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Financial Reporting 2nd Edition Janice Loftus ,Ken Leo ,Sorin Daniliuc ,Belinda Luke ,Hong Nee Ang ,Karyn Byrnes - Solutions
How are the current and future tax consequences of transactions accounted for?
What is the main principle of tax‐effect accounting as outlined in AASB 112/IAS 12?
Valuation of liabilities and non‐performance risk LO4 Wallaby Ltd and Dingo Ltd enter into a contractual obligation to pay cash of $500 to Bandicoot Ltd in 5 years’ time. Wallaby Ltd has a AA credit rating and can borrow at 6%. Dingo Ltd has a BBB credit rating and can borrow at 12%. At
Present value technique: decommissioning liability LO4 On 1 July 2019, Emu Ltd assumed a decommissioning liability in a business combination. The entity is legally required to dismantle and remove an offshore oil platform at the end of its useful life, which is estimated to be 10 years. If
Present value technique: debt obligation LO5 On 1 January 2019, Koala Ltd issued at par in a private placement 42 million BBB‐rated 5‐year fixed rate debt securities with an annual coupon interest rate of 10%. At 31 December 2019, Koala Ltd still carried a BBB credit rating. Market
Liability held as an asset LO3, 4 On 1 January 2019, Kangaroo Ltd issues at par $2 million BBB‐rated exchange‐traded 5‐year fixed rate debt securities with an annual coupon interest rate of 10%. On 31 December 2019, investments in the debt securities are trading as an asset in an active
Determination of fair value LO3 Pine Ltd holds an asset that is traded in three different markets: Market A, Market B and Market C. Pine Ltd normally trades in Market C. Some information gathered in relation to these three markets is as follows. Market A Market B Market C Annual volume 60 000
Most advantageous market LO3 Asset XYZ is sold in three different active markets. • In Market A, the price that would be received is $27; transaction costs are $2 and the transport costs are $3. • In Market B, the price that would be received is $26; transaction costs are $2 and the
Market participants LO3 Swan Ltd recognises that the concept of ‘market participants’ is an important part of the measurement of fair value. It has determined that market participants are buyers and sellers in the principal (or most advantageous) market for the asset or liability that have
Characteristics of an asset LO3 Mr Anderson owned a large house on a sizeable piece of land in Brisbane. His ancestors had been some of the first settlers in the area and the property had been in the family since around 1889. Mr Anderson was 92 years old and had become incapable of taking care
Valuation techniques and inputs used LO3 An entity acquired a machine in a business combination that is held and used in its operations. The machine was initially acquired from a supplier and was then customised by the entity for use in its own operations. The highest and best use of the
‘In‐combination’ valuation premise LO3 Palm Ltd acquired a business that used a large number of assets that worked in combination to produce a product saleable in offshore markets. The assets of the business include a computer program that transfers the inputs to the manufacturing
Highest and best use LO3 Ash Ltd is in the business of bottling wine, particularly for small wineries that cannot afford sophisticated technical equipment and prefer to concentrate on the growing of the grapes. The white wine and champagne bottles used by Ash Ltd have a built‐in insulation
Highest and best use LO3 A response to the IASB’s Exposure Draft 2009/5 Fair Value Measurements, stated: In practical terms we doubt that an asset measured on any other basis than its intended use will provide more useful information to readers. The fact that, say, a site used for production
Valuation premise for measurement of fair value LO3 Maple Ltd conducts a business that makes women’s shoes. It operates a factory in an inner suburb of Perth. The factory contains a large amount of equipment that is used in the manufacture of shoes. Maple Ltd owns both the factory and the
FAIR VALUE ACCOUNTING: THE SHORTCOMINGS Find and read the following article: Benston, G 2008, ‘The shortcomings of fair value accounting described in SFAS 157’, Journal of Accounting and Public Policy, vol. 27, no. 2, March–April, pp. 101–14. Abstract Analysis of the examples given by the
