程序代写案例-ACCT20002

Intermediate Financial Reporting
ACCT20002 Practice Exam
Solutions of Online Practice Test for the End-of-Semester Exam

1. Fair Value Meas
urement
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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