110.

309 Exam Marking Guide – 2022

SECTION A: FOREIGN CURRENCY

Question 1
1. NZ dollar is the Functional 2. The Singaporean dollar is
Local Currency
Currency the Functional Currency
Exch Exch
Income statement for 2021 $S $NZ $NZ
rate rate
Sales revenue 7,000,000 1.15 8,050,000 0.5 1.15 8,050,000 0.5
Opening Inventory 1,000,000 1.10 1100000 1.10 1100000
Purchases 4,000,000 1.15 4600000 1.15 4600000
Ending inventory -500,000 1.18 -590000 1.18 -590000
Cost of Goods Sold 4,500,000 5,110,000 1 5,110,000 1
Gross Profit 2,500,000 2,940,000 2,940,000
Depreciation- equipment -150,000 1.10 (165,000) 0.5 1.15 (172,500) 0.5
Depreciation- building -55,000 1.16 (63,800) 0.5 1.15 (63,250) 0.5
Other expenses -400,000 1.15 (460,000) 0.5 1.15 (460,000) 0.5
Tax -1,000,000 1.15 (1,150,000) 1.15 1,150,000)
-/+ foreign exchange gain/loss
75,600
(if applicable) 1
Net Profit 895,000 1,176,800 1,094,250
Retained Earnings 1/1/21 3,000,000 1.10 3,300,000 0.5 1.10 3,300,000 0.5
Dividends -500,000 1.14 (570,000) 0.5 1.14 (570,000) 0.5
Retained Earnings 31/12/21 3,395,000 3,906,800 3,824,250

Balance Sheet as at 31 December 2021

Contributed Capital 17,000,000 1.10 18,700,000 0.5 1.10 18,700,000 0.5
Additional contributed capital 3,000,000 1.17 3,510,000 0.5 1.17 3,510,000 0.5
Retained Earnings 3,395,000 3,906,800 0.5 3,824,250 0.5
Foreign Currency Translation
2,039,750
Reserve (if applicable) 1
Accounts Payable 2,000,000 1.20 2,400,000 0.5 1.20 2,400,000 0.5
Total Liabilities and Equity 25,395,000 28,516,800 30,474,000

Equipment (net) 17,850,000 1.10 19,635,000 0.5 1.20 21,420,000 0.5

Building (net) 4,055,000 1.16 4,703,800 0.5 1.20 4,866,000 0.5
Inventory 500,000 1.18 590,000 1.20 600,000
Cash and accounts receivable 2,990,000 1.20 3,588,000 1.20 3,588,000
Total Assets 25,395,000 28,516,800 30,474,000
Total 8 Total 8
Beginning net monetary
position 1,000,000 1.10 1,100,000 Beginning net asset 20,000,000 1.10 22,000,000
Capital contribution 3,000,000 1.17 3,510,000 Capital contribution 3,000,000 1.17 3,510,000
Sales 7,000,000 1.15 8,050,000 Net profit 895,000 1,094,250
Purchase of building (4,110,000) 1.16 4,767,600 Dividends (500,000) 1.14 (570,000)
Purchases (4,000,000) 1.15 4,600,000 26,034,250
Other expenses (400,000) 1.15 460,000 Ending net asset 23,395,000 1.20 28,074,000
Tax (1,000,000) 1.15 1,150,000 FC translation reserve 2,039,750
Dividends (500,000) 1.14 570,000
1,112,400
Ending net monetary position 990,000 1.20 1,188,000
FC Gain 75,600

1
Question 2

From local currency to functional currency (total 2 marks)

• The impact of changes in the exchange rates on monetary assets and liabilities are
gains or losses that recognised in the profit and loss statement. (0.5 mark each, total
1 mark)
• The items at risk are the monetary items. (0.5 mark)
• The final financial statements, after translation, will reflect amounts that would be
recorded had the transactions or events been originally recorded in the functional
currency. (0.5 mark)

The explanations in the textbook:

The translation of the foreign operation’s financial statements into the functional currency
results in exchange differences. These arise because the foreign operation’s monetary items
are translated at the closing rate, while profit or loss items (sales, purchases and other
expenses) are translated at the spot exchange rate
at the date of the transaction or, for practical purposes, at a rate (average rate) that
approximates the actual rate. The translation of non-monetary items does not give rise to
exchange differences as the spot exchange rate at the date of the transaction is used from
year to year.

