HI6025 Final Assessment T1 2021

Student Number: (enter on the line below)
Student Name: (enter on the line below)
HI6025
ACCOUNTING THEORY AND CURRENT ISSUES
FINAL ASSESSMENT
TRIMESTER TR1, 2021
Assessment Weight: 50 total marks

Instructions:
 All questions must be answered by using the answer boxes provided in this paper.
 Completed answers must be submitted to Blackboard by the published due date
and time.
Submission instructions are at the end of this paper.
Purpose:
This assessment consists of six (6) questions and is designed to assess your level of
knowledge of the key topics covered in this unit
HI6025 Final Assessment T1 2021

Adapted Harvard Referencing
Holmes has now implemented a revised Harvard approach to referencing:
1. Reference sources in assignments are limited to sources which provide full text
access to the source’s content for lecturers and markers.
2. The Reference list should be located on a separate page at the end of the essay and
titled: References.
3. It should include the details of all the in-text citations, arranged alphabetically A-Z
by author surname. In addition, it MUST include a hyperlink to the full text of the
cited reference source.
For example;
P Hawking, B McCarthy, A Stein (2004), Second Wave ERP Education, Journal of
Information Systems Education, Fall,
http://jise.org/Volume15/n3/JISEv15n3p327.pdf
4. All assignments will require additional in-text reference details which will consist of
the surname of the author/authors or name of the authoring body, year of
publication, page number of content, paragraph where the content can be found.
For example;
“The company decided to implement an enterprise wide data warehouse business
intelligence strategies (Hawking et al, 2004, p3(4)).”
Non - Adherence to Referencing Guidelines

Where students do not follow the above guidelines:
1. Students who submit assignments which do not comply with the guidelines may be
required to resubmit their assignments or incur penalties for inadequate referencing.
2. Late penalties will apply per day after a student or group has been notified of a
resubmission requirements.
 Students whose citations are identified as fictitious will be reported for academic
misconduct.

Question 1 ( 7 marks)
An asset having a cost of $200 000 and accumulated depreciation of $40 000 is revalued to $240
000 at the beginning of the year. Depreciation for the year is based on the revalued amount and
the remaining useful life of eight years. Shareholders’ equity, before adjusting for the above
revaluation and subsequent depreciation, is as follows:
Share capital 600 000

Revaluation surplus 90 000
Capital profits reserve 170 000
Retained earnings 140 000
Total 1 000 000
Required:
Prepare journal entries to reflect the revaluation of the asset and the subsequent depreciation of
the revalued asset. Which of the equity accounts would be affected directly or indirectly by the
revaluation?
ANSWER: ** Answer box will enlarge as you type
Journal entries:
1. Revaluation adjustment entry:
Asset a/c Dr. $80000
To Revaluation Surplus a/c $80000
Depreciation:
Depreciation expense a/c Dr $30000
To Accumulated Depreciation a/c $30000
In regards to the equity accounts, the revaluation surplus account will be increased i.e. $80000+
$90000=$170000. The amount of profits will also be affected as the profits are generally based
upon the value of depreciation. The profits will decrease with the sale of an asset due to
revaluation.
Workings:
Cost value of asset = $200000 (given)

Accumulated depreciation = $40000 (given)
Net value of asset = $ 160000
Revalued amount = $240000 (given)
Revaluation surplus = 240000-160000= $80000
Depreciation = book value of an asset/useful life

= 240000/8
=30,000 per year

Question 2 (7 marks)
ABC Ltd acquires 100 per cent of RedCarpet Ltd on 1 July 2021. ABC Ltd pays the shareholders of
RedCarpet Ltd the following consideration:
Cash 35 000
Plant and equipment fair value $125 000; carrying amount in the books of ABC Ltd $85
000
Land fair value $150 000; carrying amount in the books of ABC Ltd $100
000
There are also legal fees of $95 000 involved in acquiring RedCarpet Ltd.
On 1 July 2021 RedCarpet Ltd’s statement of financial position shows total assets of $300 000 and
liabilities of $150 000. The fair value of the assets is $400 000.
Required:
Has any goodwill been acquired and, if so, how much? And discuss the potential for including
associated legal fees into the cost of acquiring RedCarpet using appropriate accounting standard.
ANSWER:
Fair value of consideration:

Cash: $35000
Plant and equipment: $125000
Land: $150000
= $310000
Fair value of net assets acquired:

Asset: $400000
-Liabilities –$ 150000
= $250000
Goodwill = $310000 – $250000 = $60000
Legal fees is excluded while calculating goodwill. However, according to AASB, in case of a
business combination, all acquisition costs e.g. legal fees are always treated as an expense.

