ACCT 2005 Financial Accounting 2 PRACTIC EXAM 1

ACCT 2005 Financial Accounting 2

PRACTICE EXAM 1

Details of Exam:
• Materials Permitted: Course materials and non-programmable calculator.
• The exam is a two-hour exam. Additional one hour takes account of exceptional
circumstances and should help support students to download and upload their exams.
There is no reading time. You can start writing straight away.
• Turnitin will be in use as it is for all assessments in this course
• Answers to all questions are required to be written in the Answer Booklet and the
Answer Booklet must be summited via the submission link before the end time.
• This examination includes a total of FOUR (4) questions and two appendices.
▪ Appendix A includes present value tables.
▪ Appendix B includes extracts from accounting pronouncements.
• The questions and related marks are indicated below:
Question 1 Accounting for Equity
Question 2 Revenue from Contract with Customers
Question 3 Accounting for Leases
Question 4 Accounting for Income Tax

ACCT 2005 Financial Accounting 2 PRACTIC EXAM 1, page 1 of 16

ACCT 2005 Financial Accounting 2 PRACTIC EXAM 1

QUESTION 1: ACCOUNTING FOR EQUITY

On 1 August 2022 Rose Limited was formed and issued a prospectus calling for applications
for 100,000 ordinary shares at an issue price of $3.00, payable $1.50 on application, $0.50 on
allotment and $1.00 on a future call/s (date to be decided). It received 110,000 applications
with $1.50 paid. On 1 October 2022 it issued the shares and made refunds to 10,000
applicants. Costs incurred in the share issue totalled $5,000. All allotment monies were
received by 1 November 2022. On 1 May 2023 a call was made for $1.00 per share. Call monies
were received by 30 June 2023 from all except holders of 6,000 shares. On 30 June 2023 the
directors recommended a dividend of $18,000. This was subject to approval by shareholders
at the annual general meeting to be held in August 2023.

REQUIRED:
Prepare general journal entries to reflect the above transactions and events. Dates must be
shown for all journal entries. Narrations are not required.

ACCT 2005 Financial Accounting 2 PRACTIC EXAM 1, page 2 of 16

ACCT 2005 Financial Accounting 2 PRACTIC EXAM 1

QUESTION 2: REVENUE FROM CONTRACT WITH CUSTOMERS

PART 1

On 1 July2019, Fit Ltd enters into a 12-month contract with a customer Sophie. Under the
contract Sophie will pay $30 per month (payable at the end of each month) for access to the
fitness centre and related services (e.g., yoga and step classes etc) and pays a non-refundable
up-front payment of $600 which includes a membership fee. On 1 July 2019, on signing the
contract and paying the $600, Sophie receives a membership card, a healthy food basket
(consisting of health foods and related products, such as vitamins), a diet book and a pair of
trainers. Assume there is no option to renew the contract after 12 months.

REQUIRED:
Identify what distinct performance obligations would be identified in relation to this contract?
Give reasons for your answers. All explanations need to be in your own words.

PART 2

The standalone selling prices are:

• Healthy food basket $ 50
• Trainers $200
• Diet book $ 80

Fit Ltd commonly contracts with customers for fitness centre access only, on the basis of a
$300 upfront non-refundable membership fee and $30 per month.
Fit Ltd commonly sells the Healthy food basket and the diet book as a bundle for $100. Fit Ltd
does not provide monthly access separately to customers to use the fitness centre (this is only
provided on a contract basis).

REQUIRED:
Calculate the transaction price and the amount that would be allocated to each performance
obligation in this contract. You need to give reasons for your answer and show all calculations.
All explanations need to be in your own words.

ACCT 2005 Financial Accounting 2 PRACTIC EXAM 1, page 1 of 16

ACCT 2005 Financial Accounting 2 PRACTIC EXAM 1

QUESTION 3: ACCOUNTING FOR LEASES

PART 1

On 1 July 2015 Rose Ltd leased planting equipment from Agro Ltd. Information in relation to
the lease contract is as follows:
• The lease is for 5 years. It can be cancelled but only if Rose Ltd agrees to pay a penalty
of $50,000 for each future year of the original lease term.
• The initial payment of $60,000 is to be made on 1 July 2015.
• As an incentive to enter into the lease Agro Ltd agreed to pay the first years’ insurance
costs for the equipment. The insurance for the first year was $5,000 and was paid to
Rose Ltd’s insurer on 1 July 2015 by Agro Ltd.
• A further 4 annual lease payments are to be made of $60,000 on 1 July each year,
commencing on 1 July 2016.
• The interest rate implicit in the lease is 12%
• The residual value at the end of the lease term is $40,000. The lessee has guaranteed
$30,000 of this residual value.
• Agro Ltd incurred initial direct costs of $4,000 in relation to this lease. No costs were
incurred by Rose Ltd.
• Rose Ltd is expected to purchase the equipment at the end of the lease term (i.e., 30
June of final year of lease) for the guaranteed residual value.
• The fair value of the equipment at the 1 July 2015 is $256,000
• The equipment has an estimated economic life of 7 years, with a scrap value of $4,000.
Rose Ltd applies straight-line depreciation to this type of equipment.

