Evaluation of Financial Information with Accounting Standards
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This report evaluates the financial information of Adams Australia Pty Ltd with reference to accounting standards. It covers aspects of non-current assets, inventories, and accounts receivables.
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Contents INTRODUCTION...........................................................................................................................................3 ACQUISITION ASSETS...................................................................................................................................3 AMOUNT TO BE RECORDED IN THE BALANCE SHEET FOR THE ASSETS AND JOURNAL ENTRY................3 CALCULATION OF DEPRECIATION AND CARRYING AMOUNTS................................................................3 NEW MACHINE............................................................................................................................................4 COST OF THE ROBOTIC ASSEMBLY MACHINE AND JOURNAL ENTRY.......................................................4 ELEMENTS OF MACHINE COST WITH REFERENCE TO ACCOUNTING STANDARD....................................4 ANNUAL DEPRECIATION EXPENSE...........................................................................................................4 EFFECT ON ESTIMATED FULL YEAR PROFIT..............................................................................................5 INVENTORY PURCHASES / STOCK TAKE.......................................................................................................5 JOURNAL ENTRY – PERIODIC INVENTORY METHOD................................................................................5 CONCEPT OF OWNERSHIP.......................................................................................................................6 CALCULATION OF CLOSING STOCK – WEIGHTED AVERAGE.....................................................................6 JOURNAL ENTRY – SALE OF CONVEYOR SYSTEM AND COST ASSOCIATED...............................................7 EFFECT OF NEW ITEMS VALUE ON CLOSING STOCK................................................................................8 DRILLING EQUIPMENT.................................................................................................................................8 IMPAIRMENT...........................................................................................................................................8 RECORDING OF IMPAIRMENT OF DRILLING EQUIPMENT........................................................................8 RECORDING OF SALE OF DRILLING EQUIPMENT......................................................................................9 ACCOUNTS RECEIVABLE............................................................................................................................10 REASON FOR UNDERSTATEMENT OF PROVISION FOR DOUBTFUL DEBTS.............................................10 JOURNAL ENTRY FOR NON COLLECTION OF DEBT.................................................................................10 WAREHOUSE DAMAGE..............................................................................................................................11 JOURNAL ENTRY FOR IMPAIRMENT OF WAREHOUSE...........................................................................11 BUILDING REVALUATION...........................................................................................................................12 CONECPT OF VERIFIABLE MEASUREMENT.............................................................................................12 CONCLUSION.............................................................................................................................................12 REFERENCES..............................................................................................................................................13
