Intermediate Financial Reporting ACCT20002 Practice Exam Solutions of Online Practice Test for the End-of-Semester Exam 1. Fair Value Measurement Philip owns land with a wool factory on it in a small town near Melbourne city. The factory is a family business that started a century ago. The factory is currently used to produce wool scarfs and clothes, but could be redeveloped as a retail shopping centre. Philip recently received an attractive offer from property redevelopers, but he rejected the offer because he has no intention to stop the family business. Required: Discuss how Philip should apply AASB 13 Fair Value Measurement to measure fair value of the land and factory. Fair value is to be measured by considering the ‘highest and best use’ of the asset. AASB 13 para.28 has the following requirements for determining the highest and best use: • it must be physically possible to use the asset for the entity’spurposes. • it must be legally permissible, that is, not subject to any legal restrictions (e.g. heritage- listed, zoning regulations). • it must be financially feasible and capable of generating sufficient income or cash flows to produce the required investment return. Fair value is not based on the current use of the asset; instead, it is based on how the market participants would use the asset. As a result, Philip’s intention to continue the current use of the asset is irrelevant. Once the asset’s highest and best use has been established, the next step in determining its fair value is to select one of two valuation premises: in-combination; and stand-alone In this example, there are two possible uses for the site: 1. Continue to use the site for its current production purposes. In this instance the valuation premise would be the in-combination valuation premise. [Background: Both the land and the production facilities would be sold together so that the market participant could continue to use the site for the same production purposes. The fair value of the land would be based on its suitability to continue being used for production. The fair value of any production facilities would be based on their ability to maintain existingproduction.] 2. Redevelop the site for retail purposes. In this instance, the valuation premise is the stand- alone valuation premise. [Background: The land on which the production takes place would be sold as a stand-alone asset, separate to the production facilities, which, in turn, would be expected to be demolished to make way for the redevelopment. The production facilities would therefore have a zero fair value and the fair value of the land would be based on the amount that would be received on sale to theredevelopers.] Working Test for revaluation loss Lower of FV and RA Lower of FV and RA = $55,000 CA = $70,000 Loss on revaluation = $15,000 2. PPE, Intangibles, and Asset Impairment 2.1 Boston Ltd provides the following details regarding Machine Z PRIOR to any impairment or revaluation adjustments for the year ended 30 June 2015: Item of PPE Machine Z ($) Gross amount 160,000 Accumulated depreciation (90,000) Carrying amount on 30 June 2015 before revaluation 70,000 Additional information Model under which asset carried Revaluation Gross increments (before TAX) in asset revaluation reserve since acquisition 5,000 Fair value at 30 June 2015 Recoverable amount at 30 June 2015 60,000 55,000 Required: Prepare journal entries to record the above asset revaluations and asset value adjustments for Machine Z as at 30 June 2015. (Ignore any tax effect) DATE DETAILS DEBIT CREDIT 2015 Acc Depreciation $90,000 June 30 Machine Z $90,000 Asset Revaluation Surplus 5,000 Loss on Revaluation (1/S) 10,000 Machine Z 15,000 2.2 Spear Ltd provides the following information regarding a cash generating unit (CGU) during the 2014 and 2015 reporting period: Information for year ended 30.6.2014 Assets Plant (cost $300,000) Patent Receivables Goodwill Cash Carrying amount $200,000 $40,000 $50,000 $60,000 $20,000 Recoverable amount $280,000 Note: Receivables are all collectable (not impaired). Information for year ended 30.6.2015 The company used cost model. For the period ending 30 June 2015, the depreciation charge on plant was increased to $25,000. If the plant