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financial reporting

Questions and Answers of Financial Reporting

Present value technique: debt obligation   LO5 On 1 January 2019, Koala Ltd issued at par in a private placement 42 million BBB‐rated 5‐year fixed rate debt securities with an annual coupon
Liability held as an asset  LO3, 4 On 1 January 2019, Kangaroo Ltd issues at par $2 million BBB‐rated exchange‐traded 5‐year fixed rate debt securities with an annual coupon interest rate of
Determination of fair value  LO3 Pine Ltd holds an asset that is traded in three different markets: Market A, Market B and Market C. Pine Ltd normally trades in Market C. Some information gathered
Most advantageous market  LO3 Asset XYZ is sold in three different active markets. • In Market A, the price that would be received is $27; transaction costs are $2 and the transport costs are
Market participants  LO3 Swan Ltd recognises that the concept of ‘market participants’ is an important part of the measurement of fair value. It has determined that market participants are
Characteristics of an asset  LO3 Mr Anderson owned a large house on a sizeable piece of land in Brisbane. His ancestors had been some of the first settlers in the area and the property had been in
Valuation techniques and inputs used  LO3 An entity acquired a machine in a business combination that is held and used in its operations. The machine was initially acquired from a supplier and was
‘In‐combination’ valuation premise  LO3 Palm Ltd acquired a business that used a large number of assets that worked in combination to produce a product saleable in offshore markets. The
Highest and best use  LO3 Ash Ltd is in the business of bottling wine, particularly for small wineries that cannot afford sophisticated technical equipment and prefer to concentrate on the growing
Highest and best use  LO3 A response to the IASB’s Exposure Draft 2009/5 Fair Value Measurements, stated: In practical terms we doubt that an asset measured on any other basis than its intended
Valuation premise for measurement of fair value  LO3 Maple Ltd conducts a business that makes women’s shoes. It operates a factory in an inner suburb of Perth. The factory contains a large
FAIR VALUE ACCOUNTING: THE SHORTCOMINGS Find and read the following article: Benston, G 2008, ‘The shortcomings of fair value accounting described in SFAS 157’, Journal of Accounting and Public
FAIR VALUES OF PROPERTY, PLANT AND EQUIPMENT IN THE UNITED STATES Find and read the following article: Hermann, D, Saudagaran, S & Thomas, W 2006, ‘The quality of fair value measures for property,
FAIR VALUES AND THE CONCEPTUAL FRAMEWORK Find and read the following article: Whittington, G 2008 ‘Fair value and the IASB/FASB Conceptual Framework project: an alternative view’, Abacus, vol.
FAIR VALUES AND ENRON Find and read the following article: Benston, G 2006, ‘Fair value accounting: a cautionary tale from Enron’, Journal of Accounting and Public Policy, vol. 25, no. 4, pp.
CASE STUDY FAIR VALUES CAUSING TENSION IN THE ACCOUNTING PROFESSION Find and read the following article: Cain, A 2013, ‘Fair value continues to captivate’, Charter, vol. 84, no. 6, 2 July, pp.
