Professional Documents
Culture Documents
Question 1. Which of the following is TRUE in accordance with AASB 6 Exploration for
and Evaluation of Mineral Resources and with AASB 141 Agriculture?
I. AASB 6 applies to the whole minefield life cycle – exploration, evaluation,
development, construction, and production stages.
II. AASB 6 allows full cost method to be used to account for exploration and evaluation
costs in Australia.
III. AASB 141 applies to biological assets (such as sheep), agricultural produce (such as
wool), and products that are the result of processing after harvest (such as carpet).
IV. In accordance to AASB 141, biological assets shall be recognised on initial and at
each reporting date at its fair value less harvesting costs.
A. I, III, IV
B. I and IV
C. I, II, and IV
D. II ONLY
E. None of the above
Angry Boys Ltd acquires a flock of sheep for $ 2,000,000 on 1 July 2009. During the year
ended 30 June 2010, the following events occur.
31st March 2010 – 1500 lambs were born which had an estimated market value at
birth of $100 each
10th June 2010 – 500 lambs were sold for $300 each
15th June 2010 – Wool with a market value of $200,000 was shorn at a cost of
$50,000
30 June 2010– The wool is packaged, delivered, and sold to carpet producer at a cost
of $20,000.
30 June 2010– the fair value of the sheep is $2,500,000 and the fair value of the lambs
is $500,000
Question 2 In accordance with AASB 141 Agriculture, what is the gain from change in
fair value of biological assets (i.e., sheep and lambs) for the year ended 30 th June 2010 for
Angry Boys Ltd?
A. Gain ≤ 700,000
B. 700,001≤ Gain ≤ 800,000
C. 800,001≤ Gain ≤ 900,000
D. 900,001≤ Gain ≤ 1,000,000
E. Gain ≥ 1,000,001
Question 3 In accordance with AASB 141 Agriculture, what is total amount of cost of lamb sold and cost
of wool sold for the year ended 30th June 2010 for Angry Boys Ltd?
During 2008 financial year, Lee Ltd commenced the search for oil and gas. It carried out
exploratory drilling and evaluation at two individual geological locations known as “Hawk”
and “Tiger”. Expenditure was incurred on the wages of staff and the services provided by
contractors. The accounting policy of Lee Ltd is to capitalise exploration and evaluation
expenditure when allowed by Accounting Standards.
During the 2009 financial year, Tiger moved from the exploration and evaluation stage to the
development stage. Operations at Hawk are continuing, and no decision has been made about
the commercial viability of the site.
During 2010 financial year, Hawk failed to show the presence of any promising geological
formations and the decision to abandon the area was taken before year end. Tiger moved
from the development stage to the production stage. It is expected to yield 20 million barrels
of oil over its economic life. 5 million barrels of oil have already been extracted from Tiger
by 30 June 2010 and 1 million of these are still on hand at year-end. All sales for the year
were at $100 per barrel.
The following information is available on the expenditure incurred in relation to each of the
two locations for the years ended 30 June 2008 to 30 June 2010.
Question 5 In accordance with AASB 6 Exploration for and Evaluation of Mineral Resources, what is the net
profit for the year ended 30 June 2010? Round your answer to the nearest million.
Question 6
Which of the following shall be recognised as provisions in accordance with AASB 137 Provisions, Contingent
liabilities, and Contingent Assets?
I. Raschella Limited was awaiting the final details of a court case for damages awarded
in its favour. The amount and possible receipt of damages is unknown and will not be
decided until the court sits again in several months time.
II. A company announced that it will make a donation to a natural disaster. It has a
record of honouring its donation announcement.
III. Purcell Limited is a manufacturer of swimming pools and provides its customers with
warranties at the time of sale. The warranty applies for three years from the date of
sale. Past experience shows that there will be some claims under the warranties.
A. I and II
B. I and III
C. II and III
D. III only
E. None of the above
Question 7
Which of the following is TRUE in accordance with AASB 137 Provisions, Contingent Liabilities, and
Contingent Assets?
