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Student ID Number………………………………………………………………………………………………………………… . Student ID No. (in words) …………………………………………………………………………………………………………

THE UNIVERSITY OF MELBOURNE, DEPARTMENT OFACCOUNTING Final Examination – Semester 1, 2016 Examiners use only Subject Code: Subject Name: Reading Time: Writing Time:

ACCT 20002

Question

Marks

1

14

2

9

3

11

4

8

5

5

6

10

7

6

8

25

9

5

10

7

Total

100

Intermediate Financial Accounting 15 minutes 3 hours

This paper has 27 pages

Score

This examination comprises 10 questions for a total of 100 marks Authorised Materials: Candidates may have in their possession non-programmable calculators.

No part of this paper is to be removed by the candidate from the examination venue. Students must submit the examination paper intact. Failure to do so may result in a loss of marks. This paper can be released to the Baillieu Library.

All questions on this examination paper should be attempted. Answer all questions in the spaces provided in the examination paper. Additional working space is available on page 27 of this examination booklet. Write clearly and legibly. Pencils may be used.

Clearly label this examination booklet with your student number.

1

QUESTION ONE: Property, plant and equipment (including Business combinations) Boston Ltd provides the following details regarding a selection of items of property, plant & equipment PRIOR to any impairment or revaluation adjustments for the year ended 30 June 2015: Item of PPE Gross amount Accumulated depreciation Carrying amount on 30 June 2015 before revaluation Additional information Model under which asset carried Gross increments (before TAX) in asset revaluation reserve since acquisition Fair value at 30 June 2015 Recoverable amount at 30 June 2015

Machine D ($)

Machine Z ($)

200,000 (60,000)

160,000 (90,000)

140,000

70,000

Revaluation

Revaluation

50,000 100,000 95,000

5,000 60,000 55,000

REQUIRED: a) Prepare general journal entries to record the above asset revaluations and asset value adjustments for Machine D as at 30 June 2015. (Ignore any tax effect) (3 marks) DATE

DETAILS

2015

Acc Depreciation

June 30

Machine D

Asset Revaluation Surplus

DEBIT

CREDIT

Working

$60,000

Test for revaluation loss Lower of FV and RA

$60,000

45,000

Machine D

45,000

Lower of FV and RA = $95,000 CA = $140,000 Loss on revaluation = $45,000

b) Prepare general journal entries to record the above asset revaluations and asset value adjustments for Machine Z as at 30 June 2015. (Ignore any tax effect) (3 marks) DATE

DETAILS

2015

Acc Depreciation

June 30

Machine Z

DEBIT

CREDIT

Working

$90,000

Test for revaluation loss Lower of FV and RA

$90,000

Asset Revaluation Surplus

5,000

Loss on Revaluation (1/S)

10,000

Machine Z

Lower of FV and RA = $55,000 CA = $70,000

15,000

2

Loss on revaluation = $15,000

QUESTION ONE (continued) Boston Ltd also purchased the assets (except cash) ONLY of LA Ltd on 1 July 2015 for the purchase consideration of: Cash SUFFICIENT cash to allow LA Ltd to settle all of its liabilities Shares in Boston Ltd 260,000 shares issued with a market value of $1.30 LA Ltd had the following assets and liabilities on 1 July 2015: Carrying amount ($) Assets Building 200,000 Machinery 60,000 Inventory 30,000 Cash 20,000 Liabilities Loan payable Accounts payable

Fair value ($) 250,000 105,000 20,000 20,000

25,000 40,000

25,000 40,000

The Directors of Boston Ltd believed that when grouped together, these assets amounted to a separate business. REQUIRED: c) Calculate the purchase consideration given by Boston Ltd to LA Ltd. (3 marks) Answer $383,000 Working Sufficient cash = Liabilities $65,000 – Cash held $20,000 = Shares in Boston 260,000 shares * $1.30 = Purchase consideration

$ 45,000 $338,000 $383,000

d) Prepare relevant journal entries (including cash) pertaining to the above transaction in the books of Boston Ltd on 1 July 2015. (5 marks) Working DATE DETAILS DEBIT CREDIT 2015 July 1

