Accounting Theory and Current Issues: Tutorial Questions Analysis

This document presents a comprehensive solution to tutorial questions from an Accounting Theory and Practice course (HI6025), covering key concepts in financial reporting. The solution explores the qualitative characteristics of financial information, specifically relevance and faithful representation, providing examples of each. It addresses depreciation calculations, including asset revaluation and profit/loss on sale, and provides journal entries. Furthermore, the document examines goodwill impairment, determining the impairment loss and related journal entries. Lease accounting is also covered, demonstrating the present value calculation of lease payments and journal entries for both the lessee and lessor. The assignment also discusses the social contract and organisational legitimacy in relation to corporate disclosure.

ACCOUNTING THEORY AND
PRACTICE

TABLE OF CONTENTS
TABLE OF CONTENTS................................................................................................................2
INTRODUTION..............................................................................................................................1
WEEK 1...........................................................................................................................................1
a) Example where the information is relevant but is not faithfully presented.............................1
b) Example where the information is not relevant but faithfully represented.............................2
c) Example where information is relevant and faithfully presented............................................2
WEEK 2...........................................................................................................................................2
a) Social Contract and its relation with organisational legitimacy..............................................2
b) Corporate disclosure policy for maintaining legitimacy.........................................................3
WEEK 3...........................................................................................................................................3
Required :.....................................................................................................................................3
WEEK..............................................................................................................................................5
Required:......................................................................................................................................5
WEEK 5...........................................................................................................................................5
Required:......................................................................................................................................5
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUTION
Accounting refers to the process of recording the financial transactions related with the
business. Accounting process includes the process of recording journals, posting to ledger and
the preparation to financial statements. They are the brief summary of the accounting events and
transactions that are carried out during the year. The financial statements are to be prepared by
the organisation for giving information to the public. Therefore this requires the financial
statements to give true and fair representation of the financial position of the company. financial
statement are to be prepared in compliance with the reporting frameworks given by the
accounting authorities. The report is based on the qualitative characteristics of the financial
information. It will include the concepts of relevance and faithful representation of the financial
information provided by the statements. All the information are not relevant for the business
decision making. Study will also provide the solution about the depreciation, lease payments and
the impairment of goodwill. It will enhance the understanding about the accounting concepts.
WEEK 1
Faithful representation is fundamental qualitative characteristics of the financial
framework. Faithful representation and are relevance are categorized as qualitative
characteristics of the financial reporting framework. Enhancing the qualitative characteristic of
the financial reporting data and information will involve comparability, understandability,
timeliness and verifiability. This is focused over having relevant and reliable information
provided by the financial statements of the company (Kokina, Mancha and Pachamanova,
2017). Financial statements are essential for decision making of various users therefore it is
essential that it is free from any errors and material misstatements in the company. It should
represent actual and accurate position and performance of the business.
a) Example where the information is relevant but is not faithfully presented.
Fundamental quality in conceptual framework of the Financial Reporting is the faithful
representation. In simple terms the financial information represented by the company should
accurately reflect the position of company’s financial statement. For example company having
the debt of 800000 is relevant and presented in the business but is not faithfully presented as the
additional information regarding the debt is not provided in the notes of financial statements.
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b) Example where the information is not relevant but faithfully represented.
There are cases where the information is not relevant for the investors but is presented
faithfully by the company in the financial statements. Information is relevant that could influence
the decisions of the investors or user of the financial statements (Hoque, 2018). Relevance of the
information also depends over the materiality of the transaction or event. For example the
contingent liability that may arise in the year of 10000 is not relevant for the users of big
companies but is faithfully represented in the notes of financial statements for which the
provisions is made on balance sheet of company.
c) Example where information is relevant and faithfully presented.
All the information are not relevant but are required to be presented in the financial
statements likewise there are information that is both relevant and faithfully represented in the
financial statements of company. For example the Change in accounting policy is relevant for the
investors and also the effects are faithfully represented in the accounting figures in the financial
statements and also in qualitative terms explaining the effect.
WEEK 2
a) Social Contract and its relation with organisational legitimacy
Social contract refers to the process of how the company will be interacting with the
