Acc204 Advanced Financial Accounting-Financial Accounting Assessment Answers

You are required to finish each of these questions, total 40 marks. Please give the solutions in detail, show calculations and submit the solutions to Moodle using a single file, it can be Excel format, Word format or PDF format, no requirement on word limits. If any reference was used, please refer to Harvard style.

1. Hines (1991) argues that conceptual frameworks ‘presume, legitimize and reproduce the assumption of an objective world and as such they play a part in constituting the social world … conceptual frameworks provide social legitimacy to the accounting profession’. Try to explain what she means.
2. On 1 July 2011 Sprintfast Couriers, which has a year-end of 30 June, purchased a delivery truck for use in its courier operations at a cost of $65 000. At the end of the truck's useful life it is expected to have a residual value of $5000. During its six-year useful life, Sprintfast Couriers Limited expected the truck to be driven 246 000 kilometres

Calculate the annual depreciation charge for each of the six years of the truck’s life using the following methods:

(a) the straight-line method

(b) the sum-of-digits method

(c) the declining-balance method

(d) the units-of-production method using kilometres as the basis of use and assuming the following usage:

3. Star CityLimited commences construction of a multi-purpose water park on 1 July 2015 for Pretoria Limited. Star City Limited signs a fixed-price contract for total revenues of $50 million. The project is expected to be completed by the end of 2018 and Pretoria Limited controls the asset throughout the period of construction. The expected cost as at the commencement of construction is $38 million. The estimated costs of a construction project might change throughout the project—in this example, they do change. The following data relates to the project (the financial years end on 30 June):

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 2016 financial year using the percentage-of-completion method.

(c) Prepare the journal entries for the 2016 financial year, assuming the stage of completion cannot be reliably assessed.

4. Innovator Ltd incurred expenditure researching and developing a cure for a common disease found in turnips. At the end of 2013 management determined that the research and development project was unlikely to succeed because trials of the prototype had been unsuccessful. During 2014 a breakthrough in agricultural science improved chances of the product succeeding and development resumed. The project was completed in 2014. At the end of 2014 costs incurred on the project were expected to be recoverable. Innovator expects that 10 per cent of the project revenue will be received in 2015, 20 per cent in 2016, 30 per cent in 2017, 30 per cent in 2018 and 10 per cent in 2019. After five years the product will be at the end of its useful life because the disease found in turnips will have been eradicated. Costs incurred were as follows:

REQUIRED

(a) How much research expenditure and development expenditure should be recognized as an expense in 2013?

(b) How much research and development expenditure should be recognized as an expense in 2014?

(c) State how much expenditure should be carried forward (deferred) and reported in the statement of financial position at the end of 2013 and 2014.

(d) Prepare journal entries for the amortization of deferred costs in 2015 and 2016, assuming that actual revenues are as expected. State the amount of deferred expenditure carried forward in the statement of financial position in relation to the deferred costs.

(e) Assume that after charging amortization based on sales revenue at the end of 2014 the discounted net cash flows expected to be generated from the deferred expenditure were estimated as $15 000. Prepare any journal entries required to account for this information.

Hines or Ruth D Hines was an Australian Accounting Academics. She is a great author and best known for her paper in 2008 “Financial Accounting in communicating Reality, WE Construct Reality”.

Financial Accounting is a method of processing financial data and presenting in a much easier format that can be understood easily. Financial reports are used by a lot different parties for their decision making. Financial Accounting by simplifying the loads of financial data helps these different parties which uses financial data.

