Conceptual Framework, Accounting for Assets and Revaluation - Assignment Example

Title: СОNСЕРTUАL FRАMЕWОRK, АССОUNTING FOR АSSЕTS АND RЕVАLUАTIОN, АССОUNTING FOR INСОMЕ TАХ АND СОNSОLIDАTIОN Students name: Institutional Affiliation: Question 1 The assertion that standard setters are confused since they have developed different techniques to measure different types of assets is obnoxious. Asset valuation is a method of assessing or estimating the worth of an item. Standard setters in accounting have formulated different methods of acquiring the worth of different classes of assets which serve their purpose perfectly. Valuation on financial assets is done using various models. Financial assets can be measured using one or a combination of these models, namely the absolute value models, relative value models and the option pricing models. The absolute value models are used to determine the present value of the expected future cash flows of an asset. These models can either be multi-period models such as the discounted cash flow model or single period models such as the dividend discount model. The discounted cash flow method uses the time value of money concept to calculate the present value of the assets. The dividend discount model on the other hand computes its valuation based on the supposition that stock is worth the discounted total of all of its future dividend payments (Gordon, 1959, pp 99–105). Relative value measures the attractiveness of an instrument in terms of liquidity, risk and return relative to another. This is a common occurrence in hedge fund management where they exploit the benefits of mispricing between two related securities. Options depend on several different variables making them complex to value, however there are several pricing models employed to assist with this. This is done since value fluctuates over time and is therefore computed as of a specific date. In finance valuation is required for many purposes including business analysis, basic bookkeeping, tax assessment and divorce settlements. There is a class of assets referred to as intangible assets. These also require valuation although it can be very difficult to assess their cost. With the virtue of being intangible, most valuation of intangible assets is done qualitatively an not quantitatively. Some of the methods used to measure intangible assets include balanced score card, competency models, relative value, benchmarking, brand equity valuation and the calculated intangible value. Question 1b Contingent assets are assets that crop up from past events but whose reality will only be established by the happening of future proceedings that are devoid of the firm's control (Australian Accounting Standards Board, 2010, p19). Prior to the AASB 137, contingent assets were not required to be recognized in the financial statements since they were not certain assets and may have resulted in the recognition of an income that may never be realized. AASB 137 dictates that a contingent asset should not be recognized in the financial statements, however, when it is virtually certain that the income will be realized, the asset in question is not termed as a contingent asset and therefore it should be appropriately recognized. A contingent asset is recognized only when an economic inflow of benefits is feasible (Australian Accounting Standards Board, 2010). At the end of the financial period, the entity should disclose a short account of the makeup of the contingent asset. The financial effect is also estimated where possible. It is nonetheless important to note that the disclosures for contingent assets should be done in such a way that they do not give misleading indications on the probability of a rise in income. Prior to the amendments requiring one to disclose contingent assets, users of financial statements did not understand the nature of contingent assets. They were also in the dark in matters relating to their timing and prospective amounts of the assets. This in essence made it important for entities to include this information in their financial statements. Question 2 1 July 2011 Dr Equipment A $600,000 Equipment B 360000 Machinery A 120,000 Machinery B 100,000 Cr Cash 430000 Share Capital 750000 31 Dec 2011 Dr Depreciation Expense – Equipment A 30,000 Cr Accumulated Depreciation Expense – Equipment A 30,000 ($600,000/ (10*2)) Carry amount (CA) of Equipment A =600,000 -30000= 570000 Fair value (FV) = 592000 Therefore, revaluate upward by = 592000-570000= 22000 Dr Equipment A 22,000 Cr Revaluation Surplus – Equipment A 22000 Dr Depreciation Expense – Equipment B 18,000 Cr Accumulated Depreciation Expense – Equipment B 18,000 ($360,000/ (10*2)) CA of Equipment B=360,000-18,000=342,000 FV=336,000 Therefore, revaluation downward by =342,000-336,000=6,000 Dr Revaluation Expense – Equipment B 6,000 Cr Equipment B 6,000 Dr Depreciation Expense - Machinery A 12,000 Cr Accumulated Depreciation Expense - Machinery A 12,000 ($120,000/ (5*2)) As CA less than Recoverable (RA), no journal entries are required. Dr Depreciation Expense - Machinery B 10,000 Cr Accumulated Depreciation Expense - Machinery B 10,000 ($100,000/(5*2)) CA= 100000-10000=90000 RA=80000 Therefore, impairment loss =90,000-80,000=10,000 Dr Impairment Loss 10,000 Cr Accumulated Impairment Loss 10,000 15 Feb 2012 Dr Revaluation Surplus - Equipment A 5,600 Cr Share capital 5,600 (Issue bonus share) 30 June 2012 Dr Depreciation Expense – Equipment A 37,000 Cr Accumulated Depreciation Expense - Equipment A 37,000 ($592,000/ (8*2)) CA=$592000-37000=555,000 FV=548,000 Therefore, revaluate downward by 555,000-548,000=7,000 Dr Revaluation Surplus – Equipment A 7,000 Cr Equipment A 7,000 Dr Depreciation Expense - Equipment B 21,000 Cr Accumulated Depreciation Expense - Equipment B 21,000 ($336,000/ (8*2))=21000 CA=336,000-21,000=315000 FV =323,000 Therefore, revelation upward by 323,000-325000=8000 Dr Equipment B 