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Question
ACC510 Major Assignment (Task 2)
Semester (Trimester) 1 – 2017
Word count: approximately 1,500 words
Weighting: 30%
This assignment (task) requires you to prepare answers to the following four (4) questions. The assignment must be your own individual work, that means it is not a group assignment. If it is believed that a student has copied material from another student or any other source without appropriate referencing, the necessary action will be taken in accordance with the University’s Student Academic Integrity – Governing Policy:
(http://www.usc.edu.au/explore/policies-and-procedures/student-academic-integrity-governing policy). Consequently, it is critical that you provide complete referencing for any and all sources of information that you use in preparing your answers to the assignment. This includes both in-text references and a list of references at the end of your assignment. Please, contact your local campus lecturer/tutor if you have any questions about referencing (APA 6th Edn. is to be used – it is available on MSWord). Alternatively, you can post your enquiry on the Discussion Board of the Blackboard site for this course.
Other general points about this assignment:
- The assignment should only be submitted electronically via Safe Assignment on the ACC510 Blackboard site. If you wish to apply for an extension to your submission date, please email Dr Greg Laing ([email protected]) to explain the circumstances and attach any necessary supporting documentation.
- Late penalties will be applied for assignments submitted after 12 midnight (24:00 hours) on Monday 15th May, 2017 without an approved extension. More details on late penalties are provided in the course outline.
- It is not necessary to include an overall introduction and conclusion for the assignment.
- The suggested word count for each of the four (4) questions provides you with a guide to the approximate number of words that you should use in answering each question. The total word count is approximately 1,500 words. But if your word count is above 1,800 words, we will not continue marking your assignment after reading that number of words.
Assessment Criteria:
The assignment will be marked according to the rubric and allocation list which encompasse aspects such as:
- Logical application of concepts to situations, with adequate justification/support for choice made;
- Professional presentation (word template provided), correct spelling, grammar and the use of the American Psychological Association (APA 6th) referencing method.
Question 1: (Approximately 400 words)
TDM Ltd is a manufacturing business at Mudjimba on the Sunshine Coast. You are the accountant for the company and the following items/issues relate to the financial year ending 30th June, 2016:
- Photographs of the company’s founders and original buildings, which are of great sentimental and historical value only.
- TDM Ltd is being sued for negligence by Zero Ltd and the legal advice is that it is likely the company will lose the case in court.
- TDM Ltd is being sued for negligence by Badger Ltd and the legal advice is that it is likely the company will win the case in court.
- Obsolete plant and equipment is now (as at 30 June 2016) retired from use by the company.
- TDM Ltd has received a donation of $20,000.
Required:
Explain how TDM Ltd should account for each of the above items. You must justify your answer by reference to the AASB Conceptual Framework’s definitions and recognition criteria for assets, liabilities, income and/or expenses as applicable. You must also state which General Ledger accounts are to be debited and credited.
Question 2: (Approximately 600 words)
On 1st July, 2016, SC Airlines Ltd acquired a new aeroplane for a total cost of $10 million dollars. The following breakdown of the costs to build the aeroplane was given by the manufacturers.
Aircraft body
$3,000,000
Engines (2)
$4,000,000
Fitting out of aircraft:
Seats
$1,000,000
Carpets
$ 50,000
Electrical equipment:
Passenger seats
$ 200,000
Cockpit
$1,500,000
Food preparation equipment
$ 250,000
All costs include installation and labour costs associated with the relevant part.
It is expected that the aircraft will be kept for 10 years and then sold. The main value of the aircraft at that stage will be the body and the engines. The expected selling price is $2.1 million, with the body and engines retaining the existing proportionate value.
Costs in relation to the aircraft over the next 10 years are expected to be as follows:
- Aircraft body: This requires an inspection every 2 years for cracks and wear and tear, at a cost of $10,000.
- Engines: Each engine has an expected life of 4 years before being sold for scrap. It is expected that the engines will be replaced in 2020 for $4.5 million and again in 2024 for $6 million. These engines are expected to incur annual maintenance costs of $300,000. The manufacturer has informed SC Airlines that a new prototype engine with an extra 10% capacity should be on the market in 2022, and that existing engines could be upgraded at a cost of $1 million.
