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University of New South Wales School of Accounting ACCT 3563 Issues in Financial Reporting and Analysis




Question;1;University of;New South Wales;School of;Accounting;ACCT 3563 Issues in Financial;Reporting and Analysis ACCT 3573 Issues in Financial Reporting and Analysis;(Honours);Final;Examination With Answers;Session 1, 2011;Time;allowed: 3;hours writing time;10 minutes;reading time;Total;number of questions: 21;All;studentsmust;answer the 15 multiple choice questions in part A and Questions16 to 24;in Part B, ACCT 3563 students answer question 25, ACCT 3573 (honours) students;answer question 26.;The;20 multiple choice questions must be answered on the Generalised Answer Sheet;provided. There is no negative marking for questions 1-20. For each question;choose the best answer from the alternatives given.;Questions;1 to 20 are not of equal marks but are worth a total of 30. Questions 21 to 26;are worth 70 marks total, and they are NOT of equal marks.;Answers to;questions 21-26 must be written in ink. Pencils should be used for answering;questions 1-20, and may be used for drawing, sketching or graphical work.;Narrations are;not required for journal entries.;This paper may;be retained by the candidate..;2;Part A;Multiple Choice Questions (Questions are not of equal marks);Question;1 (2 marks). Covers;topic no longer taught in Course;The;following data applies to questions 2 and 3 ? Cover topic no longer taught in;Course;The;following data applies to questions 4 and 5 Cover topic before in-class test;cut-off;Question;6 (2 marks);Which;of the following shall be recognised as provisions in accordance with AASB 137 Provisions;Contingent liabilities, and Contingent Assets?;I.;Raschella Limited was;awaiting the final details of a court case for damages awarded in its favour.;The amount and possible receipt of damages is unknown and will not be decided;until the court sits again in several months time.;II.;A company announced that;it will make a donation to a natural disaster. It has a record of honouring its;donation announcement.;III.;Purcell Limited is a;manufacturer of swimming pools and provides its customers with warranties at;the time of sale. The warranty applies for three years from the date of sale.;Past experience shows that there will be some claims under the warranties.;A.;I and II;B.;I and III;C.;II and III (answer);D.;III only;E.;None of the above;Question;7 (2 marks);Which;of the following is TRUE in accordance with AASB 137 Provisions, Contingent;Liabilities, and Contingent Assets?;I.;An entity shall not recognise a;contingent liability in the balance sheet;II.;Provisions shall be;reviewed at each reporting date and adjusted to reflect the current best;estimate.;III.;Provision can be provided for future;operating losses;IV. A contingent liability does not;include a genuine liability which does not satisfy the;recognition;tests of probable occurrence and reliable measurement.;V.;Provisions that were previously created;cannot be reversed to increase profit.;A.;II ONLY;B.;II, III, IV;3;C.;I, IV, V;D.;II, IV, V;E.;I and II;The following;data applies to questions 8 and 9 Topic not covered in 2014 Course;The following;data applies to questions 10 and 11;Rebecca B works for;Friday Ltd. Her annual salary is $104,000. Rebecca B is entitled to 4 weeks of;accumulating and non-vesting sick leave per year. As at 30 June 2009, Rebecca B;has fully used up all her sick leave and no sick leave is carried forward to;the next year. As at 30 June 2010, Rebecca B has taken no sick leave and she is;expected to take 7 weeks sick leave next year.;Question 10 (2;marks);In accordance with AASB;119 Employee Benefits, Friday Ltd must recognise a sick leave expense and;provision for sick leave expense during the financial year 2010 equal to;Sick;leave expense;Provision;for sick leave;A.;$ 0;$;14,000;B.;$ 0;$;6,000;C.;$;6,000;$;6,000;D.;$;6,000;$;8,000;E.;$;8,000;$;8,000;Question 11 (2;marks);If the sick leave