Important note

You must use word processing software (such as Microsoft Word) to prepare the

TMAs, and submit them via the Online Learning Environment (OLE). All

assignments must be uploaded to the OLE by the due date.

Failure to upload a TMA in the required format to the OLE may result in the score

for the TMA being adjusted to zero.

Question 1 (25 marks) At 1 January 2015, the non-current asset balances of Sunny Ltd

comprised the following:

Original cost ($) Accumulated depreciation ($)

Land and building 1,165,000 119,000

Fixtures 890,000 89,000

Plant and equipment 456,000 101,000

The company’s policy is to charge depreciation at the following rates:

• Buildings: 2% straight line, no residual value

• Fixtures: 5% straight line, no residual value

• Plant and equipment: 15% reducing balance, no residual value

The accounting policy of Sunny Ltd requires a full year’s depreciation to

be charged in the year of acquisition for all assets; however, no

depreciation is charged in the year of sale. The following additional

information is relevant to the calculation of depreciation for the

yearended 31 December 2015.

i The amount of the original cost relating to buildings is $850,000, and

these were purchased in June 2005.

ii Sunny Ltd traded in a lorry (classified as plant and equipment) during

the year and acquired a new one costing $50,000. A cheque for

$25,000 was written by the finance director of Sunny Ltd, being the

balance due for the new lorry. The lorry traded in had originally cost

$40,000 in May 2009 and had a net book value of $28,900 at

1 January 2015.

2 ACT B331 Company Accounting I

iii Additional fixture improvements were carried out during the year,

costing $190,000. Legal and architect’s fees in relation to the

improvements were also incurred, amounting to $8,000.

iv Office furniture was purchased during the year for $30,000. Sunny

Ltd incurred additional expenditure on the delivery and installation

amounting to $5,000.

Required:

a Prepare accounting journal entries related to the non-current assets of

Sunny Ltd for the year ended 31 December 2015. (9 marks)

b Provide extracts of statement of financial position and statement of

profit or loss and other comprehensive income for the non-current

assets of Sunny Ltd for the year ended 31 December 2015. (5 marks)

c What factors should the accountants of Sunny Ltd consider in

determining the useful life of an asset? (6 marks)

d Outline the general guidelines for determining whether expenditure

on repairs should be capitalized rather than revenue expenditure.

(5 marks)

Question 2 (25 marks)

Please discuss whether the revaluation of land and buildings other than

investment properties is compatible with the fundamental accounting

concepts of accrual accounting and going concern.

Question 3 (25 marks)

a Discuss the pros and cons of the fair value model adopted in HKAS

40 Investment Property. (12 marks)

b Some people suggest that accounting standard setting process is

actually a political process (politicization). It is a political process

because the standard setting body is influenced by government

agencies, interest groups, bankers, financial analysts and so on.

Explain any three arguments showing that accounting standard

setting process is NOT a political process.

(13 marks)

Question 4 (25 marks)

Awaken Ltd owns a property which was purchased on 1 January 2010 for

$1,000,000, of which $400,000 was considered to be related to the land

on which the building is situated. The company has followed a policy of

depreciating the building at the rate of 4 per cent on cost per annum. On

31 December 2014 the property was valued by a firm of chartered

surveyors at $1,800,000 of which $900,000 was considered attributable to

the value of the land. The surveyors further estimated that the property

possessed a remaining useful life of 30 years from 1 January 2015. The

property market went down in 2015. The property was valued by the

surveyors again on 31 December 2015. The fair value of the property

became $1,600,000 and $600,000 was considered attributable to the

value of the building.

Awaken Ltd has another property in Ho Man Tin for capital appreciation.

The building was acquired in 2001 for $3,000,000. The estimated useful

life of this building was 25 years. The fair value of this building on

31 December 2015 was $2,700,000.

Awaken Ltd has adopted the revaluation model for its property, plant and

equipment and the fair value model for its investment properties.

a Using the above information, prepare accounting journal entries for

Awaken Ltd in 2014 and 2015. (16 marks)

b Show the details relating to the properties which would appear in the

statement of financial position and statement of profit or loss and

other comprehensive income of Awaken Ltd on 31 December 2015.

