Accounting and Financial Reporting Assignment for Dream Furniture

Verified

Added on 2021/06/17

AI Summary

This report analyzes the accounting and financial reporting practices of Dream Furniture Pty Ltd, a furniture manufacturing and selling company in Australia. The report focuses on several key areas, including the acquisition and initial recognition of non-current assets (land, building, and machinery), calculating depreciation using straight-line and diminishing value methods, and accounting for revaluation of assets according to AASB 116. It also examines the presentation of non-current assets in the balance sheet and addresses the accounting treatment of revaluation and impairment losses. Furthermore, the report explores qualitative characteristics of financial reporting such as comparability, verifiability, timeliness, and understandability, and how they relate to Dream Furniture's financial statements. Finally, the report assesses the company's revenue recognition practices in accordance with AASB 15, outlining the five-step model for revenue recognition from contracts with customers. The report provides detailed journal entries and calculations to support its analysis, demonstrating the application of relevant accounting standards and principles.

Contribute Materials

Your contribution can guide someone’s learning journey. Share your documents today.

Secure Best Marks with AI Grader

Need help grading? Try our AI Grader for instant feedback on your assignments.

1
By student name
Professor
University
Date: 25 April 2018.
1 | P a g e

2
Contents
Introduction.................................................................................................................................................3
Acquisition of Non-Current Assets (question 1).......................................................................................... 3
Calculation of Depreciation (question 2)..................................................................................................... 5
Revaluation (questions 3)............................................................................................................................ 6
Balance Sheet Excerpt (question 4).............................................................................................................7
Revaluation and Impairment (question 5)................................................................................................... 7
Qualitative Characteristics (question 6).......................................................................................................9
Revenue Recognition (question 7)............................................................................................................. 10
References................................................................................................................................................. 12
2 | P a g e

3
Introduction
In the given case, one of the consulting and accounting firms Action accountants has been asked
to review the accounts of the new client, Dream Furniture Pty Limited in Australia. The major
areas of focus will be the non current assets reporting, recording and expensing of transactions,
revenue recognition and impairment of assets. The given company has a business of
manufacturing and selling furniture in Australia and has been set up in 2013. The business has 2
directors and is registered under the Goods and Service Tax scheme (Alexander, 2016). The
business commenced on 01st January 2013 and generally closes its annual books on 30th June
every year. A number of transaction that the company entered unto has been given including the
purchase of the fixed assets alongwith the details of valuationa and impairment. The company
has also mentioned its reveuue recognition transactions and the same has been assessed below in
terms of the AASB standards and the local GAAP.
Acquisition of Non-Current Assets (question 1)
In the given case, the assets will be recorded at cost in the balance sheet since it is newly
acquired and as per AASB 116, Para 15, all the items of property, plant and equipment which
qualify to be recognised as assets in the books are to be measured at cost. Furthermore, Para 16
and Para 17 defines what all are the incidental costs and costs relating to the Property, Plant and
machinery that can be recognised initially (Bromwich & Scapens, 2016). These include costs of
site preparation, installation costs, delivery and handling costs and professional fees. Para 19
mentions some of the costs like the administration and general overhead costs, the cost of
opening new facility or the cost of introducing a product or service, etc are not be included in the
initial measurement costs. In the given case, the amounts at which the assets will be reorded is
shown below:
Assets Land Building Machinery
Fair Value 810,000 480,000 150,000
Legal Fees 3,600 - -
Renovation cost - 15,600 -
Installation cost - - 5,400
Shipping cost - - 1,800
3 | P a g e

Secure Best Marks with AI Grader

Need help grading? Try our AI Grader for instant feedback on your assignments.