FAIR VALUES OF PROPERTY, PLANT AND EQUIPMENT IN THE UNITED STATES Find and read the following article: Hermann, D, Saudagaran, S & Thomas, W 2006, ‘The quality of fair value measures for property, plant and equipment’, Accounting Forum, vol. 30, no. 1, July, pp. 43–59. Abstract Based on
FAIR VALUES AND THE CONCEPTUAL FRAMEWORK Find and read the following article: Whittington, G 2008 ‘Fair value and the IASB/FASB Conceptual Framework project: an alternative view’, Abacus, vol. 44, no. 2, pp. 139–68. Required Whittington argues there are two broad schools of thought in
FAIR VALUES AND ENRON Find and read the following article: Benston, G 2006, ‘Fair value accounting: a cautionary tale from Enron’, Journal of Accounting and Public Policy, vol. 25, no. 4, pp. 465–84. Abstract The FASB’s 2004 Exposure Draft, Fair‐Value Measurements, would have companies
CASE STUDY FAIR VALUES CAUSING TENSION IN THE ACCOUNTING PROFESSION Find and read the following article: Cain, A 2013, ‘Fair value continues to captivate’, Charter, vol. 84, no. 6, 2 July, pp. 31–2. Abstract A new accounting standard attempted to clear up the uncertainty, but the whole
Preparation of a statement of financial position, statement of profit or loss and other comprehensive income and statement of changes in equity LO3, 4, 5 The summarised general ledger trial balance of Matthew Ltd, a manufacturing company, for the year ended 30 June 2019 is detailed
Preparation of a statement of financial position, statement of profit or loss and other comprehensive income and statement of changes in equity LO3, 4, 5 The summarised general ledger trial balance of Jacob Ltd, a manufacturing company, for the year ended 30 June 2019 is detailed below.
Preparation of a statement of financial position and statement of profit or loss and other comprehensive income LO3, 4 The summarised general ledger trial balance of Ryan Ltd, a spare parts manufacturer, for the year ended 30 June 2019 is detailed below. Dr Cr Sales of goods $ 7 360 000
Presentation of items in the financial statements LO2, 3, 4, 5, 6 Consider the following items for Daniel Ltd at 30 June 2019. (a) Loss on revaluation of financial assets recognised at fair value through other comprehensive income (b) Finance expenses (c) Aggregate amount of dividends
Presentation of items in the financial statements LO2, 3, 4, 5, 6 Consider the following items for Cooper Ltd at 30 June 2019. (a) Contingent liabilities (b) Dividends paid (c) Cash and cash equivalents (d) Capital contributed during the year (e) Revaluation gain on land (not reversing any
Statement of profit or loss and other comprehensive income LO4 The general ledger trial balance of James Ltd includes the following accounts at 30 June 2019. (a) Sales revenue $975 000 (b) Interest income 20 000 (c) Share of profit of associates 15 000 (d) Gain on sale of financial assets
Preparation of a statement of profit or loss and other comprehensive income LO4 The general ledger trial balance of Liam Ltd, an investment company, includes the following revenue and expense items for the year ended 30 June 2019. Dr Cr Dividends from investments $920 000 Distributions from
Preparation of a statement of profit or loss and other comprehensive income LO4 The general ledger trial balance of Oliver Ltd, a medical manufacturing and research company, includes the following accounts at 30 June 2019. Dr Cr Sales revenue $1 300 000 Interest income 2 000 Gain on sale of
Preparation of a statement of financial position LO3 The summarised general ledger trial balance of Lucas Ltd, an investment company, includes the following accounts at 30 June 2019. Cash at bank $ 7 000 Deposits (at call) 112 869 Dividends receivable 15 693 Interest receivable 478 Settlements
Preparation of a statement of financial position LO3 The summarised general ledger trial balance of Samuel Ltd, a manufacturing company, includes the following accounts at 30 June 2019. Cash $ 175 000 Deposits (at call) 36 000 Trade debtors 1 744 000 Allowance for doubtful debts $ 80 000 Sundry
