Intermediate Financial Accounting Assignment Solution - Rhodes Ltd

This document presents a comprehensive solution to an intermediate financial accounting assignment. The solution addresses three key questions. The first question focuses on the revaluation model for property, plant, and equipment, specifically a machine acquired by Rhodes Ltd, detailing depreci...Read More

Intermediate Financial Accounting

Answer no.1 )
On 1st July a machine was acquired for $ 170000.
The useful life of machine is estimated at 5 years.
The residual or scrap value after 5years= $ 20000.
Calculation of depreciation amount
1st year = 170000-20000/5
= $30000
The carrying amount that is the value which is to be carried in the balance sheet after 1st year
Cost of the machine 170000
Less: scrap value 20000
Less: amount of deprecation 30000
Therefore the carrying amount $140000
The fair value of the asset on 30th June 2016 = 120000
Therefore it can be seen that the carrying amount is less than the fair value of the assets so
140000-120000 = 20000 will be shown as a downward revaluation.
Journal entry
For depreciation
Accumulated depreciation account DR $30000
To Machinery account CR $30000

For loss on revaluation
Profit and loss account DR $20000
To Machinery Account CR $20000
2nd year
Carrying amount of machinery
Cost of machine 120000
Less: Accumulated depreciation 30000
Carrying amount of Asset $90000
At the end of 2nd year, the fair value is determined at 110000
The difference between the fair value and the carrying amount is $20000. This difference is
upward revolution.
Journal entry at the end of second year in case of depreciation
Accumulated depreciation A/c DR 30000
To Machinery A/c CR 30000

Journal entry for Fair value gain of $20000.
Machinery A/c DR 20000
To Profit and loss A/c CR 20000
The loss of $20000 has been adjusted against the loss of previous year which was transferred
to Profit &loss statement.
The fair value on 30th June 2018 is 88000
The carrying amount at the third year-end is calculated as follows:
Cost of the asset will be the fair value of previous year 110000
Less: depreciation (accumulated) 30000
Carrying amount to be capitalized 80000
The difference after comparing the fair value and carrying value comes to 8000. This 8000 is
upward revaluation.
Journal entry
For Depreciation
Accumulated depreciation A/c DR 30000
To Machinery A/c CR 30000
Journal entry for upward revaluation
Machinery Account A/c DR 8000

To Revaluation Reserve (Other comprehensive income) A/c CR 8000
The gain of $ 8000 will be transferred to an account known as OCI.
Answer no. 2)
A provision is defined as an uncertain liability arises due to the timing difference or
uncertain timing. An organization should record the provision only when any present
obligation has been arisen due to any past event or transaction. If there is a probability or
certainty of the outflow of resources and also the outflow can be reliably measured the
provision should be immediately recognized. According to Hossain, Kummer & O’Leary
(2015), the amount which will be recognised or recorded as a provision shall be the best
judgement of those expenditures which are required to be settled at the date of the reporting
period. The estimated amount of cash outflows are computed by the management of an
organization. The entity should calculate the present value of any cash outflow by applying
the discounting rate. According to Mookdee & Bellamy (2017), the discounting factor or the
annuity factor shall not carry any risk to determine the present value of the future cash flows.
While computing the provision amount the gain which arises due to sale of any asset shall not
be included. If it is certain that the outflow will not be required in future for settlement of any
liability then the entity should reverse the provision amount. Some examples for which
provision would be required such as in case of warranty claims or case of lawsuit, customer
refunds, etc.

In the given case Brunswick limited which discharged accidentally high toxic in November
and December and because of this the water ecosystem has been seriously damaged.
Brunswick limited has been asked by the court to incur certain expenditure on the water
ecosystem to restore it so the expenses related to the restoration have been estimated by
Brunswick limited. The provision amount is required to be made by Brunswick limited and
the discounting factor of 4% has been taken to calculate the amount. The annuity factor
which has been taken is risk-free. The discounting factor of 3% has not been considered
because it will used to adjust the future outflow of cash while the 4 percent annuity factor is
based on the government bond.
Expenditure (a) Probability (b) discounting factor@4% (c) Present value (a*b*c)
$800000 0.60 0.961 461280
$900000 0.30 0.924 249480
$600000 0.10 0.889 53340
764100
So the company should make a total provision amount of $764100 which will be expensed in
future to fix the water ecosystem.
Answer no. 3)
a) (i) At first, the organisation incurs expenditure for the acquisition of the resources and
then huge amount of expenditures are incurred to develop the intangibles and also for
maintenance of resources. These resources are further developed by implementing
innovative ideas, know-how, and technical knowledge. The resources then convert

