ACC204 Advance Financial Accounting Assignment

ACC204 Advance Financial Accounting Assignment

ACC204 Advance Financial Accounting Assignment

Question 1- Revaluation of fixed assets

The Australian accounting standard Board (AASB) has framed AASB 1041 which provides the procedure and rules which the company needs to follow at the time of the revaluation of its non- current assets. The standard doesn’t applies to certain class of assets which are inventory, foreign currency monetary assets, goodwill and investment (Androgen and Ozturk, 2015).The standard provides the way in which the fixed assets are measured after initial acquisition and the disclosure which are to be made related to it. As per the standard the fixed assets may be recognized on either cost or fair value basis. As per the cost basis the assets are recorded at the acquisition cost less accumulated depreciation. It may also be recorded at the carrying amount less subsequent depreciation and the accumulated recovered amount. The fair value is the amount for which assets could be exchanged or the liabilities which could be settled between the parties during the particular duration of time. The fair value measure has the presumption that the company will conduct its operation in the near future without the intention of liquidating or winding up of its operation. If the quoted market price of the assets is not available than the price is estimated by considering the best available market evidence in relation to the assets. If the assets are valued on fair value basis the frequency of the revaluation depends upon frequency and materiality of the change in the value of the assets and similar class. Some of the fixed assets are measured when it experience frequent and material movement in fair value. If the assets doesn’t show much movement than the revaluation can be made in every three year. The fixed assets can be also being revalued substantially on the same date in order to measure the assets in meaningful and aggregate way. The revaluation of the fixed assets helps in identifying the changes which were reported during the particular period by comparing cost with the market value. As per the applicable accounting standard fixed assets are recorded on the cost and are subsequently revaluated to ascertain its true reporting in the financial statement. The company cannot utilize revaluation profit as normal profit and is directly transferred to revaluation account (Hu, et. Al., 2015).On the other hand if the fixed assets records revaluation loss than it should be written off against the reserve and if not settled should be written off from current year profit in the form of impairment loss.

ACC204 Advance Financial Accounting Assignment

Accounting for revaluation of fixed assets

John Pty Company has done the revaluation of the fixed assets by identifying the difference between cost and the market value. As per the standard assets are recognized at the cost and market value whichever is less. If the company reports revaluation loss than it is written off from the profit of the current period or if report profit than is transferred to revaluation reserve which may be utilized to write off capital losses. The revaluation of the assets is done as follows-

1. Revaluation of Factory land (new) = 140000- 100000 = $40000  

 Revaluation of Factory land (old) = 120000- 150000 = $(30000)

After revaluating the fixed assets it was observed that the factory land old has shown a revaluation gain amounted to 40000. On the other hand old factory land has reported loss of 30000.

2.  As per the standard the cost of the assets are calculated after deducting accumulated depreciation from it.

Cost of building (new) - 70000-20000 = $50000

Cost of building (old) – 125000- 45000 = $80000

Revaluation of building (new) - 80000-50000 = $30000

Revaluation of building (old) - 70000-80000 = $(10000)

The company has reported profit on revaluation which was calculated as follows-

Particular

Revaluation  profit/loss

Factory(New)

 

   Land

40000

   Building

30000

Factory(old)

 

   Land

(30000)

   Building

(10000)

Revaluation reserve

30000

The revaluation reserve of $30000 will be shown on the liabilities side of the balance sheet under the head shareholder fund.

Journal entries

Serial no

Particular

Amount Dr in $

Amount Cr in $

1

Land (new)

40000

 

 

Profit on revaluation of the assets

 

40000

 

 

 

 

2

Loss on revaluation of the assets

30000

 

 

Land (old)

 

30000

 

 

 

 

3

Building (new)

30000

 

 

Profit on revaluation of building

 

30000

 

 

 

 

4

Loss on revaluation of the building

10000

 

 

Building (old)

 

10000

 

 

 

 

5

Depreciation

65000

 

 

Land  (new)

 

20000

 

Land (old)

 

45000

 

 

 

 

6

Profit on revaluation of fixed assets

70000

 

 

Loss on revaluation of fixed assets

 

40000

 

Revaluation reserve

 

30000

Question 2 valuation of financial instrument

The AASB9 provides the way through which the fair value of the financial assets or financial liabilities of the company can be ascertained.  The company is required to amortize the cost of the debenture over the life of the assets through the process which is known as amortization (Fund, 2014).The cost of the debenture can be ascertained by amortization of the discount or premium using the effective interest method. The value of the assets through this method can be ascertained by multiplying the carrying value of the bond at the starting of the period by effective interest rate (Jin, et. Al., 2015).Further the premium or discount can be calculated by comparing the bond expenses with the interest which will be paid over the duration of the bond.

Calculation of the fair value of debenture

The effective value considers the current market rate which in the following case is 4%.

Present value of the instalment-

Instalment amount= 900000/2= 450000

Interest amount = 450000*6%= 27000

Present value of the interest= interest instalment * cumulative present value factor = 27000*10.58 = $285660

Present value of the debenture = value of the debenture * discounted value = 900000*.788= $709200

The value of the debenture can be calculated by adding the present value of interest and present value of debenture.

