answer all the seminar questions regarding particular headings.

Seminar Questions: Share Based Payments Question 1 SBP Ltd grants 50 options to each of its 100 employees on 1 July 20X5. Each grant is conditional on the employee working for the company for the next 3 years. The fair value of each option at grant date is $40. SBP Ltd's initial estimate is that 4 employees (4%) will leave during the vesting period. The following table summarises the actual employee departures and revised estimates of employee departures across the vesting period Year to 30 June X6 30 June X7 30 June X8 Actual employee departures 5 2 - Revised estimate of departures 16% 10% N/A REQUIRED: In accordance with AASB 2 Share-based Payment, prepare SBP Ltd's journal entries in respect of the option scheme with its employees for each year 30 June 20X6, 30 June 20X7 and 30 June 20X8. Question 2 option re-pricing SBP Company granted 10,000 share options with a fair value of $20 each to each of 10 senior executives on 1 July 2011. For the options to vest, the employee must work three years for the company. By the end of the third year, only six of these executives remain with SBP Company. During that year the company's share price dropped and the company decides to re-price its options. It estimates that the fair value of the original share options is now $7 and the fair value of the re-priced share options is $10. Cumulative remuneration expense at the end of the second year was $800,000. REQUIRED: (i) Given the above information, calculate the cumulative total remuneration expense at the end of the third year and the annual remuneration expense for the third year only. (ii) Write the journal entry necessary to record remuneration expense for the third year. Narrations not required. (iii) Comment on ethical issues that could arise from the use of share based payments (such as options) to remunerate key executives in a company. Question 3 Share Appreciation Rights (SARS) Short Ltd grants 100 share appreciation rights (SARs) to each of its 100 employees on 1 July 2013. Each grant is conditional on the employee working for the company for the next two years. All SARs held by employees at the end of year two vest. The intrinsic value (which equals the cash paid out) and estimates of the fair value of the SARs at the end of each year are as follows: Year Fair value of SAR Intrinsic Value = Cash Paid Out 30/6/14 $16.50 30/6/15 $18.00 $15.00 30/6/16 $20.00 $21.00 1 The fair value of the SAR is determined using an option pricing formula, e.g. the Black-Scholes model, and the intrinsic value is the difference between the price of the shares at time t and their value when the SARs were issued on 1 July 2013 (the spread). Employees can receive this spread in cash when the SARs vest or later. The following table summarises the actual employee departures and estimates of future employee departures across the vesting period. Year Actual employee departures Revised estimate of departures 30/6/14 7 a further 9 30/6/15 15 N/A Details of the number of employees who exercised the SAR's after they have vested are as follows: Year 30/6/2015 30/6/2016 Number Exercised 35 43 REQUIRED: Give journal entries to record employee expense and the SARs for each of the 2014 - 2016 years. 2 School of Accounting ACCT3563: Issues in Financial Reporting and Analysis Session 1, 2017 Accounting for assets Website: http://telt.unsw.edu.au SEMINAR QUESTIONS 1. Impairment Loss and Cash Generating Unit RA Ltd calculates an impairment loss of $4,800,000 that must be applied to one of its cashgenerating units. The carrying amounts of the assets that comprise the cash-generating unit are as follows: $'000 Goodwill 4,000 Building 2,000 Plant 1,000 Office Equipment 3,000 $10,000 RA Ltd determines that the net selling price of the building is $1 800 000 and its value in use is $1 900 000. Determine the carrying amount of each of these assets in accordance with AASB 136 Impairment of Assets. Show all workings. 2. Accounting for Intangible Assets Part A: Morris Limited is a company involved in the research and development of a new mechanical toy soldier. The company incurs the following costs: a. $150,000 on understanding the current toy market; b. $250,000 on determining whether there still exists demand for mechanical toys in the current computer-based toy environment; c. $500,000 in designing and testing a prototype; d. $500,000 in developing and testing the product. Part B: Morris Limited has an intangible asset on its books which was initially recorded on 1 July 2014 at $300,000. The asset has a finite life (10 years). At 30 June 2016, the asset was assessed as having a recoverable amount of $200,000 Required: i. Determine how each of the four incurred costs outlined in Part A (above) would be treated for accounting purposes ii. Identify if the accounting treatment of any four incurred costs outlined in Part A (above) is conditional, and explain those conditions iii. Show the journal entries to account for the intangible asset in Part B (above): (a) at 30 June 2015 and (b) at 30 June 2016 School of Accounting ACCT3563: Issues in Financial Reporting and Analysis Session 1, 2017 Week 5 Seminar Questions Accounting for provisions Website: http://telt.unsw.edu.au 1 1. Long service leave Hood Ltd provides its employees with 13 weeks long-service leave for 10 years of service. Assume there is no entitlement until 10 years of service is reached. At reporting date, Hood Ltd has 10 employees who have been with the company for 6 years and each employee earns $100 000 per annum. Hood Ltd calculates that there is an 80% probability that each employee will maintain their employment with the Company until their long-service leave entitlement vests. The projected inflation rate is 3% p.a. and it is expected that wage increases will keep pace with inflation. The corporate bond rate for an issue with 4 years to maturity is 6% while for an issue with 6 years to maturity the rate is 8%. Future Value and Present Value Table (Extract) Years 4 6 FV of $1 @ 3% 1.1254 1.1940 FV of $1 @ 6% 1.2625 1.4184 PV of $1 6% 0.7921 0.7050 PV of $1 8% 0.7350 0.6302 REQUIRED Calculate the provision for long service leave at reporting date of Hood Ltd. What is journal entry if the trial balance currently shows the provision at an amount of $60 000? 