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financial reporting

Questions and Answers of Financial Reporting

Accounting for sick leave  LO2 Melbourne Ltd has 100 employees who each earn a gross wage of $150 per day. In an attempt to reduce absenteeism, Melbourne Ltd introduced a new workplace agreement
Accounting for the payroll  LO2 Albury 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
Accrual of wages and salaries  LO2 Canberra Ltd has a weekly payroll of $125 000. The last payroll processed before the end of the annual reporting period was for the week ended Friday 24 June.
Accounting for the payroll  LO2 Adelaide 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
BONUSES Griffith Ltd pays bonuses to its staff 3 months 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 2019
LONG SERVICE LEAVE The accountant of Bond 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,
VESTING ENTITLEMENTS Deakin 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
CASE STUDY TERMINATION BENEFITS The board of directors of Swinburne Ltd met in June 2019 and decided to close down a branch of the company’s operations when the lease expired in the following
Identify and discuss the assumptions involved in the measurement of a provision for long service leave. Assess the consistency of these requirements with the fundamental qualitative characteristics
In relation to defined benefit post‐employment plans, paragraph56 of AASB 119/IAS 19 states, ‘the entity is, in substance, underwriting the actuarial and investment risks associated with the
Compare the off‐balance sheet approach to accounting for a defined benefit post‐employment plan with the net capitalisation approach adopted by AASB 119/IAS 19. Can these approaches be explained
Explain how an entity should account for its contribution to a defined contribution superannuation plan in accordance with AASB 119/IAS 19.
Applying accounting theory    LO1, 4, 5, 6 In June 2018 Great Southern Ltd built a submarine under a contract with the Australian Navy. The contract required Great Southern Ltd to provide a
Comprehensive problem    LO2, 3, 5, 6, 7, 8 ChubbyChocs Ltd, a listed company, is a manufacturer of confectionery and biscuits. The end of its reporting period is 30 June. Relevant extracts
Restructuring provisions on acquisition    LO4, 6 Tooth Ltd acquires Nail Ltd, effective 1 March 2020. At the date of acquisition, Tooth Ltd intends to close a division of Nail Ltd. As at
Calculation of a provision   LO5, 6 In May 2019, Savoir Ltd relocated an employee from head office to an office in another city. As at 30 June 2019, the end of Savoir Ltd’s reporting period,
Measuring a restructuring provision   LO6 Tee Ltd’s directors decided on 3 May 2020 to restructure the company’s operations as follows. • Factory Z would be closed down and put on the
Risk and present value of cash flows   LO5 Using examples, explain how a liability‐specific discount rate could cause the amount calculated for a provision to be lower when the risk
Recognising a provision   LO4 In each of the following scenarios, explain whether or not Omega Ltd would be required to recognise a provision. 1. As a result of its plastics operations, Omega
Contingent liabilities — disclosure   LO3, 6, 8 A customer filed a lawsuit against Delta Ltd in December 2020 for costs and damages allegedly incurred as a result of the failure of one of
Distinguishing between liabilities, provisions and contingent liabilities   LO2, 3, 4, 6 Katz Ltd’s financial statements are authorised for issue on 24 August 2019. Required Identify whether
Restructuring costs   LO6 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
Restructuring costs   LO6 A division of an acquired entity will be closed and activities discontinued. The division will operate for 1 year after the date of acquisition. At the end of the 1
Recognising a provision   LO4 Tres 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
Recognising a provision  LO4 The government introduces a number of changes to the goods and services (value‐added) tax system. As a result of these changes, Stitchers Ltd, a manufacturing
Recognising a provision  LO4 When should liabilities for each of the following items be recorded in the accounts of the business entity? 1. Acquisition of goods by purchase on credit 2. Salaries
Recognising a provision — measurement  LO5, 6 Explain how a borrowing cost could arise as part of the measurement of a provision. Illustrate your explanation with a simple example.
