On 1 January 2007, Sabeto Ltd entered into an agreement to construct a new cinema complex in Lautoka City.

Estimated costs and billings are provided below

	2007	2008	2009
Costs	1,200,000	800,000	500,000
Billings	1,250,000	1,250,000	1,250,000

Required

a.	Prepare a table to calculate the percentage of completion in 2007 and 2008 the amount of gross profit to be recognized in 2007, 2008 and 2009

Question 2 (25 Marks)

Part 1 ( 10 Marks)

Bob Ltd runs a successful chain of fashion boutiques, but has been experiencing significant cash flow problems. The directors are examining a proposal made by an accounting consultant that all the shops currently owned by the company be sold and either leased back or the businesses moved to alternative leased shops. The directors are keen on the plan but are puzzled by the consultants insistence that all lease agreements for the shops be operating rather than finance leases.

Required:

2. Explain the difference between a finance lease and an operating lease. ( 3 marks)
4. Explain, by reference to the requirements of IAS 17, why the consultant prefers operating to finance leases. ( 4 marks)
6. Describe three disadvantages to the company of entering into finance lease agreements. ( 3 marks)

Part 2(15 Marks)

Venus Ltd has entered into an agreement to lease a D9 bulldozer to Mars Ltd. The lease agreement details are as follows:

Length of lease 5 years

Commencement date 1 July 2010

Annual lease payment, payable 30 June each year commencing

30 June 2011 $8 000

Fair value of the bulldozer at 1 July 2010 $34 797

Estimated economic life of the bulldozer 8 years

Estimated residual value of the plant at the end of its economic life $2 000

Residual value at the end of the lease term, of which 50% is

guaranteed by Mars Ltd $7 200

Interest rate implicit in the lease 9%

The lease is cancellable, but a penalty equal to 50% of the total lease payments is payable on cancellation. Mars Ltd does not intend to buy the bulldozer at the end of the lease term.

Venus Ltd incurred $1 000 to negotiate and execute the lease agreement. Venus Ltd purchased the bulldozer for $34 797 just before the inception of the lease.

Required:

A. State how both companies should classify the lease. Give reasons for your answer. (2 marks)

B. Prepare a schedule of lease payments for Mars Ltd. ( 5 marks)

C. Prepare a schedule of lease receipts for Venus Ltd. ( 5 marks)

D. Prepare journal entries to record the lease transactions for the year ended 30 June 2011 in the record of both companies. (3 marks)

Question 3 (27 Marks)

Aussie Ltd gained control of Fiji Ltd by acquiring all its shares on I July 2010. The equity at that date was:

Share capital $100 000

Retained earnings 35 000

At 1 July 2010, all the identifiable assets and liabilities of Fiji Ltd were recorded at fair value except for:

Carrying amount Fair value

Inventory 18 000 22 000

Land 120 000 130 000

Plant (cost $120 000) 95 000 98 000

The inventory was all sold by 30 June 2011. The plant had a further 5 year life but was sold on 1 January 2013 for $50 000. The land was sold in March 2011 for $150 000.

Where revalued assets are sold or fully consumed, any associated amounts in the business combination valuation reserve are transferred to retained earnings. At 1 July 2010, Fiji Ltd had guaranteed a loan taken out by Swede Ltd. Fiji Ltd had not raised a liability in relation to the guarantee but, as Swede Ltd was not performing well, Aussie Ltd valued the contingent liability at $5000. in January 2013, Swede Ltd repaid the loan. Fiji Ltd had also invented a special tool and patented the process. No asset was raised by Fiji Ltd, but Aussie Ltd valued the patent at $6000, with an expected useful life of 6 years. The tax rate is 30%.

Financial information for these companies for the year ended 30 June 2013 is as follows:

Aussie Ltd Fiji Ltd

Profit before tax 50 000 15 000

Income tax expense (20 000) (6 000)

Profit for the year 30 000 9 000

Other recognized income and expense:

Gains on plant revaluation 6 000 0

Available-for-sale financial assets (4 000) (10 000)

Total recognized income and expense for the year 32 000 (1 000)

Profit 30 000 9 000

Retained earnings (1 July 2012) 37 000 45 000

67 000 54 000

Dividend paid 20 000 -

Transfer to general reserve - 20 000

20 000 20 000

Retained earnings (30 June 2013) 47 000 34 000

Share capital 150 000 100 000

General reserve 12 000 20 000

Asset revaluation reserve 20 000 -

Retained earnings 47 000 34 000

Other components of equity 10 000 4 000

Total equity 239 000 158 000

Payables 19 000 8 000

Loan 25 000 -

Total liabilities 44 000 8 000

Total equity and liabilities 283 000 166 000

Cash 5 000 14 000

Available-for-sale financial assets 10 000 5 000

Inventory 30 000 21 000

Plant and equipment 140 000 163 000

Accumulated depreciation (62 000) (37 000)

Shares in Fiji Ltd 160 000 -

Total assets 283 000 166 000

The transfer to general reserve during the year ended 30 June 2013 was from profits earned before 1 July 2010.

Required

Prepare the consolidated financial statements for Aussie Ltd as at 30 June 2013. Your answer should include all consolidation adjustment journal entries and a consolidation worksheet.