Financial Reporting 2nd Edition Janice Loftus ,Ken Leo ,Sorin Daniliuc ,Belinda Luke ,Hong Nee Ang ,Karyn Byrnes - Solutions

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Consider the family of exponential utility functions u = 1−exp(−aw)a.(a) Show that a is the degree of absolute risk aversion.(b) Show that u becomes linear in w when a tends to zero (hint: use L’Hˆ opital’s rule).(c) Consider lottery ˜ x with positive and negative payoffs. Determine the
Let u = lnw.(a) Does this utility function exhibit the DARA property?(b) Compute −u /u andcompare it with −u/u.(e) Prove that −u(w)isaconcavetransformation of u(w) (hint: use Pratt’s theorem).
Let u = w2 for w ⩾ 0.(a) Compute the exact risk premium if initial wealth is 4 and if a decision maker faces the lottery (−2, 1 2;+2, 1 2). Explain why the risk premium is negative.(b) If the utility function becomes v = w4, what happens to the risk pre mium? Show that v is a convex
As in the previous exercise, consider an initial wealth of 10 and the lottery ˜ X.Assume now that the utility is:u = w 1for w ⩽ 10, 2w +5 forw⩾10.(a) Draw the utility function. Is it globally concave?(1.18)(b) Compute the certainty equivalent and the risk premium attached to ˜ X.(c) Can you
An individual has the following utility function:u(w) = w1/2.Her initial wealth is 10 and she faces the lottery ˜ X : (−6, 1 2;+6, 1 2).(a) Compute the exact value of the certainty equivalent and of the risk premium.(b) Apply Pratt’s formula to obtain an approximation of the risk premium.(c)
Leases theory    LO1, 7 Anywhere Transport Ltd operates in the transport industry and has a fleet of trucks, most of which are leased. The lease agreements have been classified as operating leases under AASB 117. In accordance with that standard, no asset or liabilities have been
Finance lease — financier lessor    LO3, 5 On 1 July 2019, Safe Ltd acquired a new car. The manager of Safe Ltd, Jack Safe, went to the local car yard, House Autos, and discussed the price of a new Racer Special with Denzel House. Jack and Denzel agreed on a price of $37 876. As House
Finance lease — manufacturer lessor    LO3, 7 Mission Ltd manufactures specialised moulding machinery for both sale and lease. On 1 July 2019, Mission Ltd leased a machine to Impossible Ltd, incurring $1500 in costs to prepare and execute the lease document. The machine being leased
Finance lease — manufacturer lessor    LO3, 4, 7 Stella Ltd manufactures specialised machinery for both sale and lease. On 1 July 2019, Stella Ltd leased one of these machines to Freddy Ltd, incurring $1200 in costs to prepare and execute the lease document. Freddy Ltd incurred $650 in
Lease classification, lease accounting   LO3, 4, 6 Gran Ltd has entered into an agreement to lease a D9 bulldozer to Torino Ltd. The lease agreement details are as follows. Length of lease 5 years Commencement date 1 July 2019 Annual lease payment, payable 30 June each year commencing 30
Lease classification, lease accounting   LO3, 4, 7 On 1 July 2019, Cosway Ltd purchased equipment for its fair value and then leased it to Valley Ltd, incurring $2548 in costs to prepare and execute the lease document. Valley Ltd incurred $1935 in costs to negotiate the agreement. The
Lease classification, lease accounting   LO3, 4, 5 As of 1 July 2019, Acer Ltd leases a building from Hill Ltd. The building has a fair value at 1 July 2019 of $1 972 000. The lease agreement details are as follows. Length of lease 10 years Commencement date 1 July 2019 Annual lease payment,
Lease classification, lease accounting   LO3, 7 Acumen Ltd enters into a 5‐year agreement to lease an item of machinery from Ascor Ltd on 1 July 2019. Acumen Ltd incurred costs of $3928 in setting up the lease agreement. The machinery has a fair value of $492 000 at the inception of the
Lease classification, lease accounting   LO3, 4, 5 On 30 June 2019, Adeline Ltd purchased machinery for its fair value of $42 500 and then leased it to Christina Ltd. Christina Ltd incurred $349 in costs to negotiate the lease agreement. The machine is expected to have an economic life of 5
