FINANCIAL ACCOUNTING ACC201SEMESTER 2 2021Practice questions and solutionsQuestion 1 – answer all parts (1-4).In the 30 June 2019 annual report of Avoca Ltd, the equipment was reported as follows: Equipment (at cost)Accumulated depreciation1,950,000595,0001,355,000 The equipment consisted of two machines, Machine A and Machine B. Machine A had cost$1,500,000 and had a carrying amount of $980,000 at 30 June 2019, and Machine B had cost$450,000 with a carrying amount of $375,000. Both machines are measured using the cost model,and depreciated on a straight-line basis over 8 years for Machine A, and 10 years for Machine B.On 31 December 2020, the directors of Avoca Ltd decided to change the basis of measuring theequipment from the cost model to the revaluation model. Machine A was revalued to $950,000 with anexpected useful life of 6 years.Required1. Prepare journal entries to record depreciation during the year ended 30 June2020, assuming there was no revaluation, for both Machine A and Machine B. (6marks)2. Prepare the journal entry on the basis that the asset was revalued at 31December 2020. (4 marks)3. Calculate the gain or loss on revaluation. (4 marks)4. Prepare the journal entries for Machine A for the period 1 July 2020 to 30 June 2021on the basis that it was revalued on 31 December 2020. (11 marks)ACC201 Revision questions and sols S2 2021a.doc page 2 of 9 Q1 PPE CalcsMarks1.51.51.51.522222222122530-Jun-19b.2. 2.Prepare the journal entries for Machine A for the period 1 July 2016 to30 June 2017 on the basis that it was revalued on 31 December 2016 Machine A Machine B Useful Life Cost 1,500,000 450,000 8Accum Depn 520,000 75,000 10980,000 375,000b.1. Journal entries for 1 year based on costDR CRDepreciation Machine A 187,500 Accum Depn Machine A 187,500 Depreciation Machine B 45,000 Accum Depn Machine B 45,000 Depn to 31 December 2019Depreciation Machine A 93,750 Accum Depn Machine A 93,750 Carrying value at 31 December 2019Cost 1,500,000 450000Accum Depn 613,750 103125886,250 346875Fair Value 950,000 Gain 63,750 Journal entriesDR CR613,750 613,750 Machine A 63,750 63,750 (Revaluation of machine from63,750 Asset revaluation surplus – Machine A 63,750 (Accumulation of net revaluation gain in equity) 30 June, 2020Gain on revaluation of machinery (OCI)Accumulated depreciation – Machine AMachine A(Writing the asset down to carrying amount)Gain on revaluation of machinery (OCI)ACC201 Revision questions and sols S2 2021a.doc page 3 of 9Question 2 – 25 marks – answer both a. and b.a. For development costs to be capitalised, the entity must meet the following criteria: –list 5 criteria. (15 marks)1. technical feasibility2. intention to complete and sell3. ability to use or sell4. how intangible asset will generate future economic benefits: e.g. existence of a marketor internal usefulness.5. availability of resources6. ability to measure costs reliably.b. You are a financial advisor to Rio Limited, a travel consultant to the business community.You have been asked to review the following information to determine if any adjustmentsneed to be made to the financial statements.Required: – advise whether any adjustments are required to 1 and 2. below and if so, preparethe relevant General Journal entries.1. During the financial year ended 30 June 2020, the company developed a marketingcampaign and strategy for a new service, call “The Travel Experts”. The costs incurredwere $320,000 on salaries and $195,000 in other costs such as web development,market analysis etc. These costs have been capitalised as an intangible asset (‘Brands’).