# ACC204 Advance Financial Accounting Proof Reading Service

## Question 1- Revaluation of Property Plant and Equipment

According to Zakaria et al (2014), Revaluation of asset can be referred as a process of increasing or decreasing the carrying value of the asset. This increase or decrease in value is done in accordance with the fair market value of such asset. According to Australian accounting standards, initially an asset is required to be valued at its cost. As per AASB-116, after initial recognition of asset if the fair value of such assets can be measured reliably then such asset should be valued at its fair market value. Any provision accumulated depreciation and impairment losses on such asset should be deducted from fair value of the respective asset. Some of the other relevant points given in AASB-116 are as follows-

1. Usually is necessary to revalue an asset after every 3 or 5 years. Some of the assets are required to be revalued every year due to frequent changes in its market price.

2. If the fair market value differs significantly from its carrying amount then such asset should be further revalued to determine its accurate fair value.

3. Any increase in value of assets should be transferred to profit and loss account under the head “other comprehensive income”. Such profit should also be transferred to revaluation surplus under equity capital. But such profit should be recognised up to previously recognised devaluation in such asset.

4. Taxes on profit due to revaluation of asset should be disclosed in accordance with AASB-112 i.e. Income taxes (Australian Accounting Standards Board, 2014).

### 1.1 Accounting for revaluation of assets

In the given problem the assets will be revalue in accordance with the given fair market value of these assets. Any accumulated profits or impairment losses will be deducted while calculation. Revaluation for individual assets are explained as under-

Land (NSW)

Carrying value- \$100000
Current fair value- \$140000

Current fair value of the land is more than its carrying value. Therefore there will be an upward revaluation in the value of the asset. This upward revaluation will effect following two aspects of accounting-

1. Upward revaluation of \$40000 will be transferred to “Revaluation reserve” under the head equity capital in the balance sheet.

2. At the end of the financial year, value of Land will be shown at \$140000 in the balance sheet.

Building (NSW)

Carrying value = Cost – Accumulated depreciation= 70000-20000= \$50000

Current fair value = \$80000

In case of building also current fair value of the asset is greater its carrying value by \$ 30000. Therefore it will result in upward revaluation of asset by \$ 30000. Accounting for such revaluation will be as follow-

1. \$ 30000 will be transferred to revaluation reserve under equity capital head of balance sheet.

2. Carrying amount of building will be changed to \$ 80000.

Land (QLD)

Carrying value- 150000
Current fair value- 120000

Current fair value of the assets is lower than its carrying value by \$30000. This will result in downward revaluation of land by \$30000. Accounting for such downward revaluation will be as follow-

1. \$ 30000 will be deducted from the revaluation reserve created by upward revaluation of above two assets.

2. Value of land will be shown at \$ 120000 in the asset side of the balance sheet at the end of the year.

Building (QLD)

Carrying value = Cost – Accumulated depreciation= 125000-(45000) = \$80000

Current fair market value = \$70000

In this case also the current fair market value of the building is less than its fair market value. Hence there will be a downward revaluation in the balance sheet value of the asset by \$10000. Accounting for such treatment will be as follow-

1. Revaluation reserve will decrease by \$10000.

2. Value of asset will be shown at \$70000.

Values of the assets and revaluation reserve at the end of the relevant financial year are as follow-

 Accounts Carrying value in balance sheet Factory(NSW) Land 140000 Building 80000 Factory(QLD) Land 120000 Building 70000 Revaluation reserve 30000

### 1.2 Journal entries

Journal entries at the end of the financial year will be in accordance with the AASB-116. Following journal entries will be passed by the organisation-

 Sr.no Dr/Cr Particular Amount (\$) 1 Dr Land (NSW) 40000 Cr Profit on revaluation of asset 40000 2 Dr Accumulated depreciation 20000 Cr Building (NSW) 20000 Dr Building (NSW) 30000 Cr Profit on revaluation of asset 30000 3 Dr Loss on revaluation of asset 30000 Cr Land (QLD) 30000 4 Dr Accumulated depreciation 45000 Cr Building (QLD) 45000 Dr Loss on revaluation of asset 10000 Cr Building (QLD) 10000 5 Dr Profit on revaluation of asset 70000 Cr Loss on revaluation of asset 40000 Cr Revaluation reserve 30000

### Question 2- Financial instruments

According to Deegan (2012),financial instruments are the assets of an organisation which can be traded by the organisation for raising funds for organisation. Fair value of a financial instrument can also be called as its present value at the time of issue of such instrument. In the given case Kruger private limited has issued debentures at the interest rate of 6% per annum. Present market return on these debentures is 4% per annum.

#### 2.1Fair Value of debentures at the time of issue

As per AASB 9, fair value of a debenture is calculated by adding present value all semi-annual interest receivable and present value of payment to be made when debenture matures. In effective interest rate method, present value is calculated on the basis of interest rate prevailing in the market (Australian Accounting Standard Board, 2015). In present case market interest rate is 4% per annum.

Present value of Interest instalments

Semi-annual interest instalment = (\$900000 * 6%)*1/2= \$27000

Present value of all the interest payments= Interest instalment* CPV factor for 12 years @ 2 %

= 27000*10.58= \$285660

Present value of maturity value

Maturity value= \$900000

Present value of maturity value= PVF@2 % at 12th year* Maturity value

= .788*900000= \$709200

Fair value of Debentures = Present value interest + Present value of maturity value

= 285660+709200= \$994860

Fair value of the issued debenture is \$994860. Therefore it could be said that the debentures are issued at a premium of \$ 94860.

