Financial Accounting Solutions: Advanced Case Studies and Analysis

This document presents a series of financial accounting solutions addressing various scenarios. Solution-1 provides a detailed disclosure for an annual report, addressing a case against a bank involving toxic investments and class action settlements, including factors for disclosure and financial impacts. Solution-2 calculates the fair value of a leased asset (portable sound studio), creates a lease amortization schedule, and provides corresponding journal entries for Hopeful Ltd. and the return of the asset to Lessor Ltd. Solution-3 calculates Alexandra Bay's current obligation for long-service leave, including present value calculations and the required journal entry. Solution-4 presents a cash flow statement for T Pty Ltd, including adjustments and working notes for tax paid and plant & equipment. Finally, Solution-5 provides journal entries for foreign exchange transactions, covering inventory, equipment, and loan hedging, with explanations of the accounting treatments adopted under AASB 121 and forward contract hedging.

Solution-1
In the annual report the case will be disclosed under "Director's Report" column as below:
During the year, a case was lodged against the bank by Gloucester Council and an investment company,
Clurname alleging that the bank was engaged in selling the toxic investments. The case is still pending
with the Federal court to decide. Further, a class action was conducted against the bank, in which 35
investors had participated. Considering the class action results and to clam the investors the bank has paid
$50 million to the investors and $1.5 million to International Litigation Partners, funder of the class
action. However, this settlement is still pending with the court for approval.
Moreover, it has came to notice that certain news are being gossiped by various news papers regarding
the credibility of the bank and previous fallouts. The management wants to clarify that these news are
baseless and the investors should not be fearful regarding their hard earned money which they have
invested with us. The case is being invested by the court and further by an internal team of the bank and
the management wants to assure you that the case will be investigated by every aspects and the culprits
engaged in issuing the toxic investments, if any will be punished hardly.
Financial Disclosures
Further, the bank considering the density of the case, has created contingent liability to the extent bank
seems the loss or settlement claims to be paid in the future. The same is shown in the foot notes to the
statement of financial position.
Factors to be considered for determining the form of disclosures:
a. The facts of the case
b. Position by the directors or management
c. Current measures undertaken
d. Financial impact on the company/ bank
e. Future actions to be taken for mitigating the situation
f. The financial disclosure
Year of disclosure - The disclosure should be made in the year of starting of the case i.e. 2012 and till the
settlement of the case.

Solution-2
1. Calculation of the fair value of the portable sound recording studio at 1 July 2019
PV of MLP
PV of periodic rental
payments =
Annual rental payments x PVIFA (n = 4, I =
8%)
= 50000 x 3.577097
= $178,855
PV of guaranteed residual = Guaranteed residual / (1 + i)^4
= 40000 / (1 + 8%)^4
= $29,401
Lease Liability (fair value) = 178855 + 29401
= $208,256
2. Schedule for the lease payments incorporating accrued interest expense
Lease Amortization Schedule
Date Lease Payments
Interest
Expenses
Reduction
in
Liability
Lease
Liability
01-Jul-11 $208,256
01-Jul-11 $50,000 $50,000 $158,256
01-Jul-12 $50,000 $12,660 $37,340 $120,916
01-Jul-13 $50,000 $9,673 $40,327 $80,590
01-Jul-14 $50,000 $6,447 $43,553 $37,037
01-Jul-15 $40,000 $2,963 $37,037 $0
Lease payment on 1st July-15 refers to the guaranteed residual value.
3. Journal entries to account for the lease in the books of Hopeful Ltd
Date Particulars Dr./Cr.
Amount
(Dr.)
Amount
(Cr.)
01-Jul-11 Leased Studio Dr.
$208,25
6
To Leased Liability $208,256
01-Jul-11 Leased Liability Dr. $50,000
To Cash $50,000
30-Jun-12 Interest Expenses Dr. $12,660
To Interest Payable $12,660

30-Jun-12
Depreciation Expenses-Leased
Studio Dr. $42,064
To Accumulated Depreciation $42,064
01-Jul-12 Leased Liability Dr. $37,340
Interest Payable Dr. $12,660
To Cash $50,000
30-Jun-13 Interest Expenses Dr. $9,673
To Interest Payable $9,673
30-Jun-13
Depreciation Expenses-Leased
Studio Dr. $42,064
To Accumulated Depreciation $42,064
4. The journal entries in the books of Hopeful Ltd for return of the asset to Lessor Ltd and the settlement of
all obligations under the lease on 1 July 2023
Hopeful Ltd. must pay difference $15,000 (40,000 - 25,000) between fair value of studio and guaranteed
residual value.
Date Particulars Dr./Cr.
Amount
(Dr.)
Amount
(Cr.)
01-Jul-15 Accumulated Depreciation Dr.
$168,25
6
To Leased Studio $168,256
01-Jul-15 Leased Liability Dr. $37,037
Interest Payable Dr. $2,963
To Leased Studio $40,000
01-Jul-15 Loss on Guaranteed Residual Dr. $15,000
To Cash $15,000