(5 marks)2. You have reviewed Rio’s Intangible assets. You have identified an intangible asset –‘Goodwill’, has a carrying value at 30 June 2020 of $500,000, which was determined tohave suffered an impairment loss of $100,000. (5 marks) Q2 Intangibles Marks2.52.5Being reversal of costs that were capitalized in error2.52.5Being impairment loss for the period10 DR CR1 Brand development expenses 515,000 Intangible asset 515,000 2 Impairment loss – Goodwill 100,000 Accumulated impairment loss –goodwill 100,000ACC201 Revision questions and sols S2 2021a.doc page 4 of 9Question 3 – 25 marks (Answer both a. and b.)On 1 July 2020, Copacabana Ltd leased an executive jet commercial from AirFinance Ltd, afinance company. The lease agreement contained the following provisions: Lease term (years)7Economic life of equipment (years)8Annual rental payment, in arrears (Commencing 30/6/21)$ 1,000,000Residual guaranteed by the lessee$ 1,500,000Interest rate implicit in the lease7% The first lease payment was made on 30 June 2021.Required(a) Prepare the lease payments schedule for Copacabana Ltd (show all workings) – 17marks(b) Prepare the journal entry for the lease payment at 30 June 2022. (4 marks)(c) Prepare the journal entry for depreciation expense for the year ended 30 June 2022. (4marks)ACC201 Revision questions and sols S2 2021a.doc page 5 of 9Present Value (PV) of an Annuity tableACC201 Revision questions and sols S2 2021a.doc page 6 of 9 Copacabana LimitedLease term (years) 7Economic life of equipment (years) 8Annual rental payment, in arrears (Commencing 30/6/21) $ 1,000,000Residual value at the end of the lease term $ –Residual guaranteed by the lessee $ 1,500,000Interest rate implicit in the lease 7%(a) Lease payments schedule.MarksSchedule of lease payments322222222112225 Lease paymentInterestexpenseLiabilityreductionLiabilitybalance1-Jul-20 6,323,425 30-Jun-21 1,000,000 442,640 557,360 5,766,064 30-Jun-22 1,000,000 403,625 596,375 5,169,689 30-Jun-23 1,000,000 361,878 638,122 4,531,567 30-Jun-24 1,000,000 317,210 682,790 3,848,777 30-Jun-25 1,000,000 269,414 730,586 3,118,191 30-Jun-26 1,000,000 218,273 781,727 2,336,464 30-Jun-27 1,000,000 163,553 836,448 1,500,017 7,000,000 1,208,142 3,205,233Workings $ 1,000,000 5.3893 5,389,300*PV of LP $ 1,500,000 0.6227 934,1256,323,425107% 0.62270.3810539951. (b) Journal entries for the year ended 30 June 2022.30-Jun-22 DR CRLease liability 596,375 Interest expense 403,625 Cash 1,000,000 (Second lease payment) 1,000,000 1,000,000Depreciation expense 689,060.66 Accumulated depreciation 689,060.66 (Depreciation for the year)Right of use asset 6,323,425Less: Residual $ 1,500,0004,823,4257Annual Depn 689,060.66ACC201 Revision questions and sols S2 2021a.doc page 7 of 9Question 4 – 25 marks (Answer both a. and b.)a. Accounting profit is not the same as taxable income. Discuss (10 marks)______________________________________________________________________________ACC201 Revision questions and sols S2 2021a.doc page 8 of 9b. Ipanema Ltd recorded an accounting profit before tax of $550,000 for the year ended 30June 2021. Included in the accounting profit were the following items of revenue andexpense.Included in the accounting profit were: Entertainment expenses (non-deductible)27,500Depreciation expenses – vehicles (20% straight line)50,000Annual leave expense67,000Rent revenue32,000 For tax purposes the following applied Depreciation rate – vehicles30%Rent received26,000Annual leave paid77,000Income tax rate30% Required1. Use a current tax worksheet to calculate the current tax liability for the year ended 30 June2022. Prepare the adjusting journal entry. (15 Marks)– End of Exam Paper –ACC201 Revision questions and sols S2 2021a.doc page 9 of 9Current tax worksheet Marks1111111112Journal EntryDR CRIncome tax expense 49,350 2Current tax liability 49,350 215 $ $Accounting profit 150,000Add:Entertainment expense (non-deductible) 4,500 Depreciation – vehicles 26,000 Annual leave expense 32,000 Rent received (taxable income) 36,000 98,500 248,500 Deduct:Depreciation – vehicle (tax) 39,000 Annual leave paid 27,000 Rent revenue 18,000 84,000 Taxable profit 164,500 Current tax liability (30%) 49,350
