Financial Accounting: Property Plant And Equipment, Financial Statement Disclosures Essay.

Property, Plant and Equipment

Question 1
Property, plant and equipment IBM Ltd acquired an item of equipment on 1 July 2014 at a cost of $800,000. On 30 June 2015, IBM’s directors decide to continue using the cost model for equipment. They elect to depreciate the equipment acquired on 1 July 2014 using the straight-line method, over its useful life of five years. The estimated residual value is $40,000.
The directors then decide to adopt the revaluation model for equipment from 1 July 2015. They determine that the fair value of this item of equipment on this date is $730,000. The useful life is revised on this date – estimated to be six years from 1 July 2015. The estimated residual value remains unchanged.
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Question 2

Financial statement disclosures

You are the financial accountant for Melbourne Ltd, and are in the process of preparing its financial statements for the year ended 30 June 2016. Whilst preparing the financial statements, you become aware of the following situations:
a) On 1 July 2015, the directors made a decision, using information obtained over the last couple of years, to revise the useful life of an item of manufacturing equipment. The equipment was acquired on 1 July 2013 for $500,000, and has been depreciated on a straight-line basis, based on an estimated useful life of 10 years and a residual value of nil. Melbourne Ltd uses the cost model for manufacturing equipment. The directors estimate that as at 1 July 2015, the equipment has a remaining useful life of 6 years and a residual value of nil. No depreciation has been recorded as yet for the year ended 30 June 2016 as the directors were unsure how to account for the change in the 2016 financial statements, and are unsure whether the 2014 and 2015 financial statements will need to be revised as a result of the change.
b) In June 2016, the accounts payable officer discovered that an invoice for repairs to manufacturing equipment, with an amount due of $25,000, incurred in June 2015, had not been paid or provided for in the 2015 financial statements. The invoice was paid on 5 July 2016. The repairs are deductible for tax purposes. The accountant responsible for preparing the company’s income tax returns will amend the 2015 tax return, and the company will receive a tax refund of $7,500 as a result (30% x $25,000). Journal entries have not yet been done in the accounting records of Melbourne Ltd as the directors are unsure how to account for this situation, and what period adjustments need to be made in.
c) Melbourne Ltd holds shares in a listed public company, Bobsmith Ltd, which are valued in the draft 30 June 2016 financial statements at $800,000. A major fall in the stock market occurred on 10 July 2016 (prior to the 2016 financial statements being finalised), and the value of Melbourne’s shares in Bobsmith Ltd declined to $450,000.
d) One of Melbourne Ltd’s major debtors, Masterz Ltd, filed for bankruptcy on 20 July 2016. Melbourne Ltd’s draft financial statements have been prepared reflecting a 50% doubtful debts provision for this account ($900,000 debt, less $450,000 provision for doubtful debts). On 20 July 2016 (prior to the 2016 financial statements being finalised), it appears that no amount will be recovered from Masterz liquidator in respect of this debt.
Required:
State, for each situation, whether any adjustment to Melboure Ltd’s financial statements is required (assuming that each amount is material). Provide explanations and references to relevant paragraphs in the accounting standards to support your answers. State the appropriate accounting treatment (including any journal entries needed) for each situation in the 2016 financial statements.

Required journal entries

Working Notes

Depreciation calculations

Tax effect

1. As per AASB 116 whenever life of asset changed then this will change will treated as prospective change hence, there will be no any change in the previous year financial statements. Only financial statements after such change will be effected from such change (Australian Accounting Standards Board, 2017). In the given condition,

After such change in life of asset, company requires to charge depreciation $66,666.67 per year and in financial statements for year ending on 30 June 2016, company requires to disclose change in remaining life of asset, effect of such change in the yearly depreciation and reason of such change.

1. In the given case, company made tax deductable repairs during the year ending in June 2015 and no accounting treatment made by company at the date of transaction as well as at the closing of financial year. This transaction requires the recording of repair expenditure and when reduction of tax expenses due to repairs expenses (AASB, no year). Hence in the accounting year ending on June company requires to make these journal entries,

When such entry will made then tax expenses will automatically reduce. On July 2015 when company made payment for the expenses then journal entry will be,

1. Impairment loss refers to  the loss which incurred due to excess carrying amount of asset over recoverable amount (Damodaran, 2012). In the present case carting amount of investment asset is $800,000 and recoverable amount is $450,000, it means there is a impairment loss of $350,000. In such case company requires to pass entry for recording impairment loss i.e.,

2017. Whenever present obligation is present before the closure of financial stamen then for such obligation company requires to create provision (AASB, 2010). When any obligation arises then company requires to make treatment of such obligation. In the present case company make an estimate of 50% provisions for doubtful debts for the year ended on 30 June 2016 and before finalization of accounts for the year ended on 30 June 2016, company come to know that 100% debt will be irrecoverable. In such situation the company comes to know regarding the 100% loss of debts in July 2016 hence company requires to make treatment for such expenses in accounts for year ended on 30 June 2017. So, company requires to made an accounting journal entry in the accounts for the period ended on 30 June 2017. The ornal entry will be,

Calculation of current tax expenditure

Calculation of deferred tax Asset

Required journal entry

References

• AASB, A. A. S. 116.Property, Plant and Equipment, Australian Accounting Standards Board, Melbourne.
• AASB, A. A. S. 137.Provisions, Contingent Liabilities and Contingent Assets, Australian Accounting Standards Board, Melbourne.
• AASB, A. A. S. 101.Presentation of Financial Statements, Australian Accounting Standards Board, Melbourne.
• AASB, A. A. S. 112.Income taxes, Australian Accounting Standards Board, Melbourne.
• Bond, D., Govendir, B., & Wells, P. (2016). An evaluation of asset impairments by Australian firms and whether they were impacted by AASB 136. Accounting & Finance, 56(1), 259-288. https://dx.doi.org/10.1111/acfi.12194
• Australian Accounting Standards Board. (2017). https://www.aasb.gov.au. Retrieved 9 May 2017, from https://www.aasb.gov.au/admin/file/content102/c3/AASB116_07-04_ERDRjun10_07-09.pdf
• Damodaran, A. (2012).Investment valuation: Tools and techniques for determining the value of any asset (Vol. 666). John Wiley & Sons.