INTRODUCTION Accounting standards are the backbone for each type of organization. It is because of the major reason that it paves the way as to how the particular accounting transaction is required to be recorded in the books of accounts and in turn how the financial position and financial performance of the company shall be reported to the stakeholders of the company. Through this report, the emphasis has been laid on the detail of recording of each and every transaction and that too with reference to the relevant accounting standards. The report is based on the transactions entered by Adams Australia Pty Ltd and has covered main aspects of the recording of the non-current assets, inventories and accounts receivables. In order to achieve the objects, the report has been divided into seven main headings and sub headings included therein. ACQUISITION ASSETS AMOUNT TO BE RECORDED IN THE BALANCE SHEET FOR THE ASSETS AND JOURNAL ENTRY The amount to be recorded in the balance sheet for the Assets will be $ 1300000 as the value equal to the cost of the asset or the market price whichever is lower (Para 2, AASB 116). DateParticularsDebitCredit 01-01-2014Building$717,532 Warehouse$405,195 Drilling Equipment Account$177,273 Cash$1300000 (Being assets recorded as Para number 2 of AASB 116) ParticularFair ValuePurchase Value Building$850,000$717,532 Warehouse$480,000$405,195 Drilling Equipment$210,000$177,273 Total$1,540,000$1,300,000 CALCULATION OF DEPRECIATION AND CARRYING AMOUNTS
NEW MACHINE COST OF THE ROBOTIC ASSEMBLY MACHINE AND JOURNAL ENTRY The cost of the machine includes the purchase cost and any other incidental expenses which is necessary to be incurred to bring the machinery to the current location and condition (Para 4, AASB 116). In view of the above statement, the cost of the robotic machine is as follows: Amount in Dollar a)Purchase Cost€320,000 Conversion Rate for 08-08-20180.62$198,400 b )Shipping Charges$24,000 c)GST$53,300 d )Modification Work$12,000 Total Cost of New Machine$287,700 ELEMENTS OF MACHINE COST WITH REFERENCE TO ACCOUNTING STANDARD With reference to AASB 116, elements of the cost are: -Cost of purchase -Installation cost -Shipping and insurance charges and other transportation -Duties and Taxes and -Any other expense for bringing the machine to the present location and condition. ANNUAL DEPRECIATION EXPENSE Straight Line - Depreciation ParticularsAmount Purchase Value$287,700 Depreciation for 2018 - 4 months ($287700 / 8 *4 / 12)$11,988 Carrying Amount 31-12-2018$275,713 Units of Production - Depreciation ParticularsAmount Purchase Value$287,700
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Total Hours of Machine2500 Hours of Usage120 Depreciation for 2018 - 4 months ($287700 / 2500 * 120)$13,810 Carrying Amount 31-12-2018$273,890 EFFECT ON ESTIMATED FULL YEAR PROFIT If straight Line method is used then the profit will be reduced to $400000 - $ 11988 = $388013 If hours of usage method is used then the profit will be reduced to $400000 - $ 11988 = $386190 INVENTORY PURCHASES / STOCK TAKE JOURNAL ENTRY – PERIODIC INVENTORY METHOD DateParticularsDebitCredit 03/07/2018Inventory Purchase880000 Cash880000 Cash1980000 Sales1980000 10/08/2018Inventory Purchase55000 Cash55000 Cash110000 Sales110000 10/08/2018Inventory Purchase55000 Cash55000 Cash148500 Sales148500 03/09/2018Inventory Purchase275000 Cash275000 Cash412500 Sales412500 10/10/2018Inventory Purchase330000
Cash330000 24/10/2018Inventory Purchase24750 Cash24750 31/10/2018Inventory Purchase22000 Cash22000 17/11/2018Inventory Purchase110000 Cash110000 31/12/2018Closing Inventory660000 Cost of Goods Sold (Bal. Fig.)1091750 Beginning Inventory0 Purchases1751750 TOTAL61545006154500 CONCEPT OF OWNERSHIP In case of the goods sold by MPA Pty Ltd, the ownership lies with consignor till the time when the risk and rewards relating to the ownership of goods is transferred to the consignee – Adams Australia Pty Ltd (Para 2, AASB 102). In the given case, the payment is when made when the conveyor is sold to the company and therefore when the goods are transferred to the company, it means that the risks and rewards is also transferred and thus ownership has also been transferred. CALCULATION OF CLOSING STOCK – WEIGHTED AVERAGE STOCK VALUATION - WEIGHTED AVERAGE PurchaseSale QuantityRateAmountQuantityRateAmount Drills 03/07/2018100088088000090022001980000 10/10/2018500660330000 Detonators 10/08/201825022055000200550110000
24/10/201815016524750 Dynamite 10/08/201810005555000900165148500 31/10/20185004422000 Flow Measurement Device 03/09/20181002750275000755500412500 17/11/2018502200110000 Total Purchases / Sale355017517502075 Weighted Average Cost per unit (1751750 / 3550)493 Closing Inventory (units)1475 (3550-2075) Value of Closing Inventory727840 JOURNAL ENTRY – SALE OF CONVEYOR SYSTEM AND COST ASSOCIATED DateParticularsDebitCredit 12-11-2018Accounts Receivable$775000 Sale – Conveyor System$775000 (Being the sale recorded) Purchase – Conveyor System$440000 MPA Pty Ltd$440000 (Being the purchase recorded – 75%) Labor Cost$146667 Cash$146667 (Being the labor cost incurred – 25%) EFFECT OF NEW ITEMS VALUE ON CLOSING STOCK With the revised prices, the value of the closing stock will be decreased (Para 10, AASB, 102).
