ACCT10002
Introductory Financial
Accounting
Lecture 12: Part 3
Discussion of Semester 2, 2020
Exam
Question 1
20 multiple choice questions – randomly selected from a pool.
Examples:
1.1 Fantastic Fan Pty Ltd purchased second-hand equipment for its operations for $30,000. The
equipment was worth $40,000. Applying the cost principle, how much should the equipment be
recorded in Fantastic Fan’s statement of financial position?

A $30,000
B $40,000
C The company could choose either $30,000 or $40,000.
D $35,000 (which is the average of the two prices)
1.8 Vagabond Ltd manufactures handbags and provides a six-month quality warranty. The provision
for warranty account has a credit balance of $50,000 and the estimated future obligations for
warranty work is $190,000. The adjustment necessary to update the provision account is a

A debit of $140,000
B debit of $240,000
C credit of $140,000
D credit of $240,000
Question 2
Cash Flow Statement: File to be downloaded
Snow White Ltd
Statement of Financial Position
as at 30 June 2020
2020 2019
$’000 $’000
Assets
Current assets
Cash 247.5 120
Accounts receivable 285 315
Allowance for doubtful debts -30 -18
Inventory 300 255
Prepaid rent 30 90
Total current assets 832.5 762
Non-current assets
Land 630 540
Buildings 765 705
Accumulated depreciation — buildings -345 -315
Equipment 375 420
Accumulated depreciation — equipment -165 -135
Patents 45 60
Total non-current assets 1305 1275
Total assets 2077.5 1977
Liabilities and equity
Current liabilities
Accounts payable 255 285
Accrued expenses 120 112.5
Income tax payable 138 67.5
Final dividend payable 75 60
Total current liabilities 588 525
Non-current liabilities
Borrowings 465 615
Total liabilities 1053 1140
Equity
Share capital 600 525
Revaluation surplus 162 72
General reserve 67.5 52.5
Retained earnings 195 187.5
Total equity 1024.5 837
Total liabilities and equity 2077.5 1977
Question 2 (cont.)
Snow White Ltd Statement of Profit or Loss
for the year ended 30 June 2020
Revenue $’000 $’000
Sales revenue 930
Profit on sale of land 30
Total revenue 960
Less expenses
Cost of sales 360
Rent expense 60
Bad debts expense 18
Depreciation and amortisation 135
Other expenses 42
Loss on sale of office equipment 30 645
Profit before income tax 315
Income tax expense 165
Profit for the period 150
Additional information (dollar amounts expressed in full units):
1. Equipment with an original cost of $135, 000 and accumulated
depreciation of $60, 000 was sold. The firm also paid cash for
some new equipment.
2. Land with a cost of $120,000 was sold for $150, 000. The
remaining land was Revalued upwards by $90, 000.
3. Equipment to the value of $30, 000 and buildings to the value of
$60, 000 were
acquired with the additional borrowing from the bank.
REQUIRED:
Complete the following cash flow statement using the direct
method.
Question 2
Snow White Ltd
Cash Flow Statement for the year ended 30 June 2020
OPERATING ACTIVITIES
Cash receipts from customers 954,000
Cash payments to suppliers 435,000
Cash payments for operating costs 34.500
Income tax 94,500 (564,000)

Net cash flow from operating activities 390,000
INVESTING ACTIVITIES
Purchase of land (120,000)
Sale of land 150,000
Sale of equipment 45,000
Purchase of equipment (60,000)
Net cash flow from investing activities 15,000
FINANCING ACTIVITIES
Proceeds of share issue 75,000
Payment of cash dividends (112,500)
Repayment of borrowings (240,000)
Net cash flow from financing activities (277,500)
TOTAL CHANGE IN CASH HELD 127,500
CASH AT BEGINNING 120,000
CASH AT END 247,500


