ACC208

Examination – July Semester 2018

Intermediate Financial Reporting

Thursday, 22 November 2018 1:00 pm – 3:00 pm

____________________________________________________________________________________

Time allowed: 2 hours

____________________________________________________________________________________

INSTRUCTIONS TO STUDENTS:

1. This examination contains FOUR (4) questions and comprises SIX (6) printed
pages (including cover page).

2. You must answer ALL questions.

3. All answers must be written in the answer book.

4. This is an open-book examination.

At the end of the examination

Please ensure that you have written your examination number on each answer book used.

Failure to do so will mean that your work cannot be identified.

If you have used more than one answer book, please tie them together with the string
provided.

THE UNIVERSITY RESERVES THE RIGHT NOT TO MARK YOUR

SCRIPT IF YOU FAIL TO FOLLOW THESE INSTRUCTIONS.

ACC208 Copyright © 2018 Singapore University of Social Sciences (SUSS) Page 1 of 6

Examination – July Semester 2018
Question 1

AAA Construction Limited (“AAA”) has a contract commencing 1 January 20x3 to

construct a building for its customer on its customer’s land for a contract price of
$5,000,000. Construction is expected to be completed by 31 December 20x5. Details
relating to the construction are summarised below:

20x3 20x4 20x5

Financial year
$ $ $
Costs during the year 1,600,000 1,500,000 1,000,000
Estimated costs to complete 2,400,000 1,000,000 0
Total billings to date 1,500,000 3,000,000 5,000,000
Cash collection during the year 1,200,000 1,600,000 2,200,000

AAA is a Singapore listed company and adopts Singapore Financial Reporting Standards
(FRSs). It also has December 31 year-ends. When presenting your answers, please round
to the nearest dollar.

Required:

(a) Apply FRS 115 Revenue from Contracts with Customers and compute the
revenue and gross profit to be recognised by AAA for each of the financial year
ended 31 December 20x3, 31 December 20x4 and 31 December 20x5 by
assuming:

(i) AAA can reasonably measure the progress of the contract using the input
cost method.

(ii) AAA cannot reasonably measure the progress of the contract but expects
to recover the costs incurred from its customer.
(17 marks)

(b) The construction project was completed on 31 December 20x5. Assuming AAA
can reasonably measure the progress of the contract using the input cost method,
illustrate the accounting for this construction contract under FRS 115 Revenue
from Contracts with Customers by preparing the necessary journal entries
(journal narrative not required) for the financial year ended 31 December 20x5.
In addition, if any event or transaction does not require any journal entry, please
state clearly in your answers.
(8 marks)

ACC208 Copyright © 2018 Singapore University of Social Sciences (SUSS) Page 2 of 6

Examination – July Semester 2018
Question 2

On 1 January 20x1, BBB Ltd grants 50,000 share options to each of its 40 top executives
(total: 2 million share options). Each option entitles the executives to purchase a share at
the exercise price of $2. The employee share options will vest only if the executive works
for the company until 31 December 20x3. The share options are exercisable during 20x4
and will expire by 31 December 20x4.

During 20x1, four executives leave the company. The company revises its estimate that,
in total, twelve executives will leave the company over the three-year period.

During 20x2, another two executives leave the company. The company again revises its
estimate that, in total, only ten executives instead of twelve executives will leave the
company over the three-year period.

During 20x3, another three executives leave the company. On 30 June 20x4, all the
options are exercised when the share price was $4.80.

Based on the Binomial model, the fair value of each employee option is determined to
be $3.00, $3.10, $3.20 and $3.30 on 1 January 20x1, 31 December 20x1, 31 December
20x2 and 31 December 20x3 respectively.

BBB Ltd is a Singapore listed company and adopts Singapore FRSs. It also has December
31 year-ends. When presenting your answers, please round to the nearest dollar.

Required:

(a) Define vesting conditions and explain what the vesting condition is for this option
plan.
(3 marks)

(b) Illustrate the accounting of this option plan under FRS 102 Share-based Payment
by preparing the journal entries (journal narrative not required) for each of the
years from 20x1 to 20x4. Show all workings. In addition, if any event or
transaction does not require any journal entry, please state that clearly in your
answers.
(18 marks)

(c) Explain the principle laid down in FRS 102 Share-based Payment pertaining to
share options that are not exercised after the vesting date and explain the rationale
behind the principle.
(4 marks)

ACC208 Copyright © 2018 Singapore University of Social Sciences (SUSS) Page 3 of 6

Examination – July Semester 2018
Question 3

CCC Ltd is in the business of manufacturing bricks. It has entered into a lease agreement
on 1 January 20x1 to lease a standard brick-cutting machine from a leasing company,
EEE Ltd, over a non-cancellable lease period of five years commencing 1 January 20x1.
Annual lease payments are to be paid at the beginning of each of the five years with the
first payment commencing on 1 January 20x1. On 1 January 20x1, the fair value of the
machine is $500,000. The machine has a useful life of ten years and no residual value at
the end of its useful life. Both companies adopt the cost model and the straight-line
depreciation policy with respect to their property, plant and equipment under FRS 16
Property, Plant and Equipment. CCC Ltd has an incremental borrowing rate of 9% but
knows the interest rate implicit in the lease of 8%. CCC Ltd guarantees EEE Ltd a sum
of $210,000, which is the expected residual value, at the end of the lease term.

