1 CORPORATE REPORTING PRACTICE EXAM 3 QUESTION 1 (6 marks) Willy Wonker Ltd acquired the assets listed below from Chikko Pty Ltd in exchange for a block of land and 150,000 shares in Willy Wonker Ltd. At the date of the transaction the shares of Willy Wonker had a par value of $1.00 and a fair value of $1.25. The block of land had an original cost of $150,000 and a fair value at the date of the transaction of $120,000. Willy Wonker also incurred $22,500 legal fees in relation to the transaction. Assets and Liabilities Book Value at Acquisition Date Fair Value at Acquisition Date Recoverable Amount at Acquisition date Debtors $15,000 $10,000 $10,000 Inventory $10,000 $10,000 $8,000 Machinery $150,000 $90,000 $120,000 Small Factory Building $40,000 $80,000 $80,000 Vacant Land $180,000 $330,000 $280,000 Loan Payable $9,000 $9,000 $9,000 Management considers that these net assets constitute a business. Required: Prepare the journal entries to record the acquisition of assets by Willy Wonker Ltd. (6 marks) Accounts Debit $ Credit $ Debtors 10,000 Inventory 10,000 Machinery 90,000 Small Factory Building 80,000 Vacant Land 330,000 Loan Payable 9,000 Share Capital 187,500 Land 120,000 Excess on acquisition/gain on bargain purchase 203,500 Legal expenses 22,500 Legal fees payable 22,500 Loss on Land 30,000 Land 30,000 QUESTION 2 (6 marks) On 1 July 2014, Bangles Ltd leased a specialised piece of machinery from Reliability Finance Corporation Ltd. The conditions of the lease were as follows: Lease term of six years; initial lease payment on 1 July 2014 of $228,000; six annual lease payments of $180,000 each, the first payable on 30 June 2015; interest rate implicit in the lease of 18 per cent p.a; the lessee is responsible for repairs and maintenance; guaranteed residual value of $238,726; the present value of the minimum lease payments is $946,000; lease is non-cancelable and the lessee will buy the asset at the end of the lease term at the guaranteed residual value. The machinery has an estimated useful life of ten years, with a scrap value of $80,000. Bangles Ltd normally applies straight-line depreciation to this machinery. Required: Prepare all relevant journal entries for Bangles Ltd in relation to the lease transaction for the year ended 30 June 2015 (first year of lease) and for the year ended 30 June 2020 (end of lease term). (6 marks) Accounts Debit $ Credit $ 1 July 2014 Lease Asset 946,000 Lease Liability 718,000 Bank 228,000 30 June 2015 Lease Liability 50,760 30 June 2015 Lease Dep. ($946k-$80k)/10 years 86,600 Date Lease payments Interest 18% Principal reduction Principal balance 1.7.2014 946000 1.7.2014 228000 228000 718000 30.6.2015 180000 129240 50760 667240 30.6.2016 180000 120103 59897 607343 30.6.2017 180000 109322 70678 536665 30.6.2018 180000 96600 83400 453265 30.6.2019 180000 81588 98412 354852 30.6.2020 180000 63873 116127 238726 Lease Schedule – use of this space is optional 3 QUESTION 3 (4 marks) On 1 January 2016, BMB Ltd purchases a debt instrument with a 5-year term for its fair value of $1800 million (including transaction costs). The instrument has a principal amount of $2200 million (the amount payable on redemption) and carries a fixed interest rate of 5.5% paid annually in arrears on 31 December. The annual cash interest income is thus $121 million ($2200 million x 5.5% rounded to nearest million). The effective interest rate is 10.34%. The debt instrument is classified as subsequently measured at amortised cost. Required Prepare journal entries in the books of BMB Ltd for the year from 31 December 2018 to derecognition of the financial asset. (4 marks) AMORTISED COST TABLE (IN $MILLION) - use of this space is optional Year Amortised cost at beginning Interest income Interest received Amortised cost at end 31.12.2016 1800 186 121 1865 31.12.2017 1865 193 121 1937 31.12.2018 1937 200 121 2016 31.12.2019 2016 