Acc204 Advanced Financial Accounting - Assessment Answers

1. As explained within the Chapter 8, intangible asset, Australian accounting standards now prohibit goodwill from being subject to amortisation. Rather, there is a requirement that goodwill be subject to impairment testing. In relation to impairment testing of goodwill, Petersen and Plenborg (2010, p.420) state:

Many argue that an impairment test only approach seems a logical step in the development of accounting for goodwill. First, the underlying logic for removing the traditional amortization methodology is that the amortization on a straight-line basis over a number of years contains no information value for those using financial statements (Jennings et al., 2001). Moreover, IFRS 3 (IASB, 2004b) no longer requires that companies perform the almost impossible task of estimating the useful life of goodwill (Jansson et al. 2004). Second, the impairment approach should provide users of financial statements with better information, as goodwill is not automatically amortized (Colquitt and Wilson, 2002; Bens and Heltzer, 2005). Finally, goodwill impairment tests would be operational and capture a decline in the value of goodwill (Donnelly and Keys, 2002).
You are to provide a clear argument as to why you agree or disagree with the perspectives provided in the paragraph above.

Solution 1

The IFRS 3 requires that the items of financial statements like, assets, liabilities, incomes and expenses should be recognized at their fair value during the acquisition or business combination. Thus, as per IAS 36 and IFRS 3, the goodwill should be tested for impairment yearly and should be recorded at fair value.

Earlier, there were broadly two method for recognizing goodwill, one is amortization and other is impairment. Under amortization, the goodwill is amortized or charged off to the P&L on the basis of its useful life. We agree with the contention that estimating useful life is a difficult task which many a times leads to incorrect results, further it is also true that under this method the goodwill is amortized on a straight line basis. So, this method does not reflects the fair value of goodwill, hence the true and fair value concept fails (Ifrsbox.com, 2018).

The other method requires, the goodwill to be reviewed periodically for any indicators of impairment. If impairment exists, then the goodwill is impaired by the amount of impaired value. The Impairment arises when the recoverable amount falls below the carrying amount. Thus, this method helps in reflecting the fair value of the goodwill and is thus a more reliable method. Further, it also reflects the true picture of financial statements, and helps the users of the financial statement to make correct decisions. Although, this method is more typical and complex as compared to the first method, but it leads to more accurate results as compared to amortization method (Iasplus.com, 2018).

Solution 2

Coupon Rate per annum (given) = 6%

Coupon Rate half yearly (given) = 6% / 2

= 3%

Rate of return in Market per annum (given) = 4%

Rate of return in Market half yearly (given) = 4% / 2

= 2%

Face value of Debentures = $1,000,000

Interest payments (half yearly) = 1,000,000 x 3%

= $30,000

Period (in years) = 6

Number of interest payments = 6 x 2

= 12

Issue price of Debentures

= Present value of Interest payments + Present value of debentures face value

= (30,000 / 2%) (1 - (1+2%)^(-12)) + 1,000,000 / ((1+2%)^12)

= (1,500,000) (1 - (1.02)^(-12)) + 1,000,000 / ((1.02)^12)

= (1,500,000) (1 - 0.788493) + 1,000,000 / 1.268242

= (1,500,000) (0.211507) + 1,000,000 / 1.268242

= $1,105,754

Journal Entries
Date	Particulars	Dr./ Cr.	Amount ($)	Amount ($)
1st Jul-15	Cash	Dr.	1,105,754
	To Debentures	Cr.		1,105,754
31st Dec-15	Interest Expense (Note 1)	Dr.	22,115
	Debentures	Dr.	7,885
	To Cash (Note 1)	Cr.		30,000
30th Jun-16	Interest Expense (Note 2)	Dr.	21,957
	Debentures	Dr.	8,043
	To Cash (Note 2)	Cr.		30,000

Note 1

Interest expense (1st payment) = 1,105,754 x 2%

= 22,115

Semi Annual interest payment = 1,000,000 x 3%

= 30,000

Note 2

Interest expense (2nd payment) = (1,105,754 - 7,885) x 2%

= 21,957

Solution 3

Particulars	2015 ($m)	2016 ($m)	2017 ($m)
Total Contract Price	50	50	50
Less:
Cost for the year	10	28	40
Estimated costs to complete	28	12	0
Estimated total cost	38	40	40
Estimated Gross Profit	12	10	10
Percentage of completion	26.32%	70.00%	100.00%

