CITY UNIVERSITY OF HONG KONG
Course code & title: AC 3202 Corporate Accounting I
Session: Semester A 2020-2021
Time allowed: Three Hours
This paper has 6 pages (including this cover page).
1. This paper consists of 5 questions. Answer ALL questions.
2. This is an open-book examination.
3. Use the student ID course code to name the file (e.g. 5xxxxxxx_ACxxxx.pdf)
4. Information to be included on the first page of the answer script
i. Student name and student ID; and
ii. Reaffirmation of the academic honesty pledge.
5. Answers to be typed.
6. Approved calculators by University can be used during the exam.
7. Access to mobile phone or internet search is NOT allowed.
8. Students are allowed to use the following materials/aids: lecture notes and materials
distributed by the course leader.
Materials/aids other than those stated above are not permitted. Students will be subject to
disciplinary action if any unauthorized materials or aids are found on them.
1
Question 1. (23 marks)
Part A. As of the end of the fiscal year 2019, Roma Ltd.’s Statement of Financial Position contains
(1) a piece of equipment with a carrying value of $100,000, and (2) goodwill with a carrying value
of $50,000.
Please describe the procedures that Roma Ltd. needs to follow when deciding if the equipment and
the goodwill need to be impaired. Be specific about the conditions when impairment losses need to
be recognized. You do not have to consider the possibility of the reversal of impairment. (7’)
Part B. Sky Corp.’s satellite division has one equipment and one patent internally generated from
research-and-development. On December 1, 2018, the beginning balance of the accounts related to
the equipment and the patent is as follows:
Equipment (at cost) $1,000,000
Accumulated depreciation - Equipment $100,000
Patent (at cost) $800,000
Accumulated amortization – Patents $200,000
The equipment and the patent have never been impaired in the past. Annual depreciation expense
for the equipment is $50,000, and annual amortization expense for the patent is $25,000. On
December 31, 2018, the equipment has a Fair Value Less Cost of Disposal (FVLCD) of $900,000
and a Value-in-Use (VIU) of $800,000. The patent does not have an active market but the company
has determined its VIU to be $550,000 at the end of 2018. Sky Corp. uses the cost model to for the
subsequent measurement of both the equipment and the patent.
(a) Show the procedure to decide whether Sky Corp. should impair the equipment and the patent. If
yes, calculate the impairment loss. (2’)
(b) Please provide the journal entries related to the equipment and the patent at the end of 2018. (6’)
For the year of 2019, the patent’s amortization expense is $20,000. As of the end of 2019, the
equipment has a FVLCD of $750,000 and a VIU of $700,000. The patent has a VIU of $560,000.
(c) Please provide the journal entries related to the equipment and the patent at the end of 2019. (8’)
2
Question 2. (23 marks)
***Round your answers to the nearest dollar***
On December 31, 2019, Park Ltd. (lessor) leased a machine to Orange Farm Ltd. (lessee) under the
following terms:
• Term of the lease: 3 years
• Annual payments of $5,000 in advance are required from Orange Farm. The first prepayment
will be made on December 31, 2019. The following payments will be made at the end of
each year (December 31).
• The machine will be returned to the lessor at the end of the lease. The guaranteed residual
value of the machine is $3,000, while the expected residual value at the end of the lease is
$1,000. (GRV-ERV=3000-1000=2000)
• The implicit interest rate charged by Park is 10%, which is known to Orange Farm. Orange
Farm’s incremental borrowing rate is 12%.
The fair value of the machine on December 31, 2019 is $15,931. The useful life of the machine is 5
years. Both Park and Orange Farm have a fiscal year-end of December 31, and both of them adopted
the straight-line depreciation policy.
Present value of $1 Present value of an ordinary annuity of $1
Years 10% 12% Years 10% 12%
1 .90909 .89286 1 .90909 .89286
2 .82645 .79719 2 1.73554 1.69005
3 .75131 .71178 3 2.48685 2.40183
4 .68301 .63552 4 3.16986 3.03735
5 .62092 .56743 5 3.79079 3.60478
(a) Please briefly describe the type(s) of income that Park Ltd. can make from this lease contract
assuming that (1) it is a direct finance lease or (2) it is a manufacturer/dealer-type lease. (3’)
(b) How should this lease be classified by Orange Farm Ltd.? Please be specific about the
classification criteria. (2’)
(c) Please provide the journal entries related to this lease for Orange Farm Ltd. in 2019, 2020
and 2022. (11’)
(d) Please provide the journal entries related to this lease for Park Ltd. for 2019 and 2020,
assuming that it is a professional leasing company. (7’)
3
Question 3. (20 marks)
***Round your answers to the nearest dollar***
Part A. Presented below is the amortization schedule related to Maple Ltd.’s 3-year bond investment.