Acquisition related costs include costs which are incurred by the acquirer such as accounting
cost, administrativecosts and legal fees.

ABC Ltd has entered into an agreement to lease an item of equipment that produces teddy bears.
The terms of the lease are as follows:
Date of entering lease: 1 July 2023.

Duration of lease: 10 years.
Life of leased asset: 10 years.
There is no residual value.
Lease payments: $5000 at lease inception, $5500 on 30 June each year (that is, 10 payments).
Included within the lease payments are executory costs of $500.
Fair value of the machine at lease inception: $27 470.
Required:
Determine the interest rate implicit in the lease.
ANSWER:
In order to determine the interest rate implicit in the lease, trial and error method is used.
Implicit rate = 18%.
Present value of initial payment = $5000*1 = $5000

Present value of yearly payments = ( $5500 - $500)* 4.4941 = $22470
= $27470
$27470-$5000/5000 = $4.494
As per the annuity table, $4.4941 = present value of annuity in arrears of $1 per year which is
discounted at the rate of 18%.

Discuss and explain If an entity is considering revaluing its exploration and evaluation assets,
would the revaluation increase the ‘relevance’ of the information from the perspective of the
readers of the financial statements? Further, provide explanation for capitalising the expenses at
evaluation and exploration stage also restoration of a oil extraction project.
ANSWER:
The adjustments being done in the assets in the form of revaluing them are generally added to
the equity of the company under revaluation reserves or maintainenece adjustment. The
revaluation will increase the relevance of the information for the financial users as it will give the
users with more insight and helps in their decision making process. An honest disclosure by the
company regarding its assets and liabilities builds a trust among the investors and the company,
thus, building goodwill and increasing the profits of the company. The revaluation of the assets
in all ways increase the relevance of the information as the information is transparent with all
valuable information.
The
ABC Ltd is an Australian listed company. Its results for the financial year ending 30 June 2023
have exceeded expectations—profit before tax is $5.597 million and income tax expense is
$1.847 million. As at 30 June 2022, there were 9.75 million ordinary shares on issue. On 11 May
2023, 3.25 million further ordinary shares were issued at a price of $2.30—paid to $2.00. The
partly paid shares carry rights to dividends in proportion to the amount paid relative to the total
issue price.
Required:
Calculate the basic EPS for ABC Ltd for the year ending 30 June 2023.
ANSWER:

365 days / 365 days * 9750000 = $9750000
51 days/365 days * 2/2.3*3250000 = $394878
=$10144878
Profit after tax = 5.597- 1.847 = 3750000

EPS = 3750000/10144878
=$0.3696

Explain what is a hedging arrangement and how does it reduce foreign currency risk exposure?
ANSWER:
Hedging arrangement is a method which is utilized by the companies in order to reduce or

eliminate the foreign exchange risk. In other words, if a company is into the business of export or
import then hedging method is utilized to offset any type of loss incurred due to the change in
the foreign exchange rate. Thus, the companies who are into entering the foreign currencies in
their transactions are at a risk of rapidly changing foreign exchange rate.
Hedging arrangements are done by the companies in advance with the objective of avoiding any
type of financial risks. When there are hedge arrangements being made by the companies and
any gain or loss incurred by the company on any transaction can be offset by any other
transaction. If there is any decrease in the exchange rate of one currency, then there will be a
profit if an overseas purchaser sells it. However, a loss will be incurred for the contract made
with the bank. Thus, a hedge agreement helps in eliminating the risks associated with the rapid
changes in the exchange rates.
References:
- Bae, & Lee, Kunwoo & Kim, Jungsun. (2019). Does Fixed Asset
Revaluation Build Trust between Management and Investors?.
Sustainability. 11. 3700. 10.3390/su11133700.
https://www.researchgate.net/publication/334270517_Does_Fixed
_Asset_Revaluation_Build_Trust_between_Management_and_Inves
tors
-

END OF FINAL ASSESSMENT
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Student Number: (enter on the line below)

Student Name: (enter on the line below)

Assessment Weight: 50 total marks

Submission instructions are at the end of this paper.