ACCT6003 - Financial Accounting Processes: Chi Herbal Ltd Analysis

This report provides a detailed analysis of financial accounting processes, focusing on Chi Herbal Ltd. It includes journal entries for various transactions, such as preference share redemption, rights issue, and share options. The report also addresses lease accounting, determining the interest rate for a lease transaction and calculating the present value of lease payments. Furthermore, it examines the accounting treatment of intangible assets, specifically research and development costs, registration costs, and marketing expenses, in accordance with AASB 138. The report concludes with a recommendation for Chi Herbal Ltd regarding a competitor's offer, advising against acceptance due to potential financial losses. This comprehensive analysis offers valuable insights into the practical application of financial accounting principles.

Running head: FINANCIAL ACCOUNTING PROCESSES
Financial Accounting Processes
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

1FINANCIAL ACCOUNTING PROCESSES
Table of Contents
Answer to Question 1:.....................................................................................................................2
Part a:...........................................................................................................................................2
Part b:...........................................................................................................................................5
Answer to Question 2:.....................................................................................................................5
Part a:...........................................................................................................................................5
Part b:...........................................................................................................................................6
Answer to Question 3:.....................................................................................................................7
Part a:...........................................................................................................................................7
Part b:...........................................................................................................................................9
Answer to Question 4:...................................................................................................................10
References:....................................................................................................................................14

2FINANCIAL ACCOUNTING PROCESSES
Answer to Question 1:
Part a:

3FINANCIAL ACCOUNTING PROCESSES
Date Particulars Debit amount (in $) Credit amount (in $)
20-Oct-18 6% Preference Share Capital Account………………………………….Dr 1,20,000
Premium on Redemption of Preference Share Capital Account………….Dr 6,000
To Preference Shareholders Account 1,26,000
(To record amount payable to preference shareholders on redemption along with
5% premium)
Retained Earnings Account……………………………………………..Dr 6,000
To Premium on Redemption of Preference Share Capital Account 6,000
(To record premium amount adjusted against retained earnings)
Retained Earnings Account……………………………………………..Dr 1,20,000
To Capital Redemption Reserve Account 1,20,000
(To record creation of capital redemption reserve out of retained earnings
identical to the preference share capital amount redeemed)
25-Oct-18 Preference Shareholders Account……………………………………….Dr 1,26,000
To Bank Account 1,26,000
(To record cheque payment to preference shareholders due on redemption along
with 5% premium)
01-Nov-18 Underwriting Commission on Rights Issue Account………………………Dr 4,800
To Accounts Payable to Underwriters Account 4,800
(To record commission payable on underwriting of rights issue)
30-Nov-18 Bank Account…………………………………………………………..Dr 1,94,560
Discount on Issue of Shares Account……………………………………Dr 10,240
To Ordinary Class 1 Share Capital Account 2,04,800
(To record issue of ordinary class 1 share capital and receipt of money from the
public who exercised the rights offer)
Bank Account…………………………………………………………..Dr 48,640
Discount on Issue of Shares Account……………………………………Dr 2,560
To Ordinary Class 1 Share Capital Account 51,200
(To record issue of ordinary class 1 share capital and receipt of money from
underwriters for issuing balance shares)
Retained Earnings Account………………………………………………Dr 12,800
To Discount on Issue of Shares Account 12,800
(To record discount on issue of shares adjustment against retained earnings)
20-Dec-18 Accounts Payable to Underwriters Account………………………………Dr 4,800
To Bank Account 4,800
(To record commission payment to underwriters)
10-Jan-19 General Reserve Account……………………………………………….Dr 56,000
To Retained Earnings Account 56,000
(To record amount transferred from retained earnings to general reserve by
directors)
28-Feb-19 Cash Account……………………………………………………………Dr 2,01,600
To Ordinary Class 3 Share Capital Account 2,01,600
(To record issue of 56,000 ordinary class 3 shares issued at $3.60 on exercise of
28,000 share options)
30-Apr-19 Share Capital Account……………………………………………………Dr 38,400
To Ordinary Class 3 Share Capital Account 33,600
To Lapsed Options Reserve Account 4,800
(To record transfer of options exercised to share capital and transfer of options
lapsed to lapsed options reserve)
31-May-19 Call-Ordinary Class 2 Account……………………………………………Dr 3,58,400
To Ordinary Class 2 Share Capital Account 3,58,400
(To record call of $1.60 on 224,000 ordinary class 2 shares)
Cash Account……………………………………………………………..Dr 3,39,200
To Call-Ordinary Class 2 Account 3,39,200
(To record call money received on 212,000 shares)
18-Jun-19 Ordinary Class 2 Share Capital Account…………………………………..Dr 48,000
To Call-Ordinary Class 2 Account 28,800
To Forefeited Shares Liability Account 19,200
(To record forefeiture of ordinary class 2 shares for non-payment of $1.60 per
share call)
26-Jun-19 Cash Account……………………………………………………………..Dr 43,200
Forefeited Shares Liability Account………………………………………..Dr 4,800
To Ordinary Class 2 Share Capital Account 48,000
(To record re-issuance of 12,000 ordinary class 2 shares for $3.60, paid to $4)
27-Jun-19 Forefeited Shares Liability Account………………………………………..Dr 14,400
To Cash Account 14,400
(To record payment of refund to former shareholders)
In the Books of Chi Herbal Limited
Journal Entries
for the period ended 30 June 2019

