lOMoARcPSD| 62788957
ACCT10002: Tutorial 10 In-class Exercises
This tutorial provides exercises relating to the following areas of study:
Debt and equity decision-making Restatement of financial reports
Reporting discontinued operations in Overview of an Annual Report
accordance with AASB 5
Ratio calculations of a company Ethics
Students are required to prepare for all the questions prior to attending the tutorial.
Question 1: Debt v Equity ( BE10.8)
Olga Ltd is considering these two alternatives to finance its construction of a new $2 million
factory:
1. Issue 200 000 shares at the market price of $10 per share. (There
are already 700,000 shares on issue.)
2. Issue $2 million, 8% unsecured notes at face value.
(a) Complete the table; and
Issue Shares Issue Unsecured Notes
Profit before interest and taxes $1,000,000 $1,000,000
Interest Expense from Unsecured 0 160000
Notes
Profit before income tax 1,000,000 840000
Income tax expense @ 30% 300000 252000
Profit 700000 588000
Equity (number of shares) 900000 700,000
Earnings per Share 0.78 0.84
(b) Discuss factors the company would need to consider in deciding the
financingoptions.
To finance its construction of a new factory, Olga Ltd. should issue $2 million, 8%
unsecured notes because EPS is high under this alternative and lower if new shares are
issued.
Alternative Preferable :- Issue Unsecured Notes
Question 2: Discontinued Operations
Apollo Ltd. reported the following information concerning its performance for the
current year. Apollo is a manufacturing firm and has reported that it was selling one of
its many production divisions, Product X.
1
, lOMoARcPSD| 62788957
Selected information:
• Net Income from sales from Product X $20,000
• Revenue (from all other product divisions) $2,500,000
• Cost of Sales (from all other product divisions) $950,000
• Other expenses (from all other product divisions) $1,025,000
• Gain on sale of equipment (which produced product Y) $5,000
• Gain on sale of equipment that produced product X $3,000
• All the figures are before tax. Tax rate 30%
(i) Prepare the Income Statement as reflected in AASB 5 from the above
information.
Amount in $
Revenue 2,500,000
Cost of sales (950,000)
Gross profit 1,550,000
Other expenses (1,025,000)
Gain on sale of equipment 5,000
Income from Continuing Operations (before tax) 530,000
Tax @30% 159,000
Income from Continuing Operations (after tax) 371,000
Income from Discontinuing Operations
Net income from sale of product ($20000 less tax $6000) 14,000
Gain on sale of equipment product ($3000 less tax $900) 2,100
Income from Discontinuing Operations (after tax) 16,100
Total income 387,100
(ii) Why is it important for firms to report as required by AASB 5? (Refer to
AASB5,paragraphs 31-33)
Question 3: Restatement
On 30 June 2016, ABC Ltd. Buys and puts into service an item of specialised equipment to
increase the production capacity of its Property, Plant and Equipment.
Details of the new equipment item:
Cost $500,000
• Estimated residual value $10,000
• Estimated life = 10 years (to be used equally over the period)
• The equipment will be purchased by borrowing the full amount and will be repaid in
a lump sum in 2020. Interest of 10% per annum will be paid at the end of each
twelve months after purchase of the equipment.
• ABC Ltd. failed to record the new equipment in the 31 December 2016 annual
financial statements. Management discovered the omission in April 2017. is
material.
2
ACCT10002: Tutorial 10 In-class Exercises
This tutorial provides exercises relating to the following areas of study:
Debt and equity decision-making Restatement of financial reports
Reporting discontinued operations in Overview of an Annual Report
accordance with AASB 5
Ratio calculations of a company Ethics
Students are required to prepare for all the questions prior to attending the tutorial.
Question 1: Debt v Equity ( BE10.8)
Olga Ltd is considering these two alternatives to finance its construction of a new $2 million
factory:
1. Issue 200 000 shares at the market price of $10 per share. (There
are already 700,000 shares on issue.)
2. Issue $2 million, 8% unsecured notes at face value.
(a) Complete the table; and
Issue Shares Issue Unsecured Notes
Profit before interest and taxes $1,000,000 $1,000,000
Interest Expense from Unsecured 0 160000
Notes
Profit before income tax 1,000,000 840000
Income tax expense @ 30% 300000 252000
Profit 700000 588000
Equity (number of shares) 900000 700,000
Earnings per Share 0.78 0.84
(b) Discuss factors the company would need to consider in deciding the
financingoptions.
To finance its construction of a new factory, Olga Ltd. should issue $2 million, 8%
unsecured notes because EPS is high under this alternative and lower if new shares are
issued.
Alternative Preferable :- Issue Unsecured Notes
Question 2: Discontinued Operations
Apollo Ltd. reported the following information concerning its performance for the
current year. Apollo is a manufacturing firm and has reported that it was selling one of
its many production divisions, Product X.
1
, lOMoARcPSD| 62788957
Selected information:
• Net Income from sales from Product X $20,000
• Revenue (from all other product divisions) $2,500,000
• Cost of Sales (from all other product divisions) $950,000
• Other expenses (from all other product divisions) $1,025,000
• Gain on sale of equipment (which produced product Y) $5,000
• Gain on sale of equipment that produced product X $3,000
• All the figures are before tax. Tax rate 30%
(i) Prepare the Income Statement as reflected in AASB 5 from the above
information.
Amount in $
Revenue 2,500,000
Cost of sales (950,000)
Gross profit 1,550,000
Other expenses (1,025,000)
Gain on sale of equipment 5,000
Income from Continuing Operations (before tax) 530,000
Tax @30% 159,000
Income from Continuing Operations (after tax) 371,000
Income from Discontinuing Operations
Net income from sale of product ($20000 less tax $6000) 14,000
Gain on sale of equipment product ($3000 less tax $900) 2,100
Income from Discontinuing Operations (after tax) 16,100
Total income 387,100
(ii) Why is it important for firms to report as required by AASB 5? (Refer to
AASB5,paragraphs 31-33)
Question 3: Restatement
On 30 June 2016, ABC Ltd. Buys and puts into service an item of specialised equipment to
increase the production capacity of its Property, Plant and Equipment.
Details of the new equipment item:
Cost $500,000
• Estimated residual value $10,000
• Estimated life = 10 years (to be used equally over the period)
• The equipment will be purchased by borrowing the full amount and will be repaid in
a lump sum in 2020. Interest of 10% per annum will be paid at the end of each
twelve months after purchase of the equipment.
• ABC Ltd. failed to record the new equipment in the 31 December 2016 annual
financial statements. Management discovered the omission in April 2017. is
material.
2
