AASB Framework Application And Financial Statement Preparation

Scenario 1: Recognition of expenses and liabilities for flood insurance

Scenario 1.

The GDX Ltd has 2 stores in Brisbane, that are located near the river Brisbane river and to make it flood safe, apart from incurring the insurance charges, it plans to invest in self-insuring itself.  The act of GDX Retail Ltd to recognize the expense and liability for the flood insurance is correct. Since the GDX Limited intends to self-insure itself against the flood damage on its own with the investment of $500,000, hence it is practicable to recognize the same yearly as an expense of $50000 per year, instead of occurring the yearly insurance charges (Boghossian, 2017).

We can have two scenarios out here –

• If the flood insurance premium is greater than $50000 – In this scenario, we shall book the expense in our books up to $50000 assuming the principal of Conservatism.
• If the flood insurance premium is less than $50000 – In this scenario, we shall book the expense in our books up to premium amount(Maynard, 2017).

Scenario 2.

The accountant’s treatment for disclosing the stock as a current asset is wrong because as per AS 2, the ownership of the stock is not transferred to the CONSIGNEE unless the risk and rewards of goods are not transferred. In the above scenario, Able LTD has not received any risk and rewards of the stock.  Hence, the ownership rests with the consignor itself (Ghofiqi, 2018). However, it is different from that of the real leasing contracts. Hence, linking two different account treatments of leasing and consignment is a completely wrong act. The accountant should not disclose the stock of goods received from the consigner as his inventory, since the risks and rewards are still in the hands of the consignor itself.

Scenario 3.

Rickson Ltd gave $8 million to buy ‘The Triumph of Death’ that was painted by the very famous Dutch painter Pieter Bruegel the Elder. Rickson Ltd assumed this art to be a capital expenditure and as an investment since it is probable that the painting shall enhance the worth over the period over time. Since at present, the painting is not for display shall be kept as a security art storage vault handled by Axis Fine Art Installation Ltd (Chariri, 2017). Nevertheless, the members of Rickson Ltd shows this as a long-period loan of the painting to a very famous art gallery. The financial book keeper of Rickson Ltd has the intention to consider the painting as an asset in their financial statements. The act of book keeper is correct, since this will lead to enhancement in worth of the organization (YUAN, 2018).

Scenario 4.

Wattle Ltd signed a contract with Cygnet Ltd to purchase an item of plant equipment for $500,000. The terms of the contract require Wattle Ltd to pay a non-refundable deposit of $150,000 on 10 February 2018. It is expected that the plant equipment will be shipped in early April 2018 and legal title will transfer from Cygnet Ltd to Wattle Ltd on delivery of the plant equipment. Once the plant equipment has been delivered, Cygnet Ltd will invoice Wattle Ltd for the remaining $350,000. The accountant of Wattle Ltd intends to record the payment of the deposit on 10 February 2018 with a debit to the asset account ‘Plant equipment’ and a credit to the ‘Cash at bank’ account (Alexander, 2016).

Scenario 2: Recognition of consignment products as an asset

Here, an adjustment entry is required, but debit to the asset account i.e. “Plant Equipment” is not correct. The amount of the $150,000 shall be treated as advance received against the fixed asset, but not as a direct purchase price of the Plant equipment. The account to be debited is “Advance Received against purchase of Plant Equipment”.

Operating cycle is the total time that a business requires to receive the inventory, manufacture the product from that inventory and then finally sell that and receive cash. It helps in ascertaining the total working capital that a business might require functioning. Companies that have shorter cycles requires very less amount of cash, as the flow of products is very fast and the companies are more liquid in comparison to their counterparts. Companies that have larger cycles requires more amount of cash and are less liquid (Abbott & Kantor, 2017).

Thus, we see its very important that companies should be aware about their operating cycles, so that they can take effective decisions regarding their operations and investment and do not suffer losses.

The operating cycle for Celeste Ltd is 48 days.

Scenario 1.

In case the accountant decides to change the rate of bad debt calculation from 5% to 6%, then he needs to prepare reinstated financial statements for the prior year considering the current rate and provide reasons as disclosures in the notes to financial statements. Reinstatement is allowed when the accountant has some reason for changing the rate of bad debt and the effect of change is allowed on retrospective basis.

Scenario 2

In this case the method of calculating bad debts is being changed from the percentage of credit sales method to the ageing of accounts receivable method, so the accountant needs to provide disclosure with regards to that in notes to account. Only reporting is needed and no changing of financials.

Scenario 3

In this case since the accountant is aware that the calculation of bad debts is wrong, he needs to change it and calculate it as per the current rate else it would lead to overstatement of profits for the company, as there would be less bad debts and more income. Thus, it is needed that correct calculation should be done and correct estimates of provision should be there to ensure correct profit statement by the company.

References

Abbott, M., & Kantor, A. (2017). Fair Value Measurement and Mandated Accounting Changes: The Case of the Victorian Rail Track Corporation. Australian accounting Review.

Alexander, F. (2016). The Changing Face of Accountability. The Journal of Higher Education, 71(4), 411-431.

Boghossian, P. (2017). The Socratic method, defeasibility, and doxastic responsibility. Educational Philosophy and Theory, 50(3), 244-253.

Chariri, A. (2017). FINANCIAL REPORTING PRACTICE AS A RITUAL: UNDERSTANDING ACCOUNTING WITHIN INSTITUTIONAL FRAMEWORK. Journal of Economics, Business and Accountancy, 14(1).

Ghofiqi, M. (2018). FORMATION OF VIEWS AND INTERESTS TO THE ACCOUNTANTS PROFESSION IN MASTER OF ACCOUNTING STUDENTS OF JEMBER UNIVERSITY FORCE OF 2016 USING STRUCTURATION THEORY ANALYSIS. THE 3RD INTERNATIONAL CONFERENCE ON ECONOMICS, BUSINESS, AND ACCOUNTING STUDIES.

Maynard, J. (2017). Financial accounting reporting and analysis (second ed.). United Kingdom: Oxford University Press.

YUAN, T. (2018). The Prospect for RMB Becoming One of the Two Center Currencies of the Dual-Center Global Financial System. The Dual-Center Global Financial System(1), 83-91.

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