On July 1, 2018 a full year’s insurance premium of $2,400, covering the period July 1, 2018,to June 30, 2019 was paid and debited to insurance expense. Assume the following:



The company has a calendar fiscal year.



January 1, 2018, retained earnings balance is $20,000.



2018 reported net income (assuming the error is not discovered)is $22,800.



2019 net income (assuming the error is not discovered) is $30,000.



2020 net income is $40,000. Ignore taxes

REQUIRED:

a.

List the effects of the error on affected accounts and on net income in 2018 and 2019,assuming no adjusting entry is made on December 31, 2018.

b.

Prepare the entry to record the error if discovered in 2018.

c.

Prepare the entry to record the error if discovered in 2019, and the 2018 and 2019 retained earnings sections of the statement of stockholders’ equity.

d.

Prepare the entry (if needed) to record the error if discovered in 2020, and the 2019 and 2020 retained earnings sections of the statement of stockholders’ equity.

On February 1, 2020 Britney contacts Fancy Weddings, Inc. about being the event management company to coordinate her wedding in June 2020. They discuss what Britney is interested in for the wedding and agree to perform all the wedding services at a cost of $10,000. Fancy sends a written contract to Britney outlining everything both parties had agreed to and Britney calls Fancy back and advises she received the letter and is an accurate description of their agreement, but Britney never signs the contract. On March 1, 2020 Britney calls back Fancy and tells them the deal is off because she thinks she can do a better job by herself. Fancy sues Britney and Britney argues a lack of consideration as a defense.

A. Will this defense be successful? Please explain.

B. Under the same facts as above Britney argues that the contract is not binding because of the Statute of Frauds. Will this defense be successful? Please explain.

Question one  

Under IFRS, where a right to return exists,

a) sales returns and allowances are recognized as contra accounts to Revenues and Accounts Receivable.

b) a refund liability is recognized.

c) this right is disclosed in the financial statements; no accrual necessary.

d) this right does not need to be disclosed or accrued anywhere.

Part B

Marlin Pools and Spas sold 80 hot tubs at $4,500 each. The cost of the hot tubs to Marlin is $2,600. The terms of the sale include a right to return for full refund within 30 days of purchase. Marlin expects that 3 of the hot tubs will be returned. Marlin follows IFRS 15.

Required:

1. Record the journal entries related to the above transactions. Assume 1 hot tub is returned within the 30 days.
2. Now assume Marlin uses ASPE, prepare the journal entries for the above transactions.

Question Two

Ace Company manufactures equipment. Ace’s products range from simple automated machinery to complex systems containing numerous components. Unit selling prices range from $130,000 to $1,100,000 and are quoted inclusive of installation. The installation process does NOT involve changes to the features of the equipment to perform specifications. Ace has the following relationship with Rose Inc.

• Rose can purchase equipment from Ace for a price of $500,000 and contracts with Ace to install the equipment. Using market data, Rose determines installation service is estimated to have a fair value of $50,000. The cost of the equipment is $200,000.
• Rose is obligated to pay Ace the $500,000 upon delivery and installation of the equipment.

Ace delivers the equipment on August 1, 2020, and completes the installation of the equipment on October 1, 2020. The equipment has a useful life of 7 years. Assume the equipment and the installations are two distinct performance obligations that should be accounted for separately.

Instructions

a)    How should the transaction price of $500,000 be allocated among the service obligations?

b)    Prepare the journal entries for Ace for this revenue arrangement for 2020, assuming Ace receives payment when installation is completed.

Question Three

On December 31, 2019, Resilient Company sells production equipment to Ready Corp. for $160,000. Resilient includes a one-year assurance warranty service with the sale of all its equipment. The customer receives and pays for the equipment on December 31, 2019. Resilient estimates the prices to be $156,000 for the equipment and $4,000 for the cost of the warranty.

Required:

1. Prepare the journal entry to record this transaction on December 31, 2019.
2. Repeat the requirements for (a) assuming that, in addition to the assurance warranty, Resilient sold an extended warranty (service type warranty) for an additional two year (2019 – 2020) for $1,600.

Question Four  

In January 2019, Miller Construction Corp. contracted to construct a building for $3,600,000. Construction started in early 2019 and was completed in 2020. The following additional information is available:

                                                                                          2019               2020

       Costs incurred...................................................... $1,458,000          $1,620,000

       Estimated costs to complete.................................. 1,560,000                         —

       Billed ……………………………………………….    1,700,000           1,900,000

       Collections during the year.................................... 1,440,000            2,160,000

Miller uses the percentage-of-completion method.