I. An entity shall not recognise a contingent liability in the balance sheet
II. Provisions shall be reviewed at each reporting date and adjusted to reflect the
current best estimate.
III. Provision can be provided for future operating losses
IV. A contingent liability does not include a genuine liability which does not satisfy
the recognition tests of probable occurrence and reliable measurement.
V. Provisions that were previously created cannot be reversed to increase profit.
A. II ONLY
B. II, III, IV
C. I, IV, V
D. II, IV, V
E. I and II
Rebecca B works for Friday Ltd. Her annual salary is $104,000. Rebecca B is entitled to 4
weeks of accumulating and non-vesting sick leave per year. As at 30 June 2009, Rebecca B
has fully used up all her sick leave and no sick leave is carried forward to the next year. As at
30 June 2010, Rebecca B has taken no sick leave and she is expected to take 7 weeks sick
leave next year.
Question 8
In accordance with AASB 119 Employee Benefits, Friday Ltd must recognise a sick leave
expense and provision for sick leave expense during the financial year 2010 equal to:
Question 9
If the sick leave is accumulating and vesting and Rebecca B has one week sick leave carried
forward from 2009 to 2010, what is the sick leave expense and provision for sick leave that
Friday Ltd must recognise during the financial year 2010?
Question 10
According to AASB 132 Financial Instruments: Presentation, which of the following items
would be regarded as a financial liability?
(a) ordinary shares held in another entity;
(b) a contract that is a non-derivative for which the entity is obliged to deliver a
variable number of its own equity instruments;
(c) a contractual right to exchange under potentially favourable conditions, an option
to purchase shares below the market price;
(d) the right of a depositor to obtain cash from a financial institution with which it
has deposited cash;
(e) b and c.
Question 11
AASB 139 Financial Instruments: Recognition and Measurement, requires that ‘Held-to-
maturity’ investments be initially measured at:
(a) fair value;
(b) discounted future cash outflows;
(c) discounted future net cash flows;
(d) fair value plus transaction costs;
(e) none of the above.
Question 12
Balatbat Ltd issued $20 million of convertible notes on 1 July 2006. The notes have a life of
6 years and a face value of $20 each. Annual interest of 5 per cent is payable at the end of
each year. The notes were issued at their face value and can be converted at any time over
their lives. Organisations with a similar risk profile to Balatbat Ltd have issued debt with
similar terms but without the option to convert at the rate of 7 per cent.
7) What are the appropriate accounting entries to record the issue of the convertible notes and
the first payment of interest in accordance with relevant accounting standards?
(a)
1 July 2006
Dr Cash at bank 20 000 000
Cr Convertible notes 20 000 000
30 June 2007
Dr Interest expense 1 000 000
Cr Cash at bank 1 000 000
(b)
1 July 2006
Dr Cash at bank 20 000 000
Cr Convertible notes liability 18 092 500
Cr Equity (Option to convert notes) 1 907 500
30 June 2007
Dr Interest expense 1 266 475
Cr Cash at bank 1 000 000
Cr Convertible notes liability 266 475
(c)
1 July 2006
Dr Cash at bank 20 000 000
Cr Equity (Option to convert notes) 18 092 500
Cr Convertible notes liability 1 907 500
30 June 2007
Dr Interest expense 1 266 475
Cr Cash at bank 1 000 000
Cr Equity (Option to convert notes) 266 475
(d)
1 July 2006
Dr Cash at bank 20 000 000
Dr Equity (Option to convert notes) 2 030 277
Cr Convertible notes liability 22 030 277
30 June 2007
Dr Interest expense 1 542 119
Cr Cash at bank 1 000 000
Cr Convertible notes liability 542 119
(e)
1 July 2006
Dr Cash at bank 20 000 000
Cr Convertible notes liability 18 092 500
Cr Equity (Option to convert notes) 1 907 500
30 June 2007
Dr Interest expense 1 000 000
Cr Cash at bank 1 000 000
--------------
Question 13
In the previous question, what are the appropriate accounting entries to record the conversion
of the notes to equity on 1 July 2007 (after interest has been paid and recorded)?
