Problem 1: Long Service Leave
Darwin Ltd has five employees. According to their particular employment award, longservice leave can be taken after 12 years, at which time the employee is entitled to 10 weeks’
leave. If an employee were to leave before the completion of 12 years’ service, no entitlement
would be paid.
High-quality corporate bond rates exist with periods to maturity that exactly match the
various periods that must still be served by the employees before LSL entitlements vest with
them.
The projected inflation rate for the foreseeable future is 2 per cent. The projected
probabilities that the employees will stay long enough for the LSL to vest—that is, for a total
of 12 years—are as follows:
Name of
Employees
Current
Salary
Years of
service
Years until
LSL vests
Bond rate
(%)
Probability
(%) that LSL
will vest
Black 40 000 2 10 8.0 15
White 40 000 4 8 7.0 20
Brown 50 000 6 6 6.5 50
Green 60 000 8 4 6.0 70
Purple 70 000 10 2 5.8 90
Required
(a) Calculate Darwin Ltd.’s current obligation for long-service leave. 05
(b) If the opening provision for long-service leave is $12 500, provide the journal entry to
record Darwin Ltd.’s long-service leave expense. 05
Problem 2: Share capital
Darwin Ltd issues a prospectus inviting the public to subscribe for 10 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 12 million shares during July 2019. The directors allot 10
million shares on 5 August 2019. All applicants receive shares on a pro rata basis. The
amounts payable on allotment are due by 5 September 2019.
By 5 September 2019 the holders of 2 million shares have failed to pay the amounts due on
allotment. The directors forfeit the shares on 10 September 2019. The shares are resold on 15
September 2019 as fully paid. An amount of $1.80 per share is received.
Required
Provide the journal entries necessary to account for the above transactions and events. 10
Question 3: Accounting for Lease
Darwin Ltd leased a truck from a truck dealer, City Vans Ltd. City Vans Ltd acquired the
truck at a cost of
$180 000. The truck will be painted with Darwin Ltd’s logo and advertising and the cost of
repainting the truck to make it suitable for another owner four years later is estimated to be
$40 000. Darwin Ltd plans to keep the truck after the lease but has not made any commitment
to the lessor to purchase it. The terms of the lease are as follows:
• Date of entering lease: 1 July 2019.
• Duration of lease: four years.
• Life of leased asset: five years, after which it will have no residual value.
• Lease payments: $100 000 at the end of each year.
• Interest rate implicit in the lease: 10 per cent.
• Unguaranteed residual: $50 000.
• Fair value of truck at inception of the lease: $351 140.
Required
(a) Demonstrate that the interest rate implicit in the lease is 10 per cent. 01
(b) Prepare the journal entries to account for the lease transaction in the books of the lessor,
City Vans Ltd, at 1 July 2019 and 30 June 2020. 03
(c) Prepare the journal entries to account for the lease transaction in the books of the lessee,
Darwin Ltd. at 1 July 2019 and 30 June 2020. 03
(d) On 30 June 2023 Darwin Ltd. pays the residual of $50 000 and purchases the truck. all
journal entries in the books of Darwin Ltd. for 30 June 2023 in relation to the termination of
the lease and the purchase of the truck. 03
Problem 4: The Statement of Cash flows
Read the article adopted from Carol Altman’s in Financial Accounting in the Real world 19.5
(on page 739 of your text book), ‘Cooking the books the Harris Scarfe way’, and then answer
the following questions:
(a) What does ‘cook the books’ mean? 02
(b) How would a reader of financial statements know if the books had been cooked? 04
(c) Is it likely that creative accounting was employed to the statement of cash flows? Why
or why not? 04
Sample Solution