is;accumulating and vesting and Rebecca B has one week sick leave carried forward;from 2009 to 2010, what is the sick leave expense and provision for sick leave;that Friday Ltd must recognise during the financial year 2010?;Sick;leave expense;Provision;for sick leave;A.;$4,000;$;4,000;B.;$ 0;$;6,000;C.;$;6,000;$;6,000;D.;$;6,000;$;8,000;E.;$;8,000;$;8,000;4;Question;12 (1 mark);According to AASB 132 Financial;Instruments: Presentation, which of the following items would be regarded;as a financial liability?;(a);ordinary shares held in another entity;(b);a contract that is a;non-derivative for which the entity is obliged to deliver a variable number of;its own equity instruments;(c);a contractual right to;exchange under potentially favourable conditions, an option to purchase shares;below the market price;(d);the right of a depositor;to obtain cash from a financial institution with which it has deposited cash;(e);b and c.;Question;13 (1 mark);AASB 139 Financial Instruments;Recognition and Measurement, requires that ?Held-to-maturity? investments;be initially measured at;(a);fair value;(b);discounted future cash outflows;(c);discounted future net cash flows;(d);fair value plus transaction costs;(e);none of the above.;Question;14 (1 mark);Which;of the following statements in relation to functional currency is correct?;(a);the economic;relationship between the parent and subsidiary has no effect on the extent to;which a change in exchange rate affects the parent.;(b);where a foreign;subsidiary is merely a conduit for transforming foreign currency cash flows;into dollar cash flows monetary gains and losses must be recorded immediately;in profit or loss as they affect the parent directly.;(c);where a foreign;subsidiary is acting as a free standing unit foreign currency gains and losses;must be recorded immediately in profit or loss.;(d);where a foreign subsidiary is;interdependent on the parent foreign currency gains and;losses must be;recorded in equity;(c) all of the above.;Question;15 (1 mark);When translating from functional;currency into the presentation currency the translation difference is;recognised;(a);in profit or loss;5;(b);as a separate component of equity;(c);in retained earnings;(d);as an asset or liability, depending on;whether it is a debit or credit balance;(e);a and c.;Question 16 (2;marks);On;1 March 2011, Ethan Hunt buys a diversified portfolio of shares for $2,550,000.;At the time the All Ordinaries Share Price Index was 3400. Ethan is concerned;that the share market will fall during the next few months so he enters the;futures market and takes out sufficient June SPI futures ?sell? contracts at a;price of 3400 to cover his share portfolio. The value of the contracts is shown;in the table. Ethan Hunt pays a deposit of $100,000 to the Sydney Futures;Exchange (SFE) on 1 March 2011.;Relevant June;SPI futures prices;Date;June;SPI Futures;Value;of Futures;Price;contracts;1;March 2011;3400;$2,550,000;00;31;March;2011;3200;$2,400,000;+150,000;30;April;2011;3500;$2,625,000;-225,000;31;May;2011;3400;$2,550,000;+75,000;30;June;2011;3360;$2,520,000;+30,000;Ethan Hunt;closes out his futures contracts on 30 June, 2011.;Assume;that margin calls are paid when futures contracts move into overall;loss and are refunded when that loss is reversed.;Accounting for;the SPI futures contract will show: (2 marks);31 March;30 April;31 May;30 June;a);Margin;call;paid;Gain $225,000;Loss $75,000;Loss $30,000;$150,000;b);Loss $150,000;Gain $225,000;Loss $75,000;Loss $30,000;Margin call;paid;Margin;call refunded;Margin call;paid;Margin call;paid;$150,000;$150,000;$75,000;$30,000;c);Gain $150,000;Loss $225,000;Gain $75,000;Gain $30,000;Margin;call;paid;$225,000;d);Gain $150,000;Loss $225,000;Gain $75,000;Gain $30,000;Margin;call;paid;Margin;call;$75,000;refunded $75,000;6;e);Gain;$150,000;Loss;$225,000;Gain;$75,000;Loss;$30,000;Margin call;paid;Margin;call;Margin call;paid;$75,000;refunded;$75,000;$30,000;Question 17 (2;marks);Fred;Optional purchased 100,000 shares in ABC Ltd