ACCT602 FINANCIAL ACCOUNTING

TIME-CONSTRAINED ASSESSMENT – ONLINE

Semester 1 2022

COURSE NAME: FINANCIAL ACCOUNTING

COURSE CODE: ACCT602

TIME ALLOWED: 2 hours (To be completed in 3 hours)

DATE: Monday, 13 June 2022

TOTAL MARKS: 100

Assessment INSTRUCTIONS, Academic Integrity Guidelines and additional information – read all before commencing

Assessment Instructions:

Please email your Course Coordinator and BEL Exam Office (nirupika.liyanapathirana@aut.ac.nz; belexams@aut.ac.nz ) immediately if you have any technical issues with your online assessment submission on Canvas using your AUT email address. Include in your email a brief explanation of the issue, your Student ID, Course code, a screenshot of the issue including the time stamp. Email subject line: (Online Submission: Course Name – Course Code – Student ID – Student Name)
This is an individual assessment – there must be no discussion or collaboration with anyone else. No component of this assessment may be shared with any person, in any manner other than your course coordinator or BEL Exam office.
Open the header of the document and insert your name and ID number
You have one attempt to submit this assessment. Ensure frequent saving and do not leave the assessment before clicking Save and Submit.
Write down your answers in the spaces given. Add additional rows and columns if needed.
Round all amounts to the nearest dollar.
Narrations are not required for journal entries (No marks are allocated) however, you may write narrations for clarity purposes if you have time.
Submit the completed assessment via Turnitin on Canvas by 5 pm.

SUMMARY:

Section	Marks
Part 1 – Short answer questions
Inventories	15
Intangible Assets	15
Provisions, & Contingent Liabilities and Events after the reporting period	15
Part 2 – Long Answer Questions
Revenue	25
Property, Plant & Equipment & Impairment of Assets	30
Total	100

ACADEMIC INTEGRITY GUIDELINES

AUT takes Academic Integrity very seriously and you are reminded that the following actions may be deemed to constitute a breach of the General Academic Regulations Part: Academic Discipline, Section 2 Dishonesty During Assessment or Course of Study

2.1.1 copies from, or inappropriately communicates with another person
2.1.3 plagiarises the work of another person without indicating that the work

is not the student’s own – using the full work or partial work of another person without giving due credit to the original creator of that work

2.1.4 collaborates with others in the preparation of material, except where this has been approved as an assessment requirement.
2.1.5 resubmits previously submitted work without prior approval of the assessment board
2.1.6 using any other unfair means

Additional Information

Your assessment responses must be your own work. You may be required to orally defend your responses to assessment questions.
You must quote or paraphrase and reference any material that you take/use/adapt from somewhere else

You are permitted to:

Consult the textbook(s).
Consult University-provided course materials on Canvas or in printed form.
Consult reference material from the University library or from credible online sources e.g. recognised publishers, government, educational institutions, research organisations.
Consult notes that you have produced yourself.
Communicate only to authorised University staff members for the purposes of clarification and logistical/technical trouble shooting (insert relevant person but it could be someone like Lecturer or an assessment help line)

You are NOT permitted to:

Change any question
Have someone else do assessment questions for you.
Receive from, help or ask another student with assessment questions or hints.
Refer to or re-use identical or similar question solutions as might be found on social media, chat forums, ‘study help’ type websites, study note sharing websites or via other means.
Communicate or collaborate with another student or person in anyway during the assessment without explicit permission from a university staff member (other than to authorised University staff members).
Let your assessment responses become available or visible to other students.
Provide the assessment questions, assessment materials or assessment responses to another student or person via any means (other than to authorised University staff members).
Post or communicate assessment questions or other materials via forums, chat boards, ‘study help’ type websites, instant messaging platforms, photograph and send via mobile devices to others.
Cut and paste from any other material without referencing.

PART 1 – SHORT ANSWER QUESTIONS

QUESTION 1:

INVENTORIES (TOTAL: 15 MARKS)

Look Smart Ltd buys and sells men’s clothing items. The following information relates to the inventory items on hand at 31 March 2022 held by Look Smart Ltd.

Items	Quantity (As per physical count)	Cost per Unit using WAC method ($)	Estimated net selling price ($)	Estimated costs of completion and disposal ($)
T-Shirts	500	35	40	2
Jackets	250	150	145	9
Shirts	300	55	62	3
Short Pants	150	60	69	4
Long Pants	175	80	78	4

The company follows the weighted average cost (WAC) method to calculate the cost of inventories. The company also estimated the net selling price and cost of completion and disposal per unit for each individual item, taking into consideration the market conditions.