REQUIRED:
a) Calculate the present value of the lease payments, the amount of the lease asset and lease
liability to be recognised at the beginning of the lease by the lessee. Show all your
workings.

b) Draw up a schedule for the lease liability for the duration of the lease in the table below.

c) Prepare the general journal entries required to be prepared by Rose Ltd to account for
the lease for the year ending 30 June 2016 (i.e., from 1 July 2015 to 30 June 2016) and at
1 July 2016. Show all calculations and the dates for all journal entries. Narrations are not
required.

ACCT 2005 Financial Accounting 2 PRACTIC EXAM 1, page 2 of 16

ACCT 2005 Financial Accounting 2 PRACTIC EXAM 1

PART 2

Rose Ltd entered into a lease for a coffee machine with Latte Ltd on 1 August 2015. Details of
the lease agreement were as follows:
• The lease is for 2 years.
• There are 8 lease payments (a payment every 3 months) of $690 each. These are
payable in arrears with the first of these payable on 31 October 2015.
• The coffee machine has an economic life of 3 years with a residual value of $0 and the
fair value of this coffee machine at 1 August 2015 is $4,800.

REQUIRED:
Assuming that the lessee has elected to apply the recognition exemption in AASB 16, in the
table provided below, prepare the journal entries required to account for this lease in the
books of the lessee, Rose Ltd, for the year ending 30 June 2016. Show all calculations and
dates for all journal entries.

ACCT 2005 Financial Accounting 2 PRACTIC EXAM 1, page 3 of 16

ACCT 2005 Financial Accounting 2 PRACTIC EXAM 1

QUESTION 4: INCOME TAX

The accounting profit before tax for Rose Ltd for the year ended 30 June 2020 was $420,000
and included the following revenue and expense items:

Landscaping consultation fees $42,000

Depreciation of Machinery $18,500
Depreciation of Building $20,000
Long service leave expense $90,000
Entertainment expense $12,000
Insurance Expense $24,000

Additional information:
• The landscaping consultation fees includes $15,000 that was paid in advance to Rose Ltd
by the local council in May 2019.
• The machinery was purchased on 1 July 2018 for $185,000. The machine has an expected
useful life of 10 years and no residual value and is depreciated using straight-line method
for accounting purposes. Tax depreciates at 25% per annum straight line on cost.
• The balance of the provision for long service leave at 30 June 2019 was $100,000.
• Insurance is paid in advance for one year. At 30 June 2019 the amount in the statement
of financial position for Prepaid Insurance was $17,000.
• Tax includes/treats consultation fees, long service leave and insurance expenses on a cash
basis. Entertainment expenses are not allowable as deductions for tax purposes.
• Tax does not allow deductions for depreciation of buildings.
• Assume the land is exempt for tax purposes (i.e., No tax will be assessable if sold, and no
deductions allowed).
• The balances of deferred tax asset and deferred tax liability as at 1 July 2019 are $16,000
and $22,000 respectively.
• The tax rate is 30%.

ACCT 2005 Financial Accounting 2 PRACTIC EXAM 1, page 4 of 16

ACCT 2005 Financial Accounting 2 PRACTIC EXAM 1

The extract from the statement of financial position for the company as at 30 June 2020 is as
follows:
Assets
Cash 20,000
Inventory 420,000
Accounts receivable 310,000
Prepaid Insurance 14,000
Machinery 185,000
Accumulated Depreciation –Machinery 37,000
Land 250,000
Building 200,000
Accumulated Depreciation –Building 80,000
Liabilities
Accounts payable 40,000
Entertainment expenses payable 4,000
Provision for Long Service Leave 165,000
Loan 300,000

REQUIRED:
a) Prepare a statement reconciling accounting profit to taxable profit.

b) Complete the tax effect worksheet provided in the next page.

c) The assistant accountant for the company cannot understand why the taxation expense
of the period cannot simply be based on the amount of taxation payable (i.e., the current
tax liability). Explain in your own words the rationale for the requirements of AASB 112
Income Taxes that income tax expense not be based only on the amount of tax payable
for the period.

ACCT 2005 Financial Accounting 2 PRACTIC EXAM 1, page 5 of 16

ACCT 2005 Financial Accounting 2 PRACTIC EXAM 1

Future Taxable Deductible

Carrying Deductible Temporary Temporary
Amount Amount Tax Base Differences Differences

Assets
Cash
Inventory
Accounts receivable (Net)
Machinery (net)
Prepaid Ins.
Land
Buildings (net)
Liabilities
Accounts payable
Entertainment Exp Payable
Provision for LS leave
Temporary differences
Excluded differences
Net Temp. Differences
Deferred tax liability
Deferred tax asset
Beginning balances
Adjustment
Change in year

END OF EXAM QUESTIONS

PLEASE ENSURE YOU WRITE YOUR ANSWERS TO THE QUESTIONS AND

COMPLETE STUDENT DELCLATION IN THE ANSWER BOOKLET. YOU ARE
REQUIRED TO SUBMIT THE ANSWER BOOKLET.

