Note For Exam

Week 2: accounting for properties
General procedure (AASB 116)
Debit Asset
Credit Revaluation surplus
The revaluation surplus is part of shareholders’ funds (owners’ equity)
If a revalued asset is a depreciable asset, any balance of accumulated depreciation
is credited to the asset account prior to revaluation (AASB 116)
Journal entry (net-amount method)
Dr Accumulated depreciation
Cr Asset
Dr Asset
Cr Revaluation surplus
As at 1 July 2018, Farrelly Ltd has an item of machinery that originally cost $40 000
and has accumulated depreciation of $15 000. Its remaining life is assessed to be
five years, after which time it will have no residual value.
Farrelly decided on 1 July 2018 that the item should be revalued to its current fair
value, which was assessed as $45 000.
Required
Prepare relevant journal entries
Answer: Fair value – Carrying amount (Cost – Acc. Depreciation.)
$45 000 – ($40 000 – $15 000) = $20 000
The journal entries on 1 July 2018 would be:
Dr Accumulated depreciation—machinery $15 000
Cr Machinery $15 000
Dr Machinery $20 000
Cr Revaluation surplus $20 000
A building with a cost of $400 000 and accumulated depreciation of $190 000 is
revalued to its fair value of $350 000
What are the journal entries?
Fair value – Carrying amount (Cost – Acc. Depreciation.)
$350 000 – ($400 000 – $190 000) = $140 000
Dr Accumulated depreciation $190 000
Cr Building $190 000

Dr Building $140 000
Alternative method (AASB 116)
Accumulated depreciation may be restated proportionately with the change in gross
carrying amount of the asset, so the carrying amount after revaluation equals the
revalued amount
This is referred to as the gross method
Journal entry
Debit Asset
Credit Accumulated depreciation
Credit Revaluation surplus
In line with the (somewhat outdated) concept of conservatism, revaluation
decrements are recognised as an expense in the statement of comprehensive
income
Journal entry (AASB 116)
Cr Asset
Dr Loss on revaluation of asset

Cr Asset
A building with a cost of $400 000 and accumulated depreciation of $190 000 is
revalued to its fair value of $150 000
What are the journal entries?
Fair value – Carrying amount (Cost – Acc. Depreciation.)
$150 000 – ($400 000 – $190 000) = $60 000
Dr Accumulated depreciation $190 000
Cr Building $190 000
Dr Loss on revaluation of building $60 000
Cr Building $60 000
For an asset class, reversals of previous revaluations should be recorded by the
reverse of the initial revaluation entries
If a revaluation decrement reverses a previous increment for the same asset, then
the entries are:
Cr Asset
Dr Revaluation surplus
Dr Loss on revaluation (the excess, if any)
Cr Asset
PK Ltd acquires a block of land on 1 January 2017 for $200 000 in cash
Due to increased housing demand in the area, the land has a fair value of $290 000
on 1 January 2018
However, the market value falls to $140 000 on 30 June 2019
Required:
Prepare relevant journal entries.
1 Jan 2018: Revaluation Increment $290 000 – $200 000 = $90 000
30 June 2019: Revaluation decrement $140 000 – $290 000 = $150 000
Journal entries.
1 January 2017
Dr Land $200 000
Cr Cash $200 000
1 January 2018
Dr Land $90 000
30 June 2019
Dr Revaluation surplus $90 000
Dr Loss on revaluation of land $60 000
Cr Land $150 000
If a revaluation increment reverses a previous decrement for the same asset:
Dr Asset
Cr Gain on revaluation
Cr Revaluation surplus (the excess if any)
Land was acquired for $200 000 on 1 July 2017. On 30 June 2018 it has a fair value
of $150 000.
On 30 June 2020, due to increased population, the land is considered to have a fair
value of $270 000
Required
Prepare relevant journal entries.
30/6/2018: Revaluation decrement $200 000 - $150 000 = $50 000
30/6/2020: Revaluation increment $270 000 - $150 000 = $120 000
1 July 2017
Dr Land $200 000
Cr Cash $200 000
30 June 2018
Dr Loss on revaluation of land $50 000
Cr Land $50 000
30 June 2020
Dr Land $120 000
Cr Gain on revaluation of land $50 000

Ulladulla Ltd has a printing process comprising four separate but highly
interdependent assets. The printing machinery has a combined carrying value of $1
000 000, made up as follows:
Asset 1 $100 000
Asset 2 $200 000
Asset 3 $300 000
Asset 4 $400 000
$1 000 000
It was determined that the value in use of the cash-generating unit, which is
calculated at its present value, amounted to $800 000
The current fair value less costs to sell of the entire unit is $750 000
The total impairment loss will therefore be equal to $1 000 000 less the greater of the
value in use and fair value less costs to sell
This gives us a total impairment loss of $200 000. The impairment loss would be
apportioned across the four assets by using their respective carrying values as the
basis for the allocation. For example, the allocation of the impairment loss to Asset 4
would be 400 000 divided by 1 000 000 multiplied by 200 000. This would equal
$80000
answer: Hence the accounting entry to record the impairment loss on the cash-
generating unit would be:
Dr Impairment loss $200 000
Cr Accum. impairment losses—Asset 1 $20 000

