Practice Exam 2, questions PDF

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ADV ANC ED FIN ANC IAL A CC OUN TING(M)

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PART A. Multiple Choice Questions (Questions 1-15 inclusive) (30 marks) All multiple choice questions are of equal value. Please fill in your answers on the separate Multiple Choice Answer Sheet provided. The Multiple Choice answers marked on the Question Paper will not be marked. Fill in your student number and write your name on the separate Multiple Choice Answer Sheet (strictly following the instructions). Please use a pencil, not a pen as you will not be able to change your answer if you use a pen. If you make a mistake, erase your answer with an eraser.

Question 1 Dave holds an investment in Jones Limited that gives him a significant influence over the company. Dave’s daughter, Sophie, also has a significant influence over another entity, Campbell Limited. What is the relationship between Jones Limited and Campbell Limited? A. B. C. D.

Jones Limited has a significant influence over Campbell Limited. Jones Limited and Campbell Limited are not related parties. Jones Limited is a related party of Campbell Limited. Jones Limited has control over Campbell Limited.

Question 2 Which of the following transactions are not related party transactions for an entity? I. II. III. IV. A. B. C. D.

An employee purchased the entity’s products on normal trading terms. A subsidiary of the entity supplied raw materials to the entity. The entity lent money to one of its directors. The entity made an agreement with a trade union about increase in employee’s wages. I and II only. II and III only. III and IV only. I and IV only.

Scenario 1 applies to Questions 3-6: On 1 July 2016, Budget Ltd acquired all the issued shares of Cabot Ltd for $200,000. At this date, the equity of Cabot Ltd consisted of share capital of $150,000 and retained earnings of $60,000. All the identifiable assets and liabilities of Cabot Ltd were recorded at amounts equal to fair value except for the land whose fair value was $30,000 less than the carrying amount. The land was still on hand at 30 June 2017. The company tax rate is 30%. The financial statements of Cabot Ltd at 30 June 2017 contained the following information:

Cash Land Inventory Shares in Cabot Ltd Plant Accum depreciation Other assets

Profit before tax Income tax expense Net Profit Retained earnings 1/7/2016 Dividend paid Retained earnings 30/06/2017 Share capital Business combination valuation reserve Accounts payable Other liabilities

Budget Ltd 70 000 130 000 43 500 200 000 210 000 (130 000) 10 000

Cabot Ltd 30 600 87 400 32 000 0 127 000 (22 000) -

533 500

255 000

100 000 (25 000) 75 000 193 500

55 000 (15 000) 40 000 60 000

(60 000) 208 500

(10 000) 90 000

250 000 -

150 000 -

25 000 50 000 533 500

5 000 10 000 255 000

Adjustments Dr Cr

Group

Question 3 Which one of the following is the correct amount of goodwill or gain on bargain purchase arising from the acquisition? A. B. C. D.

Goodwill $31,000 Gain on bargain purchase $31,000 Goodwill $11,000 Gain on bargain purchase $11,000

Question 4 What is the carrying amount of the land in the consolidated financial statement for the year ended 30 June 2017? A. B. C. D.

$217,400 $187,400 $196,400 $247,400

Question 5 Which one of the following is the amount of consolidated retained earnings for the year ended 30 June 2017? A. B. C. D.

$248,500 $228,500 $298,500 $238,500

Question 6 Which one of the following is the amount of consolidated total assets for the year ended 30 June 2017? A. B. C. D.

$788,500 $558,500 $578,500 $758,500

Question 7 On 1 April 2017, Adelaide Ltd enters into a firm commitment with a foreign supplier to buy a machine for US$500 000. The ownership of the machine and the consideration for the purchase are transferred on 31 July 2017. On the same day as entering the firm commitment, Adelaide enters into a forward exchange contract to buy US$500 000 on 31 July 2017. Assume a discount rate of 0% for present value calculations to simplify the analysis. Relevant exchange rates are as follows: Spot rate Forward rate (for 31/07/2017) 1 April 2017 US$1=A$1.01 US$1=A$1.06 30 June 2017 US$1=A$0.99 US$1=A$1.02 31 July 2017 US$1=A$1.08 US$1=A$1.08 Which one of the following is a journal entry required at 30 June 2017 to recognise the financial effects of the changes in the fair value of the forward contract or the recognised firm commitment? A. B. C. D.

