ACCT7102 Problem Set Assignment:

Weighting: 25% of final grade
Due Date: By 12:00pm, Thursday 2 April 2020
Individual or Group Task: Individual

Task Description:
This problem set assignment is designed to examine your understanding of Topics 1-4
(revaluation and impairment, leases and tax). You are to attempt all of the problems (i.e.
there is no choice). Please show all necessary working, explanations and assumptions to
support your answers since marks are awarded for working and explanations as well the
correct answer.
NOTE: This case is to be undertaken individually, which means you are required to
independently prepare your assignment.


ADDITIONAL GUIDANCE


1. Late Submission.
An assignment (for which no extension has been granted) submitted after the due date and
time, will incur a late submission penalty. The penalty is at the rate of 5% (0.4 of a grade) of
the total available marks for that particular piece of assessment, for each calendar day or part
thereof that the item is overdue. Late assignments may be submitted through TurnItIn since
all assignments automatically have a time/date stamp of when they are submitted. However,
please contact the course coordinator if you are submitting a late assignment.

2. Length.
There is no word limit.

3. Format of Assignment
The assignment is to be prepared as a pdf document using 12 point font with 1.15 line spacing,
and 2.54cm margins (left, right, top and bottom). Please number each question carefully.
Please include your full name and student number as part of the file name, e.g.,
‘347185_Kathleen Herbohn’.

4. Submission
The assignment is to be submitted through TurnItIn, which is available in a separate case study
assignment submission folder on the course’s blackboard website. If you experience
problems uploading your assignment before the due date please contact AskIT for help, and
continue to try to upload the assignment until you are successful. A link to the AskIT
instructions on TurnItIn is as follows: assignments>. Note that assignment submission is a three-step process and it is your
responsibility to check the assignment preview and confirm that the assignment has been
successfully submitted. You will need to keep a copy of the Submission ID as proof you have
submitted the assignment.

Case Study Assignment Questions

You must answer all three questions, including all of their parts, showing all necessary
working, explanations and assumptions to support your answer.

QUESTION ONE (14 marks or 7% out of 25%)

On 1 July 2018 Currawong Ltd purchased land for $3 000 000. Currawong Ltd uses the cost
model to account for land.
On 1 July 2018 Currawong Ltd purchased equipment for $2 000 000. Currawong Ltd uses
the revaluation model to account for equipment and depreciates the asset over its
estimated useful life of 4 years using the straight-line method. The disposal value at the end
of 4 years was assessed as zero.
The following information concerning asset measurement was available:
Fair Value Costs to Sell Value in Use
30/6/2019
Land 2 500 000 200 000 2 400 000
Equipment 1 200 000 nil 1 300 000
30/6/2020
Land 2 400 000 150 000 2 400 000
Equipment 700 000 nil 750 000
Indicators of impairment and/or reversal of impairment existed at relevant dates.
REQUIRED:
Prepare journal entries to account for Currawong’s land and equipment from 1 July 2018 to
30 June 2020. Journal entries must comply with AASB 116 ‘Property, Plant and Equipment’
and AASB 136 ‘Impairment of Assets’. Show all working and provide any explanations
necessary to support your answer.
QUESTION TWO (18 marks or 9% out of 25%)
You are required to answer all parts (i.e. A, B and C). You may use the annuity and present
value tables attached to the assignment OR you may use your financial calculators to calculate
annuity and present value factors. Both approaches are acceptable.

PART A (5 marks)
Moshman Ltd enters into a contract with Lessor Ltd for the use of a mining truck for one week
to replace a truck that has broken down. The truck is to be used to transport ore from central
Queensland to the port of Brisbane. Lessor does not have substitution rights.

The ore to be transported, and the timing and location of pick-up in central Queensland and
delivery at the port of Brisbane are specified in the contract. Only the amount of ore specified
in the contract is permitted to be transported on this truck for the one-week period of the
contract. The contract specifies a maximum distance that the truck can be driven. Moshman
Ltd is responsible for driving the truck from central Queensland to the port of Brisbane and is
able to choose the details of the journey (including speed, route and rest stops) within the
parameters of the contract. Moshman Ltd does not have the right to continue using the truck
after the specified trip is complete.