On 1 January 20x1, CCC Ltd also issues a $10 million 4% convertible bond for $11
million. Assume that the effective interest rate was 6% per annum and that a plain vanilla
bond with a face value of $10 million and coupon rate of 4% could be sold for $9 million
on the same day. FFF Ltd purchased 10% of the convertible bonds issued by CCC Ltd
on 1 January 20x1.

All the companies in this question are Singapore listed companies and adopt Singapore
FRSs. All have December 31 year-ends. When presenting your answers, please round to
the nearest dollar.

Required:

(a) Compute the annual lease payment for the lease agreement.
(5 marks)

(b) EEE Ltd records the lease as a finance lease under FRS 116 Leases. Compute the
gross investment, net investment and unearned interest income and illustrate lease
accounting by passing all necessary journal entries (no journal narrative required)
on 1 January 20x1.
(11 marks)

(c) Explain how CCC Ltd should account for the convertible bonds, including on
issuance and on conversion, under FRS 32 Financial Instruments: Presentation.
Journal entries are not required.
(5 marks)

(d) Explain how FFF Ltd should account for its investment in convertible bonds
under FRS 109 Financial Instruments.
(4 marks)

ACC208 Copyright © 2018 Singapore University of Social Sciences (SUSS) Page 4 of 6

Examination – July Semester 2018
Question 4

DDD Ltd (“DDD”), a company incorporated in Singapore, commenced operations on 1

July 20x4 and presents its first statement of comprehensive income for the year ended 30
June 20x5 and its first statement of financial position as at 30 June 20x5:

Statement of Comprehensive Income for the year ended 30 June 20x5

$ $
Gross Profit 292,000
Less: Expenses
Administration Expenses 32,000
Salaries Expense 80,000
Long Service Leave Expense 8,000
Warranty Expense 12,000
Depreciation Expense – Plant 32,000
Insurance Expense 8,000 172,000
Accounting Profit Before Tax 120,000

Extracts of Assets and Liabilities in statement of financial position as at 30 June

20x5
$ $
ASSETS
Cash 8,000
Inventory 40,000
Accounts Receivable 40,000
Prepaid Insurance 4,000
Plant at Cost 160,000
Less Accumulated Depreciation (32,000) 128,000
TOTAL ASSETS 220,000

LIABILITIES
Accounts Payable 32,000
Provision for Warranty Expenses 8,000
Loan Payable 80,000
Provision for Long Service Leave 8,000
TOTAL LIABILITIES 128,000
NET ASSETS 92,000

The following additional information are mentioned to you in a conversation with DDD’s
finance manager:

(i) All administration and salaries expenses incurred have been paid as at
year end. All these expenses are tax deductible.

(ii) None of the long service leave expense as accounted for under FRS 19
Employee Benefits has been actually paid at year end. This expense is not
tax deductible until actually paid.

ACC208 Copyright © 2018 Singapore University of Social Sciences (SUSS) Page 5 of 6

Examination – July Semester 2018
 (iii) Warranty expenses were accrued and, by year end, actual payments of
$4,000 have been made. This leaves an accrued balance of $8,000. Tax
deductions are available only when the amounts are paid and not when
they are accrued.

(iv) Insurance was initially prepaid to the amount of $12,000. As at 30 June

20x5, the unused component of the prepaid insurance amounted to
$4,000. Tax deductions are allowed on the actual amounts paid.

(v) Amounts received from sales, including those on credit terms, are taxed
at the time sale is made.

(vi) The plant is depreciated using straight line basis over five years for
accounting purposes but over four years for taxation purposes.

(vii) Whenever inventory is purchased on credit, the accounts payable account

is credited. Inventory costs becomes tax deductible at the point of sales.

(viii) The corporate tax rate is 30%.

(ix) The recent board meeting suggests that the board remains very positive
about the future prospects of DDD.

Required:

(a) Prepare the tax computation for the year ended 30 June 20x5 based on the above
information and prepare the necessary journal entries (journal narrative not
required) to recognise the current tax payable for the year.
(13 marks)

(b) Apply the balance sheet liability approach by determining the tax base and the
taxable (deductible) temporary differences arising from the asset and liability
accounts listed on the extract as at 30 June 20x5. Also determine the deferred tax
asset/liability as at 30 June 20x5 and prepare the necessary journal entries (journal
narrative not required) to recognise the deferred tax for the year.
(12 marks)

----- END OF PAPER -----

ACC208 Copyright © 2018 Singapore University of Social Sciences (SUSS) Page 6 of 6

Examination – July Semester 2018