Question: Discuss briefly the three hypotheses of Positive Accounting Theory (PAT).
31 Jan 2023,4:21 PM
QUESTION 1 (10
marks)
Part I (5
marks)
(a) Discuss briefly
the three hypotheses of Positive
Accounting Theory (PAT).
(b)
According to the Legitimacy Theory, what are
the implications for an organisation to comply with the expectations held by
society?
ANSWER HERE
Part II (5 marks)
What is the ‘fair value hierarchy’?
Why do we need it, and what do each of the three levels of the hierarchy
represent?
ANSWER HERE
QUESTION 2 (10 marks)
Part I (2
marks)
Customer enters into a 15-year contract
with a utilities company (Supplier) for the right
to use three specified, physically distinct dark fibres within a
larger cable connecting Hong Kong to Tokyo. Customer makes the decisions
about the use of the fibres by connecting each end
of the fibres to its electronic equipment (i.e. Customer
‘lights’ the fibres and decides what data, and how much data, those fibres will
transport). If the fibres are damaged, Supplier is responsible for the repairs
and maintenance. Supplier owns extra fibres but can substitute those for
Customer’s fibres only for reasons of repairs,
maintenance or malfunction (and is obliged
to substitute the fibres in these cases).
Required:
For the arrangement above, state whether
a lease exists as per AASB16 ‘Leases’. Explain
your answer.
ANSWER HERE
Part II (8
marks)
On
1 July 2022, Star Ltd leased an equipment from Prince Ltd. The lease
agreement contained the
following provisions:
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Lease term
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4 years
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Quarterly
rental payment, in in arrears
commencing on 30 September
2022
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$3,200
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Executory
(service) costs included in each rental
payment of $3,200
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$200
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Residual
value at end of the useful life of 4 years
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$5,000
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Guaranteed
residual value
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$4,000
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Interest rate (per
year) implicit in lease
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12%
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The lease is cancellable only
with the permission of the lessor,
Prince.
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Assume that the equipment will be transferred to Star Ltd at the end of the lease term. Star Ltd
prepares financial statement at the end of each financial quarter.
Required:
a)
Calculate the lease
liability and lease
asset (round to the nearest dollar).
b) Prepare the lease payments
schedule for Star Ltd from 1 July 2022 to 30
June 2023 (round to the nearest dollar).
c) Prepare the journal entries
to record the leasing transactions and depreciation in the books of Star Ltd for the quarter ended 30
September 2022 (including the entries on 1 July 2022).
ANSWER HERE
QUESTION 3 (10 marks)
The draft balance
sheet of Black Ltd as at 30 June 2022 and 2021 is as follows:
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2022
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2021
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Assets
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Cash
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80,000
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85,000
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Receivables
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500,000
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480,000
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Allowance
for doubtful debts
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(55,000)
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(40,000)
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Plant
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500,000
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500,000
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Accumulated
depreciation
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(260,000)
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(210,000)
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Buildings
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300,000
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300,000
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Accumulated
depreciation
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(148,000)
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(140,000)
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Goodwill (net)
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70,000
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70,000
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Deferred
tax asset
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?
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40,500
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Liabilities
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Accounts payable
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290,000
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260,000
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Long service leave
payable
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60,000
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45,000
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Annual leave payable
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40,000
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30,000
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Rent received in advance
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25,000
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20,000
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Deferred
tax liability
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?
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38,100
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Additional information
· Depreciation of buildings and goodwill are not allowed
as tax deductions.
·
Accumulated
depreciation of plant for tax purposes was $390,000 at 30 June
2022.
·
Annual leave and long service
leave expense are only allowed
for tax deduction when it is paid.
·
Rent is tax assessable only when it is
received.
·
Doubtful debts is not allowed
for tax deduction until it becomes bad debts.
·
Assume a tax rate of 30% for the year ended 30 June 2022.
Required:
a)
Prepare the deferred tax worksheet
to calculate the deferred tax asset
and liability balances as at 30 June2022.
b)
Prepare the journal entry
for the year ended 30 June 2022 to record
the adjustments to the
deferred tax asset and liability balances [Narrations are not required].
