Loss of Cash and Tangible Assets
1.As per the stated provisions of AASB 101The accounting treatment given to assets that are either lost or stolen vary depending upon the type or nature of the asset in question. Broadly there are three main categories for this
Loss of Fixed Tangible Assets
Loss of Inventory or stores and supplies
Loss or stolen cash or other valuable assets
Since the given the case falls under the third category we will follow the treatment mentioned for this. In the case, there has been as theft of $20,000 cash from Himalaya Ltd.’s night safe. The treatment for this is we will debit the Loss on Cash
Theft A/c in the Income statement and debit Insurance account, if any. And there will be a corresponding credit of the Cash account by $20,0000 (Andiola, et al., 2018).As per the provisions of AASB 137, a liability is to be recognized only when it is confirmed that an outflow of economic resources will take place and it can be reliably measured. In the given case the entity has caused damage to the environment. Such damage need not to be recognized as an expense unless there is a law penalizing such an action. Till that time, it can show it as a Contingent liability. Hence it will not form a part of financial statements. After an order from the court is received it becomes certain that the entity will now be obligated to pay for the damages and incur a cost on the restoration of the site(Bumgarner & Vasarhelyi, 2018). An outflow of resources is no longer probable. Though the we have no certain idea of what would be the quantum of the outflow we can estimate the outflow by assessing the damage and going through the history of such cases. Hence, a reliable estimate can be made of the amount and thus the entity needs to recognize it as Liability in the balance sheet of the company.
For this scenario, we must envisage the provisions stated in AASB 1004 on Contributions. The entity in the given question can be assumed to be a regular business entity and not a non-profit entity. The donations amounting to $10,000 received by it the form of cash or through banking channels would be considered as an income and credited to the income statement(Charles H, et al., 2015). The proposed journey to record the transaction would be to Debit the Asset account, Say Cash or Bank by $10,000 and credit the Income from Donation account with a corresponding entry by the same amount. Hence as per the AASB framework, Himalaya Limited would account for it as income.
Capitalization of Traveling Expenses and Insurance Costs for Purchasing Machines
2.In the given case, it would be necessary to inspect the machines before bringing it to the place of operation, since without the inspection the company would not be in apposition to ascertain whether the machine can be purchased or not, the expenses related to travelling for employees to inspect the machines would be capitalized to the cost of the machine as per the specific provisions laid out in AASB 116 (Garon, 2018)
Freight cost is necessary to bring the asset to its desired location form where it can be used in the regular operations. Similarly, insurance of the machinery protects the interest of the purchaser against any possible damage that might occur in bringing the asset to its desired location. Since both these activities are key to acquiring the asset, both need to be capitalized to the cost of the machine. These expenses fulfill the criteria for recognition in AASB 116 and hence capitalization will occur
Renovation work done on the factory premises are key component of the current block of factory building. They are not directly relatable to the equipment life or its functioning. The renovation is likely to increase the life of the building and hence need to be capitalized to the cost of the building and not machinery (Giacomo, et al., 2013). Therefore, there will not be any capitalization to machinery.
The cooling equipment has a separate function altogether. It does not form an integral part of the machine meaning that is it not something without which the machine on itself can’t operate. Therefore, following the principles of AASB 116, this cost can’t be capitalized to that equipment.
A door must be considered an integral part of a building since it confines the building from the remaining structures around it However I cannot be related either directly or indirectly to the cost of the equipment. This can in no way said to be an expenditure said to bring the asset in question up to its place of operation or use and hence cannot be utilized.
Training costs incurred for the employees who work on the machine neither was incurred to bring the machine to its intended place of operation nor was directly attributable to purchase price or purchase conditions of the machine and cannot be capitalized.
3.Copyright is an intangible asset and is covered under AASB 138. Intangible assets can be of two types: Self-generated and Purchased. We are discussing those in relation to the question as under:
Treatment of Self-Generated and Purchased Copyrights
Self-Generated Copyright: the company has developed a copyright internally at a cost of $10,500. The test of whether an intangible asset which is self-generated is to be recognized as a capital item depends on whether it is in the Research phase of development phase. These two terms have been clearly defined in the standard. In a research phase a company is not able to demonstrate whether the intangible asset could be developed or not and whether it is probable that any economic benefits in the future will arise (Lessambo, 2018). Any expenditure incurred on the intangible in the research phase must be expensed in the income statement. On the contrary any expenditure incurred in the development phase need to be capitalized. If the entity can demonstrate that it is technically feasible to develop it and it will be able to use the intangible to derive benefit from using the asset and future economic benefits will follow, it can be said to be in development phase. In the given case as the entity has developed the intangible and the book is intended to be sold shortly, it can be said to be in development phase and hence the cost of $ 10,500 can be capitalized.
