University Accounting Assignment: Corporate Structure Analysis

This document presents a comprehensive solution to an accounting assignment focused on corporate structure. It covers several key areas, including the capitalization of a plant with depreciation calculations, journal entries related to plant purchases, and adjustments for foreign currency transactions, including translation reserves and the impact of exchange rate fluctuations on monetary items. The assignment also addresses the valuation of goodwill in acquisitions, the effective interest rate on debentures, and the use of forward contracts to mitigate foreign exchange risk. Furthermore, it analyzes bonus share scenarios for a managing director based on share price performance. The solutions are supported by references to relevant accounting standards and literature, providing a detailed analysis of each question and its corresponding solution.

ACCOUNTING FOR CORPORATE STRUCTURE ASSIGNMENT

1
By student name
Professor
University
Date: 16 September 2017.
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Contents
Question no 26 …………………………………………………………………...2
Question no 15 …………………………………………………………………...4
Question no 2 ………………………………………………………………….....5
Question no 25 …………………………………………………………………...6
Question no 17 …………………………………………………………………...7
Question no 19 …………………………………………………………………...8
Question no 43 …………………………………………………………………...9
Question no 19 …………………………………………………………………..10
References……………………………………………………………………......11
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Question no 26
Total cost of the plant Amt in $
Cost of power generator and associated technology 12,550,000.0
Cost obtaining in getting access to site 2,500,500.0
Power permits 400,500.0
Engineer's Fees 1,100,500.0
Total cost of the plant to the company 16,551,500.0
A plant is to be capitalised in the company’s books as on the date when it is ready for use i.e.,
from the day when it is intended to be used for the purposes of the company. Here, it is 1st July.
2018.
Estimated useful life of the asset is 10 years here.
Dismantling cost to be incurred at the end of the
useful life
Amount in $
Dismantling cost of the plant 750,500
Cost of Environmental remediation 1,249,500
Cost of Replacing of flora and fauna 100,000
Total cost of dismantling to the company 2,100,000
Discount rate to be used by the company 10%
Present value of dismantling as on 1st July, 2018 (2100000, 10%, 10 years) 809,641
Total depreciable cost = 16,551,500 + 809,641 = 17,361,140
Amount of depreciation each year = 17,361,140/10 = 1,736,114 (Bae, 2017)
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In the books of Modnight Boil Ltd.
Journal Entries
Date Dr./Cr. Particulars Amt in $ Amt in $
30th June'18 Dr. Plant A/C 17,361,140.00
Cr. Bank A/C 17,361,140.00
(Being Plant purchased)
30th June'19 Dr. Depreciation on Plant A/C 1,736,114.00
Cr. Accumulated Depn on Plant A/C 1,736,114.00
(Being depreciation charge for the year)
30th June'24 Dr. Depreciation on Plant A/C 1,736,114.00
Cr. Accumulated Depn on Plant A/C 1,736,114.00
(Being depreciation charge for the year)
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Question no. 15
Initial liability on account of purchase of plant = UK Pound 1.5 Mn
In the books of Kanga Ltd.
Journal Book
Date Dr./Cr. Particulars Amt in $ Amt in $
01st Mar.'18 Dr. Inventory 3,571,429
Cr. Ferrett LLc. (1500000/.42) 3,571,429
(Being inventory purchased)
30th June'18 Dr. Derivative position (Asset) 274,725
(1500000/.42)-(1500000/.39)
Cr. Oher comprehensive income 274,725
(Being gain on forward contract realised)
1st Aug'18 Dr. Oher comprehensive income 187,617
Cr. Derivative position (Asset) 187,617
(1500000/.39)-(1500000/.41)
(Being gain on forward contract trued up)
1st Aug'18 Dr. Ferrett LLc. 3,571,428
Dr. Oher comprehensive income 87,108
Cr. Bank 3,571,428
Cr. Oher comprehensive income 87,108
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Question No. 2
As per the requirements of the International financial reporting standaards and Accounting
boards, there have been many changes which are being required to be incorporated towards the
end of the financial period. The important among those is the adjustment to ne made in the books
for any changes in the foreign currency monetary item. This difference is generally termed as the
foreign currency translation reserve. All the investments, fixed assets and those in the nature of
financial assets needs to be needs to be valued and reinstated at the closing exchange rates or the
average rates for the year. (Fay & Negangard, 2017) All the gains and losses on account of this is
netted off and finally shown as the foreign currency transalation reserve. In case the items of
adjustments relates to the profist and loss account and relate to the business items, the same
would be classified under the other comprehensive income (OCI) and in case the items related to
the assets and liabilities or the non business related line items, they would be shown as the non
OCI i.e., they would be classified and shown in the profit and loss account directly. The
difference is mainly on account of changes in the spot rates and the functional currency figures..
When the fair valuation of any item is done, the exchange rate difference on the same is shown
in the profit and loss account. The amount shown under OCI is finally forming the part of the
equity in the balance sheet and is reconciled both at the beginning as well as at the end of the
accounting period. (Das, 2017)
Besides all the above changes, there is a classification between the monetary and non monetary
line items. The foreign currency transactions are generally recorded at the spot rate when the
