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financial reporting
Financial Reporting 4th Edition Janice Loftus, Ken Leo, Sorin Daniliuc, Belinda Luke, Hong Nee Ang, Mike Bradbury, Dean Hanlon, Noel Boys, Karyn Byrnes - Solutions
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 requires four annual payments of \($33\) 000. The machine will be returned to Stark Ltd at the end of the
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 against the S\&P 500 index from 2003. In mid-September 2005, eBay acquired the internet phone
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 bother
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 equipment.2. Assuming plant and equipment is carried under the cost model, determine the amount of
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 to the company. Due to the specific nature of the platform it is deemed to have no realisable value
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 determined thatthe asset could be sold to other entities for \($154\) 000 with costs of disposal of
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 negligible residual value.On 30 June 2026 it is determined that the asset has a value in use of
At 30 June 2023, Danni Ltd holds a block of land from which it generates revenue by leasing it to transportation enterprises. The land has a carrying amount of \($1.25\) million. An independent market appraisal has valued the land at \($1.18\) million but costs to dispose of the land are estimated
Sparrow Ltd reported the following information in its statement of financial position at 30 June 2023.At 30 June 2023, Sparrow Ltd analysed the internal and external sources of information that would indicate deterioration in the worth of its assets. It determined that there wereindications of
Rainier Ltd reported the following assets in its statement of financial position at 30 June 2022.The recoverable amount of the entity was calculated to be \($1\) 660 000. The fair value less costs of disposal of the land was \($280\) 913.RequiredPrepare the journal entry for any impairment loss at
Dry Ltd is an entity that specialises in the manufacture of umbrellas and rain jackets. It has aggressively undertaken a strategy of buying out other companies that produced apparel for inclement weather. These companies were liquidated and the assets and liabilities brought into Dry Ltd.At 30 June
Mitch Ltd has determined that its fine china division is a CGU. The carrying amounts of the assets at 30 June 2022 are as follows.Mitch Ltd calculated the recoverable amount of the division to be $510 000.RequiredProvide the necessary journal entries for the impairment loss. Factory Land Equipment
On 1 January 2021, Ted Ltd acquired all the assets and liabilities of Mosby Ltd. Mosby 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 trains division is regarded as a
Barney 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:Barney Ltd also recorded goodwill of \($14\) 000 (net of accumulated impairment losses of \($12\) 000) and had corporate assets
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 2022, it anticipated that its assets may be impaired due to a glut on the market for grapes and an impending tax from the Australian government seeking to
The measurement of a liability shall be the best estimate of the expenditure required to settle the present obligation. How is present value related to the estimation?
Define a contingent asset and distinguish it from other assets.
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 AASB 137/IAS 37 Provisions, Contingent Liabilities and Contingent Assets
Moolie Ltd is a manufacturer of surfboards. Pursuant to the sales terms, it gives warranties at the time of sales to purchasers of the surfboards for manufacturing defects that become apparent within two years from the date of sale. Based on past experience, Moolie is predicted to have 5% of the
Jackshire Ltd filed a lawsuit against Bormire Ltd for compensation of \($23\) million as a result of failure to deliver goods on time. At the end of the financial year the outcome of the hearing is unknown. The lawyer is of the opinion that there is a 40% chance that Bormire Ltd will be found
Kasey Ltd’s financial statements are authorised for issue on 24 August 2022.Required Identify whether each of the following would be a liability, a provision or a contingent liability, or none of the above, in the financial statements of Kasey Ltd as at the end of its reporting period of 30 June
The government introduces a number of changes to the goods and services (value-added) tax system. As a result of these changes, Welles Ltd, a manufacturing company, will need to retrain a large proportion of its administrative and sales workforce to ensure compliance with the new tax regulations.
Tray 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 Tray Ltd’s customers in June 2023, 100 people became seriously ill, possibly as a result of food poisoning from products sold by
The measurement of provisions requires the best estimate of the expenditure required to settle the present obligation at the end of the reporting period. Where the effect of the time value of money is material, a present value shall be calculated using a discount rate. Using examples, explain how a
Shark Ltd acquires Nemo Pty Ltd which has two main divisions in manufacturing activities – divisions A and B. A public announcement has been made that Nemo Pty Ltd will restructure the nature and focus of division A’s operation and close and discontinue the activities of division B. Division B
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 includes costs to retrain and
A client filed a lawsuit against Rattata Ltd in November 2022 for negligence when providing its services. The amount claimed was \($13\) million. Rattata Ltd’s lawyers have advised that the amount claimed is extortionate and that Rattata Ltd has a good chance of winning the case. However, the
In May 2023, Webb Ltd hired an employee from overseas who would commence the employment in August 2023. The employment contact specified that Webb Ltd should pay the relocation costs (including temporary accommodation costs for two months) of the employee. As at 30 June 2023, the end of Webb
In June 2022 Marvel Pty Ltd estimates that it will be required to pay \($80\) 000 in 3 years to clean up a site. The risk-free discount rate applied is 4%.Required Prepare the journal entries to record the provision for the year ended 20 June 2022, 2023 and 2024.
