You are the Group Accountant for the Australian-based company BEAR Ltd. The Chief Financial Officer (CFO) has asked you to provide a report related to events/transactions outlined below in preparation of the annual report of the company for the financial year ending 30 June 2023. Today’s date is 25 July 2023. The CFO wants to ensure that transactions are being reported accurately by you and that you have a thorough understanding of the applicable accounting standards related to these transactions and accounts.
The following events/transactions have occurred over the time since the last annual report was prepared and issued. You need to determine how you will treat these events/transactions as well as provide appropriate disclosures or adjustments to the accounts where required, in BEAR Ltd’s financial statements for the financial ending 30 June 2023 and upcoming annual report to shareholders.
Required:
a) Identify the nature of the transaction/event.
b) Identify, provide and discuss the applicable accounting standard(s) for the events/transactions relate(s) to and why.
c) Is there a requirement for the transaction or event to be disclosed in the annual report? If so, provide a suitable disclosure note to the accounts that the company will use in their upcoming annual report or alternatively where it should appear in the financial statements. (Ensure you include amounts as well as any workings where applicable).
d) Is there a requirement for an adjustment to be made to the financial statements? If so, what would this adjustment amount be to the accounts? Provide sufficient workings (calculations) where required.
Events/Transactions:
1. On July 17, 2023, BEAR’s management made the decision to sell Jaguar Ltd., one of its key subsidiaries, as a result of the detrimental effects that higher interest rates had on its operations during the year. Since Jaguar’s operations and brands are well-known throughout South-East Asia and its management team, long-term employees, and know-how are highly regarded by competitors, the company estimated that Jaguar has a fair value of around $30 million overall, which includes the market value of all its assets, liabilities, and potential goodwill.
2. The accounts receivable amount for BEAR Ltd. as of June 30, 2023, was $5.564 million. The corporation estimated an allowance of doubtful debt of $250,000 from a local client whose business suffered severely as a result of high interest rates difficulties in the previous financial year. At the time, it was anticipated that this contribution would not be recouped, so an allowance for it was created in the accounts. The customer informed BEAR Ltd on July 1, 2023, that they are now in a position to pay off their obligation and will send payment in full on July 31, 2023.
3. From July 2022 to December 2022, BEAR Ltd. received 150 claims from customers which started lawsuit due to defective products that came from a particular production batch during the year. This lawsuit amounts to a total of $3.5 million as at the end of the financial year. As at 30 June 2023 the company’s solicitors estimated that about $2 million of the total lawsuit (100 claims) was legitimate and the solicitors believed that there was a high likelihood (probable) that BEAR will need to reimburse the customers, however as at the end of the financial year the solicitors were still negotiating a settlement amount (the solicitors estimated 80% of the claimed amount) and payment date. The remaining $1.5 million related to the other 50 claims were deemed to be unsubstantiated, thus BEAR’s solicitors believed that there was a low likelihood (remote) that the company will need to reimburse these customers. The final court hearing when this lawsuit will be decided is scheduled to 15 December 2023.
4. BEAR Ltd have the following transactions that have occurred during the 2022 financial year and are looking at the impacts these transactions may have on their deferred tax asset (DTA) and/or deferred tax liability (DTL) accounts. The opening balance of the DTA was $10,000 and the DTL $1,500.
Required: You have been asked to provide applicable journal entries (including narrations) for these transactions as well as provide a schedule of temporary differences and calculate any DTA’s and/or DTL’s and applicable income tax expense.
a. Transaction 1 – BEAR Ltd purchased architecturally designed office furniture from Best Designs Pty Ltd in the amount of $280,000 on 1 July 2022. An amount of $90,000 was paid towards this purchase price by using cash reserves of the business. The remainder is being financed by the company’s bank. It is estimated that this office furniture will have a useful life of 6 years with no salvage value. The useful life on office furniture from the Australian Taxation Office’s perspective is estimated to be 5 years. An expert was asked to value the office furniture at the end of the financial year, as the company believes that the office furniture is now worth much more as the company they purchased from no longer makes these designs. A fair value of the office furniture came in at a valuation of $250,000.
b. Transaction 2 – BEAR Ltd has a development costs account in their Balance sheet as at the 30 June 2023 of $245,000. These development costs were claimed as a deduction in the prior financial year.
c. Transaction 3 – The provision for annual leave is recorded in the accounts as at 31 May 2023 at $55,000. During the month of June an accrual for June’s entitlement for annual leave totalled $9,000. Employees who took and were paid leave in June amounted to $6,000.
d. Transaction 4 – At 30 June 2022 the amount recorded in the Balance sheet for goodwill amounted to $1,200,000. The goodwill was impaired by 10% in 2023 and this needs to be recorded in the financial statements.
e. Transaction 5 – BEAR Ltd rents out part of one of their warehouses to Rabbit Pty Ltd. Rabbit paid rent for the next quarter in advance in the amount of $95,000.
f. Advice – BEAR have just reported an accounting profit for the year in their income statement and provided their tax accountant with their financial statements. The tax accountant told BEAR’s management based on draft income tax return that they have no tax to pay, but the managers are not sure why this would be the case. Explain why BEAR may not have to pay the tax office any tax for profits made this year. Use an example to assist with your explanation.
5. BEAR Ltd have leased a new van from Hyundai at Robina at a cost of $55,000 on the 1 July 2022. This new van will be used to move inventory from the various warehouses on the Gold Coast. The lease payments required by BEAR Ltd to pay each year are $20,500. Additional costs incurred by BEAR Ltd to get the van up and running for BEAR Ltd to use included the BEAR Ltd logo on the side panels and back of the van as well as install a solar system including solar panels, deep cell battery and solar regulator. The cost incurred was $9,500. The implicit interest rate on the lease is 9%. BEAR plans on keeping the van at the end of the lease term of 5 years, this has not been agreed upon as yet with Hyundai Robina. Hyundai Robina believes that the useful life of the leased asset to be 8 years. (Ensure that you show all your workings and appropriate referencing when required).
a) Record the relevant journal entries for BEAR Ltd for the 2023 financial year.
b) What is the closing lease liability as at 30 June 2023?
c) If Hyundai Robina has the right to enforce BEAR to acquire a new van at any point within the 5 years contract, by demonstrating that any alterations (e.g. solar system) made by BEAR are not reversible or changed the original characteristics and purposes of use of the van, would BEAR be able to record the vans as a lease asset? Support your discussion applying the appropriate accounting standards.
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