Question 1

Answer both parts independently of each other (PART A and PART B). Show all working and provide any explanations necessary to support your answer.

Assume the indicators of impairment and/or reversal of impairment existed at relevant dates.

PART A

On  1  July  2019  Everest  Ltd purchased  machinery  for  $1,800,000.  Everest  Ltd  uses  the revaluation model to account for property plant and equipment. Everest Ltd initially recorded the machinery at cost and depreciated the asset over its estimated useful life of 9 years – using the straight-line method.  Disposal value at the end of 9 years was assessed as zero.

On 30 June 2020, the fair value of the machinery was $1,600,000, and the value-in-use was greater than fair value.

On 30 June 2021 the fair value of the machinery was  $1,250,000 and value in use was $1,380,000.  There was no change in the estimated useful life or the disposal value.

Required:

Prepare journal entries to account for the machinery from 1 July 2019 to 30 June 2021 in accordance with AASB 116 and AASB 136.

PART B

On 1 July 2018 Everest Ltd purchased another machinery for $1,800,000. Everest Ltd uses the revaluation model to account for property plant and equipment. Everest Ltd initially recorded the machinery at cost and depreciated the asset over its estimated useful life of 9 years – using the straight-line method.  Disposal value at the end of 9 years was assessed as zero.

On 30 June 2020 the fair value of the machinery was $1,155,000 and recoverable amount was $1,280,000.  There was no change in the estimated useful life or the disposal value.

At 30 June 2021 fair value of the machinery was $990,000 and the recoverable amount of the machinery was $1,070,000.

Required:

Prepare journal entries to account for the machinery from 1 July 2018 to 30 June 2021 in accordance with AASB 116 and AASB 136.

Question 2

Answer both parts independently of each other (PART A and PART B).

PART A

Redwood Ltd (Customer) enters into a contract with an information technology company (Supplier) for the use of an identified server for three years.

Supplier delivers and installs the server at Customer’s premises in accordance with        Customer’s instructions, and provides repair and maintenance services for the server, as needed, throughout the period of use. Supplier substitutes the server only in the case of malfunction.

Customer decides which data to store on the server, and how to integrate the server within its operations. Customer can change its decisions in this regard throughout the period of use.

Required:

Does this contract constitute a lease for the purposes of AASB 16 Leases?  Explain your answer.

PART B

On 1 July 2018, Matterhorn Ltd leased an item of machinery to Everest Ltd for four years at an annual rental payment of $560 000 with the first lease payment due on 30 June 2019. All the subsequent lease payments are due on 30 June (after interest has accrued). There is a      bargain purchase option that Everest Ltd intends to exercise at the end of the four years for  $400 000.

The fair value of the machinery is $2 148 720 on 1 July 2018 when it was purchased. The   machinery has an estimated economic life of five years with a residual value of $290 000 at the end of economic life. The equipment is to be depreciated on a straight-line basis.            The interest rate implicit in the lease is 8%. The end of the financial year is 30 June.

Required:

How should the lease contract be classified in the books of Matterhorn Ltd? Provide justification for your classification.

Prepare the necessary journal entries to record the leasing arrangement in the books of Matterhorn Ltd for the year ending 30 June 2019.

Prepare the necessary journal entries to record the leasing arrangement in the books of Everest Ltd for the year ending 30 June 2019.

(Note: Show all working and provide any necessary explanations to support your answers. Round to the nearest dollar).

Question 3

The following information is extracted from the financial records of Lautaro Ltd.

Additional information

•   The allowance for doubtful debts balances as at 30 June 2018 and 30 June 2019 were $23 000 and $43 000, respectively.

•   Land was revalued on 30 June 2019.

•   The equipment was acquired on 1 July 2016 and had originally cost $300 000. The equipment is being depreciated 10% straight-line for accounting purposes and 20% straight-line for tax purposes.

•   Plant was acquired on 1 July 2015 and had originally cost $520 000. The plant is      being depreciated 12% straight-line for accounting purposes and 5% straight-line for tax purposes.