HA3011 Advance Financial Accounting Final Assessment T2 2021

This assessment consists of six (6) questions related to advanced financial accounting covering topics like acquisition cost, impairment loss, revaluation decrement, present value of minimum lease rental payment, deferred tax asset and liability, and journal entries. The questions are designed to assess the student's knowledge of the key topics covered in this unit. The subject is HA3011- Advance Financial Accounting, and the course code is HA3011. The course name is Advance Financial Accounting, and the college/university is not mentioned.

Student Number: (enter on the line below)
Student Name: (enter on the line below)
HA3011
ADVANCED FINANCIAL ACCOUNTING
TRIMESTER 2, 2021
Assessment Weight: 50 total marks
Instructions:
 All Six (6) questions must be answered by using the answer boxes
provided in this paper.
 Completed answers must be submitted to Blackboard by the published
due date and time.
Submission instructions are at the end of this paper.
Purpose:
This assessment consists of six (6) questions and is designed to assess your level of
knowledge of the key topics covered in this unit
HA3011 Final Assessment T2 2021

HA3011 Final Assessment T2 2021

Question 1 ( 7 marks)
Fabric Ltd acquired a Machine from Box Ltd for the following consideration:
Cash $110 000, Land in the books of Fabric Ltd the land is recorded at its cost of $950
000. It has a fair value of $1000 000.
Fabric Ltd also agreed to assume the liability of Box Ltd bank loan of $85 000 as part of
the Machine acquisition.
Required:
(a) Calculate the acquisition cost of the Machine and provide the journal entries that
would appear in Fabric ltd.’s books to account for the acquisition of the Machine.
(4 marks)
(b) In your own words, explain when should an impairment loss be recognised (3
marks)
ANSWER: ** Answer box will enlarge as you type
a) Journal Entries
Cash A/c Dr. 110000
Land A/c Dr. 950000
To Machine A/c Dr.
(balancing
figure
)
975000
To Bank Loan 85000
b) Impairment loss happens when assets of business suffers a loss of value or depreciation in
the market value in excess of book value on company's financial statements. The loss is
calculated by subtracting acquisition cost from depreciation. These assets which are terms as
'impaired' are recognized as a loss in final accounts, that is, in income statement.
HA3011 Final Assessment T2 2021

Question 2 (7 marks)
ABC Ltd acquired some machinery at a cost of $200 000 on 1 July 2017. On 30 June
2018,
the machinery, which has an accumulated depreciation balance of $30 000, is assessed as
having a fair value equal to $150 000. ABC Ltd measures machinery at fair value.
Required:
Provide the journal entries to reflect the revaluation decrement ( 7 marks)
ANSWER:
Journal Entries
Particulars Dr. ($) Cr.($)
Machinery Acc. Dr. 200000
To Cash Acc. 200000
Accumulated depreciation is $30000
Carrying amount = $20000 - $30000 = $170000
Revalued amount i.e. fair value = $150000
Therefore, upward adjustment of $20000 is required in Machinery Acc.
Particulars Dr. ($) Cr. ($)
Machinery Acc. Dr. 20000
To Revaluation surplus 20000
Question 3 (7 marks)
On 1 July 2018 Foreign Security Incorporation(FSI) Ltd issues $3 million in 10-year
debentures that pay interest each six months at a coupon rate of 10 per cent. At the time of
issuing the securities, the market requires a rate of return of 14 per cent. Interest expense
is determined using the effective-interest method.
HA3011 Final Assessment T2 2021

Formula for PV of $1 in n periods =1/(1+k)n
Formula for present value of annuity of $1 per period for n periods =
where, k is the discount rate expressed in decimal
Required:
(i) Determine the issue price of the debenture. (3 Marks)
(ii) Provide the journal entries at 1 July 2018 and 30 June 2019 (4 Marks)
ANSWER:
(i)
Interest paid by FSC is each six month
$3000000 *10% * 6/12 = $150000
Particulars Figure
Bond face value 3
Annual coupon rate 20%
Required rate of return 28%
Years to maturity 10
Coupon payment Half yearly
Issue price of debenture 2.21
(ii)
Bank a/c Dr 3000000
To debtures a/c 3000000
Question 4 (11 marks)
HA3011 Final Assessment T2 2021