Accounting by lessee and lessor   LO3, 4, 7 Albert Ltd entered into an agreement on 1 July 2019 to lease a processing plant with a fair value of $467 100 to Fat Ltd. The terms of the lease agreement were as follows. Lease term 3 years Economic life of plant 5 years Annual rental payment, in
Lease schedules and accounting by lessee and lessor   LO3, 7 On 1 July 2020, Harry Ltd leased a crane from Potter Ltd. The crane cost Potter Ltd $120 307, considered to be its fair value on that same day. The finance lease agreement contained the following provisions. The lease term is for 3
Accounting by lessee and lessor   LO3, 6, 7 Indiana Ltd decided to lease from Jones Ltd a car that had a fair value at 30 June 2019 of $38 960. The lease agreement contained the following provisions. Lease term 3 years Annual rental payments (commencing 30/6/19) $11 200 Guaranteed residual
Accounting by lessee and lessor  LO3, 5 On 1 July 2020, Sherlock Ltd leased a processing plant to Holmes Ltd. The plant was purchased by Sherlock Ltd on 1 July 2020 for its fair value of $467 112. The lease agreement contained the following provisions. Lease term 3 years Economic life of plant 5
Lease classification, accounting by lessor  LO4, 6, 7 Oceans Ltd manufactures specialised moulding machinery for both sale and lease. On 1 July 2020, Oceans Ltd leased a machine to Eleven Ltd. The machine being leased cost Oceans Ltd $195 000 to make and its fair value at 1 July 2020 is
to complete the following. 1. Classify the lease for Grit Ltd. Justify your answer. 2. Prepare (a) the lease receipts schedule for Grit Ltd (show all workings) and (b) the journal entries in its books for the year ended 30 June 2020.
Lease classification; accounting by lessor  LO4, 5 Use the information contained in exercise
Finance lease — lessor  LO3, 5 On 1 July 2019, Jane Plum decided she needed a new car. She went to the local car yard, North Ltd, run by Fred Peach. Jane discussed the price of a new Roadster Special with Fred, and they agreed on a price of $37 000. As North Ltd had acquired the vehicle from
Finance lease  LO3, 5 If a lease has been capitalised as a finance lease by the lessor, identify circumstances in which the lease receivable raised by the lessor will differ from the right‐of‐use asset raised by the lessee.
Accounting by lessee  LO3 On 1 July 2019, True Ltd leased a plastic‐moulding machine from Grit Ltd. The machine cost Grit Ltd $130 000 to manufacture and had a fair value of $154 109 on 1 July 2019. The lease agreement contained the following provisions. Lease term 4 years Annual rental
Accounting by lessee  LO3 Max Ltd prepares the following lease payments schedule for the lease of a machine from Payne Ltd. The machine has an economic life of 6 years. The lease agreement requires four annual payments of $33 000, and the machine will be returned to Payne Ltd at the end of the
Determination of interest rates  LO3 On 1 July 2018, Pretty Ltd leases a machine with a fair value of $109 445 to Woman Ltd for 5 years at an annual rental (payable in advance) of $25 000, and Woman Ltd guarantees in full the estimated residual value of $15 000 on return of the asset. What would
IDENTIFICATION OF LEASES For the following arrangements, discuss whether they are lease transactions, and thus fall under the ambit of AASB 16/IFRS 16. 1. Entity A enters into a contract with Entity B, whereby Entity B will provide 5 SUV vehicles for Entity A to use over the next 3 years. The
ACCOUNTING FOR LEASES BY LESSEE Farm Ltd leases some parcels of land from their owner for a period of 10 years at a time. The lease agreement can be cancelled, but a significant penalty will be incurred by Farm Ltd. The lease payments required include a payment up‐front of $300 000, followed by
CASE STUDY ACCOUNTING FOR LEASES BY LESSEE Alan Tan is the CEO for an airline company. The company has a large proportion of its aircraft leased from manufacturers under lease agreements that can be cancelled at any time with minimal penalties. At the end of the period starting on 1 January 2019,
Identify three possible adverse effects on an entity’s financial statements arising from recognition of a lease arrangement on the statement of financial position.
How are operating leases to be accounted for by lessors?
How are finance leases to be accounted for by lessors?
Where a lessee incurs initial direct costs in establishing a lease agreement, how are these costs to be accounted for?
Where a lessor incurs initial direct costs in establishing a lease agreement, how are these costs to be accounted for?
Describe what is the right to use of an identified asset.
What was the major change in accounting for leases introduced by new accounting standard AASB 16/IFRS 16?
Why was it considered that by not recognising some leased assets and associated liabilities in the statement of financial position, an entity may provide misleading information?
What was the likely adverse impact on users of financial information of AASB 117/IAS 17 allowing some leased assets and associated liabilities to be recognised as off‐balance sheet items?
Asset definition and recognition  LO7, 8 Recently, $20000 cash was stolen from Fremantle Ltd’s night safe. Explain how Fremantle should account for this event, justifying your answer by reference to relevant conceptual framework definitions and recognition criteria.
Assets  LO7,8 Glam Cosmetics has spent $220000 this year on a project to develop a new range of chemical‐free cosmetics. As yet, it is too early for Glam Cosmetics’ management to be able to predict whether this project will prove to be commercially successful. Explain whether Glam Cosmetics
Definitions and recognition criteria  LO7,8 Glenelg Accounting Services has just invoiced one of its clients $3600 for accounting services provided to the client. Explain how Glenelg Accounting Services should recognise this event, justifying your answer by reference to relevant conceptual
Definitions and recognition criteria  LO7,8 Explain how T Ltd should account for the following items, justifying your answers by reference to the definitions and recognition criteria in the conceptual framework. Also state, where appropriate, which ledger accounts should be debited and credited.
Definitions of elements  LO7,8 Explain how Q Ltd should account for the following items/situations, justifying your answers by reference to the conceptual framework’s definitions and recognition criteria. Required1. Receipt of artwork of sentimental value only. 2. Q Ltd is the guarantor for an
Purchase orders  LO8 An airline places a non‐cancellable order for a new aeroplane with one of the major commercial aircraft manufacturers at a fixed price, with delivery in 30 months and payment in full to be made on delivery. Required1. Under the conceptual framework, do you think the
Assessing probabilities in accounting recognition  LO7,8 The conceptual framework defines an asset as a resource from which future economic benefits are expected to flow. ‘Expected’ means it is not certain, and involves some degree of probability. At the same time the conceptual framework
Going concern  LO6,9 What measurement principles might be most appropriate for a company that has ceased to be a going concern (e.g. creditors have appointed a receiver who is seeking buyers for the company’s assets)?
Performance of a business entity  LO5 A financial analyst said: I advise my clients to invest for the long term. Buy good shares and hang onto them. Therefore, I am interested in a company’s long‐term earning power. Accounting standards that result in earnings volatility obscure long‐term
Meaning of ‘decision useful’  LO5 What is meant by saying that accounting information should be ‘decision useful’? Provide examples.
The conceptual framework versus interpretations  LO4, 8,9 Applying the conceptual framework is subjective and requires judgement. Would the IASB be better off to abandon the conceptual framework entirely and instead rely on a very active interpretations committee that develops detailed guidance
Financial statements  LO5,9 An entity purchases a rental property for $10000000 as an investment. The building is fully rented and is in a good area. At the end of the current year, the entity hires an appraiser who reports that the fair value of the building is $15000000 plus or minus 10%.
Recognising a loss  LO8 The law in your community requires store owners to shovel snow and ice from the footpath in front of their shops. You failed to do that and a pedestrian slipped and fell, resulting in serious and costly injury. The pedestrian has sued you. Your lawyers say that while they
Measuring inventories  LO8 AASB 102/IAS 2 Inventories allows producers of gold and silver to measure inventories of these commodities at selling price even before they have sold them, which means income is recognised at production. In nearly all other industries, however, income is recognised
Relevant information  LO5,8A year ago you bought shares in an investment company. The investment company in turn buys, holds and sells shares of business enterprises. You want to use the financial statements of the investment company to assess its performance over the past year. Required 1. What
the key purpose of the strategic plan 2013–16 2 the four sources of complexity in financial reporting that the Managing Complexity in Financial Reporting Task Force outlined in its report to the FRC in May 2012.
the policy statements and practice notes issued by ASIC. Visit the website of the Financial Reporting Council (www.frc.gov.au). Locate its strategic plan and report on:
the tips given to prospective shareholders regarding the reading of a company’s prospectus
what ASIC is and its role
the goals of the IASB. Visit the website of the Australian Securities and Investments Commission (www.asic.gov.au). Report on:
the membership of the IASB and which countries the members come from
the accounting standards being changed as a result of moves towards international convergence
the most recent stage of the conceptual framework revision project
What current projects (if any) is the AASB working on in cooperation with the IASB? Visit the website of the International Accounting Standards Board (www.ifrs.org). Report on:
Why are there differences in the numbering systems for current accounting standards (e.g. AASB x, AASB xxx and AASB xxxx)?
Which accounting standards have been issued in the past year?
Who are the members, and which organisations do they represent?
Who is the Chair of the AASB?
In relation to the following multiple choice questions, discuss your choice of correct answer. (a) Which of the following statements about the conceptual framework is incorrect? (i) The conceptual framework considers timeliness and materiality to be constraints on relevant and reliable information.
Define ‘equity’. Explain why the conceptual framework does not prescribe any recognition criteria for equity.
A government gives a parcel of land to a company at no charge. The company builds a factory on the land and employs people at the factory to produce jam that is sold in local and interstate markets. Considering the definition of income in the conceptual framework, do you think the receipt of the
Discuss the essential characteristics of a liability as described in the conceptual framework.
Discuss the importance of the going concern assumptions to the practice of accounting.
Outline the fundamental qualitative characteristics of financial reporting information to be included in general purpose financial statements.
How does the IASB influence financial reporting in Australia?
2 Describe the standard‐setting process of the AASB.
Leases and efficient market hypothesis    LO5 Accounting standard setters have introduced changes to the current requirements for accounting for leases, effective 1 January 2019. Currently, if a lease is classified as a finance lease, the leased asset and a corresponding lease liability
Accounting policies    LO1, 2, 3, 4 In small teams, obtain the financial statements of three publicly listed companies. Refer to the notes to the financial statements pertaining to accounting policies and the note pertaining to property, plant and equipment reported in the statement of
Debt covenants and agency relationships   LO4 On 1 July 2016, Medical Supplies Ltd borrowed $30 million to finance an investment in a laboratory for developing and testing surgical supplies. The loan is due 30 June 2026. The lender insisted on a debt covenant in the loan agreement,
Agency theory and management remuneration   LO4 Publicly listed companies provide a remuneration report as a component of the annual report, which is often available on the company’s website. Required Obtain the remuneration report for a publicly listed company. Examine the remuneration
Management remuneration plans and performance   LO4 UBS is a global financial institution with an executive remuneration scheme that includes both cash-based and share-based remuneration and a mix of shorter term and longer term awards. At least 80% of the performance-based award is deferred.