LACK OF SYMMETRY BETWEEN A CONTINGENT ASSET AND A CONTINGENT LIABILITY Jackshire Ltd filed a lawsuit against Bormire Ltd for compensation of $23 million after Bormire failed to deliver goods on time.
provides a useful decision tree to help management make judgements on classifying a liability. Using this decision tree, determine how the case should be recorded. CASE STUDY
MANAGEMENT JUDGEMENTS Moolie Ltd is a manufacturer and retailer of surfboards. It gives purchasers a warranty at the time of sale for manufacturing defects that become apparent within 2 years from
CASE STUDY DISTINGUISH BETWEEN PROVISIONS AND CONTINGENT LIABILITIES Provisions are recognised as a liability in the statement of financial position whereas contingent liabilities are not recognised
Compare and contrast the requirements of AASB 3/IFRS3and AASB 137/IAS37 in respect of restructuring provisions and contingent liabilities.
Accounting theory and impairment losses   LO1, 2, 7 In an article published in the March 2015 issue of Company Director, Commissioner John Price of the Australian Securities & Investments
Impairment loss    LO5 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 2019, it anticipated
Goodwill, corporate assets    LO5 A large manufacturing company, St. George Ltd, has its operations in Newcastle. It has two CGUs, Red Unit and Dragon Unit. At 30 June 2019, the management
CGUs, corporate assets, goodwill    LO5 Camelot Ltd manufactures children’s toys. Its operations are carried out through three operating divisions, namely the Merlin Division, the Hollow
CGUs, reversal of impairment losses    LO5, 6 The two CGUs of Dark Forest Ltd are referred to as the Lady CGU and the Lake CGU. At 31 July 2018, the carrying amounts of the assets of the two
Reversal of impairment losses    LO5, 6 Saxon Ltd conducted an impairment test at 30 June 2018. As a part of that exercise, it measured the recoverable amount of the entity, considered to be
Reversal of impairment losses    LO5 At 30 June 2019, Boxes Ltd reported the following assets. Land $ 50 000 Plant 250 000 Accumulated depreciation (50 000) Goodwill 8 000 Inventories 40 000
Corporate assets   LO5 Run 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 as follows.
Impairment, two CGUs   LO5 Last Ltd has two divisions, Time and Leisure. Each of these is regarded as a separate CGU. At 31 December 2019, the carrying amounts of the assets of the two
Allocation of corporate assets and goodwill   LO5 Bunsen Ltd acquired all the assets and liabilities of Jones Ltd on 1 January 2020. Jones Ltd’s activities were run through three separate
Impairment loss for a CGU, reversal of impairment loss    LO5, 6 One of the CGUs of Cooper Ltd is associated with the manufacture of wine barrels. At 30 June 2019, Cooper Ltd believed, based
Impairment loss, goodwill   LO5 On 1 January 2018, Bad Ltd acquired all the assets and liabilities of Wolf Ltd. Wolf Ltd has a number of operating divisions, including one whose major industry
Impairment of a CGU   LO5 Potters Ltd has determined that its fine china division is a CGU. The carrying amounts of the assets at 30 June 2019 are as follows. Factory $210 000 Land 150 000
Impairment of a CGU, goodwill   LO5 Crossbow Ltd manufactures leather footwear for women. It has undertaken a strategy of buying out companies that had competing products. These companies were
Impairment of a CGU   LO5 Bow Ltd reported the following assets in its statement of financial position at 30 June 2019. Plant $ 800 000 Accumulated depreciation (240 000) Land 300 000 Patent
Impairment of a CGU   LO5 Spear Ltd reported the following information in its statement of financial position at 30 June 2019. Plant $ 650 000 Accumulated depreciation — plant (150 000)
Impairment loss and reversal of an individual asset   LO4, 6 On 30 June 2020, an item of machinery had a carrying amount of $525 000. The machinery’s cost at acquisition was $750 000 at which
Impairment loss of an individual asset incorporating revaluation model  LO3, 4 At 30 June 2020, an entity holds a block of land from which it generates revenue by leasing it to agricultural
Impairment of an individual asset, calculating value‐in‐use  LO3, 4 Arrow Ltd acquired a machine for $250 000 on 1 July 2019. It depreciated the asset at 10% p.a. on a straight‐line basis.
