Faculty of Creative Industries & Business
Department of Accounting and Finance
Bachelor of Business
ACTY6201 Financial Accounting
Examination
Semester 1, 2013
Date:
Friday, 21 June 2013
Start time:
1 pm
Time allowed:
3 hours, plus 15 minutes reading time
Total marks:
100 marks
Weighting:
50% of course
Instructions:
Answer ALL questions.
Answer the questions directly in the answer booklet provided
Please write clearly in pen in the answer book.
You may refer to your own published approved (bound) copies of the NZ
Equivalents to the International Financial Reporting Standards during the
examination. This material may not contain any added writing but may
contain highlighting.
Ignore the GST implications unless stated otherwise.
Summary of paper:
Question
Topic
Marks
1
Application of NZ IFRS
22
2
Taxation
20
3
Leases
18
4
Property, Plant and Equipment
20
5
Consolidations
20
Total
100
ACTY6201 Financial Accounting
Question 1
22 Marks
Application of NZ IFRS
A new accountant has been appointed to the firm of Martin Ltd which manufactures resins and
construction related systems and is required to prepare fully NZ IFRS compliant financial
statements. Martin Ltd has a balance date of 30 June and the authorisation date of financial
statements is 12 August 2013. Upon finalising the financial statements for the year ended 30
June 2013, the accountant has identified a list of issues.
REQUIRED
Consider each financial reporting issue separately and explain the effect on the annual financial
statements for Martin Ltd. Describe what is required to be reported and support your answer
with reference to the appropriate accounting standards.
a) On 30 June 2013, Martin Ltd decided to change the useful life of its warehouse
based on the information obtained over the last few years. The warehouse was
acquired on 1 January 2009 for $10 million and at that time was estimated to
have a useful life of 30 years. Martin Ltd depreciates its warehouse on a
straight line basis over its useful life. The decision at 30 June 2013 has been
made to reduce the useful life of the warehouse from 30 years to 20 years.
[5 marks]
b) A customer claimed that chemicals used in the resins had caused serious
health issues for her. On 2 June 2013, she filed a lawsuit against Martin Ltd for
$40,000 compensation. Martin Ltd’s lawyer considers that the company has a
good chance of winning the case. However, if Martin Ltd loses the case, the
lawyer advised that the compensation and legal fees would be $70,000. The
case was heard in court on 11 August and both parties are awaiting the
judgement.
[6 marks]
c)
[5 marks]
On 11 July 2013 Martin Ltd discovered that during the period from June 2010
until November 2011, a management employee misappropriated funds totalling
$1.25 million by using a series of fictitious transactions. Management is very
concerned about the incident and has fired the employee as a consequence.
However, management is reluctant to correct the company’s financial
statements retrospectively due to negative publicity and costs.
d) On 22 June 2013 an accidental explosion of the company’s processing plant
caused ground water contamination which affected the nearby land and river.
Martin Ltd has acknowledged that it has a legal responsibility to undertake the
cleanup of the contamination. In order to meet the requirements of the
environmental legislation, it is likely that the company will bear the full cost of
the cleanup of $1 million.
[6 marks]
2
ACTY6201 Financial Accounting
Question 2
20 Marks
Taxation
Hamilton Ltd is a New Zealand company and commenced trading on 1 April 2010. The business
has a financial year end of 31 March.
At the end of the first financial year the company recorded a profit of $250,000 and tax payable
on this profit was estimated to be $75,000. The Inland Revenue Department (IRD) confirmed
the company’s calculation in the notice of assessment for the 2010/11 tax year.
Based on the profit of the first year’s income tax assessment, the company estimated the
provisional tax for the 2011/12 tax year to be $78,000 and paid in three equal installments on
the 28 August 2011, 15 January 2012 and 7 May 2012. At 31 March 2012, Hamilton had an
estimated tax expense of $79,000. In the notice of assessment for the year ended 31 March
2012, the IRD assessed the company’s tax payable as $80,000, resulting in a terminal tax
payment or refund due on 7 February 2013.
After filing the tax return, Hamilton Ltd estimated its provisional tax for the 2012/13 tax year to
be $72,000 and this estimate was the basis for provisional tax payments on 28 August 2012, 15
January 2013 and 7 May 2013. The profit before tax for the current 2012/13 year is reported at
$250,000. The applicable tax rate for 2012/13 is 28%.
REQUIRED
a) Prepare general journal entries for all tax related transactions for Hamilton
Ltd for the financial year 1 April 2012 to 31 March 2013.
b) Prepare the Provisional Tax Paid and the Taxes Payable ledger accounts for
the financial year 1 April 2012 to 31 March 2013.
c)
Referring to your answer in part b), explain how to report the closing balance
of the Taxes Payable account at 31 March 2013 in the financial statements.
Justify your answer.
[13 marks]
[6 marks]
[1 mark]
3
ACTY6201 Financial Accounting
Question 3
18 Marks
Leases
On 1 April 2012, Fonda Ltd leased a vehicle, which had a fair value of $30,000 at the inception
of the lease, to Jazz Ltd. The lease is non-cancellable and the lease term is for four years.
There are to be four annual lease payments of $9,000 payable at the end of each year. Under
the lease agreement, Jazz Ltd assumes all normal ownership costs, including repairs and
insurance. There is a bargain purchase option, which Jazz Ltd will be able to exercise at the
end of the fourth year, for $1,000.