4
Total cost of initial recognition 813,600 495,600 157,200
Assumptions that have been considered is GST rate is 20% which is extracted using
1440000/1200000. Furthermore, administrative cost and the insurance cost on the building has
been ignored as it is in the nature of general and administration expenses (Belton, 2017).
The respective journal entries for recording the above transaction are :
Journal Entries
Date Particulars Debit ($) Credit ($)
31-
May Land A/C
813,60
0
Building A/C
495,60
0
Machinery A/C
157,20
0
To Bank A/C 1,466,400
(Being assets purchased and recorded)
4 | P a g e

5
Calculation of Depreciation (question 2)
The depreciation calculation for machinery and the building for the years 2013, 2014, 2015 and
2016 has been shown below in the table. The depreciation method being used for building is
straight line method, 93000 being the residual value and life being 8 years, on the other hand, the
company has decided to use diminishing value method for machinery (Das, 2017).
Dream Furniture Pty Ltd
Calculation of depreciation
Assets Building Machinery
As on 01st January 2013 495,600 157,200
Depn Method Straight Line Diminishing Value
Life 8 years
Estimated Residual Value 93000
Depreciation Rate 10.15% 30%
Depn till 30th June 2013 25,162.50 23,580.00
WDV as on 30th June 2013 470,437.50 133,620.00
Depn for 2013-14 50,325.00 40,086.00
WDV as on 30th June 2014 420,112.50 93,534.00
Depn for 2014-15 50,325.00 28,060.20
WDV as on 30th June 2015 369,787.50 65,473.80
Depn for 2015-16 50,325.00 19,642.14
WDV as on 30th June 2016 319,462.50 45,831.66
As per Para 62 of AASB Standard 116, a company is allowed to review the depreciation method
at least once at the end of each financial year if at all there is a significant change in the
consumption pattern of the asset based on the expected future economic benefits and then the
changed pattern would be applied and it would be called the change in the accounting estimate.
Im the given case, the company was allowed to change the method but there were no significant
changes in consumption pattern and hence they continued with the same (Choy, 2018).
James and Jess wanted to change the depreciation method for the machinery from written down
value to units of production method because for them, the units were not being produced
optimally at the beginning and therefore the depreciation should be charged based on production
5 | P a g e

6
of units but on the other hand, diminishing value method being used shows that the maximum
utilisation of machine was being done in the beginning.
Revaluation (questions 3)
As per the revaluation model as defined in Para 31 of AASB 116, any plant property or
equipment after the initial recognition shall be carried at the revalued amount if it can be reliably
measured, being the fair value on the date of revaluation less accumulated depreciation and
accumulated impairment losses, if any. If an item of PPE is revalued, then all the assets
belonging to the same class will have to be revalued (Goldmann, 2016). In case there is an
incease in the carrying amount of the asset due to revaluation, it will be recognised in the other
comprehensive income and will be shown as revaluation surplus under the head equity (Dichev,
2017). However, the increase shall be recognised in P&L account to the extent it reverses the
impact of decrease in the value of same asset due to revaluation. On the other hand, if there is a
decrease in the carrying value of the asset due to revaluation, then the revaluation loss needs to
be shown in the profit and loss account. However, any decrease will be first adjusted against the
revaluation surplus balance under equity and in the other comprehensive income in case the same
asset was revalued upwards in the past.
The journal entry to record revaluation of land and building as on 30th June 2016 as per AASB
116 has been shown below:
Dream Furniture Pty Ltd
Calculation of revaluation
Assets Land Building
Carrying value as on 30th June 2016 813,600 319,463
Fair value as on 30th June 2016 900,000 400,000
Remaining useful life 8 years
Estimated Residual Value 100,000
Revaluation upwards/(downwards) 86,400 80,538
Adjusted in OCI OCI
Journal Entries
Date Particulars Debit ($) Credit ($)
6 | P a g e

Paraphrase This Document

Need a fresh take? Get an instant paraphrase of this document with our AI Paraphraser

