrued in respect of Warranty Expenses or Long Service Leave have actually been paid. The tax rate is 30 percent.

•   The Deferred Tax Assets and Liabilities as at the year end 30 June 2002 were $20,000 and $40,000

•   respectively.

Required:

Prepare all necessary journal entries to record income tax expense and temporary differences for the year ended 30 June 2003. Show workings on the worksheet provided.

QUESTION 6

The non-current assets section of the Balance Sheet of Witch-hunt Ltd as at 30 June 2003 is as follows:

The Asset Revaluation  Reserve (before tax) of Witch-hunt  Ltd  as  at  30  June 2003 is

$460,000 ($160,000 of which relates to Buildings).

On acquisition Witch-hunt Ltd elected to measure Land and Buildings on a fair value basis and Machinery and Motor Vehicles on a cost basis. Witch-hunt Ltd now has a policy of only revaluing assets when it is mandatory under the applicable accounting standards.

Director’s valuations were obtained for the listed non-current assets as at 30 June 2003, as follows:

Buildings

Machinery

Land

Motor Vehicles

Required:

Market Value

950,000

3,600,000

8,500,000

400,000

Recoverable Amount

960,000

3,100,000

8,500,000

290,000

Prepare general journal entries to account for asset revaluations and asset value adjustments as at 30 June 2003

QUESTION 7

On 1 July 2008 RATTE Ltd ("RATTE") acquired control over BAGGE Ltd ("BAGGE") by acquiring 100 per cent of the issued share capital of BAGGE Ltd for $11,000,000 cash. The shareholders’ equity and asset section of BAGGE's Balance Sheet at 1 July 2008 was:

•   On 1 July 2008, all assets and liabilities in BAGGE’s Balance Sheet were stated at their fair values with the exception of land that had a fair value $300,000 greater than its     carrying amount.

•   Company income tax is 30 per cent.

The following transactions occurred:

a)         During the year ended 30 June 2013, BAGGE Ltd sold inventory of Pollywaffles to RATTE Ltd on credit at a price of $600,000. BAGGE had recorded this inventory at cost of $460,000 immediately prior to sale. Thirty five percent (35%) of this inventory was sold to external parties during the  year ended 30 June 2013 and the remainder was still in stock at 30 June 2013. RATTE had not paid BAGGE for this stock at 30 June2013.

b)         During the year ended  30 June 2013, BAGGE Ltd purchased inventory of MarBars from RATTE Ltd for cash at a price of $300,000. BAGGE had recorded this inventory at cost of $260,000 immediately prior to sale. Fifty percent (50%) of this inventory was sold to external parties during the year ended 30 June 2013 and the remainder was still in stock at 30 June 2013.

c)         During the year ended 30 June 2012, BAGGE Ltd sold inventory to RATTE Ltd for cash at a price of $400,000. BAGGE had recorded this inventory at  cost of $350,000 immediately prior to sale. Half of this inventory was sold to external parties during the year ended 30 June 2012 and the other halfwas sold to external parties during the year ended 30 June 2013.