ACCT90012 CORPORATE REPORTING Final Examination - Semester 1 2022
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Final Examination - Semester 1 2022
ACCT90012
CORPORATE REPORTING
QUESTION ONE: Fair value measurement (Total: 5 marks)
Wombat Ltd is a company that has a vibrant Research and Development (R&D) unit that develops cutting-edge tools in its production processes. Recently, the R&D unit developed a new tool that greatly improves the company’s production efficiency. This tool can also be used by other companies in their production processes. Rather than manufacturing and selling this tool, the management of Flemington Ltd has decided to allow other companies to use this tool under a licensing program.
REQUIRED:
1.1 Discuss the valuation premise that should be applied in the determination of the fair value of the device. (2 marks)
1.2 Evaluate the appropriateness of each of the three valuation approaches in the determination of the fair value of the device. (3 marks)
[TOTAL FOR QUESTION ONE: 2 + 3 = 5 MARKS]
QUESTION TWO: Property, Plant & Equipment, Impairment & Intangibles (Total: 13 marks)
2.1 CGU and impairment loss
A Cash Generating Units (CGU) uses the cost model to measure its assets. On 30 June 2021, the carrying amounts of the assets of a CGU are as follows:
Assets |
($) |
Cash |
10,000 |
Accounts Receivable |
30,000 |
Allowance for doubtful debts |
(5,000) |
Inventories |
50,000 |
Machinery |
200,000 |
Accumulated depreciation – machinery |
(80,000) |
Building |
400,000 |
Accumulated depreciation – building |
( 120,000) |
Goodwill |
25,000 |
The recoverable amount of the unit is assessed to be $460,000 on 30 June 2021. The receivables are considered to be collectable, except those considered doubtful. The fair value of building is $265,000.
REQUIRED:
Prepare general journal entries to record the impairment loss of the CGU for the year ended 30 June 2021. (4 marks)
2.2 Revaluation and impairment loss reversal
In the 30 June 2020 annual report of Kangaroo Ltd, the plant was reported as follows:
Plant (at cost) Accumulated depreciation |
$200,000 ($40,000) $160,000 |
The plant is depreciated on a straight-line basis over a 10-year period with the residual value of zero. Kangaroo Ltd adopts the revaluation model for the plant. The company finds out that the plant has a fair value of $140,000 on 30 June 2020. On 30 June 2021, the fair value of the plant is assessed to be $145,000.
REQUIRED:
Prepare general journal entries associated with the revaluation of the plant for the year ended 30
June 2021. (4 marks)
[Please write your answer in this textbox.]
ACCOUNTS |
DEBIT ($) |
CREDIT ($) |
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Working (optional):
2.3 Intangibles
UNO Ltd acquired DUO Ltd on 25 June 2020. At the date of acquisition, DUO Ltd had a research and development project with a cost of $35,000. After the acquisition, UNO Ltd decides to continue the research and development project and incurs a cost of $20,000 for the project in the year ended 30 June
2021.
REQUIRED:
Discuss how UNO Ltd should treat the cost of the research and development project at the acquisition date and after the acquisition date in accordance with AASB 138 Intangible Assets. (5 marks)
[TOTAL FOR QUESTION TWO: 4 + 4 + 5 = 13 MARKS]
QUESTION THREE LEASES (Total: 11 marks)
3.1
On 30 June 2017, Albanese Ltd commenced the lease of machinery for use in its manufacturing operations. Key details of this non-cancellable lease agreement were as follows: Lease term of four years. Annual lease payments payable of $100,000 on June 30 each
year, commencing 30 June 2017.
Residual value of $10,000 at end of the lease term guaranteed by Albanese.
Expected fair value of $5,000 at the end of lease term.
Estimated scrap value of $1,000 at end of useful life ( 10 years).
The interest rate implicit in the lease of 5% p.a.5
The machinery was returned on 30 June 2021.
REQUIRED:
Calculate the initial lease liability (keep two decimal places in your calculation)
Prepare the lease payment schedule for all the years and prepare relevant journal entries
for the year ended 30 June 2021 ONLY in accordance with AASB16 Leases (record all amounts to the nearest whole dollar).
(5 marks)
[Please write your answer in this textbox.]
Lease payment schedule
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Lease Payment |
Interest Expense |
Liability reduction |
Liability Balance |
30.6. 17 |
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30.6. 18 |
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30.6. 19 |
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30.6.20 |
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30.6.21 |
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3.2
Silk Ltd (Customer) is a shoe retailer that only sells its shoes via its online platform. Silk Ltd enters into a contract with a manufacturer (Supplier) to produce shoes in its factory. Silk Ltd requires the shoes to be of a specific type, quality, and quantity. These requirements are specifically stated in the contract. Additionally, the contract stipulates that the Supplier cannot supply the shoes from another factory or outsource the manufacture of the shoes to another supplier.
Although the Supplier only has one factory, it produces a large quantity of shoes of various types according to specifications required by its customers. The Supplier makes all decisions about how the capacity of the factory will be used to satisfy the demand of its customers. The Supplier also decides the output to be produced and the production level.