IAS 21, paragraph 28, explains this as follows:

Exchange differences arising on the settlement of monetary items or on translating monetary
items at rates different from those at which they were translated on initial recognition during
the period or in previous financial statements shall be recognised in profit or loss in the period
in which they arise.
(IAS 21)

Applying the requirements of IAS 21 as they relate to translating the accounts from a local
currency to a
particular functional currency means that the final accounts, after translation, will reflect
amounts that would be recorded had the transactions or events been originally recorded in
the functional currency. As paragraph 34 states:
When an entity keeps its books and records in a currency other than its functional currency, at
the time the
entity prepares its financial statements; all amounts are translated into the functional
currency in accordance
with paragraphs 2~26. This produces the same amounts in the functional currency as would
have occurred had
the items been recorded initially in the functional currency. For example, monetary items are
translated into the functional currency using the closing rate, and non-monetary items that
are measured on a historical cost basis are translated using the exchange rate at the date of
the transaction that resulted in their recognition. (IAS 12)

From Functional currency to presentation currency (total 2 marks)

• The net asset position (equity) is at risk rather than the monetary items (0.5)

2
 • The exchange differences no direct effect on the present and future cash flows from
operations (0.5 mark)
• The exchange differences would be presented as a reserve- a foreign currency
translation reserve (1 mark)

The explanations in the textbook:

The exchange differences created as part of the process of converting the financial statements
to a particular presentation currency are not to be treated as part of profit or loss. Rather,
they are to be included within other comprehensive income. At the end of the accounting
period, they would then be transferred to a
reserve- a foreign currency translation reserve.

IAS 21 paragraph 41 states:

These exchange differences are not recognised in profit or loss because the changes in
exchange rates have little or no direct effect on the present and future cash flows from
operations. The cumulative amount of the exchange differences is presented in a separate
component of equity until disposal of the foreign operation. (IAS 21)

SECTION B: FINANCIAL INSTRUMENTS

Question 3

Date Description Dr Amount Cr Amount

1 April 2020 Shares in Manuka Ltd 500,000
Cash 500,000
(Acquisition of shares in Manuka Ltd)

31 March 2021 Shares in Manuka Ltd 150,000

Gain on shares in Manuka Ltd (OCI) 150,000
(Gain on shares in Manuka Ltd
= 100 000 x ($6.50 - $5.00))

31 March 2022 Loss on shares in Manuka Ltd (OCI) 100,000

Shares in Manuka Ltd 100,000
(Loss on shares in Manuka Ltd
= 100 000 x ($5.50 - $6.50))
1 mark per correct entry: sub-total = 6 marks

Question 4

Date Description Dr Amount Cr Amount

1 April 2020 Shares in Manuka Ltd 500,000
Cash 500,000
(Acquisition of shares in Manuka Ltd)

3
 31 March 2021 Shares in Manuka Ltd 150,000
Gain on shares in Manuka Ltd (P&L) 150,000
(Gain on shares in Manuka Ltd
= 100 000 x ($6.50 - $5.00))

31 March 2022 Loss on shares in Manuka Ltd (P&L) 100,000

Shares in Manuka Ltd 100,000
(Loss on shares in Manuka Ltd
= 100 000 x ($5.50 - $6.50))
1 mark per correct entry: sub-total = 6 marks

