Department of Accounting & Finance
Faculty of Creative Industries & Business
Bachelor of Business
ACTY6201 – Financial Accounting
Test - Semester 2, 2013
Date:
Monday, 16 September 2013
Time allowed:
1 hour 30 minutes, plus 5 minutes reading time
Total marks:
50 marks
Weighting:
25% of course
Instructions:
Answer ALL FOUR questions.
Answer the questions directly in the answer booklet provided.
Read each question carefully.
Answer only what is asked for.
Please write clearly in pen in the answer book
Ignore the GST implications in all transactions
Mark Allocation:
Question
Marks
1
Owners’ equity
13
2
Property, plant & equipment
14
3
Borrowing costs
15
4
Application of IFRS
TOTAL
8
50
ACTY6201 – Financial Accounting
Test - Semester 2, 2013
Question 1: Owners’ equity
13 Marks
Steel Ltd has the following shareholders’ equity as at 1 September 2012:
Share capital
500,000 ordinary shares fully paid
100,000 preference shares fully paid
Asset revaluation surplus
Retained earnings
$1,000,000
200,000
110,000
350,000
Total equity
$1,660,000
The balance date of Steel Ltd is 31 August.
The following events occurred during the year:
1. On 1 November 2012, the company decided to make a public share issue of 100,000
ordinary shares at a fair value of $2.50 per share, payable in full on application. A
prospectus was issued on 15 November 2012 and the share offer was made. The
prospectus also offered 50,000 10% preference shares at $2, fully payable on
application.
By 25 January 2013, the company had received applications for 150,000 ordinary shares
and 40,000 preferences shares.
On 1 February 2013, 100,000 ordinary shares were issued on a pro rata basis and
40,000 preference shares were issued. All application money was refunded to
unsuccessful applicants for ordinary shares.
2. On 10 February 2013, Steel Ltd satisfied the solvency test and the directors resolved to
declare an interim dividend as follows:
Ordinary shares – 6 cents per share
Preference shares – 10 cents per share
The interim dividend was paid in cash on 1 March 2013.
3. Steel Ltd made a 1 for 10 bonus issue of ordinary shares to existing shareholders on 30
June 2013. The directors approved that this bonus share issue would be made from
Retained Earnings at a fair value of $2.20 per share.
4. On 1 July 2013, Steel Ltd satisfied the solvency test and the directors resolved to
declare a final dividend as follows:
Ordinary shares – 8 cents per share
Preference shares – 10 cents per share
The AGM was held on 2 August 2013 and the dividend approved. The final dividend was
paid on 30 August 2013.
REQUIRED
a)
Prepare journal entries to record the above transactions. Ensure that you
record all relevant entries from 1 September 2012 until 31 August 2013.
[13 marks]
2
ACTY6201 – Financial Accounting
Test - Semester 2, 2013
Question 2: Property, plant & equipment
14 Marks
The following is an extract from the Balance Sheet of Baker Ltd.
Baker Ltd
Balance Sheet (extract as at 31 August 2012)
Non-Current Assets
Property, Plant and Equipment
Land (at valuation)
$150,000
Machine (at cost)
Accumulated depreciation
$82,400
(36,400)
Equipment (at cost)
Accumulated depreciation
$50,000
(11,250)
$46,000
$38,750
Baker Ltd records depreciation to the nearest month and records amounts to the nearest
dollars. The company uses straight line depreciation for the machine and equipment.
The following transactions and events occurred from 1 September 2012 onwards:
1. Baker Ltd has only one machine. On 4 October 2012, Baker Ltd traded in the old
machine for a new one that cost $90,500. A trade-in allowance of $40,200 was received
and the balance was paid in cash.
Freight charges of $400 and installation costs of $1,600 were also paid in cash.
The old machine had an estimated useful life of 5 years and a residual value of $4,400.
The company estimated the new machine’s useful life and residual value to be 6 years
and $6,100 respectively.
2. On 1 March 2013, Baker Ltd decided to reduce the useful life of the equipment as a
result of changes in technology. The equipment was purchased on 1 September 2011. It
had a useful life of four years and a residual value $5,000. The new estimated useful
would be three years (leaving one and a half years remaining) and the new residual
value be $4,625.
3. On 24 April 2013, Baker Ltd paid in cash for scheduled repair and maintenance on the
machine and equipment of $3,220.
4. At 31 August 2012 the land was in Baker Ltd’s books at its fair value of $150,000 with an
associated revaluation surplus of $40,000 related to prior revaluations of the property.
The market in the area began to rise in late 2012 and after valuation Baker Ltd records
the fair value of the land at balance date, 31 August 2013, at $450,000.
Continued on following page…
3
ACTY6201 – Financial Accounting
Test - Semester 2, 2013
Question 2 continued…
REQUIRED
a) Prepare journal entries to record the above transactions. Ensure that you
record all relevant entries from 1 September 2012 until 31 August 2013.
