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financial accounting

Questions and Answers of Financial Accounting

In a newspaper article of 1 May 2019 entitled ‘KPMG settles Discovery Metals class action’ (in The Australian Financial Review, by Edmond Tadros, p. 30) it was reported that the ‘Big 4’
On 1 July 2022 Kiama Ltd issues $5 million in five-year bonds that pay interest every six months at a coupon rate of 8 per cent. At the time of issuing the securities, the market requires a rate of
On 1 July 2022 Rankin Ltd issues $1 million in 10-year bonds that pay interest each six months at a coupon rate of 10 per cent. At the time of issuing the securities, the market requires a rate of
Maroubra Ltd enters a contract to supply Lurline Bay Ltd with 20 Sandman panel vans at a sales price of $75 000 each. The expected manufacturing cost of each van is expected to be $60 000. The vans
In a newspaper article of 3 May 2019 entitled ‘AMP facing $100m super class-action suit’ (in The Australian, by Ben Butler, p. 20) it was reported that the law firm Slater & Gordon had
Some researchers argue that it would be harder to renegotiate a public debt agreement than a private debt agreement. Why do you think this might be the case?
is often argued that managers would prefer to show lower levels of debt than higher levels of debt. Why do you think this might be so?
How would you account for a liability that cannot be reliably measured?
The following parts of this question relate to contingent assets.a. What is a contingent asset?b. When should a contingent asset be disclosed within the notes to the financial statements?c. If
On 1 July 2022 Bombo Ltd issues $2 million in six-year bonds that pay interest every six months at a coupon rate of 8 per cent. At the time of issuing the securities, the market requires a rate of
On 1 July 2022 Michaela Ltd issues $1 million in five-year bonds that pay interest each six months at a coupon rate of 10 per cent. At the time of issuing the securities, the market requires a rate
Which of the following would likely be considered to be a ‘provision’ as defined in AASB 137?a. A warranty provided by a car retailerb. An amount transferred from retained earnings to another
Cactus Ltd issues some convertible notes in 2023. These notes are issued for $20 each and allow note holders the option to convert each note to one ordinary share in Cactus Ltd. The date for
Explain how the release of a new accounting standard could potentially cause a reporting entity to violate an existing debt covenant.
Midnight Boil Ltd sells electricity generated from its nuclear power plant. Its managing director, Peter Polly, is not overly concerned about the environment but nevertheless knows that the company
Rincon Ltd has been operating for a number of periods and has been selling jet-propelled surfboards. At the end of the reporting period, available data suggests: If small defects arise with all of
Hampton Ltd has a number of non-current assets, some of which require, in addition to normal ongoing maintenance, substantial expenditure on major refits/refurbishment at certain intervals or on
Why would something be considered to be a contingent asset rather than an asset?
Brighton Ltd is a manufacturer of boats and gives warranties at the time of sale to purchasers of its boats. Pursuant to the warranty terms, Brighton Ltd undertakes to make good, by repair or
How would you determine the discount or premium on a bond issue?
How would you account for a possible obligation that has a remote likelihood of resulting in an outflow of economic resources?
What is a constructive obligation, and can constructive obligations be recognised as liabilities?
What is a ‘hybrid security’, and how should it be disclosed?
What is an ‘onerous contract’ and how shall an onerous contract be presented within the financial statements?
What factors should an organisation consider when choosing between disclosing liabilities on a current/noncurrent basis, or in order of liquidity?
What factors may cause the price of a bond (also referred to as a ‘debenture’) at issue date to be different from its face value?
Determine whether the following items would be classified and recorded as liabilities:a. Provision for repairsb. Provision for long-service leavec. Dividends payabled. A guarantee for the debts of a
An entity has determined that it will cost approximately $15 million to clean up a site that it previously contaminated as a result of its operations. Pursuant to AASB 137, what attributes should
If a reporting entity has an obligation to clean up a contaminated site, but does not believe it can measure the liability with any reliability, then should the obligation be disclosed at all within
If an organisation issues some bonds (liabilities) to the public, and the coupon rate it offers on the bonds is less than the market’s required rate of return, will the bonds be issued at a
What is a contingent liability and how should it be disclosed for financial reporting purposes?