The vehicle is expected to have an economic life of five years with an expected residual value
of $5,000. The vehicle is to be depreciated using the straight-line method.
The present value of the minimum lease payments has been calculated to be $27,972. The
interest rate implicit in the lease is 12%.
REQUIRED
a) Give all the reasons why the lease is a finance lease. Support your answer
with reference to the appropriate accounting standards.
[5 marks]
b) Prepare a schedule showing the apportionment of the lease payments
between interest and principal payments for the term of the lease.
[5 marks]
c)
Prepare the General Journal entries to record all the lease transactions for
the lessee, Jazz Ltd, for the year 1 April 2012 to 31 March 2013.
[6 marks]
d) If the lease agreement had been an operating lease, record the lease
payment for the lessee, Jazz Ltd, at 31 March 2013
[2 marks]
4
ACTY6201 Financial Accounting
Question 4
20 Marks
Property, Plant and Equipment
Orange Ltd was formed on 1 April 2009 to provide courier services in the Waikato region. On
this date, the company acquired GPS equipment for $74,000 cash. The useful life of the GPS
equipment was estimated at six years, with an estimated residual value of $2,000.
The management of Orange Ltd decided at 1 April 2010 to lengthen the estimated total life of
the GPS equipment from six to seven years (leaving six years remaining) and the residual
value remained unchanged.
At its 31 March year end in 2011 the company adopted the revaluation model to account for
the GPS equipment and a valuation of $55,000 was obtained for it at that date. The useful life
was unchanged (leaving five years remaining) but the residual value was reduced to zero.
On 31 March 2012 depreciation for the year was charged and the equipment revalued at a fair
value of $30,000. The useful life and residual value of the equipment remained unchanged.
Later the year, all went well for the company except that the GPS equipment broke down on 30
September 2012. On the following day, the company decided to upgrade the equipment at a
cost of $6,500. The upgraded GPS equipment would operate more efficiently, but
management decided to operate it only for another two and a half years, effectively the
remaining useful life. The equipment would have no residual value by the end of its useful life.
Orange Ltd has a financial year end of 31 March.
REQUIRED
a)
Assuming all the above figures are GST exclusive, prepare the Journal
entries to record the above transactions and events for the period 1 April
2009 to 31 March 2013. Show all workings.
[14 marks]
b)
Explain the requirements for companies to recognise property, plant and
equipment assets at fair value. To answer the question, you need to
address the following issues and provide references to the appropriate
accounting standards:
[6 marks]



what choices of measurement model exist on initial and
subsequent recognition of assets,
whether fair value can apply specifically to individual assets only;
and
how often fair value needs to be reassessed.
5
ACTY6201 Financial Accounting
Question 5
20 Marks
Consolidations
On 1 April 2009 Macro Ltd acquired 100% of the share capital of Micro Ltd. Macro Ltd paid
$650,000 for Micro Ltd. At 1 April 2009, Micro had the following assets, liabilities and equity:
Assets
Cash and cash equivalents
Trade and other receivables
Inventories
Property, plant and equipment
Total Assets
$ Liabilities
8,500 Trade and other payables
150,000 Borrowings
100,000
246,000 Equity
200,000 fully paid shares
Retained earnings
$504,500 Total Equity and Liabilities
$
30,000
70,000
300,000
104,500
$504,500
Additional information:
1.
On 1 April 2010, Micro Ltd sold property, plant and equipment (inventory) costing $40,000
to Macro Ltd for $50,000. Macro Ltd uses the computer equipment for its operations.
Macro depreciates all property, plant and equipment at straight-line 15% on cost.
2.
At 1 April 2012, Micro’s inventory included goods purchased from Macro at a profit of
$2,000. In the 2012-13 period, Macro Ltd sold goods for $60,000 to Micro Ltd at a mark up
of 25% on cost. Half of these goods remained on hand at 31 March 2013.
3.
Micro Ltd made an interest bearing loan of $200,000 to Macro Ltd, the latter paid interest
at 10% per annum to Micro Ltd in the period from 1 April 2012 to 31 March 2013.
4.
Interim Dividends of $40,000 were paid by Micro Ltd to Macro Ltd on 22 February 2013.
5.
Goodwill on acquisition is considered to be impaired by $35,000 in the 2012-13 period. It
had not been impaired previously.
REQUIRED
a)
Prepare the journal entries required for consolidation for the year ended 31
March 2013.
[13 marks]
Continued on following page…
Question 5 continued…
6
ACTY6201 Financial Accounting
b)
Sun Limited has acquired 45% of the share capital of Moon Limited. The
remaining 55% shares of Moon Limited are owned by a diverse group of
investors who each hold a small parcel of shares. The past record has
indicated that only a small number of the shareholders of Moon Limited
attend the general meetings or question the action of the directors. The
board of directors of Moon Limited consists of five directors, three of which
are nominated by Sun Limited and are expected to be re-elected in the
next general meeting.
[7 marks]
Advise Sun Ltd as to whether it controls Moon Ltd. Support your answer
with reference to the accounting standard.
Please note you are not given and are not required to do the
Consolidation Worksheet.
7