Revision Workshop ACC2CRE PDF

Week 12 Revision Workshop W1: Australian Reporting Environment and Conceptual Framework W2: Preparation of Financial Statements I- Revenue from contract with customers- Part A; Corporate Social Responsibility Disclosure W3: Preparation of Financial statements: II – Accounting policies, Estimates & E...

Week 12 Revision Workshop W1: Australian Reporting Environment and Conceptual Framework W2: Preparation of Financial Statements I- Revenue from contract with customers- Part A; Corporate Social Responsibility Disclosure W3: Preparation of Financial statements: II – Accounting policies, Estimates & Errors Events after the reporting date; Provisions, contingent liabilities and contingent assets W4: Share Issues W5: Statement of Cash Flows W6: Depreciation of Property, Plant and Equipment, Revaluation of Non- Current Assets, Impairment of Non-Current Assets W7: Accounting for Income Taxes W8: Accounting for Business Combinations; Consolidated Financial Statements – Wholly owned and controlled entities W9: Consolidated Financial Statements – Intragroup Transactions W10: Non-Controlling Interests W11: Equity Investments, and Joint Arrangements  Australian External Reporting Environment & Conceptual Framework  Understand the scope of regulation relating to Australian external financial reporting  Describe the sources of accounting regulation within Australia  Explain the general functions of the Australian Securities and Investments Commission, the Australian Accounting Standards Board, the Financial Reporting Council and the Australian Securities Exchange  Outline the general functions of the International Accounting Standards Board and its relevance to Australian accounting standard setting  Identify the role of an accounting standard and the process through which it is developed  Describe the changes that occurred in 2003 and 2004 in Australian Accounting Standards as a result of the Financial Reporting Council’s strategic decision  Explain that the practice of financial accounting is quite heavily regulated within Australia  Aware of some arguments for and against the regulation of financial accounting  Company Reports and Disclosure – I - Revenue from Contract with Customers – (AASB 15/IFRS 15) Corporate Social Responsibility  Explain what kinds of reports must be produced  Aware of the timing of reports  Describe the minimum contents of the reports  Discuss the legislative requirements for the preparation of comprehensive income;  Explain how profit or loss and total comprehensive income are calculated and how these measures should be disclosed in the financial statements  Understand that an entity is required to produce both a statement of comprehensive income and a statement of changes in equity as well as a statement of financial position and statement of cash flows AASB 15 Revenue from Contracts with Customers  AASB 15 applies to only a part of the income-generating activities of an entity (contracts with customers)  The objective of this Standard is to establish the principles that an entity shall apply to report useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with a customer.  Contract: An agreement between two or more parties that creates enforceable rights and obligations  Customer: A party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration Five-step model for the purposes of recognising revenue from contracts with customers (AASB 15)  Corporate Social Responsibility  What social-responsibility reporting is  How social-responsibility reporting relates to financial reporting  The possible linkages between social and environmental performance and financial performance  The regulatory requirements for disclosure of social performance  Some of the limitations of conventional financial accounting in relation to the recognition of social and environmental costs and benefits  Some of the various frameworks for social-performance and environmental-performance reporting  Company Reports and Disclosure – II Accounting policies, Estimates & Errors Events after the reporting date; Provisions, contingent liabilities and contingent assets  Understand how to account for prior period errors  Understand how to account for changes in accounting estimates  Be aware of the specific disclosure requirements stipulated in AASB 110 Events After the Reporting Period  Know the difference between an adjusting event after the reporting period, and a non-adjusting event after the reporting period  Be able to describe how dividends declared after the end of the reporting period should be disclosed  Understand provisions, contingent liabilities and contingent asset  Events after BS date (a) What are the different types of after-reporting date events and how should they be disclosed? (b) The 30 June 2022 financial statements of ABC Ltd have been prepared in draft form. However, the financial statements have not yet been printed and sent to shareholders. Subsequent to the reporting date, the following events occur. (a) A judgement