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ACCT19061 Advanced Financial Accounting

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Academic Institution: Central Queensland University 

 Academic Group: Higher Education Division Academic Career: Undergraduate Unit:	Advanced Financial Accounting Subject Area:	ACCT Catalog Number:	19061 

Instructions Sheet

  1. Write all answers in the Examination Answer Booklet provided.
  2. This examination comprises two parts, Part A and B.
  3. In Part A, students must answer three of the four questions. These are of equal value – ten marks each. If more than three questions are answered in Part A, only the first three will be marked.
  4. In Part B, students must answer one of the two questions. These are of equal value – twenty marks each. If more than one question is answered in Part B, only the first one will be marked.
  5. Write your answers clearly and use numbered headings or subheadings to show which part of your answer refers to which question. Example: Question 2 (a).
  6. Narrations/explanations for journal entries are not required.

PART A 30 MARKS

ELECTIVE QUESTIONS

Answer three of the following four questions. Each question is worth 10 marks (3 x 10 = 30 marks)

Question 1 10 Marks

Black Ltd recorded an accounting profit before income tax of $760,000 for the year ended 30 June 2016 that included the following:

Depreciation of machinery

$160,000

Prepaid rent expense

80,000

Annual leave expense

50,000

Development costs expense

40,000

Interest revenue

30,000

Impairment of goodwill

26,000

Entertainment costs

24,000

Doubtful debts expense

20,000

Depreciation of buildings

10,000

Additional information:

  • The impairment of goodwill, entertainment costs and depreciation of buildings are not allowed as deductions for income tax.
  • Tax depreciation for the machinery for the year is $200,000.
  • Total bad debts written off during the year amounted to $16,000.
  • Cash payments during the year were $45,000 for prepaid rent and $36,000 for annual leave. Interest received in cash during the year was $12,000.
  • The amount paid in cash for development costs during the year was $100,000. Black Ltd recognises development costs as an asset that is expensed over time. However, cash payments are immediately deductible for tax purposes based on 125% of the expenditure incurred.
  • The corporate tax rate is 30%.

Required

Calculate the current tax of Black Ltd for the year ended 30 June 2016 and prepare the required tax journal entry. 

Question 2

On 1 February 2016, Beige Ltd acquired 500,000 call options from Bland Ltd at a cost of $0.50 per option. Each option gives Beige Ltd the right to purchase one ordinary share in Grey Ltd. The details of the options are:

Settlement terms

Net cash settlement

Exercise date (only at maturity)

31 July 2016

Exercise price per share

$1.50

Share price at maturity

$1.70

Fair value of each option on 1 February 2016

$0.50

Fair value of each option on 30 June 2016 (reporting date)

$0.30

Fair value of each option on 31 July 2016

$0.20

Required

  1. Explain whether the call options purchased by Beige Ltd satisfy the definition of derivative financial instruments. Justify your answer. (2 marks)
  2. Explain what financial instrument classification is appropriate for Beige Ltd to apply in relation to the subsequent measurement of the call options. Justify your answer. (3 marks) 
  3. Prepare the journal entries for Beige Ltd to account for the call options. (5 marks)

Question 3

Orange Ltd is an Australian company that uses the Australian dollar (AUD) as its functional currency and has a 30 June reporting date. The following events and transactions occurred between April and July 2016:

  • 1 April 2016: Orange Ltd received an order to supply items of inventory to a customer located in Malaysia. The transaction is denominated in Malaysian Ringgit (MYR) and the selling price of the inventory is MYR 216,000.
  • 20 April 2016: Orange Ltd paid MYR 780,000 to acquire some land in Malaysia. Orange Ltd uses the fair value model to measure land in accordance with AASB 116 Property, Plant and Equipment.
  • 21 May 2016: the inventory was shipped, FOB shipping point, by Orange Ltd.
  • 30 June 2016: Orange Ltd determines that the fair value of the land in Malaysia is MYR 810,000.
  • 31 July 2016: the Malaysian customer pays the amount owing to Orange Ltd.

The following spot exchange rates are available:

Date Rate

1 April 2016

AUD 1 = MYR 2.80

20 April 2016

AUD 1 = MYR 2.60

21 May 2016

AUD 1 = MYR 2.50

30 June 2016

AUD 1 = MYR 2.40

31 July 2016

AUD 1 = MYR 2.70

Required

Provide the journal entries to account for the above events and transactions for Orange Ltd.

Question 4

Harvey Smith Ltd, an Australian company that uses the Australian dollar (AUD) as its functional currency, manufactures and exports computers. Sales made to foreign customers are denominated in foreign currency (FC).  

An order for FC 200,000 of computer parts was received from a foreign customer in April 2016 and Harvey Smith Ltd shipped the items, FOB Sydney, on 1 May 2016. The amount was payable by the foreign customer on 30 September 2016. 

Concerned about possible adverse exchange rate changes, Harvey Smith Ltd entered into a forward rate contract with the Eastpac Bank on 1 May 2016. The terms of the contract were that on 30 September 2016, the Eastpac Bank would  deliver AUD to Harvey Smith Ltd in exchange for FC 200,000 at a forward rate of AUD 1 = FC 1.06. 

The relevant exchange rates were as follows:

Date

Spot Rate

Forward rate for delivery of FC on 30 September

1 May 2016

AUD 1 = FC 1.05

AUD 1 = FC 1.06

30 June 2016

AUD 1 = FC 1.07

AUD 1 = FC 1.08

30 September 2016

AUD 1 = FC 1.09

AUD 1 = FC 1.09

The hedging arrangement was designated as a fair value hedge. Assume that the hedge arrangement qualified for hedge accounting under AASB 9 Financial Instruments. The end of the reporting period for Harvey Smith Ltd is 30 June.

Required

  • According to the forward rate contract signed on 1 May 2016, what was the amount of Australian dollars that Harvey Smith Ltd would receive from the Eastpac Bank on 30 September 2016 in exchange for FC 200,000? (1 mark)
  • Prepare the journal entries to record the above transactions and events in the books of Harvey Smith Ltd. (9 marks)

PART B 20 MARKS

ELECTIVE QUESTIONS

Answer one of the following two questions. Each question is worth 20 marks (1 x 20 = 20 marks)

Question 1 20 Marks

Red Ltd acquired 80% of the shares of White Ltd on 1 July 2014 for $350,000, when the equity of White Ltd consisted of:

Share Capital

$300,000

General Reserve

50,000

Retained Earnings

15,000

All identifiable assets and liabilities of White Ltd are recorded at fair value at this date except for an item of equipment that, as at 1 July 2014, had a carrying amount of $200,000 (original cost $300,000) and a fair value of $250,000. The equipment had a further 5-year life with depreciation based on the straight-line method. Selected financial information for both companies at 30 June 2017 is as follows:

  Red Ltd White Ltd

Sales revenue

$500,000

$400,000

Cost of sales

(300,000)

(300,000)

Other expenses

(150,000)

(60,000)

Profit before tax

50,000

40,000

Tax expense

(15,000)

(10,000)

Profit for the period

35,000

30,000

Retained earnings at 1/7/16

115,000

60,000

 

150,000

90,000

Dividend paid

(10,000)

(5,000)

Dividend declared

(20,000)

(10,000)

Retained earnings at 30/6/17

120,000

75,000

Share capital

350,000

300,000

Security Code  
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