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Questions and Answers of Financial Reporting

Briefly describe the disclosure requirements for the lessee and the lessors according to AASB 16/IFRS 16.
Mitch Ltd prepares the following lease payments schedule for the lease of a machine from Stark Ltd. The machine has an economic life of 6 years. The lease agreement commences at 1 July 2021 and
Gu and Lev (2011) argue that the root cause of many goodwill write-offs is that the shares of the buyer are overpriced at the acquisition date.Figure 8.11 presents eBay's cumulative stock return
Impairment under the revaluation model 'Impairment is only relevant to assets carried under the cost model. For assets carried under the revaluation model, such as our land and buildings, increases
Consider the following information relating to five different items of plant and equipment at the reporting date.Required 1. Calculate the recoverable amount for each of the five items of plant and
On 1 April 2021 the construction of a fixed oil platform is completed and ready for use at a total cost of $500 million. The useful life of the rig is linked to the 25-year exploration rights granted
Pan Ltd acquired a machine for \($250\) 000 on 1 July 2022. It depreciated the asset at 10% p.a. on a straight-line basis.On 30 June 2024, Flash Ltd conducted an impairment test on the asset. It
On 1 July 2023 an item of equipment is acquired at a cost of \($3\) million. The asset is to be depreciated using the straight-line method on the basis of an estimated useful life of 15 years and a
At 30 June 2023, Danni Ltd holds a block of land from which it generates revenue by leasing it to transportation enterprises. The land has a carrying amount of \($1.25\) million. An independent
Sparrow Ltd reported the following information in its statement of financial position at 30 June 2023.At 30 June 2023, Sparrow Ltd analysed the internal and external sources of information that would
Rainier Ltd reported the following assets in its statement of financial position at 30 June 2022.The recoverable amount of the entity was calculated to be \($1\) 660 000. The fair value less costs of
Dry Ltd is an entity that specialises in the manufacture of umbrellas and rain jackets. It has aggressively undertaken a strategy of buying out other companies that produced apparel for inclement
Mitch Ltd has determined that its fine china division is a CGU. The carrying amounts of the assets at 30 June 2022 are as follows.Mitch Ltd calculated the recoverable amount of the division to be
On 1 January 2021, Ted Ltd acquired all the assets and liabilities of Mosby Ltd. Mosby Ltd has a number of operating divisions, including one whose major industry is the manufacture of toy trains,
Barney Ltd has two divisions, each regarded as a separate CGU. The carrying amounts of the net assets within each division at the most recent reporting date were:Barney Ltd also recorded goodwill of
Excalibur Ltd operates in the Swan Valley in Western Australia where it is involved in the growing of grapes and the production of wine. In June 2022, it anticipated that its assets may be impaired
The measurement of a liability shall be the best estimate of the expenditure required to settle the present obligation. How is present value related to the estimation?
Define a contingent asset and distinguish it from other assets.
Provisions are recognised as a liability in the statement of financial position whereas contingent liabilities are not recognised in the financial statements but disclosed in the notes to financial
Moolie Ltd is a manufacturer of surfboards. Pursuant to the sales terms, it gives warranties at the time of sales to purchasers of the surfboards for manufacturing defects that become apparent within
Jackshire Ltd filed a lawsuit against Bormire Ltd for compensation of \($23\) million as a result of failure to deliver goods on time. At the end of the financial year the outcome of the hearing is
Kasey Ltd’s financial statements are authorised for issue on 24 August 2022.Required Identify whether each of the following would be a liability, a provision or a contingent liability, or none of
The government introduces a number of changes to the goods and services (value-added) tax system. As a result of these changes, Welles Ltd, a manufacturing company, will need to retrain a large
Tray Ltd is a listed company that provides food to function centres that host events such as weddings and engagement parties. After an engagement party held by one of Tray Ltd’s customers in June
The measurement of provisions requires the best estimate of the expenditure required to settle the present obligation at the end of the reporting period. Where the effect of the time value of money
Shark Ltd acquires Nemo Pty Ltd which has two main divisions in manufacturing activities – divisions A and B. A public announcement has been made that Nemo Pty Ltd will restructure the nature and
Groucho Ltd acquires Harpo Ltd. The restructuring plan, which satisfies the criteria for the existence of a present obligation under AASB 137/IAS 37 and AASB 3/IFRS 3, includes an advertising program
A client filed a lawsuit against Rattata Ltd in November 2022 for negligence when providing its services. The amount claimed was \($13\) million. Rattata Ltd’s lawyers have advised that the amount
In May 2023, Webb Ltd hired an employee from overseas who would commence the employment in August 2023. The employment contact specified that Webb Ltd should pay the relocation costs (including
In June 2022 Marvel Pty Ltd estimates that it will be required to pay \($80\) 000 in 3 years to clean up a site. The risk-free discount rate applied is 4%.Required Prepare the journal entries to
In June 2021 Great Southern Ltd built a submarine under a contract with the Australian Navy. The contract required Great Southern Ltd to provide a one-year warranty. The accountant was unsure how to
What is included as employee benefits under AASB 119/IAS 19?