Question 5
This means that the bond will be issued at a premium and at an amount that causes the
effective interest rate provided by the investment to become equal to the rate of return
required by the market. This is because the market was requiring a lower rate (for example,
8 per cent), but the coupon rate was higher (for example, 10 per cent) which will cause
demand for the bond to be higher. This would push the price of the bond up to the point at
which the interest payments on the higher price, plus the repayment of the principal, provides
an effective rate of return equal to the rate required by the market. That is, the effective rate
of return will equate to the market’s required rate of return on the bond.
Yellow highlights represent main points of discussion: sub-total = 3 marks

Question 6
A financial instrument is defined in NZ IAS 32 as:
any contract that gives rise to both a financial asset of one entity and a financial liability or equity
instrument of another entity (NZ IAS 32). 1 mark

a. Cash and cash equivalents

Financial instrument
Definition of a financial asset includes cash
1 mark

b. Receivables from customers

Financial instrument
Receivable is a contractual right to receive cash and is, therefore, a financial asset.
1 mark

c. Inventories
Not a financial instrument.
This is a physical asset, not a contract.
1 mark

d. Deferred tax asset

Not a financial instrument.

4
 There is no contract for tax.
1 mark

[TOTAL = 20 MARKS]

SECTION C: ACCOUNTING AND CULTURE/DIVERSITY

Question 7
This is a broad question and students could draw on a number of areas to earn the marks
allocated, but must include:
a) At least one of eight Institutional Factors.
b) At least one example of how religion influences accounting.
c) At least one of Hofstede’s ‘cultural dimensions’.
d) A forward-looking conclusion that indicates awareness of what Harari’s quotes warn
– essentially that our increasingly global culture needs to evolve and with it accounting
standards so that we move from an unsustainable continuous growth mindset to a
sustainable mindset, including actions which reverse global warming.
See below for some guidance as to what students can reasonably include in their discussions
on 1-3 above.
(Up to 2 marks for each of the above points and additional points, depending on quality of
answers, up to a maximum of 10 marks)

(a) Institutional Factors

1. Legal system – common law vs. code law

Common law – fewer statutes and more interpretation by courts to apply laws to specific
situation; leads to the creation of precedents and case law; UK origin - influence other English-
speaking counties; the source of accounting rules tends to be non-governmental
organizations

5
 Code/Civil law – more statues; in most non-English speaking countries (Europe origin);
accounting rules in those countries tend to be legislated
2. Taxation: high (Europe) vs. low (UK/US) conformity in tax v book income
3. Corporate ownership: concentrated vs. dispersed ownership
Concentrated – few large shareholders; low disclosure/ transparency
Dispersed – many small shareholders; demand for disclosures/transp.
4. Capital markets/financing:
Debt - banks (Germany, Japan) or Gov (China) v equity - shareholders/families (UK/US)
5. Political
History; invasions; colonial heritage; political systems – capitalist v socialist v communist
6. Economic
Economic development; growth; inflation; agricultural v manufacturing v services …
7. Summary of Institutional Factors

(b) Examples of how religion influences accounting

• Sanitarium – no income tax!
• Islam – no interest and other major differences!
• Other examples could be offered and should be considered on their merits,
(PTO)

6
c) Hofstede’s ‘cultural dimensions’

d) Conclusion
Examples of what students could refer to in their conclusion include:
• Growing calls and actions to incorporate indigenous cultural views in areas currently
dominated by western cultural beliefs (e.g., legal recognition of the rights of nature in
NZ in respect of the Te Urewera National Park and Whanganui River and similar Earth
Jurisprudence developments in Latin America – Barrett et al, 2020);
• Recent emphasis by accounting standards setters on the importance of External
Extended Reporting i.e., the need to integrate and report on more than just financial
aspects of the operations of entities (e.g., XRB’s recent work on standards concerning
TCFD requirements; IFRS Trustees formation of the ISSB).

