ACC222 EXTERNAL REPORTING Session 201290

ASSIGNMENT 3 Question 1 [15 marks] Internally generated intangible asset During the current financial year, Big Fuel Ltd has moved from the research phase to the development phase of an internal project designed to result ultimately in the marketing of a new motor vehicle fuel injection system. The company, through it separate fuel injection research and development division, has incurred the following costs during the financial year: (a) (b) (c) Salaries of the divisions marketing department staff in developing materials to instil market recognition of the Big Fuel brand name. Salaries of divisional staff and costs of books and other reference materials incurred in obtaining knowledge of alternative possible fuel injection systems. Salaries of company staff, following a final decision on the new fuel injection systems design, to evaluate possible alternative processes for production of the new fuel injection system. Design and construction of a pre-production prototype of the fuel injection system. Construction and operation of a small pilot production plant for manufacture of the fuel injection system. Administration and general office overhead expenditure arising from the research phase of the project. Administration and general office overhead expenditure arising from the development phase of the project. Fees to register a patent over the new fuel injection system design.

(d) (e) (f) (g) (h)

Required: For each of the above costs, indicate whether that cost could be recognised as an intangible asset by Big Fuel Ltd in accordance with AASB 138. Provide relevant paragraph numbers from the standard to support your answer.
[adapted from: Dagwell, R., Wines, G. & Lambert, C. (2012). Corporate accounting in Australia: Pearson Australia]

Question 2 [20 marks] Impairment loss for a cash-generating unit Ted Ltd has a division representing a separate cash-generating unit. At 30 June 2012, the carrying amounts of the assets of the division are as follows: Assets Motor vehicles Plant and equipment Land and buildings Trademarks Goodwill Carrying amount of cash-generating unit $ 200,000 460,000 500,000 150,000 50,000 1,360,000

All assets are carried at cost with the exception of land and buildings. They were revalued from an original cost of $450,000. The revaluation surplus for these still remains in Teds accounts, and the tax rate is 30%. Teds directors estimate that, at 30 June 2012, the recoverable amount of the division is $1,220,000. Required: Does an impairment loss need to be recognised for the division as a cash-generating unit? If so, prepare the required journal entries. Show the carrying amounts of the individual assets after recognising any impairment losses.
[adapted from: Dagwell, R., Wines, G. & Lambert, C. (2012). Corporate accounting in Australia: Pearson Australia]

Question 3 [25 marks] Accounting for leases On 1 July 2012, Ahmad Ltd leased equipment from Leasing Solutions Ltd. The equipment had a fair value of $218,690 on 1 July 2012. The lease agreement contained the following provisions: Lease term Annual rental payment, in advance on 1 July each year Residual value at the end of the lease term Residual value guaranteed by lessee Useful life of equipment Interest rate implicit in the lease 5 years $45,000 $50,000 $31,172 8 years 10%

Ahmad pays all executory costs directly to third parties. The lease is cancellable but incurs a penalty of two years rental payments. Title does not transfer at the end of the lease term and Ahmad expects to return the equipment to Leasing Solutions. The machinery is to be depreciated using the straight-line method. Required: (a) (b) (c) (d) (e) Compute the minimum lease payment for the lessee and the net investment in the lease for the lessor. Classify the lease as a finance lease or operating lease, and justify your answer. Prepare the lease schedule for the lessee. Round all figures to the nearest dollar. Prepare the lease schedule for the lessor. Round all figures to the nearest dollar. Prepare all relevant journal entries for the lessee for the years ended 30 June 2013 and 2014. Narrations are not required.

Note: 1. Show all workings where necessary. 2. Round all figures to the nearest dollar. 3. No marks would be awarded for journal entries shown for lessor in part (e) above.
[adapted from: Dagwell, R., Wines, G. & Lambert, C. (2012). Corporate accounting in Australia: Pearson Australia]