Financial Accounting Solutions for Various Topics

This article provides solutions for various financial accounting topics including cash flow, current assets and liabilities, debentures, and more. It also explains the definitions and treatments of various financial terms. The solutions are provided in a step-by-step format with working notes.

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Solution 1
a. AASB ii
b. ASIC iii
c. Company i
d. Replaceable Rules v
e. Unlimited Liability
Company iv
Solution
2
Debit Share Capital 80,000
Debit Retained earnings 25,000
Debit General Reserve 5,000
Debit Goodwill on Consolidation 10,000
Credit Investment in Vita Ltd 1,20,000
Solution 3
a TRUE
b FALSE
c TRUE
d TRUE
e FALSE
f TRUE
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Solution 1:
Statement of comprehensive income is one of the components of the financial statements.
The two major components of this statement include net income and other comprehensive
income. Other comprehensive income includes items like pension adjustments, unrealised
gains or losses from available from sale securities, gains or losses because of foreign
currency translations etc. These items do not affect the income statement directly. It is usually
followed by the income statement in the financial statement. However, the company also has
an option to combine the income statement and the statement of comprehensive income.
Statement of cash flows is prepared in order to know about the cash inflows and cash
outflows that have occurred during the year. The cash flows of the company are divided into
three main categories. They are cash flows from operating activities, investing activities and
financing activities (Alvarez, 2013).
Solution 2:
Statement of changes in equity: the statement of changes in equity represents the balances in
share capital and reserves, along with the additions and deductions made during the year.
This statement helps the shareholders understand the additions and withdrawals from the
shareholders fund (Easton, 2010).
Statement of financial position: the stamen of financial position lists the sources of funds and
application of the same. This statement lists in details the various sources which have helped
to finance the operations, the investments made and liabilities outstanding during the end of a
reporting cycle.
Solution 3:
- Merchandising: this organisation is involved in the sale of goods. Such organisations
either procure goods from a vendor or produce them and then present it to sell. Example:
Woolworths Ltd.
- Manufacturing: this organisation in involved in procurement of raw materials which are
then processed into final products. Example of such organisation is Toyota, who is
involved in manufacture of automobiles.
- Serviced: These types of organisations are involved in providing services to the
customers by helping them and supplying them with needs. Example of such organisation
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is Price Waterhouse cooper who are involved in providing various financial services
(Elaine, 2015).
- Governmental: the organisations which are owned and managed by the government are
government organisations, such as the municipalities.
- Non-Profit: the organisations which provide services and goods for a social cause and not
with the motive of earning profits, such as world trade organisations.
Solution 4:
Wages Expense Statement of Profit and Loss
Cost of Goods sold Statement of Profit and Loss
Sales revenue Statement of Profit and Loss
Merchandise
inventory Statement of financial position
Net Income Statement of Profit and Loss
Retained earnings Statement of financial position
Contributed capital Statement of financial position
Rent expense Statement of Profit and Loss
Cash Statement of financial position
Solution 5:
Financial statements are used by many people for knowing about the financial performance
and financial position of the company. The users of the financial statements are those that
have interest in the workings of the company. Such people include investors and other
stakeholders such creditors, banks, customers, competitors, employees, Investment analysts,
governments and other lenders (Penman, 2012).
Solution 6:
Goodwill is an intangible asset that is closely associated with the acquisition of one company
by the other. Goodwill arises when the purchase consideration of the company exceeds the
fair value of all assets and liabilities. Few examples of goodwill are the value that the brand
name of the company holds, a strong customer base, cordial customer and employee relation
etc (Siciliano, 2015).
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Intangible assets are those assets that are not physical in nature. Few examples of intangible
assets are patent, trademark, copyright, brand recognition and other intellectual property.
Solution 7:
When the shares are issued, the amount is raised in various stages. First the application
money is paid, after which shares are issued. After issue of shares, the company calls for the
unpaid remaining amount on the shares which are call money. There are few shareholders
who fail to pay such amount when called for by the company. This is called unpaid calls.
There are various treatments of the unpaid calls in the company’s books (Simpson, 2012).
Solution 8
Part a
Dr amount Cr Amount
Bank 1,10,000
To 8% Debentures 1,00,000
To Premium on issue of debentures 10,000
(Being 8% debentures issued at 10%
premium)
Part b
Dr amount Cr Amount
8% Debentures 1,00,000
Premium on redemption of debentures 10,000
To Bank 1,10,000
(Being 1000 number of $100 debenture redeemed at $110)
Solution 9:
Taxable temporary difference is the temporary differences which result in future taxable
liability for the company. These differences result in increase in taxable profit of the
company. This will then increase the tax liability in future
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Deductible temporary difference is the temporary difference which will reduce the tax
liability of the firm in future. This difference will result in deductions from the taxable profit
of the company which will reduce the tax liability in future (Skonieczny, 2012).