Note: the template will
be partially completed.
The items in bold were
not given.
Question 3 4 x 3 = 12 marks
Examine the selected data over the 5-year period as shown in the table below for Handsome Prince Ltd.
Year
Item 2021 2020 2019 2018 2017 2016
$m $m $m $m $m $m
Sales 286.41 280.80 275.29 269.89 264.60 252.00
Cost of sales 180.03 166.69 154.35 142.91 134.19 126.00
EBIT 51.18 51.08 50.98 50.88 49.88 48.90
Interest 37.07 33.70 30.64 27.85 25.32 24.00
NPAT 35.13 35.10 35.06 35.03 34.51 34.00
Current assets 43.85 43.20 42.56 41.93 41.31 40.70
Total assets 226.18 221.75 217.40 213.13 206.93 200.90
current liabilities 55.99 53.58 51.27 49.06 47.40 45.80
Total liabilities 98.99 91.66 84.87 78.58 74.48 70.60
Equity 127.19 130.09 132.53 134.56 132.44 130.30
Gross margin 0.37 0.41 0.44 0.47 0.49 0.50
Interest coverage 1.38 1.52 1.66 1.83 1.97 2.04
Current ratio 0.78 0.81 0.83 0.85 0.87 0.89
Debt ratio 0.44 0.41 0.39 0.37 0.36 0.35
Inventory 18.86 18.13 17.44 16.76 16.12 15.50
Inventory in days 38.23 39.70 41.23 42.82 43.85 44.90
Receivables 27.21 25.43 23.77 22.21 20.76 19.40
Receivables in days 34.68 33.06 31.51 30.04 28.63 28.10
Payables 34.09 28.41 23.67 19.73 16.44 13.70
Payables in days 69.12 62.20 55.98 50.39 44.72 39.69
Cash Conversion Cycle 3.79 10.56 16.76 22.47 27.76 33.31
REQUIRED:
Using the above data, prepare an
analysis of the firm under the
following headings:
a) Handsome Prince’s short- term
liquidity position
b) Handsome Prince’s operating
performance
c) Handsome Prince’s solvency
d) Handsome Prince’s Return on
Equity (calculate ROE for 2021
and 2017)
a) Liquidity: Students should note key measurements that
indicate liquidity: current ratio and cash conversion cycle.
Current ratio: deteriorated from 89cents per $1 debt to 78 cents
per $1 debt. Explain why.
Cash conversion: improving from negative 33.4 days to 3.8 days
when a shortfall of cash is required to fund operations.
Explanation: Better inventory turnover; slightly poorer
receivables turnover; but taking an extra month to pay payables.
Students may also mention:
Working capital: CA-CL = deteriorated from – $5m to -$12m.
and/or Quick Ratio but unlikely to have calculated the ratio.
Overall, the firm is in a deteriorating liquidity position.
b) Profitability: Students should discuss the Gross margin by
identifying changes in Sales and Cost of Sales. Gross margin
deteriorating as COS increasing at greater rate than sales even
though both are increasing.
EBIT is increasing slightly indicating that other expenses are not
changing to any great extent.
A discussion of NPAT may also be provided. NPAT slight increase
only over the period but, interest costs and other costs are rising
so, NPAT is basically not increasing at all.
Overall, performance is stagnant but concerning as the Gross
margin is falling.
c) Solvency: Solvency should include a discussion of Interest Coverage ratio and the
Debt ratio.
Interest coverage ratio is deteriorating from 2.04 times to 1.38 times as a result of
interest cost increasing at a faster rate than EBIT.
Debt ratio is increasing slightly from 35% to 44% indicating a higher level of debt
relative to assets. i.e. liabilities are increasing at a greater rate than the increase in
assets. Although debt is 44% of assets, the increase of debt is not significant and,
solvency should not be a great concern.
d) Return on Equity (calculate ROE for 2021 and 2017
The Return on Equity for 2017 is 34/131.37 = 25.88%;
for 2021 is 35.13/128.64 = 27.30%.
The reason for the increase in ROE is that the increase in NPAT is not as great as the
decrease in equity resulting is a higher ROE despite NPAT remaining almost stable.
Question 4
Question 4 5 marks
The following transactions are for Bashful’s Pet Supplies Ltd:

1. On 21 March, Bashful’s Pet Supplies Ltd sold 2 deluxe dog kennels for $4,500 each
(including GST) to Friendly Doc Ltd, terms 2.5/7, n/30. The cost of the kennels was
$1,500 each.

