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4 Structured Question; Calculator & textbook. 
2 hours to complete.
Discount Factor – refer to the end of the textbook
Annuity Factor – refer to the end of the textbook
Present Value of Future Cashflows to obtain Value in Use
Topics;
Chapter 13 Share Capital
Chapter 6 and Chapter 8 — PPE, Intangibles, Impairment and Revaluation
Chapter 18 Taxes

REVISION QUESTIONS – Solution

Question 1.a)

Sport’s Field Ltd
General Journal

Date Account name (narration) Debit

$
Credit $

2019
Jan 10 No entry

Mar 1 Cash Trust 21,000
Application 21,000
(Being application monies received (35,000 X $0.60))

Mar 2

Application

21,000

Share Capital 21,000
(Being allotment of shares (35,000 X $0.60))

Mar 2

Cash at bank

21,000

Cash Trust 21,000
(Being the transfer of funds from trust a/c to coy bank a/c)

Mar 2

Allotment

10,500

Share Capital 10,500
(Being allotment monies due (35,000 X $0.30))

Mar 31

Cash at Bank

10,500

Allotment 10,500
(Being receipt of allotment monies)

Nov 1

Call

3,500

Share Capital 3,500
(Being call monies due (35,000 X $0.10))

Nov 30

Cash at Bank

3,500

Call 3,500
(Being receipt of call monies (35,000 X $0.10))

(b) Sport’s Field Ltd Share capital: $35,000

Question 2

GENERAL JOURNAL

Details Dr Cr

Impairment loss Account 100,000

Accumulated impairment loss Account – goodwill 100,000

Recognition of impairment loss for Blue Ltd CGU

Impairment loss Account 150,000

Accumulated impairment loss Account – goodwill 50,000

Goodwill Account 200,000

Write-off of goodwill for Box CGU

Impairment loss Account – CGU Box PPE 20,000

Property, plant and equipment Account 20,000

(to recognise the impairment of PPE)

IF the CGU Box provides the following – Property, plant and equipment includes

these assets

Carrying
amount

Buildings 360,000

Equipment 225,000

Land 180,000

Fitting 135,000

900,000

Then the following allocation process has to be performed before the journal entries.

Allocate any balance of impairment to the other assets

Carrying
amount

Proportion Allocation of
impairment
loss

Net carrying
amount

Buildings 360,000 360/900 8,000 352,000

Equipment 225,000 225/900 5,000 220,000

Land 180,000 180/900 4,000 176,000

Fitting 135,000 135/900 3,000 132,000

900,000 20,000 880,000

GENERAL JOURNAL

Date Details Dr $ Cr $

Impairment loss Account 20,000

Accumulated impairment losses Account – Buildings 8,000

Accumulated impairment losses Account – Equipment 5,000

Accumulated impairment losses Account – Land 4,000

Accumulated impairment losses Account – Fittings 3,000

Being impairment loss on goodwill allocated to other
assets

Question 3
Machinery

Carrying amount + Future amount deductible – Future taxable = Tax
base
for tax purposes economic benefits

$110,000 + $90,000 – $110,000 = $90,000

Interest receivable

Carrying amount + Future amount deductible – Future taxable = Tax
base
for tax purposes economic benefits

$15,000 + $0 – $15,000 = $0

Provision for warranty

Carrying amount – Future amount deductible + -Future taxable = Tax
base
for tax purposes economic benefits

$100,000 – $100,000 + $0 = $0

GENERAL JOURNAL

Date Details Dr Cr

Income tax expense Account 6,000

Deferred tax liability Account 6,000

Being $20,000 x 30% for machinery

Income tax expense Account 4,500

Deferred tax liability Account 4,500

Being $15,000 x 30% for interest receivable

Deferred tax asset Account 30,000

Income tax expense Account 30,000

Being $100,000 x 30% for warranty expense

Question 4

Carrying Amount Fair Value Value in Use
1,000,000 650,000 180,000 x 4.1002
(200,000) (20,000)
$800,000 $630,000 $738,036

GENERAL JOURNAL

Date Details Dr $ Cr $

Impairment loss Account – Machinery 61,964

Accumulated impairment losses Account-
Machinery

61,964

Being impairment loss on Machinery

CRAIG DEEGAN

ACCOUNNG
NANCIAL

9TH EDITION

dee67382_fm_i-xxvi.indd i 10/24/19 04:13 PM

CRAIG DEEGAN

ACCOUNNG
NANCIAL

dee67382_fm_i-xxvi.indd ii 10/24/19 04:13 PM

To my beautiful daughter Cassie for being the
best daughter a dad could ever have

dee67382_fm_i-xxvi.indd iii 10/24/19 04:13 PMdee67382_fm_i-xxvi.indd iii 10/24/19 04:13 PM

