Financial Accounting Essay Example

Running Header Financial Accounting

Financial Accounting

City and State Where Institution is Located

Financial accounting

1. Conceptual framework

The conceptual frameworks provide social legitimacy to the accounting profession. This is because the conceptual framework provides the principles on whose basis the profession should be conducted. The principles on the other hand are an indication of what the society would expect of the profession. For instance, the accountants are expected by the society to observe integrity and objectivity in their work. Thus, by observing the provisions of the conceptual framework, accountants are able to fulfil what is expected of them by the society in their conduct of the accounting profession which makes the society have confidence in the work that the professionals do. In essence therefore, the conceptual framework serves to provide social legitimacy to the accounting profession by ensuring that the result of the profession are reliable and acceptable.

1. Depreciation

2a) The straight line method

Depreciation per annum = (Net book value – Residual value) * Rate %

Rate = 1/6 = 16.67%

Year 1 = ($65,000-5000)* 16.66% = $10,000

Year 2 = ($65,000-5000)* 16.66% = $10,000

Year 3 = ($65,000-5000)* 16.66% = $10,000

Year 4 = ($65,000-5000)* 16.66% = $10,000

Year 5 = ($65,000-5000)* 16.66% = $10,000

Year 6 = ($65,000-5000)* 16.66% = $10,000

2b) Sum of digits method

Depreciation per annum = Depreciable Base* (Remaining useful life / Sum of the years’ digits)

Depreciable base = $65,000- $5,000 = $60,000

Year 1 = $60,000* 6/21 = $17,143

Year 2 = $60,000* 5/21 = $14,286

Year 3 = $60,000* 4/21 = $11,429

Year 4 = $60,000*3/21 = $8,571

Year 5 = $60,000 *2/21 = $5,714

Year 6 = $60,000* 1/21 = $2,857

2c) the declining balance method

Depreciation per annum = Depreciation rate* Book value of asset

Depreciation rate =Accelerator * Straight line rate

Straight line rate = 16.666%

Accelerator = 2

Depreciation rate = 33.333%

Year 1 = $60,000* 33.33333% = $20,000

Year 2 = $40,000*33.33333% = $13,333

Year 3 = $26,667*33.33333% = $8,889

Year 4 = $17,778* 33.3333% =$5,926

Year 5 = $11,852 * 33.33333% = $3,951

Year 6 = $7,901 * 33.333333% = $2,634

2d) The units of production method

Annual depreciation = (Number of units produced /Life in number of units) * (Cost – Salvage value)

Year 1= 28,000/246,000 * 60,000 = $6,829

Year 2 = 34,000/246,000* 60,000 = $8,293

Year 3 = 42,000/246,000* 60,000 = $10,244

Year 4 = 55,000/246,000 * 60,000 = $13,415

Year 5 = 68,000/246,000 * 60,000 = $16,585

Year 6 = 19,000/246,000* 60,000 = $4,634

1. Contract accounting

1. Gross profit to be recognized

Gross profit to be recognized in the current period = % complete * Total estimated gross profit

% complete = Total construction cost to date/ Total estimated cost of contract

Total estimated gross profit = Contract revenue- contract cost

Estimated gross profit = $50m- $38m = $12m

% complete = $10m/$38m * 100 = 26.32%

Gross profit = 26.32% * $12m = $3.16m

Estimated gross profit = $50m-$40m = $10m

%complete = $28m/$40m *100% = 70%

Gross profit = 70% * $10m = $ 7m

Estimated gross profit = $50m-$40m = $10m

%complete = $40m/$40m*100% = 100%

Gross profit = 100%*$10m = $10m

3b) Journal entries for 2016 using percentage of completion method

30th June 2016	Construction in process Accounts payable To record accumulated contract cost
30th June 2016	Contracts receivable Progress billing To record progress billings
30th June 2016	Construction in process Construction expenses Construction revenues To record gross profit, revenues and expenses on the contract
30th June 2016	Contracts receivable To record cash collected during the year

3b) Journal entry for 2016 where percentage of completion not known

Gross profit = Installment billed- Cost to date = $12m- $10m = $2m

Thus, the journal entries appear as follows;

30th June 2016	Construction in process Accounts payable To record accumulated contract cost
30th June 2016	Contracts receivable Progress billing To record progress billings
30th June 2016	Construction in process Construction expenses Construction revenues To record gross profit, revenues and expenses on the contract
30th June 2016	Contracts receivable To record cash collected during the year

1. The Turnips cure project

1. In 2013, $40,000 should be recognized in respect to research expenditure while $10,000 should be recognized in respect to development expenditure bringing the total recognition in terms of the expenditures to $ 50m.

2. In 2014, it has been discovered that the product is likely to succeed and hence development has resumed. Thus, the costs incurred are expected to be recovered in future from the project revenue. As such, these expenditure will not be recognized as revenue in 2014 but as deferred expenditure to be recovered in future periods.

3. The expenditure for 2013 was already expensed in 2013 when it was thought that the project will not succeed. As such, the only expenditure to be deferred or carried forward and reported in the statement of financial position at the end of 2014 is the $72,000 incurred in 2014.

4. The following are the journal entries for the amortization of deferred costs in 2015 and 2016 assuming that actual revenues are as expected

Total cost recovered in 2015 = 10% ($72,000) = $7,200

Total costs recovered in 2016 = 20 %( $72,000) = $14,400

Journal entries

June 2015th30	Research and development cost Deferred research and development cost To record amortization of research and development costs
June 2016th30	Research and development cost Deferred research and development costs To record amortization of research and development costs

The amount of deferred expenditure carried forward in the statement of financial position in relation to the deferred costs is;

$72,000 – ($7,200 + $14,400) = $50,400

e) The journal entries required to account for the discounted net cash flow are as follows;

June 2015th30	Discounted cash net cash flow Deferred research and development cost To record net cash flow from the turnips cure project

References:

Baker, R, Lembke, V, King, T& Jeffrey, C 2008, Advanced financial accounting, McGraw- Hill/Irwin.