ACCT2542 Final Exam With Solutions

1 SURNA AME OF CA ANDIDATE E: FIRST NA AME OF CA ANDIDATE E: ST TUDENT ID D: SI GNATURE E:

OFFIICIAL US SE ONLY Y Mark M

SCHO OOL OF F ACCO OUNTIN NG ACCT 2542 2 COR RPORATE E FINANC CIAL REP PORTING G AND AN NALYSIS S Sesssion 2, 20115 Final Examinattion Time Allowed: A Readin ng Time: Number of Quesstions: Length h of exam paper Final assessmen a nt   

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 

Q1

/ 15

Q2

/ 10

Q3

/ 15

Q4

/ 20

Q5

/ 10

Q6

/ 10

Q7

/ 10

Q8

/ 10

Total

/ 100

2 Hours H 10 minutes 8 16 pages 55% %

Answer AL LL question ns. The questiions are NO OT of equal value. Questions 1 to 7 – all answers muust be writteen in ink an nd recorded in this exam m paper. Question 8 - all answ wers must bbe recorded on the Gen neralised A Answer Sheet in pencil. En nsure you record yourr student ID D and full name on thhe Generallised Answer Sh heet UNSW appproved elecctronic calcuulators may y be used. This paperr is NOT to be retainedd by the can ndidate. DO NO OT OPEN THIS T PAP PER UNTIL L INSTRUC CTED BY THE EXA AM SUPERVIISOR

2 THIS PAGE HAS BE T EEN INTEN NTIONALL LY LEFT BLLANK. YOU CAN C USE THIS T PAGE E FOR WO ORKINGS BUT THIS S PAGE WILL N OT BE MA ARKED.

3 THIS PAGE HAS BE T EEN INTEN NTIONALL LY LEFT BLLANK. YOU CAN C USE THIS T PAGE E FOR WO ORKINGS BUT THIS S PAGE WILL N NOT BE MA ARKED

4

Question 1: Accounting for company income tax (15 marks) On 1July 2014, Midson Ltd commenced operations in Australia where the corporate tax rate is 30%. The company’s accounts show a profit before tax of $80 000 for the year ended 30 June 2015. Expenses that have been recognised in profit before tax include:  Parking and other fines $5000  Depreciation of plant $15 000  Interest expense $10 000  Annual leave expense $8000 Deductions for the year are:  Depreciation of plant for tax $25 000  Annual leave paid $2000 (a)

Prepare the current tax worksheet for 30 June 2015 (6 marks)

Profit before tax Add: Parking and other fines Depreciation expense (accounts) Interest expense Annual leave expense Less: Depreciation expense (tax) Annual leave paid Taxable profit

(b)

80 000  

5 000 15 000 10 000 8 000 25 000 2 000 91 000

Prepare the journal entry for current tax (1 mark) Account name

Income tax expense Current tax liability

Debit

Credit

27 300 27 300

5 An extract of the company’s statement of financial position at 30 June 2015 shows: Assets Plant – at cost Accumulated depreciation

100,000 (15,000)

Liabilities Provision for annual leave Interest payable

(c)

85 000 5 000 10 000

Prepare the deferred tax worksheet for 30 June 2015 (6 marks)

(1) Asset/Liability

(2) Carrying Amount

(3) Deductible Amount

(4) Tax Base

(5) Taxable TempDiff

Plant

85 000

75 000

75 000

10 000

Provn AL

5 000

5 000

0

5 000

Interest Pay

10 000

10 000

0

10 000

Total TD

10 000

DTL 30%

3 000

(6) Deductible TempDiff

15 000

DTA 30%

(d)

4 500

Prepare the journal entry for deferred tax (2 marks) Account name

Deferred tax asset Deferred tax liability Income tax expense

Debit

Credit

4 500 3 000 1 500

6

Question 2: Wholly Owned Subsidiaries Topic (10 marks) On 30 June 2015, Lear Ltd acquired all of the issued share capital of Regan Ltd for cash consideration of $5000 (a)

Complete the consolidation worksheet for 30 June 2015 (8 marks)

Lear

Regan

Adjustments Dr

Group

Cr

Cash

14 000

2000

16 000

Inventories

16 000

4000

20 000

Shares in Regan

5000

Total Assets

5000

0

35 000

6000

36 000

5 000

1000

6000

Share capital

10 000

5000

Retained profits

20 000

-

20 000

Total Liabilities and Equity

35 000

6000

36 000

Trade Payables

5000

10 000

Show the worksheet entry to eliminate the investment asset (2 marks) Account name

Share capital Shares in Regan

Debit

Credit

5 000 5 000

7

Question 3: Wholly Owned Subsidiaries Topic (15 marks) On 1 July 2014, Montague Ltd acquired all of the issued shares of Romeo Ltd for $500 000. At this date, the equity of Romeo Ltd is comprised of: Share capital Retained earnings

