Preparation of a statement of financial position You are the chief accountant of Wisdom, a big accounting firm in town. You requested one of your trainee accountants, Matthew to prepare the balance sheet for one of your clients, DL Vision Ltd which is a manufacturing company. Matthew later presented you with the following balance sheet of DL Vision Ltd for the year ended 30 June 2016, which you are not very happy with. DL Vision Ltd Statement of financial position for the year ending 30 June 2016 Assets $ Liabilities and Capital $ Cash at bank 5,000 Allowance for doubtful debts 6,000 Cash on deposits, at call 37,500 Acc. depreciation machinery 15,250 Trade debtors 185,000 Acc. depreciation land and building 235,000 Other debtors 38,500 Bank loans 27,750 Loan to employee 65,000 Other loans 202,500 Raw materials inventory 13,250 Trade creditors 205,000 Finished goods inventory 297,500 Provision for employee benefits 38,250 Investment in associates 108,750 Provision for restructuring 15,500 Machinery 106,500 Current and deferred tax liabilities 32,500 Land and building 525,000 Provision for warranty 10,000 Goodwill 362,500 Share capital 730,000 Dividends paid 37,500 Retained earnings, 1 July 2015 190,000 Revaluation reserve 3,750 Profit for the year 70,500 1,782,000 1,782,000 Additional information related to DL Vision Ltd: Current tax payable is $7,500 and deferred tax liability amounted to $25,000. Provision for warranty is in respect of a 6-month warranty on certain goods sold. $6,250 of bank loans is repayable within 1 year. $100,000 of other loans is repayable within 1 year. Loan to employee includes $12,500 receivable within 1 year. Provision for employee benefits includes $27,500 payable within 1 year. The planned restructuring is intended to be fully implemented within 1 year. Required: Write a memo to Matthew outlining the key problems with the statement of financial position prepared, with references made clearly to requirements of AASB101 where appropriate. Show the corrected version of the statement of financial position of DL Vision Ltd for the year ended 30 June 2016 and attach it at the end of the memo. Your corrected statement of financial position should be prepared in accordance with AASB101, using the captions that a listed company is likely to use. At this stage, you would not worry about the notes to the accounts. Question 1 Max. marks awarded Issues identified with the original statement of financial position 10 Preparation of corrected statement of financial position 18 Overall presentation 2 Total 30 Question 2 [20 marks] Company formation share issue by instalments, oversubscription, forfeiture and reissue T. Padroni Ltd was incorporated on 2 April 2016 and the following events took place during the financial year ended 31 December 2016. 1 May Issued a prospectus inviting the public to subscribe for 2,000,000 ordinary shares of $4.80 each, with $2.40 due on application, $1.20 within one month of allotment and the balance to be paid by 1 October. 1 June Applications closed with the share issue being oversubscribed by 400,000 shares. 15 June Directors allotted the 2,000,000 shares on a pro rata basis and the amounts received in excess are credited against amounts due on allotment. 15 July All outstanding allotment monies were received. 1 October All monies were received for the final call except for the holders of 100,000 shares. 10 October The directors decided to forfeit the 100,000 shares of the defaulting shareholders. 20 October The forfeited shares were resold for $4.00 per share as fully paid. Share reissue costs amounted to $10,000. The defaulting shareholders bear all costs of the reissue and any surplus is refunded to them. Required: Provide the journal entries necessary to account for the above transactions and events for the year ended 31 December 2016 for T. Padroni Ltd. Show all relevant dates and narrations. Question 2 Max. marks awarded Journal entries 12 Dates correctly stated 3 Narration 3 Overall presentation 2 Total 20 Question 3 [30 marks] Accounting for depreciation and revaluation of assets The following information is provided for the motor vehicles of Lan Zen Ltd (LZ Ltd). The directors of LZ Ltd decided to account for the vehicles using revaluation model and to depreciate these assets using straight-line method. 1953 Rolls Royce Silver Dawn LHD: This car had a revalued amount as at 31 December 2015 of $120,000, prior to any depreciation or revaluation being recognised for the year ended 31 December 2016. This car was revalued for the first time on 31 December 2015, from $130,000 to $120,000. The directors determined that as at 31 December 2015, the car had an estimated remaining useful life of 4 years, and an estimated residual value of $20,000. The directors have determined that the fair value of this car on 31 December 2016 is $116,000. Ford F-450 Platinum Truck: This truck had a revalued amount as at 31 December 2015 of $40,000, prior to any depreciation or revaluation being recognised for the year ended 31 December 2016. This truck has been revalued a number of times, with revaluation decrements amounting to $24,000 being previously recognised in statement of profit or loss and other comprehensive income. The directors determined that as at 31 December 2015, the truck had an estimated remaining useful life of 2 years, and an estimated residual value of $8,000. The directors have determined that the fair value of the truck on 31 December 2016 is $18,000. Assume a tax rate of 30%. Required: (i) Prepare the necessary journal entries to record depreciation and the revaluation entries for each vehicle of LZ Ltd for the year ended 31 December 2016. Show all relevant workings. (ii) In accounting for a depreciable asset, how does a revaluation increment affect an entitys reported profits in subsequent periods? Explain your answers by using an example. Question 3 Max. marks awarded (i) Journal entries supported by workings 22 (ii) Explanation on effect of revaluation increment 6 Overall presentation 2 Total 30 Question 4 [20 marks] Accounting for impairment of assets On 1 January 2016 Bright Ltd (Bright) acquired all the assets of Star Ltd (Star). It was decided that Star is a Cash Generating Unit in its own right. At 31 December 2016, the carrying amounts of the assets for Star, including the goodwill that was recognised upon acquisition, were as follows: $ Buildings 1,200,000 Accumulated depreciation - buildings (320,000) Machinery 800,000 Accumulated depreciation - machinery (200,000) Inventory 320,000 Cash 200,000