Accounting Journal Entry Analysis

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This assignment involves analyzing a provided set of journal entries, which include debits and credits for various accounts (3100, 2300, 1000, 1870). The entries are linked to specific account balances as of December 31, 2016. Additionally, the document features a list of references from books and online sources covering relevant accounting standards and topics such as impairment of assets, intangible assets, fair value accounting, and revaluation models.

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FINANCIAL REPORTING

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Table of Contents
FInancial Reporting.........................................................................................................................1
Question 1........................................................................................................................................2
Provisions:...................................................................................................................................2
Issues:..........................................................................................................................................2
Highest and Best Use:..................................................................................................................2
Application to aged care home:...................................................................................................3
Question2.........................................................................................................................................3
Accounting Justification:.............................................................................................................3
Relevant Issues:...........................................................................................................................3
Calculations & General Journal Entries 1/7/16 to 30/6/17:.........................................................3
Calculations & General Journal Entries 1/8/18:..........................................................................5
Calculations & General Journal Entries 30/6/18:........................................................................5
Question 3........................................................................................................................................6
Accounting Justification:.............................................................................................................6
Relevant Issues:...........................................................................................................................7
Difference between two phases:..................................................................................................7
Accounting for Research and Development:...............................................................................7
Conclusion:..................................................................................................................................8
Question 4........................................................................................................................................8
Accounting Justification:.............................................................................................................8
Deficit of Fund.............................................................................................................................8
Net Defined Benefit Liability......................................................................................................8
Net Interest...................................................................................................................................8
Reconciliation..............................................................................................................................9
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References......................................................................................................................................11
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QUESTION 1
Accounting Justification:
AASB 13 defines “fair value” and it also provides standard guidelines for determination of fair
value. Further it also outlines the disclosures to be made for fair value measurement. As per
AASB 13 fair value measurement is market based and not entity specific based.
Relevant Issues:
Financial Institutions use fair value method for valuation of financial instruments in normal
course of business. However it involves a lot of judgment and prudence while valuing tangible
assets (International Accounting Standards Board, 2014). Unrealized Loss and Gains which are
accruing to the concern on account of using fair value method doesn’t reflect the importance of
that relevant asset to the organization. Moreover there are also inconsistencies regarding
individual businesses practices in using fair value for plant and equipment.
1& 2 Determine subject of measurement and valuation premise:
For determination of fair value it is important to whether the non-financial asset which is being
valued is used in manner from which it can yield highest returns as on the date of measurement.
It takes into account the ability of market participant to generate economic benefits from the use
of non-financial asset or by transferring it to another market competitor who would use the asset
in best and highest manner (Hu, Percy and Yao, 2015). The highest and best use of non-financial
asset also considers use of the asset that whether it is physically possible, legally permissible and
financially feasible or not.
3. Determine Market
For some asset and liability it may be possible that market information may not be available.
However market information is available or not objective remains the same in both the cases i.e.
to determine a price at which transaction will take place between two independent parties under
the prevailing market conditions (Palea, 2014). As per views of Liang and Riedl (2013) in other
words it is an exit price from the purview of independent party that holds the asset or owes the
liability.

