Accounting Theory and Current Issue

This document provides study material on accounting theory and current issues. It includes topics such as long service leave benefits, journal entries, employee benefits, gross profit computation, EPS calculation, and more. The content covers various weeks and provides detailed explanations and calculations. It is relevant for accounting students studying accounting theory and current issues.

ACCOUNTING THEORY AND
CURRENT ISSUE

TABLE OF CONTENTS
WEEK 6...........................................................................................................................................3
a) .................................................................................................................................................3
b) .................................................................................................................................................3
c)..................................................................................................................................................4
d)..................................................................................................................................................4
WEEK 7...........................................................................................................................................4
a) .................................................................................................................................................4
b) ................................................................................................................................................5
c)..................................................................................................................................................5
WEEK 8...........................................................................................................................................6
a)..................................................................................................................................................6
WEEK 9...........................................................................................................................................7
a) .................................................................................................................................................7
b)..................................................................................................................................................8
WEEK 10.........................................................................................................................................9
a)..................................................................................................................................................9
b)..................................................................................................................................................9
REFERENCES..............................................................................................................................11

WEEK 6
a)
Total accumulated long service leave benefit as on June 30, 2020.
Current
salary
Number of
employees Total salary
Inflation
rate
Years to
maturity
Projected
salary Entitlement
1200000 12 14400000 1.00% 7 15438749 1157906
800000 10 8000000 1.00% 9 8749482 218737
Accumulated total long service leave benefit on June, 2020.
Years to
maturity' Entitlement Corporate bond
Present
value Probability LSV benefit
7 1157906 0.06 770074 0.4 308029
9 218737 0.08 109423 0.2 21885
Total 329914
Total accumulated long service leave benefits is 329,194.
Notes :
 Total salary is calculated by multiplying current salary with number of employees.
 Projected salary = Total salary / (1 + Inflation rate)^years to maturity
 Entitlement amount = Projected salary * 13 weeks/ 52 weeks *years of service/ Years of
conditional period
 Calculation of present value of entitlement = Amount of entitlement / (1+rate of
corporate bond)^ years to maturity.
 Bond rate is selected by number of years left tile maturity. Therefore for service life with
3 years to 6% and for 1 year is 8%
 Calculating amount of LSV by multiplying present value with probability.
b)
Amount to be reported for long service leave provision on June 30, 2020 in accordance with
AASB 119.
The amount which is required to be reported under AASB 119 is present value of future
costs that is it will have to report the long service leave of 329,194 as the obligation under the
financial statements of company.

c)
Journal entry
As company had opening provision of 12000 for same it will be making provision of 317,194
for year.
Journal entry for the provision
Long Service leave expense 317194
To Provision for long service leave 317194
d)
Employee benefits that are required to be discounted as per AASB 119
AASB 119 of employee benefits requires rate to be used of not for pro t entities of private
sector and for pro t entities of private sector for discounting the long term benefits of employees.
It is determined with reference to the market yield at end of period over corporate bonds. AASB
119 where deep market is not there it requires market yield on the government bonds should be
used for discounted the liabilities (AASB 119, 2019). As per the standard companies are required
to measure the obligation of future employee benefits on the current period. It is essential for the
company to record the future values by bringing them at present scale using the discount rate of
the corporate bonds applicable.
WEEK 7
a)
Computation of gross profit to be recognised every year when outcome could be reliably
estimated
Year Particulars Amount
2019 2000000*31.25% 625000
2020 2000000*81.25% 1625000
- Profit already recorded -625000
Profit for the year 1000000
2021 2000000*100% 2000000
- Profit already recorded -1625000
Profit for the year 375000
Calculation of % of completion
2019 2020 2021
Billings & collection 2000000 5000000 3000000

Cost incurred during year 2500000 4000000 1500000
Cumulative cost to date 2500000 6500000 8000000
+:Estimated Cost to complete 5500000 1500000 0
Estimated total cost 8000000 8000000 8000000
% of completion 31.25% 81.25% 100.00%
b)
Journal entries when costs could be estimated reliably
Particulars 2019 2020 2021
Debit Credit Debit Credit Debit Credit
Construction under
progress 2500000 4000000 1500000
To Cash 2500000 4000000 1500000
(Being cost incurred
recorded)
Accounts receivable 2000000 5000000 3000000
To Billing of contract
under progress 2000000 5000000 3000000
(Being billing of
contract under progress
recorded)
Cash 2000000 5000000 3000000
To Accounts
Receivables 2000000 5000000 3000000
(For recording the cash
collections)
Construction under
progress 625000 1000000 375000
Construction expenses 2500000 4000000 1500000
To Revenues from
contract 3125000 5000000 1875000
c)
Journal entries when costs could not be estimated reliably
Particulars 2019 2020 2021
Debit Credit Debit Credit Debit Credit

Construction under
progress 20000000 4000000 3000000
To Cash 20000000 4000000 3000000
(Being cost incurred
recorded)
Accounts receivable 2000000 5000000 3000000
To Billing of contract
under progress 2000000 5000000 3000000
(Being billing of
contract under progress
recorded)
Cash 2000000 5000000 3000000
To Accounts
Receivables 2000000 5000000 3000000
(For recording the cash
collections)
Construction expenses 2000000 5000000 3000000
To Revenues from
contract 2000000 5000000 3000000
WEEK 8
a)
Recording Journal Entries using area of interest method
Particulars Debit Credit
Desirable
PPE 17500000
Intangible assets 7500000
To Bank 25000000
Cost = 25000000
PPE = 25000000*70%=17500000
Intangible = 25000000 – 175000000 =
7500000
PPE 32000000
Intangible assets 16000000
To Bank/ accumulated depreciation 48000000
(Being development cost recorded)