2. On 23 March, Friendly Doc Ltd was granted an allowance of $200 for a small scratch
on one of the kennels purchased on 21 March.
3. On 27 March, Bashful’s Pet Supplies Ltd received the balance due from Friendly Doc Ltd.

Required:
Prepare the journal entries to record all these transactions (including GST where appropriate)
in the records of Bashful’s Pet Supplies Ltd. Assume Bashful’s Pet Supplies Ltd uses the
perpetual inventory recording method.
(NOTE: Round your calculations to the nearest dollar.) (2+1+2 = 5 marks)

Question 4
March 21 Accounts receivable $9,000
Sales $8,182
GST Payable 818
Cost of sales $3,000
Inventory $3,000
March 23 Sales Returns & Allow $182
GST Payable 18
Accounts receivable $200
March 27 Cash $8,580
Discount expense 200
GST Payable 20
Accounts receivable $8,800
Question 5 (a)
Question 5 4 + 5 = 9 marks
a) Preparing for balance day, 30 June 2020, Grumpy, the chief accountant for Happy Ltd had
the following information:

The Provision for Warranty at the beginning of the year was $10,000.
The actual costs of warranty repairs during the year were $15,000.
Grumpy estimated that the Provision for Warranty at the end of the year would be based on:
Total sales $240,000 of which 85% would have no warranty claims and 15% would have
only minor claims and no major claims. Grumpy estimates that the Provision for Warranty at
30 June 2020 would be $6,000.

Required:
i) Calculate the Warranty expense for the year.
ii) Provide reasons why the end of year provision is less than the beginning of the year even
though the cost of warranty was greater than the provision at the beginning of the year.
iii) Explain the effect of the provision at the end of the year on the profit result for the year
ended 30 June 2020.
i) Calculate the Warranty expense for the year.
Provision for Warranty
OB $10,000
Claims $15,000 Warranty expense $11,000
CB $6,000
ii) Provide reasons why the end of year provision is less than the beginning of the
year even though the cost of warranty was greater than the provision at the beginning
of the year.
• Improved new product line
• Problem of claims/faults resolved
iii) Explain the effect of the provision at the end of the year on the profit result for the
year ended 30 June 2020.
Effect on profit is that expense is lower than the actual cost
• Profit will be higher.
Question 5 (b)
(b) After long deliberations, the CEO of The Magic Mirror Ltd decided to buy a small
company that would provide another level in achieving the vertical integration objective
that he planned for the company.

He borrowed $5 million with the expectation of Earnings Before Interest and Tax of
$1,400,000 per annum. However, he had not expected a pandemic to affect his business
plans and the EBIT figure for the year was only 50% of his projected figure. The borrowing
cost is 5% pa and the tax rate is 25%. The company has 5 million shares issued at a cost of
$1 per share. Retained earnings are $2 million and Reserves are $1 million.

Required:

i) Calculate the expected ROE of the purchase of the other company and the ROE based on
the impact of the pandemic.

ii) Assume you are were consulted prior to the pandemic and asked to prepare a note to the
Board of Directors about the issues to consider when contemplating a takeover or
expansion of a business.

