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Assignment #1 (With Answers)
Assignment #1 (With Answers)
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
Student UID
(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) To be relevant, the information must have predictive and/or confirmatory value. Revenue information for
the first six months in a current year (disclosed in its interim financial statements) can be used as the basis
for predicting the revenues in coming six months and, therefore, has predictive value. At the same time, it
can also be compared with revenue predictions for the first six months that were made in past periods,
thereby confirming or changing prior expectations.
(b) A going concern assumption states that the reporting entity will continue in operation for the foreseeable
future. It assumes the entity has neither the intention nor the need to enter liquidation or to cease trading. In
the case of Sky Limited, the going concern assumption may not hold in view of the following:
the adverse operating environment of the industry with the closure of a number of entities;
having continuous net losses in recent years;
having a net current liability of HK$6 million as at the current year end;
failure to fulfil its obligations to repay the loan to the banks; and
having a need to sell key assets.
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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)
(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).
Answers
[Please type or write your answers here.]
(a)
2. FIFO Cost of goods sold = 300 x $2.00 + 600 x $2.10 + 300 x $2.20 = $2,520
FIFO Ending inventory= 100 x $2.20 + 500 x $2.30 = $1,370
3. LIFO Cost of goods sold = 500 x $2.30 + 400 x $2.20 + 300 x $2.10 = $2,660
LIFO Ending inventory= 300 x $2.00 + 300 x $2.10 = $1,230
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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)
(b) The effect on net income will be the difference between cost of goods sold under each cost flow
assumption.
FIFO cost of goods sold is $72 less than weighted average, so net income will be $72 higher, or $6,472.
LIFO cost of goods sold is $68 higher than weighted average, so net income will be $68 lower or $6,332.
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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)
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. Assume a year end of 31 December.
(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.
(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.]
(a)
(b)
(c)
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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)
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
CLL has accounted for (i) property, plant and equipment at cost basis and depreciated assume straight-line 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
Notes:
Building A – Warehouse
As a warehouse for storage of inventories, it was accounted for as property, plant and equipment under IAS
16.
Accordingly, the building is carried at cost less any accumulated depreciation and any accumulated
impairment loss.
Cost less accumulated depreciation: $20 million × (1– (8/30)) = $14.67 million.
As the fair value of the building ($28 million) is higher than the cost less accumulated depreciation ($14.67
million), there is no indication of impairment.
As a building held for earning rental income, it was accounted for as investment property under IAS 40.
CLL accounts for investment property at fair value model. The fair value of Building B at 31 December
2021 is $22 million.
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
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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)
the year ended 31 July 2022 and wishes to know which can be recognised as intangible assets in the statement
of financial position:
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.
Answers
1. Accounting software is a separately acquired intangible asset. Where an intangible asset is acquired
separately it is, by definition, identifiable. Such an asset is also within the control of the acquiring
entity as a result of a past event. The acquisition of the asset is normally because there is an
expectation of future economic benefits. Cost can be measured reliably as the purchase price.
Since all recognition criteria are met, therefore, the stock management software package is
capitalized at its cost of $357,000 by:
2. Franchise fees meet the definition of an intangible asset as they are identifiable (evidenced by their
separate acquisition) and result in a benefit (a revenue stream) that is controlled by Anderson
Gadd as a result of a past event (the acquisition).
3. Training costs must be expensed. The benefit of the training cost is unlikely to be controlled by
the company. This is because an entity cannot control the actions of its employees as they may
leave the company on their own discretion. HKAS 38 specifically prohibits these costs forming
part of an intangible asset.
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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)
4. Advertising costs must be expensed. The benefit of the advertising cost is unlikely to be controlled
by the company. This is because an entity cannot control the actions of customers and they may
buy or may not buy the company’s products on their own discretion. HKAS 38 specifically
prohibits these costs forming part of an intangible asset.
~ End ~
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