The journal entries have been shown below:
ChiHerbal Ltd. |
||||
General Journal |
||||
Date |
Particulars |
Dr./Cr. |
Amount ($) |
Amount ($) |
2017 |
||||
1-Aug |
Cash Trust |
Dr. |
2,300,000 |
|
To Share Application |
Cr. |
2,300,000 |
||
(Cash received on application) |
||||
15-Aug |
Share Application |
Dr. |
1,500,000 |
|
Share Allotment |
Dr. |
1,250,000 |
||
To Share Capital |
Cr. |
2,750,000 |
||
(Being 500000 shares alloted) |
||||
Cash |
Dr. |
2,300,000 |
||
To Cash Trust |
Cr. |
2,300,000 |
||
(Being money received transferred) |
||||
Share Application |
Dr. |
800,000 |
||
To Share Allotment |
Cr. |
550,000 |
||
To Calls in Advance |
Cr. |
250,000 |
||
(Allocation of Application money received amongst allotment and calls in advance) |
||||
Share Issues Costs / (Share capital) |
Dr. |
36,000 |
||
To Cash |
Cr. |
36,000 |
||
(Being prospectus, legal and stamp duty costs paid) |
||||
30-Aug |
Cash |
Dr. |
700,000 |
|
To Share Allotment |
Cr. |
700,000 |
||
(Being cash received on share allotment) |
||||
2018 |
||||
1-May |
Call 1 |
Dr. |
750,000 |
|
To Share Capital |
Cr. |
750,000 |
||
(Being call 1 of $1.5 per share done) |
||||
Calls in Advance |
Dr. |
150,000 |
||
To Call 1 |
Cr. |
150,000 |
||
(Being Calls in Advance adjusted for 100000 shares) |
||||
15-Jun |
Cash |
Dr. |
577,500 |
|
To Call 1 |
Cr. |
577,500 |
||
(Being call 1 received) |
||||
1-Jul |
Call 2 |
Dr. |
500,000 |
|
To Share Capital |
Cr. |
500,000 |
||
(Being call 2 of $1.5 per share done) |
||||
Calls in Advance |
Dr. |
100,000 |
||
To Call 2 |
Cr. |
100,000 |
||
(Being Calls in Advance adjusted for 100000 shares) |
||||
30-Jul |
Cash |
Dr. |
385,000 |
|
To Call 2 |
Cr. |
385,000 |
||
(Being call 2 received) |
||||
1-Sep |
Share Capital |
Dr. |
120,000 |
|
To Call 1 |
Cr. |
22,500 |
||
To Call 2 |
Cr. |
15,000 |
||
To Forfeited Shares Liability |
Cr. |
82,500 |
||
(Being 15000 shares forfeited) |
||||
15-Sep |
Cash |
Dr. |
90,000 |
|
Forfeited Shares Liability |
Dr. |
30,000 |
||
To Share Capital |
Cr. |
120,000 |
||
(Being reissue of shares made) |
||||
Share Issues Costs / (Share capital) |
Dr. |
4,000 |
||
To Cash |
Cr. |
4,000 |
||
(Being brokerage costs paid) |
||||
30-Sep |
Forfeited Shares Liability |
Dr. |
52,500 |
|
To Cash |
Cr. |
52,500 |
||
(Being balance returned to the former shareholders) |
The journal entries and the requisite workings in regard with the same has been shown below:
Workings |
||
Sl. No |
Particulars |
Amount |
1 |
Cost of Truck A |
90,000 |
Residual Value |
10,000 |
|
Depreciable Value |
80,000 |
|
Depreciable life |
5 |
|
Depreciation each year |
16,000 |
|
2 |
Cost of Equipment |
140,000 |
Residual Value |
– |
|
Depreciable Value |
140,000 |
|
Depreciable life (Years) |
10 |
|
Depreciation each year |
14,000 |
|
Depreciation till 01st Sep |
2,333 |
|
Carrying Value as on 01st Sep |
137,667 |
|
Fair value of the equipment |
115,000 |
|
Downward Revaluation |
22,667 |
|
Remaining Life (years) |
8 |
|
Depreciation per year |
14,375 |
|
3 |
Depreciation on Truck till 01st March |
14,667 |
Carrying Value as on 01st March |
75,333 |
|
Selling Value |
59,000 |
|
Loss on Sale of Truck |
16,333 |
|
4 |
Depreciation on Equipment |
11,979 |
(from 01st Sep’17 to 30th Jun’18) |
||
Depreciation on Equipment |
2,333 |
|
(from 30th Jun’17 to 01st Sep’17) |
||
Total Depreciation for the year |
14,313 |
|
5 |
Carrying Value of Equipment as on 30th Jun’18 |
100,688 |
Fair value of the equipment |
120,000 |
|
Upward Revaluation |
19,313 |
ChiHerbal Ltd. |
||||
General Journal |
||||
Date |
Particulars |
Dr./Cr. |
Amount ($) |
Amount ($) |
