Detailed Analysis of Accounting Standards and Debentures in Finance

This assignment solution addresses key concepts in financial accounting, focusing on accounting standards and debentures. The first part of the solution analyzes the application of AASB 116 "Property, Plant & Equipment," highlighting the correct treatment of repair and maintenance costs versus capital expenditures. It explains why incorrectly debiting repair costs to plant and equipment violates the standard. The second part delves into debentures, explaining how interest rates influence their pricing (premium or discount). It provides detailed journal entries for bond issuance at a discount, including interest expense calculations and amortization of the discount over the bond's life. The solution covers the complete accounting cycle for the debentures, from issuance to interest payments and discount amortization.

Solution-1
(a) The Golf Gear Company often debits the cost of repairs or maintenance of equipment to Plant
and equipment. This is a violation of accounting standard AASB 116 “Property, Plant & Equipment” as it
does not meet the recognition criteria of standard. As per AASB 116, “The cost of an item of property,
plant and equipment shall be recognized as an asset if, and only if: (a) it is probable that future
economic benefits associated with the item will flow to the entity; and (b) the cost of the item can be
measured reliably.”
Repairs and maintenance are of two types, the ordinary repairs and maintenance does not give rise to
any future economic benefit nor they increases the life or productivity of the assets that’s why it should
not be added to the cost of assets rather it should be charged off as an expense to the Statement of
Profit and Loss account.
Manager might be of the view that since it relates to the assets so it should be added to the carrying
value of the assets. That’s why he added the cost to the asset instead of charging it to the P&L.
(b) The recognition Criteria of AASB 116 states that “The cost of an item of property, plant and
equipment shall be recognized as an asset if, and only if: (a) it is probable that future economic benefits
associated with the item will flow to the entity; and (b) the cost of the item can be measured reliably.”
As per AASB 116, any transaction that meets the recognition criteria should be classified as plant and
equipment and should be depreciated over its life. Since, purchase of plant and equipment meets the
recognition criteria and further it is having economic benefits associated with it so it should be classified
as Plant & Equipment. So, the act of Castle industries manager of debiting the plant and equipment cost
to repair and maintenance is non tenable.
Manager does so because he might want to reduce the tax liability of the company by reducing the
profit for the year by charging the entire cost of assets to P&L.
(c) Intangible assets are those assets which have no physical substance but have benefits to the
business of the company. As per AASB 138 “Intangible Assets” any intangible that has expected future
economic benefits to the entity should be recognized as an asset and these types of intangibles should
be recorded at cost. And if the asset is created or acquired at no cost or for a nominal cost, the asset
should be recorded at fair value on the transaction date (i.e. acquisition date or its creation date).
It is agreeable fact that many intangible assets have no value except to the business that owns them, but
to create such assets, the business might have incurred some or other expenses. Only after incurring all
these expenses, the business will be able to use that website. So, all these expenses associated with the
intangibles should be recognized as intangible assets.
So, the view that intangible assets should be recognized at $1 or $0 is not a valid view.

Solution-2
(a) As higher interest rate instruments attract investors as compared to lower interest rate
instruments, hence the debentures will be priced at a premium because the interest rate of debentures
is 7% whereas market instruments have interest rate of 6.5%.
(b) As higher interest rate instruments attract investors as compared to lower interest rate
instruments, hence the debentures will be priced at a discount because the interest rate of debentures
is 7% whereas market instruments have interest rate of 8%.
(c) Journal entries
Date Particulars Debit Credit
1 March 2017 Cash
Discount on bonds payable
Bonds Payable
(Bonds issued at a discount)
475,000
25,000
500,000
31 August 2017 Interest Expense
Cash ($500,000 x 7% / 2)
Discount on Bonds Payable ($25,000 /(20*2)
(Payment of interest and amortization of bonds
recorded)
18,125
17,500
625
31 December 2017 Interest Expense
Interest payable ($500,000 x 7% / 12*4)
Discount on Bonds Payable ($25,000 /(20*12)*4)
(interest expense and amortization of bonds recorded for
4 months)
12,083
11,666
417
28 February 2018 Interest Expense ($500,000 x 7% / 12*2)
Interest Payable
Cash
Discount on Bonds Payable ($25,000 /(20*12)*2)
(Payment of interest and amortization of bonds
recorded)
6,042
11,666
17,500
208