The value of the debenture = 709200+285660= $994860

Calculation of the discount/premium of the denture using effective price method

The company has issued denture at the premium which is as follows- $994860-$900000 = $94860

Amortization table

Date

Interest @ 3%

Credit cash

Interest expense@2% on BV

Debit interest expenses

Amortization of debenture premium

Credit bond discount

Debit balance in the account bond payable

Credit balance in the account bond payable

Book value of Bond

01-7-15

0.00

 

 

94860.00

900000.00

994860.00

31-12-15

27000.00

19897.20

-7102.80

87757.20

900000.00

987757.20

30-6-16

27000.00

19755.14

-7244.86

80512.34

900000.00

980512.34

31-12-16

27000.00

19610.25

-7389.75

73122.59

900000.00

973122.59

30-6-17

27000.00

19462.45

-7537.55

65585.04

900000.00

965585.04

31-12-17

27000.00

19311.70

-7688.30

57896.74

900000.00

957896.74

30-6-18

27000.00

19157.93

-7842.07

50054.68

900000.00

950054.68

31-12-18

27000.00

19001.09

-7998.91

42055.77

900000.00

942055.77

30-6-19

27000.00

18841.12

-8158.88

33896.89

900000.00

933896.89

31-12-19

27000.00

18677.94

-8322.06

25574.83

900000.00

925574.83

30-6-20

27000.00

18511.50

-8488.50

17086.32

900000.00

917086.32

31-12-20

27000.00

18341.73

-8658.27

8428.05

900000.00

908428.05

30-6-21

27000.00

18168.56

-8428.04

0.00

900000.00

900000.00

Journal entries

date

Particular

Debit in $

Credit in $

1-7-15

bank

948600

 

 

Debenture payable

 

900000

 

Premium on debenture

 

48600

 

 

 

 

31-12-15

Interest expenses

19897

 

 

Premium on debenture

7103

 

 

bank

 

27000

 

 

 

 

30-6-2016

Interest expenses

19755

 

 

Premium on debenture

7245

 

 

bank

 

27000

Question 3 construction contract

The AASB111 provides the way in which the how the revenue and the cost associated with the construction contract is accounted. The standard provides the way in which contract revenue and contract cost should be recognized while preparing the financial statement of the company. The standard how the cost and the revenue can be calculated using the percentage of completion method (Elhawary & West, 2015).The percentage of the completion follows the matching concept as per which the cost incurred during the period is charged to the revenue of the similar period. The degree of the completion is calculated by dividing total cost till date with the total estimate cost of the contract.

Calculation of the gross profit of Sun City limited for the year 2015

Estimate revenue = $40 million

Estimate cost = $38 million

Cost incurred = $10 million

Calculation of percentage of completion = (cost till date/ estimate cost)*100

(10/38)*100 = 26%

Revenue recognized till date = 40 * 26% = $10.4 million

Profit till date = 10.4- 10 = $400000

Calculation of the gross profit of Sun City limited for the year 2016

Estimate revenue = $40 million

Estimate cost = $40 million

Cost incurred = $28 million

 Increase in cost = $2 million

Percentage of completion= (28/40) *100 = 70%

Revenue recognized till date = 40 * 70% = $28 million

Profit till date = 28- 28 = nil

Gross profit during the year = profit till date – previously recognized profit = 0- .4 = $400000 (loss)

Calculation of the gross profit of Sun City limited for the year 2017

Estimate revenue = $40 million

Estimate cost = $40 million

Cost incurred = $40 million

Percentage of completion= 100%

Revenue recognized till date = 40 * 70% = $28 million

Profit till date = 40- 40 = nil

Gross profit during the year = profit till date - previously recognized profit = .4- .4 = nil

b) Journal entries by percentage of completion method

Sr no

Particular

Debit in ($million)

Credit

($million)

1

 Revenue till date

10.4

 

 

Construction till date

 

10.4

 

 

 

 

2

Construction till date

10

 

 

Expense till date

 

10

 

 

 

 

3

Construction till date

0.4

 

 

Gross profit

 

0.4

 

 

 

 

4

Receivable till date

12

 

 

Billings on construction till date

 

12

 

 

 

 

5

Bank

11

 

 

receivable till date

 

11

c) Accounting when difficulty in ascertaining stages of completion

Serial no

Particular

Debit

credit

1

P&L account

10

 

 

Expense till date

 

10

 

 

 

 

2

Bank 

11

 

 

Receivable till date

 

11

 

 

 

 

3

Receivable till date

12

 

 

billing on construction till date

 

12

References

Akdogan, N. and Ozturk, C., (2015). A Country Specific Approach to IFRS Accounting Policy Choice in the European, Australian and Turkish Context. Emerging Markets Journal, 5(1), p.60.

Elhawary, H., & West, B. (2015). All for Nothing? Accounting for Land under Roads by Australian Local Governments. Australian Accounting Review, 25(1), 38-44

Fund, R. T. S. S. (2014). Financial statements for the year ended 30 June 2010.

Hu, F., Percy, M., & Yao, D. (2015). Asset revaluations and earnings management: Evidence from Australian companies. Corporate Ownership and Control, 13(1), 930-939.

Jin, K., Shan, Y., & Taylor, S. (2015). Matching between revenues and expenses and the adoption of International Financial Reporting Standards. Pacific-Basin Finance Journal, 35, 90-107.