Preparation of a statement of financial position, statement of profit or loss and other comprehensive income and statement of changes in equity    LO3, 4, 5 The summarised general ledger
Preparation of a statement of financial position, statement of profit or loss and other comprehensive income and statement of changes in equity    LO3, 4, 5 The summarised general ledger
Preparation of a statement of financial position and statement of profit or loss and other comprehensive income   LO3, 4 The summarised general ledger trial balance of Ryan Ltd, a spare parts
Presentation of items in the financial statements   LO2, 3, 4, 5, 6 Consider the following items for Daniel Ltd at 30 June 2019. (a) Loss on revaluation of financial assets recognised at fair
Presentation of items in the financial statements   LO2, 3, 4, 5, 6 Consider the following items for Cooper Ltd at 30 June 2019. (a) Contingent liabilities (b) Dividends paid (c) Cash and cash
Statement of profit or loss and other comprehensive income   LO4 The general ledger trial balance of James Ltd includes the following accounts at 30 June 2019. (a) Sales revenue $975 000 (b)
Preparation of a statement of profit or loss and other comprehensive income  LO4 The general ledger trial balance of Liam Ltd, an investment company, includes the following revenue and expense
Preparation of a statement of profit or loss and other comprehensive income  LO4 The general ledger trial balance of Oliver Ltd, a medical manufacturing and research company, includes the
Preparation of a statement of financial position  LO3 The summarised general ledger trial balance of Lucas Ltd, an investment company, includes the following accounts at 30 June 2019. Cash at bank
Preparation of a statement of financial position  LO3 The summarised general ledger trial balance of Samuel Ltd, a manufacturing company, includes the following accounts at 30 June 2019. Cash $
Preparation of a statement of financial position  LO3 The summarised general ledger trial balance of Noah Ltd, a manufacturing company, includes the following accounts at 30 June 2019. Dr Cr Cash
Materiality, offsetting  LO2 Company A is a retailer that imports about 30% of its goods. The following foreign exchange gains and losses were recognised in profit during the year. Loss $m Gain $m
Statement of changes in equity  LO5 The shareholders’ equity section of the statement of financial position of Riley Ltd at 30 June 2019 is as follows. 2019 2018 Share capital $200 000 $160 000
Statement of profit or loss and other comprehensive income  LO4 The general ledger trial balance of William Ltd includes the following accounts at 30 June 2019. (a) Sales revenue $950 000 (b)
Statement of profit or loss and other comprehensive income  LO4 The general ledger trial balance of Lachlan Ltd includes the following accounts at 30 June 2019. (a) Sales revenue $1 200 000 (b)
Current asset classifications  LO3 The general ledger trial balance of Thomas Ltd includes the following asset accounts at 30 June 2019. (a) Inventories $100 000 (b) Trade receivables 120 000 (c)
Current asset and liability classifications  LO3 The general ledger trial balance of Joshua Ltd at 30 June 2019 includes the following asset and liability accounts. (a) Interest payable $ 2 000
Classification of items in the statement of financial position  LO3 The general ledger trial balance of Jack Ltd includes the following accounts that are reported in the statement of financial
Materiality and aggregation  LO2 Indicate whether each of the following statements is true or false. 1. A material item is determined solely on the basis of its size. 2. A class of assets or
Fair presentation  LO2 The directors of an Australian company that is required to prepare financial reports under the Corporations Act conclude that applying the requirements of AASB 136
FORMATS FOR STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME The accountant for Moonshine Ltd has heard that following recent changes to accounting standards, the income statement now has a
MANAGEMENT JUDGEMENTS Any judgements made by management when applying the entity’s accounting policies that have a significant effect on amounts recognised in the financial statements must also be
MEASUREMENT BASIS USED A first-time shareholder has approached you requesting some advice. The shareholder has received the company’s annual report and noticed the following statement in the
CASE STUDY ANALYSIS OF EXPENSES Review the published financial reports of the following companies and report on the information applicable to the statement of profit or loss and other comprehensive
Does the separate identification of profit and items of other comprehensive income provide a meaningful distinction between the effects of different types of non-owner transactions and events?
Can an asset that is not realisable within 12 months be classified as a current asset? If so, under what circumstances?
What is the purpose of a statement of financial position? What comprises a complete set of financial statements in accordance with AASB 101/IAS 1?