(3 + 2 = 5 marks)
Equity: $8,000,000 Before After
EBIT 1,400,000 700,000
Interest 250,000 250,000
EBT 1,150,000 450,000
Tax 287,500 112,500
Net profit 862,500 337,500
If did not add Net Profit to Equity
ROE 10.78% 4.2%
If added Net Profit to Equity
ROE 9.7% 4.0%
ii) Assume you are were consulted prior to the pandemic and asked to prepare a note to
the Board of Directors about the issues to consider when contemplating a takeover or
expansion of a business.
• How reliable is the estimate of EBIT?
• Can EBIT be shock proofed?
• What if interest rates were increased?
• What if taxes were changed?
Question 6
Question 6 5 marks
On 28 July 2020, Dopey, the chief accountant discovers a note that he wrote on 15 June 2020
that he needs o record some items into the journal before the last day of the financial year.
Unfortunately, Dopey fell ill later that day and did not tell the junior accountant to process
the items. The list includes:
Major overhaul of plastics fabricating machine $30,000 (bank loan).
Training cost of operator for updated plastics fabricating machine $2,500.
Purchase of new letterhead stationery $200 and printing costs of business cards for new
sales representative $120 (invoice received for both).
Dopey recovered from his illness and returned to work on 15 July 2020, discovered his note
and attended to the overlooked items.

Required:

i) Discuss the accounting principle that Dopey should adopt to decide how to record the
missing items. Use examples to illustrate your answer.

ii) The junior accountant has drafted the correcting journal as follows:

Dr. Depreciation $3,000 because the overhaul is expected to last 10 years with no residual
value
Dr. Plastic fabricating machine $30,000
Dr. Stationery expense $320
Dr. Wages expense $2,500
Cr. Accumulated depreciation of plastics fabricating machine $3,000
Cr. Accounts payable $30,000
Cr. Wages payable $2,500
Cr. Cash $320
Correct the suggested journal entry as prepared by the junior accountant and explain briefly
why you have made your changes.
(2 + 3 = 5 marks)
Question 6
Accounting principle is materiality: it is material if its omission would affect an
investor’s decision-making.
The plastic fabricating machine (PFB) and training cost material. To be recorded
immediately
The stationery items not material. Record in current year.
15 July Debit Retained earnings $4,500
Plastic Fab Machine $30,000
Credit Bank loan $30,000
Accumulated depn PFM $3,000
Wages payable $1,500
Debit Stationery expense $420
Credit Accounts payable $420
Explain why you have made your changes.
Need make changes to the permanent accounts for material items with prior period
errors. Immaterial items may be recorded in current year.
Question 7
Question 7
i) Assuming the firm uses the First-in-First-Out Method:
Calculate: (i) the total sales for the quarter
sales = 1,450 x $100 = $145,000
(ii) the Cost of Sales for the quarter
400 x $55 = $22,000
500: 100 x 55
400 x 50 = $25,500
550: 50 x 55
500 x 45 = 25,250
Total = $72,750
(iii) the Gross Profit = $145,000 - $72,750 = $75,250
ii) Calculate the Gross Profit Margin as it was for 9 July and 23 September
and explain any change.
9 July Price $100 – Cos $55 = gross margin $45 = 45%
23 July $100 - $45 = $55 = 55%
Explanation: GM has increased because the COS has gone down but the
sales price remains the same.
iii) Suppose the physical stocktake on 30 September showed that there
were 30 units on hand yet the inventory record showed there were more
units on hand.
Prepare the general journal entry to record the difference. A narration is
required.
Inventory loss 70 units x $45 = $3,150
Debit Inventory loss $3,150
Credit Inventory $3,150
(To record loss of 70 units of inventory)
iv) Following an accident in the warehouse it was assessed that five (5) of
the items of the ending inventory could only be sold for $35 after making
some repairs (which cost $5 per unit. Show how this assessment would be
journalised. A narration is required.
30 units remaining but 5 are damaged.
Net Realizable value $35 minus $5 costs = Net RV = $30
LCNRV = cost $45 NRV $30 = $15 write down per unit x 5 units = $75
Debit Inventory write down $75
Credit Inventory $75
(To record write down of 5 units based on LCNRV)
Question 8
Question 8
i) What would be recorded as the cost of the machine to be shown in the Balance Sheet?
Cost $250,000
Insurance and freight $30,000
Installation 10,000
Net dismantle costs 12,000- 2,000 = 10,000
TOTAL $300,000 Residual value $50,000
Depreciable value $250,000
Units of production 200,000
Cost per unit = $1.25
Recorded as cost of machine = $300,000
ii) The accountant recommended using the Units of Production method for depreciation. Explain why?
AASB 116 par 60 requires that an asset be depreciated using he most appropriate method that reflects the pattern in which the asse t’s future
economic benefits are expected to be consumed by the entity. Measurable by the number of units produced.
iii) What is the depreciation expense for the period 1 July 2017 to 30 June 2018?
Units produced: 10,000 x $1.25 = $12,500 depreciation expense.
Question 8 (cont.)
In September 2019, the management decided that the machine needed an upgrade to extend
its useful life for additional production of another 90,000 units (290,000 units in total). The
cost of the upgrade was $50,000 and was completed by 1 January 2020 and funded by a loan
from Scrooge Bank.

