Exam Revision

Question 1

Define Reporting Entity

Answer 1

All entities (including economic entities) in which it would be reasonable to expect the existence of users dependent on general purpose financial reports for information about that entity. This information will be useful to them for making and evaluating decisions about the allocation of scarce resources. Reporting entities shall prepare general purpose financial reports.

Question 2

Identify the users with the power to demand SPECIAL PURPOSE FINANCIAL STATEMENTS

Answer 2

Bank – Shareholders - Employees

Question 3

Identify the users that can only rely on GENERAL PURPOSE FINANCIAL STATEMENTS

Answer 3

Suppliers – Trade creditors

Question 4

Determine whether Seaside Ltd is a small proprietary company under the ASIC Corporations Act 2001.

Answer 4

TEST: (needs to meet 2 of these)

1. Its gross operating revenue is less than $25 million
2. Its gross assets are less than $12.5 million
3. It has fewer than 50 employees

Question 5

As Seaside’s accountant, advise the company about its possibilities to prepare GENERAL purpose financial statements in compliance to AASB, and/or SPECIAL purpose financial statements.

Answer 5

When there is a conflict between SAC1 and the Corporations Act 2001, the requirements in Corporations Act supersedes. Hence in this scenario, Seaside Ltd is not required to prepare general purpose financial reports. The main disadvantage of the Corporations Act 2001 is that in some cases, it does not serve the demands of financial users as demonstrated in this case. However, the advantage of the Corporations Act 2001 requirement is that it removes the subjectivity
in the definition of a reporting entity.

Question 6

Recoverable amount

Answer 6

Recoverable amount is the remaining future economic benefit. Calculated as the higher between net selling price and value in use.

Question 7

Impairment loss entry

Answer 7

DR Impairment Loss

CR Accumulated Impairment Loss

Question 8

Loss on Revaluation Entry

Answer 8

DR Loss on revaluation

CR Land

Question 9

Reversal of Revaluation decrement entry

Answer 9

DR Land

CR Gain on revaluation

Question 10

What do you do to accumulated depreciation before recording a revaluation

Answer 10

Remove it!!

Question 11

What happens when you revalue above cost price

Answer 11

Use a revaluation surplus entry

Question 12

c) Joy Ltd also consulted the accounting firm to be advised on the possibility to carry the land at fair value, instead of at cost, from the next financial year. After carrying out some research, you know that the fair value of the land at the 30 June 2016 is $2,600,000 (Cost price is 2000000) and the land is located in a fast-developing area where the land prices are expected to increase in the next few years. Furthermore, you also know that the main debt holder of Joy Ltd — as part of its due diligence – reviews – the company’s solvency as measured by the debt-to-assets ratio. In consideration of such circumstances, advise Joy Ltd about the implications of carrying land at fair value instead of at cost. Provide reasons for your answer.

Answer 12

The company could consider the change to fair value, as at the moment the cost model seems to underestimate the actual value of the land. In consideration of the due diligence performed by the bank on the debt-asset ratio, it is probably more convenient for the company to move to fair value, because, as it is forecasted a further increase of prices, the debt-asset ratio will progressively improve, giving the company also the possibility to obtain even more fund or not breaching any agreement with the debt holder with respect of its solvency. The profit won’t be penalised, as land is not depreciated and therefore, the increase in value after revaluation would not lead to an increase of depreciation expenses.

Question 13

Example of a development costs entry

Answer 13

DR Development Costs (New product) 90,000

CR Sampling and testing costs 90,000

Question 14

Is there goodwill test (when acquiring a business)

Answer 14

Cost of Acquisition > FV of net Assets

Question 15

Goodwill calculation

Answer 15

CoA – FV of Net Assets

Question 16

Amortisation of development expense entry

Answer 16

Dr Development expense

Cr Accumulated amort. deferred development costs

Question 17

Bond Ltd is planning to expand the business and to make big investments in the next year, therefore on 1 July 2016:

a) Purchases governmental bonds for a price of $575,000 (face value $500,000 and 10% interest rate);
b) issues to the public 5 years bonds for $500,000 which pay interests every 6 months at 10% interest rate;
c) purchases the 15% of the shares of Candy Ltd for $80,000, planning to acquire in the future its entire share capital;
d) obtain a loan from the Commonwealth Bank for $600,000, at 10% interest rate.