Please show your working.
[14 marks]
4
ACTY6201 – Financial Accounting
Test - Semester 2, 2013
Question 3: Borrowing costs
15 Marks
Real Production Limited constructed a building for use by the administration section of the
company. The company took out a 9% bank loan of $2 million on 1 July 2012 to help finance
the construction. The business commenced the construction on 1 September 2012 and
completed the project on 30 April 2014.
Real Production Limited has a financial year end of 31 August.
Payments relating to the construction of the new building will be as follows:
1 September 2012
30 September 2012
31 May 2013
31 October 2013
31 December 2013
31 March 2014
Demolition costs
Material costs (including freight costs and insurance of
$2,400 to get building material to the site)
Labour costs
Installation of new roof and air conditioning
Material costs and labour costs
Labour and travel costs for managers for safety inspection
prior to use
$
15,000
360,000
600,000
120,000
480,000
8,000
1,583,000
REQUIRED
a)
Calculate the weighted average expenditure for the year ending 31
August 2013 (the first year of construction).
[4 marks]
b)
Prepare the journal entry to record the capital cost of the new
building for the year ending 31 August 2013.
[3 marks]
c)
Calculate the total weighted average cost (construction expenses
plus capitalised interest costs) at the completion of the project, 30
April 2014.
[6 marks]
d)
Real Production Limited has borrowed $2 million for the construction
of the building. For the year ending 31 August 2013 how much
interest will the company capitalise and how much interest will be
expensed. (This is the only borrowing that Real Production Limited
has.)
[2 marks]
5
ACTY6201 – Financial Accounting
Test - Semester 2, 2013
Question 4: Application of IFRS
8 Marks
Avis Limited has always valued inventory on a First-in, First-out (FIFO) basis. On the balance
date of 31 August 2013, the company decides to switch to the weighted average method of
valuation. The following figures for 2012 (as reported) and 2013 (draft) are prepared on a FIFO
basis:
Revenue
Cost of sales:
Opening inventory
Purchases
Closing inventory
Gross profit
31 August 2012
$000
869
31 August 2013 (draft)
$000
933
(135)
(246)
174
(174)
(267)
165
662
657
Additional information
1. The company establishes that the opening inventory for the financial year 2012 based
on the weighted average method would be $122,000 and closing inventory would be
$143,000.
2. The closing inventory for 2013 based on the weighted average method would be
$155,000.
3. The authorisation date of Avis Limited’s financial statements is 31 October 2013.
REQUIRED
a) Determine the gross profits after the change in accounting policy by preparing
an abstract of the income statement for the year ended 31 August 2013, with
the 2012 comparative.
[3 marks]
b) On 9 September 2013, before the financial statements were authorised for
issue, Avis Limited discovered that certain items had been included in
inventory at 31 August 2013, valued at $120,000, which had in fact been
destroyed by an earthquake on 16 August 2013 and had to be written off
completely. With reference to the appropriate accounting standards, explain
how the situation would affect the annual financial statements for Avis
Limited.
[5 marks]
6
ACTY6201 – Financial Accounting
Test - Semester 2, 2013
Suggested Solutions
QUESTION ONE
13 marks
a)
Steel Ltd
General Journal
Jnl No.
1 Feb 13
1 March 13
30 June 13
30 Aug 13
31 Aug 13
J1
J2
J3
J4
J5
Bank
Ordinary Share Capital
Preference Share Capital
(to record the issue of 100,000 ordinary
shares at a fair value of $2.50 per share and
40,000 preference shares at a fair value of $2
as per directors resolution)

Ordinary Dividend
Preference Dividend
Bank
(to record the cash payment of interim
dividends)
*500,000+100,000 shares x 6c
**100,000 + 40,000 shares x 10c
Retained Earnings
Ordinary Share Capital
(to record bonus issue of 60,000 ordinary
shares at a fair value of $2.20 per share)
Ordinary Dividend
Preference Dividend
Bank
(to record the cash payment of final
dividends)
*600,000+60,000 shares x 8c
**100,000 + 40,000 shares x 10c
Retained Earnings
Ordinary Dividend
Preference Dividend
(closing entry)
330,000
250,000
80,000
*36,000
**14,000
50,000
132,000
132,000
*52,800
**14,000
66,800
116,800
88,800
28,000
Trust Account
General Journal
Jnl No.