Illustration
Range Ltd acquired a business for the following consideration:
Cash $ 50 000
Land—Carrying amount $ 90 000
Fair value $150 000
Shares in Range Ltd—Fair value $ 60 000
(Hint: it is the fair value of the consideration that is relevant)
The business being acquired had the following assets and liabilities as reported in
the balance sheet (there were no contingent liabilities):
Liabilities
Bank loan $ 50 000
Creditors $ 30 000
Assets
Plant and equipment $150 000
Motor vehicle $ 30 000
(the plant and equipment and motor vehicle have fair value of $170 000 and
$30,000, respectively)
HOW MUCH GOODWILL WAS ACQUIRED?

Cost = $150 000+ $50 000 + $60 000 = $260 000
Fair value = $170 000 + $30 000 – $50 000 – $30 000 = $120 000
Goodwill = $260 000 – $120 000 = $140 000
Dr Plant and equipment $170 000
Dr Motor vehicle $30 000
Dr Goodwill $140 000
Cr Bank loan $50 000
Cr Creditors $30 000
Cr Cash $50 000
Cr Land $90 000
Cr Gain on disposal of land $60 000
Cr Share capital $60 000
On 1 July 2018, Jack Ltd acquired some corporate bonds issued by McCoy Ltd.
These bonds cost $1 066 242. They had a ‘face value’ of $1 million and offered a
coupon rate of 10 per cent paid annually ($100 000 per year, paid on 30 June). The
bonds would repay the principal of $1 million on 30 June 2022. At the time the
market only required a rate of return on 8 per cent on such

bonds. Jack Ltd operates within a business model where government bonds are
held in order to collect contractual cash flows and there is no intention to trade them.
Assume that there were no direct costs associated with acquiring the bonds.
REQUIRED
a) Explain why the company was prepared to pay $1 066 242 for the bonds
given that, apart from the interest, they expect to receive only $1 million back
in four years.
b) Determine whether Jack Ltd can measure the government bonds at amortised
cost.
c) Calculate the amortised cost of the bonds as at 30 June 2019, 2020, 2021
and 2022.
d) Provide the accounting journal entries for the years ending 30 June 2019 and
2020.
Answer: a) In this instance the market was requiring an 8 per cent return on
securities such as these. However, McCoy Ltd was offering a 10 per cent return. In
this case, and using present values, the issue price will be $1 066 242, determined
as follows:
Present value of interest stream of four payments of $100 000
per year at the end of the next 4 years:
$100 000 × 3.312 126 4 = $331 213
Present value of the principal to be received in 4 years:
$1 000 000 × 0.735 029 7 = $735 029

Fair value at 1 July 2018 $1 066 242
(d) 1 July 2018
Dr Investment in corporate bonds $1 066 242
Cr Cash $1 066 242
30 June 2019
Dr Cash $100 000
Cr Investment in corporate bonds $14 701
Cr Interest income $85 299
30 June 2020
Dr Cash $100 000
Cr Investment in corporate bonds $15 877
Cr Interest income $84 123
On 1 July 2018, Bear Ltd acquired 100 000 shares in Island Ltd at a price of $10
each. There were brokerage fees of $1500. The closing market price of Island Ltd
shares on 30 June 2019—which is the entity’s financial year end—was $12. Bear Ltd
has not made the election to account for its equity investments at fair value through
OCI.
REQUIRED
Provide the required accounting journal entries for Bear Ltd to account for the
investment in Island Ltd using fair value through profit or loss.
Answer: 1 July 2018
The financial asset would initially be recorded at fair value. If the financial asset is
measured at fair value through profit or loss then transaction costs associated with
the acquisition of the asset shall be treated as an expense within profit or loss.
Dr Investment in Island Ltd $1 000 000
Dr Brokerage fee expense $1 500
Cr Cash $1 001 500
30 June 2019
Dr Investment in Island Ltd $200 000
Cr Gain in fair value of equity investments $200 000
(100 000 x 12 = 1 200 000, 1 200 000 – 1 000 000 = 200 000)
The facts are the same as those in Worked Example 14.6 except this time Bear Ltd
has made the decision to measure the equity investment at fair value through other
comprehensive income.
REQUIRED
Provide the required accounting journal entries for Bear Ltd to account for the
investment in Island Ltd using fair value through other comprehensive income.
Answer: 1 July 2018
The financial asset would initially be recorded at fair value. If the financial asset is
measured at fair value through other comprehensive income then transaction costs
associated with the acquisition of the asset shall be included as part of the cost of
the asset.
Dr Investment in Island Ltd $1 001 500
Cr Cash $1 001 500
30 June 2019
Dr Investment in Island Ltd $200 000
Cr Gain in fair value included within OCI $200 000
On 1 July 2018, Slater Ltd issued four-year bonds with a total face value of $100 000
and a coupon interest rate of 10 per cent per annum, payable annually in arrears.
The market interest rate for Slater’s bonds was 12 per cent and so the company had
to discount the issue price to its fair value of $93 923.