ANSWER HERE
a)
b)
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Date
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Account Name
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Debit
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Credit
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QUESTION 4 (10 marks)
On 1 July 2020,
Stanley Ltd issues 3000 convertible notes. The notes have a 2-year term and are
issued at a face value of $1000 per note. The notes pay interest at 5% per
annum in arrears. The holder of each note is entitled
to convert the note into 100 ordinary
shares of Stanley Ltd at
the end of the 2-year term.
When Stanley Ltd issues the convertible notes,
the prevailing market
interest rate for similar debt without conversion options is 8% per
annum. Refer to the appendix for the tables
of Present Value Factor for a single future amount and Present Value of
an ordinary annuity of $1.
Required
a) Determine the amount for the liability
and equity components of the convertible notes.
b) Prepare a schedule to determine the amortised cost of the convertible note up until their maturity.
c) Prepare the journal entries
for the financial year ended 30 June 2021 in relation
to the issue of the convertible notes on 1 July 2020, and the interest payment
and subsequent measurement of convertible notes on 30 June 2021.
d) Prepare the journal entries
for the redemption of convertible notes assuming there is no conversion on maturity (30 June 2022).
ANSWER HERE
QUESTION 5 (10
marks)
Part I (5 marks)
On 1 March 2023,
Coolum Ltd enters into a binding agreement with a Hong Kong company, which
requires the Hong Kong company to construct an item of machinery for Coolum
Ltd. The cost of the machinery is HK$700,000. The construction of the machinery
will be completed on 1 June 2023 and shipped FOB Hong Kong on that date. The debt
is unpaid as at 30 June 2023, which is also Coolum Ltd’s reporting date.
The exchange rates at the relevant dates are:
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1 March 2023
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A$1.00 =
HK$5.20
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1 June 2023
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A$1.00 =
HK$5.10
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30 June 2023
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A$1.00 =
HK$5.00
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Required
Provide the required journal
entries in the books of Coolum Ltd. [Narrations are not required].
Part II (5 marks)
The
CEO of Great Ltd has asked
your advice on whether the following investments should be included in the consolidated financial statements of Great
Ltd.
Investment 1
Great Ltd plans to acquire 40 % of the
ordinary shares that carry voting rights of Beans Ltd, a coffee company in US. Three other investors (Mr and Mrs James and their son) hold 20 % each of the voting
rights of Beans Ltd. There are no other arrangements that affect
decision-making.
Investment
2
Great Ltd holds 20% of the voting
rights of Hudson Ltd while another entity, Moon Bucks Ltd holds 80% of the voting
rights. Great Ltd also holds debt instruments that are convertible into voting shares of Hudson Ltd at a fixed
price that is ‘in the money’. If the debt was converted, Great Ltd would hold 63% of the shares of
Hudson Ltd.
Required:
The
CEO of Great Ltd has asked
your advice on whether investment in Beans Ltd and
Hudson Ltd are its subsidiaries and if so do they need to be included
in the consolidated financial statements of Great Ltd.
ANSWER HERE
Question 6 (10 marks)
On 1 July 2021 Melbourne Ltd acquired
all the share capital of Canberra Ltd for $2,000,000. At the date of
acquisition Canberra Ltd.’s shareholders’ equity consisted of:
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$
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Share capital
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1,200,000
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General reserve
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225,000
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Retained earnings
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242,000
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For
the year ended 30 June 2022, the following additional information is available:
· At 1 July 2021,
all the identifiable assets and liabilities of Canberra Ltd were recorded at
fair value except for land which
had a carrying amount of $1,400,000 but had a fair value
at that date of$1,500,000.
· In applying the
impairment test for the goodwill in the current year, the directors have
determined that a write down of $33,000 is required.
· On 1 January 2022, Canberra Ltd sold inventory
to Melbourne Ltd which had cost $190,000 for
a sales price of $270,000. 25%
of this inventory was still
on hand at 30 June 2022.
· On 30 June 2022,
Melbourne Ltd sold an equipment to Canberra Ltd for $34,000 when it’s carrying value in Melbourne
Ltd was $28,000 (cost $40,000,
accumulated depreciation
$12,000). The equipment is assessed
as having a remaining useful life of five years from the date of sale.
· The company
tax rate is 30%.
Required:
Provide the consolidation journal
entries necessary to prepare the consolidated financial
statements for the year ending 30 June 2022 for the group comprising Canberra Ltd and Melbourne Ltd. Show all workings. Narrations are not
required.
