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2102AFE Financial Accounting

Solution to Additional Study Questions


WARNING: This document is NOT a Practice Exam. These questions are additional questions
only and are not representative of the final exam. They are to be used in conjunction with your
existing materials (lecture notes and examples, homework questions, and special workshop questions)

2102AFE Additional Study Questions Only (Solutions)


Topic 1 Accounting Regulation and the Conceptual Framework
Question 1
Whether or not we need a conceptual framework is a matter of opinion. Also, what is included within
a conceptual framework will also be a matter of opinion. For example, we might not all agree on the
stated objectives of general purpose financial reporting or on the qualitative characteristics that
financial information should possess.
Ideally we would have had a conceptual framework prior to the development of Accounting Standards
as this may have enabled the development of Accounting Standards that are consistent with one
another. Also, if there is agreement on certain fundamental and key issues then such issues would not
need to be debated each time a new accounting standard is being developed. It is a costly process to
develop a conceptual framework, and one which will require ongoing work.

Question 2
According to the AASB Framework, an item of information is relevant if it is likely to influence
users resource allocation decisions. An item of information is reliable if it faithfully represents,
without bias, a particular transaction.
There is normally considered to be a trade-off between relevance and reliability. For example,
historical cost information may be particularly reliable, but for many decisions it may not be
particularly relevant. Current fair value data may be particularly relevant for particular decisions (for
example, in relation to a decision about selling an asset), but what management thinks the item is
currently worth will not ultimately be known until disposal. That is, the reliability of the information
may not be clear. This may particularly be the case for the market valuations attributed to unique and
thinly traded assets.
Further, financial statement data is typically audited prior to distribution. This may take many weeks.
The data becomes more reliable as a result of the audit but, being less timely, it becomes less relevant
for current investment decisions.

2102AFE Additional Study Questions Only (Solutions)


Topic 2 Assets I
Question 3
DATE
01/07/2014

01/07/2014

30/06/2015

01/07/2015

01/07/2015

01/07/2015

01/07/2015

01/07/2015

30/06/2016

DETAILS
Vehicles
Cash
Acquisition of delivery truck

DR
50,000

CR
50,000

Insurance expense
Cash
Truck Insurance

1,200

Depreciation expense - Vehicles


Accumulated depreciation - Vehicles
(50,000 24,000)/5 years

5,200

Vehicles
Cash
Acquisition of flat-top truck

30,000

Vehicles
Cash
Amounts paid on flat top truck (2,300 + 620)

2,920

1,200

5,200

30,000

2,920

Servicing expense
Cash
Service of flat top truck

480

Vehicles
Cash
Installation of truck radios (300 + 300)

600

480

600

Insurance expense
Cash
Insurance on trucks (1,200 + 900)

2,100

Depreciation expense - Vehicles


Accumulated depreciation - Vehicles
(50,000 24,000)/5 years + 300 = 5,260
(32,920 + 300 15,000)/2 years = 9,110

14,370

2,100

14,370

2102AFE Additional Study Questions Only (Solutions)


Topic 3 Assets II
Question 4
Accounts
Debtors
Inventory
Plant & Equipment
Land & Buildings
Brand Names
Goodwill
Bank Overdraft
Creditors
Bank Loan
Cash
(to record acquisition of net assets of SSP Pty Ltd)

Dr
25,000
60,000
120,000
200,000
80,000
65,000

Cr

20,000
50,000
100,000
380,000

Topic 4 - Liabilities
Question 5
(a) At 31 December 2014
Is there a present obligation as a result of an obligating event?
On the basis of the evidence available when the financial statements were approved, there is no
obligation as a result of past events.
Conclusion
No provision is recognised (see paragraphs 15 and 16). The matter is disclosed as a contingent
liability unless the probability of any outflow is regarded as remote (paragraph 86 (b)).
(b) At 31 December 2015
Is there a present obligation as a result of an obligating event?
On the basis of the evidence available, there is a present obligation.
Is there a probable outflow?
Probable.
Can a reliable estimate be made?
Yes. Given that the company is being sued, it is probably possible for them to make an estimate,
based on a range of possibilities (para 25).
Conclusion
A provision is recognised for the best estimate of the amount to settle the obligation (paragraphs 1416).

