Advanced Financial Accounting
You are required to finish each of these questions. Please give the solutions in detail, show calculations, it can be Excel format, Word format or PDF format, no requirement on word limits. If any reference was used, please refer to Harvard style.
Question 1. You have been appointed the accountant of a new organisation that is preparing its first set of financial statements. In determining the depreciation for the first year, what sorts of information would you need? Please include knowledge from this subject with references.
Question 2. During the reporting period ending 30 June 2018, Midnight Boil Ltd constructed a nuclear power generator just outside of Melbourne. The cost of the power generator and associated technology amounted to $12 550 000. Other costs associated with the construction amounted to:
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Costs incurred in obtaining access to the site
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$2 500 500
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Power Permits
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400 500
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Engineers' Fees
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1 100 500
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4 001 500
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The plant was ready to start generating power on 1 July 2018, with actual generation starting on 1 October 2018. At the end of the power plant's useful life, which is expected to be 10 years, Midnight Boil Ltd is required by the government to dismantle the plant, remove it, and return the site to its original condition. After consulting its own engineers and environmentalists, Midnight Boil Ltd estimates these costs to be:
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Dismantling the plant
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$750 500
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Environmental remediation costs
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1 249 500
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Replacement of flora and fauna
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100 000
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2 100 000
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Midnight Boil Ltd uses a discount rate of 10 per cent.
Required
Prepare the journal entries necessary to account for the power plant for the years ended 30 June 2018, 30 June 2019 and 30 June 2024. Ignore depreciation.
Question 3. Sun City Limited commences construction of a multi-purpose water park on 1 July 2014 for Pretoria Limited. Sun City Limited signs a fixed-price contract for total revenues of $50 million. The project is expected to be completed by the end of 2017 and Pretoria Limited controls the asset throughout the period of construction. The expected cost as at the commencement of construction is $38 million. The estimated costs of a construction project might change throughout the project-in this example, they do change. The following data relates to the project (the financial years end on 30 June):
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2015 ($m)
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2016 ($m)
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2017($m)
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Costs for the year
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10
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18
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12
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Costs incurred to date
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10
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28
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40
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Estimated costs to complete
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28
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12
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-
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Progress billings during the year
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12
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20
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18
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Cash collected during the year
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11
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19
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20
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REQUIRED
(a) Using the above data, compute the gross profit to be recognised for each of the three years, assuming that the outcome of the contract can be reliably estimated.
(b) Prepare the journal entries for the 2015 financial year using the percentage-of-completion method.
(c) Prepare the journal entries for the 2015 financial year, assuming the stage of completion cannot be reliably assessed.
Question 4. Mam Ltd acquired Bo Ltd on 1 July 2018 for cash of $7 000 000. At that date, Bo Ltd's net identifiable assets had a fair value of $5 800 000. The fair value of the net identifiable assets of Bo Ltd are determined as follows:(in $000)
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Customer List
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50
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Machinery
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1450
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Buildings
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1500
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Land
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3000
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6000
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Less: Bank Loan
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200
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Net assets
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5800
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At the end of the reporting period of 30 June 2019, the management of Mam Ltd determines that the recoverable amount of the cash-generating unit, which is considered to be Bo Ltd, totals $6 200 000. The carrying amount of the net identifiable assets of Bo Ltd, which excludes goodwill, has not changed since acquisition and is $5 800 000.
REQUIRED
(a) Prepare the journal entry to account for any impairment of goodwill.
(b) Assume instead that at the end of the reporting period the management of Mam Ltd determines that the recoverable amount of the cash-generating unit, which is considered to be Mam Ltd, totals $4 800 000. Prepare the journal entry to account for the impairment.
