ACCT6003: Fundamental Analysis for Equity Investment

FINANCIAL
ACCOUNTING
PROCESS
ASSIGNMENT

1
By student name
Professor
University
Date: 25 April 2018.
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Contents
Answer to Question 1..................................................................................................................................2
Answer to Question 2..................................................................................................................................4
Answer to Question 3..................................................................................................................................6
Answer to Question 4..................................................................................................................................9
Bibliography...............................................................................................................................................10
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Answer to Question 1
The journal entries have been shown below:
ChiHerbal Ltd.
General Journal
Date Particulars Dr./Cr. Amount ($) Amount ($)
2017
1-Aug Cash Trust Dr. 2,300,000
To Share Application Cr. 2,300,000
(Cash received on application)
15-
Aug Share Application Dr. 1,500,000
Share Allotment Dr. 1,250,000
To Share Capital Cr. 2,750,000
(Being 500000 shares alloted)
Cash Dr. 2,300,000
To Cash Trust Cr. 2,300,000
(Being money received transferred)
Share Application Dr. 800,000
To Share Allotment Cr. 550,000
To Calls in Advance Cr. 250,000
(Allocation of Application money received amongst
allotment and calls in advance)
Share Issues Costs / (Share capital) Dr. 36,000
To Cash Cr. 36,000
(Being prospectus, legal and stamp duty costs paid)
30-
Aug Cash Dr. 700,000
To Share Allotment Cr. 700,000
(Being cash received on share allotment)
2018
1-May Call 1 Dr. 750,000
To Share Capital Cr. 750,000
(Being call 1 of $1.5 per share done)
Calls in Advance Dr. 150,000
To Call 1 Cr. 150,000
(Being Calls in Advance adjusted for 100000 shares)
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15-Jun Cash Dr. 577,500
To Call 1 Cr. 577,500
(Being call 1 received)
1-Jul Call 2 Dr. 500,000
To Share Capital Cr. 500,000
(Being call 2 of $1.5 per share done)
Calls in Advance Dr. 100,000
To Call 2 Cr. 100,000
(Being Calls in Advance adjusted for 100000 shares)
30-Jul Cash Dr. 385,000
To Call 2 Cr. 385,000
(Being call 2 received)
1-Sep Share Capital Dr. 120,000
To Call 1 Cr. 22,500
To Call 2 Cr. 15,000
To Forfeited Shares Liability Cr. 82,500
(Being 15000 shares forfeited)
15-Sep Cash Dr. 90,000
Forfeited Shares Liability Dr. 30,000
To Share Capital Cr. 120,000
(Being reissue of shares made)
Share Issues Costs / (Share capital) Dr. 4,000
To Cash Cr. 4,000
(Being brokerage costs paid)
30-Sep Forfeited Shares Liability Dr. 52,500
To Cash Cr. 52,500
(Being balance returned to the former shareholders)
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Answer to Question 2
The journal entries and the requisite workings in regard with the same has been shown below:
Workings
Sl.
No Particulars Amount
1 Cost of Truck A 90,000
Residual Value 10,000
Depreciable Value 80,000
Depreciable life 5
Depreciation each year 16,000
2 Cost of Equipment 140,000
Residual Value -
Depreciable Value 140,000
Depreciable life (Years) 10
Depreciation each year 14,000
Depreciation till 01st Sep 2,333
Carrying Value as on 01st Sep 137,667
Fair value of the equipment 115,000
Downward Revaluation 22,667
Remaining Life (years) 8
Depreciation per year 14,375
3 Depreciation on Truck till 01st March 14,667
Carrying Value as on 01st March 75,333
Selling Value 59,000
Loss on Sale of Truck 16,333
4 Depreciation on Equipment 11,979
(from 01st Sep'17 to 30th Jun'18)
Depreciation on Equipment 2,333
(from 30th Jun'17 to 01st Sep'17)
Total Depreciation for the year 14,313
5 Carrying Value of Equipment as on 30th Jun'18 100,688
Fair value of the equipment 120,000
Upward Revaluation 19,313
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ChiHerbal Ltd.
General Journal
Date Particulars Dr./Cr. Amount ($) Amount ($)
2017
1-Apr Vehicle - Truck A Dr. 90,000
To Cash Cr. 90,000
(Being cash paid for truck)
30-Jun Depreciation on Truck A Dr. 4,000
To Accumulated Depreciation on Truck A Cr. 4,000
(Being depreciation on truck charged)
30-Jun Equipment Dr. 140,000
To Cash Cr. 140,000
(Being cash paid for equipment)
31-Aug Repair and Maintenance Dr. 2,500
To Cash Cr. 2,500
(Being transmission repairs and oil change
for Truck A
1-Sep Revaluation Loss (WN -2) Dr. 22,667
To Equipment Cr. 22,667
(Being equipment revalued at fair value)
2018
1-Mar Depreciation on Truck A Dr. 10,667
To Accumulated Depreciation on Truck A Cr. 10,667
(Being depreciation on truck charged)
1-Mar Cash (WN- 3) Dr. 59,000
Accumulated Depreciation on Truck A Dr. 14,667
Loss of sale of Truck A Dr. 16,333
To Vehicle - Truck A Cr. 90,000
(Being truck sold at loss)
30-Jun Depreciation on Equipment (WN -4) Dr. 14,313
To Accumulated Depreciation on
Equipment Cr. 14,313
(Being depreciation on equipment charged)
30-Jun Equipment (WN -5) Dr. 19,313
To Revaluation Loss (WN -5) Cr. 19,313
(Being equipment revalued at fair value)
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Answer to Question 3
The journal entries, workings and the schedule of the lease payments and receipts for the entire lease
term has also been shown below:
Inputs for the question
Economic Life of Asset (in years) 7
Lease term (in years) 5
Interest Rate 9%
Fair value (cash cost) of asset 35322
Annual lease payment 8000
Carrying value of asset 31000
Estimated Residual value of asset 3000
Guaranteed Residual value at end of lease term 2160
Workings for the lessee
Present Value of Minimum lease payments 33918
(n=5 years, I=9%)
Present Value of Guaranteed residual value 1404
(n=5 years, I=9%)
Total Lease Liability 35321
Workings for the lessor
Carrying value of asset 31000
Present value of the estimated Residual value of asset 1641
(n=7 years, I=9%)
Guaranteed present residual value by lessee 1404
Amount to be recovered from lessee 31237
First install met amount 8000
Amount to be recovered in 4 instalments 23237
PV factor of annuity due (I=9%, n=4 years) 3.2397
Annual Payment Required 7173
Lease Schedule: ChiHerbal Ltd.
