[ACCT2110] Intermediate Financial Accounting
Semester 1, 2024
Practice Mid-semester Exam
Question 1
On 30 June 2019, Momo Ltd has entered into an agreement to lease a machine to Nene Ltd. The lease agreement details are as follows:
lease term is 5 years
estimated economic life of the leased asset is 6 years
5 × annual lease payments of $29,000 at the end of each year, commencing on 30 June 2020
residual value of $20,000 at the end of the lease term is not guaranteed by Nene Ltd
interest rate implicit in the lease is 7%
Momo Ltd purchased the machine just before the inception of the lease and classified this lease as a finance lease.
Use PV tables provided at the end of this examination to do the calculations.
Do not include commas and dollar sign ($) in your answers. Present $1,000 as 1000. Round all your answers to the nearest whole dollar amount.
Required:
1. What is the balance of Lease Liability that Nene Ltd should record on its balance sheet at the inception date of lease? [1]
2. What is the balance of Lease Receivable that Momo Ltd should record on its balance sheet at the inception date of lease? [2]
3. What is the interest expense relating to the lease that Nene Ltd should record for the financial year ended on 30 June 2020? [3]
Question 2
Identify the following statements as True of False.
1. One of the impairment factors proposed by AASB 136 is that the carrying amount of net assets exceeds the entity's market capitalisation. [1]
2. The maximum term of a short-term lease is 6 months. [2]
3. For lessees, expected residual value and termination penalty (if reasonably certain) are two components of the lease liability that are measured in terms of net present value. [3]
4. Provision is a liability of uncertain timing or amount. [4]
Question 3
An impairment loss results when the [1] of an asset is less than its [2].
Question 4
Identify an appropriate accounting treatment (i.e., provision, contingent liability, contingent asset, none) for the following independent situations:
1. In August 2020, a worker was injured in the factory in an accident partially the result of his own negligence. The worker has sued Wesley Co. for $800,000. Counsel believes it is reasonably possible that the outcome of the suit will be unfavorable and that the settlement would cost the company from $250,000 to $500,000. [1]
2. A suit for breach of contract seeking damages of $2,400,000 was filed by an author against Greer Co. on October 4, 2020. Greer's legal counsel believes that an unfavorable outcome is probable. A reasonable estimate of the award to the plaintiff is between $600,000 and $1,800,000. No amount within this range is a better estimate of potential damages than any other amount. [2]
3. Quinn Ltd is involved in a pending court case and lawyers believe it is probable that Quinn Ltd will be awarded damages of $1,000,000. [3]
Question 5
Assume that an asset was bought at a cost of $50,000. It is expected that the asset will have zero residual value and a useful life of 10 years with the straight-line depreciation method being used. At the beginning of year 5, the total useful life is re-estimated downward to 8 years. The company adopted cost model for accounting for this asset class. What are the journal entries required to record depreciation expense for the final years of useful life of the asset?
Question 6
On 1 January 2019 an asset that had a useful life of five years and a cost of $100,000, had a carrying value of $60,000. On the same date, it was decided to record a revaluation increment of $30,000 with no change in its useful life. What is the depreciation expense relating to the asset should be recorded for the financial year ended on 31 December 2019?
Do not include commas and dollar sign ($) in your answers. Present $1,000 as 1000.
Question 7
What are the two elements in identifying whether a contract contains a lease?
Question 8
Present value tables are provided below. Please use them to do the calculations.