is handed down in the Victorian Supreme Court on 15 July 2022 in relation to a 2021 product liability case brought by a customer against the company. This judgement renders the company liable for court costs and compensation totalling $240,000. (b) On 14 July 2022 the Commonwealth government enacts legislation altering the company income tax rate from 39 per cent to 42 per cent for all income tax returns from 1 July 2022. © On 28 July 2022 the company’s country warehouse is destroyed by fire. The total carrying value of the warehouse, which was uninsured, is $350,000. (d) On 2 August 2022 the financial cost of inventory shipped from overseas is determined. The inventory was received in June 2018 and the cost was estimated for accounting purposes. The revised cost is $900,000 greater than the prior estimate. (e) On 16 July 2022 the company enters into a contract to purchase 25 per cent of the issued capital of competitor XYZ Ltd for $750,000. Required: Discuss the appropriate accounting treatment of the above events assuming all amounts are materials for financial statements purposes. a) AE, b) NAE, c) NAE, d) AE, e) NAE Share Issues On 1 July 2019 Sprintfast Couriers Ltd, which has a year-end of 30 June, purchased a delivery truck for use in its courier operations at a cost of $65 000. At the end of the truck’s useful life it is expected to have a residual value of $5000. During its six-year useful life, Sprintfast Couriers Ltd expected the truck to be driven 246 000 kilometres. Required: Calculate the annual depreciation charge for each of the six years of the truck’s life using the following methods: 1. the straight-line method 2. the sum-of-digits method 3. the declining-balance method 4. the units-of-production method using kilometres as the basis of use and assuming the following usage: Year Kilometres 2020 28 000 2021 34 000 2022 42 000 2023 55 000 2024 68 000 2025 19 000 246 000 (a) Straight-line depreciation (Cost – residual value) ÷ useful life = ($65 000 – $5000) ÷ 6 = $10 000 per year This method of depreciation would be appropriate when the pattern of benefits derived from the asset are expected to be uniform throughout the asset’s useful life. (b) Sum-of-digits depreciation The asset is expected to be used for six years. We need to sum the digits from one to the asset’s life, in this case five. 1 + 2 + 3 + 4 + 5 + 6 = 21 Or we could use the formula n(n + 1) ÷ 2, which gives (6 × 7) ÷ 2 = 21 Year depreciation 1 6 ÷ 21 × ($65 000 – $5000) = $17 143 2 5 ÷ 21 × ($65 000 – $5000) = $14 286 3 4 ÷ 21 × ($65 000 – $5000) = $11 429 4 3 ÷ 21 × ($65 000 – $5000) = $8 571 5 2 ÷ 21 × ($65 000 – $5000) = $5 714 6 1 ÷ 21 × ($65 000 – $5000) = $2 857 $60 000 Depreciation based on the sum-of-digits method would be appropriate where the economic benefits expected to be derived from the asset will be greater in the early years than the later years. (c) Declining-balance depreciation The percentage to be applied to the opening written-down value (or carrying amount) of the asset is determined by using the following formula: percentage = 1 – the nth root of (salvage value ÷ cost), where n = the life of the asset, which in this case is 6 6 = 1.0 – √0.076923 = 1.0 – 0.652143 = 0.347857 Year Calculation Depreciation 1 0.347857 × ($65 000) = $22 611 2 0.347857 × ($65 000 – 22 611) = $14 745 3 0.347857 × ($65 000 – 37 356) = $9 616 4 0.347857 × ($65 000 – 46 972) = $6 271 5 0.347857 × ($65 000 – 53 243) = $4 090 6 0.347857 × ($65 000 – 57 333) = $2 667 $60 000 As with the sum-of-digits approach, depreciation based on the declining- balance approach would be appropriate where the economic benefits expected to be derived from the asset will be greater in the early years than the later years. (d) Units-of-production method Year Calculation Depreciation 2020 28 ÷ 246 × $60 000 $6 829 2021 34 ÷ 246 × $60 000 $8 293 2022 42 ÷ 246 × $60 000 $10 244 2023 55 ÷ 246 × $60 000 $13 415 2024 68 ÷ 246 × $60 000 $16 585 2025 19 ÷ 246 × $60 000 $4 634 $60 000 The units-of-production method results in a depreciation charge based on the expected use or output of the asset. Depreciation is calculated by taking the actual usage for the year and dividing it by total expected usage and then multiplying it by the depreciable amount Kanga Cairns ltd owns two blocks of beachfront land, acquired in 2019 for the purposes of future residential development. Block A cost $250,000 and Block B cost $350,000. Valuations of the blocks are undertaken by an independent valuer on 30 June 2021 and 30 June 2023. The assessed values are: 2021 Valuation 2023 Valuation Block A 230,000 290,000 Block B 370,000 340,000 Required: Assuming assets revaluations were undertaken for the land in both 2021 and 2023, provide the journal entries for both years. Point Lookout acquired some machinery at a cost of $1 million. As at 30 June 2018 the machinery had accumulated depreciation of $200,000. On 30 June 2022 it was determined that the machinery could be sold for a price of $650,000 and the costs associated with make the sale would be $20,000. Alternatively, the machinery is expected to be useful for another five years and the net cash flows expected to be generated from the machine would be $180,000 over each of the next five years. As at 30 June 2022 it is assessed that the market value would require a rate of return of 7 per cent on this type of machinery. Required: Determine whether an impairment loss needs to be recognised in relation to the machinery and, if so, provide the appropriate journal entry.  