Accounting Assignment Solutions and Answers

This document provides solutions and answers to Accounting assignment questions covering topics such as AASB 101, AASB 137, AASB 1004, AASB 116, and AASB 138. The solutions are in line with Australian accounting standards and guidelines. The document also covers the topic of long service leave and its recognition as a liability. The author has provided references for further reading.

Accounting
Assignment

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By student name
Professor
University
Date: 23rd Sep 2018.
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Contents
Question 1........................................................................................................................................3
Question 2........................................................................................................................................4
Question 3........................................................................................................................................5
Question 4........................................................................................................................................7
References........................................................................................................................................8
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Answer to Question 1:
a) As per the stated provisions of AASB 101The accounting treatment given to assets that are
either lost or stolen vary depending upon the type or nature of the asset in question. Broadly
there are three main categories for this
 Loss of Fixed Tangible Assets
 Loss of Inventory or stores and supplies
 Loss or stolen cash or other valuable assets
Since the given the case falls under the third category we will follow the treatment mentioned
for this. In the case, there has been as theft of $20,000 cash from Himalaya Ltd.’s night safe.
The treatment for this is we will debit the Loss on Cash Theft A/c in the Income statement
and debit Insurance account, if any. And there will be a corresponding credit of the Cash
account by $20,0000 (Andiola, et al., 2018).
b) As per the provisions of AASB 137, a liability is to be recognized only when it is confirmed
that an outflow of economic resources will take place and it can be reliably measured. In the
given case the entity has caused damage to the environment. Such damage need not to be
recognized as an expense unless there is a law penalizing such an action. Till that time, it can
show it as a Contingent liability. Hence it will not form a part of financial statements. After an
order from the court is received it becomes certain that the entity will now be obligated to pay for
the damages and incur a cost on the restoration of the site (Bumgarner & Vasarhelyi, 2018). An
outflow of resources is no longer probable. Though the we have no certain idea of what would be
the quantum of the outflow we can estimate the outflow by assessing the damage and going
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through the history of such cases. Hence, a reliable estimate can be made of the amount and thus
the entity needs to recognize it as Liability in the balance sheet of the company.
c) For this scenario, we must envisage the provisions stated in AASB 1004 on Contributions.
The entity in the given question can be assumed to be a regular business entity and not a non-
profit entity. The donations amounting to $10,000 received by it the form of cash or through
banking channels would be considered as an income and credited to the income statement
(Charles H, et al., 2015). The proposed journey to record the transaction would be to Debit the
Asset account, Say Cash or Bank by $10,000 and credit the Income from Donation account with
a corresponding entry by the same amount. Hence as per the AASB framework, Himalaya
Limited would account for it as income.
Answers to Question 2:
1) In the given case, it would be necessary to inspect the machines before bringing it to the
place of operation, since without the inspection the company would not be in apposition
to ascertain whether the machine can be purchased or not, the expenses related to
travelling for employees to inspect the machines would be capitalized to the cost of the
machine as per the specific provisions laid out in AASB 116 (Garon, 2018)
2) Freight cost is necessary to bring the asset to its desired location form where it can be
used in the regular operations. Similarly, insurance of the machinery protects the interest
of the purchaser against any possible damage that might occur in bringing the asset to its
desired location. Since both these activities are key to acquiring the asset, both need to be
capitalized to the cost of the machine. These expenses fulfill the criteria for recognition in
AASB 116 and hence capitalization will occur
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3) Renovation work done on the factory premises are key component of the current block of
factory building. They are not directly relatable to the equipment life or its functioning.
The renovation is likely to increase the life of the building and hence need to be
capitalized to the cost of the building and not machinery (Giacomo, et al., 2013).
Therefore, there will not be any capitalization to machinery.
4) The cooling equipment has a separate function altogether. It does not form an integral
part of the machine meaning that is it not something without which the machine on itself
can’t operate. Therefore, following the principles of AASB 116, this cost can’t be
capitalized to that equipment.
5) A door must be considered an integral part of a building since it confines the building
from the remaining structures around it However I cannot be related either directly or
indirectly to the cost of the equipment. This can in no way said to be an expenditure said
to bring the asset in question up to its place of operation or use and hence cannot be
utilized.
6) Training costs incurred for the employees who work on the machine neither was incurred