had not been impaired the charge would have been $20,000. At 30 June 2015, the recoverable amount of the CGU was calculated to be $60,000 greater than the carrying amount of the assets of the CGU. Required: Prepare the journal entries to record the above events for the year ended 30 June 2014. (Ignore any tax effect) DATE DETAILS DEBIT CREDIT 2014 Impairment Loss $90,000 30 June Acc Dep & Impair. Loss - plant 25,000 Acc Amort. & Impair Loss - patent 5,000 Goodwill 60,000 Asset Carrying Amount ($) Proportion Allocation of Impairment Loss ($) Net Carrying Amount ($) Plant 200,000 200/240*30,000 25,000 175,000 Patent 40,000 40/240*30,000 5,000 35,000 240,000 30,000 Goodwill 60,000 60,000 0 90,000 Working: Reversal 30 June 2015 = RA > CA = $60,000 Maximum reversal = $180,000 - $150,000 = $30,000 2.3 Based on the information provided in Q2.2, calculate the MAXIMUM REVERSAL of the impairment that can be allocated to plant for the year ended 30 June 2015. Show your working. Plant with Impairment Loss Plant with NO Impairment Loss Cost $300,000 Cost $300,000 AD & IL AD & IL At 30.6.14 $100,000 At 30.6.14 $100,000 IL 30.6.14 25,000 AD AD 30.6.15 20,000 $120,000 30.6.15 25,000 $150,000 $150,000 $180,000 1 3. Leases 3.1 Ted Ltd signed a contract with Mark Ltd. The contract requires Mark Ltd to transport a specified quantity of goods of Ted Ltd by using 10 specified rail cars in accordance with a stated timetable for a period of five years. Mark Ltd provides the rail cares, driver and engine as part of the contract. The contract states the nature and quantity of the goods to be transported as well as the type of rail car to be used to transport the goods. Mark Ltd has a large pool of similar cars that can be used to fulfil the requirements of the contract. Mark Ltd can choose to use any one of a number of engines to fulfil the requests from Ted Ltd. The engine could be used to transport not only the goods of Ted Ltd, but also the goods of other customers. The cars and engines are stored at Mark Ltd’s premises when not being used to transport goods. Required: According to AASB 16, can the contract between Ted Ltd and Mark Ltd be treated as a lease contract? Please explain. 1. Is the asset identified? a) Is the asset specified? - Yes, the asset is explicitly specified. b) Does the supplier (Mark Ltd) have the substantive right to substitute the rail cars and engine? - The supplier has the practical ability to substitute - The supplier would benefit economically from substituting the cars and engine. There would be minimal, if any, cost associated with substituting the cars as the cars and engines are stored at supplier’s premises and the supplier has a large pool of similar cars and engines. The supplier can substitute the cars and engines to fit the demand from different customers. So, the asset is NOT identified. [Based on the above analysis, we can already decide that the contract is not a lease contract] 2. Does the customer control the use of the asset throughout the period of use? a). Does the customer enjoy all the economic benefits? No b). Can the customer direct the use of the asset? No Supplier directs the use of the rail cars and engine by selecting which cars are used for each particular delivery and obtains substantially all of the economic benefits from use of the rai cars. 1 3.2 On 30 June 2020, Small Ltd leases a large item of machinery from Fred Ltd. Small Ltd makes an initial payment of $200 000 on 30 June 2020 when the least term starts. All remaining lease payments are made in arrears. Small Ltd will return the leased asset at the end of the lease term. The lease agreement also contains the following information: Lease term (non-cancellable) 3 years Expected useful life of the leased machinery 6 years Expected salvage value at the end of useful life $100 000 Expected fair value at the end of lease term $140 000 Residual Value Guarantee at the end of lease term $300 000 Net initial directly attributable costs $20 000 Annual lease payment (paid in arrears) $210 000 Annual maintenance & insurance included in lease payments $10 000 Interest rate implicit in the lease 10% p.a. Calculate the lease liability and right-of-use asset that Small Ltd should recognise on its balance sheet on 30 June 2020. 