Finance Questions - Assignment Example

A). consolidated financial statements for Canberra Ltd A Gain or loss on disposal 0 Dr Cr Proceed on disposal 70,000 Adjusted base cost 56,300 Capital loss 13700 70000 70000 B Valuation of entries Cost of control A/c $ - Dr Cr Purchase cost 70,000 Share capital 33500 retained earning 22800 Goodwill 13700 Differed tax asset 350 Land 2800 Account receivable 1225 Plant 2800 cash 175 inventory 2100 Account payable 595 Loans 1750 Investment in ANU 7,105 9450 9450 Investment in ANU 7105 cash 7105 Investment in stock Dr Cr Cash 33500 Investment stock ANU 33,500 Consolidated worksheet Consolidation entries Debits Canberra Ltd ($000) ANU Ltd ($000) Dr Cr totals ($000) Cash 1,750 175 1925 Account receivables 1,050 1225 2,275 Inventories 4200 2100 6300 Investment (Plum) 7000 0 7105 0 Differed tax asset 700 350 1050 Land 10080 2800 12880 Plant 17290 2800 20090 42070 9450 44520 Credits Loans 4200 1750 5950 Account payable 700 595 1295 Common stock 28000 3,500 3,500 28105 Retained earning 9170 3605 3605 9170 42070 9450 7105 7105 44520 Consolidated Statement of Changes in Equity for the financial year ending 30 June 2015 Total Canberra Ltd ($000) Minority Common stock 7105 7107 0 retained earning 2800 2800 0 13-Jul 3605 3605 0 Increase 808 808 0 August 15 (total) 2562 2562 0 Shareholder equity 7105 7105 0 Consolidated Statement of Financial Position for the financial year ending 30 June 2015 Canberra Ltd ($000) ANU Ltd ($000) Consolidated Cash 1,750 175 1925 Account receivables 1,050 1225 2,275 Inventories 4200 2100 6300 Investment (Plum) 7000 0 7000 Differed tax asset 700 350 1050 Land 10080 2800 12880 Plant 17290 2800 20090 42070 9450 51520 Credits Loans 4200 1750 5950 Account payable 700 595 1295 Common stock 28000 3,500 35105 Retained earning 9170 3605 9170 42070 9450 51520 B. the relevant journal entries to record these transactions Loan from Canberra Canberra. LTD ANUS. LTD Liabilities Loan from Canberra. Ltd - 1250,000 Interest on loan 3%@5year 187,500 Assets Loan to S. Ltd 1250,000 - Interest income 3%@5year 187500 Cash 1150,000 Accumulated depreciation 200,000 Gain on sale 850,000 Plant 500,000 Sale of plant to ANU. Ltd C. One criticism of consolidation accounting is that the complexity of the process might potentially mislead the investor The legal form, importance as well as economic aspect linked with venture in other firm’s drives the manner to which investors account for the transaction. Income situation, investors might be mandated to account the venture at the original cost as well as consequently test for goodwill impairment. In other words, the worth of a venture might be updated to, portray the financial situation of the parent company. An investor in some cases may be mandated to merge the investee presenting the financial performance as well as outcome of the investee and the investor as one entity. The accounting standard in recent times issue the latest consolidation principles (Consolidation – Amendments to the Consolidation Analysis), which may modify whether your company consolidate another legal entity or not. The principle might affect the business accounting for the current and new venture and seems more complex. Firms must keenly appraise significant modification as well as communicate that modification undoubtedly to stakeholders. The shareholders of starbuck UK will be misleading since, the company is wholly owned by Sturback USA since, and Synthetic lease transaction might be prearranged as almost wholly interest at the time of lease. Because a firm merely pay 0.9 of its debt, the large portion of the payment might be due at end of the lease period. Where a firm conclude on not purchasing the asset or extend the lease period, the lesser will characteristically extend synthetic lease financing merely to a better credits. This might be misleading to users of the financial report since, the annual report of the company doesn’t portray a true and fair view situation of the company as per the financial statement due tom the fact some substantial off balance sheet transaction may have occurred which might turn out to be good or bad of the company depending on the terms and business situation of the company during the leases period. Question two; fair value The perceived benefits of fair value accounting Fair value accounting is an approach to financial reporting that corporations appraises as well as account the worth of specific asset and liabilities