CA>RA of an asset = Impairment loss  Recoverable amount = higher of the asset’s net selling price and its value in use  The net selling price = $650,000 (selling price)- $20,000 (cost to sale)=$630,000  The value in use is determined by discounting the expected future net cash flows to be generated by the asset using a discount rate relevant to the asset  The present value of an annuity of $1 for five years discounted at 7 per cent is $4.1002 (see Appendix B, Deegan, 2020, p. 1336). Hence, the value in use is determined as $180,000 multiplied by 4.1002, which gives us $738,036  Impairment loss = $800,000 - 738,036 = $61,964 The journal entry would be: Dr Impairment loss – machinery 61, 964 Cr Accumulated impairment loss- machinery 61,964 (recognition of an impairment loss on machinery)  Impairment of Non-Current Assets a) How should be the reversal of an impairment loss be accounted for? (b) XYZ Ltd is a business with a number of operating divisions. The following information relates to the glassware division. Assets Carrying Amount Showroom $160,000 Land 200,000 Fittings 80,000 Buildings 175,000 Additional information: The glassware division is considered to be a cash generating unit All assets reflect carrying amount except Land which has a fair value less costs to sell of $175,000. The value in use of the division is estimated to be $550,000. Required: Calculate any impairment loss, net carrying amount and prepare the necessary journal entries. How would your answer differ if the fair value of the land was $180,000? (I) Calculation of impairment loss:   Allocation of Loss Suggested solution Carrying Net carrying Proportion Allocation of loss amount amount Showroom 160,000 160,000/615,000 X 65,000 = 16,911 143,089 Land 200,000 200,000/615,000 X 65,000 = 21,138 178,862 Fittings 80,000 80,000/615,000 X 65,000 = 8,455 71,545 Buildings 175,000 175,000/615,000 X 65,000 = 18,496 156,504 Total 615,000 65,000  Suggested solution  Journal entries Particular Debit Credit $ $ Impairment loss 65,000 Showroom 16,911 Land 21,138 Fittings 8,455 Buildings 18,496 27 If the fair value of the land was $180,000, it cannot be written down below that amount i.e. the maximum write-down is $20,000. The additional $1138 impairment loss on land ($21,138 - $20,000) must be allocated pro-rata across the other assets. Carrying Allocation of Net Carrying Proportion Amount Loss Amount Showroom $143,089 143,089 /371,138 439 142,650 Land 180,000 - - 180,000 Fittings 71,545 71,545/371,138 219 71,326 Buildings 156,504 156,504/371,138 480 156,024 $371,138 1,138 The journal entry to record the impairment loss is: Dr Impairment Loss 65,000 Cr Accumulated Impairment Losses: Showroom 17,350 (16,911+439) Land 20,000 Fittings 8,674 (8,455 + 219) Buildings 18,976 (18,496 + 480)  Deferred tax assets and deferred tax liabilities  Assets  Deferred tax liability arises when:  carrying amount > tax base  Deferred tax asset arises when:  carrying amount < tax base  Liabilities  Deferred tax liability arises when:  carrying amount < tax base  Deferred tax asset arises when:  carrying amount > tax base  The required journal entries at 30 June 2023 would be: Dr Income tax expense (current) 210 000 Cr Income tax payable 210 000 (to recognise the tax expense pertaining to ‘taxable profit’) Dr Income tax expense (OCI) (deferred) 60 000 Cr Deferred tax liability 60 000 (to recognise the tax implications of the revaluation of land. At the end of the accounting period this income tax expense of $60,000 would be offset against the revaluation surplus rather than be treated as part of profit or loss – see final entry below.) Dr Deferred tax asset 24 000 CQ Cr Deferred tax liability 21 000 Cr Income tax expense (deferred) 3,000 18.2 (to recognise the tax implications of the temporary differences other than the 6 revaluation) Dr Revaluation surplus 60 000 Cr Income tax expense (OCI) (deferred) 60 000 (to reduce the amount of the revaluation surplus so that only the net (after tax) effect of the revaluation is recognised within equity) AASB 112 requires that the deferred tax liabilities and deferred tax assets be ‘set-off’ against one another and only the net amount be disclosed in the statement of financial position. Hence, we will also make the following entry: Dr Deferred tax liability 24 000 Cr Deferred tax asset (to offset the deferred tax asset against the deferred tax liability) 24 000 Group Structure- Intragroup Transactions Required: Provide the consolidated journal entries for Mungo Ltd and Barry Ltd as at 30 June 2023.  