3.3 Based on the information provided in Q3.2, list all the items and amounts related to the above lease contract that would be included (but not necessarily disclosed separately) in extracts from the Income Statement and Balance Sheet of Small Ltd (the lessee) for the year ended 30 June 2021. Ignore the effect on cash account. 1 3.2 Lease Liabilities =200,000/(1+10%)+200,000/(1+10%)^2+200,000/(1+10%)^3+160,000/(1+10%)^3=617,581 (1/2 mark) R-O-U asset= lease liability + initial payment + initial directly attributable cost = 617,581+200,000+ 20,000=837,581 (1/2 mark) 3.3 Date Lease Payment Interest expense Reduction in Liability Balance of Liability 30-Jun-20 200,000 200,000 617,581 30-Jun-21 200,000 61,758 138,242 479,339 30-Jun-22 200,000 47,934 152,066 327,273 30-Jun-23 200,000 32,727 167,273 160.000 30-Jun-23 160,000 160,000 0 Depreciation each year = 837,581/3= 279,194 Presentation @ 30 June 2021: Income statement: Lease depreciation expense 279,194 Lease interest expense 61,758 Balance sheet: Non-current assets R-O-U asset (machinery) 837,581 Accumulated depreciation (279,194) Current liabilities Total liability is $479,339, of which $152,066 is due within the next 12 months, and the balance is due after 12 months Lease Liabilities 152,066 Non-Current liabilities Lease liabilities 327,273 1 4. Income Tax Skye Ltd commenced operations on 1 July 2017. At 30 June 2020, the entity provided the following information: • Accounting profit before tax was $500 000. • The gross amount of accounts receivable is $80 000. A doubtful debt provision of $10 000 was created at the end of June 2020. No bad debts were written off during the year. • Revenue of $20 000 was received in advance in June 2020. The revenue is assessable for tax purposes when received. • Plant was purchased at a cost of $450 000 on 1 July 2018. For accounting purposes, plant is depreciated using the straight-line method over 5 years. For tax purposes plant is depreciated over 3 years. Plant has a residual value of nil for tax and accountingpurposes. • During 2020 the balance of long service leave increased by $30 000 to $100 000. Long service leave is only deductible when paid. • Penalties and fines paid of $30 000 during the year are included in expenses used to calculate accounting profit. Penalties and fines are not allowable taxdeductions. • Deferred tax balances at 1 July 2019 were: • Deferred Tax Assets = $21 000 • Deferred Tax Liabilities = $10 000 • The tax rate is 30 per cent. Required: 4.1 Based on the information above, complete the following deferred taxworksheet. Carrying Amount FTA FDA (or Future Non- assessable amount) Tax Base Deductible Temporary Differences Taxable Temporary Differences Accounts receivable 70000 0 10000 80000 10000 Plant 270000 270000 150000 150000 120000 Provision for long service leave 100000 0 100000 0 100000 Prepaid revenue 20000 0 20000 0 20000 1 4.2 Prepare the journal entries associated with deferred tax for the year ended 30 June 2020. Ending balance of DTA = 130000*0.3=39,000 Ending balance of DTT = 120000*0.3=36,000 Change of DTA = 39000 – 21000 = 18000 Change of DTL = 36000 – 10000=26000 4.3 As a result of a drop in global oil prices, Fortescue Ltd recognized a $50 million taxable loss in the current period. The management of Fortescue Ltd are debating whether it can raise a deferred tax asset in relation to this loss in the financial statements in the current period. REQUIRED: Provide advice to the management on the raising of a deferred tax asset and specifying the conditions, if any, under which the asset could be recognized. For deferred tax assets (DTA) arising from tax losses, the criteria is that it still must be probable that Fortescue Ltd earns sufficient taxable income to offset the past tax loss. For Fortescue to create a DTA, it must be able to provide evidence that it will earn taxable income in the future to offset the past tax losses. However as there is a tax loss in the current period, then there is strong evidence that Fortescue may not be able to earn taxable income in the future. Further if Fortescue has a history of recent tax losses, there must be convincing evidence that circumstances are going to improve in the future. AASB 112 