ACCT6003 Financial Accounting Processes: ChiHerbal Ltd Report

This report provides a comprehensive analysis of ChiHerbal Ltd's financial accounting processes across several scenarios. The first scenario examines the financing of company operations through share issuance, detailing the application, allotment, and call processes, including journal entries for cash received, refunds, share issuance costs, and calls in advance. The second scenario focuses on property, plant, and equipment, specifically addressing the change from the cost model to the revaluation model for Machine A and Machine B, including journal entries for depreciation, revaluation gains/losses, and deferred tax implications. The third scenario delves into lease accounting, classifying a lease as a finance lease based on several criteria, presenting a lease payment schedule, and providing journal entries for lease payments, depreciation, and the return of the leased asset. The final scenario discusses intangible assets, emphasizing the guidelines of AASB 138 regarding technical feasibility, intention to complete and sell, and the classification and measurement of intangible assets, particularly concerning a filter system project, its modification, and patenting process.

Running head: FINANCIAL ACCOUNTING PROCESS 1
financial accounting processes
Name
Institution

Running head: FINANCIAL ACCOUNTING PROCESS 2
Scenario 1: Financing company operations
ChiHerbal Ltd
No. of
Shares
applied for
No. of
Shares
Allotted
Money
Received
Application
$4.2
Allotment
$4.9
Call 1
$1.66
Call 2
$2.11
100 000 100 000 1 200 000 420000 490, 000 166,000 211,000
300 000 300 000 2 700 000 1 260 000 1470 000 -
440 000 400 000 1 760 000 1 680 000 160 000
20 000 0 80 000
860 000 800 000 $5 740 000 $3 360 000 $2,120,000 $166,000 $211,000
General Journal
2018
To 1 November 15 Cash Trust Dr 5,919,000
Application Cr 5,919,000
(Cash received on application)
November 7 Application Dr 84,000
Cash Trust Cr 84,000
(Refund to 20 000 applicants)
Application Dr 3 360 000
Allotment Dr 4,214,000
Share Capital Cr 7, 574,000
(Allotment of 860 000 shares)
Cash Dr 5857000

Running head: FINANCIAL ACCOUNTING PROCESS 3
Cash Trust Cr 5857000
(Transfer of trust funds)
Application * Dr 2 420 000
Allotment Cr 2,120,000
Calls in Advance Cr 377,000
(Allocation of application
across allotment and calls in advance)
* please see on the working table
Share Issue Costs/Share Capital Dr 12 000
Cash Cr 12 000
(Payment of share costs $12 000)
December 1 Cash Dr 1,932,000
Allotment Cr 1,932,000
(Cash received on allotment)
2018
February 1 Call 1 Dr 1,427,600
Share Capital Cr 1,427,600
(Call of $1.66 per share)
Calls in Advance Dr 166 000
Call 1 Cr 166 000
(Transfer of calls received
in advance)
March 1 Cash Dr 1,162,000

Running head: FINANCIAL ACCOUNTING PROCESS 4
Call 1 Cr 1,162,000
June 1 Call 2 Dr 1,814,600
Share Capital Cr 1,814,600
($1.40 per share)
Calls in Advance Dr 211,000
Call 2 Cr 211,000
(Transfer of calls received
in advance)
June 28 Cash Dr 1,477,000
Call 2 Cr 1,477,000
Chi Herbal Ltd
Equity
(as at 1st June 2018)
Contributed equity:
(800 000 shares paid to $12,87) $10,296,000
Less Share issue costs 12,000
Total Equity $10,284,000
Scenario 2: Property, Plant and Equipment

Running head: FINANCIAL ACCOUNTING PROCESS 5
CHIHERBAL LTD
During 31 December 2016, there was a Change from the cost model to the revaluation
model
Depreciation expense – Machine A Dr 15,000
Accumulated depreciation Cr 15,000
(1/2 x 10% x $300 000)
Depreciation expense – Machine B Dr 10,000
Accumulated depreciation Cr 10,000
(1/2 x 10% x $200 000)
Machine A Machine B
Cost 300,000 Cost 200,000
Accum depn 135,000 Accum depn 40,000
165,000 160,000
Fair value 180,000 Fair value 155,000
Increment 15,000 Decrement 5,000
Accumulated depreciation – Machine A Dr 135,000
Machine A Cr 135,000
(Writing the asset down to carrying amount)
Machine A Dr 15,000
Gain on revaluation of machinery (OCI) Cr 15,000
(Revaluation of asset)
Income tax expense – gain on
revaluation of asset (OCI) Dr 4,500
Deferred tax liability Cr 4,500
(Tax-effect of revaluation)
Gain on revaluation of machinery (OCI) Dr 15,000

Running head: FINANCIAL ACCOUNTING PROCESS 6
Income tax expense (OCI) Cr 4,500
Asset revaluation surplus – Machine A Cr 10,500
(Accumulation of net revaluation gain in equity)
Accumulated depreciation – Machine B Dr 40,000
Machine B Cr 40,000
(Writing the asset down to carrying amount)
Loss – revaluation decrement (P/L) Dr 5,000
Machine B Cr 5,000
(Revaluation of machine from $200 000
to $155 000)
Depreciation expense of Machine A Dr 15,000
Accumulated depreciation Cr 15,000
(1/6 x 0.5x $180,000)
Depreciation expense of Machine B Dr 15,500
Accumulated depreciation Cr 15,500
(0.2 x 0.5x $155 000)
Machine A $ Machine B $
Carrying amount 165,000 Carrying amount 139 500
Fair value 163,000 Fair value 136,500
Decrement 2,000 Decrement 3,000
Accumulated depreciation for Machine A Dr 15,000
Machine A Cr 15,000
(The writing down to the carrying amount)
Loss on revaluation of machinery (OCI) Dr 2,000
Machine A Cr 2,000

