Microsoft Word - Accounting Assignment.docx
Question 1 Provisions and Contingencies (12 marks)
Below are three independent situations.
1. ABC Ltd is a manufacturer of boats and gives wa
anties at the time of sale to purchasers
of its boats. Pursuant to the wa
anty terms, ABC Ltd undertakes to make good, by repair
or replacement, manufacturing defects that become apparent within three years from the
date of sale.
2. ABC Ltd has a number of non-cu
ent assets, some of which require, in addition to
normal ongoing maintenance, substantial expenditure on major refits
efu
ishment at
certain intervals or on major components that require replacement at regular intervals.
3. XYZ Ltd is a listed company that provides food to functional centres that host events
such as wedding and engagement parties. After an engagement party held by one of XYZ
Ltd’s customers in May 2020, 50 people became ill, possibly as a results of food
poisoning from products sold by XYZ Ltd. Legal proceedings were commenced seeking
damages from XYZ Ltd. XYZ Ltd disputed liability by claiming that the functional
centre was at fault for handling the food inco
ectly. Up to the date of 30 June 2020
(financial year-end), XYZ Ltd’s lawyers advise that it was probable that XYZ Ltd would
not be found liable.
REQUIRED:
Should a liability in the form of a provision be recorded? Briefly justify your decisions.
Question 2 Extractive Industries (20 marks)
During the year ending 31 December 2019, the Utopia Mining Company is undertaking
search and production of ore in three areas. Exploration and evaluation activity is being
undertaken in Area A and Area B. Exploration and evaluation expenditure incu
ed is
$ XXXXXXXXXXfor Area A and $ XXXXXXXXXXfor Area B in 2019. Another site, Area C, is cu
ently
producing ore. Each area is treated as an area of interest. The Utopia Mining Company
acquired the right to explore the mining site at Area C for $12 million in 2017 and the
company began exploring for ore and incu
ed $ XXXXXXXXXXin 2017. Economically recoverable
eserves of 25 million tonnes of ore were confirmed by geologists on 31 December 2017.
Geologists estimate that once ore extraction commences the Area C will be operational for
approximately 15 years, after which the ore deposit will be exhausted. The land of the
mining site has an estimated residual value of $ XXXXXXXXXXIt is company policy and a
community expectation that all mining equipment will be removed when the ore deposit is
exhausted and the mine site restored to its original condition.
For Area C, during 2018 the company spent $ XXXXXXXXXXdeveloping the property and $1 020
000 on purchasing and installing the following assets:
Costs Estimated life
Mine building $ XXXXXXXXXXyears
Other mine equipment $ XXXXXXXXXXyears
The building cannot be economically removed from the mine location, but the other mine
equipment can be removed and has alternative use. On 31 December 2018 it is estimated
that development and construction activities have resulted in $ XXXXXXXXXXof future
estoration costs. A discount rate of 5% is identified by the company as best reflecting the
isk and commercial conditions associated with Area C.
Production in Area C commenced on 1 January 2019. The details of operations during the
period 1 January 2018 to 31 December 2019 are summarised below.
Tonnes of ore mined XXXXXXXXXX
Tonnes of ore sold (at $10 per tonne XXXXXXXXXX
Production costs (excluding depreciation and amortization) $ XXXXXXXXXX
Administration expense $250 000
Selling expense $120 000
Income tax expense $ XXXXXXXXXX
Restoration costs $560 000
REQUIRED:
(1) Assume all costs incu
ed during the exploration
and evaluation phases were
capitalised. Calculate the depreciation expense and the amortisation expense for the year
ended 31 Dec 2019. No journal entry is required.
(2) Calculate the cost of goods sold (COGS) for the year ended 31 Dec 2019.
(3) Calculate the net profit of the company for the year ended 31 Dec 2019.
Show the steps in your calculations. Round to the nearest $ amount. No na
ation is
equired.
(15 marks)
l Patents were acquired at a cost of $80 000 on 1 July 2016. They have an estimated
life of 16 years, of which 12 years remain on 30 June 2020.
l The
and name is stated at fair value and is internally generated.
l The licence, acquired one year ago, has a 10-year life of which nine years remain.
The licence can be traded in an active market and has a fair value of 1.1 million.
Some of the treatments by XYZ may be inconsistent with the accounting standards AASB
138 “Intangible Assets”.
REQUIRED:
For EACH intangible asset, specify and
iefly justify the following accounting
decisions in accordance with AASB 138 ‘Intangible Assets’:
(1) How should the intangible asset be initially recognized?
(2) What is the appropriate subsequent measurement basis (i.e., measurement model)
of the recognised asset?
(3) Is the recognised asset subject to amortization?