Considering accounting theory   LO5 Integrating Business Ltd provides professional advisory services to develop internal and external reporting systems to facilitate the integration of various
Telecommunications multiple‐element arrangement    LO5 Telco Ltd is a telecommunications company that offers a variety of services to its customers including fixed‐line telephone
Revenue recognition — rendering of services    LO3, 4 In each of the following situations, state at which date(s), if any, revenue will be recognised. 1. A contract for the rendering of
Multiple‐element arrangement   LO3, 4 Alissa Ltd provides a bundled service offering to Customer B. It charges Customer B $35 000 for initial connection to its network and two ongoing
Agent vs. principal   LO5 Discuss how an entity would determine whether it acts as an agent or principal in sales transactions. In your answer, discuss the distinguishing features between an
Revenue recognition — rendering of services   LO4 On 1 February 2020, MacroDot Ltd entered into an agreement with Customer S to develop a new database system (both hardware and software) for
Revenue recognition — sale of goods   LO4 In each of the following situations, state at which date, if any, revenue will be recognised. 1. A contract for the sale of goods is entered into on
Measurement — dates for recognition   LO4 Soda Ltd sells plastic bottles. Wholesale customers that purchase more than 10 000 bottles per month are entitled to a discount of 6% on their
Recognition  LO4 What is an ‘executory contract’? How does this affect the dates on which revenue is recognised under the conceptual framework?
Measurement  LO3 State whether each of the following is true or false. 1. Revenue is measured at the fair value of the consideration given by the seller. 2. Revenue is measured at the transaction
Definitions, scope  LO1, 2, 3 State whether each of the following is true or false. 1. ‘Income’ means the same as ‘revenue’. 2. ‘Gains’ are always recognised net under IFRSs. 3.
Definitions  LO1, 2, 4 State which of the following meets the definition of ‘revenue’ under AASB 15/IFRS 15 for Toys2U Ltd, a retailer of toys. Give reasons for your answer. 1. Sales tax
REVENUE RECOGNITION AND MEASUREMENT Access the ASX website (www.asx.com.au) and search for companies within the Commercial and Professional Services industry. Choose three companies from this
PAYMENT IN ADVANCE Arizona Ltd sells goods to Barbados Ltd. The agreement between the two parties states that Barbados Ltd pays for the goods in advance of delivery which will occur in 12 months’
CASE STUDY PAYMENT BY INSTALMENTS Johnson Ltd is entering into a contract to sell boat products to Fisher Ltd for $50 000. The agreement allows Fisher Ltd to pay for these goods by equal instalments,
What is a multiple‐element transaction? Give two examples and discuss how AASB 15/IFRS 15 applies to such transactions.
What are the recognition criteria for income under the conceptual framework? How do these differ from the key stated purpose of AASB 15/IFRS 15?
What is the ‘asset/liability’ model for the definition and recognition of income under the conceptual framework? Does it give a different outcome from other models permitted under AASB 15/IFRS 15?
What are the key distinctions between ‘income’ and ‘revenue’? Why do you think the AASB/ IASB made these distinctions?
Applying accounting theory    LO6, 8, 13, 14 Tropical Tours Ltd needs to raise $500 000 to finance the acquisition of a new tour bus. It approached an investment bank that proposed the
Purchased debt instrument with impairment    LO9, 11, 13, 14 On 1 January 2019, Biko Banking Ltd purchases a debt instrument with a 5-year term for its fair value of $1000 million (including
Forward to buy shares    LO5 Wilshere Ltd enters a forward contract to buy its own ordinary shares after 12 months at a fixed forward price. Wilshere Ltd has a contractual obligation based
Various financial assets and financial liabilities   LO12, 13 Great Adventure Ltd has entered into a number of contracts that are financial instruments as follows. (a) On 1 July 2018, the
Trading in shares   LO9 Pedro Ltd is an investment company that trades in shares on the Australian Securities Exchange. Pedro Ltd measures the shares at fair value through the profit or loss.