(a)
Dr Convertible notes liability 18 358 975
Dr Equity (Option to convert notes) 1 907 500
Cr Share capital 20 266 475
(b)
Dr Convertible notes liability 18 092 500
Dr Equity (Option to convert notes) 1 907 500
Cr Share capital 20 000 000
(c)
Dr Convertible notes liability 18 358 975
Dr Equity (Option to convert notes) 1 907 500
Cr Gain on conversion of options 266 475
Cr Share capital 20 000 000
(d)
Dr Convertible notes 20 000 000
Cr Share capital 20 000 000
(e)
Dr Convertible notes liability 18 092 500
Dr Gain on conversion of options 1 907 500
Cr Share capital 20 000 000
.Question 14. On 1 March 2010, James Bond buys a diversified portfolio of shares for
$2,550,000. At the time the All Ordinaries Share Price Index is 3400. James is concerned
that the share market will fall during the next few months so he enters the futures market and
takes out sufficient June SPI futures “sell” contracts at a price of 3400 to cover his share
portfolio. The value of the contracts is shown in the table. James Bond pays a deposit of
$100,000 to the Sydney Futures Exchange (SFE) on 1 March 2010.
Relevant June SPI futures prices:
Date June SPI Futures Price Value of Futures contracts
1 March 2010 3400 $2,550,000
31 March 2010 3300 $2,475,000
30 April 2010 3500 $2,625,000
31 May 2010 3400 $2,550,000
30 June 2010 3200 $2,400,000
James Bond closes out his futures contracts on 30 June, 2010. Margin calls are paid when
futures contracts move into overall loss and are refunded as soon as that loss is reversed.
Question 16 The following is an extract from a lease payment schedule for Lessee Pty Limited.
What are the amounts of (a) current liabilities; and (b) non-current liabilities, relating to this
finance lease, disclosed by Lessee Pty Limited at 30 June 2010? Numbers have been
rounded to whole dollars.
The inventory purchase prompts UVW Ltd to take out a forward rate contract on 15 March 2009 to purchase
£600 000 on 1 August 2009 at an agreed rate of A$1.00 = 38p. Assume the forward rate contract is an effective
hedge. The inventory is not sold by UVW Ltd until September 2009.
Fair Values of the forward rate agreement are as follows (brackets indicate negative numbers):
Question 17. The book value of the inventory on the day it is recorded as an asset by UVW Ltd
is (in whole dollars):
a) $1,463,415
b) $1,621,622
c) $1,576,815
d) $1,350,015
e) $1,428,571
Question 18. The cumulative gain or loss on the foreign currency payable and the hedge
contract reported in UVW’s Income Statement for the year ended 30 June 2009 is:
a) Zero
b) $1,666 gain
c) $66,400 loss
d) $66,400 gain
e) $1,666 loss
Question 19. The net gain or loss on the foreign currency payable and the hedge contract
from 1 July 2009 to 1 August 2009 is (in whole dollars)
a) Zero
b) $3,798 loss
c) $3,798 gain
d) $143,113 loss
e) $139,314 gain
Question 20. Assume now that the inventory was not shipped FOB until 2 July 2009. At 30
June 2009, the hedge is a cash flow hedge. The amount of gain or loss recognised in the
Profit & Loss Statement of UVW Ltd at 30 June 2009 on the inventory purchase and the
hedge contract is:
a) Zero
b) $179,800 gain
c) $179,800 loss
d) $66,400 gain
e) $66,400 loss
Question 21. Now assume that instead of inventory the purchase is of plant and equipment,
which is installed ready for use on 2 July 2009 when the rate is A$1. 00 = 42p. Also assume
that this purchase is unhedged. Until 2 July 2009, the plant and equipment is a qualifying
asset. The book value of the plant and equipment on 2 July 2009 will be (in whole dollars):
a) $1,428,571
b) $1,463,415
c) $1,395,349
d) $1,538,462
e) $1,578,947
Question 22. XYZ Ltd purchased 1,000,000 shares in Babcock & Brown Ltd on 1 July 2008
