University of the South Pacific

School of Accounting and Finance

Semester 2, 2019

AF210 Financial Accounting (Blended mode)

Final Exam
Instructions
There are 11 pages in this exam paper, including this cover page
There are two sections in this exam paper, Section A and Section B.
You are to answer all questions provided in both sections.
You have 10 minutes to read the paper and 3 hours to write your answers.
This exam has a total mark of 100 and carries a 50% weighting towards your overall course
grade.
To secure a pass mark in the course, you must score a mark of at least 50% over all assessment
AND a mark of at least 40% in this examination.

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Section A: 30 Marks

This section contains 15 Multiple Choice questions worth 2 marks each. Answer this section on the special
multiple choice grid provided. You are to spend about 45 minutes on this section.

1. A deposit in foreign currency made by a Fiji entity should be translated at the following dates
for reporting purposes of the entity:

A. only at the date the deposit is made with the foreign bank.
B. only at reconciliation between the end of the first financial year after making the deposit with
the foreign bank and no further subsequent adjustments.
C. at the date of the deposit and then adjusted for a gain or loss based on the initial deposit rate at
the beginning of the financial year.
D. at the date of the deposit, and then a gain or loss should be recorded at the end of the financial
year.

2. When there is a change made to the useful life of an asset:

A. it must be recognised as a change in an accounting estimate and the impact of the reported
change must be disclosed in the notes to the accounts.
B. it must be recognised as an error and all previous financial statements must be restated.
C. it must be recognised as an error and opening retained earnings and opening balances of the
asset must be restated.
D. it is recognised as a change in an accounting estimate and the opening retained earnings and
opening balances of the asset must be restated.

3. The choice of classification between nature and function of expenses from ordinary activities
depends on:

A. the size of the items that would be reported under the possible classifications.
B. the historical evidence about the probability of the items recurring.
C. the classification that provides information that is reliable and more relevant.
D. the classification that best reflects the way expenses vary directly or indirectly with the
entity's level of activity.

4. A foreign currency transaction shall be recorded on initial recognition in the:

A. presentation currency.
B. local currency.
C. foreign currency.
D. functional currency.

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5. Which of the following statements is not correct?

A. A group comprises a parent and all of its subsidiaries.

B. Consolidated financial statements are financial statements of a group of entities presented as if
that group was acting as a single economic entity.
C. A subsidiary is an entity that is controlled by another entity.
D. A parent is an entity that has more than one subsidiary.

6. Cash equivalents include:

A. highly liquid investments with short periods to maturity that are readily convertible to cash on
hand at the investor's option and are subject to an insignificant risk of changes in value.
B. term borrowing.
C. working capital items such as prepayments and accruals.
D. highly liquid investments with short periods to maturity that are readily convertible to cash on
hand at the investor's option and are subject to an insignificant risk of changes in value and term
borrowing.

7. 'Comprehensive income' refers to:

A. the statement of total recognised income and expense.

B. the statement of changes in equity.
C. the net profit figure shown at the bottom of the statement of profit or loss.
D. none of the given answers.

8. The effect of an increase in the exchange rate for Australian dollars relative to other major
world currencies would include:

A. offshore debt would become more expensive.

B. the cost of importing goods from overseas would increase.
C. people buying goods overseas with Australian dollars would find the goods relatively cheaper
than before.
D. the cost of Australian exports for overseas buyers would decrease.

9. Investing activities are defined by IFRS as those that:

A. relate to the changing size or composition of the capital management structure of the entity.
B. relate to the acquisition or disposal of inventory.
C. relate to the acquisition and/or disposal of non-current assets and other investments not
included in cash equivalents.
D. relate to changes in capital or liabilities used to fund long-term assets.

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10. Reporting events after reporting date is concerned with:

A. information that becomes available between the date the reports are completed and the date
the auditor signs the audit report.
B. events that occur or information that becomes available after the directors sign the Directors'
Declaration and before the reports are printed.
C. events or transactions that occur or about which information becomes available between
reporting date and time of completion.
D. events or transactions that occur or about which information becomes available between
reporting date and reporting period date.

11. A non-adjusting event is one that:

A. provides evidence about new conditions that did not exist at reporting date.
B. occurs before reporting date.
C. provides additional evidence of or information about conditions that existed at the reporting
date.
D. occurs before the auditor signed the audit report.

12. Which of the following statements accurately describes important aspects of consolidation
after the date of acquisition?