#### 2.2 Journalentries

Premium on debentures of \$ 94860 is amortized as follow-

 Date Interest @ 3% Interest expense@2% on BV Amortization of debenture premium Balance in Bond premium account Balance of bond payable account Book value of Bond 01-Jul-15 0.00 94860.00 900000.00 994860.00 31-Dec-15 27000.00 19897.20 -7102.80 87757.20 900000.00 987757.20 30-Jun-16 27000.00 19755.14 -7244.86 80512.34 900000.00 980512.34 31-Dec-16 27000.00 19610.25 -7389.75 73122.59 900000.00 973122.59 30-Jun-17 27000.00 19462.45 -7537.55 65585.04 900000.00 965585.04 31-Dec-17 27000.00 19311.70 -7688.30 57896.74 900000.00 957896.74 30-Jun-18 27000.00 19157.93 -7842.07 50054.68 900000.00 950054.68 31-Dec-18 27000.00 19001.09 -7998.91 42055.77 900000.00 942055.77 30-Jun-19 27000.00 18841.12 -8158.88 33896.89 900000.00 933896.89 31-Dec-19 27000.00 18677.94 -8322.06 25574.83 900000.00 925574.83 30-Jun-20 27000.00 18511.50 -8488.50 17086.32 900000.00 917086.32 31-Dec-20 27000.00 18341.73 -8658.27 8428.05 900000.00 908428.05 30-Jun-21 27000.00 18168.56 -8428.04 0.00 900000.00 900000.00

Journal entries

 Date Dr/Cr Particular Amount (\$) 01-07-2015 Dr Bank 948600 Cr Debentures payable 900000 Cr Premium on Debentures 48600 31-12-2015 Dr Interest expense 19897 Dr Premium on Debentures 7103 Cr Bank 27000 30-06-2016 Dr Interest expense 19755 Dr Premium on Debentures 7245 Cr Bank 27000

#### Question 3- Construction Contract

According to Australian Accounting Standard Board, (2015), construction contracts in Australia are governed by AASB-111 with an objective to prescribe an accounting treatment for recognition of profit in a construction contract. As per AASB 111, a construction contract should be accounted as per percentage of completion method if contract revenue and costs can be reliably estimated at regular interval. In completion of contract method stages of completion will be calculated on the basis of the cost incurred in the contract. With the help of this method a contractor can recognise its gross profit at every financial year rather than recognising it at the end of the contract. Any increase in the estimated total cost and revenue should be immediately adjusted in profit and loss account (Clough et. al., 2015).

#### 3.1 Calculation of gross profit

It is given in the question that outcomes of the contract can be reliably estimated; hence percentage of completion method can be applied by contractor. Gross profits for each of the three years of construction are calculated as below-

2015

Total estimated cost- \$38 million

Total Estimated revenue- \$40 million

Total cost incurred- \$10 million

Percentage of completion of contract= (Cost incurred/ Total estimated cost)*100

= 10/38*100= 26%

Revenue recognised in current year= 40*26%= \$10.4 million

Cost recognised in current year= \$10 million

Gross profit recognised = \$400000

2016

Increase in estimated cost= \$ 2 million

Total estimated cost- \$40 million

Total Estimated revenue- \$40 million

Total cost incurred- \$28 million

Percentage of completion of contract= (Cost incurred/ Total estimated cost)*100

= 28/40*100= 70%

Revenue recognised in current year= 40*70%= \$28 million

Cost recognised in current year= \$28 million

G.P recognised in current year= Total G.P till date – Previously recognised G.P

= (28-28) - .4= \$.4 million (loss)

Gross loss recognised in Current = \$400000

2017

Total cost incurred- \$28 million

Percentage of completion of contract= 100 %

Revenue recognised in current year= \$40 million

Cost recognised in current year= \$40 million

G.P recognised in current year= Total G.P till date – Previously recognised G.P

= (40-40) +.4 - .4= 0

Gross profit recognised in Current = 0

#### 3.2 Journal Entries (Percentage completion method)

Journal entries for the year ending 2015-

 Sr. no. Dr/Cr Particular Amount (\$m) 1 Dr Construction revenue 10.4 Cr Construction in progress 10.4 2 Dr Construction in progress 10 Cr Construction expense 10 3 Dr Construction in progress 0.4 Cr Gross profit 0.4 4 Dr Account Receivable 12 Cr Billings on construction in progress 12 5 Dr Bank 11 Cr Account Receivable 11

#### 3.3 Journal entries (Stage of completion cannot be reliably assessed)

Journal entries for the year ending 2015-

 Sr.no. Dr/Cr Particular Amount (\$m) 1 Dr Profit and loss account 10 Cr Construction expense 10 2 Dr Account Receivable 12 Cr Billings 12 3 Dr Bank 11 Cr Account Receivable 11

### References

Australian Accounting Standard Board, (2015). AASB 111- Construction Contracts, AASB.

Australian Accounting Standard Board, (2015). AASB 9- Financial Instruments, AASB.

Australian Accounting Standard Board. (2014). AASB 116- Property, Plant and Equipment. AASB.

Clough, R.H., Sears, G.A., Sears, S.K., Segner, R.O. and Rounds, J.L. (2015). Construction contracting: A practical guide to company management. John Wiley & Sons.

Deegan, C. (2012).  Australian financial accounting. McGraw-Hill Education Australia.

Zakaria, A., Edwards, D.J., Holt, G.D. and Ramachandran, V. (2014). A Review of Property, Plant and Equipment Asset Revaluation Decision Making in Indonesia: Development of a Conceptual Model. Mindanao Journal of Science and Technology, 12(1), pp.1-1.