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DRILLING EQUIPMENT It is the second non –current asset of the company. IMPAIRMENT As per the provisions of the Australian Accounting Standard Board number 136 on the impairment of Assets, every asset shall be tested for the impairment on the regular basis and at the most at the end of each accounting year. Impairment is the amount which is the loss for the company, being a non cash item. It is equal to the excess amount of the carrying value of the asset as on the date over the amount which can be recovered from the asset. The former is known as the carrying value of the asset and the later is known as the recoverable amount (Para 6, AASB 136). If the company does not conduct the impairment test on regular basis then there are the high chances of having the inflated value of the asset which otherwise shall be equal to the recoverable amount. At the end of each reporting period, the company shall test in case of each assets whether there are any indication for the impairment (Para 9, AASB 136). Indication includes significant decline in the market value of assets or changes in the legal environment in which the company is currently operating and etc. RECORDING OF IMPAIRMENT OF DRILLING EQUIPMENT In the given case, an independent valuation has been done within which following values has been identified: -Net Selling Price = $60000 -Value in Use = $30000 Recoverable amount is higher of above = $ 60000 Carrying amount = $85800 Impairment Loss = $85800 - $60000 = $25800 Drilling ParticularsAmount Purchase Value as on 01-01-2014$177,273 Less Salvage Value$21,273 Depreciable Value$156,000 Depreciation for 2014$15,600 Carrying amount as on 31-12-2014$140,400 Depreciation for 2015$15,600 Carrying amount as on 31-12-2015$124,800 Depreciation for 2016$15,600 Carrying amount as on 31-12-2016$109,200 Depreciation for 2017$15,600
Carrying amount as on 31-12-2017$93,600 Depreciation for 2018$7,800 Carrying amount as on 30-06-2018$85,800 DateParticularsDebitCredit 30-06-2018Impairment Loss Account$25800 Drilling Equipment Account$25800 (Being the impairment loss booked as Para number 58 to 64 of AASB 136) RECORDING OF SALE OF DRILLING EQUIPMENT On the sale of equipment, the loss or profit on sale of asset is accounted for in the books of account. DateParticularsDebitCredit 31-07-2018Bank Account$35000 Loss on Sale of Asset$46900 Drilling Equipment Account$81900 (Being the asset sold and loss booked) Drilling ParticularsAmount Purchase Value as on 01-01-2014$177,273 Less Salvage Value$21,273 Depreciable Value$156,000 Depreciation for 2014$15,600 Carrying amount as on 31-12-2014$140,400 Depreciation for 2015$15,600 Carrying amount as on 31-12-2015$124,800 Depreciation for 2016$15,600 Carrying amount as on 31-12-2016$109,200 Depreciation for 2017$15,600
Carrying amount as on 31-12-2017$93,600 Depreciation for 2018$7,800 Carrying amount as on 30-06-2018$85,800 Depreciation for 3 months$3,900 Carrying Amount as on 30-09-2018$81,900 Less Sale Value of Asset$35,000 Loss on Sale of Asset$46,900 ACCOUNTS RECEIVABLE Accounts receivable is the current asset for the company and is amounting to $171000 as on 30thof June 2018. REASON FOR UNDERSTATEMENT OF PROVISION FOR DOUBTFUL DEBTS The provision for doubtful debts has been understated by the company from $81000 to $ 19000. It is because of the change in accounting estimates that the company has adopted due to non consideration of the report of the credit expert by the management of the company (Para 32 - 35 , AASB 108). The information of the credit expert has not been considered as reliable by the company. Secondly, in order to reflect the higher profits of the company, the provision has been reduced to the low level of only $19000 instead of $81000. JOURNAL ENTRY FOR NON COLLECTION OF DEBT As per the direct write off method of writing off the amounts which are not recoverable , the bad debts account is debited and the concerned accounts receivable account is credited with the amount which is not recoverable. DateParticularsDebitCredit 31-07-2018Bad Debts Expense$90000 Account Receivable Account$90000 (Being the amount written off using direct write off method and as per Para 32 of AASB 136) WAREHOUSE DAMAGE The warehouse has been damaged by storm. The independent valuation report has provided the figures of fair value, selling costs and value in use as on 31stof July 2018 amounting to $300000, $10000 and $250000 respectively. Impairment is the loss which is charged to the particular asset and the statement of profit and loss and is equivalent to the amount as carried in the financial statement as reduced by the
