ACG-2100-MW PRINCIPLES OF ACCOUNTING AND FINANCE

FINAL ASSIGNMENT
WEEK 7

INSTRUCTIONS TO STUDENTS
This Assignment carries 40% of your final grade. Please read carefully and answer ALL
questions which carry equal marks.

Expected Level of Student work

Students' assignments at undergraduate level are evaluated and graded according to the
following six scoring categories at five different levels of competence:
a. Structure & Presentation
b. Content
c. Critical Analysis and Evaluation
d. Language, Grammar and Punctuation
e. Level of Competency (Undergraduate)
f. Referencing (Text citation Reference list)

Marking Criteria
General Presentation / Structure and Cohesion 20%
Citation and References Style 20%
Content Quality/Critical Analysis / Rational 50%
Academic Writing - Grammar 'Spelling 10%
Total 100%
EXERCISE 1
Fairplay acquired a 60% holding in Ruslane three years ago when Ruslane's
retained earnings balance stood at $ 16,000. Both businesses have been very
successful since the acquisition and their respective income statements for the
year ended 30 June 20X8 are as follows:

Fairplay Ruslane
$ $
Revenue 403,400 193,000
Cost of sales (201,400) (92,600)
Gross profit 202,000 100,400
Distribution costs (16,000) (14,600)
Administrative expenses (24,250) (17,800)
Dividends from Ruslane 15,000
Profit before tax 176,750 68,000
Income tax expense (61,750) (22,000)
Profit for the period 115,000 46,000

Statement of changes in equity (extract)

Fairplay Ruslane
Retained Retained
earnings earnings
$ $
Balance at 30 June 20X7 163,000 61,000
Profit for the period 115,000 46,000
Dividends (40,000) (25,000)
Balance at 30 June 20X8 238,000 82,000

Additional information:
During the year Ruslane sold some goods to Fairplay for $40,000, including 25%
mark up. Half of these items were still in inventories at the year-end.

Required
Produce the consolidated income statement of Fairplay Co and its subsidiary
for the year ended 30 June 20X8, and an extract from the statement of changes
in equity, showing retained earnings.
Goodwill is to be ignored.
Total 40 marks
EXERCISE 2
(a) Faulty Towers Co is a coal mining company and sells its coal on the spot and futures
markets. On the spot market, the commodity is traded for immediate delivery and, on
the forward market, the commodity is traded for future delivery. The inventory is
divided into different grades of coal. One of the categories included in inventories at 30
November 20X6 is coal with a low carbon content which is of a low quality. Faulty
Towers Co will not process this low quality coal until all of the other coal has been
extracted from the mine, which is likely to be in three years’ time. Based on market
information, Faulty Towers Co has calculated that the three-year forecast price of coal
will be 20% lower than the current spot price.
The directors of Faulty Towers Co would like advice on two matters:
(i) whether the Conceptual Framework affects the valuation of inventories;
(ii) how to calculate the net realisable value of the coal inventory, including the low
quality coal. (9 marks)
(b) At 30 November 20X6, the directors of Faulty Towers Co estimate that a piece of
mining equipment needs to be reconditioned every two years. They estimate that these
costs will amount to $2 million for parts and $1 million for the labour cost of their own
employees. The directors are proposing to create a provision for the next reconditioning
which is due in two years’ time in 20X8, along with essential maintenance costs. There
is no legal obligation to maintain the mining equipment.
As explained above, it is expected that there will be future reductions in the selling
prices of coal which will affect the forward contracts being signed over the next two
years by Faulty Towers Co.
The directors of Faulty Towers Co require advice on how to treat the reconditioning
costs and whether the decline in the price of coal is an impairment indicator. (11 marks)
Required:
Advise the directors of Faulty Towers Co on how the above transactions should be
dealt with in its financial statements with reference to relevant IFRS Standards
and the Conceptual Framework and its proposed revision where indicated.
Note: The split of the mark allocation is shown against each of the three issues above.

Total 20 marks
EXERCISE 3
External disclosure of information on intangibles is useful only insofar as it is
understood and is relevant to investors. It appears that investors are increasingly
interested in and understand disclosures relating to intangibles.
A concern is that, due to the nature of disclosure requirements of IFRS Standards,
investors may feel that the information disclosed has limited usefulness, thereby
making comparisons between companies difficult. Many companies spend a huge
amount of capital on intangible investment, which is mainly developed within the
company and thus may not be reported. Often, it is not obvious that intangibles can be
valued or even separately identified for accounting purposes.
The Integrated Reporting Framework may be one way to solve this problem.

Required:
Discuss the potential issues which investors may have with:
 accounting for the different types of intangible asset acquired in a business
combination (8 marks)
 the capitalization of development expenditure (7 marks)
Total 15 marks
EXERCISE 4
On January 1, 2018, Jeepers Creepers Inc. acquired 100% of Elm Street Inc outstanding
common stock by exchanging 37,500 shares of Jeepers Creepers $2 par value common
voting stock. On January 1, 2018, Jeepers Creepers’s voting common stock had a fair
value of $40 per share. Elm Street’s voting common shares were selling for $6.50 per
share. Elm Street’s balances on the acquisition date, just prior to acquisition are listed
below.

Book Value Fair Value

Cash $ 30,000
Accounts Receivable 120,000 $ 120,000
Inventory 200,000 230,000
Land 230,000 290,000
Building (net) 450,000 600,000
Equipment (net) 175,000 160,000
Accounts Payable (80,000) (80,000)
Common Stock, $1 par (500,000)
Paid-in Capital (350,000)
Retained Earnings, 1/1/18 (275,000)

Required:
Compute the value of Goodwill on the date of acquisition, 1/1/18.
Total 25 marks

END OF QUESTION PAPER