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Accounting Theory Assignment Examining Conceptual Issues

Question

Task: Prepare a well-researched accounting theory assignment addressing the following questions:

1) Discuss the ‘primary users’ of general-purpose financial reports?
2) An asset having a cost of $200 000 and accumulated depreciation of $40 000 is revalued to $240 000 at the beginning ofthe year. Depreciation for the year is based on the revalued amount and the remaining useful life of eight years. Shareholders’ equity, before adjusting for the above revaluation and subsequent depreciation is as follows:

Share capital

600 000

Revaluation surplus

90 000

Capital profits reserve

170 000

Retained earnings

140 000

Total

1 000 000

Required: Prepare journal entries to reflect the revaluation of the asset and the subsequent depreciation of the revalued asset. Which of the equity accounts would be affected directly or indirectly by the revaluation?

3) ABC Ltd acquires 100 per cent of RedCarpet Ltd on 1 July 2021. ABC Ltd pays the shareholders of RedCarpet Ltd the following consideration:

Cash

35 000

Plant and equipment

fair value $125 000; carrying amount in the books of ABC Ltd $85 000

Land

fair value $150 000; carrying amount in the books of ABC Ltd $100 000

 

There are also legal fees of $95 000 involved in acquiring RedCarpet Ltd. On 1 July 2021 RedCarpetLtd’s statement of financial position shows total assets of $300 000 and liabilities of $150 000. The fair value of the assets is $400 000.

Required:
a) Has any goodwill been acquired and, if so, how much?
b) And discuss the potential for including associated legal fees into the cost of acquiring RedCarpet using appropriate accounting standard.?

4) Ginger Ltd is marketing a ‘surfing bundle’ in which, for $2200, it provides customers with a surfboard (which retails separately for $1700), a wetsuit (which retails separately for $500) and five lessons (which retail separately for $400). You are required to determine:

a) Whether separate performance obligations exist, and to explain why you made this judgement.
b) How much of the transaction price to allocate to each performance obligation?

5) Discuss the inclusion of the expenses incurred in the initial evaluation and exploration stage of a project involved with oil extraction into asset or inventory. Further, when should the organisation recognise the expenses related to restoration/rehabilitation at the cessation and conclusion of the mining activities?

6) Looking at different literature, discuss if there is a unique definition for the social responsibility reporting and if social responsibility has connection with accountability and accounting.

Answer

Introduction
This accounting theory assignment aims to get an understanding ofthe different aspects of accounting theories and current issues. Some of the issues which will be discussed are the unique definition of social responsibility report, primary users of general purpose financial reporting, different aspects of goodwill, journal entries which reflects the revaluation of the assets and some others. ?

Question 1 Solution
The ‘primary users’ of general-purpose financial reports include existing and potential investors, lenders and other creditors of the business in the market. The general-purpose financial report's objective is to give financial information about the reporting entity to primary users of it so that these users make an informed decision related to their investment or transaction with the business. It should be noted that the different primary users use the financial information provided in the general-purpose financial report for taking different decisions(Aasb.gov.au, 2021).

The first group of primary users of the general-purpose financial report is the business's existing and potential investors. These investors are also called shareholders of the business.These investors use this financial information for evaluating and understanding different aspects of the business as an investment. Some of the financial information about the business as an investment which is procured using this report is what is the potential return that this business can give to the investors, what is the risk of investing in the business, in what form investors are likely to get the return from investing in the business and some other aspects like these. This financial information helps the existing and potential investors decide whether they should sell, hold and purchase shares of the business in an informed manner.

The second group of primary users of the general-purpose financial report is existing and potential lenders of the business, mainly banks and other fund providers. These existing and potential lenders using the general-purpose financial report's financial information try to evaluate the business's credit taking ability. This means these lenders try to evaluate what is the level of credit which the business can take and will be able to fulfil different financial obligations arising from these lending. Under this evaluation, the risk of giving fund to the business is also analysed using the general-purpose financial report's financial information. Another aspect evaluated by this group of users is whether the reporting entity who has taken fund has met different financial conditions that it has agreed to keep in time of taking that fund related to different aspects of the business like liquidity profitability.

The third group of primary users of the general-purpose financial report is existing and potential other creditors of the business. This group of users of the general-purpose financial report are mainly supplier or vendors who given their goods or service on credit to the business or thinking to give goods or services on credit to the business in the future(Chartered Education, 2021).

Question 2 Solution
Journal Entries about the revaluation of the asset and the subsequent depreciation of the revalued asset

Journal Entries about the revaluation of the asset and the subsequent depreciation of the revalued asset

Date

Particulars

J.F.

Debit

Credit

At the beginning of the year

Accumulated Depreciation Account

    To Assets Account

(To record the accumulated depreciation of the asset at the beginning of the year)

 

$40000

 

$40000

At the beginning of the year

Asset Account

   To Asset Revaluation Surplus Account

( To record the surplus in the value of the asset after revaluation of the asset at the beginning of the year)

 

$80000

 

$80000

At the end of the year

Depreciation Account

   To Accumulated Depreciation Account

( To record depreciation of the assets at the end of the year)

 

$30000

 

$30000

 

Table 1: Journal Entries about the revaluation of the asset and the subsequent depreciation of the revalued asset
(Source: Created by the learner)

Workings
At the beginning of the year
The value increase after the asset revaluation at the beginning of the year is calculated below.