ACCT 2005 Financial Accounting 2 PRACTIC EXAM 1, page 6 of 16

ACCT 2005 Financial Accounting 2 PRACTIC EXAM 1
Present value of $1 discounted at i % per period for n periods
APPENDIX A PRESENT VALUE TABLES
1 /(1 + i) n
Present Value of $1 Discounted at i% per period for n periods

n 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 12% 14% 15% 16% 18% 20% 24% 28% 32%
1 0.9901 0.9804 0.9709 0.9615 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091 0.8929 0.8772 0.8696 0.8621 0.8475 0.8333 0.8065 0.7813 0.7576
2 0.9803 0.9612 0.9426 0.9246 0.9070 0.8900 0.8734 0.8573 0.8417 0.8264 0.7972 0.7695 0.7561 0.7432 0.7182 0.6944 0.6504 0.6104 0.5739
3 0.9706 0.9423 0.9151 0.8890 0.8638 0.8396 0.8163 0.7938 0.7722 0.7513 0.7118 0.6750 0.6575 0.6407 0.6086 0.5787 0.5245 0.4768 0.4348
4 0.9610 0.9238 0.8885 0.8548 0.8227 0.7921 0.7629 0.7350 0.7084 0.6830 0.6355 0.5921 0.5718 0.5523 0.5158 0.4823 0.4230 0.3725 0.3294
5 0.9515 0.9057 0.8626 0.8219 0.7835 0.7473 0.7130 0.6806 0.6499 0.6209 0.5674 0.5194 0.4972 0.4761 0.4371 0.4019 0.3411 0.2910 0.2495
6 0.9420 0.8880 0.8375 0.7903 0.7462 0.7050 0.6663 0.6302 0.5963 0.5645 0.5066 0.4556 0.4323 0.4104 0.3704 0.3349 0.2751 0.2274 0.1890
7 0.9327 0.8706 0.8131 0.7599 0.7107 0.6651 0.6227 0.5835 0.5470 0.5132 0.4523 0.3996 0.3759 0.3538 0.3139 0.2791 0.2218 0.1776 0.1432
8 0.9235 0.8535 0.7894 0.7307 0.6768 0.6274 0.5820 0.5403 0.5019 0.4665 0.4039 0.3506 0.3269 0.3050 0.2660 0.2326 0.1789 0.1388 0.1085
9 0.9143 0.8368 0.7664 0.7026 0.6446 0.5919 0.5439 0.5002 0.4604 0.4241 0.3606 0.3075 0.2843 0.2630 0.2255 0.1938 0.1443 0.1084 0.0822
10 0.9053 0.8203 0.7441 0.6756 0.6139 0.5584 0.5083 0.4632 0.4224 0.3855 0.3220 0.2697 0.2472 0.2267 0.1911 0.1615 0.1164 0.0847 0.0623
11 0.8963 0.8043 0.7224 0.6496 0.5847 0.5268 0.4751 0.4289 0.3875 0.3505 0.2875 0.2366 0.2149 0.1954 0.1619 0.1346 0.0938 0.0662 0.0472