REQUIRED:
1) For each transaction indicate whether it gives rise to financial assets, financial liabilities or equity instruments for Bond Ltd.

Answer 17

a) Financial assets
b) Financial Liabilities
c) Financial assets
d) Financial liabilities

Question 18

2) Explain how a financial asset can be measured, making a distinction between the initial measurement and the subsequent measurement.

Answer 18

Initial measurement at fair value +/- transaction costs

Subsequent measurement at amortised cost, or fair value through P/L or fair value through OCI

Question 19

As stated above, among the other transactions, on 1 July 2016 Bond has purchased for a price of $575,000 some governmental bonds that have a face value of $500,000 and pay annual interests at 10% interest rate on 30 June each year and pay back the principal on the 5th year.
You also know that Bond normally purchases this sort of instruments with the aim to collect the contractual cash flows.

REQUIRED

1) Bond is applying the amortised cost for the subsequent measurement of the instrument. Is this the correct treatment according to AASB 9 Financial Instrument? Justify your answer.

Answer 19

Yes the treatment is correct, because Bond holds the instruments to benefit from the contractual cash flows (business model test) and the instrument is providing contractual cash flows at established dates (contractual cash flows test).

Question 20

Cash flows of a bond

Answer 20

1st: Outflow of the payment

2nd,3rd etc: Inflow of interest payments

Last: Inflow of interest payment and face value

Question 21

3) How would you calculate the effective interest rate paid by the bonds, based on the cash-outflows and inflows of the bonds (provide formula)?

Answer 21

27/5/19

I wanted to add a note here but I really didn’t know what to say. I guess I could tell you that I ordered LA Noire for the 3rd time, this time for switch and I ordered a Superman necklace.

Question 22

Bond and bond interest entries

Answer 22

1 July 2016
DR Governmental bonds (fin assets) 575,000
CR Cash 575,000

30 June 2017
DR Cash 50,000
CR Interest revenue 36,801.14
CR Governmental Bond 13,198.86

Question 23

b) Determine whether Midget Ltd can measure the government bonds at amortised cost.

Answer 23

Midget Ltd can use amortised cost as the basis for measuring government bonds as it meets the conditions of both Business model and Contractual Cash flow characteristics:

• Business model: the government bonds are held within a business model whose objective is to hold them in order to collect contractual cash flows; and
• Contractual cash flows characteristics: the contractual terms of the government bonds give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

Question 24

Bond final journal entry

Answer 24

Dr Cash 200 000
Cr Investment in corporate bonds 75 471
Cr Interest income 124 529

Dr Cash 2 000 000
Cr Investment in corporate bonds 2 000 000

Question 25

How do you calculate lease liability

Answer 25

Present value, lease payments + present value of residual

Question 26

Leased asset =

Right to use asset =

Answer 26

lease liability + initial direct costs incurred to enter into the lease agreement (includes any lease payments made on commencement date)

Question 27

c) Provide the journal entries of Sandrigham Ltd to record the commencement of the lease agreement on 1 July 2018.

Answer 27

DR Leased equipment 95,961.90

CR Cash 10,000
CR Lease liability 85,961.90

Question 28

d) Provide the journal entries of Sandrigham Ltd to record the first interest payment on 30 June 2019

Answer 28

DR Interest expense 6,017.33
DR Lease Liability 15,982.67
CR Cash 22,000

Question 29

3) Illustrate two (2) reasons why the previous accounting standard for leases (AASB117) was criticised and required changes.

Answer 29

The previous standard was complicated and difficult in the application due to the distinction between operating and finance leases

The previous standard was excluding some leases that, therefore, were not represented in the report. This approach was creating a reduction in disclosure and less information was provided to investors about company’s liabilities.

