Unformatted text preview: FA&R Topic 4 & 5 Question 1 (topic 4) Persian Ltd is a well-‐known manufacturer of rugs in the Australian market and is seeking advice from its accountant about the treatment of the following items: -‐ copyright: on 1 July 2015 Persian acquired a copyright relative to a peculiar technique to weave the rug strings. The company paid $10,000 and estimates a useful life of 20 years for the copyright. There is no active market for the copyright. -‐ brand name: Persian is a very well-‐known brand on the market. Persian estimates the value of its brand name to be $65,000, but is not able to determine the useful life of the brand name. REQUIRED As the accountant of Persian Ltd, advise the company about the following issues: 1) The company wants to capitalise the copyright expenditure as an intangible asset but it is not sure if it is to be carried at cost or at fair value (1 mark). 2) The company would like to record the brand name as an intangible asset (1 mark). Question 2 (topic 5) William Ltd is a manufacturer of sky-‐jets and gives warranties at the time of sale to his customers. According to the warranty terms, William Ltd commits to repair or replace the defects that become apparent within a period of two years from the date of sale. It is estimated that only a 10% of the products will have defects that require repairs and replacements, for an estimated expenditure of $14,000. William is not sure if the $14,000 can be recorded as a provision for future warranty payments. REQUIRED As the accountant of Williams Ltd, advise on the following: FA&R Topic 4 & 5 1) Should a liability in the form of a provision be recorded for the estimated warranty expense of $14,000? (1 mark) 2) Using the two statements below (BS and IS), where a provision is to be recorded? (1 mark) BS IS Question 3 (topic 5) Broker Ltd is planning to expand the business and to make big investments in the next year, therefore on 1 July 2015: • issues to the public 5 years bonds for $500,000 which pay interests every 6 months at 10% interest rate; • increases its share capital by issuing 1 million new shares at $3 each. • purchases the 15% of the shares of Candy & Sons Ltd for $80,000, planning to acquire in the future its entire share capital; • obtain a loan from the ANZ Bank for $600,000, at 10% interest rate. REQUIRED: 1) For each transaction indicate whether it gives rise to financial assets, financial liabilities or equity instruments for Broker Ltd. (2 marks) 2) Identify where each financial instrument is recorded in the below balance sheet of Broker Ltd. (2 marks) Broker’s BS FA&R Topic 4 & 5 Question 4 (topic 5) Cadbury Ltd on 1 July 2015 obtained a 10 years loan of $2 million. The bank requires annual interest payments of $100,000 and the repayment of the $2 million at the end of the loan term (after 10 years). Additional information: Discount rate: 4% Interest Rate 4% Present Value of $1 in 10 years 0.6756 Present Value of 10 years annuity of $1 8.1109 REQUIRED: Calculate the present value of the total liability of Cadbury with the bank at 1 July 2015. (2 marks)...
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- One '14
- Balance Sheet, Financial Reporting, Accountant, FA&R Topic, -‐ copyright