MACC7003 Advanced Financial Accounting

Assignment 2 - Solutions
Topics 3: Equity and EPS
Question 1 (Statement of shareholders’ equity)

Kenobi Ltd.
Statement of changes in shareholders’ equity
For the year ended December 31, 2023

Preference Ordinary share Retained Total

share capital capital profits shareholders’
equity

Dec 31, 2022 $98,000 $120,000 $450,000 $668,000

(a) Issuance of 36,000 36,000

ordinary shares

(b) Repurchase of (31,500) (31,500)

preference share

(c) Bonus issue 90,000 (90,000) 0

(d) Net income 92,400 92,400

Dec 31, 2023 66,500 246,000 452,400 764,900

Kenobi Ltd.
Statement of shareholders’ equity
For the year ended December 31, 2023
$
Shareholders’ equity
Preference share capital (1,250 shares) 66,500
Ordinary share capital (9,380 shares) 246,000
Retained profits 452,400
Total shareholders’ equity 764,900
Workings:
No of preference shares outstanding = 2,000- 750 = 1,250
No of ordinary shares outstanding =5,500+ 1,200 + 2,680 = 9,380
Question 2
Basic earnings per share:
Period Shares outstanding fraction of year WANOS
Jan 1 to Feb 28 550,000 2/12 91,667
Mar 1 to Jun 30 610,000 4/12 203,333
Jul 1 to Aug 30 500,000 2/12 83,333
Sep 1 to Dec 31 590,000 4/12 196,667
WANOS 575,000

Basic EPS (2020) : $3,200,000 / 575,000 = $5.57

Dilution test
Convertible bonds
Increase in earnings
Converted bonds $1.5m x 10% x (1-20%) x 8/12 = $80,000
Non-converted bonds $2.5m x 10% x (1-20%) x 12/12 = $200,000
= $280,000
Increase in no. of shares
Converted bonds $1.5m x 60/1,000 x 8/12 = 60,000
Non-converted bonds $2.5m x 60/1,000 x 12/12 = 150,000
= 210,000

Incremental EPS = $280,000 / 210,000 = 1.33 (<BEPS ==> dilutive)

Diluted earnings per share:

Adjusted earnings = $3,200,000 + $280,000 = $3,480,000
Adjusted WANOS = 575,000 + 210,000 = 785,000
(*Alternatively, the number of shares can be computed as follows: 575,000 + (4,000,000 ×
60/ 1,000) – (1,500,000 × 60/ 1,000 × 4/12) = 785,000)

Diluted EPS (2020) : $3,480,000 / 785,000 = $4.43

Topic 4: Revenue
Question 1
1. Number of performance obligations in the contract: 2.
Delivery of a Protab computer is one performance obligation.
The option to purchase a Probook at a 50 percent discount is a second performance
obligation because it provides a material right to the customer that the customer would not
receive otherwise. The option is capable of being distinct because it could be sold or provided
separately, and it is separately identifiable, as it is not highly interrelated with the other
performance obligation of delivering a Protab computer, and the seller’s role is not to
integrate and customize them to create one product. So, the discount coupon qualifies as a
performance obligation.
The six-month quality assurance warranty is not a performance obligation. It is not sold
separately and is simply a cost to assure that the product is of good quality. The seller will
estimate and recognize an expense and related contingent warranty liability in the period of
sale.
The coupon providing an option to purchase an extended warranty does not provide a
material right to the customer because the extended warranty costs the same whether or not it
is purchased along with the Protab. Therefore, that option does not constitute a performance
obligation within the contract to purchase a Protab package.

2. Allocation of purchase price to performance obligations:

Allocation of total
Percentage of the sum of the transaction price
Stand-alone selling stand-alone selling prices of to each
price of the the performance performance
performance obligations: obligation:
Performance
obligation:
obligation:
Protab tablet $76,000,0001 95%3 $74,100,0005
Option to
purchase a 4,000,0002 5%4 3,900,0006
Probook
Total $80,000,000 100.00% $78,000,000
1
$76,000,000 = $760/unit × 100,000 units.
2
$4,000,000 = 50% discount × $400 normal Probook price × 100,000 discount coupons
issued × 20% probability of redemption.
3
95% = $76,000,000 ÷ $80,000,000
4
5% = $4,000,000 ÷ $80,000,000
5
$74,100,000 = 95.00% × ($780 × 100,000 units)
6
$3,900,000 = 5.00% × ($780 × 100,000 units)
3. Creative then allocates the total selling price based on stand-alone selling prices, as
follows:

$78,000,000

Transaction Price
95% 5%

$74,100,000 $3,900,000

Protab computers Probook discount vouchers

The journal entry to record the sale is:

Cash ($780 × 100,000 units) 78,000,000

Sales revenue 74,100,000

Contract liability—discount option 3,900,000
 4. Number of performance obligations in the contract: 3.
Allocation of purchase price to performance obligations:

Percentage of the sum Allocation of total

of the stand-alone transaction price to
Stand-alone selling selling prices of the each performance
price of the performance obligation:
performance obligations (to two
Performance
obligation: decimal places):
obligation:
Protab tablet $76,000,0001 93.83%4 $73,187,4007

Option to purchase
Probook 4,000,0002 4.94%5 3,853,2008

Option to purchase
extended warranty 1,000,0003 1.23%6 959,4009
Total $81,000,000 100.00% $78,000,000
1
$76,000,000 = $760/unit × 100,000 units.
2
$4,000,000 = 50% discount × $400 normal Probook price × 100,000 discount coupons
issued × 20% probability of redemption.
3
$1,000,000 = ($75 price of warranty sold separately minus $50 price of warranty sold at
time of software purchase) × 100,000 units sold × 40% probability of exercise of option.
4
93.83% = $76,000,000 ÷ $81,000,000
5
4.94% = $4,000,000 ÷ $81,000,000
6
1.23% = $1,000,000 ÷ $81,000,000
7
$73,187,400 = 93.83% × ($780 × 100,000 units)
8
$3,853,200 = 4.94% × ($780 × 100,000 units)
9
$959,400 = 1.23% × ($780 × 100,000 units)
Creative then allocates the total selling price based on stand-alone selling prices, as
follows:

$78,000,000

Transaction Price
93.83% 4.94% 1.23%

$73,187,400 $3,853,200 $959,400

Protab computers Probook discount vouchers Extended

warranty
The journal entry to record the sale is:
Cash ($800 × 100,000 units) 78,000,000
Sales revenue 73,187,400
Contract liability—discount option 3,853,200
Contract liability—extended warranty 959,400