Preparation of a statement of financial position LO3 The summarised general ledger trial balance of Noah Ltd, a manufacturing company, includes the following accounts at 30 June 2019. Dr Cr Cash deposits $ 117 000 Trade debtors 1 163 000 Allowance for doubtful debts $ 50 000 Sundry debtors 270
Materiality, offsetting LO2 Company A is a retailer that imports about 30% of its goods. The following foreign exchange gains and losses were recognised in profit during the year. Loss $m Gain $m Foreign currency borrowings with Bank L 50 Forward exchange contracts used as hedging instruments 1
Statement of changes in equity LO5 The shareholders’ equity section of the statement of financial position of Riley Ltd at 30 June 2019 is as follows. 2019 2018 Share capital $200 000 $160 000 General reserve 50 000 40 000 Foreign currency translation reserve 74 000 60 000 Retained earnings
Statement of profit or loss and other comprehensive income LO4 The general ledger trial balance of William Ltd includes the following accounts at 30 June 2019. (a) Sales revenue $950 000 (b) Interest revenue 25 000 (c) Gain on sale of plant and equipment 10 000 (d) Cost of sales 600 000 (e)
Statement of profit or loss and other comprehensive income LO4 The general ledger trial balance of Lachlan Ltd includes the following accounts at 30 June 2019. (a) Sales revenue $1 200 000 (b) Interest income 24 000 (c) Gain on sale of plant 5 000 (d) Valuation gain on trading securities 20 000
Current asset classifications LO3 The general ledger trial balance of Thomas Ltd includes the following asset accounts at 30 June 2019. (a) Inventories $100 000 (b) Trade receivables 120 000 (c) Prepaid insurance 8 000 (d) Listed investments held for trading purposes at fair value 20 000 (e)
Current asset and liability classifications LO3 The general ledger trial balance of Joshua Ltd at 30 June 2019 includes the following asset and liability accounts. (a) Interest payable $ 2 000 (b) Trade receivables 100 000 (c) Accounts payable 85 000 (d) Prepayments 12 000 (e) Inventories of
Classification of items in the statement of financial position LO3 The general ledger trial balance of Jack Ltd includes the following accounts that are reported in the statement of financial position. (a) Trade receivables (g) Debentures payable (b) Work in progress (h) Preference share
Materiality and aggregation LO2 Indicate whether each of the following statements is true or false. 1. A material item is determined solely on the basis of its size. 2. A class of assets or liabilities is determined by reference to items of a similar nature or function. 3. Inventories and trade
Fair presentation LO2 The directors of an Australian company that is required to prepare financial reports under the Corporations Act conclude that applying the requirements of AASB 136 Impairment of Assets would not provide a fair presentation because the resulting $80 000 impairment loss is
FORMATS FOR STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME The accountant for Moonshine Ltd has heard that following recent changes to accounting standards, the income statement now has a new title and companies now have a choice regarding the presentation of income and expense items
MANAGEMENT JUDGEMENTS Any judgements made by management when applying the entity’s accounting policies that have a significant effect on amounts recognised in the financial statements must also be disclosed. What judgements do you think are made by management? CASE STUDY
MEASUREMENT BASIS USED A first-time shareholder has approached you requesting some advice. The shareholder has received the company’s annual report and noticed the following statement in the summary of significant accounting policies. The financial report has been prepared on the basis of
CASE STUDY ANALYSIS OF EXPENSES Review the published financial reports of the following companies and report on the information applicable to the statement of profit or loss and other comprehensive income. Determine whether the expenses are classified by nature or function. Give some possible
Does the separate identification of profit and items of other comprehensive income provide a meaningful distinction between the effects of different types of non-owner transactions and events?
Can an asset that is not realisable within 12 months be classified as a current asset? If so, under what circumstances?