ANSWER HERE
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Date
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Account Name
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Debit
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Credit
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QUESTION 1 (10
marks)
Part I
Explain the concept of corporate socially
responsible reporting.
ANSWER HERE
Part II
Asset PYJ is sold in three different active markets.
In Market I, the price
that would be received
is $27; transaction costs are $2 and the transport costs are $3.
In Market II, the price that would be received is $26; transaction costs are $2 and the transport
costs are $1.
In Market
III, the price that would be received is $29; transaction costs are $4 and the transport
costs are $1.
Required
a)
What is the most advantageous market for Asset PYJ and what is its fair
value?
b)
If the principal market
for Asset PYJ were Market I, then what would be the fair value of
Asset PYJ?
(Marks:
5 +
5 = 10)
ANSWER HERE
(a)
(b)
QUESTION 2 (10 marks)
On 1 January 2022, Beta Ltd entered into a non-cancellable contract
with Gamma Ltd to
Lease equipment for 4 years. The contract requires Beta to make 4
annual payments of $5,000, with the first payment due on 31 December 2022. Each
payment includes $1,000 for service costs.
There is a bargain purchase option that Beta Ltd will be able to
exercise at the end of the fourth year for $2,500. The equipment will be
transferred to the lessee upon making the payment.
The interest rate implicit in the lease
contract is 10% per annum. The fair value of the equipment at the inception of the lease
was $14,387 and its estimated economic life is 5 years. The equipment will be
scrapped at the end of its useful life. Refer to the appendix for the tables of
Present Value Factor for a single future amount and Present Value of an
ordinary annuity of $1.
Required:
a) Calculate the lease liability and lease asset for Beta Ltd (the Lessee) (round to the nearest dollar). (2 marks)
b) Prepare a lease schedule
for Beta Ltd, showing the division of the lease rental into interest and principal components for the life of
the lease (round to the nearest dollar).
(4 marks)
c) Prepare the journal entries
to account for the lease transactions in the books
of Beta Ltd (the lessee) for
the financial year ending 31 December 2022 [narrations are not required]. (4
marks)
ANSWER HERE
QUESTION 3 (10 marks)
The profit
before tax, as reported in the statement of comprehensive income of Black Ltd
for the year ended 30 June 2022 amounted to $600,000. The statement includes
the following revenue
and expense items:
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Government grant received (exempt from tax)
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$ 10,000
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Rent revenue
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30,000
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Bad debt expense
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60,000
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Depreciation expense – plant
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50,000
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Long service leave
expense
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45,000
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Annual leave expense
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30,000
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Office supplies used
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15,000
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Entertainment costs
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18,000
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Depreciation of buildings
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8,000
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The draft balance
sheet as at 30 June 2022 and 2021 showed
the following assets
and liabilities:
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2022
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2021
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Assets
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Cash
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80,000
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85,000
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Inventory
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170,000
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155,000
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Receivables
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500,000
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480,000
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Allowance for doubtful debts
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(55,000)
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(40,000)
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Office supplies
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25,000
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22,000
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Plant
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500,000
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500,000
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Accumulated depreciation
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(260,000)
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(210,000)
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Buildings
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300,000
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300,000
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Accumulated depreciation
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(148,000)
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(140,000)
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Goodwill (net)
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70,000
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70,000
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Deferred tax asset
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?
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40,500
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Liabilities
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Accounts payable
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290,000
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260,000
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Long service leave
payable
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60,000
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45,000
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Annual leave payable
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40,000
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30,000
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Rent received in advance
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25,000
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20,000
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Deferred tax liability
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?
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38,100
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Additional information
1.
Depreciation of buildings and entertainment costs
are not allowed as tax deductions. The government grant revenue is not
assessable for tax purposes.
2.
Accumulated depreciation of plant for tax purposes
was $315,000 at 30 June 2021, and depreciation for tax purposes for the year
ended 30 June 2022 amounted to $75,000.
3.
Office supplies, annual leave and long service leave
are claimed as a tax deduction when paid in cash.
4.
Doubtful debts are claimed as a tax deduction when written off.
5.
Rent revenue is assessable when received in cash.
6.
Assume a tax rate of 30% for the year ended 30 June 2022.
Required:
a)
Prepare a worksheet to determine the taxable income for the year
ended 30 June 2022.
b)
Prepare the journal
entry for the year ended 30 June 2022 to record the current
year tax payable. Narrations are not required.
