Journal Entries, Provision and Intangible Assets - Accounting Solutions

This article provides expert solutions for journal entries, provisions and intangible assets in accounting. It covers the recognition criteria, measurement models and useful life of intangible assets. The journal entries for depreciation, revaluation, sale of assets and provision are explained in detail. The article also discusses the methods to estimate the amount of provision and accounting for risk.

Solution-1
Journal Entries in the books of White Ltd.
(Amount in $)
Date Particulars Debit Credit
30 June, 2015 Accumulated depreciation (refer WN-1) 60,000
To Machine 60,000
(To adjust depreciation with cost of asset)
30 June, 2015 Machine (refer WN-1) 45,000
To Revaluation Surplus 45,000
(To record the fair valuation of machine)
30 June, 2016 Accumulated depreciation (refer WN-2) 65,000
To Machine 65,000
(To adjust depreciation with cost of asset)
30 June, 2016 No Journal Entry is required (refer note below)
30 June, 2017 Accumulated depreciation (refer WN-3) 65,000
To Machine 65,000
(To adjust depreciation with cost of asset)
30 June, 2017 Revaluation Surplus 35,000
To Machine 35,000
(To record the fair valuation of machine)
31 Dec, 2017 Depreciation expense 30,000
To Accumulated Depreciation 30,000
(To record depreciation upto date of sale)
31 Dec, 2017 Accumulated Depreciation 30,000
To Machine 30,000
(To adjust depreciation with cost of asset)
31 Dec, 2017 Bank 500,000
To Machine 490,000
To Gain on sale of machine (refer WN-4) 10,000
(To record sale of machine)

Note: Since, the carrying value and fair value of the machine is same (i.e. $620,000 (refer WN-2)) as on
30 June, 2016, hence no entry is required.
WN-1 Calculation of value of the machine as at 30 June 2015
Date of Acquisition 01-Jul-14
Cost $700,000
Useful life 10
Residual value $100,000
Cost
Cost $700,000
Less: Depreciation for the year $60,000
WDV as on 30 June, 2015 $640,000
Fair value $685,000
Revaluation Surplus $45,000
WN-2 Calculation of value of the machine as at 30 June 2016
Remaining Useful life 9
Opening WDV $685,000
Less: Depreciation for the year $65,000
Closing WDV $620,000
Fair value $620,000
Revaluation Surplus $0
WN-3 Calculation of value of the machine as at 30 June 2017
Remaining Useful life 8
WDV $620,000
Less: Depreciation for the year $65,000
WDV as on 30 June, 2015 $555,000
Fair value $520,000
Revaluation Surplus ($35,000)

WN-4 Calculation of gain on sale of the machine as at 31 December 2017
Remaining Useful life 7
Opening WDV $520,000
Less: Depreciation for the period $30,000
Closing WDV $490,000
Sale value $500,000
Gain on sale $10,000

Solution-2
(a) As per AASB 137, “Provisions, Contingent Liabilities and Contingent Assets”, the provision are
liabilities of uncertain timing and amount. So, the provisions are those liabilities which have
present obligations and requires to be settled in economic resources such as cash, or any other
financial resource at a later point of time or after the current reporting period.
The Brown’s Ltd obligation to restore the contaminated environment is classified as a provision
because the company has accepted its liability by means of public announcements and it involves
outflow of resources in coming years. As per para 14 of AASB 137, a provision shall be
recognized if it meets the following recognition criteria’s.
(i) The company should have present obligation
(ii) The settlement of obligation requires outflow of resources
(iii) The amount of obligation can be reliably estimated.
Since, the above criteria’s are met, hence the company should recognize the obligation as
provision.
(b) As per AASB 137 (2018), the methods that can be used by an entity to estimate the amount to be
recognized as a provision are as below:
(i) Best Estimate – the first method is to make the best estimate of the amount of
expenditure required to settle the present obligation i.e. provision. This best estimate
represents the amount that according to the judgement and experience of the management
and industry practices best suits to the situation.
(ii) Present Value – This method is used when there is effect of time. Means this method is
based on time value of money. Under this method, the amount of provision is calculated
by taking the present value of all the expenditures that are required to settle the involved
obligation. This present value is calculated by using the appropriate discount rate which
is selected as per the current market situations and assessments.
(iii) Expected Value – This method is used, because the business operates in environment
which consists lots of risks and uncertainties and these uncertainties varies as per the
circumstances. This method is also used when the large population of data is available.
So, this method calculates the obligation by weighting all possible outcomes with their
associated probabilities.
(c) The Brown Ltd has accounted for the risk by taking the discount rate of 4% which is after
adjusting for the risks specific to this liability. The alternative approach to account for the risk is
to adjust the future cash obligations or resources as per the risk. For example, the company
instead of taking the discount rate can also increase its cash outflow obligations to account for the
inherent risk.
(d) Brown Ltd. should recognize the following amount as a provision on 30 June, 2017:

Cost
Probabilit
y Weighted Cost
840,000 20% 168,000
800,000 70% 560,000
600,000 5% 30,000
400,000 5% 20,000
Total 778,000
By taking the discount rate of 4% for a total period of 2 years, the present value of obligation
comes at $719,304.73. So, the Brown Ltd. should recognize the amount of $719,304 as provision
on 30 June, 2017.
The approach used is the combination of present value and expected value. Due to uncertainties
involved, first of all the weighted cost is computed by multiplying the cost with appropriate
probabilities and then the present value is calculated as the costs are going to incur in the next
two years and hence, the time value of money is involved.

Solution-3
(a) As per AASB 138, “Intangible Assets”, an intangible asset is a non-monetary asset which is
identifiable and has no physical substance; further the asset should also have future economic
benefits for the entity.
Hence, applying the above definition to the master licenses, we conclude that the master licenses
are the intangible assets, because they are separately identifiable and further they have no
physical substance, i.e. they are intangible and moreover the company has economic benefits in
the form of providing security services for 5 years. Since, these master licenses satisfy the
definition of intangible assets hence they should be recorded as intangible assets.
Moreover, as per para 12 of AASB 138 (2018),
“12 An asset is identifiable if it either:
(a) is separable, ie is capable of being separated or divided from the entity and sold ,transferred,
licensed, rented or exchanged, either individually or together with a related contract,
identifiable asset or liability, regardless of whether the entity intends to do so; or
(b) arises from contractual or other legal rights, regardless of whether those rights are
transferable or separable from the entity or from other rights and obligations.”
The master licenses are the legal rights provided under Security Industry Act, 1997, and can be
measured and identified separately, hence it is said that these licenses met the identifiability
criteria of definition of intangible assets according to which an asset which arises from any legal
or contractual right is considered as an identifiable asset.
(b) As per AASB 138 para 21, an intangible asset should be recognized when it is certain that the
asset has future economic benefits and its cost can be reliably measured.
As per para 72 of AASB 138, after recognition, the entity can choose to measure the asset either
as per cost model or as per revaluation model. Under cost model, the asset is recognized at an
initial cost and is carried for the remaining life at initial cost less accumulated impairment losses.
Under revaluation model, the asset is recognized at initial cost and thereafter its cost is reviewed
at each year end and a fair value of the asset is computed and recorded year on year. Hence, the
asset is carried at revalued amount.
Hence, the Wilson security services Ltd. can opt for either cost model or revaluation model to
measure its master license after initial recognition.
(c) As per para 94 of AASB 138, the useful life of an intangible asset which arises from any
contractual or legal rights should be the period for which the license or rights were granted and if
these rights can be renewed then that renewal period should be included in the useful life only if
there is evidences that support the renewal of the rights or licenses.
In the given case, the Wilson Security Services Ltd, was firstly given the master license for 5
years only and this license is renewable after 5 years only if the required conditions are met.

Hence, there is no strong evidence as regard to renewal of license, because it totally depends upon
the satisfaction of required conditions after 5 years.
From the above, we conclude that the licenses have finite life and that is to the useful life is 5
years which is equal to the time span for which licenses were allowed.

References:
Aasb.gov.au (2018). Retrieved from
http://www.aasb.gov.au/admin/file/content105/c9/AASB138_08-15_COMPoct15_01-
18.pdf
Aasb.gov.au (2018). Retrieved from
http://www.aasb.gov.au/admin/file/content105/c9/AASB137_07-04_COMPoct10_01-
11.pdf