at a price of $10 per share. Fearing that the value of these shares will fall over the next 12
months, XYZ also purchased 1,000,000 put options for these shares on 1 July 2008 at a cost
of $1 each with an exercise price of $6.00 per option, maturing on 30 June 2009. On 30 June
2009, the value of Babcock & Brown shares has fallen to 50 cents per share and the value of
the options is $5.50 each. XYZ exercises its options. The realised gain or loss on the above
transactions will be:
a) Zero
b) $4,000,000 loss
c) $9,500,000 loss
d) $5,500,000 gain
e) $5,000,000 loss
Question 24. RM Limited signs a contract on 1 January 20X3 agreeing to build a warehouse
for SC Limited at a contact price of $20 million. The company can reliably estimate the
outcome of the contract. The estimated construction costs are as follows:
20X3 $3 million
20X4 $4 million
20X5 $3 million
At 31 December 20X3 the actual costs incurred to build the warehouse to date are $2.5
million, however, RM limited still expects to complete the project for total costs of $10
million. Accordingly, RM Limited will recognize revenue for the year ending 31
December 20X3 amounting to:
a. $10.0 million
b. $4.0 million
c. $5.0 million
d. $2.5 million
e. $3.0 million
Question 25 Roddick Ltd holds a well-diversified portfolio of shares with a current market
value on 1 May 2007 of $750,000. On this date Roddick Ltd decides to hedge the portfolio by
taking a sell position in ten SPI futures units. The ASX 200 SPI is 2730 on 1 May 2007. The
price of one contract in SPI futures equals the ASX200 SPI multiplied by $25. The futures
broker requires a deposit of $1,500. On 30 June the ASX 200 SPI has fallen to 2570 and the
value of the company’s share portfolio has fallen to $690,000. What is the gain or loss on the
futures contract and the net gain or loss after hedging?
(a) Loss on futures contract: $40,000; Net loss after hedging: $100,000
(b) Gain on futures contract: $4,000; Net loss after hedging: $54,000
(c) Gain on futures contract: $40,000; Net loss after hedging: $20,000
(d) Gain on futures contract $1,600; Net loss after hedging: $58,400
(e) Loss on futures contract: $40,000; Net gain after hedging: $20,000
Question 26 DGC Mining Ltd has carried forward costs of $16 million relating to a gold
mine in Western Australia. It owns the site and has completed the first year of production.
The revenues from the year’s sales are 12 per cent of the total expected revenues based on
expected future sales and prices. Five thousand tonnes of gold-bearing deposits were
mined during the period out of a total estimate of 70 000 tonnes of reserves. It is expected
that it will take 20 years to fully deplete the existing reserves. How much of the carried-
forward costs should be allocated to production this period (round to the nearest dollar)?
a. $1 142 857
b. $800 000
c. $1 920 000
d. $685 714
e. None of the above.
(a)
(b)
Fair Value through Held to Maturity Available for Sale
Profit and Loss
Initial Measurement Fair Value Fair Value Fair Value
Subsequent Measurement Fair Value Fair Value Fair Value
Gains and Losses Profit and Loss Profit and Loss Profit and Loss
(c)
Fair Value through Held to Maturity Available for Sale
Profit and Loss
Initial Measurement Fair Value Fair Value Fair Value
Subsequent Measurement Fair Value Amortised Cost Fair Value
Gains and Losses Profit and Loss Profit and Loss Equity
(d)
(e)
Fair Value through Held to Maturity Available for Sale
Profit and Loss
Initial Measurement Fair Value Fair Value Fair Value
Subsequent Measurement Amortised Cost Amortised Cost Amortised Cost
Gains and Losses Profit and Loss Profit and Loss Profit and Loss
Question 29
Alpha Lessee Ltd leases equipment from Beta Lessor Ltd on 1 July 2003, on the following
conditions.