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Part b:
Answer to Question 2:
Part a:

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Part b:

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Answer to Question 3:
Part a:
For ascertaining the rate of interest for this lease transaction in the books of Easy Rental
Limited, the interest rate is supposed as a.
83,200 = 24,000 + 24,000/(1+a) + 24,000/(1+a)2 + 24,000/(1+a)3 +24,000/(1+a)4 +24,000/(1+a)5
83,200 = 24,000 {1 + 1/(1+a) + 1/(1+a)2 + 1/(1+a)3 + 1/(1+a)4 + 1/(1+a)5}
{1 + 1/(1+a) + 1/(1+a)2 + 1/(1+a)3 + 1/(1+a)4 + 1/(1+a)5} = 83,000/24,000
{1 + 1/(1+a) + 1/(1+a)2 + 1/(1+a)3 + 1/(1+a)4 + 1/(1+a)5} = 3.46
With the application of Wolfram Alpha, the interest rate is obtained as follows:

8FINANCIAL ACCOUNTING PROCESSES
a = 29.30%

9FINANCIAL ACCOUNTING PROCESSES
Part b:

10FINANCIAL ACCOUNTING PROCESSES
Answer to Question 4:
In the words of Bianchi (2017), intangible assets are those assets that could not be
measured in monetary terms and they could not be felt physically as well. This contradicts the
concept of tangible assets such as motor vehicles, machinery and others. This is because these
assets could be valued in monetary terms and their physical presence could be felt as well. As
identified from “Paragraph 4 of AASB 138”, there are some intangible assets that might be
included in a physical element like CDs in relation to computer software, legal documentation in
relation to licence or patent and film (Aasb.gov.au, 2018). Based on the provided case study, it
could be found out that Chi Herbal Limited has intended to manufacture new kinds of lavender
sales bags, which are produced from a brand new material. However, if the statement of the
above-stated paragraph is taken into consideration, this could not be categorised as intangible
asset for the stated organisation.
On the other hand, it is noteworthy to mention that intangible assets do not take into
account all intangibles. The corporate entities often create few intangible items such as logos,
goodwill, brand and research expense internally, which do not fall under the category of
intangible assets (Cañibano, 2017). The expenditure associated with these items would be
depicted as expense in the income statement at the time it is spent and the realisation is not made
in the form of intangible assets in the balance sheet statement of the firm.
Based on “Paragraph 5 of AASB 138”, the application of this standard is possible on
expenses such as advertising, training, start-up and research and development activities. The
research and development activities are intended towards knowledge development (Givoly, Hayn
& Katz, 2017). This activity might result in an asset that could be felt physically. Despite its
physical existence, its intangible element is superior in comparison to its physical component.

11FINANCIAL ACCOUNTING PROCESSES
As per “Paragraph 17 of AASB 138”, the future economic benefits flowing from
intangible assets constitute of revenue through sale of services and goods, cost savings and other
advantages generated from the utilisation of assets. In case, an entity utilises intellectual property
in the process of production, the future production costs would be lowered (Linnenluecke et al.,
2015). In the provided case study, Chi Herbal Limited has created a prototype of new lavender
sales bags along with consulting various experts regarding the durability of the bags. It could be
observed from the provided case that Chi Herbal Limited has spent research amount of $350,000,
while it has incurred legal expense of $22,000 in order to register a patent. The legal costs are
incurred due to the reason that the market demand would rise largely and thus, legal advice
would help the organisation to increase its overall sales revenue (Su & Wells, 2015). By
undertaking these steps, the firm aims to assure that its future revenue is increased by generating
additional sales of the newly created lavender bags.
The corporate entities generally purchase the intangible assets; however, there are
examples of intangibles created internally such as developmental costs and the capitalisation
could be conducted by supposing that there are adequate opportunities for future revenue
(Russell, 2017). This could be carried out in the form of market research and this is exactly the
case in Chi Herbal Limited as well. The accounting treatment pertaining to intangible assets
differs depending on their economic lives in terms of definite and indefinite lives. Those
intangible assets with finite lives have been written off or amortised over the legal lives or useful
lives, whichever have lower values. The expense of annual amortisation is computed by dividing
the economic life from the cost of the asset (Steenkamp & Steenkamp, 2016). The patent granted
to a business organisation in relation to invention or purchased from a third party is an example
of intangible asset with useful life.