Instructions

Under the contract-based approach for percentage completion,

a) How much revenue should Miller report for 2019 and 2020?

b) Prepare all journal entries for 2019 and 2020 for this contract.

c)    What amounts would be presented on Miller’s December 31, 2019 Balance Sheet?

d)    What is the gross profit on the project for each of 2019 and 2020?

QUESTION THREE                                                                                                              

Joe Soap owns a general dealer business situated in Umzinto. The following information was provided for Joe’s General Dealers for the financial year ended 28 February 2020.

Joe’s General Dealers

Additional information

1. Physical stock-take on 28 February 2020 revealed the following Inventories on hand;

• Trading inventory                                                 R228 250, and
• Consumable inventory: packing material            R3 600

2. A new tenant rented a portion of the premises from 1 March 2019. According to the rental agreement the rent for the period 1 March 2019 to 31 March 2020 was R1 500 per month. Rent is usually received in advance ie. rent is received in the month before it is due. For example; the April 2019 rent was received during March 2019.
3. Commission income of R10 800, earned in February 2020, has not yet been received nor recorded.
4. Electricity and water of R1 600 for February 2020 has not been paid and is not yet included in the above records.
5. The long term loan from People’s Bank was obtained on 1 September 2016 at an interest rate of 11,5% per year. The loan was payable in four (4) equal annual instalments. The first instalment was paid on 31 August 2019. The second instalment is payable on 31 August 2020. Interest is paid during March each year.
6. A debtor who owes Joe’s General Dealers R12 680 cannot be traced. His account must be written-off as irrecoverable.
7. The insurance account balance of R25 725 covers the period 1 March 2019 to 30 April 2020. The monthly insurance premium remained unchanged during this period.
8. Provide for depreciation for the year as follows:

• Vehicles – at 10% per year on straight line method, and
• Equipment – at 14% on the diminishing balance method.

      There were no purchases or sales of the above items during the current financial year.

Required:

Use the above information to prepare the statement of profit and loss and other comprehensive income for Joe’s General Dealers for the year ended 28 February 2020.         

Your answer must comply with International Financial Reporting Standards that are appropriate to this type of business.

Round off all amounts to the nearest rand.

All calculations must be shown

The profit before tax, as reported in the statement of profit and loss for Aileen Ltd for the year ended 30 June 2020, amounted to $150,000, including the following revenue and expense items:

Revenues

Sales revenue $600,000

Interest revenue 60,000

Government grant 40,000

Expenses

Cost of goods sold 300,000

Bad debts expense 8,000

Depreciation expense – equipment 6,000

Depreciation expense – plant 25,000

Research and development expense 51,000

Wages expense 120,000

Long service leave expense 40,000

The draft statement of financial position of Aileen Ltd at 30 June 2020 and the statement from last year showed the following assets and liabilities:

2019 2020

Assets

Cash $30,000 $30,000

Inventory 100,000 150,000

Accounts receivable 50,000 70,000

Allowance for doubtful debts (5,000) (10,000)

Interest receivable 25,000 20,000

Equipment—cost 30,000 30,000

Accumulated depreciation-equipment (12,000) (18,000)

Plant—cost 500,000 500,000

Accumulated depreciation-plant (50,000) (75,000)

Goodwill 15,000 15,000

Deferred tax asset 33,000, ?

Liabilities

Accounts payable 60,000 40,000

Wages payable 50,000 80,000

Revenue received in advance - , 40,000

Loan payable 200,000 100,000

Provision for long-service leave 40,000 30,000

Deferred tax liability 18,730, ?

Additional information:

In the year ended 30 June 2019, Aileen Ltd had a tax loss of $70,000 that it carried over in the deferred tax asset. In June 2020, the company received an amended assessment for the year ended 30 June 2020 from the ATO, indicating that an amount of $10,000 claimed as a deduction has been disallowed. Aileen Ltd has not yet adjusted its accounts to reflect the amendment. The remaining losses can be used to offset taxable incomes in future periods.

Amounts received from sales, including those on credit terms, are taxed at the time the sale is made. All other general taxation rules apply.