(Marks:
8 +
2 =10)
ANSWER HERE
Question 4 (10 marks)
On 1 January 2022 Harvey Ltd issues $10 million of
convertible notes at their face value. They have a maturity date of 31 December
2023. Harvey Ltd pays an interest rate of 5 percent per annum at the end of
each financial year on 31 December.
The notes may be
converted to ordinary shares in Harvey Ltd at any time in the next two years. Organisations of a similar risk
profile have recently issued debt with similar terms, without the option for
conversion, at a rate of 8 percent per annum. Refer to
the appendix for the tables of Present Value Factor for a single
future amount and Present Value of an ordinary annuity
of $1.
Required:
a)
Determine the amount
for the liability and equity components of the convertible notes (round to the nearest dollar). (2 marks)
b)
Prepare a schedule
to determine the amortised cost of the convertible note up until
their maturity (round to the nearest
dollar). (3 marks)
c)
Prepare the journal entries for the issue of the
convertible notes on 1 January 2022, and the interest payment and subsequent
measurement of convertible notes on 31 December 2022. (2 marks)
d)
Prepare the journal
entries for the conversion at the end of 2-year
term assuming all holders convert the notes to ordinary
shares. (3 marks)
QUESTION 5
An Australian
company, Michaela Ltd, purchases inventory for US$1,000,000 from a US company Washington Inc on 1 March 2022. The amount
is payable on 1 August 2022. A forward-
exchange contract for delivery of US$1,000,000 is taken out with Citicorp bank
on 1 May 2022. It requires delivery
of foreign currency
to Michaela Ltd on 1 August 2022.
Michaela Ltd has a 30 June end of financial year.
Additional information.
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Date
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Spot rate
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Forward rate
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1 March 2022
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$US0.80
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1 May 2022
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$US0.85
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$US0.83
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30 June 2022
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$US0.82
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$US0.81
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1 August 2022
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$US0.80
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$US0.80
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Assuming that the
hedging arrangement satisfies the requirements for hedge accounting as
stipulated in AASB 9 ‘Financial Instruments', and the management of Michaela
Ltd elects to adopt fair-value hedge accounting.
Required:
Provide the journal entries
in the books of Michaela Ltd to account
for the hedge (rounded to the nearest dollar). [Narrations are not required]
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Date
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Account Name
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Debit
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Credit
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QUESTION 6 (10 marks)
Tera Ltd acquired
100% of shares in Bit
Ltd for $300,000 on 1 July 2022. At the date of acquisition,
the equity balances of the subsidiary were:
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Share Capital
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$200,000
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Retained
Earnings
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$150,000
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General Reserve
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$110,000
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All the identifiable assets and liabilities of the subsidiary were recorded at fair value
except the following:
Carrying Amount Fair Value
Equipment $40,000 $64,000
The cost of the equipment
was $100,000. Assume
that Bit Ltd has not recorded the revaluation in its
own books. The remaining useful life of the equipment on 1 July 2022 was 6
years.
Additional information:
·
Tera Ltd has declared a $30,300 final dividend and
Bit Ltd has declared a $20,000 final dividend at the end of 30 June 2023.
·
During the quarter ended 31 March 2023, Bit Ltd sold
inventory to Tera Ltd for a profit before tax of $80,000. The inventory had
previously cost Bit Ltd $50,000. As at 30 June 2023, 35% of this inventory
remained in the books of Bit Ltd.
·
During the year ended 30 June 2023, Tera Ltd sold
inventory to Bit Ltd for $200,000. This inventory had previously cost Tera
$60,000. 40% of this inventory had been sold to an external party.
·
At 1 April 2023, Bit Ltd sold a machinery to Tera Ltd for $90,000.
The cost of the machinery
was $260,000 with an
accumulated depreciation of $60,000. The estimated useful life was 5 years with
zero residual value.
·
During the month of June 2023, Bit
Ltd provided $20,000 worth of consulting service to Tera Ltd. As at 30 June
2023. $5,000 remained unpaid.
·
Assume that tax rate is 30%.
Required:
a) Prepare
the consolidated journal entries
for the year ending 30 June 2023 [narrations are not required]. (8
marks)
b)
Explain why some consolidated journal
entries in the previous period’s
consolidation worksheet are
also made in the current period’s consolidated worksheet? (2 marks)
b)
Expert answer
QUESTION 1
Part I
(a)
1. The debt hypothesis—which typically proposes that organisations that are close to breaching accounting-based debt covenants
will select accounting methods that lead to an increase in profits
and assets.
