Questions and Answers of Financial Reporting

Sebastian Ltd grants its manager a share option plan conditional on the manager contributing 10% of his fortnightly salary of $$3000$ for the next 2 years. The fortnightly payments will be
Visit the websites of three Australian companies and access their latest annual reports. View the remuneration report within the director’s statutory report. Compare these remuneration reports and
Mulgogi Ltd, a listed company, organises major sporting events. It acquires crowd control equipment in return for a liability for an amount based on the price of 1000 of its own shares.Required Is
On 1 January 2023, Mainstay Ltd announces a grant of 1000 share options to each of its 15 senior executives. The grant is conditional on the employee continuing to work for Mainstay Ltd for the next
An employee is offered the opportunity to contribute 10% of their annual salary of $3000 across the next 2 years to a plan under which they receive share options. The employee’s accumulated
An entity receives inventories from a counterparty in exchange for a liability based on the price of 4000 of the entity’s own shares. At the date of receiving the inventories, the entity’s shares
At the beginning of year 1, Jordyn Ltd grants 500 share options to each of its 100 employees, conditional on the employee remaining in the employ of Jordyn Ltd over the next 2 years.The company
Mitchell Ltd grants 60 share options to each of its 200 employees. Each grant is conditional on the employee working for the company for the 3 years following the grant date. On grant date, the fair
At the beginning of 2024, Brandon Ltd grants 4000 employee share options with an exercise price of $$40$ to its newly appointed chief executive officer, conditional on the executive remaining in
At the beginning of 2023, Strident Ltd grants 5 000 share options to a senior marketing executive, conditional on that executive remaining in the company’s employ until the end of 2025. The share
At the beginning of 2023, Albion Ltd grants 2000 share options to each of its 40 most senior executives. The share options have a life of 5 years and will vest at the end of year 3 if the executives
Treetop Ltd grants 500 share appreciation rights (SARs) to 10 senior managers, to be taken in cash within 2 years of vesting date on condition that the managers do not leave in the next 3 years. The
Twiggy Ltd is engaged primarily in agricultural pursuits as well as in forestry products, including the management of its own forest reserves. Unfortunately, in the current year a major bushfire
Nunya Ltd is a mining company. Nunya Ltd has recognised a deferred tax asset balance for tax losses in its statement of financial position for each of the past four years as follows.At 30 June 2026,
A fellow student said, ‘Deferred tax liabilities and assets should be measured using a discounted cash flow model. The deferred tax is paid or refunded in the future — that could be years away
Torana Ltd applies the principles of tax‐effect accounting as per AASB 112/IAS 12 in accounting for income tax. Torana Ltd calculates depreciation expense on its plant using the straight‐line
Marrah Ltd made an accounting profit before tax of $150 000 for the year ended 30 June 2024. Included in the accounting profit were the following items of revenue and expense.Required 1. Calculate
Koona Ltd recorded an accounting profit before tax of $200 000 for the year ended 30 June 2024. Included in the accounting profit were the following items of revenue and expense.Required 1. Use a
At 30 June 2023, Burroo Ltd recognised a deferred tax asset of $$30$ 000 and a deferred tax liability of $$45$ 000 by applying an income tax rate of 30%. The government announced that it will
In the year ended 30 June 2023 the profits of Warrang Ltd have declined compared to the previous year as sales have fallen. As a result, in the year ended 30 June 2024 the company had to retrench
The following are all independent situations. Prepare the journal entries for deferred tax on the creation or reversal of any temporary differences. Explain in each case the nature of the temporary
The statement of financial position of Tapu Ltd at 30 June 2024 showed the following assets and liabilities.• Accumulated depreciation of plant for tax purposes was $$157$ 500 at 30 June 2023,
Motu Ltd incurred an accounting loss of $$15$ 120 for the year ended 30 June 2024. The current tax calculation determined that the company had incurred a tax loss of $$25$ 000.Tax legislation
Explain the nature of retained earnings. How do retained earnings differ from share capital? How do they differ from reserves? In what sense are they the same?
Retained earnings arise from gains and losses whereas reserves are simply internal transfers. True or false? Explain your answer.
Prior to AASB 2/IFRS 2 companies liked issuing options to employees at no cost. Why do you think this is the case? Do you agree or disagree with objective in AASB 2/IFRS 2?
When is a cash trust raised?
Mining company Rock Solid Metals Ltd announced plans to raise $$1$ 000 000 through a placement of 5 000 000 ordinary fully paid shares at $$0.20$ per share to institutional investors
The following is an extract from a letter sent on 22 February 2024 by Westshore Ltd to its shareholders in relation to a rights issue by the company.Required A client who holds shares in Westshore
In its consolidated financial statements, Sandfords Ltd provides the following information.If equity is considered a residual, explain why a company should have reserve accounts? Use the data from
In accounting for the funds received by the company in the process of raising capital, it is sometimes necessary to raise a cash trust account. However, the cash trust account is not always an
Jackknife Trucking Ltd has announced a renounceable rights issue of 1-for-5 based on shares held at 2 July 2024. The shareholders have to exercise their rights by 31 August 2024, and pay $$1$ per
Cradock Ltd has had a windfall gain of $$4$ million on a major foreign currency transaction. A director, representing a 40 percent share ownership in Cradock suggests the $$4$ million is used to
Placement of shares Fuyu 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
Collingwood Kiwifruit Ltd in its statement of financial position at 31 December 2023 reports the existence of two new reserves:• an asset replacement reserve, which has been created to replace
The directors of Pebbles Ltd are preparing the annual report for the company at 30 June 2024. The directors anticipate that the company will pay a dividend of $2.75 per share subsequent to the annual
The directors of Wai-Sabii 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
West Ltd needs to raise funds for mining projects in the Northern Territory. When it was first established it issued 2.0 million shares at $$1$ each. In the current year, the directors have decided
Whiteroll Ltd has been investigating the expansion of the company into new areas of development. In order to fund these new investments, the company needs an increase in equity. On 1 April 2022 the
Rights issue with options At 30 June 2021 Cellmid’s statement of financial position presents the following equityThe ordinary share capital of $56 064 284 comprises 125 246 865 shares. (The number
The audit and risk committee of Railnet Corporation Limited (RCL), were in a meeting with the auditors discussing the draft financial statements. Jaya Daji, an independent director, puts forward a
Figure 14.10 provides a description of Wesfarmers Limited’s reserves. Figure 14.11 is the Wesfarmers’ statement of changes in equity.Required Show the journal entries for the following
The group accountant of Tomthumb Ltd has been given the task of accounting for a repurchase of shares by the company. The company is repurchasing 5 million shares at a cost of $2 each, paying for
Bantam Ltd decided to repurchase 15% of its ordinary shares under a buyback scheme for $$3.20$ per share. At the date of the buyback, the equity of Bantam Ltd consisted of:The costs of the buyback
Define a financial instrument and identify transactions that give rise to financial instruments and those that do not.