1 July 2018
Dr Cash $93 293
Cr Bond payable $93 293
(issue of bonds for $93 293—financial instruments shall initially be measured at fair
value)
30 June 2019
Dr Interest expense $11 272
Cr Bond payable $1 272
Cr Bank $10 000
(interest payment and amortisation of bond payable using effective interest rate of 12
per cent)
Oz Ltd manufactures electric cars.
On 15 June 2018, Oz Ltd enters into a non-cancellable purchase commitment with
Vegas Ltd for the supply of batteries, with those batteries to be shipped on 30 June
2018.
The total contract price was US$2 000 000 and the full amount was due for payment
on 30 August 2018.
Because of concerns about movements in foreign exchange rates, on 15 June 2018
Oz Ltd entered into a forward rate contract on US dollars with a foreign exchange
broker so as to receive US$2 000 000 on 30 August 2018 at a forward rate of $A1.00
= US$0.80 (meaning A$2 500 000 will be payable to the foreign currency broker).
Oz Ltd elects to treat the hedge as a cash flow hedge.
The respective spot rates, with the spot rates being the exchange rates for
immediate delivery of currencies to be exchanged, are provided below. The forward
rates offered on particular dates, for delivery of US dollars on 30 August 2018, are
also provided.
On 30 August 2018, the last day of the forward rate contract, the spot rate and the
forward rate will be the same.
Given this has been designated as a cash flow hedge, and it has also been assumed
that the hedge is ‘effective’, then any gains or losses on the hedging instrument shall
initially be recognised in equity (and therefore in ‘other comprehensive income’) and
then ultimately transferred to the cost of inventory.
Gains/Losses on the hedged item (the accounts payable) are calculated as follows:
2 000 000 / 0.81 = 2 469 136

2 000 000 / 0.76 = 2 631 579
Gains/Losses on the hedging instrument (the

forward rate contract) are calculated as follows:
2 000 000 / 0.78 = 2 564 103

2 000 000 / 0.76 = 2 631 579
30 June 2018
Dr Forward rate contract (financial asset) $64 103
Cr Gain recorded in equity (other comprehensive income) $64 103
Dr Inventory $2 469 136
Cr Foreign currency payable $2 469 136

Dr Cash flow hedge reserve (OCI) $64 103
Cr Inventory $64 103
30 August 2018
Dr Forward rate contract (financial asset) $67 476
Cr Foreign exchange gain $67 476
Dr Foreign exchange loss $162 443
Cr Foreign currency payable $162 443
Dr Cash at bank $131 579
Cr Forward rate contract $131 579
Dr Foreign currency payable $2 631 579
Cr Cash at bank $2 631 579
Journal entries for SPI futures (assuming share market is ‘falling’)

Grommett Ltd issues $10 million of convertible bonds on 1 July 2018. The bonds
have a life of four years and a face value of $10.00 each, and they offer interest,
payable at the end of each financial year, at a rate of 6 per cent per annum.
The bonds are issued at their face value and each bond can be converted into one
ordinary share in Grommett Ltd at any time in the next four years.
Organisations of a similar risk profile have recently issued debt with similar terms,
without the option for conversion, at a rate of 8 per cent per annum.
REQUIRED
Identify the present value of the bonds and, allocating the difference between the
present value and the issue price to the equity component, provide the appropriate
accounting entries.
Calculate the stream of interest expenses across the four years of the life of the
bonds.
Provide the accounting entries if the holders of the options elect to convert the
options to ordinary shares at the end of the third year of the bonds.
Answer: Present value of bonds at the market rate of debt

Present value of principal to be received in four years discounted at 8 per cent
$10 000 000 × 0.735 03 = $7 350 300
Present value of interest stream discounted at 8 per cent
$600 000 × 3.312 113 = $1 987 268
Total present value $9 337 568
Equity component $662 432
Total face value of convertible bonds $10 000 000
9 337 568 x 0.08 = 747 005
The accounting entries could therefore be:
1 July 2018
Dr Cash at bank $10 000 000
Cr Convertible bonds (liability) $9 337 568
Cr Convertible bonds (equity component) $662 432