25 Jan 13
1 Feb 13
J1
J2
Bank
Applications a/c – Ordinary Shares
Applications a/c – Preference Shares
(to record cash received for 150,000 ordinary
shares at $2.50 per share and 40,000
preference shares at a fair value of $2)
Applications a/c – Ordinary Shares
Applications a/c – Preference Shares
Bank
(cash transferred to Steel Ltd on issue of
455,000
375,000
80,000
250,000
80,000
330,000
7
ACTY6201 – Financial Accounting
Test - Semester 2, 2013
J3
shares)
Applications a/c – Ordinary Shares
Bank
(refund to unsuccessful applicants))
125,000
125,000
 represents 1 mark, total 13 marks as shown
8
ACTY6201 – Financial Accounting
Test - Semester 2, 2013
QUESTION TWO
14 marks
Baker Ltd
General Journal
Jnl No.
10 Oct 12
J1
J2
J3
1 Mar 13
24 April 13
31 Aug 13
J4
J5
J6
J7
J8
Depreciation – Machine
Acc. Depreciation – Machine
(1 month Depreciation of the old machine) 
Accumulated Depreciation – Machine
Machine (new)
Loss on disposal
Cash
Machine (old)
(Trade-in the old machine for a new machine)
#36400+1300
**Carrying value of Old machine  (82,40037,700) – trade in 40,200
***new machine 90500 less trade in
allowance 40200 =50,300 cash
Machine
Cash
(Freight charges and installation cost)
Depreciation – Equipment
Accumulated Depreciation – Equipment
(6-month depreciation expense of the
equipment before the change in useful life)
**Working for depreciation for equipment:
(50000-5000)/4 x 6/12 months=5625
Repair and maintenance
Cash
(Paid scheduled repair and maintenance
expense)
Depreciation – Machine
Accumulated Depreciation – Machine
(11 months depreciation expense of the
machine)
*(92500-6100)/6 x11/12 months
Depreciation – Equipment
Accumulated Depreciation – Equipment
(depreciation expense of the equipment)
(50000-11250-5625-4625)/1.5 x 6/12 =
9,500
Land
Revaluation surplus
(To record the revaluation of the land to
$450,000)
1,300
1,300
#37,700
90,500
**4,500
***50,300
82,400
2,000
2,000
5,625
5,625
3,220
3,220
13,200
13,200
9,500
9,500
300,000
300,000 
 represents 1 mark, Total 14 marks as shown
9
ACTY6201 – Financial Accounting
Test - Semester 2, 2013
QUESTION THREE
a)
15 marks
The weighted-average expenditure to 31 August 2013:
1 Sep 2012
30 Sep 2012
31 May 2013
Accumulated
expenditure
$
15,000
360,000 
600,000
(4 marks)
x 12/12
x 11/12
x 3/12
975,000
b)
Weightedaverage
expenditure
$
15,000
330,000
150,000



495,000
Capitalised interest for year ending 31 August 2013:
(3 marks)
$495,000 x 9% = 44,550 
Journal entry
Date
Debit
$
1,019,550*
31
J1 Dr Building
Aug
Cr Bank
2013
(Capitalising construction costs of $975,000 and
interest of $44,550)
c)
1,019,550
Total weighted average cost for the building at 30 April 2014:
1 Sep 2013
31 Oct 2013
31 Dec 2013
31 March 2013
Accumulated
expenditure
$
*1,019,550
120,000
480,000
8,000
1,627,550
x
x
x
x
Credit
$
8/8
6/8
4/8
1/8
(6 marks)
Weightedaverage
expenditure
$
1,019,550
90,000
240,000
1,000
1,350,550



Capitalised interest to 30 April 2014:
$1,350,550 x 9% x 8/12 = $81,033. 
Total capitalised cost of building at 30 April 2014 will be:
$1,627,550 + $81,033 = $1,708,583
d) The interest charged on the borrowing is $2,000,000 x 9% = $180,000 per year.  Of this
$44,550 will be capitalised and $135,450 will be expensed.  This is making the assumption
10
ACTY6201 – Financial Accounting
Test - Semester 2, 2013
that no repayments are made during the financial year and that Real Production Ltd still has
the full $2 million liability at the end of the year.
(2 marks)
QUESTION FOUR
8 MARKS
a)
(3 marks as indicated)
Avis Limited
Income Statement (abstract) for the year ended 31 August 2013
2013
2012
$000
$000
Revenue
933
869
Cost of sales:
Opening
inventory
-143
-122
Purchases
-267
-246
Closing inventory
155
143
Gross profit
678
644
½ mark per  Total 6  = 3 marks
b)
(5 marks as indicated)
In accordance with NZ IAS 10, the discovery of a material error in the financial statements is an
adjusting event(NZ IAS 10 para 9(e))  and the financial statements to 31 August 2013
must be corrected (NZ IAS 10 para 8)  Avis Limited will adjust the ending inventory as follow:
Date
31 Aug 2013
Journal
No.
xx
Accounts
Debit
Impairment Loss
Inventory
(Loss of inventory due to
earthquake)
120,000 
Credit
120,000
(Journal entry is not required)
11