COLLEGE OF BUSINESS, HOSPITALITY AND TOURISM STUDIES

SCHOOL OF ECONOMICS, BANKING & FINANCE

DEPARTMENT OF ECONOMICS

ACC702: International Corporate Reporting

Trimester 3 2016
Group Assignment

Name:

ID:

Question 1
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ABC Asset Inc. owns a freely transferable taxi operator's license, which it acquired on
January 1,20X5, at an initial cost of $10,000. The useful life of the license is five years
(based on the date it is valid for). The entity uses the straight-line method to amortize the
intangible. Such licenses are frequently traded either between existing operators or with
aspiring operators. At the balance sheet date, on December 31, 20X6, due to a governmentpermitted increase in fixed taxi fares, the traded values of such a license was $12,000. The
accumulated amortization on December 31, 20X6, amounted to $4,000.
Required: What journal entries are required at December 31, 20X6, to reflect the
increase/decrease in carrying value (cost or revalued amount less accumulated
depreciation) on the revaluation of the operating license based on the traded values of
similar license? Also, what would be the resultant carrying value of the intangible asset
after the revaluation? Solution:
The journal entries to be recorded on books of accounts are:
Particulars
Intangible Assets accumulated amortization
Intangible Assets cost
(Being elimination of accumulated depreciation against
the cost of the asset)

Debit ($)
4000

Credit ($)
4000

Intangible Asset cost

6000
Revaluation Reserve
6000
(Being uplift of net book value to revalued amount)
The net results is that the assets has a revised a carrying amount of $12000 ($1000- $4000+
$6000)

QUESTION 2
XYZ Limited has recently obtained some patents considered useful in its manufacture of
mens shoes. The patents consist of: Patent XC456, acquired from a leather manufacturing
firm for $425000. Patent CU254, obtained as part of a bundle of assets acquired from the
conglomerate U- Beauty Fashions.
XYZ Ltd is also in the process of preparing an application for a patent for a new process of
softening leather. It has spent a number of years refining this process. The accountant for
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XYZ Ltd is unsure how to account for patents under IFRSs. He has asked you to prepare a
detailed report for him on the principles of how to account for patent, using the examples
above to illustrate the appropriate accountant procedures.
Required: Prepare a report for XYZ Ltd.s accountant.

Solution
A patent is viewed an intangible asset; this is due to the fact a patent does now not have bodily
substance, and affords long-term cost to the owning entity. As such, the accounting for a patent is
the identical as for any different intangible fixed asset, which is:

Initial recordation. This record the cost to accumulate the patent as the initial asset
cost. If a Organization files for a patent application, this price will consist of the
registration, documentation, and other prison prices related with the application. If the
agency as a substitute bought a patent from another party, the buy fee is the initial asset
cost.

Amortization. The proprietor of the patent step by step fees the price of the patent to
fee over the useful lifestyles of the patent, usually the usage of the straight-line
amortization method.

Impairment. If a patent no longer affords value, or a decreased stage of value,

understand an impairment to limit or dispose of the carrying quantity of the asset.

DE recognitions. Once the organization is no longer making use of the patented idea,
the asset can be derecognized by means of crediting the balance in the patent asset
account and debiting the balance in the amassed amortization account. If the asset has
now not been fully amortized at the time of DE recognition, then any ultimate
unamortized stability need to be recorded as a loss.

QUESTION 3
Provide an argument in support of the accounting requirement that research is to be
written off as incurred. Do you think this requirement is overly conservative?
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Solution
Research and improvement costs are incurred to enhance new products or processes, to improve
existing products, or to discover new knowledge. R & D fees existing issues of:"

Identifying the prices associated with unique activities, projects, or

achievements, and
Determining the magnitude of the future benefits and the length of time over
which such benefits can also be realized.

R & D things to do may additionally incur expenses categorized as follows:

materials, equipment, and facilities,

personnel,
bought intangibles,
contract services, and
Oblique costs.

