Accounting for Rebates, Financial Statements and Lease Standards

This assignment provides solutions to several accounting questions. It includes journal entries for machinery depreciation, salvage value, and new purchases. It analyzes financial statements, including adjustments for inventories, accounts receivable, insurance, and provisions. The assignm...Read More

Questions

TABLE OF CONTENTS
QUESTION 1..................................................................................................................................3
Question 2........................................................................................................................................3
Question 3........................................................................................................................................5
Question 4........................................................................................................................................5
1 Correct accounting treatment for rebate...................................................................................5
2 Accounting theory of Rebate....................................................................................................5
3 Mechanistic hypothesis.............................................................................................................6
Question 5........................................................................................................................................6
QUESTION 6..................................................................................................................................8
References......................................................................................................................................10

QUESTION 1
Journal entries:
Date Name Debit Credit
30/06/15 Depreciation expense
a/c Dr
To accumulated
depreciation a/c
12000 12000
30/06/17 Salvage value a/c Dr
Accumulated
depreciation a/c Dr
To Machinery a/c
51000
24000
75000
31/12/17 Purchase a/c Dr
Machinery A a/c Dr
To cash
90000
66000
24000
Question 2
Financial statement
Assumption: Treatment of additional information is from 20X9
Particular Amount 20X8 Amount 20X9
Current assets
Inventories 145000 767000
Cash received - 8000
Accounts receivables 4,20,000 3,50,000
Allowances for doubtful debts (21000) (42000)
Insurance 25000 22000
Less : Deduction - 22000
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Equipment 6,00,0000 6,00,0000
Accumulated depreciation (60,000) (120000)
(16107) (16107)
Intangible assets 1,80,000 1,20,000
Goodwill 152,0000 1,56,000
Liabilities
Services revenue received in
advanced
17,000 12500
Warranty payable 35000 1100000
Provision for long services
leave
28000 25000
Taxable profit for 20X9
Particular Amount
Income
Cash received 8000
Account receivable 3,50,0000
Expenses
Services revenue received in advanced 12500
Warranty payable 1,10,000
long services leave 25000
Profit before tax 2,10,5000
Less : Tax (73675)
Total income 136825
Journal entry
Entry Debit Credit
Remit tax payment 73675
To cash 73675
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Question 3
Entry Debit Credit
Right to use asset 96000
Lease liability 96000
General expense 300
Cash 300
Question 4
1 Correct accounting treatment for rebate
Rebate should be recorded as reduction to the cost which is related to inventory. But sometimes
rebate do not relate to the inventory purchase. In the given scenario Winsor ltd has purchased
large quantity of products from supplier A. But the rebate has cash value because it is being
given to customers after the entire purchase. It may be treated as coupon so the rebate paid for by
the A supplier it can be treated as reduction in cost of goods sold. CFO of this company
recoded increase in profit and loss is of $40K.
Journal entry
Particular Debit Credit
Purchase a/c $1M
To supplier A $1M
Bill payable account $1M
To Bill receivable a/c 960000
To rebate account 40000
So the correct accounting treatment for rebate is being mentioned above as the purchase is
getting as the purchaser is getting rebate of $40K from the seller when they purchase from
Supplier A so further purchaser can give discount to their customers.
2 Accounting theory of Rebate
Rebate is also known as the payment back to buyer a portion of their money when they purchase
the products in bulk. It is a kind of benefit and temporary discount which is being given to buyer.
For this reason, it is one of the important treatment for the business and necessary to mention in
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the books of accounts (Sadeghi and et.al 2021). This is why, CFO of this company has recorded
this in their books. There are few rebate accounting theory is present which states that overall
treatment of rebate is very necessary so that the purchaser may enjoy the benefit of discounts.
Theory of rebate speaks about the various set of assumptions, frame work, and standards which
is being used to make the treatment of rebate. One of the common theory which is used for
rebate is financial accounting theory. This theory says that reporting of transaction is very
important whether it is the transaction of rebate or any other. For this reason, this theory is also
known as positive accounting theory as it shares all the accurate and correct answers.
3 Mechanistic hypothesis
As per the Mechanistic hypothesis, the share price of Winsor Ltd will rise in the market because
the company is doing bulk buying and also they are getting rebate (Rodemeier, 2021). So this
will directly be going to impact the share price and market share of the company. In near future
company will get benefit from this rebate and purchase. Due to the accounting performance of
the company in the fiscal year, company will get new investors as well.
This will further lead to have an impact over the P&L account in terms of making reduction of
profits and raising of loss. It would be right to said that with the implication of new standard of
lease the P&L will affect in terms of making rise in loss and balance sheet will affected in terms
of making changes in the value of assets and liabilities. Similarly, cash flow will also decrease
