1Additional revision questions for practiceThis additional revision questions for practice are from selected topics and questions areNO WAY reflects the actual content of the final examination for semester 1, 2021, nor is ita guide to what is contained within the final examination.It is a guide to the type of question that you MAY be asked and the level of difficulty thatyou MIGHT expect. It in no way reflects the actual questions on the 2021 – semester 1alternative assessment.The lecturer/tutor will go through some selected question during the revision.Topics:1) Employee benefits2) Earnings Per share3) Intangible Assets4) Extractive Industry5) Lease6) Financial Instruments & Foreign Currency Transactions7) Construction contracts2Accounting for Employee benefitsOverviewThis topic discusses accounting for short-term, long-term and post-employment employeebenefits in accordance with AASB 119.Learning objectives:1) Outline the scope, purpose and principles of accounting for employee benefits2) Understand the various forms of employee benefits and be able to account the variousforms of employee benefits.2) Prepare journal entries to account for short – term liabilities for employee benefits, suchas wages and salaries, sick leave and annual leave3) Compare defined benefit and defined contribution benefit plans4) Explain how to measure and record other long-term liabilities for employment benefits,such as long service leaveQuestion 1Shelley Ltd. pays its salaries fortnightly in arrears. The next pay day is Thursday 2 July. Thefortnightly salary is $30,000, of which $10,000 is retained to pay the Australian Taxation Office(ATO) on behalf of the employees. Payments to the ATO are made every second Monday, withnext payment being made on Monday 6 July. Shelley Ltd’s reporting date is 30 June.Provide the journal entries in the books of Shelly Ltd for:a) 30 Juneb) 2nd Julyc) 6th JulyQuestion 2Mathew works for XYZ. His annual salary is $104 000 and he is paid weekly. As part of hisemployment agreement, he is entitled to four weeks’ annual leave each year. He receives aleave loading of 17.5 per cent.REQUIRED:a. Provide the weekly journal entries to record the recognition of Mathew’s annual leaveentitlements.b. Provide the appropriate journal entries, assuming that Mathew takes one week annualleave after being employed for one year and assuming that the tax deducted from thepayment for the one week is $900.Question 3I. What is the difference between accumulating and non-accumulating sick leave?3II. How does the recognition of accumulating sick leave differ from the recognition of nonaccumulating sick leave?Question 4Mathew worked at the La Scan Ltd for 8 years and he will receive 10 weeks leave when he hasworked for 15 years. However, he is entitled to pro-rate payouts at 12 years.Other information:Current salary: $83,119Salary growth rate: 6%Probability of Mathew still working in 4 years: 60%Assumed discount rate from RBA website: 7%Opening balance for provision for long service leave is: 2,000.Required:Calculate the current year long service leave to be expensed and appropriate journal entries.Question 5Discuss briefly the difference between a defined benefit plan and defined contribution plan?4Earnings Per Share (EPS)OverviewThe purpose of this topic is to examine and understand the earnings per share informationthat is presented in a reporting entity’s financial statements.Learning Objectives:1. Explain the objective of Earning Per Share ( AASB 133)2. Discuss the application and scope of AASB 1333. Discuss the components of basic EPS and examine how it is measured4. Discuss the concept of bonus and rights issue shares in EPS calculation5. Explain the concept of diluted EPS and how it is measured6. Describe and apply the disclosure requirement of AASB 133.Question 1For the year ending 30 June 2020 Granite Ltd reports the following:a) Net profit after tax of $1.2 million.b) Granite Ltd commenced the year with 400,000 fully paid ordinary shares. During the yearthe company:• Issued 80,000 fully paid ordinary shares on 1 November 2019 at the prevailing marketprice;• Purchased back 50,000 fully paid ordinary shares on 1 March 2020 at the prevailingmarket price; and• Issued 100,000 partly paid ordinary shares on 1 June 2020 at an issue price of $2.00. Theshares were partly paid to $1.00. The partly paid shares carry the right to participate individends in proportion to the amount paid as a fraction of the issue price.c) For the entire year, Granite Ltd had 500,000 $1.00 preference shares, which providedividends at a rate of 10 per cent per year. The dividend rights are cumulative. Thepreference were disclosed as equity.Required:Compute basic earnings per share.Question 2 (Bonus Issue)For the year ending 30 June 2019, A-Bay Ltd reports net profit after tax of $1 million.At the beginning of the year, A-Bay Ltd had 600,000 fully paid ordinary shares on issue. It alsohad 100,000 $1.00, 6 per cent, cumulative preference shares outstanding.On 1 October 2018 the company issued another 150,000 fully paid ordinary shares. On 1 May2019 the company issue further