What is the purpose of a statement of financial position? What comprises a complete set of financial statements in accordance with AASB 101/IAS 1?
Considering accounting theory LO5 Integrating Business Ltd provides professional advisory services to develop internal and external reporting systems to facilitate the integration of various forms of capital (financial, mechanical, human, intellectual, natural and social) in the business
Telecommunications multiple‐element arrangement LO5 Telco Ltd is a telecommunications company that offers a variety of services to its customers including fixed‐line telephone services, mobile phone services and internet services. It uses numerous distributors to sell its mobile
Revenue recognition — rendering of services LO3, 4 In each of the following situations, state at which date(s), if any, revenue will be recognised. 1. A contract for the rendering of services is entered into on 1 May 2020. The services are delivered on 15 May 2020. The buyer pays for
Multiple‐element arrangement LO3, 4 Alissa Ltd provides a bundled service offering to Customer B. It charges Customer B $35 000 for initial connection to its network and two ongoing services — access to the network for 1 year and ‘on‐call troubleshooting’ advice for that year.
Agent vs. principal LO5 Discuss how an entity would determine whether it acts as an agent or principal in sales transactions. In your answer, discuss the distinguishing features between an agency versus principal relationship and the consequences for revenue recognition.
Revenue recognition — rendering of services LO4 On 1 February 2020, MacroDot Ltd entered into an agreement with Customer S to develop a new database system (both hardware and software) for Customer S. The agreement states that the total consideration to be paid for the system will be $860
Revenue recognition — sale of goods LO4 In each of the following situations, state at which date, if any, revenue will be recognised. 1. A contract for the sale of goods is entered into on 1 May 2019. The goods are delivered on 15 May 2019. The buyer pays for the goods on 30 May 2019. The
Measurement — dates for recognition LO4 Soda Ltd sells plastic bottles. Wholesale customers that purchase more than 10 000 bottles per month are entitled to a discount of 6% on their purchases. On 1 March 2019, Customer P ordered 10 crates of bottles from Soda Ltd. Each crate contains
Recognition LO4 What is an ‘executory contract’? How does this affect the dates on which revenue is recognised under the conceptual framework?
Measurement LO3 State whether each of the following is true or false. 1. Revenue is measured at the fair value of the consideration given by the seller. 2. Revenue is measured at the transaction price that is allocated to that performance obligation. 3. If payment for the goods or services is
Definitions, scope LO1, 2, 3 State whether each of the following is true or false. 1. ‘Income’ means the same as ‘revenue’. 2. ‘Gains’ are always recognised net under IFRSs. 3. ‘Revenue’ must always be in respect of an entity’s ordinary operations. 4. ‘Gains’ must always
Definitions LO1, 2, 4 State which of the following meets the definition of ‘revenue’ under AASB 15/IFRS 15 for Toys2U Ltd, a retailer of toys. Give reasons for your answer. 1. Sales tax collected on behalf of the taxing authority 2. Gain on the sale of an investment property 3. Amounts
REVENUE RECOGNITION AND MEASUREMENT Access the ASX website (www.asx.com.au) and search for companies within the Commercial and Professional Services industry. Choose three companies from this industry, access their most recent annual reports, and provide a comparison of their notes to the financial
PAYMENT IN ADVANCE Arizona Ltd sells goods to Barbados Ltd. The agreement between the two parties states that Barbados Ltd pays for the goods in advance of delivery which will occur in 12 months’ time. The control of the goods pass to Barbados Ltd at the date of delivery. Barbados Ltd pays $40
CASE STUDY PAYMENT BY INSTALMENTS Johnson Ltd is entering into a contract to sell boat products to Fisher Ltd for $50 000. The agreement allows Fisher Ltd to pay for these goods by equal instalments, the first instalment being required on delivery and the remainder to be paid every 6 months for the
What is a multiple‐element transaction? Give two examples and discuss how AASB 15/IFRS 15 applies to such transactions.