Solution 10
Part a
Plant and machinery
Balance as at 1 July 300000
Carrying amount
Balance as at 1 July 300000
Less: Depreciation @ 10% 30000
270000
Tax Base
Balance as at 1 July 300000
Less: Depreciation @ 15% 45000
255000
Temporary taxable difference- Liability 15000
Part b
Accounts Receivable
Balance as at 1 July 250000
Carrying amount
Balance as at 1 July 250000
Less: Bad debts written off 10000
240000
Tax Base
Balance as at 1 July 250000
Less: Doubtful debts expensed at year
end 25000
225000
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Temporary taxable difference- Liability 15000
Solution 11:
An issue of additional equity share to the existing shareholders without any consideration is
known as bonus issue. For example, the company may issue one bonus shares for every six
shares that are already held by the shareholder.
Dividend is the amount that is paid to the shareholders of the company from the profits after
tax. These dividends are distributed to a certain class of shareholders.
Dividend equalization reserve is the portion of money that the company keeps aside for
paying out dividend in the year in which it does not earn sufficient profits.
Solution 12:
Current assets are those assets that can be easily converted into cash within a short span of
time. These assets are used to carry out day to day operations smoothly. Few examples of
current assets are debtors, inventories, prepaid expenses and cash in hand.
Current liabilities are those liabilities that to be paid within twelve months. Few examples of
current liabilities are creditors, bank overdraft, etc.
Solution 13:
AASB 124 lay down the requirements to be fulfilled by the companies f they are dealing with
any related parties. Definition of related party has also been provided in the same standard.
The disclosures which are required to be made as per the AASB 124 include disclosure of
type of relationship, which is to be made irrespective of occurrence of transactions between
the parties. In case of transactions the nature, amount, outstanding amount and other
information is also required to be reported.
Solution 14:
Impairment refers to the situation where the book value of the asset exceeds the market value
of the asset. The assets which are not included in the scope of AASB 136 include Inventories,
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Deferred tax assets and assets arising from construction contracts (Australian Accounting
Standards Board).
Solution 15
Dr amount Cr Amount
Accumulated Impairment account 5,000
To Goodwill 5,000
(Being impairment on goodwill realised)
Impairment loss 5,000
To accumulated impairment Account 5,000
(Being impairment Loss realised)
Solution 16
Dr amount Cr Amount
General Reserve 10000
Share capital 80000
Retained earnings 15000
Goodwill 95000
To Investment in Kutumba Ltd 200000
(Being elimination of investment in the books of Kawan Ltd passed)
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Solution 1:
Solution 1
Particulars Amount
Cash flow from Operating activities
Profit before tax 392
Adjustment for:
Depreciation 118
Loss on Disposal of non-current asset 18
Interest payable 28
Changes in working capital
- Increase in inventory -4
- Increase in trade receivable -18
- Increase in Trade Payables 6
Tax expense paid during the year -108
Net cash from operating activities 432
Cash Flow from Investing activities
Proceeds from Sale of Machine 12
Machine purchased -90
Interest expense -28
Net cash from Investing activities -106
Cash Flow from Financing activities
Dividend Paid -66
Issue of Shares at premium 32
Loans Repaid -300
Net cash from Financing activities -334
Opening bank 56
Changes during the year -8
Closing cash balance 48
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Solution 2
Part a
Shares applied
for
Amount
received
Shares
allotted Application Allotment Refund
5,00,000 5,00,000 5,00,000 2,50,000 2,50,000 -
12,00,000 6,00,000 10,00,000 5,00,000 5,00,000 -
1,00,000 50,000 NIL 50,000
Part b
Particulars
Dr
Amoun
t
Cr
Amoun
t
Bank 250000
To Share Application 250000
(Being application money on 500000 shares at $ 0.50 received)
Share Application 250000
To Share Capital 250000
(Being application money transferred to share capital)
Bank 250000
To Share Allotment 250000
(Being allotment money on 500000 shares at $ 0.50 received)
Share Allotment 250000
To Share Capital 250000
(Being allotment money transferred to share capital)
Bank 600000
To Share Application 600000
(Being application money on 1200000 shares at $ 0.50 received)
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Share Application 500000
To Share Capital 500000
(Being application money for 1000000 shares transferred to share
capital)
Bank 400000
Share Application 100000
To Share Allotment 500000
(Being allotment money on 500000 shares at $ 0.50 received, balance
adjusted from application money)
Share Allotment 500000
To Share Capital 500000