Accounting for Equity Investments On 1 July 2022 Ma Ltd acquires a 25 per cent interest in Pa Ltd for a cash consideration of $375,000. On the date of the acquisition, the assets of Pa Ltd are reported at fair value. The share capital and reserves of Pa Ltd at the date of acquisition are: Share capital $1,000,000 Retained earnings $500,000 Total shareholders’ equity $1,500,000 Additional information: For the year ending 30 June 2023, Pa Ltd record an after-tax profit of $80,000, from which it pays a dividend of $30,000. For the year ending 30 June 2024, Pa Ltd records an after-tax profit of $100,000, from which it pays a dividend of $50,000. On 30 June 2024, Pa Ltd revalues its land upwards by $70,000. The tax rate is 30 per cent. Ma Ltd has a number of subsidiaries. Required: Prepare the journal entries under both the cost and the equity method of accounting for the investment in Pa Ltd for the year ending 30 June 2024 (that is, two years after acquisition). 29.18 Cost method—30 June 2024 entries Dr Cash 12 500 Cr Dividend revenue 12 500 (to recognise dividend income) Equity method—30 June 2024 adjusting entries In this question, the investor’s share of the fair value of the net assets of the associate equals the purchase cost—hence there are no goodwill-related adjustments. Dr Investment in Pa Ltd 12 500 Cr Retained earnings—1 July 2023 12 500 (Equity account accumulated post-acquisition retained earnings of the associated company to the beginning of the year. These are made up of the accumulated profits made since acquisition, less dividends paid out of such profits: $12 500 = (80 000 – 30 000) × 25%.) Dr Investment in Pa Ltd 25 000 Cr Share of associate’s profit 25 000 (to increase the investment account for the investor’s share of the current period's profits: $25 000 = $100 000 × 25%) Dr Dividend revenue 12 500 Cr Investment in Pa Ltd 12 500 (to reduce the investment account for dividends recognised by the investor during the current year. This entry effectively eliminates the entry shown above under the cost method: $50 000 × 25% = $12 500) As Pa Ltd revalued its land, the journal entries in its own accounts would have resulted in a debit to land of $70 000 and credit entries to revaluation surplus of $49 000 (which is $70 000 × (1 – tax rate)), and to a deferred tax liability of $21 000 respectively. Ma Ltd’s share of the post-acquisition increase in revaluation surplus would be calculated as: Increase in the revaluation surplus of Pa Ltd $49 000 Ma Ltd’s equity interest x 25% Ma Ltd’s share of the movement in Pa Ltd’s revaluation surplus $22,250 Dr Investment in Pa Ltd 12 250 Cr Share of associate’s OCI (to then be transferred to 12 250 Revaluation surplus) (to increase the investment account for the investor’s share of post-acquisition movement in the associate’s revaluation surplus) As at 30 June 2024, the value of the investment in the associated company as a result of adopting equity accounting would be $412 250, reconciled as: Original cost $375 000 Share of net post acquisition profits to 30 June 2023 12 500 Share of 2024 profit of the associated company 25 000 Dividends received from associated company in 2024 (12 500) Share of post-acquisition increase in revaluation surplus 12 250 $412 250  Accounting for Joint Arrangements Does the required accounting treatment for a venture’s interest in a jointly controlled operation differ from the requirements for an interest in a jointly controlled entity and, if so, how do these requirements differ? On 1 July 2022 Mineral Ltd enters into a joint arrangement with Ore Ltd. Both joint operators commit themselves to a contractual arrangement in which Mineral Ltd contributes machinery and Ore Ltd contributes cash of $2.5 million. The joint arrangement is not undertaken through a separate entity and is considered to be a jointly controlled operation. The machinery contributed by Mineral Ltd has a carrying value of $2 million (cost of $2.2 million, and the accumulated depreciation of $200 00) and a fair value of $2.5 million. All current and future contributions are to be based on a 50:50 split, as are the future distributions of output. The relevant tax rate is 30 per cent. Required: Provide the journal entries to account for the joint operators’ contributions. Journal entries in the books of Mineral Ltd 1 July 2022 Dr Cash in JO 1,250,000 Dr Machinery in JO 1,100,000 Dr Accumulated depreciation 200,000 Cr Gain on sale of machinery 250,000 Cr Machinery 2,200,000 Cr Accumulated depreciation -Machinery in JO 100,000 (to recognise the assets that are in the joint operation and to recognise the gain on sale of the machinery) Journal entries in the books of Ore Ltd 1 July 2022 Dr Cash in JO 1,250,000 Dr Machinery in JO 1,250,000 Cr Cash 2,500,000 (to recognise the full amount of cash contributed to the joint operation and to recognise the share in the assets contributed to the joint operation. The machinery in the joint operation is measured at its fair value at the date the asset is contributed).