Accounting Theory and Current Issues

This study material explores various examples where information in financial statements is relevant but not faithfully represented, examples where information is not relevant but faithfully represented, and examples where information is both relevant and faithfully represented. It also discusses the relationship between social contract and organizational legitimacy, and how organizations can use corporate disclosure policy to maintain or regain organizational legitimacy. Additionally, it includes journal entries and calculations related to impairment of goodwill and interest rate implicit in a lease.

Accounting theory and
current issue

Table of Contents
Table of Contents.............................................................................................................................2
WEEK 1...........................................................................................................................................1
a. Example where information is relevant but not faithfully represented....................................1
b. Example where information is not relevant but faithfully represented...................................1
c. Example where information is relevant and faithfully represented.........................................1
WEEK 2...........................................................................................................................................2
a. Social contract and the way in which it relates to organisational legitimacy..........................2
b. Two ways in which organisations can use corporate disclosure policy to maintain or regain
organisational legitimacy.............................................................................................................2
WEEK 3...........................................................................................................................................3
Journal entries..............................................................................................................................3
WEEK 4...........................................................................................................................................4
a. Journals entries.........................................................................................................................4
b. Determination of impairment of goodwill amount..................................................................4
WEEK 5...........................................................................................................................................5
a. Prove that the interest rate implicit in the lease is 10%...........................................................5
b. Entries in the books of Fisher Ltd............................................................................................5
c. Entries in the books of XFinance Ltd......................................................................................5
REFERENCES................................................................................................................................6

