IIT Advanced Diploma of Accounting: ADACC Chapter 9 Assessment

This document presents the solutions to the ADACC Chapter 9 assessment, focusing on financial accounting principles. The assessment covers a range of topics including journal entries for asset revaluations, the manipulation of cash flows versus profit, the role of accounting standards in defining GAAP, the differences between reserves and provisions, the rules for consolidated accounts, journal entries for tax liabilities, changes in accounting policy, impairment losses, and the recognition of investments and financial statement items. The answers demonstrate understanding of accounting concepts, calculations, and the application of relevant accounting standards. The assessment includes short answer questions requiring concise explanations and calculations where necessary. The answers are presented in the format specified by the assessment brief, including proper referencing and adherence to word limits.

Advanced Diploma
of Accounting
Student
Assessment Booklet

ADACC – Chapter 9
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reference e.g. “ban on conflicted remuneration structures including
commissions” <http://futureofadvice.treasury.gov.au/content/Content.asp
x?doc=reforms.htm> accessed on the 28th of December 2012.

ADACC – Chapter 9
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Distance Education Students

ADACC – Chapter 9
Student Declaration
I understand that by completing this form I am bound by the
following declaration.
To the best of my knowledge and belief, no part of this
assignment for the above unit has been copied from any other
student’s work or from any other source except where due
acknowledgment is made in the text, or has been written for
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Name: Date:

ADACC – Chapter 9
Short Answer Question 1:
Boomer Gen Ltd had two real estate assets recorded separately. A shop (carrying
value $500,000) was revalued on 1 April 201X at $545,000 and an office building
(carrying value $300,000) was revalued on 1 April 201X at $282,000. Journal
entries were made on 1 April 201X to adjust the values. Both valuations were the
first revaluations since the assets were originally incorporated in the books.
In 201Y the assets were again revalued. This time the shop was valued at
$490,000 and the office at $310,000. Adjustments to values were made on 31
March 201Y.
Show the journal entries to record each adjustment on 1 April 201X and 31
March 201Y.
1 April
201X
Shops Account Dr. 45000
To Revaluation Account 45000
1 April
201X
Revaluation Account Dr. 18000
To Building Account 18000
1 April
201X
Revaluation Account Dr. 27000
To Capital Reserve Account 27000
31 March
201Y
Revaluation Account Dr. 55000
To Shops Account 55000
31 March
201Y
Building Account Dr. 18000
To Revaluation Account 18000
31 March
201Y
Capital Reserve Account Dr. 27000
Profit and Loss Account Dr. 10000
Revaluation Account 37000

ADACC – Chapter 9
Short Answer Question 2:
It has been suggested that ‘cash is king’ and that readers of an entity’s accounts
should pay more attention to information concerning its cash flows and balances
than to its profits and other assets.
It is often argued that cash is more difficult to manipulate than profit and that
cash flows are more important.
Explain whether you agree with the suggestion that cash flows and balances are
more difficult to manipulate than profit and non-cash assets.
Explain why it might be dangerous to concentrate only on cash flows to the
exclusion of actual profit earned by the business when analysing a set of
financial statements.
Cash flow statement is prepared on cash basis while profit and loss account is prepared on
accrual concept, so chances of manipulation in cash flow is more as due to minor lack in
authorisation control it is very easy to show fictitious cash receipts and payments in cash
flow.
Concentration only on cash flows could be dangerous as it not provide clear picture of
organisation's performance. Consideration of only cash transactions do not provide true
profitability data which may affect decision making of top management.

ADACC – Chapter 9
Short Answer Question 3:
Would it be possible for accounting standard-setters to define and provide a
guide to what constitutes GAAP?
Accounting standards are set of authorized standards to guide entire process of financial
reporting which are principle sources of GAAP. AS generally specifies how to record
transactions as well as any financial events including recognising, measuring, presenting
and disclosing financial statements. So standards are already acting as guidance for
defining GAAP in practically.