2. The bonus-plan hypothesis—which typically proposes that managers
on accounting-based bonus
schemes will select accounting methods
that lead to an increase in profits.
3. The political-cost hypothesis—which typically proposes
that firms subject to political
scrutiny will adopt accounting methods
that reduce reported income.
(b)
Legitimacy Theory is based on an assumption that the continued operations
and viability of an
entity are contingent upon continued compliance with community
expectations, perhaps
as reflected within
its social
contract—a contract negotiated between the entity
and the community in which it operates. The terms of this contract (mostly implied) will change
across time as community expectations change.
The entity can also undertake various
activities/strategies in an endeavour to alter the terms of the contract. Shocker and Sethi (1974)
provide a good description of the social
contract. As they explain (p.
67):
Any social institution—and
business is no exception—operates
in society via a social contract, expressed or implied,
whereby its survival
and growth are based
on:
(1) the delivery of some socially desirable ends
to society in general,
and
(2) the distribution of economic, social, or political benefits
to groups from which it
derives its power.
In a dynamic society, neither the sources of institutional power nor the needs for its services are permanent.
Therefore, an institution
must constantly meet
the twin tests of
legitimacy and relevance
by demonstrating that
society requires its services and that
the groups benefiting
from its rewards
have society’s approval.
Failure to comply with the social
contract is deemed to be costly to the organisation and will lead to various sanctions being imposed upon the entity.
These sanctions may be in the form of
restrictions on the entity’s operations,
limited provision of resources such as financial
capital and labour, and reduced demand for the entity’s
products. Compliance with the social contract (and therefore with the expectations of the community relating to how the entity
should operate) is considered to be consistent
with the status of organisational legitimacy.
Organisations that operate successfully are assumed to be those that have been able to interpret and react to the termsof the social contract, and changes therein. If anorganisation perceives that its legitimacy is in question it can adopt numerous
strategies. Lindblom (1994)
identifies four courses of action an organisation can take to obtain, or maintain,
legitimacy. The organisation can
seek to:
1. educate and inform its ‘relevant publics’ about (actual) changes in the organisation’s
performance and activities
2. change the perceptions of the relevant publics—but not change their actual
behaviour
3. manipulate perception by deflecting attention from the issue of concern to
other related issues through an
appeal to, for example, emotive symbols
4. change external expectations of its performance.
The
public disclosureof information is one strategy that an organisation can undertake to establish or maintain its state of legitimacy. Disclosure of information
concerning the organisation’s effect on, or relationship with, society can be employed in each of Lindblom’s four strategies. Consistent with this view, Hurst (1970) suggests that one of the functions of accounting, and subsequently
accounting reports, is to
legitimate the existence
of the corporation.
QUESTION 1
Part I
(a)
1. The debt hypothesis—which typically proposes that organisations that are close to breaching accounting-based debt covenants
will select accounting methods that lead to an increase in profits
and assets.
2. The bonus-plan hypothesis—which typically proposes that managers
on accounting-based bonus
schemes will select accounting methods
that lead to an increase in profits.
3. The political-cost hypothesis—which typically proposes
that firms subject to political
scrutiny will adopt accounting methods
that reduce reported income.
(b)
Legitimacy Theory is based on an assumption that the continued operations
and viability of an
entity are contingent upon continued compliance with community
expectations, perhaps
as reflected within
its social
contract—a contract negotiated between the entity
and the community in which it operates. The terms of this contract (mostly implied) will change
across time as community expectations change.
The entity can also undertake various
activities/strategies in an endeavour to alter the terms of the contract. Shocker and Sethi (1974)
provide a good description of the social
contract. As they explain (p.
67):
Any social institution—and
business is no exception—operates
in society via a social contract, expressed or implied,
whereby its survival
and growth are based
on:
(1) the delivery of some socially desirable ends
to society in general,
and
(2) the distribution of economic, social, or political benefits
to groups from which it
derives its power.
In a dynamic society, neither the sources of institutional power nor the needs for its services are permanent.
Therefore, an institution
must constantly meet
the twin tests of
legitimacy and relevance
by demonstrating that
society requires its services and that
the groups benefiting
from its rewards
have society’s approval.
