Tea Tree Bay Ltd acquires a Gizmo Machine from Jetsons Ltd for the following consideration:
|Land||In the books of Tea Tree Bay Ltd the land is recorded
at its cost of $100,000. It has a fair value of $140,000.
|Equipment||In the books of Tea Tree Bay Ltd the equipment is recorded at a cost of $50,000. The equipment has an accumulated depreciation balance of $20,000. The fair value of the equipment is $23,000|
|Assumption of liability||Tea Tree Bay Ltd also agrees to assume the liability of Jetsons Ltd’s bank loan of $30,000 as part of the Gizmo Machine acquisition.|
|Other costs||Tea Tree Bay Ltd also spend $5,000 as the installation cost. Testing cost was $2,500. Transportation cost for the machine was $700. During first year of operation, the company paid $650 as the maintenance cost for the machine|
Calculate the acquisition cost of the Gizmo Machine that will be used as the base for future
depreciation charge. (3 marks)
Provide the journal entries that would appear in Tea Tree Bay Ltd’s books to account for the
acquisition of the Gizmo Machine. (5 marks)
Will the maintenance cost be included in the acquisition cost of the machine? Justify your answer.
(2 marks, maximum 100 words)
RCK Ltd issues a prospectus inviting the public to subscribe for 90 million ordinary shares of $2.00
each. The terms of the issue are that $1.00 is to be paid on application and the remaining $1.00 within
one month of allotment.
Applications are received for 108 million shares during July 2018. The directors allot 90 million shares
on 15 August 2018. All applicants receive shares on a pro rata basis. The amounts payable on allotment
are due by 20 September 2018. By 20 September 2018 the holders of 18 million shares have failed to
pay the amounts due on allotment. The directors forfeit the shares on 30 September 2018.
The shares are resold on 15 October 2018 as fully paid. An amount of $2.00 per share is received. The
balance of forfeited shares is refunded on 20 October 2018.
Provide the journal entries necessary to account for the above transactions and events.
Provide some examples of items that would be adjusted directly against equity, rather than being
included as part of profit or loss. (10 marks, maximum 650 words)
Fool’s Paradise Ltd had cash and cash equivalents at 1 January 2019 of $400,000. The transactions of
Fool’s Paradise Ltd for the year to 31 December 2019 are as follows: