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Financial Reporting 2nd Edition Janice Loftus ,Ken Leo ,Sorin Daniliuc ,Belinda Luke ,Hong Nee Ang ,Karyn Byrnes - Solutions
How many parents can a group have?
What is a parent–subsidiary relationship?
What is a group, a parent and a subsidiary?
What is the purpose of preparing consolidated financial statements?
What are the consolidated financial statements?
Translation into functional and presentation currency LO4, 5 On 1 July 2020, Basil Ltd, an Australian company, acquired all the issued shares of Fawlty Ltd, an UK company. At this date, the equity of Fawlty Ltd consisted of the following. £ Share capital 800 000 Retained earnings 200
Translation into functional and presentation currency LO4, 5 Canberra Ltd, an Australian company, acquired all the issued shares of Washington Ltd, a US company, on 1 January 2020. At this date, the net assets of Washington Ltd are shown below. US$ Property, plant and equipment 155 000
Translation into presentation currency LO5 Lion Ltd is an international company resident in Singapore. It acquired the issued shares of an Australian company, Koala Ltd, on 1 July 2019 for A$700 000. At 30 June 2020, the following information was available about the two companies. Lion Ltd
Translation into presentation currency LO5 On 1 July 2018 Emu Ltd, an Australian company, acquired shares in Cantonese Ltd, a company based in Hong Kong. At this date, the equity of Cantonese Ltd was as follows. HK$ Share capital 200 000 General reserve 100 000 Retained earnings 300 000 At
and assume an average exchange rate of 1.70 for January–June 2021. Required 1. If the functional currency for Bear Ltd is the US dollar, prepare the financial statements of Bear Ltd at 30 June 2021 in the presentation currency of the Australian dollar. 2. Verify the foreign currency translation
Translation into presentation currency LO5 Use the information in exercise
Translation into functional currency LO4 On 1 July 2020, Echidna Ltd, an Australian company, acquired the issued shares of Bear Ltd, a company incorporated in the United States. The draft statement of profit or loss and other comprehensive income and statement of financial position of Bear
Translation into functional currency LO5 On 1 January 2019, Southern Ltd formed a company, Cross Ltd, in the United States to sell Australian products such as boomerangs and cuddly toy koalas and kangaroos. The initial capital was US$500 000. On 1 February 2019, a lease was signed on a shop
Translation into functional currency LO4, 5 Maylay Ltd, a company incorporated in Singapore, acquired all the issued shares of Victoria Ltd, a Hong Kong company, on 1 July 2019. The trial balance of Victoria Ltd at 30 June 2020 was: HK$ Dr HK$ Cr Share capital 800 000 Retained earnings (1/7/19)
Translation into functional and presentation currency LO4, 5 Sydney Ltd is a manufacturer of sheepskin products in Australia. It is a wholly owned subsidiary of a Hong Kong company, Wan Chai Ltd. The following assets are held by Sydney Ltd at 30 June 2019. Plant: Cost A$ Useful life (years)
Identifying the exchange rate LO3 The accounts listed below are those for Peak Ltd, a foreign subsidiary in Hong Kong, that maintains its accounting records in Hong Kong dollars (HK$). The parent is an Australian company, Merino Ltd. In the spaces provided indicate the exchange rates that
Multiple choice LO2, 3, 4 Select the best answer for each of the following items. 1. The account balances of a foreign subsidiary are to be translated from the local currency into the functional currency. The functional currency is: (a) the currency in which the transactions are recorded by the
DETERMINATION OF FUNCTIONAL CURRENCY Victory Ltd is an Australian company with two overseas subsidiaries, one in Indonesia and the other in South Korea. The Indonesian subsidiary has as its major activity the distribution in Indonesia of Victory Ltd’s products. It has been agreed that the
DETERMINATION OF FUNCTIONAL CURRENCY Foreign Ltd is a Queensland software developer that specialises in software that controls the operations of open cut mining. To exploit opportunities in the US market, the firm has established a wholly owned subsidiary operating in Atlanta, Georgia. The
DETERMINATION OF FUNCTIONAL CURRENCY Case A An Indonesian operation manufactures a product using Indonesian materials and labour. Patented processes and senior operations staff are supplied by its Australian parent. Reimbursement invoices for these services are denominated in Australian dollars.
DETERMINATION OF FUNCTIONAL CURRENCY Case A A Malaysian operation manufactures a product using Malaysian materials and labour. Specialised equipment and senior operations staff are supplied by its Australian parent. Reimbursement invoices for these services are denominated in the Malaysian
FINANCIAL REPORTING In its 2013 annual report (p. 106), Wesfarmers Limited notes that the functional currency and presentation currency of Wesfarmers Limited and its Australian subsidiaries are the Australian dollar. In Note 30 it lists its overseas subsidiaries and their functional currencies.
CASE STUDY FINANCIAL REPORTING In Note 1 (p. 105) of the 2013 annual report of the Qantas Group, the following information was provided. Translation of Foreign Operations Assets and liabilities of foreign operations, including controlled entities and investments in associates and jointly controlled
Why are gains/losses on translation into the presentation currency taken to a foreign currency translation reserve rather than to profit or loss for the period?
How are statement of profit or loss and other comprehensive income items translated from functional currency to presentation currency?
How are statement of profit or loss and other comprehensive income items translated from the local currency into the functional currency?
What guidelines are used to determine the functional currency of an entity?
What is meant by ‘functional currency’?
Options, shares, dividends, reserves LO6, 8 The statement of changes in equity for Salmon Ltd for the year ended 30 June 2020 was as shown below. SALMON LTD Statement of changes in equity for the year ended 30 June 2020 Profit for the year $ 69 420 Other comprehensive income 0 Total
Dividends, share issues, share buybacks, options and movements in reserves LO6, 7, 8, 9 Chilli Crab Ltd, a company whose principal interests were in the manufacture of fine leather shoes and handbags, was formed on 1 January 2017. Prior to the 2020 period, Chilli Crab Ltd had issued 110
Shares, options, dividends and reserve transfers LO6, 8, 9 The equity of Raw Prawn Ltd at 30 June 2019 consisted of: 400 000 ordinary ‘A’ shares issued at $2.00, fully paid $800 000 300 000 ordinary ‘B’ shares issued at $2.00, called to $1.20 360 000 50 000 6% preference shares
Share issues, options, statement of changes in equity LO6, 8, 9 On 30 June 2019, the equity accounts of Crayfish Ltd consisted of: 120 000 ordinary shares, issued at $2.50 each, fully paid $300 000 Options (80 000 at 50c each)* 40 000 General reserve 30 000 Forfeited shares reserve 2
Buyback of shares LO7 Lobster Ltd decided to repurchase 10% of its ordinary shares under a buyback scheme for $5.60 per share. At the date of the buyback, the equity of Lobster Ltd consisted of: Share capital — 4 million shares fully paid $4 000 000 General reserve 600 000 Retained
Issue of option and shares, forfeiture of shares LO6, 8 Prepare ledger accounts to record the following transactions for Sea Snake Ltd. 2020 July 1 A prospectus was issued inviting applications for 100 000 ordinary shares at an issue price of $3, with $2 payable on application and the
Share issue, options LO6, 7 On 30 June 2018, the equity accounts of Moray Ltd consisted of: 175 000 ‘A’ ordinary shares, issued at $2.50 each, fully paid $437 500 50 000 6% cumulative preference shares, issued at $3 and paid to $2 100 000 Options (20 000 at 56c each) 11 200 Accumulated
Dividends, calls on shares and bonus issues LO6, 8, 9 The equity of Sea Horse Ltd at 1 January 2020 was as follows. Share capital 600 000 shares fully paid $600 000 400 000 shares issued for $1 and paid to 50c 200 000 $ 800 000 General reserve 200 000 Plant maintenance reserve 50 000
Rights issues and placement of shares LO6 At 1 July 2019 Surf Cat Ltd reported that it had a share capital of $800 000 resulting from the issue of 400 000 shares. The following transactions occurred during the year ended 30 June 2020. 1. On 10 August 2019, a renounceable 1‐for‐2 rights
Issues of shares and options LO6 White Foam Ltd has been investigating the expansion of the company into new areas of development. In order to fund these new investments the company needs an increase in equity. On 1 April 2019 the company decided to make a public issue to raise $1 200 000 for
Rights issue LO6 Sunny Day Ltd needs to raise funds for mining projects in Western Australia. It currently has share capital of $2 million dollars and has issued 1 million shares. The directors have decided to make a non‐renounceable rights issue to existing shareholders of 200 000 new shares
Movements in reserves and retained earnings LO8 Sunshine Ltd undertook the following transactions during the financial year ended 30 June 2019. (a) Transferred $68 000 from the general reserve to retained earnings (b) Paid an interim dividend of $60 000 (c) Transferred $104 000 from the asset
Placement of shares, rights issues LO6 The directors of Sunny Palms Ltd are considering increasing its share capital. However they are unsure as to whether they should pursue a placement of shares or an accelerated rights issue. Some of the directors believe that this will target the same
Share buybacks LO7 The group accountant of Ship Ltd has been given the task of accounting for a repurchase of shares by the company. The company is repurchasing 5 million shares at a cost of $2 each, paying for this in cash. However, the accountant is unsure which accounts should be reduced by
Application accounts LO5, 6 Sea Horse Ltd has announced a renounceable rights issue of 1‐for‐4 based on shares held at 2 July 2019. The shareholders have to exercise their rights by 31 August 2019, and pay $2 per share on application. At the end of the company’s reporting period, 30 June
Dividends LO8, 9 The directors of Surf Ltd are preparing the annual report for the company at 30 June 2019. The directors anticipate that the company will pay a dividend of $1.00 per share subsequent to the annual general meeting scheduled for 13 August 2019. This information will be included
Cash trust accounts LO5, 6 In accounting for the funds received by the company in the process of raising capital, it is sometimes necessary to raise a cash trust account. However, the cash trust account is not always an appropriate account to use. Required Compare the various ways in which a
Reserves LO8 Crab Ltd in its statement of financial position at 30 June 2019 reported the existence of two reserves: • an asset replacement reserve created to inform shareholders of the potential amounts of funds needed to replace critical manufacturing assets in the next few years • an
Placement of shares LO6 Sun Ltd is in need of an injection of capital. The directors are considering whether to raise capital via a public issue or by placing new shares with a selected group of new investors. Required Examine the factors that would motivate the directors to choose a placement
Repurchase of shares LO7 The directors of Sand Ltd are considering spending $5 million in a repurchase of the company’s shares. Some directors argue that this outlay requires the company to use a large amount of its capital that could be better put to alternative uses. They also argue that
RESERVES In its consolidated balance sheet, Qantas Airways Ltd (2013, p. 100) provided the following information. EQUITY 2013 2012 $m $m Share capital 4 693 4 729 Treasury shares (43) (42) Reserves 128 36 Retained earnings 1 171 1 162 Equity attributable to members of Qantas 5 949 5 885
RIGHTS ISSUES The following is an extract from a letter sent on 22 February 2017 by Oz Outback Ltd to its shareholders in relation to a rights issue by the company. Required A client who holds shares in Oz Outback Ltd has approached you in relation to this letter. She requires you to explain the
CASE STUDY PRIVATE PLACEMENT Mining company Aeon Metals Ltd announced plans to raise $1 150 000 through a placement of 5 227 273 ordinary fully paid shares at $0.22 per share to institutional investors to fund new surveys and drilling campaigns for its copper project. Prior to this announcement the
For what reasons may a company make an appropriation of its retained earnings?
Discuss whether it is necessary to distinguish between the different components of equity rather than just having a single number for shareholders’ equity.
What is a private placement of shares? What are the advantages and disadvantages of such a placement?
Discuss the nature of a rights issue, distinguishing between a renounceable and a non‐renounceable issue.
When is a cash trust raised?
A company has a share capital consisting of 100000 shares issued at $2 per share, and 50000 shares issued at $3 per share. Discuss the effects on the accounts if: (a) the company buys back 20000 shares at $4 per share (b) the company buys back 20000 shares at $2.50 per share.
Explain the difference between a renounceable and a non‐renounceable rights issue.
Explain when an options reserve would be raised.
The telecommunications industry in a particular country has been a part of the public sector. As a part of its privatisation agenda, the government decided to establish a limited liability company called Telecom Plus, with the issue of 10 million $3 shares. These shares were to be offered to the
Explain the nature of a reserve. How do reserves differ from the other main components of equity?
What are the minimum factors required under AASB 2/IFRS 2 to be taken into account in option‐pricing models?
Considering accounting theory LO1, 2, 3, 4, 7 Technology Enterprises Ltd, a listed company, commenced a research and development (R&D) project in July 2019 to modify the method of recharging batteries used in its products. The project was successfully completed in June 2020 and the company
Research and development outlays LO4 Future Ltd has been involved in a project to develop an engine that runs on fuel extracted from sugar cane. It started the project in February 2020. Between then and 30 June 2020, the end of the company’s reporting period, Future Ltd spent $254 000
Research and development outlays LO4 A small manufacturing company, Stirling Ltd, has significantly increased it expenditure on research and development over the past year. Required Advise Stirling Ltd on how research and development expenditure should be accounted for under AASB
Recognition of intangible assets LO4 Jersey Ltd is unsure of how to obtain computer software. Four possibilities are: 1. purchase computer software externally, including packages for payroll and general ledger 2. contract to independent programmers to develop specific software for the
Research and development LO4 Pharma Labs Ltd manufactures and distributes a wide range of general pharmaceutical products. Selected preliminary figures for the reporting period ended 31 December 2019 are as follows. Gross profit $17 600 000 Profit before income tax 1 700 000 Income tax
Internally generated intangible assets LO4 In their article entitled ‘U.S. firms challenged to get “intangibles” on the books’, Byrnes and Aubin (2011) noted that in the United States some companies were accounting for intangibles such as brands, patents and information technology
Recognition of intangible assets LO3, 4 The latest annual report of Heeler Ltd states that the principal activities of the group are ‘the production and broadcasting of television programs, local and national radio production and broadcasting, the sale of advertising airtime and space
Recognition of intangible assets LO3, 6, 7 The Public Relations Institute of Australia provided these statements on its website, www.pria.com.au, on 30 April 2014: During an event organised by the Spanish Association of Communication Directors, Dircom, in the framework of the 8th World
Intangible assets acquired in a business combination LO4 As reported by Edwards (2013), when Yahoo acquired Tumblr for US$1.1 billion it recognised three amortisable intangible assets, namely: $’000 Developed technology 23 700 Customer contracts and related relationships 182 400 Trade
Financial statements and intangible assets LO1 Upton (2001, p. 50) notes: There is a popular view of financial statements that underlies and motivates many discussions of intangible assets. That popular view often sounds something like this: If accountants got all the assets and liabilities
Brands and formulas LO3, 4 Wayne Upton (2001, p. 71) in his discussion of the lives of intangible assets noted that the formula for Coca‐Cola has grown more valuable over time, not less, and that Sir David Tweedie, former chairman of the IASB, jokes that the brand name of his favourite Scotch
Recognition of intangible assets LO3 Dory Ltd has the following: 1. the cost of purchasing a trademark 2. unrecovered costs of a successful lawsuit to protect a patent 3. goodwill acquired in the purchase of a business 4. costs of developing a patent 5. the cost of engineering activity to
Recognition of intangible assets LO3 Flash Ltd has the following: 1. an investment in a subsidiary company 2. training costs associated with a new product 3. the cost of testing in search for product alternatives 4. legal costs incurred in securing a patent 5. long‐term receivables. Required
Research and development LO4 Salmon Ltd’s research and development section has an idea for a project on using cane toad poison for medicinal purposes. The board of directors believes the project has promise and could lead to future profits. The project is, however, very expensive and needs
Recognition of copyright LO4, 7 Sarah Ltd acquired two copyrights during 2019. One copyright related to a textbook that was developed internally at a cost of $10 500. This book is estimated to have a useful life of 5 years from 1 September 2019, the date it was published. The second copyright
Useful life of trademark LO2, 4, 6 Snapper Ltd holds a trademark that is well known within consumer circles and has enabled the company to be a market leader in its area. The trademark has been held by the company for 9 years. The legal life of the trademark is 5 years, but is renewable by the
ACCOUNTING FOR INTANGIBLE ASSETS Mags Ltd is an Australian mail‐order company. Although the sector in Australia is growing slowly, Mags Ltd has reported significant increases in sales and net income in recent years. Sales increased from $50 million in 2012 to $120 million in 2018. Profit
CASE STUDY ACCOUNTING FOR BRANDS West Ltd is a leading company in the sale of frozen and canned fish produce. These products are sold under two brand names. • Fish caught in southern Australian waters are sold under the brand ‘Antarctic Fresh’, which is the brand the company developed when it
Explain how intangible assets are initially measured, and whether the measurement differs depending on whether the assets are acquired in a business combination or internally generated by an entity.
What intangible assets can never be recognised if internally generated? Why?
What are the factors a manager might consider in making various expensing–capitalising choices?
Explain the following agency problems that can arise in the relationship between owners and managers: (a) the horizon problem (b) risk aversion (c) dividend retention.
Identifying reportable segments LO5, 6 The following information concerning eight operating segments has been presented to the CODM of a large retail company. Segment Total revenue Internal revenue External revenue A 60 5 55 B 45 — 45 C 30 — 30 D 15 — 15 E 12 — 12 F 10 — 10 G
Disclosing segment information LO5, 6 Neenish Ltd is a diversified manufacturing company. The CODM has been presented with the following information concerning eight operating segments that have been identified. A B C D E F G H Revenue 150 50 25 25 20 15 10 5 Profits 38 5 7 6 2 3 Losses
Analysing the segment information LO7 Shakes Ltd is a listed diversified manufacturing company. It is listed on the London Stock Exchange and produces most of its products in China and India. Its markets are in the European Union and the Asia–Pacific region. It produces three types of
Reportable segments, allocating amounts to segments LO5, 6, 7 Sellsit Ltd is a listed diversified retail company. Its stores are located mainly in Australia. It has three main types of stores: general department stores, liquor stores and specialist toy stores. Each of these stores has
Disclosures LO5, 6 Makesit Ltd, a listed manufacturing company, has two reportable segments, A and B. Both A and B are manufacturing segments. Required For each item listed, state whether or not it would be disclosed for each of the reportable segments, identify the segments for which it
Disclosures LO5, 6 Jag Ltd has three reportable segments, A, B and C, which represent distinct geographical areas. The CODM receives financial information about the geographical areas. Segment A produces Product P and Product Y. Segment B produces Product P only. Segment C produces Product
Analysing the information provided LO5 Using the information provided about Rocky Ltd in exercise 20.4, analyse the relative profitability of the reportable segments.
Identifying reportable segments LO5 Rocky Ltd is a listed diversified retail company. Its stores are located mainly in Australia. It has three main types of stores: general department stores, liquor stores and specialist toy stores. Each of these stores has different products, customer
Identifying reportable segments LO5 Using the information from exercise 20.2, identify Yacon Ltd’s reportable segments.
Aggregating operating segments LO5 Yacon Ltd is a listed manufacturing company. It produces most of its products in Australia but exports 90% of these products to the United States, Canada and Germany. It has only one main product line: scientific equipment. Yacon Ltd is organised internally
Defining operating segments LO4 AASB 8/IFRS 8 sets out three criteria that need to be met in order to identify an operating segment. Required List the three criteria.
EXPERIENCE OF IFRS 8 Download the document ‘Post‐implementation Review: Operating Segments’. Referring to page 7 of this document, prepare a brief report that summarises the key issues identified in the feedback received by the IASB with respect to areas for improvement and amendment to IFRS
CASE STUDY CONTROVERSY OVER IFRS 8 Download the document ‘EU Adoption of the IFRS 8 Standard on Operating Segments’. Refer to the section headed ‘Segment Reporting’ and prepare a summary of the four sets of questions raised by the author in relation to the adoption of IFRS 8. CASE STUDY
Evaluate whether the reconciliations required by paragraph 28 of AASB 8/IFRS 8 address a concern about lack of comparability between entities caused by management’s ability to select any measurement basis it chooses in reporting segment information.
The 75% threshold relating to revenue refers to ‘external revenue’. Explain what is meant by external revenue and how a segment could generate revenue that is not external.
Describe how an entity determines its chief operating decision maker.
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