12 0.8874 0.7885 0.7014 0.6246 0.5568 0.4970 0.4440 0.3971 0.3555 0.3186 0.2567 0.2076 0.1869 0.1685 0.1372 0.1122 0.0757 0.0517 0.0357
13 0.8787 0.7730 0.6810 0.6006 0.5303 0.4688 0.4150 0.3677 0.3262 0.2897 0.2292 0.1821 0.1625 0.1452 0.1163 0.0935 0.0610 0.0404 0.0271
14 0.8700 0.7579 0.6611 0.5775 0.5051 0.4423 0.3878 0.3405 0.2992 0.2633 0.2046 0.1597 0.1413 0.1252 0.0985 0.0779 0.0492 0.0316 0.0205
15 0.8613 0.7430 0.6419 0.5553 0.4810 0.4173 0.3624 0.3152 0.2745 0.2394 0.1827 0.1401 0.1229 0.1079 0.0835 0.0649 0.0397 0.0247 0.0155
16 0.8528 0.7284 0.6232 0.5339 0.4581 0.3936 0.3387 0.2919 0.2519 0.2176 0.1631 0.1229 0.1069 0.0930 0.0708 0.0541 0.0320 0.0193 0.0118
17 0.8444 0.7142 0.6050 0.5134 0.4363 0.3714 0.3166 0.2703 0.2311 0.1978 0.1456 0.1078 0.0929 0.0802 0.0600 0.0451 0.0258 0.0150 0.0089
18 0.8360 0.7002 0.5874 0.4936 0.4155 0.3503 0.2959 0.2502 0.2120 0.1799 0.1300 0.0946 0.0808 0.0691 0.0508 0.0376 0.0208 0.0118 0.0068
19 0.8277 0.6864 0.5703 0.4746 0.3957 0.3305 0.2765 0.2317 0.1945 0.1635 0.1161 0.0829 0.0703 0.0596 0.0431 0.0313 0.0168 0.0092 0.0051
20 0.8195 0.6730 0.5537 0.4564 0.3769 0.3118 0.2584 0.2145 0.1784 0.1486 0.1037 0.0728 0.0611 0.0514 0.0365 0.0261 0.0135 0.0072 0.0039
25 0.7798 0.6095 0.4776 0.3751 0.2953 0.2330 0.1842 0.1460 0.1160 0.0923 0.0588 0.0378 0.0304 0.0245 0.0160 0.0105 0.0046 0.0021 0.0010
30 0.7419 0.5521 0.4120 0.3083 0.2314 0.1741 0.1314 0.0994 0.0754 0.0573 0.0334 0.0196 0.0151 0.0116 0.0070 0.0042 0.0016 0.0006 0.0002
35 0.7059 0.5000 0.3554 0.2534 0.1813 0.1301 0.0937 0.0676 0.0490 0.0356 0.0189 0.0102 0.0075 0.0055 0.0030 0.0017 0.0005 0.0002 0.0001
40 0.6717 0.4529 0.3066 0.2083 0.1420 0.0972 0.0668 0.0460 0.0318 0.0221 0.0107 0.0053 0.0037 0.0026 0.0013 0.0007 0.0002 0.0001 0.0000
50 0.6080 0.3715 0.2281 0.1407 0.0872 0.0543 0.0339 0.0213 0.0134 0.0085 0.0035 0.0014 0.0009 0.0006 0.0003 0.0001 0.0000 0.0000 0.0000

