HKU Business School – Master of Accounting Programme 2022-23

MACC 7001 Financial Accounting Foundation

Assignment #2 (5% of full course marks)

Instructions:
1. Fill in your name and UID below.
2. Type or write your answers in the spaces provided.
3. Upload completed work to Moodle by 11pm of Oct 2, 2022. Late submission will not be graded.

Student Name Chen Zhaoxu

Student UID 3036008709

Question #1 – IAS 36 Impairment of Assets

Lawson Limited had two divisions, Mable and Gibbs, each of which was a separate cash-generating unit
(CGU). Ariana Henry, CEO of Lawson Limited, adopted a decentralised management approach and
required all divisional managers to effectively autonomously operate their divisions. As at 30 June 2022,
the net assets of each division were as follows:
Mable Gibbs
HK$’000 HK$’000
Land 2,700 1,740
Plant 7,860 5,760
Accumulated depreciation (5,502) (2,304)
Goodwill 276 192
Patent 1,260 1,530
Accumulated amortisation (126) (612)
Cash 120 72
Inventories 72 480
Receivables 204 240
Assets 6,864 7,098
Liabilities (1,656) (1,134)
Net Assets 5,208 5,964

Impairment test was undertaken at 30 June 2022. The recoverable amount of Mable was HK$5,580,000
and that of Gibbs was HK$7,290,000. Mable’s plant had a fair value less costs of disposal of
HK$2,000,000.

Required:
Explain how the impairment test was conducted and prepare any required journal entries to record the
results of the impairment test for each of the cash-generating units.

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HKU Business School – Master of Accounting Programme 2022-23
MACC 7001 Financial Accounting Foundation
Assignment #2 (5% of full course marks)

Answers
Under IAS 36 - Impairment losses are the amount by which the carrying value of an asset or cash
generated exceeds its recoverable amount. If the recoverable amount is less than the carrying amount
then there is an impairment loss, otherwise the cash generating unit is not impaired.
For Mable, the carrying amount of assets is $6,864,000, the recoverable amount is $5,580,000 (have
impairment loss).
For Gibbs, the carrying amount of assets is $7,098,000, the recoverable amount is $7,290,000 (no
impairment loss).
Mable Gibbs
Carrying Value of assets 6,864,000 7,098,000
Less: Recoverable Amount 5,580,000 7,290,000
Impairment Loss 1,284,000 0

Since, the recoverable amount for Gibbs is higher than the Carrying amount, we can say that the CGU
is impaired.

Allocation of Impairment Loss:

Impairment Loss 1,284,000
Less: Absorbed by Goodwill 276,000
Amount to be allocated to Non-Cash Assets 1,008,000

Assets Carrying Proportion Allocation of loss Adjust carrying

amount HK$ HK$ value
Land 2,700,000 2700/6468 = 41.74% (420,779) 2,279,221
Plant 2,358,000 2358/6468 = 36.46% (367,481) 1,990,519
Patent 1,134,000 1134/6468 = 17.53% (176,727) 957,273
Inventories 72,000 72/6468 = 1.11% (11,221) 60,779
Receivables 204,000 204/6468 = 3.15% (31,792) 172,208
Total 6,468,000 (1,008,000) 5,460,000

The journal entries regarding the imparment of the Mable CGU:

Debit Credit
Impairment Loss 1,284,000
Goodwill 276,000
Land 420,779
Accumulated Depreciation- Plant 367,481
Accumulated Amortization- Patent 176,727
Inventories 11,221
Receivables 31,792

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HKU Business School – Master of Accounting Programme 2022-23
MACC 7001 Financial Accounting Foundation
Assignment #2 (5% of full course marks)

Question #2 – IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
Reilly Co., a family-owned company, had a vacant property (recorded under IAS 16) with a carrying
amount of $289,500 at 31 July 2022. On this date, Reilly Co. was able to locate a buyer and the board of
the company agreed to sell the property at its present condition. On 31 July 2022, the fair value of the
property was $295,000 and the costs to sell it amounted to $7,500. The property has a remaining useful
life of 10 years on 31 July 2022. The current year end of Reilly Co. was 31 August 2022 and the sale
was completed on 15 September 2022.

