Internal Code: MAS5493
Financial Accounting Assignment:
Case Study 1:
In 2012 a claim was lodged in the Federal Court against the Commonwealth Bank by Gloucester Council and an investment company, Surname, alleging that CBA had breached its duty of care and engaged in misleading and deceptive conduct in selling them ‘toxic’ investments, ignoring their request for conservative investments. Eventually, around 35 investors, who had been sold $140 million worth of AAA-rated collateralized debt obligations (CDOs), participated in the class action. CBA settled with the investors for $50 million, including legal fees, and agreed to pay $1.5 million to International Litigation Partners, funder of the class action. The bank refused to comment on the settlement, saying the court still had to approve it, although CBA had previously said the investor’s claim had no merit. In the course of the case, it had been revealed that CBA had settled with at least 14 other CDO investors. CBA had earlier been faced with the fallout from the frauds perpetrated by some of its financial planners, which led to public apologies and expensive settlements.
Question:
On the basis of the brief information provided, consider how, if you were the chief accountant at the Commonwealth Bank, the case would be disclosed within the annual report of CBA. What factors would you consider in determining the form the disclosures should take, and in which years the disclosures would be made?
Case Study 2:
Hopeful Ltd leased a portable sound recording studio from Lessor Ltd. essor has no material initial direct costs. Hopeful Ltd does not plan to acquire the portable studio at the end of the lease because it expects that, by then, it will need a larger studio. The terms of the lease are as follows:
• Date of entering lease: 1 July 2019.
• Duration of lease: four years.
• Life of leased asset: five years.
• Lease payments: $50 000 at the beginning of each year.
• First lease payment: 1 July 2019.
• The lease expires 1 July 2023.
• Interest rate implicit in the lease: 8 percent.
• Guaranteed residual: $40 000.
Questions:
1. Determine the fair value of the portable sound recording studio at 1 July 2019.
2. Prepare a schedule for the lease payments incorporating accrued interest expense.
3. Prepare the journal entries to account for the lease in the books of Hopeful Ltd at 1 July 2019, 30 June 2020 and 1 July 2020.
4. At the termination of the lease, Hopeful Ltd returns the portable sound recording studio to Lessor Ltd, but its fair value at that time is $25 000. What must Hopeful Ltd do to comply with the terms of the lease? Prepare the journal entries in the books of Hopeful Ltd for return of the asset to Lessor Ltd and the settlement of all obligations under the lease on 1 July 2023
Case Study 3:
Alexandra Bay Ltd has five employees. According to their particular employment award, long-service leave can be taken after 12 years, at which time the employee is entitled to 10 weeks’ leave. If an employee were to leave before the completion of 12 years’ service, no entitlement would be paid.
Current Years of Years until
Name of employee salary ($) service LSL vests
Mike Black 40 000 2 10
Jan White 40 000 4 8
Noel Brown 50 000 6 6
Peter Green 60 000 8 4
Alvin Purple 70 000 10 2
High-quality corporate bond rates exist with periods to maturity that exactly match the various periods that must still be served by the employees before LSL entitlements vest with them. Corporate bond Bond rate (%)
Corporate bond Bond rate (%)
Period to maturity
10 8
8 7
6 6.5
4 6
2 5.8
The projected inflation rate for the foreseeable future is 2 per cent. The projected probabilities that the employees will stay long enough for the LSL to vest—that is, for a total of 12 years—are as follows:
Probability (%) that
Name LSL will vest
Mike Black 15
Jan White 20
Noel Brown 50
Peter Green 70
Alvin Purple 90
Questions:
1) Calculate Alexandra Bay’s current obligation for long-service leave.
2). If the opening provision for long-service leave is $12 500, provide the journal entry to record Alexandra Bay’s long- service leave expense
Case Study 4:
You are the finance director of ME Ltd. The company specialises in importing classic foreign vehicles from overseas countries and then selling these vehicles cheaply on the open market. The company’s financial year ends on 30 June 2018. The company enters into the following transactions during the year:
(a) The company purchases inventories from Hong Kong for HK$300 000. The order is placed on 22 April 2018, with delivery due by 30 April 2018. Under the conditions of the contract, title to the goods passes to the company on delivery. Payment in respect of these inventories is due in equal instalments on 30 May 2018, 30 June 2018 and a final payment on 31 July 2018. The following exchange rates are applicable:
22-Apr-18 HK$8.00 = A$1.00
30-Apr-18 HK$8.50 = A$1.00
31-May-18 HK$8.56 = A$1.00
30-Jun-18 HK$8.59 = A$1.00
31-Jul-18 HK$8.94 = A$1.00
(b) The company enters into a long-term construction contract with a Japanese company. Under the terms of the contract the Japanese firm will manufacture an engine diagnosis machine, which can be used on all classic cars. The contract is entered into on 30 April 2017 for a fixed price of ¥5 million. The equipment is delivered on 31 May 2018, subject to a two-month credit period after the date of delivery to ensure that the company is satisfied with the equipment. Payment falls due on 31 July 2018. The following exchange rates are applicable:
30-Apr-17 ¥160 = A$1.00
30-Jun-17 ¥160 = A$1.00
31-May-18 ¥240 = A$1.00
30-Jun-18 ¥245 = A$1.00
31-Jul-18 ¥260 = A$1.00
(c) The company arranges a US-dollar interest-only loan on 1 January 2018 for US$20 million. The loan is for a 10-year a period at an interest rate of 11.5 percent per annum. Interest is payable annually. Concerned about the volatility of the Australian dollar against the US dollar, the company takes out a hedge contract on the loan, payable on 1 January 2018. The hedge contract covers the first two years’ interest payments. The hedge rate is set at A$1.00 = US$0.65. The following exchange rates are applicable:
Date Spot rate Forward rate
1-Jan-18 $US0.69 $US0.65
30-Jun-18 $US0.64 $US0.60
(d) The company has agreed to purchase 10 new handmade sports cars from an English supplier. The official order for
the vehicles is placed on 31 January 2018. The contract price is established at £350 000 and delivery takes place
on 30 May 2018, as agreed. Payment is due in respect of these vehicles on 31 August 2018. In anticipation of the
contract on 31 January 2018, the company enters into a foreign currency contract to receive £350 000 at a forward
rate of £0.46 = A$1.00. The following exchange rates are applicable:
Date Spot rate Forward rate
31-Jan-18 £0.49 = A$1.00 £0.46 = A$1.00
31-May-18 £0.47 = A$1.00 £0.44 = A$1.00
30-Jun-18 £0.43 = A$1.00 £0.40 = A$1.00
31-Aug-18 £0.40 = A$1.00 £0.40 = A$1.00
Questions:
Prepare the journal entries to reflect the effects of the above transactions in accordance with AASB 121, AASB 123 and AASB 9. Explain the treatment adopted in respect of each of the above transactions
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