Required:

Compute the value of inventories as of 31 March 2022 by applying NZ IAS 2 guidelines. In answering this question, complete the last four columns of the table below and provide your answer of total value of inventories in the last row of the last column.

(6 Marks)

ItemsQuantity (No. of units)Cost per Unit ($)Total Cost ($)Net Realisable Value (NRV) per unit ($)Total NRV ($)Value of Inventories ($)T-Shirts5003517,5003819,00017,500Jackets25015037,50013634,00037,500Shirts 3005516,5005917,70016,500Short Pants150609,000659,7509,000Long Pants1758014,0007412,95014,000 Total Value of Inventories ($) 94,500

Explain the rule that you applied on 31 March 2022 to calculate the value of inventories in (a) above and discuss the effect that rule has on the financial statements of the company?

(5 Marks)

Answer

Because the NRV is greater than the cost of inventory, the company makes a profit on the sale of inventory items. If the NRV is less than the cost of inventory, the company will sell the goods at a loss. The income statement is negative.

Write down the inventories accounting policy note to be included in the Statement of Financial Position of Look Smart Ltd as at 31 March 2022.

(4 Marks)

Answer

The cost of this stock of clothing is determined by the cost of current purchases or production items and the various costs per unit are determined by the number of units at a particular price, if the cost of goods sold and goods on hand at the end of the month are calculated on a weighted average cost basis.

QUESTION 2:

INTANGIBLE ASSETS (TOTAL: 15 MARKS)

Briefly outline four possible reasons why it is necessary to have different accounting rules for intangible assets (NZ IAS 38) as compared to Property, Plant & Equipment (PPE) assets (NZ IAS 16).

(4 marks)

Intangible assets cannot be manually calculated for depreciation as well as life cycle, such as brand benefits and trademarks.

Intangible assets are not clearly measurable in terms of profit and revenue.

The depreciation aspect of intangible assets such as intellectual property is different from that of tangible assets, for example, equipment can form a balance, intangible assets cannot.

Gains from intangible assets such as stock class are not ordinary sales revenue, while sales of tangible assets are generally recognised as ordinary sales revenue. There are differences in the way in which they are accounted for.

On 1 July 2021, Food Mart Ltd acquired a franchise – Tasty Bakery Foods- for $56,000 for 7 years. “Tasty Bakery Foods” is a very popular franchise across New Zealand and there is a great demand for this franchise in the current market. As at 31 March 2022, the current market price for the franchise is $ 60,000.

Paul, the accountant of Food Mart Ltd, seeks your advice on how to account for the above franchise in their books.

Required:

Explain to Paul about the options available in measuring the above franchise – Tasty Bakery Foods – on 31 March 2022 in line with NZ IAS 38. In your answer, show all calculations to the franchise value for each of your suggested option and show how the franchise should be presented in the Statement of Financial Position as at 31 March 2022 under each option (Note: You don’t need to write journal entries).

(6 marks)

Answer (with workings)

The right to operate the Tasty Bakery Foods brand at 1 July 2021 is an intangible asset of Food Mart Ltd and was purchased for $56,000. At 31 March 2022, the intangible asset of Food Mart Ltd can be revalued. During this period the intangible asset is depreciated over 9 months at an accumulated cost of $6,000. The estimated cost is increased by $10,000 and re-depreciated at a price of $60,000. Depreciation of $10,000 per annum over 6 years of use.

While Paul is thankful to you for the options that you have explained in (i) above, he understands that he should choose one option. However, he is still unsure which is the best option to be used in measuring the above franchise on 31 March 2022.

Recommend to Paul the most appropriate option to use to measure the franchise on 31 March 2022. Give reasons and justify your reasons using principles in NZ Conceptual framework.

(5 marks)

Answer

The recommended way to calculate depreciation is to use the original depreciation method, which is to depreciate Tasty Bakery Foods at $56,000 over 7 years of use. This will give a better representation of the day-to-day operating profit rather than the financial position of the company from other profits. It would be clearer in the accounting statements and help users understand the company’s position.

QUESTION 3:

PROVISIONS, CONTINGENT LIABILITIES/ EVENTS AFTER THE REPORTING PERIOD (TOTAL: 15 MARKS)

On 1 February 2022, Keith filed a lawsuit against Hamilton Deliveries Ltd for compensation of $5 million as a result of failure to deliver goods on time and some items were faulty. At the end of the financial year on 31 March 2022, the outcome of the hearing is unknown. The lawyer is of the opinion that there is a 40% chance that Hamilton Deliveries will be found liable for the damages.