CRAIG DEEGAN

ACCOUNNG
NANCIAL

9TH EDITION

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Copyright © 2020 McGraw-Hill Education (Australia) Pty Ltd

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National Library of Australia
Author: Deegan, Craig Michael
Title: Financial accounting
Edition: 9th edition.
ISBN: 9781743767382

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dee67382_fm_i-xxvi.indd v 10/24/19 04:13 PM

v

Craig Deegan is Professor of Accounting in the
School of Accounting at RMIT University in Melbourne.
He has been teaching at undergraduate and
postgraduate levels for nearly thirty years, and
before embarking on his distinguished academic
career, practised as a chartered accountant. Craig
is a Fellow of Chartered Accountants Australia and
New Zealand, and was, for approximately a decade,
a member of the judging panel of the Australasian
Sustainability Reporting Awards. He is currently on
the editorial boards of several academic accounting
journals and is a former Chairperson of the Triple
Bottom Line Issues Group of Chartered Accountants
Australia and New Zealand. For many years he
assisted in the development of the CPA Program,
Australia, with a notable contribution to the Ethics
and Governance Module.

An internationally renowned expert in the field
of financial accounting, Craig’s work is regularly
published in peer-reviewed accounting journals
including: Accounting, Organizations and Society;
Accounting and Business Research; Accounting,
Auditing and Accountability Journal; Accounting
and Finance; British Accounting Review; Critical
Perspectives on Accounting; Journal of Business
Ethics; Australian Accounting Review; Australian
Journal of Management; and The International
Journal of Accounting. According to Google Scholar,
his work has attracted over 22 000 citations, making
him one of the most highly cited researchers within
the accounting and/or finance literature in the world.
On 28 September 2018, and reflective of the extent
to which his research has been relied upon by
researchers and practitioners, the leading national

newspaper The Australian (in its annual feature
on Australian research leaders), identified Craig as
Australia’s Research Field Leader in the Field of
Accountability and Taxation

Craig’s expertise is frequently sought by
corporations, government and industry bodies on
issues pertaining to financial accounting, corporate
social and environmental accountability, and
ethics. The depth of his knowledge with respect
to social and environmental accountability is
reflected in the impressive Chapter 32, which has
been comprehensively updated for this edition.
A key tenet of his work, and reflected in his own
high standard of professional ethics, is that business
organisations have responsibilities to a broader
group of stakeholders, beyond their shareholders,
for their social and environmental performance, as
well as their financial performance.

Craig is the recipient of various teaching
and research awards, including teaching prizes
sponsored by KPMG and Chartered Accountants
Australia and New Zealand. He was the inaugural
recipient of the Peter Brownell Manuscript Award, an
annual research award presented by the Accounting
and Finance Association of Australia and New
Zealand. He was also awarded the University of
Southern Queensland Individual Award for Research
Excellence.

Craig is now working on the fifth edition of
his leading financial accounting theory textbook,
Financial Accounting Theory. His introductory
accounting textbook, An Introduction to Accounting:
Accountability in Organisations and Society, was
published by Cengage Learning in late 2019.

Craig Deegan
BCom (UNSW), MCom (Hons) (UNSW), PhD (UQ), FCA

ABOUT THE AUTHOR

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vi

CONTENTS IN BRIEF

PART 1 THE AUSTRALIAN ACCOUNTING ENVIRONMENT 1
Chapter 1 An overview of the Australian external reporting environment . . . . . . . . . . . . . . . . . . . . . . . . . 2
Chapter 2 The Conceptual Framework for Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

PART 2 THEORIES OF ACCOUNTING 99
Chapter 3 Theories of financial accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100

PART 3 ACCOUNTING FOR ASSETS 159
Chapter 4 An overview of accounting for assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160
Chapter 5 Depreciation of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201
Chapter 6 Revaluations and impairment testing of non-current assets . . . . . . . . . . . . . . . . . . . . . . . . 223
Chapter 7 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257
Chapter 8 Accounting for intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283
Chapter 9 Accounting for heritage assets and biological assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 327