2017 |
||||
1-Apr |
Vehicle – Truck A |
Dr. |
90,000 |
|
To Cash |
Cr. |
90,000 |
||
(Being cash paid for truck) |
||||
30-Jun |
Depreciation on Truck A |
Dr. |
4,000 |
|
To Accumulated Depreciation on Truck A |
Cr. |
4,000 |
||
(Being depreciation on truck charged) |
||||
30-Jun |
Equipment |
Dr. |
140,000 |
|
To Cash |
Cr. |
140,000 |
||
(Being cash paid for equipment) |
||||
31-Aug |
Repair and Maintenance |
Dr. |
2,500 |
|
To Cash |
Cr. |
2,500 |
||
(Being transmission repairs and oil change for Truck A |
||||
1-Sep |
Revaluation Loss (WN -2) |
Dr. |
22,667 |
|
To Equipment |
Cr. |
22,667 |
||
(Being equipment revalued at fair value) |
||||
2018 |
||||
1-Mar |
Depreciation on Truck A |
Dr. |
10,667 |
|
To Accumulated Depreciation on Truck A |
Cr. |
10,667 |
||
(Being depreciation on truck charged) |
||||
1-Mar |
Cash (WN- 3) |
Dr. |
59,000 |
|
Accumulated Depreciation on Truck A |
Dr. |
14,667 |
||
Loss of sale of Truck A |
Dr. |
16,333 |
||
To Vehicle – Truck A |
Cr. |
90,000 |
||
(Being truck sold at loss) |
||||
30-Jun |
Depreciation on Equipment (WN -4) |
Dr. |
14,313 |
|
To Accumulated Depreciation on Equipment |
Cr. |
14,313 |
||
(Being depreciation on equipment charged) |
||||
30-Jun |
Equipment (WN -5) |
Dr. |
19,313 |
|
To Revaluation Loss (WN -5) |
Cr. |
19,313 |
||
(Being equipment revalued at fair value) |
The journal entries, workings and the schedule of the lease payments and receipts for the entire lease term has also been shown below:
Inputs for the question |
|
Economic Life of Asset (in years) |
7 |
Lease term (in years) |
5 |
Interest Rate |
9% |
Fair value (cash cost) of asset |
35322 |
Annual lease payment |
8000 |
Carrying value of asset |
31000 |
Estimated Residual value of asset |
3000 |
Guaranteed Residual value at end of lease term |
2160 |
Workings for the lessee |
|
Present Value of Minimum lease payments |
33918 |
(n=5 years, I=9%) |
|
Present Value of Guaranteed residual value |
1404 |
(n=5 years, I=9%) |
|
Total Lease Liability |
35321 |
Workings for the lessor |
|
Carrying value of asset |
31000 |
Present value of the estimated Residual value of asset |
1641 |
(n=7 years, I=9%) |
|
Guaranteed present residual value by lessee |
1404 |
Amount to be recovered from lessee |
31237 |
First install met amount |
8000 |
Amount to be recovered in 4 instalments |
23237 |
PV factor of annuity due (I=9%, n=4 years) |
3.2397 |
Annual Payment Required |
7173 |
Lease Schedule: ChiHerbal Ltd. |
||||
Date |
Lease Payment |
Interest Expense |
Reduction in Liability |
Lease Liability |
1/7/2017 |
35,321.38 |
|||
1/7/2017 |
8,000.00 |
– |
8,000.00 |
27,321.38 |
30/06/2018 |
8,000.00 |
2,458.92 |
5,541.08 |
21,780.31 |
30/06/2019 |
8,000.00 |
1,960.23 |
6,039.77 |
15,800.54 |
30/06/2020 |
8,000.00 |
1,422.05 |
6,577.95 |
9,322.58 |
30/06/2021 |
8,000.00 |
839.03 |
7,160.97 |
2,161.62 |
ChiHerbal Ltd. |
||||
General Journal |
||||
Date |
Particulars |
Dr./Cr. |
Amount ($) |
Amount ($) |
2017 |
||||
1-Jul |
Leased Machine under capital lease |
Dr. |
35,321 |
|
To Lease liability |
Cr. |
35,321 |
||
(Being lease liability Booked) |
||||
1-Jul |
Lease Liability |
Dr. |
8000 |
|
To Cash |
Cr. |
8000 |
||
(Being lease instalment paid) |
||||
2018 |
||||
30-Jun |
Lease Liability |
Dr. |
5,541.08 |
|
Interest Payable |
Dr. |
2,458.92 |
||
To cash |
Cr. |
8,000.00 |
||
(Being lease instalment paid) |
||||
2019 |
||||
30-Jun |
Lease Liability |
Dr. |
6,039.77 |
|
Interest Payable |
Dr. |
1,960.23 |
||
To cash |
Cr. |
8,000.00 |
||
(Being lease instalment paid) |
Lease Schedule: Cessnock Ltd. |
||||
Date |
Lease Payment |