(5 marks)

c Why is residual value of property, plant and equipment normally

zero?(4 marks)

Assignment File 1

Question 5 (25 marks) Good Dairy Ltd (‘GD’) is a listed company in Hong Kong engaging in

farm management business. It has farms in China and Australia. The

board of directors wants to diversify their business into a number of new

areas. The following information is available in respect of the year ended

31 December 2015:

i GD purchased a cow quota for 100 cows for $500 per cow on 1

January 2015. There is an active market for cow quotas, which must

be owned to enable an application for subsidy income to be made. On

31 December 2015, the market value of the quota was $600 per cow.

ii On 1 April 2009, GD acquired an operator’s licence in Australia for a

fleet of 20 heavy goods vehicles to set up a haulage division. GD had

rented out several of its farm sheds to manufacturing companies and

it had identified a further source of revenue by offering a haulage

service to the tenants. The price paid for the licence, which is for ten

years, was $5,000 per vehicle. In addition to the initial price, GD

spends $4,000 each year advertising the haulage division. GD

received the invoice for the year ended 31 December 2015 from the

advertising agency in January 2016.

iii On 1 July 2015, GD purchased fishing rights for $28,000 which

entitle the company to seven years’ fishing in a lake in China. The

employees of GD use this primarily for corporate entertainment. This

right is non-transferable during the seven-year period.

iv During the year ended 31 December 2015, GD began the

development of a new type of organic crop spray. The costs incurred

on this project in the year amounted to $40,000. The book-keeper,

who was unsure how to classify this expenditure, has posted it to a

2 ACT B331 Company

Accounting I

suspense account. The

research manager

believes that the product

will be both technically

feasible and

commercially viable.

However, the product is

still at an early stage and

it is not certain how long

it will be before it can be

marketed.

The accounting policy of the

company in respect of

intangible assets is as follows:

• Intangible assets with

an active market are

revalued on an

annual basis.

• Intangible assets are

amortized on a straight-

line basis over 20 years

or their estimated useful

lives, whichever is

lower, on a monthly

basis.

Required:

Explain how each of the

items (i) to (iv) should be

dealt with in the accounts

of GD for the year ended

31 December 2015, and

prepare the relevant

accounting journal entries

with narratives.

Question 6 (25 marks) Sugar Ltd was acquired by

Sour Ltd on 1 January 2015.

Sugar Ltd faced difficult

trading activities in the past

few years and the business

performance did not recover

after the acquisition. The

finance director of Sour Ltd

had doubts about the value of

some of the assets in the

statement of financial

position of Sugar Ltd. Sugar

Ltd consisted of two

divisions (CGUs), which had

the following net assets on 31

December 2015:

Division A Division B

$’000 $’000

Cash 750 900

Machine 16,000 15,000

Intangible 400 −

Goodwill − 620

17,150 16,520

In addition Sugar Ltd

had central tangible

non-current assets of

$4,500,000. These

were estimated to be

equally related to the

two divisions. None

of the assets had been

revalued in the past.

The intangible asset of the

Division A relates to the

cost of a trade mark

acquired from a competitor

several years ago. It is

estimated that the trade

mark had a net selling price

of $380,000 on 31

December 2015.

Both divisions have suffered

from under-investment in

recent years. The net fair

value of Division A was

estimated to be $13,500,000

and $12,000,000 for

Division B.

Budgeted cash flows for the

next four years are as follows

(ignore tax):

Assignment File 3

Year Division A Division B

$’000 $’000

1 3,900 4,700

2 4,000 4,800

3 5,300 5,400

4 5,200 5,900

18,400 20,800

The required rate of return was 12% for both divisions. The significant

increases in cash flow would arise from the impact of the new

management team from Sour Ltd. There would be no significant cash

flows from the assets employed in each division after Year 4.

Required:

a Assuming all cash flows occurs at the end of the year concerned,

determine the recoverable amount and impairment loss in Division A

and B for the year ended 31 December 2015. Show your workings.

(10 marks)

b Determine the carrying amount of the assets in Sugar Ltd as at

31 December 2015. Show your workings. (15 marks)

Question 7 (25 marks) Jupiter Ltd (Jupiter) is a property developer in Hong Kong. Jupiter

started its construction of a commercial building in Ho Man Tin, namely

Building A, which will be rented out to commercial customers and earn

rental income. On 1 July 2015, Jupiter started the construction at a fixed

cost of HK$ 50 million. Construction commenced on that day and it will

take three years to complete.

Payments to the contractor is made as follows:

Amount

Payment date HK$’000

1 July 2015 5,000

1 November 2015 6,000

1 February 2016 8,000

1 June 2016 7,000

26,000

In order to finance the construction and its ordinary business, Jupiter

arranged the following borrowings at 1 July 2015:

a 6% HK$10 million 4-year loan note with simple interest payable

annually, which relates specifically to the construction. The HK$10

million was put on deposit before payments were made to the

4 ACT B331 Company

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Warehouse CEO’s quarters

Office for earning

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Date of acquisition 1 January 2000 1 January 2008 1 January 2005

Estimated useful life 20 years 40 years 30 years

Cost of the building HK$20 m HK$40 m HK$20 m

Fair value of the building at HK$45 m HK$30 m HK$25 m

31 December 2015

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Assignment File 5

Required:

Determine the classification of these three buildings and their

respective amounts to be recognized on the statement of financial

position of Casi Ltd as at 31 December 2015. Explain your

calculations.