UNIT CODE: ACT204 UNIT
NAME: FINANCIAL ACCOUNTING
Assignment Information
Semester 2 2017 Assessment 20%
Submission Requirements.
This assignment is to be submitted before 11.59pm Friday 6th October in Week 11
Assignments are to be submitted by one of the following means;
DO NOT LODGE BY FAX nor EMAIL nor at LECTURER'S OFFICE KEEP A COPY
• The assignment must be lodged on or before the due date indicated in the assignment details.
Only word docs and/or Excel converted to pdf will be acceptable. Handwritten answers will be rejected.-
• The assignment must conform to the requirements set out in this assignment
• The assignment must be lodged online via the ACT204 Learnline Assignment Lodgement link on the ACT204 Learnline site. Ensure your file is named using a file naming convention that allows the lecturer to identify to whom it belongs. Failure to use an acceptable file naming convention may result in your assignment lodgment being rejected.
• DO NOT LODGE VIA EMAILor FAX - assignments lodged by email or fax will not be accepted.
• KEEP A COPY - Ensure you have a copy of the assignment lodged. If you have submitted assessment work electronically please make sure you have a backup copy.
• Assignment lodgements will be acknowledged automatically on the Learnline site, on submission.
• DO NOT submit an assignment front sheet.
Resubmission
As a general rule resubmission of assessment items is NOT possible, however the Lecturer may ask for resubmission if it is deemed appropriate. Details for such resubmission will be made available by the Lecturer if and when the situation occurs.
University Plagiarism policy
Plagiarism is the unacknowledged use of material written or produced by others or a rework of your own material. All sources of information and ideas used in assignments must be referenced. This applies whether the information is from a book, journal article, the internet, or a previous essay you wrote or the assignment of a friend.
Plagiarism policy is available at: http://learnline.cdu.edu.au/studyskills/studyskills/avoidingplagiarism.html and
Student Breach of Academic Integrity Procedures http://www.cdu.edu.au/governance/doclibrary/pro-092.pdf
EXTENSIONS AND LATE LODGEMENTS
LATE ASSIGNMENTS WILL GENERALLY NOT BE ACCEPTED UNLESS AN EXTENSION TO THE DUE DATE HAS BEEN GRANTED BY THE HEAD OF SCHOOL.
Exceptions will only be made where assignments are late due to special circumstances that are supported by documentary evidence, and may be subject to a penalty of 5% of assignment marks per day. Partially completed assignments will be accepted with appropriate loss of marks for the incomplete portion.
Should students foresee potential difficulties with submission of assessment items, they should contact the lecturer immediately the difficulties come to notice, to discuss suitable arrangements etc. for the submission of those assessment times. An Application for Assignment Extension or Special Consideration should be completed and provided to the Head of School, School of Law and Business.
This application form, explanation and instructions is available on the ACT204 CDU Learnline course site or direct from http://learnline.cdu.edu.au/units/lb_school_templates/deployed/assignment_extension.docx
Please note that it is now Faculty policy that all extension requests must be approved by the Head of School. The lecturer is no longer able to personally approve extension requests.
Leaving a request for an extension, special assessment or special consideration until the last moment, based on grounds that students could have reasonably been able to foresee, may result in the application being rejected.
ASSIGNMENT INFORMATION
This Assignment is worth 20% of the total assessment for this unit. This assignment will be marked out of 100 and scaled down to being out of 20. The assignment has 5 questions.
Question 1
Read the following adaptation of an article entitled ‘CBA in payout on “toxic” products’ by Leo Shanahan that appeared in The Australian on 4 April 2015.
In 2012 a claim was lodged in the Federal Court against the Commonwealth Bank by Gloucester Council and an investment company, Clurname, alleging that CBA had breached its duty of care and engaged in misleading and deceptive conduct in selling them ‘toxic’ investments, ignoring their request for conservative investments. Eventually around 35 investors, who had been sold $140 million worth of AAA-rated collateralised debt obligations (CDOs), participated in the class action.
CBA settled with the investors for $50 million, including legal fees, and agreed to pay $1.5 million to International Litigation Partners, funder of the class action.
The bank refused to comment on the settlement, saying the court still had to approve it, although CBA had previously said the investor’s claim had no merit. In the course of the case it had been revealed that CBA had settled with at least 14 other CDO investors.
CBA had earlier been faced with the fallout from the frauds perpetrated by some of its financial planners, which led to public apologies and expensive settlements.
