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ACCT207 Financial Accounting

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Questions:

Issue 1 Measurement of Assets

At our recent board meeting, Ambrose a director of our company suggested that we no longer need to show our non-current assets at their cost value in the balance sheet. Is this correct? Could you please outline our options? Would you advise us to show all our assets at cost value, fair value, or market value or just increase those assets that have appreciated in the market?

Issue 2 Warranty Expenses

The board is also concerned with the frequent variances in the amount of warranty expenses that were initially recognised compared to the actual cost of the warranty the company paid/incurred to fix/replace the faulty products. Therefore at the most recent board meeting it was agreed to stop recognising the warranty expenses before the warranty cost is actually incurred. The directors are wandering why we should complicate a very simple way of calculating warranty expenses – why not “stick with” recognising the expense when we pay for it. This way we won’t have to deal with all these variances. What do you think we should do and why?

Issue 3 Long Service Leave

We currently have a number of employees who have been with us at Byrne Limited for a number of years – at least five (5) of them have been with us since the company commenced operations in 2005. Our staff department has accurately calculated the long service leave owing to employees as $150,000, in respect of past services.

Our usual practice is to show the long service leave expense in the Statement of Comprehensive Income when the employee actually takes leave and is paid. We have no idea when these staff will take their long service leave, so we don’t believe we need to show this as a liability in the financial statements. Saroo, our director has suggested we should still disclose it as a contingent liability. What do you think we should do and why?

Issue 4 Revenue Recognition

We currently have a number of non-cancellable contracts for rendering services to Byrne Limited clients. To overcome dealing with clients who do not pay for services rendered, the company has a policy that the buyer of services must pay for all of services at the date of signing the contact or two weeks thereafter. A contract of $12,000 for the rendering of services to a customer is entered into on 15 April 2017. The services are delivered continuously over a 1-year period commencing on 1 May 2017. The buyer pays for all of the services to Byrne  Our usual practice is to show the service revenue in the Statement of Comprehensive Income when the money is received. Ambrose, a director of our company takes an alternative view that this is deferred income and should only be recognised as revenue over the period of the contract when the service is performed. Saroo another director says what we are doing is correct. Saroo states that since the contracts are non-cancellable the revenue should be recognised when the buyer pays for all the services otherwise we will have to deal with numerous journal entries – why not “stick with” recognising the revenue when we receive it. What do you think we should do and why?

Issue 5 Goodwill, Unrecorded Patent and Shareholder

We recently decided to sell one of our divisions to a New Zealand company since we have decided not to focus on that particular line of business. Negotiations are still ongoing however it looks like the New Zealand company is willing to pay an additional $300,000 on top of the fair value of identifiable net assets agreed by both of us. If this deal doesn’t go through, can we recognise this $300,000 as goodwill in our books? We are also unsure of how to account for an unrecorded

patent which we will transfer to them? In return for this division, the New Zealand company will issue us some shares as well. Does this mean we will be shareholders of this New Zealand company? If so, then how should we account for these shares?

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