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HI6025 Accounting Theory And Current Issues 3

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Week 1

The fundamental qualitative characteristics that financial information must possess to be useful to the primary users of general purpose financial reports—identified in the Conceptual Framework are ‘relevance’ and ‘faithful representation’.


a) Provide one example where information is relevant but not faithfully represented.

b) Provide one example where information is not relevant but is faithfully represented.

c) Provide one example where information is relevant and faithfully represented.

Week 2

a) What is a social contract and how does it relate to organisational legitimacy?

b) Explain two ways organisations can use corporate disclosure policy to maintain or regain organisational legitimacy?

Week 3

Diamond Ltd acquired an item of polishing equipment on 1 July 2015 for $440,000. The equipment is expected to have a useful life of 10 years and the straight-line method of depreciation is to be used. It has salvage value of $40,000. On 1 July 2017, the equipment is deemed to have a fair value of $424,000 and revaluation is undertaken in accordance with the Diamond Ltd policy of measuring property, plant and equipment at fair value. The asset is still usable for next 8 years but the salvage value is determined to be zero. The asset is sold for $356,000 on 1 July 2019.


Provide the journal entries necessary at the following dates to account for the above transactions and events. (Ignore narrations).

  • 01/07/2015
  • 01/07/2017
  • 01/07/2019

Week 4

Snowy Ltd acquires Pax Ltd on 1 July 2018 for $5,000,000 being the fair value of the consideration transferred. At that date, Pax Ltd’s net identifiable assets have a fair value of $4,400,000. Goodwill of $600,000 is therefore the difference between the aggregate of the consideration transferred and the net identifiable assets acquired.

The fair value of the net identifiable assets of Pax Limited are determined as follows:


Patent rights











Less: Bank loan 600

Net assets



At the end of the reporting period of 30 June 2019, the management of Snowy Ltd determines that the recoverable amount of the cash-generating unit, which is considered to be Pax Ltd, totals $4,500,000. The carrying amount of the net identifiable assets of Pax Ltd, excluding goodwill, is unchanged and remains at $4,400,000.


a) Prepare the journal entry to account for any impairment of goodwill.

b) Assume instead that at the end of the reporting period the management of Snowy Ltd determines that the recoverable amount of the cash-generating unit, which is considered to be Pax Ltd, totals $4,200,000. Determine the impairment of goodwill amount. (No journal entries required)

Week 5

On 1 July 2019, Fisher Ltd decides to lease a cargo ship from XFinance Ltd. The term of the lease is 20 years. The implicit interest rate in the lease is 10 per cent. The fair value of the cargo ship at the commencement of the lease is $2,215,560. The lease is non-cancellable, and requires a lease payment of $300,000 on inception of the lease (on 1 July 2019) and lease payments of $250,000 on 30 June each year (starting 30 June 2020). Included within the $250,000 lease payments is an amount of $25,000 representing payment to the lessor for the insurance and maintenance of the cargo ship. There is no residual payment required. Annuity factor, n=20; r = 10% is 8.5136.


a) Prove that the interest rate implicit in the lease is 10 per cent.

b) Provide the entries for the lease in the books of Fisher Ltd as at 1 July 2019, and 30 June 2020.

c) Provide the entries for the lease in the books of XFinance Ltd as at 1 July 2019, and 30 June 2020.

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