AF210: Financial Accounting

School of Accounting and Finance

Final Examination

Semester 2, 2020

Blended Mode

Duration of Exam: 3 hours + 10 minutes

Reading Time: 10 minutes
Writing Time: 3 hours

Instructions
There are 11 pages in this exam paper, including this cover page.
There are two sections in this exam paper, Section A and Section B.
You are to answer all questions provided in both sections.
This exam has a total mark of 100 and carries a 50% weighting towards your overall course
grade.
To secure a pass mark in the course, you must score a mark of at least 50% over all assessment
AND a mark of at least 40% in this examination.

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Section A: 30 Marks

This section contains 15 Multiple Choice questions worth 2 marks each. Answer this section on the special
multiple choice grid provided. You are to spend about 45 minutes on this section.

1. In the case of a lease, the accounting treatment by the lessee could:

A. calculate the IRR implicit in the lease contract and disclose it in the notes to the accounts.
B. provide note disclosure to the accounts and recognise the lease payments in the same way as a
rental expense.
C. accrue the lease payments and match them against revenues earned by using a unit of
production method.
D. recognise an asset and associated liability equal in value to the present value of the minimum
lease payments.

2. The amount of a lease receivable recorded by the lessor for a direct finance lease should equal
at the beginning of the lease term:

A. the aggregate of the present value of the minimum lease and executory payments and the
present value of any unguaranteed residual value expected to accrue to the benefit of the lessor at
the end of the lease term.
B. the aggregate of the present value of the minimum lease payments and the present value of
any unguaranteed residual value expected to accrue to the benefit of the lessor at the end of the
lease term. Any initial direct costs should also be included in the lease receivable.
C. the aggregate of the present value of the total lease payments and the present value of any
guaranteed residual value expected to accrue to the benefit of the lessor at the end of the lease
term.
D. the aggregate of the present value of the minimum lease payments and the present value of
any guaranteed residual value expected to accrue to the benefit of the lessor at the end of the
lease term, plus any initial direct costs.

3. There are various appropriate accounting treatments when a sale is made subject to a right of
return. These methods include:

A. recording the sale and accounting for the returns as they occur in future periods.
B. recording the cash received as held in trust until all return privileges have expired.
C. recording the sale but reducing sales by an estimate of the future returns.
D. recording the sale and accounting for the returns as they occur in future periods and recording
the sale but reducing sales by an estimate of the future returns.

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4. Using the cost method to calculate the percentage of completion, the formula for the current
period revenue or gross profit to be recognised is:

A. costs incurred to the end of the current period divided by most recent estimate of total costs.
B. estimated total revenue or gross profit from the contract multiplied by (costs incurred to the
end of the current period divided by most recent estimate of total costs) less (total revenue or
gross profit recognised in prior periods).
C. costs incurred to the end of the current period divided by most recent estimate of total costs
multiplied by (total revenue or gross profit recognised in prior periods).
D. estimated total revenue or gross profit from the contract divided by (costs incurred to the end
of the current period multiplied by most recent estimate of total costs) less (total revenue or gross
profit recognised in prior periods).

5. The choice of classification between nature and function of expenses from ordinary activities
depends on:

A. the size of the items that would be reported under the possible classifications.
B. the historical evidence about the probability of the items recurring.
C. the classification that provides information that is reliable and more relevant.
D. the classification that best reflects the way expenses vary directly or indirectly with the
entity's level of activity.

6. A non-adjusting event is one that occurs:

A. after the reporting date.

B. after the auditor has signed the audit report.
C. after the completion of the financial reports.
D. after the financial statements have been distributed.

7. Management of Utopia Ltd has become aware after reporting date that a major customer is
insolvent. The customer apparently went into receivership before Utopia's reporting date and
owes Utopia a material amount for inventory purchased during the period. According to IFRS,
how should this event be treated in Utopia's financial statements?

A. The account receivable should be written off.

B. The event should be disclosed in the notes to the financial statements, including information
about the financial effect of the customer's insolvency.
C. No reporting is required.
D. The directors are required to disclose the event in the Directors' Declaration.

8. Accounts that represent cash or cash equivalents include:

A. bank overdrafts.
B. accounts receivable.
C. short-term money market deposits.
D. bank overdrafts and short-term money market deposits.

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9. Investing activities are defined by IFRS as those that:

A. relate to the changing size or composition of the capital management structure of the entity.
B. relate to the acquisition or disposal of inventory.
C. relate to the acquisition and/or disposal of non-current assets and other investments not
included in cash equivalents.
D. relate to changes in capital or liabilities used to fund long-term assets.

