Unit: ACC204 – Advanced Financial Accounting Essay Example

Unit: ACC204 – Advanced Financial Accounting

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 a set of rules that govern the profession and hence explain the logic behind how the accounting profession is carried out. Thus, it makes accounting a legal profession by ensuring that certain standards are observed as the profession is carried out. There are certain attributes that a certain profession is expected to exhibit. Such attributes include neutrality, objectivity, and reliability among others. If a profession is to be seen as legitimate, it must possess the characteristics and its results should possess the above legitimizing characteristics. For accounting, the conceptual framework serves to ensure that the profession and the work carried out in the profession possesses the legitimizing characteristics and effectively serves to provide social legitimacy to the accounting profession since when the framework is applied, people will see the results of accounting profession as being legitimate.

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:

1. the straight-line method

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

Annual depreciation = $60,000/6 = $10,000

2. the sum-of-digits method

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

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

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

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

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

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

3. the declining-balance method

1/6 *100% = 16.67

Reducing balance rate = 16.67*2 = 33.34%

Year 1 = 33.34%* 60,000 = 20,000

Year 2 = 33.34%*40,000 = $13,333

Year 3 = 33.34% * 26,667 = $8,889

Year 4 = 33.34% * 17,778 = $5,926

Year 5 = 33.34% * 11,852 = $3,951

Year 6 = 33.34% * 7,901 = $2,634

(d) The units-of-production method using kilometers as the basis of use and assuming the following usage:

	Kilometers	Depreciation amount
		28,000/246,000*60,000 = $6,829
		34,000/246,000*60,000 = $8,293
		42,000/246,000*60,000 = $10,244
		55,000/246,000* 60,000 = $13,415
		68,000/246,000* 60,000 = $16,585
		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.   Using the above data, compute the gross profit to be recognized for each of the three years, assuming that the outcome of the contract can be reliably estimated.

% of completion = cost incurred during 2016/Total estimated cost = $m10/38 = 26.32%2016:

Total expected gross profit = $m50- 38 = $m12

Gross profit to be recognized during the year = 26.32%* $m12 = $m3.16

% of completion = $m28/40 = 70%2017:

Total expected gross profit = $m50-$m40 = $m10

Gross profit to be recognized during the year = 70% * 10 = $m7

% of completion = $m40/40 = 100%2018:

Total expected gross profit to be recognized during the year = 100%* 10 = $m10

2.  .Prepare the journal entries for the 2016 financial year using the percentage-of-completion method

Construction in process $10,000,000

Accounts Payable $10,000,000

To record the costs incurred in 2016

Contracts receivable $12,000,000

Progress Billings $12,000,000

To record progress billings receivable

Construction in process $3,160,000

Construction expenses $10,000,000

Construction revenue $13,160,000

To recognize gross profit to date

3.  Prepare the journal entries for the 2016 financial year, assuming the stage of completion cannot be reliably assessed.

Construction in process $10,000,000

Accounts Payable $10,000,000

To record the costs incurred in 2016

Contracts receivable $12,000,000

Progress Billings $12,000,000

To record progress billings receivable

Construction in process $2,000,000

Construction expenses $10,000,000

Construction revenue $12,000,000

To recognize gross profit to date

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. How much research expenditure and development expenditure should be recognized as an expense in 2013?

$50,000 should be recognized as research and development expenditure since the project had been deemed unsuccessful and hence the expenses cannot have been capitalized.

2. How much research and development expenditure should be recognized as an expense in 2014?

None of the expense should be recognized but it should be capitalized since the project is expected to be successful

3. State how much expenditure should be carried forward (deferred) and reported in the statement of financial position at the end of 2013 and 2014.

$50,000 should be carried forward and reported in the statement of financial position at the end of 2014. At the end of 2014, $72,000 will be recorded in the statement of financial position since it will be recovered in future periods.

4. Prepare journal entries for the amortization of deferred costs in 2015 and 2016, assuming that actual revenues are as expected. State the amount of deferred expenditure carried forward in the statement of financial position in relation to the deferred costs.

Total cost recovered in 2015 = 10% ($50,000 + 72,000) = $12,200

Total costs recovered in 2016 = 20 %($122,000) = $24,400

Journal entries 2015

Research and development costs $12,200

Deferred research and development costs $12,200

To record amortization of research and development costs

Journal entries 2016

Research and development costs $24,400

Deferred research and development costs $24,400

To record amortization of research and development costs

5. Assume that after charging amortization based on sales revenue at the end of 2014 the discounted net cash flows expected to be generated from the deferred expenditure were estimated as $15 000. Prepare any journal entries required to account for this information.

Discounted net cash flow $15,000

Deferred research and development cost $15,000

To record discounted net cash flow from the deferred research and development cost

References:

, London, Rutledge. Advanced Financial AccountingTheodore, C& Cassy, B2016,