SECTION D: GROUP/CONSOLIDATIONS
Question 8

Students might prepare the following table:

Jack Ltd Parent entity’s

80% interest
$ $
Share capital at acquisition date—1 July 2012 1,500,000 1,200,000
Retained earnings at acquisition date—1 July 2012 1,275,000 1,020,000
2,220,000
Investment in Jack Ltd 2,670,000
Goodwill on consolidation 450,000

Allocate 1 mark per each blue highlighted item correctly stated.

7
Question 9

Dr Share capital 1,200,000

Dr Retained earnings 1,020,000
Dr Goodwill 450,000
Cr Investment in Jack Ltd 2,670,000
The consolidation entry to eliminate the investment
Allocate ½ mark to each blue highlighted item correctly stated. Maximum 2 marks.

Dr Retained earnings—1 July 2020 168,750

Dr Impairment loss—goodwill 22,500
Cr Accumulated impairment losses—goodwill 191,250
Impairment of goodwill
Allocate 1 mark for correct amount and Dr RE and ½ mark for each Dr Impairment loss and CR
Accumulated impairment – goodwill.

Question 10

(1a) Dr Sales 390,000

Cr Cost of goods sold/Purchases 390, 000
Sale of inventory from Jack Ltd to Luke Ltd

(1b) Dr Sales 487,500

Cr Cost of goods sold/Purchases 487,500

(2) Dr Retained earnings—30 June 2021 36,750

Dr Income tax expense 15,750
Cr Cost of sales/Opening inventory 52,500
Unrealised profit in opening inventory

(3a) Dr Cost of goods sold/Closing inventory 18,000

Cr Inventory 18,000

(3b) Dr Deferred tax asset 5,400

Cr Income tax expense 5,400
Sale of inventory from Jack Ltd to Luke Ltd in 2021 ($6000 x 30 per cent)

(4a) Dr Cost of goods sold/Closing inventory 42,000

Cr Inventory 42,000
Elimination of unrealised profit in closing inventory

(4b) Dr Deferred tax asset 12,600

Cr Income tax expense 12,600
Consideration of the tax paid or payable on the sale of inventory that is still held within
the group ($14 000 x 30 per cent)

8
(5a) Dr Profit on sale of plant 262,500
Dr Plant 144,000
Cr Accumulated depreciation 406,500
Adjustments for intragroup sale of plant

(5b) Dr Deferred tax asset 78,750

Cr Income tax expense 78,750
Impact of tax on profit on sale of item of plant

(5c) Dr Accumulated depreciation 43,750

Cr Depreciation expense 43,750
Reinstating accumulated depreciation in the statement of financial position

(5d) Dr Income tax expense 13,125

Cr Deferred tax asset 13,125
Consideration of the tax effect of the reduction in depreciation expense

(6) Dr Consulting fee revenue 198,750

Cr Consulting fee expense 198,750
Elimination of intragroup transactions—consulting fees

(7) Dr Dividend revenue 558,000

Cr Dividend paid 558,000
Dividends paid

Allocate 1 mark for each correctly stated journal – that includes the correct amounts and
correct Dr or CR to the correct account. ½ mark can be allocated where the journal is partially
correct in those respects.

SECTION E: FINANCIAL ANALYSIS AND BEYOND/ACCOUNTING THEORIES

Question 11

Description Comments 2021 2020 Marks

Current ratio (CA/CL) Liquidity appears to increase 1.13 1.03 1
Quick ratio ((Cash+Receivables)/CL) Liquidity appears to decrease 0.38 0.40 1
Horizontal analysis Inventory (less liquid) drives most of CA increase 16% 1
CA increase 9% 1
CL decrease (relatively immaterial) -0.4% 1
Vertical analysis Liquid CA's as % of TA's 13% 14% 1
Inventory as % of TA's 24% 21% 1

Summary/ Conclusion:
Both 'near cash' assets decrease while less liquid assets (especially inventory) increase 1
Inventory also increases in relation to TA's, so overall liquidity has deteriorated 1
Available marks 9
Maximum marks 5

