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ACT204 Financial Accounting For the Contingent Liability

Questions:

1. On the basis of the brief information provided, consider how, if you were the chief accountant at the Commonwealth Bank, the case would be disclosed within the annual report of CBA. What factors would you consider in determining the form the disclosures should take, and in which years the disclosures would be made?

2. Required
1. Determine the fair value of the portable sound recording studio at 1 July 2019.
2. Prepare a schedule for the lease payments incorporating accrued interest expense.
3. Prepare the journal entries to account for the lease in the books of Hopeful Ltd at 1 July 2019, 30 June 2020 and 1 July 2020.
4. At the termination of the lease, Hopeful Ltd returns the portable sound recording studio to Lessor Ltd, but its fair value at that time is $25 000. What must Hopeful Ltd do to comply with the terms of the lease? Prepare the journal entries in the books of Hopeful Ltd for return of the asset to Lessor Ltd and the settlement of all obligations under the lease on 1 July 2023

Answers:

Factors that could be considered in determining the form the disclosures that should be taken and the period of years the disclosures would be made

Contingent liability: This is a form of commitment that depends on the occurrence of the future events which may either happen or not. If a contingent liability that is considered to be both probable and the amount can be estimated with reasonable certainty is basically to be recorded as a loss or expense in the income statement and also as a liability in the company balance sheet (Annan, 2014). It can be noted that if a contingent that is probable but the amount cannot be recorded in the financial accounts, but will be disclosed in the notes to the financial statements. Furthermore, a contingent liability that is very remote that may happen in future need not to be recorded as well as disclosed in the notes section of the financial statements. In this particular case, the factor that needs to be considered is that CBA has settled with the investors for A$50 Million and agreed to pay A$1.5 Million. Therefore, the settlement has occurred that is not contingent (Buchman, Harris, and Liu, 2016). The entry for payment for A$50 Million must be demonstrated as an expense in the income statement for the company. The nature and details of this particular transaction should also be given in the notes for the readers to have a better understanding of the item.

Provision must be made in the account for A$1.5 Million which is an amount not paid but agreed upon, and the obligation must be made in the statement of financial position. The details of this particular transaction must be provided in the notes sections for easy understanding (El-Gazzar, Lilien, and Pastena, 2008). The accounting treatment as above and such disclosures must be included in the financial statement for the FY2012 which is considered to be the year of the transaction. Since this item is considered to be significant and repetitive, complete disclosures must be made in the director's report and the action plan that would be implemented in future so as to ensure that such incidents do not repeat itself. 

Yearly rental income * PVIFA (n=4, i=8%)

$50,000 * 3.5771

178855

Guaranteed residual * PVIF (n=4, i=8%)

$40,000 * 0.7350

$29,400

Lease obligation = PV of period rental costs + PV of the guaranteed residual

Lease Liability = $178,855 + $29,400

Lease Amortization Table

Interest payment

12660.4

9673.232

6447.0906

2962.8578

Lease expense on 1/7/2023 is the guaranteed residual

Depreciation payment rented studio

Acc. Depreciation rented studio

iv. 

Hopeful Ltd should pay $15,000 that is the variance between fair value of the guaranteed residual and the leased studio.

Acc. Depreciation rented studio

Loss on guaranteed residual

T Pty Limited

  

Cash Flow Statement for the year ended June 2020

  

Cash Flows from Operations:

$

$

Profit Before Tax

  

365000

365000

Add

  

Depreciation Expense

 

140000

 

Increase in interest expense

 

315000

 

Increase in accounts payables

 

154000

 

Decrease in inventories

 

288000

 
    

897000

1262000

 

Subtract

   

Increase Accts Rec

 

508000

 
     

508000

Cash Flows from Operations

 

754000

Cash Flows from Investing

  

Interest paid

  

315000

 

Income tax paid

  

100000

415000

Net Cash Flows from Operations

339000

Cash Flows from Investing

  

Interest received

  

110000

 

Dividends received

  

51000

 

Squash Pty Ltd bet of cash acquired

-250000

 

Purchase of tennis equipment

 

-80000

 

Proceed from sale of equipment

 

-50000

 

Net Cash Flows from Investing activities

-219000

Cash Flows from Financing activities

  

Payments of finance lease liabilities

-25000

 

Share capital issue

  

-750000

 

Net Cash Flows from Financing activities

 

-775000

Net decrease in cash and cash equivalents

 