2102AFE Additional Study Questions Only (Solutions)


Topic 5 Revaluation and Impairment
Question 6
DATE
30/06/2015

30/06/2015

30/06/2015

30/06/2015

DETAILS
Loss on revaluation (P/L)
Land
Revaluation of land from $1,600,000 to $1,500,000

DR
100,000

Accumulated depreciation Plant and Equipment


Plant and Equipment (P&E)
Writing the asset down to carrying amount

40,000

Plant and Equipment (P&E)


Gain on revaluation of P&E (OCI)
Revaluation of asset from $160,000 to $220,000

60,000

Gain on revaluation of P&E (OCI)


Asset revaluation surplus P&E
Accumulation of revaluation gain in equity

60,000

CR
100,000

40,000

60,000

60,000

Question 7
Step 1: Determine the Recoverable Amount
RA is the higher of:

Fair value less costs of disposal = $205,000 (higher)


Value in Use = $155,000

Therefore, RA = $205,000
Step 2: Compare RA and CA

RA = $205,000
CA = $185,000 ($250,000 cost - $65,000 accumulated depreciation)
RA ($205,000) > CA ($185,000) so there is NO impairment loss

Therefore, NO journal entries are required.

2102AFE Additional Study Questions Only (Solutions)


Topic 6 Leases
Question 8
Requirement 1
The lease would be classified by both lessee and lessor as a finance lease as substantially all of the
risks and rewards incidental with ownership have been transferred as a result of the lease
arrangement.
This is evidenced by the fact that:

the lease is non-cancellable (by definition),

the lease term, at 67% (4years/6years), could be argued to represent a major part of the
economic life of the machine, and

the present value of the minimum lease payments is substantially all of the fair value of the
machine at the inception of the lease:
PV of MLP = 40,000 + 40,000 x 2.5771 [T2 8% 3 yrs]
= 40,000 + 103,084
= 143,084/154,109
= 93%
Requirement 2(a)
Lease schedule

MLP
$
1 July 2016
1 July 2016
1 July 2017
1 July 2018
1 July 2019

40,000
40,000
40,000
40,000
160,000

True Ltd (Lessee)


Schedule of lease payments
Interest
Liability
expense
reduction
$
$
8,247
5,706
2,963
16,916

40,000
31,753
34,294
37,037
143,084

Liability
balance
$
143,084
103,084
71,331
37,037
-

Requirement 2(b)
Journal entries for the year ended 30 June 2017
True Ltd (Lessee)
Journal entries
DATE
1/07/2016

1/07/2016

DETAILS
Leased machine
Lease liability
Inception of lease
Lease liability
Executory costs expense
Cash
First lease payment

DR
143,084

CR
143,084

40,000
1,500
41,500

2102AFE Additional Study Questions Only (Solutions)


30/06/2017

30/06/2017

Interest expense
Interest payable
Interest accrued at balance date

8,247

Depreciation expense
Accumulated depreciation
Depreciation for the year (143,084/4)

35,771

8,247

35,771

Topic 7 Share Capital and Reserves


Question 9
DATE
1/07/2017
21/07/2017

21/07/2017

31/07/2017

31/07/2017

31/07/2017

31/07/2017

31/07/2017

DETAILS

DR

CR

No journal entry
Cash trust
Application ordinary
Monies received from applicants for ordinary shares
= (100,000 shares + 20,000 share oversubscription) x $2

240,000

Cash trust
Application preference
Monies received from applicants for preference shares
= (50,000 shares 15,000 share undersubscription) x $2

70,000

240,000

70,000

Application ordinary
200,000
Share capital ordinary
Issue of ordinary shares applied for only 100,000 ordinary shares x $2

200,000

Application preference
70,000
Share capital preference
Issue of preference shares applied for 35,000 preference shares x $2

70,000

Receivable from underwriter


30,000
Share capital preference
Amount due from underwriter 15,000 undersubscription x $2

30,000

Cash (200,000 + 70,000)


270,000
Cash trust
Transfer from cash trust on issue of shares to successful applicants

270,000

Share capital ordinary


Share capital - preference
Cash
Payment of share issue costs

2,500
2,500
5,000

2102AFE Additional Study Questions Only (Solutions)


31/07/2017

14/08/2017

1/05/2018

10/05/2018

15/05/2018

25/05/2018

25/05/2018

25/05/2018

Application - ordinary
40,000
Cash trust
Return of cash to unsuccessful applicants = 20,000 shares x $2
Share capital ordinary
Share capital preference
Cash
Receivable from underwriter
Receipt from Underwriter
Call ordinary
Share capital ordinary
Call of $1 on 100,000 shares

3,250
3,250
23,500
30,000

100,000
100,000

Cash
Call ordinary
Receipt of call money of $1 on 95,000 shares

95,000

Share capital ordinary ($3 x 5,000)


Call ($1 x 5,000 shares)
Forfeited shares ($2 x 5,000 shares)
Forfeiture of 5,000 shares called to $3 paid to $2

15,000

Cash (5,000 shares x $2.80)


Forfeited Shares
Share capital ordinary (5,000 x $3)
Reissue of shares at $3 per share on payment of $2.80)

14,000
1,000

Forfeited shares
Cash
Payment of share issue costs
Forfeited shares (10,000 1,000 550)
Cash
Payment of monies refundable to shareholders