Impairment of an individual asset  LO3, 4 On 1 July 2020 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
Impairment of an individual asset  LO3, 4 On 1 April 2018 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
Determining recoverable amount and impairment adjustments  LO3, 4 Consider the following information relating to five different items of plant and equipment at the reporting date. Asset Carrying
IMPACT OF IMPAIRMENT LOSSES On 28 August 2014, Qantas announced an annual statutory loss after tax of $2.8 billion for the 12 months ended 30 June. This result included a massive $2.6 billion
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,
presents eBay’s cumulative stock return against the S&P 500 index from 2003. In mid‐ September 2005, eBay acquired the internet phone company Skype for $2.6 billion. On 1 October 2007, it
GOODWILL WRITE‐OFFS 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
DETERMINATION OF CGUs The Scenic City Council contracts out the bus routes in and around Scenic City to various subcontractors based on a tender arrangement. Some routes, such as the Express to City
CASE STUDY INDICATIONS AND DETERMINATION OF IMPAIRMENT LOSSES BHP Billiton released the following announcement to investors and media on 15 January 2016. Onshore US asset review BHP Billiton expects
What is an impairment test?
Applying accounting theory to property, plant and equipment   LO5, 6 Bill was recently appointed as the accountant for Lorikeet Ltd. He was surprised to learn that the company uses the cost
Depreciation    LO5 Hawk Ltd started operations on 1 September 2014. Hawk Ltd’s accounts at 31 December 2017 included the following balances. Machinery (at cost) $ 91 000 Accumulated
Depreciation calculation    LO5 Dove Ltd operates a factory that contains a large number of machines designed to produce knitted garments. These machines are generally depreciated at 10%
Acquisitions, revaluations, replacements, depreciation   LO2, 3, 5, 6, 7 Wren Trading operates in a very competitive field. To maintain its market position, it purchased two new machines for
Acquisitions, disposals, trade‐ins, overhauls, depreciation   LO2, 3, 4, 5, 6, 7 River Song is the owner of Kestrel Fishing Charters. The business’s final trial balance on 30 June 2019 (end
Classification of acquisition costs   LO2, 3 Harrier Ltd began operations on 1 July 2019. During the following year, the company acquired a tract of land, demolished the building on the land
Determining the cost of assets   LO3 Magpie Ltd uses many kinds of machines in its operations. It constructs some of these machines itself and acquires others from the manufacturers. The
Revaluation model   LO2, 3, 5, 6, 7 On 1 July 2019, Peewee Ltd acquired two assets within the same class of plant and equipment. Information on these assets is as follows. Cost Expected useful
Acquisitions, disposals, depreciation   LO5, 6, 7 Swan Ltd purchased equipment on 1 July 2018 for $39 800 cash. Transport and installation costs of $4200 were paid on 5 July 2018. Useful life
Acquisition and sale of assets, depreciation   LO2, 3, 5, 6 Lark’s Turf Farm owned the following items of property, plant and equipment as at 30 June 2019. Land (at cost) $120 000 Office
Calculation of depreciation   LO5 On 1 July 2019, Eagle Airlines acquired a new aeroplane for a total cost of $10 million. A breakdown of the costs to build the aeroplane was given by the
Depreciation  LO5, 6 Wader Ltd constructed a building for use by its administration department. The completion date was 1 July 2012, and the construction cost was $840 000. The company expected to
Depreciation  LO5, 6 Stork Ltd was formed on 1 July 2017 to courier packages between the city and the airport. On this date, the company acquired a delivery truck from Lyons Trucks. The company
Revaluation of assets  LO5, 6 On 30 June 2019, the statement of financial position of Kookaburra Ltd showed the following non‐current assets after charging depreciation. Building $ 300 000
Depreciation and revaluation of assets  LO5, 6 In the 30 June 2019 annual report of Emu Ltd, the equipment was reported as follows. Equipment (at cost) $500 000 Accumulated depreciation 150 000
Determination of cost  LO3 Kingfisher Ltd has acquired a new building for $500 000. It has incurred incidental costs of $10 000 in the acquisition process for legal fees, the real estate agent’s
Determination of cost  LO3 Corella Ltd has acquired a new machine, which it has now been installed in its factory. Assess which of the following items should be capitalised into the cost of the
Determination of cost  LO3 Galah 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.
