ACC204 Advanced Accounting Assignment

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ACC204 Advanced Accounting Assignment

Introduction

Advance financial accounting is the branch of accounting system that is used for the purpose of recording accounting entries that has been taken place during the reporting period. Financial accounting is the process of recording and presenting financial transaction that has been taken place during the year in the business entity. In this report, has been divided into three major sections that are essential for the business entities that are preparing their financial statements. First section includesentriesor accountingtreatment of lease transactions.Sale and lease back transaction has been defined in the first section.Under this section, entries and their explanation related to sales and lease back has been defined in this sections.Next section covers the treatment and calculation related to accounting for income tax of the business entity. In this section calculation of tax expenses and preparation of statement of taxable profit as been prepared. Tax expense has been calculated for the MR limited during the reporting period. In last section analysis of consolidation of accounts has been prepared and implications related to consolidation of accounts have been explained. Consolidation is merger of accounts of two companies according to Australian accounting standard board.

ACC204 Advanced Accounting Assignment

Question 1: Accounting for Lease

Lease is the transaction that is undertaken betweentwo parties i.e. lesser and lessee. Under lease transaction, one company or other entity provides asset to anothercompany or other entity for use the asset. There are two types of lease i.e. capital lease and operating lease. There are different conditions if fulfilled then the traction shall be treated as capital lease. Following are conditions if fulfilled then lease shall be treated as capital lease:

  • When life of the lease asset is more than 75 % of total life of lease asset
  • At the end of lease terms, ownership of lease asset shall be transferred to the lesser under lease agreement.
  • When there is option with the lesser to purchase the lease asset at minimal price or bargain price.
  • When present value of lease rentals is more than or exceedsthe fair value of the leaseasset that has been taken into account(Stickney & Weil, 2011).

If any of the above mention conditions are not fulfilled then leas transaction shall be treated as revenue nature lease transaction. Therefore in this case, lease asset is of operating nature. Leaseback is the transaction under which asset used is sold back to the seller for their use and buyer of the lease asset will be getting lease rentalsfrom the actual seller. In this case, transaction forsale and lease back transaction has been conducted and accounting entries has been done for the same(Cyert & March, 2009).Sale and lease back transaction is the transaction under which both companiesare involve in single transaction.Assettaken under lease transaction are recorded in the financial statement i.e. statement of financialstatements of the buyer i.e. company that has taken asset back under lease transaction(Duchêne, 2010).

Following is the accounting entries and its related amount that has been recorded in the books of accounts:

(a)- Provide the entries for the sale and leaseback in the books of Lisa Ltd as at 1 July 2015.

Sr no

Date

Particulars

Dr / Cr

Amount

1

01 July,2015

Anderson Ltd-Account

To Land-Account

To Building-Account

To Differed gain-Account

[Being land and building has been to Anderson ltd for the lease back transaction]

Dr

Cr

Cr

Cr

$ 43,34,700

$ 18,00,000

$ 14,00,000

$ 1,13,4700

2

01 July,2015

Lease Expenses-Account

Bank-Account

[Being payment of the lease expenses has been made at the inception point]

Dr

Cr

$ 6,00,000

$ 6,00,000

Notes and Assumption-

  • In above case, land and building has been sold with the intention of lease back transaction. In this transaction there is profit of 11,34,700which is earned by the Lisa Ltd at the time of selling the land and building.
  • At the point of inception of lease transaction there are some lease expenses that are to be paid by the Lisa ltd and shall be paid from bank account. Therefore it shall be charged to the profit and loss account during the year.

b) Provide the entries for the purchase and lease in the books of Anderson ltd as at 1 July 2015.

Sr no

Date

Particulars

Dr / Cr

Amount

1

01 July,2015

Land-Account

Building-Account

Lisa Ltd-Account

[Beingland and buildingpurchased and recorded in the books of accounts and Lisa ltd has been created as creditor or non-current liability]

Dr

Dr

Cr

$ 21,67,350

$ 21,67,350

$ 43,34,700

2

01 July,2015

Bank-Account

Lease Payments–Account

[Being payment of lease has been made and recorded inthe books of accounts]

Dr

Cr

$ 6,00,000

$ 6,00,000

Notes and Assumption-

  • In this case, Anderson Ltd has purchase the land and buildingfrom the Lisa ltd for the lease back transaction between Lisa ltd and Anderson ltd. This transaction has taken placeon01 July,2015.
  • At the inception of lease there is payment of some amount i.e. $ 600,000 that shall be treated as lease rentals of the lease transaction.