30 June 2019
Cr Cash $600 000
Cr Convertible bonds (liability) $147 005
30 June 2021
Dr Interest expense 771 467
Cr Cash 600 000
Cr Convertible bonds (liability) 71 467
(to recognise interest expense for the period)
Dr Convertible bonds liability 9 814 806
Dr Convertible bonds (equity component) 662 432
Cr Share capital 10 477 238
(to recognise the conversion of the bonds into shares of Grommett Ltd)
On 1 July 2018, Mini Ltd enters into a four-year lease of a machine.
Mini will pay fixed annual payments of $100 000 for four years with the first payment
on 30 June 2019.
To enter the lease Mini incurs direct costs of $10 000 at the commencement of the
lease term.
There is a bargain purchase price option (that Mini is willing to exercise) for $25 000
at the end of the lease term.
The machine is expected to have a useful life of 10 years and no residual value.
Additional information:
Lessee’s incremental borrowing rate: 6%.
Present value of an annuity in arrears of $1 for 4 periods at 6% = 3.4651
Present value of $1 in 4 periods at 6% = 0.7921
Determine the initial measure of the lease liability

and right-of-use asset and prepare the related
accounting journal entry.
$100 000 x 3.4651 = $346 510
$25 000 x 0.7921 = $19 802
Lease liability = $366 312
right-of-use asset = Lease liability + Direct costs = $366 312 + $10 000 = $376 312
Dr Lease machine $376 312
Cr Lease liability $366 312
Cr Cash/payables $10 000

Interest expense = 6% x $366 312 = $21 979
Principal repayment = $100 000 – $21 979 = $78 021
30 June 2019
Dr Lease liability $78 021
Cr Cash $100 000
Dr Lease amortisation expense $37 631
Cr Accumulated. lease amortisation expense—machine $37 631
On 1 July 2019, Maggie Ltd enters a lease agreement with Riva Ltd for the lease of
an item of machinery for eight months. The lease cost is $20 000 per month. Maggie
Ltd has decided that for such leases, the exemption available within the accounting
standard will be used.
Provide the required accounting journal entry
Dr Lease expenses $20 000
Cr Cash at bank $20 000
McTavish Ltd decides to lease some machinery from Cornish Ltd on the following
terms:
Date of entering lease 1 July 2019
Duration of lease 10 years
Life of leased asset 11 years
Unguaranteed residual value $2000

Lease payments $4000 at lease inception, $3500 on 30 June each year (i.e. 10
yearly payments in arrears of $3500 each)
Fair value of leased asset at date of lease inception $26 277
REQUIRED
Determine the interest rate implicit in the lease.
3 500 x 6.1446 = 21 506
2 000 x 0.3855 = 771
Trigger Ltd enters into a five-year lease agreement with Brothers Ltd on 1 July 2019
for an item of machinery.
There is a bargain purchase option that Trigger Ltd will be willing to exercise at the
end of the fifth year for $80 000. The machinery is expected to have a useful life of
six years.
There are to be five annual payments of $100 000, the first being made on 30 June
2020. Included within these payments is $10 000 representing payment to the lessor
for insurance and maintenance of the equipment.
Additional information:
Implicit interest rate: 12 per cent
Present value of an annuity in arrears of $1 for five years at 12 per cent = 3.6048
Present value of $1 in five years at 12 per cent = 0.5674
REQUIRED
Determine the initial measurement of the lease liability
Determine the initial measurement of right-of-use asset cost.
Provide the accounting journal entries for the year ended 30 June 2020
Present value of five lease payments of ($100 000 - $10 000 = $90 000) discounted
at 12 per cent
= $90 000 x 3.6048 = $324 432 +
Present value of the bargain purchase option
= $80 000 x 0.5674 = $45 392 = $369 824
(b) Determine the initial measurement of right-of-use asset cost.
Right-of-use asset cost = lease liability, as there are no other costs to add
Right-of-use asset cost = $369 824
1 July 2019
Dr Leased machine $369 824
Cr Lease liability $369 824
30 June 2020
Dr Service costs $10 000
Dr Lease amort. expense $61 637
Cr Accum. lease amortisation $61 637
As at 1 July 2018, Winki Company enter into a 10-year lease contract for a building.
Lease payments are $400 000 per year, starting on 30 June 2019 and there is no
purchase option or residual value guaranteed. Winki pays $5000 to enter the lease
contract (direct costs). The implicit interest rate is 15 per cent (use the textbook
Appendixes to calculate the present values).
REQUIRED
Determine the initial measurement of right-of-use asset cost
Provide the accounting journal entries for the year ended 30 June 2019
(a) Determine the initial measurement of the lease liability

Present value of 10 lease payments of $400 000 discounted at 15 per cent
= $400 000 x 5.0188 = $2 007 520
(b) Determine the initial measurement of right-of-use asset cost.
right-of-use asset cost = lease liability + any payment before the commencement +
any direct cost
right-of-use asset cost = $2 007 520 + $5 000 = $2 012 520
1 July 2018
Dr Leased machine $2 012 520
Cr Lease liability $2 007 520
Cr Cash/payables etc $5 000
30 June 2019
Dr Lease amort. expense $201 252
Cr Accum. lease amortisation $201 252