Solution-3
1. Calculation of Alexandra Bay’s current obligation for long-service leave
Leave entitlement (in weeks) = 10
Inflation rate = 2%
Corporate bond - Period to
Maturity (in years)
Bond
rate
10 8.00%
8 7.00%
6 6.50%
4 6.00%
2 5.80%
Name of
employee
Current
salary ($)
Years
of
service
Years
until
LSL
vests
Probability
that LSL will
vest
Projected
Salary
Accumulated
LSL benefit
Present
Value of
LSL
Obligation
LSL
Liability
Mike Black 40000 2 10 15% 48,760 1,563 724 109
Jan White 40000 4 8 20% 46,866 3,004 1,749 350
Noel
Brown 50000 6 6 50% 56,308 5,414 3,711 1,855
Peter Green 60000 8 4 70% 64,946 8,326 6,595 4,617
Alvin
Purple 70000 10 2 90% 72,828 11,671 10,427 9,384
16,314
Alexandra Bay's current obligation for long service is $16,314/-.
2. The journal entry to record Alexandra Bay’s long-service leave expense
Closing balance of provision
required =
$16,31
4
Opening balance of provision
(given) =
$12,50
0
Additional provision required = $3,814
Journal Entry
Long Service Leave Expenses Dr. $3,814
To Provision for Long Service
Leave Cr. -$3,814

Solution-4
T Pty Ltd
CASH FLOW STATEMENT
For the year ended on June 30, 2020
(Amount in $)
Particulars
For the year
ended on
June 30, 2020
Cash flow from operating activities
Profit before tax 365,000
Non-cash adjustment:
Warranty Expense 314,000
Depreciation expense 140,000 454,000
Non-operating expenses/ incomes:
Dividends income (51,000)
Interest expense 315,000
Finance charges 7,000 271,000
Operating profit before working capital changes 1,090,000
Changes in working capital
Increase in inventory (288,000)
Increase in prepayments (115,000)
Increase in accounts receivable (243,000)
Increase in deferred tax assets (10,000)
Allowance for doubtful debts 30,000
Increase in accounts payable 154,000
Increase in accruals 465,000
Increase in lease liability 20,000
Increase in provisions (93,000) (80,000)
Cash generated from operations 1,010,000
Less: taxes paid (refer WN-1) 55,000
Net cash generated from operating activities (a) 955,000
Cash flow from investing activities
Investment in associated company (250,000)
Investments made (188,000)
Tennis equipment purchased (80,000)
Purchase of equipment under lease (25,000)
Sale proceeds from plant & equipment 20,000
Dividends received 51,000
Net cash used in investing activities (b) (472,000)
Cash flow from financing activities
Repayment of borrowings (300,000)

Interest paid (315,000)
Financing charges paid (7,000)
Net cash generated from financing activities (c) (622,000)
Net increase/(decrease) in cash and cash equivalents
(a+b+c) (139,000)
Cash and cash equivalents at the beginning of the year 274,000
Cash and cash equivalents at the end of the year 135,000
-
WORKING NOTES:
WN-1 Calculation of tax paid:
Taxes Payable
Particulars Amount ($) Particulars Amount ($)
taxes paid 55,000 balance b/d 83,000
balance c/d 243,000 tax expense 215,000
298,000 298,000
WN-2
Plant & Equipment
Particulars Amount ($) Particulars Amount ($)
bal b/d 768,000 Acc. Dep 500,000
revaluation surplus 800,000 Sale of equip 68,000
acquired under finance
lease 25,000 bal c/d 1,025,000
1,593,000 1,593,000
Acc. Dep - Plant & Equipment
Particulars Amount ($) Particulars Amount ($)
Plant & Equip 500,000 bal b/d 548,000
Sale of equip 48,000
bal c/d 100,000 dep exp 100,000
648,000 648,000

Solution-5
a. Journal Entries
Date Particulars Dr./Cr. Amount ($)
22-Apr-18 No Entry
30-Apr-18 Inventory Dr. 35,294.12
To Accounts Payable Cr. (35,294.12)
30-May-18 Accounts Payable Dr. 11,764.71
To Bank Cr. (11,682.24)
To Realised Gain on forex Cr. (82.46)
30-Jun-18 Accounts Payable Dr. 11,764.71
To Bank Cr. (11,641.44)
To Realised Gain on forex Cr. (123.26)
30-Jun-18 Accounts Payable Dr. 123.26
To Unrealised Gain on forex Cr. (123.26)
31-Jul-18 Accounts Payable Dr. 11,641.44
To Bank Cr. (11,185.68)
To Realised Gain on forex Cr. (455.76)
Month Rate Payable
22-Apr-18 8.00 37,500.00
30-Apr-18 8.50 35,294.12
31-May-18 8.56 35,046.73
30-Jun-18 8.59 34,924.33
31-Jul-18 8.94 33,557.05
Treatment adopted:
As per the generally adopted accounting norms, the inventory is recorded in the books when the title of
goods is passed. As per the contract in the given case, the title of goods is passed on 30 April, 2018, i.e.
on the date of delivery and hence, the goods are recorded as inventory on 30 April, 2018 at the prevailing
exchange rate. Further, AASB 121, “The effect of changes in foreign exchange rates”, requires to fair
value the pending liabilities and assets at the reporting date, i.e. 30 June, 2018 and respective gain or loss
to be transferred to P&L. The same has been followed. Further, the liabilities are paid off at the payment
dates and respective gain or loss due to foreign exchange fluctuations is recorded.