DR Loss of forward contract A$20 000; CR Forward contract A$20 000 DR Forward contract A$20 000; CR Gain on forward contract A$20 000 DR Loss on unrecognised firm commitment A$20 000; CR Unrecognised Firm commitment A$20 000 DR Cash at Bank A$10 000; DR Forward contract A$20 000; CR Gain on forward contract A$30 000

Scenario 2 applies to Questions 8-9: On 1 March 2017, Brook Ltd acquired all the assets and liabilities of Moriarty Ltd for $230,000 cash. The cost of undertaking a due diligence was $3,000, paid on 1 April 2017. The due diligence process revealed that Moriaty Ltd was being sued by a former client seeking compensation of $21,000. The lawyers estimated that Moriaty Ltd faced a 25% chance of losing the lawsuit. At that date, Moriarty Ltd’s recorded assets and liabilities were as follows: Assets & Liabilities of Moriarty Ltd Accounts Receivable Inventory Plant and Equipment (net of depreciation) Land Accounts Payable Short-Term Borrowings Bank Loan The company tax rate is 30%.

Book Value 20,000 42,000 106,000 100,000 (6,000) (12,000) (50,000)

Fair Value 18,000 40,000 110,000 133,500 (6,000) (12,000) (50,000)

Question 8 What is the goodwill or gain on bargain purchase arising from the business combination? A. B. C. D.

Goodwill of $175 Gain on Bargain Purchase of $3,175 Goodwill of $1,750 Gain on Bargain Purchase of $2,825

Question 9 Which of the following may form part of the correct journal entry recorded by Brook Ltd on the acquisition date? A. B. C. D.

Dr Accounts Receivable $20,000 Cr Shares in Moriarty Ltd $230,000 Dr Business Combination Valuation Reserve $3,675 Dr Deferred Tax Asset $1,575

Question 10 Which of the following statements is incorrect? A. Liquidators have power to do whatever is necessary to achieve the objectives for which they were appointed. B. Liquidators are normally appointed by the court or by creditors. C. Secured creditors have a ‘charge’ over some or all of the company’s assets. D. Liquidators are responsible to the company.

Question 11 The acquisition date for a business combination is the date on which: A. B. C. D.

the business combination is announced to the public. the acquirer announces the acquisition to the acquiree. the acquirer effectively obtains control of the acquiree. a substantive agreement between the combining parties is reached.

Question 12 After receiving the statement of affairs from the directors, the liquidator must submit a preliminary report to ASIC within: A. B. C. D.

14 days. 2 months. 6 months. 12 months.

Question 13 The constitution of Big Ltd states that in the event of liquidation, all shares are to rank equally, based on the number of shares held, in distributing any surplus or deficiency. Big Ltd went into liquidation on 20 June 2018. At this date, the equity of Big Ltd consisted of : 400 000 preference shares issued for $1 paid to 50c $200 000 1 000 000 ordinary shares issued for $1 paid to 80c $800 000 After realising the assets and paying all creditors, the liquidator had $300 000 cash available to distribute to the shareholders. Which one of the following is the correct amount of actual refund to be made by the preference shareholders? A. B. C. D.

$0 $200 000 $300 000 $700 000

Question 14 Small Ltd went into liquidation on 20 June 2019. At this date, the summarised statement of financial position of Small Ltd was as follows: Assets Land Inventory Cash

$100 000 $15 000 $10 000

$125 000

Liabilities Payables Equity Share capital 47 500 shares issued at a price of $2

$30 000

$95 000 $125 000

All assets realised amounted to $75 000. Costs of liquidation were $15,000. Which one of the following is the correct amount of the ultimate deficiency(surplus) to be borne by (distributed to) contributories? A. B. C. D.

$0 $40 000 $55 000 $75 000

Question 15 The accounting standard, AASB 121 The Effects of Changes in Foreign Exchange Rates, covers which of the following? A. Treatment of any exchange differences that arise. B. Subsequent measurement of assets and liabilities at the end of the reporting period. C. Initial recognition and measurement of financial statement elements arising from foreign currency transactions. D. All of these options.

