Financial Accounting Essay Example

Running Header: Accounting

Management Accounting

City and State Where Institution is Located

1. Hines (1991) argues that conceptual frameworks ‘presume, legitimize and reproduce the assumption of an objective world and as such they play a part in constituting the social world … conceptual frameworks provide social legitimacy to the accounting profession’. Try to explain what she means.

By this she means that the conceptual framework provides principles that accounting professionals should follow in conducting their work. This is because the conceptual framework contains the ideas and objectives that lead to the creation of a consistent set of rules and standards which set the nature, functions and limits of financial accounting and financial statements. Thus they define what accountants are expected to do and what they ought to avoid. By so doing, the principles, rules and standards define the character of accountants and hence give them the characteristics that they are socially expected to exhibit. Thus, in so doing, the conceptual framework provides social legitimacy to the accounting profession.

2. On 1 July 2011 Sprintfast Couriers, which has a year-end of 30 June, purchased a delivery truck for use in its courier operations at a cost of $65 000. At the end of the truck’s useful life it is expected to have a residual value of $5000. During its six-year useful life, Sprintfast Couriers Limited expected the truck to be driven 246 000 kilometres

REQUIRED

Calculate the annual depreciation charge for each of the six years of the truck’s life using the following methods:

Depreciation per annum = (Net book value – Residual value) / Number of years

Year 1 = ($65,000-5000)/6 = $10,000

Year 2 = ($65,000-5000)/6 = $10,000

Year 3 = ($65,000-5000)/6 = $10,000

Year 4 = ($65,000-5000)/6 = $10,000

Year 5 = ($65,000-5000)/6 = $10,000

Year 6 = ($65,000-5000)/6 = $10,000

2b) Sum of digits method

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

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

Year 1 = $60,000× 6/21 = $17,142.86

Year 2 = $60,000× 5/21 = $14,285.71

Year 3 = $60,000×4/21 = $11,428.57

Year 4 = $60,000×3/21 = $8,571.43

Year 5 = $60,000 ×2/21 = $5,714.29

Year 6 = $60,000× 1/21 = $2,857.14

2c) the declining balance method

Depreciation per annum = Depreciation rate Book value of asset

Depreciation rate =2× Rate used in straight line

Straight line rate = 1/6 = 16.6667%

Depreciation rate = 33.333%

Year 1 = $60,000× 33.333% = $20,000

Year 2 = $40,000×33.333% = $13,333

Year 3 = $26,667×33.333% = $8,889

Year 4 = $17,778× 33.333% =$5,926

Year 5 = $11,852 × 33.333% = $3,951

Year 6 = $7,901 × 33.333% = $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

3. Star City Limited commences construction of a multi-purpose water park on 1 July 2015 for Pretoria Limited. Star City Limited signs a fixed-price contract for total revenues of $50 million. The project is expected to be completed by the end of 2018 and Pretoria Limited controls the asset throughout the period of construction. The expected cost as at the commencement of construction is $38 million. The estimated costs of a construction project might change throughout the project—in this example, they do change. The following data relates to the project (the financial years end on 30 June):

	2016 ($m)	2017 ($m)	2018($m)
Costs for the year
Costs incurred to date
Estimated costs to complete
Progress billings during the year
Cash collected during the year

Required

1. Gross profit to be recognized

We expect a gross profit of $50m-$38m = $12m

Percentage of completion is $10m/$38m × 100 = 26.32%

Thus, gross profit to be recognized in year 1 = 26.32% × $12m = $3.16m

The expected gross profit in year 2 is $50m-$40m = $10m

Percentage of completion at this stage is $28m/$40m ×100% = 70%

Thus, gross profit to be recognized is 70% × $10m = $ 7m

The expected gross profit at this stage is $50m-$40m = $10m

Percentage of completion at this stage is $40m/$40m×100% = 100%

Thus, gross profit to be recognized is 100%×$10m = $10m

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

June 2016 ^th30

Construction in process $m10

Accounts payable $m10

To record accumulated contract cost

Construction in process $m3.16

Construction expenses $m3.16

To record gross profit, revenues and expenses on the contract

Cash $m11

Contracts receivable $m11

To record cash collected during the year

3b) If percentage of completion is not known, then;

The Gross profit will be given by Installment billed less Cost to date = $12m- $10m = $2m

The journal entries will thus be as follows;

June 2016th30	Construction in process Accounts payable To record accumulated contract cost
June 2016th30	Contracts receivable Progress billing To record progress billings
June 2016th30	Construction in process Construction expenses Construction revenues To record gross profit, revenues and expenses on the contract
June 2016th30	Contracts receivable To record cash collected during the year

4. Innovator Ltd incurred expenditure researching and developing a cure for a common disease found in turnips. At the end of 2013 management determined that the research and development project was unlikely to succeed because trials of the prototype had been unsuccessful. During 2014 a breakthrough in agricultural science improved chances of the product succeeding and development resumed. The project was completed in 2014. At the end of 2014 costs incurred on the project were expected to be recoverable. Innovator expects that 10 per cent of the project revenue will be received in 2015, 20 per cent in 2016, 30 per cent in 2017, 30 per cent in 2018 and 10 per cent in 2019. After five years the product will be at the end of its useful life because the disease found in turnips will have been eradicated. Costs incurred were as follows:

	Research ($000)	Development ($000)

REQUIRED

1. In 2013, the total research and development expenditure amounting to $50m ought to be recognized given that the project has been deemed unlikely to succeed.

2. Since the project has now been considered likely to succeed in 2014, the development has resumed and the research and development costs will be recovered in future once the project has been developed. Thus, the expenses will not be recognized in 2014 but will be deferred and recovered in future periods.

3. As stated above, the whole 2013 expenditure will be recognized as the project was not likely to succeed then. This means we will only defer and hence carry forward to the statement of financial position expenditure worth $72,000 in 2014 in respect to research and development.

4. The journal entries for amortizing the deferred costs in June 2015 and 2016 if the actual revenues are as expected will appear as follows;

The total cost to be recovered in 2015 will be 10% of $72,000 = $7,200

Total costs to be recovered in 2016 will be 20 % of $72,000 = $14,400

The 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

Thus, the amount of deferred expenditure to be carried forward in the statement of financial position in relation to the deferred costs will be $72,000 – ($7,200 + $14,400) = $50,400. These amounts will be recognized in future periods.

e) The following are the journal entries that will account for the discounted net cash flow;

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

References:

, Pearson Education, Canada.Advanced financial accountingLewis, R& Pendrill, D2004,