ACCT90012 Corporate Reporting

Practice Exam Solutions

1. Fair Value Measurement

Philip owns land with a wool factory on it in a small town near Melbourne city. The factory
is a family business that started a century ago. The factory is currently used to produce wool
scarfs and clothes but could be redeveloped as a retail shopping centre. Philip recently
received an attractive offer from property redevelopers, but he rejected the offer because he
has no intention to stop the family business.

Required:
Discuss how Philip should apply AASB 13 Fair Value Measurement to measure fair
value of the land and factory.

Fair value is to be measured by considering the ‘highest and best use’ of the asset.

AASB 13 para.28 has the following requirements for determining the highest and best use:
 it must be physically possible to use the asset for the entity’s purposes.
 it must be legally permissible, that is, not subject to any legal restrictions (e.g. heritage-
listed, zoning regulations).
 it must be financially feasible and capable of generating sufficient income or cash flows
to produce the required investment return.

Fair value is not based on the current use of the asset; instead, it is based on how the market
participants would use the asset. As a result, Philip’s intention to continue the current use of the
asset is irrelevant.

Once the asset’s highest and best use has been established, the next step in determining its fair
value is to select one of two valuation premises: in-combination; and stand-alone

In this example, there are two possible uses for the site:
1. Continue to use the site for its current production purposes. In this instance the valuation
premise would be the in-combination valuation premise. [Background: Both the land and
the production facilities would be sold together so that the market participant could
continue to use the site for the same production purposes. The fair value of the land would
be based on its suitability to continue being used for production. The fair value of any
production facilities would be based on their ability to maintain existing production.]

2. Redevelop the site for retail purposes. In this instance, the valuation premise is the stand-
alone valuation premise. [Background: The land on which the production takes place
would be sold as a stand-alone asset, separate to the production facilities, which, in turn,
would be expected to be demolished to make way for the redevelopment. The production
facilities would therefore have a zero fair value and the fair value of the land would be
based on the amount that would be received on sale to the redevelopers.]
2. PPE, Intangibles, and Asset Impairment
2.1
Boston Ltd provides the following details regarding Machine Z PRIOR to any impairment or
revaluation adjustments for the year ended 30 June 2015:

Item of PPE Machine Z ($)

Gross amount 160,000
Accumulated depreciation (90,000)
Carrying amount on 30 June 2015 before revaluation
70,000
Additional information
Model under which asset carried Revaluation
Gross increments (before TAX) in asset revaluation reserve since
acquisition 5,000
Fair value at 30 June 2015 60,000
Recoverable amount at 30 June 2015 55,000

Required:

Prepare journal entries to record the above asset revaluations and asset value adjustments for
Machine Z as at 30 June 2015. (Ignore any tax effect)

Accounts Debit $ Credit $

Acc Depreciation 90,000
Machine Z 90,000

Asset Revaluation Surplus 5,000

Loss on Revaluation (1/S) 10,000
Machine Z 15,000

Working:

Test for revaluation loss

Lower of FV and RA

Lower of FV and RA =
$55,000 CA < $70,000

Loss on revaluation = $15,000

2.2
Spear Ltd provides the following information regarding a cash generating unit (CGU) during the 2014
and 2015 reporting period:

Information for year ended 30.6.2014

Assets Carrying amount

Plant (cost $300,000) $200,000
Patent $40,000
Receivables $50,000
Goodwill $60,000
Cash $20,000

Recoverable amount $280,000

Note: Receivables are all collectable (not impaired).

Information for year ended 30.6.2015

For the period ending 30 June 2015, the depreciation charge on plant was increased to $25,000. If the
plant had not been impaired the charge would have been $20,000. At 30 June 2015, the recoverable
amount of the CGU was calculated to be $60,000 greater than the carrying amount of the assets of the
CGU.

Required:
Prepare the journal entries to record the above events for the year ended 30 June 2014. (Ignore any tax
effect)

Accounts Debit $ Credit $

Impairment Loss 90,000
Acc Dep & Impair. Loss - plant 25,000
Acc Amort. & Impair Loss - patent 5,000
Goodwill 60,000

Asset Carrying Amount Proportion Allocation of Net Carrying

($) Impairment Loss Amount ($)
($)
Plant 200,000 200/240*30,000 25,000 175,000
Patent 40,000 40/240*30,000 5,000 35,000
240,000 30,000
Goodwill 60,000 60,000 0

90,000
2.3

Calculate the MAXIMUM REVERSAL of the impairment that can be allocated to plant for the year
ended 30 June 2015. Show your working.