Part B. QUESTION 16 – Total of 15 Marks On July 1 2015, Adelaide Ltd acquired 80% of the share capital of National Ltd for $500,000. The fair value of the non-controlling interest at 1 July 2015 was $97,000. At the date of acquisition, the total for shareholders’ equity in National Ltd was made up as follows: Share capital Retained earnings General Reserve Asset Revaluation Surplus

300,000 100,000 50,000 30,000 480,000

At the date of acquisition, all the identifiable assets and liabilities of National Ltd were recorded at amounts equal to fair value. The following information is relevant to preparing the consolidated financial statements for the year ended 30 June 2016:     

During the year ended 30 June 2016, National Ltd recorded a profit of $70,000 (net of tax). On 1 July 2015, National Ltd sold a motor vehicle to Adelaide Ltd for $25,000. This had a carrying amount to National Ltd of $20,000. Both entities depreciate motor vehicles at a rate of 20% p.a. on cost. On 1 November 2015, National Ltd sold inventory costing $5,000 to Adelaide Ltd at a transfer price of $13,000. One quarter of this inventory was still unsold at 30 June 2016. This inventory was sold during July 2016. In December 2015, National Ltd paid a $20,000 dividend. Assume that the tax rate is 30%.

Required: (a) Adelaide group uses the full goodwill method. Determine the amount of goodwill involved in the acquisition, and the amount of goodwill attributable to Adelaide Ltd and the amount attributable to the Non-Controlling interest. Show all calculations.

(b) Calculate the amount of the Non-Controlling interest in National Ltd as at 30 June 2016. Show all supporting calculations. You are NOT required to provide any consolidation worksheet journal entries.

(c) Assume the profit of National Ltd for the year ended 30 June 2017 was $100,000. Calculate the non-controlling interest in net profit after tax for the year ended 30 June 2017.

QUESTION 17 – Total of 6 Marks Stranded Ltd is an Australian company that purchases inventory from Hammers plc, which is an English company. The following information is relevant to a recent acquisition of inventory for £300 000. Date 22-6-2017 30-6-2017 31-7-2017

Event Inventory delivered End of reporting period Cash payment of £300 000 to Hammers plc

Exchange rate A$1 = £0.42 A$1 = £0.43 A$1 = £0.39

Required In accordance with AASB 121, prepare all of the journal entries of Stranded Ltd that relate to the foreign currency purchase of inventory.

QUESTION 18 – Total of 13 Marks On 1 July 2015, Export Ltd acquired all the issued shares of Mobile Ltd. Export Ltd is an Australian company whose functional and presentation currency is Australian dollars. Mobile Ltd is an overseas subsidiary which operates in China and whose functional currency is the Chinese Yuan (¥).On 1 July 2015, the shareholder’s equity of Mobile Ltd consisted of: Share Capital Retained Earnings General Reserve

¥200,000 150,000 35,000 ¥385,000

The trial balance of Mobile Ltd as at 30 June 2016 was:

Sales Revenue Cost of Goods Sold Gross Profit Other Expenses Net Profit Retained earnings (o/b) Retained earnings (c/b) General Reserve Share capital Current Assets PPE (net of Acc. Depreciation) Total Assets Debentures Current liabilities Net Assets

Yuan ¥ 170,000 (50,000) 120,000 (30,000) 90,000 150,000 240,000 35,000 200,000 475,000 525,000 320,000 845,000 250,000 120,000 475,000

Additional information:  Relevant exchange rates for the year were: o 1 July, 2015 o 30 June, 2016 o Average for the period 1 July, 2015 - 30 June, 2016 

¥1 = 0.1 $Aus ¥1 = 0.4 $Aus ¥1 = 0.25 $Aus

Mobile Ltd’s revenues and expenses were incurred evenly over the financial year.

Required: (a) Prepare the profit or loss statement for Mobile Ltd for the year ended 30 June 2016 in the presentation currency of Australian dollars. (b) Prepare the statement of financial position for Mobile Ltd as at 30 June 2016 in the presentation currency of Australian dollars. (c) Calculate the movement in the Foreign Currency Translation Reserve for the year ended 30 June 2016 to reconcile the closing balance of the Foreign Currency Translation Reserve in your answer to part (b).

QUESTION 19 – Total of 12 Marks At 1 July 2014, Frank Ltd acquired a 30% investment in an associate, City Ltd. At the date of the acquisition of the shares, the net assets of City Ltd were $285,000 and stated at fair value in the balance sheet. The following information relates to the investment in the associate, City Ltd:   

  

The investment cost $100,000 Frank Ltd prepares consolidated financial statements and uses the cost method to account for its investment in City Ltd in its own financial statements. During the year ended 30 June 2015, City Ltd sold inventory to Frank Ltd at a profit before tax of $5,000. At 30 June 2015, 80% of the inventory was still on hand. All of the inventory had been sold by Frank Ltd by 30 June 2016. At 1 July 2014, Frank Ltd sold City Ltd machinery at a profit before tax of $15,000. The machinery is depreciated on a straight-line basis over a useful life of five years (residual $0). During the year ended 30 June 2016, City Ltd provided management consulting services to Frank Ltd for $11,000. Assume that the tax rate is 30%.