REQUIRED:
Based on the above facts, should the contract be treated as a lease contract in Silk Ltd’s books in
accordance with AASB 16 Leases? Discuss the rationales. (6
marks)
[TOTAL FOR QUESTION THREE: 5 + 6 = 11 MARKS]
QUESTION FOUR INCOME TAXES (Total: 13 marks)
The manager of Pilbara Ltd provides the following information and asks your help to prepare the Current Tax and Deferred Tax Worksheet for the items listed below. The accounting profit before tax of Pilbara Ltd for the year ended 30 June 2021 was $900,000. It included the following revenue and expense items:
ACCOUNTS |
$ |
Royalty revenue (non-taxable exempt income) |
10,000 |
Interest revenue |
15,000 |
Depreciation – plant |
75,000 |
Additional information:
1) The tax depreciation for plant (which cost $750,000, purchased on 1 July 2017) is 25%. For accounting purposes, depreciation is at 10% per annum. No residual value applies.
2) Pilbara Ltd has $30,000 tax losses carried forward from the previous year. A deferred tax asset was recognized for these losses.
3) During the year, interest of $20,000 was received in cash. Pilbara Ltd had recognized an interest receivable asset of $8,000 on 1 July 2020.
REQUIRED:
4.1 Calculate the Current Tax liability for Pilbara Ltd for the year ended 30 June 2021. (4 marks)
4.2 Calculate the deferred tax for the following items for Pilbara Ltd (4 marks)
Plant
Interest receivable
4.3
Ball Ltd has recently revalued its land from its historical cost of $500,000 to its fair value of $2,000,000. Ball Ltd has no current intention to sell this land but anticipates that it will sell the land in 10 years’ time. The discount rate applicable to Ball Ltd is 5%. The accountant of Ball Ltd is not sure of the amount of the deferred tax liability that needs to be shown in the financial statements and whether the deferred tax liability will need to be discounted as it is probably due only in 10 years’ time.
REQUIRED:
Explain to the accountant the amount of the deferred tax liability and whether the deferred tax liability needs to be discounted to present value in the financial statements of Ball Ltd. (no journal entries are required, but you should critically comment on the current accounting standard AASB 112 on
(non)discounting) (3 marks)
4.4
Effectively, tax-effect accounting ensures that the tax-effect of each transaction or event recognised during a financial year will be reflected in the income tax expense of that year irrespective of when that tax-effect will occur.
REQUIRED:
Explain the above statement from the perspective of deferred tax (i.e., why deferred taxes exist). (2 marks)
[TOTAL FOR QUESTION FOUR: 4 + 4 + 3 + 2 = 13 MARKS]
QUESTION FIVE (Total: 8 marks]
5.1 Bold Ltd sells a dining table to a customer for $600. To encourage early payment for the dining table, Bold offers the following payment terms:
25% discount ifpayment is received in 10 days
10% discount ifpayment is received in 20 days
Historically, 60 per cent of customers pay within 10 days, 30 per cent of customers pay within 20 days, and 10 per cent of customers pay on the due date.
REQUIRED:
Applying the expected value approach, what is the revenue that Bold would recognise on the sale of the dining table in accordance with the requirements of AASB 15 Revenuefrom Contracts with Customers? (2 marks)
5.2 A supermarket, Idla Ltd, offers its regular customers a customer loyalty card. The customer is entitled to $50 off their groceries after each $2,000 spent in the supermarket.
On 18 September 2020 a customer comes into the supermarket. The customer has already accumulated grocery purchases of $1,800 on their card. The customer buys $300 worth of groceries. As the customer has now spent an accumulated total of more than $2,000 on grocery purchases in the supermarket, the customer is entitled and decides to redeem their $50 off their groceries. The customer pays only $250 for the $300 worth of groceries.
Assume
all customers will redeem and that the supermarket recognizes the performance obligation.
a 50% mark-up on selling prices of the goods above.
REQUIRED:
Prepare the journal entries for the above contract on 18 September 2020. (6 marks)
[TOTAL FOR QUESTION FIVE: 2 + 6 = 8 MARKS]
QUESTION SIX FINANCIAL INSTRUMENTS (Total: 10 marks)
6.1 An entity expects to have a large capital expenditure in 5 years’ time. The entity’s business model is to invest its excess funds in short-term debt instruments to collect contractual cash flows. When these debt instruments mature, the entity re-invests the proceeds in new debt instruments. It continues with this strategy until the funds are needed to finance the capital investment.
REQUIRED:
Explain how this debt instrument will be measured on initial recognition and its subsequent measurement
in the entity’s financial statements. (4 marks)
6.2 On 1 September 2020, Hall Ltd wrote 150,000 exchange traded call options in Popstar Ltd at a premium of $4.00 per option. The options have an exercise price of $50.00 and mature on 15 August
2021. The share price of Popstar Ltd is $35 on 15 August 2021. The options have a fair value to the holder of $1.00 each on 30 June 2021 and nil each on 15 August 2021.
REQUIRED:
Identify the type and classification of the financial instrument to be recorded in Hall Ltd.’s books. Explain
your answer. (2 marks)
6.3 Explain whether the holder of the options will exercise the option to buy the shares in Popstar Ltd on
15 August 2021. (2 marks)
6.4 Prepare the journal entries in the books of Hall Ltd for the year ended 30 June 2021 and on 15
August 2021.
[TOTAL FOR QUESTION SIX: 4 + 2 + 2 + 2 = 10 MARKS]
2022-07-19