- Fittings: Seats are replaced every 3 years. Expected replacement costs are $1.2 million in 2019 and $1.5 million in 2025. The repair of torn seats and faulty mechanisms is expected to cost $100,000 per annum. Carpets are replaced every 5 years. They will be replaced in 2022 at an expected cost of $65,000, but will not be replaced again before the aircraft is sold in 2026. Cleaning costs amount to $10,000 per annum. The electrical equipment (such as the TV) for each seat has an annual repair cost of $15,000. It is expected that, with the improvements in technology, the equipment will be totally replaced in 2022 by substantially better equipment at a cost of $350,000. The electrical equipment in the cockpit is tested frequently at an expected annual cost of $250,000. Major upgrades to the equipment are expected every 2 years at expected costs of $250,000 (in 2015), $300,000 (in 2017), $345,000 (in 2019), and $410,000 (in 2024). The upgrades will take into effect the expected changes in technology.
- Food preparation equipment: This incurs annual costs for repair and maintenance of $20,000. The equipment is expected to be totally replaced in 2022.
Required:
- Start by establish the issues for your analysis by addressing the following:
- the advantages of a components approach versus a simple depreciation of the $10 million dollars over the 10-year period.
- Since AASB 116 requires initial recognition at cost and then provides a choice between either the cost model (impairment) or the revaluation model (increment and/or decrement) – discuss the advantages and/or disadvantages in applying either model to the aeroplane as a whole – indicating which would be the most appropriate as a result or if treated as components then which would be most applicable to the components you have identified.
- Basis for selecting the method of depreciation according to AASB 116.
- Discuss how the costs relating to the aircraft should be accounted for (treated) with respect to:
- Aircraft body;
- Engines;
- Fittings;
- Food preparation equipment.
- Where relevant consider/discuss issues such as:
- the treatment of the upgrades of cockpit equipment.
- accounting for inspections.
- Determine the expenses to be recognised for the financial year 1st July 2016 to 30th June 2017.
- Aircraft body;
- Engines;
- Fittings;
- Food preparation equipment;
- Total Expenses.
Question 3: (Approximately 200 words)
In the discussion by Upton (2001, 71) regarding the lives of intangible assets it is noted that the formula for Coca-Cola has grown more valuable over time, not less, and that Sir David Tweedie, former chairman of the IASB, jokes that the brand name of his favourite Scotch whisky is older than the United States of America — and, in Sir David’s view, the formula for Scotch whisky has contributed more to the sum of human happiness.
Required:
Outline the accounting treatment for brands under AASB 138/IAS 38, and discuss the difficulties for standard setters in allowing the recognition of all brands and formulas on statements of financial position.
Question 4: (Approximately 300 words)
Provisions are recognised as a liability in the statement of financial position whereas contingent liabilities are not recognised in the financial statements but disclosed in the notes to financial statements. Paragraph 12 of AASB 137/IAS 37 Provisions, Contingent Liabilities and Contingent Assets states that ‘in a general sense, all provisions are contingent because they are uncertain in timing or amount’.
Required:
- Discuss possible reasons as to why provisions are recognised in the financial statements whilst contingent liabilities are not.
- Determine whether the following items would be classified and recoded as liabilities or not (provide a brief explanation for your decision):
- Provision for long-service-leave;
- Dividends payable;
- Preference shares.
| Subject | Business | Pages | 11 | Style | APA |
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Answer
Question 1. TDM Limited Company
Accounting is a systematic way of managing a company’s belongings through proper records known as book keeping (Neel, 2017). For the financial statements to reflect the true and fair value for an organization, it is prudent that all items be accounted. In the case of TDM Company, the items below will be accounted for as follows;
Photographs and Original Buildings
The above items are non-current assets for the company since the company will be in possession of them for a period which is more than one year. According Anton (2016), International Financial Reporting Standards law 9 requires that all assets be recognized in the statement of financial position. However, these items are not used in revenue generation hence they will be categorized as other non-current assets and not as part of Plant Properties and Equipment. Before recognizing in the annual financial reports, valuation for them has to be done.