Working:

Reversal 30 June 2015 = RA > CA = $60,000

Plant with Impairment Loss Plant with NO Impairment Loss

Cost $300,000 Cost $300,000
AD & IL AD & IL
At 30.6.14 $100,000 At 30.6.14 $100,000
IL 30.6.14 25,000 AD
AD 30.6.15 20,000 $120,000
30.6.15 25,000 $150,000
$150,000 $180,000

Maximum reversal = $180,000 - $150,000 = $30,000

3. Leases
3.1
Ted Ltd signed a contract with Mark Ltd. The contract requires Mark Ltd to transport a specified
quantity of goods of Ted Ltd by using 10 specified rail cars in accordance with a stated timetable for a
period of five years. Mark Ltd provides the rail cares, driver and engine as part of the contract. The
contract states the nature and quantity of the goods to be transported as well as the type of rail car to
be used to transport the goods. Mark Ltd has a large pool of similar cars that can be used to fulfil the
requirements of the contract. Mark Ltd can choose to use any one of a number of engines to fulfil the
requests from Ted Ltd. The engine could be used to transport not only the goods of Ted Ltd, but also
the goods of other customers. The cars and engines are stored at Mark Ltd’s premises when not being
used to transport goods.

Required:
According to AASB 16, can the contract between Ted Ltd and Mark Ltd be treated as a lease
contract? Please explain.

1. Is the asset identified?

a) Is the asset specified?
- Yes, the asset is explicitly specified.
b) Does the supplier (Mark Ltd) have the substantive right to substitute the rail
cars and engine?
- The supplier has the practical ability to substitute
- The supplier would benefit economically from substituting the cars and
engine. There would be minimal, if any, cost associated with substituting
the cars as the cars and engines are stored at supplier’s premises and the
supplier has a large pool of similar cars and engines. The supplier can
substitute the cars and engines to fit the demand from different customers.
So, the asset is NOT identified.

[Based on the above analysis, we can already decide that the contract is not a lease
contract]

2. Does the customer control the use of the asset throughout the period of use?
a). Does the customer enjoy all the economic benefits? No
b). Can the customer direct the use of the asset? No
Supplier directs the use of the rail cars and engine by selecting which cars are
used for each particular delivery and obtains substantially all of the economic
benefits from use of the rai cars.
3.2
On 30 June 2020, Small Ltd leases a large item of machinery from Fred Ltd. Small Ltd makes an initial
payment of $200 000 on 30 June 2020 when the least term starts. All remaining lease payments are
made in arrears. Small Ltd will return the leased asset at the end of the lease term. The lease agreement
also contains the following information:

Lease term (non-cancellable) 3 years

Expected useful life of the leased machinery 6 years
Expected salvage value at the end of useful life $100 000
Expected fair value at the end of lease term $140 000
Residual Value Guarantee at the end of lease term $300 000
Net initial directly attributable costs $20 000
Annual lease payment (paid in arrears) $210 000
Annual maintenance & insurance included in lease payments $10 000
Interest rate implicit in the lease 10% p.a.

Calculate the lease liability and right-of-use asset that Small Ltd should recognise on its balance
sheet on 30 June 2020.

3.3
Based on the information provided in Q3.2, list all the items and amounts related to the above lease
contract that would be included (but not necessarily disclosed separately) in extracts from the Income
Statement and Balance Sheet of Small Ltd (the lessee) for the year ended 30 June 2021. Ignore the
effect on cash account.
3.2
Lease Liabilities
=200,000/(1+10%)+200,000/(1+10%)^2+200,000/(1+10%)^3+160,000/(1+10%)^3=617,581

R-O-U asset= lease liability + initial payment + initial directly attributable cost =
617,581+200,000+ 20,000=837,581

3.3
Lease Interest Reduction in Balance of
Date
Payment expense Liability Liability
(10%)
30-Jun-20 200,000 200,000 617,581
30-Jun-21 200,000 61,758 138,242 479,339
30-Jun-22 200,000 47,934 152,066 327,273
30-Jun-23 200,000 32,727 167,273 160.000
30-Jun-23 160,000 160,000 0

Depreciation each year = 837,581/3= 279,194

Presentation @ 30 June 2021:

Income statement:
Lease depreciation expense 279,194
Lease interest expense 61,758

Balance sheet:
Non-current assets
R-O-U asset (machinery) 837,581
Accumulated depreciation (279,194)

Current liabilities
Lease Liabilities 152,066 Total liability is $479,339, of which
$152,066 is due within the next 12
Non-Current liabilities months, and the balance is due after
Lease liabilities 327,273 12 months
 4. Income Tax

Skye Ltd commenced operations on 1 July 2017. At 30 June 2020, the entity provided the following
information:
 Accounting profit before tax was $500 000.
 The gross amount of accounts receivable is $80 000. A doubtful debt provision of
$10 000 was created at the end of June 2020. No bad debts were written off during the year.
 Revenue of $20 000 was received in advance in June 2020. The revenue is assessable for tax
purposes when received.
 Plant was purchased at a cost of $450 000 on 1 July 2018. For accounting purposes, plant is
depreciated using the straight-line method over 5 years. For tax purposes plant is depreciated
over 3 years. Plant has a residual value of nil for tax and accounting purposes.
 During 2020 the balance of long service leave increased by $30 000 to $100 000. Long service
leave is only deductible when paid.
 Penalties and fines paid of $30 000 during the year are included in expenses used to calculate
accounting profit. Penalties and fines are not allowable tax deductions.
 Deferred tax balances at 1 July 2019 were:
 Deferred Tax Assets = $21 000
 Deferred Tax Liabilities = $10 000
 The tax rate is 30 per cent.

Required:
4.1 Based on the information above, complete the following deferred tax worksheet.

Carrying FTA FDA Tax Base Deductible Taxable

Amount Temporary Temporary
Differences Differences

Accounts 70,000 0 10,000 80,000 10,000

receivable
Plant 270,000 270,000 150,000 150,000 120,000

Provision for long 100,000 0 100,000 0 100,000

service leave
Prepaid revenue 20,000 0 20,000 0 20,000
4.2 Prepare the journal entries associated with deferred tax for the year ended 30 June 2020.

Ending balance of DTA = 130000*0.3=39,000

Ending balance of DTT = 120000*0.3=36,000

Change of DTA = 39000 – 21000 = 18000

Change of DTL = 36000 – 10000=26000

Accounts Debit $ Credit $

DTA 18000
Income tax expense (deferred) 18000

Income tax expense (deferred) 26000

DTL 26000

4.3

As a result of a drop in global oil prices, Fortescue Ltd recognized a $50 million taxable
loss in the current period. The management of Fortescue Ltd are debating whether it can
raise a deferred tax asset in relation to this loss in the financial statements in the current
period.

REQUIRED:
Provide advice to the management on the raising of a deferred tax asset and specifying the
conditions, if any, under which the asset could be recognized.

For deferred tax assets (DTA) arising from tax losses, the criteria is that it still must be
probable that Fortescue Ltd earns sufficient taxable income to offset the past tax loss.
For Fortescue to create a DTA, it must be able to provide evidence that it will earn
taxable income in the future to offset the past tax losses.
However as there is a tax loss in the current period, then there is strong evidence that
Fortescue may not be able to earn taxable income in the future. Further if Fortescue has
a history of recent tax losses, there must be convincing evidence that circumstances are
going to improve in the future.
AASB 112 provides a number of factors that can be used to assess whether
circumstances will improve in the future:
1. Whether the entity has sufficient taxable temporary differences that will result in
taxable amounts in the future against which the tax loss can be offset.
2. Whether the unused tax losses result from identifiable causes which are unlikely
to recur.
3. Whether tax planning opportunities are available to the entity that will create
future taxable profit.
Fortescue could examine the following areas to provide evidence that a change is
expected in the profits of the entity in the future:
1. Causes of past/current losses. Fortescue could show that the drop in oil prices is
not expected to persist.
2. Analysis of existing contracts and sales agreements. If there is new contracts
being signed and this will boost/return Fortescue to profit.
If the above is strong evidence, then Fortescue will Be able to create a DTA.
5. Revenue
5.1
A supermarket, XYZ Ltd, offers its regular customers a customer loyalty card. The customer is entitled to
$20 off their groceries after each $3,000 spent in the supermarket.
On 14 August 2016 a customer comes into the supermarket. The customer has already accumulated grocery
purchases of $2,850 on their card. The customer buys $350 worth of groceries. As the customer has now
spent an accumulated total of more than $3,000 on grocery purchases in the supermarket, the customer is
entitled and decides to redeem their $20 off their groceries. The customer pays only $330 for the $350 worth
of groceries.