A. The elimination entry is made only the first time the consolidation is conducted. Any
goodwill arising from the purchase is amortised over the appropriate period (not more than 20
years) and any excess will have been written off in the first year's elimination entry. Post-
acquisition earnings are considered to be part of the group's earnings.
B. The elimination entry will be made each time the consolidation is undertaken. Goodwill
arising on consolidation will be recognised. If the controlled entity was purchased at a discount
the excess is recognised as a gain in the profit or loss on the acquisition date
C. The elimination entry is made each time the consolidation is undertaken. If an excess arises on
consolidation it is completely written off in the first year and is not included in the consolidation
worksheet entries again. If goodwill arises it is recognised for the full amount at acquisition and
amortised over a period not exceeding 20 years. Any earnings made by the controlled entity after
acquisition belongs to the parent entity and should be reflected in the consolidated accounts and
the parent entity's books.
D. The elimination entry will be made each time the consolidation is undertaken, but the amount
of goodwill or excess recognised each time will change. The excess will be written off in the first
period and the goodwill amortised over an appropriate period (not exceeding 20 years). The
goodwill expense will be recognised in the books of the parent company and matched against the
post-acquisition earnings of the controlled entity. Any remaining surplus is treated as income in
the consolidated accounts.

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13. Which of the following tables provides an appropriate classification for the items listed for
the statement of cash flows for a retailing business?

A.

B.

C.

D.

14. McKay Ltd is a parent entity of Shephard Ltd, a wholly owned subsidiary. Which of the
following is true of the dividends reported in McKay Ltd's consolidated statement of financial
position?

A. Only intra-group dividends received from Shephard Ltd.

B. Only those paid by McKay Ltd to external shareholders.
C. Both those paid to McKay Ltd by Shephard Ltd and those paid to McKay Ltd's external
shareholders.
D. An offset amount of both those paid to McKay Ltd by Shephard Ltd and those paid to McKay
Ltd's external shareholders.

15. The spot rate is defined as:

A. the rate at which the currency to be exchanged is currently selling against a bundle of
currencies of major trading partners.
B. the exchange rate for immediate delivery of currencies to be exchanged.
C. one identified exchange rate for the relevant currencies from the period on or around the date
of the transaction.
D. the current exchange rate as implied by forward-exchange contracts in place at the time of the
transaction.

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Section B: 70 Marks

This section has 5 compulsory questions. You are to spend about 135 minutes on this section.

Question 16: Events occurring after the end of the reporting period (10 marks)
In relation to the operations of Nadi Ltd, the following events took place after the 30 June 2019
reporting period end (Assuming all events are material by reason of size and nature):

• On 17 July 2019 Nadi Ltd’s main fishing fleet was sunk during a freak storm. Insurance will
cover the replacement of the vessels but lost sales representing $550 000 in profits are not
covered.
• On 19 July 2019 Nadi Ltd took delivery of a fishing net for its prawn trawler. The net was
purchased from a UK manufacturer on delivered duty paid shipping terms and was in transit at
the end of the reporting period. An inspection of the net revealed significant structural flaws and
the net was returned to the supplier on 28 July 2019. Nadi Ltd is to receive a full refund of the
$650 000 purchase price which had been paid in advance on 29 June 2019.
• On 29 August 2019 a lawsuit was lodged against the company by the families of crew members
drowned in the 17 July storm, alleging negligence, and claiming $4 million in damages. No date
has as yet been set for the court hearing.
• On 1 September 2019 the directors resolved to issue to the public 10 000 shares of $10 each,
payable $5 on application and $5 on allotment.
• On 3 September 2019 Nadi Ltd was confirmed to be responsible for the sea pollution event that
happened in early June 2019. An amount of $500 000 was payable by the company. An expert
investigation was conducted immediately after the sea pollution event, but the investigator’s
report was released on 3 September 2019.

Required:

Classify the above events into adjusting and non-adjusting events after the end of the reporting
period, justifying your choice. (10 marks)

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Question 17: Statement of profit or loss and other comprehensive
income (10 marks)
The accountant at Ross Ltd is preparing the statement of profit or loss and other comprehensive
income for the year ended 30 June 2019 (classify expenses by nature). To assist, the following trial
balance extract has been provided:

Sales revenue 1 145 000

Decrease in inventories of finished goods and work in progress 78 100
Raw materials used 800 000
Salaries and wages expense 135 000
Other employee benefits expenses 25 000
Other expenses 45 740
Interest paid 16 480
Interest received 14 500
Dividends paid 5 000
Dividends received 4 600
Proceeds from sale of land 60 000
Cost of land sold 37 000
Other revenue 300
Depreciation and amortisation expense 68 700

During the year building was revalued from $160 000 to $170 000.
Ignore income tax effects (i.e. assume the tax rate is 0%).