Do employee benefits include only payments made to employees? Explain.
What is a paid absence? Provide an example.
Would employers likely consider a defined benefit superannuation plan or a defined contribution superannuation plan a bigger risk to the entity’s future commitments?Explain your answer.
Evaluate whether the requirements for the recognition and measurement of the net defined benefit liability reflect the underlying assumptions about the entity’s risks.
What is meant by the term ‘asset ceiling’?
Identify and discuss the assumptions involved in the measurement of a provision for long service leave.
The board of directors of Launceston Ltd met in June 2023 and decided to close down a branch of the company’s operations when the lease expired in the following February. The chief financial
Monash Ltd is a newly formed company and is formulating its policies in terms of employee benefits. The company would like to offer employees payment for any accumulated unused sick leave if they
The accountant of Oxford Ltd believes that long service leave should not be considered as a liability in the accounts until employees have commenced their tenth year of service, given this leave
Bond Ltd pays bonuses to its staff after year-end, provided profit targets are met and staff remain employed with the company at the time the bonuses are paid. At 30 June 2022 the company determines
A manager of a newly registered company has asked for advice on whether to establish a defined benefit superannuation plan or a defined contribution superannuation plan.Required Outline the issues
Kings Ltd pays its employees on a monthly basis. The payroll is processed on the 6th day of the month and payable on the 7th day of the month. Gross salaries for July were \($300\) 000, from
Sufe Ltd has a weekly payroll of \($210\) 000. The last payroll processed before the end of the annual reporting period was for the week ended Friday 24 June. Employees do not work during
Melbourne Ltd pays management on a monthly basis and staff on a fortnightly basis. Payroll is processed and paid on the 1st of each month for management, and the 1st and 15th of each month for staff.
Michigan Ltd has 80 employees who each earn a gross wage of \($180\) per day. In an attempt to reduce absenteeism, Michigan Ltd introduced a new workplace agreement providing all employees with
Otago Ltd has 2 200 employees who each earn a gross wage of \($145\) per day. Otago Ltd provides 5 days of paid non-accumulating sick leave for each employee per annum. During the year, 160 days of
Boree Ltd provides employees with 4 weeks (20 days) of annual leave for each year of service. The annual leave is accumulating and vesting up to a maximum of 6 weeks. Thus, all employees take their
Richmond Ltd has a profit-sharing arrangement in which 1% of profit for the period is payable to employees, paid 3 months after the end of the reporting period. Employees’ entitlements under the
Nanjing Ltd provides 4 weeks (20 days) of accumulating vested annual leave for each year of service. The company policy is that annual leave must be taken within 6 months of the end of the period in
Assume the same details as in Exercise 10.9, except that Nanjing Ltd’s trial balance showed the provision for annual leave had a credit balance of \($92\) 640.Required 1. Prepare journal entries
Bath Ltd provides a defined contribution superannuation fund for its employees. The company pays contributions equivalent to 10% of annual wages and salaries. Contributions of \($60\) 000 per
Princeton Ltd provides a defined benefit superannuation plan for its managers. The assistant accountant has completed some sections of the defined benefit worksheet based on information provided in
For each of the following scenarios, determine (i) the surplus or deficit in the defined benefit superannuation fund and (ii) the net defined benefit liability or asset that should be recognised by
Victoria Ltd provides long service leave entitlement of 13 weeks of paid leave after 10 years of continuous employment. The provision for long service leave had a credit balance of \($180\) 000
On 1 January 2023, Blue Jay Ltd revalued land from \(\$ 300000\) to \(\$ 500000\). On 1 January 2024, the company subsequently revalued the land to \(\$ 420000\). And on 1 January 2025 , the company
The following data from Lyre Ltd's accounts relates to two assets at 30 June 2023.At 30 June 2023 Lyre Ltd decides to adopt the revaluation model for both these assets. On this date land has a fair
Crane Ltd has proposed that the company adopt the revaluation model for fixed assets. Some of these assets are hard to obtain and certain items have increased in value in the current period, however
Recently Sparrow Ltd experienced temporary closure that affected a number of its operating plants. The group accountant of Sparrow Ltd indicated that it was not appropriate to report depreciation
Seagull Ltd purchased land for use as its corporate headquarters. A small factory that was on the land when it was purchased was torn down before construction of the office building began.