Undesirable
Expense 20000000
To Bank 20000000
Neutral Site
PPE 19600000
Intangible assets 8400000
To Bank 28000000
Cost = 28000000
PPE = 28000000*70%=19600000
Intangible = 28000000 – 196000000 =
8400000
WEEK 9
a)
Calculating basic EPS of 2019 and adjusted EPS of 2018.
Calculating Income for the equity shareholders
Particulars Amount
Net Income after tax 1500000
Less : Dividend on preference shares -40000
(500000 * 8%)
Income to equity shareholder 1460000
Calculation of weighted average shares for the June
2019
Particulars Amount
Shares at beginning of the period 900000
+ : Fresh issue on 1/12/2019 175000
(300000 * 7/12)
+ : Issue of bonus shares 200000
(900000 + 300000)*1/6
Weighted average shares June 2019 1275000
Calculation of EPS
EPS = (Net Profit – Preference dividends) 1460000

(Average no. of shares outstanding ) 1275000
EPS = 1.145
Computation of Adjusted EPS for year 2018 of Alps ltd
Computing Adjusted EPS for 2018
Calculation of Earnings
Earnings = (EPS of 30/6/2018 * Fully paid up shares)
= 1.5 * 900000
1350000
Calculating weighted bonus shares
Bonus weighted shares
= (900000 + 900000 * 1/6)
= (900000 + 150000)
1050000
Calculation of adjusted EPS 2018
Adjusted EPS 2018
= (1350000 / 1050000)
1.286
b)
Diluted EPS
Diluted earnings per share are essentially earnings made over every share of public
company which is calculated on the assumptions that all securities which are convertible are duly
exercised. In place of taking existing stocks in consideration. In diluted earning per share it is
assumed that securities inclusive of convertible preference shares, convertible bonds, warrants,
stock options and other things that could be altered into stock which are actually altered. It is
important for the shareholders as it lays down earnings that shareholder would be getting in
worst scenarios. In a public listed company where there are different types of stocks in the
capital framework, they should provide information that pertains to both the diluted EPS and
basic EPS (Samaha, Khlif and Dahawy, 2016). Presentation of the information is for existing
operation and net income both and is provided on income statement of company.
Diluted EPS considers what will be happening if the diluted securities would have been
exercised. They are the securities which are not the common stocks but could be converted to the

common stocks if holder exercise the option. On conversions dilutive securities increases
number of weighted shares effectively decreasing the EPS. For calculating diluted EPS it is
essential that impact of shares is dilutive. It is only the net income of company which is divided
by total of average shares of company and other convertible instruments. Net income of
company could be acquired from income statement and average shares are the average common
shares for entire year.
Example of the diluted EPS securities includes convertible preference shares, stock
options etc. Preferred stock which is convertible in nature means as it could be converted into the
common stock anytime in the future. Stock option is granted as the common benefit for
employee, that grants right to the buyer for purchasing common stock at set price and set time.
WEEK 10
a)
Journal Entries
Date Particulars Debit Credit
11/05/19 Purchases a/c 731707
To DFO ltd a/c 731707
(Being purchase recorded)
(300000 / 0.41)
30/06/19 DFO ltd a/c 34032
To Foreign Exchange profit or loss a/c 34032
(Being difference recorded in foreign exchange
profit or loss)
[(300000/0.41) – (300000/0.43)
14/08/20 DFO ltd a/c 769230
To Bank a/c 769230
(Being payment to creditor recorded )
(300000/0.39)
14/08/20 Foreign Exchange profit or loss a/c 71556
To DFO ltd a/c 71556
(Being effect of foreign exchange recorded)
[(300000/0.39) – (300000/0.43)

b)
Qualifying Asset
It could be defined as assets that takes substantial time period for keeping ready for the
intended use and sale. As per IAS 23 substantial period is period of twelve months. Period
shorter or longer than the specified period is considerable as per IAS 23. Qualifying assets could
be anything which takes time to get ready for the use which could properties, plant, equipments
or the investment properties during construction period and it also covers intangible assets under
development phase. IAS 23 excludes two type of asset from the scope which would otherwise
have been qualifying assets which are qualifying asset that are measured at fair value like
biological assets and inventories which are produced or manufactured in big quantities on
repetitive basis and takes substantial period for getting ready for the sale.
Borrowing cost is directly attributable construction, acquisition or production of the
qualifying assets forms part of cost of the asset, therefore is required to be capitalised. When
company borrows funds the cost which are eligible for the capitalisation are actual cost incurred
minus the income earned on temporary investments of the borrowings. Where fund is part of
general pool, amount eligible is determined through application of capitalisation rate over the
expenditure on assets. Capitalisation rate is weighted average of borrowing cost applicable to
general pool. The capitalisation is commenced when the expenditures are incurred, borrowings
cost are incurred and other activities which are essential for making asset for the intended use or
the sale are under progress. Company can suspend capitalisation over the where development of
the asset is interrupted. It should cease substantially when all the activities related to preparation
of asset for intended use or the sale are completed.
Examples
1. Fixed assets which take substantial time in getting for the intended use or the sale.
2. Investments could be regarded as qualifying assets is it is taking considerable time to
make the investment ready for use or the sale.

REFERENCES
Books and Journals
Samaha, K., Khlif, H. and Dahawy, K., 2016. Compliance with IAS/IFRS and its determinants:
A meta-analysis. Journal of Accounting, Business and Management (JABM). 23(1). pp.41-
63.
Folkinshteyn, D. and Romeo, G., 2017. Twenty-five years of effective US and Foreign Tax Rates
for Large and Small Firms and their Effect on EPS. Journal of Applied Business and
Economics.
Online
AASB 119. 2019. [Online]. Available through :
<https://www.nexia.com.au/news/accounting/use-discount-rates-measuring-employee-benefits>.