Faculty of Creative Industries & Business
Department of Accounting and Finance
Bachelor of Business
ACTY6201 Financial Accounting
Examination
Semester 2, 2013
Date:
Friday, 15 November 2013
Start time:
8.30 am
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, except
Question 5b) which is answered on the worksheet 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
25
2
Taxation
15
3
Leases
15
4
Property, Plant and Equipment
15
5
Consolidations
30
Total
100
ACTY6201 Financial Accounting
Semester 2, 2013
Question 1
25 Marks
Application of NZ IFRS
Carrington Computing Ltd (CCL) is a distributor of computers and computer accessories. In
each of the following independent situations you are required to:
 consider each financial reporting issue separately;
 explain the effect on the annual financial statements;
 describe what is required to be reported; and
 support your answer with reference to the appropriate accounting standards.
CCL has a current financial year end of 31 August 2013 and on 15 November 2013 the
directors authorised the financial statements for distribution.
a) On 14 October 2013, the directors resolved to provide for a final dividend to be
paid in respect of the year ended 31 August 2013. The dividend of 10 cents
per share will be paid on 4 December 2013 to all shareholders. Shareholders
are those on the company's register at the close of business on 29 November
2013.
[5 marks]
b) CCL maintains a perpetual inventory system. On 31 August 2013, a sales
assistant was reported to have stolen $689,000 worth of inventory from CCL.
The offending occurred over a 6 month period from January 2013 until June
2013. The fraudulent activities involved the staff ordering a number of desktop
computers and then later dissembing the computers into smaller parts and
selling them for personal gains. The stolen computers represent approximately
15% of the total inventory at 31 August 2013.
[5 marks]
c)
[5 marks]
In the past, CCL adopted the revaluation method to value its core plant and
equipment which were acquired on 1 January 2005 for $10 million. The
company has relied upon an independent valuation of such assets for
determining a fair value. On 31 August 2013, CCL decided to move to a cost
basis in relation to the measurement basis for its plant and equipment as the
fair value is no longer obtainable for those assets. The management considers
that the new measurement basis is reliable and more relevant to the
shareholders.
Continued on following page…
2
ACTY6201 Financial Accounting
Semester 2, 2013
Question 1 continued…
d) On 20 August 2013, the government enacted a number of changes to the
Goods and Services Tax Act. As a result of these changes of legislation, CCL
will need to replace its existing mainframe computer in order to ensure
continued compliance with the new GST regulations effective on 30 June
2015. The estimated cost of the new mainframe computer will be $250,000.
[10 marks]
The carrying amount of the existing mainframe computer at 31 August 2013
was $140,000. Its original cost was $200,000. It is depreciated on a straight
line basis over ten years with zero residual value. The decision at 31 August
2013 has been made to reduce its remaining useful life substantially from 7
years to 1 year.
3
ACTY6201 Financial Accounting
Semester 2, 2013
Question 2
15 Marks
Taxation
Sue Hunter, the director of Household Supplies Ltd (HSL), has come to you and asks for your
assistance to prepare the accounting records for her company. HSL commenced trading on 1
April 2010. The business has a financial year end of 31 March.
On 31 March 2011, the company recorded a profit of $250,000 and tax payable on this profit
was estimated to be $60,000. The Inland Revenue Department (IRD) confirmed the company’s
calculation in the notice of assessment for the 2010/11 tax year. The tax liabilities were settled
in full on 7 February 2012.
In the 2011/12 year, HSL began paying provisional tax. 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 $63,000 and paid in three equal instalments on the 28 August 2011, 15 January 2012 and 7
May 2012. At 31 March 2012, HSL had an estimated tax expense of $65,000. In the notice of
assessment for the year ended 31 March 2012, the IRD assessed the company’s tax payable
as $66,000, resulting in a terminal tax payment or refund due on 7 February 2013.
HSL estimated its provisional tax for the 2012/13 tax year to be $69,000 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 HSL for the
financial year 1 April 2012 to 31 March 2013.
[13 marks]
b) Explain to Sue what provisional tax is and why the Inland Revenue requires
businesses to pay provisional tax.
[2 marks]
4
ACTY6201 Financial Accounting
Semester 2, 2013
Question 3
15 Marks
Leases
On 1 July 2010, McQueen Ltd (the lessee) leased a truck from Toyoda Ltd. The recorded fair
value of the truck on 1 July 2010 was $38,000. The lease agreement contains the following
provisions:
Date of commencdment of lease
1 July 2010
Lease term
3 years
Annual payment, payable in advance on 1 July each year
$15,000
Economic life of the truck
4 years
Estimated residual value at the end of the lease term when the truck is
returned to Toyoda Ltd
$3,000
Residual value guaranteed by McQueen Ltd
$1,500
Interest rate implicit in the lease
9%
Present Value of total Minimum Lease Payments
$37,026
The lease is considered to be non-cancellable. The annual payment includes an amount of
$2,000 per annum paid to Toyoda Ltd for maintenance and servicing of the truck.
On 30 June 2013, at the end of the lease term, McQueen Ltd returned the truck to Toyoda Ltd,
who then sold the truck for a total of $3,000.
REQUIRED
a) Prepare the lease payment schedule for the lessee, including the
apportionment of interest and principal for the term of the lease.