Assume all customers will redeem.

Required:
Show the journal entry in the books of XYZ Ltd to record the transaction on 14 August 2016 (assume a 60%
mark-up on the price of these goods).

Date Details DR CR
Bank 330.00

2016 Deferred revenue

14 August (Points redemption - Accumulation of further 17.68
points)
$20*$3000/$3020 – $330*$20/$3020)
Sales revenue ($350*$3000/$3020) 347.68

Cost of sales ($350*100/160) 218.75

Inventory 218.75

Alternative entries
Bank 150.00
Sales revenue ($150 *$3000/$3020k) 149.01
Deferred revenue ($150 * $20/$3020) $330 0.99
First $150 of sales Def.
revenue
Bank 180.00 $0.99 Cr +
$1.19 Cr --
Sales revenue ($180 *$3000/$3020k) 178.81
$19.87 Dr
Deferred revenue ($180 * $20/$3020) 1.19 = $17.69 Dr

Second $180 of sales

Deferred revenue ($3000*$20/$3020) 19.87
Sales revenue 19.87
Redemption of loyalty points
Cost of sales 218.75
Inventory 218.75
Note: Consideration received $3,000; Stand-alone selling price $3,020.
 5.2
Rocky Ltd provides a bundled service offering to Customer A. Rocky charges Customer A $70 000 for
initial connection to its network and two ongoing services — access to the network for two years and ‘on-
call troubleshooting’ advice for two years (ending 30 June 2022).

Customer A pays the $70 000 upfront, on 1 July 2020. Rocky determines that, if it were to charge a
separate fee for each service if sold separately, the fee would be:

Connection fee $10 000

Access fee $24 000
Advice $46 000

Required
Prepare the journal entries to account for this transaction for the year ended
30 June 2021 in accordance with AASB 15 Revenue from Contracts with Customers, assuming Rocky
applies the relative fair value approach.

Accounts Debit Credit

$ $

Cash 70 000
Revenue – connection fee 8 750
Liability – obligation to provide access to network 21 000
Liability – obligation to provide troubleshooting advice 40 250

Liability – obligation to provide access to network 10 500

Liability – obligation to provide advice 20 125

Revenue 30 625

Workings

Fair value of each Allocation of fair value Allocated amount

component if sold to total consideration
separately
Connection fee 10 000 10 000/80 000 x 70 000 8 750
Access fee 24 000 24 000/80 000 x 70 000 21 000
Troubleshooting 46 000 46 000/80 000 x 70 000 40 250
Total 80 000 70 000
6. Financial Instruments

6.1
On 1 July 2014, Ball Ltd purchases a debt instrument with a 4-year term for its fair value of $526,210
(including transaction costs). The instrument has a principal amount of $580,000 (the amount payable on
redemption) and carries fixed interest of 5.2% per annum paid annually in arrears on 30 June every year.
The effective interest rate is 8% per annum. The debt instrument is classified as subsequently measured
at amortised cost.

Required:
Prepare the journal entries for the year ended 30 June 2018.

Accounts Debit $ Credit $

Cash $30,160
Investment in debt security 15,037
Interest income $45,197

Cash 580,000
Investment in debt security 580,000

(Note: Above entries can be combined)

Working:

Year Opening Balance Interest Cash flows Closing Balance

30.6.2015 $526,210 $42,097 $30,160 $538,147

30.6.2016 538,147 43,052 30,160 551,039

30.6.2017 551,039 44,083 30,160 564,962

30.6.2018 564,962 45,197 30,160 580,000

 t
5kX o
35 205001

6.2
5k
Smith Ltd issues 100,000 $1 redeemable convertible notes. The notes pay interest at 5% per
annum. Each note converts at any time at the option of the holder into one ordinary share. The
notes are redeemable at the option of the issuer for cash after 5 years. If after 5 years the notes
have not been redeemed or converted, they cease to carry interest. Market rates for similar notes
without the conversion option are 7% per annum.

Required:

Determine whether the entity has a financial liability or equity instrument, and calculate the
amount of any financial liability or equity instrument in accordance with AASB 132 Financial
Instruments: Presentation. Give reasons to support your answer.