The lease is a finance lease and both companies comply with AASB 1008. Alpha Lessee will
retain the equipment when the lease expires. Straight line depreciation is used for assets. The
balance sheet of Alpha Lessee Ltd at 30 June 2004 will show (in whole dollars):
Question 1
At the beginning of year 1, ABC Corporation grants 100 share options to each of its 200
employees. Receiving the options is conditional on an employee working for ABC
Corporation for the next two years. The fair value of the options on grant date is $12. ABC
Corporation estimates that 15% of its employees will leave during the two year vesting
period. At the end of year 1, 20 employees have left, and ABC Corporation estimates that a
further 10 will leave during year 2. During year 2, ABC Corporation’s share price has
dropped, and it decides to reprice the share options. It estimates that the fair value of the
original share options is now $7 and the fair value of the repriced share options is $10. Ten
employees leave the firm during year 2.
Required:
(a) Prepare a schedule setting out the remuneration expense to be recognised at
the end of years 1 and 2. Show all workings.
(b) Give journal entries to record remuneration expense for each of years 1 and 2.
(c) Comment on ethical issues that could arise from the use of share based
payments (such as options) to remunerate key executives in a company.
Question 2
PC Carpets Ltd is a company involved in the manufacture and distribution of quality carpets.
On 1 July 20X1 PC Carpets Ltd arranged to lease equipment from Cheapa Finance Co. that
has a fair value of $1,000,000.
Both companies classify the lease of the equipment as a finance lease in accordance with
AASB 117 Leases.
The lease term is 4 years and payments of $250,000 are due in advance on 1 July each year.
The guaranteed residual value of the equipment at the end of the lease term is $187,825.
The present value of the minimum lease payments equals the fair value of the equipment at 1
July 20X1.
At the inception of the lease the equipment had an estimated useful life of 5 years and a
constant pattern of future economic benefits are expected from the asset.
PC Carpets Ltd pays the guaranteed residual on 30 June 20X5 and retains the equipment.
Lease Repayment Schedule – partially completed
Required:
b) Record the journal entries of PC Carpets Ltd for the years ending 30 June 20X2 and 30
June 20X3
c) Record the journal entries of Cheapa Finance Co. for the years ending 30 June 20X4 and
30 June 20X5
QUESTION 3
GFC Ltd is an Australian company with a 30 June year end. GFC Ltd purchases inventories
from a United States (US) supplier under an FOB shipping contract for an agreed price of
$US 2,000,000. GFC Ltd placed the order to buy the goods on 22 May 20X3. The goods are
put on the ship on 30 May 20X3.
GFC Ltd pays the US supplier for the inventories in two equal instalments of $US 1,000,000.
The payments were made on the dates of 31 July 20X3 and 31 August 20X3.
Prepare the journal entries of GFC Ltd in respect of the purchase of inventory, the year-end
adjustment to accounts payable and settlement of accounts payable.
Question 4 Cascade Ltd (the lessee) enters into a non-cancellable five-year lease agreement
with Boags Ltd (the lessor) on 1 July 2009. The lease is for an item of machinery, and the
following details are provided:
Fair value of machinery at inception of lease $1,294,384
Present value of minimum lease payments $1,294,384
Expected economic life of machinery 6 years
Salvage value at end of economic life $210,000
Bargain purchase option available for
Cascade Ltd at the end of the fifth year is for $280,000
Five annual payments (the first on 30 June 2010) $350,000 per annum
Included in each lease payment amount to the
lessor for insurance and maintenance
of the machinery $35,000
1 (i) Classify the type of lease for the lessee, giving reasons for the classification.
4 (ii) Prepare the lease payment schedule for the period 1 July 2009 to 30 June 2011.
5 (iii) Prepare the journal entries for Cascade Ltd as at 1st July 2009 and 30 June
2011.
Question 5 On 1 July 2009, Sydney Doctors Ltd leased a CT Scanning machine from Hi
Tech Medical Imaging Ltd, a company that manufactures, retails and leases CT Scanners.
The CT Scanner had cost Hi Tech Medical Imaging $130,000 to make but had a fair value on
1 July 2009 of $150,000. The lease agreement contained the following provisions:
Hi Tech Medical Imaging Ltd’s solicitor prepared the lease agreement for a fee of $1,500.