9
Question 12

a) Extended external reporting 1

b) TCFD climate related disclosures 1
c) Any two of the following ‘capitals’:
• Financial
• Manufactured
• Intellectual
• Human
• Social and relationship
• Natural
(1/2 mark each = 1 mark) 1
d) The ‘ethical’ branch of Stakeholder Theory is normative view that all stakeholders have
an intrinsic right to best efforts by entities for good of all stakeholders and to
information in this regard 1
Integrated reporting favours providers of capital so is seen to be less supportive of
other stakeholders than GRI when it comes to sustainability reporting 1
(1 mark each = 2 marks) 2
Total for Q12 5

SECTION F: SEGMENT REPORTING AND RELATED PARTY DISCLOSURE

Segment Reporting
Question 13

Insurance, banking, and agriculture are reportable segments as their revenue is more than 10
per cent of total segment revenue, thus satisfying test (a). Insurance [1], banking [1] and
agriculture [1] qualify as material using test (b), as the absolute-amount total of the
profits/losses of the segments that earned a profit is $180 000, whereas the combined
reported loss of those that generated a loss totals $15 000. Hence for test (b) we need to
compare the absolute amount of the profit/loss with $180 000. Using these criteria,
Insurance, banking and agriculture are reportable operating segments. Using test (c),
Insurance and banking are reportable operating segments, as their assets are 10 per cent or
more of the total segment assets of all segments. Therefore, Insurance, banking and
agriculture are all reportable segments. Telecom is not a reportable segment [2], as it did not
pass any of the three tests.
Insurance, banking, and agriculture also generate more than 75 per cent of the entity’s total
revenues (510/555 x 100 = 92 per cent) [1], and so meet the test of paragraph 15 of IFRS 8.
Note that even though we have considered each segment under all three tests, the passing of
only one of the tests would be enough to establish a segment as reportable.

10
Related Party Disclosure
Question 14
a. Yes. Such persons are regarded as key management personnel of the entity. [1 mark]
b. Yes. Under IAS 24, paragraph 9, the children, spouse or domestic partner, other
children of the spouse or domestic partner, and dependents of the key
management person or of their spouse or domestic partner, are all regarded as related
parties of the entity. [1 mark]
c. Yes. IAS 24, paragraph 9 considers members of the same corporate group to be related
parties. [1 mark]
d. No. If the share investment made by the employee is an arm’s length transaction and
the terms and conditions are not more favourable than would occur with other non-
related parties, then the dividends on those share investments are not regarded as
related party transactions. If the employee is a key management person or their close
family members, then, yes, the dividend payment to that employee would be
considered a related party transaction. [1 mark]

SECTION G: ACCOUNTING FOR AGRICULTURE

Question 15

a. Operating expenses 100,000

Cash 100,000
[2 marks]
b. Inventory (timber) 150,000
Profit or loss 150,000
[1 mark]

Record harvested timber at fair value less costs to sell. An acceptable alternative is to credit
the Forest asset. This can also be done by including the above entry and Dr Profit or loss
150,000/Cr Forest 150,000. Either alternative would give an offsetting difference in the
change in fair value of the forest for part 4.
Profit or loss 60,000
Cash 60,000
[1 mark]

c. Cost of sales 150,000

Inventory (timber) 150,000

Cash 160,000
Sales revenue 160,000

Operating expenses 10,000

Cash 10,000
[4 marks]

11
Question 16

Profit = (1,700,000 – 1,600,000) [1] - 100,000 - 60,000 + 160,000 - 10,000 = $90,000 [1]

Alternatively, if the student credited the Forest asset in part 2, the adjusted value of the forest
is 1,600,000-150,000=1,450,000, and so the profit calculation is Profit = (1,700,000 -
1,450,000) [1] - 100,000 - 60,000 - 150,000 + 160,000 – 10,000 = $90,000 [1]

12