Financial Accounting Home

13 Jun Financial Accounting Home

UNIT CODE: ACT204 UNIT NAME: FINANCIAL ACCOUNTING

Submission Requirements

1. This Assignment is worth 20% of the total assessment for this unit. This assignment will be marked out of 40 and scaled down to being out of 20.

2. This assignment is to be submitted before 11.59pm (Darwin time) Monday 20th May in Week 11

3. In preparing the assignment use Times New Roman font 12. Do not highlight or bold any section of the assignment.

4. On the cover page of the assignment write your name, ID, campus location, submission date and time.

5. The assignment must be lodged on or before the due date indicated in the assignment details. Submit your Assignment using PDF file format. Handwritten answers will be rejected. Keep a copy of your assignment with you for future reference.

6. The assignment must be lodged online via the ACT204 Learnline Assignment Lodgement link on the ACT204 Learnline site.

7. Your file name should include your student number and your campus, for example S123456WFDACT204.pdf, or S123456SYDACT204.pdf or S123456MELBACT204.pdf or S123456EXTACT204.pdf.

Without your file number and campus location we won’t know to whom it belongs and it may result in your assignment lodgement being rejected.

8. Include your name, student number and campus in a Footer for your assignment.

9. Assignments lodged by email or fax will not be accepted.

7. Ensure you have a copy of the assignment lodged. If you have submitted assessment work electronically please make sure you have a backup copy.

8. Assignment lodgements will be acknowledged automatically on the Learnline site, on submission

Problem 1: Long Service Leave

Darwin Ltd has five employees. According to their particular employment award, longservice leave can be taken after 12 years, at which time the employee is entitled to 10 weeks’ leave. If an employee were to leave before the completion of 12 years’ service, no entitlement would be paid.

High-quality corporate bond rates exist with periods to maturity that exactly match the various periods that must still be served by the employees before LSL entitlements vest with them.

The projected inflation rate for the foreseeable future is 2 per cent. The projected probabilities that the employees will stay long enough for the LSL to vest—that is, for a total of 12 years—are as follows:

Name of Employees	Current Salary	Years of service	Years until LSL vests	Bond rate (%)	Probability (%) that LSL will vest
Black	40 000	2	10	8.0	15
White	40 000	4	8	7.0	20
Brown	50 000	6	6	6.5	50
Green	60 000	8	4	6.0	70
Purple	70 000	10	2	5.8	90

Required

(a) Calculate Darwin Ltd.’s current obligation for long-service leave. 05 (b) If the opening provision for long-service leave is $12 500, provide the journal entry to

record Darwin Ltd.’s long-service leave expense. 05

Problem 2: Share capital

Darwin Ltd issues a prospectus inviting the public to subscribe for 10 million ordinary shares of $2.00 each. The terms of the issue are that $1.00 is to be paid on application and the remaining $1.00 within one month of allotment.

Applications are received for 12 million shares during July 2019. The directors allot 10 million shares on 5 August 2019. All applicants receive shares on a pro rata basis. The amounts payable on allotment are due by 5 September 2019.

By 5 September 2019 the holders of 2 million shares have failed to pay the amounts due on allotment. The directors forfeit the shares on 10 September 2019. The shares are resold on 15 September 2019 as fully paid. An amount of $1.80 per share is received.

Required

Provide the journal entries necessary to account for the above transactions and events. 10 Question 3: Accounting for Lease

Darwin Ltd leased a truck from a truck dealer, City Vans Ltd. City Vans Ltd acquired the truck at a cost of

$180 000. The truck will be painted with Darwin Ltd’s logo and advertising and the cost of repainting the truck to make it suitable for another owner four years later is estimated to be $40 000. Darwin Ltd plans to keep the truck after the lease but has not made any commitment to the lessor to purchase it. The terms of the lease are as follows:

· Date of entering lease: 1 July 2019.

· Duration of lease: four years.

· Life of leased asset: five years, after which it will have no residual value.

· Lease payments: $100 000 at the end of each year.

· Interest rate implicit in the lease: 10 per cent.

· Unguaranteed residual: $50 000.

· Fair value of truck at inception of the lease: $351 140.

Required

(a) Demonstrate that the interest rate implicit in the lease is 10 per cent. 01

(b) Prepare the journal entries to account for the lease transaction in the books of the lessor,

City Vans Ltd, at 1 July 2019 and 30 June 2020. 03

(c) Prepare the journal entries to account for the lease transaction in the books of the lessee,

Darwin Ltd. at 1 July 2019 and 30 June 2020. 03 (d) On 30 June 2023 Darwin Ltd. pays the residual of $50 000 and purchases the truck. all journal entries in the books of Darwin Ltd. for 30 June 2023 in relation to the termination of

the lease and the purchase of the truck. 03

Problem 4: The Statement of Cash flows

Read the article adopted from Carol Altman’s in Financial Accounting in the Real world 19.5

(on page 739 of your text book), ‘Cooking the books the Harris Scarfe way’, and then answer the following questions:

(a) What does ‘cook the books’ mean? 02

(b) How would a reader of financial statements know if the books had been cooked? 04

(c) Is it likely that creative accounting was employed to the statement of cash flows? Why or why not? 04

Cooking the books the Harris Scarfe way

Following the collapse of the Harris Scarfe retail empire in April 2001, Ferrier Hodgson, the receivers, launched an action in the Supreme Court in South Australia, presided over by Judge Bowen Pain, in an attempt to follow the trail of debt accumulation of the company.

The company expanded from its Rundle Mall flagship to 31 stores across Australia, six of which are earmarked for closure as a result of the collapse in April.

The chairman, Adam Trescowthick, and the managing director, Ron Baker are said to have ordered the former Harris Scarfe financial officer, Alan Hodgson (now unemployed), to provide them with the profit they ordered whether it bore any relationship to reality or not.

Mr Hodgson told the court that if he were unable to adjust the profit in a ‘conventional sense’—by making legitimate corrections—he would direct the company’s systems accountant, Michael Johnson, to manipulate the gross profits.

‘I would simply sit down with Michael Johnson and say, “Mike, this is the result I am required to produce this year for whatever reasons” and he would put the adjustment over,’ he said. Under cross-examination by Dick Worthington QC, Mr Hodgson said the ‘unbusinesslike and unconventional’ adjustments started in 1997. ‘So this was profit through the manipulation of accounts,’ Mr Worthington said. ‘That is correct,’ Mr Hodgson replied.

The court was told that for the financial half-year ended January 1999, the company overstated its profits by $1.62 million to $6 million, including $605 000 from adjustments to gross profits across its stores and $1 million worth of adjustments to its general ledger.

It appeared from Hodgson’s testimony that the manipulation of accounts was a long-standing practice at Harris Scarfe—Hodgson said it was happening back in 1997.

Hodgson said that Trescowthick and Baker would have been well aware of the falsification of the accounts. The two were also due to give evidence in the case.

There had been no decision announced by the Australian Securities & Investments Commission (ASIC) as to laying charges against Harris Scarfe officers for breaches of the Corporations Law.

SOURCE: Adapted from ‘I was told to cook books, says Harris Scarfe man’, by Carol Altmann, The Australian, 7 August 2001, p. 1