The bond investment has a face value of $100,000, and it has an 8% stated interest rate and a 10%
effective interest rate. The bond was purchased on December 31, 2016, for $95,027. Interests are
paid at the end of each year. Maple Ltd. has a December 31 fiscal year-end.
Date Cash received Interest revenue Bond discount Carrying amount of bonds
amortization $
$ $ $
31.12.2016 95,027
31.12.2017 8,000 9,503 1,503 96,530
31.12.2018 8,000 9,653 1,653 98,183
31.12.2019 8,000 9,818 1,818 100,000
(adjusted for rounding)
(a) Show how the bond price is determined on December 31, 2016 ($95,027)? What is the main
difference between the stated interest rate and the effective interest rate? (One or two
sentences are sufficient) (2’)
(b) Assuming that the bond is classified as financial assets at amortized cost, please provide the
journal entries related to the bond for Maple Ltd. in 2016 and 2017. (3’)
(c) Assuming that the bond is classified as fair value through other comprehensive income
(FVTOCI), please provide the journal entries related to the bond for Maple Ltd. in 2016,
2017 and 2018. Additional information is as follows:
- At the end of 2017, the fair value of the debt is $110,000 due to interest rate changes.
- At the end of 2018, Maple Ltd. sells the bond for $100,500 after receiving the interest
payment. (9’)
Part B. Lilly Ltd. has the following transactions in purchasing and selling the ordinary shares of
Daisy Company:
- On March 15, Lilly purchased 1,000 shares of Daisy Company for $10 per share.
- On April 29, the fair value of Daisy Company’s shares is $8 per share.
- On May 10, Lilly sold 500 shares of Daisy Company for $15 per share.
Assuming that Lilly Ltd. classifies Daisy Company’s shares as fair value through profit and loss
(FVTPL), please provide all the relevant journal entries for Lilly Ltd. regarding its investment in
Daisy Company’s shares. (6’)
4
Question 4. (13 marks)
***Round your answers to the nearest dollar***
Jose Ltd. acquired a building on January 1, 2017 with the intention of self-occupation for $2,000,000.
The building has a useful life of 10 years and $500,000 residual value at the end of its useful life.
The company used the cost model to value its PP&E assets. On December 31, 2017, Jose Ltd.
decided to change its intention from self-occupation to investment property for rental purpose. The
company uses the fair value model for investment properties, and the fair value of this building at
the end of 2017 and 2018 is as follows:
- Dec. 31, 2017: $1,800,000
- Dec. 31, 2018: $2,100,000
The company adopts a straight-line depreciation policy and has a fiscal year-end of December 31.
Please provide all journal entries related to this building in 2017 and 2018.
Question 5. (21 marks)
***Round your answers to the nearest dollar***
Part A. FinTech Ltd. is a developer of cutting-edge trading platforms. On June 1, 2018, Thrifty Ltd.
purchased two trading terminals from FinTech Ltd., and FinTech agreed to perform complimentary
installation service free of charge. Thrifty Ltd. also purchased a training package from FinTech Ltd.
with a discount. The training package would entitle Thrifty to receive training and consultation
services for 12 months.
Information about this sales contract and the associated costs is as follows:
Stand-alone selling price Contract sales Cost to FinTech Ltd.
Trading terminal $500,000 each $500,000 each $200,000 each
Installation service $10,000 free $5,000 (payable to the
technician after successful
job completion)
Training package $60,000 $30,000 $24,000 (payable to
training staff at the end of
the training period)
Total $1,030,000
Thrifty paid FinTech $1,030,000 on June 1, 2018. FinTech delivered the two trading terminals to
Thrifty on June 15, 2018 and completed installation on that day. The training session started on July
1, 2018. FinTech has a fiscal year-end of December 31.
5
Please provide the journal entries related to the above transaction for FinTech Ltd. FinTech Ltd.
keeps separate ledger accounts for trading terminals-, installation-, and training-related
revenues and expenses. Please clearly indicate the dates of different journal entries. (12’)
Part B. Electro Co. recently developed an incentive scheme that allows customers to defer payments
to boost sales. On May 1, 2018, a customer signed a purchase agreement with Electro Co. for a
television. The television had a list price of $10,000, which represents the price the customer had to
pay if full-payment would be made on the purchase date.
The contract permitted the customer to return the television within 3 months, and Electro Co. did not
have past experience regarding the return rate of the television.
After the expiration of the return period, the customer paid Electro Co. $5,500 on April 30, 2019 and
$5,250 on April 30, 2020. The interest rate charged by Electro Co. is 5% per annum.
The television had a cost of $4,000. Electro Co. has a fiscal year-end of April 30.
(a) Can Electro Co. recognize sales revenue on May 1, 2018? Why? (2’)
(b) Please provide the journal entries related to this sales transaction for Electro Co. Please
clearly denote the dates of each journal entry. (7’)
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