provides a number of factors that can be used to assess whether circumstances will improve in the future: 1. Whether the entity has sufficient taxable temporary differences that will result in taxable amounts in the future against which the tax loss can be offset. DR CR DTA 18000 Income tax expense (deferred) 18000 Income tax expense (deferred) 26000 DTL 26000 1 2. Whether the unused tax losses result from identifiable causes which are unlikely to recur 3. Whether tax planning opportunities are available to the entity that will create future taxable profit Fortescue could examine the following areas to provide evidence that a change is expected in the profits of the entity in the future: 1. Causes of past/current losses. Fortescue could show that the drop in oil prices is not expected to persist. 2. Analysis of existing contracts and sales agreements. If there is new contracts being signed and this will boost/return Fortescue to profit. If the above is strong evidence, then Fortescue will Be able to create a DTA. 1 Def. revenue $0.99 Cr + $1.19 Cr -- $19.87 Dr = $17.69 Dr 5. Revenue 5.1 A supermarket, XYZ Ltd, offers its regular customers a customer loyalty card. The customer is entitled to $20 off their groceries after each $3,000 spent in the supermarket. On 14 August 2016 a customer comes into the supermarket. The customer has already accumulated grocery purchases of $2,850 on their card. The customer buys $350 worth of groceries. As the customer has now spent an accumulated total of more than $3,000 on grocery purchases in the supermarket, the customer is entitled and decides to redeem their $20 off their groceries. The customer pays only $330 for the $350 worth of groceries. Assume all customers will redeem. Required: Show the journal entry in the books of XYZ Ltd to record the transaction on 14 August 2016 (assume a 60% mark-up on the price of these goods). Date Details DR CR 2016 14 August Bank 330.00 Deferred revenue (Points redemption - Accumulation of further points) $20*$3000/$3020 – $330*$20/$3020) 17.68 Sales revenue ($350*$3000/$3020) 347.68 Cost of sales ($350*100/160) 218.75 Inventory 218.75 Alternative entries Bank 150.00 Sales revenue ($150 *$3000/$3020k) 149.01 Deferred revenue ($150 * $20/$3020) $330 0.99 First $150 of sales Bank 180.00 Sales revenue ($180 *$3000/$3020k) 178.81 Deferred revenue ($180 * $20/$3020) 1.19 Second $180 of sales Deferred revenue ($20*$3000/$3020) 19.87 Sales revenue 19.87 Redemption of loyalty points Cost of sales 218.75 Inventory 218.75 Note: Consideration received $3,000; Stand-alone selling price $3,020. 1 5.2 Rocky Ltd provides a bundled service offering to Customer A. Rocky charges Customer A $70 000 for initial connection to its network and two ongoing services — access to the network for two years and ‘on- call troubleshooting’ advice for two years (ending 30 June 2022). Customer A pays the $70 000 upfront, on 1 July 2020. Rocky determines that, if it were to charge a separate fee for each service if sold separately, the fee would be: Connection fee $10 000 Access fee $24 000 Advice $46 000 Required Prepare the journal entries to account for this transaction for the year ended 30 June 2021 in accordance with AASB 15 Revenue from Contracts with Customers. Accounts Debit $ Credit $ Cash 70 000 Revenue – connection fee 8 750 Liability – obligation to provide access to network 21 000 Liability – obligation to provide troubleshooting advice 40 250 Liability – obligation to provide access to network 10 500 Liability – obligation to provide advice 20 125 Revenue 30 625 Workings Fair value of each component if sold separately Allocation of fair value to total consideration Allocated amount Connection fee 10 000 10 000/80 000 x 70 000 8 750 Access fee 24 000 24 000/80 000 x 70 000 21 000 Troubleshooting 46 000 46 000/80 000 x 70 000 40 250 Total 80 000 70 000 1 6. Financial Instruments 6.1 On 1 July 2014, Ball Ltd purchases a debt instrument with a 4-year term for its fair value of $526,210 (including transaction costs). The instrument has a principal amount of $580,000 (the amount payable on redemption) and carries fixed interest of 5.2% per annum paid annually in arrears on 30 June every year. The effective interest rate is 8% per