7
30-Jun Land A/C 86,400
Building A/C 80,538
To Revaluation Surplus A/C - 166,938
(Being assets revalued through OCI)
Balance Sheet Excerpt (question 4)
The excerpt of the balance sheet which shows the non current assets as appearing on 30th June
2016 for Dream Furniture Pty Ltd is as follows:
Dream Furniture Pty Ltd
Balance Sheet as on 30th June 2016 (excerpts)
Particulars Amount Amount
Non Current assets -
Land 900,000
Building
400,00
0
Machinery 45,832
Total Non Current Assets 1,345,832
Note: The balances shown above have been considered post the effect of revaluation.
Revaluation and Impairment (question 5)
a. The company Dream Furnitures Pty Ltd. would not like to record the revaluation loss for
the building as it would be first set off against the revaluation surplus balance and then
the remainder would be charged to profit and loss account. This would lead to decrease in
profits (Carlin, 2011). Similarly, for machinery, the impairment loss would be directly
charged to the profit and loss account and again the profitability would be impacted. The
company cannot change the model of the building from revaluation to the cost model as
in such a case the model for all the assets lying in the same class would also need to be
changed. In the given case, the along with the building, the change would also be
7 | P a g e

8
required for the land. In case the impairment loss and the revaluation are not being
recorded in the books of the company, two of the qualitative characteristics of the
financial reporting would be violated is comparability alongwith consistency. The ussers
of the financial statements would not be able to compare the last year’s working with the
current year. At the same time, it can also be said that the verifiability aspect of the
financial reporting is also being compromised.
b. The journal entries to record both building and machinery in the books of the company as
on 30th June 2018 is mentioned beloe. In the given case, the company is doing the
impairment of the assets as a bad storm has done a major damage to both these assets.
Assets should not be carried in the books at more than the recoverable value which is
higher of value in use and fair value less cost of disposal (Heminway, 2017).
Dream Furniture Pty Ltd
Calculation of impairment on 30th June 2018
Assets Building Machinery
Carrying value as on 30th June 2016 400,000 45,832
Depn Method Straight Line Diminishing Value
Life 8 years
Estimated Residual Value 100000
Depreciation Rate 9.38% 30%
Depn for 2016-17 37,500 13,750
WDV as on 30th June 2017 362,500 32,082
Depn for 2017-18 37,500 9,625
WDV as on 30th June 2018 (a) 325,000 22,458
Fair value as on 30th June 2018 200,000 8,570
Less: Selling Cost 5,000 525
Fair value less cost of disposal (b) 195,000 8,045
Value in Use (c) 210,000 9,500
Recoverable Value, higher of b & c (d) 210,000 9,500
Impairment Loss (a-d) 115,000 12,958
Journal Entries
Date Particulars Debit ($) Credit ($)
30-
Jun Impairment Loss A/C
127,95
8
To Accumulated depreciation & impairment loss on building 115,000
To Accumulated depreciation & impairment loss on
machinery
12,95
8
8 | P a g e

9
(Being impairment of assets recorded)
Qualitative Characteristics (question 6)
While preparing the financial statements, the companies need to follow and ensure that the
qualitative charteristics of the financials are being followed while reporting. The enhancing
qualitative charteristics which Dream Furnitures Pty Ltd needs to follow are mentioned below.
These are required to ensure the reliability of the financial statements and that it becomes
relevant to the user and they get reasonable assurance to rely on the same and take their
investment decisions.
1. Comparability: This ensures the user to compare the current year data with the last year
and do the trend analysis and fin out what are the similarities and what are the
differences. This will be significantly affected if the methods of accounting are changed
every now and then (Knechel & Salterio, 2016).
2. Verifiability: This is one of the new concepts in reporting and any financial report is
verifiable when a group of knowledgeable person are able to reach to a consensus based
on the given information as to whether it gives the faithful representation of matters.
3. Timeliness: It is a very important aspect as the report needs to be delivered in time to the
users or else it renders them useless. If timely delivered, it can affect many investment
decisions.
4. Understandability: The information in the financial statements must be delivered in a way
that it can be clearly understood by the user, classified, characterised in a way that it can
give out some meaningful information (Raiborn, et al., 2016).
9 | P a g e

Secure Best Marks with AI Grader

Need help grading? Try our AI Grader for instant feedback on your assignments.