QUESTION 4
On 1st June 2016, Big Ltd acquired the following assets and liabilities of Small Ltd:
Carrying Amount
Land

Fair Value

$310000

$340000

Plant (cost $400000)

280000

295000

Inventory

80000

85000

Cash

15000

15000

Account payable

(20000)

(20000)

Loans

(80000)

(80000)

In exchange for these assets and liabilities, Big Ltd issued 100000 shares that has been
issued for $1.20 per shares but at 1 June 2016 had a fair value of $6.10 per share. Required:
i)
ii)

Prepare the acquisition analysis

Prepare the journal entries in the records of Big Ltd to account for the
acquisition of the assets and liabilities of Small Ltd.

iii)

Prepare the journal entries assuming that the fair value of the shares was $7.50
per share.

Solution
Part I
Journal Entries
Particulars
Land
Plant
Inventory
Cash
Account Payable
Loans
FVINA

Debit($)
$340000
$295000
$85000
$15000

Credit($)

($20000)
($80000)
$6365000

Consideration Transfer
Share capital 100000 @ 6.10 = $610000
Gain on bargain purchase = $635000- $610000
= $25000

Part II
Journal Entries
Particulars
Land
Plant
Inventory
Cash
Account payable
Loans
Share capital
Gain on bargain purchase

Debit ($)
34000
295000
85000
15000

Credit ($)

20000
80000
610000
25000

Part III
Particulars
land
Plant

Debit ($)
340000
2950000

Credit ($)

inventory
Cash
Accounts payable
loan
FVINA

85000
15000
(20000)
(80000)
$635000

Consideration Transfer
Share capital 100000 @ $ 7.50 = $ 750000
Goodwill = $750000 - $635000
= $115000

Journal Entries
Particulars
Land
Plant
Inventory
Cash
Goodwill
Account payable
Loans
Share capital

Debit ($)
340000
295000
85000
15000
115000

Credit ($)

20000
800000
750000

Question 5
Silver Ltd has acquired a major manufacturing division from Fern Ltd. The accountant,
Ms. Anna, has shown the board of directors of Silver Ltd the financial information
regarding the acquisition. Ms. Anna calculated a residual amount of $45000 to be reported
as goodwill in the accounts. The directors are not sure whether they want to record
goodwill on Silver Ltds statement of financial position. Some directors are not sure what
goodwill is or why the company has bought it. Other directors even query whether goodwill
is an asset, with some being concerned with future effects on the statement of profit or loss
and other comprehensive income.
Required: Prepare a report for Ms. Anna to present to the directors to help them
understand the nature of goodwill and how to account for it.
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Solution
Goodwill consists of the blessings a business- has in connection with its customers, employees
and backyard events with whom it has to contact. That is why it used to be defined as the chance
that the old customers will lodge to the historical place. Goodwill has been stated be desirable
pressure which brings in customers. Thus, to decide the nature of goodwill in a unique case, it is
integral to reflect on consideration on the type of commercial enterprise and the type of
customers which such a commercial enterprise is inherently in all likelihood to attract as properly
as surrounding instances of every cases. Goodwill of a business is a composite thing referable in
phase to its locality, in pan lo the way in which it is conducted and the personality of these who
behavior and in part to the probability of competition. Goodwill is an intangible asset
compounded from a variety of successful business ingredients competent and vigorous
management, purchaser acceptance, a favorable location, a high-quality and profitable product,
efficient manufacturing methods, an exceptional reputation, plus the expectation that these
ingredients, will continue to produce an above-normal charge of return for an indefinite period of
time. Goodwill is as a result existing value of a firms anticipated extra earnings. It is the greater
saleable price attaching to a prosperous enterprise beyond the intrinsic cost of net assets.

Features of Goodwill:
The following are the special features of goodwill;

Goodwill can be sold only with the entire business or it cannot be sold in part or in
isolation except on admission or retirement of a partner when new partner. Compensate

the old partners or the retiring partner gives up his rights in favor of remaining partners.
Goodwill is valuable only if it is capable of being transferred from one person to another.

If it cannot be transferred, then there will be no value of goodwill.

Goodwill represents a non-physical value over and above the physical assets.
Goodwill cannot have an exact cost as its value fluctuates from time to time due to

internal or external factors which ultimately affect the fortune of the Company.
The value of goodwill is based on subjective judgement of the value.

