Reference no: EM132265713 , Length: word count:1000

Financial Accounting Issues Assignment -

This assignment consists of 5 questions: you must show all calculations and workings in addition to your answer. You must show dates and narrations for your journal entries. Refer to the relevant Accounting Standard wherever it is requested in the question.

Question 1 -

The following segment information relates to BFC Ltd.

All revenues are external, except for $75,000 of Fishing, $45,000 of Camping, and $60,000 of Financial Services, which are internal. BFC Ltd earned a further $150,000 of revenue that is not attributable to operating segments.

Required:

a) Determine which segments are reportable according to the guidelines provided in AASB 8. Show all calculations and workings and refer to the appropriate paragraphs of AASB 8 being applied.

b) If a segment has seen large growth in this reporting period to become reportable under para 13, but was not large enough to be reportable in the previous period, how would this affect the segment disclosures? Refer to AASB 8 as appropriate.

Question 2 -

Surf's SUP Ltd sell stand-up paddleboards. They pride themselves on offering quality products and offer a 3 year warranty on all of their paddleboards.

If minor defects occurred in all products sold, repair costs would be $2m. If major defects occurred, repair costs would be $6m. Based on the entity's past experience and future expectations, they estimate that 15% of boards will present with minor defects over the warranty period, and only 3% with major defects.

It is expected that one third of the warranty claims (major and minor) will happen at the end of the first year, another third at the end of the second year, and another third at the end of the third year. The pre-tax rate that reflects the current market assessments of the time value of money and the risks specific to the liability is 8%.

Surf's SUP Ltd ask for your advice as to whether they should establish a provision for their expected warranty claims, and what the appropriate accounting treatment would be.

Required:

a) Advise Surf's SUP Ltd (max. 250 words) on whether they need to create a warranty provision and why. Refer to the Accounting Standards in your answer.

b) Calculate the amount of the warranty provision that you would advise Surf's Up Ltd to establish. Show all workings.

c) Provide the appropriate journal entry for Surf's SUP Ltd to establish a provision for warranties at 30 June 2019.

d) On 3 July 2019, Surf's SUP Ltd paid out $35,000 in warranty claims. Provide the appropriate journal entry.

Question 3 -

Required: Discuss the current accounting treatment of internally generated intangible assets under AASB 138. Provide arguments both FOR and AGAINST this accounting treatment. If you were an Accounting Standard Setter, what would your proposal be for the accounting treatment of internally generated intangibles? (Refer to the Accounting Standards and/or Conceptual Framework as appropriate. Maximum 350 words).

Question 4 -

Mumpets Ltd has determined that its construction division is a cash-generating unit. The carrying amounts of the net assets for this division as at 30 June 2018 are as follows:

The land has a fair value less costs of disposal of $250,000 (as at 30 June 2018).

It was determined on 30 June 2018 that the CGU's fair value less costs of disposal was $896,000, and its value in use was $912,000.

At 30 June 2019, Mumpets Ltd, because of a reversal of the indicators leading to the impairment, assessed the recoverable amount of the cash-generating unit to be $70,000 more than the carrying amount of the unit. As a result, Mumpets Ltd recognised a reversal of the impairment loss.

As at 30 June 2018, prior to impairment, depreciation was charged on the Machinery at $45,000 p.a. and on the Buildings at $15,000 p.a. After impairment, the new depreciation was revised to $30,000 p.a. for the Machinery and $25,000 p.a. for the Buildings.

The land has a fair value less costs of disposal of $280,000 (as at 30 June 2019).

Required:

a) Provide the appropriate journal entry for Mumpets Ltd in relation to the impairment testing on 30 June 2018. Show all calculations and workings.

b) Provide the appropriate journal entry for Mumpets Ltd in relation to the impairment reversal on 30 June 2019. Show all calculations and workings.

Question 5 -

Toobits Ltd issues $5m in convertible bonds on 1 July 2018. They are issued at their face value for a term of four years. They pay an interest rate of 5% annually in arrears. The bonds may be converted to shares at any time in the next four years. Organisations similar to Toobits Ltd have recently issued similar debt instruments (without the conversion option) with an interest rate of 7%.

On 30 June 2021, all the holders of the convertible notes elect to convert the bonds to shares in Toobits Ltd.

Diddies Ltd purchased $1m of the convertible bonds from Toobits Ltd when they were issued on 1 July 2018, within a bond-trading business model. On the same date, Diddies Ltd paid $5,000 of brokerage costs associated with purchasing the bonds.

Required -

a) Identify the present value of the bond liability and calculate the equity component.

b) Calculate the stream of interest expense across the life of the bonds.

c) Provide the appropriate journal entries for Toobits Ltd in relation to the convertible bonds for the period 1 July 2018 to 30 June 2021.

d) Provide the appropriate journal entry(ies) for Diddies Ltd on 1 July 2018.