PART 4 ACCOUNTING FOR LIABILITIES AND OWNERS’ EQUITY 373
Chapter 10 An overview of accounting for liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 374
Chapter 11 Accounting for leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 409
Chapter 12 Accounting for employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 463
Chapter 13 Share capital and reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 495
Chapter 14 Accounting for financial instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 527
Chapter 15 Revenue recognition issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 599
Chapter 16 The statement of profit or loss and other comprehensive income,

and the statement of changes in equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 641

Chapter 17 Accounting for share-based payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 687
Chapter 18 Accounting for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 723

PART 5 ACCOUNTING FOR THE DISCLOSURE OF CASH FLOWS 769
Chapter 19 The statement of cash flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 770

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vii

PART 6 INDUSTRY-SPECIFIC ACCOUNTING ISSUES 813
Chapter 20 Accounting for the extractive industries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 814

PART 7 OTHER DISCLOSURE ISSUES 853
Chapter 21 Events occurring after the end of the reporting period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 854
Chapter 22 Segment reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 869
Chapter 23 Related party disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 899
Chapter 24 Earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 917

PART 8 ACCOUNTING FOR EQUITY INTERESTS IN OTHER ENTITIES 947
Chapter 25 Accounting for group structures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 948
Chapter 26 Further consolidation issues I: accounting for intragroup transactions . . . . . . . . . . . . . . 1005
Chapter 27 Further consolidation issues II: accounting for non-controlling interests . . . . . . . . . . . . 1055
Chapter 28 Further consolidation issues III: accounting for indirect ownership interests . . . . . . . . . 1103
Chapter 29 Accounting for investments in associates and joint ventures . . . . . . . . . . . . . . . . . . . . . . 1155

PART 9 FOREIGN CURRENCY 1205
Chapter 30 Accounting for foreign currency transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1206
Chapter 31 Translating the financial statements of foreign operations . . . . . . . . . . . . . . . . . . . . . . . . . 1227

PART 10 CORPORATE SOCIAL-RESPONSIBILITY REPORTING 1249
Chapter 32 Accounting for corporate social responsibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1250

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viii

CONTENTS

About the author � � � � � � � � � � � � � � � � � � � � � � � � � � � � � v
Contents in brief � � � � � � � � � � � � � � � � � � � � � � � � � � � � �vi
Preface � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �xix
Acknowledgments � � � � � � � � � � � � � � � � � � � � � � � � � � xx

AACSB statement � � � � � � � � � � � � � � � � � � � � � � � � � � � �xxi
How to use this book � � � � � � � � � � � � � � � � � � � � � � � xxii
Digital resources � � � � � � � � � � � � � � � � � � � � � � � � � � �xxiv

CHAPTER 2 The Conceptual Framework for Financial Reporting . . . . . . . . . 59

2.1 An introduction to the IASB Conceptual Framework 60
2.2 Benefits of a conceptual framework 61
2.3 An overview of the recently revised Conceptual Framework 61
2.4 An overview of the building blocks of the

Conceptual Framework 63
2.5 Definition of general purpose financial reporting and a

reporting entity 64
2.6 Users of general purpose financial statements 65
2.7 Objective of general purpose financial reporting 67
2.8 Qualitative characteristics of useful financial information 68
2.9 Definition and recognition of the elements

of financial statements 74
2.10 Measurement principles 87
2.11 A critical review of conceptual frameworks 90
2.12 The conceptual framework as a normative theory of accounting 93

Learning objectives (LO) 59
Opening questions 60
Summary 93
Key terms 94
Answers to Opening
questions 94
Review questions 95
Challenging questions 95
References 97

PART 1
THE AUSTRALIAN ACCOUNTING ENVIRONMENT . . . . . . . . . . . . . . . . . . . 1

1.1 Accounting, accountability and the role of financial accounting 3
1.2 Users’ demand for general purpose financial statements 6
1.3 Australian Securities and Investments Commission 7
1.4 Australian Accounting standards Board 18
1.5 Financial Reporting Council 31
1.6 Australian Securities Exchange 32
1.7 International Accounting Standards Board 34
1.8 Accounting standards change across time 38
1.9 Differential reporting 38
1.10 The use and role of audit reports 41
1.11 What benefits can we expect from all of this international

standardisation? 42
1.12 International cultural differences and the harmonisation of

accounting standards 44
1.13 All of this regulation—is it really necessary? 45
1.14 The reporting of alternative measures of ‘profits’ 48

