IAsgns3+solution.docx
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IAsgns3+solution.docx
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IAsgns3+solution
LESSON3
Suggestedsolutions
Question1(24marks)
Part(a)—Newaccounts(3marks)
Studentsmustaddthefollowingaccountsinthechartofaccounts:
Accountingerrorcorrection—balancesheet
Cashdividends—balancesheet
Stockdividends—balancesheet
Excessofretirementpriceoverissue—balancesheet
Lossonexpropriation—incomestatement
Part(b)—Adjustingentries(12marks)
Item(a)—June1,20X5(distributionofstockdividend)
DrStockdividends30,000
CrOrdinaryshares30,000
Torecordthedistributionofstockdividends
(15,0000.10=1,500sharesat€20each)
Item(b)—July1,20X5
DrLossonexpropriation135,500
DrBank—currentaccount1,750,000
DrAccumulateddepreciation—Plant(Vienna)264,500
CrLand(Vienna)1,250,000
CrPlant(Vienna)900,000
TorecordtheexpropriationoflandandplantinVienna.
Thetotalbookvalueof€1,250,000+€900,000€264,500
lesscompensationof€1,750,000resultsinalossof€135,500.
Item(c)—October1,20X5(declarationdateofcashdividend)
DrCashdividends2,475
CrDividendspayable2,475
(15,000+1500)(0.15)
November1,20X5(dateofdividendpayment)
DrDividendspayable2,475
CrBank—currentaccount2,475
Item(d)—November1,20X5
DrOrdinaryshares15,760
DrExcessofretirementpriceoverissue3,740
CrBank—currentaccount19,500
Torecordretirementof1,000ordinarysharesfor€19.50pershare
1,000[(€230,000+€30,000)(15,000+1,500)]=€15,758
Item(e)—December31,20X5
DrAccountingerrorcorrection15,000
CrAccumulateddepreciation—plant
(Salzburg)15,000
TocorrectunderstatementofdepreciationexpenseforSalzburg
plantin20X4.
Part(c)—Statementofretainedearnings(9marks)
WATCANMICROSCO.
StatementofRetainedEarnings
fortheperiod1/1/X5to12/31/X5
Beginningretainedearnings
Retainedearnings€1,091,550.00
Accountingerrorcorrection15,000.00
Adjustedretainedearnings1,076,550.00
Add:
Netprofit(Loss)516,930.00
Deductdividends:
Cashdividends2,475.00
Stockdividends30,000.00
Totaldividends32,475.00
Otheradjustmentstoretainedearnings
Excessretirementpriceoverissueprice3,740.00
Totaladjustments(3,740.00)
Endingretainedearnings€1,557,265.00
Question2(10marks)
(2markseach)
a.1)€320,000
(€860,000–€500,000)–€40,000
b.1)€0
Cashdividendswerenotpaid;stockdividendsdidnotusecash.
c.4)€1,131,500
Openingretainedearnings,lessdividends,lesstheexcessofretirementpriceofordinarysharesoveroriginalissueandpriorcontributedcapital:
€1,435,000–€350,000–€246,000–€3,000(€216,000–€250,000+€31,000)=€836,000.Actualbalance,€1,967,500,sothe€1,131,500differenceisnetprofit.
d.3)€250,000
Given
e.2)€220,000
Openingbalance,€450,000,lesssharesretired,€216,000,plusstockdividend,€246,000,equals€480,000.Actualclosingbalance,€700,000.Thedifferencemustequalsharesissued.
Question3(16marks)
Requirement1(12marks:
1markeachforentriesa,b,f,andg;2marksforc;and3 markseachfordande)
Torecordinitialsaleofshares(notrequired):
Cash840,000
Ordinaryshares(60,000shares€14)840,000
a.Torecordpurchaseof500sharesoftreasurystockat€20:
Treasurystock10,000
Cash(500shares€20)10,000
b.Torecordpurchaseof500sharesoftreasurystockat€22:
Treasurystock11,000
Cash(500shares€22)11,000
c.Torecordsaleof600sharesoftreasurystockat€25:
Cash(600shares€25)15,000
Treasurystock(Averagecost=€21,000/1,000=€21600)12,600
Contributedcapitalfromtreasurystocktransactions2,400
d.Torecordsaleof200sharesoftreasurystockat€18:
Cash(200shares€18)3,600
Contributedcapitalfromtreasurystocktransactions600
Treasurystock(200shares€21)4,200
e.Torecordretirementof100sharesoftreasurystock:
Ordinaryshares(100€14*)1,400
Retainedearnings700
Treasurystock(100€21)2,100
*Originalissueprice,or€840,000/60,000shares.
Thisisaretirementandthusthecontributedcapitalfrompriortreasurystocktransactions(resale)maynotbeusedasthedebit.
f.Memoentry:
Splitordinaryshares3for1;therearenow179,700(59,9003)sharesoutstanding,ofwhich300(1003)areinthetreasury.
g.Torecorddividendpaymentof€0.75perordinaryshare:
Retainedearnings(ordividends)(179,700–300)€0.75134,550
Cash134,550
h.Tocloseincomeforfiscal20X6toretainedearnings:
Incomesummary45,000
Retainedearnings45,000
Thisentryneednotbemade,aslongastheincreaseinretainedearningsisincludedintheclosingbalanceinrequirement2.