10
Revenue Recognition (question 7)
As per AASB 15 on Revenue from Contracts with customers, there is a five step model for
recognise revenue, which are identifying the contract and its terms and conditions from which
the revnue will be derived (Para 9-16), then the performance obligation that needs to be met is to
be identified (Para 22-23), post which the transaction price is being detrmined by the parties to
the contract in agreement with each other and considering the total efforts that will be required
(Para 47-49). After this step, the allocation of the transaction price is being done based on the
different activities or some other parameters depending on the company (Para 73-75) (Visinescu,
et al., 2017). Finally the reveue is being recognised for the period to which it pertains based on
all the above steps.
In the given case, joining fees and the monthly membership fees are not separate performance
obligations as one the former is collected as a one time fees at the outset and is non refundable
and is basically taken on account of admisistrative expenses where as the other being monthly
membership fees is based on the performance or service to the members on the monthly basis.
But the non refundable is not on account of any specific goods of services, therefore, it is not a
separate performance obligation (Jefferson, 2017). Therefore, here the non refundable joining
fees would be allocated over the period of 24 months as & when the monthly memebership fees
is received and recognised based on the performance of services. Post 2 years, there is a material
10 | P a g e

11
right with the customer and hence no joining fees is being taken and then only the monthly
membership fees is being recognised a revenue.
The calculation for the allocation of revenue and the respective journal entries have been shown
below:
Dream Furniture Pty Ltd
Calculation of revenue to be recognised for the year ended 30th June 2019
Particulars
Non refundable
joining fees
Monthly
membership fees
No. of members 30 30
Fees Amount including GST @ 20% 1200 120
Period Once in 2 years Monthly
24 month 1 month
Recognition in books Monthly Monthly
Amount of revenue recognition per member 50 120
Journal Entries
Date Particulars Debit ($) Credit ($)
1-Jun Bank A/C 36,000
To Pre-received income (Non refundable joining fees) 36,000
(Being advance received recorded)
1-Jun Bank A/C 3,600
To Revenue from monthly membership fees 3,600
(Being monthly revenue recorded recorded)
1-Jun Pre-received income (Non refundable joining fees) 1,500
To Revenue from non refundable joining fees 1,500
(Being allocation of non refundable fees recorded)
11 | P a g e

12
References
Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp.
411-431.
Belton, P., 2017. Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat
International ltd.
Bromwich, M. & Scapens, R., 2016. Management Accounting Research: 25 years on. Management
Accounting Research, Volume 31, pp. 1-9.
Carlin, T. a. F. N., 2011. Goodwill impairment testing under IFRS: a false impossible shore. Pacific
Accounting Review, 23(3), pp. 368-392.
Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview Analysis.
Ecological Economics, p. 145.
Das, P., 2017. Financing Pattern and Utilization of Fixed Assets - A Study. Asian Journal of Social Science
Studies, 2(2), pp. 10-17.
Dichev, I., 2017. On the conceptual foundations of financial reporting. Accounting and Business
Research, 47(6), pp. 617-632.
Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish Business.
Financial Environment and Business Development, Volume 4, pp. 103-112.
Heminway, J., 2017. Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and
Organic Documents. SSRN, pp. 1-35.
Jefferson, M., 2017. Energy, Complexity and Wealth Maximization, R. Ayres. Springer, Switzerland.
Technological Forecasting and Social Change, pp. 353-354.
Knechel, W. & Salterio, S., 2016. Auditing:Assurance and Risk. fourth ed. New York: Routledge.
12 | P a g e

Paraphrase This Document

Need a fresh take? Get an instant paraphrase of this document with our AI Paraphraser

13
Raiborn, C., Butler, J. & Martin, K., 2016. The internal audit function: A prerequisite for Good
Governance. Journal of Corporate Accounting and Finance, 28(2), pp. 10-21.
Visinescu, L., Jones, M. & Sidorova, A., 2017. Improving Decision Quality: The Role of Business
Intelligence. Journal of Computer Information Systems, 57(1), pp. 58-66.
13 | P a g e