Failure to comply with the social
contract is deemed to be costly to the organisation and will lead to various sanctions being imposed upon the entity.
These sanctions may be in the form of
restrictions on the entity’s operations,
limited provision of resources such as financial
capital and labour, and reduced demand for the entity’s
products. Compliance with the social contract (and therefore with the expectations of the community relating to how the entity
should operate) is considered to be consistent
with the status of organisational legitimacy.
Organisations that operate successfully are assumed to be those that have been able to interpret and react to the termsof the social contract, and changes therein. If anorganisation perceives that its legitimacy is in question it can adopt numerous
strategies. Lindblom (1994)
identifies four courses of action an organisation can take to obtain, or maintain,
legitimacy. The organisation can
seek to:
1
1. educate and inform its ‘relevant publics’ about (actual) changes in the organisation’s
performance and activities
2. change the perceptions of the relevant publics—but not change their actual
behaviour
3. manipulate perception by deflecting attention from the issue of concern to
other related issues through an
appeal to, for example, emotive symbols
4. change external expectations of its performance.
The
public disclosureof information is one strategy that an organisation can undertake to establish or maintain its state of legitimacy. Disclosure of information
concerning the organisation’s effect on, or relationship with, society can be employed in each of Lindblom’s four strategies. Consistent with this view, Hurst (1970) suggests that one of the functions of accounting, and subsequently
accounting reports, is to
legitimate the existence
of the corporation.
Part II
When determining fair value, there are different ways to do it. Some are preferable to others as
the valuations derived from using some methods of valuation (for example, based on ‘Level 1
inputs’) are more objective/reliable than others (for example,
those based on ‘Level 3 inputs’). By establishing a ‘fair value hierarchy’,
the IASB has provided a way for users of financial statements tounderstand how fair value has been determined by a reporting
entity, and how much confidence can be attributed to the fair value measurements.
As paragraph 72 of AASB 13
states:
To increase consistency and comparability in fair value measurements and related disclosures,this Standard establishes a fair value hierarchy that categorises into three
levels the inputs to
valuation techniques used to measure
fair value. The fair value
hierarchy gives the highest
priority to
quoted prices (unadjusted) in active markets
for identical assets or
liabilities (Level
1 inputs) and the lowest priority
to unobservable inputs
(Level
3 inputs).
Levels 1 and 2 in the hierarchy
can be referred to as mark-to-market situations, with the highest level, Level 1 inputs, being quoted prices
(unadjusted) in active
markets for identical
assets or liabilities that the entity can
access at the measurement date.
Level 2 are directly observable inputs other than Level 1 market prices (Level 2 inputs could
include market prices for similar assets
or liabilities, or market prices for identical assets but
that are observed in less active markets). As paragraph 81 states:
Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or
indirectly.
Level 3 inputs are mark-to-model situations
where observable inputs are not available and risk-adjusted valuation models need to be used instead.
Level 3 inputs are unobservable
inputs for the asset or liability. Paragraph 87 states:
Unobservable inputs
shall be used to
measure fair value to the extent
that relevant observable inputs are not available, thereby allowing for
situations in which
there is little, if any, market
activity for the asset or liability at
the measurement date. However, the
fair value measurement
2
objective remains
the same, i.e. an exit
price at the measurement date from the perspective of a market participant that holds the asset or owes the liability.
Therefore, unobservable inputs shall reflect the assumptions that
market participants would
use when pricing
the asset or liability, including assumptions about risk.
(NOTE: the suggested answers
are guidance only.)
3
QUESTION 2
Part
I
Is there an identifiable asset?
There are three identified fibres. The fibres are explicitly specified in the contract and are physically distinct
from other fibres within the cable. Supplier cannot substitute the fibres
other than for reasons of repairs,
maintenance or malfunction.
Does the customer control the use of the identified asset throughout the period of use? Customer has the right to control the use of the fibres throughout the 15-year
period of use because:
(a) Customerhasthe rightto obtain substantially allof the economicbenefitsfromtheuse of
the fibres over the 15-year period. Customer has exclusive use of the fibres throughout the period
of use.
(b) Customer has the right to direct the use of the fibres. Customer makes the relevant
decisions about how and for what purpose the fibres are used by deciding (i) when and
whether to light the fibres and (ii) when and how much output the fibres will produce (i.e. what
data, and how much data, those fibres will transport). Customer
has the right to change these decisions during the 15-year
period
of use.