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recoverable amount so as to make the carrying amount equal to the recoverable amount (Para 59, AASB136). In the given case, Recoverable amount is the higher of the fair value less selling costs and value in use. -Fair Value Less Selling Costs = $300000 - $10000 = $290000 -Value in Use = $250000 Recoverable amount is higher of above = $ 290000 Carrying amount = $252026 Warehouse ParticularsAmount Purchase Value as on 01-01-2014$405,195 Less Salvage Value$80,000 Depreciable Value$325,195 Depreciation for 2014$16,260 Carrying amount as on 31-12-2014$308,935 Depreciation for 2015$16,260 Carrying amount as on 31-12-2015$292,675 Depreciation for 2016$16,260 Carrying amount as on 31-12-2016$276,416 Depreciation for 2017$16,260 Carrying amount as on 31-12-2017$260,156 Depreciation for 2018$8,130 Carrying amount as on 31-07-2018$252,026 Impairment Loss = NIL as carrying amount is less than the recoverable amount and hence no journal entry is required to be done in the books of accounts. JOURNAL ENTRY FOR IMPAIRMENT OF WAREHOUSE DateParticularsDebitCredit 31-07-2018Impairment Loss AccountNIL Warehouse AccountNIL (Being the impairment loss booked as Para number 58 to 64 of AASB 136)
BUILDING REVALUATION Revaluation of building requires the correct valuation considering the changes that have occurred in the past and some contingencies for future. CONECPT OF VERIFIABLE MEASUREMENT Verifiability is regarded as one of the qualifying characteristic feature of the financial statements of the company. It provides the assurance to the users of the financial statements of the company that the amount presented in the financial statements is faithfully presented and represents the amount that it purports to represent (Para 2.29, AASB CF). There are two types of verification – one is direct and the other one is indirect. In the given case it is neither the direct verification nor the indirect verification. Also the verification can neither be said as observable nor unobservable. The value has been given by the friend of the directors of the company for the building for $12, 00,000 which cannot be verified without employing the registered valuer. Therefore, without verifying the value, no question arises of having the value of the building recorded in the books of accounts only as per the value given by their friend. CONCLUSION In the report, it is clearly exhibited that the accounting standards plays an important role in the functioning of the company. Whether it is related to the acquisition of assets or related to the sale of the assets or the recording of the transactions on the basis of the changes in market conditions and the social and legal environment in which the company operates.The accounting of the transactions that have been entered into by the company – Adams Australia Pty Ltd have been discussed in detail along with the calculations with reference to the relevant accounting standards. The report has laid down the main focus on the inventory recording and its valuation, impairment and asset valuation. Whole of the report has flowed around the accounting policies and norms and detailing how the company shall record the particular transaction in the books of accounts. In order to conclude the report, the accounting function of every organization shall be given equal and utmost importance as it forms the base for every function. REFERENCES AASB CF, (2014), “Framework for the preparation and presentation for financial statement”, available on https://www.aasb.gov.au/Pronouncements/Conceptual-framework.aspx accessed on 12-01-2019. AASB 108, (2010), “Accounting Policies, Changes in Accounting estimates and Errors”, available on https://www.legislation.gov.au/Details/F2005B01544 accessed on 12-01-2019.
AASB 136, (2011), “Impairment of Assets”, available on https://www.aasb.gov.au/admin/file/content102/c3/AASB136_07-04_ERDRjun10_07-09.pdf accessed on 12-01-2019. AASB 102, (2010), “Inventory”, available on https://www.aasb.gov.au/admin/file/content105/c9/AASB102_07-15.pdf accessed on 12-01-2019. AASB 116, (2015), “Property Plant and Equipment”, available on https://www.aasb.gov.au/admin/file/content105/c9/AASB116_08-15_COMPoct15_01-18.pdf accessed on 12-01-2019.