HKU Business School – Master of Accounting Programme 2022-23

MACC 7001 Financial Accounting Foundation

Assignment #1 (5% of full course marks)

Instructions:
1. Fill in your name and UID below.
2. Type or write your answers in the spaces provided.
3. Upload completed work to Moodle by 11pm of Sep 11, 2022. Late submission will not be graded.

Student Name Chen Zhaoxu

Student UID 3036008709

Question #1 – The IASB and its Conceptual Framework

(a) Explain why, with reference to the fundamental qualitative characteristics in the Conceptual Framework,
revenue information disclosed in the interim financial statements is relevant.

(b) Sky Limited is a travel agent. The competition in the industry is keen, and many entities have failed and
closed down in recent years. After having net losses in the past few years, Sky Limited reported net losses
of HK$8 million for the year ended 31 August 2022. Its current assets and current liabilities as of 31 August
2022 were HK$16 million and HK$22 million respectively. Sky Limited breached the loan covenants
relating to the borrowings from two financial institutions and was considering selling its key assets to repay
the loans. State what assumption in the Conceptual Framework may not hold when preparing Sky Limited’s
financial statements for the current year ended 31 August 2022. Explain your answer.

Answers
[Please type or write your answers here.]
a) The income information disclosed in the interim financial statements helps capital providers to confirm the
profitability of the companies in which they invest in forecasting, and it also helps them predict future trends in
the company's earnings.

b) In preparing Sky Limited's financial statements for the current year, I believe that the going concern
assumption may not be valid because all of the above facts indicate that the company has had serious financial
problems and will not be able to maintain its business as usual in the future.
Firstly, its short-term debt repayment ability is poor, with the ratio of current asset to current liabilities less than
1. Secondly, the company has failed to generate income for shareholders and has a net loss of HK$8 million for
the previous year, so it is using the closure and sale of its operating entities to repay its debts and is considering
selling its key assets. However, in this case, the company has also violated its loan covenants and has very low
credit worthiness in the debt market, making it difficult to achieve future debt financing. Therefore, in my
opinion, the going concern assumption may not be valid in preparing the financial statements of Sky Limited for
the year ending August 31, 2021.

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HKU Business School – Master of Accounting Programme 2022-23
MACC 7001 Financial Accounting Foundation
Assignment #1 (5% of full course marks)

Question #2 – IAS 2 Inventories

The following are data available for Blue Grass for the month of June (using perpetual inventory system):

Beginning inventory 300 units @2.00

Purchase 600 units @2.10
400 units @2.20
500 units @2.30
Sales (made at the end of the month) 1,200 units

(a) Calculate cost of goods sold and ending inventory under the following cost flow assumptions: (1) Weighted
average; (2) FIFO; (3) LIFO and prepare the corresponding journal entries.

(b) Assume net income using the weighted average cost-flow assumption was $6,400. Calculate net income
under FIFO and LIFO.

(c) NRV (net realizable value) of the ending inventory is @$1.90/unit. Assuming the use of weighted average
method, prepare the journal entry for the inventory write-down (the management determines that the write-
down is not material).

Show your workings clearly.

Answers
[Please type or write your answers here.]
a)
Inventory
Unit Cost per Unit Total Cost
 Beginning inventory             300           $ 2.00 $600
 Purchase             600           $ 2.10 $1,260
 Purchase             400           $ 2.20 $ 880
 Purchase             500           $ 2.30 $1,150
 Total          1,800 $3,890

Ending inventory in units = 1800-1200 = 600 units

(1) Weighted average

Weighted average = 3,890/1,800 = 2.16
Cost of goods sold = 1200*2.16 = $2,592
Ending inventory = 3,890-2,592 = $1,298

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HKU Business School – Master of Accounting Programme 2022-23
MACC 7001 Financial Accounting Foundation
Assignment #1 (5% of full course marks)

 Accounts  Dr.  Cr.

 Cost of goods sold          2,592
 Inventory          2,592

(2) FIFO
Cost of goods sold = 600+1,260+660 = $2,520
Ending inventory = 3,890-2,520= $1,370
 Accounts  Dr.  Cr.
 Cost of goods sold          2,520
 Inventory          2,520

(3) LIFO
Cost of goods sold = 1,150+880+620 = $2,660
Ending inventory = 3,890-2,660= $1,230
 Accounts  Dr.  Cr.
 Cost of goods sold          2,660
 Inventory          2,660

b) Net income under FIFO=6,400+2,592-2,520 = $6,472

Net Income under LIFO= 6,400+2,592-2,660 = $6,332

c) Weighted average cost= $1,298

NRV = 600*1.90 = $1,140
Because NRV is less than weighted average cost, the inventory is reported as $1,140.
Inventory written down = 1,298-1,140 = $158

 Accounts  Dr.  Cr.

