Financial Accounting & Reporting (2) 2020
(FIN220)
Main exam
1 September 2020
Time allowed – Three and a half hours
This open-book exam contains four (4) short-answer questions to a total of 80 marks
This paper contains 12 pages
Announcement
Where a question refers to, or requires candidates to provide, a reference to an
Accounting Standard, candidates can use either the International Standards,
the Australian Standards or the New Zealand Standards.
Workings must be shown in answers to every question.
In the FIN module, workings may include calculations, decision points required by
the relevant Accounting Standard, and a comparison of numbers required by the
Standard.
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Chartered Accountants Program
Financial Accounting & Reporting
Question 1 (20 marks)
Part A (9 marks)
Letto Limited is a retailer of beds and bedroom furniture. The company is currently preparing
the financial statements for the year ended 30 June 2020.
Letto’s policy is to recognise revenue from a transaction with a customer once delivery occurs,
control has passed, and other requirements in IFRS 15 Revenue from Contracts with Customers are
satisfied.
Customer – James Bett
On 1 June 2019, James Bett purchased a king-size bed for $7,000 under Letto’s ‘buy now, pay
later’ promotion. The bed was delivered to James on 30 June 2019. James agreed to pay $7,000
on 30 June 2022. The present value of the $7,000 at 30 June 2019 was $5,714 and at 30 June 2020
was $6,114.
Customer – Livinia Cama
On 15 May 2020, Livinia Cama ordered a queen-size bed and other custom-made furniture.
Letto identifies two performance obligations and correctly allocates the $23,000 transaction price
to the performance obligations as follows:
Performance obligation
Allocation of transaction price per IFRS 15
$
Supply and delivery of queen-size bed
5,000
Supply and delivery of custom-made furniture
18,000
Total
23,000
Payment terms outlined in the sales agreement are:
•• $2,000 deposit upon ordering.
•• $1,800 due upon delivery of the bed.
•• $19,200 due upon delivery of the custom-made furniture.
The bed is delivered to Livinia on 30 June 2020. The custom-made furniture is delivered to
Livinia on 2 July 2020. Assume that all payments are received in cash on the dates specified in
the sales agreement.
Custom-made furniture – Italian supplier
Letto places an order with its Italian supplier, to supply the custom-made furniture ordered
by Livinia, on 15 May 2020, based on a quoted price of 10,000 euro. The furniture is delivered
on 20 June 2020, when control of the goods passes to Letto. The invoice was paid to the Italian
supplier on 10 July 2020. The relevant exchange rates are:
Date
AUD
EUR
15 May 2020
1.00
0.55
20 June 2020
1.00
0.56
30 June 2020
1.00
0.60
Average for year to 30 June 2020
1.00
0.53
Question 1 continues, please turn over
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Chartered Accountants Program
Financial Accounting & Reporting
Question 1 (cont.)
Letto is currently preparing the financial statements for the year ended 30 June 2020.
Required
(a) Prepare the journal entries to recognise the transactions relating to the two (6 marks)
customers above for the year ending 30 June 2020. Ignore the impact of tax.
(b) Prepare the journal entries to recognise the transactions relating to the Italian (3 marks)
supplier for the year ending 30 June 2020. Ignore the impact of tax.
9 marks
Part B (6 marks)
Gold Limited is an Australian finance business. Gold enters into a two-year lease for a laptop
with Negroni Limited. Gold classifies the lease with Negroni as a finance lease. The lease
commenced on 1 July 2019 and included these key terms:
•• Two annual lease payments of $2,700, with the first payment to be made on 30 June 2020.
•• The lease gives Negroni the right to use the laptop exclusively for the two-year period.
•• Ownership of the laptop transfers to Negroni at the end of the lease.
•• The interest rate implicit in the lease is 6%.
The fair value of the laptop that Gold paid to a third-party supplier on 1 July 2019 was $4,800.
The useful life of the laptop is three years. Gold paid costs of $150 in drawing up the lease
contract.
When accounting for leases, Gold and Negroni take advantage of any available exemptions
under IFRS 16 Leases.
Required
Prepare the journal entries to recognise the lease for the year ending 30 June 2020
in the general ledger of:
(i) Gold Limited.
(ii) Negroni Limited.
Justify the use of an exemption, if applicable. Ignore the impact of tax.