based on their real or anticipated fair market values. Modification in asset and liabilities of the company for a period of time creates unrealized losses for the asset and liabilities outstanding, growing or declining the net income and also equity in the statement of financial position. The benefit of fair value there are; Accurate Valuation The main benefit of fair value accounting is that it is precise and correct in terms of value of asset and liabilities on a continuous basis .where the value of an asset or liability has grow, the business marks up the worth of the asset or liabilities to its present market value to depict what is was to be received if the asset was to be disposed. Company marks down the value of an asset or liability to reflect any decrease in the market price. True Income The fair value accounting controls a firm’s capacity to significantly manipulate its realized net income. This is because, the management might at times dispose an asset as well as use the gains or losses from the disposal to grow or decline the net income intentionally. Using the fair value accounting. Gains or losses from disposal are accounted for in the period in which the existed (way, 2007).while a growth in worth of an asset or a decline in liabilities increases the expense in the net income and reduces the value of the asset. Market Effects The employment of fair value accounting might further impact a down market unfavorably .for instance an asset is revalued downward due to a decline in the existing market price, the lower price of the asset may prompt superior value of asset’s selling price at a very depresses market price. Devoid of appraisal markdown as mandated by fair value accounting, firms might not feel the importance of disposing the asset in a low price to stop potentially more downward appraisal of the asset (way, 2007). The perceived weaknesses of fair value accounting The financial outcome created in conformity with air value accounting entails unrealized gain. It is a great threat to a firm as well as entire shareholders since; the distribution of unrealized gains threatens the substance. I.e. the firm capital as well as may put in danger the existence of the firm. There is no established method that may sensibly protect the disclosure of unrealized gains Assigning the statement of financial position a duty of the key instrument for periodicity of financial outcome humiliates the duty as well as the significance that the income statement portrays. It loses the function of an instrument for creating a financial outcome as per the ort, value as well as sources. This has been realized as well as apparently focused on in the Disclosure power of profit and loss statement is strictly limited which is mistaken method that favors the duty as well as place of income statement in financial reporting, so that it doesn’t turn to be appropriate for many users of the financial statement. This is therefore not possible task since, it is hard to appraise the risk in a volatile financial hypothesis, and the investors will be in excessively favored as the financially as well strongest group. How accounting regulations attempting to guard against these weaknesses and limitations The new accounting standard brings alignment to United States Generally Accepted Accounting Practices (GAAP) and International Financial Reporting Standards (IFRS) postulating the manner in which an entity ought to make application of the fair value measurement requirements that are applicable in prevailing IFRS standards (Deegan, 2014). The assets are not supposed to be shown at their cost but rather at their fair value price. In accordance to the new accounting standard, fair value can be defined as the price that would be accepted to sell an asset or paid so as to transfer a liability between parties in the market at the date of measurements. This standard is applicable to all assets as well as liabilities that are measures at fair value by other accounting standards apart from share-based payments and leases. It has been pointed out that the company lowered the value of inventory in the previous year because the net realizable value of a number of items was less than the original cost. This ought not to be an issue because the new standard is not applicable to other bases of measurement that are not fair value. This includes the net realizable value of inventories and also the value in use for impairment (Henderson et al, 