transaction took place in the books. All the monetary line items in the financial books should be
taken at the closing rates whereas all the non monetary line items needs to be reported at the
historical cost or the rate which prevailed on the date of actual transaction. Also, in case
something has been fair valued and it is shown in the balance sheetm the same should be shown
at the exchange rate which existed on the date of fair valuation.
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Answer to Question 25
(a) Recoverable Value of the land is generally lower of the net selling price and the fair value
as on each of the reporting date.
Therefore, recoverable value of land to be reported as on 30th June 2017, 2018 and 2019
is $900000, $900000 and $ 920000 respectively. (Buchanan, et al., 2017)
(b) Carrying amount of the land on each of the reporting days would be (i) value in use or (ii)
cost, whichever is lower.
Date Dr./Cr. Particulars Amt in $ Amt in $
30th June'17
No entry
30th June'18 Dr. Revaluation Reserve A/C 40,000.00
Cr. Plant 40,000.00
(Being downward revaluation down)
30th June'19 Dr. Revaluation Reserve A/C 60,000.00
Cr. Plant 60,000.00
(Being downward revaluation down)
(c) If the company goes on to revalue its land each year, the carrying amount of the land
would be determined using the fair value each year.
Date Dr./Cr. Particulars Amt in $ Amt in $
30th June'18 Dr. Revaluation Reserve A/C 50,000.00
Cr. Plant 50,000.00
(Being downward revaluation down)
30th June'19
No entry
30th June'24 Dr. Plant 20,000.00
Cr. Revaluation Reserve A/C 20,000.00
(Being upward revaluation down)
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Question no. 17
Goodwill in an acquisition is determined by the excess of the payment consideration being paid
to other company being taken over in lieu of the assets and liabilities taken over. (David, 2005)
The assets and liabilities are generally being taken at the values recorded in the books. The value
of the goodwill taken over is
Particulars Amt in $
Cash 70,000
Plant & Equipment 170,000
Land 200,000
Less:Assets at book value 700,000
Add: Liabilities at book value 300,000
Value of the goodwill 40,000
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Question no. 19
(a) The issue price of the 5 years, 10% debenture having half yearly payment is $ 1 million.
(Félix, 2017)
(b) Effective rate of interest = (1.05*1.05) – 1*100 = 10.25%
Date Dr./Cr. Particulars Amt in $ Amt in $
1st July'18 Dr. Bank 1,000,000
Cr. To 10%, 5- year Debenture 100,000
(Being debentures issued)
30th June'19 Dr. Interest on debentures 102,500
Cr. Debentureholders 102,500
(Being interest on debentures made due)
30th June'19 Dr. Debentureholders 102,500
Cr. Bank 102,500
(Being interest on debentures paid)
30th June'20 Dr. Interest on debentures 102,500
Cr. Debentureholders 102,500
(Being interest on debentures made due)
30th June'20 Dr. Debentureholders 102,500
Cr. Bank 102,500
(Being interest on debentures paid)
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Question no. 43
(a) Amount borrowed from the bank to be paid back = $ 500000
Transaction’s spot rate = A$1 = US$ 0.70
Forward rate contract has been done at the rate of US$ 0.72 for buying $500000
The forward rate agreement is the agreement in which all the risks pertaining to the
changes in the rate of exchange in the future is covered by entering into a forward
transaction with the financial instiitutions or bank who charges some commission and
will give us the rate such that the risk of increase in the exchange rate and ultimately the
payment to be made becomes low. The amount to be paid based on the spot rate herein in
A$ is 500000/0.7 is A$ 714286. (Fay & Negangard, 2017)
However, Amount to be paid based on the forward contract entered is 500000/0.72 =
$694444. Since the amount which is to be paid on account of forward contract entered is
less, it eases out the risk of increase in the fluctuation of exchange rate in future and
hence the company has to pay back a comparatively lesser amount in terms of the AUD.
(Sonu, et al., 2017)
(b) The amount of money to be received received by Lehman Ltd. on the sale of the US$ is
as under
500000/0/72 = AUD 694,444. This is on account of the forward purchase contract being
entered by the company to negate the risk of changes in rates of foreign currency.
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Question No. 19
Case 1: Share price on 30th June, 2020 is $ 4.
Here since the share’s fair value is decreasing, no bonus would be accruing to the managing
director of Lurline Ltd. Therefore, for the year ended 30th Jun, 2020, there would be no journal
entry in the books of the company. (Lin, et al., 2017)
Case 2: The share price of the companyis $ 5. 50 on 30th June, 2021
Therfore, increase in rate of the share beyond $5 = $ 0.5
So amount still remaining unpaid as bonus to registered shareholders = 0.5*100000 = $ 50000
Date Dr./Cr. Particulars Amt in $ Amt in $
30th June, 21 Dr. Equityshareholders A/c 50,000
Cr. Equity share capital (bonus shares) 50,000
(Being bonus shares issued to managing director)
Case 3: The share price of the companyis $ 6 on 30th June, 2022
Therfore, increase in rate beyond $5 = $ 1
Amount of increase already being recognised in the books = $ 0.5
Therefore amount to be used from the general reserves of the company for the issue of the bonus
shares to the managing director = 100000*.50 = $500000
Date Dr./Cr. Particulars Amt in $ Amt in $
30th June, 22 Dr. Equityshareholders A/c 50,000
Cr. Equity share capital (bonus shares) 50,000
(Being bonus shares issued to managing director)
References
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