208 121 2103 31.12.2020 2103 218 (rounding error) 121 + 2200 (principal) 0 Date Details Dr (in $millions) Cr (in $millions) 31.12.2018 Cash 121 Investment in debt security 79 Interest income 200 31.12.2019 Cash 121 Investment in debt security 87 Interest income 208 31.12.2020 Cash 121 4 . QUESTION 4 (7 marks) A telecommunications operator sells standard mobile phones for $360 each. It also provides network services for $35 a month, with no mobile phone included. If a customer purchases a mobile phone and a 24 month service plan, then the customer only pays $25 a month and receives the mobile phone for free. A customer, Zhang, enters into a contract with the telecommunications operator on 1 January 2016 where he receives the mobile phone for free and enters into a 24 month plan for $25 a month. Part A Prepare the journal entries to record the above contract in the books of the telecommunications operator on 1 January 2016 and at the end of the first month of the contract, 31 January 2016. (4 marks) Date Details Dr (in $) Cr (in $) 2016 Mobile phone contract asset 180 1 January Sales revenue 180 Cash 25 Mobile phone contract asset 7.50 Deferred revenue from network services 17.50 31 January Deferred revenue 17.50 Revenue 17.50 Part B AASB15 Revenue from customers requires that a promised good or service must be distinct or consist of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer. A promised good or service is distinct if the customer can benefit from the goods or services on its own or in conjunction with readily available resources and the entity’s promise to transfer the goods or services to the customer is separately identifiable from other promises in the contract. Discuss the factors that indicate an entity’s promise to transfer a goods or services is separately identifiable. (3 marks) 5 QUESTION 5 (8 marks) Razer Ltd commences operations on 1 July 2001. Two years later, on 30 June 2003, the entity prepares the following information, showing the carrying amounts for accounting purposes of its assets and liabilities Extract from accounting Balance Sheet ($) Assets 115,000 Cash Accounts receivable (net) 35,000 Prepaid Interest expense 5,000 Plant-net 160,000 Land 400,000 Liabilities $715,000 25,000 Accounts payable Unearned revenue 10,000 Accrued interest 5,000 Provision for long service leave 50,000 Provision for warranty 70,000 Loan payable 355,000 Net assets $515,000 $200,000 Other information • After adjustments are made for differences between tax rules and accounting rules, it is determined that the Taxable Income/Profit of Razer Ltd is $400,000. • There is a Doubtful Debt Provision of $5,000. • An item of plant is purchased at a cost of $200,000 on 1 July 2002. For accounting purposes it is expected to have a life of 5 years; however, for taxation purposes it can be depreciated over 4 years. It is not expected to have any residual value. • None of the amounts accrued in respect of Warranty Expenses or Long Service Leave have actually been paid. • The tax rate is 30 per cent. • The Deferred Tax Assets and Liabilities as at the year end 30 June 2002 were $20,000 and $40,000 respectively. Required: Prepare all necessary journal entries for the year ended 30 June 2003. Show workings on the worksheet provided. (6 marks) Accounts Debit $ Credit $ ITE 120,000 ITP 120,000 DTA 22,000 ITE 22,000 DTL 35,500 DEFERRED TAX WORKSHEET Assets CA FTA FDA Tax base Deductible TD Taxable TD $ $ $ $ $ $ Cash 115,000 0 0 115,000 Accounts receivable (net) 35,000 0 5,000 40,000 5,000 Prepaid Interest expense 5,000 5,000 0 0 5,000 Plant-net 160,000 160,000 150,000* 150,000 10,000 Land 400,000 400,000 400,000 400,000 715,000 Liabilities Accounts payable 25,000 0 0 25,000 Unearned revenue ** 10,000 0 (10,000)** 0 10,000 Accrued interest 5,000 0 (5,000) 0 5,000 Provision for long service leave 50,000 0 (50,000) 0 50,000 Provision for warranty 