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Balance Sheet and Accounting Standards

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ANSWER SHEET STUDENT’S SURNAME  OTHER NAMES  STUDENT NUMBER  TUTORIAL DAY & TIME TUTOR’S FULL NAME  Test 1 – Version 2 Session 2, 2012 Course Code: ACCG 224 Course Name: INTERMEDIATE FINANCIAL ACCOUNTING Time allowed: 55 minutes plus 5 minutes reading time Total No. of questions: Three Questions Instructions 1. You must answer ALL questions in the test booklet. No separate booklet will be provided to answer the questions. . This is a closed-book test. You are not allowed to refer to any text material for the test. 3. Show all workings. Handwriting must be legible. 4. Non-programmable and non-text retrieval calculators may be used, but dictionaries are not to be used. Question No. Marks 1 /15 2 /15 3 /10 Total /40 Question 1 – Multiple Choice (15 marks) (Please circle the correct answer) 1. The main functions of the Financial Reporting Council include: I. II. III. IV. V. a. b. * c. d. overseeing the process for the setting of accounting standards of the AASB. determining the AASB’s broad strategic direction. onitoring and reviewing the level of funding for the AASB. directing the AASB in relation to the development or making of a particular standard. the power to veto a standard recommended by the AASB. I, II, III and V only I, II, and III only I, II, IV and V only II, III, IV and V only 2. The role of the Australian Securities and Investments Commission is to: I. II. III. IV. a. b. c. * d. 3. I, II, III and IV I, III and IV only I, II and IV only II, and III only Regulatory capture is said to occur in which of the following situations? a. b. c. d. * 4. Enforce and administer the Corporations Act.

Inform the public about Australian companies, financial markets and financial professionals who deal and advise in financial instruments. Issue accounting standards. Improve the performance of the financial system. When the regulated entities ensure non-performance by the regulating body When the regulated entities co-opt the regulators into a mutually shared perspective When the regulated entities control the regulations and the regulatory body All of the above Which of these theories could explain a move towards government control of accounting standards setting in Australia? a. b. . d. * 5. Public interest theory Regulatory capture theory Private interest theory All of the above The primary reasons for developing a conceptual framework is: a. * b. c. d. To enable regulators to develop accounting standards that are consistent and logical To provide guidance to accountants in areas where no standard exists To reduce the number of accounting standards needed To assist auditors 2 6. According to the AASBs Conceptual Framework an asset is: a. b. c*. d. 7. A company incurs significant costs in relation to a speculative project that intends to turn rocks into gold.

In accordance with the AASBs Conceptual Framework the costs of this project are an: a. * b. c. d. 8. d. it is not necessary to restate the prior period comparatives; the error may be amended prospectively; it may be deferred and recognised in the subsequent period; a retrospective correction must be made. When changing an accounting policy which of the following has to be applied retrospectively? a. * b. c. d. 11. Relevance, reliability, materiality, consistency, verifiability, understandability Understandability, timeliness, relevance, readability, timeliness, reliability Relevance, faithful representation, comparability, nderstandability, verifiability, timeliness Uniformity, relevance, reliability, consistency, faithful representation Where a fundamental error occurs in the recognition process: a. b. c. d*. 10. expense because there is little probability that future economic benefits will eventuate expense because the recognition criteria for an asset is not satisfied asset because the definition and recognition criteria for assets are satisfied asset because the company will control the future economic benefits. The qualitative characteristics for financial reporting contained in the Conceptual Framework are: a. b. c. 9. a contingent item depending on another event occurs at some time in the future a future benefits controlled by an entity as the result of a future transaction a future benefit controlled by an entity as the result of past transactions or events an item that has a physical existence and can be converted into cash. a voluntary change to improve the relevance of information presented a change due to the adoption of a new accounting standard a change due to the adoption of a new interpretation all of the above. A company’s workforce went on strike for an indefinite period commencing on 5 August 20X1.