In June 2021 Great Southern Ltd built a submarine under a contract with the Australian Navy. The contract required Great Southern Ltd to provide a one-year warranty. The accountant was unsure how to measure the warranty because the design of the submarine differed from those previously built by
What is included as employee benefits under AASB 119/IAS 19?
Do employee benefits include only payments made to employees? Explain.
What is a paid absence? Provide an example.
Would employers likely consider a defined benefit superannuation plan or a defined contribution superannuation plan a bigger risk to the entity’s future commitments?Explain your answer.
Evaluate whether the requirements for the recognition and measurement of the net defined benefit liability reflect the underlying assumptions about the entity’s risks.
What is meant by the term ‘asset ceiling’?
Identify and discuss the assumptions involved in the measurement of a provision for long service leave.
The board of directors of Launceston Ltd met in June 2023 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 paid.Required Advise the
Monash 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 statements if sick
The accountant of Oxford 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 Oxford Ltd employees after 10 years of continuous service.Required Advise
Bond Ltd pays bonuses to its staff 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 2022 the company determines it has exceeded its profit target for the year, but intends to delay payment until September so that
A manager of a newly registered company has asked for advice on whether to establish a defined benefit superannuation plan or a defined contribution superannuation plan.Required Outline the issues associated with each option, which the manager should be aware of.
Kings 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 \($300\) 000, from which \($75\) 000 was deducted in tax. All of Kings Ltd’s salaries are accounted for as
Sufe Ltd has a weekly payroll of \($210\) 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 as at 30 June.
Melbourne 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 \($360\) 000 (less \($162\) 000 tax). Gross staff wages per
Michigan Ltd has 80 employees who each earn a gross wage of \($180\) per day. In an attempt to reduce absenteeism, Michigan Ltd introduced a new workplace agreement providing all employees with entitlement to 5 days of non-vesting, accumulating sick leave per annum, effective from 1 July 2023.
Otago Ltd has 2 200 employees who each earn a gross wage of \($145\) per day. Otago Ltd provides 5 days of paid non-accumulating sick leave for each employee per annum. During the year, 160 days of paid sick leave and 20 days of unpaid sick leave were taken. Staff turnover is
Boree 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 period so that it does not lapse. Boree
Richmond 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 their continued employment at the time the payment is made.
Nanjing 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 (which excludes commissions, bonuses
Assume the same details as in Exercise 10.9, except that Nanjing Ltd’s trial balance showed the provision for annual leave had a credit balance of \($92\) 640.Required 1. Prepare journal entries to account for the annual leave liability at 30 June 2024.2. Prepare journal entries to account for
Bath Ltd provides a defined contribution superannuation fund for its employees. The company pays contributions equivalent to 10% of annual wages and salaries. Contributions of \($60\) 000 per month were paid for the year ended 30 June 2023. Actual wages and salaries were \($8\) million. Three
Princeton 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 Princeton DB Superannuation Fund for the year ended 30 June 2024.The
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 with AASB 119/IAS 19. Present value of DBO Fair value of plan
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 \($180\) 000 at 30 June 2023. During the year ended 30 June 2024, long service leave of \($45\) 000 was
On 1 January 2023, Blue Jay Ltd revalued land from \(\$ 300000\) to \(\$ 500000\). On 1 January 2024, the company subsequently revalued the land to \(\$ 420000\). And on 1 January 2025 , the company again revalued the asset downwards to \(\$ 260000\).Required Prepare the journal entries required
The following data from Lyre Ltd's accounts relates to two assets at 30 June 2023.At 30 June 2023 Lyre Ltd decides to adopt the revaluation model for both these assets. On this date land has a fair value of \$250 \(\mathbf{0 0 0}\) and plant and equipment has a fair value of \(\$ 330000\). On 30
Crane Ltd has proposed that the company adopt the revaluation model for fixed assets. Some of these assets are hard to obtain and certain items have increased in value in the current period, however it is difficult to know what their fair value is. The director is arguing that fair value will
Recently Sparrow Ltd experienced temporary closure that affected a number of its operating plants. The group accountant of Sparrow Ltd indicated that it was not appropriate to report depreciation expense during this period as the equipment was not used during the closure. She stated that during the
Seagull 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. Furthermore, a substantial amount of rock blasting and removal of soil had to be done to the site before
Parakeet Ltd has recently acquired a machine for an invoice price of \(\$ 70 \mathbf{0 0 0}\). 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 \$6 250. The machine
A new accountant has been appointed to Flamingo 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 that they take particular care in the