REQUIRED
On the basis of the brief information provided, consider how, if you were the chief accountant at the Commonwealth Bank, the case would be disclosed within the annual report of CBA. What factors would you consider in determining the form the disclosures should take, and in which years the disclosures would be made?
(15 Mark)
Question 2
Hopeful Ltd leased a portable sound recording studio from Lessor Ltd. essor has no material initial direct costs. Hopeful Ltd does not plan to acquire the portable studio at the end of the lease because it expects that, by then, it will need a larger studio. The terms of the lease are as follows:
• Date of entering lease: 1 July 2019.
• Duration of lease: four years.
• Life of leased asset: five years.
• Lease payments: $50 000 at the beginning of each year.
• First lease payment: 1 July 2019.
• Lease expires: 1 July 2023.
• Interest rate implicit in the lease: 8 per cent.
• Guaranteed residual: $40 000.
REQUIRED
1. Determine the fair value of the portable sound recording studio at 1 July 2019.
2. Prepare a schedule for the lease payments incorporating accrued interest expense.
3. Prepare the journal entries to account for the lease in the books of Hopeful Ltd at 1 July 2019, 30 June 2020 and 1 July 2020.
4. At the termination of the lease, Hopeful Ltd returns the portable sound recording studio to Lessor Ltd, but its fair value at that time is $25 000. What must Hopeful Ltd do to comply with the terms of the lease? Prepare the journal entries in the books of Hopeful Ltd for return of the asset to Lessor Ltd and the settlement of all obligations under the lease on 1 July 2023
(15 Mark)
Question 3
Alexandra Bay Ltd has five employees. According to their particular employment award, long-service leave can be taken after 12 years, at which time the employee is entitled to 10 weeks’ leave. If an employee were to leave before the completion of 12 years’ service, no entitlement would be paid.
High-quality corporate bond rates exist with periods to maturity that exactly match the various periods that must still be served by the employees before LSL entitlements vest with them.
The projected inflation rate for the foreseeable future is 2 per cent. The projected probabilities that the employees will stay long enough for the LSL to vest—that is, for a total of 12 years—are as follows:
REQUIRED
1. Calculate Alexandra Bay’s current obligation for long-service leave.
2. If the opening provision for long-service leave is $12 500, provide the journal entry to record Alexandra Bay’s longservice leave expense
(20 Mark)
Question 4
T Pty Ltd is a manufacturer of tennis equipment and fashion wear. The statement of financial position as at 30 June 2020 and details of expenses and revenues for the year ending 30 June 2020 are as follows:
Statement of financial position as at 30 June 2020
2020
($000) 2019 ($000)
Current assets
Cash 135 274
Inventory 2 774 2 486
Prepayments 115 0
Accounts receivable 2 897 2 654
Allowance for doubtful debts (150) (120)
Total current assets 5 771 5 294
Non-current assets
Investment—associated company 1 050 0
Investments 1 216 948
Land 1 500 1 750
Buildings 800 800
Accumulated depreciation—buildings (200) (160)
Plant and equipment 1 025 768
Accumulated depreciation—plant and equipment (100) (548)
Deferred tax asset 312 302
Total non-current assets 5 603 3 860
Total assets 11 374 9 154
Current liabilities
Accounts payable 1 637 1 483
Accruals 1 575 1 110
Lease liability 5 0
Income tax payable 243 83
Provision for employee entitlements 205 298
Provision for deferred payment (relating to investment in Squash Pty Ltd) 50 0
Provision for warranty 314 0
Total current liabilities 4 029 2 974
2020
($000) 2019 ($000)
Non-current liabilities
Lease liability 15 0
Deferred tax liability 240 75
Borrowings 3 500 3 800
Total non-current liabilities 3 755 3 875
Total liabilities 7 784 6 849
Net assets 3 590 2 305
Shareholders’ equity
Share capital 2 750 2 000
Retained earnings 280 130
Revaluation surplus 560 175
Total shareholders’ equity 3 590 2 305
Statement of profit or loss and other comprehensive income for the year ending 30 June 2020
2020 2019
($000) ($000)
Income
Sales 31 394 27 346
Dividends income 51 47
Expenses
Bad debts (90) (85)
Cost of sales (28 205) (24 611)
Doubtful debts (35) (40)
Inventory write-off (50) 0
Warranty expenses (taken to provision for warranty) (314) 0
Depreciation
– Building (40) (40)
– Plant and equipment (100) (60)
Interest (315) (418)
Rent (600) (600)
Salaries and wages (1 324) (1 231)
Finance charges (7) (90)
2020 2019
($000) ($000)
Profit before tax 365 218
Income tax (215) (90)
Profit after tax
Other comprehensive income 150 128
Reduction in revaluation surplus as a result of reduction in fair value of land (175) –
Increase in revaluation surplus as a result of increase in fair value of plant and
equipment 560 –
Total comprehensive income 535 128
Statement of changes in equity for the year ending 30 June 2020
Share capital ($000) Retained earnings ($000) Revaluation surplus ($000) Total ($000)
Opening balance 1 July 2019 2 000 130 175 2 305
Statement of profit and loss and other comprehensive income – 150 385 535
Issue of shares as part consideration for acquisition of associated company 750 – – –
Balance 30 June 2020 2 750 280 560 3 590
Additional information
• An additional investment of $80 000 is acquired for consideration of tennis equipment costing $80 000.