Purpose of depreciation  LO5 A new accountant has been appointed to Albatross Ltd and has implemented major changes in the calculation of depreciation. As a result, some parts of the factory are
Costs of acquisition  LO3 Darter Ltd has recently acquired a machine for an invoice price of $50 000. Various other costs relating to the acquisition and installation of the machine include
Determination of cost  LO2 Pelican 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
Purpose of depreciation  LO5 Recently Sea Eagle Ltd experienced a workers’ strike that affected a number of its operating plants. The group accountant of Sea Eagle Ltd indicated that it was not
Revaluation model  LO6 One of the board of directors of Seagull Ltd has proposed that the company adopt the revaluation model for fixed assets. Some of these assets are difficult to obtain and
Revaluation adjustments and reversals  LO6 The following data from Lyre Ltd’s accounts relates to two assets at 30 June 2018. Asset Value Accumulated depreciation Carrying amount Land $ 1 600
Revaluation adjustments and reversals  LO6 On 1 January 2019, Lima Ltd revalued land from $100 000 to $200 000. On 1 January 2020, the company subsequently revalued the land to $160 000. And on 1
DEPRECIATION CHARGES The management of Predator Ltd has been analysing the financial reports provided by the accountant, who has been with the firm for a number of years. Management has expressed its
DEPRECIATION CHARGES A new accountant has been appointed to Outlander Ltd and has implemented major changes in the calculation of depreciation. As a result, some parts of the factory have much larger
ANNUAL DEPRECIATION CHARGE A company is in the movie rental business. Movies are generally rented out over a period of 2 years and then either sold or destroyed. However, management wants to show
STRAIGHT-LINE VS DIMINISHING BALANCE DEPRECIATION Silence Ltd uses tractors as part of its operating equipment, and it applies the straight‐line depreciation method to these assets. Silence Ltd has
CASE STUDY FAIR VALUE BASIS FOR MEASUREMENT The management of Ransom Ltd has decided to use the fair value basis for the measurement of its equipment. Some of this equipment is very hard to obtain
Should accounting for revaluation increases and decreases be done on an asset‐by‐asset basis or on a class‐of‐assets basis?
How should items of property, plant and equipment be measured at initial recognition?
Assignment of cost (periodic and perpetual methods)   LO4, 5, 6 Darwin Ltd’s inventories transactions for April 2021 are shown below. Purchases Cost of sales Balance Date No. units Unit cost
Applying the lower of cost and NRV rule   LO7 The following information relates to the inventories on hand at 30 June 2020 held by Canberra Ltd. Item No. Quantity Cost per unit $ Cost to
End‐of‐period adjustments   LO5 A physical count of inventories at 31 December 2020 revealed that Katoomba Pty Ltd had inventories on hand at that date with a cost of $441 000. Katoomba
End‐of‐period adjustments  LO5 An extract from Gosford Ltd’s unadjusted trial balance as at 30 June 2020 appears below. Gosford Ltd’s reporting period ends on 30 June and it uses the
Assigning cost (perpetual method)  LO4 Select the correct answer. Show any workings required and provide reasons to justify your choice. Cairns Ltd uses the perpetual method. Cairns Ltd’s
Determining inventories cost and cost of sales (periodic method)  LO3, 4 Select the correct answer. Show any workings required and provide reasons to justify your choice. 1. The cost of
Recording inventories transactions  LO3, 4 William Ltd began business on 1 March 2021. William Ltd balances the books at month‐end and uses the periodic method. William Ltd’s transactions for

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