What are the recognition criteria for income under the conceptual framework? How do these differ from the key stated purpose of AASB 15/IFRS 15?
What is the ‘asset/liability’ model for the definition and recognition of income under the conceptual framework? Does it give a different outcome from other models permitted under AASB 15/IFRS 15?
What are the key distinctions between ‘income’ and ‘revenue’? Why do you think the AASB/ IASB made these distinctions?
Applying accounting theory LO6, 8, 13, 14 Tropical Tours Ltd needs to raise $500 000 to finance the acquisition of a new tour bus. It approached an investment bank that proposed the following alternatives: (a) the issue of 8%, cumulative preference shares for $500 000 with a fixed
Purchased debt instrument with impairment LO9, 11, 13, 14 On 1 January 2019, Biko Banking Ltd purchases a debt instrument with a 5-year term for its fair value of $1000 million (including transaction costs). The instrument has a principal amount of $1250 million (the amount payable on
Forward to buy shares LO5 Wilshere Ltd enters a forward contract to buy its own ordinary shares after 12 months at a fixed forward price. Wilshere Ltd has a contractual obligation based on the forward price and it has a contractual right based on the market price at the maturity date.
Various financial assets and financial liabilities LO12, 13 Great Adventure Ltd has entered into a number of contracts that are financial instruments as follows. (a) On 1 July 2018, the company acquired 100 000 shares in Telstra Corporation Limited as a longterm investment at a cost of
Trading in shares LO9 Pedro Ltd is an investment company that trades in shares on the Australian Securities Exchange. Pedro Ltd measures the shares at fair value through the profit or loss. Pedro Ltd makes the following trades in Telstra Corporation Limited. Trade date Quantity Price
Accounting for loan assets at amortised cost LO12, 13, 14 Last Ltd is a manufacturing company that makes loans to other parties from time to time. The loan assets are classified by Last Ltd as subsequently measured at amortised cost. Last Ltd does not apply the simplified approach to
Convertible notes issue including financial liability at amortised cost LO7 On 1 July 2018 Strawman Ltd issues convertible notes with a face value of $12 million. The convertible notes have a 20-year term and mature on 30 June 2038. Interest is payable semiannually in arrears, on 31
Convertible notes issue including financial liability at amortised cost LO7 On 1 July 2021, Parade Ltd issues 2000 convertible notes. The notes have a 3-year term and are issued at par with a face value of $1000 per note, giving total proceeds at the date of issue of $2 million. The notes
Netting off a financial asset and financial liability LO10 In each of the situations below, state whether the financial asset and financial liability must be offset in the books of Company A as at 30 June 2019, and explain why. 1. Company A owes Company B $500 000, due on 30 June 2022. Company
Distinguishing financial liabilities from equity instruments LO6 Determine whether Satellite Ltd has as a financial liability or equity instrument resulting from the issue of securities in each situation below. Give reasons for your answer. 1. Satellite Ltd issues 100 000 $1 convertible notes.
Subsequent measurement of financial assets and financial liabilities LO2, 3, 13, 15 The trainee accountant at Dragon Ltd is unsure how to measure a number of items included in its financial records and has asked for your advice. Identify whether each of the following is a financial asset or
Identification of financial assets, financial liabilities and equity instruments LO1, 2, 3, 5, 6 Which of the following items qualify as a financial asset, financial liability or equity instrument within the scope of AASB 9/IFRS 9? Give reasons for your answers. 1. Cash held 2. Investment in a
FINANCIAL INSTRUMENTS AND PERFORMANCE REPORTING Find and read the following article. Horton, J & Macve, R 2008, ‘“Fair value” for financial instruments: how erasing theory is leading to unworkable global accounting standards for performance reporting’, Australian Accounting Review, vol. 10,
CASE STUDY FINANCIAL INSTRUMENTS IN THE GLOBAL FINANCIAL CRISIS The global financial crisis (GFC) gave rise to criticism of financial reporting, particularly in relation to the accounting treatment of financial instruments. The Financial Crisis Advisory Group (FCAG) identified four primary
Describe the various approaches to subsequent measurement of financial assets permitted by AASB 9/IFRS 9 and the circumstances in which each approach may be applied.