Although Supplier’s decisions about repairing and maintaining the fibres are essential to their efficient use,thosedecisionsdonotgiveSupplierthe righttodirecthowandforwhat purpose the fibres are used. Consequently, Supplier does not control the use of the fibres during the
period of use.
Conclusion: The contract contains a lease of dark fibres. Customer
has the right to use the
three dark fibres for 15 years.
4
Part II
a)
Lease liability = ($3,000 x 12.5611*) + ($4,000 x0.6232*) = $40,176
*Factors:
k- 3% (12%/4 quarters), n(periods) – 16
(4 quarters × 4 years)
Lease asset = $40,176
b)
|
Date
|
Lease Payment
(1)
|
Interest Expense
(2)
|
Principal Reduction
(3)
|
LeaseLiability
(4)
$40,176
|
|
1/7/22
|
|
|
|
|
30/9/22
|
$3,000
|
$1,205 (w1)
|
$1,795(w2)
|
$38,381(w3)
|
|
31/12/22
|
$3,000
|
$1,151
|
$1,849
|
$36,533
|
|
31/3/23
|
$3,000
|
$1,096
|
$1,904
|
$34,629
|
|
30/6/23
|
$3,000
|
$1,039
|
$1,961
|
$32,668
|
Workings:
W1
$40,176 × 3% = $1,205
W2 (column 1 – column 2 = column 3) $3,000 - $1,205 = $1,795
W3
$40,176 - $1,795 = $38,381
c)
|
Date
|
Account Name
|
Debit
|
Credit
|
|
1/7/22
|
Lease Asset
|
$40,176
|
|
|
|
Lease Liability
|
|
$40,176
|
|
|
|
|
|
|
30/9/22
|
Lease Liability
|
$1,795
|
|
|
|
Interest Expense
|
$1,205
|
|
|
|
Service/Executory Expense
|
$200
|
|
|
|
Cash
|
|
$3,200
|
|
|
|
|
|
|
30/9/22
|
Depreciation Expense
|
$2,198
|
|
|
|
Accumulated Depreciation
|
|
$2,198
|
|
|
($40,176-$5,000)/4years/4
quarters
|
|
|
5
QUESTION 3
a)
Black Ltd Calculation of deferred tax as at 30 June 2022
|
|
Carrying Amount
|
Tax base
|
Taxable temp. diff.
|
Deductible temp. diff.
|
|
Assets:
|
$
|
$
|
$
|
$
|
|
Cash
|
80,000
|
80,000
|
|
|
|
Receivables
|
445,000
|
500,000
|
|
55,000
|
|
Plant
|
240,000
|
110,000
|
130,000
|
|
|
Buildings
|
152,000
|
152,000
|
|
|
|
Goodwill
|
70,000
|
70,000
|
|
|
|
Liabilities:
|
|
|
|
|
|
Accounts payable
|
290,000
|
290,000
|
|
|
|
LSL payable
|
60,000
|
0
|
|
60,000
|
|
Annual leave payable
|
40,000
|
0
|
|
40,000
|
|
Rent in advance
|
25,000
|
0
|
|
25,000
|
|
|
|
|
|
|
|
Net temp. differences
|
|
|
130,000
|
180,000
|
|
Deferred tax liability
|
|
|
39,000
|
|
|
Deferred tax
asset
|
|
|
|
54,000
|
|
Beginning balances
|
|
|
(38,100)
|
(40,500)
|
|
Adjustment
|
|
|
900 CR
|
13,500 DR
|
b)
|
Date
|
Account Name
|
Debit
|
Credit
|
|
|
Deferred tax assets
|
13,500
|
|
|
|
Deferred tax liability
|
|
900
|
|
|
Income tax expense
|
|
12,600
|
6
QUESTION 4
a)
Present value of principal:
$3,000,000 * 0.8573 (from
PV of $1 table [i=8%, t=2]) 2,571,900 Present value of interest stream:
$3,000,000 * 5% coupon * 1.7833 (from PV of annuity table [i=8%, t=2])
267,495
Total liability component
2,839,395
Equity component
Proceedsfrom the note issue (face value)
160,605
3,000,000
b)
|
Year
|
Amortisedcost at beginning
|
Interest expense
|
Cashflowsfor
coupon
payment
|
at the end
|
|
30 June 2021
|
2,839,395
|
227,152
|
150,000
|
2,916,547
|
|
30 June 2022
|
2,916,547
|