ACCT 2005 Financial Accounting 2 PRACTIC EXAM 1, page 7 of 16

 Present value of an annuity of $1 discounted at i % per period for n periods
ACCT 2005 Financial Accounting 2 PRACTIC EXAM 1
1 − 1 /(1 + i) n

i
Present Value of an Annuity of $1 Discounted at i% per period for n periods

n 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 12% 14% 15% 16% 18% 20% 24% 28% 32%
1 0.9901 0.9804 0.9709 0.9615 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091 0.8929 0.8772 0.8696 0.8621 0.8475 0.8333 0.8065 0.7813 0.7576
2 1.9704 1.9416 1.9135 1.8861 1.8594 1.8334 1.8080 1.7833 1.7591 1.7355 1.6901 1.6467 1.6257 1.6052 1.5656 1.5278 1.4568 1.3916 1.3315
3 2.9410 2.8839 2.8286 2.7751 2.7232 2.6730 2.6243 2.5771 2.5313 2.4869 2.4018 2.3216 2.2832 2.2459 2.1743 2.1065 1.9813 1.8684 1.7663
4 3.9020 3.8077 3.7171 3.6299 3.5460 3.4651 3.3872 3.3121 3.2397 3.1699 3.0373 2.9137 2.8550 2.7982 2.6901 2.5887 2.4043 2.2410 2.0957
5 4.8534 4.7135 4.5797 4.4518 4.3295 4.2124 4.1002 3.9927 3.8897 3.7908 3.6048 3.4331 3.3522 3.2743 3.1272 2.9906 2.7454 2.5320 2.3452
6 5.7955 5.6014 5.4172 5.2421 5.0757 4.9173 4.7665 4.6229 4.4859 4.3553 4.1114 3.8887 3.7845 3.6847 3.4976 3.3255 3.0205 2.7594 2.5342
7 6.7282 6.4720 6.2303 6.0021 5.7864 5.5824 5.3893 5.2064 5.0330 4.8684 4.5638 4.2883 4.1604 4.0386 3.8115 3.6046 3.2423 2.9370 2.6775
8 7.6517 7.3255 7.0197 6.7327 6.4632 6.2098 5.9713 5.7466 5.5348 5.3349 4.9676 4.6389 4.4873 4.3436 4.0776 3.8372 3.4212 3.0758 2.7860
9 8.5660 8.1622 7.7861 7.4353 7.1078 6.8017 6.5152 6.2469 5.9952 5.7590 5.3282 4.9464 4.7716 4.6065 4.3030 4.0310 3.5655 3.1842 2.8681
10 9.4713 8.9826 8.5302 8.1109 7.7217 7.3601 7.0236 6.7101 6.4177 6.1446 5.6502 5.2161 5.0188 4.8332 4.4941 4.1925 3.6819 3.2689 2.9304
11 10.3676 9.7868 9.2526 8.7605 8.3064 7.8869 7.4987 7.1390 6.8052 6.4951 5.9377 5.4527 5.2337 5.0286 4.6560 4.3271 3.7757 3.3351 2.9776
12 11.2551 10.5753 9.9540 9.3851 8.8633 8.3838 7.9427 7.5361 7.1607 6.8137 6.1944 5.6603 5.4206 5.1971 4.7932 4.4392 3.8514 3.3868 3.0133
13 12.1337 11.3484 10.6350 9.9856 9.3936 8.8527 8.3577 7.9038 7.4869 7.1034 6.4235 5.8424 5.5831 5.3423 4.9095 4.5327 3.9124 3.4272 3.0404
14 13.0037 12.1062 11.2961 10.5631 9.8986 9.2950 8.7455 8.2442 7.7862 7.3667 6.6282 6.0021 5.7245 5.4675 5.0081 4.6106 3.9616 3.4587 3.0609
15 13.8651 12.8493 11.9379 11.1184 10.3797 9.7122 9.1079 8.5595 8.0607 7.6061 6.8109 6.1422 5.8474 5.5755 5.0916 4.6755 4.0013 3.4834 3.0764
16 14.7179 13.5777 12.5611 11.6523 10.8378 10.1059 9.4466 8.8514 8.3126 7.8237 6.9740 6.2651 5.9542 5.6685 5.1624 4.7296 4.0333 3.5026 3.0882
17 15.5623 14.2919 13.1661 12.1657 11.2741 10.4773 9.7632 9.1216 8.5436 8.0216 7.1196 6.3729 6.0472 5.7487 5.2223 4.7746 4.0591 3.5177 3.0971
18 16.3983 14.9920 13.7535 12.6593 11.6896 10.8276 10.0591 9.3719 8.7556 8.2014 7.2497 6.4674 6.1280 5.8178 5.2732 4.8122 4.0799 3.5294 3.1039
19 17.2260 15.6785 14.3238 13.1339 12.0853 11.1581 10.3356 9.6036 8.9501 8.3649 7.3658 6.5504 6.1982 5.8775 5.3162 4.8435 4.0967 3.5386 3.1090
20 18.0456 16.3514 14.8775 13.5903 12.4622 11.4699 10.5940 9.8181 9.1285 8.5136 7.4694 6.6231 6.2593 5.9288 5.3527 4.8696 4.1103 3.5458 3.1129
25 22.0232 19.5235 17.4131 15.6221 14.0939 12.7834 11.6536 10.6748 9.8226 9.0770 7.8431 6.8729 6.4641 6.0971 5.4669 4.9476 4.1474 3.5640 3.1220
30 25.8077 22.3965 19.6004 17.2920 15.3725 13.7648 12.4090 11.2578 10.2737 9.4269 8.0552 7.0027 6.5660 6.1772 5.5168 4.9789 4.1601 3.5693 3.1242
40 32.8347 27.3555 23.1148 19.7928 17.1591 15.0463 13.3317 11.9246 10.7574 9.7791 8.2438 7.1050 6.6418 6.2335 5.5482 4.9966 4.1659 3.5712 3.1250
50 39.1961 31.4236 25.7298 21.4822 18.2559 15.7619 13.8007 12.2335 10.9617 9.9148 8.3045 7.1327 6.6605 6.2463 5.5541 4.9995 4.1666 3.5714 3.1250
60 44.9550 34.7609 27.6756 22.6235 18.9293 16.1614 14.0392 12.3766 11.0480 9.9672 8.3240 7.1401 6.6651 6.2492 5.5553 4.9999 4.1667 3.5714 3.1250