because lease will be treated as an asset and making it availed to other would lead to have an
impact over decrease in the value of asset in case if the business make any lease to other.
Likewise, the ratio of leverage and Return on Assets will also positively affected because lease
will be treated as an asset and it may positively impact them.
Question 5
1. Revenue to be recorded
Percentage of contract completed:
Labour 61000 (120000 – 59000)
Material 143000 (470000 – 10000 – 7000 310000)
Total completed contract cost 204000
Estimated cost of contract 800000
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Percentage of contract completed 204000 / 800000 * 100
= 25.5%
Revenue recognised:
1000000 * 25.5%
= 255000
2. Journal Entry
Cleland Ltd a/c Dr. 255000
To Sales 255000
(Sales being made to Cleland Ltd.)
Bank a/c Dr. 400000
To Clenland Ltd 255000
To advance payment 145000
(Being payment made against the contract output of which only
255000 worth of contract part is completed that will be
recognised as a revenue the rest of the payment will remain
advance till the time contract do not get completed of the
respective part)
3. The material loss will not be capitalised rather it will be treated against the profit for the
respective financial year. This is an abnormal loss which is not capitalised rather treated
as an expense for the respective financial year. There is not any policy specified about the
percentage of material wastage treated as an idle loss so the entire loss would be treated
as abnormal and will treat against the profitability of the respective time.
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QUESTION 6
A)
As per the lease AASB 117 a lease will be classified and determined as financial lease if
there is a transfer of risk and rewards along with the ownership of the asset. Also finance lease
need to be shown on the asset side of the balance sheet against the liability (Guidance for AASB
16 Leases, 2020).
While AASB 116 make removal of all the distinction between operating and finance lease. It
also raise the recognition of right to use assets and lease liability on balance sheet.
This agreement also make focus towards the aspect that whether there is any existence of
any right that is related with the use or control of asset. This proves to be beneficial with respect
to make identification that whether there is a lease or contract or service or both. However, this
was not made available in case of ASSB 117.
In addition, of this another major difference is the treatment of lease in balance sheet. As in
ASSB 117 the lease asset is shown in balance sheet and treated as an assets with the
charging of depreciation. However, it will be different in case of ASSB 116 which says that all
leases will be treated under single account of lease in balance sheet and treated as finance lease
as per ASSB 117 but with certain exception. This includes making payment of low value assets
or lease within a period of 12 months.
B)
AASB 16 is having a direct and major impact over the firm's financial statements
including profit and loss account along with balance sheet. As per new lease standard all lease
need to be shown in the balance sheet which will lead to raise the value of assets and liabilities.
This will also lead to have a rise in gearing as well as debt measures (New Australian accounting
pronouncements, 2020). This means that it will raise the debt level of the company. With an
increase in debts and gearing the amount of expenses in terms of interest and other expenses also
raise. Likewise, being presence in balance sheet and making treatment as an asset would also
lead to have a raise in the amount of depreciation. This will further lead to have an impact over
the P&L account in terms of making reduction of profits and raising of loss. It would be right to
said that with the implication of new standard of lease the P&L will affect in terms of making
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rise in loss and balance sheet will affected in terms of making changes in the value of assets and
liabilities. Similarly cash flow will also decrease because lease will be treated as an asset and
making it availed to other would lead to have an impact over decrease in the value of asset in
case if the business make any lease to other. Likewise, the ratio of leverage and Return on Assets
will also positively affected because lease will be treated as an asset and it may positively impact
them.
C)
As per bonus plan hypothesis, managers of the firm want to choose accounting
procedures that enable them to make shift in reported earning from future to current period. This
will lead to have a raise in the percentage of their bonus.
However, debt convent hypothesis states that closure of the firm is having a relation with
the compromising of debt covenants. They are also more likely to make use of accounting
policies which will lead to a shift in the future earning to present.
With regard to the above hypothesis managers will definitely like the AASB 116 because
it enables the long term lease to be present on the balance sheet which will further assist the
managers to make earning which is the priority choice of managers. Likewise, as the AASB 116
make early repayment of short term lease which will further lead to assist the managers in raising
their earning and income.
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References
Books and journal
Rodemeier, M., 2021. Buy baits and consumer sophistication: Theory and field evidence from
large-scale rebate promotions (No. 124). CAWM Discussion Paper.
Sadeghi, F. and Hemmati, M., 2021. Rebate Contracts. In Influencing Customer Demand (pp.
59-76). CRC Press.
Online references
Guidance for AASB 16 Leases., 2020. [Online]. Available through
<https://www.treasury.nsw.gov.au/sites/default/files/2017-04/Guidance%20for
%20AASB%2016%20Leases%20-%20New%20Lease%20Standards.pdf>
New Australian accounting pronouncements., 2020. [Online]. Available through
<https://assets.ey.com/content/dam/ey-sites/ey-com/en_au/pdfs/ey-new-au-aactg-
pronouncements-30-april-2020.pdf>
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