Purchased Copyright: A price that is paid to acquire an intangible asset is a mirror to show that there are certain levels of expected income to be generated from that asset as it has trading value. The cost incurred to acquire the intangible can be measure in a reliable manner as the purchase consideration paid is known. The consideration paid could be in the form of cash or other assets that are monetary in nature. The cost to be capitalized would include the purchase price of the product along with any duties or taxes incurred on it which are not refundable reduced by any concessions received by the supplier and would also include certain other additional cost incurred in getting the asset ready for use in income generation and that can be directly attributed to intangible asset in question (Kangarluie & Aalizadeh, 2017). Therefore, in the given question the cost paid by Harry Limited in acquiring the intangible copyright from Oxford university at a price of $12,000 is to be capitalized.
4.As per the Australian accounting standards, the term long service leaves can be defined as the number of days of paid leaves after an employee is entitled to after completing specified period of employment with the company. As per law, the period of long service leaves are 8.67 weeks which can be availed after completing ten years of continuous service. The period of ten years is generally considered a usual period for full time employees of the company. For the part time employees and casual employees also, the period does not vary. Though the amount becomes payable or leaves accrue only after ten completed years of service but it does not absolve the company from recognizing a certain liability. Since in normal employees are to be considered as regular full-time employees a portion of their long service leave shall be recognized as a liability each up to the usual retirement age (Mock, et al., 2018). There will not be any ad-hoc or one-time recognition of this liability after ten years. In the given case, the accountant of Harry Limited is of the view that should not be considered as a liability until the employees complete 10 years of service. As per the provisions stated in the Australian accounting standard, the view presented by the accountant is incorrect. The total amount of this benefit to be paid would depend on the number of years served. The quantum of the benefit would be estimated using the actuarial method. The number of periods served are considered as each unit of measurement and each such unit will add some portion to the benefit he becomes entitled to (Mubako & O’Donnell, 2018). The cumulative of all these additions to the liability amount each year made by debiting the income statement will ultimately sum up to a final amount that would be required to be paid. Hence the company should imitate accounting for these benefits.
References
Andiola, L., Lambert, T. & Lynch, E., 2018. Sprandel, Inc.: Electronic Workpapers, Audit Documentation, and Closing Review Notes in the Audit of Accounts Receivable. Issues in Accounting Education, 33(2), pp. 43-55.
Bumgarner, N. & Vasarhelyi, M., 2018. Continuous auditing—a new view.. Continuous Auditing: Theory and Application, 20(1), pp. 7-51.
Charles H, C., Giovanna, M., Dennis M, P. & Robin W, R., 2015. CSR disclosure: the more things change…?. Accounting, Auditing & Accountability Journal, 28(1), pp. 14-35.
Garon, J., 2018. Ownership of University Intellectual Property. Cardozo Arts & Ent. LJ, 36(1), p. 635.
Giacomo, B., Kamalesh, K. & Giovanna, M., 2013. Descriptive, instrumental and strategic approaches to corporate social responsibility. Accounting, Auditing & Accountability Journal, 26(3), pp. 399-422.
Kangarluie, S. & Aalizadeh, A., 2017. ‘The expectation gap in auditing. Accounting, 3(1), pp. 19-22.
Lessambo, F., 2018. Audit Risks: Identification and Procedures. Auditing, Assurance Services, and Forensics, 3(1), pp. 183-202.
Mock, T. J., Ragothaman, S. C. & Srivastava, R. P., 2018. Using Evidential Reasoning Technology to Enhance the Audit Quality Assurance Inspection Process. Journal of Emerging Technologies in Accounting, 15(1), pp. 29-43.
Mubako, G. & O’Donnell, E., 2018. Effect of fraud risk assessments on auditor skepticism: Unintended consequences on evidence evaluation. International Journal of Auditing, 22(1), pp. 55-64.
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