2. Sick leave On 1 January 20X1, Jol Ltd commenced operations in the child care industry. Jol Ltd's annual payroll is $2.6 million. The sick leave entitlement of each employee is two weeks per year. Each employee receives the same annual salary. The entitlements to sick leave are accumulating but non-vesting. During the 20X1 year, 40% of employees used their full entitlement to sick leave and 60% used none of their entitlement. Jol Ltd expects that one half of the sick leave that has accumulated by 31 December 20X1 will be used up in subsequent periods. REQUIRED Prepare Jol Ltd's journal entries for sick leave for the year to 31 December 20X1. 3. Ethics case with Provisions You are the newly appointed deputy chief-accountant at Ship Ahoy Shipping Co Ltd. You review of the company's accounts for the past 10 years, and you observe the following data: 2 Year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Profits (losses) from shipping ($'000s) A 900 (780) (450) (380) (425) (538) (540) (334) (95) (427) Investment income ($'000s) B 500 452 435 422 404 261 267 559 452 385 Shipping + Annual debit Reported Investment or (credit) to Net Profit Income($'000s) Provision for ($'000s) Ship Modernisation ($'000s) A+B C A+B+C 1400 (565) 837 (328) 995 668 (15) 740 725 42 736 779 (21) 794 773 (277) 1008 731 (273) 901 629 225 513 737 357 372 729 (42) 194 152 Each year, the reported Net Profit equals the sum of shipping profit (or loss), investment income and the debit or credit to Provision for Ship Modernisation. You are concerned that the shipping operations (the company's core business) have been unprofitable for all but one of the past 10 years, and that these losses have been made up each year by investment income (the company has a large investment portfolio). The sum of shipping and investment income varies a lot, being negative in six and positive in four of the past 10 years. Reported Net Profit on the other hand, is always positive, although it is not a smoothly increasing series of numbers, and indeed in 2016 has declined sharply. Puzzled by the account Provision for Ship Modernisation, you make enquiries and find that this account had been created and built up in the late 1990s and early 2000s when the company had several lucrative shipping contracts with the Australian government and profits on those contracts were very high. Those contracts have now ceased. In order to counter accusations that the company was earning excessive profits, each year in the late 1990s/early 2000s, an accrual debit to a Ship Modernisation expense account was created with the corresponding credit to Provision for Ship Modernisation account. The latter has appeared in the balance sheet as a noncurrent liability for many years. In 2006, the account had a credit balance built up of $5,400,000. Ship modernisations are a major activity involving large outlays but are not essential if ships are well maintained. Ship Ahoy's vessels are very well maintained. Up to 2016, none of the company's fleet has ever actually been modernised and the company has no immediate plans to modernise any ship. The company's key executives are paid annual bonuses if the company reports a net profit, but no bonus is paid if a loss is reported. 3 Required: (a) Comment on the legitimacy of the Provision for Ship Modernisation Account from the viewpoint of AASB 137 Provisions. (b) Has the company been engaged in earnings management? (c) Comment on the use made of the Provision for Ship Modernisation Account from a Positive Accounting Theory perspective. (d) Comment from an Aristotelian ethical perspective on the legitimacy of the Provision for Ship Modernisation Account and the use made of it over the past 10 years. (e) Comment from a Utilitarian ethical perspective on the legitimacy of the Provision for Ship Modernisation Account and the use made of it over the past 10 years. Acknowledgement: This case is adapted from the Royal Mail Steam Packet Company case (R vs Kylsant 1931). For simplicity, the currency is now in dollars, some terminology and the nature of the Provision have been changed, and the years updated to the present. The contractual incentives (bonuses) did not appear in the original case. Data are from Johnson, Jager & Taylor The Law and Practice of Company Accounting 5th ed 1983, p. 32) 4 THE UNIVERSITY OF NEW SOUTH WALES School of Accounting ACCT3563: Issues in Financial Reporting and Analysis Session 1, 2017 Revenue recognition Seminar Questions Website: http://telt.unsw.edu.au 1. Construction contract Company XYZ signs a contract on 1 July 2014 to construct a bridge, at a contract price of $9m. It will be completed in 3 years at an expected total cost of $8m. Now assume that XYZ calculates the percentage