Date Lease Payment Interest Expense Reduction in Liability Lease Liability
1/7/2017 35,321.38
1/7/2017 8,000.00 - 8,000.00 27,321.38
30/06/2018 8,000.00 2,458.92 5,541.08 21,780.31
30/06/2019 8,000.00 1,960.23 6,039.77 15,800.54
30/06/2020 8,000.00 1,422.05 6,577.95 9,322.58
30/06/2021 8,000.00 839.03 7,160.97 2,161.62
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ChiHerbal Ltd.
General Journal
Date Particulars Dr./Cr. Amount ($) Amount ($)
2017
1-Jul Leased Machine under capital lease Dr. 35,321
To Lease liability Cr. 35,321
(Being lease liability Booked)
1-Jul Lease Liability Dr. 8000
To Cash Cr. 8000
(Being lease instalment paid)
2018
30-Jun Lease Liability Dr. 5,541.08
Interest Payable Dr. 2,458.92
To cash Cr. 8,000.00
(Being lease instalment paid)
2019
30-Jun Lease Liability Dr. 6,039.77
Interest Payable Dr. 1,960.23
To cash Cr. 8,000.00
(Being lease instalment paid)
Lease Schedule: Cessnock Ltd.
Date Lease Payment Interest Expense Reduction in Liability Lease Liability
1/7/2017 31,237.22
1/7/2017 8,000.00 - 8,000.00 23,237.22
30/06/2018 7,172.64 2,091.35 5,081.29 18,155.92
30/06/2019 7,172.64 1,634.03 5,538.61 12,617.31
30/06/2020 7,172.64 1,135.56 6,037.09 6,580.22
30/06/2021 7,172.64 592.22 6,580.42 (0.20)
Cessnock Ltd.
General Journal
Date Particulars Dr./Cr. Amount ($) Amount ($)
2017
1-Jul Lease Receivable Dr. 31,237
To Leased Machine Cr. 31,237
(Being lease receivable recorded)
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1-Jul Cash Dr. 8,000.00
To Lease Receivable Cr. 8000
(Being lease instalment received)
2018
30-Jun Interest Receivable Dr. 2,091.35
To Interest Revenue Cr. 2,091.35
(Being interest revenue recorded)
30-Jun Cash Dr. 9,263.99
To Interest Receivable Cr. 2,091.35
To Lease Receivable Cr. 7,172.64
(Being lease instalment received)
2018
30-Jun Interest Receivable Dr. 1,634.03
To Interest Revenue Cr. 1,634.03
(Being interest revenue recorded)
30-Jun Cash Dr. 8,806.68
To Interest Receivable Cr. 1,634.03
To Lease Receivable Cr. 7,172.64
(Being lease instalment paid)
Answer to Question 4
In the given case, the company ChiHerbal Ltd has undertaken a project for the online sales team under
which the all the sales representatives of the company will be equipped with special hologram
projecting equipment which would be able to project the accurate image of the item ordered by the
customers. But the same is still under progress in spite that the company expected it to go live by the
end of 2017. Errors have been detected during the experimental testing phase and therefore the
application for patent has been delayed. The company is now considering to sell it to other company in
the marketplace but the marketing department of the company has confirmed that there is no
conclusive evidence of existence of for such a market for new product now1. The question here is
whether this expenses can be capitalised in the books of company as developmental expenses or should
be charged off to expense.
As per AASB 138, Para 51 on the intangible assets, an internally generated asset can qualify for
recognition only if it has identifiable future economic benefits flowing to the entity and where the cost
of generating the asset can be determined reliably. As per Para 52, All the expenses can be broadly
1 Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview
Analysis. Ecological Economics, p. 145.
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classified into two parts: the research phase and the development phase. If the entity is not able to
distinguish between the research and the development phase, the entire thing is treated as research
cost and charged off to the profit and loss account. As per Para 57, any expense can be categorised as
development expense if it satisfies all the following criteria’s namely:
1. The technical feasibility of the use of the asset has been done.
2. The intention to develop such an asset is clear.
3. The ability to sell or use the intangible asset is established.
4. It is capable enough of generating future economic benefit
5. The cost incurred to develop it can be reliably measured
6. Adequate technical, financial and other resources are there to use or sell it.
In the given case though the intension and the use of the asset us clear and also the cost incurred to
develop the same is available but adequate research has not been made to check if the market for same
exists or not and hence it does not qualifies as an asset2. Therefore, in case the technology is not being
used by the company, it should be charged off to profit and loss account as the research expense.
2 Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish Business.
Financial Environment and Business Development, 4(3), pp. 103-112.
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Bibliography
Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview Analysis.
Ecological Economics, p. 145.
Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish Business.
Financial Environment and Business Development, 4(3), pp. 103-112.
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