Required

Discuss how the court case should be recorded by Hamilton Deliveries Ltd on 31 March 2022. Your answer must include justifications using the relevant criteria in NZ IAS 37, the necessary journal entry (if any) or any note disclosure required to comply with NZ IAS 37 requirements (if any). (8 Marks)

Answer

On the present facts Hamilton Delivery Ltd was in breach of contract with Keith in respect of the non-delivery of the goods and the defects in some of the goods. As the company currently has a 40% chance of liability, Hamilton Delivery Ltd can privately mediate with Keith and Hamilton Delivery Ltd can reduce its compensation to Keith through private communication. If the private mediation is unsuccessful, Hamilton Delivery Ltd will have to pay $5 million to Keith. DR Non-operating expenses $5 million CR Bank $5 million

On 31 March 2022, a fire destroyed a part of the building and some inventory items in the stores of Hamilton Deliveries Ltd in Huntley. This information was received by the directors in Head Office after 3 days. The building was insured for the current year, however, the insurance cover for inventory items has not been renewed for the current year due to an oversight by the management. Therefore, the insurance company agrees to pay for the full building damage of $45,000 and it was paid on 1 May 2022. The inventory damage has been estimated as $7,500. The company is following perpetual inventory system.

Required

Classify the above event on 31 March 2022 as either an adjusting or a non-adjusting event after the end of the reporting period. Justify your classification using the criteria in NZ IAS 10. Prepare the necessary journal entries (if required) on 31 March 2022 or note disclosures to comply with the requirements of NZ IAS 10 (if any).

(7 marks)

Answer
The Deliveries Ltd shop lost part of its building and stock of merchandise due to a fire, which caused damage to the property. The insurance company paid $45,000 based on the management’s negligence in failing to insure the stock, the part of the stock that could not be covered was the management’s negligence and the management should pay for the loss, the part that could not be covered by the management was handled by the company.
Journal Entries on 31 March 2022 (if required)
Particulars	Dr ($)	CR ($)
1 May 2022
Insurance Payments	$45,000
Building		$45,000

Management costs	$7,500
inventory		$7,500

PART 2 – LONG ANSWER QUESTIONS

QUESTION 4:

REVENUE (TOTAL: 25 MARKS)

Excellent Motors Ltd is a retailer of various types of motor vehicles. In the following table, State, which of the following transactions meets the definition of “Revenue”, which of the followings meets the definition of “Gains” or none (Complete the second column) and Give reasons for your answer in the third column.

(6 marks)

	Revenue/ Gain/ None	Reason
Sale of a TOYOTA car	Revenue	The sale of cars by this motor company is an everyday commodity and is included in revenue
Goods and Services Tax (GST) received for sales	NONE	GST received on the sale of goods is taxed by the government income and cannot be recognised as business income.
Revaluation Gain of Building (recognised under NZ IAS 16)	Gain	The gain is not revenue from the day-to-day sales of the company should be recognised as gain

On 1 May 2021, Zara signed a contract to purchase a motor vehicle from Excellent Motors Ltd. The agreed contract price is $63,000. The company also offers a free service of the vehicle that will be performed one year after the delivery of the vehicle.

The selling price of the vehicle, excluding the free service, is $61,750. The one year service is usually sold at $3,250.

On 10 May 2021, Zara paid the full amount and on the same day, the motor vehicle is delivered to her. The free service was performed on the due date.

The accountant of Excellent Motors Ltd, Ash, seeks your help in deciding how and when to recognise the revenue from the above sale. In particular, Ash wants to know how to deal with Step 2, 4 and 5 of the 5-step model in NZ IFRS 15.

Required:

As required by Ash, briefly explain how to deal with the 3 steps (Steps 2, 4 and 5) of the 5-step model in NZ IFRS 15 in recognising the revenue from the above sale. Your answer must include an explanation of Step 2 – what are the performance obligations, Step 4 – how to allocate transaction price among performance obligations with appropriate calculations and Step 5 –how to recognise revenue (with relevant criteria and dates).

(14 marks)

Step 2Zaraneeds to determine all performance obligations under the contract with Excellent Motors Ltd1.Excellent Motors Ltd was required to deliver the car to Zara within the time frame specified in the contract.2. Excellent Motors Ltd offers free service items for one year after delivery.