b. Journal Entries
Date Particulars
Dr./
Cr. Amount ($)
31-May-18 Equipment Dr. 20,833.33
To Accounts Payable Cr. (20,833.33)
30-Jun-18 Accounts Payable Dr. 425.17
To Unrealised Gain on forex Cr. (425.17)
31-Jul-18 Accounts Payable Dr. 20,408.16
To Bank Cr. (19,230.77)
To Realised Gain on forex Cr. (1,177.39)
Month Rate Payable Gain/Loss
30-Apr-17 160.00 31,250.00
30-Jun-17 160.00 31,250.00
31-May-18 240.00 20,833.33
30-Jun-18 245.00 20,408.16 425.17
31-Jul-18 260.00 19,230.77 1,177.39
Treatment adopted:
In the given case, the Equipment is recorded on the delivery date i.e. on 31 May, 2018 with subsequent
valuation of pending liabilities, i.e. accounts payable on closing date i.e. on 30 June, 2018, as required by
AASB 121, “Effects of changes in Foreign Exchange rates”.
The accounts payable are settled on 31 July, 2018 and the difference due to foreign exchange fluctuation
is recorded in P&L.

c. Journal Entries
Physical Position using spot rate
Date Particulars Dr./Cr. Amount ($)
01-Jan-18 Bank Dr. 28,985,507.25
To Loan Cr. (28,985,507.25)
30-Jun-18 Unrealised exchange loss Dr. 2,564,102.56
To Loan Cr. (2,564,102.56)
30-Jun-18 Interest expense Dr. 1,666,666.67
Unrealised exchange loss Dr. 130,208.33
To Interest expense payable Cr. (1,796,875.00)
Hedging Position using forward rate
Date Particulars Dr./Cr. Amount ($)
01-Jan-18 No Entry
30-Jun-18 Forward Contract Dr. 2,564,102.56
To Hedging Reserve Cr. (2,564,102.56)
30-Jun-18 Hedging Reserve Dr. 2,564,102.56
To Gain on forward contract Cr. (2,564,102.56)
Month Rate Receivable Payable FV Gain/ Loss
01-Jan-18 0.65 30,769,230.77 30,769,230.77 - -
30-Jun-18 0.60 33,333,333.33 30,769,230.77 2,564,102.56 2,564,102.56
Treatment adopted:
In the given case, the loan is recorded using spot rate on the date of transaction, i.e. on the date of taking
loan. Further, as required by AASB 121, the loan is marked to market to carry the loan at fair value on the
reporting date. The interest upto 30 June, 2018 has been accrued and the exchange difference between the
rate on the transaction date and on the reporting date has been transferred to the P&L.
The hedging portion of the loan has been recorded at the forward rate on the reporting date and the
corresponding amount is transferred to the Hedge Reserve account and from the Hedge reserve account to
the P&L.

d. Journal Entries
Physical Position using spot rate
Date Particulars Dr./Cr. Amount ($)
31st Jan-18 No entry required
31st May-18 Inventory Dr. 744,680.85
To Accounts Payable Cr. (744,680.85)
(Purchase of inventory)
30th Jun-18 Loss on Forex Dr. 69,272.64
To Accounts Payable Cr. (69,272.64)
31st Aug-18 Loss on Forex Dr. 61,046.51
To Accounts Payable Cr. (61,046.51)
Hedging Position using forward rate
Date Particulars Dr./Cr. Amount ($)
31st Jan-18 No entry required
31st May-18 No entry required
30th Jun-18 Forward Contract Dr. 114,130.43
To Hedging Reserve Cr. (114,130.43)
30th Jun-18 Hedging Reserve Dr. 114,130.43
To Gain on forward contract Cr. (114,130.43)
31st Aug-18 No entry required
Month Rate Receivable Payable FV Gain/ Loss
Jan 0.46 760,869.57 760,869.57 - -
May 0.44 795,454.55 760,869.57 34,584.98 34,584.98
Jun 0.40 875,000.00 760,869.57 114,130.43 79,545.45
Aug 0.40 875,000.00 760,869.57 114,130.43 -

Treatment adopted:
The inventory is recorded on the date of delivery (as title and possession of the goods is passed on the
date of delivery) using the spot rate prevailing on the transaction date. Then, the amount payable to
vendor, i.e. accounts payable is marked to market on the reporting date and finally settled on 31st August,
2018 by paying off the liability at the prevailing spot rate and differences arising due to foreign exchange
fluctuations are recorded in P&L.
The treatment of hedging portion is that the contract is valued on the reporting date i.e. 30th June, 2018 at
the forward rates prevailing on 30th June and corresponding amount is transferred to the P&L through
Hedging Reserve.