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Financial Reporting 2nd Edition Janice Loftus ,Ken Leo ,Sorin Daniliuc ,Belinda Luke ,Hong Nee Ang ,Karyn Byrnes - Solutions
Accounting for long service leave LO6 Victoria Ltd provides long service leave entitlement of 13 weeks of paid leave after 10 years of continuous employment. The provision for long service leave had a credit balance of $140 000 at 30 June 2019. During the year ended 30 June 2020, long service
Accounting for profit‐sharing arrangements LO2 Wellington Ltd has a profit‐sharing arrangement in which 1% of profit for the period is payable to employees, paid 3 months after the end of the reporting period. Employees’ entitlements under the profit‐sharing arrangement are subject to
Accounting for annual leave LO2 Newcastle Ltd provides employees with 4 weeks (20 days) of annual leave for each year of service. The annual leave is accumulating and vesting up to a maximum of 6 weeks. Thus, all employees take their annual leave within 6 months after the end of each reporting
Accounting for sick leave LO2 Auckland Ltd has 200 employees who each earn a gross wage of $140 per day. Auckland Ltd provides 5 days of paid non‐accumulating sick leave for each employee per annum. During the year, 150 days of paid sick leave and 20 days of unpaid sick leave were taken.
Accounting for sick leave LO2 Melbourne Ltd has 100 employees who each earn a gross wage of $150 per day. In an attempt to reduce absenteeism, Melbourne Ltd introduced a new workplace agreement providing all employees with entitlement to 5 days of non‐vesting, accumulating sick leave per
Accounting for the payroll LO2 Albury Ltd pays management on a monthly basis and staff on a fortnightly basis. Payroll is processed and paid on the 1st of each month for management, and the 1st and 15th of each month for staff. Gross management salaries per month are $400 000 (less $190 000
Accrual of wages and salaries LO2 Canberra Ltd has a weekly payroll of $125 000. The last payroll processed before the end of the annual reporting period was for the week ended Friday 24 June. Employees do not work during weekends. Required Prepare a journal entry to accrue the weekly payroll
Accounting for the payroll LO2 Adelaide Ltd pays its employees on a monthly basis. The payroll is processed on the 6th day of the month and payable on the 7th day of the month. Gross salaries for July were $500 000, from which $125 000 was deducted in tax. All of Adelaide Ltd’s salaries are
BONUSES Griffith Ltd pays bonuses to its staff 3 months after year‐end, provided profit targets are met and staff remain employed with the company at the time the bonuses are paid. At 30 June 2019 the company determines it has exceeded its profit target for the year, but prefers not to record a
LONG SERVICE LEAVE The accountant of Bond Ltd believes that long service leave should not be considered as a liability in the accounts until employees have commenced their tenth year of service, given this leave entitlement only applies to Bond Ltd employees after 10 years of continuous service.
VESTING ENTITLEMENTS Deakin Ltd is a newly formed company and is formulating its policies in terms of employee benefits. The company would like to offer employees payment for any accumulated unused sick leave if they resign from the company. Required Explain to the CEO the effect on the financial
CASE STUDY TERMINATION BENEFITS The board of directors of Swinburne Ltd met in June 2019 and decided to close down a branch of the company’s operations when the lease expired in the following February. The chief financial officer advised that termination benefits of $2 million are likely to be
Identify and discuss the assumptions involved in the measurement of a provision for long service leave. Assess the consistency of these requirements with the fundamental qualitative characteristics of financial information prescribed by the conceptual framework.
In relation to defined benefit post‐employment plans, paragraph56 of AASB 119/IAS 19 states, ‘the entity is, in substance, underwriting the actuarial and investment risks associated with the plan’. Evaluate whether the requirements for the recognition and measurement of the net defined
Compare the off‐balance sheet approach to accounting for a defined benefit post‐employment plan with the net capitalisation approach adopted by AASB 119/IAS 19. Can these approaches be explained by different underlying views as to whether a deficit or surplus in the fund meets the definition of
Explain how an entity should account for its contribution to a defined contribution superannuation plan in accordance with AASB 119/IAS 19.