[5 marks]
b) Prepare the general journal entries recorded in the books of the lessee for 1
July 2012 and 30 June 2013.
[6 marks]
c)
[4 marks]
The lease taken by McQueen Ltd has been deemed to be a finance lease.
Give four reasons that are relevant to this lease that would justify the finance
classification.
5
ACTY6201 Financial Accounting
Semester 2, 2013
Question 4
15 Marks
Property, Plant and Equipment
Part A
On 1 April 2010, Great Wall Ltd purchased equipment for a total cost of $47,000. The
estimated useful life of the equipment was 8 years, with an estimated residual value of $7,000.
The entity’s balance date is 31 March, and it uses straight-line depreciation.
On 1 April 2012, Great Wall Ltd upgraded the equipment by $12,000 to increase its capacity.
The revised useful life was 7 years from 1 April 2012 and residual value was still estimated at
$7,000.
On 30 September 2013 Great Wall Ltd sold the equipment for $42,000.
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
2010 to 30 September 2013. Show all workings.
[10 marks]
Part B
At 31 August 2012 Great Wall Ltd had a land which was valued by an independent property
specialist at $150,000. There was a gross revaluation decrement of $40,000 that had been
made in an earlier year. The market in the area began to rise in late 2012 and after valuation
Great Wall Ltd records the fair value of the land at balance date, 31 August 2013, at $450,000.
REQUIRED
a)
Prepare the Journal entries to record the above transactions for 31
August 2013.
[2 marks]
b)
Explain and justify your answer in (a) with reference to the appropriate
accounting standards.
[3 marks]
6
ACTY6201 Financial Accounting
Semester 2, 2013
Question 5
30 Marks
Consolidations
Apple Ltd sells printers and other office equipment. Orange Ltd is a supplier of mobile
accessories. Both companies operate in the Auckland region.
The relevant financial statements of Apple Ltd and Orange Ltd for the year ended 31 March
2013 are given in the worksheet on the following page.
You are provided with the following information:
1.
Apple Ltd acquired all of the issued shares of Orange Ltd on 1 April 2008 for $3,640,000.
At acquisition date the Balance Sheet of Orange Ltd was as follows:
Inventory
Bank
Accounts Receivable
Property, Plant and Equip.
$
380,000
80,000
220,000
3,000,000
$3,680,000
Issued Capital (250,000 shares)
Retained Earnings
Other Reserves
Liabilities
$
2,680,000
320,000
160,000
520,000
$3,680,000
2.
On 1 April 2008 Orange Ltd revalued its property, plant and equipment upwards by
$120,000. All other assets were recorded at fair value.
3.
At balance date, inventory on hand for Orange Ltd was as follow:
In Orange Ltd’s books, the inventory
portion purchased from Apple Ltd
As at 31 March 2012
$120,000
As at 31 March 2013
$130,000
4.
During the current financial year Apple Ltd made inter-company sales of $1,320,000 to
Orange Ltd. Apple Ltd has a mark up on cost of 25%
5.
On 1 April 2011, Apple Ltd sold 8 printers (an inventory item) to Orange Ltd for $100,000.
Orange retained the item as property, plant and equipment. The printers had originally
cost Apple Ltd $80,000.
6.
Both companies depreciate their property, plant and equipment at the rate of 20% on cost.
7.
Orange Ltd made an interest bearing loan of $170,000 to Apple Ltd, the latter paid interest
at 10% per annum to Orange Ltd in the period from 1 April 2012 to 31 March 2013.
8.
During the current financial year, Orange Ltd paid dividend of $130,000.
9.
As at 31 March 2013, goodwill on acquisition is considered to be impaired by a total of
$20,000. Of this $4,000 is impairment for the current year.
Continued on following page…
7
ACTY6201 Financial Accounting
Semester 2, 2013
Question 5 continued…
REQUIRED
a)
Prepare the notional journal entries required for consolidation
for the year ended 31 March 2013.
[17 marks]
b)
Post the journal entries on to the worksheet and prepare the
consolidated figures.
[7 marks]
c)
Apple Ltd is deemed to have control over Orange Ltd. Explain
what is ‘control’ in a business combination. Give an example
where a parent company, which owns less than 50% voting
rights of a subsidiary, can result in having control over a
subsidiary. Support your answer with reference to the
accounting standard.
[6 marks]
8
ACTY6201 Financial Accounting
Semester 2, 2013
DETACH THE WORKSHEET AND HAND IN WITH YOUR ANSWER BOOKLET
Name:…………………………………………….
Worksheet, Question 5
Income Statement
ID Number: ………………….
Consolidation of Apple Ltd with subsidiary Orange Ltd
for the year ended 31 March 2013
Notional Journals
Group
Apple
Orange
A/cs
(000)
(000)
DR
CR
Sales
11,200
3,000
Less Cost of Sales
(6,580)
(1,700)
Gross Profit
Plus Other Income
4,620
320
1,300
60
4,940
(3,120)
1,360
(720)
Profit before tax
Less Tax
Profit after tax
Plus Retained Earnings b/fwd
1,820
(600)
1,220
740
640
(200)
440
400
Less Dividend paid
Retained Earnings c/fwd
1,960
(280)
1,680
840
(130)
710
Less Expenses
9