= The revalued amount of assets at the beginning of the year – the cost of the assets + accumulated depreciation of assets
=$240,000-$200,000+$40,000
=$80000

At the end of the year
The amount of depreciation recorded of the assets at the end of the year calculated below.
= revalued asset value in the beginning/remaining useful life of assets
=$240000/8
=$30000

One of the equity accounts directly affected by the revaluation of the assets is therevaluation surplus account. The revaluation surplus account will be increased at the beginning of the year due to revaluation of assets recording surplus in the asset's value. Also, the retained earnings of the business will be indirectly affected as profit will decline. The profit will decrease due to the increase in the asset's value as the depreciation that will be calculated on the revalued asset value will be higher than what would have been the depreciation amount calculated if the asset value would not increase due to revaluation. Therefore, this increased depreciation amount declined the profit of the business.

Question 3 Solution
Part a

Yes, goodwill has been acquired as the cost of acquisition is significantly higher than the net identified assets of RedCarpet Limited.

The goodwill which has been acquired has been calculated below.
=cost of acquisition of RedCarpet Limited –(Fair value of assets of RedCarpet Limited-Fair value of liabilities of RedCarpet Limited)

Calculation of goodwill acquired

Particulars

Amount

The following is paid as consideration for acquisition for following assets

 

Cash

$35,000

Plant and equipment

$125,000

Land

$150,000

Total consideration for assets of Redcarpet Limited

$310,000

Legal cost involved in acquiring RedCarpet Ltd

$95,000

Cost of acquisition (A)

$405,000

Fair value of assets  (B)

$400,000

Fair value of liabilities ( C)

$150,000

Net identified Assets  (D) = ( B)- (C )

$250,000

Goodwill acquired (A) - (D)

$155,000

 

Table 2: Calculation of goodwill acquired
(Source: Created by the learner)

The amount of goodwill acquired is $155000.

Part b
Paragraph 5.7.4 of AASB 1013 stated that the legal costs are included in the cost of acquisition if the legal fee has been incurred in relation to feasibility tests and investigations preceding acquisition(Aasb.gov.au, 2021). Therefore, the legal cost can be included in the cost of acquiring of RedCarpet Limited if this legal cost has been incurred preceding the acquisition for different feasibility tests and investigations. Therefore, as this legal cost can be included in this cost of acquisition of RedCarpet Limited as it has been stated that this cost has been incurred involving acquisition. So it is assumed that the condition given under Paragraph 5.7.4 of AASB 1013 has been fulfilled by this legal cost to be included in the cost of acquisition.

Question 4 Solution
Part a

No, separate performance obligations exist in the case of ‘surfing bundle’ marketed by Ginger Limited. This opinion has been given by using the decision tree, which is given under AASB 15. The first question that is asked under this decision tree is whether each good given under this stated bundle can benefit the customer on its own or needed to be used with other items tobenefitted. It is assessed that item under this surfing bundle includes surfboard, wetsuit, and five lessons; each item can give customer benefits separately. As the answer under this question is yes, and this question indicates there is separate performance obligation exist in the bundle, so this will lead to the second question being assessed under this decision tree.

The second question is whether the business has done significant service of integrating the goods under this bundle(Aasb.gov.au, 2021). It has been assessed that the no there is no significant steps taken for integrating three items under this bundle as all these items are also sold separately in the retail shop and in here, these items are only collectively sold at a collective discounted price with any additional integration. So, question answer is no. Therefore, this question indicates a separate performance obligation arising. So, the third question will be evaluated now.

The third question which is asked is whether one or more goods under this bundle has significantly modified other goods in the bundle or not. It is concluded that the items under this bundle have not been significantly modified as this bundle only include the items which separately sold and give the same benefit to the customers. This question answer is no, so it will be concluded that under this question. Therefore, this leads to the fourth and last question under this decision tree being assessed.

However, the fourth question which is asked is whether the goods or services which are given under the bundle is significantly interrelated or not. It is concluded that items under this bundle are significantly interrelated as all the three items are related to surfing activity only. For example, a person with no surfing experience will need surfing lessons before using the surfboard and wetsuit to surf. On the other hand, the five lessons that will be given on surfing will be of no use, if that person does not have surfboard or wetsuit, they will be unable to do surfing. All these show the high interrelationship of the goods and services under this bundle. Therefore, it is decided that there is a significant interrelation between the different items in the bundle. This question answer is yes, and this interrelationship between goods and services under this bundlewhich is identified is the reason for giving the judgement that there is no separate obligation created under this bundle(Bdo.com.au, 2021).

Part b
It can be seen that all three items in the surfing bundle have been sold at a significantly discounted price collectively compared to what the collective value is arising from the stand-alone price of these three items (Bdo.com.au, 2021).

Therefore, the formula used to calculate the transaction price for each item's performance obligations is given below.