based on costs to date to total estimated costs. The following information is available: Required: Provide journal entries to account for all transactions in 2015, 2016 and 2017. Assume all estimates are reliable and XYZ uses costs to calculate the percentage of completion 2. Accounting standard, PAT and Ethics Moonbeam Appliances Ltd is an Australian electrical appliance manufacturer. It has just employed a new CEO, Alan Doppler, whose task is to boost the company's reported earnings and share price. In the first year of Doppler's tenure as CEO, the company engages in a major marketing campaign in June (the company's year-end is 30th June) to sell outdoor electric barbecues to customers at a major discount below the normal selling price, on the basis that the customers need not take physical delivery of the appliances for six months and will not be billed for the sale, or asked to pay, until delivery. In the meantime, the barbecues sold are shipped to a company-owned warehouse and stored until customers request delivery. The marketing campaign is very successful and Moonbeam books $35 million of sales revenue in June when the customers agree to buy the barbecues (but 6 months before delivery and billing), thereby boosting its sales and profits for the year ended 30 June in the first year of Doppler's tenure as CEO. A $35million boost to sales is a material increase for this company. The share price increases when the company announces its improved profit performance to 30th June. Alan Doppler has a compensation scheme in place which pays him a bonus if he increases the company's revenue and profits, so he is awarded his bonus. It is important to note that these sales take place in the winter (June in Australia), but most customers would not want their barbecues until the summer months (December/January in Australia). At 30th June, the number of customers who will actually request delivery of the barbecues six months later is unknown. The sale contracts in June legally transfer the risks and rewards of ownership to the buyers. The company's financial report for the year ended 30th June must be released by September at the latest to comply with corporations' law requirements. REQUIRED i) Is the company's revenue recognition policy on these barbecues consistent with Australian accounting standards? ii) Evaluate the company's revenue recognition policy from a Positive Accounting Theory perspective. iii) Evaluate the company's revenue recognition policy from the ethical perspectives of: (a) Utilitarianism (b) Aristotelian ethics Acknowledgement: this case is very loosely based on that of the Sunbeam Corporation in the USA in the 1990s. THE UNIVERSITY OF NEW SOUTH WALES School of Accounting ACCT3563: Issues in Financial Reporting and Analysis Session 1, 2017 Accounting for leases Website: http://telt.unsw.edu.au SEMINAR QUESTIONS 1. Lease accounting by lessee and lessor PC Carpets Ltd is a company involved in the manufacture and distribution of quality carpets. On 1 July 20X1 PC Carpets Ltd arranged to lease equipment from Cheapa Finance Co. that has a fair value of $1,000,000. Both companies classify the lease of the equipment as a finance lease in accordance with AASB 117 Leases. The lease term is 4 years and payments of $250,000 are due in advance on 1 July each year. The guaranteed residual value of the equipment at the end of the lease term is $187,825. The interest rate implicit in the lease is 10% p.a. The present value of the minimum lease payments equals the fair value of the equipment at 1 July 20X1. At the inception of the lease the equipment had an estimated useful life of 5 years and a constant pattern of future economic benefits are expected from the asset. PC Carpets Ltd pays the guaranteed residual on 30 June 20X5 and retains the equipment. REQUIRED: a) Prepare the lease repayment schedule. b) Record the journal entries of PC Carpets Ltd for the years ending 30 June 20X2 and 30 June 20X3 c) Record the journal entries of Cheapa Finance Co. for the years ending 30 June 20X4 and 30 June 20X5 2. Lease accounting by lessee On 1 July 2014, Lessee Ltd and Lessor Ltd enter into a finance lease agreement with the following terms: lease term is 4 years; estimated economic life of the leased asset is 8 years, zero scrap value; 4 annual rental payments of $46,000; each payment is made one year in arrears; contingent rental payments of $1,000 per year (not included in each $46,000), paid in arrears, while the contingent rent is not paid for year ended 30 June 2015 but is paid for the year ended 30 June 2016; bargain purchase option (which the Lessee intends to exercise) of $5,491 at the end of the lease term; interest rate implicit in the lease is 7% per annum; and straight-line depreciation of assets is used by both the lessee and lessor. Required: Write the necessary journal entries for the lease in the books of Lessee Ltd for the year ended 30 June 2016 only. 3. Leases It has often been argued that lease accounting standards, such as Australia's AASB 117 Leases, result in a situation of not enough leases appearing on the balance sheets of lessees. (Do NOT consider lessors in your answer.) (i) (ii) (iii) (iv) Why does this situation arise? Explain whether or not the situation is a problem from a business ethics perspective. Outline solutions currently proposed by international accounting standard setters to resolve the situation. What Positive Accounting Theory implications could arise from the international accounting standard setters' proposals