Building

$250,000

Machinery

105,000

Inventory

20,000

Goodwill

8,000

Ordinary share capital

Goodwill PC = $383,000

338,000

Cash

45,000

FVINA = $375,000 (Note: Only assets (except cash). Does not include liabilities as liabilities were settled in cash

[TOTAL FOR QUESTION ONE: 3+3+3+5 =14 MARKS] 3

QUESTION TWO: Impairment of assets Spear Ltd provides the following information regarding a cash generating unit (CGU) during the 2014 and 2015 reporting period: Information for year ended 30.6.2014

Assets Plant (cost $300,000) Patent Receivables Goodwill Cash

Carrying amount $200,000 $40,000 $50,000 $60,000 $20,000

$280,000

Recoverable amount Note: Receivables are all collectable (not impaired). Information for year ended 30.6.2015

For the period ending 30 June 2015, the depreciation charge on plant was increased to $25,000. If the plant had not been impaired the charge would have been $20,000. At 30 June 2015, the recoverable amount of the CGU was calculated to be $60,000 greater than the carrying amount of the assets of the CGU. REQUIRED: Show the allocation of the impairment loss of the CGU for the year ended 30 June 2014. (3 marks).

a)

Carrying Amount ($)

Proportion

Allocation of Impairment Loss ($)

Net Carrying Amount ($)

Plant

200,000

200/240*30,000

25,000

175,000

Patent

40,000

40/240*30,000

5,000

35,000

Asset

Goodwill

240,000

30,000

60,000

60,000 90,000

4

0

QUESTION TWO (continued) Prepare the journal entries to record the above events for the year ended 30 June 2014. (3 marks)

b) DATE

DETAILS

2014 30 June

DEBIT

Impairment Loss

Working

$90,000

Acc Dep & Impair. Loss - plant

25,000

Acc Amort. & Impair Loss - patent

5,000

Goodwill

c)

CREDIT

60,000

Calculate the MAXIMUM REVERSAL of the impairment that can be allocated to plant for the year ended 30 June 2015. (3 marks)

Answer $30,000 Working Reversal 30 June 2015 = RA > CA = $60,000 Plant with Impairment Loss Cost AD & IL At 30.6.14 $100,000 IL 30.6.14 25,000 AD 30.6.15 25,000

Plant with NO Impairment Loss Cost $300,000 AD & IL At 30.6.14 $100,000 AD 30.6.15 20,000 $120,000

$300,000

$150,000 $150,000

$180,000

Maximum reversal = $180,000 - $150,000 = $30,000

[TOTAL FOR QUESTION TWO: 3+3+3=9 MARKS]

5

QUESTION THREE: Income taxes PART A The manager of Edward Ltd provides the following information and asks you to prepare the Deferred Tax Worksheet. 1) The motor vehicle is FULLY depreciated for tax purposes. For accounting purposes, depreciation expense on motor vehicle in the current period is $75,000. 2) Edward Ltd has an allowance for doubtful debts of $64,000 at the end of the reporting period relating to accounts receivable of $320,000. The prior period balances for these accounts were $56,000 and $280,000 respectively. During the current period, debts worth $42,000 were written off as uncollectable. 3) Edward Ltd has an amortization balance of $120,000 at the end of the reporting period relating to development expenditure of $350,000. The prior period balances for these accounts were $75,000 and $200,000 respectively. During the current period, amortization expense of $45,000 was brought to account in the Income Statement. Edward Ltd has FULLY claimed a tax deduction of 133% for development expenditure in the year of expenditure. For accounting purposes, Edward Ltd has adopted a policy of capitalizing and then amortising the expenditure. REQUIRED:

400

$0

$0

Accounts receivable

256

$0

$320

Development expenditure

230

$0

$0

b)

Taxable temporary differences ($)

Tax base ($)

Motor vehicle

Deductible temporary differences ($)

Deductible amount ($)

Complete the following deferred tax worksheet. (3 marks) DEFERRED TAX WORKSHEET ( EXTRACT) AS AT 30 JUNE 2015 (note that all figures are in $’000s) Carrying amount as per Balance Sheet ($)

a)

$400 $64 $230

Calculate the allowable deduction for development expenditure in the CURRENT TAX worksheet for the year ended 30.6.2015. (2 marks)

