please answer the questions below

Exercise 10.8 and

Ch 9

Comprehension question 5

ACCT 3321 Financial Accounting Theory and Practice Select solutions to Week 6 workshop: Leases Chapter 10, Liabilities Chapter 8, Employee benefits Chapter 9 Workshop Questions: Ch 10: Ex 10.8 (solution in workshop), 10.14 Ch8: Exercise 8.14. Ch9: Comprehensive question 5 (solution in workshop); Exercise 9.19. Exercise 10.8 Finance lease lessee Max Ltd prepares the following lease payments schedule for the lease of a machine from Payne Ltd. The machine has an economic life of 6 years. The lease agreement requires four annual payments of $30 000, and the machine will be returned to Payne Ltd at the end of the lease term. The lease payments schedule is: MLP 1 July 2015 1 July 2016 1 July 2017 1 July 2018 1 July 2019 $ 30 000 30 000 30 000 35 000 $125 000 Interest expense (10%) $ 9 851 7 836 5 620 3 181 $26 488 Reduction in liability $20 149 22 164 24 380 31 819 $98 512 Balance of liability $98 512 78 363 56 199 31 819 The following five multiple-choice questions relate to the information provided above. Select the correct answer and show any workings required. 1. In its notes to the accounts at 30 June 2017, Max Ltd would disclose future lease payments of what amount? (a) $95 000 (b) $65 000 (c) $99 000 (d) $104 000 2. For the year ended 30 June 2016, what would Max Ltd record in relation to the lease? (a) An interest payable of $26 488 (b) An interest payable of $nil (c) An interest payable of $9851 (d) An interest payable of $7836 3. How much annual depreciation expense would Max Ltd record? (a) $24 628 (b) $16 419 (c) $15 585 (d) $23 378 4. If Payne Ltd (the lessor) records a lease receivable of $102 327, the variance between this receivable and the liability of $98 512 recorded by Max Ltd could be due to what? (a) Initial direct costs paid by Payne Ltd (b) An unguaranteed residual value (c) Both of the above (d) Neither of the above 5. Assume that the 1 July 2016 lease payment included an additional amount of $3000 for exceeding a limit for machine usage hours specified in the lease agreement. Max Ltd would account for this charge by recognising it as what? (a) An expense and disclosing the amount in the notes (if material) (b) Additional executory costs (c) Revenue (d) A reduction in the lease liability Solution in workshop Exercise 10.14 Finance lease with GRV and lease variations On 1 July 2016, Fair Ltd acquired an item of plant for $31 864. On the same date, Fair Ltd entered into a lease agreement with Game Ltd in relation to the asset. According to the lease agreement, Game Ltd agreed to pay $12 000 immediately, with a further two payments of $12 000 on 1 July 2017 and 1 July 2018. At 30 June 2019, the asset is to be returned to the lessor and its residual value is expected to be $6000. Game Ltd has agreed to guarantee the expected residual value at 30 June 2016. All insurance and maintenance costs are to be paid by Fair Ltd and are expected to amount to $2000 p.a. The costs of preparing the lease agreement amounted to $360. The interest rate implicit in the lease is 9%. The lease is classified as a finance lease. Plant is depreciable on a straight-line basis. Required 1. Prepare a schedule of lease receipts for Fair Ltd and the journal entries for the year ended 30 June 2017. 2. Prepare a schedule of lease payments for Game Ltd and the journal entries for the year ended 30 June 2017. 3. Assume that Game Ltd guaranteed a residual value of only $4000. Prepare a lease schedule for both Fair Ltd and Game Ltd. 4. Instead of acquiring the plant for $31 864, assume that Fair Ltd manufactured the plant at a cost of $29 500 before entering into the lease agreement with Game Ltd. Prepare a schedule of lease receipts for Fair Ltd and the journal entries for the year ended 30 June 2017. 