Required:

Prepare a statement of profit or loss and other comprehensive income for Ross Ltd, for the year
ended 30 June 2019 (classify expenses by nature). (10 marks)

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Question 18: Statement of cash flow (20 Marks)

Pacific Ltd is preparing a statement of cash flows for the year ended 30 June 2019. The data are
provided as below.

PACIFIC LTD
Statements of Financial Position
as at 30 June
2019 2018
Assets
Cash at bank $ 22 500 $ 12 500
Accounts Receivables 120 000 77 000
Inventory 150 000 80 000
Equipment $ 75 000 $ 110 000
Acc. depreciation – equipment (20 000 ) 55 000 (30 000 ) 80 000
Buildings 430 000 330 000
Acc. depreciation – buildings (110 000 ) 320 000 (80 000 ) 250 000
Total assets $ 667 500 $ 499 500
Liabilities
Accounting Payables $ 120 000 $ 60 000
Long-term loan 80 000 —
Equity
Share capital 420 000 400 000
Retained earnings 47 500 39 500
Total liabilities and equity $ 667 500 $ 499 500

PACIFIC LTD
Statement of Profit or Loss
for the year ended 30 June 2019
Income
Sales revenue $ 485 000 $ 485 000
Less: Expenses
Cost of sales 365 000
Bad debts expenses 6 000
Salaries and wages 39 000
Loss on sale of equipment 5 000
Depreciation – buildings 30 000
Depreciation – equipment 10 000 455 000
Profit before tax 30 000
Less: Income tax expense -
Profit after tax $ 30 000

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Additional information

(a) New demountable buildings were purchased for cash.

(b) During the year, a dividend to shareholders was declared.
(c) A loan was raised during the year to provide cash for working capital needs.
(d) Equipment that had cost $35 000 and been depreciated by $20 000 was sold for cash of
$10 000.
(e) Ignore income tax effects (i.e. assume the tax rate is 0%).

Required:

(a) Prepare the statement of cash flows based on the direct method of presentation for the year
ended 30 June 2019. (15 marks)
(b) Prepare a reconciliation of the profit for the year with net cash flows from operating activities.
(5 marks)

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Question 19: Accounting for Group Structures and Intragroup Transactions
(20 marks)

On 1 July 2018, Fiji Ltd acquired all the issued shares of Suva Ltd for $155 000. At this date
the equity of Suva Ltd was recorded as follows:

Share capital $80 000

General reserve 30 000
Retained earnings 40 000
Dividend payable 20 000

All the identifiable assets and liabilities were recorded at amounts equal to their fair values. The
dividend payable reported at 1 July 2018 by Suva Ltd was paid on 15 September 2018. During the
2018–19 year, the following intragroup transactions occurred.

(1) On 1 July 2018, Fiji Ltd sold a car costing $15 000 to Suva Ltd for $18 000. Fiji Ltd had not
charged any depreciation on the car before the sale. Both entities depreciate assets at 10% p.a.
on cost.
(2) In October 2018, Fiji Ltd sold inventory to Suva Ltd for $12 000. This inventory had
previously cost Fiji Ltd $8 000. Half of the inventory remained unsold by Suva Ltd at the end
of the year.
(3) In December 2018, Suva Ltd sold inventory (different type of inventory from the above
transaction 2) to Fiji Ltd for $20 000. This inventory had previously cost Suva Ltd $15 000.
All the inventory is sold to Cockatoo Ltd, an external party, for $22 500 on 19 June 2019.
(4) On 1 January 2019, Fiji Ltd rented a spare warehouse from Suva Ltd. Fiji Ltd paid rent to
Suva Ltd of $300 per month. Fiji Ltd was still using the warehouse at the end of the year.
(5) In March 2019, Suva Ltd gave Fiji Ltd an interest-free loan of $10 000. Fiji Ltd has as yet
made no repayments on the loan.

Required:

(a) Prepare the consolidation worksheet entries at 1 July 2018. (10 marks)
(b) Prepare the intra-group elimination entries for items (1) to (5) above for the year ended 30 June
2019. (10 marks)

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Question 20: Accounting for Foreign Currency (10 Marks)

Pineapple Ltd is a Fiji company that purchases inventory from Hammers Plc, which is an English
company. The following information is relevant to a recent acquisition of inventory for £300 000
pursuant to a contract with terms including FOB shipping.

Date Event Exchange rate

11-May-2019 Inventory shipped FJ$1 = £0.41
30-June-2019 End of reporting period FJ$1 = £0.43
31-July-2019 Cash payment of £300 000 to Hammers plc FJ$1 = £0.39

Required:

Provide all of the journal entries of Pineapple Ltd that relate to the foreign currency purchase of
inventory. (Narrations are not required) (10 Marks)

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