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ACT204 Financial Accounting

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Question:

Read the following adaptation of an article entitled ‘CBA in payout on “toxic” products’ by Leo Shanahan that appeared
in The Australian on 4 April 2015.In 2012 a claim was lodged in the Federal Court against the Commonwealth Bank by Gloucester Council and an investment company, Clurname, 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 collateralised 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.
REQUIRED
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.

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.
• Lease expires: 1 July 2023.
• Interest rate implicit in the lease: 8 per cent.
• Guaranteed residual: $40 000.

REQUIRED
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.
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