Question 1 (3 marks) 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 summary of significant accounting policies: The financial report has been prepared on the basis of historical cost, except for the revaluation of certain non-current assets which is explained in the notes.' Required Explain to the shareholder why this statement is included in the accounting policy note. Question 2 (4 marks) '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 and decreases in fair value dictate whether carrying amounts are adjusted up or down. We don't bother testing land and buildings for impairment.' Required Critically evaluate the above statement. Question 3 (3 marks) Alloy Ltd has acquired a Blink manufacturing division from LGIA Ltd. The accountant, Mr Lee, has shown the board of directors of Alloy Ltd the financial information regarding the acquisition. Mr Lee calculated a residual amount of $45 000 to be reported as goodwill in the accounts. The directors are not sure whether they want to record goodwill on Alloy Ltd's statement of financial position. Some directors are not sure what goodwill is or why the company has bought it. Other directors even query whether goodwill is an asset, with some being concerned with future effects on the statement of profit or loss and other comprehensive income. Required Advise Mr Lee about the nature of goodwill and how to account for it. Question 4 (4 marks) Jay Ltd sold inventories during the current period to its wholly owned subsidiary, Adios Ltd, for $15 000. These items previously cost Jay Ltd $12000. Adios Ltd subsequently sold half the items to Night Ltd, an external entity, for $8000. The income tax rate is 30%. The group accountant for Jay Ltd, Bonita Jeffrey, maintains that the appropriate consolidation adjustment entries are as follows. Dr 15000 Sales Cost of sales Inventories Deferred tax asset Income tax expense 13000 2000 Dr Cr 300 300 1. Required Discuss whether the entries suggested by Bonita Jeffrey are correct, explaining on a line-by-line basis the correct adjustment entries. 2. Determine the consolidation worksheet entries in the following period, assuming the inventories are on- sold to external parties, and explain the adjustments on a line-by-line basis. Question 5 (3 marks) The accountant of Chocolate Ltd, Ms Fraser, has been advised by her auditors that the entity's investment in Corio Milk Ltd should be accounted for using the equity method of accounting. Chocolate Ltd holds only 20.2% of the voting shares currently issued by Corio Milk Ltd. Since the investment was undertaken purely for cash flow reasons based on the potential dividend stream from the investment, Ms Fraser does not believe that Chocolate Ltd exerts significant influence over the investee. Required Discuss the factors that Ms Fraser should investigate in determining whether an investor-associate relationship exists, and what avenues are available so that the equity method of accounting does not have to be applied. Question 6 (3 marks) A shareholder of a company in liquidation was told 'Creditors are to be paid in full but there is insufficient funds to pay out all contributories.'. The shareholder is unsure of what this means and asks your advice. Required Explain to the shareholder the meaning of the above statement. Your explanation will include a discussion of the principles to be followed in apportioning a deficiency among contributories