Learning objectives (LO) 2
Opening questions 3
Summary 53
Key terms 53
Answers to Opening
questions 53
Review questions 54
Challenging questions 55
References 57

CHAPTER 1 An overview of the Australian external reporting environment . . . . . . 2

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ix

PART 2
THEORIES OF ACCOUNTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99

3.1 Introduction to theories applicable to financial accounting 101
3.2 Positive accounting theory 104
3.3 Efficiency and opportunistic perspectives of PAT 105
3.4 Owner–manager contracting 106
3.5 Debt contracting 110
3.6 Political costs 114
3.7 Accounting policy choice and ‘creative accounting’ 120
3.8 Some criticisms of Positive Accounting Theory 122
3.9 Normative accounting theories 124
3.10 Systems-oriented theories to explain accounting practice 128
3.11 Stakeholder Theory 129
3.12 Legitimacy Theory 133
3.13 Institutional Theory 137
3.14 Theories that seek to explain why regulation is introduced 144

Learning objectives (LO) 100
Opening questions 101
Summary 148
Key terms 149
Answers to Opening
questions 149
Review questions 150
Challenging questions 151
Further reading 155
References 155

CHAPTER 3 Theories of financial accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100

PART 3
ACCOUNTING FOR ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159

4.1 Introduction to accounting for assets 161
4.2 Recognition criteria 162
4.3 Measurement of assets 165
4.4 Further consideration of ‘fair value’ 171
4.5 Definition of current assets 178
4.6 How to present a statement of financial position 179
4.7 Accounting for property, plant and equipment—an introduction 182
4.8 Property, plant and equipment acquired with non-cash

consideration 188
4.9 Deferred payments made to acquire an asset 189
4.10 Accounting for borrowing costs incurred when constructing

an item of property, plant and equipment 190
4.11 Assets acquired at no cost 193

Learning objectives (LO) 160
Opening questions 160
Summary 195
Key terms 195
Answers to Opening
questions 195
Review questions 196
Challenging questions 197
References 200

CHAPTER 4 An overview of accounting for assets . . . . . . . . . . . . . . . . . . . . . . . 160

CHAPTER 5 Depreciation of property, plant and equipment . . . . . . . . . . . . . . . 201

5.1 Introduction to accounting for the depreciation of property,
plant and equipment 202

5.2 Key factors to consider when determining depreciation 204
5.3 Applying different methods of depreciation 205
5.4 Depreciation of separate components 208
5.5 When to start depreciating an asset 209
5.6 Revision of depreciation rate and depreciation method 210
5.7 Land and buildings 210
5.8 Modifying existing non-current assets 212
5.9 Disposition of a depreciable asset 212
5.10 Depreciation as a process of allocating the cost of an

asset over its useful life: some related concerns 214
5.11 Disclosure requirements 215

Learning objectives (LO) 201
Opening questions 202
Summary 216
Key terms 216
Answers to Opening
Questions 216
Review questions 217
Challenging questions 218
References 221

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CONTENTS

x

CHAPTER 6 Revaluations and impairment testing of non-current assets. . . . . 223

6.1 Introduction to revaluations and impairment testing of
non-current assets 224

6.2 Measuring property, plant and equipment at cost or at fair
value—there’s a choice 224

6.3 The use of fair values 226
6.4 Revaluation increments 226
6.5 Treatment of balances of accumulated depreciation

upon revaluation 228
6.6 Revaluation decrements 231
6.7 Reversal of revaluation decrements and increments 232
6.8 Accounting for the gain or loss on the disposal or

derecognition of a revalued non-current asset 234
6.9 Recognition of impairment losses 239
6.10 Further consideration of present values 244
6.11 Investment properties 246
6.12 Economic consequences of asset revaluations

and impairments 247
6.13 Disclosure requirements 250

Learning objectives (LO) 223
Opening questions 224
Summary 250
Key terms 250
Answers to Opening
questions 251
Review questions 251
Challenging questions 253
References 256

CHAPTER 7 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257

7.1 Introduction to inventory 258
7.2 The general basis of inventory measurement 259
7.3 Inventory cost-flow assumptions 267
7.4 Reversal of previous inventory write-downs 275
7.5 Disclosure requirements 275

Learning objectives (LO) 257
Opening questions 257
Summary 276
Key terms 277
Answers to Opening
questions 277
Review questions 277
Challenging questions 279
References 282

