Part A – THEORETICAL QUESTIONS

Theoretical Question One :

Discuss your view of “True and Fair” in financial statement. How would a company director try to ensure that the financial statements are true and fair before signing the directors’ declaration?

Theoretical Question Two:

What is the difference between recoverable amount and fair value? Where revaluations are undertaken, can a reporting entity use “value in use” as the basis for the revaluation?

Part B – PRACTICAL QUESTIONS

Practical Question 1

Sunshine Ltd acquires an item of machinery on 1 July 2011 for \$420000. When the asset is acquired, it is considered to have a useful life for the entity of six years. After this time, the machine will have no residual value. It is believed that the pattern of economic benefits would best be reflected by applying the sum-of-digits method of depreciation. However, contrary to expectations, on 30 June 2014 the asset is sold for \$150000.

Required:

Calculate depreciation expense and gain or loss on disposal of the machinery and prepare all the journal entries necessary for Sunshine Ltd for the year ended 30 June 2012, 30 June 2013, 30 June 2014.

Practical Question 2

As at 1 July 2015, Top Ltd has an asset that has a cost of \$100000 and accumulated depreciation of \$20000. Top Ltd decided on 1 July 2015 that the asset should be revalued to \$120000. The remaining useful life of the asset is eight years, after which time it will have no residual value. Top Ltd use straight line method to allocate depreciation for the asset.

Required:

Prepare journal entries to reflect the revaluation of the asset and the subsequent depreciationof the revalued assetusing the net-amount method for the year ended 30 June 2016.

Practical Question 3

Tamarama Ltd acquires \$100% of Bronte Ltd on 1 July 2013. Tamarama Ltd pays the shareholders of Bronte Ltd the following consideration:

Cash: \$70000

Plant and equipment: fair value \$250000; carrying amount in the books of Tamarama Ltd \$17000

Land: fair value \$300000; carrying amount in the books of Tamarama Ltd \$200000

There are also legal fees of \$35000 involved in acquiring Bronte Ltd.

On 1 July 2013 Bronte Ltd’s statement of financial position shows total assets of \$700000 and liabilities of \$300000. The fair value of the assets is \$800000.

Required:

1. Has any goodwill been acquired and, if so, how much?
2. Can Tamarama Ltd revalue the goodwill upwards in a subsequent period?

Practical Question 4

Johnson Ltd has entered into a lease arrangement with ABC Ltd in which it has agreed to lease an item of machinery from ABC Ltd on the following terms:

Date of commencement of lease: 1 July 2015

Duration of lease: 8 years

Fair value of machine at lease inception: \$871172

Initial up-front payment: \$200000

Lease payments at the end of each year: \$100000

Implicit rate of interest: 6%

The lease is considered to be non-cancellable. The economic life of the machinery is considered to be 10 years. However, Johnson Ltd will return the machinery to ABC Ltd at the end of the lease term. At this stage it is expected that the machinery will have a residual(unguaranteed)value of \$80000 at the end of the lease term.

Required:

1. Determine the present value of the minimum lease payments.
2. prove that the rate of interest implicit in the lease is 6%.