What is an ‘onerous contract’, and how is financial statements such a contract to be represented within the financial statements?
How are provisions to be measured?
How shall provisions be measured?
What attributes should an item or transaction exhibit in order to be classified a liability?
What distinguishes a ‘provision’ from other liabilities?
What are three key components of the definition of a liability?
For financial reporting purposes, should property, plant and equipment be reported at cost or at fair value?
What effect will an asset revaluation have on subsequent periods’ profits? Explain your answer
If the fair value of an item of property, plant and equipment increases, is this increase included within profit or loss?
Explain the difference in the accounting treatment for revaluation increments and revaluation decrements. Do you consider that this difference is ‘conceptually sound’?
For financial reporting purposes, is there a need to determine the recoverable amount of non-current assets?
When should a revaluation increment be included as part of profit or loss?
How is the recoverable amount of a non-current asset to be determined?
For the purposes of AASB 136, how is ‘recoverable amount’ determined?
When is an impairment loss recognized?
When would you determine the recoverable amount for a cash-generating unit rather than for an individual item of property, plant and equipment?
If an item of property, plant and equipment is measured at cost, but the recoverable amount of the asset is determined to be less than cost, what action must be taken?
Prior to 2005, reporting entities within Australia could offset increments and decrements within a class of assets so that only the net amount would go to profit or loss, or the revaluation surplus.
If a reporting entity decides to revalue its property, plant and equipment, what basis of valuation must be adopted?
If a reporting entity elects to use either cost or fair value as the basis for measuring its property, plant and equipment, can it elect to switch to the other method at a later time?
For the purposes of AASB 116, how is a ‘class of assets’ defined? Would residential land and farming land be included in the same class of assets?
How is the revaluation of an investment property treated differently from the revaluation of an item of property, plant and equipment?
Describe some disclosures that are to be made in relation to:The revaluation of assetsImpairment losses.
How could a revaluation of a non-current asset minimise or loosen the effects of a restrictive debt covenant?
An asset having a cost of $100 000 and accumulated depreciation of $20 000 is revalued to $120 000 at the beginning of the year. Depreciation for the year is based on the revalued amount and the
Ignoring reversals of previous revaluations, do you think that requiring revaluation decrements to be part of the period’s profit or loss but requiring that revaluation increments go to
How should the reversal of an impairment loss be accounted for?
How is the gain or loss on the disposal of an item of property, plant and equipment determined?
Townend Ltd has the following assets in its statement of financial position as at 30 June 2022.The plant and equipment originally cost Townend $600 000 in 2020, but due to market conditions the fair
Bad Company Ltd has some machinery that it acquired in 2021 at a cost of $4 000 000. In 2022 it is concerned about high reported profits—the labour union is considering pushing for additional
Petersen Ltd has the following land and buildings in its financial statements as at 30 June 2022:At 30 June 2022, the balance of the revaluation surplus is $400 000, of which $300 000 relates to the
What, if anything, is the difference between recoverable amount and fair value? Where revaluations are undertaken, can a reporting entity use ‘value in use’ as the basis for the revaluation?
Kanga Cairns Ltd owns two blocks of beachfront land, acquired in 2019 for the purposes of future residential development. Block A cost $250 000 and Block B cost $350 000. Valuations of the blocks are
Why could a revaluation of a non-current asset by a company with shares listed on a securities exchange change the cash flows of the organisation and impact its share price?