Question 30

Taxable income calculation

Answer 30

Accounting revenues (according to AASB standards)
+ Taxable revenues (according to tax rules)
+ Accounting expenses (according to AASB standards)
-
Deductible expenses (according to tax rules)

Question 31

Tax Expense calculation

Answer 31

Tax Expense = Income Tax Payable + Increase in DTL

Increase in DTA

Question 32

DTA AND DTL CALCULATIONS

Answer 32

4/6/19

Sick for exams…. again

Question 33

Determine the amount of Goodwill or Gain on Bargain Purchase (calculation)

Answer 33

Fair Value of Identifiable Net Assets and Liabilities of new Subsidiary
= Goodwill or Gain on Bargain Purchase

Where the difference is positive, the difference is Goodwill; where the
difference is negative, the difference is Gian on Bargain Purchase

Question 34

c) Explain if the amounts recorded in the “revaluation surplus” account are to be considered profit and why.

Answer 34

The gain on revaluation of Land is not included in profit but is included in other comprehensive income. At the moment they constitute an increase in shareholders’ equity and are classified as OCI at the end of the year.

Question 35

d) Illustrate step by step the process of impairment testing for an asset carried at cost model.

Answer 35

Determine the recoverable amount as the higher between Net selling price and Value in use
Compare Recoverable amount with carrying amount of the asset
If carrying amount > recoverable amount an impairment loss for the difference must be recognised (as a loss in the P/L of the year)
If carrying amount < recoverable amount, (given the cost model is being used), nothing should be recorded (because in the cost model, valuations above cost are not permitted)

Question 36

For each situation identify the nature of the amount and how if at all it should be recorded in the year-end 30 June 2016 financial statements. Provide reasons to support your answer.

a) An amount of $3 million payable by Jeff Ltd as compensation due to an ongoing lawsuit for violation of copyrights. The case is still under review by the court at the reporting date.

Answer 36

CONTINGENT LIABILITY (1 mark). Given the court case is still in progress, either Jeff Ltd is arguing it is not liable, in which case a future sacrifice of economic benefits is not probable (1 mark), or disputing the amount, in which case the liability cannot be reliably measured (or 1 mark).

Question 37

For each situation identify the nature of the amount and how if at all it should be recorded in the year-end 30 June 2016 financial statements. Provide reasons to support your answer.

b) An amount of $40,000 owing to Page Ltd for inventory delivered and invoiced to Jeff on 30 May 2016 and to be paid on 1 October 2016.

Answer 37

LIABILITY – account payable for $40,000 (1 mark) Present obligation, where time and amount are certain (1 mark)

Question 38

For each situation identify the nature of the amount and how if at all it should be recorded in the year-end 30 June 2016 financial statements. Provide reasons to support your answer.

c) It has been discovered that an amount of $10,000 payable to a foreign supplier was not included in the annual report for financial year 2014-15

Answer 38

It is a prior period error. The comparative figures for 2014-2015 appearing in the 2016 financial report must be corrected by increasing the liability, accounts payable

Question 39

As an accounting practitioner at the firm, you are asked to identify whether the amounts below are intangible assets according to AASB 138 Intangible assets. Provide reasons supporting your answer.

a) Alfredo spent $10,000,000 to buy the famous pasta brand name “Barilla”. The company intends to recognise this brand as an intangible asset.

Answer 39

Brand name can be recognised as intangible assets (1 mark) The brand name is purchased from a third party (1 mark)

Question 40

As an accounting practitioner at the firm, you are asked to identify whether the amounts below are intangible assets according to AASB 138 Intangible assets. Provide reasons supporting your answer.

b) On 30 June 2016, independent valuations indicate that Alfredo Ltd, as a business, has developed goodwill for $780,000, if the company was sold in the open market. Alfredo Ltd intends to recognise the goodwill as intangible assets.

Answer 40

Goodwill cannot be recognised as an intangible asset by Alfredo because it is internally generated.
{If the company is subsequently sold, the goodwill can be recognised in the consolidated accounts of the purchaser, because then the goodwill would be purchased}.

Question 41

d) Illustrate one of the benefits that the new accounting standard AASB16 Leases will provide to existing and potential investors in respect to the old accounting standard

Answer 41

ALL LEASES are represented in the statement of financial position of Lessees (except short-term leases less than 1 year, and leases for assets of low value), which provides more information about obligations (liabilities) and assets of the lessee to investors
Less complicated/reduced complexity, as it is no longer necessary for lessees to classify leases as operating or finance leases.

