Paper 1
QUESTION 1: Foreign Currency

(12 marks) st Adit Ltd acquires all the issued shares in Solo Inc on the 1 July 2010. Adit Ltd’s presentation currency is the Australian Dollar (AUD). The exchange rates are as follows:
1 July 2010:
Average:
Ending inventory acquired (before year end):
30 June 2011:

AUD 1.00
AUD 1.00
AUD 1.00
AUD 1.00

=
=
=
=

USD 0.750
USD 0.870
USD 0.900
USD 0.940

Required:

Translate Solo Inc’s financial statements from United States Dollars (USD), which is the functional currency of Solo Inc, so that the consolidated statements can be prepared.
Solo Inc
Profit and Loss Statement for the Year Ended 30 June 2011
USD
560,000

Sales

Translation Rate

AUD

less COGS
Open
Purchases
Closing

40,000
230,000
35,000

Total

235,000

Gross Profit

325,000

Less expenses
Sales & Admin. Expenses

189,000

Depreciation Expense

43,000

NPBT

93,000

Income Tax Expense

27,900

NPAT

65,100

Retained Earnings (open)

32,000

Retained Earnings (close)

97,100
The balance sheet is provided on the next page.

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22420 Accounting Standards and Regulation

The rates are repeated here for your convenience:
1 July 2010:
Average:
Ending inventory acquired (before year end):
30 June 2011:

AUD 1.00
AUD 1.00
AUD 1.00
AUD 1.00

=
=
=
=

USD 0.750
USD 0.870
USD 0.900
USD 0.940

Solo Inc
Statement of Financial Position as at 30 June 2011
USD

Translation Rate

AUD

ASSETS
Cash

21,000

Accounts Receivable

43,000

Inventory

35,000

DTA

9,000

PPE

190,000

Total Assets

298,000

LIABILITIES
Accounts Payable

17,900

Provisions

33,000

Bank Loan

50,000

Total Liabilities

100,900

Equity
Share Capital
Retained Earnings

100,000
97,100

Total Equity

197,100

Total Liability and Equity

298,000

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22420 Accounting Standards and Regulation

QUESTION 2: Liabilities

(10 marks)

To help fund the acquisition of Solo Inc, as well as to meet general working capital requirements, Adit Ltd has raised finance by issuing convertible notes with a face value of
$10m. The notes pay a 4% annual coupon in arrears with a term of 3 years. They are redeemable by the holder for shares in Adit Ltd at any point. At the time of the issue (1 July
2010), the market rate on a similar instrument without the conversion option is paying 6%.
The issue raises $9,715,398 for Adit Ltd.
Required:

(a) Please provide the journal entries for the issue of the convertible note.

(4 marks)

(b) What is the carrying value of the liability as at the end of the second year (i.e. after the second coupon payment).
(4 marks)

c)

If NKVD Pty Ltd had purchased 10% of the convertible notes at the time of issue, how much would the asset be recognised for on NKVD Pty Ltd’s Balance Sheet at the time of issue? (2 marks)

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22420 Accounting Standards and Regulation

QUESTION 3: Employee Benefits

(8 marks)

You are providing advice to Lupi Ltd, a start-up company. Lupi Ltd’s directors are trying to determine whether to provide their employees with a defined benefit plan or a defined contribution plan.
Required

(a) Explain the key economic differences between a defined benefit plan and a defined contribution plan.
(4 marks)

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22420 Accounting Standards and Regulation

(b) Explain the impact these differences have for the accounting for defined benefit plans and defined contribution plans.
(4 marks)

6

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22420 Accounting Standards and Regulation

QUESTION 4: Financial Instruments

(8 marks)

st

On the 1 April, 2010, you have been asked to provide advice to BTB Ltd, a small publicly listed chocolatier based in Adelaide. They own farmland worth 750m Indonesian Rupiah
(IDR) in Java, but are anticipating selling it in 6 months time.
BTB Ltd is concerned that the Australian Dollar (AUD) may strengthen against the IDR in the next 6 months, and has taken out a futures contract to sell IDR, with delivery in 6 months.
Required

BTB Ltd is unsure how to account for the futures contract. Please advise them:
(a) Whether they should designate