Accounting for loan assets at amortised cost   LO12, 13, 14 Last Ltd is a manufacturing company that makes loans to other parties from time to time. The loan assets are classified by Last Ltd
Convertible notes issue including financial liability at amortised cost   LO7 On 1 July 2018 Strawman Ltd issues convertible notes with a face value of $12 million. The convertible notes have
Convertible notes issue including financial liability at amortised cost   LO7 On 1 July 2021, Parade Ltd issues 2000 convertible notes. The notes have a 3-year term and are issued at par with a
Netting off a financial asset and financial liability  LO10 In each of the situations below, state whether the financial asset and financial liability must be offset in the books of Company A as
Distinguishing financial liabilities from equity instruments  LO6 Determine whether Satellite Ltd has as a financial liability or equity instrument resulting from the issue of securities in each
Subsequent measurement of financial assets and financial liabilities  LO2, 3, 13, 15 The trainee accountant at Dragon Ltd is unsure how to measure a number of items included in its financial
Identification of financial assets, financial liabilities and equity instruments  LO1, 2, 3, 5, 6 Which of the following items qualify as a financial asset, financial liability or equity
FINANCIAL INSTRUMENTS AND PERFORMANCE REPORTING Find and read the following article. Horton, J & Macve, R 2008, ‘“Fair value” for financial instruments: how erasing theory is leading to
CASE STUDY FINANCIAL INSTRUMENTS IN THE GLOBAL FINANCIAL CRISIS The global financial crisis (GFC) gave rise to criticism of financial reporting, particularly in relation to the accounting treatment
Describe the various approaches to subsequent measurement of financial assets permitted by AASB 9/IFRS 9 and the circumstances in which each approach may be applied.
Explain why some preference shares are recognised as financial liabilities by the issuer while others and are recognised as equity instruments.
Define an equity instrument and explain how it differs from a financial liability.
Define derivative and explain how a hybrid contract can have an embedded derivate. List some common examples of derivatives and embedded derivatives.
Define financial liability and list some common examples.
Define financial asset and list some common examples.
Define financial instrument and identify transactions that give rise to financial instruments and those that do not.
Accounting for defined benefit superannuation plans    LO5 Some years ago, Wattle Ltd established a defined benefit superannuation plan for its employees. The company has since introduced a
Accounting for defined benefit superannuation plans    LO5 Lily Ltd provides a defined benefit superannuation plan for its managers. The following information is available in relation to
Accounting for long service leave    LO6 Bluebell Ltd provides credit services. Bluebell Ltd provides its employees with long service leave entitlements of 13 weeks of paid leave for every
Accounting for long service leave   LO6 Geranium Ltd provides long service leave for its retail staff. Long service leave entitlement is determined as 13 weeks of paid leave for 10 years of
Accounting for sick leave   LO2, 6 Rose Ltd provides 1 week (5 days) of accumulating non‐vesting sick leave for each year of service. Sick leave is paid at the base pay rate, which does not
Accounting for defined benefit superannuation plans   LO5 For each of the following scenarios, determine (i) the surplus or deficit in the defined benefit superannuation fund and (ii) the net
Accounting for defined benefit superannuation plans   LO5 Which of the following items in relation to a defined benefit fund are recognised in (i) profit or loss and (ii) other comprehensive
Accounting for defined benefit superannuation plans   LO5 Sydney Ltd provides a defined benefit superannuation plan for its managers. The assistant accountant has completed some sections of the
Accounting for sick leave   LO2 Daffodil Ltd opened a call centre on 1 July 2018. The company provides 1 week (5 days) of sick leave entitlement for the employees working at the call centre.
Accounting for annual leave   LO2 Assume the same details as in exercise 9.11, except that Tulip Ltd’s trial balance showed the provision for annual leave had a credit balance of $62 640.
Accounting for annual leave   LO2 Tulip 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
Accounting for the payroll and accrual of wages and salaries   LO2 Lavender Ltd pays its employees on a fortnightly basis. All employee benefits are recognised as expenses. The following
Accounting for defined contribution superannuation plans  LO4 Wollongong Ltd provides a defined contribution superannuation fund for its employees. The company pays contributions equivalent to 10%
Accounting for long service leave  LO6 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
Accounting for profit‐sharing arrangements  LO2 Wellington 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
Accounting for annual leave  LO2 Newcastle 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
Accounting for sick leave  LO2 Auckland Ltd has 200 employees who each earn a gross wage of $140 per day. Auckland Ltd provides 5 days of paid non‐accumulating sick leave for each employee per

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