annum. The debt instrument is classified as subsequently measured at amortised cost. Required: Prepare the journal entries for the year ended 30 June 2018. Year Opening Balance Interest Cash flows Closing Balance 30.6.2015 $526,210 $42,097 $30,160 $538,147 30.6.2016 538,147 43,052 30,160 551,039 30.6.2017 551,039 44,083 30,160 564,962 30.6.2018 564,962 45,197 30,160 580,000 DATE DETAILS DEBIT CREDIT 2018 Cash $30,160 30 June Investment in debt security 15,037 Interest income $45,197 Cash 580,000 Investment in debt security 580,000 (Note: Above entries can be combined) 11 6.2 Smith Ltd issues 100,000 $1 redeemable convertible notes. The notes pay interest at 5% per annum. Each note converts at any time at the option of the holder into one ordinary share. The notes are redeemable at the option of the issuer for cash after 5 years. If after 5 years the notes have not been redeemed or converted, they cease to carry interest. Market rates for similar notes without the conversion option are 7% per annum. Required: Determine whether the entity has a financial liability or equity instrument, and calculate the amount of any financial liability or equity instrument in accordance with AASB 132 Financial Instruments: Presentation. Give reasons to support your answer. Equity Instrument Equity component for the conversion option as it relates to a fixed number of own equity instruments: refer para 16(b). The equity component is initially measured as the difference between issue proceeds and financial liability component Option to convert = Issue proceeds – Financial Liability component = $100 000 – $20 501 = $79 499 Financial Liability Contractual obligation for annual interest only. The issuer does not have a contractual obligation to repay principal at redemption since redemption is at the issuer’s option. Financial liability component is initially measured as the present value of the interest discounted at equivalent rate of 7% p.a. for pure play debt security. Interest is $100,000*5% = $5,000 PV of interest = $5 000 x 4.1002 (annuity factor) = $20 501 12 6.3 Golden Ltd acquired some government bonds. Under what condition(s) can Golden Ltd subsequently measure the government bonds at amortised cost? Please identify the relevant accounting standard and explain. AASB 9 requires subsequent measurement of a financial asset at amortized cost when both of the following are satisfied: 1. Cash flow characteristic test: the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal andinterest 2. Business model test: the financial asset is held within a business model is to hold financial assets in order to collect contractual cash flows. 13 7. Business combinations 7.1 On 1 July 2020, GWS Ltd confirmed and contracted to acquire all the assets and liabilities of Power Ltd. Power Ltd would then liquidate. The purchase consideration was agreed as follows: Upon liquidation, shareholders of Power Ltd to receive 4 shares in GWS Ltd for every five shares held in Power Ltd. Each GWS Ltd shares has a fair value of $2.50 at 1 July 2020. GWS Ltd incurred and paid share issue costs of $1,000. The Balance Sheet of Power Ltd on 1 July 2020 is as follows: Assets $ Liabilities $ Accounts receivable 65,000 Accounts payable 75,000 Inventories 30,000 Loans 80,000 Property, plant and equipment 260,000 Equity Goodwill 20,000 Share capital - $1 shares 150,000 Retained earnings 70,000 375,000 375,000 The assets of Power Ltd are all recorded at fair value except the following: $ Accounts receivable 40,000 Inventories 25,000 Property, plant and equipment 350,000 A check of the financial records of Power Ltd also revealed an unrecognized liability for annual leave of $25,000. REQUIRED: Prepare ALL journal entries (including cash) pertaining to the above event in the books of GWS Ltd on 1 July 2020. (4 marks) DATE DETAILS DEBIT ($) CREDIT ($) 2020 Accounts receivable 40,000 July 1 Inventories 25,000 Property, plant and equipment 350,000 Goodwill 65,000 Accounts payable 75,000 Loans 80,000 Provision for annual leave 25,000 Share capital 300,000 Share capital 1,000 Cash 1,000 Working (optional) (4/5*150,000*$2.50 = $300,000 14 7.2 In accordance with AASB 3 Business Combinations, explain why it is necessary to identify an acquirer