on 1 July 2008 for $5.00 per;share. Fred mustkeep these shares for three years. Concerned that the;share market is likely to fall sharplyin that time, Fred Optional also;purchased 100,000 put options in ABC Ltd at 50cents per option on 1 July 2008.;The options have an exercise price of $3.00 per share and a life of 3 years ?;they expire on 30 June 2011. Prices of ABC Ltd shares and put options each 30;June over the period to 30 June 2011 are shown below;Date;Share price;Option price;30;June 2009;$4.00;20;cents;30;June 2010;$3.00;30;cents;30;June 2011;$2.00;$1.00;Fred Optional;revalues all his financial instruments to their fair value each 30 June balance;date.;Fred exercises;his put options on 30 June 2011.;A. The;total gain or loss on the shares and options from 1 July 2008 to 30 June 2011;is $200,000 loss;B. The;total gain or loss on the shares and options from 1 July 2008 to 30 June 2011;is $250,000 loss;C. If;Fred had not purchased the options, and had sold the shares on 30 June 2011;his total loss would have been $300,000;D.;A and C;E.;B and C;7;Part B: Written;Questions. The questions are NOT of equal marks;Question;18 (4 marks);Rebecca B?s annual;salary is $110,000. She is entitled to 13 weeks long service leave provided she;worked for the company for 10 years. At 30 June 2010, Rebecca B has worked with;Friday Ltd for 6 years and there is an 80% probability that she will stay with;Friday Ltd for 10 years.;Expected inflation for;the foreseeable future is 3% per year and wages are expected to keep pace with;inflation. The corporate bond rate with 4 years to maturity is 6% and with 6;years to maturity is 8%. The government bond rate with 4 years to maturity is;5% and with 6 years to maturity is 7%. The market Friday Ltd operates in does;NOT have a deep market for corporate bonds.;At;30 June 2009, the balance of provision for long service leave for Friday Ltd;was $6,000.;In accordance with AASB;119 Employee Benefits, what is the long service leave expense that;Friday Ltd must recognise for the year ended 30 June 2010? Show workings.;*(1+3%)4*(6/10)*(13/52)*(1+5%)-4*0.8 - 6,000 = 6222.62;?;?;?;?;?;?;?;?;marks;Future;Value (FV) and Present Value (PV) Factors;Years;FV of $1;FV;of $1;FV;of $1;FV;of $1;FV;of $1;4%;5%;6%;7%;8%;4;1.1699;1.2155;1.2625;1.3108;1.3605;6;1.2653;1.3401;1.4184;1.5007;1.5869;Years;PV;of $1;PV of $1;PV of $1;PV;of $1;PV;of $1;4%;5%;6%;7%;8%;4;.8548;.8227;0.7921;.7629;.7350;6;.7903;.7462;0.7050;.6663;.6302;Question;19 (10 marks);On 1 July 2008;the Mizone Corporation grants 50 share options to each of its 100 employees;conditional on the employee remaining in the employ of Mizone Corporation for;the next two years. The fair value of the options on grant date is $15.;On the basis of a weighted average probability, the Mizone Corporation;estimates that 15% of its employees will leave during the vesting period. The;following table summarises the actual employee departures and revised estimates;of employee departures across the vesting period.;Actual;Employee Departure;Revised;Estimate of Departure;30;June 2009;6;A;further 8;30;June 2010;9;N/A;By the end of 31st;December 2008 (i.e., six months after the issuance of the option), the;Mizone corporation?s share price has dropped, and it decides to reprice the;share options. It estimates that the fair value of the original share options;is $7 and the fair value of the repriced share options is $10.;8;REQUIRED;In accordance with AASB 2 Share-based;Payment, calculate the expense that would be recognised for the year ended;30 June 2009 and 30 June 2010. Show workings.;Question;20 [6 Marks];On;5 July 2009 Sydney Ltd provides some consulting services to New York Inc. (US);for an agreed fee of US$2 million. The amount is paid into the US bank account;of Sydney Ltd on 5 July 2009. Sydney Ltd decides to leave the amount in the US;bank account, which pays interest each 30 June at the rate of 10 per cent per;annum. The relevant exchange rates are;5;July 2009 A$1.00 = US$0.98;30;June 2010 A$1.00 = US$0.95;Required;Provide;the journal entries that would need to be made in the books of Sydney Ltd to;account for the above transactions for the year ending 30 June 2010.;9;Question;21 [5 Marks];Company P issues 500 000;$2 redeemable convertible notes. The notes pay interest at 6%. The notes are;redeemable after five years at the option of the issuer for cash or for a;variable number of shares (calculated according to a formula). If after five;years the notes have not been redeemed or converted, they continue to carry;interest at a new market rate to be determined at the expiration of the five;years.;Required;Determine whether this;financial instrument should be classified as a financial liability or equity;instrument of company P. Give reasons for your answer.;Question 22 (15;marks);Darwin;Ltd, an Australian company, acquired all the issued shares of LA Corp., a US;company, on 1 January 2010. At that date, the net assets of LA Corp. are shown;below;US$;Cash;20,000;Inventory;40,000;Accounts Receivable;20,000;Property;Plant and Equipment;310,000;Less;Accumulated depreciation;60,000;250,000;Total Assets;330,000;10;Accounts;Payable;30,000;Net Assets;300,000;The trial;balance of LA Ltd at 31 December 2010 was;US$;US$;___Dr;___Cr;Sales;180,000;Cost of sales;60,000;Depreciation ?;PP&E;30,000;Other expenses;60,000;Share capital;200,000;Retained;earnings;100,000;Accounts;payable;84,000;Property;plant and equipment;310,000;Accumulated;depreciation - PP&E;90,000;Accounts;receivable;80,000;Inventory;90,000;Cash;24,000;654,000;654,000;Additional;information;1.;Exchange rates;were (A$1 = US$);1;January 2010;US$;0.82;31 December;2010;US$ 0.90;Average for;2010;US$ 0.86;2.;No additional property, plant and equipment were acquired in the 2010;period.;3.;All sales and;expenses were incurred evenly throughout the period.;4.;The functional;currency for LA Ltd is the US dollar.;5.;Round all;conversions to the nearest dollar.;Required;a);Prepare the Income;Statement and Balance Sheet of LA Ltd at 31 December 2010 in the presentation;currency of Australian dollars [12 Marks];b);Verify the translation adjustment [3;Marks];11;Question 23 (15;marks);Recent;corporate failures illustrate shortcomings in financial reporting and in;ethical behaviour of key corporate executives;(a) Identify;any three ethical shortcomings of key corporate executives in the failure of;Enron and/or in the Global Financial Crisis. (6 marks);(b) How;did ethical shortcomings of key corporate executives in the failure of Enron;and/or in the Global Financial Crisis result in problems with fair value;accounting (also called mark-to-market accounting)? Ignore other accounting;issues. (6 marks);(c) Have;accounting standards been changed to remedy the problems in fair value;accounting that you identified in part (b)? (3 marks);14;Question 24 (15;marks) To be answered by ACCT 3563 students only;On 1 March 2011 Kangaroo;Ltd, an Australian entity, places an order for Euro 10 million of inventory;with Napoleon Corporation, a French supplier. The goods will be purchased FOB;Marseilles. The goods are shipped on 1 June 2011 and paid for on 1 August 2011.;A decision is made to take out a foreign exchange forward contract for Euro 10;million on 1 March 2011 with Aussie Bank in which Aussie Bank agrees to supply;Kangaroo Ltd with Euro 10 million on 1 August 2010.;Exchange;rate ? 1;March 2011;A$1.00 = ?0.55;Forward;rate for the hedge contract;A$1.00 = ?0.51;Exchange;rate ? 1;June 2011;A$1.00 = ?0.52;Exchange;rate ? 30 June 2011;A$1.00 = ?0.50;Exchange;rate ? 1;August 2011;A$1.00 = ?0.53;Fair Values of;the forward rate agreement are as follows (brackets indicate credit balances);1;March 2011;$Nil;1;June 2011;($500,000);30;June 2011;$200,000;1;August 2011;($739,918);Required;Assuming that the;hedging arrangement satisfies the requirements for hedge accounting as;stipulated in AASB 139, provide the necessary journal entries for Kangaroo Ltd;from 1 March 2011 to 1 August 2011.;15


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