5. Assume that Game Ltd manufactured the plant itself at a cost of $29 500 and sold the plant to Fair Ltd for $31 864. Game Ltd then leased it back under the original terms of the finance lease, with Game Ltd guaranteeing a residual value of $4000. Prepare a lease schedule and journal entries for both Fair Ltd and Game Ltd for the year ended 30 June 2017. FAIR LTD - GAME LTD 1. Lease receipts schedule & lessor's journal entries - year ended 30/6/2017 Workings: Annual payment of $12 000 includes $2 000 executory cost reimbursement Lessor incurred $360 initial direct costs (costs of preparing lease agreement). AASB 117, paragraph 38 requires that initial direct costs must be included as part of the lease receivable (unless the lessor is a manufacturer/dealer). The interest rate implicit in the lease is defined in such a way that the initial direct costs are automatically included in the finance lease receivable. AASB 117, paragraph 36 requires the lessors to recognise a receivable equal to the net investment of the lease (PV of MLP receivable and PV of UGRV) Calculations Present value of the initial lease payment on 1 July 2016 $10 000 Present value of two lease payments ($10 000 x 1.7591*) 17 591 Present value of the guaranteed residual value ($6 000 x 0.7722**) 4 633 Present Value of Minimum Lease Payments: 32 224 This figure is equal to the fair value of the asset $31 864 plus the lessor's initial direct costs $360. * ** 1 July 2016 1 July 2016 1 July 2017 1 July 2018 30 June 2019 based on an annuity rate on 2 years at 9% based on a single payment at the end of year 3 at 9% Fair Ltd (lessor) Schedule of lease receipts MLR Interest Receivable Receivable Revenue reduction balance 9% 32 224 10 000 10 000 22 224 10 000 2 000 8 000 14 224 10 000 1 280 8 720 5 504 6 000 496 5 504 NIL 36 000 3 776 32 224 Fair Ltd Journal entries Year ended 30 June 2017 1 July 2016 Plant Dr Cr 31 864 Lease receivable Dr Plant Cr Cash Cr (Recognition of receivable for leased asset & payment of initial direct costs) 32 224 Cash Dr Cr Cr 12 000 Dr Cr 2 000 Dr Cr 2 000 Cash (Acquisition of plant) Lease receivable Executory costs reimbursement Revenue (Receipt of 1st payment) 31 864 31 864 360 10 000 1 July 2016 to 30 June 2017 Executory costs expense Cash (Payment of executory costs) 2 000 30 June 2017 Interest receivable Interest revenue (Accrual for interest revenue) 2. 2 000 Lease payments schedule & lessee's journal entries - year ended 30/6/2017 1 July 2016 1 July 2017 I July 2018 1 July 2019 Game Ltd (lessee) Schedule of lease payments MLP Interest Liability Liability Expense reduction balance 10% 31 864 10 000 0 10 000 21 864 10 000 2 186 7 814 14 050 10 000 1 405 8 595 5 455 6 000 545 5 455 Nil 36 000 4 136 31 864 2 000 AASB 117 requires the lessee to recognise finance lease assets/liabilities at 'amounts equal to fair value of leased property or, if lower, the present value of minimum lease payments' (paragraph 20). In this case, using an interest rate of 9%, the PV of MLP ($32 224) is higher than fair value ($31 864) due to the existence of the lessor's initial direct costs of $360 being included in the implicit rate of 9%, as well as a 100% guaranteed residual value. As the value of the lessee's asset/liability is restricted to a maximum of fair value, the interest implicit in the lease must be recalculated for the lessee as follows: Using a 10% rate: $10 000 + $10 000 x 1.7355 [T2 10% 2y] + $6 000 x 0.7513 [T1 10% 3y] . = $10 000 + $17 355 + $4 508 = $31 864 (fair value) Game Ltd Journal entries Year ended 30 June 2017 1 July 2016 Leased equipment Dr Lease liability Cr (Recognition of lease asset and lease liability at the inception of the lease). 31 864 Lease liability Executory costs expense Cash (First lease payment) Dr Dr Cr 10 000 2 000 Dr Cr 2 186 31 864 12 000 30 June 2017 Interest expense Interest payable (Accrued interest expense) Depreciation expense Accumulated depreciation (depreciation of the leased asset*) * Cr Dr 2 186 8 621 8 621 As ownership is not expected to be transferred to the lessee at the end of the lease term, the asset should be depreciated over the lease term (i.e. over 3 years). Depreciation of $8 621 is calculated as follows: $8 621 = ($31 864 - $6 000)/3 years 3. Assuming a Guaranteed Residual Value of only $4 000, prepare lease schedules for both lessor and lessee For Fair Ltd, as the total residual value is unchanged the receipts schedule is identical to part 1. For Game Ltd, as the guaranteed residual