10. The following are cash flow transactions for Mungo Ltd:

Which of the following combinations includes all of the transactions that will determine cash
flows from operating activities of Mungo Ltd that are in accordance with IFRS?

A. I, II, III, IV and V

B. I, II, III, IV and VI
C. I, II, III and IV
D. I, II and III

11. The factors that are taken into consideration in determining whether or not an entity should
be consolidated under IFRS include:

A. the nature of the legal form of the entity and whether or not the 'parent' entity owns enough of
the equity in the entity to effectively control the benefits that flow from the relationship with the
other entity.
B. whether or not the potential 'parent' entity controls the other entity.
C. the number of members on the board under the control of the potential 'parent' entity, and
whether or not the other entity has been partitioned by the potential 'parent' entity.
D. whether or not the potential 'parent' entity controls the other entity and whether or not it is in a
significantly different business to the potential 'parent'.

12. Aladdin Ltd sells inventory for a profit to its subsidiary Jasmine Ltd to be used as machinery
in Jasmine Ltd's production process. The consolidation worksheet of Aladdin Ltd with respect to
this transaction only should not include:

A. a debit to sales.
B. a credit to cost of sales.
C. a credit to inventories.
D. a credit to machinery.

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13. Dividends paid between entities in the group should be:

A. not permitted by the ultimate controlling entity because it does not make sense to exchange
money between entities in the one economic group.
B. reflected in the group accounts because it reflects the economic return the group earned by
investing in the companies that form its operations.
C. eliminated from the group accounts, but reflected in the individual legal entity accounts, since
the group accounts reflect the many entities as one single economic entity.
D. retained in the consolidated statements but disclosed separately as related-party transactions.

14. A foreign currency transaction shall be recorded on initial recognition in the:

A. presentation currency.
B. local currency.
C. foreign currency.
D. functional currency.

15. The exchange rate for a currency depends on many factors including:

A. the price of McDonald's hamburgers in each country.

B. the rate at which the Australian currency is pegged at relative to the other currency of interest.
C. the price of options on futures of the foreign currency.
D. the demand for and supply of the currency in the market.

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Section B: 70 Marks

This section has 5 compulsory questions. You are to spend about 135 minutes on this section.

Question 16: Lease (10 marks)

Mike Deliveries Ltd leased a truck from City Vehicles Ltd. Mike Deliveries Ltd has not made
any commitment to the lessor to purchase it. The terms of the lease are as follows:
 Date of entering lease: 1 July 2019.
 Duration of lease: four years.
 Life of leased asset: five years, after which it will have no residual value.
 Lease payments: $100 000 at each financial year end at 30 June 2020, 2021, 2022 and
2023.
 Interest rate implicit in the lease: 10 per cent.
 Unguaranteed residual at the end of lease term: $50 000.
 Fair value of truck at inception of the lease: $351 140.

Note: the present value of an annuity of $1 in arrears for 4 years discounted at 10 per cent is
3.1699, and the present value of $1 in 4 years, discounted at 10 per cent is 0.6830.

Required:

A. Prepare the lease repayment schedule for Mike Deliveries Ltd (the lessee). (3 Marks)

B. Provide the journal entries to account for the lease transaction in the books of the lessee,
Mike Deliveries Ltd, at 1 July 2019 and 30 June 2020. Rounding to the nearest whole
number. (7 Marks)

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Question 17: Statement of profit or loss and other comprehensive
income (10 marks)
The following information has been extracted from the accounting records of Hellen Ltd for the
year ended 30 June 2020:

Debit Credit
Sales $1 800 000
Dividends paid $ 10 000
Cost of sales 1 072 000
Finance costs 40 000
Distribution costs 116 000
Transfer from general reserve 16 000
Marketing costs 54 000
Administrative costs 104 000
Proceeds from sale of plant 60 000
Carrying amount of the plant sold 40 000

During the year the land owned by Hellen Ltd was revalued from $160 000 to $170 000.
Ignore income tax effects (i.e. assume the tax rate is 0%).

Required:

Prepare a statement of profit or loss and other comprehensive income for Hellen Ltd, for the year
ended 30 June 2020. (classify expenses by function). (10 marks)

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Question 18: Statement of cash flow (20 Marks)

Island Ltd is preparing a statement of cash flows for the year ended 30 June 2019. The data are
provided as below.

