MAA261 - Financial Information Evaluation with Accounting Standards

This report provides a detailed financial evaluation of Adams Australia Pty Ltd, focusing on the application of various accounting standards. It covers the recording, expensing, and reporting of non-current assets, inventories, and accounts receivables. Key areas explored include the acquisition of assets (buildings, warehouses, and drilling equipment) according to AASB 116, the cost and depreciation of a robotic assembly machine, inventory valuation using the weighted average method (AASB 102), impairment of drilling equipment (AASB 136), and the understatement of provision for doubtful debts (AASB 108). The report also addresses the impact of a warehouse damage event and building revaluation, ensuring all transactions are recorded in compliance with relevant accounting standards. The analysis includes journal entries for various transactions and assesses the effect of different accounting methods on the company's financial performance.

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EVALUATION OF THE FINANCIAL INFORMATION WITH ACCOUNTING
STANDARDS
ADAMS AUSTRALIA PTY LTD
1/12/2019
admin

Contents
INTRODUCTION...........................................................................................................................................3
ACQUISITION ASSETS...................................................................................................................................3
AMOUNT TO BE RECORDED IN THE BALANCE SHEET FOR THE ASSETS AND JOURNAL ENTRY................3
CALCULATION OF DEPRECIATION AND CARRYING AMOUNTS................................................................3
NEW MACHINE............................................................................................................................................4
COST OF THE ROBOTIC ASSEMBLY MACHINE AND JOURNAL ENTRY.......................................................4
ELEMENTS OF MACHINE COST WITH REFERENCE TO ACCOUNTING STANDARD....................................4
ANNUAL DEPRECIATION EXPENSE...........................................................................................................4
EFFECT ON ESTIMATED FULL YEAR PROFIT..............................................................................................5
INVENTORY PURCHASES / STOCK TAKE.......................................................................................................5
JOURNAL ENTRY – PERIODIC INVENTORY METHOD................................................................................5
CONCEPT OF OWNERSHIP.......................................................................................................................6
CALCULATION OF CLOSING STOCK – WEIGHTED AVERAGE.....................................................................6
JOURNAL ENTRY – SALE OF CONVEYOR SYSTEM AND COST ASSOCIATED...............................................7
EFFECT OF NEW ITEMS VALUE ON CLOSING STOCK................................................................................8
DRILLING EQUIPMENT.................................................................................................................................8
IMPAIRMENT...........................................................................................................................................8
RECORDING OF IMPAIRMENT OF DRILLING EQUIPMENT........................................................................8
RECORDING OF SALE OF DRILLING EQUIPMENT......................................................................................9
ACCOUNTS RECEIVABLE............................................................................................................................10
REASON FOR UNDERSTATEMENT OF PROVISION FOR DOUBTFUL DEBTS.............................................10
JOURNAL ENTRY FOR NON COLLECTION OF DEBT.................................................................................10
WAREHOUSE DAMAGE..............................................................................................................................11
JOURNAL ENTRY FOR IMPAIRMENT OF WAREHOUSE...........................................................................11
BUILDING REVALUATION...........................................................................................................................12
CONECPT OF VERIFIABLE MEASUREMENT.............................................................................................12
CONCLUSION.............................................................................................................................................12
REFERENCES..............................................................................................................................................13

INTRODUCTION
Accounting standards are the backbone for each type of organization. It is because of the major reason
that it paves the way as to how the particular accounting transaction is required to be recorded in the
books of accounts and in turn how the financial position and financial performance of the company shall
be reported to the stakeholders of the company. Through this report, the emphasis has been laid on the
detail of recording of each and every transaction and that too with reference to the relevant accounting
standards. The report is based on the transactions entered by Adams Australia Pty Ltd and has covered
main aspects of the recording of the non-current assets, inventories and accounts receivables. In order
to achieve the objects, the report has been divided into seven main headings and sub headings included
therein.
ACQUISITION ASSETS
AMOUNT TO BE RECORDED IN THE BALANCE SHEET FOR THE ASSETS AND
JOURNAL ENTRY
The amount to be recorded in the balance sheet for the Assets will be $ 1300000 as the value equal to
the cost of the asset or the market price whichever is lower (Para 2, AASB 116).
Date Particulars Debit Credit
01-01-2014 Building $717,532
Warehouse $405,195
Drilling Equipment Account $177,273
Cash $1300000
(Being assets recorded as Para
number 2 of AASB 116)
Particular Fair Value Purchase Value
Building $850,000 $717,532
Warehouse $480,000 $405,195
Drilling Equipment $210,000 $177,273
Total $1,540,000 $1,300,000
CALCULATION OF DEPRECIATION AND CARRYING AMOUNTS