= selling price of “Surfing Bundle”*(the standalone price of that item/summation of the standalone price of all three items in “Surfing Bundle.”

So, the transaction price to allocate for surfing board performance obligation is given below.
=2200*(1700/(1700+500+400))
=1439

So, the transaction price to allocate for wetsuit performance obligation is given below.
=2200*(500/(1700+500+400))
=423

So, the transaction price to allocate for five lessons performance obligation is given below.
=2200*(400/(1700+500+400))
=338

Therefore, the transaction price allocated for the surfboard is $1439, the wetsuit is $423, and five lessons are $338.

Question 5 Solution
The expenses incurred in the initial evaluation and exploration stage of a project involved with oil extraction are included into asset or inventories of the business if it meets two conditions which are stated under paragraph 7.2 of AASB 6. These two conditions will be discussed here. The first conditions which have to be fulfilled for the initial evaluation and exploration stage of a project involved with oil extraction to be included into asset or inventories are that the rights to the tenure of the area of interest should be current.

The second condition that has to be fulfilled to be asset or inventory is the expenses incurred in the initial evaluation and exploration stage of a project involved with oil extraction, which is projected to be recovered through successful development and exploration of that area of interest through sales.

Under this condition, that area of interest should not reach that stage at the end of that reporting period that it allows that there is the existence or otherwise of economically recoverable reserves which are active and significant operation is continuing when these expenditures are converted into inventories or assets (Aasb.gov.au, 2021).

The expenses related to restoration or rehabilitation at the cessation and conclusion of the mining activities are recognised as described in the AASB 137 in which it has been stated that provision has to be made for any contingent liabilities which is likely to be incurred in the future period(Aasb.gov.au, 2021). These restorations or rehabilitation at the cessation and conclusion of the mining activities fall under the contingent liabilities project. Therefore, the business has to recognise this expense under the provision, which is created to cover this restoration and restoration at the cessation and conclusion of the mining activities. This provision is recognised according to the business's mining activities in that area for which the level of restoration and rehabilitation has to be done in the conclusion of the mining activities.

Question 6 Solution
There is no one specific or unique definition given under the term social responsibility report. However, social responsibility reporting comes under sustainability reporting, and there is one unique definition given of the sustainability report by the Global Reporting Initiative. Under the definition given by Global reporting Initiative, it has told that sustainability report is a report which is prepared by the organisation about the economic, social, environmental impact caused by the business through its everyday activities. It also stated that this report shows the value and governance model presented by the organisation. It shows a relationship between the organisation’s strategy and commitment to a sustainable global economy(Globalreporting.org, 2021).

Other than this definition, one general definition of social responsibility reporting can be that it is the documents that summaries and give all material information about the steps and actions which the organisation takes to fulfil its responsibility toward the society in general.

It can be stated that the purpose of the social responsibility report is prepared by the companies to provide information about the actions taken by the companies to fulfil their social responsibility. So that different users can be analysed how well the companies havea responsibility toward society(Rashid, 2018).

It can be stated that social responsibility has a connection with accountability and accounting. This opinion has been formed as the social responsibility includes the obligations that the business has to fulfil its different responsibilities toward the society in which it operates. The social responsibility reporting includes the report of the company's different actions and steps to fulfil its responsibilities toward society. Therefore, it can be stated that social responsibility is one concept of the business, which makes the business more accountable toward society, and this accountability is fulfilled by the business using social responsibility reporting. This is the connection between social responsibility and society(Youmatter, 2021). Also, the social responsibility reporting is done under the sustainability accounting, which is considered as a subcategory of financial accounting in which actions are taken to fulfil the economic, social and environmental responsibility of the business is disclosed. Therefore, this is the relationship between social responsibility and accounting.

Conclusion
In this report, the different aspects of accounting theories and issues had been discussed. This report's findings are three primary users of the general-purpose financial report, journal entries for revaluation of assets and its subsequent depreciation, and some other aspects like these.

References
Aasb.gov.au. 2021. [online] Available at: [Accessed 8 February 2021].

Aasb.gov.au. 2021. [online] Available at: [Accessed 8 February 2021]. Aasb.gov.au. 2021. [online] Available at: [Accessed 8 February 2021].

Aasb.gov.au. 2021. [online] Available at: [Accessed 8 February 2021].

Aasb.gov.au. 2021. [online] Available at: [Accessed 8 February 2021].

Bdo.com.au. 2021. Allocating the transaction price. [online] Available at: [Accessed 8 February 2021].

Bdo.com.au. 2021. IFRS 15. [online] Available at: [Accessed 8 February 2021].

Chartered Education. 2021. Primary Users of Financial Statements & their Information Needs under IFRS - Chartered Education. [online] Available at: [Accessed 8 February 2021]. Globalreporting.org. 2021. Standards. [online] Available at: [Accessed 8 February 2021].

Rashid, A., 2018. The influence of corporate governance practices on corporate social responsibility reporting. Social Responsibility Journal.

Youmatter. 2021. CSR Report - Definition, Meaning, Benefits & Examples. [online] Available at: [Accessed 8 February 2021].

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