ISLAND LTD
Statements of Financial Position
as at 30 June 2019
2019 2018
Assets
Petty cash $ 800 $ 700
Cash at bank 46 400 33 700
Accounts receivable $ 127 400 $ 102 960
Allowance for doubtful debts (11 400 ) 116 000 (6 960 ) 96 000
Inventory 70 800 74 600
Motor vehicles 50 400 42 000
Acc. depn – motor vehicles (12 800 ) 37 600 (10 000 ) 32 000
Office furniture 18 400 16 000
Acc. depn – office furniture (8 400 ) 10 000 (7 600 ) 8 400
Total assets $ 281 600 $ 245 400
Liabilities
Accounts payable $ 47 200 $ 45 000
Equity
Share capital 196 000 165 000
Retained earnings 38 400 35 400
Total liabilities and equity $ 281 600 $ 245 400

ISLAND LTD
Statement of Profit or Loss
for the year ended 30 June 2019
Income
Sales revenue $ 750 000
Proceeds from sale of vehicle 3 000 753 000
Less: Expenses
Cost of sales 603 000
Salaries and wages 116 360
Doubtful debts expenses 14 440
Depreciation – motor vehicles 6 000
Depreciation – office equipment 800
Carrying amount of vehicle sold 2 400 743 000
Profit before tax 10 000
Less: Income tax expense -
Profit after tax $ 10 000

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Additional information

(a) A dividend was paid during the year.

(b) A vehicle that had carrying amount $2 400 was sold for cash of $3 000; a new vehicle was
bought during the year.
(c) Some new office furniture was bought.
(d) New shares were issued during the year.
(e) Ignore income tax effects (i.e. assume the tax rate is 0%).

Required:

A. Prepare the statement of cash flows based on the direct method of presentation for the year
ended 30 June 2019. (15 marks)

B. Prepare a reconciliation of the profit for the year with net cash flows from operating
activities. (5 marks)

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Question 19: Accounting for Group Structures and Intragroup Transactions
(20 marks)

Part A:

On 1 July 2018, Fiji Sport Ltd acquired all the issued shares of Nadi Ltd for $480 000. At that date
the financial statements of Nadi Ltd showed the following information:

Share capital $200 000

General reserve 100 000
Retained earnings 140 000

All the assets and liabilities of Nadi Ltd were recorded at amounts equal to their fair values
at that date.

Required:

Prepare the consolidation worksheet entries at 1 July 2018. (10 Marks)

Part B:

Fiji Sport Ltd owns all of the shares of Nadi Ltd. During the financial year 1 July 2019 – 30 June
2020, the following intragroup transactions occurred.

(1) On 1 July 2019, Fiji Sport Ltd sold an item of plant costing $15 000 to Nadi Ltd for $18
000. Fiji Sport Ltd had not charged any depreciation on the plant before the sale. Both
entities depreciate assets at 10% p.a. on cost.
(2) Fiji Sport Ltd, in September 2019, sold inventory for $8000 to an external party. This
inventory had been sold to it by Nadi Ltd in the previous year. It had originally cost Nadi
Ltd $4800, and was sold to Fiji Sport Ltd for $9600.
(3) Nadi Ltd sold land to Fiji Sport Ltd in October 2019. The land had originally cost Nadi Ltd
$40 000, but was sold to Fiji Sport Ltd for only $32 000.
(4) In January 2020, Nadi Ltd paid a $4500 interim dividend.
(5) In April 2020, Fiji Sport Ltd sold inventory to Nadi Ltd for $12 000. This inventory had
previously cost Fiji Sport Ltd $8000, and half remained unsold by Nadi Ltd at the end of
the period.

Required:

Prepare the consolidation worksheet adjusting entries for the intragroup transactions (1) to (5) for
the year ended 30 June 2020. (10 Marks)

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Question 20: Accounting for Foreign Currency (10 Marks)

Pacific Ltd is a Fiji company that purchases inventory from Kiwi Ltd, which is a New Zealand
company. On 11 May 2020, Pacific Ltd purchased inventory for NZ$500 000. At the financial
year end 30 June 2020, the inventory was still unpaid. Pacific Ltd made cash payment on 31 July
2020 after a careful check on the inventory. The foreign currency exchange rates are shown bellow.

Date Exchange rate

11-May-2020 FJ$1 = NZ$0.71
30-June-2020 FJ$1 = NZ$0.72
31-July-2020 FJ$1 = NZ$0.69

Required:

Provide all of the journal entries of Pacific Ltd that relate to the foreign currency purchase of
inventory. (Narrations are not required) (10 Marks)

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