6 marks
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Chartered Accountants Program
Financial Accounting & Reporting
Question 1 (cont.)
Part C (5 marks)
Raha Limited is a manufacturer of hand sanitisers. Its product is manufactured at its
Shepparton plant using a liquid-mixing machine. Details of the machine are as follows:
•• It was purchased on 1 July 2015 for $500,000. It depreciates over 10 years on a straight-line
basis.
•• Raha measures its assets under the cost model in accordance with IAS 16 Property, Plant and
Equipment.
•• On 30 June 2018, an impairment loss of $70,000 was recognised. After the impairment was
recognised, the carrying amount of the machine was the recoverable amount of $280,000.
•• After recognition of the impairment loss, the remaining useful life was assessed as seven
years. Depreciation continued on a straight-line basis.
During the current year, demand for Raha’s product has increased, and that is expected to
continue in the years after the recent COVID-19 pandemic. As a result of these indications,
Raha has measured the machine’s recoverable amount at $270,000 at 30 June 2020.
Required
Prepare the journal entry to recognise the impairment loss reversal at 30 June 2020.
Ignore the impact of tax.
5 marks
End of Question 1
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Chartered Accountants Program
Financial Accounting & Reporting
Question 2 (20 marks)
Part A (10 marks)
Hook, Line and Sinker Limited (HLS) is a fishing supply store based in Australia. Bob Fishkins
is responsible for the year-end accounting processes and has prepared the deferred tax
calculations for the year ended 30 June 2020.
You are the financial controller at HLS. The table below shows information you have gathered
from Bob’s workpapers to begin your review.
Land at fair value1
Carrying
amount
Tax base
$
$
Taxable
temporary
difference
(TTD)
$
1,800,000
500,000
1,300,000
575,000
630,000
12,000
12,000
100,000
–
50,000
–
Equipment – written down
value2
Software licence3
Provision for annual leave4
Share issue costs5
Total temporary differences
DTL/DTA @30%
Deductible
temporary
difference
(DTD)
$
Deductible
temporary
difference
(DTD equity)
$
55,000
100,000
50,000
1,400,000
55,000
50,000
420,000
16,500
15,000
Notes
1. During the year, the land was revalued by $300,000, which increased its carrying amount to $1,800,000.
The revaluation has no impact on the tax base of the land, which is equal to the land’s original cost. Asset revaluations
are not assessable or deductible for tax purposes. The land was originally purchased for $500,000 and since
acquisition, the fair value has only increased.
2. At 30 June 2020, the cost of the equipment is $800,000 and accumulated depreciation is $225,000. The tax writtendown value at 30 June 2020 is $630,000.
3. The software licence was paid on 30 June 2020 with a two-year licence period commencing 1 July 2020. The software
licence will be amortised each month for accounting purposes. For tax purposes, the software licence is deductible
when paid.
4. Annual leave is deductible for tax purposes when paid.
5. During the year there was a share issue of $1,000,000. Share issue costs of $50,000 were correctly debited to the share
capital account. For tax purposes, the share issue costs are fully deductible in the year ending 30 June 2020.
The deferred tax asset at 30 June 2019 was correctly calculated at $42,000. The deferred tax
liability at 30 June 2019 was correctly calculated at $300,000.
The following journal entry, proposed by Bob, is included in his workpapers:
Date
Account description
30.06.2020
Income tax expense
Deferred tax asset
Deferred tax liability
Dr
$
Cr
$
388,500
31,500
420,000
Record deferred tax for the year ending 30 June 2020
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Chartered Accountants Program
Financial Accounting & Reporting
Question 2 (cont.)
Required
Identify five (5) errors in Bob’s deferred tax workpapers. For each of the five (5) errors
noted, clearly state the correct treatment.
You are not required to include calculations in your answer.
10 marks
Part B (8 marks)
Oak Limited is a timber furniture producer based in Australia. It is wholly owned by Willow Inc, a
company based in Europe. The shareholdings in the Willow Group are illustrated below:
Willow Inc.
100%
Oak
Limited
100%
Gum
Limited
50% joint control
Acorn
Limited
50% joint control
Banksia joint venture
You are a Chartered Accountant working at Oak Limited. You are currently helping prepare
the related party disclosures for the 30 June 2020 financial statements of Oak. You have the
following information:
•• The directors of Willow Inc are Mark Tammi, Ailsa Oaten and Sofia Alberghi.
