You are a manager in a consulting and accounting firm, King Business Services(KBS), located at King Centre Building, 1 Queen Street, 4000, Brisbane. Among other things, your firm provides its clients with advice regarding accounting issues, including applying the Australian Accounting Standards in preparing Financial Reports. You must prepare a Statement of Advice (SoA) for Caddiback Ltd. (a golf club manufacturer) to address several accounting issues raised by Ms Camila Smith on behalf of the company's directors. Ms Smith has raised these issues in a letter in the following two pages

Ms Camila Smith, On behalf of the Directors Caddiback Limited

58 Driver Street, Eagle Farm

QLD,4123

3 December 2022

The Manager King Business Services

1 Queen Street,

Brisbane, QLD 4000

Dear Sir/Madam

I am writing to seek your advice regarding numerous accounting issues. As you know, most of our directors have limited accounting knowledge and are a bit confused with the accounting treatment for several items that our junior accountant has proposed. Our senior accountant is on sick leave, and we are unsure when she will be back. The directors want to ensure that the junior accountant's proposal is in line with the requirements of the Australian Accounting Standards. They would also like to understand the reasoning behind the appropriate accounting treatments. The items of concern are as follows:

1. The directors are confident that they have a new club design, the driver XCLBR, which will be a best seller. During the year ended 30 June 2023, we will have incurred $50,000 to source new materials for testing in order to manufacture this product. The prototype cost $55,000 to produce. Initial material identified has proven difficult to obtain. Our junior accountant insists that we should recognize these amounts as expenses, but the directors are adamant that the total $105,000 should be included as an asset in the balance sheet as it has the potential to produce economic benefits.

2. We have developed list of potential retail stores, agreeing to place orders for the XCLBR. Our marketing director says there is a possibility we can recognise the value of these orders as an asset, but he has not been clear on how to make this determination. Can you please explain how we can recognise this amount as an asset? Please explain the requirements with examples that would be relevant to this case.

3. The company has reported significant accounting losses over the last 3 years, during a period of multiple product developments incurring significant costs. At the same time, our net cash flows showed positive results. How can we explain such a difference?

4. A court case, that has been ongoing for 6 months, was finalized on 23 July 2022. It related to Caddiback Limited using a manufacturing method that was patented by another golf club producer relating to a new putter. Caddiback Limited was required to pay damages of $1,200,000 to the other producer. An estimate of $1,000,000 was previously provided by our lawyer in relation to this. How should we account for the damages this financial year ended 30 June 2023?

5. The junior accountant has also suggested that our choice of the accounting methods below, will affect the following ratios return on assets, quick ratio, profit margin, asset turnover:

(a) a change in accounting method for depreciation from straight line to diminishing balance

(b) revaluation of a non-current asset upwards at the beginning of the current year

(c) recognizing a loss through obsolescence of certain items of inventory.

The junior accountant has tried to explain the accounting treatment for items 1 to 4, using terms like asset, liability, provision, contingent liability, present obligation, etc., but failed to explain in a way that the directors could understand. Along with your advice for the correct accounting treatment for items 1 to 4, could you also please explain item 5 affects on our performance ratios? I would appreciate it if you could prepare a Statement of Advice to address the accounting for the above issues at your earliest convenience.

Yours sincerely,

Camila Smith

Answer rating: 100% (QA)

Statement of Advice SoA Client Caddiback Ltd Date Insert Date Prepared by Your Name Position Manager King Business Services 1 Queen Street Brisbane QLD 4000 Dear Ms Camila Smith Re Accounting Advice f... View the full answer