Question 1

A shareholder of a company in liquidation was told 'Creditors are to be paid in full but there is insufficient funds to pay out all contributories.'.The shareholder is unsure of what this means and asks your advice.

Required

Explain to the shareholder the meaning of the above statement.Your explanation will include a discussion of the principles to be followed in apportioning a deficiency among contributories.

Question 2

The accountant of Chocolate Ltd, Ms Fraser, has been advised by her auditors that the entity's investment in Corio Milk Ltd should be accounted for using the equity method of accounting. Chocolate Ltd holds only 20.2% of the voting shares currently issued by Corio Milk Ltd. Since the investment was undertaken purely for cash flow reasons based on the potential dividend stream from the investment, Ms Fraser does not believe that Chocolate Ltd exerts significant influence over the investee.

Required

Discuss the factors that Ms Fraser should investigate in determining whether an investor-associate relationship exists, and what avenues are available so that the equity method of accounting does not have to be applied.

Question 3

A first-time shareholder has approached you requesting some advice. The shareholder has received the company's annual report and noticed the following statement in the summary of significant accounting policies:

'The financial report has been prepared on the basis of historical cost, except for the revaluation of certain non-current assets which is explained in the notes.'

Required

Explain to the shareholder why this statement is included in the accounting policy note.

Question 4

Jay Ltd sold inventories during the current period to its wholly owned subsidiary, Adios Ltd, for $15 000. These items previously cost Jay Ltd $12 000. Adios Ltd subsequently sold half the items to Night Ltd, an external entity, for $8000. The income tax rate is 30%.

The group accountant for Jay Ltd, Bonita Jeffrey, maintains that the appropriate consolidation adjustment entries are as follows.