Question 42

(d) Explain what a deferred tax asset represents and provide an example of a “tax-accounting” situation where a deferred tax asset arises

Answer 42

Deferred tax asset represents prepaid taxes, or a future tax saving / reduction in tax.
It occurs when the company pays more taxes in current period and will pay less tax in future periods, (when the temporary difference reverses).
Example: depreciation expense for tax purposes is lower than the depreciation expense for accounting purposes. This will cause the Carrying Amount of the asset to be lower than the Tax Base of the asset, which results in a deductible temporary difference and Deferred Tax Asset.
This situation causes taxable income to be higher in the early years of the asset’s life, resulting in higher tax payments. In the later years of the asset’s life, tax depreciation will be higher than accounting depreciation, which causes taxable income to be lower, resulting in lower tax payments.

Question 43

a) Explain whether Diesel Ltd is controlling Play Ltd (they bought 100% of shares)

Answer 43

Diesel Ltd has the control because it owns the 100% of the shares, and therefore has 100% of the voting rights. Therefore Diesel can direct all the operating and finance decisions of Play, and affects the dividends (variable returns( it receives from Play by the quality of its decision making relating to Play Ltd.

Question 44

c) Provide the adjusting journal entries to prepare the consolidated financial statement as at 1 July 2015. example

Answer 44

DR Share Capital			300,000
DR Retained Earnings 1/7/15		  85,000
DR Brand Name			  85,000
DR Goodwill				330,000
CR Investment in Play Ltd			800,000

Question 45

d) Illustrate the main reasons for the origins of groups and provide 1 example to support your answer.

Answer 45

A group can be created by one entity purchasing another entity. A clothes retailer could acquire one of its suppliers, (vertical expansion), to control over the design of clothing its sells.
Another example, an Australian clothes retailer could register a new subsidiary in Hong Kong, to commence retailing in Hong Kong, (horizontal growth).

Question 46

Example of a tax journal entry

Answer 46

DR Income Tax expense 99,000
DR DTA 6000
CR Income Tax payable 96,000
CR DTL 9,000

Question 47

Describe the major factors to be considered when determining which are the entities to be consolidated by the parent company to produce consolidated financial statement.

Answer 47

Describe the major factors to be considered when determining which are the entities to be consolidated by the parent company to produce consolidated financial statement.

The definition of Control has three elements (AASB10.6 and .7):

1) The parent has power of the subsidiary:
2) The parent is exposed to variable returns from the subsidiary; and
3) The parent has the ability to use its power of the subsidiary to affect the variable returns it receives from the subsidiary

Usually, a parent entity has control of a subsidiary, if holds the majority of the voting power in the subsidiary

Determining whether a parent-subsidiary exits, depends upon professional judgement considering all the circumstances.
For example, a parent can control a subsidiary by holding less than 50% of voting power, (e.g.35%), if the remaining voting power is distributed amongst many small shareholders.

Question 48

On 30 June 2015, Holding Ltd has the following investments in other companies:

a) 90% shares of Apple Ltd;
b) 100% shares of Pear Ltd, which in turn owns the 80% shares of Carrot Trust;
c) 50% shares of Orange Ltd, whose other 50% shares are owned by Market Ltd;
d) 10% shares of Avo Ltd.

REQUIRED:
1) List the entities that are subsidiaries of Holding Ltd and are to be consolidated in the consolidated financial report (check for control)

Answer 48

The subsidiaries are

a) Apple Ltd
b) Pear Ltd
b) Carrot Trust (Holding Ltd has indirect control via Pear Ltd)

[Note a subsidiary entity can take any legal form: company, trust, partnership. The issue is whether the investor (Holding Ltd) has control].

c) Orange Ltd is not a subsidiary but a joint venture.

Question 49

3) If goodwill arises from the business combination, explain how it will be amortised for accounting purposes.

Answer 49

Goodwill has an indefinite life; therefore, amortisation of goodwill is prohibited. Instead, goodwill is subject to annual impairment testing

Question 50

3) There can be peculiar circumstances when a gain on bargain purchase arises from a business combination.
Explain why it is considered to be a gain, and how the gain on bargain purchase is accounted for in the consolidated financial statement.