(a) Explain how the property should be classified on 31 July 2022.

(b) Prepare the journal entry for the reclassification as at 31 July 2022.
(c) What was the carrying amount of this property at 31 August 2022?

Show your workings clearly.

Answers
[Please type or write your answers here.]

a) Assets can be classified as held for sale under IFRS 5.6 - when the carrying value of the asset will be
recovered principally through a sale transaction rather than through continuing use. In this case Reilly
Co. has found a buyer and the company's board has agreed to sell in its current condition, so the
property can be classified as held for sale.

b) Property = Net Realizable Value = Fair Value (-) Costs to Sell

= $295,000 - $7,500 = $287,500
Loss on Held for Sale = Carrying value of assets (-) Net Realizable Value
= $289,500 - $287,500 = $2,000
Journal entry on 31 July 2022:
Debit Credit
Property - Held for Sale A/C $287,500
Loss on Held for sale assets A/C $2,000
Property A/C $289,500

c) Carrying amount of Held for sale property = $ 287,500

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HKU Business School – Master of Accounting Programme 2022-23
MACC 7001 Financial Accounting Foundation
Assignment #2 (5% of full course marks)

Question #3 – IAS 23 Borrowing Costs

ABB builds a bridge for HK$35 million, with construction beginning on 1 January 2022. Half of the
cost of bridge construction was paid at the time construction began. ABB’s borrowings as at 31 March
2022 were as follows:
• 5.5% five-year note with interest paid annually; the debt outstanding at 31 March 2022 was
HK$60 million and remained unchanged during the year.
• 4.75% five-year note with interest paid annually; the debt outstanding at 31 March 2022 was
HK$40 million and remained unchanged during the year.
No borrowings had been used for specific projects, and you can assume the bridge meets the definition
of a qualifying asset. Assume there were no other transactions during the year.

Required:

For the year ended 31 March 2022, prepare journal entries for the borrowing costs, including expensed
and capitalised borrowing costs.

Show your workings clearly.

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HKU Business School – Master of Accounting Programme 2022-23
MACC 7001 Financial Accounting Foundation
Assignment #2 (5% of full course marks)

Answers
[Please type or write your answers here.]
The Weighted average cost of interest = ( Total Interest Expense for Borrowings not Specifically Used
/ Total Borrowings not Specifically Used ) * 100
Total Interest Expense for Borrowings not Specifically Used = ( Amount of five year notes *
Interest rate of notes ) + ( Amount of debt outstanding * Interest rate of debt outstanding )
= ( 60 * 5.5/100 ) + ( 40 * 4.75/100 )
= 3.30 + 1.90
= $5,200,000
Total Borrowings not Specifically Used = ( Amount of five year notes + Amount of debt
outstanding )
= ( 60 + 40 )
= $100 million
So, the Weighted average cost of interest = ( 5.20 / 100 ) * 100 = 5.20%
From the question: half of the construction cost of the bridge is paid on January 1, 2022.
So, the amount paid for construction cost of the bridge is paid on January 1, 2022 = ( Construction cost
* 1/2 ) = ( 35 * 1/2 ) =$17,500,000
Months interest paid for construction = January 1, 2022 to March 31, 2022 = 3 months
Interest expense is to be capitalized for borrowing costs = ( Amount paid for construction cost of the
bridge * Weighted average cost of interest * Months interest paid / 12 )
So, Interest expense is to be capitalized for borrowing cost for the year ended March 31, 2022 = ( 17.50
* 5.20/100 * 3/12 ) = $ 227,500

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HKU Business School – Master of Accounting Programme 2022-23
MACC 7001 Financial Accounting Foundation
Assignment #2 (5% of full course marks)

