TEST SAMPLE AND PRACTICE QUESTIONS
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TEST SAMPLE AND PRACTICE QUESTIONS
The best way to utilise the practice questions is to prepare your own answer and then compare it with the guidance provided.
Question 1
South Ltd has many vineyards and it uses the grapes that it grows in the production of wine. When grapes are harvested they become part of the company’s work in progress inventory. The fair value of vines is determined by an independent valuer, based on the current market value of purchased vines (rootings). The fair value of grapes are determined by reference to the weighted district average grape prices for each grape variety in each district in which South Ltd grows grapes.
The company discloses the carrying amount of grape vines in the notes to the statement of financial positon. It also discloses gains or losses recognised in profit or loss in relation to:
i) the grape vines and
ii) the annual harvest of grapes.
South Ltd complies with AASB 141 and AASB 102.
Required
a) Describe South Ltd’s policy for accounting for grapes at the point of harvest.
b) Using the Conceptual Framework only, should South Ltd recognise harvested grapes as assets?
Question 2
Superlectra Ltd’s accountant is trying to decide whether to recognise a liability for customer refunds for a product recall of its electric blankets announced in June.
Required
Which principles would help guide her decision?
Question 3
Richard Schmidt Ltd operates a retailing business which purchases and sells inventory.
Required
a) Describe an accounting policy for inventory.
b) Identify principles that have been used in formulating this policy in a).
Question 4 (This question should take about 12 minutes)
Can positive theories and normative theories in accounting assist each other? If yes, support you answer with an example. If no, explain why not.
Question 5 (This question should take about 10 minutes)
a) What is an active market?
b) Explain why in an active market we can use the observed price without being concerned about whether it is an orderly transaction.
Question 6
Startel Ltd is a new telecom company. During the final week of June 20X1, Startel Ltd offered free mobile phone handsets to new customers signing on to its two-year mobile phone plan (contract). The handsets cost Startel Ltd $60 and are sold separately for $120. Under the terms of the contract, subscribers pay $3080 immediately or $145 per month for two years and receive 200GB of data each month for the life of the plan. (The present value of $145 per month over two years is $3080.) Startel Ltd’s competitors charge $145 per month for 200GB of data on two-year contracts without a free handset.
Required
a) Identify the performance obligations of Startel Ltd’s contract.
b) What is the transaction price?
c) Demonstrate (or calculate) how you would determine how much of the transaction price should be allocated to each performance obligation.
d) When should revenue be recognised for each performance obligation of the contract?
Question 7
Historical cost provides the most objective measure of economic reality.
Required
Critically evaluate this statement.
Question 8
A criticism of the true and fair view requirement is the lack of a clear definition about what its requirements might actually be. In an attempt to remedy this, the National Companies and Securities Commission (NCSC) (the forerunner to today’s ASIC) commissioned a report to try and provide a definition of the phrase. That report proposed the following definition of a true and fairview:
“Without affecting the generality of the meaning of the term “true and fair view”, a “true and fairview” in relation to accounts or group accounts means a representation which affords those who might reasonably be expected to refer to those accounts (including holders or prospective purchasers of shares, debentures, notes or other interests, and creditors or prospective creditors) information which is relevant to the decisions which may be made by those persons in relation to the purchase, sale or other action in connection with their securities or interests.” (NCSC, 1984, p. 28).
Required
Critically evaluate the definition of true and fair proposed by the NCSC.
Hint: Start with an introduction that describes the NCSC’s proposed definition of true and fair, and state whether you think that definition clarifies the meaning of true and fair, or whether it merely introduces more ambiguity.
Question 9
Refer to the NCSC’s proposed definition of true and fair in Practice Question 8.
Required
a) Why do you think this definition was not incorporated into the Corporations Act? And why do you think the phrase ‘true and fair view’ has remained undefined in the Corporations Act?
b) Do you think true and fair should be defined as in compliance with accounting standards? Why/why not?
2023-08-18