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ASSESSMENT BRIEF

Subject Code and Title ACCT6003 Financial Accounting Processes

Assessment Major Assignment – Part B

Individual/Group Individual

Length Not applicable

Learning Outcomes 1. Explain the regulatory framework that governs


financial reporting in Australia with emphasis on the
Conceptual Framework for financial reporting
3. Apply accounting principles and standards when
accounting for non-current assets, revenue and
liabilities and recognise the judgements required in a
range of diverse business contexts
5. Differentiate between shares and debentures and
apply appropriate accounting procedures

Submission Week 8, by 11:55pm Sunday 15th April (AEST/AEDT)

Weighting Part B: 25% (Full assignment: 30%)

Total Marks 100 marks

Context:
This assignment forms Part B (final part) of the major assignment. Students are provided
with a business case in which an entrepreneur, Xiaojing Wu, from China immigrated to
Australia and considered setting up a small business in South Australia. Xiaojing decided to
start her business as a partnership but decided to dissolve the partnership. Subsequently,
Xiaojing formed a public company named ChiHerbal Ltd. In Part A of the assignment,
students are required to discuss the accounting regulation and reporting requirements for
companies.
In Part B, students are required to account for a range of transactions undertaken by
ChiHerbal Ltd.
Assignment Part B Questions

Assume you were the accountant of ChiHerbal Ltd, address the requirements of the
following independent scenarios for the company.

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Scenario 1 Financing Company Operations (30 marks)

The equity of ChiHerbal Ltd as at 30 June 2018 comprises the following:

320 000 ordinary Class 1 shares, issued at $4, fully paid $1 280 000
240 000 ordinary Class 2 shares, issued at $4, called to $2.40 576 000
40 000 6% redeemable preference shares, issued at $3.00, fully paid 120 000
Share issue costs (4 272)
Calls in advance (at $1.60) 25 600
Share options (issued at $1.20, fully paid) 38 400
Retained earnings 508 800

The options are exercisable by 28 February 2019. Each option entitles the holder to acquire
two ordinary Class 3 shares at a price of $3.60 per share, payable by 28 February 2019.

The following transactions occurred during the financial year ending 30 June 2019:

2018
Oct. 20 The preference shares were redeemed out of Retained earnings at a 5%
premium.
25 Cheques were issued to the preference shareholders.
Nov. 1 A 1-for-5 renounceable rights offer was made to ordinary Class 1
shareholders at an issue price of $3.80 per share. The offer’s expiry date
is 30 November 2018. The rights issue is underwritten at a commission
of $4 800.
30 Holders of 256 000 shares accept the rights offer, with other rights being
renounced to the underwriter. Ordinary Class 1 shares are issued and
money received.
Dec. 20 The underwriting commission is paid.

2019
Jan. 10 The directors transfer $56 000 from Retained earnings to a General
reserve account.
Feb. 28 As a result of options being exercised, 56 000 ordinary Class 3 shares are
issued.
April 30 Unexercised options lapse.
May 31 The final call, due by 31 May 2019, is made on the partly paid shares.
All call money is received by this date, except for that due on 12 000
shares.
June 18 The shares on which the final call was unpaid are forfeited.
26 The forfeited shares are reissued, credited as paid to $4, for $3.60 cash
per share. The balance of the Forfeited Shares account will be refunded
to the former shareholders on 27 June.
27 Pay refund to former holders of forfeited shares.

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Required:

a) Prepare general journal entries to record the above transactions. (25 marks)

Note: Show all your workings. Journal narrations are required.

b) Prepare the equity section of ChiHerbal’s statement of financial position as at 30 June


2019 once the above transactions have been recorded. (5 marks)

Scenario 2 Property, Plant and Equipment (25 marks)

a) The extracted financial statements of ChiHerbal shows the following land and
buildings at 30 June 2018:

$
Residential land, at cost 1 600 000
Factory land, at valuation 2015 1 440 000
Buildings, at valuation 2014 1 280 000
Accumulated depreciation (160 000)

At 30 June 2018, the balance of Revaluation Surplus is $640 000, of which $480 000 relates
to Factory land and $160 000 relates to Buildings. On 30 June 2018, independent valuations
of the land and building are obtained. The assessed fair values of the above assets as at 30
June 2018 are:

$
Residential land, previously recorded at cost 1 760 000
Factory land, previously revalued in 2015 1 120 000
Buildings, previously revalued in 2014 1 440 000

ChiHerbal Ltd classifies Residential land and Factory land as different classes of assets.