Answer 50

The gain on bargain purchase is a gain because the Net Identifiable Assets acquired have been purchased for consideration less than their fair value, that is:
Fair Value of Purchase Consideration < Fair Value of Net identifiable assets acquired

The parent entity could make an immediate profit by selling all the assets of the new subsidiary for their fair values and discharging the liabilities.

The Gain on Bargain Purchase is recognised as an income (gain) in the Consolidated Statement of Profit or Loss at acquisition date
Note: the Gain on Bargain Purchase is only recorded in the consolidated accounts, not in the separate accounts of the Parent entity or subsidiary.

Question 51

The consolidation process involves the following steps:

Answer 51

1) Recognise any unrecognised identifiable assets and liabilities of the subsidiary, and revalue identifiable assets of subsidiary to fair value at acquisition date

2)
Calculate the amount of goodwill (or gain on bargain purchase) arising from the business combination

3) Substitute the Investment in Subsidiary account (in parent’s accounts) with the identifiable assets and liabilities of the subsidiary and recognise goodwill (or gain on bargain purchase)

4)
Eliminate all intragroup transactions and debts.

Question 52

Each of the following events occurred after the reporting period ending on 30 June 2019, but before the financial report of Jane Ltd was authorised for issue on 18 September 2019. Identify whether each event is an adjusting event after the reporting period, a non-adjusting event after the reporting period, or a prior period error.
For each event, explain what Jane Ltd is required to do:

(a) On 15 July 2019, Jane received the news that one of its debtors became insolvent. Jane Ltd is owed a material amount from this debtor at reporting date.

Answer 52

Adjusting event, because it relates to a condition existing at reporting date, 30 June 2019, as the debtor would have been in financial difficulty at 30 June 2019.

The financial statements of Jane Ltd for the year ending 30 June 2019, need to be adjusted by reducing accounts receivable by writing off the debt, and recognising a bad and doubtful debts expense.

Question 53

Each of the following events occurred after the reporting period ending on 30 June 2019, but before the financial report of Jane Ltd was authorised for issue on 18 September 2019. Identify whether each event is an adjusting event after the reporting period, a non-adjusting event after the reporting period, or a prior period error.
For each event, explain what Jane Ltd is required to do:

(b) On 25 July 2019 a fire occurred at the main plant, significantly damaging the company’s property, plant and equipment.

Answer 53

Non-Adjusting event, because it relates to a new condition arising after reporting date, 30 June 2019, as the fire occurred on 25 July 2019.

The non-adjusting event need to be disclosed in the notes to the accounts, disclosing the nature of the event, (fire at Jane Ltd’s main plant significantly damaging property, plant and equipment), and the financial effect of the event, (amount of the damage, and disruption to future operations).
Note: the financial statements of Jane Ltd for the year ended 30 June 2019 should not be adjusted, because the event does not relate to that financial year, (at reporting date, 30 June 2019, the main plant was not damaged).

Question 54

Each of the following events occurred after the reporting period ending on 30 June 2019, but before the financial report of Jane Ltd was authorised for issue on 18 September 2019. Identify whether each event is an adjusting event after the reporting period, a non-adjusting event after the reporting period, or a prior period error.
For each event, explain what Jane Ltd is required to do:

(c) On 27 July 2019 Jane Ltd discovered that an amount of $9,000 representing interest expense owed to the bank was not included in the financial statements for the 2017-2018 financial year.

Answer 54

Prior Period Error, because when the financial statements for the 2017-18 financial year were prepared, information about the interest was available, but the interest was incorrectly omitted from financial statements for the 2017-18 financial year.

The Prior Period Error is accounted for, by retrospectively correcting the error by:

(i) Restating the comparative financial statements for 2017-18 included in the 2018-19 financial report, increasing interest expense by $9,000, and increasing interest payable of $9,000;
(ii) Reducing the opening balance of retained earnings for the 2018-19 financial year.

