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MAA261: FINANCIAL ACCOUNTING T3 2020 EXAMINATION

EXAMINATION PAPER

Faculty of Business and Law

Trimester 3 2020 Examination

Unit Code: MAA261

Unit Name: Financial Accounting

Anticipated writing time: TWO (2) HOURS

Maximum exam time: You must submit your exam response within THREE (3) hours. The additional hour includes 15 minutes reading time, and time to download and save the exam paper and upload the completed paper into CloudDeakin

Special instructions for candidates:

• This examination is OPEN BOOK.

• Calculators are ALLOWED.

• This examination constitutes 50% of your assessment in this unit.

• This examination comprises 5 questions. You are required to answer ALL 5 questions.

• Save this document on your computer using the file name: student ID, unit code and the unit name, for example: 216123123_MAA261_FinancialAccounting

• Record all answers in the spaces provided below for each question

• Upload your exam response to the Exam Submission Dropbox in the CloudDeakin unit site. Check that you upload the correct file.

• Late submissions will not be marked.

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• In the unlikely event that you cannot upload your completed exam paper, email it as an attachment to your unit chair [email protected] within the submission time.

• The breakdown of marks in this exam is:

• All candidates MUST complete this section

Type your student ID number here:

You are required to answer ALL questions.

Question 1 (7 marks)

On 30 June 2017 Sew Pty Ltd purchased equipment at a cost of $625,000 (GST Exclusive.) with an estimated useful life of 10 years and no residual value. On 30 June 2020, the equipment had a carrying amount of $437 500.

On 30 June 2020 the same item of equipment was determined as having a recoverable amount of $350 000 and a remaining useful life of 7 years.

On 30 June 2023, the equipment was assessed as having a recoverable amount of $260 000 and a remaining useful life of 3 years.

All equipment is carried under the cost model.

Required:

Prepare the general journal entries to record the impairment of equipment and depreciation under the cost model on 30 June 2020, 30 June 2023 and 30 June 2024. Please note the depreciation expense for the equipment has not been recorded for the year 2020.

Narrations are not required

Question 2 (11 marks)

A trial balance taken from GoFresh Pty Ltd’s accounting records at 30 September 2019, showed the following account balances:

GoFresh Pty Ltd

Trial Balance

as at 30 September 2019

At a meeting of directors on 1 October, it was decided to issue additional shares to fund future operations. Accordingly a prospectus was issued on 10 October offering 200,000 ordinary shares at $3 each to the public, payable $2.50 per share on application and the remainder in one call when required.

By 30 November, applications were received from the public for 224,000 shares. On 3 December the application money paid on 24,000 shares was refunded to unsuccessful applicants. The rest of the shares were allotted to the successful applicants.

On 31 January 2020, an interim dividend of 8c per share was paid out of retained earnings on all fully paid equivalent shares pro rata.

On 20 February, the remaining call on the shares was made, and all cash was received on the call by 31st March, except for the holder of 6,000 shares.

Required:

a) Prepare the general journal entries to record the information above. (7 marks)

Narrations are NOT required.

b) Prepare a Statement of Changes of Equity as at 30 June 2020. (3 marks)

ANSWER HERE

QUESTION 3 (12 marks)

The following comparative Balance sheets for the years ended June 30, 2019 and 2020 and income statement information for 2020 for Smile Clinic Pty Ltd are set out below:

Note: 1. No plant and equipment was sold during the year.

2. Dividends of $27,000 in cash were paid during the year.

3. All sales are on credit.

Required:

Prepare a statement of cash flows for the year ended 30 June 2020 using the direct method.

ANSWER HERE

Cash flow from operating activities:

Cash:

Debtors 2,700

Inventory (900)

Equipment (135,000)

Net cash provided by operating activities: (133,200)

Cash flow from investing activities:

Purchase of plant and equipment (54,000)

Net cash provided by investing activities: (54,000)

Cash flow from financing activities:

Creditors 13,500

Accrued expenses 2,700

Long-term loan 36,000

Capital and reserves 27,000

Net cash provided by financing activities: 79,200

Question 4 (This question has two parts: I and II) (7 + 7 = 14 marks)

Part I

Your Guitar Pty Ltd sells guitar machines and lessons on how to guitar. On 1 March 2020, Your Guitar Pty Ltd signs an agreement with Music Studio to provide 8 guitar lessons and 5 guitar machines. The contract price amounted to $6,160 (GST Inclusive), on credit terms n/30 for the guitar machines and guitar lessons. This amount also includes one free service for the guitar machines to be performed six months after the delivery of the guitar machines to Music Studio.

The stand-alone price for the 8 guitar lessons is $2,860 (GST Inclusive). The guitar lessons will start on 8 March 2020.

The stand-alone price of the guitar equipment is $5,720 (GST Inclusive). The six-month service fee for the guitar machines is usually $660 (GST Inclusive).

Music Studio paid the full amount on 26 March 2020 for the equipment and personal training lessons.

The equipment was delivered on 28 March 2020.

By 31 March 2020, 3 guitar lessons had been held.