ADACC – Chapter 9
Short Answer Question 4:
Another client is confused about the terms Reserves and Provisions. In a table
list some characteristics of each of these two terms.
Reserves: Provisions:
1. Reserves are made in a organisation for
meeting any unknown contingent liabilities
or losses.
1. Provisions are made for meeting
anticipated liabilities or losses.
2. Reserves are normally made out of the
amount of profit.
2 Provisions are created by debiting P&L
Account.

ADACC – Chapter 9
Short Answer Question 5:
a) What accounting standards provide rules for public companies in
relation to preparing consolidated accounts?
b) How is the term “consolidated financial statements” defined?
c) Using your own words explain what is meant by the term “control” in
the context of accounting consolidations.
d) What factors could be considered in helping to determine whether
there is “control”?
(a). AASB-10 For Consolidated Financial Statements
(b). Consolidated financial statements are corporation's accounts for different branches or
subsidiaries. Organizations may also use term consolidated broadly in the presentation of
financial reports to refer generally to aggregated reporting of entire company.
(c). Here control refers to rights and power to influence the working of any other enterprise.
(d). Factors to determine control are: Shareholding in Percentage, Shareholding by number
of shareholders, Non controlling interest and Level of influence.

ADACC – Chapter 9
Short Answer Question 6:
XYZ Pty Ltd. recorded a net profit of $520,000 before tax for the year ended 30
June 201X. Tax was assessed at $0.30 in the dollar. The ATO assessment for the
year (received on 31 March, 201Y) was $164,000. Tax was paid by 30 April,
201Y. The company recorded a net profit of $640,000 before tax for the year
ended 30 June 201Y.
a) Show the journal entries to record the tax liability for the years ending
30 June 201X and 201Y and any adjustments
b) Show the tax payable account in the general ledger
(a). Tax assessed for year ended 30 June 201X: 520000*.3 : $156000
Tax as per ATO Assessment: $ 164000
Tax payable: $ 8000
30 June
201X
Tax Account Dr. 164000
To Tax Payable 164000
30 April,
201Y
Tax payable Account Dr. 164000
To Bank Account 164000
30 June
201Y
Tax Account Dr. 192000
To Tax Payable 192000
Tax Payable Account
Date Particulars Amount $ Date Particulars Amount $
30 June
201X
Balance b/d 164000 30
April,
201Y
Bank 164000
30 June
201Y
Tax Account 192000 30 June
201Y
Balance C/d 192000

ADACC – Chapter 9
Short Answer Question 7:
Which of the following items should be dealt with as a change in accounting
policy in the accounts of ABC Co?
a) Raw material inventory has always been measured using the FIFO
method and ABC Co has decided that inventory would be better
presented if it were measured using the Weighted Average Cost
method.
b) ABC reports plant depreciation in distribution costs but believe that a
fairer presentation of the results would be achieved if plant
depreciation were included in cost of sales.
c) The depreciation of an asset over 10 years on a straight-line basis has
been changed to diminishing value (reducing balance) to match the
costs with the benefits earned.
(a). Change in inventory method is regarded as change in accounting policy
(b.) Change in manner of showing depreciation cost is can not be regarded as change in
accounting policy.
(c.) Change in method of depreciation is regarded as change in accounting estimate not
change in accounting policy.

ADACC – Chapter 9
Short Answer Question 8:
Brown Co has an asset with a carrying amount of $35 million. The asset has been
damaged and if continued to be used in the business can only operate at
reduced capacity giving a value in use of $25 million. Alternatively, if some
repairs were made it could be sold for $21 million after incurring repair costs of
$5 million.
Determine whether the asset has been impaired and the amount of the
impairment loss.
Carrying amount = $ 35 million
value in use = $ 25 Million
Fair Value= $ 21 Million
So Recoverable Amount would be Higher of value in use and fair value i.e. 25 million
Impairment Loss = Carrying Amount – Recoverable Amount
= $ 35 million – $ 25 million
= $ 10 million

