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financial accounting

Questions and Answers of Financial Accounting

Explain how a currency swap operates.
Explain why it is that when the market’s required rate of return is less than the coupon rate being offered on a bond the price the bond will be sold for (its fair value) will be above its face
Subsequent to initial measurement, financial assets are to be classified as being measured at either fair value through profit or loss, at fair value through OCI, or at amortised cost. What is the
Wedding Cake Ltd has its shares listed on a securities exchange. It has entered a contractual agreement to issue $10 million of its ordinary shares to Island Ltd in two years’ time. The number of
Arthur Ltd has the following statement of financial position:Assume that Arthur Ltd has an amount owing to Blayney Ltd of $300 000 and an amount receivable fromBlayney Ltd of $400 000.Assuming a
Parent Ltd controls two other companies, A Ltd and B Ltd. Parent Ltd owes an outside organisation, Outsider Ltd, an amount of $400 000. Outsider Ltd owes A Ltd $300 000. Can the two amounts be offset?
Futures contracts are considered to be highly leveraged instruments, with the result that considerable gains or losses can be incurred. What does this mean?
Where are the gains and losses on a futures contract reported? Is the reporting of the gains or losses on a futures contract influenced by whether or not the contract is used as part of a hedging
Should interest on financial liabilities always be treated as an expense?
Would it ever be appropriate to classify the distributions to holders of preference shares as interest expense rather than dividends? Explain your answer.
On 1 July 2022, Kelly Ltd issued five-year bonds with a total face value of $1 000 000 and which paid interest of $100 000 annually in arrears. The market-required interest rate for Kelly Ltd’s
AASB 132 requires the issuing entity to classify a financial instrument, or its component parts, as a liability or as equity in accordance with the economic substance of the instrument at the time of
Holder Ltd purchases an options contract from Issuer Ltd that gives Holder Ltd the right to acquire 100 000 options in Torquay Ltd for a price (exercise price) of $10.00 per share. When the contract
Dorothy Wax has 10 000 shares in Skeg Ltd. The current price per share in Skeg Ltd is $9.50. Dorothy would like to sell the shares immediately, but certain restrictions have been imposed upon her
Lehman Ltd sells some printed material to an organisation in the United States on 1 July 2023. The price is denominated in US dollars and is US$500 000. It is to be paid on 1 September 2023. The
In the past, a number of organisations have disclosed convertible bonds just below the total of shareholders’ equity and therefore have not really disclosed them as debt or equity.a. Is the
Barry Ltd issued some convertible bonds to Bennett Ltd. They have a life of three years and pay interest to Bennett Ltd each six months. The convertible bonds will be converted to shares only if
On 1 July 2023 Billy Ltd, an Australian company, borrows US$1.54 million at a rate of 6 percent from a United States bank for a period of three years.On the same date Rip Ltd, also an Australian
On 1 July 2022 Supertubes Ltd issues $50 million of convertible bonds to Magnatubes Ltd. The bonds have a life of three years, a face value of $10.00 each, and they offer interest, payable at the end
On 1 June 2022 Sydney Ltd enters into a firm commitment with SanFran Co. to buy US$1 000 000 of6 inventory. The inventory will be transferred to Sydney Ltd (making Sydney Ltd therefore liable for the
a. What is hedge accounting and what are the three types of hedges identified in AASB 9?b. What is a ‘hedged item’ and what is a ‘hedging instrument’?c. What criteria must be satisfied before
Malibu Ltd issues $10 million of convertible bonds on 1 July 2022. The bonds have a life of four years and they offer interest, payable at the end of each financial year, at a rate of 7 per cent per
On 1 November 2022 Sandy Ltd issued 10 000 convertible notes with the following features: Face value Term Issue price $1000 Four years At face value
On 1 June 2023 Safe Boards Ltd invested in five hundred 7 per cent, ten-year Teleco bonds with a face value of $100 each. The bonds were issued at face value. On 30 June 2023 the Teleco bonds, which
Woodie Ltd issues $5 million in convertible bonds on 1 July 2023. They are issued at their face value and pay an interest rate of 4 per cent. The interest is paid at the end of each year. The bonds
Mamb Ltd has been able to arrange a loan from the bank at either a 10 per cent fixed rate or at the variable 90-day bank bill rate plus 0.5 percent. Bong Ltd can borrow funds at either 13 per cent or