to bring the machine to its intended place of operation nor was directly attributable to
purchase price or purchase conditions of the machine and cannot be capitalized.
Answer to Question 3:
Copyright is an intangible asset and is covered under AASB 138. Intangible assets can be of
two types: Self-generated and Purchased. We are discussing those in relation to the question
as under:
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Self-Generated Copyright: the company has developed a copyright internally at a cost of
$10,500. The test of whether an intangible asset which is self-generated is to be recognized
as a capital item depends on whether it is in the Research phase of development phase. These
two terms have been clearly defined in the standard. In a research phase a company is not
able to demonstrate whether the intangible asset could be developed or not and whether it is
probable that any economic benefits in the future will arise (Lessambo, 2018). Any
expenditure incurred on the intangible in the research phase must be expensed in the income
statement. On the contrary any expenditure incurred in the development phase need to be
capitalized. If the entity can demonstrate that it is technically feasible to develop it and it will
be able to use the intangible to derive benefit from using the asset and future economic
benefits will follow, it can be said to be in development phase. In the given case as the entity
has developed the intangible and the book is intended to be sold shortly, it can be said to be
in development phase and hence the cost of $ 10,500 can be capitalized.
Purchased Copyright: A price that is paid to acquire an intangible asset is a mirror to show
that there are certain levels of expected income to be generated from that asset as it has
trading value. The cost incurred to acquire the intangible can be measure in a reliable manner
as the purchase consideration paid is known. The consideration paid could be in the form of
cash or other assets that are monetary in nature. The cost to be capitalized would include the
purchase price of the product along with any duties or taxes incurred on it which are not
refundable reduced by any concessions received by the supplier and would also include
certain other additional cost incurred in getting the asset ready for use in income generation
and that can be directly attributed to intangible asset in question (Kangarluie & Aalizadeh,
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2017). Therefore, in the given question the cost paid by Harry Limited in acquiring the
intangible copyright from Oxford university at a price of $12,000 is to be capitalized.
Answer to Question 4:
As per the Australian accounting standards, the term long service leaves can be defined as the
number of days of paid leaves after an employee is entitled to after completing specified
period of employment with the company. As per law, the period of long service leaves are
8.67 weeks which can be availed after completing ten years of continuous service. The period
of ten years is generally considered a usual period for full time employees of the company.
For the part time employees and casual employees also, the period does not vary. Though the
amount becomes payable or leaves accrue only after ten completed years of service but it
does not absolve the company from recognizing a certain liability. Since in normal
employees are to be considered as regular full-time employees a portion of their long service
leave shall be recognized as a liability each up to the usual retirement age (Mock, et al.,
2018). There will not be any ad-hoc or one-time recognition of this liability after ten years. In
the given case, the accountant of Harry Limited is of the view that should not be considered
as a liability until the employees complete 10 years of service. As per the provisions stated in
the Australian accounting standard, the view presented by the accountant is incorrect. The
total amount of this benefit to be paid would depend on the number of years served. The
quantum of the benefit would be estimated using the actuarial method. The number of
periods served are considered as each unit of measurement and each such unit will add some
portion to the benefit he becomes entitled to (Mubako & O'Donnell, 2018). The cumulative
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of all these additions to the liability amount each year made by debiting the income statement
will ultimately sum up to a final amount that would be required to be paid. Hence the
company should imitate accounting for these benefits.
References
Andiola, L., Lambert, T. & Lynch, E., 2018. Sprandel, Inc.: Electronic Workpapers, Audit
Documentation, and Closing Review Notes in the Audit of Accounts Receivable. Issues in
Accounting Education, 33(2), pp. 43-55.
Bumgarner, N. & Vasarhelyi, M., 2018. Continuous auditing—a new view.. Continuous
Auditing: Theory and Application, 20(1), pp. 7-51.
Charles H, C., Giovanna, M., Dennis M, P. & Robin W, R., 2015. CSR disclosure: the more
things change…?. Accounting, Auditing & Accountability Journal, 28(1), pp. 14-35.
Garon, J., 2018. Ownership of University Intellectual Property. Cardozo Arts & Ent. LJ, 36(1), p.
635.
Giacomo, B., Kamalesh, K. & Giovanna, M., 2013. Descriptive, instrumental and strategic
approaches to corporate social responsibility. Accounting, Auditing & Accountability Journal,
26(3), pp. 399-422.
Kangarluie, S. & Aalizadeh, A., 2017. 'The expectation gap in auditing. Accounting, 3(1), pp. 19-
22.
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Lessambo, F., 2018. Audit Risks: Identification and Procedures. Auditing, Assurance Services,
and Forensics, 3(1), pp. 183-202.
Mock, T. J., Ragothaman, S. C. & Srivastava, R. P., 2018. Using Evidential Reasoning
Technology to Enhance the Audit Quality Assurance Inspection Process. Journal of Emerging
Technologies in Accounting, 15(1), pp. 29-43.
Mubako, G. & O'Donnell, E., 2018. Effect of fraud risk assessments on auditor skepticism:
Unintended consequences on evidence evaluation. International Journal of Auditing, 22(1), pp.
55-64.
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