ADACC – Chapter 9
Short Answer Question 9:
Orange Co purchased 40 per cent of Lemon Co on 1 January 20X4 for $50 000.
The net assets at acquisition amounted to $125 000. During the year ended 31
December 20X4, Lemon made profits after tax of $12 000.
Calculate the amounts that should be recognised in the consolidated statement
of profit or loss and the statement of financial position in respect of Lemon Co.
Purchase consideration = $50000
Proportionate Net assets($50000 * 40%) = $20000
Capital Reserve = $30000 (Shown in statement of financial position)
Lemon's Profit after tax = $12000
Share in PAT of Lemon = $12000 * 40% = $4800

ADACC – Chapter 9
Short Answer Question 10:
Where in the statement of financial position would the following items be
recognised?
a) Goodwill.
b) Redeemable preference shares.
c) Loan to be repaid in three years' time.
(a) Goodwill = Intangible asset (shown in asset side of statement of financial position under
the head of Non Current Assets
(b) Redeemable preference shares = Recognised as share capital under the head of
shareholder's equity
(c) Loan to be repaid in three years' time = Recognised as long term debt and shown under
the head of Non Current Liabilities

ADACC – Chapter 9
Case Study Information
Fred Jones Case Study
You are working as an accountant for Contract Accounting Services (CAS). You
have been asked to provide advice, and accounting services to a new client, Fred
Jones Ltd.
Your client has a number of different areas in which he would like advice.
Purchase of new business
Your client, Fred Jones Limited, has decided to buy an existing business Blue
Limited. The CEO of Fred Jones Limited is Fred Jones.
The current trial balance of Blue Limited shows the following:
DR
$
CR
$
Property, Plant and Equipment 800,000
Accumulated depreciation 100,000
Inventory 200,000
Accounts receivable 90,000
Cash at bank 50,000
Accounts payable 40,000
Bank Overdraft 10,000
Equity 990,000
Fred Jones considers that the property, plant and equipment has a current fair
value of $600,000 and the accounts receivable which he expects will realise
$70,000.
He is planning to purchase the business for $850,000.
Consolidation
Fred Jones has also asked you to demonstrate how consolidation would work
should he choose to purchase another business. Your manager has provided you
with the following information to use in order to demonstrate this principle.
On 1 July 201X A Ltd acquired all the share capital of Blue Ltd.
At that date the equity of Blue Ltd was:
 Share Capital $150,000
 Retained Earnings $12,000
During the current year A Ltd received a dividend of $15,000 declared by B Ltd
at 30 June 201Y. Goodwill is tested annually for impairment goodwill has not
been impaired in any period.
Taxable Income
Fred Jones then provides you with some financial information for the end of the
year. He would like you to calculate the taxable income of Blue Ltd. All items are
in $’000s.
PROFIT AND LOSS
ACCOUNT

ADACC – Chapter 9
Freight outwards 7 Gross Profit 360
Insurance 9 Profit on asset disposals 11
General expenses 15
Salaries and wages 94
Depreciation – machinery 8
Impairment of goodwill 12
Annual leave transfer to
provision 17
Long service leave transfer
to provision 19
Net profit before tax 190
371 371
A number of items in the profit and loss account have to be treated differently
for taxation purposes:
Accountin
g Records
Taxation
Records
Impairment of goodwill 12 Nil
Profit on asset disposals 11 Nil
Transfer to provision for annual leave 17 Nil
Transfer to provision for long service leave 19 Nil
Depreciation – machinery 8 12
In addition, an amount of $7 for long service leave paid has been charged
against the provision. This amount can now be claimed as a taxation deduction.
Cash Flow Statement
Fred has also provided you with the following figures for Fred Jones Ltd for the
year ending 30 June 201X to be used in the preparation of a cash flow statement.
Account Amount
Cash at bank opening balance 20,000
Cash from accounts receivable 597,500
Credit sales 625,000
Credit purchases 215,000
Interest received 15,000
Interest paid 22,500
Cash paid to suppliers 200,000
Additional loan taken out 100,000
Loan repayments 21,000
Proceeds of new share issue 50,000
Cash received for sale of vehicles 66,000
Dividends paid 45,000
Office expenses paid 67,000
Accrued office expenses 6,000
Dividends received 22,000
New vehicles purchased for cash 99,000
Profit on sale of vehicles 10,000
Salaries and benefits paid to employees 77,000
Depreciation of equipment 45,000
Depreciation of vehicles 22,500
Income tax paid 75,000
Cash at bank closing balance 264,000