233,453*
|
150,000
|
3,000,000*
|
* Students
are not penalised for rounding
error
c)
|
Date
|
Account Name
|
Debit
|
Credit
|
|
1 July 2020
|
Cash
|
3,000,000
|
|
|
|
Convertible note
liability
|
|
2,839,395
|
|
|
Option to convert
notes (equity)
|
|
160,605
|
|
|
|
|
|
|
30 June 2021
|
Interest expense
|
227,152
|
|
|
|
Cash
|
|
150,000
|
|
|
Convertible note
liability
|
|
77,152
|
d)
|
Date
|
Account Name
|
Debit
|
Credit
|
|
30 June 2022
|
Dr Convertible note liability
|
3,000,000
|
|
|
|
Cr Cash
|
|
3,000,000
|
|
|
|
|
|
|
30 June 2022
|
Dr Option to convert notes (equity)
|
160,605
|
|
|
|
Cr Retained earnings
|
|
160,605
|
7
QUESTION 5 Part I
|
Date
|
Account Name
|
Debit
|
Credit
|
|
1 March 2023
|
Machinery
|
134,615
|
|
|
|
Accounts payable
|
|
134,615
|
|
|
(HK$700,000 ÷ 5.20 = AU$134
615)
|
|
|
|
1 June 2023
|
Machinery
|
2,640
|
|
|
|
Accounts payable
|
|
2,640
|
|
|
(700,000÷5.20)- (700,000÷5.10)
|
|
|
|
30 June 2023
|
Foreign exchange loss
|
2,745
|
|
|
|
Accounts payable
|
|
2,745
|
|
|
(700,000÷5.10)- (700,000÷5.00)
|
|
|
Part
II
In
the first investment, Great Ltd
holds 40% of the voting rights
of Beans Ltd. Three other
investors hold 20% of the
voting rights of the investee.
There are no other
arrangements that affect decision making. In this case, consideration of the size of Great's
voting interest and its relative size to other shareholdingsis sufficient to conclude that Great Ltd doesnothave power. Only threeinvestorswouldneedto cooperatetobe able to prevent
Great Ltd from controlling the investee.
In
the second investment, as the debt instruments are in the money, it can be argued
that Great would most probably exercise the conversion. Hence, it may be considered
that Great Ltd has power over Hudson Ltd given Great Ltd’s ability to convert the debt instrument into shares
that would give it the ability
to direct the relevant activity.
8
Question
6
|
Date
|
Account Name
|
Debit
|
Credit
|
|
30/6/22
|
Land
|
100,000
|
|
|
|
Asset revaluation surplus
|
|
70,000
|
|
|
Deferred Tax Liability
|
|
30,000
|
|
|
|
|
|
|
30/6/22
|
Share capital
|
1,200,000
|
|
|
|
General Reserve
|
225,000
|
|
|
|
Retained earnings
|
242,000
|
|
|
|
Asset revaluation surplus
|
70,000
|
|
|
|
Goodwill
|
263,000
|
|
|
|
Investment in Canberra Ltd
|
|
2,000,000
|
|
|
|
|
|
|
30/6/22
|
ImpairmentExpense – Goodwill
|
33,000
|
|
|
|
Accumulated Impairment – Goodwill
|
|
33,000
|
|
|
|
|
|
|
30/6/22
|
Sales
|
270,000
|
|
|
|
Cost of Goods Sold
|
|
270,000
|
|
|
|
|
|
|
30/6/22
|
Cost of Goods Sold
|
20,000
|
|
|
|
Inventory
|
|
20,000
|
|
|
|
|
|
|
|
Deferred Tax
Asset
|
6,000
|
|
|
|
Income Tax Expense
|
|
6,000
|
|
|
|
|
|
|
30/6/22
|
Plant
|
12,000
|
|
|
|
Accumulated Depreciation
|
|
12,000
|
|
|
|
|
|
|
30/6/22
|
Gain on sale
|
6,000
|
|
|
|
Plant
|
|
6,000
|
|
|
|
|
|
|
30/6/22
|
Deferred Tax
Asset
|
1,800
|
|
|
|
Income Tax Expense
|
|
1,800
|
|
|
|
|
|
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