Case Study (Issues identified from three clients) You are an assistant accountant for Pinnacle Pty Ltd, Public Accounting firm. Your manager Sunika asked you to draft a statement of advice to the following three clients regarding their concerns listed below. Client 1 (Perpetual Ltd) Re. Impairment loss and reversal On 1 July 2019, Perpetual Ltd acquired an asset for $1,000,000, which it is depreciating using the straight-line method over 20 years (hence, $50,000 depreciation charged each year). The director has realised a further $200,000 was written off as impairment loss for the year ending 30 June 2021 in addition to $50,000 depreciation for the year in that year. (Recoverable amount of the asset at 30 June 2021 due to COVID19 was estimated to be $700,000). The directors are very concerned about writing off asset values like that and asked the following (1) what is impairment loss compare to depreciation expense? (2) what is recoverable amount? (3) whether the asset carrying amount can be increased in the future. Therefore, the directors are also wondering, whether impairment loss can be reversed. They were hoping by 30 June 2022, a favourable reassessment of the recoverable amount occurs as the world economy would be recovered. The directors are asking you to (4) explain the reversal process, if recoverable amount of the asset is estimated to be $880,000 on 30 June 2022. Explanation must include the carrying amount of asset, depreciation expense for the year ending 30 June 2022, and journal entry for the reversal.

Provide advice to the managing director, with relevant references to the Australian Accounting standards in your answer.

Client 2 (Craft Ltd) Re. Accounting Estimates and Errors Craft Ltd is preparing its financial statements for the year ended 31 December 2021. The directors learnt about errors in accounting balances as follows. The following new information became available: (a) The current tax provision of the prior year was understated by $50,000 based on the final self-assessed tax computation completed in the current year.

(b) The write-down for an item of inventory in the prior year was determined to be over- stated. The item was sold in the current year for an amount that exceeded its net

realisable value by $20,000. (c) A machine with a cost of $110,000 and an accumulated depreciation of $20,000 at the end of the prior year was previously estimated to have a residual value of $10,000 and a useful life of ten (10) years. The current year estimates indicated that the residual value was nil and the useful life was eight (8) years. The company used the straight-line method for depreciation. The directors are wondering whether (1) any adjustments are required, if so, (2) show the journal entries to effect the change in estimates. In addition, (3) any disclosure requirements of changes in Accounting Estimates.

Page 3 Kaplan Business School Assessment Outline Provide advice to the managing director, with relevant references to the Australian Accounting standards in your answer.

Client 3 (Optimus Ltd) Re. Accounting for Revenue Optimus Ltd provides telephone services to its customers. Optimus recently advertised the following; $300 bundle including a mobile phone and a phone sim card sold for $240 if purchased online, which the customer pays at the time of entering into the contract. Once the contract is signed by a customer, Optimus Ltd will supply a mobile handset and a prepaid sim card.

If these items were sold separately, the handset would be sold for $200 and the prepaid sim card would provide access to $100 worth of phone calls, total of $300. The prepaid sim card will be active until either the $100 worth of calls is expired or the end of a three-month period beginning on the day that the contract is entered into. The directors are wondering how to apply the five-step model per accounting standard to record revenue for online sales including journal entries. The directors are keen to understand each step with thorough explanations. The companys financial reports are prepared on a monthly basis.

Provide advice including journal entries to the managing director, with relevant references to the Accounting Standards in your answer.