into intangibles assets which will give further benefits to the entity. There are many
examples of intangibles assets such as software, goodwill, copyright, patent, know-
how, license, motion pictures, trademark, franchise, etc. According to Lam (2018), the
intangible assets do not have any physical existence and are classified as non-
monetary assets that are identifiable. The intangibles assets should be capable of
being sold, exchanged, licenced, and transferred by the entity. The intangible assets
should also have the capacity of being traded in the market. Bitcoins lacks the
characteristics of physical existence. According to Powell & Hope (2018), the
bitcoins can be easily traded in the market and so the bitcoin satisfies the definition
criteria of intangibles assets.
ii) the recognition or measurement criteria of intangible assets are:
 amount of expenditure which is expensed by the firm or entity should be
recorded immediately as and when the expenditure is incurred.
 All the assets which are intangibles shall initially be recorded at cost.
 If an asset is purchased in case of corporate restructuring or business
combination then the intangible assets should not be recognised.
 the expenses which are incurred on the development stages shall only be
recorded if the expenses meet certain criteria such as 1) technical feasibility
has been developed 2) the intangible has the ability to sell or used by the
entity 3) the asset will provide or generate economic benefits in the future
4) the total expenses on intangible assets can be measured reliably 5) a
clear intention to develop the assets.

 the goodwill which is generated internally shall not be measured or
reported as an intangible asset.
 If the intangibles are exchanged with another non-monetary asset then the
fair value of the receiving asset should be considered and if the fair value is
not available then the fair value of the given asset should be taken and if
both the values are not available then the amount of the given asset which
needs to be capitalized by the organization should be recognized.
b) I) As the cost of the bitcoin can be measured reliably and are also traded on the
security exchange the revaluation model can be applied for the measurement of
bitcoin. According to Foy (2019), if the value of intangibles decreases then it can be
recorded to P&L account and if the intangibles value increases then the profit on
revaluation should be transferred to OCI account. As the bitcoin meets the definition
process of intangibles AASB138 specifies that the bitcoin should be treated as per the
provision of AASB2. So it should be reported by the company by comparing the
lower of net sale value or the cost. While recognising bitcoin it should be converted
into the functional currency of the organization as per AASB 21. Any amount of
impairment in the bitcoins should be written off.
ii) An asset life will be indefinite if the benefit from the asset will flow for an infinite
period to the entity. Bitcoin is also considered as that type of intangibles from where the
benefit will for infinite life. Bitcoins are not classified as financial assets. The expenditures
on bitcoins will not be allowed to write off. According to Procházka (2018), the bitcoins

should also be tested annually for any impairment in its value an if there is any indicator of
impairment then the bitcoin value will be impaired accordingly.

References
Foy, J. (2019). Financial Accounting Classification of Cryptocurrency. 6(1). pp.55-91
Hossain, M., Kummer, T., & O’Leary, C. (2015). Successful implementation of written
communication across an accounting degree program. Business Education &
Accreditation, 7(1), 43-56.
Lam, P. P. Y. (2018). Write-offs of exploration and evaluation assets in Australian mining
development stage entities: determinants and stock price reactions (Doctoral
dissertation).
Mookdee, T., & Bellamy, S. (2017). Asset classification, subsequent measurement and
impairment testing for carbon emission trading. European Financial and
Accounting Journal, 12(3), 65-86.
Powell, K., & Hope, M. (2018). Shifting digital currency definitions: current considerations
in Australian and US tax law. eJTR, 16, 594.
Procházka, D. (2018). Accounting for Bitcoin and other cryptocurrencies under IFRS: a
comparison and assessment of competing models.

References