NEW MACHINE
COST OF THE ROBOTIC ASSEMBLY MACHINE AND JOURNAL ENTRY
The cost of the machine includes the purchase cost and any other incidental expenses which is
necessary to be incurred to bring the machinery to the current location and condition (Para 4, AASB
116). In view of the above statement, the cost of the robotic machine is as follows:
Amount in Dollar
a) Purchase Cost € 320,000
Conversion Rate for 08-08-2018 0.62 $ 198,400
b
) Shipping Charges $ 24,000
c) GST $ 53,300
d
) Modification Work $ 12,000
Total Cost of New Machine $ 287,700
ELEMENTS OF MACHINE COST WITH REFERENCE TO ACCOUNTING STANDARD
With reference to AASB 116, elements of the cost are:
- Cost of purchase
- Installation cost
- Shipping and insurance charges and other transportation
- Duties and Taxes and
- Any other expense for bringing the machine to the present location and condition.
ANNUAL DEPRECIATION EXPENSE
Straight Line - Depreciation
Particulars Amount
Purchase Value $287,700
Depreciation for 2018 - 4 months ($287700 / 8 *4 / 12) $11,988
Carrying Amount 31-12-2018 $275,713
Units of Production - Depreciation
Particulars Amount
Purchase Value $287,700

Total Hours of Machine 2500
Hours of Usage 120
Depreciation for 2018 - 4 months ($287700 / 2500 * 120) $13,810
Carrying Amount 31-12-2018 $273,890
EFFECT ON ESTIMATED FULL YEAR PROFIT
If straight Line method is used then the profit will be reduced to $400000 - $ 11988 = $388013
If hours of usage method is used then the profit will be reduced to $400000 - $ 11988 = $386190
INVENTORY PURCHASES / STOCK TAKE
JOURNAL ENTRY – PERIODIC INVENTORY METHOD
Date Particulars Debit Credit
03/07/2018 Inventory Purchase 880000
Cash 880000
Cash 1980000
Sales 1980000
10/08/2018 Inventory Purchase 55000
Cash 55000
Cash 110000
Sales 110000
10/08/2018 Inventory Purchase 55000
Cash 55000
Cash 148500
Sales 148500
03/09/2018 Inventory Purchase 275000
Cash 275000
Cash 412500
Sales 412500
10/10/2018 Inventory Purchase 330000

Cash 330000
24/10/2018 Inventory Purchase 24750
Cash 24750
31/10/2018 Inventory Purchase 22000
Cash 22000
17/11/2018 Inventory Purchase 110000
Cash 110000
31/12/2018 Closing Inventory 660000
Cost of Goods Sold (Bal. Fig.) 1091750
Beginning Inventory 0
Purchases 1751750
TOTAL 6154500 6154500
CONCEPT OF OWNERSHIP
In case of the goods sold by MPA Pty Ltd, the ownership lies with consignor till the time when the risk
and rewards relating to the ownership of goods is transferred to the consignee – Adams Australia Pty Ltd
(Para 2, AASB 102). In the given case, the payment is when made when the conveyor is sold to the
company and therefore when the goods are transferred to the company, it means that the risks and
rewards is also transferred and thus ownership has also been transferred.
CALCULATION OF CLOSING STOCK – WEIGHTED AVERAGE
STOCK VALUATION - WEIGHTED AVERAGE
Purchase Sale
Quantity Rate Amount Quantity Rate Amount
Drills
03/07/2018 1000 880 880000 900 2200 1980000
10/10/2018 500 660 330000
Detonators
10/08/2018 250 220 55000 200 550 110000

24/10/2018 150 165 24750
Dynamite
10/08/2018 1000 55 55000 900 165 148500
31/10/2018 500 44 22000
Flow Measurement Device
03/09/2018 100 2750 275000 75 5500 412500
17/11/2018 50 2200 110000
Total Purchases / Sale 3550 1751750 2075
Weighted Average Cost per unit
(1751750 / 3550) 493
Closing Inventory (units) 1475
(3550-2075)
Value of Closing Inventory 727840
JOURNAL ENTRY – SALE OF CONVEYOR SYSTEM AND COST ASSOCIATED
Date Particulars Debit Credit
12-11-2018 Accounts Receivable $775000
Sale – Conveyor System $775000
(Being the sale recorded)
Purchase – Conveyor System $440000
MPA Pty Ltd $440000
(Being the purchase recorded – 75%)
Labor Cost $146667
Cash $146667
(Being the labor cost incurred – 25%)
EFFECT OF NEW ITEMS VALUE ON CLOSING STOCK
With the revised prices, the value of the closing stock will be decreased (Para 10, AASB, 102).