Interest Expense |
Reduction in Liability |
Lease Liability |
1/7/2017 |
31,237.22 |
|||
1/7/2017 |
8,000.00 |
– |
8,000.00 |
23,237.22 |
30/06/2018 |
7,172.64 |
2,091.35 |
5,081.29 |
18,155.92 |
30/06/2019 |
7,172.64 |
1,634.03 |
5,538.61 |
12,617.31 |
30/06/2020 |
7,172.64 |
1,135.56 |
6,037.09 |
6,580.22 |
30/06/2021 |
7,172.64 |
592.22 |
6,580.42 |
(0.20) |
Cessnock Ltd. |
||||
General Journal |
||||
Date |
Particulars |
Dr./Cr. |
Amount ($) |
Amount ($) |
2017 |
||||
1-Jul |
Lease Receivable |
Dr. |
31,237 |
|
To Leased Machine |
Cr. |
31,237 |
||
(Being lease receivable recorded) |
||||
1-Jul |
Cash |
Dr. |
8,000.00 |
|
To Lease Receivable |
Cr. |
8000 |
||
(Being lease instalment received) |
||||
2018 |
||||
30-Jun |
Interest Receivable |
Dr. |
2,091.35 |
|
To Interest Revenue |
Cr. |
2,091.35 |
||
(Being interest revenue recorded) |
||||
30-Jun |
Cash |
Dr. |
9,263.99 |
|
To Interest Receivable |
Cr. |
2,091.35 |
||
To Lease Receivable |
Cr. |
7,172.64 |
||
(Being lease instalment received) |
||||
2018 |
||||
30-Jun |
Interest Receivable |
Dr. |
1,634.03 |
|
To Interest Revenue |
Cr. |
1,634.03 |
||
(Being interest revenue recorded) |
||||
30-Jun |
Cash |
Dr. |
8,806.68 |
|
To Interest Receivable |
Cr. |
1,634.03 |
||
To Lease Receivable |
Cr. |
7,172.64 |
||
(Being lease instalment paid) |
In the given case, the company ChiHerbal Ltd has undertaken a project for the online sales team under which the all the sales representatives of the company will be equipped with special hologram projecting equipment which would be able to project the accurate image of the item ordered by the customers. But the same is still under progress in spite that the company expected it to go live by the end of 2017. Errors have been detected during the experimental testing phase and therefore the application for patent has been delayed. The company is now considering to sell it to other company in the marketplace but the marketing department of the company has confirmed that there is no conclusive evidence of existence of for such a market for new product now. The question here is whether this expenses can be capitalised in the books of company as developmental expenses or should be charged off to expense.
As per AASB 138, Para 51 on the intangible assets, an internally generated asset can qualify for recognition only if it has identifiable future economic benefits flowing to the entity and where the cost of generating the asset can be determined reliably. As per Para 52, All the expenses can be broadly classified into two parts: the research phase and the development phase. If the entity is not able to distinguish between the research and the development phase, the entire thing is treated as research cost and charged off to the profit and loss account. As per Para 57, any expense can be categorised as development expense if it satisfies all the following criteria’s namely:
In the given case though the intension and the use of the asset us clear and also the cost incurred to develop the same is available but adequate research has not been made to check if the market for same exists or not and hence it does not qualifies as an asset. Therefore, in case the technology is not being used by the company, it should be charged off to profit and loss account as the research expense.
Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview Analysis. Ecological Economics, p. 145.
Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish Business. Financial Environment and Business Development, 4(3), pp. 103-112.
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