2014). . Expense or asset is accounted under AASB 13 in which the asset must be accounted for as well as fair value measurement is a must to be applied in transaction falling under AASB 13 From the time in which the transaction contract was created and actually the expense incurred. Where the valuation is executed before the beginning of the current financial period, then an entity will require establishing if the valuation was executed as per the AASB 13 approach and if the required AASB 13 disclosure is provided (Opperman, 2009). Question 3: Leasing: AASB 117 A. Operating lease This is an operating lease since. It a short useful life of three years as well as the asset cannot be capitalized at end of the lease period and the ownership of the leased asset is remaining to owner. Interest implicit on lease it on lease Fair value=ALR/(1+R)1+( ALR/(1+R)2+( ALR/(1+R)2)=(RV/1+r)3} Where ALR is the annual lease rate RV is the residual value R is the interest rate 20,038= {4000/1+r) 1+ (4000/1+r) 2+ (4000/ (1+r) 3+ (6000/1+r) 3 1st payment 1/(1+0,0612) * 3 500 3 237,08 2nd payment 1/(1+0,0612)2 * 3 500 2 993,92 3rd payment 1/(1+0,0612)3 * 3 500 2 769,02 Total: 4000 Interest rate hall be 32038/20038=1.59^ (1/3)=1.167-1*100}%=16.7% C. journal entries for the lease in the books of Printers Alive Limited Printer Dr Cr Printing 20038 cash 20038 Lease records on asset and liabilities Dr Cr Dr Asset 20038 Lease obligation 20038 D. For the second year journal entries interest expense a/c Dr Cr Interest expense 4000 Lease obligation 4000 cash 4000 Depreciation Dr Cr Depreciation (20038-6000/3) 4679 Accumulated depreciation 4679 Lease terminate Dr Cr Lease obligation 20038 Acc depreciation -14037 6000 Cash 6000 2. Finance lease This is a fiancé lease since, there is long lease agreement of 8 years as well as the title of the land is going to be transferred to Canberra limited B. Interest rate implicit PVOA = PMT x PVOA factor for n=8 years, $20,000 = $1,000 x PVOA factor for n=8 years $20,000/$10, 000 = PVOA factor for n=8 years 20.000 = PVOA factor for n=8 Interest rate= {1.09-1*100%} =9% The journal entries for the lease in the books of Canberra Land Dr Cr Land 20,000 cash 20000 Lease records on asset and liabilities Dr Cr Dr Asset 20,000 Lease obligation 20,000 C. journal entries in the books of Canberra for the second year of the lease. Land Dr Cr Land 20,000 cash 20000 Lease records on asset and liabilities Dr Cr Asset 20,000 Lease obligation 20,000 interest expense a/c Dr Cr Interest expense 10,000 Lease obligation 10,000 cash 10,000 Lease terminate Dr Cr Lease obligation 20,000 Interest (1.09^8 years*20,000) 10,037 30,037 Cash 30,037 3. How the current approach to leasing (in AASB 117) may encourage off-balance sheet financing off balance financing exist majorly where under synthetic lease, the lessee maintain the tax benefit of possession. Since the transition places important advantage, the weight as well as management of ownership with the firm user, the users is considered as the owner of the asset as well as is entitled for the for the growing rate of depreciation as well as interest allowances entailed in the lease payment. Synthetic lease transaction might be prearranged as almost wholly interest at the time of lease. Because a firm merely pay 0.9 of its debt, the large portion of the payment might be due at end of the lease period. Where a firm conclude on not purchasing the asset or extend the lease period, the lesser will characteristically extend synthetic lease financing merely to a better credits. This might be misleading to users of the financial report since, the annual report of the company doesn’t portray a true and fairs view situation of the company as per the financial statement due tom the fact some substantial off balance sheet transaction may have occurred which might turn out to be good or bad of the company depending on the terms and business situation of the company during the leases period. References Deegan, C. (2014). Financial Accounting Theory. Australia: McGraw-Hill Education. Gaffikin, ‎.M. (2003). Corporate Accounting in Australia. New York: Cengage Learning. Henderson, S., Peirson, G., Herbohn, K., Artiach, T., Howieson, B. (2014). Issues in Financial Accounting. NSW: Pearson Australia. Kimmel, P. D., Weygandt, J. J., Kieso, D. E. (2011). Accounting: Tools for Business Decision Makers. Hoboken: John Wiley and Sons. Schäfer, N. (2005). Deferred taxes in IAS 12. GRIN Verlag. Read More