DRILLING EQUIPMENT
It is the second non –current asset of the company.
IMPAIRMENT
As per the provisions of the Australian Accounting Standard Board number 136 on the impairment of
Assets, every asset shall be tested for the impairment on the regular basis and at the most at the end of
each accounting year. Impairment is the amount which is the loss for the company, being a non cash
item. It is equal to the excess amount of the carrying value of the asset as on the date over the amount
which can be recovered from the asset. The former is known as the carrying value of the asset and the
later is known as the recoverable amount (Para 6, AASB 136).
If the company does not conduct the impairment test on regular basis then there are the high chances
of having the inflated value of the asset which otherwise shall be equal to the recoverable amount. At
the end of each reporting period, the company shall test in case of each assets whether there are any
indication for the impairment (Para 9, AASB 136). Indication includes significant decline in the market
value of assets or changes in the legal environment in which the company is currently operating and etc.
RECORDING OF IMPAIRMENT OF DRILLING EQUIPMENT
In the given case, an independent valuation has been done within which following values has been
identified:
- Net Selling Price = $60000
- Value in Use = $30000
Recoverable amount is higher of above = $ 60000
Carrying amount = $85800
Impairment Loss = $85800 - $60000 = $25800
Drilling
Particulars Amount
Purchase Value as on 01-01-2014 $177,273
Less Salvage Value $21,273
Depreciable Value $156,000
Depreciation for 2014 $15,600
Carrying amount as on 31-12-2014 $140,400
Depreciation for 2015 $15,600
Carrying amount as on 31-12-2015 $124,800
Depreciation for 2016 $15,600
Carrying amount as on 31-12-2016 $109,200
Depreciation for 2017 $15,600

Carrying amount as on 31-12-2017 $93,600
Depreciation for 2018 $7,800
Carrying amount as on 30-06-2018 $85,800
Date Particulars Debit Credit
30-06-2018 Impairment Loss Account $25800
Drilling Equipment Account $25800
(Being the impairment loss booked
as Para number 58 to 64 of AASB
136)
RECORDING OF SALE OF DRILLING EQUIPMENT
On the sale of equipment, the loss or profit on sale of asset is accounted for in the books of account.
Date Particulars Debit Credit
31-07-2018 Bank Account $35000
Loss on Sale of Asset $46900
Drilling Equipment Account $81900
(Being the asset sold and loss
booked)
Drilling
Particulars Amount
Purchase Value as on 01-01-2014 $177,273
Less Salvage Value $21,273
Depreciable Value $156,000
Depreciation for 2014 $15,600
Carrying amount as on 31-12-2014 $140,400
Depreciation for 2015 $15,600
Carrying amount as on 31-12-2015 $124,800
Depreciation for 2016 $15,600
Carrying amount as on 31-12-2016 $109,200
Depreciation for 2017 $15,600

Carrying amount as on 31-12-2017 $93,600
Depreciation for 2018 $7,800
Carrying amount as on 30-06-2018 $85,800
Depreciation for 3 months $3,900
Carrying Amount as on 30-09-2018 $81,900
Less Sale Value of Asset $35,000
Loss on Sale of Asset $46,900
ACCOUNTS RECEIVABLE
Accounts receivable is the current asset for the company and is amounting to $171000 as on 30th of June
2018.
REASON FOR UNDERSTATEMENT OF PROVISION FOR DOUBTFUL DEBTS
The provision for doubtful debts has been understated by the company from $81000 to $ 19000. It is
because of the change in accounting estimates that the company has adopted due to non consideration
of the report of the credit expert by the management of the company (Para 32 - 35 , AASB 108). The
information of the credit expert has not been considered as reliable by the company. Secondly, in order
to reflect the higher profits of the company, the provision has been reduced to the low level of only
$19000 instead of $81000.
JOURNAL ENTRY FOR NON COLLECTION OF DEBT
As per the direct write off method of writing off the amounts which are not recoverable , the bad debts
account is debited and the concerned accounts receivable account is credited with the amount which is
not recoverable.
Date Particulars Debit Credit
31-07-2018 Bad Debts Expense $90000
Account Receivable Account $90000
(Being the amount written off
using direct write off method and
as per Para 32 of AASB 136)
WAREHOUSE DAMAGE
The warehouse has been damaged by storm. The independent valuation report has provided the figures
of fair value, selling costs and value in use as on 31st of July 2018 amounting to $300000, $10000 and
$250000 respectively. Impairment is the loss which is charged to the particular asset and the statement
of profit and loss and is equivalent to the amount as carried in the financial statement as reduced by the