Applying accounting theory LO1, 4, 5, 6 In June 2018 Great Southern Ltd built a submarine under a contract with the Australian Navy. The contract required Great Southern Ltd to provide a 1‐year warranty. The accountant was unsure how to measure the warranty because the design of the
Comprehensive problem LO2, 3, 5, 6, 7, 8 ChubbyChocs Ltd, a listed company, is a manufacturer of confectionery and biscuits. The end of its reporting period is 30 June. Relevant extracts from its financial statements at 30 June 2020 are shown. The provision for warranties at 30 June
Restructuring provisions on acquisition LO4, 6 Tooth Ltd acquires Nail Ltd, effective 1 March 2020. At the date of acquisition, Tooth Ltd intends to close a division of Nail Ltd. As at the date of acquisition, management has developed and the board has approved the main features of the
Calculation of a provision LO5, 6 In May 2019, Savoir Ltd relocated an employee from head office to an office in another city. As at 30 June 2019, the end of Savoir Ltd’s reporting period, the costs were estimated to be $40 000. Analysis of the costs is as follows. Costs for shipping
Measuring a restructuring provision LO6 Tee Ltd’s directors decided on 3 May 2020 to restructure the company’s operations as follows. • Factory Z would be closed down and put on the market for sale. • 100 employees working in Factory Z would be retrenched on 31 May 2020, and would
Risk and present value of cash flows LO5 Using examples, explain how a liability‐specific discount rate could cause the amount calculated for a provision to be lower when the risk associated with that provision is high. How could this problem be averted in practice?
Recognising a provision LO4 In each of the following scenarios, explain whether or not Omega Ltd would be required to recognise a provision. 1. As a result of its plastics operations, Omega Ltd has contaminated the land on which it operates. There is no legal requirement to clean up the
Contingent liabilities — disclosure LO3, 6, 8 A customer filed a lawsuit against Delta Ltd in December 2020 for costs and damages allegedly incurred as a result of the failure of one of Delta Ltd’s electrical products. The amount claimed was $3 million. Delta Ltd’s lawyers have
Distinguishing between liabilities, provisions and contingent liabilities LO2, 3, 4, 6 Katz Ltd’s financial statements are authorised for issue on 24 August 2019. Required Identify whether each of the following would be a liability, a provision or a contingent liability, or none of the
Restructuring costs LO6 Groucho Ltd acquires Harpo Ltd. The restructuring plan, which satisfies the criteria for the existence of a present obligation under AASB 137/IAS 37 and AASB 3/IFRS 3, includes an advertising program to promote the new company image. The restructuring plan also
Restructuring costs LO6 A division of an acquired entity will be closed and activities discontinued. The division will operate for 1 year after the date of acquisition. At the end of the 1 year, a few divisional employees will be retained to finalise closure of the division, but the rest
Recognising a provision LO4 Tres Ltd is a listed company that provides food to function centres that host events such as weddings and engagement parties. After an engagement party held by one of Tres Ltd’s customers in June 2020, 100 people became seriously ill, possibly as a result of
Recognising a provision LO4 The government introduces a number of changes to the goods and services (value‐added) tax system. As a result of these changes, Stitchers Ltd, a manufacturing company, will need to retrain a large proportion of its administrative and sales workforce to ensure
Recognising a provision LO4 When should liabilities for each of the following items be recorded in the accounts of the business entity? 1. Acquisition of goods by purchase on credit 2. Salaries 3. Annual bonus paid to management 4. Dividends
Recognising a provision — measurement LO5, 6 Explain how a borrowing cost could arise as part of the measurement of a provision. Illustrate your explanation with a simple example.
LACK OF SYMMETRY BETWEEN A CONTINGENT ASSET AND A CONTINGENT LIABILITY Jackshire Ltd filed a lawsuit against Bormire Ltd for compensation of $23 million after Bormire failed to deliver goods on time. At the end of the financial year the outcome of the hearing is unknown. The lawyer is of the
provides a useful decision tree to help management make judgements on classifying a liability. Using this decision tree, determine how the case should be recorded. CASE STUDY
MANAGEMENT JUDGEMENTS Moolie Ltd is a manufacturer and retailer of surfboards. It gives purchasers a warranty at the time of sale for manufacturing defects that become apparent within 2 years from the date of sale. Based on past experience, Moolie expects to have 5% of its sales returned for
CASE STUDY DISTINGUISH BETWEEN PROVISIONS AND CONTINGENT LIABILITIES Provisions are recognised as a liability in the statement of financial position whereas contingent liabilities are not recognised in the financial statements but disclosed in the notes to financial statements. Paragraph 12 of
Compare and contrast the requirements of AASB 3/IFRS3and AASB 137/IAS37 in respect of restructuring provisions and contingent liabilities.