On 1 July 2019, Tamarama Ltd—the lessor—leases a building to Bronte Ltd (the
lessee) for a period of three years.
The lease requires an up-front payment (prepayment) of $100 000 and then
payments (prepayments for the following 12 months) on 30 June 2020 and 30 June
2021 of $100 000 each.
The building is expected to have an economic life of 60 years.
REQUIRED
Provide the required journal entries for Tamarama Ltd for the year ending 30 June
2020.
1 July 2019
Dr Cash $100 000
Cr Rent received in advance $100 000
(the initial payment would be treated as a liability labelled ‘Rent received in advance’)
30 June 2020
Dr Rent received in advance $100 000
Cr Rental income $100 000
(as the rent has now been earned, we recognise revenue)
Dr Cash $100 000
Cr Rent received in advance $100 000
(the payment made on 30 June 2020 represents rent received in advance for the
next 12 months)
Rincon Ltd provides consulting services to The Bowl Ltd. Rather than paying in cash,
it is agreed that The Bowl Ltd will transfer some machinery to Rincon Ltd. The
machinery is recorded in The Bowl Ltd’s accounts at a cost of $75 000 and with
accumulated depreciation of $20 000. The fair value of the machinery is assessed as
being $60 000.
REQUIRED
Provide the journal entries for Rincon Ltd to recognise revenue to be received from
The Bowl Ltd.
SOLUTION
It is the fair value of the machinery that is relevant, not the carrying amount of the
machinery as recorded in The Bowl Ltd’s accounts (and that carrying amount would
be $55 000). The accounting entry for Rincon Ltd would be:
Dr Machinery $60 000
Cr Consulting revenue $60 000
An entity has a contract to sell 100 bikes to a customer for $500 each and the
customer has the right to return the bikes within 30 days for a full refund. On the
basis of past experience the entity places the following probabilities on the number of
bikes the customer is expected to return:
Number of bikes returned Probability of outcome
0 15%
1 20%
2 28%
3 22%
4 15%
Using the ‘expected value’ method, the amount of revenue from the customer to be
recognised would be calculated as (100 × $500 × 0.15) + (99 × 500 × 0.20) + (98 ×
$500 × 0.28) + (97 × $500 × 0.22) + (96 × $500 × 0.15) = $48 990.
If, by contrast, the ‘most likely amount’ approach is applied, and if it is assumed that
the most likely outcome is that two bikes will be returned, then the revenue to be
recognised would be calculated as 98 × $500, which equals $49 000. As can be
seen, this is very similar to the amount calculated above using the expected-value
method.
On 1 July 2019, Cassie Ltd sells a computer to Ted Ltd.
The computer cost Cassie Ltd $9000.
Rather than selling the item for a cash price or a short-term claim for cash of $12
009, Cassie Ltd accepts a promissory note that requires Ted Ltd to make three
annual payments of $5000 each, the first one to be made on 30 June 2020.
The difference between the gross receipts and the current sales price represents
interest revenue to be earned by Cassie Ltd over the period of the note.
The rate implicit in the arrangement is 12 per cent.
REQUIRED
Provide the journal entries for Cassie Ltd for the years ended 30 June 2020, 2021
and 2022.
1 July 2019
Dr Note receivable $12 009
Cr Sales $12 009
Dr Cost of sales $9 000
Cr Inventory $9 000
30 June 2020
Dr Cash $5 000
Cr Note receivable $3 559
Cr Interest revenue $1 441
30 June 2021
Dr Cash $5 000
Cr Interest revenue $1 014
30 June 2022
Dr Cash $5 000
Cr Interest revenue $536
An entity sells 100 products for $100 each. Sales are made for cash, rather than on
credit terms. The entity’s customary business practice is to allow a customer to
return any unused product within 30 days and receive a full refund. The cost of each
product is $60. To determine the transaction price, the entity decides that the
approach that is most predictive of the amount of consideration to which the entity
will be entitled is the most likely amount. Using the most likely amount, the entity
estimates that three products will be returned. The entity’s experience is predictive
of the amount of consideration to which the entity will be entitled. The entity
estimates that the costs of recovering the products will be immaterial and expects
that the returned products can be resold at a profit.
REQUIRED
Provide the accounting entries to record the sale, and the subsequent return of the
assets, assuming that the returns occur in accordance with expectations.
Solution: a) Revenue of $9700 ($100 × 97 products expected not to be returned).