value has changed the present value of the minimum lease payments will need to be recalculated as follows, using the implicit rate of 9%: PV of MLP Present value of the initial lease payment on 1 July 2016 $10 000 Present value of two lease payments ($10 000 x 1.7591*) 17 591 Present value of the guaranteed residual value ($4 000 x 0.7722**) 3 089 Present Value of Minimum Lease Payments: 30 680 * based on an annuity rate on 2 years at 9% ** based on a single payment at the end of year 3 at 9% the payments schedule must now start with a liability of $30 680: Game Ltd (lessee) Schedule of lease payments MLP Interest Liability expense reduction 9% 1 July 2016 1 July 2016 1 July 2017 1 July 2018 30 June 2019 10 000 10 000 10 000 4 000 34 000 1 861 1 129 330 3 320 10 000 8 139 8 871 3 670 30 680 Liability balance 30 680 20 680 12 541 3 670 NIL 4. As Fair Ltd is now a manufacturer lessor, AASB 117 paragraph 42 requires a profit or loss to be recorded with respect to the plant at the commencement of the lease and the establishment costs to be recognised as an expense when the selling profit is recognised. Fair Ltd's net investment in the lease is now equal to $31 864 and the interest rate implicit in the lease is 10%. 1/7/2016 1/7/2016 1/7/2017 1/7/2018 30/6/2019 Fair Ltd (lessor) Schedule of lease receipts MLR Interest Receivable Receivable Revenue reduction balance 10% 31 864 10 000 10 000 21 864 10 000 2 186 7 814 14 050 10 000 1 405 8 595 5 455 6 000 545 5 455 NIL 36 000 4 136 31 864 Fair Ltd Journal entries Year ended 30 June 2017 1 July 2016 Lease receivable Sales revenue* Cost of sales** Inventory (initial recognition of lease receivable and recording sale of plant) Dr Cr Dr Cr $ 31 864 29 500 $ 31 864 29 500 *Sales revenue = fair value as there is a 100% guaranteed residual value **Cost of sales = carrying amount as there is a 100% guaranteed residual value Lease establishment expenses Cash (payment of establishment costs) Dr Cr 360 Dr Lease receivable Cr Executory costs reimburse revenue Cr (Receipt of 1st payment) 12 000 1 July 2016 Cash 1 July 2016 to 30 June 2017 Executory costs expense Cash (Payment of executory costs) Dr Cr 360 10 000 2 000 2 000 2 000 30 June 2017 Interest receivable Interest revenue (Accrual for interest revenue) Dr Cr 2 186 2 186 5. As the lease terms are unchanged, the schedules are the same as for Part 1 for Fair Ltd, and Part 3 for Game Ltd. 1 July 2016 1 July 2016 1 July 2017 1 July 2018 30 June 2019 1 July 2016 1 July 2016 1 July 2017 1 July 2018 30 June 2019 Fair Ltd (lessor) Schedule of lease receipts MLR Interest Receivable Receivable Revenue reduction balance 9% 32 224 10 000 10 000 22 224 10 000 2 000 8 000 14 224 10 000 1 280 8 720 5 504 6 000 496 5 504 NIL 36 000 3 776 32 224 Game Ltd (lessee) Schedule of lease payments MLP Interest Liability expense reduction 9% 10 000 10 000 10 000 4 000 34 000 1 861 1 129 330 3 320 10 000 8 139 8 871 3 670 30 680 Liability balance 30 680 20 680 12 541 3 670 NIL Game Ltd has entered into a sale & leaseback transaction. As the lease is a finance lease AASB 117, paragraph 59, requires that any excess of sales proceeds over the carrying amount of the plant be deferred and amortised over the lease term. Game Ltd Journal entries Year ended 30 June 2017 1 July 2016 Cash Dr Inventory - Plant Cr Deferred gain on sale Cr (Sale of plant and recognition of excess proceeds as a deferred gain) $ 31 864 30 680 Lease liability Executory costs expense Cash (First lease payment) 10 000 2 000 30 June 2017 Interest expense Interest payable (Accrued interest expense) Depreciation expense Accumulated depreciation (Depreciation of the leased asset (30 680 - 4,000)/3 = 8 893)) Dr Cr Cr 30 680 1 861 Dr 29 500 2 364 Leased equipment Dr Lease liability Cr (Recognition of lease asset and lease liability at the inception of the lease). Dr Dr Cr $ 8 893 12 000 1 861 8 893 Deferred gain on sale Dr 788 Gain on sale of leased plant Cr 788 (Amortisation of deferred gain over lease term: $2 364/3 = $788) For the journal entries for Fair Ltd see Part 1. Ch 8 Exercise 8.14 ChubbyChocs Ltd, a listed company, is a manufacturer of confectionery and biscuits. The