At the end of the lease term on 30 June 2012, Sydney Doctors Ltd returned the CT Scanner to
Hi Tech Medical Imaging Ltd, who sold the CT Scanner for $14,000.
Required:
1. Explain why Sydney Doctors Ltd has classified the lease as a finance lease
2. Prepare the lease payment schedule for Sydney Doctors Ltd
3. Prepare the journal entries of Sydney Doctors Ltd for each of years ended 30 June 2010
and 30 June 2012
4. Explain whether the lease receipt schedule of Hi Tech Medical Imaging Ltd will be
identical to the lease payment schedule of Sydney Doctors Ltd? Why or why not? Do
NOT prepare the lease receipt schedule.
Question 6
On 1 March 2010 Wombat Ltd, an Australian entity, places an order for UK£3.0 million of
inventory with Badger plc, a UK supplier. The goods will be purchased FOB Southampton.
A decision is made to take out a foreign exchange forward contract for UK£3.0 million on 1
March 2010 with Oz Bank in which Oz Bank agrees to supply Wombat Ltd with UK£3.0
million on 1 August 2010. The goods are shipped on 1 June 2010 and paid for on 1 August
2010.
Fair Values of the forward rate agreement are as follows (brackets indicate credit balances):
Required:
Assuming that the hedging arrangement satisfies the requirements for hedge accounting as
stipulated in AASB 139, provide the necessary journal entries for Wombat Ltd from 1 March
2010 to 1 August 2010.
Question 7
(a) Bridge Ltd signs a contract on 1 January 20X7 to build a bridge for a customer over three
years at an agreed contact price of $80m.
20X7 $20m
20X8 $20m
20X9 $10m
$50m
Due to weather delays, Bridge Ltd has only incurred actual costs to build the bridge of $10m
by the end of 20X7 but it still expects to complete the project on time for total construction
costs of around $50m.
REQUIRED
i) Students are required to pay the entire three years tuition fee on commencement. The
college notes clearly that the fee is non-refundable in any circumstances. Students attend
the college for ten and fifteen hours per week in their first and second years of enrolment
respectively. In their final year of enrolment students attend class for thirty hours per
week. On completion of the diploma the College guarantees that it will find employment
for each student within six months or half the tuition fee will be refunded.
ii) Students are required to purchase a laptop from the College. The laptop is purchased
from a local manufacturer and sold to students at 15% above cost. Students pay for the
laptop in three equal instalments at the end of each year of study. Included in the sales
price is ongoing telephone support with College IT staff.
Required: By reference to the recognition criteria in AASB 118 Revenue, explain how the
College should account for (a) the tuition fees and (b) the sale of laptops
Question 9 Accounting standard, PAT and Ethics (This is a homework qn, not a past
exam paper question)
Moonbeam Appliances Ltd is an Australian electrical appliance manufacturer. It has just
employed a new CEO, Alan Doppler, whose task is to boost the company’s reported earnings
and share price. In the first year of Doppler’s tenure as CEO, the company engages in a major
marketing campaign in June (the company’s year-end is 30th June) to sell outdoor electric
barbecues to customers at a major discount below the normal selling price, on the basis that
the customers need not take physical delivery of the appliances for six months and will not be
billed for the sale, or asked to pay, until delivery. In the meantime, the barbecues sold are
shipped to a company-owned warehouse and stored until customers request delivery. The
marketing campaign is very successful and Moonbeam books $35 million of sales revenue in
June when the customers agree to buy the barbecues (but 6 months before delivery and
billing), thereby boosting its sales and profits for the year ended 30 June in the first year of
Doppler’s tenure as CEO. A $35million boost to sales is a material increase for this company.
The share price increases when the company announces its improved profit performance to
30th June. Alan Doppler has a compensation scheme in place which pays him a bonus if he
increases the company’s revenue and profits, so he is awarded his bonus.