Answer $199,500 Working Closing balance of Development expenditure = $350,000 Opening balance of Development expenditure = $200,000, increase of $150,000 Allowable deduction $150,000*1.33 = $199,500

c)

State the allowable deduction for bad debts in the CURRENT TAX worksheet for the year ended 30.6.2015. (1 mark)

Answer Bad debts of $42,000 Working

6

QUESTION THREE (continued) PART B As a result of a drop in global oil prices, Fortescue Ltd recognized a $50 million taxable loss in the current period. The management of Fortescue Ltd are debating whether it can raise a deferred tax asset in relation to this loss in the financial statements in the current period. REQUIRED: Provide advice to the management on the raising of a deferred tax asset and specifying the conditions, if any, under which the asset could be recognized. (5 marks) For deferred tax assets (DTA) arising from tax losses, the criteria is that it still must be probable that Fortescue Ltd earns sufficient taxable income to offset the past tax loss. For Fortescue to create a DTA, it must be able to provide evidence that it will earn taxable income in the future to offset the past tax losses.

However as there is a tax loss in the current period, then there is strong evidence that Fortescue may not be able to earn taxable income in the future. Further if Fortescue has a history of recent tax losses, there must be convincing evidence that circumstances are going to improve in the future. AASB 112 provides a number of factors that can be used to assess whether circumstances will improve in the future: 1. Whether the entity has sufficient taxable temporary differences that will result in taxable amounts in the future against which the tax loss can be offset. 2. Whether the unused tax losses result from identifiable causes which are unlikely to recur 3. Whether tax planning opportunities are available to the entity that will create future taxable profit Fortescue could examine the following areas to provide evidence that a change is expected in the profits of the entity in the future: 1. Causes of past/current losses. Fortescue could show that the drop in oil prices is not expected to persist. 2. Analysis of existing contracts and sales agreements. If there is new contracts being signed and this will boost/return Fortescue to profit. If the above is strong evidence, then only can Fortescue create a DTA. [TOTAL FOR QUESTION THREE: 3 + 2 + 1 + 5 = 11 MARKS] 7

QUESTION FOUR: Revenue and Financial Instruments (updated) PART A Revenue Amber Ltd provides a bundled Information Technology service to Lim Ltd for which it charges a transaction price of $30,000. Lim Ltd pays $30,000 upfront for the bundled service on 1 October 2014. The stand-alone selling price for each service is as follows: Connection fee Access fee to the network for 1 year On call service for 1 year

$ 8,000 10,800 18,000

Required Prepare the journal entries for Amber Ltd in accordance with AASB15 Revenue from contracts with customers for the year ended 30 June 2015. (4 marks) DATE 2014 1 Oct

DETAILS

DEBIT

Cash

CREDIT

$30,000

Revenue

$6,522

Deferred revenue (access fees)

$8,804

Deferred revenue (on call)

$14,674

2015

Deferred revenue (access fees – 9 months)

$6,603

30 June

Deferred revenue (on call fees – 9 months)

$11,005.5

Revenue

$17,608.5

8

Working Revenue $8000*30000 $36800

QUESTION FOUR PART B Financial Instruments On 1 July 2014, Ball Ltd purchases a debt instrument with a 4-year term for its fair value of $526,210 (including transaction costs). The instrument has a principal amount of $580,000 (the amount payable on redemption) and carries fixed interest of 5.2% per annum paid annually in arrears on 30 June every year. The effective interest rate is 8% per annum. The debt instrument is classified as subsequently measured at amortised cost. Required

a) Prepare the amortised cost table for Ball Ltd for the life of the Financial Instrument. (2 marks) Year

Opening Balance

Interest

Cash flows

Closing Balance

30.6.2015

$526,210

$42,097

$30,160

$538,147

30.6.2016

538,147

43,052

30,160

551,039

30.6.2017

551,039

44,083

30,160

564,962

30.6.2018

564,962

45,197

30,160

580,000

b) Prepare the journal entries for the year ended 30 June 2018 only. (2 marks) DATE 2018

DETAILS

DEBIT

Cash

CREDIT

$30,160

30 June Investment in debt security

15,037

Interest income

$45,197

Cash

580,000

Investment in debt security

580,000

(Note: Above entries can be combined)