end of its reporting period is 30 June. Relevant extracts from its financial statements at 30 June 2017 are shown. Current liabilities Provisions Provision for warranties Non-current liabilities Provisions Provision for warranties Non-current assets Plant and equipment At cost Accumulated depreciation Carrying amount $ 270 000 160 200 $ 2 000 000 600 000 1 400 000 Plant and equipment has a useful life of 10 years and is depreciated on a straight-line basis. Note 36 Contingent liabilities ChubbyChocs is engaged in litigation with various parties in relation to allergic reactions to traces of peanuts alleged to have been found in packets of fruit gums. ChubbyChocs strenuously denies the allegations and, as at the date of authorising the financial statements for issue, is unable to estimate the financial effect, if any, of any costs or damages that may be payable to the plaintiffs. The provision for warranties at 30 June 2017 was calculated using the following assumptions (there was no balance carried forward from the prior year): Estimated cost of repairs products with minor defects Estimated cost of repairs products with major defects Expected % of products sold during FY 2017 having no defects in FY 2018 Expected % of products sold during FY 2017 having minor defects in FY 2018 Expected % of products sold during FY 2017 having major defects in FY 2018 Expected timing of settlement of warranty payments those with minor defects Expected timing of settlement of warranty payments those with major defects Discount rate $1 000 000 $6 000 000 80% 15% 5% All in FY 2018 40% in FY 2018, 60% in FY 2019 6%. The effect of discounting for FY 2018 is considered to be immaterial. During the year ended 30 June 2018, the following occurred: (a) In relation to the warranty provision of $430 200 at 30 June 2017, $200 000 was paid out of the provision. Of the amount paid, $150 000 was for products with minor defects and $50 000 was for products with major defects, all of which related to amounts that had been expected to be paid in the 2018 financial year. (b) In calculating its warranty provision for 30 June 2018, ChubbyChocs made the following adjustments to the assumptions used for the prior year: Estimated cost of repairs products with minor defects Estimated cost of repairs products with major defects Expected % of products sold during FY 2018 having no defects in FY 2019 Expected % of products sold during FY 2018 having minor defects in FY 2019 Expected % of products sold during FY 2018 having major defects in FY 2019 Expected timing of settlement of warranty payments those with minor defects Expected timing of settlement of warranty payments those with major defects Discount rate No change $5 000 000 85% 12% 3% All in FY 2019 20% in FY 2019, 80% in FY 2020 No change. The effect of discounting for FY 2019 is considered to be immaterial. (c) ChubbyChocs determined that part of its plant and equipment needed an overhaul the conveyor belt on one of its machines would need to be replaced in about May 2019 at an estimated cost of $250 000. The carrying amount of the conveyor belt at 30 June 2017 was $140 000. Its original cost was $200 000. (d) ChubbyChocs was unsuccessful in its defence of the peanut allergy case and was ordered to pay $1 500 000 to the plaintiffs. As at 30 June 2018, ChubbyChocs had paid $800 000. (e) ChubbyChocs commenced litigation against one of its advisers for negligent advice given on the original installation of the conveyor belt referred to in (c) above. In April 2018 the court found in favour of ChubbyChocs. The hearing for damages had not been scheduled as at the date the financial statements for 2018 were authorised for issue. ChubbyChocs estimated that it would receive about $425 000. (f) ChubbyChocs signed an agreement with BankSweet to the effect that ChubbyChocs would guarantee a loan made by BankSweet to ChubbyChocs' subsidiary, CCC Ltd. CCC's loan with BankSweet was $3 200 000 as at 30 June 2018. CCC was in a strong financial position at 30 June 2018. Required Prepare the relevant extracts from the financial statements (including the notes) of ChubbyChocs Ltd as at 30 June 2018, in compliance with AASB 137/IAS 37 and related accounting standards. Include comparative figures where required. Show all workings separately. Perform your workings in the following order: 1. Calculate the warranty provision as at 30 June 2017. This should agree with the financial statements provided in the question. 