(b) A refund liability for $300 ($100 refund × 3 products expected to be returned).
(c) An asset of $180 ($60 × 3 products) for its right to recover products from
customers on settling the refund liability. The assets are recorded at cost as it is
assumed there is no cost associated with recovering the assets. Hence, the amount
recognised in cost of sales for 97 products is $5820 ($60 × 97).
The accounting entries would be:

Dr Cash $10 000
Cr Revenue $9 700
Cr Refund liability $300
(to recognise the initial sale)
Dr Refund liability $300
Cr Cash $300
(to recognise the refund provided to the customer when the goods are ultimately
returned)
Dr Inventory $180
Cr Right to recover $180
(to place the returned assets back into inventory when they are returned)
XYZ signed a contract on 1 January 2019, agreeing to build a warehouse for ABC at
a contract price of $20 000 000. XYZ estimated that construction costs would be as
follows:
2019 $5 000 000
2020 $8 000 000
2021 $3 000 000
$16 000 000
The contract provided that ABC would make payments on 31 December of each
year as follows:
2019 $ 4 000 000
2020 $10 000 000
2021 $ 6 000 000
$20 000 000
The contract was completed and accepted on 31 December 2021. Assume that
actual costs and cash collections coincided with expectations.
INCOME RECOGNISED EACH YEAR
YEAR P.O.C.
2019 $1.25
2020 $2.00
2021 $0.75
$4.00
(b) Journal entries POC method
2019 2020 2021
(i) To record costs incurred
Dr Construction in progress 5 8 3
Cr Cash, accounts payable 5 8 3
(ii) To record billings to customers
Dr Accounts receivable 4 10 6
Cr Construction in progress 4 10 6
Format of the statement of profit or loss and other comprehensive income—Nature
of expense approach
Statement of changes in equity
Let us assume that an organisation in 2019 has a liability for cleaning up a
contaminated site in 20 years’ time at an expected cost of $100 million. The relevant
discount rate is 5 per cent. Assuming we don’t revise the discount rate or expected
cost, the liability in 2019 would be: $100m x 0.3769 = $37.69m (20)
The liability one year later would be: $100 m x 0.3957 = $39.57m. (19) The entry in
2020 would be:
Dr Interest expense $1.88m
Cr Provision for clean-up $1.88m
Issue of debentures
Debit Cash trust
Credit Application—debentures
(To record receipt of funds from investors)
…………………………………………………………………………..
Debit Cash at bank
Credit Cash trust
(To transfer funds to the entity's operating account following the allocation of
debentures)
…………………………………………………………………………
Debit Application—debentures
Credit Debentures
(To record the allocation of debentures and to eliminate the ‘application’ account)
Payment of interest
Debit Interest expense
Credit Cash at bank
(To record the first payment of interest)
……………………………………………………………………..
Redemption of debentures
Debit Debentures
Credit Cash at bank
(To record repayment of the face value of the debenture)
…………………………………………………………………………
Company C issues $10m, 5 year, 10% semi-annual coupon debentures on 30 June
2020. Assume that the market requires 12% for the debentures (in percentage we
divide and periods we multiplied)
Present value of interest payments
$500 000 for (5 X 2 =10 periods) @ 6% (%12/2)
$500 000 x 7.3600866 = $3 680 043
Present value of principal repayment
$10 000 000 in 10 periods @ 6%
$10 000 000 x 0.5583948 = $5 583 948

Actual cash received from the issue $9,263,991
(which is both the issue price and the PV of the liability)
Dr Cash $9 263 991
Cr Debentures *9 263 991
(To record receipt of cash)
Using the effective-interest method, the interest expense will equal the present value
of the liability at the beginning of the period multiplied by the market rate of interest.
$9 263 991 x 6% = $555 839.50
The accounting entries to recognise the payment of interest would be:
31 December 2020
Cr Debentures $55 839
Cr Cash $500 000
(To record payment of interest and debenture)
The accounting entries to recognise the payment of interest
30 June 2021 would be:

Cr Cash $500 000
(To record payment of interest and debenture)
The debenture issue is the same as that in the previous example except we now
assume that the market demands 8% per annum on such debentures.
Present value of interest payments
$500 000 for 10 periods @ 4%
$500 000 x 8.1108925 = $4 055 446
Present value of principal repayment
$10 000 000 in 10 periods @ 4%
$10 000 000 x 0.6755643 = $6 755 643
Actual cash received from the issue $10 811 089

Hence a premium of $811 089. We will assume this is a direct private placement and
so we will not use a trust or application account.
Dr Cash $10 811 089
Cr Debentures $10 811 089
(To record receipt of cash from issue of debenture)
Again, using the effective-interest method, the interest expense will equal the
present value of the liability at the beginning of the period multiplied by the market
rate of interest.
$10 811 089 x 4% = $432 444
The accounting entries to recognise the payment of interest would be:
31 December 2020
Dr debentures $67 556
Cr Cash $500 000
30 June 2021
Cr Cash $500 000
Salaries and wages—Accounting entry at reporting date
Dr Wages and salaries expense
Cr PAYG tax payable

