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Assignment 1 SC

Assignbment

Uploaded by

marykara1915
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© © All Rights Reserved
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Download as PDF, TXT or read online on Scribd
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SOLOMON ISLANDS NATIONAL UNIVERSITY (SINU)

SCHOOL OF BUSINESS AND MANAGEMENT (SBM)

Advance Financial Accounting and Reporting II (ACC711)

ACC711 – ASSIGNMENT 1 (Individual)

Instructions:
• The assignment 1 weight is 10%.
• This assignment is an individual assignment and has a total mark
of 75.
• Use the SBM assignment cover when you submit this assignment.
• Provide proper referencing of materials cited, copying other
people’s work without properly acknowledging it is known as
plagiarism and is NOT allowed and will NOT be tolerated
• Copying from another student is NOT allowed. Anyone found
doing so will get ZERO mark.
• The assignment must be word processed; hand written
assignment will not be accepted.
• Please submit original MS WORD document copy of your
assignment by uploading it on the Moodle, on or before the due
date. A folder will be created on the Moodle for this purpose. To
upload your assignment, you use MS Word document only, PDF
document will not be accepted nor marked.
• Due date & time: 9 September 2024, 11:45pm. Late assignment
will attract the penalty stipulated in the Course Outline.
• This is an individual assignment.

1
QUESTION 1 [25 marks]
Wrecks & Dive Tours Ltd needs to raise $500 000 to finance the acquisition of a new tour bus. It
approached an investment bank that proposed the following alternatives:

(a) the issue of 8%, cumulative preference shares for $500 000 with a fixed redemption date 5 years
from the date of issue (8% cumulative preference shares)
(b) the issue of 10%, non-cumulative, preference shares for $500 000, redeemable at the option of the
issuer (10% non-cumulative preference shares).

The preference share issue is planned for 2022. The accountant prepared an abridged projected
statement of financial position for Wrecks & Dive Tours Ltd s at 30 June 2021, based on the company’s
master budget. The projected statement of financial position excludes the effects of the proposed
preference share issue or the investment in the new tour bus.

Projected statement of financial position of Wrecks & Dive Tours Ltd as at 30 June 2018 (extract)
$ $
Assets 2,500,000 Liabilities 1,500,000
Equity 1,000,000
2,500,000 2,500,000

Additional information
• Wrecks & Dive Tours Ltd estimates profit before interest and tax (EBIT) as $420 000. This estimate
is based on prior years’ performance, adjusted for the effects of the additional tour bus.
• Interest expense in relation to a bank loan included in ‘Liabilities’ = $100 000
• Wrecks & Dive Tours Ltd’s bank loan includes a debt covenant which specifies a maximum leverage
ratio (total liabilities/total assets) of 60%.
• The company has investigated alternative sources of funding and found that most lenders require it
to have maintained interest coverage (EBIT/Interest expense) greater than 3.0.
• Management receives a bonus of 2% of profit before tax, provided the return on investment
(EBIT/total assets) exceeds 12%.

Required
1. Calculate Wrecks & Dive Tours Ltd’s leverage ratio at 30 June 2021 based on the projected
statement of financial position. [2 marks]
2. How should the 8% cumulative preference shares be classified in accordance with AASB 132/IAS
32? Justify your classification. [2 marks]
3. Prepare a journal entry to record the annual dividend payable on the 8% cumulative preference
shares. [2 marks]
4. Using the projected figures and estimates provided, calculate Wrecks & Dive Tours Ltd’s leverage
ratio and interest coverage assuming the company issues the 8% cumulative preference shares. [2
marks]
5. How should the 10% non-cumulative preference shares be classified in accordance with AASB
132/IAS 32? Justify your classification. [3 marks]
6. Prepare a journal entry to record the annual dividend payable on the 10% non-cumulative
preference shares. [3 marks]
7. Using the projected figures and estimates provided, calculate Wrecks & Dive Tours Ltd’s leverage
ratio and interest coverage assuming the company issues the 10% non-cumulative preference shares.
[3 marks]
8. Compare Wrecks & Dive Tours Ltd’s profit before tax for each financing alternative. [4 marks]
9. Drawing on agency theory, explain which financing arrangement would be preferred by
management. Where relevant, refer to your analysis of financial statement implications in parts 2 to
8. [4 marks]

2
QUESTION 2: Essay [50 marks]
Discuss the accounting treatment of investment property under the International Financial
Reporting Standards (IFRS), specifically focusing on the distinctions between the cost model and the
fair value model. How do these models affect the financial statements, and what are the potential
advantages and disadvantages of each approach? (600 words max) [50 marks]

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