• Land is devalued against a previous increment in the revaluation reserve. The previous increment is fully reversed.
• Plant and equipment with a cost of $700 000 and accumulated depreciation of $500 000 are revalued to $1 000 000 during the year.
• Plant and equipment with a fair value of $25 000 are acquired under a finance lease. The residual is guaranteed by the lessee.
• Plant and equipment are sold for $20 000 cash. Cost is $68 000 and no profit or loss is made on the sale.
• During the year, one line of wooden tennis racquets is scrapped at a loss of $50 000, as there is little demand for this range.
• During the year, an investment is made in an associated company, Squash Pty Ltd. Consideration is $1 000 000, funded by cash of $250 000 and the balance by the issue of 500 000 shares at $1.50 per share. The purchase agreement includes a clause stating that if profits exceed $110 000 in the first financial year after purchase, additional amounts are payable. Using the formula, an extra $50 000 is provided.
• Provision for warranty is based on 1 per cent of sales.
• Rent expense of $600 000 is accrued within ‘Accruals’.
• Interest expense is paid during the year and dividends are received.
• Salaries and wages expense includes the expense for employee entitlements.
• The tax rate is 30 per cent.
REQUIRED
Prepare the statement of cash flows in accordance with AASB 107 for the year ending 30 June 2020. Comparatives are not required
(25 mark)
Question 5
You are the finance director of ME Ltd. The company specialises in importing classic foreign vehicles from overseas countries and then selling these vehicles cheaply on the open market. The company’s financial year ends on 30 June 2018. The company enters into the following transactions during the year:
(a) The company purchases inventories from Hong Kong for HK$300 000. The order is placed on 22 April 2018, with delivery due by 30 April 2018. Under the conditions of the contract, title to the goods passes to the company on delivery. Payment in respect of these inventories is due in equal instalments on 30 May 2018, 30 June 2018 and a final payment on 31 July 2018. The following exchange rates are applicable:
(b) The company enters into a long-term construction contract with a Japanese company. Under the terms of the contract the Japanese firm will manufacture an engine diagnosis machine, which can be used on all classic cars. The contract is entered into on 30 April 2017 for a fixed price of ¥5 million. The equipment is delivered on 31 May 2018, subject to a two-month credit period after the date of delivery to ensure that the company is satisfied with the equipment. Payment falls due on 31 July 2018. The following exchange rates are applicable:
(c) The company arranges a US-dollar interest-only loan on 1 January 2018 for US$20 million. The loan is for a 10-year period at an interest rate of 11.5 per cent per annum. Interest is payable annually. Concerned about the volatility of the Australian dollar against the US dollar, the company takes out a hedge contract on the loan, payable on 1 January 2018. The hedge contract covers the first two years’ interest payments. The hedge rate is set at A$1.00 = US$0.65. The following exchange rates are applicable:
(d) The company has agreed to purchase 10 new handmade sports cars from an English supplier. The official order for the vehicles is placed on 31 January 2018. The contract price is established at £350 000 and delivery takes place on 30 May 2018, as agreed. Payment is due in respect of these vehicles on 31 August 2018. In anticipation of the contract on 31 January 2018, the company enters into a foreign currency contract to receive £350 000 at a forward rate of £0.46 = A$1.00. The following exchange rates are applicable:
REQUIRED
Prepare the journal entries to reflect the effects of the above transactions in accordance with AASB 121, AASB 123 and AASB 9. Explain the treatment adopted in respect of each of the above transactions
(25 mark)