These different parties which use Financial Statement:-

• Investors: Investors identifies the risk associated with the company they are planning to invest with the help of financial statement.
• Employees: -The financial statement of the company provides information about the stability of company and they can predict the future of company on basis of present data.
• Customer: - Long term customers are likely to know about the financial position of the company they are associated for a long time.
• Government and various Legal Organisations: -A large amount of public funds are with the public sector companies and it is the duty of government and their various agencies to safeguard the interest of general public. Government should check that the resources of society are used efficiently by these companies (Georgiou, 2010)
• Suppliers or Vendors: -Large suppliers usually don’t deal in cash and generally sell goods and services on credits to its client. They are surely eagerly to find out the financial stability of the client. This information can be available easily when the financial statement are prepared correctly and are unbiased.
• Banks and other Financial institute: -Bank and other financial institute want to find out the credit worthiness of any company before providing any financial assistance. This will reduce the risk of non-recovering of the amount given as loan (Gray, et. al., 2011).

Conceptual Framework defines the scope of Financial Reporting. It identifies and defines the type of information to be displayed in the Financial Statement like Assets, Liabilities, Income, Expenditure, Profit, Loss, and Equity. It also defines the principal and rule of recognition. While defining the Scope of Financial Reporting the different uses and users of the financial report should be kept in mind (Tsalavoutas, et. al., 2012).

The Conceptual Framework will keep a check on the Companies that Financial Statement prepared and presented by them will show the true and fair view of the state of affairs of the company and does show false information that could materially affect the decisions of the user of Financial Statement. Conceptual Framework prevents the fraud companies from taking any action which is prejudicial to the interest of the society. Financial statements prepared under the framework will be prepared according to the applicable accounting standards and will be generally acceptable by the general public as well as other legal authorities (Atwood, et. al., 2011).

Benefits of preparing financial Statement under the conceptual framework:-

• A single format will be followed for preparing Financial Statement that will be easier for the users to understand and prevent fraudulent practices by adopting different methods of Financial Reporting.
• Giving Entities a fully fledged generally accepted accounting framework.
• Financial Statement prepared as per the Conceptual Framework will possess a legal validity and acceptable by everyone.
• As these Financial Statement posses the legal validity therefore they ultimately gains the trust of general public (Humpherys, et. al., 2011).

In the above case Hines(1991) argue that conceptual framework presume legitimize and reproduce the assumption of an objective world and as such play apart in constituting social world and provide social legitimacy to the accounting profession.

In public sector undertakings there is a large involvement of public funds so these funds should be utilized effectively. In the absence of any framework or guideline there will be severe mis-utilisation of these funds therefore with the presence of Conceptual Framework there will be c check that these funds are utilized by the management of the company for which they are being raised for.

As by working under the guidelines of a legal framework which legally and generally accepted the accounting profession has been acknowledged socially. The reports and statement generated and prepared by the accountant are generally accepted by the general public and widely used by them for fulfilling their objective (Weil, et. al., 2013).

Facts given in the question

Purchase price of Delivery Truck =$65000

Salvage Value of the Delivery Truck = $5000

Life of the Delivery Truck = 6 Years

Expected Kilometers covered = 246000 kilometers

Annual depreciation charge for 6 year using straight line method of depreciation

Straight line Method of Depreciation is the simplest depreciation calculating technique. The depreciable value of asset is equally apportioned over the Useful life of the asset (Jackson, et. al., 2010).

Formula for Calculating Depreciation as per Straight Line Method=

(Purchase price-Salvage Value)/Life of the asset

= ($65000-$5000)/6

Calculation of depreciation for 6 years using sum of digits method:-

Sum of the year’s digit method of depreciation provides higher depreciation in the initial year and will decrease from year to year at the end of useful life of the asset whole depreciable value of the asset is apportioned throughout the year (Noland, 2011). The depreciable value of asset is calculated in this method by subtracting Salvage Value from the Initial Cash outflow.

Formula of Sum of the Year of Digit =n (n+1)/2

N = useful life of the asset

Sum of the year of the digit = 6(6+1)/2

Calculating depreciation through Declining balance method:-

Calculating depreciation through Declining Balance method

Declining Balance Method: Declining Balance Method of Depreciation is also known as Written down Value Method. In this method rate of depreciation is charged on the Written down value of the asset. In this method More Depreciation is charger in the beginning of life of asset. The reason for such allocation is because a machine is more productive during its initial period as compared to the later period of its life. Thus the Revenue generation from the asset in the initial year is more therefore depreciation will be charged accordingly (Gravelle, 2011).