Brisbane Ltd manufactures cars. On 15 June 2022 Brisbane Ltd enters into a non-cancellable purchase commitment with LA Ltd for the supply of engines, with those engines to be shipped on 30 June 2022,
Tea Tree Ltd has acquired some government bonds on 1 July 2022. The government bonds will generate contractual cash flows that are solely principal and interest. The cash flows comprise:A return of
On 1 July 2023 Busta Ltd holds a well-diversified portfolio of shares that is valued at $1.55 million. On this date it enters into 60 futures contracts on All Ordinaries Share Price Index futures in
On 1 July 2022 Midget Ltd acquired some corporate bonds issued by Farrelly Ltd. These bonds cost $2 277 220 and had a life of four years. They had a ‘face value’ of $2 million and offered a
Would it be appropriate to recognize revenue at completion of production rather than at the point of sale?
‘Income’ is often subdivided into ‘revenues’ and ‘gains’, but is there a difference between them?
Coombes and Martin (1982) argue that ‘accountants would be indifferent to the point chosen for revenue recognition if there were a constant and repetitive process of purchasing and selling goods or
What is the general rule in terms of when revenue shall be recognised from contracts with customers?
What is the difference between a bad debt and a doubtful debt?
If a customer pays for a product or service provided by an organisation with a payment that is not in the form of cash, on what basis will that revenue be measured?
Consider the statement that ‘the measurement model adopted, and its underlying concepts of capital and capital maintenance, are relevant to the timing of the recognition of revenues’. Explain
Organisations often sell products to customers with a ‘right of return’. What is a ‘right of return’, and how, if at all, shall the right of return be accounted for at the point of sale?
Does AASB 15 apply to income derived from financial instruments?
If an organisation is constructing a building, and that building will take a number of years to complete, can the organisation recognise revenue throughout the contract, or does the
Why is it important for a reporting entity to identify its contracts with customers and to fully understand the terms of the contracts?
AASB 15 identifies five steps that need to be taken when recognising revenue from contracts with customers. What are these steps?
Identify the five steps that would be followed when recognising revenue from contracts with customers.
If a sale is made ‘f.o.b. destination’, when should the associated revenue be recognised?
If an organisation received non-cash consideration from a customer in return for providing a good or service, then how would the entity determine how much to assign to sales revenue?
When organisations sell various goods to customers there is often some uncertainty about the ultimate collectability of the transaction price. Should sales revenue be reduced to take into account the
If the promised amount of consideration on a contract is variable, how shall an entity estimate the total amount to which the entity will be entitled in exchange for transferring the promised goods
On what basis shall a reporting entity allocate a transaction price to separate performance obligations within a contract with a customer?
Is dividend revenue addressed within AASB 15? Would dividends received from pre-acquisition earnings from an investee be recognised as income?
Can a contract with a customer contain multiple performance obligations, and if so, why is it important to identify them?
Big Construction Company signs a contract on 1 July 2023, agreeing to build a warehouse for Buyer Corporation Ltd at a fixed contract price of $10 million. Buyer Ltd will be in control of the asset
What are some of the various forms of employee benefits?
What is an ‘employee benefit’ and what are the various forms that these benefits can take?
Shall obligations for employee benefits be measured at their present value?
When an organisation recognises a provision and related expense for annual leave, and a provision for longservice leave for its employees, the risk to employees that they will not be paid these
What is long-service leave, and what are some of the factors that need to be considered when recognising an organisation’s provision for long-service leave?
If an organisation would prefer to shift the risks associated with superannuation to its employees, the organisation would establish a defined benefit superannuation plan rather than a defined
What are the two main categories of superannuation plans, and in which type does the employee bear relatively more of the risk in terms of the amount ultimately to be received on their retirement?