Define a financial asset and list some common examples.
Define a financial liability and list some common examples.
Define a derivative and explain how a hybrid contract can have an embedded derivative. List some common examples of derivatives and embedded derivatives.
Define an equity instrument and explain how it differs to a financial liability.
Explain why some preference shares are recognised as financial liabilities by the issuer while others are recognised as equity instruments.
What is a convertible note? How does the issuer of convertible notes initially recognise the notes in its financial statements?
Should the dividends on preference shares be recognised directly in equity or as an expense in profit or loss?
The initial recognition of a financial asset or financial liability is based on a ‘rights and obligations approach’. Discuss.
What is a regular way purchase or sale of a financial asset and what is the difference between trade date accounting and settlement date accounting?
When does an entity set off a financial asset and financial liability for presentation in its statement of financial position?
When does an entity derecognise a financial asset or financial liability?
How is the initial measurement of a financial asset determined? Explain how a gain or loss can arise on initial measurement of a financial asset.
How is the initial measurement of a financial liability determined and how does it differ to the initial measurement of a financial asset?
Describe the various approaches to subsequent measurement of financial assets permitted by AASB 9 and the circumstances in which each approach may be applied.
Explain how financial assets that are debt instruments, equity instruments or derivatives may subsequently be measured.
Describe the subsequent measurement of financial liabilities. What is the default category for subsequent measurement of a financial liability?
How is the loss allowance for financial assets measured for assets classified as:(a) Stage 1(b) Stage 2 or 3?
Disclosures are required in respect of the nature and extent of risks arising from financial instruments. What are the usual risks and what details must be included in the disclosures?
How are the current and future tax consequences of transactions or other events accounted for?
Provide five examples of differences in the treatment of revenues and expenses under GAAP and ITAA.
What are permanent and temporary differences between accounting and taxable profit?
How is the taxable profit and the related current tax expense calculated?
Provide three examples of how taxable revenues or tax deductions are determined with regards to some items disclosed in the statement of financial position based on the changes between the opening
What is an ‘exempt income’ and how does it affect the calculation or recovery of carry‐forward tax losses?
What are the steps in the calculation of deferred tax?
What is a tax base?
How are tax bases for assets calculated?
How are tax bases for liabilities calculated?
Explain when a temporary difference is classified as deductible or taxable for an asset or liability.
Are all differences that exist at the end of the reporting period between the carrying amounts and tax bases of assets and liabilities recognised as part of deferred tax assets or deferred tax
Explain the movements that occur in deferred tax accounts due to revaluation of noncurrent assets.
Explain the movements that occur in deferred tax accounts due to the recovery of a tax loss.
Can current or deferred tax assets and liabilities be offset against each other?
What characteristics should a contract have to be considered a lease?
What constitutes the ‘right to use’ of an identified asset?
What are ‘lease payments’?
What is meant by ‘the interest rate implicit in a lease’ and ‘the lessee’s incremental borrowing rate’?
How are leases to be accounted for by lessees according to AASB 16/IFRS 16?
How is the lease term identified and what happens if the assessment of the lease term changes subsequent to the commencement date according to AASB 16/IFRS 16?
What is the impact of residual value guarantees on lessee accounting according to AASB 16/IFRS 16?
What is the impact of variable lease payments on lessee accounting according to AASB 16/IFRS 16?
What is the impact of lease modifications on lessee accounting according to AASB 16/IFRS 16?
How are short-term leases and leases involving low-value assets accounted for according to AASB 16/IFRS 16?
What are operating and finance leases?
How are finance leases to be accounted for by lessors according to AASB 16/IFRS 16?
How are operating leases to be accounted for by lessors according to AASB 16/IFRS 16?
Identify three possible adverse effects on a lessee’s financial statements arising from recognition of a lease arrangement on the statement of financial position.
Briefly describe the disclosure requirements for the lessee and the lessors according to AASB 16/IFRS 16.
Mitch Ltd prepares the following lease payments schedule for the lease of a machine from Stark Ltd. The machine has an economic life of 6 years. The lease agreement commences at 1 July 2021 and
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 8.11 presents eBay's cumulative stock return
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
Consider the following information relating to five different items of plant and equipment at the reporting date.Required 1. Calculate the recoverable amount for each of the five items of plant and
On 1 April 2021 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
Pan Ltd acquired a machine for $$250$ 000 on 1 July 2022. It depreciated the asset at 10% p.a. on a straight-line basis.On 30 June 2024, Flash Ltd conducted an impairment test on the asset. It
On 1 July 2023 an item of equipment is acquired at a cost of $$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

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