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The strike was expected to cause severe financial conditions for the company. The financial statements for the year ended 30 June 20X1 were expected to be completed by 7 August 20X1. In accordance with AASB 110 Events after the Reporting Date, the appropriate treatment regarding the strike is: a. * b. c. d. disclosure as a note to the financial statements, as it is a non-adjusting event; disclosure as a note to the financial statements, as it is an adjusting event; to adjust the financial statements, as it is a non-adjusting event; to adjust the financial statements, as it is an adjusting event. 12. Differences between the carrying amounts of an entity’s net assets determined under accounting standards and accrual accounting, and the tax bases of those net assets determined under the Income Tax Assessment Act, are described as: a. * b. c. d. 13. CTT Limited has an asset which cost $300 and against which depreciation of $100 has accumulated. The accumulated depreciation for tax purposes is $180 and the company tax rate is 30%. The tax base of this asset is: a. * b. c. d. 14. temporary differences permanent differences tax losses the current income tax liability. $120 $220 $80 $20

In jurisdictions where the impairment of goodwill is not tax deductible, AASB 112 Income Taxes: a. * b. c. d. does not permit the application of deferred tax accounting to goodwill allows the recognition of a deferred tax item in relation to goodwill requires that any deferred tax items in relation to goodwill be recognised directly in equity requires that any deferred tax items for goodwill be capitalised in the carrying amount of goodwill. 15. Revaluations under AASB 116 Property, Plant and Equipment apply to: a. b. c. d. * all assets on an individual basis individual current assets only individual non-current assets only ssets on a class-by-class basis. 4 Question 2 - Short Answers (15 marks) Part a. The ASIC Act details that one of the primary accounting standard functions of the Financial Reporting Council (FRC) is to ensure that accounting standards serve the best interests of both the private and public sector. Why is it important that the FRC ensure that the interests of the public sector are met? (3 marks) One of the crucial roles of FRC is to assess the continued relevance and effectiveness of accounting and auditing standards to ensure that accounting standards serve the best interests of both the private and public sector.

Relevant accounting standards lead to required and appropriate accounting information disclosure. Accounting information serves an important public policy purpose — namely improving the flow of information to investors in a country’s capital markets. Accounting information helps investors and other stakeholders make sound economic decisions, which will enhance the efficiency of resource allocation and fairness of wealth distribution in the society. With the development of a country’s economy, the social welfare will increase.

The public interest means such social welfare. 5 Part b. You have recently graduated with your Bachelor’s degree and have applied for a position with the Australian Accounting Standards Board (AASB) as a technical adviser. At the interview, the Chairman stresses that they often have difficulties in determining whether the standards they draw up should follow a ‘principles based’ or ‘rules based’ approach. In particular they want to implement standards to overcome creative accounting practices.

Knowing that you have recently completed studies in accounting theory and standard setting, explain the Chairman what are the three main differences between the ‘principles based’ approach as opposed to a ‘rules based’ approach to standard setting? (3 marks) Principles Based ? • • IASB follows a principles-based approach to standard setting. Constructed in a broad framework that is not focussed on specific rules under specific circumstances Allows for professional judgement in relation to substance rather than form Advantages of principles-based standards • Principles-based standards are simpler. They supply broad guidelines that can be applied to many situations. • They improve the representational faithfulness of financial statements. • They allow accountants to use their professional judgement. • Evidence suggests that managers are less likely to attempt earnings management. Disadvantages of principles-based standards • Managers may select treatments that do not reflect the underlying economic substance. • The judgement and choice involved in many of the decisions mean that comparability among financial statements may be reduced Rules-based • Currently FASB follows rules-based approach. Constructed in a framework that is focussed on specific rules under specific circumstances. • Misuse in corporate collapses means that FASB is reconsidering if they should move to principles-based standards. Disadvantages of rules-based standards • Rules-based standards can be very complex. • Organisations can structure transactions to circumvent unfavourable reporting. • Standards are likely to be incomplete or even obsolete by the time they are issued. • Manipulated compliance with rules makes auditing more difficult. • Rules-based standards can be confusing. Part c.