Accounting theory and impairment losses LO1, 2, 7 In an article published in the March 2015 issue of Company Director, Commissioner John Price of the Australian Securities & Investments Commission (ASIC) noted that some entities have made significant impairment write‐downs in response to
Impairment loss LO5 Excalibur Ltd operates in the Swan Valley in Western Australia where it is involved in the growing of grapes and the production of wine. In June 2019, it anticipated that its assets may be impaired due to a glut on the market for grapes and an impending tax from the
Goodwill, corporate assets LO5 A large manufacturing company, St. George Ltd, has its operations in Newcastle. It has two CGUs, Red Unit and Dragon Unit. At 30 June 2019, the management of the company decided to conduct impairment testing. It calculated that the recoverable amounts of
CGUs, corporate assets, goodwill LO5 Camelot Ltd manufactures children’s toys. Its operations are carried out through three operating divisions, namely the Merlin Division, the Hollow Division and the Hills Division. These divisions are separate CGUs. In accounting for any impairment
CGUs, reversal of impairment losses LO5, 6 The two CGUs of Dark Forest Ltd are referred to as the Lady CGU and the Lake CGU. At 31 July 2018, the carrying amounts of the assets of the two divisions were as follows. Lady CGU Lake CGU Equipment $ 9 000 $ 7 200 Accumulated depreciation (3
Reversal of impairment losses LO5, 6 Saxon Ltd conducted an impairment test at 30 June 2018. As a part of that exercise, it measured the recoverable amount of the entity, considered to be a single CGU, to be $217 600. The carrying amounts of the assets of the entity at 30 June 2018 were
Reversal of impairment losses LO5 At 30 June 2019, Boxes Ltd reported the following assets. Land $ 50 000 Plant 250 000 Accumulated depreciation (50 000) Goodwill 8 000 Inventories 40 000 Cash 2 000 All assets are measured using the cost model. At 30 June 2019, the recoverable amount of
Corporate assets LO5 Run Ltd has two divisions, each regarded as a separate CGU. The carrying amounts of the net assets within each division at the most recent reporting date were as follows. Division One Division Two Cash $ 5 000 $ 8 000 Inventories 30 000 40 000 Receivables 20 000 8 000
Impairment, two CGUs LO5 Last Ltd has two divisions, Time and Leisure. Each of these is regarded as a separate CGU. At 31 December 2019, the carrying amounts of the assets of the two divisions were as follows. Time Leisure Plant $1 500 $1 200 Accumulated depreciation (650) (375) Patent 240
Allocation of corporate assets and goodwill LO5 Bunsen Ltd acquired all the assets and liabilities of Jones Ltd on 1 January 2020. Jones Ltd’s activities were run through three separate businesses, namely the Alpha Unit, the Beta Unit and the Gamma Unit. These units are separate CGUs.