Required:

1. How should Your Guitar Ltd allocate the transaction price to the distinct performance obligations in this contract based on IFRS 15 / AASB 15 Revenue with Contracts from Customers? (3 marks)

ANSWER HERE

- Stand alone price for 8 guitar lessons $2,860:

 Allocated price= Amount of obligation 1/total amount of obligation & 2 transactions price

 Allocated price= 6,160/2,860= $2.15

- Stand alone price for the equipment $5,700:

 Allocated price= Amount of obligation 1/total amount of obligation & 2 transactions price

 Allocated price= 6,160/5,720*660= $710.77

1. The owners of the business have asked you the Accountant to record all of the revenue from the contract in the statement of Financial Performance as at 31 March 2020. Discuss how recording all of the contract as revenue as at 301 March 2020 will influence the usefulness of financial information with reference to the fundamental qualitative characteristics of information prescribed by the Conceptual Framework for Financial Reporting. (4 marks)

ANSWER HERE

Revue is recognised when the entity has transferred the control of promise goods or services to customer. The conceptual framework defines control: present ability to direct the use of the economic resource and obtain the economic benefits. Revenue is recognised at an amount that reflects the consideration the entity expects to receive for providing those goods or services. And five steps to record revenue is:

- Identify the contract with the customer

- Identify the separate performance obligations

- Determine the transaction price

- Allocate the transaction price

- Recognise revenue when a performance obligation is satisfied

Question 4, Part II

Classic Clocks Pty Ltd uses the allowance method to account for doubtful debts. The business allows for bad and doubtful debts at 3% of net credit sales.

At the 1 June 2020 the accounts receivable ledger balance of $56,000 debit and a credit balance in the allowance for doubtful debts ledger account of $5,000.

Credit sales for the month of June were $24,000 (GST Exclusive) and sales returns for the month were $5,000 (GST Exclusive) and these have been recorded in the journal

The business received notification from City Hall Pty Ltd on 8 June 2020 that, $3,630 (GST Inclusive) that had previously been written off as uncollectible in May 2020 would be paid in full in 2 weeks. The money was received on 22 June.

On 28 June Classic Clocks Pty Ltd was contacted by Vogue Homeware Pty Ltd to notify that the business had been declared bankrupt and that they would not be able to pay the $1,100 owing to Classic Clocks from a previous credit sale made to them in April 2020.

Required:

1. Prepare journal entries for each of the above events. Narrations are not required. (4 marks)

1. The owners recently purchased machinery to use in the business. All of the employees employed by Classic Clocks will be trained on how to use the features of the equipment. This will cost Classic Clocks a considerable amount of money. The manager has approached you and would like you to include the training costs as an asset in the Statement of Financial Position for 30 June 2020. Discuss whether the training costs should be treated as an asset in the Statement of Financial Position for the financial period ending 30 June 2020, with reference to the Conceptual Framework definition and recognition criteria of an asset. (3 marks)

ANSWER HERE

No, it is not a liability, because when we are taking a look at the definition of a liability is when present obligation, this is a duty you can’t avoid. No ruling has happened saying when is the training will start, but they did mention that you would like to train their employees there is obligation. Past event, transaction/obligation that has occurred. The event has happened which is Classic Clocks will train their employees how to use the features of the equipment.

Transfer of economic resources, payment of cash. No cash amount has been decided and no cash has been paid. As it is not a liability it should be a provision liability. A provision shall be recognised when: an entity has a present obligation as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, a reliable estimate can be made of the amount of the obligation.

Question 5 (6 marks)

Hygiene4U Pty Ltd is a business that cleans and polishes walkways in hospitals around Australia. The accountant, Phuong, has sought your advice on the treatment of the following items in the financial statements as at 30 June 2020.

During June 2020, Hygiene4U Pty Ltd was involved in a court case. The plaintiff sought compensation for harm caused when visiting the hospital. They slipped and fell over on one of the walkways due to chemicals used to clean the floors being spilled and not cleaned up. The plaintiff received broken bones and loss of income as they were unable to work while injured. At present, Hygiene4U Pty Ltd has been found guilty, but the judge has yet to award damages. The damages that Hygiene4U Pty Ltd will need to pay are estimated to be from $200,000 to $800,000. Phuong would like to include the damages as a liability in balance sheet of Hygiene4U Pty Ltd for the 2020 financial year.

Required:

Discuss whether the damages should be recognised as a liability in the Statement of Financial Position. Alternatively, what would you recommend to the manager the item be recorded as? Justify your answer with reference to the Conceptual Framework definition and recognition criteria of a liability, and AASB 137 Provisions, Contingent Liabilities, and Contingent Assets.

ANSWER HERE

-Present obligation exists:

Yes, company is obliged to pay damages by the court.

Legally enforceable obligation – so no “practical ability to avoid”.

-Transfer economic resource:

Yes, damages to be paid to plaintiff.

-Past events:

Yes, the decision of the court has created the present obligation, but not yet to award damages.

- Discuss recognition criteria for liability and apply facts:

Recognise if:

1. It meets the definition of liability.

2. The liability recognised will provide users with useful information:

Relevance: existence certainty of liability – Hygiene4U is liable to pay plaintiff.

Faithful representation: court has yet to determine damages, the amount cannot be reliably estimated. Will it be $200,000 to $800,000.

- Conclusion: obligation to pay damages “cannot” be recorded as a liability as it cannot reliably measured. Disclose it in the Notes as a contingent liability.

• END OF EXAMINATION -