[TOTAL FOR QUESTION FOUR: 4 + 2 + 2 = 8 MARKS] 9

QUESTION FIVE Foreign Currency Translations On 1 July 2013 Aloha Ltd acquired a 100% interest in Sayonara Ltd, a foreign subsidiary based in Japan whose presentation currency is the Yen (¥). At the date of acquisition the equity in Sayonara Ltd (which reflected the fair value of the net assets) consisted of the following: Share capital Revaluation surplus Retained profits

¥400,000 ¥80,000 ¥90,000

Sayonara Ltd reported an after-tax profit for the year ended 30 June 2014 of ¥120,000 and declared a dividend of ¥40,000 during the reporting period. Sayonara Ltd declares its annual dividend on 30 September each year. Sayonara Ltd revalued its assets on 30 June 2014. There have been no other movements in the equity accounts of Sayonara Ltd since acquisition. Aloha Ltd.’s presentation currency is the Australian dollar (A$). Relevant exchange rates since acquisition are as follows: 1 July 2013 A$1= ¥0.85 30 September 2013 A$1= ¥0.80 30 June 2014 A$1= ¥0.75 12 month average to 30 June 2014 A$1= ¥0.82 30 September 2014 A$1= ¥0.72 30 June 2015 A$1= ¥0.70 12 month average to 30 June 2015 A$1= ¥0.68 Key figures extracted from Sayonara Ltd's financial statements for the year ended 30 June 2015 appear in the table on the following page. REQUIRED: Complete the table on the following page that facilitates the translation of Sayonara Ltd.’s key financial information into the presentation currency of Aloha Ltd on 30 June 2015. (5 marks)

10

QUESTION FIVE (continued) SAYONARA LTD

Foreign Currency Translation Worksheet as at 30 June 2015

Item

¥

Rate

A$

Revenue

250,000

0.68

367,647

Expenses (including tax)

(90,000)

0.68

(132,353)

Profit after tax

160,000

0.68

235,294

Opening retained profits

170,000

See working

202,223

Dividends (paid 30.9.14)

(50,000)

0.72

(69,444)

Closing retained profits

280,000

Share capital

400,000

0.85

470,588

100,000

0.85

94,118

0.75

26,667

Balancing fig.

154,840

Revaluation surplus 1.7.13 30.6.14

$80,000 $20,000

Foreign currency translation reserve

-

368,073

1,114,286

780,000

Total equity Assets

1,020,000

0.7

1,457,143

Liabilities

(240,000)

0.7

(342,857)

Net assets

780,000

0.7

1,114,286

[TOTAL FOR QUESTION FIVE: 5 MARKS] Working

Retained profit Profit Dividend

1.7.13 30.6.14 30.6.13

¥ 90,000 120,000 (40,000) $170,000

11

0.85 0.82 0.80 (paid on 30/9/13)

$105,882 146,341 (50,000) $202,223

QUESTION SIX: Leases

PART A On 30 June 2014, DUTTON LTD commenced the lease of m a c h i n e r y for use in its manufacturing operations. Key details of this lease agreement were as follows: • • • • • •

•

Lease term of seven years. Annual lease payments payable on June 30 each year of $60,000, commencing 30 June 2014 (including Guaranteed Residual Value). The annual lease payment INCLUDES an amount of $9,000 to cover annual maintenance and insurance costs. Residual value guaranteed by lessee of $35,000. The interest rate implicit in the lease of 6% p.a. The present value of the minimum lease payments (which was equal to its fair value at the commencement of the lease) is $325,060 (including Guaranteed Residual Value). The lease is non -cancellable.

Other information: • DUTTON Ltd does intend purchasing the machinery at the end of the lease term. • The machinery's expected useful life is eight years with a scrap value of $5,000. • Management complies with the requirements of AASB117: Leases REQUIRED: a)

For each of the financial statement elements in the table below, list the items with their corresponding amounts that would be recognized with respect to the lease on 30 June 2017 (3 years after the commencement of the lease). (6 marks) (Note: record all amounts to the nearest whole dollar) FINANCIAL STATEMENT ELEMENT

Item

$ Amount

INCOME STATEMENT

Expenses

Maintenance & Insurance Lease Interest

$9,000 $12,172.43

Depreciation

$40,007.5

BALANCE SHEET...