$ 200 000 172 000

All identifiable assets and liabilities of Romeo Ltd were recorded at fair value except for the following: Book value Fair value Plant (cost $120 000)

$50 000

$90 000

The plant is expected to have a further 4 year life. The tax rate is 30%. (a)

Prepare the acquisition analysis (4 marks)

Consideration

500 000

Share Capital Retained earnings BVINA

200 000 172 000 372 000

Plant [40 000 x (1-0.3)]

28 000  

(b)

FVINA

400 000

Goodwill

100 000

 

Prepare the fair value entry for the plant at 1 July 2014 (3 marks) Account name

Accumulated Depreciation Plant Plant Deferred tax liability BCVR

Debit

Credit

70 000 70 000 40 000 12 000 28 000

8 (c)

Prepare the entry to record goodwill at 1 July 2014 (1 mark) Account name

Goodwill

Debit

100 000 BCVR

(d)

Share capital Retained profits BCVR Investment in Romeo

Debit

Credit

200 000 172 000 128 000 500 000

Prepare any depreciation adjustment for consolidation at 30 June 2015 (3 marks) Account name

Depreciation expense Accumulated depreciation Deferred tax liability Income tax expense

(f)

100 000

Prepare the pre-acquisition entry for consolidation at 1 July 2014 (3 marks) Account name

(e)

Credit

Debit

Credit

10 000 10 000 3000 3000

Assume Montague had acquired the shares of Romeo cum-dividend and the dividend was $20 000. How much would be the goodwill in this case? (1mark)

$80 000

9

Question 4: Intragroup Transactions Topic (20 marks) Gertrude Ltd owns 100% of the ordinary shares of Hamlet Ltd. For each of the following intragroup transactions prepare the consolidation journal entry in the space provided. Assume the consolidation is being undertaken at 30 June 2015 and an income tax rate of 30% applies. (a)

Hamlet Ltd pays Gertrude Ltd an annual service fee of $35 000 at the end of June each year. (2 marks) Account name

Service revenue Service expense

(b)

Credit

35 000 35 000

On 1 February 2015, Hamlet Ltd declared and paid an interim dividend of $15 000. (2 marks) Account name

Dividend revenue Dividend paid

(c)

Debit

Debit

Credit

15 000 15 000

On 1 January 2015, Gertrude provided a loan of $200 000 to Hamlet Ltd. The loan is interest-free and due to be repaid on 30 June 2020. (2 marks) Account name

Loan payable Loan receivable

Debit

Credit

200 000 200 000

10 (d)

On 20 May 2010, Gertrude Ltd transferred land to Hamlet Ltd in exchange for cash consideration of $120 000. The land had originally cost Gertrude $20 000. The land is still on hand at 30 June 2015. (3 marks) Account name

Retained earnings Deferred tax asset Land

(e)

Credit

70 000 30 000 100 000

Hamlet Ltd had inventory on hand at 30 June 2014 purchased from Gertrude Ltd. The unrealised profit in opening inventory is $12 000. (3 marks) Account name

Retained earnings Income tax expense COGS

(f)

Debit

Debit

Credit

8 400 3 600 12 000

Hamlet Ltd sold inventory to Gertrude Ltd for $70 000 during the year to 30 June 2015. The original cost of the inventory to Hamlet Ltd was $50 000. On 30 June 2015, Gertrude Ltd still has all of this inventory still on hand. (3 marks) Account name

Debit

Sales revenue COGS Inventory

70 000

Deferred tax asset Income tax expense

6 000

Credit

50 000 20 000

6 000

11 (g)

On 1 July 2014, Gertrude Ltd transferred an item of plant to Hamlet Ltd for cash consideration of $50 000. In Gertrude Ltd’s records, the plant had a book value of $10 000 before the transfer (original cost $30 000). The plant had a remaining useful life of two years at the date of transfer. On 30 June 2015, the plant is still on hand. (4 marks) Account name

Debit

Gain on sale Plant Accumulated depreciation

40 000

Deferred tax asset Income tax expense

12 000

Accumulated depreciation Depreciation expense

20 000

Income tax expense Deferred tax asset

6 000

(h)

Credit

20 000 20 000

12 000

20 000

6 000

Assume Gertrude only owns 80% of the ordinary shares of Hamlet Ltd. Would this affect the required journal entries in (a) to (g) above. Briefly discuss. (1 mark)

The only entry that would change is (b) the intercompany dividend

12

Question 5: Translation of financial statements (10 marks) On 1 July 2014, Austco Ltd incorporated a subsidiary in the United States, Hilary Inc. Details of exchange rates for the first year of operations are as follows: 1 July 2014 6 August 2014 12 January 2015 30 June 2015 1/7/14 to 30/6/15

$U.S. 1 = $A 1.00 $U.S. 1 = $A1.20 $U.S. 1 = $A1.40 $U.S. 1 = $A2.00 $U.S. 1 = $A1.50

Beginning of year Equipment bought Cash received End of year Average for year

Hilary Inc. has a functional currency of $U.S. (a)

Translate the statement of financial position of Hilary Inc. as at 30 June 2015 into $A using the current rate method. (7 marks) $U.S.