Explain why some preference shares are recognised as financial liabilities by the issuer while others and are recognised as equity instruments.
Define an equity instrument and explain how it differs from a financial liability.
Define derivative and explain how a hybrid contract can have an embedded derivate. List some common examples of derivatives and embedded derivatives.
Define financial liability and list some common examples.
Define financial asset and list some common examples.
Define financial instrument and identify transactions that give rise to financial instruments and those that do not.
Accounting for defined benefit superannuation plans LO5 Some years ago, Wattle Ltd established a defined benefit superannuation plan for its employees. The company has since introduced a defined contribution plan, which all new staff join when commencing employment with Wattle Ltd.
Accounting for defined benefit superannuation plans LO5 Lily Ltd provides a defined benefit superannuation plan for its managers. The following information is available in relation to the plan. 2019 $ Present value of the defined benefit obligation 1 July 2018 10 000 000 Fair value of
Accounting for long service leave LO6 Bluebell Ltd provides credit services. Bluebell Ltd provides its employees with long service leave entitlements of 13 weeks of paid leave for every 10 years of continuous service. As the company has been operating for only 5 years, no employees have
Accounting for long service leave LO6 Geranium Ltd provides long service leave for its retail staff. Long service leave entitlement is determined as 13 weeks of paid leave for 10 years of continued service. The following information is obtained from Geranium Ltd’s payroll records and
Accounting for sick leave LO2, 6 Rose Ltd provides 1 week (5 days) of accumulating non‐vesting sick leave for each year of service. Sick leave is paid at the base pay rate, which does not include commissions, bonuses and overtime. The proportion of accumulated sick leave that will be
Accounting for defined benefit superannuation plans LO5 For each of the following scenarios, determine (i) the surplus or deficit in the defined benefit superannuation fund and (ii) the net defined benefit liability or asset that should be recognised by the sponsoring employer in accordance
Accounting for defined benefit superannuation plans LO5 Which of the following items in relation to a defined benefit fund are recognised in (i) profit or loss and (ii) other comprehensive income in accordance with AASB 119/IAS 19? 1. Current service cost 2. Past service cost incurred
Accounting for defined benefit superannuation plans LO5 Sydney Ltd provides a defined benefit superannuation plan for its managers. The assistant accountant has completed some sections of the defined benefit worksheet based on information provided in an actuary’s report on the Sydney DB
Accounting for sick leave LO2 Daffodil Ltd opened a call centre on 1 July 2018. The company provides 1 week (5 days) of sick leave entitlement for the employees working at the call centre. The following information has been obtained from Daffodil Ltd’s payroll records and actuarial
Accounting for annual leave LO2 Assume the same details as in exercise 9.11, except that Tulip Ltd’s trial balance showed the provision for annual leave had a credit balance of $62 640. Required 1. Prepare journal entries to account for the annual leave liability at 30 June 2019. 2.
Accounting for annual leave LO2 Tulip Ltd provides 4 weeks (20 days) of accumulating vested annual leave for each year of service. The company policy is that annual leave must be taken within 6 months of the end of the period in which it accrues. Annual leave is paid at the base salary rate
Accounting for the payroll and accrual of wages and salaries LO2 Lavender Ltd pays its employees on a fortnightly basis. All employee benefits are recognised as expenses. The following information is provided for its July and August payrolls. July August $ $ $ $ Fortnightly payroll 580 000
Accounting for defined contribution superannuation plans LO4 Wollongong Ltd provides a defined contribution superannuation fund for its employees. The company pays contributions equivalent to 10% of annual wages and salaries. Contributions of $50 000 per month were paid for the year ended 30
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