Vulture Ltd sells and supplies security and surveillance equipment and other spyware and also provides related services.

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Question:

Vulture Ltd sells and supplies security and surveillance equipment and other spyware and also provides related services. The accountant of Vulture Ltd is currently preparing its financial reports for the year ended 30 June 2021. The company is a reporting entity. The reports have not been completed as of 8 September 2021.

REQUIRED:

Explain (with reasons) how and where (including class/category where applicable) each of the events/transactions described below would be treated, recognised and/or disclosed in the financial reports of Vurture Ltd for the year ended 30 June 2021.

Note: You need to consider whether information about the event or transaction needs to be presented separately. Journal entries and actual disclosure notes are NOT required.

(a) On 5 July 2021, the government announced new regulations relating to the sale and use of the flying exo-suits. Part of the new regulations require that from 1 September 2021 exo-suits can only be sold to persons who have a 'Flying Exo-Suit Permit'. A person must apply to the government for a permit and pay a fee of $400. The permit must be provided before an exo-suit can be sold. Vulture sells two types of exo-suits: an economic exo suit and an advanced exo-suit, and sales have been increasing for Vulture Ltd over the last 3 years. There is expected to be a significant increase in sales of exo-suits until the regulations apply. Once the change in regulations applies, it is anticipated this will reduce the sale of economic exo-suits by 80% and of advanced exo-suits by 20%. This is estimated to result in a reduction in expected profit of around 6% for the year ending 30 June 2021 but 21% in future years. [5 marks]

(b) All company employees are provided with safety uniform, equipment and sophisticated communication devices, although these remain the property of the company. In previous years, such items were expensed as purchased. The directors of Vulture Ltd have decided to change the way such items are treated and to capitalise these and include the items as equipment (assets) in the statement of financial position and depreciate over their useful lives. [4 marks]

ACCT 2005d/s Financial Accounting 2 2021 SP2

Financial Accounting 2 SP2 2021 ACCT 2005 Final Exam, page 3 of 18

PART 2
On 20 May 2021, legal action was commenced against Vulture Ltd by a customer. The customer, a jeweller, had a security system installed by Vulture Ltd in 2010 in one of its shops. In late January 2021, the customer's shop was robbed and a large number of gemstones, valued at $1 million, were stolen. The security system installed by Vulture Ltd did not alert the monitoring service team, who would have contacted the police. Subsequently, the customer has cancelled its contract with Vulture Ltd. The customer is claiming $500,000 in compensation from Vulture Ltd as the customers insurance company will not pay the full value of the goods stolen. The insurance policy of the customer limits any payment to a maximum amount of $500,000 per claim. There is currently a police investigation into the robbery. This has established that at the time of the robbery, the security system had been deactivated (i.e. turned off). However, it was not confirmed how the security system was deactivated or who deactivated the security system. This investigation is continuing.

Legal advice has estimated the probability of Vulture Ltd being liable to pay compensation currently at 35%, as at this time it has not been confirmed how the system was breached/deactivated. The court hearing is scheduled for February 2022.

REQUIRED:

Explain whether and how the above events should be recognised and/or disclosed in the financial statements and notes for the year ended 30 June 2021. You need to justify your answer with reference to the applicable accounting standard(s) (provided in Appendix B) and give reasons for your answer. You are NOT required to quote the paragraph reference numbers. [7 marks]