Question 1

Eliseth Ltd is a public company whose shares are traded on the ASX. A former executive was formally accused of fraud last month. This executive used his influence with three major suppliers to increase the price of the inventories' contracts for the last three years. Eliseth identified those contracts and estimated a loss around AUD 5 billion which this amount was paid by Eliseth in the past three years. The inventory was recorded at cost. Using the appropriate accounting standard and the new conceptual framework issued by IASB in 2018 respond:

What would you recommend Eliseth to do? You must provide the basis of your recommendation.

Question 2

Mercure Corporation enters into a contract with Pluton Ltd. to provide a system that manages Pluton's portfolio of clients for 5 years. Mercure will not transfer the system to Pluton, but it will provide the system and the services included in the contract while it is still valid. The contract is renewable for subsequent one-year periods.

Mercure incurred the following costs to obtain the contract:

a) $2,000 bonus paid to the accounting department for preparing the proposal at very short notice.

b) $8,000 legal fees paid externally

c) $12,000 accommodation costs incurred to deliver the proposal.

d) $10,000 commission for the sales representatives.

After a month testing, Pluton decided to sign the contract.

Required:

i. Your manager wants advice on how to account for these expenditures under Australian accounting standards in each of the relevant years. The manager is aware that you do not have the full set of facts and encourages you to provide multiple solutions to each question. For example, if x is the case, then the accounting treatment would be .... Based on the information provided, I think it is more likely that z would apply. You must justify your treatment by referring to specific paragraphs in the standards. You must also state any assumptions you make.

ii. Present the journal entries (if any) for each expenditure.

Question 3

The company bought debentures with a face value of $145,000 and paid $125,000 to the issuer

plus a purchase commission of $2,000. The debentures have a life of 4 years and will pay a

coupon of 6.53% per year at the end of each year. These instruments have been classified as

subsequently measured at fair value through profit and loss. By the end of the 4th year,

Australian interest rates have moved to 12%. The fair value amounts for this debenture at the

end of each year are:

Year

Fair Value

1

$133,000

2

$147,000

3

$123,000

4

$154,469

Required:

a. Calculate the effective rate of return (the market rate of interest) for these debentures.

b. Prepare table which shows the movements relating to these debentures over their life. Please remember, these debentures are not held at amortized cost.

c. Prepare journal entries for all transactions relating to these debentures.