iv) Prepare the general journal entry to record the upgrade as at 1 January 2020. Include a
narration.

v) Prepare the journal entry to record the depreciation as at 30 June 2020 if 10,000 units
were produced between I January 2020 and 30 June 2020. No change to the estimated
residual value was made.


On 30 June 2020 the directors obtained an independent valuation which indicated that the
market value of the machine was $270,000.

vi) Prepare the general journal to record the recognition of the valuation of the machine for
30 June 2020. Include a narration.

vii) How would the machine be shown in the Balance Sheet at 30 June 2020? Show an
extract from the Balance Sheet.


(2+2+1+1+3+2+1 = 12 marks)

iv) Prepare the general journal entry to record the upgrade as at 1 January 2020
Debit Machine $50,000
Credit Loan The Poisoned Apple bank $50,000
v) Prepare the journal entry to record the depreciation as at 30 June 2020 if 10,000
units were produced between I January 2020 and 30 June 2020. No change to the
estimated residual value was made.
Accumulated depreciation = epreciation Accum dep’n
Units used: 2017-18 = 10,000 x 1.25 = 12,500 12,500
2018-19 = 15,000 x 1.25 = 18,750 31,250
July 19 to Dec 19 = 5,000 x 1.25 = 6,250 37,500
Jan 20 to June 20 = 10,000
At 1 January 2020 Cost $300,000 + 50,000 =350,000
Less Accumulated depreciation 37,500
= Carrying value 312,500
Less residual value 50,000
= Depreciable amount $262,500
Divided by remaining units to be produced: 200,000 – 30,000 + 90,000 = 260,000
New Depreciation amount per unit = $262,500/260,000 = $1.00 per unit. (Rounded)
Debit Depreciation 1 Jan to 30 June 2020 10,000 x $1 = $10,000
Accumulated depreciation Machine $10,000
On 30 June 2020 the directors obtained an independent valuation which indicated that
the market value of the machine was $270,000.
vi) Prepare the general journal to record the recognition of the valuation of the
machine for 30 June 2020.
At 30 June 2020 the Carrying amount of the PFM =
Cost $350,000 Minus Accum deprec $47,500 = $302,500
Less Recoverable amount $270,000
= Impairment of Machine = $32,500
Debit Impairment of Machine $32,500
Credit Accumulated Impairment of Machine $32,500
vii) How would the machine be shown in the Balance Sheet at 30 June 2020?
Non-current assets
Machine Cost $350,000
Less Accumulated dep’n 47,500
Less Accumulated Impairment 32,500 $270,000
Question 9

b) Chip ‘n Dale Ltd is a successful advertising business. It has regularly met shareholder
expectations by paying regular dividends. The board of directors’ policy requires that for a
dividend to be declared, net cash flow provided by operating activities must exceed $2 million.

At the end of the current year, the accountant reports that the net cash provided by operating
activities is calculated to be $1,940, 000. The managing director is keen to maintain
shareholders’ approval and suggests to the accountant to find ways to report a cash flow from
operating activities to be at least $2,000,000.

The accountant considers the draft financial reports and concludes that he can get the operating
cash flows to be $2 million by removing $120,000 from unearned revenue on the basis that the
work has almost been completed and can be recorded as revenue. In this way the cash receipts
from clients will be increased by the required amount.