CHAPTER 8 Accounting for intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283

8.1 Introduction to accounting for intangible assets 284
8.2 Which intangible assets can be recognised and included in the

statement of financial position? 287
8.3 What is the initial basis of measurement of intangible assets? 288
8.4 General amortisation requirements for intangible assets 290
8.5 Revaluation of intangible assets 292
8.6 Required disclosures in relation to intangible assets 294
8.7 Research and development 295
8.8 Accounting for goodwill 303
8.9 Does the way we account for intangible assets provide

useful financial accounting information? 313

Learning objectives (LO) 283
Opening questions 283
Summary 314
Key terms 315
Answers to Opening
questions 315
Review questions 316
Challenging questions 319
References 325

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CONTENTS

xi

CHAPTER 9 Accounting for heritage assets and biological assets . . . . . . . . . 327

9.1 Introduction to accounting for heritage assets and
biological assets 328

9.2 Some arguments for and against recognising heritage
assets in financial terms 330

9.3 Do heritage assets provide future economic benefits? 335
9.4 Who controls heritage assets? 337
9.5 Faithful representation: are the benefits measurable

with reasonable accuracy? 338
9.6 Is the information ‘relevant’? The actual demand for

financial information about heritage assets 339
9.7 Measuring heritage assets in financial terms 341
9.8 An introduction to accounting for biological assets:

what is a biological asset? 349
9.9 The unique nature of biological assets 352
9.10 How should biological assets be classified, presented and

measured in financial statements? 352
9.11 When and how should revenue associated with biological

assets be recognised? 358
9.12 Accounting for agricultural produce 360
9.13 Non-financial disclosures 360
9.14 Opposition to AASB 1037 and AASB 141 364

Learning objectives (LO) 327
Opening questions 328
Summary 365
Key terms 365
Answers to Opening
questions 365
Review questions 366
Challenging questions 367
References 370

PART 4
ACCOUNTING FOR LIABILITIES AND OWNERS’ EQUITY . . . . . . . . . . 373

10.1 The definition of liabilities 375
10.2 The recognition criteria for liabilities 377
10.3 Classification of liabilities as ‘current’ or ‘non-current’ 379
10.4 Liability provisions 380
10.5 Onerous contracts 383
10.6 Accounting for bonds (debentures) 385
10.7 Contingent liabilities 390
10.8 Contingent assets 394
10.9 Some implications of reporting liabilities 395
10.10 Debt equity debate 397
10.11 Hybrid securities 399

Learning objectives (LO) 374
Opening questions 375
Summary 400
Key terms 400
Answers to Opening
questions 400
Review questions 401
Challenging questions 404
References 407

CHAPTER 10 An overview of accounting for liabilities . . . . . . . . . . . . . . . . . . . . 374

CHAPTER 11 Accounting for leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 409

11.1 An overview of recent developments in the accounting
requirements pertaining to accounting for leases 410

11.2 The core principle and scope of AASB 16 415
11.3 What is a lease pursuant to AASB 16? 417
11.4 When to recognise a lease 420
11.5 Accounting for the service component of a contract

that includes a lease 420
11.6 The meaning of ‘lease term’ 421
11.7 Accounting for leases by lessees 422
11.8 Accounting for leases by lessors 436
11.9 Implications for accounting-based contracts 451

Learning objectives (LO) 409
Opening questions 410
Summary 453
Key terms 455
Answers to Opening
questions 455
Review questions 456
Challenging questions 458
References 462

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CONTENTS

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CHAPTER 12 Accounting for employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . 463

12.1 Overview of employee benefits 464
12.2 Categories of employee benefits 466
12.3 Accounting for employee benefits in the form of salaries

and wages 468
12.4 Annual leave 469
12.5 Sick leave 470
12.6 Long-service leave 471
12.7 Superannuation contributions 476
12.8 Employees’ accrued employee benefits and

corporate collapses 488

Learning objectives (LO) 463
Opening questions 464
Summary 489
Key terms 489
Answers to Opening
questions 489
Review questions 490
Challenging questions 491
Reference 494

CHAPTER 13 Share capital and reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 495

13.1 Introduction to accounting for share capital and reserves 496
13.2 Creating reserves 498
13.3 Different classes of shares 499
13.4 Accounting for the issue of share capital 500
13.5 Forfeited shares 507
13.6 Rights issues and share options 511
13.7 Share splits and bonus issues 513
13.8 Accounting for distributions 514
13.9 ‘Buyback’ of ordinary shares, and redemption of

preference shares 518
13.10 Required disclosures for share capital and reserves 520

