(a) B marks Scenario 1 First Choice Home Loans Ltd is an Australian company that provides...

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(a) B marks Scenario 1 First Choice Home Loans Ltd is an Australian company that provides mortgage loans which are loans that are typically secured by the property of the borrower. First Choice Home Loans Ltd's mortgage loan portfolio currently comprises 120 mortgage loans. Sixty percent of these mortgage loans are to first home buyers of residential properties with the remaining 40% being to investors in residential properties and to owners of commercial properties. (b) Management of First Choice Home Loans Ltd wants to significantly increase the number of mortgage loans. A detailed review of their operations conducted by external consultants revealed that the main obstacle to staff making new mortgage loans was the time and effort required to administer the existing mortgage loans. To overcome this obstacle, management of First Choice Home Loans Ltd decided to sell the mortgage servicing rights to the existing 120 mortgage loans to another financial services company, Delta Financial Services Ltd. The terms of the contract specify that Delta Financial Services Ltd assumes responsibility for servicing the mortgage loans. These services include: billing collecting cash, and processing payments from borrowers and forwarding the cash collected to First Choice Home Loans Ltd; paying any tax and insurance related to the mortgage payments; dealing with borrower enquiries; undertaking modifications to the mortgage loans; and taking action to recover payments in arrears In return for these services, Delta Financial Services Ltd receives a monthly servicing fee equal to 0.5% of the outstanding balance of each mortgage loan. This fee provides adequate compensation to Delta Financial Services Ltd as the fee covers the cost of servicing the mortgage loan and provides a reasonable amount of profit. The terms of the contract prohibit Delta Financial Services Ltd from selling the mortgage servicing rights. In addition, during February 2023, EZ Games Ltd will run a promotion to increase sales of its gaming merchandise through the distribution of discount vouchers. Each of these discount vouchers entitles the holder to a 40 % discount on any purchase of $100 or more of gaming merchandise made before 31 December 2023. A marketing company will be engaged to distribute half of the discount vouchers to the mailboxes of houses and apartments in suburbs that were identified on the basis of customer profiles. The other half of the discount vouchers will be distributed to pedestrians walking on the main streets of Brisbane's central business district. Based on past experience, EZ Games Ltd expects 10% of the discount vouchers to be used. Required Scenario 2 EZ Games Ltd is a Brisbane retailer that sells video games, consumer electronics, and gaming merchandise through retail outlets and online. To increase sales, EZ Games Ltd is going to provide discount vouchers to customers who purchase products between 1 March 2023 and 31 December 2023 with a total value, in a single transaction, of $150 or more. The discount voucher entitles the customer to a 50% discount on their next purchase. Based on historical experience of similar promotions, EZ Games Ltd anticipates that 25% of customers receiving a discount voucher will return and use the discount voucher. The discount vouchers are valid until 30 June 2024. Scenario 1: explain how Delta Financial Services Ltd should account for the contract to provide mortgage servicing rights (as an expense, an asset, or a liability). Justify your answer by reference to the relevant definitions and recognition criteria in the AASB's Conceptual Framework for Financial Reporting. (4 marks) Scenario 2: explain whether EZ Games Ltd should recognise a liability for (1) the discount vouchers when they are issued to customers and (2) the discount vouchers for gaming merchandise when they are distributed. Justify your answer by reference to the definition and recognition criteria for a liability from the AASB's Conceptual Framework for Financial Reporting. (4 marks) (a) B marks Scenario 1 First Choice Home Loans Ltd is an Australian company that provides mortgage loans which are loans that are typically secured by the property of the borrower. First Choice Home Loans Ltd's mortgage loan portfolio currently comprises 120 mortgage loans. Sixty percent of these mortgage loans are to first home buyers of residential properties with the remaining 40% being to investors in residential properties and to owners of commercial properties. (b) Management of First Choice Home Loans Ltd wants to significantly increase the number of mortgage loans. A detailed review of their operations conducted by external consultants revealed that the main obstacle to staff making new mortgage loans was the time and effort required to administer the existing mortgage loans. To overcome this obstacle, management of First Choice Home Loans Ltd decided to sell the mortgage servicing rights to the existing 120 mortgage loans to another financial services company, Delta Financial Services Ltd. The terms of the contract specify that Delta Financial Services Ltd assumes responsibility for servicing the mortgage loans. These services include: billing collecting cash, and processing payments from borrowers and forwarding the cash collected to First Choice Home Loans Ltd; paying any tax and insurance related to the mortgage payments; dealing with borrower enquiries; undertaking modifications to the mortgage loans; and taking action to recover payments in arrears In return for these services, Delta Financial Services Ltd receives a monthly servicing fee equal to 0.5% of the outstanding balance of each mortgage loan. This fee provides adequate compensation to Delta Financial Services Ltd as the fee covers the cost of servicing the mortgage loan and provides a reasonable amount of profit. The terms of the contract prohibit Delta Financial Services Ltd from selling the mortgage servicing rights. In addition, during February 2023, EZ Games Ltd will run a promotion to increase sales of its gaming merchandise through the distribution of discount vouchers. Each of these discount vouchers entitles the holder to a 40 % discount on any purchase of $100 or more of gaming merchandise made before 31 December 2023. A marketing company will be engaged to distribute half of the discount vouchers to the mailboxes of houses and apartments in suburbs that were identified on the basis of customer profiles. The other half of the discount vouchers will be distributed to pedestrians walking on the main streets of Brisbane's central business district. Based on past experience, EZ Games Ltd expects 10% of the discount vouchers to be used. Required Scenario 2 EZ Games Ltd is a Brisbane retailer that sells video games, consumer electronics, and gaming merchandise through retail outlets and online. To increase sales, EZ Games Ltd is going to provide discount vouchers to customers who purchase products between 1 March 2023 and 31 December 2023 with a total value, in a single transaction, of $150 or more. The discount voucher entitles the customer to a 50% discount on their next purchase. Based on historical experience of similar promotions, EZ Games Ltd anticipates that 25% of customers receiving a discount voucher will return and use the discount voucher. The discount vouchers are valid until 30 June 2024. Scenario 1: explain how Delta Financial Services Ltd should account for the contract to provide mortgage servicing rights (as an expense, an asset, or a liability). Justify your answer by reference to the relevant definitions and recognition criteria in the AASB's Conceptual Framework for Financial Reporting. (4 marks) Scenario 2: explain whether EZ Games Ltd should recognise a liability for (1) the discount vouchers when they are issued to customers and (2) the discount vouchers for gaming merchandise when they are distributed. Justify your answer by reference to the definition and recognition criteria for a liability from the AASB's Conceptual Framework for Financial Reporting. (4 marks)

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Scenario 1 Mortgage servicing rights should be recognised as an intangible asset by Delta Financial ... View the full answer