The managing director is very grateful for the news and rewards the accountant with an extra
week’s leave because the dividend policy can be maintained.

Required:

i) Explain how the accountant was able to manage the desired result.

ii) Discuss ethical issues concerned with this scenario.

(3 + 4 = 7 marks)
Question 9
(a) AASB 15 Under the 5 step rule to determine when revenue
may be recognised, Jetstar is not able to recognise revenue until the
service has been delivered to the customer. i.e. when the entity
satisfies the performance obligation. So, Jetstar cannot recognise
revenue until the customer is provided with the flights.
ii) Discuss why JetStar may have been reluctant to pay a refund but
instead provided a voucher for flights to be taken at a later time.
To withhold and preserve cash to pay for other costs
• To ensure that revenue will be counted sometime in the future
rather than risk the customer deciding not to fly in the future.
ii) Discuss ethical issues concerned with this scenario.
Stakeholders (shareholders, banks, suppliers, investors) may be
deceived by the increased recording of revenue. False
recognition of revenue before the performance obligation has
been satisfied AASB 15.
It provides increased profit result and increased ROE ratio.
The accountant has to decide to follow the MD request to keep
shareholders happy
or to follow:
AASB rules regarding revenue recognition,
• Conceptual Framework of the qualitative characteristics of
faithful representation.(b) i) Explain how the accountant was able to manage the desired result.
Reconstruct T accounts for Accounts receivable to determine cash flow effect:
Before After
Assume OB 100 Cash 100 OB 100 Cash 160
Revenue 100 CB 100 venue 160 CB 100
Therefore, Cash received from customers increased by $60,000
By debiting Unearned revenue by $60,000 and crediting revenue by $60,000 the
cash received from customers is calculated as increasing by $60,000.
Question 10

Question 10 7 marks

Westpac flags $1.2b hit to earnings on misconduct costs, write-downs
By Charlotte Grieve, The Age, 27 October, 2020
Westpac has flagged a $1.2 billion hit to earnings caused by write-downs across its insurance
businesses, a growing remediation bill and mounting costs related to the landmark legal case
over anti-money laundering law breaches.
The big four bank said on Monday that the value of its life insurance business would be
written down by $406 million and the group's disability insurance business would report a
loss of $260 million, ahead of its full-year result next Monday.
The losses were partly offset by an increased valuation of its holding of buy now, pay later
platform Zip Co by $303 million, which became effective before Westpac sold its shares last
week.

Westpac has also put aside an additional $182 million to compensate customers who were
sold incorrect loans, overcharged or provided with poor advice. As part of this increased
provision, $104 million will pay for running the remediation program and $38 million will be
used for settling legal disputes with customers.

Last Wednesday, the Federal Court agreed Westpac should pay a fine of $1.3 billion, the
largest civil penalty in Australian corporate history, after negotiations with financial crimes
watchdog AUSTRAC over 23 million breaches of anti-money laundering and counter-
terrorism financing laws.

Australia's second-largest bank said the asset write-downs were partly caused by COVID-19.
Question 10
i) From your study of accounting this semester, explain
the impact of the various items on Westpac’s Annual
Report.
Income Statement:
• Increase expenses (fines, write downs/impairments)
• Decrease profits
Balance Sheet:
• Increased provisions (liabilities)
• Decreased cash (assets)
Cash Flow Statement:
• Decreased cash from Operating activities (fines)
• Decreased cash flow – reduced insurance sales
ii) Westpac’s board of directors has already stated that
there would be no interim dividend in the financial
year. However, they may consider issuing a share
dividend at the end of the year instead of a cash dividend.
Explain the difference in the two dividend types and
what effect that a share dividend would have on the
company.
Cash dividend: payment of cash (decrease assets and
decrease equity)
Share dividend: Increase share capital and decrease
Retained earnings (no effect on Equity)
Share dividend effect on the company?
The share dividend assists to retain cash in the business.
• Shareholders may react and sell shares because no
dividend is payable or,
• Future dividends may be less as profit is spread over
more shareholders.