Country : New Zealand

Assignment Task

Question Accounting for Employee Entitlements

You should refer to the relevant accounting standards and the New Zealand Framework where applicable.

NZ IAS 19 Employee Benefits requires an employer to recognise employee benefits, such as unpaid wages, holiday pay and long-service leave in the financial statements at the end of the financial year.

Required:

1.1 Explain why these employee benefits should be recognised and how each of the above are measured in the financial statements.

1.2 List any four assumptions and estimates that are made in recognising and measuring long-service leave.

Long Service leave - calculation

Assume that ALPHA Engineering Ltd has four employees. According to their particular employment contracts, long-service leave can be taken after fifteen years, at which time the employee is entitled to twenty weeks’ leave (6.667 days per year entitlement).

Further assume that, after ten years, pro rata payment is allowed so that if employees leave after serving ten years, they will be entitled to a cash payment in relation to their pro rata entitlement to long-service leave.

The employees of ALPHA Engineering Ltd, their current salaries and their years of service are provided below:

20221006095651AM-368236864-1624268584.png

Assuming that bonds exist with periods to maturity exactly matching the various periods that must still be served by the employees before long-service leave entitlements vest with them.

20221006095653AM-666649948-1866229646.png

Assuming also that the projected inflation rate for the foreseeable future is 2 per cent, and that wage increases will keep pace with the inflation.

Required:

(a) Calculate the long-service leave liabilities for ALPHA Engineering Ltd

20221006095700AM-1743933362-1841019396.png

You may copy the above table into your answer book and complete it.

Formula for calculating Long Service Leave (LSL) Entitlements =

[(Years of employment / No. of years’ service needed for full LSL entitlement) *(No. of weeks LSL entitlement / 52) * Annual Salary in the year of Entitlement)]

(b) Provide the accounting entry for the long service leave provision from the calculation (the opening balance of LSL is $32,500).

 

Accounting for Foreign Exchange Transactions

2.1 Accounting for foreign currency

Adel Electronics Limited purchased inventory from Alpha Computers Limited, a company registered in the United States. Relevant events and the spot rates at each date are shown as follows:

20221006095705AM-238372490-1080007212.png

Required:

Prepare the journal entries to record:

· Purchase of the inventory

· Amount of exchange gain/loss on balance sheet date

· Amount of exchange gain/loss on payment date

· Payment of money on due date

Narrations are NOT required. Show ALL workings. Round to nearest $.

2.2 Forward Contracts

You are given the following forward rates. Explain the possible benefits and/or drawbacks to Adel Electronics Limited if they had taken out a forward contract on 10 May 2018 for the payment to be made on 12 August 2018. Use the figures given below to show the effect on the financial statements of Adel Electronics Limited.

The relevant forward-rate applicable are as follows:

20221006095710AM-1802603951-2057490934.png

2.3 Translating accounts into functional currency

Alpha Garments Limited, a company operating in the United States, is a wholly owned subsidiary of Gama Fashions Limited, a New Zealand company. Gama Fashions Limited acquired all the shares of Alpha Garments Limited on 1 October 2014. The records and financial statements of Alpha Garments Limited are prepared in US dollars (US $). The financial statements of Alpha Garments Limited at 30 September 2017 are as follows:

20221006095719AM-1687040010-1037813258.png 20221006095727AM-713929731-1310499104.png

Additional information:

1 Exchange rates are as follows:

20221006095732AM-1078862491-269973975.png

2 The closing inventory was purchased during the last quarter of the year.

3 Sales and other expenses occur evenly throughout the year.

4 No equipment was bought or sold during the year.

5 The Building was purchased for cash on 1 April 2017.

6 The functional currency of the US operation is the New Zealand dollar.

Required:

State the functional currency amount that would be recorded in the accounts for Gama Fashions Limited for the following items in the financial statements (rounded to nearest thousand dollars):

2.3.1 Purchases

2.3.2 Closing inventory

2.3.3 Depreciation

2.3.4 Accounts Payable

2.3.5 Bank loan

2.3.6 Equipment (at cost)

2.3.7 Equity – Issued Capital

2.3.8 Building

 

Question Accounting for Leases

Ethnic Foods Limited leased custom-made machinery from Eastern Machinery Limited under the following terms:

  • Date of inception of the lease 1 April 20X4

  • Lease term (non-cancellable) 5 years

  • Bargain purchase option $80,000

  • Annual lease payment (in arrears) $100,000

  • Implicit contractual interest rate 10% pa

  • Fair value of machinery $430,000

  • Depreciation is to be provided at 20% pa straight line

3.1 The lease is classified as a finance lease. List reasons to support this classification based on the guidance given in NZ IFRS 16.

3.2 Prepare the journal entries in the books of Ethnic Foods Limited:

3.2.1 The lease inception on 1 April 20X4; and

3.2.2 The year ended 31 March 20X8.

NOTE: Show all workings from the inception of the lease until 31 March 20X9.

Ignore any income tax effect. Round all calculations to the nearest dollar.

Use Excel to show your calculations.

3.3

Show the relevant entries in the Balance Sheet of Ethnic Foods Limited as at 31 March 20X6

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