ACCT 2005 Financial Accounting 2 PRACTIC EXAM 1, page 8 of 16

ACCT 2005 Financial Accounting 2 PRACTIC EXAM 1

APPENDIX B: Extracts from Accounting Pronouncements

AASB 15
Contract An agreement between two or more parties that creates enforceable rights and
obligations.
contract asset An entity’s right to consideration in exchange for goods or services that the entity has
transferred to a customer when that right is conditioned on something other than the
passage of time (for example, the entity’s future performance).
contract liability An entity’s obligation to transfer goods or services to a customer for which the entity
has received consideration (or the amount is due) from the customer.
Customer A party that has contracted with an entity to obtain goods or services that are an
output of the entity’s ordinary activities in exchange for consideration.
Income Increases in economic benefits during the accounting period in the form of inflows or
enhancements of assets or decreases of liabilities that result in an increase in equity,
other than those relating to contributions from equity participants.
performance obligation A promise in a contract with a customer to transfer to the customer either:
(a) a good or service (or a bundle of goods or services) that is distinct; or
(b) a series of distinct goods or services that are substantially the same and that have the same
pattern of transfer to the customer.
Revenue Income arising in the course of an entity’s ordinary activities.
stand-alone selling price (of a good or service) The price at which an entity would sell a promised
good or service separately to a customer.
transaction price (for a contract with a customer) The amount of consideration to which an entity
expects to be entitled in exchange for transferring promised goods or services to a
customer, excluding amounts collected on behalf of third parties.
9 An entity shall account for a contract with a customer that is within the scope of this Standard only
when all of the following criteria are met:
(a) the parties to the contract have approved the contract (in writing orally or in accordance with
other customary business practices) and are committed to perform their respective obligations.
(b) the entity can identify each party’s rights regarding the goods or services to be transferred.
(c) the entity can identify the payment terms for the goods or services to be transferred.
(d) the contract has commercial substance (i.e. the risk, timing or amount of the entity’s future cash
flows is expected to change as a result of the contract); and
(e) it is probable that the entity will collect the consideration to which it will be entitled in exchange
for the goods or services that will be transferred to the customer. In evaluating whether
collectability of an amount of consideration is probable, an entity shall consider only the
customer’s ability and intention to pay that amount of consideration when it is due. The amount
of consideration to which the entity will be entitled may be less than the price stated in the
contract if the consideration is variable because the entity may offer the customer a price
concession.
22 At contract inception, an entity shall assess the goods or services promised in a contract with a
customer and shall identify as a performance obligation each promise to transfer to the customer
either:
(a) a good or service (or a bundle of goods or services) that is distinct; or
(b) a series of distinct goods or services that are substantially the same and that have the same
pattern of transfer to the customer

ACCT 2005 Financial Accounting 2 PRACTIC EXAM 1, page 9 of 16

ACCT 2005 Financial Accounting 2 PRACTIC EXAM 1

81 A customer receives a discount for purchasing a bundle of goods or services if the sum of the stand-
alone selling prices of those promised goods or services in the contract exceeds the promised
consideration in a contract. Except when an entity has observable evidence in accordance with
paragraph 82 that the entire discount relates to only one or more, but not all, performance
obligations in a contract, the entity shall allocate a discount proportionately to all performance
obligations in the contract. The proportionate allocation of the discount in those circumstances is
a consequence of the entity allocating the transaction price to each performance obligation on the
basis of the relative stand-alone selling prices of the underlying distinct goods or services.

AASB 16
fixed payments Payments made by a lessee to a lessor for the right to use an underlying asset
during the lease term, excluding variable lease payments.
initial direct costs Incremental costs of obtaining a lease that would not have been incurred if
the lease had not been obtained, except for such costs incurred by a
manufacturer or dealer lessor in connection with a finance lease.
interest rate The rate of interest that causes the present value of (a) the lease payments
implicit in the lease and (b) the unguaranteed residual value to equal the sum of (i) the fair value
of the underlying asset and (ii) any initial direct costs of the lessor.
Lease A contract, or part of a contract, that conveys the right to use an asset (the
underlying asset) for a period of time in exchange for consideration.
lease incentives Payments made by a lessor to a lessee associated with a lease, or the
reimbursement or assumption by a lessor of costs of a lessee.
lease payments Payments made by a lessee to a lessor relating to the right to use an
underlying asset during the lease term, comprising the following:
(a) fixed payments (including in-substance fixed payments), less any lease
incentives;
(b) variable lease payments that depend on an index or a rate;
(c) the exercise price of a purchase option if the lessee is reasonably certain
to exercise that option; and
(d) payments of penalties for terminating the lease, if the lease term reflects
the lessee exercising an option to terminate the lease.
For the lessee, lease payments also include amounts expected to be payable
by the lessee under residual value guarantees. Lease payments do not
include payments allocated to non-lease components of a contract, unless
the lessee elects to combine non-lease components with a lease component
and to account for them as a single lease component.
lease term The non-cancellable period for which a lessee has the right to use an
underlying asset, together with both:
(a) periods covered by an option to extend the lease if the lessee is
reasonably certain to exercise that option; and
(b) periods covered by an option to terminate the lease if the lessee is
reasonably certain not to exercise that option.

lessee’s The rate of interest that a lessee would have to pay to borrow over a similar
incremental term, and with a similar security, the funds necessary to obtain an asset of a
borrowing rate similar value to the right-of-use asset in a similar economic environment.