Cr Medical benefits payable
Cr Wages and salaries payable
Salaries and wages—Entry paid after reporting date
Dr Salaries and wages expense (incurred since reporting date)
Dr Salaries and wages payable (owing at reporting date)
Cr PAYG tax payable
Cr Medical benefits payable (both incurred since reporting date)
Cr Cash (payment to employees)
Salaries and wages—Remittance to tax office and medical fund
Dr PAYG tax payable
Dr Medical benefits payable
Cr Cash
Thruster Ltd employs its staff on a five-day work week, with employees being paid on
Fridays. The weekly salaries expense is $10 000 and employees are paid in arrears.
That is, when the employees are paid, the salaries paid are for work performed in the
preceding week. Thruster Ltd retains $3000 per week to pay the Australian Taxation
Office for PAYG tax on behalf of the employees. This is paid on the following
Monday of each week. It also retains $500 per week to pay staff premiums to the
Oceanic Medical Benefits Fund.
If we assume that the reporting date falls on a Thursday, what would the accounting
entry at reporting date be to recognise four days’ salary and wages expense?
Dr Wages and salaries expense $8 000 (2 000 x 4)
Cr PAYG tax payable $2 400 (600 x 4)
Cr Oceanic MBF payable $400 (100 x 4)
Cr Wages and salaries payable $5 200
(8000 – 2400 – 400 =5200)
When the wages are ultimately paid to employees on Friday, the entry would be:
Dr Wages and salaries expense $2 000 (10 000 / 5)
Dr Wages and salaries payables $5 200
Cr PAYG tax payable $600 (3 000 / 5)
Cr Oceanic MBF payable $100 (500 / 5)
Cr Cash $6 500
(2 000 + 5 200 – 600 – 100)
When the amounts are paid to the Australian Taxation Office (ATO) and the medical
fund on Monday, the entry would be:
Dr PAYG tax payable $3 000
Dr Oceanic MBF payable $500
Cr Cash $3 500
Accounting for annual leave
To recognise annual leave obligation throughout the year

Dr Annual leave expense
Cr Provision for annual leave
When annual leave taken
Dr Provision for annual leave
Cr PAYG tax payable
Cr Cash at bank
Journal entry each week (based on past experience)
Dr Sick-leave expense
Cr Provision for sick leave
If employees are sick, their entitlements are charged to sick leave instead of salaries
and wages:
Dr Provision for sick leave (wages during sick leave)
Dr Salaries and wages (wages for rest of period)
Cr PAYG tax payable
Cr Cash at bank
projected salary
current salary × (1 + inflation rate)n
accumulated LSL benefit
years of employment / total no. of periods required to be served before leave can be
taken × weeks of LSL entitlement available after conditional period has been
served / 52 × projected salary

Present value of LSL obligation
accumulated LSL benefit/(1 + appropriate bond rate)n
Probability that LSL will be paid
determined by reference to prior experience within the organisation and industry
Entry to recognise the LSL expense
Dr Long-service leave expense
Cr Provision for long-service leave
Entry when LSL is subsequently taken
Dr Provision for long-service leave
Cr Cash at bank
Torquay Ltd has five employees
Torquay Ltd’s employees are entitled to 13 weeks’ LSL after 15 years of continuous
service
Employees who cease employment with Torquay Ltd after 10 years’ service are
entitled to a pro rata payment of accumulated LSL

The balance in the provision for LSL brought forward from 30 June 2018 is $19 700
Required:
Calculate the LSL liability of Torquay Ltd at 30 June 2019, and prepare the journal
entry to adjust the balance of the provision for LSL on 30 June 2019
Dr LSL expense $7 338
Cr Provision for LSL $7 338
[$27 038 (required balance on 30 June 2019) – $19 700 (existing balance)]
Accounting for employer’s obligation to a defined contribution superannuation plan
Dr Employee benefits cost—superannuation
Cr Employee benefits payable
When amount paid
Dr Employee benefits payable
Cr Cash at bank
Accounting for the issue of share capital

(cont.)
• To recognise receipt of application monies
Debit Bank trust

Credit Application
• To recognise the issue of shares and to close application

account
Debit Application
Credit Share capital
Accounting for the issue of share capital
(cont.)
• To transfer cash from trust account to general operating bank
account
Debit Cash at bank

Credit Bank trust
Worked Example 13.3—Issue of partly

paid shares
• Yeates Ltd commenced operations on 1 July
2019 by issuing 15 million ordinary shares by
way of a direct private placement and at an
issue price of $1.50 per share.
• Shareholders were required to pay $1.00 on

application, with a further $0.35 payable on
September 2019 and a further $0.15 payable
on 1 December 2019.
1 July 2019
Dr Cash $15 000 000
Cr Share capital $15 000 000
1 July 2019
Dr First call $5 250 000 (15 000 000 x 0.35)