The prior period error needs to be disclosed in the notes to the accounts, disclosing the nature of the event, (omission of accrued interest expense from 2017-18 financial statements), and the financial effect of the event, (interest expense for 2017-18 increased by $9,000, and interest payable at 30 June 2018 increased by 9,000).

Question 55

Each of the following events occurred after the reporting period ending on 30 June 2019, but before the financial report of Jane Ltd was authorised for issue on 18 September 2019. Identify whether each event is an adjusting event after the reporting period, a non-adjusting event after the reporting period, or a prior period error.
For each event, explain what Jane Ltd is required to do:

(d) On 30 July 2019 Jane Ltd concluded the negotiations and acquired Pitch Ltd. This acquisition will allow Jane to expand its business internationally.

Answer 55

Non-Adjusting event, because it relates to a new condition arising after reporting date, 30 June 2019, as Pitch Ltd was acquired on 30 July 2019.

The non-adjusting event need to be disclosed in the notes to the account, disclosing the nature of the event, (acquisition of Pitch Ltd), and the financial effect of the event, (amount paid for Pitch Ltd, and international expansion of operations).
Note: the financial statements of Jane Ltd for the year ended 30 June 2019 should not be adjusted, because the event does not relate to that financial year, (at reporting date, 30 June 2019, Pitch Ltd had not been purchased).

Question 56

On 30 June 2019, the end of the current reporting period, Lily Ltd reviewed the useful life of its manufacturing equipment. Lily Ltd decided to revise the useful life of a particular item of manufacturing equipment, acquired five years earlier on 1 July 2014 for $300 000. The useful life was revised from an original estimate of 12 years to a revised estimate of 8 years.

The equipment is depreciated on a straight-line basis over its useful life, with zero residual value. No depreciation has been recorded for in the financial year ending 30 June 2019.

REQUIRED
(a) Identify whether this event is a prior period error, or a change in accounting estimates.

Answer 56

The change in the useful life of the manufacturing equipment is a change in accounting estimates, because it results from new information, experience in using the manufacturing equipment.
Note, the revision of the useful life of the manufacturing equipment is not a prior period error, because when the useful life of the manufacturing equipment was estimated on 1 July 2014, it was estimated based upon the best information available at that time.

Question 57

An
asset is to be recognised in the statement of financial
position (balance sheet) only when:

Answer 57

1. It is probable that future economic benefits embodied in the asset will occur
2. The asset possesses a cost or other value that can be measured reliably

Question 58

Research

Answer 58

Original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding. Does not have a specific commercial objective. Generally precedes development

Question 59

Development

Answer 59

Application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems, or services prior to the commencement of commercial production or use. Typically follows research activity and involves the commercial application of knowledge generated in earlier research phases.

Question 60

Equity Instruments

Answer 60

Any contract that evidences a RESIDUAL*interest in the asset of an entity after deducting all of its liabilities (i.e. ordinary shares in a company). But the contract DOES NOT include an obligation to deliver cash or another financial asset to another entity or to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the issuer.

Question 61

Example of equity instruments

Answer 61

Ordinary shares

Question 62

Deferred tax liability defined

Answer 62

It is generated by a taxable temporary difference when the carrying amount of the asset exceeds the tax base, or the tax base of a liability exceeds its carrying amount. It represent a deferral of taxation payments to future periods. The tax payments are reduced (or ‘saved’) in early years, but additional tax will need to be paid in future
years. Tax payments are delayed to future periods.

Question 63

Deferred tax asset

Answer 63

It is generated by a deductible temporary difference when the tax base of an asset exceeds its carrying amount or the carrying amount of the liability exceeds the tax base. It represent a prepayment of tax relating to future years. The tax payments are higher in early years, but lower tax will be paid in future years (when the deferred tax asset is reversed). Tax Payments are paid in advance.