Payments made by an organisation to its employees for work performed by employees shall always be treated as an expense. Is this true or false? Why?
Is it easier to account for an employer’s contributions and obligations to a defined benefit superannuation plan or a defined contribution superannuation plan?
Employee benefit expenses relating to annual leave should be recognised by the employer only when the annual leave is actually taken by the employee. True or false? Why?
If an organisation collapses, but the organisation has already created a provision for annual leave, and a provision for long-service leave, then there will be some cash available for employees after
According to AASB 119, how should an employer’s obligation for employee benefits be measured?
According to AASB 119, when should the rates on high-quality corporate bonds be used to discount expected future payments back to their present value?
According to AASB 119, when should the rates on government bonds be used to discount expected future payments back to their present value?
When would payments made to employees be considered to be an asset?
Critically evaluate AASB 119’s requirement that present values be determined by reference to high-quality bond rates rather than organisation-specific, market-determined, risk-adjusted discount
Which employee benefits are required to be discounted in accordance with AASB 119?
What is an inventory cost-flow assumption and why is one necessary?
What inventory cost-flow assumptions are permitted in Australia?
Distinguish between the periodic and perpetual inventory methods.
As at 30 June 2022, which is the end of the financial year, Rincon Ltd has 100 000 hats in inventory, all of the same type and size. The hats cost Rincon Ltd $4 each. At 30 June 2022, and because of
Paragraph 107 of AASB 138 Intangible Assets states: An intangible asset with an indefinite useful life shall not be amortized.REQUIREDEvaluate the above requirement.
Provide an argument in support of the accounting requirement that research is to be expensed as incurred. Do you think this requirement is overly ‘conservative’?
Billybang Pty Ltd imports surf shorts and sells them to department stores throughout Australia. At 1 July 2021 opening inventory comprised 10 units @ $22.00 each. Throughout the quarter ended 30
Provide an opinion on whether you consider that the way we measure inventory for financial reporting purposes enables the financial accountant to provide information which satisfies the qualitative
Strapper Ltd sells one type of surfboard. Its financial year ends on 30 June and it commenced the financial year with 50 surfboards that cost $450 each. Strapper Ltd uses the FIFO method and it had
For the purposes of AASB 16 Leases, what is a ‘lease’?
Provide an overview of how accounting for leases was changed as a result of the release of AASB 16.
What distinguishes a provision from other liabilities?
In an article by Jeff Whalley entitled ‘QBE Superstorm’ that appeared in The Herald Sun on 10 December 2013 (p. 29) it was reported that:Insurance investors have stripped more than $4 billion
What is a ‘lessee’ and what is a ‘lessor’?
Wat is a ‘lease term’ and how is it determined?
At the commencement of a lease, is a lessee required to recognise an asset and/or a liability?
What factors would influence whether an agreement with a supplier is considered to be a ‘lease’ and therefore would require lease assets and lease liabilities to be recognised?
Are a lease liability and a right-of-use asset required to be recognised by a lessee at lease inception for all leases?
How is a lease liability to be measured at lease inception?
For financial reporting purposes, what are inventories?
How do we account for service costs that are included within a contract to lease an asset?
What is the difference between a ‘direct-financing lease’ and a ‘manufacturer- (dealer-)type lease’?
What expenses are typically recognised by a lessee throughout the term of a lease?
What exemptions are available that would allow a lessee not to capitalise lease assets and lease liabilities?
When should a lessee capitalise a lease transaction?
How is a right-of-use asset measured at lease inception?
What is inventory?
What does net realisable value mean as it pertains to inventory?
What should be included in the ‘cost’ of inventories?
What is an inventory cost-flow assumption, and which cost-flow assumptions are permitted to account for the cost of inventory?
Is it permissible to revalue inventory to its fair value? Do you think the requirements in relation to inventory valuation are overly conservative?
For financial reporting purposes, how should inventory be measured?

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