Comprehensive Solution to 3101AFE Accounting Theory Homework

This assignment provides solutions to several questions related to accounting theory and practice, covering topics such as the classification of financial instruments (loan receivable, loan payable, ordinary shares, etc.), the valuation of derivative financial instruments according to AASB 139, and the consequences of misclassifying financial instruments as debt versus equity. It also discusses the definition of fair value as per AASB 13, the right to set-off mutual debts, and the reasons why a company might want to exercise this right to improve its leverage position. The solutions are supported by references to relevant accounting standards and textbooks, including Deegan (2013, 2016), Henderson (2015), and Sangiuolo (2008). Desklib offers a wide range of solved assignments and past papers for students.

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3101AFE ACCOUNTING THEORY AND PRACTICE

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Answer 1:
a) Loan receivable is a amount that has to be recovered by the company so it is classified as
financial assets
b) Loan Payable refers to the amount that to be paid by the company at any future period so
it means it is financial liability.
c) Ordinary shares classified as equity as it represents shareholder’s capital
d) Investment in ordinary shares is type of financial asset for any company (Deegan, 2013)
e) It is financial liability due to obligation on company
f) Investment is preference share is financial assets as it guarantee inflow of economic
resources
Answer 2:
The value of a derivative financial instrument is influenced by the value of an underlying
item. This is because these are categorized to be secondary financial instruments whose value is
influenced by the significant change that occurs in the value of underlying financial instruments.
For example, the value of a share option is influenced by the changes that occur in the market
value of the underlying shares. The financial instruments are required to be measured at the fair
value as per the AASB 139 accounting standard. The profit or loss realized on the financial
instruments is transferred to the profit or loss (Sangiuolo, 2008).
Answer 3:
There is a consequence of reporting a financial instrument as debt rather than in the
equity on the statement of proof or loss. For example, if preference shares are reported as a
liability in place of equity then the payments realized at regular intervals related to it will be
categorized as interest expense and not dividends. Thus, it will have an impact on the reported
profit or loss of an entity and therefore the issues should classify the preference shares as equity.
The accounting standard of AASB 132 has provided in-depth guidance for reporting the debt and
equity components of a financial instrument (Deegan, 2016).
Answer 4:
The accounting standard of AASB 13 has stated fair value to be the price that is expected
be realized by selling an asset or transferring of a liability in an orderly transaction carried out
between the participants of a market on the date at which they are measured. Orderly transactions
that assumes having a sufficient exposure about the market for developing in-depth information
about asset or liability before the date of measuring their significant values. Such a transaction
cannot be a forced one and usually involves insufficient exposure to the market for enabling the
participants to acquired in -depth information about an asset or a liability (Henderson, 2015).
Answer 5:

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The right to set-off is also known as reconciliations regarded as the right possessed by a
debtor to meet the mutual debts with a creditor. The right to set-off is said to exist when a
remained due amount of any of the parties is still owned but the remaining of the mutual debts
has been set-off (Sangiuolo, 2008).
Answer 6:
The main reason why company wants to set off the debt own by the company because it
will reduce the debt to assets ratio i.e. leverage position will improve.
Pre set off debt to assets ratio: $1000000/$2000000 = 0.50 or 50%
Post set off debt to assets ratio: $700000/$1700000= 0.412 or 41.20%
So it is advised to the company to make use the right of set off the debt (Deegan, 2013).

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References
Deegan, C., (2013). Financial accounting theory. McGraw-Hill Education Australia.
Deegan. C. (2016). Financial Accounting, 8th Edition. McGraw-Hill Education Australia.
Henderson, S. (2015). Issues in Financial Accounting. Pearson Higher Education AU.
Sangiuolo, R. (2008). Financial Instruments: A Comprehensive Guide to Accounting and
Reporting.CCH.