ADACC – Chapter 9

ADACC – Chapter 9
Case Study Question 1:
Prepare the journals required for the business purchase of Blue Ltd:
DR
$
CR
$
Property, Plant and Equipment 600000
Inventory 200000
Accounts receivable 90000
Provision for doubtful debts 20000
Cash at bank 50000
Accounts payable 40000
Bank Overdraft 10000
Net Assets Acquired 870000

ADACC – Chapter 9
Case Study Question 2:
Explain to Fred Jones what it would mean if he has:
a) generated goodwill in the purchase of Blue Ltd or
b) has made a gain on the same transaction
Purchase Consideration: $850000
Net Assets: $870000
Gain on Transaction: $20000 [870000 - 850000]

ADACC – Chapter 9
Case Study Question 3:
Based on the following information, and the information provided in the Fred
Jones Limited case study, complete the following consolidation worksheet:
Consolidati
on
Worksheet
30 June
201Z
A Ltd
$000
B Ltd
$000
Elimination DR Elimination
CR
Consolidated
Statements
$000
Gross Profit 300 150 450
Dividend received
from B Ltd
22 - 22
322 150 472
Expenses 102 50 152
Profit before tax 220 100 320
Less: income tax
expense
60 30 90
Profit 160 70 230
Retained earnings
1/7/1Y
25 20 45
Available for
appropriation
185 90 275
Appropriations:
Interim dividend
paid
20 7 27
Declared dividend 20 13 33
Total appropriations 40 20 60
Retained earnings
30/6/1Z
145 70 215
Share capital 300 150 450
Dividend payable 20 13 33
Other liabilities 140 67 207
605 300 905
Shares in B Ltd 170 - 170
Other assets 435 300 735

ADACC – Chapter 9
Goodwill on
consolidation
- -
605 300 905

ADACC – Chapter 9
Case Study Question 4:
In the table provide a reconciliation between accounting income and taxable
income for Blue Ltd, based on the information he has provided in the Fred Jones
Ltd case study.
STATEMENT OF TAXABLE INCOME
Net profit before taxation 190
Add:
Impairment of goodwill 12
Transfer to provision for annual leave 17
Transfer to provision for long service leave 19
Less:
Profit on asset disposals 11
long service leave paid against the provision 7
Depreciation – machinery [12-8] 4
TAXABLE INCOME 216

ADACC – Chapter 9
Case Study Question 5:
Construct a cash flow statement for Fred Jones Ltd from the information provided
in the Fred Jones Ltd case study to conform to AASB107 Cash Flow Statements
(ignore GST):
Fred Jones Ltd Cash Flow Statement for the year ended 30 June 201X
Cash flows from Operating Activities
Credit sales 625000
Credit purchases -215000
410000
Office expenses paid 67000
Salaries and benefits paid to employees 77000
Income tax paid 75000
Net Earning 191000
Add:Depreciation of equipment 45000
Add:Depreciation of equipment 22500
258500
Less: Change in working Capital 80000
Net cash used in Operating Activities 178500
Cash flows from Investing Activities
Cash received for sale of vehicles 66000
New vehicles purchased for cash -99000
Net cash used in Investing Activities -33000
Cash flows from Financing Activities
Additional loan taken out 100000
Loan repayments -21000
Proceeds of new share issue 50000
Dividends paid -45000
Dividends received 22000
Interest received 15000
Interest paid -22500
Net cash used in Financing Activities 98500
Net increase (decrease) in cash and cash equivalents 244000
Cash and cash equivalents at beginning of year 20000
Cash and cash equivalents at end of year 264000