The depreciation regimes for the financial reports and the company income tax return respectively, are listed below.

Depreciation Regimes Equipment Plant Depreciation rate:

All research and development expenses were paid in cash during the year ended 30 June 2020. A tax deduction for development costs of 120% of the $51,000 spent during the year is available

All movements of deferred tax accounts during the year are not yet recongised.

The company tax rate applicable is 30%.

REQUIRED: (a) Determine the taxable profit for the year ended 30 June 2020. Start from the accounting profit before tax and show the adjustments for differences between taxation and accounting rules.

(b) Complete the worksheet on the additional page provided to determine the movements in the deferred tax accounts for the year ended 30 June 2020.

(c) Prepare the journal entries to recognise the current tax liability and the final deferred tax adjustments for the year ended 30 June 2020 including the movement during the year due to carry-forward tax loss. Note Aileen Ltd does not set off the deferred tax accounts against each other.

Shamrock Corporation was formed 5 years ago through a public subscription of common stock. Daniel Brown, who owns 15% of the common stock, was one of the organizers of Shamrock and is its current president. The company has been successful, but it currently is experiencing a shortage of funds. On June 10, 2021, Daniel Brown approached the Topeka National Bank, asking for a 24-month extension on two $35,170 notes, which are due on June 30, 2021, and September 30, 2021. Another note of $6,020 is due on March 31, 2022, but he expects no difficulty in paying this note on its due date. Brown explained that Shamrock’s cash flow problems are due primarily to the company’s desire to finance a $300,530 plant expansion over the next 2 fiscal years through internally generated funds.

The commercial loan officer of Topeka National Bank requested the following financial reports for the last 2 fiscal years.

(a)

Compute the following items for Shamrock Corporation. (Round answers to 2 decimal places, e.g. 2.25 or 2.25%.)

1.On January 1, 2020, KJ Inc. acquired an equipment for P2,400,000 with residual value of P400,000 and useful life of 8 years. On December 31, 2023, due to hyperinflation, KJ Inc. tested for impairment the equipment. As of this date, the fair value of the equipment is P1,500,000 and the related disposal cost is P300,000 while the value in use of the equipment is P1,350,000. On December 31, 2024, the fair value of the equipment is P1,700,000 and the related disposal cost is P400,000 while the value in use of the equipment is P1,500,000. Using the same data, what is the gain on reversal of impairment loss to be recognized in year 2024? *

P387,500

P187,500

P37,500

P50,000

2.On January 1, 2020, KJ Inc. acquired an equipment for P2,400,000 with residual value of P400,000 and useful life of 8 years. On December 31, 2023, due to hyperinflation, KJ Inc. tested for impairment the equipment. As of this date, the fair value of the equipment is P1,500,000 and the related disposal cost is P300,000 while the value in use of the equipment is P1,350,000. On December 31, 2024, the fair value of the equipment is P1,700,000 and the related disposal cost is P400,000 while the value in use of the equipment is P1,500,000. What is the carrying amount to be presented on the equipment as of December 31, 2024? *

P1,112,500

P1,150,000

P1,500,000

P1,300,000

3.KJ Company had a machinery costing P3,000,000 when purchased on January 2, 2015. Estimated useful life of the asset was for 20 years with no salvage value at the end of its useful life. KJ uses the straight line method of Depreciation. On January 2, 2020, KJ is evaluating the machinery for possible impairment. The machinery has a remaining useful life of 5 years and is expected to generate cash inflows of P500,000 per year. KJ has determined that the rate implicit in current market transaction for similar asset is 10%. Available information as of January 2, 2020 also showed that the appropriate market price for the same asset is P1,950,000. Estimated cost of disposal, P150,000.What amount of Impairment loss, if any, is to be recognized? *

300,000

450,000

355,000

0

4.On January 1, 2015, KJ Company purchased a new building at a cost of P3,000,000. Depreciation was computed on the straight line basis at 4% per year. On January 1, 2020, the building was revalued at a fair value of P4,000,000. To record the revaluation the following journal entry was made: Dr. Building 1,000,000 Cr. Retained Earnings 1,000,000 Correcting entry will include which of the following? *

