Financial Accounting 2 Report: Accounting Issues and Solutions

This Financial Accounting 2 report addresses accounting issues raised by Mr. Con Pewter, focusing on Australian accounting standards (AASB). The report analyzes a lease under AASB 16, classifying it as a finance lease based on the present value of lease rentals. It calculates the present value and compares it to the fair value of the asset. The report also examines revenue recognition under AASB 15 and AASB 18, detailing when and how revenue from installation fees, technical support, and combined contracts should be recognized. The student provides recommendations for accounting treatments, ensuring compliance with the relevant standards, and includes references to supporting literature.

Running head: FINANCIAL ACCOUNTING 2
Financial Accounting 2
Name of the Student:
Name of the University:
Authors Note:

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FINANCIAL ACCOUNTING 2
Contents
Issue 1:.............................................................................................................................................2
Issue 2:.............................................................................................................................................3
References........................................................................................................................................5

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FINANCIAL ACCOUNTING 2
To: Ms Jane McKenzie, Manager, McKenzie and Associates.
Ref.: Response letter to the accounting issues raised by Mr Con Pewter.
Respected Madam,
This letter is in reference to the accounting issues raised by Mr Con Pewter in respect of
financial transactions took place in his company Pewter Limited. It is expected that the letter will
provide necessary resolutions for the accounting issues raised by Mr Con Pewter. In Australia,
accounting issues are governed by the accounting standards (AASB) issued by the highest
accounting body in the country.
Issue 1:
AASB 16 deals with leases in the books of accounts of an organization. While recording the
financial transactions related to leases in the books of accounts of an entity, the guidelines
mentioned in AASB 16 shall be followed. As per AASB 16 a lease shall be classified as a
finance lease if the lease term of the asset is more or less similar to the estimated life of the asset
and the present value of lease rental over the course of the lease term is close to the cost incurred
to acquire the asset (Lin and Graham, 2017).
Taking into consideration the information about the lease terms and conditions the present value
of lease rent to be received by the lessor over the course of the lease term is calculated in the
table below.
Year Lease rental
($)
PV factor @10% pa Present value of lease rental ($)
01.06.2015 10,000.00 1.0000 10,000.00

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FINANCIAL ACCOUNTING 2
01.06.2016 10,000.00 0.9091 9,090.91
01.06.2017 10,000.00 0.8264 8,264.46
01.06.2018 10,000.00 0.8183 8,182.64
Present value of lease rent 35,538.01
The lease term is for 4 years which is also the expected life of the motor vehicle leased.
Considering that the present value of lease rental is $35,538.01 which is similar to the fair value
of the machine at the inception of the lease hence, the lease has all the characteristics of a finance
lease. Hence, the accounting team of Pewter Limited shall record the lease as finance lease in its
books of accounts.
Issue 2:
AASB 15 and AASB 18 deal with the matter of revenue in the books of accounts of an
organization. According to AASB 15, revenue from contracts with customers shall be recognized
in the books of accounts when there is no uncertainty regarding the final collection of revenue or
the revenue has been received from the customers and the contract has been completed.
AASB 118 further states that revenue shall be recognized by an entity when the products or
services as the case may be have been delivered / provided and the revenue has either been
received or to be received in the future without any uncertainty. In case any uncertainty in
regards to the final receipt of revenue, revenue recognition is postponed to the extent such
uncertainty remains.

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FINANCIAL ACCOUNTING 2
The installation fees of $2000 shall be recognized by Con Pewter Limited immediately after
completion of installation provided there is no uncertainty in receiving the installation fees. The
technical support service charge of $1000 shall be recognized in timely basis as it is received for
two years. Hence, $500 each shall be recognized in each year when the services shall be
provided.
In case of combined contract of goods and services of $3400, it shall be recognized only after it
becomes due. However, for the service charge part the amount shall be recognized in timely
basis by recording liability against the receipt for the part of the revenue that denotes services to
be provided in second year (Benavides, 2015).
Date: 27th May, 2019
Place: Australia
Regards,
(Name of the student)

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FINANCIAL ACCOUNTING 2
References
Benavides, L. (2015). Flattening the Revenue Recognition Standard. SSRN Electronic Journal,
1(4), pp.15-35.
Lin, K. and Graham, R. (2017). How Will the New Lease Accounting Standard Affect the
Relevance of Lease Asset Accounting?. SSRN Electronic Journal, 2(3), pp.12-38.