Question 1 Accounting Measurement Systems [20 marks]

Part A

On 1 January 2019, George commenced a retail business, which buys and sells fuel. He started the

business by investing personal savings of $20, 000. The entire amount was utilized to purchase fuel

at a cost of $2.00 per litre. During the year, all the fuel was sold for $2.50 per litre. By the end of the

year, the cost of the fuel was $2.10 per litre.

Required

Using current cost accounting, calculate the maximum dividend the business can pay out while still

maintaining its:

a) Financial capital [3 marks]

b) Physical capital [3 marks]

Part B

Pitt Limited has 3 non-current assets as shown in the table below. It uses the straight line

depreciation method.

Asset Date of

Acquisition

Depreciation

Rate

Current Cost Selling Price

01.01.18 31.12.18 01.01.18 31.12.18

Equipment 01.01.15 10% 300, 000 330, 000 250, 000 275, 000

Land 01.01.14 N.A 200, 000 250, 000 220, 000 260, 000

Vehicle 01.01.18 20% 100, 000 80, 000 90, 000 70, 000

Required

a) Calculate depreciation on the vehicle for 2018 using

(i) current cost [2 marks]

(ii) exit pricing [1 mark]

b) Calculate the closing balance for each class of non-current asset (after deducting accumulated

depreciation) using

(i) current cost [4 marks]

(ii) exit pricing [3 marks]

c) With reference to the non-current assets in the table above, briefly outline one benefit and one

challenge of applying fair value measurement in a Pacific Island Country like Fiji. [4 marks]

Question 2 Positive Accounting Theory [20 marks]

Part A

The Principal-Agent relationship is very important in modern day business.

Required

a) Explain two agency problems of debt [6 marks]

b) Briefly outline how debt-holders can mitigate one of the problems outlined above [2 marks]

Part B

Elizabeth is the CEO of Spark International Limited. She is entitled to receive a fixed bonus of

$100,000 if the business achieves or exceeds the annual profit target. Otherwise she receives no

bonus.

2016 2017 2018

Profit Target $2, 000, 000 $2, 000, 000 $2, 000, 000

Calculated Profit $2, 200, 000 $1, 998, 000 $500, 000

Variance $200, 000 $2, 000 $1, 500, 000

Required

a) Explain the meaning of "earnings management" [3 marks]

b) Suggest the most likely behavior of the CEO in relation to the profit target for:

(i) 2016 [3 marks]

(ii) 2017 [3 marks]

(iii) 2018 [3 marks]

Question 3 Social and Environmental Accounting [20 marks]

Part A

Large firms are gradually adopting voluntary disclosure of the impacts of social and environmental

issues.

Required

Use both branches of stakeholder theory to explain why firms may engage in voluntary disclosure

of social and environmental issues such as climate change [10 marks].

Part B

The banking sector occasionally faces allegations of excessive interest rates and unreasonable bank

fees. It may also be perceived as failing to support certain groups in the population and certain

sectors of the economy.

Required

Use legitimacy theory to explain some of the strategies that a bank might adopt in light of such

allegations [10 marks].

Question 4 Behavioral Accounting Theory [20 marks]

James is evaluating shares in several companies, with a view to investing in one or more of them.

He intends to use a financial investment model to assist him in the decision making process.

Required

a) Explain how James can apply the Brunswick Lens Model to make his investment decision [10

marks]

b) Alternatively, James can use decision-making heuristics. Explain two such heuristics and how

James can apply them to make his investment decision [10 marks]

Question 5 Culture and Harmonization [20 marks]

International Financial Reporting standards (IFRS) govern financial disclosures.

a) Discuss the core accounting values embedded in IFRS (Hint: Use Gray's sub-cultural

dimensions) [10 marks].

b) Chand and White argue that IFRS for Small and Medium Entities (SMEs) may not be relevant

for Pacific Island Countries. Explain the basis of their arguments, citing relevant examples