Credit Retained Earnings at 600,000

Credit Revaluation Surplus of P1,000,000

Debit Building of P2,000,000

Credit Accumulated Depreciation of 400,000

5.On January 1, 2015, KJ Company purchased a new building at a cost of P3,000,000. Depreciation was computed on the straight line basis at 4% per year. On January 1, 2020, the building was revalued at a fair value of P4,000,000. To record the revaluation the following journal entry was made: Dr. Building 1,000,000 Cr. Retained Earnings 1,000,000 What is the Accumulated Depreciation on Replacement Cost on January 1, 2020? *

400,000

600,000

1,000,000

1,600,000

6.KJ Company determined that, due to the obsolescence, equipment with an original cost of P180,000 and accumulated depreciation at January 1, 2020 of P84,000 had suffered permanent impairment, and as a result should have a fair value of only P60,000 as of the beginning of the year. Additionally, the remaining useful life of the equipment was reduced from eight years to three years. In its December 31, 2020 Income statement, how much should be reflected as Depreciation? *

104,000

20,000

140,000

120,000

Recording and Reporting Equity Investment: FV-NI

Adjust FVA at Year-End

On November 1, 2020, Drucker Co. acquired the following investments in equity securities measured at FV‑NI.

Kelly Corporation—600 shares of common stock (no-par) at $60 per share. Keefe Corporation—360 shares preferred stock ($10 par) at $20 per share. On December 31, 2020, the company’s year-end, the quoted market prices were as follows: Kelly Corporation common stock, $52, and Keefe Corporation preferred stock, $24. Following are the data for 2021.

Mar. 2, 2021 Dividends per share, declared and paid: Kelly Corp., $1, and Keefe Corp., $0.50.
Oct. 1, 2021 Sold 120 shares of Keefe Corporation preferred stock at $25 per share.
Dec. 31, 2021 Fair values: Kelly common, $46 per share, Keefe preferred, $26 per share.

• Journal Entries and Financial Statement Presentation for 2020
• Journal Entries and Financial Statement Presentation for 2021

a. Prepare the entry for Drucker Company to record the purchase of the securities.

b. Prepare any adjusting entry needed at December 31, 2020.

c. Indicate the items and amounts that should be reported on the 2020 income statement of Drucker and its year-end balance sheet. Assume that the investments are classified as current.
Note: Use a negative sign to indicate a loss.

Feedback

You have correctly selected 13.

Partially correct

25.Your firm (an Australian firm) makes a sale to a Japanese customer.  The sale price is 200 million Japanese Yen payable in exactly three months from today.  The current exchange rate is AUD/JPY = 90 (i.e., 1 Australian Dollar (AUD) is worth 90 Japanese Yen (JPY)). The current interest rates in Australia and Japan are 3% p.a. and 0.5% p.a., respectively.
Given this information, please answer the following questions. Please label your answers according to parts.
(a) Given that Australian Dollar is the domestic currency, what is the direct quote of the exchange rate between Australian Dollar and Japanese Yen ? Please round the final answer to five decimal places.
(b) What is the theoretical current forward exchange rate quoted directly in terms of Australian Dollar (i.e. JPY/AUD) for delivery three months from today ? Show your input to the formula to arrive at the final answer.  Please round the final answer to five decimal places.
(c) How can the firm take advantage of any decreases in the exchange rate and also ensure that it receives at least Australian $2 million ? (Hint: Which derivative instrument can be used to achieve this objective?)
(d) Ignoring the cost of the derivative instrument to be used in part (c), what would be the outcome from hedging if the spot exchange rate in 3 month’s time is (i) AUD/JPY=150 and (ii) AUD/JPY = 50?

27.Your uncle has a big proportion of his life savings deposited in one of the Big Four Australian banks. He read in the newspaper that due to COVID-19, these banks’ profitability has declined significantly as a result of some customers not being able to service their loans and negative economic outlook. He is worried that his deposit in the bank may not be secure and is wondering whether he should withdraw all his deposit from the bank. Knowing that you have just completed this unit, he asked for your advice.
What advice will you provide to your uncle given what you have learned about financial institutions in this unit?

23.Having observed the dramatic rebound of technology stocks from their lows in March 2020, your friend Jake believes that this rally of technology stocks is simply too good to be fundamentally true given the ongoing significant economic impact of COVID-19. Accordingly, he has borrowed 50,000 shares of Cooper Technologies Ltd from his broker and sold them all at the price of $21.08 per share.
Explain the rationale behind Jake’s investment strategy. What is the risk that Jake faces that might keep him awake at night ?