Question

In its ongoing efforts to make the student life easier, Large Mart is currently attempting to develop a “study pillow” which will allow students to upload study material into their brain whilst sleeping. However, Large Mart has recently discovered that an American company called Bpple already holds a patent for this type of device. As a result, Large Mart has given up on its development attempts and decided to sell the Bpple product, which is called iSLEEP. In order to sell the iSLEEP, Large Mart has rented a second store in Armidale. Large Mart signs a one year renting contract on 1st May 201x. The rent for the store will be $250 per month, and the renting contract requires Large Mart to pay rent at the end of every quarter (this means that Large Mart will pay the rent for January/February/March at end of March, the rent for April/May/June at the end of June, the rent for July/August/September at the end of September, and the rent for October/November/December at the end of December). As soon as the renting contract for the new store is signed, Large Mart employs a UNE student (Morgan) to manage an iSLEEP fan-site on Facebook. Morgan is employed for 2 hours every day of the week (7 days a week). He starts his jobs on 1st May 201x and will be paid $30 per hour. Morgan’s wage for the month will be paid on the last day of the month. However, instead of receiving his entire wage in cash at the end of the first month, Morgan receives a flat-screen TV (with a value of $1,000) from the store’s inventory and a cash payment for the difference between the value of the TV and his overall wage. The furniture in the new store is designed and manufactured in Melbourne. An important part of the store design is a big bed on which customers can lie to test the iSLEEP before purchasing the product. The bed is delivered on 1st June 201x. On that day, Large Mart also receives an invoice of $40,000 from the Melbourne designer/manufacturer of the bed. When the bed was produced in Melbourne, the director of the Large Mart sales department visited the design/manufacturing team to approve the final design of the bed before the start of the manufacturing process. The director made this trip for the specific purpose of visiting the design/manufacturing team and to approve the bed. The costs of the director’s trip to Melbourne are $2,000, and all costs of this trip were incurred on credit and will be paid on 15th July 201x. After the new store is completed, Large Mart orders 20 iSLEEPs from Bpple for a price of $400 per iSLEEP, and these iSLEEPs arrive on 1st June 201x, and are paid via bank transfer 5 days later. On 5th June 201x, UNE purchases 15 iSLEEPs for the library for a price of $2,000 per iSLEEP on credit. UNE then pays the iSLEEPs on 6th June 201x. On 6th June 201x, Large Mart purchases another 60 iSLEEPs from Bpple for a special price of $450. Normally the iSLEEP would currently cost $460, but Large Mart was able to receive a volume discount of $10 for each iSLEEP. The iSLEEPs arrive on the same day, and Large Mart pays this new delivery of iSLEEPs on the next day after deducting an early payment discount of 5%. On 8th June 201x, UNE returns two of the iSLEEPs that were purchased on 5th June 201x because the library does not have sufficient space for all purchased iSLEEPs. Large Mart accepts the return, amends the original invoice on 8th June 201x, and returns the money paid for the two iSLEEPs to UNE on that day. Large Mart also keeps the two returned iSLEEPs in its inventory (valued at their full original cost) and will sell them again at a later date. On 12th June 201x, Large Mart sells 5 iSLEEPs to Wright College for $1,600 per iSLEEP. Wright College pays via bank transfer on the same day. On 1st July 201x, Large Mart leases a company car for the service department of the new store (called the “Nerd Herd”). The duration of the lease is 6 years, and the car has an expected useful life of 8 years. The lease contract requires Large Mart to pay $3,000 at the time the lease is signed. This payment is made via a bank transfer. A further $9,000 must be paid (also via bank transfer) on 30th June of each year during the lease period. The lease contract states that Large Mart cannot cancel the lease once the contract is signed. At the end of the lease period, Large Mart will be able to retain the car without having to pay any additional amount. The interest rate in the lease is 12%. Large Mart decided to enter into the lease agreement instead of purchasing the car because the purchase price would have been $40,500 and Large Mart did not have sufficient cash resources to make such a purchase at that time. IMPORTANT NOTE: Large Mart has decided to use the exemption rules outlined in AASB 16, paragraphs 5-8 for all leased items to which these exemptions apply. Please answer the following questions about the scenario outlined above:

Question 2) Provide all journal entries that are necessary in the books of Large Mart to account for the wage of Morgan between 1st May 201x and the end of the month, as well as the “payment” of wages (in cash and the TV) on 31 May 201x (2 marks).

Question 3) Provide a detailed explanation whether or not the expenditures associated with the director’s visit to the design/manufacturing team in Melbourne are part of the cost of the bed (1.0 marks), and calculate the cost of the bed (0.5 marks).

Answer 1

For Question no. 2

On 31st May 201X
		Debit	Credit
Wages Account		$        1,000
Administrative expense account
Inventory Account			$        1,000
Output GST account			$           100
(Being TV transfer in lieu of wages for month of May 201X)
Wages Account		$           860
Cash Account			$           860
(Being Wages after adjustment of value of TV, paid to Morgan)
* Wages = $30 per hour for 2 hours for 31 days ($30*2*31 = $1860)

In above solution, I have not covered any deduction of tax deduction at source or any social security component.

For Question no. 3 (i)

As per AASB 116, all administrative expenses are considered as profit and loss item.

However, in current scenario, the trip of director is specifically taken for reviewing and approving the design of the bed. and as per the AASB 116 "any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management.". There directors visit is a must in order to get a bed manufactured in accordance with the requirement of the company to achieve it intended use.

For Question no. 3 (ii)

The cost of the bed in this situation will be $40,000 + $2,000 = $42,000. However any related costs to bring the assets to its intended location will also become part of the asset, like import duties, taxes, installation fees and initial delivery charges etc.