Dr Second call $2 250 000 (15 000 000 x 0.15)
1 September 2019
Dr Cash $5 250 000
Cr First call $5 250 000
1 December 2019
Dr Cash $2 250 000
Cr Second call $2 250 000
In July 2019, Mooloolaba Ltd calls for public subscriptions for 10 million shares.
The issue price per share is $1.20, to be paid in three parts, these being $0.50 on
application, $0.40 within one month of the shares being allotted and $0.30 within two
months of the first and final call, with the call for final payment being payable on 1
September 2019.
By the end of July, when applications close, applications have been received for 12
million shares; that is, two million in excess of the amount to be allotted.
1–31 July 2019
Dr Bank trust $6 000 000 (12 000 000 x 0.5)
Cr Application $6 000 000
for shares issued as partly paid (cont.)
We will assume that the excess funds are used to offset the amount due on
allotment ($0.40 per share), and that all subscribers will receive an allotment of
shares on a pro rata basis

1 August 2019
Dr Application $5 000 000 (10 000 000 x 0.5)
(to allot the shares as partly paid to $0.50)
Dr Allotment $4 000 000 (10 000 000 x 0.4)
Dr Call $3 000 000 (10 000 000 x 0.3)
Dr Application $1 000 000 (7 000 000 – 6 000 000)
Cr Allotment $1 000 000
Cr Bank trust $6 000 000
for shares issued as partly paid (cont.)
We will assume that the excess funds are used to offset the amount due on
allotment ($0.40 per share), and that all subscribers will receive an allotment of
shares on a pro rata basis.
30 August 2019
Dr Cash at bank $3 000 000 (10 000 000 x 0.3)
Cr Allotment $3 000 000
(to recognise the receipt of amounts due on allotment)
It is assumed that all amounts due on allotment are paid.

1 September 2019
Cr Call $3 000 000
Redemption of preference shares (cont.)
• To recognise issue of preference shares
Debit Cash at bank

Credit Share capital—preference shares
• To eliminate preference shares and create ‘capital

redemption reserve’
Debit Share capital—preference shares

Credit Capital redemption reserve
• To redeem shares out of profits

Debit Retained earnings
Credit Cash
• Further entry required pursuant to amendments to the

Corporations Act
Debit Capital redemption reserve

Forfeited shares (cont.)
To record the call
Debit Call
To record receipt of call monies

Debit Cash at bank
Credit Call
To record forfeiture of shares
Debit Share capital
Credit Call
Credit Forfeited shares account

To recognise amount received on sale of forfeited shares
Debit Cash at bank
Debit Forfeited shares account

To recognise payment of costs relating to sale of shares
Credit Cash at bank
To recognise return of remaining monies to original

shareholders
Credit Cash at bank

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Week 2: accounting for properties

General procedure (AASB 116)

Credit Revaluation surplus

The revaluation surplus is part of shareholders’ funds (owners’ equity)

If a revalued asset is a depreciable asset, any balance of accumulated depreciation

is credited to the asset account prior to revaluation (AASB 116)

Journal entry (net-amount method)

five years, after which time it will have no residual value.

value, which was assessed as $45 000.

Answer: Fair value – Carrying amount (Cost – Acc. Depreciation.)

$45 000 – ($40 000 – $15 000) = $20 000

The journal entries on 1 July 2018 would be:

Dr Accumulated depreciation—machinery $15 000

Cr Machinery $15 000

Dr Machinery $20 000

Cr Revaluation surplus $20 000

revalued to its fair value of $350 000

What are the journal entries?

Fair value – Carrying amount (Cost – Acc. Depreciation.)

$350 000 – ($400 000 – $190 000) = $140 000

Dr Accumulated depreciation $190 000

Cr Building $190 000

Cr Revaluation surplus $140 000

Alternative method (AASB 116)

Accumulated depreciation may be restated proportionately with the change in gross

This is referred to as the gross method

Credit Accumulated depreciation

Credit Revaluation surplus

In line with the (somewhat outdated) concept of conservatism, revaluation

decrements are recognised as an expense in the statement of comprehensive

Journal entry (AASB 116)

Dr Loss on revaluation of asset

revalued to its fair value of $150 000

What are the journal entries?

Fair value – Carrying amount (Cost – Acc. Depreciation.)

$150 000 – ($400 000 – $190 000) = $60 000

Dr Accumulated depreciation $190 000

Cr Building $190 000

Dr Loss on revaluation of building $60 000

Cr Building $60 000

For an asset class, reversals of previous revaluations should be recorded by the

reverse of the initial revaluation entries

the entries are:

Dr Loss on revaluation (the excess, if any)

However, the market value falls to $140 000 on 30 June 2019

Prepare relevant journal entries.

Dr Land $200 000

Cr Cash $200 000

Dr Land $90 000

Cr Revaluation surplus $90 000

Dr Revaluation surplus $90 000

Dr Loss on revaluation of land $60 000

Cr Land $150 000

If a revaluation increment reverses a previous decrement for the same asset:

value of $270 000

Prepare relevant journal entries.

30/6/2018: Revaluation decrement $200 000 - $150 000 = $50 000

30/6/2020: Revaluation increment $270 000 - $150 000 = $120 000

Dr Land $200 000

Cr Cash $200 000