40,000

95,000

5,000
10,000

15,000

550
550

8,450
8,450

2102AFE Additional Study Questions Only (Solutions)


Topic 8 Revenue and Financial Statement Presentation
Question 10
AASB 118: paragraph 14:
Revenue from the sale of goods is only to be recognised when all of the following conditions have
been satisfied:
a) the entity has transferred to the buyer the significant risks and rewards of ownership of
the goods
b) the entity retains neither continuing managerial involvement to the degree usually
associated with ownership nor effective control over the goods
c) the amount of revenue can be measured reliably
d) it is probable that the economic benefits associated with the transaction will flow to the
entity
e) the costs incurred or to be incurred in respect of the transaction can be measured reliably

The manufacturer should recognise revenue when JJs Transport resells the goods to a third party.
JJs Transport has an unlimited right of return if it is not able to sell those goods to a third party.
Accordingly, the manufacturer has not transferred to JJs Transport the significant risks and
rewards of ownership.
If there is no market for the goods, it is the manufacturer who suffers, not JJs Transport (who can
simply return the goods to the manufacturer).

2102AFE Additional Study Questions Only (Solutions)


Topics 9 and 10 Cash Flow Statements
Question 11

OPERATING ACTIVITIES
Receipts from Customers
Account Reconstruction Method

Bad debts/Acc. rec


Closing balance

Opening balance
Sales

Provision for Doubtful Debts


20,000 Opening balance
20,000 Bad debts expense
40,000

10,000
30,000
$40,000

Accounts Receivables
107,500 Cash received
550,000 Allow. D.Debts
Closing balance
657,500

437,500
20,000
200,000
657,500

OR Formula Method
Cash receipts from customers =
Sales revenue
Increase in accounts receivable
Bad debts written off
Cash Received (Inflow) *CFS*

550,000
(92,500)
(20,000)
437,500

Payments to Suppliers and Employees


Payments to Suppliers for Inventory Purchases
Inventories
Opening balance
Purchases (accounts payable)

182,500 Cost of sales


400,000 Closing balance
582,500

277,000
305,500
582,500

Accounts Payable
Discount Received
Cash paid
Closing balance

750 Opening balance


406,150 Purchases (inventories)
29,300
436,200

36,200
400,000
436,200

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2102AFE Additional Study Questions Only (Solutions)


OR
Payments to suppliers for purchases of inventory =
Cost of sales
+
Increase in inventory (305,500 182,500)
+
Decrease in accounts payable (29,300 36,200)
Discount received
Cash Paid

277,000
123,000
6,900
750
406,150

Cash Paid to Suppliers of Services


Cash paid to suppliers of services =
Salaries and wages expense
+
Electricity expense
Cash Paid

60,250
3,000
63,250

TOTAL payments to Suppliers and Employees


Payments to Suppliers for Purchases
Payments to Suppliers of Services
Total Payments (Outflow) *CFS*

406,150
63,250
469,400

Payments for Income Tax (required as a separate line item)


Current Income Tax (using Current Tax Payable account) =
Beginning balance Current tax payable
+
Income tax expense (current)
Income tax PAID (plug amount) (Outflow) *CFS*
Ending balance Current tax payable

6,000
52,500
43,500
15,000

INVESTING ACTIVITIES
Plant and Equipment

Plant sold
Closing balance

Accumulated Depreciation - Plant and Equipment (NCA)


10,000 Opening balance
55,500 Depreciation expense
65,500

27,000
38,500
65,500

Plant and Equipment (NCA)


Opening balance
207,000 Plant sold
55,000
300,000
Cash paid for purchases* *CFS*
148,000 Closing balance
355,000
355,000
*The purchases of plant are determined as the increase in plant in the absence of any disposals
of plant during the year, as per the additional information.

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2102AFE Additional Study Questions Only (Solutions)

FINANCING ACTIVITIES

General reserve
Dividend paid
Closing balance

Retained Profits
35,000 Opening balance
22,500 P & L Summary
78,500
136,000

49,000
87,000
136,000

Yellow Submarine Ltd


Statement of Cash Flows
For the year ended 30 June 2016
Cash flows from operating activities
Receipts from customers
Payments to suppliers and employees
Cash generated from operations
Income tax paid
Net cash used in operating activities

$
437,500
(469,400)
(31,900)
(43,500)
(75,400)

Cash flows from investing activities


Payment for plant and equipment
Proceeds from sale of plant and equipment
Net cash used in investing activities

(148,000)
47,500
(100,500)

Cash flows from financing activities


Additional shares issued
Dividend paid
Net cash from financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year

85,000
(22,500)
62,500
(113,400)
(58,800)
(172,200)

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