Written down Value = Purchase value – Depreciation of that year

The rate of depreciation is not given in the question therefore it will be calculated as follows

Rate of Depreciation =

n = number of years

s = salvage value

c = cost

Rate of depreciation = 35%

Calculating Depreciation using the unit of production method using kilometers as the basis of use

GIVEN INFORMATION

Total Kilometers covered by the delivery truck = 246000 km

In this method the depreciable value of asset will divided in the years on the basis of kilometers covered by the Delivery truck during that year. Before calculating depreciation of each year the depreciable value is calculated by subtracting the Salvage Value from the Purchase Cost of the Asset. At the end of the life of the Asset the value of the asset will be 0 as all the depreciable value is divided between the years on the basis of the kilometer covered (Stárová, & ?ermáková, 2010).

Depreciable value of Asset = Purchase Cost – Salvage Value

= $65000 - $5000

= $ 60000

Given Information

Contract Price = $50 million

Expected Cost = $38 million

Every year last day of June:-

Calculation of gross profit recognized each year

Percentage completion method is generally an accountings method used by large construction companies. The main business of these companies is to take construction contracts which are completed in number of years and the division of contract price over the years is also not uniform. Now the problem arises with these companies is the recognition of revenue over the term of contract. The percentage of completion method is used to divide the revenue and the cost of contract over the years in which contract is completed.

Gross profit of the complete contract will be calculated by Subtracting Estimated total cost from Contract price received

Gross profit of the contact = Total Contract Price – Total Estimated Cost

= $50 million - $ 38 million

= $ 12 million

Calculation of percentage of completion of work

Year 1:

Percentage of completion of work = (Total cost incurred / Estimated total cost) * 100

= (10 / 38) * 100

= 26.32%

Gross profit of Year 1 = (26.32 / 100) * $ 12 million

= $ 3158400

Revenue of the Year 1 = (26.32 / 100) * 50 million

= $ 13160000

Income of the Year 1 = $ 13160000 - $ 10000000

= $ 3160000

Year 2:-

Percentage of completion of work = (Total cost incurred / Estimated total cost) * 100

= (28 / 40) * 100

= 70 %

Gross profit at 70% completion = (70 / 100) * $ 10 million

= $ 7000000

Gross profit of year 2 = total gross profit till date – previous year profit

= $ 7000000 - $ 3158400

= $ 3841600

Revenue of the year 2 = ((70 / 100) * $ 50 million) - $ 13160000

= $ 35000000 - $ 13160000

= $ 21840000

Income of year 2 = $ 21840000 - $ 18000000

= $ 3840000

Year 3

Contract is completed in this year

Gross profit of Year 3 = Total gross profit – Gross profit till year 2

= $ 10000000 - $ 7000000

= $ 3000000

Journal entries for 2016 using percentage of completion method

Year 1

Construction in progress $ 10000000

Accounts Payable $ 10000000

(Cost incurred for the year)

Contract Receivable $12000000

Progress Billing $12000000

(Bills made by company during that year)

Cash $ 11000000

Accounts receivables $ 11000000

(Cash received by the company)

Year 2

Construction in progress $ 18000000

Accounts Payables $18000000

(Cost incurred during year 2)

Contract Receivable $ 20000000

Progress Billing $ 20000000

(Bills made by the company during year 2)

Cash $ 19000000

Accounts Receivable $ 19000000

(Cash collected during that year)

Year 3

Construction in progress $ 12000000

Accounts Payables $ 12000000

(Cost incurred during the year 3)

Contracts Receivable $ 18000000

Progress Billings $ 18000000

(Total billings made for year 3)

Cash $ 20000000

Accounts Receivable $ 20000000

(Cash received during year 3)

Progress Billings $ 50000000

Construction Contract Revenue $ 50000000

(Total Revenue recognized)

Cost of Construction $ 40000000

Construction in progress $ 40000000

(Total construction cost recognized)

Stage of completion cannot be reliably assessed 

When the stage of completion cannot reliably assess that profit of year 2016 will be the cash received from the client and the cost incurred on completing that contract.