Impairment loss for a CGU, reversal of impairment loss LO5, 6 One of the CGUs of Cooper Ltd is associated with the manufacture of wine barrels. At 30 June 2019, Cooper Ltd believed, based on an analysis of economic indicators, that the assets of the unit were impaired. The carrying
Impairment loss, goodwill LO5 On 1 January 2018, Bad Ltd acquired all the assets and liabilities of Wolf Ltd. Wolf Ltd has a number of operating divisions, including one whose major industry is the manufacture of toy trains, particularly models of trains of historical significance. The toy
Impairment of a CGU LO5 Potters Ltd has determined that its fine china division is a CGU. The carrying amounts of the assets at 30 June 2019 are as follows. Factory $210 000 Land 150 000 Equipment 120 000 Inventories 60 000 Potters Ltd calculated the value in use of the division to be $510
Impairment of a CGU, goodwill LO5 Crossbow Ltd manufactures leather footwear for women. It has undertaken a strategy of buying out companies that had competing products. These companies were liquidated and the assets and liabilities brought into Crossbow Ltd. At 30 June 2019, Crossbow Ltd
Impairment of a CGU LO5 Bow Ltd reported the following assets in its statement of financial position at 30 June 2019. Plant $ 800 000 Accumulated depreciation (240 000) Land 300 000 Patent 240 000 Office equipment 620 000 Accumulated depreciation (340 000) Inventories 220 000 Cash and cash
Impairment of a CGU LO5 Spear Ltd reported the following information in its statement of financial position at 30 June 2019. Plant $ 650 000 Accumulated depreciation — plant (150 000) Intangible assets 300 000 Accumulated amortisation (100 000) Land 300 000 Total non‐current assets 1
Impairment loss and reversal of an individual asset LO4, 6 On 30 June 2020, an item of machinery had a carrying amount of $525 000. The machinery’s cost at acquisition was $750 000 at which time its estimated useful life was 10 years with no residual value. On 30 June 2020, the same item
Impairment loss of an individual asset incorporating revaluation model LO3, 4 At 30 June 2020, an entity holds a block of land from which it generates revenue by leasing it to agricultural enterprises. The land has a carrying amount of $2.5 million. An independent market appraisal has valued
Impairment of an individual asset, calculating value‐in‐use LO3, 4 Arrow Ltd acquired a machine for $250 000 on 1 July 2019. It depreciated the asset at 10% p.a. on a straight‐line basis. On 30 June 2021, Arrow Ltd conducted an impairment test on the asset. It determined that the asset
Impairment of an individual asset LO3, 4 On 1 July 2020 an item of equipment is acquired at a cost of $3 million. The asset is to be depreciated using the straight‐line method on the basis of an estimated useful life of 15 years and a negligible residual value. On 30 June 2023 it is
Impairment of an individual asset LO3, 4 On 1 April 2018 the construction of a fixed oil platform is completed and ready for use at a total cost of $500 million. The useful life of the rig is linked to the 25‐year exploration rights granted to the company. Due to the specific nature of the
Determining recoverable amount and impairment adjustments LO3, 4 Consider the following information relating to five different items of plant and equipment at the reporting date. Asset Carrying amount $ Fair value $ Costs of disposal $ Value in use $ A 100 000 105 000 3 000 110 000 B 50 000 45
IMPACT OF IMPAIRMENT LOSSES On 28 August 2014, Qantas announced an annual statutory loss after tax of $2.8 billion for the 12 months ended 30 June. This result included a massive $2.6 billion write‐down of its international aircraft fleet. These losses were the largest in the airline’s history
IMPAIRMENT UNDER THE REVALUATION MODEL ‘Impairment is only relevant to assets carried under the cost model. For assets carried under the revaluation model, such as our land and buildings, increases and decreases in fair value dictate whether carrying amounts are adjusted up or down. We don’t
presents eBay’s cumulative stock return against the S&P 500 index from 2003. In mid‐ September 2005, eBay acquired the internet phone company Skype for $2.6 billion. On 1 October 2007, it announced a massive goodwill write‐off of $1.43 billion (55% of the acquisition price) related to the
GOODWILL WRITE‐OFFS Gu and Lev (2011) argue that the root cause of many goodwill write‐offs is that the shares of the buyer are overpriced at the acquisition date. Figure
DETERMINATION OF CGUs The Scenic City Council contracts out the bus routes in and around Scenic City to various subcontractors based on a tender arrangement. Some routes, such as the Express to City routes, are quite profitable, while others, such as those transporting schoolchildren to and from
CASE STUDY INDICATIONS AND DETERMINATION OF IMPAIRMENT LOSSES BHP Billiton released the following announcement to investors and media on 15 January 2016. Onshore US asset review BHP Billiton expects to recognise an impairment charge of approximately US$4.9 billion post‐tax (or approximately
What is an impairment test?