Particulars	2015	2016	2017
Estimated Gross Profit	12,000,000	10,000,000	10,000,000
Percentage of completion	26.32%	70.00%	100.00%
Gross Profit Recognised for the year	3,158,400	3,841,600	3,000,000

Particulars	2015 ($m)	2016 ($m)	2017 ($m)
Cash collected	11	19	20

Journal entries for the 2015 financial year using the percentage-of-completion method
Particulars	Dr./ Cr.	Amount ($)	Amount ($)
Construction in progress A/c	Dr.	10,000,000
To Expenses A/c	Cr.		10,000,000
(Contract cost recognised)
Construction in progress A/c	Dr.	3,158,400
Construction expenses A/c	Dr.	10,000,000
To Income from Contract A/c	Cr.		13,158,400
(Revenue & Profit recognised)
Accounts receivable A/c	Dr.	12,000,000
To Construction in progress A/c	Cr.		12,000,000
(Amount receivable from client)
Cash A/c	Dr.	11,000,000
To Accounts receivable A/c	Cr.		11,000,000
(Cash received from client)

Journal entries for the 2015 financial year, assuming the stage of completion cannot be reliably assessed
Particulars	Dr./ Cr.	Amount ($)	Amount ($)
Construction in progress A/c	Dr.	10,000,000
To Expenses A/c	Cr.		10,000,000
(Contract cost recognised)
Construction expenses A/c	Dr.	10,000,000
To Income from Contract A/c	Cr.		10,000,000
(Revenue from contract recognised)
Accounts receivable A/c	Dr.	12,000,000
To Construction in progress A/c	Cr.		12,000,000
(Amount receivable from client)
Cash A/c	Dr.	11,000,000
To Accounts receivable A/c	Cr.		11,000,000
(Cash received from client)
Construction in progress A/c	Dr.	2,000,000
To Contract Liability A/c	Cr.		2,000,000
(Difference of revenue over cost recognised as liability)

 Solution 4

1. a) Revaluation of assets

For the revaluation of assets, carrying values of the assets needs to be adjusted to fair value. It means carrying value will be increased or decreased to match its fair value.

Revaluation Surplus = Fair value - Carrying amount

Revaluation Loss = Carrying amount - Fair value

Investments in companies	Carrying Value ($)	Current fair value ($)	Revaluation Surplus	Revaluation Loss
Property, plant and equipment
Factory (NSW)
Land	100,000	150,000	50,000	-
Buildings
– Cost	70,000	80,000	30,000	-
– Accumulated depreciation	- 20,000	-
Factory (Qld)
Land	150,000	120,000	-	30,000
Buildings
– Cost	125,000	70,000		10,000
– Accumulated depreciation	- 45,000	-

1. b) Journal Entries

Particulars	Dr./ Cr.	Amount ($)	Amount ($)
Accumulated Depreciation - Building (factory NSW)	Dr.	20,000
To Building - Cost (factory NSW)	Cr.		20,000
(Accumulated depreciation transferred to building)
Land - Cost (factory NSW)	Dr.	50,000
Building - Cost (factory NSW)	Dr.	30,000
To Revaluation Surplus A/c	Cr.		80,000
(Revaluation surplus recorded)
Accumulated Depreciation - Building (factory QLD)	Dr.	45,000
To Building - Cost (factory QLD)	Cr.		45,000
(Accumulated depreciation transferred to building)
Revaluation Surplus A/c	Dr.	40,000
To Land - Cost (factory QLD)	Cr.		30,000
To Building - Cost (factory QLD)	Cr.		10,000
(Revaluation loss recorded and adjusted in surplus)

References:

Iasplus.com. (2018). IAS 36 — Impairment of Assets. [online] Available at: https://www.iasplus.com/en/standards/ias/ias36 [Accessed 24 Aug. 2018].

Ifrsbox.com. (2018). How to Test Goodwill for Impairment – IFRSbox – Making IFRS Easy. [online] Available at: https://www.ifrsbox.com/impairment-goodwill-ifrs-testing/ [Accessed 24 Aug. 2018].