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4. Determine valuation technique:
AASB 13 directs the chief accountant to reflect assets market price considering its best and
highest use for determination of fair value. But this creates problem for the non-profit
organization. If the asset of the non-profit organization i.e. old age homes if provided to market
participant for building flats (which will be its best and highest use) then the fair value would be
much higher as depicted in the books. This also doesn’t depict the importance of asset to the
organization. It only states that value should be market based and situation based. It only focuses
or considers the value which would have been deprived by the market participant by using it or
by selling it. Thus in this case fair value may not reflect actual value and it also creates lot of
problem and confusion (Hoyle, Schaefer and Doupnik, 2015).
QUESTION 2
Accounting Justification:
AASB 136 provides accounting treatment relating to impairment of assets. Provision relating to
accounting of impairment loss has been provided in Para 58 to 64 in specified accounting
standard.
Relevant Issues:
In accordance with provided facts, Peewee Ltd, has acquired assets A& B and further sold asset
B and purchased C. As the asset has been revalued at the end of each year; thus calculation
relating to impairment of same has been provided below.
1. Calculations & General Journal Entries 1/7/16 to 30/6/17:
(Amount in $000)
Date Account Debit Credit
01.07.2016 Asset A A/c Dr. 100
Bank A/C 100
01.07.2016 Asset B A/c Dr. 60
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Bank A/c Cr. 60
30.07.2017 Depreciation A/c Dr (working note 1) 20
Asset A A/c Cr. 20
30.07.2017 Depreciation A/c Dr (working note 1) 20
Asset B A/c Cr. 20
30.07.2017 Asset A A/c Dr (working note 2) 4
Revaluation Surplus Cr 4
30.07.2017 Revaluation Surplus A/c Dr (working note
2)
2
Asset B A/c Cr. 2
Working Note 1 (Depreciation)
Asset A Asset B
Cost of Machine $100000 Cost of Machine $60000
Expected year 5 years Expected year 3years
Depreciation $100000/5 Depreciation $60000/3
$20000
p.a.
$20000 p.a.
Working Note 2 (Revaluation Surplus)
Asset A Asset B
Fair Value $84000 Fair Value $38000
Carried Value $80000 Carried Value $40000
Revaluation Surplus $4000 Revaluation Surplus
Fair value - Book Value (after
-$2000
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Fair value - Book Value (after
depreciation) (Hitz, 2013)
depreciation)
2. Calculations & General Journal Entries 1/8/18:
(Amount in $000)
Date Account Debit Credit
01.08 2018 Cash A/c 29
Revaluation A/c 2
Profit & Loss A/c 7
To Asset B A/c Cr. 38
(Being Loss recognized on sale of
machine)
01.08.2018 Cash A/c 80
To Asset C A/c 80
(Being Asset C purchased for cash)
01.08.2018 General reserve A/c 8
Revaluation Surplus A/c 2
To Share Capital A/c Cr. 10
(Bonus share issued during year)
3. Calculations & General Journal Entries 30/6/18:
(Amount in $000)
Date Account Debit Credit
30.06.2018 Depreciation A/c (working note 1) 21
To Asset A/c Cr 21