70,000 0 (70,000) 0 70,000 Loan payable 355,000 0 0 355,000 515,000 Net assets 200,000 Temporary differences 140,000 15,000 DT balances at end 42,000 4,500 DT balances at beginning 20,000 40,000 Adjustments 22,000 Dr 35,500 Dr * FDA for plant is Cost $200k – Accumulated tax depreciation (claimed deductions) $50k = $150k (future deductions to be claimed) ** Unearned revenue –– This is revenue received in advance, that is we have received cash but the service has not been performed, not revenue for accounting purposes but is assessable for tax purposes . To calculate the tax base for unearned revenue = CA – Revenue received in advance. Tax base is always zero as the revenue has been taxed on receipt of the cash. 7 QUESTION 6 (6 marks) The non-current assets section of the Balance Sheet of Witch-hunt Ltd as at 30 June 2003 is as follows: Non-Current Assets Buildings 1,700,000 Accumulated Depreciation (500,000) Carrying Amount 1,200,000 Machinery 4,850,000 Accumulated Depreciation (1,700,000) Carrying Amount 3,150,000 Land, 7,000,000 Motor Vehicles 740,000 Accumulated Depreciation (260,000) Carrying Amount 480,000 The Asset Revaluation Surplus of Witch-hunt Ltd as at 30 June 2003 is $460,000 ($160,000 of which relates to Buildings). On acquisition Witch-hunt Ltd elected to use the revaluation model to measure Land and Buildings and the cost model for Machinery and Motor Vehicles. Witch-hunt Ltd now has a policy of only revaluing assets when it is mandatory under the applicable accounting standards. Director’s valuations were obtained for the listed non-current assets as at 30 June 2003, as follows: Buildings Fair Value 950,000 Recoverable Amount 960,000 Machinery 3,600,000 3,100,000 Land 8,500,000 8,500,000 Motor Vehicles 400,000 290,000 Required: Prepare general journal entries to account for asset revaluations and asset value adjustments as at 30 June 2003. (ignore tax effects) (6 marks) 8 Accounts Debit $ Credit $ Accumulated Depreciation 500,000 Building 500,000 ARS 160,000 Loss on Revaluation (P&L) 90,000 Building 250,000 Impairment Losses 50,000 Accumulated Depn & Impairment of Machinery 50,000 Cost model: CA $3.15m > RA$3.1m = Impairment Loss $50k Land 1,500,000 Gain on revaluation (OCI) 1,500,000 Gain on revaluation (OCI) 1,500,000 ARS 1,500,000 Impairment Losses 190,000 Accumulated Depn & Impairment of Motor Veh 190,000 9 QUESTION 7 (28 marks) On 1 July 2010 RATTE Ltd ("RATTE") acquired control over BAGGE Ltd ("BAGGE") by acquiring 90 per cent of the issued share capital of BAGGE Ltd for $10,000,000 cash. The shareholders’ equity and asset section of BAGGE's Balance Sheet at 1 July 2010 was: Shareholders’ Equity $ Share Capital 7,500,000 Retained Earnings 2,800,000 General Reserve 500,000 Assets Land 2,600,000 Buildings 3,200,000 • On 1 July 2010, all assets and liabilities in BAGGE’s Balance Sheet were stated at their fair values • Goodwill is assessed for impairment on 30 June 2015 – $40,000. • The present rate of company income tax is 30 per cent. The following transactions occurred: a) During the year ended 30 June 2015, BAGGE Ltd sold inventory of Pollywaffles to RATTE Ltd on credit at a price of $600,000. BAGGE had recorded this inventory at cost of $460,000 immediately prior to sale. Thirty five percent (35%) of this inventory was sold to external parties during the year ended 30 June 2015 and the remainder was still in stock at 30 June 2015. RATTE had not paid BAGGE for this stock at 30 June 2015. b) During the year ended 30 June 2015, BAGGE Ltd sold inventory of MarBars to RATTE Ltd for cash at a price of $200,000. BAGGE had recorded this inventory at cost of $260,000 immediately prior to sale. Fifty percent (50%) of this inventory was sold to external parties during the year ended 30 June 2015 and the remainder was still in stock at 30 June 2015. c) During the year ended 30 June 2014, BAGGE Ltd sold inventory to