Question 64

Consider the following items for Daniel Ltd at 30 June 2016:

(a) Capital contributed during the year
(b) Provisions
(c) Finance income
(d) Revaluation surplus
(e) Machinery
(f) Contingent liabilities
(g) Revaluation gain on land
(h) Transfer from retained earnings to general reserve
(i) Profit of the year

REQUIRED
State whether each item is reported:
1. In the statement of financial position (specify assets; liability or shareholders’ equity)
2. In the profit and loss in the statement of profit and loss and other comprehensive income
3. In the other comprehensive income in the statement of profit and loss and other comprehensive income
4. In the statement of changes in equity
5. In the notes to the financial statement

Answer 64

(a) 1 – Shareholders’ equity & 4 (reconciliation of opening and closing Share Capital)
(b) 1 - Liabilities

(c) 2 & 4 (reconciliation of opening and closing Retained Earnings) &
1 Shareholders’ Equity (Retained Earnings)

(d) 1 – Shareholders’ equity
(e) 1 - Assets
(f) 5

(g) 3 (if first time revalaution) & 4 (reconciliation of opening and closing Revalaution Surplus) & 1 Equity (Revalaution Surplus)
OR
2 (if reversal of previous revalaution decrement) & 4 (reconcilation of
opening and closing Retained Earnings) & 1 Equity (Retained Earnings)

(h) 4 (reconciliations of opening and closing Retained Earnings & General Reserve) & 1 – Shareholders’ equity (Retained Earnings & General Reserve)
(i) 2 & 4 (reconciliation of opening and closing Retained Earnings) & 1 Shareholders’ Equity (Retained Earnings)

Question 65

As an accounting practitioner at the firm, for each amount described below, state whether the amount should be recorded and provide reasons for your answer:
• In the statement of financial position (specify whether asset, liability or shareholders’ equity)
• In the profit and loss and other comprehensive income (specify whether cost, revenue or other comprehensive income)
• In the notes
• None of the above

a) On 30 June 2017, both internal and independent valuations suggest that the company has generated a goodwill worth $600,000 if the company is sold on the open market.

Answer 65

None of the above – this is not recognised as an intangible asset because it is internally generated Goodwill.

Question 66

As an accounting practitioner at the firm, for each amount described below, state whether the amount should be recorded and provide reasons for your answer:
• In the statement of financial position (specify whether asset, liability or shareholders’ equity)
• In the profit and loss and other comprehensive income (specify whether cost, revenue or other comprehensive income)
• In the notes
• None of the above

b) On 30 June 2017, Drogon Ltd has invested in bonds for $200,000 which pay interest every 6 months at 10% interest rate.

Answer 66

Drogon Ltd records the bonds in the Statement of Financial Position an asset, as financial asset, because Drogon Ltd is entitled to receive future economic benefits in the form of interest and principal. The issuer of the bonds, would record this amount in the Statement of Financial Position as a liability, financial liability, because the issuer is required sacrifice future economic benefits – payments of interest and principal.

Question 67

As an accounting practitioner at the firm, for each amount described below, state whether the amount should be recorded and provide reasons for your answer:
• In the statement of financial position (specify whether asset, liability or shareholders’ equity)
• In the profit and loss and other comprehensive income (specify whether cost, revenue or other comprehensive income)
• In the notes
• None of the above

c) On 30 June 2017, Lambda Ltd owes $300,000 to Drogon Ltd for products delivered and invoiced and to be paid to Drogon Ltd on 30 September 2016.

Answer 67

Dragon records the account receivable in the Statement of Financial Position an asset, as a financial asset, because Drogon Ltd is entitled to receive future economic benefits in the form of the amount due for the products.

Alternatively, as the account receivable has been outstanding for 9 months, Drogon Ltd should record a bad and doubtful debt expense, in Profit, in the Statement of Profit or Loss and Other Comprehensive Income, because they are depletion of assets, (future economic benefits are no longer expected) resulting in a reduction in equity

Lambda Ltd would record this account payable in the Statement of Financial Position as a liability, financial liability, because the Lambda Ltd is required sacrifice future economic benefits – payments of the amount owing for the products.

Question 68

As an accounting practitioner at the firm, for each amount described below, state whether the amount should be recorded and provide reasons for your answer:
• In the statement of financial position (specify whether asset, liability or shareholders’ equity)
• In the profit and loss and other comprehensive income (specify whether cost, revenue or other comprehensive income)
• In the notes
• None of the above

d) On 30 June 2017, Drogon Ltd has revalued upwards its land by $500,000.

