Semester 1 Week 9 Tutorial 7

Question 1

1. Martinson Plc. have recently bought over the another company, Fallin Ltd. Fallin have a balance sheet total of £1,000,000 yet Martinson paid £1,300,000 for Fallin.

Why might they be willing to pay this additional amount?
How would this be accounted for?

Answer 1

1. Martinson would likely be willing to pay this additional amount in order to gain access to acquire Fallin’s intellectual property, trading history, reputation etc. This is called goodwill and should be recognised as an intangible asset on the statement of financial position.

Question 2

2. Dorian Ltd (‘Dorian’) bought a property using cash during the year ended 31 December 20X3 for £180,000. On 31 December 20X6 the property was revalued at £640,000, and in May 20X9 the property was sold for £720,000. Dorian depreciates its property using 5% per annum straight line with a full year’s depreciation charged in the year of purchase, none in the year of sale. It is Dorian’s accounting policy to make annual transfers between the revaluation reserve and retained earnings.

Prepare the journal entries required in respect of Dorian’s property from the date of purchase through to the year of sale.

Answer 2

Question 3

3. Until the 1980’s intangible assets were not typically recognised on company balance sheets.

Outline the issues in not recognising intangible assets and why this was changed.

Answer 3

In the latter part of the 20th century there has been a move away from companies which physically produce something to companies operating more in the technology and service sector. Often these companies real value arose from the technology and intellectual property which they owned.
Before the recognition of intellectual, property, therefore a large part of what actually gave the company value and generated revenue was not fully recognised on the balance sheet/statement of financial position. This therefore gave a skewed image of the company’s position as the principal assets were not recognised.
For this reason from the 1990s onwards there was a move towards fully recognising these assets in the statement of financial position – to give a more accurate view of the company’s true position.

Question 4

1. The inventory was counted at 31 December 20X4 and valued at £35,000.
2. The acquisition of a piece of machinery for £14,000 has been posted incorrectly to the repairs account. No adjustment has yet been made in respect of this error.
3. The balance on the disposals account represents the proceeds of the disposal of a delivery vehicle which had originally cost £24,000 and had been depreciated by £12,000. No other entries have been made in respect of this transaction.
4. Depreciation has still to be charged as follows:
   Machinery – 10% straight line
   Warehouse – 2% straight line
   Computer – 20% straight line
   Delivery vehicles – 25% reducing balance

Answer 4

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