Impending Court Ruling for Suit Filed by Zero Company
According to Neel (2017), provision for unforeseeable and foreseeable contingencies is important for smooth operations. In this case, the determination of this case is foreseeable. Therefore, it is prudent for such expenditure to be proved for. This provision will be recognized as a liability (Credited) in the balance sheet and as expenditure in the income statement (Debited). However, a post balance sheet event can be done to adjust any change in the event the court rules otherwise.
Impending Court Ruling for Suit by Badger Limited
In the event the court rules in favour of TDM limited, the compensation will come as income. On the other hand, if the ruling is not in their favour, this will be expenditure. This issue should, therefore, be recognized as accrued income hence credited in the income statement and an asset in the balance sheet (Debited). An allowance of post balance sheet adjustment in the event the court does not rule in favour of the company should be given.
Obsolete Plant and Equipment
According to Anton (2016), obsolete assets should be deducted from Plants, Properties accounts. These items should, therefore, be deducted from plant and equipment account and the net balance be posted in balance sheet. The individual accounts will be debited and Plants Properties and Equipment accounts credited.
Donation for $ 20,000
According to International Financial Reporting Standards law 15, Gross income of a company entails trading related income and non- trading related income. This donation, therefore, forms part of non-trading income for the company. In the balance sheet, however, it will increase the cash and cash equivalent items hence meeting the requirement of duality.
Question 2. SC Airlines Limited
Before venturing into an investment opportunity, it is prudent that all the associated costs be tallied so as to verify on whether or not the venture is profitable. In this case, all the associated costs from the time the asset is installed to the time of disposing should be accounted for. This should also entail the accumulated depreciation.
1 a) Advantages of Components Depreciation over Simple Depreciation
Components depreciation is a systematic way of depreciating items by focusing on the individual parts. Simple depreciation on the other hand, deprecates an asset by focusing on the whole asset. This can either be in the form of reducing balance or straight line (Zhang & Zhang, 2017). Component depreciation is, however, preferred due to its accuracy in that each part of the asset is treated separately, simpler to interpret, and it facilitates asset management and maintenance.
- b) Merits and Demerits of Cost Model (Impairment) and Revaluation Model (Increment/ Decrement)
Cost model is the process of accounting for an asset through carrying the net book value after deducting the accumulated depreciation and impairment loss (Weetman, 2016). In this case, the historical cost does not change. This is calculated as follows:
NBV carried forward= the initial asset cost-accumulated depreciation-impairment loss.
Advantages of this model include; the figures calculated are objective hence accurate and it is simple to apply hence less time consuming. The demerit of this method, however, is that it involves estimation hence less accurate among others.
Revaluation model on the other hand calculates the value an asset through taking the devalued cost of an asset less accumulated depreciation and impairment loss. In this case the historical cost keeps changing due to continuous revaluation. The advantages of this method include; reflection of the true asset value, it is more accurate since it works with real values and not estimation, among others. However, this method is challenging because the figures calculated are subjective and time consuming.
- Treating the Body Expenditure in Relation to the Overall Cost
- a) Aircraft Body
The inspection cost of $ 10,000 biannually is put as part of maintenance cost hence contributes to the overall cost of the aircraft.
- b) Engines
The annual maintenance cost contributes to the overall cost of the aircraft. The new engines, however, are treated as new assets and their benefits and accounts thereof should be assessed separately.
- c) Fittings
Maintenance of the seats is a revenue expenditure which should be included in the overall body cost. Replacement cost, however, a capital cost is and is therefore treated separately from the overall body cost of the aircraft’s body.
- d) Food and Equipment
The maintenance cost for and inspection of this item will be added to the overall cost of the aircraft’s body. These expenditures cannot be alienated hence taken into consideration when doing capital budgeting. The replacement cost in 2022, however, is a capital cost hence separated from the overall cost of the body.
3) Expenses to be recognized
- a) Aircraft Body: Maintenance of the components as well as inspection expenditures should be recognized. Replacement cost, however, is not recognized as expenditure.
- b) Engines: Maintenance costs are accounted for as expenditure in the annual income statement while replacement cost is recognized as an asset in the balance sheet.
- c) Fittings: Repair and maintenance of the various items are the only transactions that are recognized as expenditure. Upgrades and new installations are capital expenditures hence not recognized in the in the annual income statement.