fully paid shares on the basis of a one-for-five bonus issue.The last sale price per ordinary share before the bonus issue was $3.00.The basic EPS for the year ended 30 June 2018 was $2.30.5RequiredCompute the basic earnings per share amount for 2019 and provide the adjusted comparativeEPS for 2018.Question 3Ltd is an Australian listed company. Its results for the financial year ending 30 June 2019 haveexceeded expectations—profit before tax is $5.597 million and income tax expense is $1.847million. As at 30 June 2018, there were 9.75 million ordinary shares on issue.On 11 May 2019, 3.25 million further ordinary shares were issued at a price of $2.30 – paid to$2.00. The partly paid shares carry rights to dividends in proportion to the amount paidrelative to the total issue price.Required:Calculate the basic EPS for P Ltd for the year ending 30 June 2019.Question 4 (Rights issue)For the year ending 30 June 2018, Sandon Ltd reports net profit after tax of $500 000.At the beginning of the year, Sandon Ltd had 800 000 fully paid ordinary shares. It also had100 000 $1.00, 10 per cent, cumulative preference shares outstanding. The preference shareswere classified as equity. On 1 September 2017 the company issued another 200 000 fullypaid ordinary shares by way of a rights issue. The right provided an additional share for eachfour held, and required the payment of $1.50. The last cum rights share price was $2.The basic EPS for the year ended 30 June 2017 was $1.95.RequiredCompute the basic EPS amount for 2018, and provide the adjusted comparative EPS for 2017.Question 5ABC Ltd is an Australian listed company. Its results for the financial year ended 30 June 2018have exceeded expectations: profit before tax is $6.5 million and income tax expense is $1.5million.As at 30 June 2016, there were 10 million ordinary shares on issue. On 11 May 2018, 3 millionadditional ordinary shares were issued at a price of $2.50 (paid to – date $2.00). The partlypaid shares carry rights to dividends in proportion to the amount paid relative to the totalissue price.6In addition, ABC Ltd has 1 million $1.00 preference convertible shares, which providedividends at a rate of 10% per year. The dividend rights are cumulative. The preference sharedividends were not treated as part of interest expense. The owners of the preference shareshave the right to convert into ordinary shares at the rate of two preference shares for oneordinary share at a future date.REQUIRED:i) Calculate the basic EPS for ABC Ltd for the year ending 30 June 2018.ii) Calculate the diluted earnings per share for ABC Ltd for the year ended 30 June 2018.iii) When both basic and diluted EPS should be disclosed.iv) If there has been a bonus/rights issue in a particular year, do we need to make anyadjustments to previously reported earnings per share? Why or why not?7Intangible Assets – Advanced IssuesOverviewThis topic discusses the accounting treatment for intangible assets particularly the researchand development.Learning Objectives:1. Explain the need for an accounting standard on intangible assets2. Explain the key characteristics of an intangible assets3. Discuss the recognition criteria applied to intangible assets4. Discuss the measurement at initial recognition of intangible assets5. Describe how to amortize intangible assets6. explain the accounting for intangible assets subsequent to initial recognition7. Discuss the disclosures required for intangible assetsQuestion 1Explain the difference between ‘research’ and ‘development’.Question 2XYZ Windows Ltd is involved in a research and development project to create a filteringwindow that removes the need for curtains. For the current year ended 30 June 2018expenditure on the project is as follows: Research$235,000Development$500,000 The window is expected to return profits of $70,000 per year for the 10 years commencing 1July 2018. Assuming the company uses a straight-line method amortisation. This companyuses a discount rate of 8 per cent.Required:i)How much research and development cost should be expensed in the year to 30 June2018?ii)How much development expenditure should be amortised in the year to 30 June 2019?Question 3An assistant of yours has encountered the following matter during the preparation of thedraft financial statements of XYZ Ltd for the year ending 30 June 2018. He /She has given anexplanation of his/her treatment of the item.“XYZ Ltd management spent $200,000 sending its staff on training courses during the year.This has already led to an improvement in the company’s efficiency and resulted in costsavings. The organiser of the course has stated that the benefits from the training should last8for a minimum of four years. The assistant has therefore treated the cost of the training as anintangible asset and charged six months’ amortisation based on the average date during theyear on which the training courses were completed.”Required:Comment on the assistant’s treatment of them in the financial statement for the year ended30 June 2018 and advise him how they should be treated under AASB 138 Intangible Assets.Question 4IP Ltd reports the following intangible assets: $mPatents at directors’ valuation160less Accumulated amortisation(40)120Trademarks, at cost15Goodwill, at cost50less Accumulated amortisation(10)40Brand name100Licence at cost10less Accumulated amortisation(1)9Additional information: • Patents were acquired at a cost of $80 million and were revalued soon afterwards.They have an estimated life of 16 years, of which 12 years remain.