Advanced Financial Accounting Assignment Solution: ACC204, Semester 1

This document presents a comprehensive solution to an Advanced Financial Accounting (ACC204) assignment. Part A addresses theoretical questions, including a discussion of the "True and Fair" view in financial statements and the role of company directors in ensuring its accuracy. It also differentiates between recoverable amount and fair value, and explores the use of "value in use" in revaluations. Part B delves into practical applications, providing detailed calculations and journal entries for depreciation using the sum of the digits method, asset revaluation, the acquisition of a company (Bronte Ltd) by another (Tamarama Ltd), and lease accounting, including the determination of the present value of minimum lease payments and the implicit rate of interest. The assignment utilizes the Harvard referencing style.

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Advanced financial accounting

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Table of Contents
Part A.........................................................................................................................................3
Question 1..............................................................................................................................3
Question 2..............................................................................................................................3
Part B..........................................................................................................................................4
Question 1..............................................................................................................................4
Question 2..............................................................................................................................5
Question 3..............................................................................................................................6
Question 4..............................................................................................................................7
References..................................................................................................................................9

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Part A
Question 1
In the business, there are financial statements which are prepared and in that the company
will be recording all the transactions and events in an adequate manner. There is a concept
known as true and fair view in accounting and it means that the financial statements are free
from any kind of material misstatement and all of the information that is presented is true
(Man and Ciurea, 2016). By them, the correct financial position of the business is ascertained
which helps the investors and others in the decision-making process.
All the directors are required to sign the declaration which states that the financial statements
are representing the true and fair view. Before signing the declaration it will be required that
they perform their own analysis of the financial reports and all of them shall be read by them
in a proper manner. The report which is provided by the external auditors and audit
committee will be taken into account and also the management report will be considered. The
information that is presented in the reports will be evaluated to identify their consistency
(Blankespoor et al., 2013). It will be checked that the accounting concepts and standards are
applied effectively and also proper treatments are made. All the required disclosures are made
and there is the correct recording which is made in accounts. They all will be evaluated in an
appropriate manner so that the correctness of accounting can be ascertained.
Question 2
All the assets which are involved in the business have various values that need to be taken
into account for various processes. The fair value of the asset is the value which has been
agreed by the buyer or the seller of the asset. It represents the value which is there for the
asset and incorporated in the financial statements.
There is the recoverable amount which shows the amount that is available for the asset and
that is ascertained with the help of various values. In this the highest of the value in use or the
amount which is derived after deducting the cost of sale from the fair value (Enahoro and
Jayeoba, 2013). There is the difference between the fair value and recoverable amount as in
the fair value the complete value which is available is taken into account whereas the

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recoverable amount involves the value which is available after deducting the cost of the asset.
This is the gain that is made or the value which is currently in use.
In the case of the revaluation, the value of the asset is revalued and in that case, the value in
use will only be considered if it is more than the amount which is attained after revaluation.
In that case, the value in use will be of importance otherwise not (Păvăloaia, 2013). This is
the condition under the revaluation model which is used and in that the carrying value is
important and for that, the value in use is taken into account.
Part B
Question 1
The assets are required to be depreciated to ascertain the current value which is to be
recorded in the books of the company. For this, there are various methods that can be used
and one of them is the sum of the digit method (Zuca, 2013). With the help of this, the
depreciation in the given case is calculated and the same is represented below:
Year Value of
asset
The remaining
life of the asset
Depreciation
fraction
Depreciation
expense
Book
value
2012 420000 6 0.285714 120000 300000
2013 420000 5 0.238095 100000 200000
2014 420000 4 0.190476 80000 120000
2015 420000 3 0.142857 60000 60000
2016 420000 2 0.095238 40000 20000
2017 420000 1 0.047619 20000 0
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The carrying value of the asset on the date of disposal that is 30 June 2014 will be $120000.
The selling price of the asset is $150000 and with that, the gain on disposal will as follows:
Gain = sale value – carrying the amount
= 150000-120000
= $30000
Date Particulars Amount (Dr) Amount (Cr)