society. This is related to implicit and explicit expectation of the society about the business and
how it should be acting for having sustainable survival in future. It is not always a written
agreement but the expectations of the society. Relationship between business and society is
explained by social contract, the organisational legitimacy describe states where the organisation
is meeting the social contract. The process explains process through which organisation meets
terms of social contract. It has explained the process through which terms of the social contract
are maintained or gained. Social contract is hypothetical, actual or agreement between rulers and
ruled defining rights and the duties of the each.
Social contract states that the moral and obligations of the people depend on the contract
or agreement they have entered into. In the accounting organisations are required to give true and
fair view of the financial statement representing actual position and condition of company.
Organisational legitimacy is concerned with establishing congruency between social values that
are associated with the norms of behaviours accepted behaviour in the society they are operating
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in (Kothari, 2019). Theory of social contract is related with the organisational legitimacy that is
concerned with the establishing values for the business that they are operating their society along
with the growth of the company. It establishes obligation for the company to have prescribed
behaviours pattern towards its customers and society.
b) Corporate disclosure policy for maintaining legitimacy.
It refers to voluntary disclosure of qualitative information to the public.
1. Corporate disclosure policy of representing all the current liabilities and contingent
liabilities of the company in the financial statements.
2. Policy of disclosing the practices adopted under the corporate social responsibility.
WEEK 3
Required :
Depreciation = (Cost of asset - salvage value) / useful life of assets
Asset cost 440000
salvage value 40000
Useful life in years 10
(440000 - 40000) / 10
Yearly depreciation 40000
depreciation 1/7/2015 -1/7/2017 = 2 years
2*40000 = 80000
Book value 1/7/2017 440000-80000
360000
Revaluation of assets
Asset value on 1/7/2017 424000
Book value 360000
Upward revaluation 64000
Useful life 8
Salvage value 0
Yearly depreciation (424000 / 8)
53000
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Depreciation
1/7/2017 - 1/7/2019 = 2
Years
2*53000 = 106000
Book value 1/7/2019 424000 - 106000
318000
Asset book value on 1/7/2019 318000
Asset sold on 1/7/2019 356000
Profit on sale 38000
Journal Entries
01-07-2015
Equipment 440000
To Bank 440000
Depreciation 40000
To Equipment 40000
01-07-2017
Equipment 64000
To Revaluation Surplus 64000
Depreciation 53000
To Equipment 53000
01-07-2019
Bank a/c 356000
Profit & loss 38000
To Equipment 318000
Impairment of Goodwill 500000
To Goodwill 500000
Company has acquired the equipment in year 2015 with a salvage value of 40000. The
depreciation at the same rate is charged for 2 years till 2017. On 1 July 2017 the fair value of the
machine is revalued to 424000 when the book value of equipments was 360000. There has been
an upward revaluation of 64000 in equipment (Khosa And et.al., 2019). The depreciation is
calculated at the revalued value of equipment with no salvage value and life of 8 years. The
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depreciation for 2017 & 2018 is charges at 53000. Equipment is sold for 356000 on July 1, 2019
when the carrying value was 318000. This means the company had earned a profit of 38000 on
the sale of equipments.
WEEK
Required:
a)
Consideration paid 5000000
Net Identifiable assets 4400000
Goodwill as on 1/7/2018 600000
Recoverable amount 30/6/2019 4500000
Goodwill on 30/6/2019 4500000 - 4400000
100000
Impairment of Goodwill 600000 - 100000
500000
30-06-2019 Impairment of Goodwill 500000
To Goodwill 500000
There has been an impairment of 500000 in the goodwill as the recoverable amount of the cash
generating units is 4500000. The goodwill is valued at 100000 of the company in the year 2019.
b)
Recoverable amount 4200000
Goodwill 4200000 - 4400000
-200000
Impairment of goodwill 600000
Since the recoverable amount of CGU is less than the carrying amount therefore the whole of the
impairment loss is charged to goodwill and the remaining loss of 100000 will be charged to
profit and loss statements for the year (Schaltegger and Burritt, 2017).
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WEEK 5
Required:
a)
a) Present value of lease payments
Year Lease
Present value
factor @ 10%
PV of lease
payments
0 300000 1 300000
Jan-20 225000 8.5136 1915560
PV of lease
payments 2215560
Fair value of lease 2215560
*Lease payments 250000 - 25000
= 225000
Since the present value using the rate of 10% is 2215560 of the lease this proves that the implicit
rate of interest is 10% in the lease.
b)
In books of Fisher
Date Particulars Debit Credit
01-07-2019 Cargo ship 2215560
To leasehold obligation 2215560
01-07-2019 Lease payments 300000
To Bank 300000
30-06-2020 Interest on lease 199056
Leasehold obligation 25944
Insurance expense 25000
To Bank 250000
(2215560-300000)*10%
c)
In books of X Finance
01-07-2019 Lease Receivables 2215560
To Cargo Ship 2215560
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30-06-2019 Bank 300000
To Lease rental income 300000
30-06-2020 Bank 250000
To Lease Receivables 199056
To Finance income 25944
To Insurance 25000
CONCLUSION
From the above report it could be concluded that the relevance and faithful presentation are
the qualitative characteristics of the financial statements. The accounting standards provides
about the reporting frameworks to be complied with for preparation of the financial statements.
The financial statements of company should give true and fair presentation of the financial
condition that is free from material misstatements.
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REFERENCES
Books and Journals
Schaltegger, S. and Burritt, R., 2017. Contemporary environmental accounting: issues, concepts
and practice. Routledge.
Khosa, A. And et.al., 2019. Current issues in PhD supervision of accounting and finance
students: Evidence from Australia and New Zealand. The British Accounting
Review.p.100874.
Kothari, S.P., 2019. Accounting Information in Corporate Governance: Implications for Standard
Setting. The Accounting Review.94(2). pp.357-361.
Kokina, J., Mancha, R. and Pachamanova, D., 2017. Blockchain: Emergent industry adoption
and implications for accounting. Journal of Emerging Technologies in
Accounting.14(2).pp.91-100.
Hoque, Z., 2018. Methodological issues in accounting research. Spiramus Press Ltd.
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