Learning objectives (LO) 495
Opening questions 496
Summary 521
Key terms 522
Answers to Opening
questions 522
Review questions 523
Challenging questions 524
Reference 525

CHAPTER 14 Accounting for financial instruments . . . . . . . . . . . . . . . . . . . . . . . 527

14.1 Introduction to accounting for financial instruments 528
14.2 The definitions of financial assets, financial liabilities and

equity instruments, and the difference between primary
financial instruments and derivative financial instruments 530

14.3 Debt versus equity components of financial instruments 536
14.4 Set-off of financial assets and financial liabilities 540
14.5 Recognition and measurement of financial instruments on

acquisition 542
14.6 Measurement of financial assets following initial recognition 543
14.7 Initial recognition of financial liabilities 558
14.8 Subsequent measurements of financial liabilities 559
14.9 Derivative financial instruments and their use as

hedging instruments 560
14.10 Accounting for derivatives used within a …

BUS356 CONTEMPORARY FINANCIAL ACCOUNTING

Mid-Term Revision Questions

Question 1

Sport’s Field Ltd was registered on 31 January 2019. It invited the public to subscribe to the issue of 35,000 ordinary shares for $1 per share with $0.60 due on application, $0.30 due on allotment and the balance due on call.

Jan 10
Mar 1
Mar 2
Mar 31
Nov 1
Nov 30

Prospectus is issued
Received applications for 35,000 shares
Allotted 35,000 ordinary shares
All allotment money received
Remaining capital called
All money due on call is received

Required:

a) Journalise the transactions in the general journal
b) What is the share capital of Sport’s Field at 1 December?

Question 2

Gift Ltd has two cash generating units: Blue and Box. A comparison of these CGUs and their recoverable amounts are shown below:

CGU – Blue

CGU – Box

Property, plant and equipment

$1,000,000

$900,000

Goodwill

300,000

200,000

Accumulated impairment – goodwill

(100,000)

(50,000)

Carrying amount

1,200,000

1,050,000

Recoverable amount

1,100,000

880,000

Impairment loss

100,000

170,000

Required:

Prepare the general journal entries to write down the goodwill.

Question 3

Wombat Ltd’s balance sheet and statement of financial position shows an item of machinery that cost $150,000 and that has accumulated depreciation of $40,000. For taxation purposes the asset has a net value of $90,000. Wombat Ltd also has interest receivable of $15,000 which will not be taxed by the ATO until it is received. Wombat has a provision for warranty expenses with a balance of $100,000. All of the provision was created in the current financial year, and no amounts have been paid. The warranty expense is not deductible until such time as the costs associated with the warranty are actually paid. The tax rate is 30 percent.

Required:

Calculate any deferred tax assets and liabilities for Wombat Ltd and provide the relevant journal entries.

Question 4

Pinot Ltd acquired some machinery at a cost of $1 million, which it accounts for using the cost method. As at 30 June 2020 the machinery had accumulated depreciation of $200,000. On 30 June 2020 it was determined that the machinery could be sold at a price of $650,000 and the costs to sell would be $20,000. Alternatively, the machinery is expected to have a useful life of 5 years and the net cash flows expected to be generated from the machine would be $180,000 over each year. At 40 June 2020 it is expected that the market would require a rate of return of 7 per cent on this type of asset.

Required:

Determine whether an impairment loss needs to be recognised for this asset and also provide the journal entry.

Question 1 [13 Marks]

1. On 1 August 2020 Apple Ltd issues 50,000 shares at $1.00. The terms of the issue requiring the shareholders to pay $0.60 immediately with the balance due in one year’s time. In one year’s time, the company makes a call on the shareholders for the remaining $0.40 per share, with payments to be made by 31 August 2021. Holders of 49,000 shares pay the required call by 31 August 2021. On 5 September, the company forfeits the shares on which the call was not paid.

Required

1.Prepare the journal entries required to record the above transactions (ignore narrations).

2. The forfeited shares were reissued on 5 November 2021 as fully paid to $1.00 on payment of $0.80 per share, with the forfeited shares account being used to fund the difference as well as any costs of reissue. Assuming all the shares were reissued, incurring costs of $150, and any balance of the forfeited shares account being returned to the former shareholders,
Prepare the necessary journal entries to reflect these events (ignore narrations).
3. If a company used a direct private placement for issuing shares rather than a public placement, briefly explain how this would change the accounting for the share issue.

