Question

Exercise 1.12

Definition and recognition criteria

Explain how T Ltd should account for the following items, justifying your answer by reference to the definitions and recognition criteria in the conceptual framework. Also state, where appropriate, which ledger accounts should be debited and credited.

Required

1. Photographs of the company’s founders, which are of great sentimental and historical value.
2. (a) T Ltd has been sued for negligence — likely it will lose the case.

(b) T Ltd has been sued for negligence — likely it will win the case.

3. Obsolete plant now retired from use.
4. T Ltd receives a donation of $10 000.

(LO7 and LO8)

Chapter 13:

CQ1. Explain the nature of a reserve. How do reserves differ from the other main components of equity?

Exercise 13.9

Sunshine Ltd undertook the following transactions during the financial year ended 30 June 2019.

(a) transferred $68  000 from the general reserve to retained earnings

(b) paid an interim dividend of $60  000

(c) transferred $104  000 from the asset revaluation surplus to the general reserve subsequent to the sale of an item of plant that was measured using the revaluation model

(d) used the general reserve to fund the payment of 480  000 bonus shares, these being issued at $2 per share.

Required

Prepare the journal entries in relation to these events. (LO8)

Answer 1

Answer to Exercise 1.12 :

(a) T Ltd been sued for negligence. Likely to lose the case :

This is a contingent liability. There is not accounting treatment for contingent liability since the event has not occured. However, since it is almost certain that T Ltd will lose the case, this needs to mentioned in the Notes in the Financial Report

(b) T Ltd been sued for negligence. Likely to win the case :

This is not a contingent liability since T Ltd is likely to win the case. There is not need for disclosure in the given case.

(c) Obselete plant written off :

When disposing of a plant asset, a company must remove both the asset’s cost and accumulated depreciation from the accounts. Overall, then, all plant asset disposals have the following steps in common:

•Bring the asset’s depreciation up to date.
•Record the disposal by:
-Writing off the asset’s cost.
-Writing off the accumulated depreciation.
•Recording any consideration (usually cash) received or paid or to be received or paid.
•Recording the gain or loss, if any.

(d) T Ltd receives a donation

Debit Bank A/c 10,000$

Credit Donation Received A/c 10,000$

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Answers to Exercise 13.9

(a) Transferred from General Reserve to Retained Earnings :

Debit General Reserves A/c $68000

Credit Retained Earnings A/c $68000

(b) Payment of Interim Dividend :

Debit Interim Dividend A/c $60000

Credit Bank A/c $60000

(c) Transfer from Asset Revaluation Surplus

Debit Asset Revaluation Surplus A/c $104,000

General Reserve A/c $104,000

(d) Issue of Bonus Shares

Debit General Reserve A/c $960,000

Credit Equity Share Capital A/c $960,000