- d) Food Preparation Equipment: Repair and maintenance cost are only recognized as expenditure.
- e) Total Expenses: Apportioning will be done in order to identify the revenue expenditure which is the one recognized. This expenditure entails maintenance and inspection costs only.
Question 3. Accounting for Brands
According to Alves, Souza & Lemes (2016), intangible assets are items owned by an organization that contributes to their overall contribution but they are not physical. Intangible assets include; intellectual properties, trademarks, brands, goodwill among others. International Accounting standards number 38 states that intangible assets can be recognized only if they have a future economic value and if their cost can be measured accurately (Alvis, Souza & Lemes, 2016). Intangible assets can either be internally generated or be bought. Brand is an example of internally generated intangible assets. Unlike externally generated intangible assets, internally generated assets such as brands are not recognized in the books of accounts.
However, the research expenditure leading to discovery of the brand is recognized in the income statement of the very organization that owns it. An organization is, however, at liberty to accumulate the research costs of discovering brand and debit it as the cost of the intangible assets (Alvis, Souza & Lemes, 2016). Impairment will, therefore, be done in subsequent years in order to have balance carried forward for those years. The difficulty that comes when accounting for intangible asset like brand is determination of their useful lives (Alvis, Souza & Lemes, 2016). Unlike tangible assets, intangible assets have a very uncertain future due to continuous research that is needed so as to maintain their relevance. This makes it hard to determine the future value of these assets.
Question 4
Part 1. Provisions and Contingent Liabilities
Provision is defined by IAS 37 as a subset of the main liabilities. This is because through these provisions, investors appreciate indirectly that uncertainties are likely to happen in future causing major liabilities (Holder & Karim, 2013). The main difference between the liability and provisions is certainty. This essentially means that liability is an item whose activity has passed hence valid unlike provisions which are futuristic. Contingent liabilities are bound to happen only in the event an unfortunate occurrence or uncertainty happens. These uncertain happenings are, however, provided and the provision thereof recognized as expenditure in the annual income statement and a liability in the statement of financial position (Holder & Karim, 2013). The validity of provisions is, therefore, sensible in that it attempts to reduce the magnitude of negative consequences in the event an unforeseeable contingency happens. Recognizing contingent liabilities on the hand will pose two major challenges: it will lead to a double transaction since its role is played better by provisions and measuring them is impossible hence they cannot be accounted for.
Part 2. Classification of Items
- Provision for Long Service Leave
This an event whose happening is not certain. Long term service leave can, however, paralyze an organization’s normal operations due to expertise apathy during such periods. Companies should, therefore, treat them as contingency liabilities. They should, therefore, not be put as items in the financial statements.
- Dividends Payable
These are liabilities whose happening are futuristic. Dividends is paid only when the company makes profit hence their happening is not certain (Holder & Karim, 2013). They should, therefore, be recognized as provisions and recognized in the financial statements.
- Preference Shares
These are capital investments that attract a more superior treatment than ordinary shares. Their happening is futuristic and measurable. They should, therefore, be accounted for as provision.
References
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Alves De Souza, F. E., & Lemes, S. (2016). Comparability of Accounting Choices in Subsequent Measurement of Fixed Assets, Intangible Assets, and Investment Property in South American Companies. Revista Contabilidade & Financas, (71), 169. Anton, C. E. (2016). The accounting expertise - A practical approach. Bulletin of the Transilvania University of Brasov. Series V: Economic Sciences, 9(2), 215-222. Holder, A. D., & Karim, K. E. (2013). A content analysis of the comment letters to the FASB and IASB: Accounting for contingencies. Advances in Accounting, Incorporating Advances in International Accounting, Neel, M. (2017). Accounting Comparability and Economic Outcomes of Mandatory IFRS Adoption. Contemporary Accounting Research, 34(1), 658-690. Weetman, P. (2016). Financial and Management Accounting: An Introduction. Harlow: Pearson. Zhang, I. X., & Zhang, Y. (2017). Accounting Discretion and Purchase Price Allocation after Acquisitions. Journal of Accounting, Auditing & Finance, 32(2), 241-270.
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