2. Calculate the warranty provision as at 30 June 2018. 3. Calculate the movement in the warranty provision for the year. 4. Calculate the prospective change in depreciation required as a result of the shortened useful life of the conveyer belt. 5. Determine whether the unpaid amount owing as a result of the peanut allergy case is a liability or a provision. 6. Determine whether the receipt of damages for the negligent advice meets the definition of an asset or a contingent asset. 7. Determine whether the bank guarantee meets the definition of a provision or a contingent liability (ignore AASB 139/IAS 39 in this regard). 8. Prepare the financial statement disclosures Workings (1) + (80% x 0) + (15% x 1 000 000) + (5% x 6 000 000) = = = $0 $150 000 $300 000 $450 000 Timing: FY 2018: + 150 000 + (40% x 300 000) $150 000 $120 000 $270 000 (current portion) FY 2019: + (60% x 300,000 discounted at 6% [for 2 years]) = 180 000/1.1236* $160 200 (non-current portion) * = rounded to 4 decimal places (1 + 0.06)2 = 1.1236 (the PV discount factor is therefore calculated as 1/1.1236 = 0.8900) Therefore total provision = 270 000 + 160 200 = $430 200 (2) + (85% x 0) + (12% x 1 000 000) + ( 3% x 5 000 000) $0 $120 000 $150 000 $270 000 Timing: FY 2019: + 120 000 + (20% x 150 000) $120 000 $ 30 000 $150 000 FY 2020: + (80% X 150 000 discounted at 6% [for 2 years]) = 120 000/1.1236 $106 800 Therefore total new provision = 150 000 + 106 800 = $256 800 (3) Opening balance $430 200 Plus: Increase in the provision $256 800 Less: Amounts used during the year (200 000) Less: Unused amounts reversed during the year ( 70 000) [270 000 expected to be paid in FY 2018, 200 000 was actually paid] Plus: Increase in discounted amount arising from the passage of time $19 800 [180 000 - 160 200] Closing balance $436 800 Proof: New provision: Balance of provision from FY 2018 payable in FY 2019 Current portion = $330 000 ($150 000 + $180 000) Non-current portion = $106 800 $256 800 $180 000 $436 800 (4) Conveyer Belt overhaul The expected overhaul is not a provision as ChubbyChocs has no present obligation to conduct the overhaul. Rather, it is evidence that the conveyer belt's useful life has been shortened. The change in the depreciation rate must be accounted for prospectively in accordance with AASB 116/IAS 16 paragraph 61 as follows: Conveyer belt Original cost Accumulated depreciation Carrying amount As at 30 June 2017 200 000 60 000 140 000 As at 30 June 2018 200 000 130 000 70 000 The following adjustment should be made for the year ending 30/06/2018: Original expected life Expired life at 30 June 2017 New expected life 10 years 3 years 5 years (3 years old at 30 June 2017, approx. 2 year left) Therefore, remaining life at 30 June 2017 2 years Therefore, new depreciation amount for 70,000 per annum 2018 should be i.e. CA at 30/06/17 of $140 000 / 2 years Therefore, accumulated depreciation as at 130 000 (60 000 + 70 000) 30 June 2018 Calculations for disclosure of plant & equipment: Excluding conveyer Conveyer (5 yr Total (10 yr life) life) Cost 1 800 000 200 000 2 000 000 Accumulated 720 000 * 130 000 850 000 depreciation to 30 June 2018 Carrying amount 1 080 000 70 000 1 150 000 *Accumulated depreciation as at 30/06/17 $600,000 Less Accumulated depreciation at 30/06/17 re: Conveyor Belt (60,000) Add Accumulated depreciation for year ending 30/06/18 (1,800,000/10) 180,000 720,000 (5) The unpaid amount of $700 000 ($1 500 000 - $800 000 already paid) owing as a result of the peanut allergy case, should be included as part of trade and other payables as there is no uncertainty regarding timing or amount of settlement and hence it is not a provision. (6) The receipt of damages for the negligent advice about the conveyer belt meets the definition of a contingent asset because the case has been found in