Question #4 – IAS 37 Provisions, Contingent Liabilities and Contingent Assets

Copy Mate Limited (Copy Mate) is a manufacturer of photocopiers. Equip Limited (Equip) operates a
chain of office supplies stores throughout Asia.
On 1 January 2020, Copy Mate entered into a three-year contract with Equip to supply its ‘A1’
photocopier, in all Equip stores at a discounted wholesale price of HK$950 per photocopier. The cost of
manufacturing the A1 photocopier was HK$925.
As part of the agreement, Copy Mate offered a 12-month warranty, whereby Copy Mate would repair
any defects free to Equip customers within the first 12 months of purchase. Based on past experience,
Copy Mate estimated that 0.5% of 2020 sales made by Equip would be returned by Equip customers for
repair and estimated the cost of repairs for each unit to be equal to the unit’s wholesale price.
Equip sold 1,000,000 A1 photocopiers during the first 12 months of the contract. By 31 December 2020,
Copy Mate had incurred HK$4,500,000 on materials and labour costs to repair A1 photocopiers returned
during the warranty period.
On 1 January 2021, Copy Mate sourced a new supplier for the drum component of the A1 photocopier,
which was the main cause of 2020 defects. Upon sourcing the new supplier, the cost of manufacturing
the A1 photocopier increased to HK$960. Copy Mate approached Equip about renegotiating the
wholesale price of the A1 photocopier for the final two years of the contract, but Equip did not agree to
an amendment of the contract.
As a result of changing suppliers for the drum component, Copy Mate now estimated that 0.3% of 2021
sales would be returned by Equip customers for repair.
For the year ended 31 December 2021, Equip sold 900,000 A1 photocopiers and Copy Mate incurred the
following costs for repairing photocopiers.
 HK$210,000 in respect of 2020 sales; and
 HK$2,250,000 in respect of 2021 sales.
Equip has indicated it would order 800,000 A1 photocopiers in 2022.

31 December 2020
Provision for 2020 sales =$950*1,000,000*0.5% = $4,750,000
DR Warranty expense $4,750,000
CR Provision for warranty $4,750,000

DR Provision for warranty $4,500,000

CR Cash/ Spare Parts Inventory $4,500,000

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HKU Business School – Master of Accounting Programme 2022-23
MACC 7001 Financial Accounting Foundation
Assignment #2 (5% of full course marks)

31 December 2021
DR Provision for warranty $210,000
CR Cash/ Spare Parts Inventory $210,000

DR Provision for warranty $40,000

CR Warranty expense (reversal) $40,000

Provision for 2021 sales = $950*900,000 sales *0.3% = $2,565,000

DR Warranty expense $2,565,000
CR Provision for warranty $2,565,000

DR Provision for warranty $2,250,000

CR Cash/ Spare Parts Inventory $2,250,000

Closing balance in provision account = $2,565,000 - 2,250,000 = $315,000

Required:
(a) Prepare all necessary journal entries with regard to the provision for warranties arising from the
contract with Equip in the financial statements of Copy Mate for the reporting periods ended 31
December 2020 and 2021.
(b) What was the closing balance in the provision for warranties account as at 31 December 2021?
Show all workings clearly.
Answers

31 December 2020
Provision for 2020 sales =$950*1,000,000*0.5% = $4,750,000
DR Warranty expense $4,750,000
CR Provision for warranty $4,750,000

DR Provision for warranty $4,500,000

CR Cash/ Spare Parts Inventory $4,500,000
The movement in the provision for warranties account for 2020 is:

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HKU Business School – Master of Accounting Programme 2022-23
MACC 7001 Financial Accounting Foundation
Assignment #2 (5% of full course marks)

HK $
Opening balance 1.1.2020 0

Increase in provision for best estimate of expenditure required 4,750,000

Payments made for warranty claims (4,500,000)

Closing balance 31.12.2020 250,000

31 December 2021
DR Provision for warranty $210,000
CR Cash/ Spare Parts Inventory $210,000

DR Provision for warranty $40,000

CR Warranty expense (reversal) $40,000

Provision for 2021 sales = $950*900,000 sales *0.3% = $2,565,000

DR Warranty expense $2,565,000
CR Provision for warranty $2,565,000
DR Provision for warranty $2,250,000
CR Cash/ Spare Parts Inventory $2,250,000