Running head: FINANCIAL ACCOUNTING PROCESS 7
(Revaluation downwards)
Tax liability Deferred Dr 600
Income tax Cr 600
Asset revaluation surplus for Machine A Dr 1,400
Expense (Income tax Dr 600
Loss on revaluation of machinery
Cr 2,000
(Reduction in accumulated equity due
to revaluation decrement)
Accumulated depreciation – Machine B Dr 15,500
Machine B Cr 15,500
(Writing down to carrying amount)
The loss by revaluation decrement of Dr 3,000
Machine B Cr 3,000
(Writing down to fair value)
Scenario 3: Leases

Running head: FINANCIAL ACCOUNTING PROCESS 8
Part A
Chi Herbal Ltd should base their classification criteria on the following:
(i) The lessee cannot cancel the lease contract. A finance lease cannot be canceled as the
lessee has the ownership of the property for the time agreed.
(ii) The lessee enjoys all the rewards and takes all the risks of the asset until it is returned,
on the date agreed.
(iii) The finance lease treatment is similar to that of the loan as It appears in the balance
sheets.
(iv) Linhong, G., & Jun, L. (2017) stated that, the present value of the minimum lease
payments is substantial all the economic
life of the leased asset.
PV of MLP = 30,500 x 2.8550 + 3,115 x 0.4972
= 30,500 + 85,650+ 1,350
=103,791
Present Value of Minimum Lease Payment ÷ Future Value= 103,791÷ 129,000 = 80.5%
(v) The five-year lease term represents the asset life (i.e. 5/6*100 =83.3%)
(vi) The lessee bears all maintenance and insurance costs consistent with ownership. The lessee
incurs all insurance and maintenance cost just like the owner of the asset.
The Chi herbal should classify as a finance lease.

Running head: FINANCIAL ACCOUNTING PROCESS 9
PART B – LEASE PAYMENT SCHEDULE
PV of MLP = 30 500 x 3.3522 + 3,115 x 0.4972
= 1,022,42.1 + 1548.778 =
=103790.9
=103,791
Chi Herbal Ltd (Lessee)
Schedule of lease payments
MLP Interest Liability liability
expense reduction
balance
$ $ $
$
31 Dec 2015
103,791
31 Dec 2015 30 500 30 500
73,291
31 Dec 2016 30 500 10,994 19,506
62,297
31 Dec 2017 30 500 9,345 21,155
52,952
31 Dec 2018 30 500 7,943 22,557
30,395
31 Dec 2019 30 500 4,559 25,941
4,454
31 Dec 2020 3115 668* 4,454
*Includes adjustment for the effect of rounding

Running head: FINANCIAL ACCOUNTING PROCESS
10
PART C
31 December 2016
Lease Liability Dr 19,506
Interest Expense Dr 10,994
Cash Cr 30,500
(Second lease payment in advance)
Depreciation Expense Dr 20,135
Accumulated Depreciation Cr 20,135
(Depreciation for year 1, [$103,791– 3,115] ÷ 5)
31 December 2017
Lease Liability Dr 21,155
Interest Expense Dr 9,345
Cash Cr 30,500
(Third lease payment in advance)
Depreciation Expense Dr 20,135
Accumulated Depreciation Cr 20,135
(Depreciation for year 2, [[$103,791– 3,115] ÷ 5))
31 December 2018
Lease Liability Dr 22,557
Interest Expense Dr 7,943
Cash Cr 30,500
(Fourth lease payment in advance)
Depreciation Expense Dr 20,135
Accumulated Depreciation Cr 20,135
(Depreciation for year 3, [$103,791– 3,115] ÷ 5)

Running head: FINANCIAL ACCOUNTING PROCESS
11
31 December 2019
Lease Liability Dr 25,941
Interest Expense Dr 4,559
Cash Cr
30,500
(Fifth lease payment in advance)
Depreciation Expense Dr 20,135
Accumulated Depreciation Cr 20,135
(Depreciation for year 4, [$103,791– 3,115] ÷ 5)
31 December 2020
Depreciation Expense Dr 20,135
Accumulated Depreciation Cr 20,135
(Depreciation for year 5, [$103,791– 3,115] ÷ 5)
Lease Liability Dr 4,454
Interest Expense Dr 668
Leased Equipment Cr 3,115
(Return of leased asset at guaranteed residual value)
Accumulated Depreciation Dr 98,669
Leased Equipment Cr
98,669
(De-recognition of leased asset)

Running head: FINANCIAL ACCOUNTING PROCESS
12
Scenario 4: Intangible Assets
Introduction
In the 2014/2015, the chi herbal had finished the project believing that, it was going to be
successful. Although the company had the freedom to do what it takes to make sure that, the
problem is solved, but had to follow the guidelines provided in paragraph 57 of the AASB 138.
The start and the end of the project should be predetermined in accordance with some factors
listed and explained below. It is accountable for its outlay in the following ways (.
Technical feasibility
Linhong, G., & Jun, L. (2017) explained that, The company will be accountable for the
unproductivity of the project if it occurs. It is very difficult to forecast the future of any business
in terms of profitability or ability to serve what it is supposed. To reduce this, the Chi herbal
must do some research. Regarding the international financial reporting standards, the carrying
cost must be equal to the fair value of the asset. During the viable period of the asset to be
introduced, the chi herbal should make sure that the revaluation is taken into account. The
revaluation process helps the owner of the asset to keep its updated value anytime and therefore
avoid unproductive projects. The workability and flexibility are the other important aspects of
the business projects to consider. It is not sensible when the machine that is not operable is
introduced in the market for serving other people.