Requirement2(4marks)
Amountsshouldbeconsistentwithentries.
Ordinaryshares(€840,000–1,400)€838,600
Contributedcapitalfromtreasurystocktransactions(€2,400–600)1,800
Retainedearnings(€660,000+€45,000–€700–€134,550)569,750
Treasurystock(300sharesaveragecost,€7)…(2,100)
Question4(14marks)
a.(3marks)
TheIASBFrameworkdefinitionof“gains”and“losses”excludesgainsandlossesontransactionsaffectingacorporation’sownshares.Essentially,acorporationcannotrecognizeagainorlossfromtransactionsinvolvingitsownequity.Therefore,anygainsarerecordedascontributedcapital,appropriatelydesignated.Losses,totheextentthattheycannotbeoffsetagainstappropriatecontributedcapitalaccounts,aredebitedtoretainedearningsonthepresumptionthattheyrepresentareturnofequitytotheshareholderinvolvedinthetransaction.
b.(2marks)
Thepurposeofrestrictingorappropriatingretainedearningsistoconstrainacertainamountofaccumulatedearningsforaspecificpurpose.Thiscommunicatestofinancialstatementreadersthefactthatretainedearningsarenotavailablefordistribution,becauseofeitheranoutsiderestrictionoraninternaldecision.
c.(4marks)
Whenapropertydividendisdeclared,thedividendisrecordedatthemarketvalueofthepropertydistributed.Therefore,againorlossondisposalofthepropertymustberecorded.Thegainorlossisthedifferencebetweenthemarketvalueandcarryingvalueofthepropertydistributed,measuredatthedeclarationdate.
Aspin-offisadistributionofnon-cashassetstoshareholders,wherethenon-cashassetisashareofanothercompany.Itisrecordedatbookvalue,notmarketvalue.(Thismeasurementruleisdeemedappropriatebecauseinsubstancetherehasbeennochangeincontrolovertheinvestmentshares.)
d.(5marks)
Agroupofindividualsmightchoosetoincorporatetoestablishlimitedlegalliabilityforthepartner/owners,tofacilitatecapitalaccumulation,ortomakeiteasiertotransferownership.Negativeaspectsofincorporatingincludethepotentialforincreasedtaxationinvariousways,difficultiesofcontrol,themorelimitedpowerof(alwaysoutvoted)minorityshareholders,andgenerallyhigherlegalandaccountingcostsofoperation.
Question5(16marks)
CaseA(3marks)
Preferencenon-cumulative,non-participating:
YearTotalPaidPreferenceOrdinary
1€4,000€4,000€0
2€40,000€6,000€34,000
3€32,000€6,000€26,000
4€5,000€5,000€0
5€42,000€6,000€36,000
CaseB(3marks)
Preferencecumulative,non-participating:
1Partial€4,000€4,000€0
2Arrears€2,000
Current6,000€32,000
Total€40,000€8,000€32,000
3€32,000€6,000€26,000
4Partial€5,000€5,000€0
5Arrears€1,000
Current6,000€35,000
Total€42,000€7,000€35,000
CaseC(5marks)
Preference,cumulative,fullyparticipating:
1Preference,current(partial)€4,000€4,000€0
2Preference,inarrears€2,000
Preference,current6,000
Ordinary,tomatch€24,000
Balance:
preference1/5,ordinary4/5*1,6006,400
Total€40,000€9,600€30,400
3Preference,current€6,000
Ordinary,tomatch€24,000
Balance:
preference1/5,ordinary4/5*4001,600
Total€32,000€6,400€25,600
4Preference,current(partial)€5,000€5,0000
5Preference,inarrears€1,000
Preference,current6,000
Ordinary,tomatch€24,000
Balance:
preference1/5,ordinary4/5*2,2008,800
Total€42,000€9,200€32,800
*Participation:
Preference=1/5=€6,000/(€6,000+€24,000)
Ordinary=4/5=€24,000/(€6,000+€24,000)
CaseD(5marks)
Preference,cumulative,partiallyparticipatinguptoanadditional€0.40/shareor€2,000
(5,000€0.40):
1Preference,current(partial)€4,000€4,000€0
2Preference,inarrears€2,000
Preference,current6,000
Ordinary,tomatch€24,000
Balance,preference1/5(nottoexceed
5,000€0.40=€2,000),ordinary4/51,6006,400
Total€40,000€9,600€30,400
3Preference,current€6,000
Ordinary,tomatch€24,000
Balance:
preference1/5(limit€2,000),
ordinary4/54001,600
Total€32,000€6,400€25,600
4Preference,current(partial)€5,000€5,000€0
5Preference,inarrears€1,000
Preference,current6,000
Ordinary,tomatch€24,000
Balance:
preference1/5(limit€2,000),
ordinary4/5orremainder2,0009,000
Total€42,000€9,000€33,000
Question6(20marks)
Caseanalysissolution
Overview
ManufacturedProductsLimited(MPL)isapubliccompanyandmustcomplywithGAAPtoreceiveanunqualifiedauditopinionandmeettherequirementsofanystockexchange.ToearnalistingonthePSE,itmustmeetsizethresholds,wheresizeismeasuredasassetsandsales.Maximizingtheseitemsisthereforeanobjectiveoffinancialreporting.Thecompanyisvolatileandthereforerisky,asisshownbythereferenceto
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