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financial accounting
Financial Accounting 9th Edition Craig Deegan - Solutions
Can profit be considered to be overstated if depreciation is calculated on the basis of the historical cost of an asset?
An item of inventory is sitting idle. Should it be depreciated?
Does depreciation expense represent an accounting number that can be relatively easily manipulated as part of the manager’s strategy of earnings management? How would managers do this, and why?
At the beginning of 2019, Lorne Ltd acquired an item of machinery at a cost of $100 000. At the time it was expected that the machinery would have a useful life of 10 years and a residual value of $10 000. Until the end of the 2021 financial year, the depreciation expense was recognised on a
Page 220On 1 July 2019, Bear Island Ltd acquired a computer for an initial cost of $50 000. To make the computer more efficient in the workplace, a number of hardware modifications were necessary before installation. These modifications cost $40 000. The computer was ready for use on 1 January
Gazza Ltd acquired a machine for a cost of $29 000. It is expectedt hat the machine will continue to be operational for seven years, during which time it is expected to run for 35 000 hours. The estimated residual value of the machine is $7000 at the end of its useful life.REQUIREDCalculate the
On 1 July 2019 Sprintfast Couriers Ltd, which has a year-end of 30 June, purchased a delivery truck for use in its courier operations at a cost of $65 000. At the end of the truck’s useful life it is expected to have a residual value of $5000. During its sixyear useful life, Sprintfast Couriers
Lonsdale Ltd has a machine that makes one type of fin for surfboards. The machine was acquired in 2020 at a cost of $20 000 and it is expected that the machine will be able to produce approximately 2000 fins before it would need to be replaced. It is not expected to have any residual value. At the
Page 219Anglesea Ltd constructed a building in 2018 at a cost of $960 000. The building was expected to have a useful life of 25 years after which time it would be demolished at an expected demolition cost of $100 000. Being on the coast, the building was subject to wild winds at times. At the end
Brisbane Ltd purchased a property 10 years ago for $3 000 000. Included in this amount is $350 000 that relates to buildings constructed on the land. A recent valuation has shown that the property is now valued at $5 400 000. The valuer has suggested that the location of the property and the
First Point Ltd acquired an item of machinery on 1 July 2019 for a cost of $250 000. When the asset was acquired, it was considered to have a useful life for the entity of six years. After this time, the machine will have no residual value. It is believed that the pattern of economic benefits would
Possoes Ltd acquired an aeroplane in 2022 for $75 million. Possoes does not revalue its assets, but instead measures its aeroplanes at cost less accumulated depreciation. If the cost of the same type of aeroplane increases to $110 million over the next three years, and assuming that the
Many organisations measure their property, plant and equipment at cost, less accumulated depreciation and accumulated impairment losses (while other organisations might measure their property, plant and equipment at fair value). You are required to discuss some of the problems associated with
Malibu Ltd acquired a building on 1 July 2015 at a cost of $800 000. The useful life of the building was estimated as 20 years with no residual value. Malibu Ltd used the straight-line method of depreciation. On 30 June 2021 the estimate of the remaining useful life of the building was revised to
What are some of the various asset measurement rules currently utilised within accounting standards?
AASB 101 stipulates a number of disclosures that many reporting entities are required to make. What specific disclosures are required by AASB 101 in relation to assets?
What are intangible assets and how, according to AASB 101 and AASB 138, should they be disclosed in a reporting entity’s statement of financial position?
AASB 101 provides alternative presentation formats for a reporting entity’s statement of financial position. Explain the alternative presentation formats, and describe the issues to consider as part of the process of selecting from the alternative presentation formats.
Cactus Ltd acquires some printing machinery. The amount paid to the manufacturer is $85000, plus an additional $2000 for delivery. Once the machinery is delivered, it needs some modifications before it can be used. The modifications amount to $7000. An additional amount of $2000 is paid for
Believing that it will be good for future business prospects, Point Lonsdale Ltd gives Ocean Grove Ltd some computer machinery at no cost. At the time, Ocean Grove Ltd is considering entering into a long-term agreement to acquire raw materials from Point Lonsdale. Just before the asset transfer,
Assume that the Geelong Football Club signs up five promising recruits by offering each of them a five-year player’s contract. As an additional incentive, it also offers each of the players a substantial sign-on fee. Do you think these players, or the associated economic benefits that they will
According to AASB 116, would you expense or capitalise expenditure incurred in repairing an asset? Explain your answer.
A university spent $4 million on a swimming pool for its staff. The expenditure was made in an endeavour to improve their health and wellbeing. The staff will not be charged any money for using the pool and the expected operating costs of the pool are expected to be $450 000 per year, meaning that
In an article that appeared in The Australian Financial Review on 26 August 2011 (‘Apple could easily flounder without its founder’ by Mark Ritson), it was reported:The news that Steve Jobs has resigned from Apple and will be replaced as CEO by Tim Cook made global headlines yesterday. What has
During the reporting period ending 30 June 2022, Midnight Boil Ltd constructed a nuclear power generator just outside of Melbourne. The cost of the power generator and associated technology amounted to $12 550 000. Other costs associated with the construction amounted to:The plant was ready to
For financial accounting purposes, the Australian National Museum placed a $10 million value on the preserved remains of the legendary Australian racehorse Phar Lap.REQUIREDWhat do you think this valuation actually represents?