WEEK 1
a. Example where information is relevant but not faithfully represented
In financial statements the information which is recorded by accounting professionals of an
entity is relevant as they record it in the right account. The details that are mentioned in final
accounts such as trading, profit and loss account, balance sheet and cash flow statement could be
unfaithful because sometimes the information is changed by them to present a good image in the
market or reduce the tax liability (Baker, 2017). All these final accounts are used to represent
actual position of business and if a company is not able to generate good profits then it may bias
the data which is recorded in them. Mistakes in the statements may also take place unknowingly.
For example, if the accounting professional forgets to record any transaction in journal then it
will also result in unfaithful information because the details will not be accurate and complete.
b. Example where information is not relevant but faithfully represented
All the internal reports which are generated by the management are used by managers for
the purpose of recording detailed and faithful information in the books. It can help to analyse the
appropriate information so that strategic decisions for future could be formulated. If these reports
are not formulated then it may create issues for the management to analyse the business
performance and reach to a decision of improving it appropriately. There are various
management reports which are inventory management, cost accounting, performance, budget etc.
All of them have faithful information which is used by companies to make sure that effective
strategies for future are formulated so that business could be developed (Deb, 2019).
c. Example where information is relevant and faithfully represented
Auditor’s report is the place where all the information recorded is relevant and faithful. The
main responsibility of an auditor is to analyse the final accounts and figure out the mistakes in it
so that an accurate report could be delivered to the stakeholders. All the final accounts such as
income statement, balance sheet and cash flow are evaluated by an auditor and then a report is
generated on the basis of it which is highly accurate and faithful (Schroeder, Clark and Cathey,
2019). With the help of it all the stakeholders such as investors, creditors, suppliers, customers,
government etc. can determine the actual position of business and make further decisions. All of
them the report of auditors used to analyse that the company in which they are planning to invest
or already invested will be able to provide them good returns in future or not.
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WEEK 2
a. Social contract and the way in which it relates to organisational legitimacy
Social contract can be defined as a type of agreement which is formulated by the members
on a society so that they can contribute or the development of it. Main purpose of it is to make
sure that appropriate benefits to the society are provided so that the individuals who are living in
it can live freely. Organisational legitimacy can be defined as the initiative of a company to
establish social values and perform such activities that are focused with societal development.
Main purpose of it is to assure the societies that the entity is operating its business by following
the values that are formulated by community. With the help of it, growth of economy could be
focused.
Social contracts and organisational legitimacy are related with each other because while
focusing upon development of society the organisations can use social contracts. With the help
of it, the business entities can sign an agreement with other parties that it will be working for
welfare of community in upcoming period. While planning to take part in societal development
activities social contract is one of the key elements which should be focused by companies as it
can help to accomplish all the future goals and objectives (Sharma, 2019).
b. Two ways in which organisations can use corporate disclosure policy to maintain or regain
organisational legitimacy
Corporate disclosure policy can be defined as an approach which is highly focused with
material information and the circumstances due to which the level of confidentiality of data
could be affected. There are various ways in which organisations can use it to maintain or regain
organisational legitimacy. Some of them which could be focused by an organisation are as
follows:
 Corporate disclosure policy could be used by companies to make sure that the
information which is used by them to formulate final accounts are appropriate or not. It
could be used by companies to maintain the organisational legitimacy by making sure
that the details that are recorded in accounts are appropriate or not. It can help to
formulate specific decisions for future so that the business can attain growth and reach
the goals such as societal development (Zeff, 2018).
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 Corporate disclosure policy is focused with prevention of abuse of undisclosed material
information and monitoring of the market rumours. While planning to maintain or regain
organisational legitimacy it could be focused. By using the policy the companies will be
able to ignore abuse of material information which will help to establish a positive market
image and work for development of society.
WEEK 3
Journal entries
Date Particulars L.F Amount
Debit Credit
01/ 07/
2015
Polishing equipment a/c Dr.
To cash or bank a/c
440000
440000
30/ 06/
2016
Depreciation a/c Dr.
To Polishing equipment a/c
40000
40000
30/ 06/
2016
Profit and loss a/c Dr.
To Depreciation a/c
40000
40000
30/ 06/
2017
Depreciation a/c Dr.
To Polishing equipment a/c
40000
40000
30/ 06/
2017
Profit and loss a/c Dr.
To Depreciation a/c
40000
40000
01/ 07/
2017
Polishing equipment a/c Dr.
To revaluation surplus
64000
64000
30/ 06/
2018
Depreciation a/c Dr.
To Polishing equipment a/c
53000
53000
30/ 06/
2018
Profit and loss a/c Dr.
To Depreciation a/c
53000
53000
30/ 06/
2019
Depreciation a/c Dr.
To Polishing equipment a/c
53000
53000
30/ 06/
2019
Profit and loss a/c Dr.
To Depreciation a/c
53000
53000
01/ 07/ Cash of bank a/c Dr. 356000
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2017 To polishing equipment a/c
To profit on sale of equipment a/c
318000
38000
30/ 06/
2019
Profit on sale of equipment a/c Dr.
To Profit and loss a/c
38000
38000
WEEK 4
a. Journals entries
Date Particulars L.F Amount
Debit Credit
01/ 07/
2018
Business purchase a/c Dr.
To Pax Ltd. a/c
5000
5000
01/ 07/
2018
Patent rights a/c Dr.
Machinery a/c Dr.
Building a/c Dr.
Land a/c Dr.
Goodwill a/c Dr.
To Bank loan a/c
To business purchase a/c
200
1000
1500
2300
600
600
5000
30/ 06/
2019
Goodwill impairment expenses a/c Dr.
To Goodwill a/c
500
500
Working notes:
Calculation of impairment of goodwill:
Carrying value of reporting unit including good will = 5000
Less: Fair value of reporting unit = 4500
Impairment expenses on good will = 500
b. Determination of impairment of goodwill amount
If the recoverable will cost around 4200000 then the calculation of impairment of goodwill
will be as follows:
Carrying value of reporting unit including good will = 5000
Less: Fair value of reporting unit = 4200
Impairment expenses on good will = 800
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WEEK 5
a. Prove that the interest rate implicit in the lease is 10%
The interest rate which is implicit in the lease is 10%. It could be proved with the help of
following calculations:
Annuity factor = (1 - (1 + r)^-n) / r
8.5136 = (1 - (1 + 10)^-20) / 10
8.5136 = 8.5136
From the above calculations it has been proved that the rate is 10% because it fits
appropriately in the formula of calculating annuity factor.
b. Entries in the books of Fisher Ltd.
Date Particulars L.F Amount
Debit Credit
01/ 07/
2019
Cargo Ship a/c Dr.
To Leased liability a/c
2215560
2215560
01/ 07/
2019
XFinance Ltd. a/c Dr.
To cash a/c
300000
300000
30/ 06/
2019
Lease liability a/c Dr.
Interest expenses a/c Dr.
To Cash a/c
225000
25000
250000
c. Entries in the books of XFinance Ltd
Date Particulars L.F Amount
Debit Credit
01/ 07/
2019
Lease receivable a/c Dr.
To Cargo ship. a/c
2215560
2215560
30/ 06/
2019
Cash a/c Dr.
To lease receivables a/c
To interest a/c
250000
225000
25000
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REFERENCES
Books and Journals:
Baker, C. R., 2017. The influence of accounting theory on the FASB conceptual
framework. Accounting Historians Journal. 44(2). pp.109-124.
Deb, R., 2019. Accounting Theory Coherence Revisited. Management and Labour Studies.
44(1). pp.36-57.
Schroeder, R. G., Clark, M. W. and Cathey, J. M., 2019. Financial accounting theory and
analysis: text and cases. John Wiley & Sons.
Sharma, U., 2019. Giving contingency theory of management accounting and control a critical
edge. International Journal of Critical Accounting. 11(1). pp.16-25.
Zeff, S. A., 2018. My accounting theory seminar. Accounting Historians Journal. 45(1). pp.135-
140.
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