Parakeet Ltd has recently acquired a machine for an invoice price of \(\$ 70 \mathbf{0 0 0}\). Various other costs relating to the acquisition and installation of the machine include transportation,
A new accountant has been appointed to Flamingo Ltd and has implemented major changes in the calculation of depreciation. As a result, some parts of the factory are now subject to higher depreciation
Gannet Ltd has acquired a new building. Assess which of the following items should be included in the cost of the building. Provide a reason for your conclusions.1. Stamp duty 2. Real estate
Corella Ltd has acquired a new equipment, which it has now installed in its factory. Assess which of the following items should be capitalised into the cost of the building. Provide a reason for your
Peewee Ltd has acquired a new building for \(\$ 750\) 000. It has incurred incidental costs of \(\$ 15000\) in the acquisition process for legal fees, real estate agent's fees and stamp duties.
In the 30 June 2023 annual report of Emu Ltd, the equipment was reported as follows:The equipment consisted of two machines, Machine A and Machine B. Machine A had cost \(\$ 75000\) and had a
On 30 June 2023, the statement of financial position of Cuckoo Ltd showed the following non-current assets after charging depreciation.The company has adopted fair value for the valuation of
Sejenis Ltd constructed a building for use by its freight department. The completion date was 1 July 2017, and the construction cost was \(\$ 840000\). The company expected to remain in the building
On 1 July 2023, Eagle Airlines acquired a new aeroplane for a total cost of \(\$ 20\) million. A breakdown of the costs to build the aeroplane was given by the manufacturers.All costs include
Magpie Ltd uses many kinds of machines in its operations. It constructs some of these machines itself and acquires others from the manufacturers. The following information relates to two machines
Harrier Ltd began operations on 1 July 2023. During the following year, the company acquired a tract of land, demolished the building on the land and built a new factory. Equipment was acquired for
Applying accounting theory to property, plant and equipment Beatrix was recently appointed as the accountant for Lorikeet Ltd. She was surprised to learn that the company uses the cost model for its
Can development costs initially expensed be subsequently recognised as an intangible asset? Explain your answer.
Explain the accounting treatment of subsequent expenditure on intangible assets.
West Ltd is a leading company in the sale of frozen and canned fish produce. These products are sold under two brand names.- Fish caught in southern Australian waters are sold under the brand
Mags Ltd is an Australian mail-order company. Although the sector in Australia is growing slowly, Mags Ltd has reported significant increases in sales and net income in recent years. Sales increased
Healthy Eating Pty Ltd (Healthy Eating) is a company that runs a chain of food outlets in shopping centres throughout Australia that offer healthy food alternatives to shoppers. The outlets operate
There is a popular view of financial statements that underlies and motivates many discussions of intangible assets. That popular view often sounds something like this:If accountants got all the
Innovative Ltd holds a patent that has enabled the company to be a market leader in its area. The patent has been held by the company for 25 years. The legal life of the trademark is 20 years, but is
Sandy Beach Ltd's research and development section has come up with an idea for a project on using cane toad poison for medicinal purposes. The board of directors of Sandy Beach Ltd believes that
Recognition of intangible assets Black Ltd has the following:1. an investment in a subsidiary company 2. training costs associated with a new product 3. the cost of testing in search for product
Recognition of intangible assets Grasp Ltd has the following:1. the cost of purchasing a trademark 2. unrecovered costs of a successful lawsuit to protect a patent 3. goodwill acquired in the
Wayne Upton (2001, p. 71) in his discussion of the lives of intangible assets noted that the formula for Coca-Cola has grown more valuable over time, not less, and that Sir David Tweedie, former
In their article entitled 'U.S. firms challenged to get "intangibles" on the books', Byrnes and Aubin (2011) noted that in the United States some companies were accounting for intangibles
Easy Access, an internet services provider, acquired Visible, an eye-tracking software development company, for US\$3.75 billion. At the date of acquisition, it recognised three amortisable
Limitations include:1. The definition of an intangible asset - particularly the criterion of "separability". Requiring separability means that potential assets such as human resources, reputation,
Libby Ltd is unsure of how to obtain computer software. Four possibilities are:1. employ its own programmers to write software that the company will use.2. buy computer software to incorporate into a
A small manufacturing company, Cable Ltd, has significantly increased it expenditure on research and development over the past year.Required Advise Cable Ltd on how research and development
For what assets must an impairment test be conducted annually?
What is meant by recoverable amount?
How does an entity calculate fair value less costs of disposal?
How does an entity calculate value in use?
What estimates does an entity make when calculating value in use?
What are the limits to which an asset can be written down in relation to impairment losses?
What is a cash-generating unit (CGU)?
What is a corporate asset?
Are there limits in reversing past impairment losses?
Under FAS 28, if a client accelerates payment of one or more of the instalments before the due date, the bank may waive part of the profit that was agreed upon earlier. The deducted amount shall be
On learning you studied ethics as part of your accounting degree, your co-worker in marketing says: 'What a waste of time. Surely there aren't any significant ethical issues in accounting. After all,

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