Required:

Prepare general journal entries to account for the revaluation of the above assets on 30
June 2018.

Note: Show all your workings. Journal narrations are required.


(10 marks)

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b) ChiHerbal acquired a delivery truck on 1 July 2015 for $480 000. The truck is
expected to have a useful life of seven years, and is depreciated using the straight-
line method.

On 1 July 2017 the truck was revalued to $400 000. On this same date, its useful life is
reassessed, according to which the truck is expected to have a remaining useful life of six
years.

On 1 July 2018, the truck is unexpectedly sold for $220 000.

Required:

Prepare general journal entries to account for the revaluation of the truck on 1 July 2017
and the subsequent sale on 1 July 2018.

Note: Show all your workings. Journal narrations are required. (15 marks)

Scenario 3 Leases (30 marks)

ChiHerbal Ltd leases a motor vehicle from Easy Rental Ltd, a dealer/manufacturer lessor.
The lease terms are as follows:

• Lease term is six years, commencing on 1 July 2018.


• The motor vehicle has a useful life of six years, after which it will have no residual
value.
• Annual lease payments are $24 000, commencing on 1 July 2018.
• The interest rate implicit in the lease is 10 per cent.
• The motor vehicle has zero unguaranteed residual value.
• The motor vehicle has a normal selling price, i.e. fair value, of $115 200.
• The cost of motor vehicle in the book of Easy Rental Ltd is $83 200.

Required:

a) Prepare general journal entries to account for the lease transaction in the book of
the lessor, Easy Rental Ltd, for two financial years ending 30 June 2019 and 30 June
2020. (16 marks)

b) Prepare general journal entries to account for the lease transaction in the book of
the lessee, ChiHerbal Ltd, for two financial years ending 30 June 2019 and 30 June
2020. (14 marks)

Note: Show all your workings. Journal narrations are required.

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Scenario 4 Intangible Assets (15 marks)

In 2016, ChiHerbal decided to develop a new type of lavender sales bags, which were made
from a new material. The material to be used was more like plastics and thus more resistant
to damage than the traditional material used to make sales bags. In 2016, ChiHerbal spent
$350 000 on research to gain knowledge of different plastics. ChiHerbal believed this
knowledge could be utilised to bring significant future economic benefits.

In 2017, ChiHerbal developed a prototype of new sales bags and asked a number of experts
on plastics materials for their opinions regarding the durability of new bags. The company
incurred total costs of $528 000 in developing the prototype in 2017. The experts’ comments
were positive. Some other companies even put in orders to buy new bags. Anticipating a
substantial market demand, ChiHerbal spent $22 000 on legal costs to register a patent for
new bags. The patent has a life of 4 years, after which time other producers may copy the bag
design.

In 2018, ChiHerbal conducted a large-scale marketing campaign for new bags at total costs of
$650 000. The marketing campaign indicated a huge demand for new bags. Within four
months, total orders for over $2 million worth of bags were received.

ChiHerbal employed an accounting firm to estimate the present value of revenues from new
bags at $15 million. The company’s Chief Financial Officer decided that he would like to have
this present value of the bags recognised in the company’s financial statements at its fair
value. While the accounting company determined the present value at $15 million, a major
competitor of ChiHerbal made a legally binding offer to buy the patent for new bags at a price
of $12 million.

Required:

Describe how to account for the events and costs incurred each year. Provide appropriate
journal entries.

Note: You are expected to refer to the relevant sections and paragraphs in AASB 138
Intangible Assets in your responses to Scenario 4, where applicable.
(15 marks)

End of Assignment

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