Accounting: Westros Ltd's Purchase

Topics: Balance sheet, Generally Accepted Accounting Principles, Depreciation Pages: 19 (1620 words) Published: September 22, 2014

Westros Ltd buys a throne building business from Essos Ltd on 1st July 2014. The items are shown at their carrying amount in Essos Ltd’s accounting records and at the fair values estimated by Westros Ltd.

Item
Cost
Accumulated depreciation/ amortisation
Carrying amount
Fair value

$
$
$
$
Accounts receivable
100,000

100,000
90,000
Land and buildings
800,000

400,000
600,000
Plant & Equipment
250,000
200,000
50,000
70,000
Precious metals and jewels
525,000

525,000
570,000
Accounts payable
105,000

105,000
105,000

Included in the purchases by Westros Ltd was an identifiable intangible asset for a Patent developed by Essos Ltd for securing the gilding to the thrones. The Patent has a fair value of $100,000.

The purchase consideration for the business consisted of $750,000 in cash, plus 500,000 ordinary shares in Westros Ltd, fully paid. Westros Ltd ordinary shares are presently trading on the stock exchange for $1.50. Westros Ltd also incurred legal fees of $2,500.

Required:
Prepare the journal entries to record the purchase by Westros Ltd and the payment to Essos Ltd.

Key numbers:
Goodwill $175,000
Question 2 – 10 marks

Arryn Ltd, an Australian company, acquires all the issued shares of Greyjoy Inc, a company operating in the United States, on 1 July 2013 at a cost of AUD $450,000. Relevant exchange rates for the year to 30 June 2014 are as follows: Exchange rates

1$US = $AUD
1 July 2013
1.70
Average rate for year
1.80
Ending inventory
1.95
30 June 2014
2.00
The income statement of Greyjoy Inc for the year to 30 June 2014 (i.e. one year after the date of acquisition) is shown below: Income Statement for the year ended 30 June 2014

$US

$000
Sales revenue
1,000
Cost of sales

Opening inventory
200
Purchases
800
Ending inventory
180

820
Gross Profit
180
Expenses

Administration
10
Interest
20
Depreciation
40
Total expenses
70
Operating profit before tax
110
Income tax expense
50
Operating profit after tax
60
Retained Profits - 1 July 2013
60
Total available for appropriation
120
Interim dividend paid
20
Retained Profits - 30 June 2014
100
Required
Translate the income statement of Greyjoy Inc for the financial period 30 June 2014 in accordance with AASB 121. Key numbers:
Translated retained profits – 30th June 2014
203
Question 3 – 22 marks

On 1st July 2014 Lannister Ltd entered into a contract with Stark Ltd to lease equipment for four years at an annual cost of $40,000 payable on the 30th June each year. Included in this $40,000 is $10,000 for insurance and maintenance. An initial amount of $15,000 is payable at the inception of the lease. The contract provides for a guaranteed residual at the end of the lease term of $12,000. The rate of interest implicit in the lease is 12% and the reporting date is 30th June. The machinery will depreciate on a straight line basis and is expected to have an economic useful life of 5 years. At the inception of the lease the machinery had a fair value of $113,745. Required

According to the requirements of AASB 117:
From the point of view of Lannister Ltd, show calculations that support that the implicit interest rate in the lease is 12%. The Present Value tables are shown below.
[6 marks]
Prepare general journal entries in the books of the lessee, Lannister Ltd, to record the lease over its life. Narrations are not required for the general journal. Round all calculations to the nearest dollar where necessary. [16 marks]

Present Value Tables:

Present Value of $1 in n periods [Appendix A]
n
4.0%
5.0%
6.0%
7.0%
8.0%
10.0%
12.0%
15.0%

1
0.9615
0.9524
0.9434
0.9346
0.9259
0.9091
0.8929
0.8696
2
0.9246
0.9070
0.8900
0.8734
0.8573
0.8264
0.7972
0.7561
3
0.8890
0.8638
0.8396
0.8163
0.7938
0.7513
0.7118
0.6575
4
0.8548
0.8227
0.7921
0.7629
0.7350
0.6830
0.6355
0.5718
5...
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