Applying accounting theory to property, plant and equipment LO5, 6 Bill was recently appointed as the accountant for Lorikeet Ltd. He was surprised to learn that the company uses the cost model for its buildings. His previous employer, Raven Ltd, had used the revaluation model for its
Depreciation LO5 Hawk Ltd started operations on 1 September 2014. Hawk Ltd’s accounts at 31 December 2017 included the following balances. Machinery (at cost) $ 91 000 Accumulated depreciation — machinery 48 200 Vehicles (at cost; purchased 21 November 2016) 46 800 Accumulated
Depreciation calculation LO5 Dove Ltd operates a factory that contains a large number of machines designed to produce knitted garments. These machines are generally depreciated at 10% p.a. on a straight‐line basis. In general, machines are estimated to have a residual value on
Acquisitions, revaluations, replacements, depreciation LO2, 3, 5, 6, 7 Wren Trading operates in a very competitive field. To maintain its market position, it purchased two new machines for cash on 1 January 2018. It had previously rented its machines. Machine A cost $40 000. Machine B cost
Acquisitions, disposals, trade‐ins, overhauls, depreciation LO2, 3, 4, 5, 6, 7 River Song is the owner of Kestrel Fishing Charters. The business’s final trial balance on 30 June 2019 (end of the reporting period) included the following balances. Processing plant (at cost, purchased 4
Classification of acquisition costs LO2, 3 Harrier Ltd began operations on 1 July 2019. During the following year, the company acquired a tract of land, demolished the building on the land and built a new factory. Equipment was acquired for the factory and, in March 2020, the factory was
Determining the cost of assets LO3 Magpie Ltd uses many kinds of machines in its operations. It constructs some of these machines itself and acquires others from the manufacturers. The following information relates to two machines that it has recorded in the 2020–21 period. Machine A was
Revaluation model LO2, 3, 5, 6, 7 On 1 July 2019, Peewee Ltd acquired two assets within the same class of plant and equipment. Information on these assets is as follows. Cost Expected useful life Machine A $100 000 5 years Machine B 60 000 3 years The machines are expected to generate
Acquisitions, disposals, depreciation LO5, 6, 7 Swan Ltd purchased equipment on 1 July 2018 for $39 800 cash. Transport and installation costs of $4200 were paid on 5 July 2018. Useful life and residual value were estimated to be 10 years and $1800 respectively. Swan Ltd depreciates
Acquisition and sale of assets, depreciation LO2, 3, 5, 6 Lark’s Turf Farm owned the following items of property, plant and equipment as at 30 June 2019. Land (at cost) $120 000 Office building (at cost) $150 000 Accumulated depreciation (23 375) 126 625 Turf cutter (at cost) 65 000
Calculation of depreciation LO5 On 1 July 2019, Eagle Airlines acquired a new aeroplane for a total cost of $10 million. A breakdown of the costs to build the aeroplane was given by the manufacturers. Aircraft body $3 000 000 Engines (2) 4 000 000 Fitting out of aircraft: Seats 1 000 000
Depreciation LO5, 6 Wader Ltd constructed a building for use by its administration department. The completion date was 1 July 2012, and the construction cost was $840 000. The company expected to remain in the building for the next 20 years, at which time the building would probably have no
Depreciation LO5, 6 Stork Ltd was formed on 1 July 2017 to courier packages between the city and the airport. On this date, the company acquired a delivery truck from Lyons Trucks. The company paid cash of $50 000 to Lyons Trucks, which included government charges of $600 and registration of
Revaluation of assets LO5, 6 On 30 June 2019, the statement of financial position of Kookaburra Ltd showed the following non‐current assets after charging depreciation. Building $ 300 000 Accumulated depreciation (100 000) $200 000 Motor vehicle 120 000 Accumulated depreciation (40 000) 80
Depreciation and revaluation of assets LO5, 6 In the 30 June 2019 annual report of Emu Ltd, the equipment was reported as follows. Equipment (at cost) $500 000 Accumulated depreciation 150 000 350 000 The equipment consisted of two machines, Machine A and Machine B. Machine A had cost $300 000
Determination of cost LO3 Kingfisher Ltd has acquired a new building for $500 000. It has incurred incidental costs of $10 000 in the acquisition process for legal fees, the real estate agent’s fees and stamp duties. Management believes that these costs should be expensed because they have
Determination of cost LO3 Corella Ltd has acquired a new machine, which it has now been installed in its factory. Assess which of the following items should be capitalised into the cost of the building. Provide a reason for your conclusions. 1. Labour and travel costs for managers to inspect