 Cost of goods sold   158
 Inventory 158

Question #3 – IAS 16 Property, Plant and Equipment

A property was purchased at a cost of $10m on 1 January 2019. It has a useful life of 10 years with straight-line
depreciation and no residual value.

(a) At 1 January 2020, the property was revalued to $12m and its useful life remains unchanged. Prepare the
journal entry to account for this revaluation.

(b) At 1 January 2021, the property was revalued to $6m and its useful life remains unchanged. Prepare the
journal entry to account for this revaluation.

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HKU Business School – Master of Accounting Programme 2022-23
MACC 7001 Financial Accounting Foundation
Assignment #1 (5% of full course marks)

(c) At 1 January 2022, the property was revalued to $10m and its useful life remains unchanged. Prepare the
journal entry to account for this revaluation.

Show your workings clearly and specify the nature of the accounts (i.e. P&L or OCI) in the journal entries.

Answers
[Please type or write your answers here.]
Date Accounts Dr. Cr.
1 January 2020 Depreciation A/c 1,000,000
Property A/c 1,000,000
Property A/c 3,000,000
Revaluation reserve A/c 3,000,000
1 January 2021 Depreciation A/c 1,333,333
Property A/c 1,333,333
Revaluation reserve A/c 3,000,000
Impairment loss A/c 1,666,667
Property A/c 4,666,667
1 January 2022 Depreciation A/c 7,500,000
Property A/c 7,500,000
Property A/c 4,750,000
Impairment loss A/c 1,666,667
Revaluation reserve A/c 3,083,333

Question #4 – IAS 40 Investment Properties

CLand Limited (“CLL”) owns the following two buildings in Hong Kong:

Building A Building B
Usage Warehouse Earning rental income
Date of acquisition 1 January 2014 1 January 2019
Cost of building $20 million $18 million
Fair value of the building at 31 December 2021 $28 million $22 million
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HKU Business School – Master of Accounting Programme 2022-23
MACC 7001 Financial Accounting Foundation
Assignment #1 (5% of full course marks)

CLL has accounted for (i) property, plant and equipment at cost basis and depreciated the cost with an estimated
useful life of 30 years and (ii) investment property using the fair value model.

Required:
Classify the two buildings under the relevant financial reporting standards and calculate the respective amounts
to be recognised on the statement of financial position as at 31 December 2021 by completing the following
table. Show your workings clearly.

Answers

As at 31 December 2021 Building A Building B

Classification Property, plant and equipment Investment property

(specify the relevant accounting
standard)
Cost of acquisition $20 million $18 million
Depreciation -$5.33 million -$4.8 million
Remain value $14.67 million $13.2 million
Fair value change $8.8 million
Amounts recognized on the $14.67 million $22.00 million
Statement of Financial Position

Question #5 – IAS 38 Intangible Assets

Anderson Gadd owns and operates a number of restaurants, half of which are operated under franchise from a
global company Allied Restaurant Company (“ARC”). Anderson Gadd has incurred the following expenses in
the year ended 31 July 2022 and wishes to know which can be recognised as intangible assets in the statement
of financial position:

1. The $357,000 purchase cost of a new stock management software package.

2. Franchise fees of $250,000 paid to ARC for the use of the trading name 'Cowabunga' for a new outlet.
3. Training costs amounting to $130,000 for staff at the new Cowabunga outlet.
4. Advertising costs of $75,000 incurred prior to the opening of the new Cowabunga outlet.

Required:

Briefly explain the accounting treatment and prepare the corresponding journal entries for Anderson Gadd
regarding the above transactions for the year ended 31 July 2022.
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HKU Business School – Master of Accounting Programme 2022-23
MACC 7001 Financial Accounting Foundation
Assignment #1 (5% of full course marks)

Answers

1. In order to mimic the purchase of the building, Anderson Gadd would debit the edifice account for
the building's worth and credit the brokerage account for the amount of money spent in the group
action.
2. For the purchase of the furniture, Anderson Gadd would debit the Furniture account, credit the
Cash account for its worth, and debit the Brokerage account for the amount of money made
through the Furniture Group Action.
3. Anderson Gadd would credit the brokerage account with the money received for the edifice
improvements and debit the edifice account for the cost of the renovations.
4. In order to credit the brokerage account with the same amount, Anderson Gadd would debit the
building rent expense account for the amount of paid building rent.

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