The following are extracts from the financial statements of City Ltd for the year ended 30 June 2016 with comparative information for 2015 . Statement of profit or loss and other Comprehensive Income Profit (loss) for the period Other comprehensive Income Revaluation gain net of tax Comprehensive income (loss) Statement of changes in owners’ equity Opening retained earnings Dividends paid Statement of financial position Closing Retained earnings Share capital Asset Revaluation Reserve General Reserve Equity at 30 June

2016 $

2015 $

80,000

10,000

27,000 107,000

5,000 15,000

110,000 20,000

100,000 -

170,000 110,000 150,000 150,000 32,000 5,000 12,000 12,000 $364,000 $277,000

Required: (a) Calculate any goodwill or gain on bargain purchase arising from the acquisition. Please show the workings of your calculation. (b) Prepare all journal entries necessary to account for Frank Ltd’s investment in City Ltd in the consolidation worksheet for the year ended 30 June 2015. (c) Prepare all journal entries necessary to account for Frank Ltd’s investment in City Ltd in the consolidation worksheet for the year ended 30 June 2016.

QUESTION 20 – Total of 24 Marks On 1 July 2014, David Ltd acquired all the share capital of Jones Ltd when the equity of Jones Ltd consisted of: Share capital Retained earnings General reserve

200,000 80,000 25,000 305,000

The recorded amounts of the identifiable assets and liabilities of Jones Ltd at acquisition date were equal to their fair values except for inventory whose fair value was $120,000 and had a book value of $80,000. At 1 July 2014, Jones Ltd was involved in a court case with an entity that was claiming damages from it. Jones Ltd had not raised a liability in relation to any expected damages. David Ltd measured the fair value of the liability for damages at $30,000. The trial balances of David Ltd and its subsidiary Jones Ltd as at 30 June 2016 are provided in the Consolidation worksheet.

Additional Information: 

The inventory in Jones Ltd that existed at acquisition date was sold to parties outside the group during the year ended 30 June 2015. The contingent liability at acquisition date was not settled at 30 June 2016.



On 1 January 2015, David Ltd sold some plant to Jones Ltd for $30,000. At that date, the plant had a carrying amount of $20,000 in the records of David Ltd. David Ltd depreciates plant at 20%p.a. on cost, whereas Jones charges depreciation at the rate of 10% p.a. on cost.



On 1 April 2016, Jones Ltd issued 100 8% debentures of $1,000 at nominal value. David Ltd acquired 30 of these. Interest is payable half-yearly on 30 September and 31 March.



On 1 June 2016, David Ltd provided accounting services to Jones Ltd for $3,000 and received the payment on 20 June 2016.



On 1 May 2015, David Ltd sold inventory to Jones Ltd for $16,000. This inventory previously cost David Ltd $12,000. Half of this inventory was sold to an external party for $5,000 on 31 May 2015. On 1 September 2015, the remaining inventory was sold by Jones Ltd to an external party.



The tax rate is 30%.

Required: Complete the separate consolidation worksheet for the David Ltd Group at 30 June 2016 (Please complete the acquisition analysis and show all your journal entries).

Consolidation worksheet for the David Ltd Group as at 30 June 2016 David Ltd Sales

Ref ID

Jones Ltd

250,000

125,000

Less Cost of Goods Sold

(35,000)

(20,000)

Gross Profit

215,000

105,000

add Interest Revenue

5,000

1,500

50,000

30,000

(70,000)

(42,000)

less Interest Expense

(13,500)

(7,000)

less Other Expenses

(35,000)

(20,000)

Profit before Tax

151,500

67,500

Income Tax Expense

(45,450)

(20,250)

Net Profit After Tax

106,050

47,250

350,000

130,000

(7,500)

-

add Other Revenue Gain on Bargain Purchase less Depreciation Expense

Opening Retained Earnings (1/07/2015)

Less Dividends Paid

Dr

Cr

Ref ID

Group

Less Dividend Declared

-

(25,000)

448,550

152,250

300,000

200,000

General Reserve

55,000

25,000

Total Net Assets

803,550

377,250

175,000

115,000

150,000

55,000

150,000

65,000

25,000

-

-

-

5,000

3,500

2...