Large Mart has previously attempted to develop a âstudy pillowâwhich would have allowed students to upload study material intotheir brain whilst sleeping. However, Large Mart has recentlydiscovered that an American company called Bpple already holds apatent for this type of device. As a result, Large Mart has givenup on its development attempts and decided to sell the Bppleproduct, which is called iSLEEP.
In order to sell the iSLEEP, Large Mart has rented a secondstore in Armidale. The renting contract is for a period of 6 month,with the possibility to extend the contract by a further 3 month.Large Mart signs the renting contract on the 1 May 201x. The rentfor the store will be $10,000 per month, and rent payments will bemade by bank transfer at the end of each month.
As soon as the renting contract for the new store is signed,Large Mart employs two UNE students (Chuck and Morgan) to getstudents interested in the iSLEEP by using it in the UNE library tostudy for their exams. Chuck and Morgan will later work for thestore as shop assistants and they are payed $30 for each hour ofwork (this includes their work in the store and the time they spendusing the iSLEEP in the library to study for their exams). In May201x Chuck spends 60 hours studying for his exams and Morgan spends100 hours studying for his exams. However, Chuck and Morgan willnot be paid for their work until the end of June.
The interior of the new store is designed in China andmanufactured in the United States of America. An important part ofthe store design is a big bed on which customers can lie to testthe iSLEEP. The bed is delivered on the 1 June 201x. On that day,Large Mart also receives an invoice of $30,000 from the Chinesedesigners of the bed as well as an invoice of $5,000 from theAmerican manufacturer. The truck driver who delivered the bed alsoleft an invoice of $1,000 (which consists of $500 fortransportation services and $500 for assembly of the bed). LargeMart pays all three invoices on the 10 June 201x through a banktransfer. As part of this payment Large Mart claims an earlypayment discount of $500 from the invoice of the manufacturer ofthe bed.
After the new store is completed, Large Mart orders 250 iSLEEPsfrom Bpple for a price of $700 per item, and these iSLEEPs arriveon 1 June 201x, and are paid via bank transfer on the same day.
After this initial purchase, the following purchase and salestransactions take place within the new store:
On 2 June 201x UNE purchases 100 iSLEEPs for the library for aprice of $3,000 per iSLEEP on credit. Two days later UNE noticesthat the Library does not have sufficient space for all 100 iSLEEPsand asks Large Mart to return 50 unused iSLEEPs. Large Mart allowsUNE to return the 50 excess iSLEEPs and returns them to theInventory of the store. UNE then pays the remaining iSLEEPs on the6 June 201x, after deducting an early payment discount of 10% fromthe invoice.
On 15 June 201x Large Mart receives a new shipment of 500iSLEEPs for a price of $600 per iSLEEP. The invoice for thereceived iSLEEPs is paid (via bank transfer) 3 days after theiSLEEPs are received.
On 18 June 201x, Large Mart starts an end of financial yearsale. On the 19 June 201x Large Mart sells 100 iSLEEPs to theUniversity of Western Sydney (UWS). UWS purchases the iSLEEPs oncredit for a price of $2,500 per item (before any discounts).Because UWS is a very good customer of Large Mart, UWS receives avolume discount of $100 per iSLEEP at the time UWS pays for thepurchased iSLEEPs. Payment is made via bank transfer 10 days afterthe purchase.
At the end of June 201x (which is also the end of the financialyear), Large Mart finds out that Bpple will start to sell a newversion of the iSLEEP (called the iSLEEP2) early in July 201x.As aresult, Large Mart believes that all iSLEEPs that are currently instore can only be sold if the sales price is immediately reduced to$500 per iSLEEP.
On 1 July 201x, Large Mart leases a company car for the servicedepartment of the Bpple store (called the âNerd Herdâ). Theduration of the lease is 8 years, and the car has an expecteduseful life of 9 years. The lease contract requires Large Mart topay $5,000 at the time the lease is signed. This payment is madevia a bank transfer. A further $8,000 must be paid (also via banktransfer) on the 30 June of each year, starting on the 30 June201x+1. The lease contract states that Large Mart can cancel thelease at any time during the lease period, but that Large Mart mustpay a fine equal to 85% of the remaining lease liability if thelease contract is cancelled. The interest rate implicit in thelease is 10%. Large Mart decided to enter into the lease agreementinstead of purchasing the car because the purchase price would havebeen $47,800, and Large Mart did not have sufficient cash resourcesto make such a purchase at that time.
The car is depreciated using the same depreciation method thatis used for all other Large Mart motor vehicles (see Large MartDepreciation Schedule in Topic 2). Large Mart expects that theresidual value of the car at the end of the useful life will be$500. The lease contract also includes a clause that allows LargeMart to purchase the car at the end of the lease term for a priceof $400. At that time the fair value of the car is expected to be$1,000.
IMPORTANT NOTE: Large Mart has decidedto use the exemption rules outlined in AASB 16, paragraphs 5-8 forleased items to which these exemptions apply.
Please answer the following questions about the scenariooutlined above:
Question 1) Provide all journal entries thatare necessary in the books of Large Mart to account for the signingof the renting contract (if any) and the payment of rent for themonth of May 201x, and provide a detailed explanation why you havechosen the accounting treatment that you have used (1mark).
Question 2) Calculate the cost of the bed andprovide all journal entries that are necessary in the books ofLarge Mart to account for the receipt and payment of the invoicesfor design, manufacture and delivery/assembly of the bed, andprovide an outline and explanation for all necessary calculations(1.5 mark)
Question 3) Provide all journal entries thatare necessary in the books of Large Mart to account for allpurchase and sales transactions (including the payment and receiptof funds) of the new store, assuming that Large Mart uses aperpetual inventory system on a first-in-first-out basis (4marks).
Question 4) Calculate Cost-of-Goods-Sold andthe closing balance of the Inventory â Trade/Sales account for theyear ended 30 June 201x of the new Large Mart Store (based on theinformation provided in this assignment ONLY), determine if therelease of the iSLEEP2 will have any impact on the closing balanceof the Inventory â Trade/Sales account, explain your decision, andprovide all journal entries that are necessary in the books ofLarge Mart to account of this impact (if any exists) (3.5marks).
Question 5) Determine whether thelessor of the company car will be required toapply the accounting regulations for operating leases or financeleases AND PROVIDE A DETAILED EXPLANATION FOR YOURDECISION (2 mark).
Question 6) Provide all journal entries thatare necessary in the books of Large Mart to record the inception ofthe lease for the car, the lease payments made at the end of thefirst year of the lease term (30 June 201x+1), and the depreciationof the leased car for the month ended 31 July 201x (if anydepreciation is required) (3 marks). YOU MUST PROVIDEDETAILS OF ALL NECESSARY CALCULATIONS!