•• The directors of Oak are Sofia Alberghi and Connie Styles.
•• Gum, a wholly owned subsidiary of Willow, and Acorn share joint control of the Banksia
joint venture, a native plant wholesaler.
•• Mark’s husband, Thomas Paju, has a controlling interest in a listed entity, Timbertop Inc.
Required
For each entity and individual listed below, identify whether they are a related party
of Oak Limited in accordance with IAS 24 Related Party Disclosures for the year
ended 30 June 2020. Justify your answer with specific references to IAS 24.
(i) Mark Tammi.
(ii) Timbertop Inc.
(iii) Banksia joint venture.
(iv) Acorn Limited.
8 marks
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Chartered Accountants Program
Financial Accounting & Reporting
Question 2 (cont.)
Part C (2 marks)
Part C is related to Part B
Willow recently conducted a tender process in relation to sourcing sustainable timber supplies.
The relevant managers provided their recommendation to the Willow board for approval. Their
recommendation was to engage Timbertop as the supplier.
As a Willow director, Mark Tammi (Chartered Accountant) was eligible to vote on the supplier
decision; however, he chose not to vote on the decision.
The Willow board endorsed the recommendation and subsequently a supplier agreement was
signed between Willow and Timbertop.
Required
Identify the key fundamental principle of the International Code of Ethics for
Professional Accountants that Mark would have placed at risk if he had voted on the
supplier decision. Justify your answer.
2 marks
End of Question 2
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Chartered Accountants Program
Financial Accounting & Reporting
Question 3 (20 marks)
Part A (12 marks)
Honch Repairs Limited is a kitchen appliance repair company. The financial controller,
Charlotte Avery, has asked for your help in finalising the financial statements for the year ended
30 June 2020. You consider the following independent items (items 1 – 4 below) that have yet to
be recognised in the financial statements:
Item
Details
1
On 1 July 2019, Honch Repairs borrowed $375,000 from the bank to upgrade tools and repair vans.
The terms of the borrowing are:
•• Interest is payable at 5% per annum
•• Annual repayments of $105,750 (comprising interest and principal) are due on 30 June each year
•• The term is four years
Honch Repairs incurred $1,500 in direct costs related to the borrowing. The effective interest rate is
5.1709% per annum. No entries in relation to the borrowing have been recognised this year; however,
all transactions occurred on the specified date
2
Honch Repairs declared an interim dividend on 1 March 2020 of $50,000. The interim dividend was
paid on 15 April 2020
On 20 July 2020, a final dividend of $75,000 was declared in relation to the financial year ending
30 June 2020. This dividend is due to be paid on 1 September 2020
3
Honch Repairs operates a share-based payment scheme designed to retain and reward its top ten
repairers. On 1 July 2018, it granted 5,000 share options to each of its top ten repairers, conditional
upon the repairers remaining employed at Honch Repairs until 30 June 2022
The fair value of the options on grant date was $2 per option. Honch Repairs uses a ‘share-based
payment reserve’ when accounting for its share-based payment scheme
At 30 June 2019, all ten repairers were still employed at Honch Repairs with no departures expected.
However, during the 2020 year, a competitor recruited six of the repairers by offering them large
bonuses to move. At 30 June 2020, only four of the top repairers remained employed at Honch Repairs
with no further departures expected
4
Honch Repairs has a head office land and building located in Springvale. It measures the land under
the IAS 16 Property, Plant and Equipment revaluation model and needs to record the revaluation at
30 June 2020
The carrying amount of the land prior to revaluation is $400,000. Its fair value at 30 June 2020 is
$450,000. The only previous revaluation in relation to this asset resulted in a revaluation decrement of
$80,000. It had been assessed that realisation of the resulting deferred tax asset was probable.
The tax rate is 30%
Required
Prepare journal entries for items 1–4 above for the year ended 30 June 2020.
Where no journal entry is required, justify why this is the case.
Ignore any tax implications for items 1–3.
12 marks
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Chartered Accountants Program
Financial Accounting & Reporting
Question 3 (cont.)