RATTE Ltd for cash at a price of $300,000. BAGGE had recorded this inventory at cost of $350,000 immediately prior to sale. Half of this inventory was sold to external parties during the year ended 30 June 2014 and the other half was sold to external parties during the year ended 30 June 2015. d) RATTE Ltd provided a loan of $500,000 to BAGGE Ltd on 1 May 2009. The loan terms require a principal repayment of $300,000 on 1 September 2012. During the year ended 30 June 2015 no cash was paid by BAGGE to RATTE to cover interest. The annual interest rate on the loan was seven percent (7%). Both entities had recorded interest accruals. 10 e) An item of equipment owned by BAGGE Ltd (original cost $600,000, accumulated depreciation $250,000 as at 1 July 2012) was sold to RATTE Ltd for $380,000 on 1 July 2012. RATTE will depreciate the equipment on a straight-line basis over the next 5 years. Income Statements and Balance Sheets for the 30 June 2015 year are given below. Income Statements RATTE Ltd ($ '000) BAGGE Ltd ($ '000) Sales 18,000 10,000 less COGS (12,800) (6,000) Gross Profit 5,200 4,000 Profits on sale of NCAs 3,000 1,000 Dividends Revenue 810 (900) Interest revenue 610 Interest expense (800) Depreciation expense (1,850) (1,150) Impairment loss – goodwill - - Operating Profit before tax 6,970 2,950 Income tax expense (2,000) (900) Net Profit (after tax) 4,970 2,050 Retained Earnings 1 July 2014 2,200 2,300 Interim dividend paid (1,100) (300) Final Dividend Declared (600) Retained Earnings (30/6/2015) 6,070 3,450 11 Balance Sheets RATTE Ltd ($ '000) BAGGE Ltd ($ '000) Retained Earnings (30/6/2015) (from above) 6,070 3,450 Share capital 10,000 8,000 General Reserve 3,160 1,900 Total Equity 19,230 13,350 Current liabilities 1,800 800 Income tax payable Creditors & Accruals 4,640 1,700 Dividends Payable 1,100 600 Non-Current liabilities 3,100 1,050 Loans payable Long-term (external) debt 4,000 6,300 Deferred tax liability 250 100 Total Liabilities 14,890 10,550 Total Equity & Liabilities 34,120 23,900 Current assets 1,000 1,000 Cash Inventory (30/6/2015) 3,000 3,500 Debtors, Accruals, Prepayments 1,640 2,320 Dividends Receivable 540 100 5,850 Non-current assets 2,100 Loans receivable Deferred tax asset 100 Vehicles (various) 6,000 Accumulated Depreciation (2,100) (1,500) Plant and Equipment 4,800 6,000 Accumulated Depreciation (1,300) (1,300) Investment in BAGGE Ltd 10,000 - Land 6,100 3,250 Buildings 2,440 4,980 Accumulated Depreciation Goodwill (200) - (300) - Total Assets 34,120 23,900 Required: (a) Prepare all necessary consolidation journal entries for the year ended 30 June 2015. (20 marks) 12 Accounts Debit $ Credit $ Share Capital 6,750,000 General Reserve 450,000 Retained Earnings (1/7/2014) 2,520,000 Goodwill on Acquisition 280,000 Investment in Bagge 10,000,000 Impairment Loss – Goodwill 40,000 Accumulated Impairment Loss – Goodwill 40,000 Sales 600,000 COGS 509,000 Inventory 30/6/2015 (B/S) 91,000 DTA 27,300 ITE 27,300 Creditors & Accruals (A/c Payable) 600,000 Debtors, Accruals, Prepayments (A/c Receivable) 600,000 Sales 200,000 Inventory (B/S) 30,000 COGS 230,000 ITE 9,000 DTL 9,000 COGS (P/L) 25,000 Retained Earnings 1/7/2014 25,000 Retained Earnings 1/7/2014 7,500 ITE 7,500 13 Loans Payable 200,000 Loans Receivable 200,000 Interest Revenue 14,000 Interest Expense 14,000 Creditors & Accruals (interest payable) 14,000 Debtors, Accruals, Prepayments (interest rec.) 14,000 Plant & Equipment 250,000 Accumulated Depreciation – P&E 250,000 Retained Earnings 1/7/2014 30,000 Plant & Equipment 30,000 DTA 9,000 Retained Earnings 1/7/2014 9,000 Accumulated Depreciation – P&E 18,000 Depreciation Expense 6,000 Retained Earnings 1/7/2014 12,000 ITE 1,800 Retained Earnings 1/7/2014 3,600 DTA 5,400 Dividend Revenue 810,000 Interim Dividend 270,000 Final Dividend Declared 540,000 Dividends Payable 540,000 Dividends Receivable 540,000 14 