in a business combination, and identify two factors that an entity should consider in assessing which entity is an acquirer. Solution: The acquirer is usually the entity: • Form of consideration: that transfers cash or other assets for the shares of the other [para B14]; that issues its own equity interests in exchange for another entity’s equity interests [para B15] that pays a premium to one of the entities [para B16(e)]. • Subsequent management: whose management subsequently controls the business combination and retains or receives the largest relative voting rights after the business combination [para B15(a)] whose management dominates the senior management of the combined entity [para B15(d)]. • Large minority voting interest: that holds the largest minority voting interest in the combined entity [para B15(b)]. • Predator or target: that initiated the combination [B17]. • Relative size of the businesses: whose fair value is significantly greater than that of the other combining entities [para B16]]. (Large entities normally takeover small entities) WHY? The consideration transferred is measured on the basis of the consideration given by the acquirer, while the identifiable assets and liabilities of the acquiree are measured at fair value. 15 8. Consolidation On 1 July 2021, Alpha Ltd. (‘Alpha’) acquired control over Beta Ltd. (‘Beta’) by acquiring 100% of the shares of Beta for $6,000. On the date of the acquisition, the equity in Beta comprised the following: Shareholders’ Equity $ Share Capital 3,750 Retained Earnings 1,400 Reserves 250 This equity reflected the fair value of all the assets and liabilities of Beta, with the exception of land, which had a fair value of $100 in excess of its carrying amount. The following additional information is available: (a) On 1 May 2022, Beta sold inventories costing $600 to Alpha for $1200 on credit. On 30 June 2022, only half of these goods had been sold to external parties by Alpha, and Alpha had paid $600 to Beta. All remaining inventories were sold to external entities by 30 June 2023 and Alpha paid the outstanding amount to Beta on 5 May 2023. (b) On 1 January 2022, Alpha sold an item of plant to Beta for $10 000. Immediately before the sale, Alpha had the item of plant on its accounts for $12 000. Alpha depreciated items at 5% p.a. on the diminishing balance and Beta used the straight-line method and assumes that the plant has further 10 years of useful life. (c) An inventories item with a cost of $4000 was sold by Alpha to Beta Ltd for $3 600 on 1 January 2023. Beta intended to use this item as equipment. Both entities charge depreciation at the rate of 10% p.a. on non-current assets. The item was still on hand at 30 June 2023. (d) Alpha provided management services to Beta during the period ended 30 June 2023. The total charge for those services was $500 that was unpaid at 30 June 2023. (e) Alpha borrows $600 from Beta on 1 July 2021 with an interest rate of 6% p.a. The loan is for 5 years. The interest is to be paid biannually in arrears, starting on 31 December 2021. Required: For the year ended 30 June 2023: 8.1 Prepare BCVR entries. 8.2 Prepare pre-acquisition elimination entries. 8.3 Prepare intragroup transaction elimination entries. 18 8.1 BUSINESS COMBINATION VALUATION RESERVE ENTRIES DETAILS DEBIT CREDIT Land 100 DLT 30 BCVR 70 Goodwill 530 BCVR 530 8.2 PRE-ACQUISITION ENTRIES DETAILS DEBIT CREDIT Share capital 3,750 RE 1,400 Reserves 250 BCVR 600 Shares in Beta 6,000 8.3 Intragroup Transaction Elimination Entries: (a) Retained earnings (1/7/22) Dr 210 Income tax expense Dr 90 Cost of sales Cr 300 (b) Plant Dr 2 000 Retained earnings (1/7/22) Cr 2 000 Retained earnings (1/7/22) Dr 600 Deferred tax liability Cr 600 Depreciation expense Dr 200 Retained earnings (1/7/22) Dr 100 Accumulated depreciation - plant Cr 300 Deferred tax liability Dr 90 Income tax expense Cr 60 Retained earnings (1/7/19) Cr 30 (c) Sales revenue Dr 4 000 Equipment Cr 400 Cost of sales Cr 3 600 Deferred tax assets Dr 120 Income tax expense Cr 120 Accumulated depreciation Dr 20 Depreciation expense Cr 20 Income tax expense Dr 6 Deferred tax asset Cr 6 (d) Management fees revenue Dr 500 Management fees expense Cr 500 Management fees payable Dr 500 