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30.06.2018 Depreciation A/c (working note 1) 20
To Asset C A/c 20
30.06.2018 Impairment loss A/c (Working note 2) 3.5
To Asset A A/C 2
To Asset C A/c 1.5
Working Note 1 (Depreciation)
Asset A Asset C
Carried value after revaluation $84000 Cost of Machine $80000
Expected year 4 years Expected year 4years
Depreciation $84000/4 Depreciation $80000/4
$21000
p.a.
$20000 p.a.
and $10000
for six
months
Working Note 2 (Impairment Loss)
Asset A Asset C
Fair Value $61000 Fair Value $68500
Carried Value $63000 Carried Value $70000
Revaluation Surplus
Fair value - Book Value (after
depreciation)
-$2000 Revaluation Surplus
Fair value - Book Value (after
depreciation)
-$1500
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QUESTION 3
Accounting Justification & Relevant Issues
AASB 138 (Intangible Assets) deals with the accounting and disclosure of Intangible Assets. It
also throws light on goodwill generated within the organization and expenditure done during
research and development phase. AASB 138 states that expenditure done during the
development phase should be recognized as intangible asset only when the following conditions
are satisfied:
1. Intangible Asset should can be use further or sold during at the end of development
phase.
2. There must be intention of organization of using the Intangible or selling it.
3. It must be capable to generate future economic benefits.
4. Adequate resources must be available to complete the development phase of the
Intangibles.
5. Expenditure done during the development phase and attributed to the Intangible should
be measurable.
1. Relevant Issues:
If conditions mentioned above aren’t fulfilled then expenditure incurred to create intangibles will
be charged to Revenue Account of that particular period and won’t be capitalized i.e. it won’t be
added to the cost of asset. Hence the expenditure incurred on internally generated goodwill
doesn’t include the total cost incurred (Yao and Percy , 2015). It also prohibits capitalization of
some intangible assets that are internally generated.
AASB 138 requires that expenditures incurred during development phase of internally generated
goodwill should be charged to Revenue account if the conditions mentioned in it are not met
(AASB 138.Intangible Assets, 2016). But if the conditions mentioned are met then these cost
should be capitalized or should be added to the cost of asset. Moreover AASB 138 also requires
assessing the useful life of internally generated goodwill. If the life of the goodwill is assessed
then the cost of asset will be amortized over the useful life of it but if the useful life of the asset
cannot be worked out then AASB 138 gives an option to amortize the cost of asset in maximum
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amortization period i.e. 20 years. If the asset has indefinite life then the same would not be
amortized but will be assessed annually for adjustments of impairment.
2. Difference internally generated vs Acquired:
In case the intangible asset is purchase or acquired; then as per provision of AASB 3 the same is
accounted on its fair value on date of acquisition. In case of internally generated the expenditure
relating to research and development phase is done in following manner:
Research phase planning is done with the intent to gain scientific or technical knowledge and
understanding. It is important phase in creating internally generated goodwill. In the research
phase an organization conceptualize the discoveries which will go take place if all things go well.
This is an act of creating new processes that will be used to create new products. Development
phase comes after the research phase where discovered science in converted into a useful product
that organization can use to its benefits and asset is recognized only after it criteria of
development stage. (Zakaria and et.al. 2014).
3. Reason for Reluctance:
AASB 138 mandates only those organizations which are involved in medium and long term
contracts of research and development and to those who work in technology sector. Such
companies are required to reflect and disclose the asset internally generated.
QUESTION 4
Accounting Justification:
AASB 119 ‘Employee benefits’; provides specification relating to employee benefits which
comprises defined benefit plan (AASB 119, Employee Benefit. (2016).). Recognizing procedure
for the same has been specified in Para 66 of AASB 119. Further, Para 26-30 specifies provision
regarding defined plans.
1. Deficit of Fund
Carried value of benefit obligation as on 31st December 2016 – Fair value of plan assets
$23000000- $20130000

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= $28700000
2. Net Defined Benefit Liability
It is same as balance of deficit i.e. $28700000
3. Net Interest
$300000
Particular Amount is $
A. Interest cost (Carried value of defined obligation + Past service)
*10%
$20000000+$2000000 *10%
2200000
B. Interest Income
$19000000*10%
1900000
A-B 300000
4. Reconciliation
(Amount in $000)
Liability of Net
Defined Benefit
Obligation of
Defined Benefit
Plan Assets
Balance as on 1st Jan
2016
1 20 1
Cost of Past service 2
Adjusted Balance 22
10% interest 2.2 1.9
Cost of Present service .8
Fund Contributions
received
1
Funds’ paid Benefits (2.1) (2.1)
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Return on Plan Assets
excluding Interest*
.33
Remeasured Actual loss
of Defined Benefit
Obligation
.1
Balance as 31st
December 2016
2.870 23 20.130
Return on plan asset excluding interest
Value as on 31.12.06 – Opening balance – contribution- paid benefits – Interest income
= $20130000 -$19000000 -$1900000 -$1000000- (2100000)
= $330000
5. Summary Journal
Journal Entry
(Amount in $000)
Date Particular Debit Credit
31st December
2016
Superannuation Expenses (P/L) 3 100
To Superannuation Income Account 230
To Bank A/c 1 000
To Superannuation liability A/c 1 870
Reconciliation
(Amount in $000)
Profit or Loss Other
comprehensive
Income
Bank Net DBL(A)
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Balance 00.01.2016 1000
Past service cost 2000
Net interest 300
Service cost 800
Contributions paid to the
fund
1000
Gain on plan assets (ex.
interest)
330
Actuarial loss on DBO -100
Journal entry 3100 Debit 2300 Credit 1000 Credit 1870 Credit
Balance 31 December
2016
2870
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