2016

Construction Expenses $ 10000000

Accounts Payable $ 10000000

(Expenditure of year 2016)

Construction receivable $ 12000000

Progress Billings $ 12000000

(Billings for year 2016)

 Cash $ 11000000

Construction Receivable $ 11000000

(Total cash received during the year)

Profit and loss account $ 2000000

Construction account $ 2000000

(Profit transferred)

(a) Research and Development done by the company require a large amount of expenditure and it gives future economical benefit to the company. Research and development is considered to be the intangible asset for the company. The expenditure incurred on the research does not directly relate to future benefit of company and should be written off during that year from the profit and loss account and the development expenditure should be written off from the revenue generated by such development done by the company. However the development expenses can also be carried forward as an intangible asset.

Therefore all of the research expenditure done in the year 2013 will be charged from the profit and loss account of that year.

The expenses incurred on the development of the will be written off from the year from which the project will start generating income. The generation of income start from year 2015 therefore no expenses will be charger in the year 2013 for development.

(b) Research and Development of the project was completed in the Year 2014 but the revenue from the project was started from year 2015 and thus the expenses incurred on development will to be written off from the profit from the respective year. But the expenses incurred on the on the research work of the project will be amortized in the year in the year in which expenses took place which is 2014.

(c) Expenditure to be carried forward in Year 2013 and 2014

Year 2013

Research Expenses to be carried Forward = Nil

Development Expenses to be Carried forward = Expenses incurred in 2013

Year 2014

Research Expenses to be carried Forward = Nil

Development Expenses to be Carried forward = Expenses incurred in 2013 and 2014

(d) Journal entries of amortization of cost in 2015 and 2016 are as follows:-

Year 2015

Deferred cost $ 10 million

Profit & Loss $ 10 million

(Deferred cost amortized)

Year 2016

Deferred cost $ 20 million

Profit & Loss $ 20 million

(Deferred cost Amortized)

Note: - (Since no figure is present in the question therefore Cost of Development of project is taken as $ 100 million)

(e) Journal entries

Revenue from operations $ 20 million

Profit & Loss $ 20 million

(Income recognized)

References

Atwood, T. J., Drake, M. S., Myers, J. N., & Myers, L. A. (2011). Do earnings reported under IFRS tell us more about future earnings and cash flows?. Journal of Accounting and Public Policy.

Georgiou, G. (2010). The IASB standard-setting process: Participation and perceptions of financial statement users. The British Accounting Review.

Gravelle, J. G. (2011). Reducing depreciation allowances to finance a lower corporate tax rate. National Tax Journal.

Gray, G. L., Turner, J. L., Coram, P. J., & Mock, T. J. (2011). Perceptions and misperceptions regarding the unqualified auditor's report by financial statement preparers, users, and auditors. Accounting Horizons.

Humpherys, S. L., Moffitt, K. C., Burns, M. B., Burgoon, J. K., & Felix, W. F. (2011). Identification of fraudulent financial statements using linguistic credibility analysis. Decision Support Systems.

Jackson, S. B., Rodgers, T. C., & Tuttle, B. (2010). The effect of depreciation method choice on asset selling prices. Accounting, Organizations and Societ.

Noland, T. R. (2011). The sum-of-years' digits depreciation method: use by SEC filers. Journal of Finance and Accountancy, 5, 1.

Stárová, M., & ?ermáková, H. (2010). Method of Component Depreciation of Fixed Assetsts and Its Comparision with Traditional Methods. AGRIS on-line Papers in Economics and Informatics.

Tsalavoutas, I., André, P., & Evans, L. (2012). The transition to IFRS and the value relevance of financial statements in Greece. The British Accounting Review.

Weil, R. L., Schipper, K., & Francis, J. (2013). Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.