Auditing and Professional Practice
Scenario One:
You have been asked by your audit client, Bolts Ltd (Bolts), to prepare a report that analyses the potential acquisition of Steel Pty Ltd (Steel). Prior to conducting your analysis, you decide to verify the accuracy and completeness of the cash flow statement provided by Steel for the year ended 30 June 2012. After reviewing a draft of your analysis, the chief financial officer (CFO) of Bolts has asked you to focus your attention on the sales and profitability of Steel and to avoid the distraction of cash flow reporting. He suggests that the acquisition will provide substantial future financial benefits to Bolts and that confusing the board with cash flow issues would not be helpful to the acquisition or to the likelihood of your being asked to undertake similar engagements in the future.
Required
List two threats to compliance with the fundamental principles that may exist resulting from your discussion with the CFO, and identify the fundamental principles at risk of being breached.
Scenario Two:
Luke and Zane are two audit seniors working for the same Big Four accounting firm. Both started employment with the firm around the same time. They have mutual respect for each other; however, they have been highly competitive since they commenced work together.
Luke has recently married and he and his wife are paying off their mortgage. Zane is single with a reputation in the firm for playing hard but working hard too. They have both been seniors for almost 18 months and are looking for promotion to audit supervisor.
They are both aware that there is only one supervisor position available.
Luke recently replaced Zane on a particular job, and the reason given to both Luke and Zane was that another assignment had arisen with a long-time client of Zane's. Once Luke had replaced Zane on that particular job, he realised that the client had called the audit manager to say that they were not impressed with Zane, as he had missed a number of issues within the audit and was arriving at work late. The audit manager had not discussed these comments with either Luke or Zane. After going through the work that Zane had completed, Luke realised that Zane had performed an excellent job, identifying a number of issues that he thought he might possibly have missed. Furthermore, Luke suspects that Zane and the client had a personality conflict, and that the client has misled the audit manager.
Luke realises that he can finish off the audit, resolve the issues and obtain a good review from this assignment, which would help him in the promotion stakes. He also knows that the audit manager is unlikely to bring the client's unsupported allegations to Zane's attention.
Required
(a) Work through this scenario using the American Accounting Association decision- making model, and decide what action Luke should take.
(b) Would your decision be any different if you used the Mary Guy decision-making model?
Scenario Three: (1000 Words)
The Peak Sawmill Limited (Peak) operates a timber sawmill in a large regional town. It sources its raw material (pine logs) from a number of local growers and from its own plantations. Logs are transported on large trucks that are weighed in on the company's weighbridge and weighed out after dropping their loads in the storage area. Logs are then debarked and sawn to size in the cutting area of the mill. The various logs are then sent to other areas of the sawmill depending on what they will be used for.
You are a senior on the audit. In the planning stage of the audit, you perform analytical procedures. In the current audit period, the average number of days to pay creditors has declined significantly from the average recorded over the past three financial years.
Your investigation reveals that log suppliers represent more than 90 per cent of the value of accounts payable. As an internal control, details of the goods received notes are matched against the supplier's invoice. The accuracy of the invoice is checked, after which the invoice is authorised for payment by the mill accountant. Any discrepancy between what the supplier's invoice amount should be and the actual amount charged by the supplier is communicated to the supplier by way of a pre-numbered ‘request for credit' form. This form provides reasons for the differences and the amount requested to be credited to the company by the supplier.
The correct amount of the invoice is entered into the accounts payable accounting system and the supplier's monthly statement is reconciled to the accounts payable balance per the creditors' ledger at month end. The differences are mostly attributable to:
- unprocessed invoices due to pricing differences
- timing differences in the recorded date of a payment made
- amounts requested for credit
- settlement discounts disallowed.
Cathy Vernon, the company's financial controller, informs you that due to the increase in the price of timber, new contracts with suppliers have been negotiated over the past year. The accounts payable personnel have complained that management is too slow in informing them about the effective dates of the implementation of the contracts and the revised prices. A brief inspection of the accounts payable reconciliations for five of the biggest suppliers indicates that many invoices are being held back due to the lack of correct pricing.
Required
(a) List two key assertions at risk in relation to accounts payable.
(b) Provide your justification for each assertion.
(c) For each assertion, outline one substantive test of detail to obtain sufficient appropriate audit evidence.