FABS Ltd acquired an item of equipment and entered into a non-cancellable lease
agreement with MBC Equipment Ltd on 1 January 2019. The lease consists of the
following:
 Date of inception: 1/1/19
 Duration of lease: 5 years
 Life of leased asset: 6 years
 Lease payments (annual): $250,000 (annual) which includes $30,000 for
maintenance and insurance costs per annum.
 Guaranteed residual value
(Added to final payment): $70,000
 Interest rate: 14%
Required:
a) Determine the present value of minimum lease rental payment. (2 Marks)
b) Prepare the journal entries for FABS (the Lessee) using the Net Method for the
following (6 marks)
i. Transfer of control
ii. Payment of annual payments for 2019 and 2020.
c) In your own words, explain how do we account for service costs that are included
within a contract to lease an asset? (3 marks)
ANSWER:
a) Present value of minimum lease rental payment
Year 1 = 250000 / (1 + 0.14)^ 1
Year 2 = 250000 / (1 + 0.14)^ 2
Year 3 = 250000 / (1 + 0.14)^ 3
Year 4 = 250000 / (1 + 0.14)^ 4
Year 5 = 250000 / (1 + 0.14)^ 5
Year PV amount
1 219298.25
2 192366.88
HA3011 Final Assessment T2 2021

3 168742.88
4 148020.07
5 129842.17
SUM 858270.24
PV of residual amount 70000 /(1+14%)^5 36355.81
PV of minimum lease payment
Sum of PV's and PV of residual
amount
858270.24 + 36355.81 894626.05
b) Journal Entries
Particulars Dr. ($) Cr. ($)
1. Equipment A/c 250000
To MBC Equipment Ltd. 250000
2. Interest A/c 35000
To MBC Equipment Ltd. 35000
3. Profit and Loss A/c 35000
To Interest a/c 35000
c) Accounting of Service costs in contract of lease
There are certain contracts such as sales contracts, affiliation, employment and advertising
that are considered as intangible assets because they enhance the value of business. IFRS 16
requires companies to have transparency at times of lease obligations which means company
should comply with the standards by evaluating service contracts. Evaluation of service
contracts is a time-consuming task which is as follows:
Suppose
HA3011 Final Assessment T2 2021

Company X has warehouse contract with another company Z which provides warehouse
facilities including monitors. The contract includes that company X can use facility and
monitors and enlists each item that can be used by company X which means it has full control
over warehouse facilities and equipments. It results in substantial benefits to company X from
such contract. Contract between both company meets all criteria of lease standards.
Question 5 (11 marks)
Phoenix Arrumax (PAX) Ltd has the following deferred tax balances as at 30 June 2019:
Deferred tax asset: $1 500 000
Deferred tax liability: $1 000 000
The above balances were calculated when the tax rate was 20 per cent. On 1 December
2019 the government raised the corporate tax rate to 25 per cent.
Required:
a) Provide the journal entries to adjust the carry-forward balances of the deferred tax asset
and deferred tax liability. ( 6 marks)
b) In your own words, explain the rationale and the argument for recognizing a
deferred tax asset and a deferred tax liability (5 marks)
ANSWER:
a)
Deferred tax asset @ 25% = $1875000
Deferred tax liability @ 25% is $1250000
therefore, carry-forward balance is $625000
Particulars Dr. ($) Cr. ($)
1. Profit & loss A/c 1000000
To Deferred tax liability A/c 1000000
2. Deferred tax asset A/c 1500000
To Profit & loss A/c 1500000
HA3011 Final Assessment T2 2021

3. Deferred tax asset A/c 625000
To Deferred tax expense 625000
b) Deferred tax assets and liabilities are those items (financial) that is shown company's balance
sheet because income in tax return is different from accounting records income. There are some
transaction that lead to deferred tax assets and liability such as warranties, leases, inventories,
depreciation, pensions, etc. The taxable income computed by company does not always match
tax and financial accounting because of some transaction that are treated differently. For
example, municipal bonds are not included in taxable income on tax return abut included in
accounting income. In addition to this, depreciation methods creates temporary differences for
income and taxable income. Regulations stated under law allows a firm to use accelerated
method for depreciation which gives more tax expense in yearly years and less in later years,
Question 6 (7 marks)
On 1 July 2019 Bassy Ltd enters into an agreement to borrow £3 million from London plc
(UK). London plc sends the loan money to Bassy Ltd’s Australian bank account. The loan
is for four years and requires the payment of interest at the rate of 9 per cent on 30 June
each year. Bassy Ltd’s reporting date is 30 June. The relevant exchange rates are:
1 July 2019 A$1.00 = UK£0.50
30 June 2020 A$1.00 = UK£0.54
Required:
Provide the necessary journal entries that would be made in the books of Bassy Ltd to
account for the above transaction for the year ending 30 June 2020. (7 marks)
ANSWER:
A$1.00 = UK£0.50
£ 3000000 = A$ 6000000
Particulars Dr. ($) Cr. ($)
HA3011 Final Assessment T2 2021

1. Cash A/c 6000000
To Australian bank A/c 6000000
2. Interest A/c 500000
To Australian bank a/c 500000
3. Bank loan A/c 500000
To bank A/c 500000
END OF FINAL ASSESSMENT
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HA3011 Final Assessment T2 2021