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1 July 2011 Machinery A/c Dr
To Cash
(Machinery purchased)
$420000
$420000
30 June 2012 Depreciation A/c Dr
To Machinery
(depreciation expense charged)
$120000
$120000
30 June 2013 Depreciation A/c Dr
To Machinery
(depreciation expense charged)
$100000
$100000
30 June 2014 Depreciation A/c Dr
To Machinery
$80000
$80000
30 June 2014 Cash A/c Dr
To machinery
To profit and loss A/c
(Disposal of the asset)
$150000
$120000
$30000
Question 2
Revaluation is often done in the business in the situation of change in the fair value of the
asset. To bring the change in the books revaluation is done and required accounting treatment
is made possible. The calculation and entries for the same are provided below:

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Particulars Amount
Cost of asset 100000
Accumulated depreciation 20000
Carrying value of an asset 80000
Revalued amount 120000
Gain on revaluation 40000
Remaining life 8
Depreciation 15000
Date Particulars Amount (Dr) Amount (Cr)
1 July 2015 Asset A/c Dr
To Revaluation reserve
(Asset revalued)
$40000
$40000
30 June 2016 Depreciation A/c Dr
To Asset
(depreciation expense charged)
$15000
$15000
Question 3
In the given case Bronte Ltd is acquired by Tamarama Ltd and for that purchase,
consideration is paid which is calculated as follows:
Purchase consideration = Cash + Fair value of plant and equipment + fair value of land
= $70000+ $250000 + $300000
= $620000
Value of Bronte Ltd assets = $800000-$300000
= $500000

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Goodwill = Purchase consideration – Value of acquired company net assets
= $620000 - $500000
= $120000
So it can be said that goodwill has been acquired for the value of $120000.
The goodwill cannot be revalued upward by the Tamarama ltd and it will be required to be
amortized in accordance with the accounting standard and proper treatment for the same will
be made. There is no provision that is available in respect of goodwill revaluation and so the
same will not be taking place in Tamarama ltd also.
Question 4
a) Determination of PV of minimum lease payments
In the process of the lease, there is a payment that is required to be made and that is identified
as lease rent (Barone, Birt and Moya, 2014). The PV of lease payment will be calculated in
the following way:
Yea
r
Payments PVF @ 6% PV
0 200000 1 200000
1 100000 0.9434 94339.62
2 100000 0.8900 88999.64
3 100000 0.8396 83961.93
4 100000 0.7921 79209.37
5 100000 0.7473 74725.82
6 100000 0.7050 70496.05
7 100000 0.6651 66505.71
8 100000 0.6274 62741.24
Total PV 820979.4
It is identified that the present value of minimum lease payment which is made by Johnson
ltd is $820979.4 which will be paid in the duration of 8 years.
b)

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The initial implicit rate of interest is the rate at which the present value of the minimum lease
payment and the residual value will be equal to the fair value of the asset and any cost
incurred by the lessor. The formula for the same is as provided below.
Present value of minimum lease payment + PV of unguaranteed residual value = Fair value of
leased asset + initial direct cost of lessor.
$820979.4 + (80000*0.6274) = $871172 + 0
$820979.4 + $50192.99 = $871172
$871172 = $871172
From the above calculation it can be seen that the fair value is equal to the present value of all
the lease payments and residual value and this shows that 6% is the implicit rate of interest.

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References
Barone, E., Birt, J. and Moya, S. (2014) Lease accounting: A review of recent
literature. Accounting in Europe, 11(1), pp.35-54.
Blankespoor, E., Linsmeier, T.J., Petroni, K.R. and Shakespeare, C. (2013) Fair value
accounting for financial instruments: Does it improve the association between bank leverage
and credit risk?. The Accounting Review, 88(4), pp.1143-1177.
Enahoro, J.A. and Jayeoba, J. (2013) Value measurement and disclosures in fair value
accounting. Asian Economic and Financial Review, 3(9), p.1170.
Man, M. and Ciurea, M. (2016) Transparency of accounting information in achieving good
corporate governance. True view and fair value. Social Sciences and Education Research
Review, 3(1), pp.41-62.
Păvăloaia, L. (2013) Valuation of tangible assets for financial reporting. Revista tinerilor
economişti, (20), pp.77-84.
Zuca, M.R. (2013) The accounting treatment of asset depreciation and the impact on
result. Annals of the University of Petroşani. Economics, 13, pp.271-280.