On 1 July 2022, Point Lookout Ltd acquired a boat to use in its surfing holidays business. Point Lookout Ltd paid an initial amount of $250 000 on the date of acquisition and agreed to make a further five annual payments of $300 000, starting on 30 June 2023. Point Lookout Ltd can borrow funds at 8
If we look at a reporting entity’s statement of financial position, we will see a total given for all of the entity’s assets (this is a requirement of AASB 101). This aggregate total is derived by adding together the various classes of current and non-current assets. Do you think it is
Deebar Ltd has constructed an item of machinery at a cost of $220 000. Construction began on 1 January 2022 and was completed on 30 April 2022. The machinery produces a new damage-resistant surfboard. The cost of $220 000 comprises wages of $100 000, raw materials of $75 000 and depreciation of $45
Does the statement of financial position item ‘Total assets’ represent the value of a reporting entity’s assets? Explain your answer
Double Island Ltd constructed a Whizbang Machine and incurred the following costs in doing so:Depreciation of manufacturing equipment attributed to the construction of the Whizbang Machine $25 000REQUIREDa. Provide the journal entries that Double Island Ltd would use to account for the construction
Lighthouse Ltd acquired land for the purpose of building Lighthouse Point, a health and beauty spa. The following costs were incurred:The original buildings on the site were removed by Lighthouse Ltd and sold for $50 000.REQUIREDa. Determine the cost of the Lighthouse Point health and beauty spa.b.
On 15 September 2020, Tweed Ltd acquired land on a remote island at a cost of $100 000. The land was held for future development as a resort when transport to the island was made available. At each reporting date, Tweed Ltd made the following assessments of the net selling price of the land and the
Does the balance sheet provide an insight into all of the valuable resources available for use by an organisation?
If the Conceptual Framework had a paragraph inserted that addressed measurement and that paragraph suggested that one basis of measurement, such as fair value, should be used by all reporting entities for all assets, thereby excluding the use of historical cost, do you think that all reporting
Do we need a conceptual framework in Australia? Why?
With all the regulations that companies must follow, fulfilling the requirement for corporate reporting is an additional expensive activity. What are some possible arguments for and against disclosure regulation?
Define ‘relevance’ and ‘faithful representation’. Is there a trade-off between the two?
Which is more important-relevance or representational faithfulness?
Why is it useful for students of financial accounting to consider theories such as those discussed in this chapter?
What is a systems-oriented theory of accounting?
An organisation has received an interest-free loan from its parent company with no set repayment date. Should the ‘loan’ be disclosed as debt or as equity, and how should it be measured?
Are dividends paid to the owners of a reporting entity an ‘expense’ of a reporting entity? Why or why not?
Identify three theories that could be used to explain why particular regulation, such as specific regulation pertaining to financial reporting, has been enacted.
What mechanisms could be put in place to motivate management to consider the interests of:a. The owners?b. The debtholders?
If firms are voluntarily producing information about the environment, about their initiatives with respect to their employees or about their commitments to the local population, what does this imply about their perceptions of who the ‘users’ of the information are?
Why would firms voluntarily present certain information, such as information about their performance with regard to the environment?
What role does the auditor play in financial reporting?
Explain why a firm’s management might be prepared to expend considerable resources to lobby ‘for’ or ‘against’ a proposed accounting standard.
Positive Accounting Theory utilises the concept of political costs. Briefly define political costs. What actions might a firm’s management undertake in an attempt to minimise the political costs that might be imposed on the firm?
Why would a change in accounting policy affect a contractual agreement between a firm and a manager or debtholder?
If we accept the assumptions of Positive Accounting Theory, would you expect a manager who is rewarded by way of a profit-sharing bonus scheme to prepare the firm’s financial statements in an unbiased manner? Explain your answer.
Some researchers who utilise Legitimacy Theory posit that organisations will attempt to operate within the terms of their ‘social contract’. What is a social contract?
Using Institutional Theory as your theoretical basis, explain why an organisation might voluntarily elect to make particular financial disclosures.
Do you expect that we will ever have a single universally accepted theory of accounting? If not, why not?
Provide some arguments to explain what motivates regulators to introduce particular regulations.
The IASB’s Conceptual Framework for Financial Reporting indicates that financial statements should provide unbiased representations of the underlying transactions. Is this realistic?
If we accept the assumptions of Positive Accounting Theory, would you expect a manager who is employed by a firm that has negotiated lending agreements which include accounting-based debt covenants to have a relatively greater incentive to manipulate the financial statements? Explain your answer.
Within Institutional Theory, reference is made to isomorphism and decoupling. What do these terms mean?
Does the teaching of Positive Accounting Theory act to instil inappropriate values within the minds of students?
Identify three potential limitations or shortcomings of Positive Accounting Theory.
Explain the essential characteristics of an asset according to the Conceptual Framework for Financial Reporting.
