HI6025 Accounting Theory Tutorial Solution
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Tutorial 1 Australian External Reporting Environment and The Conceptual Framework of Accounting
1. What is differential reporting? Which entities in Australia do they relate to?
2. The fundamental qualitative characteristics that financial information must possess to be useful to the primary users of general purpose financial reports—identified in the Conceptual Framework are ‘relevance’ and ‘faithful representation’.
a) Provide one example of information which is relevant but not faithfully represented.
b) Provide one example of information which is not relevant but is faithfully represented.
c) Provide one example of information which is relevant and faithfully represented.
3. Who benefits from the Conceptual Framework? Discuss with examples. (Word limit: 300 words)
Tutorial 2 Topic of Lecture 2: Theories of Financial Accounting
1. a) What is the difference between a normative theory and a positive theory?
b) Give an example of a normative theory in accounting and a positive theory in accounting.
2. Why are theories important in our understanding of financial reporting? Provide an example to illustrate your answer.
3. A newspaper article in 2016 was titled: Australian corporate social responsibility reports are little better than window dressing. The article explained that this was clear from the sections in financial reports from Australian companies listed on the stock exchange that cover social and environmental initiatives. For example, only a fraction of Australian firms report transparently, using suggested guidelines when publishing annual reports. Instead, there are carefully tailored public relations documents, fancy media campaigns, and glossy reports that showcase the firm’s social good deeds. This weighting of image over substance, and spin over objectivity, leaves us questioning whether social initiatives today are simply window dressing.
Using any suitable accounting theory or theories discussed in this topic as your theoretical basis, explain why Australian companies were slower to adopt sustainability reporting, or simply “window dress” as implied in the article.
Tutorial 3 Topic of Lecture 3: Revaluations and Impairment Testing
1. Many organisations elect not to measure their property, plant and equipment at fair value, but rather, prefer to use the ‘cost model’. This will provide lower total assets and lower measures, such as net asset backing per share. You are required to answer the following questions: a) What might motivate directors not to revalue the property, plant and equipment? b) What are some of the effects the decision not to revalue might have on the firm’s financial statements?
2. ‘Asset revaluation is the same as impairment losses’. What is wrong with this statement? Provide the correct explanation of these two terms, in their correct context.
3. TAKULAH Traders Ltd purchased a machine for $650 000 and there was an accumulated depreciation balance of $110 000 at 30 June 2022. Its fair value is assessed at this time, with its first revaluation as $450 000. The machine’s useful life is expected to be 5 more years and the residual value to be $50 000. On 1 July 2023 the asset’s fair value is $460 000 and the residual value and useful life are expected to be unchanged (that is, there is 4 years of remaining life).
Required: Provide the journal entries necessary to account for all the above transactions and events up to 1 July 2023, in accordance with AASB 116 if the revaluation is undertaken.
Tutorial 4 Topic of Lecture 4: Accounting for Intangibles
1. Choose any two Australian companies listed on the Australian Stock Exchange (ASX) and list down the types of intangible assets they have and their values ($).
2. In a paper written for CPA Australia (August 2003), Colin Parker made the following comment in relation to AASB 138 just prior to the time it was being implemented within Australia:
While the intangible asset standard will promote a new level of international consistency in financial reporting, it is seriously flawed and an archly conservative standard. It fails to require recognition of many intangible assets, and places a number of severe restrictions on the recognition of internally generated intangible assets and on revaluation on those assets. Arguably, this reduced the value or ‘relevance’ of statements of financial position in relation to providing information about the resources under the control of the reporting entity. Given the conservative nature of the accounting standard that requires expenditure on many internally generated intangibles to be expensed, it will not be possible to differentiate an entity that has valuable internally generated intangibles from one that has expended resources on intangible assets that are not expected to generate future economic benefits. Users will find a loss of information on intangibles as many will now go unreported. To capture the importance of knowledge assets, the standard-setters need to do much better than this proposed standard.
Required: In your opinion, does the way in which intangible assets are accounted for (as per AASB 138) provide useful financial accounting information? Explain. (Word limit: 300 words)
Tutorial 5 Topic of Lecture 5: Accounting for Leases
1. In IASB (2016b, p. 5) it is stated: The IASB acknowledges that the change in lessee accounting (brought about by the release of IFRS 16) might have an effect on the leasing market if companies decide to buy more assets and, as a consequence, lease fewer assets. Required: Provide a possible explanation as to why, when now required to capitalise leases, reporting entities might be more likely to buy more assets, and lease fewer assets
2. Fitbit Ltd has leased a machine on the following terms: Date of entering lease 1 July 2019 Duration of lease 5 years Life of asset 6 years Unguaranteed residual value $40,000 Lease payments inception (at the start) $60,000 Annual payments (5) $65,000 Implied rate 11.0 %
Required: Determine the Fair Value (rounded off) of the leased asset.
