Swinburne University of Technology

HBCO 504 Corporate

Accounting

Semester 2, 2010

This Exam:

1. Duration of Exam = 3 hours plus 15 minutes reading time.

2. This paper represents 70% of the final assessment for this
subject.
Marks on the paper total 100.
3. There are 6 questions. Attempt all questions.
4. Candidates are permitted to bring into the exam:
Writing implements and Calculators (nonprogrammable)
All materials will be checked
Answer your questions in the Answer Booklet provided.
Remember to write the number of the question you are
answering on each page.

Page 1 of 8 pages of Exam

Initialled:

Sample Exam 2

Final EXAM

Semester 2, 2010

QUESTION 1

(30 Marks)

On 3 January 20X5, Hosting Ltd acquired 65% of the shares of Scorpio Ltd for $1,300,000.
On that day, the equity of Scorpio Ltd consisted of:
Share capital
$ 1,200,000
Retained earnings
$ 230,000
General reserve
$ 350,000
All the identifiable net assets of Scorpio Ltd were recorded at fair value except for land
which had a fair value of $100,000 above the carrying amount.
The following information is extracted from the books of both companies for the
financial year ended 31 December 20X9:

Profit before income tax

Income tax expense
Retained earnings as at 1 January 20X8
Dividends paid
Dividends provided
Share capital
General reserve
Debentures in Hosting (Interest 5.5%)

Hosting Ltd

Scorpio Ltd

$1,200,000
$336,000
$1,253,000
$325,000
$325,000
$3,250,000
$1,160,000

$300,000
$98,000
$253,000
$30,000
$42,000
$1,200,000
$460,000
$120,000

The following information relates to the year ending 31st December 20X9:

Both companies recognise and accrue dividends before receipt of cash. In relation
to the dividend paid by Scorpio Ltd in the current financial year, $12,000 is from
profits earned before 3 January 20X5. The Accountant of Hosting Ltd took this under
consideration and decided to put in an adjustment to impair the Investment in
Scorpio account by the relevant amount.

In May 20X8, Scorpio Ltd sold some inventory to Hosting Ltd for $90,000, recording a
profit before tax of $32,000. Hosting Ltd re-sold one-third of the inventory to external
customers in October 20X8 for $45,000. Another one-third was re-sold to an
overseas customer in February 20X9 for $40,000. The remaining one-third was still on
hand on 31 December 20X9.

On 1 July 20X9, Hosting Ltd purchased an item of machinery from Scorpio Ltd for
$460,000. This machinery had previously cost Scorpio Ltd $410,000. Scorpio Ltd
regarded this item as inventory whereas Hosting Ltd intended to use it as a noncurrent asset. Hosting Ltd charges depreciation of 10% per annum on cost.

During the current financial year Scorpio Ltd paid management fees amounting to
$300,000 to Hosting Ltd in relation to services rendered to secure valuable customer
lists from overseas.

Goodwill is impairment tested on an annual basis and an impairment amount of

20% on the original amount was accounted for in each financial year since
acquisition.

The company income tax rate is 30%.

Page 2 of 8 pages - Exam Paper

Sample Exam 2

Final EXAM

Semester 2, 2010

REQUIRED:
Prepare:
(a)

The acquisition analysis as at 3 January 20X5. (Note: This is NOT the journal
entry, only the calculation to determine any goodwill or gain).

(b)

Appropriate journal entries to consolidate Hosting Ltd and Scorpio Ltd for
the financial year ended 31 December 20X9.
Show all workings and calculations
Journal narrations are required.
(30 marks)

QUESTION 2

(10 Marks)

For each of the following statements, you are required to answer whether the
statement is true or false and explain what is wrong (if anything) with the statement
AND where necessary re-write the sentence so as to make it correct.
i.

Corporate governance sounds like a good idea but as it is not required by law,
then companies can ignore it for reporting purposes.

ii. Companies are not allowed to change their share capital once they begin
operations. How would it look if they could write off part of their capital if they
had accumulated losses?
iii. The most severe penalty that may be imposed for non-payment of calls is
forfeiture of the shares involved. Once forfeiture occurs it must be undertaken
under strict protocol and the monies must be refunded to shareholders in the
case of a public company.
iv. Financial statements must be true and fair and if they are not, then you cant
trust the information presented.