Superbank Ltd acquired some machinery at a cost of $2 000 000. As at 30 June 2022 the machinery had accumulated depreciation of $400 000 and an expected remaining useful life of four years. On
Endless Summer Ltd purchased two parcels of land (Bruce and Brown) for $2 000 000 each on 1 July 2020. Subsequent to initial measurement, Endless Summer revalued the land. Fair values are as
On 1 July 2021, Ocean Grove Ltd acquired and installed an item of machinery for use in its manufacturing business. When acquired the machinery cost $1 200 000, had an estimated useful life of 10
Many organisations elect not to measure their property, plant and equipment at fair value, but rather, prefer to use the ‘cost model’. This will provide lower total assets and lower measures,
Crescent Head Co. acquired some land in 2021 at a cost of $4.2 million. It measures land at cost. In 2022 it was determined that the recoverable amount of the land was $5.2 million. In 2023 it was
Warren Ltd acquires a four-wheel-drive bus on 1 July 2019 for $300 000. The bus is expected to have a useful life to Warren Ltd of seven years, after which time it will be towed out to sea and sunk
An item of depreciable machinery is acquired on 1 July 2019 for $120 000. It is expected to have a useful life of 10 years and a zero residual value. On 1 July 2023, it is decided to revalue the
What does the ‘impairment of an asset’ mean? How should an impairment of an item of property, plant and equipment be accounted for?
How could the recognition of an impairment loss cause an organisation to default on a loan agreement?
On 1 July 2020 Long Boards Ltd acquired a printing machine at a cost of $120 000. At acquisition the machine had an expected useful life of 12 000 machine hours and was expected to be in operation
What is depreciation expense?
An item of plant is acquired at a direct cost of $110 000. It requires installation and modifications amounting to $20 000 and $10 000, respectively, before it is efficiently operational. It is
Have an understanding of the requirements within accounting standards pertaining to the revaluation of non-current assets.
Does depreciation reflect the change in the fair value of an asset that occurred within a reporting period?
Define ‘useful life’ in terms of the decision to depreciate an asset.
Will depreciation always be treated as an expense within the reporting period in which it was calculated?
What effect does depreciation have on the statement of profit or loss and other comprehensive income, and on the statement of financial position?
What are three main issues to consider when determining depreciation expense?
When should we start recognizing depreciation expense?
What is the difference between amortisation and depreciation?
If managers assign a relatively high residual value to a depreciable asset, will this increase profits?
In the 2019 Annual Report of Telstra, it was reported that a ‘Review of useful lives during the year resulted in a $253 million decrease in depreciation’. Can you provide a possible explanation
You are the accountant for a manufacturing company and have decided to review the depreciation expenses being recognised. Your review has caused the depreciation charges for a number of factory
The financial statements of ABC Ltd indicate that the directors did not depreciate their buildings on the basis that the increase in the value of the associated land more than offset the decline in
Staunton Ltd acquires a new tractor for its pineapple farm. The tractor is expected to be operational for a period of 18 years, although a more economical version, which Staunton Ltd’s competitors
What could motivate management to use one method of depreciation in preference to another?
How is the gain or loss on the disposal of a non-current asset determined?
Winkipop Ltd acquires an item of machinery on 1 July 2019 for a total acquisition cost of $90 000. The life of the asset is assessed as being six years, after which time Winkipop Ltd expects to be
What considerations would you take into account when deciding to use one depreciation method, for example, the straight-line method, in preference to another?
If a company depreciates its property, plant and equipment, what are the associated disclosure requirements?
Can an organisation switch depreciation methods from one financial period to the next?
On 1 July 2021, Bells Beach Tourist Operations acquired an aircraft that can be used for taking wealthy surfers to remote surfing destinations with lovely waves and limited crowds. The aircraft cost
Assume you are the accountant for an organisation and that managing director queries you about an item of machinery that is shown in the financial statements at a cost of $200 000 less
Is depreciation an allocation process or a valuation process? Provide reasons for your answer.
Can profit be considered to be overstated if depreciation is calculated on the basis of the historical cost of an asset?

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