It is important to note that these sales take place in the winter (June in Australia), but most
customers would not want their barbecues until the summer months (December/January in
Australia). At 30th June, the number of customers who will actually request delivery of the
barbecues six months later is unknown. The sale contracts in June legally transfer the risks
and rewards of ownership to the buyers. The company’s financial report for the year ended
30th June must be released by September at the latest to comply with corporations’ law
requirements.
Required:
i) Is the company’s revenue recognition policy on these barbecues consistent with
Australian accounting standard AASB 15?
ii) Evaluate the company’s revenue recognition policy from a Positive Accounting Theory
perspective.
iii) Evaluate the company's revenue recognition policy from the ethical perspectives of:
(a) utilitarianism
(b) Aristotelian ethics
Acknowledgement: this case is very loosely based on that of the Sunbeam Corporation in the
USA in the 1990s.
Question 10
Aussie Power Ltd operates electricity generating plants across Australia. It is listed on the
Australian Stock Exchange and has long term debt in place to finance its electricity
generating plants. For years, the company has recognised revenue when electricity is
delivered to customers in accordance with long-term contracts that customers have signed
with the company. Many of these contracts are long term, with the average life being 5 years.
Due to competition in the industry, sales of electricity have been falling in the current year
(year ended 30 June 2014), and the company’s CEO is concerned that the company will not
meet analysts’ earnings forecasts, a consequence of which will be a fall in the share price.
The CEO’s annual bonus depends on the company reporting a profit increase each year of at
least 10 percent. The company’s lenders have imposed a maximum debt to asset ratio on the
company of 60%. As 30 June 2014 approaches, it is estimated that the company’s actual
value of that ratio will be 62% and thus the company will be in breach of its loan agreements.
Therefore, the CEO directs that for the year ended 30 June 2014 all the company’s power
supply contracts are to be valued at fair value and the resulting gain taken to the P&L.
Previously, the company’s power contracts have not appeared as assets on the company’s
balance sheet. Calculations indicate that, for the year ended 30 June 2014, this change in
accounting policy will increase reported earnings by 40 percent, increase assets on the
balance sheet by 10 percent, and reduce leverage by 5 percent.
However, because there is no active market for electricity supply contracts in Australia, the
fair value of the power contracts has to be calculated by estimating future sales (on average 5
years into the future, and sometimes up to 10 years) from the contracts and discounting these
to a net present value, using the method known as fair value level 3 or “mark to model”; the
resulting net present value is then deemed to be the fair value.
Required:
(a) Explain whether the proposed accounting policy is consistent with standard AASB 15
“Revenue” (2 marks)
(b) Evaluate the proposed accounting policy change from a Positive Accounting Theory
perspective (4 marks)
(c) Evaluate the proposed accounting policy change from an Aristotelian ethical
perspective (4 marks)
(d) Evaluate the proposed accounting policy change from a Utilitarian ethical perspective
(4 marks)
Question 11
Pierpont Mining Company has been smoothing profits for the last 10 years by means of a
Provision for Future Mine Expansion account. The Provision for Future Mine Expansion is
created in good (profitable) years by the journal entry:
Dr Expense (P&L)
Cr Provision for Future Mine Expansion
In bad years (poor profits or losses), the Provision is drawn down by the journal entry:
The company prides itself on a good environmental reputation but has recently had a water
contamination issue at its South Australian mine. The Provision for Future Mine Expansion
account is planned to be used to down-size the reported loss from the damages.
You discuss the water contamination potential damages with the Senior Accountant, Mr
Robson. You are concerned that the smoothing has been going on and also that the Provision
for Future Mine Expansion will be used to reduce the ‘impact’ of the expected losses from
damages. Mr Robson does not share your concerns and indicates that there is nothing wrong.
The company has not expanded its mine over the past 10 years and has no plans to do so at
present.
Required:
(a) Does the company's Provision for Future Mine Expansion account conform with AASB
137 Provisions and Contingencies? Explain
(b) Evaluate the company's proposal to use the Provision for Future Mine Expansion account
to down-size the reported loss from the contamination damages from the viewpoints of:
(i) Positive Accounting Theory
(ii) the Aristotelian ethical position
(iii) the Utilitarian ethical position