Accounting Standards and Debentures

This solved assignment delves into key accounting concepts. It analyzes the manager's incorrect application of accounting standards at three different companies regarding the classification of expenses (repairs & maintenance) and the valuation of intangible assets. Additionally, it provides a comprehensive explanation of how debentures are priced based on market interest rates, including journal entries to demonstrate the issuance and subsequent interest payments.

Solution-1
Part-(a)
Issue - The manager of Golf Gear often debits the cost of repair or maintenance of
equipment to Plant and equipment.
Explanation - Repairs and Maintenance are necessary for maintaining the assets in
proper condition. Repairs and maintenance are of two types, one is ordinary repairs
and maintenance and other is Major repairs and maintenance which are done to
increase the productivity or life of the assets. Ordinary repairs are done for
maintaining the assets in a good working condition and includes expenses like
oiling, lubrication, small repairs, etc. and are charged off to the P&L whereas major
repairs and maintenance are those which are done with an intention to increase the
productivity or life of the assets and are considered as capital expenditure and are
added to the cost of assets. Further as per Accounting standard issued by
Australian Accounting Standard Board, the ordinary repairs and maintenance does
not qualify as an asset since they have no future economic benefits.
Reference of Accounting Standard - As per of AASB 116, “The cost of an item of
property, plant and equipment shall be recognized as an asset if, and only if: (a) it
is probable that future economic benefits associated with the item will flow to the
entity; and (b) the cost of the item can be measured reliably.”
Conclusion - So, debiting cost of ordinary repairs or maintenance of equipment to
Plant and equipment is a violation of accounting standard AASB 116 “Property, Plant
& Equipment” as it does not meet the recognition criteria of standard.
Manager’s View - Manager might be of the view that since the cost relates to the
assets so it should be added to the value of the assets. That’s why he added the
cost to the asset instead of charging it to the P&L.
Part-(b)
Issue - The manager of Castle Industries often buys plant and equipment and debits
the cost to Repairs and maintenance expense.
Explanation – Plant & Equipment are those assets of the company which are vital for
the company’s operations and benefits the company in future in one way or
another. Its example includes machinery engaged in productions, office equipment
which facilitate the manufacturing etc. As they have economic future benefits so
they are required to be capitalized. This fact is widely accepted in accounting world
as well as mandated by various accounting standards bodies. Even the recognition
Criteria of AASB 116, also clarifies that any asset which has future economic

benefits and whose cost can be identified is required to be capitalized and shown as
Plant & Equipment in financials.
Reference of Accounting Standard - As per of AASB 116, “The cost of an item of
property, plant and equipment shall be recognized as an asset if, and only if: (a) it
is probable that future economic benefits associated with the item will flow to the
entity; and (b) the cost of the item can be measured reliably.”
Conclusion - So, purchasing Plant & Equipment and debiting its cost to repairs and
maintenance is a violation of accounting standard AASB 116 “Property, Plant &
Equipment” as well as accepted good practice.
Manager’s View - Manager might have does so because he wants to reduce the
profit for the year by charging the entire cost of assets to P&L. By reducing profit,
he can reduce the tax liability, keeping the cash flow intact. This is a common
practice used to window dressed the profits of the company.
Part-(c)
Issue - Some people suggest that, since many intangible assets have no value
except to the business that owns them, e.g. the website, they should be valued at
$1.00 or zero on the balance sheet.
Explanation - Intangible assets are those assets which have no physical substance
but have benefits to the business of the company. It commonly includes goodwill,
patent, trademark, etc. Generally, these assets are not purchased from anyone,
these are created or self-developed. So, these assets always involve some amount
of cost incurred either directly or indirectly. So, we can say that every asset has a
value. It is agreeable fact that many intangible assets have no value except to the
business that owns them, but to create such assets, the business might have
incurred some or other expenses. For example, for creating website, the business
will have purchased the domain name, will have incurred expenses on its designing
and all, etc. Only after incurring all these expenses, the business will be able to use
that website. So, all these expenses associated with the intangibles should be
recognized as intangible assets.
Reference of Accounting Standard - Moreover, AASB 138 “Intangible Assets” also
states that any intangible that has expected future economic benefits to the entity
should be recognized as an asset and these types of intangibles should be recorded
at cost. And if the asset is created or acquired at no cost or for a nominal cost, the
asset should be recorded at fair value on the transaction date (i.e. acquisition date
or its creation date).

Conclusion - So, the view that intangible assets should be recognized at $1 or $0 is
not a valid view and it should be recorded at the cost incurrent in creating such
asset.

Solution-2
(a) If on the issue date, the market interest rate is 6.5% and the debentures are
issued at 7% then the debentures will be priced at a premium. As the investors will
earn more in these debentures as compared to other instruments.
(b) If on the issue date, the market interest rate is 8% and the debentures are
issued at 7% then the debentures will be priced at a discount. As the investors will
earn more in other instruments as compared to these debentures.
(c) Journal entries
Date Particulars Debit Credit
1 March 2017 Cash
Discount on bonds payable
Bonds Payable
(Being bonds issued at a discount)
475,000
25,000
500,000
31 August
2017
Interest Expense
Cash ($500,000 x 7% / 2)
Discount on Bonds Payable ($25,000
/(20*2)
(Being payment of interest and amortization
of bonds recorded)
18,125
17,500
625
31 December
2017
Interest Expense
Interest payable ($500,000 x 7% / 12*4)
Discount on Bonds Payable ($25,000
/(20*12)*4)
(Being payment of interest and amortization
of bonds recorded)
12,083
11,666
417
28 February
2018
Interest Expense ($500,000 x 7% / 12*2)
Interest Payable
Cash
Discount on Bonds Payable ($25,000
/(20*12)*2)
(Being payment of interest and amortization
of bonds recorded)
6,042
11,666
17,500
208