ACC222 EXTERNAL REPORTING

Session 201290
ASSIGNMENT 3
Question 1 [15 marks]
Internally generated intangible asset
During the current financial year, Big Fuel Ltd has moved from the research phase to the
development phase of an internal project designed to result ultimately in the marketing of a
new motor vehicle fuel injection system. The company, through it separate fuel injection
research and development division, has incurred the following costs during the financial year:
(a)
(b)
(c)

(d)
(e)
(f)
(g)
(h)

Salaries of the divisions marketing department staff in developing materials to instil

market recognition of the Big Fuel brand name.
Salaries of divisional staff and costs of books and other reference materials incurred in
obtaining knowledge of alternative possible fuel injection systems.
Salaries of company staff, following a final decision on the new fuel injection systems
design, to evaluate possible alternative processes for production of the new fuel
injection system.
Design and construction of a pre-production prototype of the fuel injection system.
Construction and operation of a small pilot production plant for manufacture of the fuel
injection system.
Administration and general office overhead expenditure arising from the research phase
of the project.
Administration and general office overhead expenditure arising from the development
phase of the project.
Fees to register a patent over the new fuel injection system design.

Required:
For each of the above costs, indicate whether that cost could be recognised as an intangible
asset by Big Fuel Ltd in accordance with AASB 138. Provide relevant paragraph numbers from
the standard to support your answer.
[adapted from: Dagwell, R., Wines, G. & Lambert, C. (2012). Corporate accounting in Australia: Pearson
Australia]

Question 2 [20 marks]

Impairment loss for a cash-generating unit
Ted Ltd has a division representing a separate cash-generating unit. At 30 June 2012, the
carrying amounts of the assets of the division are as follows:
Assets
Motor vehicles
Plant and equipment
Land and buildings
Trademarks
Goodwill
Carrying amount of cash-generating unit

$
200,000
460,000
500,000
150,000
50,000
1,360,000

All assets are carried at cost with the exception of land and buildings. They were revalued
from an original cost of $450,000. The revaluation surplus for these still remains in Teds
accounts, and the tax rate is 30%. Teds directors estimate that, at 30 June 2012, the
recoverable amount of the division is $1,220,000.
Required:
Does an impairment loss need to be recognised for the division as a cash-generating unit? If so,
prepare the required journal entries. Show the carrying amounts of the individual assets after
recognising any impairment losses.
[adapted from: Dagwell, R., Wines, G. & Lambert, C. (2012). Corporate accounting in Australia: Pearson
Australia]

Question 3 [25 marks]

Accounting for leases
On 1 July 2012, Ahmad Ltd leased equipment from Leasing Solutions Ltd. The equipment
had a fair value of $218,690 on 1 July 2012. The lease agreement contained the following
provisions:
Lease term
Annual rental payment, in advance on 1 July each year
Residual value at the end of the lease term
Residual value guaranteed by lessee
Useful life of equipment
Interest rate implicit in the lease

5 years
$45,000
$50,000
$31,172
8 years
10%

Ahmad pays all executory costs directly to third parties. The lease is cancellable but incurs a
penalty of two years rental payments. Title does not transfer at the end of the lease term and
Ahmad expects to return the equipment to Leasing Solutions.
The machinery is to be depreciated using the straight-line method.
Required:
(a)
(b)
(c)
(d)
(e)

Compute the minimum lease payment for the lessee and the net investment in the
lease for the lessor.
Classify the lease as a finance lease or operating lease, and justify your answer.
Prepare the lease schedule for the lessee. Round all figures to the nearest dollar.
Prepare the lease schedule for the lessor. Round all figures to the nearest dollar.
Prepare all relevant journal entries for the lessee for the years ended 30 June 2013 and
2014. Narrations are not required.

Note:
1. Show all workings where necessary.
2. Round all figures to the nearest dollar.
3. No marks would be awarded for journal entries shown for lessor in part (e) above.
[adapted from: Dagwell, R., Wines, G. & Lambert, C. (2012). Corporate accounting in Australia: Pearson
Australia]