ANSWER

CLEARLY LABEL YOUR ANSWER – 1, 2, 3
1. & 2. GENERAL JOURNAL

Date

Details

Dr

Cr

3.

Question 2 [ 15 Marks]

Banana Ltd acquired all of the net assets of Orange Ltd on 1 July 2020. The consideration paid totalled $350,000. On the date of acquisition, Orange Ltd had the following assets and liabilities on their balance sheet: Accounts receivable $2,500; Equipment $100,000, Buildings $100,000; Land at cost $100,000; Long-term loan payable 1 July 2020 $10,000; Accumulated depreciation – Equipment $27,500; Accumulated depreciation – Building $25,000; Revalued land on acquisition date amounted to $150,000; Share capital $200,000.

Required:

a) List the assets and liabilities (include totals) that will be included in the acquisition analysis and calculate goodwill.
b) At the end of 2020, the CEO advised the CFO that the cash generating unit had a recoverable amount of $240,000. Prepare the general journal entry to reflect this event. Show all workings.
c) Assume that the carrying amount of the net identifiable assets is $290,000. Goodwill was impaired during the first year of acquisition by $10,000 and at the end of the acquisition year, the cash generating unit had a recoverable amount of $310,000. Prepare the general journal entry to account for goodwill at the end of the acquisition year.
d) Briefly explain the difference between an identifiable intangible asset and an unidentifiable intangible asset.

ANSWER

CLEARLY LABEL YOUR ANSWER – a) b) c) d)

a)

WORKINGS

b), c) GENERAL JOURNAL

Date

Details

Dr

Cr

d)

Question 3 [ 9 + 3 = 12 Marks]

Simpson Ltd purchased a piece of plant at a cost of $200,000. Simpson has a 30 June year end. At 30 June 2019, the plant had accumulated depreciation of $40,000 and an expected remaining useful life of 4 years. On 30 June 2019, Simpson determined that the plant could be sold for $120,000 with associated costs of $5,000. Alternatively, the plant is expected to be used by Simpson for another 4 years and it is expected that the net cash flows to be generated from the Plant would be $39,000 over each of the next 4 years. At 30 June 2019, it is considered that the market would require a return of 6% on this item of plant.

Required:

a) Determine if any impairment loss needs to be recognised in relation to this plant at 30 June 2019.
b) Provide the depreciation entry for this plant item at 30 June 2020.
c) If the recoverable amount of an item of machinery is higher than the carrying amount, is the business required to report the machinery at its recoverable amount in the balance sheet?

ANSWER

WORKINGS:

b) GENERAL JOURNAL

c)

Question 4 [12 + 3 = 15 Marks]

Statement of comprehensive income for the year ended 30 June 2020

Gross profit 730 000

Expenses

Administration expenses 80,000
Salaries and wages 200 000
Long service leave 20 000
Insurance 20 000
Warranty expense 30 000
Depreciation – plant 80 000 430,000

Profit before income tax 300 000

Statement of Financial Position as at 30 June 2020

Assets

Cash 20 000
Accounts Receivable 100 000
Inventory 100 000
Prepaid insurance 10 000
Machinery (cost) 400 000
Less: Accumulated depreciation (80 000) 320 000

Total assets 550 000

Liabilities

Accounts payable 80 000
Provision for long-service leave 20 000
Loan payable 200 000
Provision for warranty expenses 20 000

Total liabilities 320 000

Net Assets 230 000

Shareholders’ equity

Share capital 150 000
Retained earnings 80 000

230 000

Other Information

· All administration and salaries and wages expenses incurred have been paid at year end
· None of the long-service leave expense has been paid
· Warranty expenses were accrued and at year end actual payments of $10,000 had been made
· Insurance was initially prepaid to the amount of $30,000. At year end the unused component of the prepaid insurance account was $10,000
· The plant is depreciated over five years for accounting purposes, but over four years for taxation purposes.
· Tax rate is 30 per cent

Required:

a) Provide the general journal entry(ies) to account for tax in accordance with AASB112 at 30 June 2020? Show workings.
b) Why is tax-effect accounting known as the balance sheet approach to accounting for income tax?

ANSWER

a) GENERAL JOURNAL

b)

END OF EXAM PAPER

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