favour of ChubbyChocs as at the end of the reporting period (thus it is a possible asset) and the amount to be received is dependent on the outcome of future events not wholly within the control of ChubbyChocs (the hearing for damages). The contingent asset should be disclosed because the receipt of damages is probable. Note that the receipt of damages is not a reimbursement relating to a provision - the overhaul of the conveyer belt is not accounted for as a provision. (7) ChubbyChocs' guarantee of the loan made by BankSweet to CCC Ltd would be disclosed as a contingent liability rather than recorded as a provision because CCC was in a strong financial position at 30 June 2018 and therefore whilst ChubbyChocs has a present obligation under the guarantee, it is not probable that an outflow of economic benefits will be required to settle the obligation. (8) Extracts from Financial Statements of ChubbyChocs Limited as at 30 June 2018 30 June 2018 30 June 2017 Reference $ $ CURRENT LIABILITIES Trade & other payables Provisions Provision for warranties (Note x) NON-CURRENT LIABILITIES Provision for warranties (Note x) NON-CURRENT ASSETS Plant and equipment (Note y) At cost Accumulated depreciation Carrying amount Note x: Provision for warranties 700 000 330 000 XXX 270 000 AASB 101/IAS 1 para.54 AASB 101/IAS 1 para.54 AASB 101/IAS 1 para. 54, AASB 137/IAS 37 para.84 AASB 101/IAS 1 para. 54 106 800 160 200 2 000 000 2 000 000 850 000 1 150 000 600 000 1 400 000 AASB 101/IAS 1 para.54, AASB 137/IAS 37 para.84 AASB 101/IAS 1 para.54 AASB 101/IAS 1 para. 54, AASB 116/IAS 16 para. 73 (d) ChubbyChocs provides for expected amounts payable under AASB 137/IAS 37 para. 85 warranties for products sold during the financial year. The portion of the warranty provision that is expected to be settled more than 1 year after the end of the reporting period is classified as a non-current provision. Assumptions used in calculating the warranty are based on past history and experience and include the percentage of products having minor defects vs. those having major defects, the expected costs of rectifying those defects and the expected timing of settlement. Reconciliation of warranty provision: Opening balance 430 200 Plus: Additional provision made in the current year 256 800 AASB 137/IAS 37 para. 84. No comparatives required. As above Less: Amounts used during the year (200 000) As above Less: Unused amounts reversed during the year As above Plus: Increase in discounted amount arising from the passage of time Closing balance (70 000) As above 19 800 436 800 Note y: Plant and equipment Plant and equipment is measured at cost. Depreciation is calculated on a straight line basis. Useful lives of the assets vary from 5 years to 10 years. As above AASB 116/IAS 16 para. 73 Reconciliation not required as all the available information is disclosed on the face of the financial statements at the end of reporting period. Note z: Contingent liabilities and contingent assets During the year ChubbyChocs signed an agreement with BankSweet to the effect that ChubbyChocs would guarantee a loan made by BankSweet to ChubbyChocs' subsidiary, CCC Ltd. CCC's loan with BankSweet was $3 200 000 as at 30 June 2018. CCC was in a strong financial position at 30 June 2018 and accordingly ChubbyChocs believes that it is not probable that the guarantee will be called (AASB 137/IAS 37 para. 86). ChubbyChocs commenced litigation against one of its advisers for negligent advice in relation to the installation of certain plant and equipment. In April 2018 the court found in favour of ChubbyChocs. The hearing for damages had not been scheduled as at the date these financial statements were authorised for issue. ChubbyChocs estimates that it will receive approximately $425 000, based on advice from their lawyers (AASB 137/IAS 37 para. 89). Ch 9 Comprehension question 5. During October 2008 there was a sudden global decline in the price of equity securities and credit securities. Many superannuation funds made negative returns on investments during this period. How would this event affect the wealth of employees and employers? Consider both defined benefit