Question

You have been asked by the accountant at Playfum Ltd whether the following items should be recorded as assets, liabilities, equity, income or expenses. Use Framework 2014 to prepare a response to the accountant's enquiry Give reasons for your advise

(a) The company provides an annual recreation leave entitlement of 20 days to its employees. If an employee does not take any of the entitlement in a particular year, it is carried forward to following years.

(b) Playfurn has entered into a contract with Clayton Metal Manufacturers to purchase capital equipment at a cost of $1 million. Playfurn has paid a 10% deposit.

(c) Playfurn has the following equity:

Share capital:
20 million ordinary shares $2000000
5 million redeemable preference shares $5000000
Retained earnings $3500000
Taking advantage of the Corporations Act, which allows companies to buy back their own shares, the company has bought back 10% of its ordinary share capital at $1.50 per share

(d) Playfurn has a regular program of maintaining its plant and equipment. To provide for this program it has established a Provision for Plant Maintenance account which the company shows with other provisions in the statement of financial position

(e) The preference shares on issue (see point (c)) are non-participating, cumulative and redeemable. The accountant believes that the shares should be shown as a liability in the statement of financial position rather than as part of equity.

Answer 1

a)

As Per Money Measurment concept that a business should only record an accounting transaction if it can be expressed in terms of money

In the given scenario it was not mentioned any amount is going to be paid to the employees for the unavailed leaves, if there is any amount to be paid

we can post the accrual entry for the year end and payment entry while paying the amount

Accrual Entry

Leave Encashment Expenses A/c Dr

To Amount Payable on Encashment of Leaves A/c

(Being Leave Encashment exp debited the P&L and Amount payable shown in Balance sheet as payables)

Payment Entry

Amount Payable on Encashment A/c Dr

To Bank A/c

(Being Previous shown liability debited and Bank is credited)

b)

Advance to Metal manufactures A/c Dr 100,000

To Bank A/c 1Million 100,000

(Being 10% Advance paid to Metal manufactures for purchase of capital asset)

*** Advance paid can be shown as Current Asset in the Balance sheet

c)

Shareholders Account Dr 300,000

Equity Share Holding

2000000

To Bank A/c 300,000

10% Buy Back

200000

(Being of 10% Purchase of Own shares at premium)

At Premium of 1.5

300000

Equity Share Capital A/c Dr 200,000

Retained Earnings A/c Dr 100,000

To Share Holders A/c        300,000

(Being Cancellation 200,000 Equity Shares and retained earnings utilised for premium)

Assumed for payment of premium retained earnings utilised

General Reserve A/c Dr 200,000

To Capital Redemption Reserve A/c 200,000

(If Any General Reserve maintained nominal value of shares Bought back should transfer to capital redemption reserve A/c)

d)

Profit & Loss A/c Dr

To Provision for Palnt and Maintenance

( Being Provision created for Plant and maintenance )

** Debited the P&L A/c and Provision for P&M can be shown under liabilities side of Blance sheet or netoff from Assets)

e)

Bank A/c Dr

To Preference Share Capital A/c

(As your question was not clear assumed that you are asking entry for preference share capital)