Week 1

A) Calculate the acquisition cost of the Gizmo Machine:

The Gizmo Machine Should be recorded at the fair value of purchase consideration. This

would be calculated as follows:

Particulars Fair Value

Cash $20000

Land $140000

Value of assumed Liability $30000

Total Acquisition Cost $190000

B) Provide Journal entries that would appear in Tea Tree Bay Ltd’s books to account

for the acquisition of the Gizmo Machine:

Tea Tree Bay Ltd’s

Journal

Date Account Titles Ref. Debit Credit

Plant and Machinery- Gizmo Machine 190000

Dr. 20000

Cash Cr. 100000

Land Cr. 40000

Profit on disposal of land 30000

Cr.
 Bank loan

Cr.

Total 190000 190000

C)

Maintenance cost will not be included in the acquisition cost of the machine. Because,

Acquisition cost refers to the all-in cost to purchase an asset. These costs include shipping,

sales taxes, and customs fees, as well as the costs of site preparation, installation, and testing.

When acquiring property, acquisition costs can include surveying, closing fees, and paying

off liens. This amount is considered to be the book value of an asset.

Besides the price paid for the asset itself, additional costs may also be considered part of

acquisition when these costs are directly tied to the acquisition process. For example, if the

asset in question requires legal assistance to complete the transaction, legal and regulatory

fees are also included. Commissions associated with the purchase may also be included, such

as those paid to a real estate agent when dealing with a property transaction, to a staffing

company for placing an employee, to a marketing firm for acquiring customers, or to an

investment bank for brokering a merger.

With regard to manufacturing or production equipment, any costs associated with bringing

the equipment to an operational state may also be included in the cost of acquisition. This

includes the cost of shipping & receiving, general installation, mounting, and calibration.
Week 2
Week 3

Provide the Journal entries necessary to account for the transaction and events:

RCK Ltd’s

Journal

Date Account Titles Ref Debit Credit

July Bank Trust Dr. 12000000

2018 Application Account Cr. 12000000

(The application account is considered to be

a liability)

5 Aug Application Account Dr. 10000000

2018 Share Capital Cr. 10000000

(To allot 10 million shares as paid)

Allotment Dr. 10000000

Share Capital Cr. 10000000

(To recognize the amount of $1 per share

which is due following the allotment of

share) 2000000

Application amount Dr. 2000000

Allotment Cr.
 ($8 million is now due on allotment) 12000000

Cash at bank Dr. 12000000

Bank Trust Cr.

(The Shares have been allotted to the

company)

5 Sep Cash at Bank 6400000

2018 Dr. 6400000

Allotment Cr.

(To recognize the amount of cash received

from holders of 8 million shares)

10 Sep Share Capital Dr. 4000000

2018 Allotment Cr. 1600000

Forfeited Shares Amount Cr. 2400000

(To record the forfeited of 2 million Shares)

15 Sep Cash at Bank Dr. 3600000

2018 Forfeited Share Amount Dr. 400000

Share Capital Cr. 4000000

(To record the amount received on the

auction)

Forfeited Share amount Dr. 2000000

Cash at bank Cr. 200000

(Return of the defaulting shareholder)

Week 4

The following are the examples of items that would be adjusted directly against equity, rather

than being included as part of profit or loss:

Retained earnings

Retained earnings (or accumulated earnings) or accumulated losses is the amount of earnings

accumulated from previous periods. Retained earnings increase by the amount of net income

for a period and decrease on account of dividend payments and restatement, if any.

Retained earnings at the start of a period+ Net income for the period- Dividends paid±

Restatement on account of accounting policy changes or errors= Retained earnings at the end

of a period.

Available for sale securities reserve

Available for sale securities reserve accounts for fair value changes in the available for sale

securities. While the realized income and loss from available for sale securities is included in

the net income, unrealized gains and losses i.e. fair value changes are reflected directly in

shareholders’ equity.

Cash flow hedge reserve

Reserve for cash flow hedges represents effective changes in fair value of a hedging item. For

example, if a company has hedged a bond with an option, changes in value of the option

which successfully offsets changes in fair value of the bond is accounted for in reserve for

cash flow hedge.

Non-controlling interest (minority interest)

Non-controlling interest is a equity component that appears in case of consolidated financial

statements. It represents the shareholders equity attributable to owners other than the parent

company, i.e. those shareholders who do not have controlling stake in the company.

Contributed capital

Contributed capital is the total consideration received from shareholders in return of the

ownership right.

Contributed capital = common stock + additional paid-in capital

Contributed capital = shares issued × issue price

Additional paid-up capital

Additional paid-up capital (also called share premium) represents the amount received from

investors on all shares issued by a company is excess of the balance in common stock

account.

Additional paid-up capital = Number of shares issued × (share price – par value)

Additional paid-up capital account accumulates all the share premium received since

formation.

Common Stock
Common stock represents interest of shareholders who are owners of the company, who have

voting powers, who are the ultimate recipients of all profits and losses after interest and

preferred dividends are paid, and who bear any loss or enjoy any gains in event of winding

up.

Common stock = Number of shares issued × par value per share