MAA261 Financial Accounting Assessment Solution - Deakin University

This document presents a comprehensive solution to a financial accounting assignment, addressing key concepts such as depreciation methods and the application of accounting standards. The solution includes a detailed journal entry to record machinery disposal expenses and revised depreciation calculations after an overhaul, considering the asset's fair value and working hours. It also provides a discussion on depreciation as an expense versus a fund, referencing AASB 116 and its guidelines. The assignment further explores a case study involving a building's fair value assessment and the implications of changing depreciation methods, emphasizing the importance of consistency in financial reporting. The document concludes with recommendations regarding the company's accounting practices, ensuring the comparability of financial reports. References to relevant accounting standards and literature are also provided.

Running head: FINANCIAL ACCOUNITNG
Financial Accounting
Name of the Student:
Name of the University:
Author’s Note:

1FINANCIAL ACCOUNTING
Table of Contents
Answer to question 4:.................................................................................................................2
Answer to question 5:.................................................................................................................2
References and bibliography:.....................................................................................................5

2FINANCIAL ACCOUNTING
Answer to question 4:
Dragon’s Fire Pty Ltd
General Journal
Date Particulars Debit Credit
30-Jun Machinery $ 9,000
Machinery Disposal Expense $ 700
GST Paid $ 970
Bank $ 10,670
(To record machinery overhauled and
machinery disposal expenses paid)
Computation of Revised depreciation after the machine was overhauled:
Fair Value of Machinery as on 1 July 2019 $ 1,80,000
Less: Residual Value $ 3,758
Depreciable Amount $ 1,76,242
Total estimated working hour of the machine 40,000
Working hours in first three years (13000+10000+8000) 31,000
Depreciation charged in first three years ((176242/40000)*31000) $ 1,36,588
Written down value as on 1 July 2022 (180000-136588) $ 43,412
Add: Addition on 1 July 2022 $ 9,000
Total Value as at 1 July 2022 $ 52,412
Less: Estimated residual value $ 4,000
Depreciable amount as at 1 July 2022 $ 48,412
Working hours left for the next two years 9,000
Add: Additional working hours 16,000
Total estimated working hours remaining as at 1 July 2022 25,000
Depreciation in the fourth year ((48412/25000)*(5000+4000)) $ 27,111
Depreciation in the fifth year ((48412/25000)*(4000+4000)) $ 15,492
Depreciation in the sixth and seventh year ((48412/25000)*4000) $ 7,746
Answer to question 5:
Depreciation is the gradual decrease in the value of a tangible fixed asset due to
natural wear and tear or any other factors. When an asset is purchased the total cost of
purchase and all the incidental expenses which are incurred to bring the asset in usable

3FINANCIAL ACCOUNTING
condition are capitalised and subsequently it is recognised as an expense over the useful life
of the asset. There are various methods of charging depreciation. as the fund is already spent
for acquisition of the asset, subsequently charging depreciation and keeping a part of the
profit aside in accumulated depreciation is a process of creating another fund for easy
replacement of the asset. Hence, some author considers the depreciation as a fund for
replacement of the asset. However, most of the authors considered the depreciation as an
expense and a charge against profit. There are specific accounting standards and guidelines
for computation of depreciation and charging depreciation in the books of accounts
(Choudhary, Merkley and Schipper 2017).
AASB 116 deals with the accounting and reporting of the Property, Plant and
Equipment. It specifies the methods of charging depreciation for each class of assets and for
different forms of business organisation. There are certain guidelines from the income tax
department also for claiming depreciation as a deductible expense from the incomes.
Therefore, in financial books of accounts depreciation needs to be charged following the
provisions of accounting standard AASB 116 (AASB 2014).
In the given case study, building was acquired on 30 June 2019 and the management
follows a straight line method of depreciation assuming 10 years working life of the building.
On 30 June 2021, the company assed the fair value of the building and the management
propose to change the method of charging depreciation. Fair valuation of assets and restating
the value of assets to their fair value expresses the correct financial position of the company,
but it does not require changing the method of charging depreciation unless there is a major
change in use and nature of the asset. Hence, if there is such a major change which
completely changes the nature and use of the asset, then only the method of charging
depreciation can be changed accordingly.

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There are various qualitative characteristics of financial accounting and reporting, and
Consistency is one of the most important of them. As per the doctrine of consistency it is
assumed that an organisation will be following same principles and policies consistently
without a major change unless it is required statutorily. Frequent change in accounting
principles and policies of an organisation makes the financial report incomparable with the
others even it cannot be compared with their own performance. Hence, changing the method
of depreciation violates the Doctrine of Consistency which impacts one of the most important
qualitative characteristics of financial reporting. Therefore, it can be recommended for the
company, to restate the value of building to its fair value but they should not change the
method of charging depreciation on building as it may have an impact on the comparability
of their financial reports (Choudhary, Merkley and Schipper 2017).

5FINANCIAL ACCOUNTING
References and bibliography:
AASB, 2014. AASB 116 Property, Plant and Equipment.
AASB, C.A.S., 2015. Investment property.
Choudhary, P., Merkley, K.J. and Schipper, K., 2017. Qualitative characteristics of financial
reporting errors deemed immaterial by managers. Available at SSRN 2830676.
Laing, G. and Perrin, R.W., 2014. Deconstructing an accounting paradigm shift: AASB 116
non-current asset measurement models. International Journal of Critical Accounting, 6(5/6),
pp.509-519.