REQUIRED:
Identify whether a lease exists for Moshman Ltd in accordance with the provisions of AASB
16 ‘Leases’. Provide any necessary explanations to support your answer.

PART B (8 marks)
On 1 July, 2020 Moshman Ltd entered into a four-year lease of a large item of mining
equipment from Lessor Ltd. The terms of the lease agreement are as follows.
• A payment of $100,000 is required on 1 July, 2020.
• Four subsequent payments of $220,000 are due starting on 30 June 2021.
• Moshman Ltd has no intention to extend the lease.
• The economic life of the equipment is estimated to be eight years.
• Moshman Ltd has agreed to guarantee a residual value of $120,000.
• The fair value of the machinery at the commencement of the lease is $1,001,154.
• The interest rate implicit in the lease is 4 per cent.
Assume that the contract is a lease for the purposes of AASB 16 ‘Leases’.

REQUIRED:
Prepare any necessary journal entries in the books of Moshman Ltd to record the lease in its
first year (i.e. 1 July 2020 to 30 June 2021) in accordance with the requirements of AASB 16
‘Leases’. Show all necessary working, explanations and assumptions to support your answer.

PART C (5 marks)
REQUIRED:
Using the facts from PART B, explain how Lessor Ltd would classify the lease in accordance
with the requirements of AASB 116 ‘Leases’. Show all necessary working, explanations and
assumptions to support your answer. (Note: No journal entries are required).



QUESTION THREE (18 marks or 9% out of 25%)

Stowe Ltd is a reporting entity and complies with AASB 112 ‘Income Taxes'. Stowe
maintains separate accounts for any deferred tax assets or deferred tax liabilities (i.e. does
not offset deferred tax assets and deferred tax liabilities). Stowe’s accounting records
disclosed the following:
Income Statement Information:
Year ended 30/6/20 30/6/19
Accounting Profit before income tax $2,775,000 $1,200,000
Revenue/expenses included in profit/(loss) before tax:
Legal fees (not deductible for income tax purposes) 0 $120,000
Exempt income $340,000 0
Prepaid expenses 465,000 650,000
Depreciation expense on plant & equipment 675,000 675,000
Bad & doubtful debts expense 60,000 220,000
Warranty expense 285,000 700,000
Extracts from Stowe’s balance sheets as at 30 June 2020, June 2019 and 30 June 2018:
Extract from Balance Sheet 30 June 30/6/20 30/6/19 30/6/18
Accounts receivable Dr $600,000 $750,000 950,000
Less Allowance for bad debts Cr (52,500) (82,500) (90,000)
547,500 667,500 860,000
Prepaid expenses Dr 615,000 510,000 780,000
Plant & Equipment (net) Dr 3,375,000 4,050,000 4,725,000
Provision for warranty Cr 375,000 630,000 400,000


Other Information:
1. A tax deduction for bad debts is allowed when bad debts are written off. Bad debts
written off were $242,000, $227,500 and $250,000 at 30 June 2018, 30 June 2019 and
30 June 2020 respectively.
2. Cash paid for prepaid expenses in each year was allowed as a tax deduction.
3. Plant and equipment was purchased on 1 July 2017 for $5,400,000. This asset was
depreciated straight-line over 8 years for accounting purposes and 6 years for tax
purposes. The tax base of plant and equipment was $4,500,000, $3,600,000, and
$2,700,000 at 30 June 2018, 30 June 2019 and 30 June 2020 respectively.
4. Warranty claims are allowed as a deduction for tax purposes when cash is paid to meet
warranty claims. The warranty claims paid were $470,000 and $540,000 during the
periods ended 30 June 2019 and 30 June 2020 respectively.
5. The company income tax rate over the relevant period was 30%.

REQUIRED:
Prepare journal entries to record current tax expense and deferred tax expense for the year
ended 30 June 2020. Journal entries must comply with AASB 112 ‘Income Taxes’. Show all
necessary working, explanations and assumptions to support your answer.







Source: Table 1, Appendix, p. 986 Henderson, S., G. Peirson, K. Herbohn, T. Artiach and
Howieson, B. 2017, Issues in Financial Accounting (16 ed.).





Source: Table 2, Appendix, pp. 987-988 Henderson, S., G. Peirson, K. Herbohn, T. Artiach and
Howieson, B. 2017, Issues in Financial Accounting (16 ed.).