Rate

$A

20 000

2.00

40 000

Trade receivables

4 000

2.00

8 000

Equipment

8 000

2.00

16 000

Cash

Total assets

32 000

Accounts payable

5 000

Retained profits

12 000

Share capital

15 000

64 000 2.00

18 000 1.00

FCTR

15 000 21 000

Total liabilities and equity

(b)

10 000

32 000

64 000

Translate the statement of profit or loss of Hilary Inc. for 30 June 2015 into $A using the current rate method. (3 marks) $U.S.

Rate

$A

20 000

1.50

30 000

Employee expenses

6 000

1.50

9 000

Depreciation

2 000

1.50

3 000

Sales

Profit for the year

12 000

18 000

13

Question 6: The equity method of accounting (10 marks) Desdemona Ltd holds 20% of the ordinary shares of Othello Ltd. The profits and dividends of Othello Ltd are as follows: 30 June 2015 Profit after tax Dividend paid (a)

$ 200 000 60 000

30 June 2014 $ 100 000 20 000

Desdemona does NOT prepare consolidated financial statements. Prepare the entries to apply the equity method for 30 June 2015 (4 marks). Account name

Debit

Investment in Othello Share of profit of associate

40 000

Cash

12 000

40 000

12 000

Investment in Othello

(b)

Credit

Desdemona does prepare consolidated financial statements. Prepare the entries to apply the equity method for 30 June 2015. Account name

Debit

Investment in Othello Retained earnings

16 000

Investment in Othello Share of profit of associate

40 000

Dividend revenue Investment in Othello (20% x $30 000)

12 000

Credit

16 000

40 000

12 000

14

Question 7: Interest in joint operation (10 marks) On 1 July 2014, Viola Ltd and Sebastian Ltd enter into a 50:50 joint operation to explore for gold. Viola initially contributes cash of $40 000. Sebastian Ltd initially contributes land with a fair value of $40 000. The accounting records of the joint operation for 30 June 2015 show the following: Cash Land Exploration asset Accounts payable (a)

$ 10 000 40 000 36 000 6 000

What is a key difference between a joint operation and joint venture? (2 marks)

A joint venture is structured through a separate vehicle

(b)

Prepare the journal entries of Viola Ltd to account for its interest in the joint operation in the financial statements for 30 June 2015 (8 marks) Account name

Debit

Land in JO Cash in JO Cash

20 000 20 000

Exploration asset in JO Accounts payable in JO Cash in JO

18 000

Credit

40 000

3 000 15 000

15

Question 8: Various Topics (10 marks) Answers for this question must be in the generalized answer sheet. 1. In Australia, the body responsible for the enforcement of accounting standards is: A) B) C) D) E)

Australian Accounting Standards Board Australian Securities Investments Commission Australian Securities Exchange CPA Australia International Accounting Standards Board

2. Comprehensive income includes: A) B) C) D) E)

Translation gain or loss Gain on sale of land Revaluation increment for land Income tax attributable to revaluation of land All of the above

3. In accounting for intangible assets: A) B) C) D) E)

Internally generated goodwill is recognised Intangible assets with indefinite useful lives are amortised Intangible assets are subject to annual impairment Subsequent measurement at fair value requires an active market All of the above

4. If there is an impairment loss of $40 000 on a cash generating unit (CGU) and the CGU has land of $50 000 and plant of $30 000, then the impairment loss allocated to land is: A) B) C) D) E)

$50 000 $40 000 $30 000 $25 000 $15 000

5. An example of a non-adjusting event is: A) B) C) D) E)

Discovery of manufacturing defects Issue of a court judgment Changes in prices Insolvency All of the above

16 6. An investor controls an investee when it has: Exposure to or rights to variable returns X X

A) B) C) D) E)

Ability to affect returns X X X

Power over the investee X X X X

X

7. The financial statements would be adjusted for the following: A) B) C) D) E)

Error in disclosure of a contingent asset Error in classification of a non-current liability Change in the auditor Lower expected future sales All of the above

8. A complete set of financial statements includes:

A) B) C) D) E)

Statement of Financial Position

Statement of Profit or Loss and Other Comprehensive Income

Statement of Changes in Equity

Statement of Cash Flows

X X X X

X X X

X X

X

X

X X

X X X

9. Fair value for an asset means: A) The value that is fair according to an accounting standard B) The price that would be received to sell an asset in an orderly transaction between market participants at the measurement date C) The entry price to buy an asset D) Net realisable value E) Recoverable amount

10. Continuous disclosure refers to: A) The way corporations are managed and governed. B) Disclosures in the annual financial report C) Immediate disclosure of any information that a reasonable person would expect to have a material effect on share price D) Disclosures required by the ASX Corporate Governance Principles E) Disclosures that are continuously evolving from changing regulations