(4 x 2.5 marks = 10 marks)

Page 3 of 8 pages - Exam Paper

Sample Exam 2

QUESTION 3

Final EXAM

Semester 2, 2010

(20 Marks)

Roxan Ltd is a large retail company with department stores in the city centre and in
several suburban shopping centres. The accountant is in the process of finalising
accounts for the financial year ended 30 June 2010 and she is somewhat concerned
about several transactions that she gave her assistant to follow up on.
You are required to help the assistant with making sure that the company complies
with the Corporations Law and Australian Accounting Standards on the following
transactions:
a)

Due to a new surge in real estate values the Collins Street store has been
revalued upward by $10 million. The company had originally paid $60 million
for the store but following a downward revaluation three years ago, its value in
the accounts before this revaluation is shown as $55 million.

b)

The market has just recently been flooded with low priced copies of exclusive
designer clothing by a well known Australian designer. Roxan Ltd has a large
inventory of this clothing and the directors are concerned that they wont be
able to sell the clothing. To this end the company decided to try and
overcome any potential losses and undertook a massive advertising campaign
for the clothing. They also decided to write down all the stock by this designer
by 20%. The value of this stock is currently $45 million.

c)

During the year, Roxan Ltd had provided financial support in respect of
financial loan facilities to Dannon Pty. Ltd. a company wholly owned by one of
Roxan Ltds directors, Sally Few, who also owns shares in Roxan Ltd.

d)

During the post-Christmas sales, a customer slipped and fell whilst stepping
onto escalators in one of Roxan Ltds suburban stores. The customer filed a
lawsuit which the company is presently defending. The possibility exists of an
amount of $8,500,000 (which is material) being owed by the company. Lawyers
estimate however, that there is a good chance that the company will win the
case.

e)

Roxan Ltd recently signed a contract with a new security company which
would be responsible for the security of all the Companys warehouses
throughout Victoria. Unfortunately, during the changeover to the new contract
there was a period of one week when the company had no security. During
that week, the first week of August, one of the Companys warehouses was
broken into and thieves made off with a considerable amount of inventory and
set fire to whatever they did not take. The total loss comes to $5,900,000 and is
covered by insurance, however, there is a clause in the insurance contract that
stipulates that the property must be under security surveillance at all times.

REQUIRED:
For EACH of the above items specify how the transaction would be recorded and
disclosed in order to comply with the requirements of the Corporations Law and
Australian Accounting standards?
All items are MATERIAL.
(5 x 4 marks = 20 marks)

Page 4 of 8 pages - Exam Paper

Sample Exam 2

Final EXAM

Semester 2, 2010

QUESTION 4

(8 Marks)

Fishbowl Learning Ltd is a large on-line retailer of developmental toys and books for
children. The company has a cash-generating unit (CGU) for its packaging division.
The division, known as Virtual Packers, has the following carrying amounts for its
assets and liabilities at 30 June 2010:

Cash
Accounts Receivable (net)
Inventory
IT Equipment
Accumulated Depreciation - IT Equip
Machines
Accumulated Depreciation - Machines
Goodwill
Accounts Payable
Loan

$40,000
$70,000
$160,000
$450,000
-$114,000
$574,000
-$70,000
$30,000
$65,000
$150,000

In the year 30 June 2010 the accountant reviews the accounts of the company and
determines that due to changes in packaging technology the assets of cashgenerating unit (CGU), Virtual Packers might be impaired.
The accountant determines that the value in use of the CGU is $1,060,000.

REQUIRED:
(a)

Prepare the journal entries to account for the impairment loss (if any) in Virtual
Packers at 30 June 2010.

(b)

The accountant is somewhat concerned about the Units IT Equipment, so he

sends you out to get a valuation for this Item. Your investigations show that the IT
Equipment has a fair value (less cost to sell) of $320,000.
Prepare the journal entries (if any) to take into account this new information.
Explain your answer.

Show all workings and explanations.