recoverable amount so as to make the carrying amount equal to the recoverable amount (Para 59,
AASB136).
In the given case, Recoverable amount is the higher of the fair value less selling costs and value in use.
- Fair Value Less Selling Costs = $300000 - $10000 = $290000
- Value in Use = $250000
Recoverable amount is higher of above = $ 290000
Carrying amount = $252026
Warehouse
Particulars Amount
Purchase Value as on 01-01-2014 $405,195
Less Salvage Value $80,000
Depreciable Value $325,195
Depreciation for 2014 $16,260
Carrying amount as on 31-12-2014 $308,935
Depreciation for 2015 $16,260
Carrying amount as on 31-12-2015 $292,675
Depreciation for 2016 $16,260
Carrying amount as on 31-12-2016 $276,416
Depreciation for 2017 $16,260
Carrying amount as on 31-12-2017 $260,156
Depreciation for 2018 $8,130
Carrying amount as on 31-07-2018 $252,026
Impairment Loss = NIL as carrying amount is less than the recoverable amount and hence no journal
entry is required to be done in the books of accounts.
JOURNAL ENTRY FOR IMPAIRMENT OF WAREHOUSE
Date Particulars Debit Credit
31-07-2018 Impairment Loss Account NIL
Warehouse Account NIL
(Being the impairment loss booked
as Para number 58 to 64 of AASB
136)

BUILDING REVALUATION
Revaluation of building requires the correct valuation considering the changes that have occurred in the
past and some contingencies for future.
CONECPT OF VERIFIABLE MEASUREMENT
Verifiability is regarded as one of the qualifying characteristic feature of the financial statements of the
company. It provides the assurance to the users of the financial statements of the company that the
amount presented in the financial statements is faithfully presented and represents the amount that it
purports to represent (Para 2.29, AASB CF). There are two types of verification – one is direct and the
other one is indirect. In the given case it is neither the direct verification nor the indirect verification.
Also the verification can neither be said as observable nor unobservable. The value has been given by
the friend of the directors of the company for the building for $12, 00,000 which cannot be verified
without employing the registered valuer. Therefore, without verifying the value, no question arises of
having the value of the building recorded in the books of accounts only as per the value given by their
friend.
CONCLUSION
In the report, it is clearly exhibited that the accounting standards plays an important role in the
functioning of the company. Whether it is related to the acquisition of assets or related to the sale of the
assets or the recording of the transactions on the basis of the changes in market conditions and the
social and legal environment in which the company operates. The accounting of the transactions that
have been entered into by the company – Adams Australia Pty Ltd have been discussed in detail along
with the calculations with reference to the relevant accounting standards. The report has laid down the
main focus on the inventory recording and its valuation, impairment and asset valuation. Whole of the
report has flowed around the accounting policies and norms and detailing how the company shall record
the particular transaction in the books of accounts.
In order to conclude the report, the accounting function of every organization shall be given equal and
utmost importance as it forms the base for every function.
REFERENCES
AASB CF, (2014), “Framework for the preparation and presentation for financial statement”, available on
https://www.aasb.gov.au/Pronouncements/Conceptual-framework.aspx accessed on 12-01-2019.
AASB 108, (2010), “Accounting Policies, Changes in Accounting estimates and Errors”, available on
https://www.legislation.gov.au/Details/F2005B01544 accessed on 12-01-2019.

AASB 136, (2011), “Impairment of Assets”, available on
https://www.aasb.gov.au/admin/file/content102/c3/AASB136_07-04_ERDRjun10_07-09.pdf accessed
on 12-01-2019.
AASB 102, (2010), “Inventory”, available on
https://www.aasb.gov.au/admin/file/content105/c9/AASB102_07-15.pdf accessed on 12-01-2019.
AASB 116, (2015), “Property Plant and Equipment”, available on
https://www.aasb.gov.au/admin/file/content105/c9/AASB116_08-15_COMPoct15_01-18.pdf accessed
on 12-01-2019.