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AMFA601 Intermediate Financial Accounting

tag 0 Download 7 Pages / 1,571 Words tag 30-07-2021

Question:

On 1 July 2014, Magenta Ltd purchased an item of machinery for $200,000 to be used In the manufacture of furniture. The machinery had an estimated useful life of 8 years and a zero residual value. Magenta Ltd uses the straight-line method of depreciation for items of property, plant and equipment. In accordance with AASB 116 Property, Plant and Equipment, Magenta Ltd uses the cost model as its accounting policy to measure items of property, plant and equipment.

On 30 June 2017, Magenta Ltd changed its accounting policy in relation to the measurement of items of property, plant and equipment from the cost model to the revaluation model. On this date the fair value of the item of machinery was determined to be $135,000.

On 30 June 2018, the fair value of the item of machinery was determined to be $92,000.On 1 July 2019, the item of machinery was sold for $60,000 cash.

Required

  • Under what circumstances does AASB 108 Accounting Policies, Changes in Accounting Estimates and Errorspermit an entity to make a voluntary change in an accounting policy? How should Magenta Ltd account for the change in accounting policy from the cost model to the revaluation model? 
  • Based on the requirements of AASB 116 Property, Plant and Equipment, provide appropriate journal entries in relation to the item of machinery from 1 July 2014 to 1 July 2019. On 1 January 2014 Greymouth Ltd commenced construction of a chemical manufacturing plant which was to be used to manufacture a range of chemical compounds. The chemical manufacturing plant cost $3 million to construct and became operational on 30 June 2016. The estimated useful life of the chemical manufacturing plant is twenty five years from 30 June 2016.

Because the chemical manufacturing plant satisfies the definition (in the Work Health and Safety legislation) of a ‘major hazard facility’, it must be licensed by the local government. Greymouth Ltd obtained its licence for the chemical manufacturing plant on 30 June 2016. The cost of obtaining the licence was negligible and the licence is valid for the life of the chemical manufacturing plant. A condition of the licence is that, at the end of its useful life, the chemical manufacturing plant must be decommissioned. Decommissioning involves dismantling the chemical manufacturing plant and recycling some of the equipment at the local government’s recycling facility.        

As at 30 June 2016, Greymouth Ltd estimates the cost of decommissioning the chemical manufacturing plant at the end of its useful life to be:

Cost Probability

$520,000 15%

500,000 80%

300,000 5%

Greymouth Ltd believes that a discount rate of 5% is appropriate to adjust for the risks specific to this liability.

Required 

  • Explain why the cost of decommissioning the chemical manufacturing plant satisfies the definition of a provision in AASB 137 Provisions, Contingent Liabilities and Contingent Assets.    
  • Determine the amount that, in your judgement, Greymouth Ltd should recognise as a provision as at 30 June In your answer, you should
  • Briefly explain the three methods that, according to AASB 137 Provisions, Contingent Liabilities and Contingent Assets, can be used by an entity to estimate the amount to be recognised as a provision,
  • Discuss which method (or methods) are appropriate in this situation,
  • Identify and justify which method, in your judgement, is the most appropriate to use in this situation, and
  • Use this method to calculate the amount of the provision. 
  • Provide the appropriate journal entries in relation to the provision as at 30 June2016 and 30 June 2017.  

Prime Media Ltd is a digital marketing company that undertakes online marketing functions for its customers. In May 2017, Prime Media Ltd hired an external consulting firm to review its operations. One of the recommendations made by the external consultants was that the computer software used by Prime Media Ltd to produce online advertisements was outdated and should be replaced. Management of Prime Media Ltd prepared a report that outlined the following options for the replacement of the computer software:

  • Option 1: acquire a licence from Digital Solutions Ltd to use their computer software package. The licence could be acquired immediately for $60,000 and would last five years. A condition of the licence is that Prime Media Ltd is prohibited from selling, transferring, licensing, renting or exchanging the computer software even after the licence has expired.
  • Option 2: internally develop a computer software package. It would take between 8 and 12 months to develop the computer software at an estimated cost of $40,000. The computer software would be patented at an additional cost of $15,000.
  • Option 3: internally develop a computer software package. It would take between 8 and 12 months to develop the computer software at an estimated cost of $40,000. The computer software would not be patented.

Required

  • For each of the three options, explain whether the computer software satisfies the definition of an intangible asset in accordance with AASB 138 Intangible Assets. In particular, explain whether the computer software satisfies the criterion of identifiability in the definition of an intangible asset.
  • For each option that satisfies the definition of an intangible asset, explain the recognition criteria that would be applied by Prime Media Ltd. 
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My Assignment Help. (2021). AMFA601 Intermediate Financial Accounting. Retrieved from https://myassignmenthelp.com/free-samples/amfa601-intermediate-financial-accounting/accounting-standard.html.

"AMFA601 Intermediate Financial Accounting." My Assignment Help, 2021, https://myassignmenthelp.com/free-samples/amfa601-intermediate-financial-accounting/accounting-standard.html.

My Assignment Help (2021) AMFA601 Intermediate Financial Accounting [Online]. Available from: https://myassignmenthelp.com/free-samples/amfa601-intermediate-financial-accounting/accounting-standard.html
[Accessed 27 January 2023].

My Assignment Help. 'AMFA601 Intermediate Financial Accounting' (My Assignment Help, 2021) <https://myassignmenthelp.com/free-samples/amfa601-intermediate-financial-accounting/accounting-standard.html> accessed 27 January 2023.

My Assignment Help. AMFA601 Intermediate Financial Accounting [Internet]. My Assignment Help. 2021 [cited 27 January 2023]. Available from: https://myassignmenthelp.com/free-samples/amfa601-intermediate-financial-accounting/accounting-standard.html.


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