8,000 Cr Revaluation Expense – Equipment B 6,000 Revaluation Surplus – Equipment B 2,000 Dr Depreciation Expense – Machinery A 12,000 Cr Accumulated Depreciation Expense – Machinery A 12,000 Dr Depreciation Expense – Machinery B 10,000 Cr Accumulated Depreciation Expense – Machinery B 10,000 (80,000/ (4*2)) For both Machinery A and B, the Carrying Amount is less than the Revaluation Amount. Therefore, no journal entries are required. Question 2b Yes, I totally agree with the statement that given that there is no apparent decline in fair value of the Equipment (Equipment A); depreciation should not be charged on this particular equipment. Depreciation is defined as the decrease in the fair value of an asset which calls for distribution of the depreciation costs across the period in which the assets are used. Since there is no depreciation expense to be allocated, it should be accounted for as a change in accounting estimate (CPA Australia, 2007, p2). Question 3 I. II. Income tax expense 54,100 Income tax payable 13,500 Deferred tax liability 40,600 III. The estimated warranty liability account has a portion that is classified as a current liability and the remainder is classified as a non-current liability. The tax basis for both the current and non-current portions of the estimated warranty liability is assumed to be zero based on non-accrual of warranty obligations under tax regulations. For tax purposes, only current period actual warranty expenditures are deductible. The book basis in both cases was measured using the accrual basis of accounting. Part B According to AASB 112, the current tax in prior periods to be recognized as a liability to the extent that it has not been paid. However if the amount paid exceeds amount due, the excess should be recognized as an asset i.e. prepaid tax. In relation to the two companies, the amount of tax asset has continued to rise in the midst of financial distress. The amount is recoverable in future in relation to temporary differences. When the allowable temporary differences keep on rising, the definite effect is on the deferred tax asset. In other words, what causes the rise in the allowable temporary differences is the increase in losses. When the losses of the company increases, instead of paying taxes the company is allowed some amount against its future tax liability. Therefore, in the future the company will have to pay less tax in the future. Question 4a Dr. Equity Investment 60 000 Cr. Cash 60 000 (To record acquisition of Minor Ltd) Dr. Share capital of Minor 32 000 Dr. General reserve of Minor 12 000 Dr. Retained earnings of Minor 11 000 Dr. Differential 5 000 Cr. Equity Investment 60 000 (To eliminate the Equity Investment account and related Stockholder’s Equity of the Minor ltd) Computation of differential Fair value of consideration given 60 000 Book value of Minors assets 71 400 Book value of Minors Liabilities (16 400) Net book value (55 000) Differential 5 000 Question 4b Consolidation is the act of amalgamating smaller business entities into larger companies. In reference to financial accounting, consolidated financial statements show the financial position and the operational results of the controlling entity, known as the parent, and one or more controlled entities referred to as subsidiaries in a manner that suggests they are a single company (Beechy, Trivedi, & MacAuay, 2005, p65). To prepare consolidated financial statements, the two or more entities must be related, that is, one firm controls another. Many financial analysts try to justify the existence of goodwill claiming that they reflect synergies between the parent company and the subsidiary through their ability to eliminate costs such as duplicate overheads and increasing their marketing presence. However, from a practical accounting perspective, the concept of goodwill is a lot simpler. It is more of the figure that balances off the surplus of fair value relinquished to purchase a subsidiary and the fair value of the identifiable net assets of the acquired subsidiary (Halsey & Hopkins, 200-, pp50-55). Immediately after the purchase, the book value of stockholders equity in the subsidiary firm is added to the acquisition accounting premium which consists of goodwill in addition to other elements such as patents and undervalued property and equipment. These two are added up to make the total equity investment. Intercompany transactions are transactions that include distributions to a different entity or between units of one entity. There are downstream transaction, which are those transactions flowing from the parent company to the subsidiary while the vice versa is called an upstream transaction. Example of a downstream transaction: Assuming equipment was purchased by ABC Company on July 1, 2003, for $9,000 and is being depreciated fully on a straight-line method with a useful life 10 years. It is then is sold to XYZ for $6,000 on December 31, 2009. ABC records its 2009 depreciation expense before the sale. The accumulated depreciation is $5,400 ($900 × 6) with a remaining useful life of 4 years. On the date of the sale, ABC records Dr. Cash 6 000 Dr. Accumulated Depreciation 5 400 Cr. Gain on sale 2 400 Cr. Equipment 9 000 (To record sale of equipment to XYZ) Dr. Equipment 6 000 Cr. Cash 6 000 (To record purchase of equipment from ABC) References: Australian Accounting Standards Board. (2010). Provisions, Contingent Liabilities and Contingent Assets. Melbourne: Australian Accounting Standards Board, p19. Beechy, T. H., Trivedi, V. U., & MacAuay, K. E. (2005). Advanced Financial Accounting, 6th Edition. Irwin: McGraw-Hill, p65. CPA Australia. (2007). AASB 116 Property, Plant and Equipment. CPA Australia, p2. Gordon, M. J. (1959). Dividends, Earnings and Stock Prices. Review of Economics and Statistics , pp99–105. Halsey, R. F., & Hopkins, P. E. (200-). Advanced Accounting. Cambridge: Cambridge publishers, pp50-55. Read More