Types of Goodwill:

The goodwill is commonly of two types i.e., bought goodwill or non-purchased (raised)
goodwill. Purchased goodwill arises solely when a business corporation is obtained by way of
another enterprise business enterprise and the price paid is greater than the net assets acquired.
Such goodwill is diagnosed by way of the accounting occupation and is additionally shown in
the Balance Sheet. The essential aspects of such goodwill are:
(i)
(ii)
(iii)
(iv)

It arises solely on buy of enterprise

It is mirrored by means of a purchase transaction
Us fee could, rely upon the future maintainable earnings
It can be proven in the Balance Sheet

Question 6
An entity operates an oil platform in the sea. The entity has provided the amount of $10
million for the financial costs of the restoration of the seabed, which is the present value of
such costs. The entity has received an offer to buy the oil platform for $16 million, and the
disposal costs would be $2 million. The value-in-use of the oil platform is approximately
$24 million before the restoration costs. The carrying value of the oil platform is $20
million.
Required: Is the value of the oil platform impaired?

Solution
Offered

$16 million -

Disposal costs = The fair value less cost to sell of the oil platform
$2 million

$14 million.

The value-in-use of the platform will be $24 million - $10 million= $14 million
The carrying amount of the platform is $20 million - $10 million= $10 million
Therefore, the recoverable amount of the cash-generating units exceeds its carrying amount, and
it is not impaired.

QUESTION 7

An entity has an oil platform in the sea. The entity has to decommission the platform at the
end of its useful life, and a provision was set up at the commencement of production. The
carrying value of the provision is $8 million. The entity has received an offer of $20 million
(selling costs $1 million) for the rights to the oil platform, which reflects the fact that the
owners have to decommission it at the end of its useful life. The value-in-use of the oil plat
form is $26 million ignoring the decommissioning costs. The current carrying value of the
oil platform is $28 million.

Solution
The fair value less costs to sell is ($20million -1 million) = $19million
The value in use is ($26million - $8million) = $18 million.
The carrying value is ($28million -$8miliion) = $20million
Therefore, the recoverable amount ($19million) is less than its carrying value ($20million), and
the asset is impaired.

QUESTION 8
An entity has two cash-generating units, X and Y. There is no goodwill within the units'
carrying values. The carrying values are X $10 million and Y $15 million. The entity has an
office building that has not been included in the above values and can be allocated to the
units on the basis of their carrying values. The office building has a carrying value of $5
million. The recoverable amounts are based on value-in-use of $9 million for X and $19
million for Y.
Required Determine whether the carrying values of X and Y are impaired?

Solution
Carrying value
Office Building
Recoverable Amount
Impairment loss

X (m)
10
add 2
12
Less 9
3

Y(m)
15
add 3
18
Less 19
0

TOTAL(m)
25
add 5
30

The impairment loss will be allocated on the basis of 2/12 against the building ($0.5m) and 10/12
against the other assets ($2.5 million).

QUESTION 9
Some employers will pay out employees for any unused sick leave entitlements if they leave
the organization, whereas in other organizations employees forfeit this entitlement when
they leave.
Required: Explain how these different types of sick leave entitlements are treated for
accounting purpose.

Solution
With reference to IAS 19 Employee Benefits, that goes away entitlements
that are unused are to be paid out when the employee leaves the
organization or organization. These ailing depart entitlements are usually
recognized as vesting unwell go away entitlements. As the employee
continues to work for the organization, the entitlements proceed to accrue.
The accounting cure used is the equal as to account for annual leave. While
assigning probabilities to the odds that the worker will genuinely take the
leave, a liability will be recognized and this will now not be structured upon
it. Suppose the sick go away is viewed to be non-vesting, entitlements will
solely be paid when the worker is sick, and they will now not be paid out
when the worker terminates employment. With regards to non-vesting sick
leave, accounting entries have to be made which recognize the employees
entitlements to ill depart based on previous service, and the likelihood that
the unwell leave will really be taken. For example, if an character worker on a
revenue of $50 zero has an entitlement to two weeks sick depart and it is
predicted that the worker has a 50 per cent probability of taking one week
leave, and a 50 per cent chance of taking no leave, then the bills would need
to realize a liability of $50 0 x 1/52 x 0.50 = $481 in relation to the
employee.
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Question 10
IAS 19 Employee Benefits was issued in February 1998. Amongst other things, the
standard deals with the treatment of post-employment benefits such as pensions and other
retirement benefits. Postemployment benefits are classified as either defined contribution
or defined benefit plans.
Required: Describe the relevant features and required accounting treatment of defined
contribution and defined benefit plans under IAS 19.