Equity Instrument Financial Liability

Equity component for the conversion option as it Contractual obligation for annual interest
relates to a fixed number of own equity only. The issuer does not have a contractual
instruments: refer para 16(b). The equity obligation to repay principal at redemption
component is initially measured as the difference since redemption is at the issuer’s option.
between issue proceeds and financial liability Financial liability component is initially
component measured as the present value of the interest
discounted at equivalent rate of 7% p.a. for
Option to convert pure play debt security.
= Issue proceeds – Financial Liability component
= $100 000 – $20 501 Interest is $100,000*5% = $5,000
= $79 499 PV of interest
= $5 000 x 4.1002 (annuity factor)
= $20 501
6.3
Golden Ltd acquired some government bonds. Under what condition(s) can Golden Ltd
subsequently measure the government bonds at amortised cost? Please identify the relevant
accounting standard and explain.

AASB 9 requires subsequent measurement of a financial asset at amortized cost when both of the
following are satisfied:

1. Cash flow characteristic test: the contractual terms of the financial asset give rise on specified
dates to cash flows that are solely payments of principal and interest

2. Business model test: the financial asset is held within a business model is to hold financial assets in
order to collect contractual cash flows.
 7. Business combinations

On 1 July 2020, GWS Ltd confirmed and contracted to acquire all the assets and liabilities of Power Ltd.
Power Ltd would then liquidate. The purchase consideration was agreed as follows:
Upon liquidation, shareholders of Power Ltd to receive 4 shares in GWS Ltd for every five shares held in Power
Ltd. Each GWS Ltd shares has a fair value of $2.50 at 1 July 2020. GWS Ltd incurred and paid share issue
costs of $1,000.
The Balance Sheet of Power Ltd on 1 July 2020 is as follows:
Assets $ Liabilities $
Accounts receivable 65,000 Accounts payable 75,000
Inventories 30,000 Loans 80,000
Property, plant and equipment 260,000 Equity
Goodwill 20,000 Share capital - $1 shares 150,000
Retained earnings 70,000
375,000 375,000

The assets of Power Ltd are all recorded at fair value except the following:
$
Accounts receivable 40,000
Inventories 25,000
Property, plant and equipment 350,000

A check of the financial records of Power Ltd also revealed an unrecognized liability for annual leave of
$25,000.

REQUIRED:
Prepare ALL journal entries (including cash) pertaining to the above event in the books of GWS Ltd on 1 July
2020. (4 marks)

DETAILS DEBIT ($) CREDIT ($) Working (optional)

Accounts receivable 40,000
Inventories 25,000
Property, plant and equipment 350,000
Goodwill 65,000
Accounts payable 75,000
Loans 80,000
Provision for annual leave 25,000
Share capital 300,000 (4/5*150,000*$2.50
= $300,000

Share capital 1,000

Cash 1,000
8. Consolidation

8.1
1. On 1 July 2012, Safe Ltd acquired 90% of the shares of Mission Ltd for $550,000. On 1 July 2012, the
equity of Mission Ltd consisted of:

Share capital $300,000

General reserve 60,000
Retained earnings 75,000
2. All the identifiable assets and liabilities of Mission Ltd were recorded at fair value on 1 July2012
except for:
Carrying amount Fair value

Inventories $ 90,000 $ 105,000

Plant and equipment (cost $300,000) $180,000 $250,000

3. The above plant and equipment had a further 5-year life and was expected to be used evenly over that
time.
4. During the year ended 30 June 2013, all inventories on hand at 1 July 2012 were sold.
5. On 1 May 2014, Mission Ltd sold inventory costing $50,000 to Safe Ltd for $80,000. On 30 June
2014, only 70% of these goods had been sold by Safe Ltd.
6. During the 2014-15 period, Mission Ltd sold inventory to Safe Ltd costing $130,000 for $160,000. At
30 June 2015, $20,000 worth of inventory is still held by Safe Ltd.
7. Mission Ltd paid dividends totaling $70,000 for the period ended 30 June2015.
8. Safe Ltd uses the partial goodwill method.
9. Corporate tax rate of 30% applies, where applicable.