Management fees receivable Cr 500 (e) Loan from Eve Ltd Dr 560 Loan to Kaitlyn Ltd Cr 560 Interest revenue Dr 36 Interest expense Cr 36 9 Investments in Associates /the equity method of accounting On 1 July 2001 Left Ltd acquired 40% of the equity in Right Ltd for $220 000. At this date the equity in Right Ltd consisted of: Capital 250 000 Revaluation reserve 50 000 Retained profits 150 000 Right Ltd carried its assets fair values with the exception of one item of plant & equipment whose fair value was $20 000 greater than its carrying amount. The estimated useful life of this item is 4 years. Summary of movements in the retained earnings of Right Ltd: 2002 2003 Profit after tax 140 000 200 000 Retained profits at start 150 000 210 000 Dividends (80 000) (100 000) Retained profits at end 210 000 310 000 At 30 June 2002 there were unrealised profits before tax of $10 000 arising from inventory transfers between the two entities. On 30 June 2003 Right Ltd revalued Land by $30 000 (before tax). 9.1 Required Show the general journal entries to record the above events in the books of Left Ltd under the equity method of accounting for the investment in an associate. WORKING 2002 2003 $140,000 $200,000 Dep. after tax ($20,000/4 years *70% (3,500) (3,500) Unrealised profit - closing inventory after tax ($10k*70%) (7,000) Realised profit – opening inventory after tax ($10k*70%) 7,000 129,500 203,500 Left’s share (*40%) BEFORE DIVIDENDS 51,800 81,400 Less: Share of dividends 32,000 40,000 19,800 41,400 Account Debit Credit 1/7/01 Investment in Right Ltd 220 000 Bank 220 000 30/6/02 Bank 32 000 Investment in Right Ltd 32 000 Investment in Right Ltd 51 800 Share of profit in associate 51 800 30/6/03 Bank (share of dividend $100k*40%) 40 000 Investment in Right Ltd 40 000 Investment in Right Ltd 81 400 Share of profit in associate (see working above – 2003 profit before dividends) 81 400 Investment in Right Ltd 8 400 Share of OCI in associate - Gain on revaluation (after tax) ($30k*40%*70%) 8 400 9.2 Required: Show the consolidation journal entry on 30 June 2003 assuming Left Ltd is a parent of other entities. Note by end of 30 June 2003, the associate has been held for 2 years, hence you will need to account for 2 years profit, that is opening retained earnings and current year profit. Account Debit Credit 30/6/03 Investment in Right Ltd 19 800 Opening retained profits (after dividends) (see workings above) 19 800 Dividend revenue 40 000 Investment in Right Ltd 49 800 Share of profit in associate (bf. dividends) 81 400 Share of OCI - Gain on revaluation 8 400 OR (entries can be combined as follows): Investment in Right Ltd 69,600 Dividend revenue 40 000 Retained profits 19,800 Share of profit in associate 81,400 Share of OCI – gain on revaluation 8,400 $69,600 10 Disclosure issues 10.1 Assuming an investigation during 2018-19 finds that the figure for warranty expense was incorrectly calculated for 2017-18 and should have been $96,000 and not $65,000 as shown in the table above. Required: In accordance with AASB 108: Accounting Policies, Changes in Accounting Estimates and Errors, should the error be accounted for and if so, retrospectively or prospectively? Explain. If the variance for the year ended 30 June 2018 was due to an ERROR IN CALCULATION, then providing it is material, the figures for year ended 30 June 2018 should be RETROSPECTIVELY corrected by $31,000 Such a correction would suggest that the variance between the warranty expense that would have been provided for had the error not occurred ($96,000) and the actual costs ($99,000) were not material (that is only $3,000 or only 3%) which may indicate that the significant variance for year ended 30 June 2017 may be a one-off aberration. 10.2 BHP Billiton pays an annual cash bonus to its steel workers. Required: Is this a related party transaction under AASB124 Related Party Transactions, and does it require disclosure in the annual financial statements. Explain. There is no disclosure required as it is not regarded as a related party transaction. The cash bonus occurred in an arm’s length transaction and the factory workers would not be considered as key management personnel.
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