(c) Provide the entries in the books of Lisa Ltd as at 30 June 2025

Sr no

Date

Particulars

Dr / Cr

Amount

1

30 June,2025

Lease Payment-Account

Bank-Account

[Being payment for the lease has been made recorded in the books of accounts]

Dr

Dr

5,00,000

5,00,000

2

30 June,2025

Income Statement or Profit and loss account

Lease Payment-Account

[Being lease payment made at the end is transferred to the income statement or profit and loss account]

Dr

Cr

5,00,000

5,00,000

Notes and Assumption-

  • Lisa ltdwill be paying lease rentals to the Anderson ltd for the lease transaction that is undertaken.For this purpose, journal entry has been done with the amount of lease payments at the time of end of lease.
  • Provide the entries in the books of Anderson Ltd as at 30 June 2025

Sr no

Date

Particulars

Dr / Cr

Amount

1

30 June 2025

Bank-Account

Lease Rent-Account

[Being lease rent has been paid to the Lisa Ltd for the lease transaction]

Dr

Cr

5,00,000

5,00,000

2

30 June,2025

Lease Rent-Account

Income Statement or Profit and loss Account

[Being lease rent expense has been transferred to profit and loss account or income statement for the year]

Dr

Cr

5,00,000

5,00,000

Question 2: Accounting for Income Tax

Provide the journal entries to account for tax in accordance with AASB 112

In this case study, tax expenses will be calculated for the MR limited for the year. MR limited has prepared its first statement of comprehensive income and first statement of financial position on 30 June 2015. Therefore these statements, value or amount of tax expenses will be calculated by the management and shown in this section. For the purpose of calculating amount of tax expense for the year statement of income tax will be prepared, under which profit as per statement of comprehensiveincome will be analysed. In this analysis, if any expense isdeductable for the taxation purpose shall be reduced from the profit of the year and if any expense is chargeable to the income tax then it shall be added to the profit of the year(Tax, 2015). This statement will be prepared in two column i.e. one of particulars where all transaction will be shown and second one is for amount. Since income tax is the statutory expense for the business entity that shall be calculated and reflected in the financial statement i.e.balance sheet or statement of financial positionand statement of financial performancei.e. income statement or profit and loss account. End result of this is profit of the year and on that profit tax will be charged. Tax rate for this task is 30 % and shall be charged on the profit of the company.

Statement showing tax expense for the year

Particulars

Amount

Profit of the year (before tax)

$ 300,000

Add: Unpaid long service leave expenses

20,000

Add: Unpaid accrued-warranty expenses

20,000

Add: Unused prepaid insurance expenses

10,000

Add: Depreciation on plant (as per accounts)

80,000

Add: Depreciation on plant (as per taxation)

(10,0000)

Net profit liable to tax

330,000

Tax @ 30%

99,000

Notes and assumptions-

  • Long service leaves has not been paid and these are available as the deduction from the profit of the year only when they are paid during the year. In this case, long service leaves expenses are not paid by the MR limited or has not been used in the business.
  • Insurance is available for the deduction from the profit of the companyearned during the year only when they are paid. Therefore unpaid amount of insurance will be added back to the profit of the year.
  • MR ltd is having unpaid accrued-warranty expensesduring the year ad these unpaid warrantyexpense arenot available for the deduction from the profit of the yearfor income tax purposes.
  • Depreciation on the plant is to be reduced fromthe profit of the current year as per the income tax. Depreciation as per income tax and as per accounts are different therefore there is requirement of calculating depreciation as per income tax and accounts and difference will be added or reduced from the profit of the year. 

Sr no

Date

Particulars

Dr / Cr

Amount

1

30 June 2015

Tax Expense-Account

Provision for Tax-Account

[Being provision has been created for the tax expense during the year]

Dr

Cr

$ 99,000

$ 99,000

2

30 June 2015

Profit and loss-Account

Tax Expense-Account

[Being tax expense has been transfer to profit and loss account at the year-end]

Dr

Cr

$ 99,000

$ 99,000

Question 3: Consolidation

Consolidation of accounts is the financial statement that are required to be prepared by entities or business organisation that has two or more entities as its subsidiary. In consolidation of accounts there are two types of entities that are required to consolidate their accounts i.e. holding company and subsidiary company. Holding company will consolidate accounts of the subsidiary company and for this purpose some accounting standards has been issued. Australian Accounting standard - 127has been issued by the Australianaccounting standard board(Wiening, George, & Constance, 2010). AASB is the prime body that issues notes and guidelines for the consolidation of accounts of the business entity.In this case, consolidation of accounts has beentaken place between Sandy ltd and Beach ltd. Statement of consolidated financial position has been prepared for the same(Holt, 2014).