Step 4Excellent Motors Ltd was required to allocate the transaction price of $63,000 to the individual performance obligations under the contract based on its relative standalone selling price.Performance ObligationsStand-alone prices%Transaction Pricemotor vehicle$61,75095%$59,850free service of the vehicle$3,2505%$3,150 $65,000100%$63,000

Step 5The fifth step is to recognise revenue when Excellent Motors Ltd meets its performance obligations. So.Revenue of $61,750 needs to be recognised when Excellent Motors Ltd delivers the car to Zara.When Excellent Motors Ltd provides the vehicle free of charge to Zara, revenue of $3,250 is recognised, giving a total revenue of $65,000.

Write relevant journal entries to recognise revenue for the above sale in terms of the 5-step model for the year ended 30 June 2022.

(5 marks)

Date	Particulars	Dr ($)	CR ($)
1 May 2021	DR Accounts Receivable	$63,000
	CR Revenue from contracts with customers		$63,000

10 May 2021	Bank account	$63,000
	Accounts Receivable		$63,000

QUESTION 5:

PROPERTY, PLANT & EQUIPMENT & IMPAIRMENT OF ASSETS (TOTAL: 30 MARKS)

Alder Ltd had several Property, Plant & Equipment items and they followed the cost model to measure their assets. Its financial year end is 31 March. On 31 March 2021, the company’s PPE items and their balances are as follows:

	Land ($)	Plant ($)	Motor Vehicles ($)
Cost as at 01 April 2020	1,200,000	300,750	550,000
Less: Accumulated Depreciation		175,500	267,500
Less: Accumulated Impairments
Balance as at 31 March 2021	1,200,000	125,250	282,500

Alder Ltd uses the straight line method to depreciate Plant and Motor Vehicles.

Alder Ltd has been following the cost model to measure PPE however on 1 April 2021, the company decides to revalue the Land and Motor Vehicles. An independent value assessed the assets at fair values as follows:

Land 1,500,000

Motor Vehicles 250,000

Required:

Show the journal entries required on 1 April 2021 to reflect the revaluation for Land and Motor Vehicles. Show all workings.

(8 Marks)

Particulars	Dr ($)	Cr ($)
DR Land ($)	300,000
CR Revaluation reserve		300,000

Dr Accumulated Depreciation	32,500
CR Motor Vehicles		32,500

Workings

Land 1,200,000- 1,500,000=-300,000

Motor Vehicles282,500-250,000=32,500

On 1 April 2021, the expected useful lives and residual values for Motor Vehicles (after revaluation) and Plant were reassessed as follows.

	New Estimated Useful Life from 1 April 2021	New Residual Value
Plant	6 years	$5,250
Motor Vehicle	8 years	$11,000

Required:

Prepare depreciation journal entries for plant & Motor Vehicles for the year ended 31 March 2022. Show all workings.

(7 Marks)

Particulars	Dr ($)	Cr ($)
DR Accumulated Depreciation	20,000
CR Plant		20,000

DR Accumulated Depreciation	33,937.5
CR Motor Vehicles		33,937.5

Workings

Plant125,250-5,250=120,000120,000/6=20,000

Motor Vehicles282,500-11,000=271,500271,500/8=33,937.5

During mid-March 2022, there was a hurricane and it swept through the city and damaged the land. After assessing the amount of damage, the land’s new selling price has fallen to $1,225,000 on 31 March 2022 and the Value in Use is $1,100,000. The accountant of Alder’s Ltd, Aladin, seeks your advice on the accounting treatment on 31 March 2022 with respect to the land.

Required:

Briefly explain the accounting treatment with reference to the relevant accounting standards. Show calculations and prepare the journal entry on 31 March 2022.

(7 Marks)

Land is depreciated over its useful life and fair value is estimated. The land is not a liquid commodity and to better reflect the value of the asset, it is recommended that specific use values are used to calculate and account for it.

Journal entry as at 31 March 2022

Particulars	Dr ($)	Cr ($)
Dr Accumulated Impairments	100,000
CR Land		100,000

Complete the following table as a part of the PPE note to be included in the notes to the financial statements of Alder Ltd on 31 March 2022.

(8 Marks)

	Land ($)	Plant ($)	Motor Vehicles ($)
Balance as at 01 April 2021	1,500,000	125,250	250,000
Less: Accumulated Depreciation		20,000	33,937.5
Less: Accumulated Impairments	100,000
Balance as at 31 March 2022	1,400,000	105,250	216,062.5