Financial information for the year ended 30 June 2015 includes the following:

Safe Ltd Mission Ltd

Sales revenue $360,000 190,000
Dividend revenue 63,000
Other revenue 40,000 20,000
Total revenue 463,000 210,000
Cost of sales 220,000 60,000
Other expenses
Selling and administrative (including depreciation) 30,000 10,000

Financial 40,000 20,000

Total expenses 290,000 90,000
Profit before tax 173,000 120,000
Income tax expense 40,000 30,000
Profit after tax 133,000 90,000
Retained earnings 1/7/14 60,000 100,000
193,000 190,000
Dividends paid (80,000) (70,000)
Retained earnings 30/6/15 113,000 120,000

Required:
For the year ended 30 June 2015, complete the Consolidation Worksheet Journal entries below to record
the above transactions. When recording the Consolidation worksheet journal entries Non-controlling
interest (NCI) NEEDS TO BE INCLUDED WHERE APPROPRIATE.
 1. BCVR entries
DETAILS DEBIT CREDIT
Accumulated depreciation $120,000
Plant & Machinery $50,000
BCVR $49,000
DTL $21,000

Depreciation ($70,000/5 years) $14,000

RE ($70,000/5years  2 years) $28,000
Acc Depreciation $42,000

DTL $12,600
ITE $4,200
RE $8,400

RE 10,500
BCVR 10,500

Effects on NCI of above

NCI $3,010
RE (28,000 + 10,500 – 8,400)  10% $3,010

NCI 980

NCI share of profit (14,000 – 4,200)  10% 980

1. Pre-acquisition entries: Parent

DETAILS DEBIT CREDIT
Share capital ($300k  90%) $270,000
Gen Reserve ($60k  90%) 54,000
RE ($75k  90%) 67,500
BCVR ($59.5k  90%) 53,550
Goodwill 104,950
Shares in Mission 550,000
 2. Pre-acquisition entries: NCI
DETAILS DEBIT CREDIT
Share capital ($300k  10%) $30,000
Gen Reserve ($60k  10%) 6,000
RE ($75k  10%) 7,500
BCVR ($59.5k  10%) 5,950
NCI $49,450
3. Elimination of the effects of intragroup transactions at 30 June 2015
Dividends paid
DETAILS DEBIT CREDIT
Dividend revenue $63,000
Dividend paid $63,000

DETAILS DEBIT CREDIT

Opening inventory 8050 1 7
RE $6,300 9K
ITE 2,700 4kt
3
Cost of sales $9,000

NCI share of profit 630

RE 630
($6.3k*10%)

Closing inventory
Revenue (160,000 – 20,000) 140,000
Cost of sales $140,000

Revenue $20,000
Cost of sales (130k/160k 20,000%) $16,250
Inventory $3,750

DTA $1,125
ITE ($3,750  30%) $1,125

NCI $262.5
NCI share of profit (after tax) $262.5
($3,750 – $1,125)  10%
1. Accounting for changes in books of subsidiary
 Step 2: NCI changes from date of acquisition to beginning of current
period

DETAILS DEBIT CREDIT

RE (100,000 – 75,000)  10% $2,500
NCI $2,500

2. STEP 3: NCI changes in current period

DETAILS DEBIT CREDIT 90
NCI share of profit (75,000  10%) $9,000
NCI $9,000

NCI $7,000
Dividend paid (70,000  10%) $7,000
8.2 IGNORE THIS PART OF THE QUESTION

The consolidated financial statements of Solar Ltd are being prepared by the group accountant, Li Mei. She
is currently in dispute with the auditors with the notion of ‘realisation’ of profit for depreciable non-current
assets in relation to the Non-controlling interest (NCI).

REQUIRED:
Provide an explanation to Li Mei regarding the above issue.

It is true that profit is normally realized when the group transacts with an entity external to the group.
With assets used by the group such as depreciable assets, the group does not interact directly with an
external entity. It is then impossible to determine a point of ‘realisation’ based on direct involvement of
the group with an external entity. The point of ‘realisation’ is then based on the indirect involvement
as the asset is used by the group to produce items/services that will be sold, at some point, to external
entities, e.g. by making inventories for sale to external entities. The depreciation charge measures the
extent of that involvement in any one year as the depreciation charge reflects the pattern of benefits
consumed by the entity. Realisation is then then achieved in proportion to the depreciation charge
made on the asset.
The need to adjust for the NCI share of equity in relation to intragroup transactions:

It is true that the holders of the NCI are entitled to the share of what subsidiary records as equity based
on their ownership interest in the subsidiary. However, the consolidated financial statements should
disclose the NCI share of the consolidated equity from the group’s perspective. Note that consolidated
equity includes the subsidiary’s equity post-acquisition adjusted for the effects of intragroup
transactions that originate from the subsidiary and generate unrealized profits/losses – that is, realised
subsidiary equity.
 9. Investments in Associates /the equity method of accounting

On 1 July 2001 Left Ltd acquired 40% of the equity in Right Ltd for $220 000. At this date the equity
in Right Ltd consisted of:

Capital 250 000

Revaluation reserve 50 000
Retained profits 150 000
Right Ltd carried its assets fair values with the exception of one item of plant & equipment whose fair
value was $20 000 greater than its carrying amount. The estimated useful life of this item is 4 years.
Summary of movements in the retained earnings of Right Ltd:

2002 2003
Profit after tax 140 000 200 000
Retained profits at start 150 000 210 000
Dividends (80 000) (100 000)
Retained profits at end 210 000 310 000

At 30 June 2002 there were unrealised profits before tax of $10 000 arising from inventory
transfers between the two entities.

On 30 June 2003 Right Ltd revalued Land by $30 000 (before tax).
9.1
Required
Show the general journal entries to record the above events in the books of Left Ltd under the
equity method of accounting for the investment in an associate.
WORKING 2002 2003
$140,000 $200,000
Dep. after tax ($20,000/4 years *70% (3,500) (3,500)
Unrealised profit - closing inventory after tax ($10k*70%) (7,000)
Realised profit – opening inventory after tax ($10k*70%) 7,000
129,500 203,500
Left’s share (*40%) BEFORE DIVIDENDS 51,800 81,400
Less: Share of dividends 32,000 40,000
19,800 41,400

Account Debit Credit

1/7/01
Investment in Right Ltd 220 000
Bank 220 000
30/6/02
Bank 32 000
Investment in Right Ltd 32 000
Investment in Right Ltd 51 800
Share of profit in associate 51 800
 30/6/03
Bank (share of dividend $100k*40%) 40 000
Investment in Right Ltd 40 000

Investment in Right Ltd 81 400

Share of profit in associate (see working above 81 400
– 2003 profit before dividends)

Investment in Right Ltd 8 400

Share of OCI in associate 8 400
- Gain on revaluation (after tax)
($30k*40%*70%)

9.2
Required:
Show the consolidation journal entry on 30 June 2003 assuming Left Ltd is a parent of other
entities.

Note by end of 30 June 2003, the associate has been held for 2 years, hence you will need to account for 2
years profit, that is opening retained earnings and current year profit.

Account Debit Credit

30/6/03
Investment in Right Ltd 19 800
Opening retained profits (after dividends) (see 19 800
workings above)
$69,600

Dividend revenue 40 000

Investment in Right Ltd 49 800
Share of profit in associate (bf. dividends) 81 400
Share of OCI - Gain on revaluation 8 400

OR (entries can be combined as follows):

Investment in Right Ltd
69,600
Dividend revenue
40 000
Retained profits
19,800
Share of profit in associate
81,400
Share of OCI – gain on revaluation
8,400
10. Disclosure issues
10.1
Warranty provisions ($) Actual costs ($)
2017-18 60,000 90,000
2018-19 65,000 99,000
Assuming an investigation during 2018-19 finds that the figure for warranty expense was
incorrectly calculated for 2017-18 and should have been $96,000 and not $65,000 as shown in
the table above.

Required:
In accordance with AASB 108: Accounting Policies, Changes in Accounting Estimates
and Errors, should the error be accounted for and if so, retrospectively or prospectively?
Explain.

If the variance for the year ended 30 June 2018 was due to an ERROR IN CALCULATION, then
providing it is material, the figures for year ended 30 June 2018 should be RETROSPECTIVELY
corrected by $31,000
Such a correction would suggest that the variance between the warranty expense that would have been
provided for had the error not occurred ($96,000) and the actual costs ($99,000) were not material (that
is only $3,000 or only 3%) which may indicate that the significant variance for year ended 30 June
2018 may be a one-off aberration.

10.2
BHP Billiton pays an annual cash bonus to its steel workers.

Required:
Is this a related party transaction under AASB124 Related Party Transactions, and does it
require disclosure in the annual financial statements. Explain.

There is no disclosure required as it is not regarded as a related party transaction.

The cash bonus occurred in an arm’s length transaction and the factory workers would not be considered
as key management personnel.