Question 1 (20 marks) Eliseth Ltd is a public company whose shares are traded on the ASX. A former executive was formally accused of fraud last month. This executive used his influence with three major suppliers to increase the price of the inventories contracts for the last three years. Eliseth identified those contracts and estimated a loss around AUD 5 billion which this amount was paid by Eliseth in the past three years. The inventory was recorded at cost. Using the appropriate accounting standard and the new conceptual framework issued by IASB in 2018 respond: What would you recommend Eliseth to do? You must provide the basis of your recommendation. Question 2 (20 marks) Mercure Corporation enters into a contract with Pluton Ltd. to provide a system that manages Plutons portfolio of clients for 5 years. Mercure will not transfer the system to Pluton, but it will provide the system and the services included in the contract while it is still valid. The contract is renewable for subsequent one-year periods. Mercure incurred the following costs to obtain the contract: a) $2,000 bonus paid to the accounting department for preparing the proposal at very short notice. b) $8,000 legal fees paid externally c) $12,000 accommodation costs incurred to deliver the proposal. d) $10,000 commission for the sales representatives. After a month testing, Pluton decided to sign the contract. Required: i. Your manager wants advice on how to account for these expenditures under Australian accounting standards in each of the relevant years. The manager is aware that you do not have the full set of facts and encourages you to provide multiple solutions to each question. For example, if x is the case, then the accounting treatment would be . Based on the information provided, I think it is more likely that z would apply. You must justify your treatment by referring to specific paragraphs in the standards. You must also state any assumptions you make. (15 marks) ii. Present the journal entries (if any) for each expenditure. (5 marks) Group Assignment Page 2 of 3 Question 3 (20 marks) The company bought debentures with a face value of $145,000 and paid $125,000 to the issuer plus a purchase commission of $2,000. The debentures have a life of 4 years and will pay a coupon of 6.53% per year at the end of each year. These instruments have been classified as subsequently measured at fair value through profit and loss. By the end of the 4th year, Australian interest rates have moved to 12%. The fair value amounts for this debenture at the end of each year are: Year Fair Value 1 $133,000 2 $147,000 3 $123,000 4 $154,469 Required: a. Calculate the effective rate of return (the market rate of interest) for these debentures. (3 marks) b. Prepare a table which shows the movements relating to these debentures over their life. Please remember, these debentures are not held at amortized cost. (5 marks) c. Prepare journal entries for all transactions relating to these debentures. (12 marks) Question 4 (40 marks) Orange Ltd. enters into a 12-year lease of a whole a building, with an option to extend for five years. Orange will make periodic payments of $77,000 per year during the initial term and $87,000 per year during the optional period, all payable at the start of each year. Lima, the landlord, will charge Orange another $5,000 per year for executory costs, relating to insurance and maintenance of the building. These are included in the periodic payments mentioned above. To obtain the lease, Orange paid initial direct costs of $30,000 of which $12,000 relates to a payment to a former tenant occupying one of the floors of the building and $18,000 as a commission for the real estate agent that arranged the lease. As an incentive to Orange for entering into the lease, Lima Ltd (the lessor) made the following payments to Orange: $18,000 for the real estate and $8,000 for leasehold improvements. Orange is required to restore the building at the end of the lease. This involves removing all branding, floor coverings, internal walls put up by Orange, etc. Orange spoke to some builders and real estate agents and the consensus view is that Orange will have to pay $600,000 in 12 years time. Your old manager referred you to section 45 of AASB 137 and requested you to use the companys incremental borrowing rate. This manager also mumbled something about ensuring you unwind the discount relating to this provision over the life of the lease. You smiled politely and wondered what the manager was talking about. This manager noticed your strange look and suggested you have a look at example 1 in Interpretation 1 (see Pronouncements) on the AASB website. The manager said to ignore material relating to changes in decommissioning liabilities in that Interpretation, just get a sense of what unwinding the discount means and how it is treated for accounting purposes. Group Assignment Page 3 of 3 Lima Ltd. (the lessor) has incurred in the following costs: $35,000 for terminating the lease contract with the previous lessee; $5,000 legal fees; $18,000 restoration and $23,000 renovation. At the commencement date, Orange concludes that it is not reasonably certain to exercise the option to extend the lease and, therefore, determines that the lease term is 12 years. The interest rate implicit in the lease is not readily determinable. Oranges incremental borrowing rate is 5.8 per cent per annum, which reflects the rate at which Orange could borrow an amount similar to the value of the right-of-use asset, in the same currency, for a 12-year term, and with similar collateral. Required: a. Calculate the initial amount the lease liability will be measured at. (2 marks) b. Calculate the initial amount the right-of-use asset will be measured at. (5 marks) c. Justify your answer in (b) using the Australian Accounting Standards. (3 marks) d. Prepare a table which shows the amortization of the lease liability over its life. (3 marks) e. Prepare journal entries for the commencement date and for the next 3 lease payments (15 marks) f. Prepare a table which shows changes in the make good provision over the life of the asset. Based on this table, prepare relevant journal entries for the first 4 years. (7 marks) g. Assume at the end of the lease Orange handed back the leased asset and incurred exactly $600,000 restoring the property to the condition demanded by Lima the landlord. Prepare the relevant journal entries. (2 marks) h. This time assume that Orange only had to pay $585,000 to restore the property to the condition demanded by the landlord. Prepare the relevant journal entries. (3 marks