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ACT4111 Advanced Financial Accounting
(Semester 2, 2024-25)
ASSIGNMENT 1
(Total Marks: 160)
Question 1 (48 marks)
|
Non-strategic Investments |
Accounting Category |
Date of Purchase |
Purchase Cost ($) |
Fair Value ($) (on Dec. 31, 2023) |
|
Debt Investment |
||||
|
Bonds issued by Yelena Limited
(Yelena)
- Coupon rate: 5% p.a.
- Effective rate: 6% p.a.
- Face value: $2,100,000
- Mature date: Dec 31, 2032
- Interest payable annually on Dec 31
|
FVPL |
Jan. 1, 2022 |
1,934,376 |
1,961,300 |
|
Equity Investment |
||||
|
Ordinary Shares of Xandra Limited
(Xandra)
- 180,000 shares
|
FVOCI |
Feb. 1, 2023 |
2,160,000 |
2,286,000 |
|
April 1 |
Xandra declared and paid dividends of $0.3 per share. |
|
November 1 |
Zoey purchased 80,000 ordinary shares of Wanda Limited (Wanda) at $27.0 per share, using FVPL method for accounting. |
|
December 31 |
The fair market value of the ordinary shares of Wanda and Xandra were $28.4 and $11.9 per share, respectively. And the fair value of the bonds of Yelena was $1,977,200. |
(b) What should be reported on Zoey's statement of financial position as of December 31, 2024, for its non-strategic debt and equity investments?
During 2025, Zoey engaged in the following transactions.
|
January 1 |
Zoey purchased bonds issued by Vanessa Limited (Vanessa) for $1,872,588, using FVOCI method for accounting. The details of the bonds are as follows:
- Coupon Rate: 10% per annum
- Effective Rate: 6% per annum
- Face Value: $1,500,000
- Maturity Date: December 31, 2032
- Interest Payment: Annually on December 31
|
|
February 1 |
Zoey sold all shares of Wanda at $27.9 per share. |
|
March 1 |
Zoey sold the bonds of Yelena for $1,998,000. |
|
April 1 |
Zoey sold all shares of Xandra at $12.2 per share. |
|
December 31 |
The fair market value of the ordinary shares of Wanda and Xandra were $27.6 and $12.4 per share, respectively. And the fair value of the bonds of Vanessa and Yelena were $1,839,700 and $1,994,200, respectively. |
(c) Prepare the necessary journal entries for Zoey regarding its non-strategic debt and equity investments for the year 2025.
On December 31, 2024, Ursula Company (Ursula) acquired all 200,000 outstanding voting shares of Tessa Limited (Tessa) from Sophia Corporation (Sophia), which was the major shareholder of Tessa prior to this transaction. The purchase consideration includes the following:
|
Cash Payment |
|
|
Cash payment to Sophia on December 31, 2024 |
$ 770,000 |
|
Cash payment to a Professional Firm for due diligence and professional advice on December 31, 2024 |
123,000 |
|
Deferred cash payment to Sophia, payable on December 31, 2026 |
726,000 |
|
Share Issuance |
|
|
Issuance of Ursula's new shares to Sophia on December 31, 2024. (Ursula incurred $34,000 for the stamp duties and other incidentals for the share issuance) |
18,000 shares |
|
Assets Transferred |
|
|
A parcel of land was transferred to Sophia on December 31, 2024. |
Carrying Amount: 384,000
Fair Value: 426,000
|
|
|
Par Value ($) |
Fair Market Value ($) |
|
Ursula's ordinary shares |
2 |
28.0 |
|
Tessa’s ordinary shares |
1 |
10.0 |
Tessa reported the following account balances just before the acquisition.
|
Intangible Assets |
$ 999,000 |
Property and Equipment (net) |
$ 777,000 |
|
Inventories |
444,000 |
Retained Earnings |
666,000 |
|
Liabilities |
699,000 |
Share Capital |
200,000 |
|
Other Assets |
233,000 |
Share Premium |
888,000 |
Ursula has consistently maintained strong financial health. In 2025, Ursula acquired 69,000 ordinary shares of Rosa Limited (Rosa), which accounts for a 46% ownership stake. Additionally, Ursula secured an option to purchase 21,000 outstanding ordinary shares of Rosa from Sophia, representing an additional 14% shareholding stake, exercisable at any time until June 30, 2027. The transaction price will be determined based on the market price at the time of exercise, with a 5% discount applied.