ACCT 2005 Financial Accounting 2 PRACTIC EXAM 1, page 10 of 16

ACCT 2005 Financial Accounting 2 PRACTIC EXAM 1

residual value A guarantee made to a lessor by a party unrelated to the lessor that the value
guarantee (or part of the value) of an underlying asset at the end of a lease will be at
least a specified amount.
right-of-use asset An asset that represents a lessee’s right to use an underlying asset for the
lease term.
short-term lease A lease that, at the commencement date, has a lease term of 12 months or
less. A lease that contains a purchase option is not a short-term lease.
underlying asset An asset that is the subject of a lease, for which the right to use that asset
has been provided by a lessor to a lessee.
unguaranteed That portion of the residual value of the underlying asset, the realisation of
residual value which by a lessor is not assured or is guaranteed solely by a party related to
the lessor.
variable lease The portion of payments made by a lessee to a lessor for the right to use an
payments underlying asset during the lease term that varies because of changes in facts
or circumstances occurring after the commencement date, other than the
passage of time.
23 At the commencement date, a lessee shall measure the right-of-use asset at cost.
24 The cost of the right-of-use asset shall comprise:
(a) the amount of the initial measurement of the lease liability, as described in paragraph 26;
(b) any lease payments made at or before the commencement date, less any lease incentives
received;
(c) any initial direct costs incurred by the lessee; and
(d) an estimate of costs to be incurred by the lessee in dismantling and removing the underlying
asset, restoring the site on which it is located or restoring the underlying asset to the condition
required by the terms and conditions of the lease, unless those costs are incurred to produce
inventories. The lessee incurs the obligation for those costs either at the commencement date
or as a consequence of having used the underlying asset during a particular period.
26 At the commencement date, a lessee shall measure the lease liability at the present value of the
lease payments that are not paid at that date. The lease payments shall be discounted using the
interest rate implicit in the lease, if that rate can be readily determined. If that rate cannot be
readily determined, the lessee shall use the lessee’s incremental borrowing rate.
36 After the commencement date, a lessee shall measure the lease liability by:
(a) increasing the carrying amount to reflect interest on the lease liability;
(b) reducing the carrying amount to reflect the lease payments made; and
(c) remeasuring the carrying amount to reflect any reassessment or lease modifications specified
in paragraphs 39–46, or to reflect revised in-substance fixed lease payments

AASB 101
General purpose financial statements (referred to as ‘financial statements’) are those intended to
meet the needs of users who are not in a position to require an entity to prepare reports
tailored to their particular information needs.
Material Omissions or misstatements of items are material if they could, individually or collectively,
influence the economic decisions that users make on the basis of the financial statements.
Materiality depends on the size and nature of the omission or misstatement judged in the

ACCT 2005 Financial Accounting 2 PRACTIC EXAM 1, page 11 of 16

ACCT 2005 Financial Accounting 2 PRACTIC EXAM 1

surrounding circumstances. The size or nature of the item, or a combination of both, could
be the determining factor.
Assessing whether an omission or misstatement could influence economic decisions of users, and so
be material, requires consideration of the characteristics of those users. The Framework for
the Preparation and Presentation of Financial Statements states in paragraph 25 that ‘users
are assumed to have a reasonable knowledge of business and economic activities and
accounting and a willingness to study the information with reasonable diligence.’ Therefore,
the assessment needs to take into account how users with such attributes could reasonably
be expected to be influenced in making economic decisions.
Notes contain information in addition to that presented in the statement of financial position,
statement(s) of profit or loss and other comprehensive income, statement of changes in
equity and statement of cash flows. Notes provide narrative descriptions or disaggregations
of items presented in those statements and information about items that do not qualify for
recognition in those statements.
Other comprehensive income comprises items of income and expense (including reclassification
adjustments) that are not recognised in profit or loss as required or permitted by other
Australian Accounting Standards.
Profit or loss is the total of income less expenses, excluding the components of other comprehensive
income.
10 A complete set of financial statements comprises:
(a) a statement of financial position as at the end of the period;
(b) a statement of profit or loss and other comprehensive income for the period;
(c) a statement of changes in equity for the period;
(d) a statement of cash flows for the period;
(e) notes, comprising significant accounting policies and other explanatory information;
(ea) comparative information in respect of the preceding period as specified in paragraphs 38 and
38A; and
(f) a statement of financial position as at the beginning of the preceding period when an entity
applies an accounting policy retrospectively or makes a retrospective restatement of items in
its financial statements, or when it reclassifies items in its financial statements in accordance
with paragraphs 40A–40D.
107 An entity shall present, either in the statement of changes in equity or in the notes, the amount
of dividends recognised as distributions to owners during the period, and the related amount of
dividends per share.
137 An entity shall disclose in the notes:
(a) the amount of dividends proposed or declared before the financial statements were authorised
for issue but not recognised as a distribution to owners during the period, and the related
amount per share; and
(b) the amount of any cumulative preference dividends not recognised.

AASB 108
Accounting policies are the specific principles, bases, conventions, rules and practices applied by an
entity in preparing and presenting financial statements.
A change in accounting estimate is an adjustment of the carrying amount of an asset or a liability, or
the amount of the periodic consumption of an asset, that results from the assessment of
the present status of, and expected future benefits and obligations associated with,