3. Telstra Ltd enters into a non-cancellable five-year lease agreement with Optus Ltd on 1 July 2019. The lease is for an item of machinery that, at the inception of the lease, has a fair value of $1 294 384. The machinery is expected to have an economic life of six years, after which time it will have an expected residual value of $210 000. There is a bargain purchase option that Telstra Ltd will be able to exercise at the end of the fifth year for $280 000. There are to be five annual payments of $350 000, the first being made on 30 June 2020. Included within the $350 000 lease payments is an amount of $35 000 representing payment to the lessor for the insurance and maintenance of the equipment. The equipment is to be depreciated on a straight-line basis. The implicit rate is 12 per cent.
Required: Prepare the journal entries in the books of Telstra Ltd for the years ending 30 June 2020 and 30 June 2021.
Tutorial 6 Topic of Lecture 6: Accounting for Employee Benefits
1. a) Differentiate vesting sick leave and non-vesting sick leave. b) Provide two examples of long-term employee benefits
2. Dainty Ltd has an average weekly payroll of $200 000. The employees are entitled to 2 weeks’, non-vesting sick leave per annum. Past experience suggests that 56% of employees will take the full 2 weeks’ sick leave and 22% will take 1 week’s leave each year. The rest of the employees take no sick leave.
a) Calculate the expected annual sick-leave expense for Dainty Ltd (on the basis of average salaries).
b) Provide the journal entry necessary to recognise the sick-leave entitlement expense as it accrues each week.
c) In the current week an employee with a weekly salary of $600 has been off sick for the first time this year. The employee took 2 days off out of her normal 5-day working week. Assuming that PAYG tax is deducted at 30%, what would the entry be to record the employee’s weekly salary (round amounts to the nearest dollar)?
3. Oceania School Ltd has six employees who are entitled to long-service leave (LSL). The LSL can be taken after 10 years of service, at which time the employee is entitled to 13 weeks’ leave. Entitlements to payment on departure arise after eight years of service. The following information about the employees is available: No. of employees Current salary per employee Years of service Probability (%) that LSL will be paid Periods to maturity High-quality corporate bond rate (%) 2 50 000 6 45 4 9 2 65 000 7 70 3 7 2 70 000 8 100 2 6 Employees’ salaries are expected to increase by 2.5 per cent per annum. The opening balance of the LSL provision was $32 500, and the interest rate for corporate bonds for all relevant periods to maturity was 8 per cent at the beginning of the year.
Required: What is the accounting journal entry to record LSL expense for the current period (round amounts to the nearest dollar)?
Tutorial 7 Topic of Lecture 7: Revenue Recognition
1. Discuss the meaning of ‘control’ as per AASB 15.
2. Light Rail Constructions Ltd uses the percentage of completion method for its construction projects. Which of the following is the point at which it can recognise revenue? A. during production B. on completion of production C. at point of sale D. at point of final inspection
3. Gold City Ltd commences construction of a highway on 1 July 2017 for the NSW Local Government. Gold City Ltd signs a fixed-price contract for total revenues of $60 million. The project is expected to be completed by the end of 2020 and NSW Local Government controls the asset throughout the period of construction. The expected cost as at the commencement of construction is $45 million. The following data relates to the project (the financial years end on 30 June): 2018 ($m) 2019 ($m) 2020 ($m) Costs for the year 15 18 17 Costs incurred to date 15 33 50 Estimated costs to complete 35 17 – Progress billings during the year 16 20 24 Cash collected during the year 15 19 26 2
Required:
a) Using the above data, compute the gross profit to be recognised for each of the three years, assuming that the outcome of the contract can be reliably estimated.
b) Prepare the journal entries for the 2018 financial year, assuming that the measure of progress on the contract cannot be reliably assessed.
Tutorial 8 Topic of Lecture 8: Accounting for the Extractive Industries
1. When can the costs incurred in the exploration and evaluation phases of operations be carried forward as assets?
2. Mining operations will typically create various forms of damage to the natural environment, and that environment will need to be restored/rehabilitated at the cessation of the mining activities. When should the costs associated with the future restoration/rehabilitation be recognised by an entity?
3. Kakadu Ltd commences mining operations on 1 July 2017. During the first year of exploration and mining operations, Kakadu Ltd explores three areas known as Green, Tree and Frog. It incurs the following costs: ______________________________________________________________________________ Exploration and evaluation costs – Exploration and evaluation costs – Total site property, plant & equipment intangible assets costs ($m) ($m) ($m)_______ Green 3 6 9 Tree 6 4 10 Frog 3 7 10 12 17 29 On 10 January 2018, uranium is discovered at Green. Because of damage continually being caused by wild animals, it is decided in March 2018 that it is too costly to continue operations at Tree. Operations at Tree are abandoned. Operations at Frog are continuing, although no decision has been made about the commercial viability of the site. Up until 30 June 2018, development costs of $12 million are incurred at Green (to be written off on a production basis). This cost relates to the construction of plant and equipment. The site is estimated to have 50 000 tonnes of uranium. The current sale price is $3 000 per tonne. Up until 30 June 2018, 5 000 tonnes of uranium are extracted at a production cost of $2 million. In June 2018, 4 000 tonnes are sold, with 1 000 remaining on hand. The reporting date of Kakadu Ltd is 30 June 2018.
Required: Provide the journal entries using the area-of-interest method.