• The trademark can be renewed indefinitely, subject to continued use. The costrepresents registration fees, which were initially expensed but recognised five yearslater after the trademark had started to become recognised by consumers.• Goodwill has been purchased and amortised on the straight-line basis.• The brand name is stated at fair value and is internally generated.• The licence has a 10-year life of which nine years remain. The licence can be tradedin an active market and has a fair value of $17 million.REQUIRED(a) State how each asset, or class of assets, should be reported in accordance with AASB 138.(b) Apply AASB 138 and state the carrying amount and whether each asset/asset class shouldbe amortised. Specify any choice of methods permitted for IP Ltd.9Extractive industriesOverviewThis topic explains the operations of extractive industries and the relevant accountingstandard for this topic is AASB 6. This standard tells us how to account for expendituresincurred in the exploration and evaluation phases of mining operations. The main issue iswhether the expenditures generate assets or expenses for the reporting entity.Learning Objectives1) Understand the extractive industries and various phases of the operations involved in theindustry.2) How to account for exploration and evaluation expenditures according to the ‘area -of –interest method’3) How to account for costs incurred in the pre-production phases of operation4) Impairment when a site is abandon5) How and when to account for any restoration costs that might be incurred as a result of anentity’s operations.6) Issues associated with the recognition of revenue and how to value inventory within theextractive industries.Question 1During the reporting period ending 30 June 2018, Cortese Ltd erected an oil rig off the coastof Wollongong. The cost of the rig and associated technology amounted to $200 million.The oil rig commenced production on 1 July 2018. At the end of the rig’s useful life, which isexpected to be 10 years, Cortese Ltd is required by its resource consent to dismantle the oilrig, remove it, and return the site to its original condition. Cortese Ltd estimates that if suchwork was required to be done at the present time it would cost $25 million. The costs of thiswork are expected to increase by an average of 3 per cent per year over the next 10 years.The rate on 10-year government bonds reflects the relevant time value of money, and therate is 4 per cent.REQUIREDPrepare the journal entries necessary to account for the establishment of the rig and thechanging balance of the restoration provision for the years ended 30 June 2018, 30 June 2019and 30 June 2020. Ignore depreciation.10Question 2ABC Ltd commences operations on 1 January 2017. During 2017 ABC Ltd explores two areasand incurs the following costs: AreaExploration and evaluation expenditure ($m)X20Y8 In 2018 oil is discovered at X Site. Y Site is abandoned. In relation to the exploration andevaluation expenditures incurred at X Site and Y Site, 60 per cent of the expenditures relateto property, plant and equipment, and the balance relates to intangible assets. X Site isestimated to have 5 000 000 barrels. The current sale price is $6 per barrel. One million barrelsare extracted at a production cost of $1 million and 500,000 barrels are sold.REQUIREDProvide the necessary journal entries for year 2017 & 2018 using the area-of-interestmethod11Accounting for LeaseOverviewThis topic explains how to account for leases in accordance with AASB 16. The accountingfor leases covers both perspective for lessee and lessor.Learning Objectives1) Understand what is a lease?2) Accounting for leases by lessees3) Accounting for finance leases by lessor – direct finance or manufacturer/dealer typeleases.4) Accounting for operating leases by lessorQuestion 1Burt Ltd enters into a non-cancellable five-year lease agreement with Earnie Ltd on 1 July2019. The lease is for an item of machinery that, at the inception of the lease, has a fair valueof $1 294 384.The machinery is expected to have an economic life of six years, after which time it will havean expected residual value of $210 000. There is a bargain purchase option that Burt Ltd willbe able to exercise at the end of the fifth year for $280 000.There are to be five annual payments of $350 000, the first being made on 30 June 2020.Included within the $350 000 lease payments is an amount of $35 000 representing paymentto the lessor for the insurance and maintenance of the equipment. The equipment is to bedepreciated on a straight-line basis. The rate of interest implicit in the lease is 12%.Requireda) Prepare the minimum lease payment schedule for Harry Ltd for