Statement of consolidated financial position

Particulars

 

Amount

ASSETS

 

 

Non-Current assets

 

 

Land (600,000 + 400,000)

$ 10,00,000

 

Property, plant &Equipment ($ 900,000 + $ 700,000 – $ 300,000 – $ 313,000 – $ 53,000)

$ 934,000

 

 

Goodwill on consolidation

$ 200,000

 

Total non-current assets

 

$ 21,34,000

Current assets

 

 

Cash ($ 80,000 + $ 40,000)

$ 120,000

 

Accounts receivable ($ 50,000 + $ 50,000)

$ 100,000

 

Inventory ($ 140,000 + $ 123,000)

$ 263000

 

Total current assets

 

$ 483,000

Total Assets

 

$ 26,17,000

LIABILITIES

 

 

Non-Current Liabilities

 

 

Loan ($ 670,000 + $ 140,000)

$ 810,000

 

Total Non-Current Liabilities

 

$ 810,000

Current Liabilities

 

 

Accounts payable ($ 100,000 + $ 10,000)

$ 110,000

 

Dividend payable ($ 100,000 + $ 50,000)

$ 150,000

 

Provision for tax

$ 171430

 

Total Current Liabilities

 

$ 431,430

Total Liabilities

 

$ 12,41,430

EQUITY SHARE CAPITAL

 

 

Share capital

$ 10,00,000

 

Retained earnings ($ 520,000 – $53,000 – $171,430 +  $ 80,000)

$ 375,570

 

Total shareholders fund

 

$ 13,75,570

TOTAL LIABILITIES AND SHAREHOLDER FUNDS 

 

$ 26,17,000

Notes and assumption

  • Analysis of capital and revenue profit:

Statement showing analysis of revenue and capital profit

 

Profit

Particulars

Pre-acquisition

 

Opening balance of profit as June 30,2014

Less: Pre-acquisition Dividend

$ 200,000

$40,000

 

Retained earnings increase

Less: Dividend paid (Interim)

 

$100000

$40000

Share of Sandy Ltd

  1.  
  1.  

(iii)- Statement showing consolidation of profit and loss account:

Particulars

Amount

Sandy Ltd

$90,000

Add: Share of Beach Ltd

$40,000

Less: Share of pre-acquisition dividend

$86,0000

 

$500,000

(ii)Statement showing amount of goodwill or capital reserve:

Particulars

Amount

Investment (at cost)

$ 900,000

Less: Share in pre-acquisition dividend ($ 40,000 x 100 / 100)

$40000

Net investment (at cost)

$ 860,000

Less: Share in Beach Ltd

($ 500,000)

Less: Share in Capital-Profit

$160,000

Goodwill

$ 200,000

Conclusion

From Advanced Accounting Assignment it can be concluded that there are various Australian accounting standard that shall be implemented and used inthe preparation and presentation of financial statement.It can be concluded that accounting for lease transaction has been important for the business entity.Journal entries for the lease transaction are also presented in this report. The accounting for sale and lease backhas been demonstrated in this report. It is concluded that accounting for income tax has been demonstrated in this report. Income tax expense is the important concern for thebusiness entity and shall be recorded in the financial statement as provision for income tax and expenses for the year. It can be concluded that consolidation is the important factor or concern for the business entityas it is statutory requirement for the business entity. It is conclude that consolidation is another important factor that shall be taken into account by the business entity i.e. holding and subsidiary companies. Consolidation istheprocess under which accounting records and transactions are recorded and analysed for the financial statements.

Bibliography

Basu, C. (2010). Examples of Consolidation in Advanced Financial Accounting. Journal of Accounting , 1.
Cyert, M. R., & March, J. G. (2009). Implementation of Accounting Standards . Presentation Theory , 76–90.
Duchêne, F. (2010). Australian Accounting Standards and its effects. Melbourne: Stevegan.
Holt, G. (2014). IFRS 3 (revised) business combinations. Corporate reporting , 1.
Luis, R. C. (2014, June 01). Intermediate Accounting. Retrieved June 07, 2016, from Academia.edu: https://www.academia.edu/8179393/Intermediate_Accounting_15th_Ed_gnv64_
Stickney, & Weil. (2011). Lease Transactions in Financial Statement. London: Prentice Hall.
Tax, 2. I. (2015). Income Tax. Factsheet , 1-19.
Wiening, E., George, R., & Constance, L. C. (2010). Consolidation of Finanial Statement. Business Resources , 200-207.