-655000

Cash and cash equivalents at the beginning of the year

790000

Cash and cash equivalents at the end of the year

 

135000

Workings 1

    

HK$8.00 = A$1.00

   

HK$300,000

   

Purchases at as 22/4/2018

300,000/8.00 = A$37,500

(HF$300,000/3)

HK$100,000

  

HK$8.56 = A$1.00

   

HK$100,000

   

Purchases at as 30/5/2018

100,000/8.56 = A$11682

Foreign exchange gain

 

(12500-11682) = 818

 

HK$8.56 = A$1.00

   

HK$100,000

   

Purchases at as 30/6/2018

100,000/8.59 = A$11641

Foreign exchange gain

 

(12500-11641) = 859

 

HK$8.56 = A$1.00

   

HK$100,000

   

Purchases at as 31/7/2018

100,000/8.94 = A$11186

Foreign exchange gain

 

(12500-11186) = 1314

 

Workings 1

     

Yen160 = A$1.00

    

Yen 5,000,000

    

Purchases at as 30/5/2018

5,000,000/160 = A$31,250

Purchases at as 31/7/2018

5,000,000/260 = A$19,230

Foreign exchange gain

 

(31250-19231) = 12019

20, 000,000 * 11.5 * 10

23,000,000

   
   

Loan = 3,000,000

 

Date

   

Dr.

Cr.

30/4

Purchases

  

A$37500

 
 

Accounts Payables

  

A$37500

 

To record Purchases at as 22/4/2018

  

30/5

Accounts Payables

 

A$12500

 
 

Cash

   

A$11682

 

Foreign exchange gain

 

A$818

 

To record Purchases at as 30/5/2018

  

30/6

Accounts Payables

 

A$12500

 
 

Cash

   

A$11641

 

Foreign exchange gain

 

A$859

 

To record Purchases at as 30/6/2018

  

31/7

Accounts Payables

 

A$12500

 
 

Cash

   

A$11186

 

Foreign exchange gain

 

A$1314

 

To record payment for mortgage payable

  

30/4

Equipment

  

A$31250

 
 

Accounts Payables

  

A$31250

 

To record Purchases at as 30/5/2018

  

31/7

Accounts Payables

 

A$31250

 
 

Cash

   

A$19231

 

Foreign exchange gain

 

A$12019

 

To record Purchases at as 31/7/2018

  

31/1

Loan

  

US$3,000,000

 

Interest Payables

  

US$2,070,000

 

Hedge funds

  

US$930000

 

To record Interest payables

  

31/1

Purchases for car

 

A$744,680

 
 

Cash

   

A$714286

 

Foreign exchange gain

 

A$30,394

 

To record Interest payables

  

Bibliography

Annan, M., 2014. The Case of Lease Accounting (Doctoral dissertation, University of Amsterdam).

Biondi, Y., Bloomfield, R. J., Glover, J. C., Jamal, K., Ohlson, J. A., Penman, S. H., ...

Wilks, T. J. 2011. A Perspective on the Joint IASB/FASB Exposure Draft on Accounting for Leases: American Accounting Association's Financial Accounting Standards Committee (AAA FASC). Accounting Horizons, 25(4), 861-871.

Buchman, T. A., Harris, P., & Liu, M. 2016. GAAP vs. IFRS Treatment of Leases and the Impact on Financial Ratios.

Deegan, C. (2012). Australian financial accounting. McGraw-Hill Education Australia.

El-Gazzar, S., Lilien, S., & Pastena, V. 2008. Accounting for leases by lessees. Journal of Accounting and Economics, 8(3), 217-237.

Ji, S. and Deegan, C., 2011. Accounting for contaminated sites: how transparent are Australian companies?. Australian Accounting Review, 21(2), pp.131-153.

Grenier, J. H., Pomeroy, B., & Stern, M. T. 2015. The effects of accounting standard precision, auditor task expertise, and judgment frameworks on audit firm litigation exposure. Contemporary Accounting Research, 32(1), 336-357.

Riccardi, L., 2016. Accounting Standards for Business Enterprises No. 3—Investment Real Estates. In China Accounting Standards (pp. 25-29). Springer Singapore.

Wong, K. and Joshi, M., 2015. The impact of lease capitalisation on financial statements and key ratios: Evidence from Australia. Australasian Accounting Business & Finance Journal, 9(3), p.27.


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