the first 3 years.b) Prepare the journal entries in the books Harry Ltd for the years ending 30 June 2020 and30 June 2021.c) Prepare the extract of the statement of financial position for the year ending 30 June 2021and comparative year relating to the lease asset and lease liability.12Question 2 (Lessee accounting with an advance lease payment)ABC Limited is a Melbourne-based company that manufactures and constructs granny flats. Ithas a year end of 30 June. ABC has negotiated to acquire the use of a transport truck under alease agreement which commences on 1 July 20X7. The lease contains the following key terms: Initial paymentAn initial payment of $100,000 to be paid on 1 July 20X7Lease paymentsTwo payments of $170,000 to be paid on 30 June 20X8 and 30 June20X9Transfer ofownershipOwnership of the transport truck will transfer to ABC on 30 June20X9 when the final payment is made.Interest rateThe interest rate implicit in the lease is 12% Additional information• ABC intends to use the transport truck after the lease term has finished.• The truck’s useful life to be eight years.• The incremental borrowing rate is 14%.• ABC incurred legal costs of $10,000 in setting up the lease.• Income tax deductions can be claimed for lease payments and legal costs paid. Interestexpense and depreciation calculated for accounting purposes do not give rise to a taxdeduction.• ABC has a tax rate of 30%.Required:a) Calculate the lease liability amount as at 1 July 20X7.b) Prepare the lease payment schedule from 1 July 20X7 to 30 June 20X8.c) Prepare the journal entries in relation to the lease for the year ending 30 Jun 20X8.Note: Show all the working.13Question 3 (Lessor accounting)You are a Certified Public Accountant working for XYZ Limited. XYZ Limited owns building withoffice spaces which it leases to other companies for their various training and teaching purposes.One of XYZ’s buildings in Melbourne CBD has a specialised fit out which has been speciallytailored for La Trobe University to deliver professional accounting courses. There are only a fewother businesses who could use the space in its current format. The office space, with its currentfit-outs, is expected to have a life of five years from 1 July 2017.On 1 July 2017, La Trobe University entered a four-year lease for XYZ building office spaces. Thelease agreement specified lease payments of $100,000, to be paid at the end of each year on30 June. At the end of the lease on 30 June 2021, La Trobe University has the option ofpurchasing the office space for $300,000. The purchase price is expected to be at a significantdiscount on the market value of the premises at that time. XYZ incurred $20,000 in legal costsin relation to the lease.XYZ has adopted the new AASB 16 Leases and it determine that the lease has an implicit interestrate of 5%. Required(a) Determine how XYZ should classify the lease. Support your determination with referencesto AASB 16.(b) Calculate the value of the lease receivable, using 5% as interest rate.(c) Prepare the lease receipt schedule.(d) Prepare the journal entry for the financial year end 2019.(e) Prepare the current and non-current asset sections of XYZ statement of financial positionas at 30 June 2019 in relation to the lease. Show all workings and ignore the impact of tax. 14Financial Instruments and Foreign Currency TransactionsQuestion 1Define ‘financial instrument’.Question 2Define a financial asset, a financial liability and an equity instrumentQuestion 3What is a primary financial instrument? Provide some examples.Question 4What is a derivative financial instrument? Provide some examplesQuestion 5Arthur Ltd has the following statement of financial position Statement of financial position before set-offLoans payable1 000 000Loans receivable1 200 000Shareholders’ equity1 000 000Non-current assets800 000$2 000 000$2 000 000 Assume that Arthur Ltd has an amount owing to Blayney Ltd of $300 000 and an amountreceivable from Blayney Ltd of $400 000.Assuming a right of set-off exists, why would Arthur want to perform a set-off? What wouldbe the impact on the debt to assets ratio?Question 6On 1 July 2018, Kelly Ltd issued an issue of 1000 five-year $1000 coupon bonds and whichpaid interest of $100 000 annually in arrears. The market required interest rate for Kelly Ltdbonds was 14 per cent.Required:Prepare the journal entry to issue the bond at 1 July 2018, and the entry at 30 June 2019 torecord the interest paid.Question 7a) What is a qualifying asset?15b) How does the accounting treatment for qualifying assets different from the accountingtreatment for non-qualifying assets?c) What is hedge accounting and what is its purpose? What are the three types of hedgesidentified in the AASB 139/AASB 9?d) What is a compound or hybrid financial instrument and provide an example.Question 8a) How would you determine the debt component and the equity component of a compoundfinancial instrument?b) Do you think that a reporting entity would prefer to classify a financial instrument as debtor equity? Why?Question 9Barry Ltd issued some convertible bonds to Bennett Ltd. They have a life of three years andpay interest to Bennett Ltd each six months. The convertible bonds will be converted to sharesonly if Bennett makes the decision, at any time in the next three years, that it would prefer toreceive shares in Barry Ltd, rather than have its funds repaid.Required:(a)At the time of issue, should Barry Ltd disclose the convertible bonds as debt, equity orpart debt and part equity?