Determination of cost LO3 Galah Ltd has acquired a new building. Assess which of the following items should be included in the cost of the building. Provide a reason for your conclusions. 1. Stamp duty 2. Real estate agent’s fees 3. Architect’s fees for drawings for internal adjustments to
Purpose of depreciation LO5 A new accountant has been appointed to Albatross Ltd and has implemented major changes in the calculation of depreciation. As a result, some parts of the factory are now subject to higher depreciation charges. This has incensed some operations managers who argue
Costs of acquisition LO3 Darter Ltd has recently acquired a machine for an invoice price of $50 000. Various other costs relating to the acquisition and installation of the machine include transportation, electrical wiring, and preparing a platform for installation. These amounted to $7500. The
Determination of cost LO2 Pelican Ltd purchased land for use as its corporate headquarters. A small factory that was on the land when it was purchased was torn down before construction of the office building began. A substantial amount of rock blasting and removal of soil then had to be done to
Purpose of depreciation LO5 Recently Sea Eagle Ltd experienced a workers’ strike that affected a number of its operating plants. The group accountant of Sea Eagle Ltd indicated that it was not appropriate to report depreciation expense during this period as the equipment was not used during
Revaluation model LO6 One of the board of directors of Seagull Ltd has proposed that the company adopt the revaluation model for fixed assets. Some of these assets are difficult to obtain and certain items have increased in value in the current period; however, it is difficult to know what
Revaluation adjustments and reversals LO6 The following data from Lyre Ltd’s accounts relates to two assets at 30 June 2018. Asset Value Accumulated depreciation Carrying amount Land $ 1 600 000 0 $1 600 000 Plant and equipment $ 200 000 $40 000 $ 160 000 At 30 June 2018 Lyre Ltd decides to
Revaluation adjustments and reversals LO6 On 1 January 2019, Lima Ltd revalued land from $100 000 to $200 000. On 1 January 2020, the company subsequently revalued the land to $160 000. And on 1 January 2021, the company again revalued the asset downwards to $80 000. Required 1. Prepare the
DEPRECIATION CHARGES The management of Predator Ltd has been analysing the financial reports provided by the accountant, who has been with the firm for a number of years. Management has expressed its concern over depreciation charges being made in relation to the company’s equipment. In
DEPRECIATION CHARGES A new accountant has been appointed to Outlander Ltd and has implemented major changes in the calculation of depreciation. As a result, some parts of the factory have much larger depreciation charges. This has angered some operations managers who believe that, as they take
ANNUAL DEPRECIATION CHARGE A company is in the movie rental business. Movies are generally rented out over a period of 2 years and then either sold or destroyed. However, management wants to show increased profits, and believes that the annual depreciation charge can be lowered by keeping the
STRAIGHT-LINE VS DIMINISHING BALANCE DEPRECIATION Silence Ltd uses tractors as part of its operating equipment, and it applies the straight‐line depreciation method to these assets. Silence Ltd has just taken over Lambs Ltd, which uses similar tractors in its operations. However, Lambs Ltd has
CASE STUDY FAIR VALUE BASIS FOR MEASUREMENT The management of Ransom Ltd has decided to use the fair value basis for the measurement of its equipment. Some of this equipment is very hard to obtain and has in fact increased in value over the current period. Management is arguing that, as there has
Should accounting for revaluation increases and decreases be done on an asset‐by‐asset basis or on a class‐of‐assets basis?
How should items of property, plant and equipment be measured at initial recognition?
Assignment of cost (periodic and perpetual methods) LO4, 5, 6 Darwin Ltd’s inventories transactions for April 2021 are shown below. Purchases Cost of sales Balance Date No. units Unit cost Total cost No. units Unit cost Total cost No. units Unit cost Total cost April 1 20 $8.00 $160.00 4
Applying the lower of cost and NRV rule LO7 The following information relates to the inventories on hand at 30 June 2020 held by Canberra Ltd. Item No. Quantity Cost per unit $ Cost to replace $ Estimated selling price $ Cost of completion and disposal $ A1458 6002.30 2.41 3.75 0.49 A1965
End‐of‐period adjustments LO5 A physical count of inventories at 31 December 2020 revealed that Katoomba Pty Ltd had inventories on hand at that date with a cost of $441 000. Katoomba Pty Ltd uses the periodic method to record inventories transactions. Inventories at 1 January 2020
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