(Being allotment money transferred to share capital)
Bank 50000
To Share Application 50000
(Being application money on 100000 shares at $ 0.50 received)
Share Application 50000
To Bank 50000
(Being application money received refunded)
Solution 3
Part a
30th September Bank 28000000
To 8% Debentures 28000000
(Being 280000 number of 8% debentures of
$100 each issued)
Part b
1st March Interest on Debentures 375000
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To Bank 375000
(Being interest on 150000 debentures @ 5%
paid, semi-annually)
30th September Interest on Debentures 375000
To Bank 375000
(Being interest on 150000 debentures @ 5%
paid, semi-annually)
Part c
30th June 8% Debentures 7500000
To Bank 7500000
(Being debentures worth $7500000
redeemed)
Part d
1st January Bank 22500000
To 8% Debentures 22500000
(Being 225000 number of 9% debentures of
$100 each issued)
15th May 8% Debentures 4500000
Premium on debentures repurchased 270000
To Bank 4770000
(Being 45000 number debentures bought back from ASX
at $6 premium)
Part e
1st April Bank 15000000
To 7.5% Debentures 15000000
(Being 150000 number of 7.5% debentures of
$100 each issued)
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30th September Interest on Debentures 562500
To Bank 562500
(Being interest on 150000 debentures @ 3.75% paid, semi-
annually)
1st December 7.5% Debentures 5500000
To Discount on redemption of debentures 165000
To Bank 5335000
(Being 45000 number debentures bought back from ASX
at $6 premium)
31st March Interest on Debentures 450000
To Bank 450000
(Being interest on 150000 debentures @ 3.75% paid, semi-
annually)
Solution 4
Working Note:
Calculation of Net assets taken over
Freehold Premises 90000
Plant and Machinery 30000
Patents 7400
Inventory 8600
Accounts Receivable 7000
Less:
Bank Overdraft 8000
Accounts Payable 5000
Mortgage on Freehold 20000
NATO 110000
Purchase consideration 102000
Capital Reserve 8000
Part i
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Freehold Premises 90000
Plant and Machinery 30000
Patents 7400
Inventory 8600
Accounts Receivable 7000
To Business Purchase 102000
To Bank Overdraft 8000
To Accounts Payable 5000
To Mortgage on Freehold 20000
To Capital Reserve 8000
(Being Assets taken over)
Part ii
Business Purchase 102000
To Equity Share Capital 102000
(Being purchase consideration paid)
Solution 5
Part i
Proposed Dividend 20000
To Bank 20000
(Being payment made for dividend proposed)
Part ii
General Reserve 150000
To Dividend Equalisation Reserve 150000
(Being transfer made to dividend equalisation reserve)
Part iii
Land 50000
To Revaluation 50000
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(Being land revalued upward by $50000)
Revaluation 50000
To Equity Share Capital 50000
(Being bonus shares issued)
Part iv
General Reserve 50000
To Proposed Dividend 50000
(Being dividend proposed)
Solution 6:
Working Note:
Calculation of
Depreciation
Machine 150000
Less: Depreciation 2014 25000
Less: Depreciation 2015 50000
WDV 75000
Calculation of deferred tax
Expenses as per companies act
Long service Leave expense 24,000
Depreciation on Machine as per companies act 50,000
Expenses as per income tax
Long service Leave expense 16,000
Depreciation on Machine as per companies act 75,000
Temporary difference -17,000
Deferred tax liability 5100
Part a
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Calculation of taxable profit
Operating Profit before tax 5,40,000
Add: Expenses not allowable
Impairment loss goodwill 20,000
Depreciation building 15,000
Long service Leave expense 24,000
Depreciation on Machine as per companies act 50,000
Less: Incomes not taxable
Profit on sale of Shares 45,000
Less: Expenses allowable under income tax act
Long service Leave expense 16,000
Depreciation on Machine as per companies act 75,000
Taxable Income 5,13,000
Tax @ 30% 1,53,900
Part b
Tax Expense 1,59,000
To Provision for Tax 1,53,900
To Deferred tax liability 5,100
(Being current tax for the year recorded)
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Bibliography
Alvarez, F. (2013). Financial statement analysis. Hoboken, N.J.: Wiley.
Australian Accounting Standards Board. (n.d.). Impairment of Assets. Retrieved from
www.aasb.gov.au: https://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-
04_COMPjun09_01-10.pdf
Easton, P. (2010). Financial statement analysis & valuation. Cambridge, UK: Cambridge
Business Publishers.
Elaine, H. (2015). International financial statement analysis. Hoboken: John Wiley & Sons.
Penman, S. (2012). Financial statement analysis and security valuation. Boston, Mass.:
McGraw-Hill.
Siciliano, G. (2015). Finance for Nonfinancial Managers. New York: McGraw-Hill.
Simpson, M. (2012). Financial accounting. Basingstoke: Macmillan Press.
Skonieczny, M. (2012). The basics of understanding financial statements. Schaumburg, Ill.:
Investment Publishing.
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