Mechanistic hypothesis and efficient market hypothesis   LO5 Due to a change of accounting standards Adele Ltd reclassified some of its financial instruments in preparing its financial statements for the year ended 30 June 2019. The fair value of the financial instruments actually declined by
Mechanistic hypothesis and efficient market hypothesis   LO5 Douglas Ltd had always classified interest paid as an operating cash flow. In 2019 Douglas Ltd changed its accounting policy and classified interest paid of $100 000 as a financing cash flow in its statement of cash flows. The
Debt covenants and accounting information  LO4 You have recently been appointed as a lending officer in the commercial division of a major bank. The bank is concerned about lending in the current economic environment, where there has been an economic downturn. Required Prepare a report outlining
ACCOUNTING THEORIES Rocky Retail Ltd had experienced a difficult year with declining sales as a result of increased competition from online retailers. The accountant for Rocky Retail Ltd presented a set of draft financial statements to management to review before the final set of financial
AGENCY THEORY At the beginning of the current reporting period City Retail Ltd launched a new logo and spent $1 000 000 on new signage for all its premises. The expenditure on signage was originally accounted for as part of property, plant and equipment. It was recognised as a depreciable asset
CASE STUDY ACCOUNTING POLICY DECISION Penny Ltd made the following disclosure in the notes to its financial statements about how it accounts for insurance premiums. Other current assets Insurance premiums are paid in advance and recognised as ‘Prepaid insurance’ asset at the time of settlement.
Discuss the use of entity‐specific information in the generation of fair value measurements under AASB 13/IFRS 13.
Discuss the differences between the various levels in the fair value hierarchy. Do you agree that the outcomes at all three levels should be described as ‘fair values’?
What are the issues associated with fair value measurement of assets without an active market?
How does the measurement of the fair value of a liability differ from that of an asset? What are the key steps in determining a fair value measure?
Does the measurement of fair value take into account transport costs and transaction costs? Explain.
What are market participants? Is the entity applying AASB 13/IRFS 13 a market participant?
What are the key elements of the definition of ‘fair value’? Explain the effects of the inclusion of each element in the definition.
Name three current accounting standards that permit or require the use of fair values for the measurement of assets or liabilities.
Preparation of financial statements applying AASB 141/IAS 41    LO10 Sorrell Ltd owns sheep and the end of its reporting period is 30 June. The sheep are held to produce wool. At 1 July 2019, Sorrell Ltd had 1000 sheep and 200 lambs, with a fair value (less costs to sell) of $200 per
Accounting for a government grant    LO7 Strahan Ltd engages in agricultural activities and measures its biological assets at fair value in accordance with AASB 141/IAS 41. In 2019, Strahan Ltd received a grant of $250 000 from the government. The grant was notified to the company on 31
Application of theory to accounting    LO3 Moo Ltd is a listed company with a large dairy farm. The fair value of the company’s herd of cows declined as a result of a drop in the price of milk. The managing director is very worried about the impact that recognising the loss might have on
Disclosure of biological assets   LO9 State whether each of the following is true or false. 1. Companies applying AASB 141/IAS 41 must disclose separately the fair value (less costs to sell) of mature and immature biological assets. 2. A vineyard planted on land classified as an investment
Fair value determination  LO5, 6 Wynyard Ltd owns a plantation forest. As at the end of the reporting period the fair value of the plantation forest including the land was $2.5 million. Wynyard Ltd needs to determine the fair value of the trees excluding the land to comply with AASB 141/IAS 41
Fair value determination   LO5, 6 Which of the following is included in determining the fair value of a biological asset that does not have an active market and which has a 5-year production cycle? 1. Revenue from sale in 5 years’ time 2. Costs of growing for 5 years 3. Financing costs on
Agricultural activity — measurement  LO3, 4, 5 For each of the items listed, state whether they would be measured (a) at fair value under AASB 141 (b) at the lower of cost and net realisable value under AASB 102/IAS 2 or (c) at cost or fair value under AASB 116/IAS 16. 1. Living pigs 2. Living

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Financial Reporting 2nd Edition Janice Loftus ,Ken Leo ,Sorin Daniliuc ,Belinda Luke ,Hong Nee Ang ,Karyn Byrnes - Solutions

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