Answer 68

Assuming land has not been previously revalued, the revaluation increment should be included in other comprehensive income (as a Gain on Revaluation) in the Statement of Profit or Loss and Other Comprehensive Income. The revaluation increment should also be included in the Statement of Changes in Equity, in the reconciliation of opening and closing Revaluation Surplus. The revaluation increment should also be included in equity (in Revaluation Surplus), in the Statement of Financial Position. Also in the Statement of Financial Position, Drogon Ltd should adjust the value of its asset, land upwards by $500,000.

Alternatively, if the land revaluation is a reversal of a previous upwards revaluation of the land, the revaluation increment should be included in profit (as a Gain on Revaluation) in the Statement of Profit or Loss and Other Comprehensive Income. The revaluation increment should also be included in the Statement of Changes in Equity, in the reconciliation of opening and closing Retained Earnings. The revaluation increment should also be included in equity (in Retained Earnings), in the Statement of Financial Position. Also in the Statement of Financial Position, Drogon Ltd should adjust the value of its asset, land upwards by $500,000.

Question 69

As an accounting practitioner at the firm, for each amount described below, state whether the amount should be recorded and provide reasons for your answer:
• In the statement of financial position (specify whether asset, liability or shareholders’ equity)
• In the profit and loss and other comprehensive income (specify whether cost, revenue or other comprehensive income)
• In the notes
• None of the above

e) On 30 August 2017, vandals have entered in Drogon’s remote warehouse and destroyed part of the inventory worth $600,000.

Answer 69

This is to be recorded in the notes, as this is a non-adjusting event after the reporting period. The note should disclose the nature of the event (destruction of inventory), and the financial affect ($600,000).

Question 70

Question 3

Ambili Ltd acquires a special cutting machine from Sruthi Ltd for the following consideration:

Cash: $10,000
Land: In the books of Ambili Ltd, the land is recorded at its cost of $50,000. It has a fair value of $60,000.
Ambili Ltd also agrees to assume the liability of Sruthi Ltd’s bank loan of $5,000 as part of the special cutting machine acquisition.

REQUIRED

(a) Calculate the acquisition cost of the special cutting machine.
 (b) Provide the journal entries that would appear in Ambili Ltd’s books to account for the acquisition of the special cutting machine.

Answer 70

The Special cutting machine should be recorded at the fair value of purchase consideration. This would be calculated as follows:

Cash	$10 000
Land	$60 000
Value of assumed liability	$5 000
Total acquisition cost	$75 000
	(b)	The accounting entries to record the acquisition would be:
Dr	Plant and machinery	75 000	
Cr	Cash		10 000
Cr	Land		60 000
Cr	Bank loan		5 000

Question 71

Income tax expense =

Answer 71

Income tax expense = Income tax payable + Increase in DTL – Increase in DTA

Question 72

Intragroup Inventory Discrepancies

Answer 72

Elimination of intragroup unrealised profit in closing inventory

Profit on intragroup sale = Intragroup Selling price – Cost to Silver (which is cost to Group)
= 20,000 – 15,000
= 5,000
Unrealised Profit on intragroup sale = Profit on intragroup sale x Proportion of the Inventory sold remaining in Bold’s (the Group’s) Closing Inventory
= 5,000 x 75%
= 3,750

DR Cost of Goods Sold 3,750
CR Inventory 3,750

Tax Effect of Unrealised Profit in Closing Inventory = Unrealised profit in Closing Inventory x Tax rate x
= 3,750 x 30%
= 1,125

DR Deferred Tax Asset 1,125
CR Income Tax Expense 1,125

Question 73

Change in accounting estimate example note

Answer 73

The change in accounting estimates needs to be disclosed in the notes to the accounts, disclosing the nature of the change in accounting estimate, and the financial effect in the current and future periods.

2019 ($)	2018 ($) Profit before tax has been arrived at after taking into account:		 Depreciation		 Original	25 000	25 000 Change in accounting estimate	25 000	……….–
50 000	25 000 The estimated useful life of the manufacturing equipment was revised from twelve to eight years.  Consequently, the annual depreciation expense increased by $25,000 in the current year and will increase by $25 000 for next three years.