Assignment of the Week – Financial Accounting

Instructions:

Ensure your work is prepared using Word (not excel). This assignment needs to be submitted using Plagiarism on Blackboard by the due date above. Late penalties will apply. This is an individual assignment not a group assignment. Sharing of work and answers is not permitted and will be marked as an automatic Fail grade.

Question 1 (26 marks)

Luke Media Ltd was incorporated on 1 July 2016 and issued a prospectus inviting applications for 500,000 ordinary shares at an issue price of $10.

The shares are payable are follows:

• $5 payable on application
• $2 payable on allotment
• $3 payable on call to be made 30th September 2016 The transactions for the period were as follows:

31 August 2016: Applications were received for 560,000 shares.

3 September 2016: Applications for 60,000 were rejected by the directors and the application money was returned to the shareholders concerned.

4 September 2016: The Company allotted 500,000 shares to the remaining applicants.

25 September 2016: All the allotment money was received.

30 September 2016: The call was made on the shares, payable by 31 October 2016.

31 October 2016: Call money was received from the shareholders of only 480,000 shares.

31 December 2016: The remaining 20,000 shares were forfeited. The forfeited shares were offered to an investment company at a price of $8.00 per share paid to $10 and the transfer was completed on 31 March 2017. The costs of reissue amounted to $1,500.

The company’s constitution states that any forfeited shares must be refunded to the shareholders.

30 April 2017: These shareholders received a refund for the amount owed to them.

Required:

Prepare the general journal entries in the books of Luke Media Ltd to record the above transactions. Provide narrations for all your entries. An example of journal template is given below:

1. Office equipment is acquired during the year at a cost of $30,000 cash.
2. Some old office equipment was scrapped during the year, which had a cost of $20,000 and accumulated depreciation of $20,000.
3. Share capital is increased by the bonus issue of 20,000 shares for $1.00 each out of retained earnings.
4. No dividends were paid during the year.

Required:

1. Prepare the statement of cash flows for the year ended 30/6/2017. (20 marks)
2. Comment on the cash flow position of the entity as shown in the statement of cash flows. In your analysis, identify any warning signs or areas of strength for the liquidity of the business. (8 marks)
3. Prepare the following ledger accounts (T-Account format) for 30^th June 2017:

Solution 1

Solution 2

Part a

Part b

If the cash balance of the company is observed it can be assessed that it has increased in this year as compared to the previous year. The firm has generated cash from operations and the current ratio of the company has also improved in the year 2017 as compared to the year 2016. The company already had a strong current ratio which has further improved in the current year due to which the liquidity position has strengthened. The working capital of the company has increased by almost 12% therefore, it is important to assess that the company does not have an excess working capital invested in the business. The excess working capital would remain idle and would not generate any income for the business.

Therefore, the overall liquidity position has strengthened of the company in the current year but it is also important to ensure that the firm does not have excess working capital employed in the business.

Part c