The movement in the provision for warranties account for 2021 is:
HK $
Opening balance 1.1.2021 250,000

Payments made for warranty claims on 2020 sales (210,000)

Reversal of 2020 overprovision (40,000)

Increase in provision for best estimate of expenditure required 2,565,000
Payments made for warranty claims on 2021 sales (2,250,000)
Closing balance 31.12.2021 315,000

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HKU Business School – Master of Accounting Programme 2022-23
MACC 7001 Financial Accounting Foundation
Assignment #2 (5% of full course marks)

Question #5 – IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

During the reporting period ended 31 December 2021, management of Sky Limited (“Sky”) discovered
an invoice processing oversight. An invoice of HK$6,000,000 for services provided by Sky during the
reporting period ended 31 December 2020 was incorrectly processed during the 2021 reporting period,
i.e. HK$6,000,000 was included (incorrectly) in the sales for the 2021 reporting period. At the time of
detecting the error, the customer still owed the amount.

The following amounts were available for 2020 (as reported) and 2021 (draft):

(draft) 2021 (reported) 2020

HK$’000 HK$’000
Sales 36,800 38,600
Cost of sales (5,600) (7,400)
Selling and administrative expenses (4,300) (5,380)
Profit before income taxes 26,900 25,820
Income taxes (4,439) (4,260)
Profit 22,461 21,560

Published (reported) closing RE on 31 Dec 2020 = $14,300+21,560 = $35,860

The following additional information was also available:

1. Retained earnings at 1 January 2020 was HK$14,300,000;
2. The income tax rate was 16.5%;
3. No dividends were declared or paid; and
4. Assume the error was material.

Required:

(a) Applying IAS 8, determine how Sky will account for the prior period error for the reporting period
ended 31 December 2021. In doing so, provide an extract of:
 the statement of profit or loss and other comprehensive income; and
 the statement of changes in equity.

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HKU Business School – Master of Accounting Programme 2022-23
MACC 7001 Financial Accounting Foundation
Assignment #2 (5% of full course marks)

(b) Apply the disclosure requirements of IAS 8 and compose the note Sky will disclose for the reporting
period ended 31 December 2021.
(draft) 2021 (reported) 2020
HK$’000 HK$’000
Sales 30,800a 44,600b
Cost of sales (5,600) (7,400)
Selling and administrative expenses (4,300) (5,380)
Profit before income taxes 26,900 31,820
Income taxes (3,449)c (5,250)d
Profit 22,461 26,570

a) HK$36,800 - 6,000 = 30,800

b) 38,600 + 6,000 = 44,600
c) 44,439- 16.5%*6,000 = 3,449
d) 4,260 + 16.5%*6,000 = 5,250

Retained Earnings HK$’000

Balance as of 1 January 2020 14,300
Profit for the year ended 31 December 2020 as restated 26,570
Balance as of 31 December 2020 as restated 40,870
Profit for the year ended 31 December 2021 17,451
Balance as of 31 December 2021 58,321

Retained earnings 2020 2021

Opening retained earnings $'000 $'000
As previously reported 14,300 35,860
Correction of prior period error (6,000 – 990) – 5,010
As restated 14,300 40,870
Profit for the year 26,570 17,451
Closing retained earnings 40,870 58,321

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HKU Business School – Master of Accounting Programme 2022-23
MACC 7001 Financial Accounting Foundation
Assignment #2 (5% of full course marks)

Answers
[Please type or write your answers here.]
Note X: Correction of Prior Period Error
An invoice of services performed during the reporting period ended 31 December 202 was wrongly
processed during the 2021 reporting period, resulting in HKS6 million being incorrectly recorded as
sales in 2021 rather than 2020. The 2020 financial statements have been restated to correct this
error.The effect of this statement on 2020 financial statements is summarized below. There is no effect
for the reporting period ended 31 December 2021.

Effect on 2020 (HK$’000)

Increase in Sales 6,000

Increase Income tax expense (990)

Increase in Profit 5,010

Increase in Receivable 6,000

Increase in Income tax payable (990)

Increase in Equity 5,010

~ End ~

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