Accounting Theory and Current Issue

This document provides a comprehensive study on accounting theory and current issues. It covers topics such as calculation of long service leave benefits, provision for long service leave, computation of gross profit, journal entries for revenue recognition, recording journal entries using area of interest method, calculating basic and adjusted EPS, diluted EPS, journal entries for foreign exchange transactions, and the concept of qualifying assets.

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)
Calculation of 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
Calculation of 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.
Working Notes :
1. Total salary is calculated by multiplying current salary with number of employees.
2. Projected salary = Total salary / (1 + Inflation rate)^years to maturity
3. Entitlement amount = Projected salary * 13 weeks/ 52 weeks *years of service/ Years of
conditional period
4. Calculation of present value of entitlement = Amount of entitlement / (1+rate of
corporate bond)^ years to maturity.
5. 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%
6. 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 for provision of long service leave for June 31, 2020 as per AASB 119
As the company has opening provision of 12000 for the same it will be required to make
provision for 317,194 for the year.
Journal entry for 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
As per AASB 119 companies are required to report on employee benefits that are accrued
and will be paid in future. Company is required to record for the future expenses or obligations
that are required to be paid by the company. To record the expenses or future obligation
company is required to record them at present value of the obligation. Therefore, the company is
required to discount the employee benefits that will be recorded for recording the future
obligation of the employee benefit. It is discounted at the inflation rate at which they will be
growing.
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 for the year 2019, 2020 & 2021 for recognising revenues 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 for the year 2019, 2020 & 2021 for recognising revenues when costs could
not be estimated reliably

Particulars 2019 2020 2021
Debit Credit 500000 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)
(Average no. of shares outstanding ) 1460000
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 EPS refers to the calculation that is been used for gauging quality of an entity's
earnings per share in case all the convertible securities were been exercised. It includes all the
outstanding convertible debentures, preference shares, stock, warrants and the option. Unless and
until the firm is not having an additional potential of an outstanding share that is rare, diluted
EPS would always be counted as low as compared to basic or simple EPS. Dilutive securities
aren't the common stock, but involves securities which could be converted into the common
stock.
Converting these instruments or securities decrease the EPS and thus diluted EPS tend to
always been lower than EPS. It is counted as the conservative metric as it depicts the worst
condition with respect to EPS. It considers the situation that would occur if the dilutive securities
were been exercised (Folkinshteyn and Romeo, 2017). In case of conversion, dilutive securities
increases weighted number of the shares outstanding that in turn decline the value of EPS. A

large amount of difference between basic & diluted EPS indicates high potential dilution for an
entity's shares, an unattractive feature as per most of the investors and analysts. For instance- An
entity is having $9 billion outstanding number of shares. There is $0.10 difference resulted
between basic and diluted EPS. However, $0.10 deemed as insignificant, equating to $900
million in amount that is not available to the investors.
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 731707
To DFO ltd 731707
(Being purchase recorded)
(300000 / 0.41)
30/06/19 DFO ltd 34032
To Foreign Exchange profit or loss 34032
(Being difference recorded in foreign
exchange profit or loss)
[(300000/0.41) – (300000/0.43)
14/08/20 DFO ltd 769230
To Bank 769230
(Being payment to creditor recorded )
(300000/0.39)
14/08/20 Foreign Exchange profit or loss 71556
To DFO ltd 71556
(Being effect of foreign exchange
recorded)
[(300000/0.39) – (300000/0.43)
b)
Qualifying Asset

Qualifying asset refers to the assets which takes substantial period for getting ready for
the intended use or for sale. It could be plant, property or equipment and the investment property
over construction period, assets that are intangible during their development period. Qualifying
asset concept is essential for the business enterprise to implement IAS 23. It allows capitalisation
of the borrowing cost for qualifying assets (Haines, 2017). The borrowing cost of company could
be material and it requires company to give proper accounting treatment for preparation of the
financial assets. It is essential to understand concept of the qualifying asset for applying the IAS
23 on capitalisation of the borrowing costs. These are assets that are built by the entity and takes
substantial period of time for building them. The assets which are already ready to be used for
intended purpose at the time of acquisition are not recognised as qualifying asset under IAS 23.
Inventories that are manufactured normally by the entity on repetitive basis over short
period are not qualified as qualifying asset. However inventories that take considerable time for
bringing them over saleable condition could be recognised as qualifying asset. The concept is
complex and is often misunderstood (Ivanus, 2016). Entities insists for regarding or regard
expensive assets as the qualifying asset. It is thought that quantum of borrowing cost related to
the high costs of assets justifies the asset to be recognised as the qualifying asset. It is argued that
borrowing cost related with expensive assets are significant and therefore it is not considered
appropriate expensing them. As per IAS 23 asset could not be recognised as qualifying on basis
of justification.
Examples of some the assets that are classified as the qualifying assets.
1. Power Plant that takes substantial time for getting ready for generating the electricity.
2. Toll bridge that takes couple of years for construction before it could be opened for
public use.

REFERENCES
Books and Journals
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.
Haines, A., 2017. Luxembourg: New BEPS-compliant IP regime to open up
opportunities. International Tax Review.
Ivanus, A.I., 2016. CAPITALIZATION AND ACCOUNT OF QUALIFYING ASSETS OF
WORKERS AS WAY OF REDUCTION OF INEQUALITY OF
ACUESTSS. Хроноэкономика, (2 (2)).