Question 3 (86 marks)
On January 1, 2024, Quiana Company (Quiana) acquired all outstanding ordinary shares of Paloma Limited (Paloma) for $7,789,000 in cash, thereby gaining control over Paloma. Quiana recorded its investment in Paloma at cost using the cost method and will operate Paloma as a wholly owned subsidiary, maintaining a separate legal and accounting identity.
At the acquisition date, Paloma reported total shareholders’ equity of $5,400,000, which included share capital of $400,000 (at $1 par), share premium of $3,500,000, and retained earnings of $1,500,000. An examination of Paloma's books revealed the following discrepancies between book values and fair values:
|
|
Book Value ($) |
Fair Value ($) |
|
An Investment Property |
1,230,000 |
1,540,000 |
|
An Intangible asset |
840,000 |
1,080,000 |
|
Inventories |
660,000 |
710,000 |
Financial data of Quiana and Paloma for 2024 are presented below:
*1: Both companies used cost method for measuring and recording of property and equipment and intangible assets
(b) Prepare necessary consolidation adjusting entries to prepare the consolidated financial statements for the year ended December 31, 2024.
(e) Determine the consolidated net income for the year ended December 31, 2025 and the consolidated retained earnings as of December 31, 2025.
The accounting team of Quiana has prepared the consolidated financial statements for the year ended December 31, 2025. Consequently, a board meeting was held in February to discuss related matters. Below is an extract from the minutes of this board meeting, attended by directors of Quiana (Luna, Marissa, Nadia, and Odessa).
|
Luna |
The accounting team has finally prepared the draft of the consolidated financial statements ahead of the Spring Festival. Upon reviewing the adjusting entries in the working paper, I noticed that several entries are exactly the same or very similar to those prepared last year. This raises an important question about why we are repeating these adjustments, as it seems inefficient to spend valuable time on entries that do not reflect any changes in our financial position. Although I am not a student in the accounting major, my studies in the introductory financial accounting class had taught me that adjusting entries are posted to T-accounts. If we prepare these entries again, it could lead to double-counting. This situation makes me wonder if this is a mistake by the accounting team, as it could compromise the accuracy of our financial statements.
|
|
Marissa |
I have also undertaken a further examination of the consolidation adjusting entries prepared by the accounting team. I have noticed that additional expenses, such as the cost of goods sold and amortisation expense, have been recorded through these adjustments. Luna, as you know, I was your classmate in the introductory financial accounting class. Based on my understanding, recognising expenses must adhere to the matching principle. In the individual financial statements of Quiana and Paloma, they have already followed this principle when reporting expenses related to their assets. Therefore, I am puzzled by the accounting team’s approach regarding these additional adjusting entries in the preparation of the consolidated financial statements. It appears that this could potentially violate the matching principle. This redundancy could lead to inaccuracies in our financial statements, ultimately misrepresenting our financial position.
|
|
Nadia |
Last year, when I first reviewed the consolidated financial statements, I had doubts about the goodwill recorded, which was over 20% of the purchase price we paid for Paloma Limited. I find it concerning that Paloma's individual financial statements do not include any goodwill, which leads me to wonder what exactly goodwill represents in this context. As a science student with no formal training in accounting, I find this situation perplexing. Why do the statements of Quiana and Paloma not report goodwill, while such an asset appears in the consolidated financial statements? Additionally, some of our major shareholders have expressed concerns regarding the high goodwill value and its potential impact on the financial performance of the group, particularly concerning key financial ratios such as the price-to-earnings ratio and return on equity.
|
|
Odessa |
I want to share some important updates with all of you. On a positive note, we are nearing the completion of the deal to acquire all outstanding ordinary shares of Kayla Limited, which means we will soon own and control Kayla. This acquisition is particularly exciting because Kayla owns the land and building where our headquarters is located, allowing us to own our office space and no longer pay rent. It is worth noting that Kayla has no other assets, liabilities, or operations, so our primary focus in this acquisition is indeed the land and building that Kayla holds. However, while this deal is good news, I am concerned about the implications for next year. The accounting team will need to consolidate Kayla alongside Paloma, and I am uncertain how much additional time they may require for the consolidation process. Given the numerous issues we have raised, it is crucial for the accounting team to prepare a report addressing our concerns.
|
On June 30, 2026, Paloma sold the undervalued intangible asset, which was undervalued at the date of acquisition, to an external party for $612,000.