and defined contribution superannuation funds in your answer to this question. Solution in workshop Exercise 9.19 Accounting for defined benefit superannuation plans Some years ago, Wattle Ltd established a defined benefit superannuation plan for its employees. The company has since introduced a defined contribution plan, which all new staff join when commencing employment with Wattle Ltd. Although the defined benefit plan is now closed to new recruits, the fund continues to provide for employees who have been with the company for a long time. The following actuarial report has been received for the defined benefit plan: 2016 $ Present value of the defined benefit obligation 1 Jan. 20 000 000 Past service cost 2 000 000 Net interest ? Current service cost 800 000 Benefits paid 2 100 000 Actuarial loss on DBO 100 000 Present value of the defined benefit obligation 31 Dec. 23 000 000 Fair value of plan assets at 1 Jan. 19 000 000 Return on plan assets ? Contributions paid to the fund during the year 1 000 000 Benefits paid by the fund during the year 2 100 000 Fair value of plan assets at 30 June 2016 20 130 000 Additional information (a) All contributions received by the funds were paid by Wattle Ltd. Employees make no contributions. (b) The interest rate used to measure the present value of the defined benefit obligation was 10% at 31 December 2015 and 31 December 2016. (c) The asset ceiling was nil at 31 December 2015 and 31 December 2016. Required 1. Determine the surplus or deficit of Wattle Ltd's defined benefit plan at 31 December 2016. 2. Determine the net defined benefit asset or liability that should be recognised by Wattle Ltd at 31 December 2016. 3. Calculate the net interest and the return on plan assets for the year ended 31 December 2016. 4. Present a reconciliation of the opening balance to the closing balance of the net defined benefit liability (asset), showing separate reconciliations for plan assets and the present value of the defined benefit obligation. 5. Prepare a summary journal entry to account for the defined benefit superannuation plan in the books of Wattle Ltd for the year ended 31 December 2016. 1. Deficit of the fund = $2 870 000 Present value of the defined benefit obligation 31 December 2016 $23 000 000 Fair value of plan assets 31 December 2016 20 130 000 Deficit of the fund at 31 December 2016 $ 2 870 000 2. The net defined benefit liability at 31 December 2016 is $2 870 000, being the deficit of the fund. 3. Net interest = $300 000 Workings Interest expense component of the defined benefit obligation: Defined benefit obligation brought forward $20 000 000 Past service cost 2 000 000 $22 000 000 x 10% =$2 200 000 Interest income component: $19 000 000 x 10% = $1 900 000 4. Reconciliation Balance 1/1/16 Past service cost Revised balance Interest @ 10% Current service cost Contributions received by fund Benefits paid by fund Return on plan assets excluding interest recognised * Actuarial loss on remeasurement of DBO Balance 31 Dec 2016 Net defined benefit liability $ 1 000 000 2 870 000 * Workings for return on plan assets Fair value of plan assets 31 Dec. 2016 $20 130 000 Less: Opening balance 19 000 000 Interest income 1 900 000 Contributions received 1 000 000 Benefits paid (2 100 000) 19 800 000 Return on plan assets ex. Interest income $ 330 000 Defined Plan assets benefit $ obligation $ 20 000 000 19 000 000 2 000 000 22 000 000 2 200 000 1 900 000 800 000 1 000 000 (2 100 000) (2 100 000) 330 000 100 000 23 000 000 20 130 000 5. Summary journal entry 30/6/2013 Superannuation Expense (P/L) Superannuation Income (OCI) Bank Net Superannuation liability Dr Cr Cr Cr 3 100 000 230 000 1 000 000 1 870 000 (Superannuation expense and contributions for the year) Workings Profit or Loss Other comprehensive income Bank Balance 1 January 2016 Past service cost Net interest Service cost Contributions paid to the fund Gain on plan assets (ex. interest) Actuarial loss on DBO Journal entry Balance 31 December 2016 Net DBL(A) 1 000 000 Cr 2 000 000 Dr 300 000 Dr 800 000 Dr 1 000 000 Cr 330 000 Cr 3 100 000 Dr 100 000 Dr 230 000 Cr 1 000 000 Cr 1 870 000 Cr 2 870 000 Cr