Explain what a conceptual framework is and what are the benefits of having a Conceptual Framework for the accounting profession? (4 marks) Definition of a Conceptual Framework ? ‘A coherent system of interrelated objectives and fundamentals that is expected to lead to consistent standards’; ? Also, it is an attempt to provide a structured theory of accounting that prescribes practice. ? establishes concepts/ideas that underlie the preparation and presentation of financial reports; ? assists standard setters, preparers, auditors, users and those interested in the work of standard setters How the framework is used for the accounting profession? Explains the concepts/ideas that underlie the preparation and presentation of financial reports for external users - What is the purpose of financial reporting? - For whom should financial reports be prepared? - What qualitative characteristics should financial information possess? - What are the elements of financial reporting? - What measurement rules should be employed? It provides guidance to the accountants when there is no specific guidance given in the accounting standards.

It also assists the accountants when they cannot understand the application of certain IFRS due to the complexity involved. 7 Part d. Barton Ltd uses tractors as a part of its operating equipment, and it applies the straight-line depreciation method to depreciate these assets. Barton Ltd has just taken over Deakin Ltd, which uses similar tractors in its operations. However, Deakin Ltd has been using diminishing balance method of depreciation for these tractors. The accountant in Barton Ltd is arguing that for both entities the same depreciation method should be used for tractors. Provide arguments for and against this proposal. 2 marks) Para 50 of AASB 116 notes that depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.. Arguments against the Proposal ? Depreciation is measuring the change in value due to the use of an asset over the period. It is possible that Deakin Ltd has been using the diminishing value as it was going to use the tractor more in the early years of the economic life and hence the choice of the depreciation method is justified. Arguments in Favour ? It is important that there is consistency in the type of the asset and depreciation method applied.

Part e. a. Explain the difference between the cost model and revaluation model under measurement subsequent to initial measurement. (3 marks) Cost Model AASB 116 requires that measurement subsequent to initial measurement of assets could be carried at cost less any accumulated: - depreciation; - impairment losses. Revaluation model - As an alternative to the cost model AASB 116 allows the revaluation model to be used for classes of assets. Revaluation is an adjustment of PPE’s carrying amount so that it reflects its current fair value. Measurement basis is fair value (FV).

Frequency of revaluations is not specified, but must be performed with sufficient regularity such that the carrying amount of assets is not materially different from their FV. Revaluation performed on a class basis. Accounting performed on an asset-by-asset basis. 8 Question 3 – Practical (10 Marks) Bravo Ltd began operations on 1 July 2011 and has provided the following information: 1. 2. 3. Pre-tax accounting profit for the financial year ended 30 June 2012 is $150 000. The enacted tax rate is 30%. Differences between the 30 June 2012 income statement and tax return are listed below: (a) b) (c) (d) (e) 4. Annual leave expense accrued for financial reporting purposes amounts to $15 000. The employees were not allowed to take annual leave in the first year of operation. Depreciation of property, plant and equipment for accounting purposes amounts to $120 000. Depreciation of these assets amounts to $80 000 for the tax return. Entertainment expenses of $6 500 were included in computing pre-tax accounting profit. Tax free government grants of $5 000 were recognised as income. As a small business, Bravo Ltd chose for taxation purposes cash accounting for their sales revenue.

Accounts receivable regarding sales show a balance of $20 000 at year-end. There was no need to recognise any allowance for doubtful debts. Taxable profit is expected for the next few years. Required (a) (b) (c) Calculate taxable profit for the financial year ended 30 June 2012. (4 marks) Prepare the journal entry to record income tax expense, deferred tax and income tax payable for the financial year ended 30 June 2012. (4 marks) Draft the income statement beginning with ‘Profit before income tax’. (2 marks) (a) Pre-tax accounting profit $150 000 Permanent differences: Entertainment expense

Tax-exempt revenue Adjusted accounting profit 6 500 (5 000) 151 500 Originating temporary differences: Annual Leave Provision Accounting expense Tax deductible Excess depreciation expense Accounting expense Tax deductible Excess Revenue Taxable profit (b) $ 15 000 (0 ) 15 000 > DTA 4 500 120 000 (80 000) 40 000 > DTA 12 000 (20 000) > DTL 6,000 $186 500 > Income tax payable 55 950 Income Tax Expense 45 450 Deferred Tax Asset 16 500 Income Tax Payable 55 950 9 Deferred tax liability 6 000 DTA = 4 500 + 12 000 (c) Profit before income tax Income tax expense Profit for the period $150 000 45 450 $104 550 10

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