Gannet 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 fees3. Architect's fees for drawings for internal adjustments to the building required to
Corella Ltd has acquired a new equipment, which it has now 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 possible new items of equipment and
Peewee Ltd has acquired a new building for \(\$ 750\) 000. It has incurred incidental costs of \(\$ 15000\) in the acquisition process for legal fees, real estate agent's fees and stamp duties. Management believes that these costs should be expensed because they have not increased the value of
In the 30 June 2023 annual report of Emu Ltd, the equipment was reported as follows:The equipment consisted of two machines, Machine A and Machine B. Machine A had cost \(\$ 75000\) and had a carrying amount of \(\$ 45000\) at 30 June 2023. Machine B had cost \(\$ 50000\) and had a carrying amount
On 30 June 2023, the statement of financial position of Cuckoo Ltd showed the following non-current assets after charging depreciation.The company has adopted fair value for the valuation of non-current assets. This has resulted in the recognition in previous periods of an asset revaluation surplus
Sejenis Ltd constructed a building for use by its freight department. The completion date was 1 July 2017, and the construction cost was \(\$ 840000\). The company expected to remain in the building for the next 20 years, at which time the building would probably have no real salvage value.In
On 1 July 2023, Eagle Airlines acquired a new aeroplane for a total cost of \(\$ 20\) million. A breakdown of the costs to build the aeroplane was given by the manufacturers.All costs include installation and labour costs associated with the relevant part. It is expected that the aircraft will be
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 2023-24 period. Machine A was acquired, and Machine B was constructed by
Harrier Ltd began operations on 1 July 2023. 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 2024, the factory was ready. A gala opening was held on 18 March, with the
Applying accounting theory to property, plant and equipment Beatrix was recently appointed as the accountant for Lorikeet Ltd. She was surprised to learn that the company uses the cost model for its buildings. Her previous employer, Raven Ltd, had used the revaluation model for its buildings.Eager
Can development costs initially expensed be subsequently recognised as an intangible asset? Explain your answer.
Explain the accounting treatment of subsequent expenditure on intangible assets.
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 commenced operations and which
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 2017 to \(\$ 120\) million in 2023, profit increased from \$3 million to
Healthy Eating Pty Ltd (Healthy Eating) is a company that runs a chain of food outlets in shopping centres throughout Australia that offer healthy food alternatives to shoppers. The outlets operate under the brand 'Good Choice', which the company developed when it commenced operations and
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 into financial statements, and they measured all those assets and liabilities at
Innovative Ltd holds a patent that has enabled the company to be a market leader in its area. The patent has been held by the company for 25 years. The legal life of the trademark is 20 years, but is renewable by the company at little cost to it.Required Discuss how the company should determine
Sandy Beach Ltd's research and development section has come up with an idea for a project on using cane toad poison for medicinal purposes. The board of directors of Sandy Beach Ltd believes that the project has promise and could lead to future profits for the firm. The project is, however,
Recognition of intangible assets Black 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 Which
Recognition of intangible assets Grasp 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 advance the
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 whisky is older than the United
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 differently when they were developed internally
Easy Access, an internet services provider, acquired Visible, an eye-tracking software development company, for US\$3.75 billion. At the date of acquisition, it recognised three amortisable intangible assets, namely:These intangible assets were acquired as part of a business combination.Required
Limitations include:1. The definition of an intangible asset - particularly the criterion of "separability". Requiring separability means that potential assets such as human resources, reputation, customer relationships labour relations and the "meaning our job conveys to society" cannot be
Libby Ltd is unsure of how to obtain computer software. Four possibilities are:1. employ its own programmers to write software that the company will use.2. buy computer software to incorporate into a product that the company will develop.3. purchase computer software externally, including packages
A small manufacturing company, Cable Ltd, has significantly increased it expenditure on research and development over the past year.Required Advise Cable Ltd on how research and development expenditure should be accounted for under AASB 138/IAS 38 (disregard any discussion on amortisation of
For what assets must an impairment test be conducted annually?
What is meant by recoverable amount?
How does an entity calculate fair value less costs of disposal?
How does an entity calculate value in use?
What estimates does an entity make when calculating value in use?
What are the limits to which an asset can be written down in relation to impairment losses?
What is a cash-generating unit (CGU)?
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