Accting 2501 Financial Accounting Ii Assessment Answers

1. a. Describe the nature of this event and explain how it should be accounted for in the financial statements of the company for the year ended 30 June 20X6.

2. a.Describe the nature of this event and explain how it should be accounted for in the financial statements of the company for the year ended 30 June 20X6.

b. Specify any journal cringes) and or disclosures that may be required to account for this event in the financial statements prepared by the company for the years ended 30 June 20X6 and 30 June 20X7. Support your answers with adequate and appropriate explanation. justification and referencing from relevant Australian accounting pronouncements (including paragraph numbers).

3. a. Explain how the sale and lease back of the planes would improve the company's cash flow in the short term.

b. Briefly explain how the accounting treatment would differ if the leases were accounted for as operating leases in the company's financial statements rather than finance leases.

c. Identify and briefly explain two reasons why the consultant has recommended that the new leases be accounted for as operating leases rather than finance leases in the company's financial statements. Support your answer with adequate and appropriate justification and referencing from relevant Australian accounting pronouncements (including paragraph numbers).

Answer:

1.a Clearly the nature of the event is significant primarily because of the significant costs involved in laying off the employees and the same need to be communicated through appropriate disclosures.

2.a Due to the decrease in the useful life of the asset, it is essential that the depreciation charged on the asset per year should be adjusted so as to ensure that at the end of the estimated useful life, the book value is equal to the salvage value of the assets.

b. The disclosures need to be made in the annual report with regards to the change in the useful life of the asset resulting in change in depreciation expense. This is required as the implications of this may be future also and similar change may happen in the future or other assets as well. Hence, it is pivotal that this needs to be reported to the investors so that they could account for the same in a prudent manner.

3.a. The short term cash flow situation is improved through the sale and lease back as the company would get cash on account of the sale of the asset to the other party. Further, the operations of the company would not be hampered as the aircrafts would be again leased back to the company from the buyer. However using the cash available from sale, the short term liquidity position would surely improve as the company would need to make incremental lease payments over a period of time. Thus, the company gets immediate cash and has to pay lease installments.

b. The main difference in the accounting treatment of the two leases stems from the fact that operating lease is considered an expense for the lessee as the ownership of the asset rests with the lessor. However, this is not the case in finance lease where the lessee treats the leased equipment as asset. Hence, in case of operating lease, the lease payment would be reflected as expense unlike operating lease where depreciation in asset would be captured in the income statement besides the lease payments.

c. They would be considered as operating leases primarily because of the following reasons.

One potential reason is that any risk associated with the asset and maintenance and other costs borne by the asset would be borne by the owner or the lessor.

It might have been possible that the airplanes leasedback had only limited life remaining at the time of sale.

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