(b)Does the probability of conversion to equity influence whether the convertible bondsare disclosed as debt or equity?(c)If Bennett Ltd notifies Barry Ltd that it would like to convert the convertible bonds toshares in Barry Ltd then will this influence how the convertible bonds are disclosed in thefinancial statements of Barry Ltd?16Question 10Woodie Ltd issues $5 million in convertible bonds on 1 July 2019. They are issued at their facevalue and pay an interest rate of 4 per cent. The interest is paid at the end of each year. Thebonds may be converted to ordinary shares in Woodie Ltd at any time in the next three years.Organisations similar to Woodie Ltd have recently issued similar debt instruments but withoutthe option for conversion to ordinary shares. These instruments issued by the other entitiesoffer interest at a rate of 6 per cent.On 1 July 2020 all the holders of the convertible notes decide to convert the bonds to sharesin Woodie Ltd.Provide the journal entries to:(a) record the issue of the securities on 1 July 2019(b) recognise the interest payment on 30 June 2020, and(c) recognise the conversion of the bonds to ordinary shares on 1 July 2020.(d) Prepare extracts to show how the convertible notes and the finance charge should betreated by Woodie Ltd in its financial statements for the year ended 30 June 2020. Showyour workings. Assuming that the convertible notes are not converted into equity yet.Question 11Brisbane Ltd manufactures cars. On 15 June 2022 Brisbane Ltd enters into a non-cancellablepurchase commitment with LA Ltd for the supply of engines, with those engines to be shippedon 30 June 2022, at which time control of the assets will be transferred to Brisbane Ltd. Thetotal contract price was US$4 000 000, and the full amount was due for payment on 30 August2022.Because of concerns about movements in foreign exchange rates, on 15 June 2022 BrisbaneLtd entered into a forward rate contract on US dollars with a foreign exchange broker so asto receive US$4 000 000 on 30 August 2022 at a forward rate of A$1.00 = US$0.75.Brisbane Ltd elects to treat the hedge as a cash flow hedge and the hedge arrangementsatisfies the criteria within AASB 9 for hedge accounting.Other informationThe respective spot rates are provided below. The forward rates offered on particular dates,for delivery of US dollars on 30 August 2022, are also provided. DateSpot rateForward rates for 30 Augustdelivery of US$15 June 2022A$1.00 = US$0.78A$1.00 = US$0.7530 June 2022A$1.00 = US$0.76A$1.00 = US$0.7330 August 2022A$1.00 = US$0.71A$1.00 = US$0.71 17Required:Provide the journal entries to account for the ‘hedged item’ and the ‘hedging instrument’.The financial year end is 30 June 202218Construction contractsOverviewThis topic explains the issues associated with recognising revenues for long-termconstruction projects.Learning Objectives1) Understand the accounting for construction contracts.2) Understand the measuring progress towards completion of the construction contracts.3) How to account profit and losses of construction contracts.Question 1XYZ Ltd was contracted to build new townhouses in a block of land for ABC Ltd for$72,000,000. Payment of three $24,000,000 instalments were due and paid on June 30 ofeach year.The expected and actual costs at the end of each year are detailed as follows: YearExpectedActual20XI16,000,00016,000,00020X226,000,00030,000,00020X320,000,00020,000,000Total62,000,00066,000,000 Note: The stage of completion can be measured reliablyRequired:1) The percentage of completion2) The gross profit and revenue for year 20X1, 20X2 & 20X3.3) The appropriate journal entries19Question 2Big Construction Company signs a contract on 1 July 2019, agreeing to build a warehouse forBuyer Corporation Ltd at a fixed contract price of $10 million. Buyer Ltd will be in control ofthe asset throughout the construction process. Big Construction Company estimates thatconstruction costs will be as follows: 2019$2.5 million2020$4 million2021$1.5 million The contract provides that Buyer Corporation Ltd will make payments on 31 December eachyear as follows: 2019$2 million2020$5 million2021$3 million The contract is completed and accepted on 31 December 2021. Assume that actual costs andcash collections coincide with expectations and that cost (an input measure) is used as thebasis for assessing progress on the construction contract. Big Construction Company has afinancial year ending 31 December.Required:Provide the journal entries for 2019, 2020 and 2021, assuming that:(a)the level of progress on the contract can be reliably estimated(b)the level of progress on the contract cannot be reliably estimated.
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