ACCT 2005 Financial Accounting 2 PRACTIC EXAM 1, page 12 of 16

ACCT 2005 Financial Accounting 2 PRACTIC EXAM 1

assets and liabilities. Changes in accounting estimates result from new information or
new developments and, accordingly, are not corrections of errors.
Prior period errors are omissions from, and misstatements in, the entity’s financial statements for one
or more prior periods arising from a failure to use, or misuse of, reliable information that:
(a) was available when financial statements for those periods were authorised for issue;
and
(b) could reasonably be expected to have been obtained and taken into account in the
preparation and presentation of those financial statements.
Such errors include the effects of mathematical mistakes, mistakes in applying accounting
policies, oversights or misinterpretations of facts, and fraud.
Retrospective application is applying a new accounting policy to transactions, other events and
conditions as if that policy had always been applied. Retrospective restatement is
correcting the recognition, measurement and disclosure of amounts of elements of
financial statements as if a prior period error had never occurred.
Impracticable Applying a requirement is impracticable when the entity cannot apply it after making
every reasonable effort to do so.
Prospective application of a change in accounting policy and of recognising the effect of a change in
an accounting estimate, respectively, are:
(a) applying the new accounting policy to transactions, other events and conditions
occurring after the date as at which the policy is changed; and
(b) recognising the effect of the change in the accounting estimate in the current and
future periods affected by the change.
16 The following are not changes in accounting policies:
(a) the application of an accounting policy for transactions, other events or conditions that differ
in substance from those previously occurring; and
(b) the application of a new accounting policy for transactions, other events or conditions that did
not occur previously or were immaterial.
41 Errors can arise in respect of the recognition, measurement, presentation or disclosure of elements
of financial statements. Financial statements do not comply with Australian Accounting Standards
if they contain either material errors or immaterial errors made intentionally to achieve a particular
presentation of an entity’s financial position, financial performance or cash flows. Potential current
period errors discovered in that period are corrected before the financial statements are
authorised for issue. However, material errors are sometimes not discovered until a subsequent
period, and these prior period errors are corrected in the comparative information presented in
the financial statements for that subsequent period.
42 Subject to paragraph 43, an entity shall correct material prior period errors retrospectively in the
first set of financial statements authorised for issue after their discovery by: (a) restating the
comparative amounts for the prior period(s) presented in which the error occurred; or (b) if the
error occurred before the earliest prior period presented, restating the opening balances of assets,
liabilities and equity for the earliest prior period presented.

AASB 110
3 Events after the reporting period are those events, favourable and unfavourable, that occur between
the end of the reporting period and the date when the financial statements are authorised for
issue. Two types of events can be identified:
(a) those that provide evidence of conditions that existed at the end of the reporting period
(adjusting events after the reporting period); and

ACCT 2005 Financial Accounting 2 PRACTIC EXAM 1, page 13 of 16

ACCT 2005 Financial Accounting 2 PRACTIC EXAM 1

(b) those that are indicative of conditions that arose after the reporting period (non-adjusting
events after the reporting period).

AASB 137
10 A provision is a liability of uncertain timing or amount.
A liability is a present obligation of the entity arising from past events, the settlement of which is
expected to result in an outflow from the entity of resources embodying economic benefits.
An obligating event is an event that creates a legal or constructive obligation that results in an entity
having no realistic alternative to settling that obligation.
A legal obligation is an obligation that derives from: (a) a contract (through its explicit or implicit
terms);
(b) legislation; or (c) other operation of law.
A constructive obligation is an obligation that derives from an entity’s actions where:
(a) by an established pattern of past practice, published policies or a sufficiently specific current
statement, the entity has indicated to other parties that it will accept certain responsibilities;
and
(b) as a result, the entity has created a valid expectation on the part of those other parties that it
will discharge those responsibilities.
A contingent liability is:
(a) a possible obligation that arises from past events and whose existence will be confirmed only
by the occurrence or non-occurrence of one or more uncertain future events not wholly within
the control of the entity; or
(b) a present obligation that arises from past events but is not recognised because:
(i) it is not probable that an outflow of resources embodying economic benefits will be
required to settle the obligation; or
(ii) the amount of the obligation cannot be measured with sufficient reliability.
14 A provision shall be recognised when:
(a) an entity has a present obligation (legal or constructive) as a result of a past event;
(b) it is probable that an outflow of resources embodying economic benefits will be required to
settle the obligation; and
(c) a reliable estimate can be made of the amount of the obligation.
If these conditions are not met, no provision shall be recognised.
27 An entity shall not recognise a contingent liability.
84 For each class of provision, an entity shall disclose: (a) the carrying amount at the beginning and
end of the period; (b) additional provisions made in the period, including increases to existing
provisions; (c) amounts used (that is, incurred and charged against the provision) during the period;
(d) unused amounts reversed during the period; and (e) the increase during the period in the
discounted amount arising from the passage of time and the effect of any change in the discount
rate. Comparative information is not required.
85 An entity shall disclose the following for each class of provision: (a) a brief description of the nature
of the obligation and the expected timing of any resulting outflows of economic benefits; (b) an
indication of the uncertainties about the amount or timing of those outflows. Where necessary to
provide adequate information, an entity shall disclose the major assumptions made concerning
future events, as addressed in paragraph; and (c) the amount of any expected reimbursement,
stating the amount of any asset that has been recognised for that expected reimbursement.

ACCT 2005 Financial Accounting 2 PRACTIC EXAM 1, page 14 of 16