Journal narrations are not required.
(4 + 4 = 8 marks)

Page 5 of 8 pages - Exam Paper

Sample Exam 2

Final EXAM

QUESTION 5

Semester 2, 2010

(8 Marks)

Repo Limited acquired an item of Plant, a stamping machine, for $200,000 with an
expected useful life of 5 years. The associated installation costs amounted to $35,000
and the expected residual cost of the plant is zero.
The expected total production output over this period is:
Year 1,
35,000 units
Year 2
30,000 units
Year 3
18,000 units
Year 4
12,000 units
Year 5
10,000 units
The machine was acquired on the 1st July 20X8 and the company uses the units-ofuse method of depreciation.
On the 30th June 20X9 the machine is revalued to $450,000 and its useful life is reassessed to have a remaining life of six years. At this stage the company decides to
simplify its deprecation and all assets are depreciated on a straight-line basis.

REQUIRED:
(a)

Prepare the journal entry to show the initial recording of the machinery.

(b)

Prepare the journal entry/entries to show the revaluation of the machinery on

the 30th June 20X9.

(c)

Explain whether you think that the net book value of a fixed asset is intended to
be an approximation of its market value.

Show all workings

(2 + 4 + 2 = 8 marks)

Page 6 of 8 pages - Exam Paper

Sample Exam 2

Final EXAM

QUESTION 6

Semester 2, 2010

(24 Marks)

On 30th June 2009, Potential Ltd acquired all of the identifiable assets (except cash)
and liabilities of Sensation Ltd. Protracted negotiations finally resulted in an agreed
purchase price of $1,000,000 cash plus two fully paid shares in Potential Ltd (fair value
$5 each) for every four ordinary shares in Sensation Ltd. In addition, preference
shareholders in Sensation Ltd were to receive a non-voting ordinary share (fair value
$11 each) for each preference share. Potential Ltd held 20,000 ordinary shares in
Sensation Ltd (carrying amount $50,000 in total; fair value $2.40 each) which were
cancelled without compensation as a condition of the acquisition agreement. On
completion of the amalgamation, Sensation Ltd went into liquidation.
The Statement of Financial Position of Sensation Ltd immediately prior to the
amalgamation disclosed the following:
Sensation Ltd: Statement of Financial Position as at 30th June, 2009
Assets
Current Assets
Cash
Accounts Receivable (net)
Other Accounts Receivable
Inventory

Non Current Assets

Plant and Machinery
Depreciation
Land and Buildings
Depreciation
Goodwill

Total Assets

Shareholders Funds & Liabilities

Share Capital
68,000 8% $20 Preference Shares (fully paid)
164,000 400,000 Ordinary Shares $2 (fully paid)
4,000 General Reserve
128,000 Retained Profits
364,000 Total Share Capital and Reserves

880,000 Non-Current Liabilities

-190,000 10% Debentures
780,000
-80,000 Current Liabilities
176,000 Accounts Payable
1,566,000 Accrued Expenses
Total Liabilities
1,930,000 Total Shareholders Funds and Liabilities

$
200,000
800,000
240,000
260,000
1,500,000

200,000

160,000
70,000
430,000
1,930,000

Additional Information

Expenses of liquidation were $50,000. These were to be paid by Potential Ltd.

The carrying amount of all liabilities in Sensation Ltd equals the fair value. The
Accounts Payable of Sensation Ltd includes an amount payable of $4,000 to
Potential Ltd for purchase of goods on credit during June 2009. Potential Ltd has
recognised this amount as Other Accounts Receivable in its books. However, this
is cancelled on acquisition.

The fair values of the assets acquired by Potential Ltd. were as follows:
Accounts Receivable $132,000
Inventory
$84,000
Plant & Machinery
$700,000
Land and Buildings
$800,000

Page 7 of 8 pages - Exam Paper

Sample Exam 2

Final EXAM

Semester 2, 2010

REQUIRED:
a)

Record the above amalgamation in the books of Potential Ltd for the 30th June
2009.

b)

Show the following ledger accounts in the books of Sensation Ltd:

i)

Liquidation account

ii)

Liquidators Statement of Receipts & Payments

iii)

Shareholders Distribution account

Show all workings.

(12 + 12 = 24 marks)

Page 8 of 8 pages - Exam Paper