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ACCT3563 - Practice Exam

1 A company has a debt contract in place which limits the amount it can borrow to 60% of total tangible assets.  As balance day approaches, the company estimates that its ratio of total     liabilities to total tangible assets will be 65% unless remedial action is taken, based on total  tangible assets of $2,000,000 and total liabilities of $1,300,000.

According to Positive Accounting Theory, in order to reduce the ratio of total liabilities to total tangible assets to 60% the company could:

Refuse to conduct impairment tests on purchased goodwill even though there is evidence of impairment.

Switch from cost model to revaluation model for a trademark owned by the company and revalue the trademark upwards by $100,000 to its fair value.

Delay to next year recognition of revenue of $100,000 on a bundled package of two             performance obligations, one of which has been performed in the current year and the other in the next year.

Classify a forward contract liability for $100,000 as a non-current liability rather than as a current liability. The forward contract is to purchase foreign currency in six months’ time

Reduce Provision for Sick Leave by $100,000 at balance date.

2 Which of the following statements about  ethical systems you  have  learnt  in this  Course are correct?

I. In Aristotelian ethics, intellectual virtues help a person attain the moral virtues and vice versa

II. In utilitarian ethics, in making a decision you weigh up how many in a group of people are better off by the decision and how many are worse off. If those better off exceed those worse off, the decision is ethical

III. In  Aristotelian  ethics,  prudence  is  a  moral  virtue  because  it  involves  control  of  the emotions.

IV. In Aristotelian ethics, an injustice occurs only if someone gets less than their rightful due

V. In self-interest maximization, a person acts to further their own welfare even if that means a majority of other people are worse off as a result

All statements are correct

I, II and V are correct

I and II are correct

I, III and IV are correct

III, IV and V are correct

3 King Lessee Ltd leases an item of equipment on 1 July 20X1 on the following terms:

Term of lease (years)

8

Interest rate implicit in lease

10%

Initial lease payment up front on 1 July 20X1

$4,500

Initial direct costs paid by King Lessee

zero

Subsequent lease payments, in arrears, each 30 June

$12,000

Useful life of equipment (years)

10

Assume straight line depreciation method is used for the lease asset and residual value is zero at the end of the lease term.

At the end of the lease term, King Lessee is going to return the equipment to the lessor.

What is the amount of the current lease liability and non-current lease liability at 30 June 20X2, each rounded to nearest hundred dollars?

Current liability

Non-current liability

$5600

$58,000

Current liability

Non-current liability

$6,200

$52,300

Current liability

Non-current liability

$5,800

$58,400

Current liability

Non-current liability

$6,200

$58,400

Current liability

Non-current liability

$5,600

$52,300

4 Jack Lessee Ltd leases an item of equipment on 1 July 20X1 on the following terms:

Term of lease (years)

8

Interest rate implicit in lease

10%

Initial lease payment up front on 1 July 20X1

$4,500

Initial direct costs by Jack Lessee

zero

Subsequent lease payments, in arrears, each 30 June, each including $1,500 for costs of maintenance of the equipment

$11,500

Useful life of equipment (years)

10

Jack guarantees a residual value at the end of lease of

$5,000

Unguaranteed residual value at end of lease

$3,000

Assume straight line depreciation method is used for the lease asset.

At the end of the lease term, Jack Lessee will return the equipment to the lessor

What annual depreciation expense (to nearest hundred dollars) will Jack Lessee record for this leased equipment?

$6,900

$7,200

$5,500

$6,700

$7,900

5 Allied Lessor leases equipment to XYZ Lessee on 1 July 20X1 on the following terms

Term of lease (years)

5

Interest rate implicit in lease

10%

Initial lease payment up front on 1 July 20X1 by XYZ to Allied

$4,500

Subsequent lease payments, in arrears, each 30 June

$10,000

Useful life of equipment (years)

6

XYZ guarantees a residual value at the end of lease of

$5,000

Unguaranteed residual value at end of lease

$3,000

At the end of the lease term, XYZ Lessee will return the equipment to Allied Lessor

Allied Lessor purchased the asset on 1 July 20X1 for $40,000 and then immediately leased it to XYZ Lessee

There are no initial direct costs incurred by Allied Lessor on 1 July 20X1

For Allied Lessor, what is the interest revenue for the year ended 30 June 20X2 and the book value of the lease receivable at 30 June 20X2 (both rounded to nearest hundred dollars)

Interest revenue

Lease receivable

$4,300

$37,000

Interest revenue

Lease