When should an ‘impairment loss’ be recognised?
What is the difference between value-in-use and net sales price less cost of disposal? Of what relevance is either to the determination of the amount at which an asset is to be disclosed within the statement of financial position (balance sheet)?
Professional accountants are expected to be objective when performing their duties. How would you reconcile this expectation with the central assumptions of Positive Accounting Theory, and are they mutually exclusive?
What do we mean with respect to assets when we say we need to draw a distinction between the economic benefits and the source of the economic benefits?
If a reporting entity acquires an asset in exchange for another asset that is not cash, then how is the cost of the acquired asset determined?
List some concerns that have been raised about the use of fair values.
In accounting for the acquisition of assets, the assets acquired are to be recorded at the ‘cost of acquisition’. How would you determine the ‘cost of acquisition’?
What is the ‘fair-value hierarchy’? Why do we need it, and what do each of the three levels of the hierarchy represent?
What are three valuation techniques that can be used to determine fair value?
There are three key components to the definition of fair value. What are these?
Why would advertising expenditure typically be expensed in the period incurred? What would be an exception to this general rule?
Should borrowing costs associated with the construction of a building be treated as part of the cost of the building, or should the borrowing costs be expensed as incurred?
How are current assets defined for the purpose of presentation in a statement of financial position (balance sheet)?
Assume that, in a particular year, a reporting entity acquires a patent for a solar-powered toothbrush, but the probability of future economic benefits being generated by the patent is considered to be very low. As a result of changed circumstances in a subsequent year, the outlook is that the
According to Positive Accounting Theory, why could a change in the existing set of accounting standards affect the value of a firm?
How could accounting regulators use the research conducted by Positive Accounting theorists?
If management agrees to restrict its ability to wealth away from debtholders perhaps through agreeing not to pay dividends; not to take on excessive levels of debt; or not to participate in excessively risky ventures what effect should this have on the cost of debt capital of the firm?
In an article that appeared in The Australian on 28 July 2014 entitled ‘Southern Cross CFO quit over writedown’ (by Darren Davidson) it was reported that: Mr Lewis joined Southern Cross after it issued a profit downgrade in May. The owner of the 2DayFM radio network said that it expected
If an asset is expensed in one financial year because future economic benefits were subject to a high degree of ‘measurement uncertainty’, can the same asset be reinstated in future periods if the benefits are subsequently assessed as reliably measurable? In this respect, does the ability to
Identify three classes of assets that shall be measured at fair value.
Differentiate between the ‘definition of assets’ and the ‘criteria for recognition of assets’ provided in the Conceptual Framework.
Can an entity include an asset in its statement of financial position that it does not legally own? Justify your answer
Tea Tree Bay Ltd acquires a Gizmo Machine from Jetsons Ltd for the following consideration: Cash $20 000Land In the books of Tea Tree Bay Ltd the land is recorded at its cost of $100 000. It has a fair value of $140000. Tea Tree Bay Ltd also agrees to assume the liability of Jetsons Ltd’s
What is a theory and how would you evaluate whether a theory is a ‘good’ theory or a ‘bad’ theory? Is there actually such a thing as a good or a bad theory?
Read the brief extract from Anthony Hughes’ article ‘Credit card profit soars but ANZ feels no guilt’ and answer the following questions (be specific about the theories you are using when providing your answers).ANZ denied yesterday it was overcharging customers after reporting a 71 per cent
Read the brief extract from an article by Sue Mitchell entitled ‘Retailers face multibillion-dollar hit from proposed lease accounting changes’ (The Canberra Times, 22 April 2015, Web) and answer the questions that follow.Australia’s fastest growing retailers face a hit to their bottom line
The accounting standard AASB 138 Intangible Assets requires Australian companies to expense research expenditure instead of treating it as an asset.REQUIRED1. Construct three hypotheses based on each of the three major components of Positive Accounting Theory to predict which companies are more
In 2006 the Australian Government established an inquiry into corporate social responsibilities with the aim of deciding whether the Corporations Act should be amended so as to specifically include particular social and environmental responsibilities within the Act. At the completion of the inquiry
Read the following extract from an article by Greg Barnes entitled ‘Time for a free market in Tasmanian tourism’, The Mercury, 8 December 2014. Web and then answer the questions that follow.American economist George Stigler wrote ‘as a rule, regulation is acquired by the industry and is
Should all expenditure carried forward to future periods be amortised/depreciated? Why?
Is there a requirement that all assets shall be measured on the same basis (for example, at fair value)?
What does a ‘qualitative characteristic’ mean as it relates to financial information?
What role does ‘materiality’ have with respect to deciding whether particular financial information should be disclosed?
Are all assets required to be measured using the same basis of measurement?
Is it true that for an asset to be recognized by a reporting entity it needs to be owned?
The IASB released a revised Conceptual Framework in 2018. Explain why the changes it made in the definition of assets and liabilities subsequently had implications for the profits of reporting entities.
Why don’t we need separate recognition criteria for equity?
Is it true that for a liability to be recognized the related obligation needs to be legally enforceable?
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