Part B (8 marks)
Part B is related to Part A
After recording the required journal entries in Part A, you now prepare Honch Repairs’
financial statements.
Required
(i) Illustrate how the borrowing repayment from Item 1 in Part A above would be
shown for the year ended 30 June 2020 on the:
•• Statement of cash flows.
•• Statement of profit or loss.
(ii) Illustrate how Item 2 in Part A above would be shown on the statement of cash
flows for the year ended 30 June 2020.
8 marks
End of Question 3
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Chartered Accountants Program
Financial Accounting & Reporting
Question 4 (20 marks)
Part A (6 marks)
Bonobo Limited is the parent company in a large consolidated group. Molly, the financial
controller at Bonobo, is reviewing Bonobo’s financial instruments to determine their correct
classification under IFRS 9 Financial Instruments. Molly has the following information from the
treasury team concerning two financial assets:
•• A bond with a face value of $500,000 and a four-year maturity was acquired on 1 July 2019.
Interest is received at 2% per annum and paid in arrears every six months. Bonobo uses
the bonds to manage cash flow requirements through collecting the interest cash flows or
selling the bonds as required.
•• During the year, Bonobo loaned a subsidiary $100,000 interest-free. The loan is due to be
repaid in three years’ time. Bonobo has a policy of holding all intragroup loans to maturity.
Required
Determine the correct classification of each financial instrument for the year ended
30 June 2020 in Bonobo’s individual financial statements (i.e. not consolidated
financial statements).
Justify your decision using the requirements of IFRS 9 Financial Instruments.
References are not required.
6 marks
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Financial Accounting & Reporting
Question 4 (cont.)
Part B (4 marks)
Part B is not related to Part A
Amarilla Limited purchased 70% of Roja Limited on 30 June 2018. At acquisition date, the
recorded net assets of Roja were represented by:
Net assets at 30 June 2018
$
Share capital
2,000,000
Retained earnings
1,750,000
Total equity
3,750,000
Roja’s identifiable assets and liabilities at acquisition date were recorded at fair value.
The consideration transferred to acquire the 70% interest in Roja is as follows:
•• A cash payment of $2.2 million at acquisition date.
•• A cash payment of $1.8 million due on 30 June 2019.
Roja applies the partial goodwill method when accounting for business combinations.
The acquisition analysis has been correctly performed below:
Acquisition analysis for Roja
Item
$
Cash
2,200,000
Deferred consideration
1,730,770
$
Consideration transferred
3,930,770
Non-controlling interest‘s proportionate share of Roja’s
fair value of identifiable net assets (FVINA)
1,125,000
5,055,770
Recorded net assets
3,750,000
FVINA
3,750,000
Goodwill acquired
1,305,770
Required
Prepare the journal entries to be recorded by Amarilla in its general ledger relating
to the acquisition of Roja for the years ended:
(i) 30 June 2018.
(ii) 30 June 2019.
Ignore the impact of tax.
4 marks
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Chartered Accountants Program
Financial Accounting & Reporting
Question 4 (cont.)
Part C (10 marks)
Part C is related to Part B
You are preparing the consolidated financial statements for the year ended 30 June 2020 for the
Amarilla group. Details of the relevant intragroup transactions are set out in the table below:
Transaction
Details
Amount
Sales for the year ended 30 •• The sales were made on the basis of cost plus 30% $500,000 in sales
June 2019 – Amarilla to Roja •• Roja still held $80,000 of these purchases in its
inventory at 30 June 2019. This inventory was
subsequently sold to external customers during
the 30 June 2020 year
Sale of machine on 30 June
2019 – Roja to Amarilla
•• The original cost of the machine was $150,000
$75,000 sale of machine
•• The net book value of the machine on the date of
transfer was $60,000
•• The asset was being depreciated on a straight-line
basis over 10 years. At the time of the transfer the
remaining useful life was four years
Additional information
•• The tax rate is 30%.
•• After performing the notional gross up calculation required by IAS 36 Impairment of Assets,
a $120,000 impairment loss was determined at 30 June 2020 in respect of the Roja cash
generating unit.
Required
Prepare the consolidation journal entries relating to the intragroup transactions and
the goodwill impairment for the year ended 30 June 2020.
Journal entries for the elimination of the investment asset and the noncontrolling interest are not required.
10 marks
End of Question 4
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