Solution
International Accounting Standards (IAS 19) is an accounting rules which as a important intent
of benefiting the employees in each possible way, which includes:

Short time period benefits (e.g. wages, salaries, annual leave, social
protection contributions, paid sick depart and different monetary benefits such

as scientific care, housing cars, and sponsored goods and services).

Post-employment benefits (e.g. retirement benefits, pensions, post-

employment existence in insurance and post-employment clinical care).

Other long term advantages (e.g. lengthy provider leaves, long-term

disability benefits.).
Termination benefits.

This accounting standard principle requires, the benefits provided to the personnel to be
diagnosed in the identical duration in which the benefits are earned through the employee, highly
when this is paid or payable.

Question 11
The board of directors of ABC Ltd met in June 2016 and decided to close down a branch
of the companys operations when the lease expired in the following February. The chief
financial officer advised that termination benefits of $2.0 million are likely to be paid.
Should the company recognize a liability for termination benefits in its financial statements
for the year ended June 2016? Justify your judgment with reference to the requirements of
IAS 19.

Solution
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ABC Ltd ought to become aware of $2.0 million greenbacks quit advantage as a cost. As
indicated by using IAS 19 cease benefits are to be perceived simply when the business has
exhibited its dedication to hearth its workers due to the fact of close down of a branch of the
organization's operation as an end result of rent expiry. For this situation the cease is finished
earlier than the people normal retirement date or the representatives contract expiry. So the
organization has given $2.0 million greenbacks as an essential component of their prompting to
empower early retirement. Since end benefit don't current any future economic benefits on the
utilizing substance, it should be expensed instantly.

QUESTION 12
What are the arguments for and against the use of fair value as the measurement basis for
biological assets and agricultural produce? Why do you think the IASB settled on requiring
fair value?

Solution
With reference to AASB 141 paragraph 30 There is a presumption that truthful price can be
measured reliably for a organic asset. However, that presumption can be rebutted only on initial
focus for a organic asset for which market-determined prices or values are now not on hand and
for which alternative estimates of fair cost are decided to be absolutely unreliable. The truthful
cost supplied gives greater relevant records for that reason making the statistics more comparable
and understandable. It is additionally determined that fair price ought to be reliably determined
however made an exception for instances the place this used to be no longer viable (AASB 141
paragraph 30). This exemption resolute that honest fee may not be able to be measured reliably
in situations the place market expenses are not accessible and alternative estimates of fair cost
are decided to be definitely unreliable. On the different hand, this exception can only be practical
on most important recognition of the organic asset.
As per AASB 141, the arguments for encompass that: many biological property are traded in
lively markets and active markets grant applicable and dependable information; long
manufacturing cycles mean that the trade in asset cost is more applicable than a period-end
measure of expenses incurred; valuation primarily based on fees is arbitrary when there are joint
products and joint costs; and, one-of-a-kind sources of animals and plants (e.g. home-grown or
purchased) need to not be measured in another way which would show up if the historical price
valuation model have been used rather than the honest cost model.
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REFERENCES

IAS 19 Employee Benefits http://www.iasplus.com/en/standards/ias/ias19 Accessed on

4/11/2016

IAS 36 Impairment of assets http://www.iasplus.com/en/standards/ias/ias36 Accessed on

4/11/2016.

AASB 141 paragraph 30

http://www.aasb.gov.au/admin/file/content102/c3/AASB141_07-04_ERDRjun10_0709.pdf Accessed on 4/11/2016.

Employee benefits https://www.studeersnel.nl/nl/document/university-of-westernaustralia/corporate-accounting/antwoordenboeken/book-solution-company-accountingbusiness-combinations/306331/view&flashcards_url_type=control.Accessed on

23/11/2016.

Nature of goodwill http://www.publishyourarticles.net/knowledge-hub/companyaccounts/complete-information-on-goodwill-its-nature-features-types-and-classes/4418/

Accessed on 23/11/2016.

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