Work space for question 6(b) NCI in Net Profit 199,400 Share Capital 800,000 General Reserve 190,000 Retained Earnings (1/7/2014) 230,490 Equity attributable to NCI 1,329,890 Interim Dividends paid 30,000 Final Dividend declared 60,000 (could combine two dividend items) (b) In the box below, show the amount of Inventory that would be reported in the consolidated Balance Sheet as at 30 June 2015. Show workings in space below. (2 mark) Ltd 3,000,000 Ratte Bagge Ltd 3,500,000 6,500,000 Less: Adjustment re: Unrealised Profit in Closing Inventory 61,000 Balance in consolidated accounts 6,439,000 (c) In the box below, show the total equity attributable to NCI at 30 June 2015. Show workings in space below (6 marks). 15 Question 6(c) NC Interest calculation Bagge (Sub) NC Interest 100% 10% Opening Retained Earnings 2,300,000 Less: Unrealised Gain on Sale – equipment (net of tax) (21,000) Add: Excess Depreciation – equipment (2 yrs) (net of tax) 8,400 Add: Unrealised Loss in Opening Inventory (net of tax) 17,500 Adjusted Ret Earnings 2,304,900 230,490 Net Profit (Sub contribution to Consolid. Ret Earnings – begin) Operating Profit for the Year 2,050,000 Add: Excess Depreciation – equipment (net of tax) 4,200 Less: Unrealised Loss in Opening Inventory (net of tax) (17,500) # Less: Unrealised (net) Profit in Closing Inventory (net of tax) (63,700) # Add: Unrealised (net) Loss in Closing Inventory (net of tax) 21,000 Adjusted Net Profit 1,994,000 199,400 (Sub contribution to Consolid. NP) Profits Available for distribution 4,298,900 429,890 Less: Dividends declared & paid Interim (paid) (300,000) (30,000) Final (declared) (600,000) (60,000) Adjusted Closing Retained Earnings 3,398,900 339,890 (Sub contribution to Consolid. Ret Earnings – end) (300,000) (300,000) (600,000) (600,000) Total Non-Controlling Interest (600,000) 1,329,890 # provided for illustrative purposes these two adjustments could be combined 16 QUESTION 8 (7 marks) In 2000 Left Ltd acquired a 20% investment in Right Ltd for $2 million. At the time of acquisition the equity in Right Ltd consisted of Share Capital of $5 million and Retained profits of $3 million. This equity reflected the fair value of net assets with the exception of an item of PPE that was carried at $400,000 below its fair value. This asset had a remaining estimated useful life of 10 years. During 2001 Right Ltd revalued its assets by $300,000. At 30 June 2002 the carrying amount of the investment in Right Ltd was $2.7 million in the books of Left Ltd. At 30 June 2002 Right Ltd held inventory purchased from Left Ltd. Left Ltd had recorded a profit of $150,000 on the sale. This inventory had been sold by Right Ltd by 30 June 2003. Right Ltd declared an after tax profit of $500,000 and dividends of $250,000 for the year ended 30 June 2003. Required a) Calculate the amount of goodwill acquired by Left Ltd pertaining to the investment in Right Ltd and state how this goodwill would be reported by Left Ltd. (3 marks) b) Show the journal entry to recognise the asset revaluation in the books of Left Ltd. (1 mark) Date Accounts Debit $ Credit $ Investment in Associate 42,000 Revaluation Surplus 42,000 17 c) State the relevant line disclosures pertaining to the investment in Right Ltd in the 30 June 2003 financial statements of Left Ltd. (3 marks) In comprehensive income statement as part of P&L Share of profit in Associate $115,400 Under non current assets in the balance sheet Investment in associate $2,765,400 Workings: Profit after tax (given) 500,000 Realised gain on opening inventory ($150k x 70%) 105,000 FV increment depreciation ($400,000 / 10 x 70%) (28,000) Adjusted profit bf. dividends 577,000 x 20% share 115,400 CA of investment at 30 June 2002 2,700,000 Share of profit (per above) 115,400 Dividend (250,000 x 20%) (50,000) Balance at 30 June 2003 2,765,400
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