(4) Calculate the ca
ying amount of each asset at 30 June 2020.
No journal entry is required.
Question 3 Intangible Assets
XYZ Ltd reports the following intangible assets on 30 June 2020:
Patents at directors’ valuation $160 000
Less Accumulated amortisation XXXXXXXXXX)
Brand name at fair value XXXXXXXXXX
Licence at cost $100 000
Less Accumulated amortisation XXXXXXXXXX)
Additional information:
Question 4 Employee Benefits (15 marks)
ABC Ltd contributes to a defined benefit superannuation plan for its employees. The
following information is available for the plan at 30 June 2020.
Fair value of plan assets (1 July 2019) $ XXXXXXXXXX
Fair value of plan assets (30 June 2020) $ XXXXXXXXXX
Present value of defined benefit obligation (1 July 2019) $ XXXXXXXXXX
Present value of defined benefit obligation (30 June 2020) $ XXXXXXXXXX
Benefits paid by the fund to members during the year $ XXXXXXXXXX
Contributions paid by ABC Ltd to the fund during the year $ XXXXXXXXXX
Cu
ent service cost $ XXXXXXXXXX
Rate of return on plan assets for the period 7.0%
Discount rate (1 July XXXXXXXXXX%
Discount rate (30 June XXXXXXXXXX%
REQUIRED:
(1) Calculate the actuarial gain or loss of the plan assets for the period ended 30 June
2020. Please specify whether it is a gain or loss.
(2) Calculate the actuarial gain or loss of defined benefit obligation for the period ended
30 June 2020. Please specify whether it is a gain or loss.
(3) Calculate the defined benefit cost or income recognised in other comprehensive
income for the period ended 30 June 2020. Please specify whether it is a cost or income?
Question 5 Financial Instruments (20 marks)
JY investment Ltd holds a well-diversified portfolio of shares that has a market value of
$1.5 million on 30 June 2019. JY is concerned about possible downturns in the share market
and on 1 March 2020 decides to take out a sell position in eleven “September 2020 SPI
200 Futures” units when the SPI 200 is 5500. The SPI 200 Futures contract unit value is the
value of SPI 200 multiplied by $25. To enter the contract, JY pays an initial cash deposit
(margin) of $150,000 to a
oker.
On 30 June 2020, the reporting date of JY investment Ltd, the unit price of the September
SPI futures contracts has fallen to 5300 and the market value of the firm’s portfolio of shares
is $ XXXXXXXXXXAssume
oker allows a $50,000 drop before making a margin call to allow
for minor fluctuations in the market.
The shares are sold on 31 August 2020 when the market value of the shares is $ XXXXXXXXXX
and the September SPI 200 futures contract closed out at 5250 on 31 August 2020. Assume
the futures contracts qualify as a hedge, the shares are marked to market.
REQUIRED:
Prepare journal entries to account for the above events from 1 March 2020 to 31 August
2020. Show all calculations and round them to the nearest dollar amount. No na
ation is
equired.
Question 6 Foreign Cu
ency (18 marks)
You are CFO of Koala Ltd, an Australian entity. The company’s financial year ends on 30
June. The company has agreed to purchase 10 new handmade sports cars (as inventory)
from a British supplier. The official order for the vehicle is placed on 31 January 2020. The
contract price is £ XXXXXXXXXXand delivery takes place on 30 May 2020, as agreed, at which
time the title of the goods passes to Koala Ltd. Payment in respect of these vehicles is due
on 31 August 2020. In anticipation of the contract on 31 January 2020, the company enters
into a foreign cu
ency contract to receive £ XXXXXXXXXXon 31 August 2020 at a forward rate of
A$1.00=£0.46.
Assume that the hedge satisfied the hedge accounting requirements of AASB 9, it was 100%
effective and that Koala Ltd had designated the hedging a
angement as a cash flow hedge.
The following exchange rates are applicable:
Spot rate Forward rate for delivery of £350 000
on 31 August 2020
31 January 2020 A$1.00 = £0.49 A$1.00 = £0.46
30 May 2020 A$1.00 = £0.47 A$1.00 = £0.44
30 June 2020 A$1.00 = £0.43 A$1.00 = £0.40
31 August 2020 A$1.00 = £0.40 A$1.00 = £0.40
REQUIRED:
Prepare general journal entries to record these transactions in Koala Ltd’s books in
accordance with the requirements of AASB 9.
Show all calculations on measuring fair values and changes in fair values of the hedging
instrument and the hedged item at various dates. Provide any necessary explanation to
support your answer. No na
ation is required. Round answers to the nearest Australian
dollar.
Present value interest factor of $1 per period at i% for n periods, PVIF(i,n).
Period 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18%